Update release today (attached), some highlights and notes:

·        Gross Sales $330.5m (+21.1% YoY, +23.2% QoQ)

·        Gross Profit $52.5m (-1.7% YoY, +31.6% QoQ).  Gross margin of 15.9% is up on last quarter 14.9% but down on last year 19.6%

·        Adj EBITDA $10.8m – probably worth ignoring as there is a note in the fine print that there was a significant increase in share based compensation for the quarter which is excluded. The good news is there is some improvements in inventory levels and warehouse costs ($0.8m savings), seems like they still have problems but are getting on top of it. EBITDA margin of 3.3% is up on last quarter of 1.2% but down on last year of 9.2%

·        Active Customers 3,351k for Kogan (+144k or 4.5% QoQ which is solid) 748k for Mighty Ape (-16k or -2.1% QoQ, a variance not highlighted).

·        Marketplace gross sales of $110.4m, up from 65.4m in Q4 FY21 and 73.7m in Q1 FY21 is a good sign, as is the increase in Kogan First with sales up to $5.9m from $2.5m last quarter and membership up to 197k which is 64.4% up on last quarter.

As usual we get a clear focus on anything good, but even reading between the lines it was a solid result and showing a recovery from a bad H2 last FY. 

I have trimmed my KGN position but still see opportunity if they can get the execution right.  The current turmoil in supply chain and buying patters is an issue for everyone so I am prepared to cut them some slack in dealing with it.

Smoke and mirrors from Kogan today on the business update (attached), in promoting a good year (+56% Revenue, +60% Gross Profit, +23% “Adjusted” EBITDA) it hides a not so good second half.

What the announcement didn’t highlight:

·         Revenue down 32% Half on Half (HoH) for Kogan brand, Mighty Ape was only added in December so HoH not comparable, but it added 60m in H2 Vs 20m for one month of H1 all be it the high sales month of December, I would expect better.

·         Active Customers: up 7% HoH for Kogan and 6% for Mighty Ape, which is solid, but Kogan customer growth rate for FY21 is 47%, so a significant slow down on the rate of growth from H1, but that rate of growth was very Covid impacted and not long term sustainable.

·         Gross Profit for Kogan down 37% HoH which is worse than sales, resulting in GM% dropping from 27.3% in H1 to 24.7% in H2.  FY is a solid 26.2% but supply chain and the need to discount to clear excess stock is clearly impacting margins.

·         Adjusted EBITDA: Firstly note this excludes equity based compensation (which is normal), material logistic demurrage charges (which is part of business for a import wholesaler as far as I am concerned) and inventory write-downs (also part of business).  Overall growth of 23% YoY is highlighted but take out Mightly Ape (which wasn’t in last year) and you are left with 5% growth, because Adjusted EBITDA for the Kogan brand was down 95% HoH from 51.7m to 2.5m in the second half.

·         Inventory – “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 figures tell a different story, at the end of H1 Inventory was 225.3m and was a blow out, it is now “approaching the right level” and is 228.1m yet revenue has dropped 32% HoH… What the Kogan!

·         Cash – They started the half with $76.2m in net cash and finished with $12.8m… No comment on that in the statement.  The only hope is that this is a result a reduction in the blow out in Accounts Payable reported at the end of H1 and that we will see high inventory levels convert to cash in the next half.

I continue to hold KGN, but will need to update my valuation as soon as FY21 figures are released in full.  Indications from this announcement are that it is most likely a downward valuation revision.  The real concern is the cash position and a possible need to raise capital, but I suspect that if Kogan was going to do that they would have done it prior to releasing these figures…  

Nice to see them actually put some figures in their update this time following the ASX rebuke of their last business update – blood from a stone

Kogan has been asked by the ASX to provide more transparancy on it's Q3 update - fantastic to see the ASX pushing on this point, KGN needs to be more opaic.

Details attached:

Well the market didn’t like KGN’s update this morning, down around 10% currently, a hit to EBITDA and ok not great growth seems to be why.

3QFY21:

·         Gross Sales +47% (solid but slower than +96% for H1)

·         Revenue +65% (higher than Gross Sales due to Kogan Market growth)

·         Gross Profit +54% (indicates lower margins)

·         Adjusted EBITDA -24% (Ouch… Inventory storage and increased promotional activity, so possibly timing rather than systemic)

·         Active Customers +77%: 3.2m Kogan (up from 3.0m at the end of H1), 742k Mighty Ape (up form 716k at the end of H1) – good growth here.

A typical release from Kogan, a strong focus on the positive.   I would have liked to see stronger sales growth but customer growth looks good for what is a soft quarter for retail normally.

In all I expect my FY21 sales and EBITDA estimates are overstated in my valuation, but it would take continued evidence of inventory issues and margin pressure for me to re-assess my overall valuation.  I continue to see the business as undervalued over the long term.

Valuation details from my Feb valuation in response to CHill's great valuation model.  Discount rate and terminal growth rate variances are the only significant points of difference.

I maintain my view on valuation at $39.04, based on the attached.