Curmudgeonly value investors went “yeah, nah” when the then online electronics retailer, Kogan, listed in 2016.
Headed by mercurial Russian émigré Ruslan Kogan, the $1.80 stock, debuted with a market cap of $160 million and staggering P/E of 67 times – compared to Amazon (see last week’s Amazonstan blog), then at 64 times. Other world leading online retailers like E-Bay were on 2017 P/E’s of 12 xs.
Traditional bricks and mortar retailers like Harvey Norman were somewhat sceptical of Kogan’s chest beating and braggadocio. Ruslan planned to quickly lift revenue from $200 million to $2 billion competing against offerings he described as “unbranded shit.’’
Kogan, ever the master of self-promotion, has eaten healthy portions of humble pie while laughing all the way to the bank. There have been earnings downgrades, executive share sell offs and price rises and falls which would have given Sir Edmund Hillary a nosebleed. From issue price to a high of $10, back to $4, back to just under $9.00 powered by a local consumer Covid-inspired spending frenzy.
The Australian retail market runs around $300 billion per annum and Kogan has less than 1% penetration. But is it really a small local Amazon? The difference largely is Amazon will forsake near term profitability and continually reinvest in new businesses and markets. Kogan, meanwhile, adding SKU units (it has 10 million SKU’s on its site) and building its online presence, nothing wrong with that, but is subject to the transformational consumer spending changes between online and traditional retail.
The forced work-from-home environment and temporary closure of its bricks and mortar peers has accelerated that channel shift. The argument goes that online retailers have a significant fixed cost saving component over traditional bricks and mortar (lease/rent, higher employee staffing levels, long dated inventory tails and substantial working capital). So, Kogan becomes a channel clearer.
Because competing old school retailers need third party clearers so to avoid cannibalizing their online offering. Presently about 20-25% of total retail sales are online.
Much is made of the shift back to normality, post Covid. But Kogan shareholders have seen $200 million in sales, in 2016, with $1.3 million EBITDA scale with business from $25 million of inventory to now over $100 million of fast turning inventory, a targeted $1 billion in sales and $50 million EBITDA.
And at that scale growth builds its own momentum. Plenty to brag about there, Ruslan.
Kogan has seen plenty of growth this year in its private label/exclusive division despite supply chain issues. And consumers have been spending more, indicating uplift in website conversion rates.
The company now reckons about 10% of the Australian adult population have bought from the Kogan website in the past 12 months. And this momentum has been maintained. (Cynically I reckon a lot of Kogan Covid purchases will, in coming months, end up as council roadside pickups).
Consumers however love the website with most of the traffic generated organically. Kogan is now targeting a marketing campaign to drive sales with its active customer base in a number of different business verticals like pet insurance, mobile phone plans etc.
Kogan has a 70% dividend payout ratio. So, shareholders should see dividends increase from an expected 20 cents this year to 24 cents next, putting Kogan on a modest dividend yield of about 2.5 %. Current forward P/E predictions have Kogan on around 30x. Despite the stock’s volatility shareholders capital growth have been impressive through the cycle and, as long tailed revenue builds, expected to top just under $600 million in 2021 that P/E could drop into the low 20’. The $1 billion revenue is some way off. And it is easy to see price upgrades for Kogan to around the $11.00 mark, as it delivers. Beware, however, of missteps. Sell at the first sign.
Retailing is possibly the world’s second oldest profession, and Kogan’s business, I think, is bit like the Sydney family carpet business ad of the 1990’s – “Tell em the price, son”.
The louder the better.