The Kogan.com Ltd (ASX: KGN) share price has fallen 35% since the company provided a disappointing first half update in mid-January.
What did Kogan announce?
Kogan reported that in 1H FY20, gross sales grew by more than 16%, while gross profit grew by more than 9%. This, however, was a significant slowdown on the company's gross profit growth during 1Q FY20 when it delivered a 28% increase over the prior corresponding period (pcp).
Kogan didn't provide an explanation for the slowdown in its gross profit growth. However, it did note that Third-Party Brands sales fell materially year-on-year. This was partly due to the growth of the company's Kogan Marketplace business.
Kogan Marketplace gross sales in 2QFY20 grew by more than 44% on the prior quarter. Meanwhile, active customers grew by more than 10% year-on-year to 1,699,000 as at 31 December 2019. Both of these were positive results.
Another positive to come out of the update was that Kogan's operating costs marginally reduced during the half-year, while Advertising income contributed more than $2 million to gross profit.
With regard to some of the company's other divisions, Kogan Insurance grew revenue by more than 40%. Additionally, following a launch during the second half of last year, Kogan Credit Cards, Kogan Energy and Kogan First were reported to be growing strongly.
Still a very attractive business model
Despite the poor market reaction to its results, the fundamentals of Kogan's business still appear to be solid.
Kogan, unlike most retailers, doesn't actually own any warehouses and stores. Instead, its inventory is kept in third-party-owned locations where Kogan is charged on a per-product or per-pallet basis.
The company has also automated as many of its processes as possible, to further minimise staffing costs.
As well as this, Kogan utilises cutting edge technology through a range of data analytics to forecast demand for its products. In doing so, the company is able to only order as much inventory as it needs.
Kogan also utilises a pre-sales strategy, enabling it to fund inventory purchases with customer cash. For its range of private label products, the company uses a competitive tender process that requires suppliers to offer the cheapest price. Although this further drives down Kogan's cost of sales, its margins are, however, very thin.
Increasingly diversified business model
I believe that Kogan is well-placed to leverage the growing traction of online shopping and the increasing popularity of its Kogan-branded products. Meanwhile, the Kogan Marketplace continues its strong growth trajectory.
The company's expansion into broad verticals including internet, mobile, energy, credit cards, super, travel, insurance (pet, life and health), and cars, provides Kogan with a more diversified business model and further growth opportunities.
With the Kogan share price down significantly over the past few weeks, I believe this offers a good buying opportunity.
