Kogan (ASX:KGN) share price falls on business update

Kogan had a positive finish to the financial year…

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The Kogan.com Ltd (ASX: KGN) share price was storming higher on Wednesday morning until giving back its gains and more.

In early trade, the ecommerce company’s shares were up 5% to $12.35.

The Kogan share price has since dropped back and is now trading 0.5% lower at $11.68.

Why is the Kogan share price volatile?

Investors were bidding the Kogan share price higher after it released a business update which revealed an improvement in its performance.

It advised: “Following the Company’s continued focus on improving customer value, trading performance in June 2021 saw an acceleration in the delivered Gross Sales, Gross Profit and Adjusted EBITDA , ahead of the performance in April and May 2021.”

According to the release, Kogan achieved gross sales of $1,177.7 million in FY 2021. This was an increase of 52.5% on the prior corresponding period. This figure was boosted by the acquisition of Mighty Ape, which added $80.3 million of gross sales. Excluding Mighty Ape, Kogan’s gross sales would have been up 42.1% year on year to $1,097.4 million.

This strong top line growth was driven by the shift online and a solid increase in active customers. The release reveals that active customers grew by more than 46% over the 12 months to 3,207,000 for Kogan.com. Whereas the Mighty Ape business had 764,000 active customers at the end of the financial year.

Softer profit growth

Things weren’t quite as positive for its operating profits due to its significant inventory issues in the second half.

Kogan reported adjusted EBITDA of $61.1 million for FY 2021, up 23.1% year on year. This is a sharp slowdown on the adjusted EBITDA growth rate of 184.4% it reported in the first half.

Once again, the acquisition of Mighty Ape was a boost. Excluding Mighty Ape’s operating profit of $6.9 million, Kogan’s adjusted EBITDA would have been up 9.2% year on year to $54.2 million.

Nevertheless, its adjusted EBITDA is in line with the guidance given in May of $58 million to $63 million.

Inventory issues

Potentially giving the Kogan share price an extra boost in early trade was an update on the inventory issues it has been facing. Positively, it revealed that it ended the period with its inventory in a much better position.

Total inventories were $228.1 million at the end of June. This comprises $191.8 million in its warehouse and $36.3 million in transit. Management notes that this reflects a significant unwinding of inventories received during the second half.

Commenting on the issues, it said: “The Company utilises data and analytics in forecasting its operations to enable the delivery of the right products to customers at the right time. Given the turbulent trading and social environment over the last year, forecasting consumer needs has been harder than ever for the Company.”

“The Company took the view late last year that the levels of demand during the first half of FY21 would likely continue into the second half, and potentially grow further still. The Company invested in inventory and operational capacity to be able to fulfil that growth. As is now clear, the Company’s expectations weren’t accurate and as a result the Company purchased too much stock. This led the Company to focus on strong promotions to bring inventory to the right level for the relative size of business, and this promotional activity combined with high warehousing costs has impacted financial performance in the second half,” management added.

Positively, these issues appear to be behind the company now, thanks potentially to recent lockdowns which sent consumers back online again.

“Following the end of the second half, the Company can now say that the efforts to bring down levels of inventory have come a very long way, and inventory is approaching the right level for the business. The Company expects improved efficiency moving forward,” it concluded.

Why is the Kogan share price falling?

Given that the Kogan share price has rebounded strongly during the recent lockdowns, the market may have already priced in much of this improvement.

For example, prior to today, the Kogan share price was up 8% during the last four weeks. This could potentially be holding back its shares on Wednesday.

Should you invest $1,000 in Kogan right now?

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Motley Fool contributor 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 and has recommended Kogan.com ltd. The Motley Fool Australia owns shares of and 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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