Kogan.com (ASX:KGN) - Founder and CEO, Ruslan Kogan
Founder and CEO, Ruslan Kogan
Source: Byteside
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  • It’s been a tough start to the trading day for Kogan.com (KGN) after the company flagged higher expenses and the need for delicate cost management in a business update this morning
  • The online retailer has been facing some inventory management issues and warehousing costs following explosive growth over 2020
  • The company said it effectively doubled in size over the first half of the 2021 financial year on the back of a COVID-driven surge in demand
  • Such rapid growth comes its own set of challenges, including the need to expand and manage inventory
  • This inventory growth brought about some demurrage costs for Kogan, with $3.9 million in demurrage charges flagged in April this year
  • Kogan said in light of all its cost management challenges, it expects its underlying operating performance to be “challenged” in the near-term
  • The company said its best projection for full-year earnings before interest, tax, depreciation and amortisation (EBITDA) is between $58 million and $63 million for the 2021 financial year
  • While this is higher than the 2020 financial year’s EBITDA result, Kogan shares are still down 12 per cent to $8.93 each this morning

It’s been a tough start to the trading day for Kogan (KGN) after the company flagged higher expenses and the need for delicate cost management in a business update this morning.

The online retailer has exploded in growth over the past year on the back of a COVID-driven surge in online shopping. Kogan said it effectively doubled in size over the first half of the 2021 financial year.

However, such rapid growth comes with its own set of challenges, not least of all the need to expand and manage inventory. This was certainly the case for Kogan, which quickly expanded its inventory holding to 31 facilities — many of which, the company said, were established over the last five months.

This inventory growth brought about demurrage issues, which refers to fees needing to be paid to the owner of a chartered ship when a company fails to load or discharge the ship on time. 

In a business update from April this year, Kogan highlighted $3.9 million in demurrage charges after it had to store larger than expected levels of inventory.

Today, Kogan said this demurrage issue has been resolved and the company does not expect to incur further costs from this demurrage issue in the future.

Fluctuating demand

Another challenge highlighted by Kogan is inventory management as demand for its online marketplace continues to fluctuate.

Kogan said customer demand for April has been consistent with demand over the first three months of 2021, but below the levels seen over the nine months to December 2020.

This means Kogan rapidly grew its inventory last year to support the strong demand, which brought about high warehousing costs.

Now that demand has settled slightly, however, this means the company still has high warehouse costs but not as many products being shipped out.

As such, Kogan said it has been progressively working towards optimising its inventory position by increasing promotional activity — increasing marketing costs and leading to lower near-term gross margin.

What does this mean for Kogan’s bottom line?

Kogan said in light of all its cost management challenges, it expects its underlying operating performance to “continue to be challenged in the near-term”.

The company said its best projection for full-year earnings before interest, tax, depreciation and amortisation (EBITDA) is between $58 million and $63 million for the 2021 financial year.

For reference, Kogan’s EBITDA for the 2020 financial year was $46.5 million — meaning the predicted 2021 financial year result is an improvement, but perhaps not reflective of the surge in company growth since the pandemic struck.

Still, the company is confident in the future of its business.

“The longer-term 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,” today’s market announcement said.

“The initiatives that the company has put in place to address the rapid scaling of a large eCommerce company are expected to drive continuous customer experience improvements in FY22.”

Investors didn’t respond particularly well to today’s update, however, with Kogan shares down 12 per cent to $8.93 each as of 10:38 am AEST. Kogan has a $945 million market cap.

KGN by the numbers
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