Why the Kogan (ASX:KGN) share price crashed 14% to a 52-week low

The Kogan.com Ltd (ASX:KGN) share price was well and truly out of form on Friday. Here’s why it crashed to a 52-week low…

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It has been another day to forget for the Kogan.com Ltd (ASX: KGN) share price on Friday.

The ecommerce company’s shares have just closed the day 14% lower at a 52-week low of $8.70.

This latest decline means the Kogan share price has now lost 66% of its value since peaking at $25.57.

Why did the Kogan share price crash?

Investors have been hitting the sell button again on Friday following the release of a trading update.

As you might have guessed from the performance of the Kogan share price, this update fell well short of the market’s already reasonably downbeat expectations.

According to the release, Kogan is expecting to report adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of $58 million to $63 million in FY 2021. The market consensus estimate stood at ~$70 million.

Kogan’s guidance represents growth of just 16.7% to 27% on FY 2020’s adjusted EBITDA of $49.7 million. While many companies would be pleased with this level of growth, it is a significant slowdown on its first half growth rates. During the first half, Kogan reported adjusted EBITDA of $51.7 million, up a whopping 184.4% on the prior corresponding period.

It is also worth noting that FY 2021’s result includes the Mighty Ape business, which was acquired for $122.4 million.

According to the acquisition announcement, the Mighty Ape business was expected to contribute EBITDA of A$14.3 million in FY 2021. If it has indeed contributed this, then it would mean the core Kogan business has actually posted a decline in EBITDA in FY 2021.

What is going wrong?

Unfortunately for the company, and therefore the Kogan share price, it appears as though management has simply got it wrong with its inventory management. Kogan has filled its warehouses with inventory and then failed to shift it as planned.

This has led to demurrage costs at ports, an increase in costs for warehousing, and then an increase in marketing spend to move it along. Throw in some significant discounting and product cost inflation, and you have a recipe for disaster for a retailer.

The good news is that the company expects to return to normal inventory levels and marketing spend over the coming few months. However, based on the Kogan share price on Friday, some investors aren’t sticking around to find out if that happens.

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James Mickleboro 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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