The Kogan.com Ltd (ASX: KGN) share price has suffered a strong sell-off over the last couple of weeks. At the time of writing it's down by 18%. Uncertainty has risen in the global and local economies.
Inflation has risen because of a variety of impacts such as higher energy costs and difficulties in the supply chain.
Central banks are doing what they can to manage and bring down inflation. Low inflation, in the 2% to 3% range, is seen as a good benchmark for stability.
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ASX retail shares suffer
Higher interest rates are meant to hurt the valuation of most assets, in theory. That's because the 'safe' return that people can get from cash has risen, so the potential return from 'risk' assets like ASX shares isn't as attractive.
Investors are generally paying a lower multiple for a company's earnings. This can be measured with the price/earnings (P/E) ratio.
But, some companies' earnings are also expected to reduce in this environment. Even in a downturn, households are going to keep buying food from the supermarket and paying their telco bill. But not every sector may be essential to a household's spending.
People may not spend as much at some retailers in this new environment. That's probably why a number of ASX retail shares have been hurt.
In 2022, the Wesfarmers Ltd (ASX: WES) share price has fallen 26%, the JB Hi-Fi Limited (ASX: JBH) share price has dropped 20%, the Harvey Norman Holdings Limited (ASX: HVN) share price has declined 18%, the Reject Shop Ltd (ASX: TRS) share price is down 42%, the City Chic Collective Ltd (ASX: CCX) share price is down 75% and so on.
This year, the Kogan share price has fallen 64%.
Let's recap what was said in the latest report.
FY22 report
The FY22 result did show difficulty for the business, so it's not surprising that investors haven't been positive on the business recently.
Kogan's FY22 gross sales grew by 0.1% to $1.18 billion.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) was $18.9 million, which Kogan said fell largely as a result of elevated operating costs from excess inventory after fluctuating demand for online shopping during COVID-19.
Adjusted net profit after tax (NPAT) was a loss of $2.9 million, with a statutory net loss of $35.5 million – this was impacted by "unrealised losses on financial instruments, non-cash equity-based compensation" and other factors.
Is the Kogan share price an opportunity?
There were already positive green shoots that Kogan talked about.
It said that it's looking forward to returning to positive operating leverage, having commenced the process of "driving efficiencies in operating costs and product ranges" which led to a return to adjusted EBITDA profitability in the fourth quarter of FY22.
Kogan First, which is its membership program, is aiming to reach 1,000,000 subscribers in the medium-term. It grew to 372,000 at 30 June 2022.
Fellow Motley Fool writer Sebastian Bowen is still planning to be a long-term shareholder in Kogan shares. In my opinion, there are a few key reasons to be interested in the business.
I think the adoption of online shopping is going to grow over time, which should be a useful tailwind for Kogan. Growing scale should help Kogan's margins, but it could take a while for it to return to pre-COVID profitability levels as it works through its inventory and supply chain challenges, while also traversing the current economic climate.
At this low level, I think the Kogan share price is probably a bargain when thinking about how much profit it could make in FY25. But, investors are likely to see quite a bit more volatility over the next three years, so a long-term mindset could be required.
