What’s happening with the Kogan share price after the AGM presentation yesterday. Gleaning the the report there wasn’t one chart that didn’t show a strong upwards trend! Maybe that’s because they didn’t include a chart for operating expenses.

James Mickleboro from the Motley Fool has done a little digging into the adjusted EBITDA so far for FY22 and it’s not sounding promising:

”There appear to have been a few catalysts for the volatility in the Kogan share price on Thursday.

One was its trading update. Although Kogan spoke about further revenue growth during the first four months of FY 2022, this hasn’t translated into profit growth.

Kogan revealed that its adjusted EBITDA (including Mighty Ape) was down 61% year to date to $12.4 million. Excluding Mighty Ape, adjusted EBITDA was down 70.3% to $9.5 million over the prior corresponding period.

Given that Kogan reported adjusted EBITDA (including Mighty Ape) of $10.8 million for the first quarter, this means it only added $1.6 million of EBITDA in October. That compares to a first quarter average of $3.6 million per month. And this is despite the company advising that it had resolved previous inventory pressures during the first quarter, reducing warehousing costs.”

So what do we make of this? Are profit margins getting squeezed? Something to watch out for in the 2H22 report.

Disc: Shares held IRL and SM

The Kogan share price has climbed 9.2% over 5 trading days. While I'm pleased to see the uplift I'm not sure what is driving it. It could be due to short sellers closing out on positions.

Short positions have dropped from 12.85% (26 May) to 8.73% (30 July), a 32% drop in 2 months. The move to close out on shorts could in itself be self-perpetuating, and could drive the Kogan prices even higher, at least until we see the 2021 FY results!

Kogan short activity peaked at 12.85% on 26 May and has declined to 11.4% on 21 June. Kogan shares shot up 6% today. Is this a sign that shorters are scrambling to cover short positions? If this is the case it will be interesting to watch the Kogan share price over coming weeks.

A summary of Kogan's announcement below. It appears Kogan's growing pains have turned out to be a fully blown case of COVID. While KGN it is likely to survive and prosper in the long term, the short term outlook is grim. With Updated EBIDTA lower than analysts forecast, and a suttle warning that things could get worse, I don't see any rush to buy shares at the moment. I think it's a hold for now. I think the shorters had it right this time.

• KGN doubled in size over first half of FY21
• operational challenges as a result of growth
• KGN significantly expanded its inventory holding, and also expanded its logistics footprint to 31 facilities
• rapid expansion has resulted in a number of near-term chain inefficiencies and inventory planning challenges
• During the month of April, the demurrage issue that the Company was experiencing was resolved.
• imposed significant abnormal costs on the business over the past five months. 
• KGN built up its inventory levels from late 2020, which has caused high warehousing costs that are continuing.
• KGN progressively working towards optimising the inventory position to reflect current market conditions
• increasing promotional activity has led to lower near-term gross margin and higher near-term marketing costs.
• Kogan.com is expected to return to normal inventory levels (relative to the size of the business) and marketing spend as the current inventory is progressively reduced over the coming few months.
• cost price inflation of many consumer products is being observed in respect of products that are currently being planned for reorder in advance of the peak Christmas trading period.
• price inflation is being driven by COVID-19 market dislocations, together with inflation in international shipping costs.

Short-term Outlook

• KGN expects underlying operating performance to continue to be challenged in the near-term, and Adjusted EBITDA for FY21 is likely to be lower than analyst forecasts 
• FY21 Adjusted EBITDA1 expected in range of $58 million to $63 million (based on unaudited management accounts to April 2021) but warns of a highly dynamic trading environment with trading conditions subject to continual change.

Long-term Outlook

• fundamentals for Kogan.com remain very attractive given the Company’s position in the Australian and New Zealand online retail markets, and with online retail sales currently only accounting for a small percentage of total retail sales in Australia and New Zealand.
• KGN has invested in key strategic initiatives and has a strong level of in-demand inventory heading into the first half of FY22
• The initiatives put in place to address the rapid scaling of a large eCommerce company are expected to drive continuous customer experience improvements in FY22
• KGN has learnt valuable lessons over the last few months, including many key strategies on how to better scale operations of a large fast-growing eCommerce company.

Disc: hold shares (Ouch!)

KGN is now number 3 most shorted stock on the ASX with 10.1% shorted on  Shortman. What does this mean for long term value? Absolutely nothing in my experience. JBHIFi was highly shorted when it was under $20. Today JBH is trading at over $47. This could be another opportunity on offer by Mr Market!

Just a quick update to clarify and expand on a few points:

1. I am very bullish on Kogan at the current price
2. A short squeeze would  be good news for Investors
3. Shorters are underestimating the upside to Kogan and are likely to take a bit hit as they are forced to close out on shorted stock (over 9%)
4. I think there could be a 40% spike in the share price as Kogan corrects back to fair value.

Did you know that Kogan is number 5 most most shorted stock on the ASX (shortman.com.au) increasing from 1.4% shorted in Jan 2021 to over 9% shorted now (See chart below).

Despite strong business growth (Revenue up 65% and Gross Profit up 54%), the market was not impressed by its inventory management prior Christmas and early this year which resulted in high storage and demurrage fees. This combined with inflated product costs prior to Christmas resulted in a 24% drop in adjusted EBITA.

Is this just growing pains for Kogan, or is it something more long term? I think it’s just growing pains and we could see a short squeeze when the next good news comes through.

Disc. Hold KGN and adding.