Kogan.com Ltd (ASX: KGN) is the largest pure-play online retailer in Australia. This means that the company has no bricks-and-mortar retail presence, instead operating an entirely online e-commerce marketplace through its website.
Kogan was founded in 2006 by entrepreneur Ruslan Kogan when he began selling LCD TVs direct from the manufacturer out of his parents' garage. From these modest beginnings it has grown into a company with millions of customers that now ships products worldwide.
What drove its 2017 gains?
Kogan's share price surged over 360% in 2017, from $1.34 at the beginning of the year to close Friday afternoon trading at $6.20. It now has a market cap of $579 million, which is greater than Myer Holdings Ltd's (ASX: MYR) $501 million, and places it just inside the ASX300 as of December 22.
Its full year FY17 financial results were particularly strong, driven by a 36% increase in active customers for the year.
Pro forma EBITDA of $13.2 million represented an increase of 230% on the prior year, and beat its prospectus forecast by 91.3%.
Pro forma NPAT was $7.2 million, 188% higher than forecast.
Adjusting for costs associated with the company's 2016 IPO as well as unrealised FX gains, statutory NPAT of $3.7 million represented an increase of 363% on FY16.
Gross margin for FY17 was 17.9%, which was again higher than forecast, by a full 2.7%.
This in particular was a great result for a growing online discount retailer that would generally be expected to steal market share by pursuing an aggressive pricing strategy with razor-thin margins.
Integral to FY17 margin growth was the Kogan Mobile business, which is nearly 100% gross margin and made up 7% of total gross profit.
Kogan Mobile offers pre-paid phone plans to customers as part of a partnership with Vodafone, wherein Vodafone looks after operations and Kogan is responsible for customer acquisition and branding.
Kogan is also now expanding this partnership with Vodafone to provide fixed-line NBN plans.
Kogan's unaudited first quarter FY18 results were also positive, keeping the share price trending upwards. Gross margin was even higher, at 18.2%, and EBITDA grew 37.7% versus 1Q17.
Compare these results with Kogan's competitors and we can see why the market was so impressed. JB Hi-Fi Limited (ASX: JBH) had a good year but still fell well short of Kogan's growth. JB's underlying NPAT increased by 36.5% year on year for FY17 (FY16 NPAT increased by only 11.5%).
Harvey Norman Holdings Limited (ASX: HVN) grew its FY17 NPAT by 28.8% (FY16 NPAT increased 30%).
And we can observe this relative performance in their respective share prices. While Kogan was storming up the charts, shares in both JB Hi-Fi and Harvey Norman lost value during 2017. This is the market's way of saying that it doesn't have much faith in the future earnings potential of JB or Harvey Norman, while it views Kogan as a growth stock.
The companies' respective price multiples reflect this too.
Kogan currently trades at almost 155x earnings, while JB Hi-Fi trades at 16x earnings, and Harvey Norman trades at a little over 10x earnings.
Kogan's price multiple is also high against other pure-play online retailers like Webjet Limited (ASX: WEB) (20x earnings), REA Group Limited (ASX: REA) (49x earnings), and Carsales.com Ltd (ASX: CAR) (32x earnings).
Kogan needs to make sure it continues to maintain its earnings growth to justify that high a price multiple relative to its peers.
There is also one big black cloud looming on the horizon, in the form of American e-commerce giant Amazon.com, Inc.
The issue is that Amazon essentially operates the same style of online marketplace as Kogan, but has the cash reserves and economies of scale to undercut it on price.
Prior to Amazon's December launch, Kogan founder Ruslan Kogan argued that the presence of Amazon could actually boost the amount of people choosing to shop online more broadly, indirectly helping Kogan's market penetration.
E-commerce currently only accounts for about 7.5% of the total Australian retail market, whereas in countries where either Amazon or Chinese competitor Alibaba Group Holding Limited operate, online sales make up closer to 20% of total retail sales.
When Amazon did finally launch its Australian operations on December 5, the response from both analysts and consumers was underwhelming. Prices were not as cheap as many anticipated, some deliveries were delayed, and the range of products offered was disappointing.
But this might simply have been a case of Amazon underestimating its local Australian competitors. It delivered huge Boxing Day sales, so it might pay to wait and reserve judgement until the results of that traditionally frenzied retail contest are in.
Foolish takeaway
Kogan enjoyed an excellent 2017. The market almost always rewards a positive earnings surprise, so if Kogan can continue to beat its own and analysts' forecasts its share price should respond well.
However, the Australian retail space – and in particular the online retail space – could be in store for some significant upheaval in 2018, despite Amazon's underwhelming initial performance.
I will continue to hold my stock in Kogan, especially as I see its expansion into new product offerings like phone, internet and even pet insurance as key differentiators. But if I was considering a new investment in the company I might wait on one or two more quarterly updates before buying in.
Watch the number of active customers in particular: if Kogan can continue to grow these numbers each quarter, and not lose significant market share to Amazon, 2018 may be another great year for this young Australian company.
