She’s Apples: Ruslan Kogan wants his ASX-listed retail business valued like a software company after $25 million loss

- August 22, 2023 4 MIN READ
Ruslan Kogan and David Shafer.
Kogan.com CEO Ruslan Kogan and CFO David Shafer. Photo: Supplied
Shares in online retailer Kogan.com fell nearly 14% in early trade on Tuesday after the company revealed sales had fallen 28%, revenue dropped 32% and the business posted a 26% fall in gross profit for the 2023 financial year.

The statutory net profit after tax (NPAT) loss was $25.9 million an improvement on FY22’s $36.2 million loss. Adjusted NPAT was a $7.7 million loss.

The results were within guidance as the business (ASX:KGN) continues to deal with the fall out of excessive inventory and associated costs in the wake of the pandemic. Inventory was reduced by 57% last financial year to $68.2 million in value at June 30, with the company saying its levels are now aligned to current demand.

Overstocking problems first emerged in April 2021, with founder and CEO Ruslan Kogan saying they learnt “valuable lessons” at the time. Those lessons continued until the CEO declared “the ship has steadied” in in February this year, as the company’s half-year losses doubled.

FY23 saw revenue drop 31.9% to $489.5 million, with gross sales down 28.4% to $844.8 million.

Gross profit declined 26% year-on-year, to $136.6 million, with the company saying it was impacted by the soft topline performance and suppressed margins in 1HFY23 in order to correct inventory levels.

But getting inventory and associated marketing costs under control saw gross margin bounce back, up 2.2% for the year, with an accelerated improvement of 8.9% in the second half of the financial years.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) was $6.8 million, with an EBITDA loss of $20.8 million.

The company says the July 2023 unaudited management accounts showed Adjusted EBITDA of $3.5 million.

Kogan.com saw its subscriber program – the company’s Amazon Prime – growing by 39,000 over the 12 months to 401,000 people, with revenue up 69.6% to $26.3 million.

Shares in the 17-year-old business, which was dropped from the All Tech Index in March this year, having been climbing from a 12-month low of $2.91 in October last year, fell under $5 in morning trade.

Alongside electronics retailing, the company also has several other Kogan-branded products, including travel and insurance , internet and mobile, cars and energy, as well as Dick Smith and Matt Blatt. In December, the business acquired the assets of collapsed furniture retailer Brosa for $1.5 million from the administrators, including a database of 500,000 people,

But the business now posits in its annual results that it is shifting from making money flogging cheap electronics to platform-based sales, claiming last financial year saw a majority of income generated from that side of the business – 57% of gross sales and 71% of gross profit. Kogan says he now wants to see his eponymous business valued more like a software company than a retailer.

“This has enabled us to deliver better quality earnings as we successfully transitioned into a higher margin, lower risk, platform and software based business while offering our customers increased competition and improved value,” he said.

“We have set ourselves up for success in FY24 and beyond, and in doing so, we have ensured we’re in the best position possible to deliver exceptional value products and services to millions of customers.”

Mighty Ape importance grows

In putting forward that premise, Kogan.com excluded a key source of income, Mighty Ape, to calculate its platform sales percentage figures. The company acquired the Kiwi online retailer in December 2020 for $122 million. The fourth and final tranche of acquisition payments is due later this year to its founders.

The numbers around the “platform sales” shift are in part aided by plummeting income from the product sides of the business far more than growth on the platform end. Alongside Kogan First, the only other divisions to grow revenue were Kogan Mobile, with a 6.4% increase of $700,000 to $11.6 million, and Kogan Money, up 22% and $600,000 to $3.4 million.

Revenue from exclusive and third-party brands went over a cliff, with nearly $130 million disappearing from the exclusive side, down 41.3% to $183 million, while third-party revenue plunged 53.5% $82.2 million – $94.4. million less that FY22.

Despite a small fall in revenue from Mighty Ape, its importance to the company’s total revenue grew dramatically to just under a third.

Kogan Marketplace gross sales declined 28.5%.

Overall, product divisions revenue fell 45.7% to $265.2 million. Mighty Ape suffered the smallest decline at 5.3%, down $8.6m to $154.8m, representing 31.6% of the company’s total revenue of $489.5m.

Apple values

Ahead of the results today, Ruslan Kogan looked to Apple for inspiration on its stock price, telling the AFR “we are now actually a tech business” and should be valued like one.

“While Apple’s top line continues to grow at a moderate pace, its share price has been going ballistic because everyone’s valuing them like a software business,” the CEO said.

“Even if nobody changes their Apple Mac or their iPhone, their apps and Apple TV subscriptions are going to keep renewing … And investors see this software revenue as the best for business because it is the least risky and highest margin.”

One small different between Kogan.com and Apple is that the US computing and software giant’s latest results saw it pay a cash dividend of US$0.24 per share on US$81.8 billion in revenue, down 1% YoY and quarterly earnings per diluted share of US$1.26, up 5%.

The Australian small cap’s Fy23 results remain a far cry from the heady days when Kogan.com co-founders Ruslan Kogan and CFO David Shafer, sold a 6.9% stake in the business, worth around $160 million, when the shares were worth more than $21.60, following the FY20 results.

While investors have now been waiting two years for a dividend from the loss-making business, Ruslan Kogan remains one Australia’s highest paid CEOs, taking home $15.2 million in FY22 – a 60% increase on FY21’s $9 million when the business was last profitable.

Today’s results also note “significant equity-based compensation expenses driven largely by the award of options after the Kogan.com’s 2020 AGM”, with Kogan and Shafer offered $31 million worth of stock a strike price of $5.291.

Kogan.com shares regained some value in afternoon trade to sit at $5.04, but remain down nearly 12%.

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