Kogan (ASX:KGN) share price sinks 12% on profit downgrade

Investors are hitting the sell button on the e-commerce giant’s shares following today’s business update.

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The Kogan.com Ltd (ASX: KGN) share price is plummeting today after the company provided a subdued business update for FY21.

During early afternoon trade, the e-commerce company’s shares are fetching $8.98, down a sizeable 11.53%.

What is happening with the Kogan share price?

Investors are driving Kogan shares well into the red today after digesting the company’s latest trading update.

According to this morning’s release, Kogan is reporting a number of issues that has led it to cut its guidance for the current financial year.

The business advised that, despite doubling in growth over the first half of FY21, operational challenges have been encountered. These relate to excess inventory holdings which have had a profound impact on storage costs. In addition, the company has experienced supply chain and logistical issues, setting back its FY21 financial targets.

Kogan stated that, in responding to the rapid increase in customer demand, it expanded its logistics capability to 31 facilities over the last 5 months. However, this has imposed higher warehouse costs for unused stock left sitting on the floor. To manage this, the company has discounted products and increased promotional marketing spend. Consequently, this has weakened Kogan’s near-term gross margin.

Furthermore, price inflation on many consumer products is being noticed as the company orders ahead for the busy Christmas period later this year. Kogan stated that the cause is due to ‘COVID-19 market dislocations’ along with rising international shipping costs.

The company also highlighted that demurrage fees incurred in April have now been resolved. This imposed a significant cost to the business since the start of the calendar year.

As a result, the company has dropped its earnings guidance for FY21, which has sent the Kogan share price diving. Kogan said its underlying operating performance is continuing to face short-term challenges.

FY21 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) is projected to come in the range of $58 million to $63 million. This is a substantial fall from the previous $67 million to $72 million in EBITDA previously indicated. In percentage terms, this equates to a fall of 11% to 18% on market expectations.

However, Kogan did highlight it expects current inventory levels to reduce progressively over the coming few months.

On another positive note, the company said that its future prospects remain upbeat. Kogan highlighted that its position in the Australian and New Zealand online retail markets is strong. Currently, its online sales division only accounts for a small percentage of the total retail sales market in both countries. This potentially provides the company with an attractive opportunity to pursue and expand its digital footprint.

More about Kogan

Kogan operates a portfolio of retail and services businesses that includes Kogan Retail, Kogan Marketplace, Kogan Mobile, Kogan Broadband, Kogan Insurance and Kogan Travel. The parent company is a leading Australian consumer brand renowned for price competitiveness through its digital offering.

According to Kogan, the company is focused on making in-demand products and services more affordable and accessible to everyday consumers.

Over the past 12 months, Kogan shares have had an interesting run, moving initially higher before heading downward. In this timeframe, the company’s shares have recorded a loss of around 5% and a year-to-date decline of around 53%. Kogan shares hit a 52-week high of more than $25 in October last year.

Based on valuation metrics, Kogan has a market capitalisation of around $1 billion, with roughly 106 million shares outstanding.

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Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia has recommended Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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