Kogan.com Ltd (ASX: KGN) shares have had a rough run in 2021. A slowdown in sales paired with excess inventory has led to a year fraught with challenges.
For shareholders, this difficult time for the company has meant a depressed Kogan share price. Since the beginning of the year, Kogan shares have fallen nearly 54% in value. For context, the S&P/ASX 200 Index (ASX: XJO) has rallied 10% during this time.
Despite the heavily reduced price, one fund manager prefers Temple & Webster Group Ltd (ASX: TPW) over Kogan.
Let's delve deeper into why that is.
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Why this expert isn't a huge fan of Kogan shares
The team at EGP Capital shared their perspective on Kogan shares in their fund's October report. In explaining the positioning of the EGP Concentrated Value fund, chief investment officer (CIO) Tony Hansen compared two ASX-listed e-commerce heavyweights — Kogan and Temple and Webster.
The seasoned fund manager explained how he has witnessed the Kogan business grow revenues year after year. Likewise, profits have seemed to enlarge over the years. However, often more than 100% of the profits have been poured straight back into inventory.
Alternatively, Hansen would prefer cash flows that could be paid to shareholders if no other investment opportunities exist within the business. The overdone reinvestment in inventory can manifest itself in excessive inventory levels, which has been the case for Kogan recently.
Turning to the company's FY 2020 annual report, Kogan achieved $781 million in annual revenue from a closing inventory of $228 million. As the CIO of EGP Capital points out, this implies 3.4 inventory turns based on booked turnover.
As a result, the Ruslan Kogan-led company was operationally cash flow negative despite increasing sales by $307 million year on year. This has been part of the reason for the recent weakness in Kogan shares. In addition, the true value for inventory efficiency is likely worse considering a portion of the company's sales are non-inventory items, such as mobile plans, travel insurance, and internet plans.
In comparison, Temple and Webster reported $326 million in annual revenues from a closing inventory of $21.3 million. This equates to 15.3 inventory turns during the period, compared to Kogan's 3.4. This indicator of higher inventory efficiency resulted in the generation of $24.5 million in positive operating cash flow.
What else?
While the fund suggests a preference for Temple and Webster over Kogan shares, the most preferred e-commerce play in the fund is Mydeal.Com AU Ltd (ASX: MYD). In fact, EGP Capital's fund holds the smaller e-commerce company as its tenth largest position, holding a 3.3% weighting.
