Why 'tight-arse' Kogan is going hunting
Kogan.com's $115 million capital raising is designed to help the retailer maintain its growth rate by buying up COVID-19-hit rivals.
The combination of a tripling of Kogan.com shares in the last 10 weeks and last Friday’s bullish trading update would have had many braced for some sort of deal from the online retailer and its founder, Ruslan Kogan.
But there are sighs of relief that the deal announced on Wednesday is a $115 million capital raising to fund the next phase of growth, rather than the founder selldowns that followed the release of positive news in September 2018 and again in August 2019.
It’s another sign of welcome maturity and ambition from a business that’s burst through the $1 billion market cap milestone in spectacular fashion – in the midst of one of the biggest disruptions in the Australian economy for a generation, no less.
Ruslan Kogan believes retail is seeing a "once in a century" moment. David Rs revealed by Street Talk on Tuesday night, Kogan.com will raise $100 million through an institutional placement priced at $11.45, a discount of just 7.5 per cent to Tuesday’s record closing price of $12.38. Another $15 million will be raised via a share purchase plan for retail investors at the same price.
For perspective, Kogan.com shares sat at just $4.10 on March 23, when the Australian market touched the bottom and the COVID-19 crisis threatened to engulf the world.
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$14.38 2.42%View KGN related articlesJun 19Sep 19Dec 19Mar 200.005.0010.0015.00Updated: Jun 19, 2020 – 6.42pm. Data is 20 mins delayed.AdvertisementBut while the world is a decidedly more optimistic place now, it’s actually the pandemic that has turned Kogan.com from a nice little online retailer into a white-hot growth stock.
As Ruslan said during a Zoom call for investors on Wednesday morning – resplendent in his black Kogan.com hoodie, of course – the structural shift to online retailing he’s been riding for 15 years has been turbocharged. “We are seeing it advance several years in the space of a few months.”
Kogan.com was always going to be a beneficiary of this, but as Canaccord Genuity analyst Owen Humphries points out, it appears to have grown much faster than the market.
Kogan.com sales increased by more than 100 per cent in April and by the same amount again in May, while NAB’s online sales index suggested online sales grew by 59 per cent in April.
Structural change, or canny marketing?
As Credit Suisse says, how much of this sales surge can be attributed to the structural COVID-19-driven switch to online shopping, and how much can be attributed to Kogan.com’s aggressive COVID-19 marketing efforts – it’s spend increased 310 per cent across April and May – is difficult to determine.
But the broker argues this is exactly the right time to be attracting customers to the platform. Kogan.com’s active customers jumped 7.6 per cent in May to finish the month at 2.1 million.
Advertisement“With more customers having experienced online purchasing and delivery, we believe that a large proportion of online sales growth will stick,” Credit Suisse says.
The $115 million raised from investors is designed to ensure that is the case.
Co-founder and chief financial officer David Shafer says despite Kogan’s growth, and its creation of a marketplace where third parties can sell their goods to Kogan.com customers on commission, there are still gaps in the retailer’s product range.
But the COVID-19 pain is creating opportunities to fill them.
The right price for a tightwad
Ruslan says Kogan.com is regularly presented with acquisition opportunities, but the fact that “we’re tight-arses” means only one deal has been done in the past four years –
But the number of deals coming across the desks of Ruslan and Shafer has jumped sharply as a result of pressure on retailers due to the pandemic. Even more importantly, Ruslan says they’re “in that tight-arse range. Price expectations for really valuable assets are now very realistic”.
AdvertisementEarly-stage discussions on potential deals are already under way, although there are no details yet.
Shafer declared Kogan.com was in “pole position” to take on struggling businesses like Matt Blatt that could be turned around, but is also prepared to look at better-performing businesses that could flourish on the Kogan.com platform.
While there is no shortage of confidence from Ruslan and Shafer, there will be plenty of investors who will rightly pause at the idea of putting more money into the shares of a largely discretionary stock that’s run so hard, so quickly.
That's especially so at a time when the Australian economy is about to enter the inevitably difficult period that will follow the end of the biggest government stimulus program in decades.
But building a war chest for growth amid what Ruslan, ever the pitchman, calls a “once in a century opportunity” makes sense.
Discipline key to turning growth wheel
If he and Shafer can maintain their “tight-arse” approach to acquisitions, and spend this $115 million in a disciplined way, then success in turning active customers into repeat buyers should make the growth wheel turn faster.
Fortunately, discipline has been one of the hallmarks of this business. For all the hyperbole around once-in-a-century opportunities, Ruslan and Shafer have been able to build a business that lays claim to the lowest costs in the Australian retail sector; it’s notable that even during past two months, with growth soaring, gross margin improved year-on-year by 40 per cent to 29.7 per cent.
AdvertisemeStill, every acquisition brings risk, particularly in execution. But there’s comfort in the fact Shafer and Kogan, who set this business up in 2006, have proven adept at tweaking the dials of the business to find the next leg up in growth.The decision to invest heavily in marketing in recent months, for instance, was a real risk.
Traditionally, the Kogan.com model has been to invest in marketing such that it broke even on the customer’s initial transaction, and made money on subsequent ones. But the pair decided at the onset of the pandemic they were prepared to invest as if a customer wouldn’t be profitable for 12 months.
It was a big change in discipline. But it’s worked. While sales rose 100 per cent across April and May, earnings before interest, tax, depreciation and amortisation rose 219.3 per cent, to $14 million.
That sort of run rate suggests annual EBITDA of $84 million in the 2021 financial year; market consensus is $48 million.
One big area for improvement
Could the growth in April and May suddenly drop away as the economy finds its new normal? Possibly – but that’s still a fair bit of blue sky for investors to play with.
If there’s one area Kogan.com still has room for improvement in, it's governance. The four-man board – no women, unbelievably in this day and age – is made by of Ruslan, Shafer, independent chairman Greg Ridder and independent director Harry Debney.
This is a serios company now, with serious ambitions and a serious market capitalisation. It’s time for a serious approach to corporate governance, tow
