Can Kogan’s share price turn the page in FY23?

The Kogan.com Ltd (ASX: KGN) the share price was heavily sold off. For the 2022 calendar year to date, it has fallen by about two-thirds. But is this a possibility?

The e-commerce retailer has been through a lot volatility from the beginning COVID-19. But it’s now down more than 30% since the start of the COVID-19 slump. In other words, it appears that the market now rates the business as having a less favorable outlook than it did at the worst of the pandemic’s uncertainty.

Certainly, the profitability of the company has decreased significantly.

Let’s take a look at Figures for the third quarter of FY22which is the most recent update.

Quarterly update

Total gross sales were $262.1 million, down 3.8% year over year. Gross profit fell 11.2% year over year to $41 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was down 110.5% year-over-year and lost $0.8 million. The decline in profitability could have had a big impact on Kogan’s share price.

Active customers rose 3.6% year-on-year to 4.1 million, while Kogan First members jumped 264% year-on-year to 328,000.

Kogan explained that the previous year had seen a decline in sales of both exclusive brands and sales of third-party brands, which had led to “extraordinary growth”.

Consumer demand fell short of management’s expectations for continued growth. At the end of the quarter, inventory was $193.9 million. The company intends to “gradually recalibrate” its baseline inventory level over the next year.

Can things improve in FY23?

The management, of course, thinks so.

In terms of sales, the business is much bigger than two years ago. Gross sales in the third quarter of fiscal year 2020 were 42.6% higher than in the third quarter of fiscal year 20.

If Kogan can improve its profit margin, then the profit numbers could look a little better.

Kogan.com founder and CEO Ruslan Kogan said:

While current market conditions are challenging, the foundations laid over the past 16 years stand us in good stead. Our current focus on recalibrating inventory levels and core operating expenses is aimed at returning the company to its historical margins as well as positioning it for its next phase of growth.

Kogan didn’t specify what profit margins the business would aim for, but a return to profitability could provide some reassurance to the market about its future prospects.

Looking at earnings estimates at CMC Markets, Kogan is expected to return to form net profit after tax (NPAT) in FY23, with a forecast of 6.5 cents earnings per share (EPS). Therefore, Kogan shares are valued at 42 times FY23 earnings estimates.

The FY24 earnings forecast is 14 cents earnings per share, which means it is valued at 20 times FY24 earnings estimates.

Broker rating

UBS rates Kogan as a sell due to lower profitability and inventory levels. The economic environment can also make it challenging for retailers. There is a constant impact on supply chains.

However, Kogan’s share price has fallen so much that the $2.90 price target represents little upside over the next 12 months.