Is Competition Killing Kogan.com?

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Analysts highlight growing competitive pressure on Kogan.com and question the long-term sustainability of the company’s business model.

-Analysts unconvinced by Kogan.com’s quarterly
-Competition weighs on marketplaces
-Unsustainable business model, suggests Jarden
-Focus on membership numbers for Kogan First

By Mark Woodruff

While Kogan.com ((KGN)) remains one of the largest and most profitable e-commerce retailers in Australia, points out Buy-rated Canaccord Genuity, other less enthused analysts note competitors like Amazon, eBay, Kmart, and Temu have increasingly marginalised domestic online marketplaces.

Future profitability for Kogan.com will be derived from Kogan First membership, the company has previously stated, but in commentary upon the release of fourth quarter results, management warned membership growth may slow in FY25.

Moreover, the sustainability of Kogan First is inevitably linked to the health of the Kogan ecosystem, points out Citi, noting overall activity indicators are showing double-digit declines.

Due to competitive pressures, explains the broker, July-to-date web traffic for both Kogan.com and Mighty Ape in New Zealand deteriorated further in the fourth quarter, falling by -28% and -16%, respectively, year-on-year. App usage is also down by -40% year-on-year.

In further fourth quarter negatives, UBS highlights active customers remain in decline and the gross margin came in slightly below the broker’s forecast.

More positively, Kogan.com product sales (Exclusive and Third-Party brands) returned to year-on-year growth of 7% and FY24 earnings (EBITDA) of $40m marked a small beat versus the $39m forecast by the broker.

Jarden has lowered its target for Kogan.com to $4.30 from $5.40 and downgraded its rating to Underweight from Neutral due to a reduction in the broker’s terminal value growth rate to -3% from 3%.

This broker holds concerns around ongoing corporate governance and the long-term sustainability of the company’s business model.

Jarden reiterates competition from Amazon and new entrant Temu endangers growth for Kogan First, pushing the company’s active users into structural decline. As the membership price is increased for Kogan First, there is also increased risk of churn, cautions the broker.

These views follow the ninth successive quarter of decline in active users in the June quarter, which overshadowed an around 4% earnings (EBITDA) beat against Jarden’s forecast.

Focus on Kogan First

As Kogan First is the key line item the market is focused on, further analysis is warranted.

Kogan First Subscribers increased by 30,000 over FY24 to 502,000, but UBS draws attention to an apparent increase in churn during the fourth quarter following a price increase, as gross sales increased by 26% quarter-on-quarter, yet the membership price increase was 30%.

Because of the operating leverage relating to membership fees and the fact Kogan First members are far more engaged (around 20% of customers generating circa 60% of Kogan.com gross sales) the market should expect greater transparency around the breakdown of gross additions and churn rate, in this broker’s opinion.

After Canaccord Genuity incorporates a subscription price of $129 per annum, $65m of earnings (EBIT) should be generated going forward.

This broker raises its FY25 EBITDA forecast by 3% and still sees see upside to this estimate stemming from the Kogan First subscriber base (i.e. the $65m EBIT contribution) and the Kogan Mobile division.

More on the fourth quarter result

The macroeconomic outlook for retailers remains rather anaemic, points out Canaccord, as evidenced by the -15% and -13% respective year-on-year revenue declines for Kogan marketplace and Mighty Ape in the fourth quarter.

By way of contrast, consensus was expecting revenue growth of 7% and 6%, respectively in FY25, and now Citi expects no growth for both segments.

A rebound for Kogan First gross sales in the quarter wasn’t sufficient for this Sell-rated broker to turn positive.

While Kogan First subscribers grew by 25% year-on-year and gross sales rose by 50% in the quarter, subscription sales in the second half were still lower than in the first half, and Citi analysts see no abatement of competitive pressures heading into FY25.

Outlook

Canaccord anticipates Kogan.com’s private label business will be a beneficiary as consumers trade down from branded goods, noting the Private Label/Exclusive Brands division returned to sales growth in the fourth quarter.

This broker even suggests Kogan.com could become an acquisition target for a global retailer who identifies the subscriber base as a valuable asset to backfill and enhance its own services.

Three brokers covered daily in the FNArena Database have an average target price of $6.95, suggesting around 60% upside to the latest share price. Citi (as noted above) has a Sell rating while UBS is Neutral.

It should be noted Ord Minnett (Accumulate; target $10.70) has not updated research on Kogan.com since late-April.

Outside of daily monitoring, Jarden is Underweight after downgrading from Neutral and Canaccord Genuity maintains a Buy rating. Providing a real contrast, Canaccord has an $8.00 target while Jarden is now at $4.30, down from $5.40.

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