Thought I'd try my first thread and make it something topical, $KGN. Most of you won't know, but I actually worked at $JBH for several years a long time ago, so the journey of Ruslan Kogan has been something of an amusement for me for a long time.

Ruslan founded Kogan in the mid-2000s, buying smart phones on the cheap in Asia then reselling them in Australia. He later branched out into TVs & other electronics. Products were dropshipped (no inventory held), meaning low capital requirements and low margins.

For years, profit was relatively low and inconsistent. 2nd largest shareholder David Shafer, a school friend of Ruslan, joined the business before its 2016 IPO. They realised that increasing their product range & holding inventory (private label) were key to growth and profit.

In 2016 the business floated & raised a large amount of capital to, among other things, buy inventory. This cash ended up being largely retained as the stronger balance sheet gave suppliers confidence to stretch out payment terms, which helped fund the increase in inventory.

The strategy worked, with sales, profit and margins all increasing substantially. Helping alongside was a burgeoning mobile business which sold rebadged prepaid Vodafone service for a commission. This had some marketing costs it but it was otherwise basically pure profit.

There were hiccups though. Phone reselling and the dropshipping business fell off a cliff due to GST changes currency headwinds (see prospectus disclosure for 2015). The prepaid mobile business also matured, flat since early 2019. But the private label kept growing.

Growth in private label wasn’t without risk. It required more products, meaning expanding outside Kogan’s strength in electronics to other areas like furniture, groceries, air conditioners & books. This required inventory. More inventory which took longer to move.

The rate at which inventory turned over dropped from >5x per year (around IPO) to ~2.5x in the last reported period. This meant inventory grew faster than sales figures, placing increasing strain on the balance sheet and impeding cashflow.

Marketing also grew faster than sales, meaning that Kogan’s margin after marketing and variable costs remained in the single digits despite an increasing amount coming from the higher margin private label collection.

Eventually, even private label began to falter with sales and gross profit stalling in 1H20. Group earnings also flatlined despite benefitting from new income streams like ‘Marketplace’.

This is where market sentiment turned. The share price fell from $7.94 in January 2021 to $5.30 just before COVID. Other concerns were regular share sales by management, erratic and selective reporting disclosures and poor online reviews.

But then the Great Reprieve happened for ecommerce companies around the world. COVID-19. Locked down people with stimulated wallets could not shop in physical stores.

Online retailers that had struggled to turn a profit for years due to low barriers to entry and ever-increasing marketing costs were all of a sudden printing cash. Share prices skyrocketed because stonks always up. KGN appreciated in value far more than sturdier competitors.

At some point these tailwinds would abate. Things changed here in Aus, but not THAT much. In the March quarter update Kogan revealed sales had slowed dramatically, EBITDA had halved compared to the same time last year. We see “one-off” demurrage charges. A red flag?

Demurrage charges are incurred when you fail to pick up cargo up on time. It is very expensive and usually avoided at all costs. So why did Kogan not delay new stock purchases to avoid this happening? Is there slow moving inventory stuck in warehouses?

Kogan signed new third party storage to handle the excess inventory. Will these deals be on similar terms to those currently held with related party eStore Logistics?

Will Kogan need to write off a large chunk of its inventory balance, over $200m? Will margins take a hit if they clears stock by discounting for an extended period despite private label margins already dropping extensively?

Or maybe Kogan can rejuvenate sales growth and start moving that inventory.

Watch this space.