The Kogan.com Ltd (ASX: KGN) share price has dropped by 42% over the last six months. Could it be a turn around opportunity?
Why has the Kogan share price fallen so much?
Kogan has explained the difficulties that the e-commerce business has been facing.
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, in the millions, on the business over the last five months. The company doesn’t expect any material demurrage issues to arise in the future.
If you’re wondering what demurrage means, the Googled definition puts it succinctly, it’s “a charge payable to the owner of a chartered ship on failure to load or discharge the ship within the time agreed.”
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.
Could it be a turnaround opportunity?
Sometimes businesses are able to get back on track – look at an ASX share like BWX Ltd (ASX: BWX).
Many of the issues that Kogan is experiencing are likely to be temporary. The demurrage costs are finalised and the inventory position should hopefully improve over time as well.
Whilst there have been some issues relating to growth, and very generous packages for management, I think it is worth thinking about for FY23 onwards. Online shopping is steadily growing and Kogan is one of the biggest businesses in this space. It’s steadily making bolt-on acquisitions that improve the growth prospects like Matt Blatt and Mighty Ape.
Prior to these issues, Kogan was revealing steadily rising profit margins, which could return in FY23. But there’s likely to be some volatility over the next 12 months as growth slows. According to CommSec, the Kogan share price is valued at 21 times the estimated earnings for the 2023 financial year.
There are also other ASX growth shares that might be opportunities to think about.
