3 reasons why the Kogan (ASX:KGN) share price could be a smart buy

The Kogan.com Ltd (ASX: KGN) share price could be a smart idea to look at right now for a few different reasons.

Kogan is one of the largest online-only retailers in Australia. It sells a wide array of products through its Kogan.com website such as TVs, phones, clothes, shoes, garden supplies and appliances. It also acquired the Mighty Ape e-commerce business in New Zealand not too long ago.

However, the Kogan share price has dropped by 58% over 2021. After this decline, there are a few reasons why it could be an investment with potential, not just for being cheaper:

Continuing to scale

Kogan says that online retail is in its infancy in Australia. Its market share has grown over many years, while the market itself continues to rapidly increase in size. In FY19 it had a 2.1% market share, in FY20 that market share had increased to 2.4% and in FY21 the market share had risen again to 2.7%.

In the first four months of FY22, it has seen a “strong performance” from Kogan Marketplace and Kogan First.

Looking at the first four months of FY22, total gross sales (including Mighty Ape) were up 19.2% to $432.7 million. Just looking at Kogan.com sales alone, there was growth of 4.8% despite all of the impacts of COVID-19 and the large level of e-commerce sales in the prior year.

In the first quarter of FY22, active customers had increased by 30.7% year on year to 3.35 million. Kogan First members had increased 171.1% year on year and 64.4% quarter on quarter to 197,000.

Recovery of margins expected

The company (and analysts) have been focused on the significant drop in profitability of the business over 2021 as issues relating to excess inventory affected various expense categories, with impacts like increased inventory costs and higher spending on advertising required. This may have impacted the Kogan share price heavily.

The company said that a couple of months ago it had resolved the previous inventory pressures and closed a number of inefficient overflow warehouses. Kogan noted that operating costs have been a key focus for the business in the first four months of FY22.

This reduction in inventory levels led to the company significantly reducing its warehousing costs, delivering an average variable cost saving of $0.8 million per month in the first quarter of FY22 compared to the fourth quarter of FY21.

Long-term plans

Management have set goals for the next five years ahead. The company is focused on the long-term.

It is aiming to achieve $3 billion of annual gross sales and 1 million Kogan First subscribers by FY26. In FY21, it achieved around $1.2 billion of annual gross sales. Therefore, the company is looking to generate a compound annual growth rate (CAGR) of at least 20% over this five-year period to reach that goal.

Management say that the company can do this by re-investing in its customers, ensuring they get the best deals on a wide range of products, delivered quickly and efficiently.

A key strategy for the business is to get customers, particularly Kogan First members, to come back and re-purchase again and again. These customers will generate more gross sales for the company and Kogan may not need to spend as much on advertising with them.

Kogan share price valuation

According to Credit Suisse, Kogan shares are a buy, with a price target of $13.88 – that’s around 70% higher than where it is today.

Credit Suisse puts Kogan shares at 20x FY23’s estimated earnings.

The post 3 reasons why the Kogan (ASX:KGN) share price could be a smart buy appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Kogan.com ltd. The Motley Fool Australia owns and has recommended Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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