Online retailer Kogan (ASX: KGN) is confident it is on track for a return to profitability in the wake of a ‘turbulent’ period for the e-commerce sector with founder and CEO Ruslan Kogan declaring the business has been ‘right sized’ for growth.
The retailer reported a blowout in losses to $23.8 million for the first half of FY23, a result driven by what Kogan describes as a ‘drastic change in demand for online retail’.
The loss is up from an $11.78 million deficit a year earlier and was driven by heavy discounting of excess inventory during the half year, with some products sold below cost.
This led to a 32.5 per cent fall in gross sales to $471 million and a 34.3 per cent drop in revenue to $275.55 million for the period.
Kogan has spent the past year cutting back on inventory that stood at $159.9 million in the previous corresponding period, shaving it down to $98.3 million by 31 December 2022.
Chief operating officer David Shafer says the company has realigned the business to achieve a ‘sustainable level of operational capacity’ after overestimating market growth during the pandemic.
“Our business significantly ramped up its capacities through the first half of the COVID-19 period in order to respond to consumer demand and our projections of future demand at that time,” he says.
A slowdown and reversal of inventory growth since then has allowed Kogan to become ‘more nimble and agile’ with a stronger balance sheet and smaller warehousing footprint. This has led Shafer to project a return to adjusted EBITDA profitability in the second half of FY23.
“The last few years were very challenging,” says Kogan.
“A lot of businesses overcommitted on inventory, including us. We made that mistake and we’ve been paying for it.”
However, Kogan is confident the worst is now behind the company after returning to profitability on an adjusted EBITDA basis in January this year. It was the first positive month recorded since July last year, supported by profitability of its New Zealand arm Mighty Ape.
Kogan says the business has been ramping up other revenue streams that he says have built a ‘strong business on multiple fronts’.
The majority of group sales and profit is now generated from non-inventory-based income streams such as Kogan Marketplace, the subscription-based Kogan First model and Kogan Mobile.
“While it has been a challenging period, our growth is coming from a subscription-type services business model and that is what we see as the strength of our business into the future,” Kogan says.
“Inventory is very important to us. It’s going to be more targeted and more efficient, and it will keep delivering incredible value that customers come to find at Kogan.com. But we are building a stronger business off the back row.”
Kogan ended the half year with 3.32 million active customers, including 773,000 from Mighty Ape, down from 3.97 million at the end of June.
However, Kogan First continued to grow, with subscribers up 47.6 per cent to more than 404,000. Kogan First subscription revenue increased 83 per cent and the company is planning to lift annual subscriptions for its customer membership program from $79 to $99.
Kogan says despite the rollercoaster ride for online retail over the past three years, ‘the ship has steadied’.
“We have a renewed focus on the ruthless efficiency that’s underpinned our entire existence, and we have doubled down on delivering great value for customers,” he says.
“We look forward to the second half of this financial year with confidence. We have reset Kogan.com for success, and in doing so, have ensured we continue to delight our millions of customers during these challenging times.”
Kogan shares were higher today on the news, trading at $3.55, up almost 4 per cent at 12.17pm AEDT.
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