COMMENT: Why I Would NOT Invest One Single Cent In Kogan Online
Ruslan Kogan the CEO of Kogan online, is promising a “big profit jump” if he and his advisors manage to get investors to part with their cash in July despite sales going backwards this year by 3.1%.
Then again so did Anchorage Capital, Nick Aboud and the Directors at Dick Smith and we all know where that ended up, going belly up for $400M.
In the 2014 and 2015 Financial Year Kogan made a loss of $300,000 while this year he is forecasting and I stress forecasting a $400,000 profit which is not a lot when you consider he does not have the overheads of a JB Hi Fi or Harvey Norman, which in reality means more profits should be falling to the bottom line because technically he should have a lower cost of operation.
If he does get your money, he claims that he will grow profits more than sixfold to $2.4 million in the 2017 financial year.
Kogan does claim to have an Algorithmic Prediction Engine so maybe he knows something that the likes of Richard Murray CEO at JB Hi Fi or Gerry Harvey the Chairman at Harvey Norman don’t know.
I wonder if he has taken into account Aldi?
The facts are that Kogan operates at the bottom end of the market. He appeals to people who want value and a product that is cheap which is the exact market that Aldi is stripping sales from.
If you ask Sydney based distributor Tempo who are a major supplier of consumer electronics and appliances to Aldi or Euro Centra who also supply goods to the mass retailer their problem is keeping up with demand because of the fast sell through of goods at the German retailer where last year 10,000 UHD 4K TV’s sold out in 90 minutes.
This is dream territory for Kogan.
Aldi Australia’s sales are forecast to rise almost 90 per cent to $15 billion over the next four years – challenging discount stores, online retailers like Kogan and the likes of The Good Guys in the appliance market.
Remember Aldi is rapidly expanding into WA and South Australia as well as in NSW, Victoria and Queensland.
And each and every time they open a new store and there are hundreds planned, they are building out bigger areas to range products similar to what Kogan is selling.
The Aldi products are also coming out of the same factories in Asia that Kogan is buying from however the big difference is that Aldi buy more, volume, cheaper and the product can be picked up immediately.
There is also an excellent warranty program behind most products that Aldi sells.
We know that Kogan is a person who loves to shoot off at the mouth, he is the same guy who was adamant that Apple were set to dump the likes of JB Hi Fi or Harvey Norman to sell direct via their own stores.
It never happened.
In the CEO’s letter that accompanies the pathfinder prospectus for Kogan.com, he was again out their spinning yarn about his Algorithmic Prediction Engine, cool tech and being a “statistics business masquerading as a retailer”.
He claims that his team are “thought leaders in the local market” really, so are the likes of Cameron Trainer at JB Hi Fi or David Ackery at Harvey Norman.
These are guys who collectively have more knowledge of consumer electronics and appliance retailing than the entire team at Kogan, they also do a better job than Kogan has ever done both online and bricks and mortar stores.
“We make a lot of decisions every day and we get most of them right,” Kogan says. “But we are human, and occasionally, we get some wrong.
How about trying to con consumers into believing that you sell seriously discounted products when in reality Kogan has on multiple occasions been caught out manipulation prices on their site in an effort to lure customers into buying products believing them to be discounted.
Earlier this year Kogan was forced to pay penalties totalling $32,400 following issue of three infringement notices by the Australian Competition and Consumer Commission.
The ACCC issued the infringement notices because it had reasonable grounds to believe that Kogan had made false or misleading representations about the price of three of their products advertised by Kogan during a Fathers’ Day promotion on its eBay store, in contravention of the Australian Consumer Law.
In 2009, Kogan was forced to modify its advertising after the Australian Competition and Consumer Commission raised concerns about Kogan’s representations on its website and in the Herald Sun.
At the time the ACCC said that the Companies actions may mislead consumers about savings.
Kogan Technologies’ newspaper advertisement and website at the time used price comparisons such as Now $X (Save Y%) and save over $X.
The ACCC who have a watch brief on Kogan declared that advertised Kogan products had not been offered by Kogan Technologies at the higher price.
The savings were based on an estimated average price a consumer might pay for a product with similar specifications from another manufacturer.
The ACCC was concerned that this conduct may have contravened sections 52 and 53(e) of the Trade Practices Act 1974.
Now Kogan is drumming up sales numbers in an effort to line he and his partners pockets with millions.
Arch rival JB Hi Fi has seen its share price rise more than 18% so far this year, compared to the S&P/ASX 200 rise of just 0.3%, on the back of the demise of Dick Smith.
Net profit was up 7.5% as revenues reach $2.1 billion for the six months to end of December 2015.
JB Hi-Fi expects net profit to be in the range of $143 to $147 million for the full year, but could beat that if the $200M that JB Hi Fi CEO Richard Murray is predicting will flow into JB Hi Fi tills from the demise of Dick Smith.
Over at Kogan the Company was wallowed, during the most recent half – the six months ended December 31 – revenue falling 3.1 per cent, net profit dropping by half, and EBITDA margins falling from 4.6 per cent to 2.5 per cent.
Kogan management blamed it on the tough half and the subdued performance in 2015 on the fall in the Australian dollar.
These are same conditions that both Harvey Norman who day after electronics retailer Dick Smith announced the closure of all its stores across Australia and New Zealand, posted a 30.7 per cent jump in profits.
For the six months to December 31, Harvey Norman also lifted net profits to $185.5 million.
“As a result of these cash constraints, and in partnership with its bank, Kogan.com reduced the size of its credit facility from $9.0 million to $5.5 million in November 2015,” the prospectus says.
“While appropriate in the context of events impacting the business at the time, this pay down exacerbated existing cash constraints experienced throughout the period.”
His latest profit forecast relies on EBIDTA margins more than doubling from 1.4 per cent to 2.9 per cent, as $2.1 million of the $50 million to be raised through the float is pumped into marketing.
As for the rest of the cash raised, $4 million will be used to repay debt, $28 million will be used to support growth (including that marketing spend), and $3 million will used to pay for the float.
The remaining $15 million in cash will go to Kogan and his long-time business partner David Schafer who is also chief financial officer and chief operating officer. The pair will share equally in the $15 million.
This will be a nice earner if the float goes in the same direction as Dick Smith.
I have been in the consumer electronics technology business reporting on retailers and distributors for more than 20 years.
Kogan Online is a high risk investment. It not only faces tough competition from Harvey Norman and JB Hi Fi on one side who sell branded consumer electronics products actually made and distributed by the manufacturer.
They are also investing in expanding their online operations up against Kogan.
Then there is Aldi who are in a position to driver a bulldozer through Kogan sales with similar and cheaper products that can be picked up immediately at their store network which is growing every month.
Then there is the risk that the mother of all online operators, Amazon sets up in Australia and if this happens Kogan will have one mother of all threats to their business to cope with.
Under his latest proposal Kogan will emerge with a 50.5 per cent stake in the listed company worth about $85 million, while Shafer will hold a 19.1 per cent shareholding worth almost $20 million.
One has to seriously ask.
Is this Anchorage Capital all over again but on a smaller scale?
And remember we were the only media Company who back in April 2015 were forecasting that Dick Smith was in trouble while Fairfax Media and News Corporation were still listening to Nick Aboud the CEO of Dick Smith bullshit about how good Dick Smith was doing.
There is one hope for Kogan.
In the financial market there are a lot of advisors, who take risks with other people’s money. They are out and out gamblers and Kogan is a high risk punt that people have already gambled on. They will lose nothing you will.