Kogan.com’s impending listing on the ASX raises legitimate questions about growth projections for the pure-play retail industry leader. With the brash confidence of the tech stock set, Kogan.com is reaching for the stars with a listing on the Australian Stock Exchange just as another online retailer is desperately treading water – and quite possibly drowning. Kogan.com, one of the best-known pure-play retailers in Australia, plans to float on the stock market on June 30, offering 30.8 per ce
nt of the 10-year-old company up to investors.
Kogan.com will issue shares at $1.80 each to raise $50 million that would predominantly be used for growth capital, including investment in new products and categories as well as marketing.
The company expects to attain a market capitalisation of $168 million on listing with shares offered to institutional investors, broker clients, investors nominated by Kogan.com and employees of the company.
The limited share offer should protect Kogan.com from some of the market volatility that can cruel the success of new listings, but is also a realistic proposition for a company that has grown quickly – some might say haphazardly – and has yet to generate sustainable returns.
In fact, Kogan.com is estimating net earnings of just $400,000 for the current financial year, compared with a loss of $300,000 in the full 2015 financial year.
In the 2014 financial year, net earnings were four times this year’s expected result, coming in at $1.8 million.
Kogan.com is forecasting sales of around $241 million in the 2017 financial year and a substantial lift in net earnings to about $2.4 million, in large measure achieved through an improvement in margins from 1.4 per cent to 2.9 per cent.
The Kogan.com float is arguably not for the faint-hearted with the trading forecasts looking rather ambitious when viewed against trading performance for the past 18 months and at a time when another ambitious e-tailer, Surfstitch, seems to be decidedly coming unstitched.
Launched in 2007 in Sydney, Surfstitch attracted Billabong International as a business partner just two years later and through the joint venture expanded into international markets as a global action and youth culture brand.
In August 2014, Surfstitch bought out Billabong International, which was divesting some of its acquired businesses as part of a restructure, for $35 million. Later that year, Surfstitch listed on the Australian Stock Exchange after raising $83 million at $1 a share from investors.
The company had hoped to raise $110 million and the shortfall has weighed heavily on Surfstitch as it was forced to draw on debt, cash flow and a further capital raising for a series of acquisitions in the past 18 months, including Garage Entertainment and Production, Surf Hardware International and Magic Seaweed.
SurfStitch Group’s websites claim to serve a unique customer audience of over six million, retailing more than 50,000 styles from over 600 of the world’s leading and unique action sports and street fashion brands including SurfStitch, FCS, Gorilla, Hydro and Softech.
The first sign of problems at Surfstitch emerged in March when CEO and co-founder, Justin Cameron, resigned amid rumours that he wanted to take the company private through private equity-backed acquisition.
Buoyed by its acquisitions, Surfstitch posted a 40 per cent increase in revenue and a net profit of $5.7 million for the first half of the 2016 financial year, but the company has now been forced to downgrade its earnings expectations.
In May, the company indicated it expected pre-tax earnings to be less than $3 million as a result of trading conditions and a transformation plan and management restructure within the business.
Last week the company announced that a contractual deal with a third party would require a $20.3 million reversal on revenue income booked in the first half and an expected pre-tax loss of up to $18.3 million for the full financial year.
The price of shares in Surfstitch have plunged from close to $2 in January to around 32 cents before the market fully digested the announcement on the sales and profit downgrade.
Surfstitch sells products and media services into the North American and European markets as well as Australasia, but the optimism when it cuts its ties with Billabong International and the somewhat dented hopes of its public float have left the company vulnerable to a takeover, quite possibly involving co-founder and former CEO, Cameron.
Surfstitch’s woes weigh on Kogan listing
The problems at Surfstitch have come at an unfortunate time for Kogan.com and reminded investors that the promise of e-tailing in Australia seems to be somewhat exaggerated, especially for pure-play retailers.
Investors have already been burnt badly by Dick Smith and are being teased by The Good Guys, who both trade or traded in categories that Kogan.com has been trying to develop.
Kogan.com acquired Dick Smith’s online retail business in March for an undisclosed sum from the administrators of the failed retailer, formally taking control of the brand and website infrastructure on June 1 and, importantly, obtaining around 1.3 million Dick Smith customer records.
