The Kogan.com Ltd (ASX: KGN) share price has been sold off heavily. It's down around two thirds in the 2022 calendar year to date. But is this an opportunity?
The e-commerce retailer has been through a lot of volatility since the start of COVID-19. But, it's currently down more than 30% from the bottom of the COVID-19 crash. In other words, the market seems to be pricing the business as having less favourable prospects now than at the worst point of the pandemic uncertainty.
It's certainly true that the company's profitability has significantly reduced.
Let's look at the FY22 third quarter numbers, which is the most recent update.
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Quarterly update
Total gross sales were $262.1 million, which was a reduction of 3.8% year on year. Gross profit fell 11.2% year on year to $41 million. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) sank 110.5% year on year to a loss of $0.8 million. Reducing profitability may have had a big impact on the Kogan share price.
Active customers grew 3.6% year on year to 4.1 million, while Kogan First members jumped 264% year on year to 328,000.
Kogan explained that there was a decline in both exclusive brands and third-party brand sales, cycling "extreme growth" in the prior year.
Consumer demand did not meet management's expectation of continuing growth. It had $193.9 million of inventory at the end of the quarter. The company has an intention to "progressively recalibrate" its baseline level of inventory over the coming year.
Can things get better in FY23?
Management certainly thinks so.
In terms of sales, the business is quite a bit bigger than it was two years ago. FY22 third quarter gross sales were 42.6% higher than the third quarter of FY20.
If Kogan can improve its profit margins, then the profit numbers may look a bit better.
Kogan.com founder and CEO Ruslan Kogan said:
While market conditions are challenging at present, the foundations laid over the last 16 years are holding us in good stead. Our current focus on recalibrating inventory levels and core operational costs is aimed at returning the company to its historical margins and also to position the business for its next phase of growth.
Kogan didn't spell out what profit margin the business would be aiming for, but a return to profitability could go some way to reassure the market of its future prospects.
Looking at the earnings estimate on CMC Markets, Kogan is expected to return to making a net profit after tax (NPAT) in FY23, with a projection of 6.5 cents of earnings per share (EPS). This puts the Kogan share price at 42 times FY23's estimated earnings.
The FY24 profit projection is 14 cents of EPS, meaning it's valued at 20 times FY24's estimated earnings.
Broker rating
UBS rates Kogan as a sell because of the lower profitability and inventory level. The economic environment could also make it tricky for retailers. There is an ongoing impact on supply chains.
However, the Kogan share price has fallen so much that the price target of $2.90 represents a small rise over the next 12 months.
