Kogan.com financials dented by GST reforms, ACCC issues new warning

Ruslan Kogan Kogan.Com ASX KGN GST ACCC
Kogan.com's share price has fallen 45% over the past month.

Australian online shopping platform Kogan.com (ASX: KGN) this week reported an impressive 73% increase in Partner Brands revenues for the first quarter of 2019, however it was the 27.4% slump in earnings for the company’s Global Brands division which caught the market’s eye.

The decrease was reported just months after the federal government introduced a mandatory goods and services tax on low-value imported goods, and will directly affect the range of cut-price electronic imports marketed to the company’s million-plus subscribers.

GST impacts sales

The new law, which took effect earlier this year, forced the retailer to add another 10% to the cost of some of its cheaper products directly imported from overseas.

Direct imports – or items shipped straight to customers from overseas warehouses – had previously been exempt from carrying a goods and services tax (GST) charge where the customs value was less than $1000.

But from 1 July the government extended the application of GST to all imported goods regardless of their value, in an effort to “ensure that Australian businesses, particularly small retailers, do not continue to be unfairly disadvantaged” by any exemptions.

“[This] will stop the unfair and distortionary benefit enjoyed by foreign sellers since the introduction of the GST in 2000,” former treasurer Scott Morrison said at the time.

Initially, the revised law saw some importers exit the online retail market, helping Kogan.com’s July revenue grow 33% year-on-year and allowing the company to benefit from the change.

But the reality of adding another 10% to the cost of cheap goods put a decent dent in the competitiveness of Kogan.com’s pricing structure and affected profit margins on individual items.

Kogan share price ASX KGN
Kogan.com share price since the company listed on the ASX.

Exacerbating the issue is Kogan.com’s claim that some offshore online trading sites are still not charging GST, which may compromise its own long-term gains.

The company has placed blame on the suspected conduct of these sites for its earnings loss, but also hinted at a sustained impact to its bottom line, stating “[we are] unable to determine whether the recent widespread avoidance of GST will be temporary”.

“While growth in [our] Global Brands division presents a challenge to the business in the short term, we have built a resilient portfolio of businesses, with the core divisions of Exclusive Brands, Partner Brands and Kogan Mobile continuing to show healthy growth,” said founder and chief executive officer Ruslan Kogan.

Exclusive Brands posted a 15.7% growth in revenue compared to the first quarter of 2018, while Partner Brands revenue grew 73.0%, driven by new brands and some brands transitioning from Global to Partner status.

Kogan Mobile Active reported a 102.9% growth in its customer base year-on-year to September.

ACCC warning

Kogan’s financial results were delivered not long after an official warning that the national consumer watchdog may once again be on its tail.

Earlier this month, the Australian Competition and Consumer Commission requested the company provide information relating to the marketing and pricing of a promotion run in June, raising market speculation of an impending investigation.

It follows a case in 2015, when the company was ordered to pay $32,400 in penalties following infringement notices relating to “false or misleading representations” about the price of computer monitors during a 20% discount promotion on its eBay store.

The ACCC said Kogan.com increased the prices of the monitors before the promotion started, so while consumers believed they had received the advertised 20% discount off the newly-increased prices, they had actually received a 9% discount off the previously-advertised prices.

When the discount promotion ended, Kogan.com changed the prices back.

In 2009, the online retailer was also accused of actively promoting percentage and dollar price comparisons based on dodgy calculations of what consumers could be expected to pay for a product, rather than on prices actually charged by Kogan.com.

The company was made to modify its advertising to comply with national trade practices.

In responding to the ACCC’s latest notice, Kogan.com said it “has strict processes and procedures in place to ensure compliance with the Australian Consumer Law”.

The company said it is in the process of compiling the information requested and plans to cooperate with the ACCC during its enquiry.

Founders sell shares

Last month, Kogan.com founding directors Ruslan Kogan and David Shafer pocketed $40 million after selling 6.25 million of their company shares, at an implied sale price of $6.41 per share.

While the company’s stock dropped around 9% on the news, chairman Greg Ridder was quick to brush off media speculation on reasons for the sale, claiming it was a “further step in the maturity of the company”.

“It is great to see our work continue to attract significant interest from both domestic and international shareholders who value our business strategy and execution,” he said.

“All shareholders will have the benefit of added depth and liquidity afforded by this transaction while maintaining (Mr Kogan and Mr Shafer’s) interests in the company at proportions amongst the highest on the ASX.”

The company has advised the directors “have no intention” of selling any securities prior to the release of Kogan.com’s 2019 half-yearly results.

“Affordable” business model

Kogan.com was founded in 2006 as an online retailer focused on making in-demand products and services more affordable and accessible via a “direct-to-consumer, online-only” business model.

Its suite of offerings are housed under brand names including Kogan Retail, Kogan Marketplace, Kogan Mobile, Kogan Internet, Kogan Insurance and Kogan Travel.

In September, the company partnered with Adelaide Bank and specialist lender Pepper Group to kickoff a new competitive home loan products strategy aimed at Australian buyers and investors.

The yet-to-be-finalised strategy is expected to house a number of financial services to be rolled out under the new brand in 2019.

Kogan.com made a crippling debut on the Australian Stock Exchange in 2016, with the IPO being issues at $1.80 per share, the online retailer closed down 16% on its first day at $1.49.

However KGN shares began rising a year later and in March of this year reached a peak of $10 per share.

Shares in Kogan.com closed out yesterday’s trading session at $3.11 per share.

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