The Kogan.com Ltd (ASX: KGN) share price is under pressure after releasing an update with a profit warning for FY21.
Kogan’s FY21 profit warning
The e-commerce business told investors that it’s experiencing some growth pains.
During the first half of FY21, the ASX share effectively doubled in size after significant consumer demand. It spent heavily on inventory and increased its logistics footprint to 31 facilities, many of which were established over the last five months.
This rapid expansion has resulted in a number of near-term supply chain inefficiencies and inventory planning challenges.
During the month of April, the demurrage issue that the company was experiencing was resolved. This imposed significant abnormal costs on the business over the last five months. The company doesn’t expect any material demurrage issues to arise in the future.
However, the high levels of inventory have resulted in continuing high warehousing costs with customer demand consistent in April 2021 as the March 2021 quarter, which was lower than the nine months to December 2020.
Kogan has been working towards optimising/lowering its inventory position by increasing promotional activity. That means a lower near-term gross profit margin and higher near-term marketing costs.
The company expects to return to normal inventory levels (relative to the size of the business) and marketing spend as the current inventory is progressively reduced over the coming few months.
However, Kogan is also seeing cost price inflation for many products that are being planned for reorder in advance of the Christmas trading period. The inflation is being caused by COVID-19 ‘market dislocations’ and inflation in international shipping costs.
Outlook
Kogan admitted underlying operating performance will be challenged in the near-term. Adjusted EBITDA (EBITDA explained) is likely to differ from the current range of analyst forecasts.
FY21 adjusted EBITDA is expected to be in a range of $58 million to $63 million. At the moment that suggests growth compared to FY20. However, multiple downgrades and disappointments are possible in a slowing situation like this.
Kogan tried to put a positive spin on things, saying the longer term fundamentals remain very attractive with long term growth of online shopping expected. It said it has learnt valuable lessons over the last few months.
It seems management became too bullish about growth expectations and now it’s biting with inventory problems, which is affecting various elements of the business.
It’s true that Kogan does have a very exciting e-commerce platform with many ways to grow profit. However, keeping on top of supply and demand with inventory is an integral part of a business like Kogan.
The prediction of this taking a ‘few months’ means that it sounds like it’s going to affect the start of FY22 as well. Hopefully Kogan can get back to profit growth after that. The share price fall of Kogan may be a long term opportunity, but it’s very disappointing in the short term.
