Kogan growing pains put earnings under strain

Kogan growing pains put earnings under strain

Kogan.com founder and CEO Ruslan Kogan.

After doubling the size of the overall business during the first half of FY21, online retail giant Kogan.com (ASX: KGN) is expecting earnings for the full year to significantly soften as rapid growth takes a toll.

In a two-page business update released today, shareholders were given some insight into how the business is managing to keep pace with growth.

These challenges will ultimately result in FY21 adjusted EBITDA coming in the range of $58-63 million.

Though that would be an improvement on the group's FY20 adjusted EBITDA result of $49.7 million, the group managed to generate even more than that in the first half of FY21 alone recording $51.7 million in adjusted earnings.

Investors have responded to the update in turn, with shares down more than 10 per cent in early trade to $9.15 - a far cry from the company's all-time high price of $25.10 recorded in October 2020, just seven months ago.

The company says this earnings estimate is a direct consequence of the company's major growth experienced in the December half.

"Over the first half of FY21, Kogan.com effectively doubled in size following a significant increase in consumer demand," says Kogan.com.

"However, as with any company that experiences such rapid growth, Kogan.com has had to progressively resolve the operational challenges that come with this growth."

Kogan.com says it expanded its inventory holding following that massive growth 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, all of which are being addressed to optimise operations going forward," says Kogan.com.

"In order to provide the delivery experience customers desire, Kogan.com built up its inventory levels from late 2020, which has caused high warehousing costs that are continuing.

"Kogan.com is expected 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."

While the company's EBITDA outlook may disappoint some shareholders, the company believes longer term fundamentals remain very attractive given its position in the Australia and New Zealand online retail markets.

"The Board looks to the future with confidence as the business has invested in key strategic initiatives and has a strong level of in-demand inventory heading into the first half of FY22 while observing price inflation through global supply chains," says Kogan.com.

"The initiatives that the company has put in place to address the rapid scaling of a large e-commerce company are expected to drive continuous customer experience improvements in FY22.

"The company has learnt valuable lessons over the last few months, including many key strategies on how to better scale operations of a large fast-growing e-commerce company."

Shares in KGN are down 10.59 per cent to $9.05 per share at 10.08am AEST.

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