Why is Kogan (ASX:KGN) up 14% today after a trading update that doesn’t look so great?

In its AGM presentation today, Kogan gave a trading update for the first few months of the fiscal year. Judging by the +14% share price move this morning, you’d think KGN announced great numbers. But sales actually dropped by 38% and gross profit fell by nearly 41% (?!). What’s going on here?

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There were some positives in the trading update, specifically the company’s net cash position jumped by $21.3m. In addition, Kogan’s inventory keeps on dropping and now totals approximately $126m, down from around $147m in July. But overall, this trading update didn’t read well, in our view, with sales and profits declining substantially in FY23 year-to-date. So, something else must be at play.

Kogan (ASX:KGN) share price chart, log scale (Source: Tradingview)

Kogan has been punished too hard

We think the market is realising that the company’s shares have been punished too hard in the last two years. It’s share price dropped from a peak of more than $25 in October 2020 to below $3 in the middle of 2022. Granted, the share price was way too high back then, driven by pandemic-driven optimism around online sales, but a share price below $3 seems way too pessimistic given the company’s long term potential. Just look at the doubling of Kogan First subscribers in FY22.

Add to that the fact that KGN’s high inventory levels are coming down nicely now. This was a major sticking point for investors, who don’t like it if too much cash is tied up in inventories that are just sitting there. Just ask City Chic Collective (CCX). Cash should be put to work, or be returned to shareholders.

So, we may be looking at a pivotal moment for Kogan right now. If the market starts to re-evaluate Australian retailers’ potential, we could be at the beginning of a nice, longer term rebound of their share prices.

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