Doubts & Worries Dominate Kogan’s Outlook

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Despite a marketing-led revenue boost, earnings for Kogan.com missed expectations in the second quarter and brokers remain cautious on the outlook.

-Kogan.com’s first half earnings miss expectations
-Marketing investment boosts revenue and gross profit
-Concerns over rising competition/marketplace share

By Mark Woodruff

Online retailer Kogan.com returned to top-line growth in the first half of FY25, with gross sales accelerating at the fastest pace since the pandemic, but higher marketing and technology costs led to an earnings shortfall, triggering a -22% share price decline post the recent share market update.

Shareholders have become accustomed to a declining share price, which has fallen to $4.67 at the time of writing after peaking above $24 in October 2020.

While analysts acknowledge the strength of Kogan First membership and improved sales momentum, concerns remain over competition, declining web traffic (despite a year-end surge), and the sustainability of growth.

For the first time in three years, management invested in marketing and the benefits were illustrated by the company’s revenue and gross profit performance in the second quarter, points out Canaccord Genuity.

Accelerating strongly into the end of 2024, revenue and gross profit beat the broker’s forecasts by 10% and 18%, respectively.

Overall, sales exceeded the consensus expectation by 21%, growing by circa 24% on the previous corresponding period, yet higher marketing expenditure, as well as greater technology costs at Mighty Ape in New Zealand, meant operating earnings fell -17% short of consensus.

Ord Minnett awaits further data before passing judgment on the company’s new strategy to reinvest in growth, a necessary impost, according to the analyst, given a highly competitive backdrop as also evidenced by Wesfarmers’ ((WES)) recent exit from its e-commerce platform Catch.com.

At Kogan.com, the Marketplace segment facilitates third-party sellers on its platform, and the Product segment generates revenue through direct product sales, making the latter more margin-sensitive due to inventory management and cost fluctuations.

While a segment breakdown was not provided, UBS highlights a solid implied improvement in Marketplace and Product segment sales, noting increased Kogan First member fees were the primary driver of earnings growth.

This analyst suggests the return to top-line growth should be welcomed by investors, who have viewed the stock as largely ex-growth since covid. UBS also highlights Kogan.com remains the most profitable e-commerce company in Australia.

But UBS has its own doubts, see further below.

The doubters

While initially questioning if the earnings miss was mostly due to marketing spend or underperformance at the Mighty Ape operations in New Zealand, Citi has now decided both are likely evenly responsible.

More broadly, Citi ponders whether Kogan.com is capable of sustaining growth while maintaining margin.

Expecting a negative trading update in February, this broker also fails to see a way management can address mounting competition from online player Amazon (brand power) and the ultra-low pricing at Temu.

Further, the marketplace will find it difficult to take market share from leadings bricks and mortar consumer electronics retailers, in the analysts’ opinion, given their brand power and access to major suppliers.

Highlighting an around -3% fall in web traffic in the first half, Citi notes a further -21% year-on-year decline in the second half up to January 15.

Additionally, Citi analysts observe Kogan app usage declined by -27% year-on-year up to January 20, while competitors either grew or saw smaller declines.

Similarly, UBS remains unconvinced Kogan.com can achieve sustainable top-line growth while delivering operating leverage, as cost reductions appear exhausted and visibility on Kogan First retention remains limited.

Mighty Ape and Kogan First

The analysts at Canaccord Genuity note how the digital transformation of Mighty Ape resulted in “implementation and technology challenges” which impacted profitability during a key sales period.

Fortunately, these issues have since been resolved, suggesting to the broker a tailwind for earnings moving forward.

Ultimately, the analysts at Citi believe Mighty Ape has a greater chance to grow in New Zealand due to lower competition among online marketplaces.

While overall earnings momentum may now be slowing, this broker believes the contribution from Kogan First will remain strong, driven by a larger member base and the annualisation of fee increases.

Despite these near-term positives, and taking the big picture into account, Citi fails to see how Kogan First membership can grow independently in the face of declining marketplace gross transaction value (GTV) and product revenue for Kogan.com.

Of the four brokers updated daily covering Kogan.com in the FNArena database, three have Hold (or equivalent ratings) while Citi has a Sell rating.

The average target price of $5.14, down from $5.23 prior to the quarterly update, suggests circa 10.70% upside to the share price.

Outside of daily coverage, Buy-rated Canaccord Genuity has an $8.00 target.

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