Kogan.com has been expanding its categories and now offers travel and food as well as computers, televisions, phones, home appliances, cameras, furniture, floorcoverings, cookware, wine, toys, heating appliances and Manchester.
In a prospectus for the float, Kogan.com claims it had 52 million visits from 621,300 unique users in 2015 and that it has 2.3 million email subscribers on its database.
However, those enviable figures translate to a surprisingly low $200 million – low because the industry touting by founder and namesake, Ruslan Kogan, had some industry pundits believing sales were closer to $500 million.
By any measure, Kogan.com’s growth forecasts are ambitious and they explain Kogan’s enthusiasm for the Dick Smith customer lists that have bolstered his database to around 3.6 million people.
Kogan.com was understood to be hoping to raise $300 million by listing on the Australian Stock Exchange, but market conditions and the trading results of the online retailer themselves forced a more modest launch into public company ranks.
Those factors also forced Kogan and co-director and CFO, David Shafer, to agree to voluntary escrow agreements in respect of their retained 69.2 per cent controlling stakes in the online retailer when it goes public.
The entrepreneur risk
Ruslan Kogan is an entrepreneur and has been able to develop his company according to his own whims and intuition and the proposed float confirms his ongoing commitment in managing and expanding the business.
However, institutional investors are becoming increasingly wary of entrepreneurs, who all too often find that the constraints, costs, obligations and scrutiny of a public company are difficult to abide.
Kogan may well regret the decision to go public for a relatively modest capital raising rather than entertaining a private equity partner.
It seems likely Kogan has had discussions with private equity firms, but resented their strict management regimes.
A public listing will provide a similar brake on management – as Kogan might well have learned if he had a chat with Surfstitch’s Cameron.
Overzealous forecasts?
In any event, Kogan’s forecasts in the prospectus are likely to raise investor eyebrows from the outset with the expectations on sales and earnings for the 2017 financial year appearing quite ambitious against results in the past two years.
Expanding into new categories has obviously soaked up a significant amount of funds within the business without achieving a substantial boost in sales to date.
Kogan’s strategy in recruiting customers has, not surprisingly, relied on what he describes as being a, “challenger brand that stands for price leadership through digital efficiency”.
Kogan says his goal is to make in-demand products and services more affordable and accessible, which is arguably somewhat at odds with his expectation that Kogan.com can boost its bottom line by more than doubling its margin.
Kogan.com has funded its growth over the past decade on cash flow, but the business needs greater scale, albeit a focus on more dominant categories, rather than a ‘bit of everything’ strategy. And it needs that scale quickly if it is to achieve sustainable sales and earnings growth.
Greg Ridder, who has been appointed as non-executive chairman ahead of the float, says Kogan.com is part of a, “‘next generation’ of online retailers” and is already an iconic Australian online retailer that has helped shape the local online market.
“In combining the data analytics opportunity offered by online retail with the deep technological expertise of its management and team, Kogan.com has created a vertically-integrated business model with a market-leading private label capability,” Ridder said.
“This is complemented by a compelling range of in-demand Australian and international third-party brands, supporting website traffic and cash generation.”
Ridder said the Australian online retail market has grown rapidly but remains underpenetrated compared to other developed economies.
In a letter to potential investors, Kogan said his management team often joke that, “we’re a statistics business masquerading as a retailer”, and that might well be a matter of concern to investors who have been bruised by forecasts and statistics a little too often.
They will certainly need a good dose of optimism to believe the earnings trajectory forecast in the prospectus, given the trading results of the 2015 and anticipated 2016 sales and earnings.
TRACING KOGAN.COM’S RESULTS
2014
$1,800,000
In the 2014 financial year, Kogan.com’s net earnings were $1.8 million – more than four times the expected result for the current financial year.
2015
$300,000 LOSS
Kogan.com reported a loss of $300,000 for the full 2015 financial year.
2016
$400,000
Estimated net earnings for Kogan.com for the current financial year.
2017
$2,400,000
Kogan.com is forecasting a substantial lift in net earnings to around $2.4 million for the coming 2017 financial year, from anticipated sales of around $241 million.
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