Not a total loss – Kogan is a total bargain, albeit based on total hubris

Shares of Kogan.com fell 7% on Tuesday, closing at around $3.50, about 60% from recent highs, after the Australian version of Bezos.com finally delivered its inaugural full-year loss. which he has been talking about since around Easter.

It doesn’t matter what Morningstar says. Even at $11.70, this stock is fair value.

The inference is: if you owned Kogan (ASX:KGN) and his $35.5 million deficit was a surprise and added his two cents to the 7% drop, so frankly it’s a bit silly.

I for a one credit management for insanely flagging their inventory-related mismanagement way ahead of schedule, so that even we were talking about the not-unpleasant and, yes, possibly therapeutic slow-motion CAGR drop to come.

At the time, he may have pointed to arrogance as the real culprit in KGN’s needless downfall.

After all, on one level, Kogan.com is about being a really successful e-commerce business, selling everything from televisions, credit cards, clothing, Matt Blatt furniture, and even insurance.

But, on another level, when you name something after yourself, it can really only be about you.

Back in 2008, when Kogan CEO and founder Ruslan Kogan launched his Ruslan-focused online marketplace, his mission statement was delight customers. Whether or not that has been achieved will be something that executives are currently debating (the company says that right now they are actually obsessed over it). While, on the other hand, Kogan’s unspoken mission, to delight Ruslan, is not up for debate.

The whole Visionary as Founder thing put Ruslan and his handpicked Praetorian Guard in the spotlight as the company did, in retrospect, ill-advised excess inventory.

It was pico-COVID…

… We all made mistakes:

The former US president, for example, wanted to inject the world with ultraviolet light. Our former prime minister tried to seize everything. I failed to kill and bury several hatchlings in the backyard while I had the chance.

Ruslan Kogan thought that the whole e-commerce thing had finally clicked.

“Finally,” Kogan may have dialogued with himself, “as I suspected, it was only a matter of time until everyone was buying everything online.”

Thus vindicated, Kogan the Man piled endless Kogan the Company warehouses full of endless junk. He overpaid for a non-existent shipment and didn’t see how the customer base was living online and locked up.

Worst of all, with a net profit of just $3.5 million (a drop of almost 90% from the previous year), Kogan the Company gave Kogan the Man and his Men about $53 million worth of sweet options, candy in the money: Materially screwing up NPAT and accounts, with non-cash share-based payments having to be fully recorded, no matter how much the company shares its name.

So much for the damning look of The CEO as a Star.

Now for the retraction

When your name is on the label, there can be no question.

As a working adult, endowed with free will, free access to information, and a Volkswagen (VW) Tiguan, I know better than most the temptation to lie, cheat, confuse, and fabulate in order to get out of a mistake.

Volkswagen did just that when the US Environmental Protection Agency (EPA) said it thought VW had been cheating on its emissions tests.

VW said something like, that’s crazy, man, and moved on.

It wasn’t. It turned out to be crazy to talk about some very crazy behavior, like putting ‘defeat devices’ in VW cars, or more accurately in my VW car, that would detect when cars were put through lab tests and trigger controls to reduce nitrogen emissions, while actually emitting about 40 times the limit for nitrogen dioxide.

This is what happened when VW confessed:

Idiots. I mention this because I’m not just trying to sell my Tiguan (2008 Black, 100,000 miles) like an idiot, but because maybe if the company had been run by Wolfgang Volkswagen it might have been different. There might have been a sense of… property.

In any case, Ruslan Kogan and the newly rich executive preempted their misstep. They owned it. The share price fell. But the essential offering has not.

the worst is behind

As I write, Credit Suisse tells me that their rating on KGN is being upgraded to Neutral from Underperform.

Traders note that selling costs moderated in the second half and believe Kogan First’s price increases should provide additional support in FY23.

A small gain is now expected in FY23, with estimates for FY24 and FY25 improved by 38% and 30%, respectively.

Credit Suisse has been watching the bloodshed lately in the stock market and says that KGN’s cash position has improved.

The target price also rises a bit to $3.66 from $3.44.

And now I’m going to the person who even when using bullet points knows the business best of everyone I know. Presentation:

Mr. Johannes Faul of Morningstar:

• We maintain our fair value estimate of AUD 11.70 per share for Kogan ‘no pit’.

• Kogan’s underlying loss per share of A$0.03 for FY2022 did not meet our estimate of a loss of A$0.01 per share, primarily due to a lower than expected income tax benefit.

• July 2022 posted gross sales of $1.2 billion, gross profit of about $184 million, and underlying EBITDA of $19 million.

• We expect Kogan to improve its EBITDA margins in FY2023 as its focus remains on cost efficiency.

• In the June 2022 quarter, Kogan posted underlying EBITDA of $3 million after suffering a slight loss in the March 2022 quarter.

• KGN has continued to sequentially reduce its marketing and warehousing expenses with decreasing inventory levels.

• We expect EBITDA margins to remain relatively stable, despite significant operating deleveraging.

• We estimate that gross sales decreased more than 20% in July 2022 compared to July 2021, a period marked by high sales due to COVID restrictions.

• However, we continue to expect Kogan’s top-line growth to pick up in FY2023 after the exceptionally strong COVID-19-induced prior period sales growth passes.

• We estimate that the group’s gross sales will increase by 5% in fiscal year 2023 and an average of 6% per year over the next decade.

• Kogan First, Kogan’s loyalty program, continued to be a highlight in Kogan’s results.

• Subscriptions increased to 372,000 in June 2022, up 8% from March 2022 and 36% up from 274,000 in December 2021.

• Activity around Kogan First is likely to lower short-term profitability for the business while enhancing long-term shareholder value.

• Kogan First’s subscriber acquisition costs are captured up front as a marketing expense, but we expect membership to generate a long-lasting revenue stream if members are retained.

• Kogan First’s renewal rates have improved to 85% in FY2022 from 78% in FY2021 and 70% in FY2020.

• October 2022 increase in annual subscription fees may affect renewals. (Fees will increase to $79 from $59 per year previously, due to cost inflation.)

I know this because about 2 minutes after the KGN FY22 results were sent to me, I also received this:

Worth noting: Bezos.com.au (Amazon Australia) currently charges $59 for an annual Prime membership, much lower than the standard $139 annual fee it charges in the US.

• We forecast subscribers to grow to around 760,000 in FY2026, below management’s mid-term goal of 1,000,000 subscribers by FY2026.

• Unsurprisingly, Kogan’s dividend remains suspended.

• We consider it prudent to preserve your cash given the still high marketing costs to grow Kogan First and consolidate gross sales.

• As of June 2022, Kogan had net cash of $31 million.

• With liquidation of high inventories, operating cash flow improved to $62 million vs. negative operating cash flow of $63 in fiscal 2022