Shares in online retailer Kogan (KGN) sank almost 5% on Wednesday, as the cost-of-living crisis continues to stoke fears of more retail spending pullback—but the outlook for the company may be rosier than expected, according to Morningstar analysis.

Concerns surrounding discretionary spending levels have mounted in the last 12 months, as an inflation-fueled cost-of-living crisis continues to place pressure on consumers.

Australian retail sales volumes fell 0.6% in the March quarter 2023, according to figures released this month by the Australian Bureau of Statistics.

The fall in the March quarter follows a 0.3% fall in the December quarter 2022.

Ben Dorber, ABS head of retail statistics, said the second straight quarter fall resulted from mounting cost of living pressures which were continuing to weigh on household spending.

“Outside of the COVID-19 pandemic period, this is the largest fall in retail sales volumes since the September quarter 2009,” Dorber said.

But even against the backdrop of retreating retail sales, Kogan shares have already rallied several times since the start of the year, spurred on by improving margins in the first quarter of the year and news of a share buyback late last month.

These opposing forces, as well as broader stock market volatility, have caused Kogan’s share price to yo-yo dramatically since the start of the year.

Following Wednesday’s minor sell-off, Kogan has pulled ahead of cloud services provider Megaport (MP1) to become the most undervalued company in Morningstar’s coverage universe, even accounting for the 18% jump in KGN shares since January 1.

We sat down with Morningstar analyst Johannes Faul to discuss why the outlook for Kogan remains strong, even against a difficult macro-economic backdrop.

Move to online to spur sales momentum


For Faul, the largest factor weighing on Kogan’s share price is the fallout from the retailer’s dramatic boom under the pandemic, when online sales spiked during lockdown measures.

The shift to online sent the company’s share price soaring. Shares more than doubled in less than 12 months, peaking at almost $25 in October 2020.

Since then, however, shares in the company have retreated dramatically, and are still trading substantially below their pre-COVID levels.

Faul ascribes share price weakness to a material decline in sales and earnings from boomtime levels but sees signs of upside starting to emerge in the company’s financials.

“On balance, Kogan's operating metrics markedly improved during the third quarter of fiscal 2023,” he says.

“First signs of improving underlying operating performance had emerged in January 2023, which was the first month in which Kogan generated a profit at the adjusted EBITDA level since July 2022,” he says.

Also of note to Faul is the company’s gross margin, which had previously shrunk as the company discounted heavily to offload inventory stockpiled during the pandemic boom. That margin squeeze may be abating however, after jumping up 650 basis points in the most recent quarter.

With margins moving in the right direction, Faul says structural tailwinds from the global shift to online retail over brick and mortar should help the company still waning sales numbers recover.

“We anticipate top-line growth to reignite, albeit at a lower level than enjoyed during COVID-19 restrictions,” he says.

“We expect e-commerce sales to significantly outperform in-store retailing sales over the next decade.”

While Kogan’s share price has retreated dramatically since the height of the pandemic, data from the Australian Bureau of Statistics shows online retail sales remain well above their pre-pandemic levels since peaking in September 2021. 

Faul sees this trend sustaining over the long term, adding momentum to Kogan sales recovery, even if demand for discretionary goods dips in the near term.

“Kogan is one of the largest online retailers of discretionary goods in Australia, and well positioned to benefit from strong growth in the online retailing channel.”

With all that in mind, Morningstar is forecasting Kogan to be close to breaking even on an adjusted net profit after tax basis in fiscal 2023 and reinstate a dividend in fiscal 2024.

Shares in Kogan are trading at a 60% discount to Morningstar’s fair value estimate of $10.70 apiece.