Retail Deep Dive: Kogan shows the money and Cettire close to the edge

0:00This episode of The Contrarians is brought to you by Acquire Intelligence. They help you eliminate wasted processes, automate with AI, and reallocate work through global outsourcing. They offer a 100 % ROI guarantee. If you don't see a measurable return, you don't pay a cent. Learn more at acquire.ai forward slash contrarians. This episode is brought to you by Braze. And as listeners know, we don't spruit products we don't love. And we absolutely love Braze and Luxury Escapes. Not long ago, we moved our entire marketing stack, every email, SMS, and WhatsApp from Salesforce onto Braze. It took us a little while, but it was one of the best calls we ever made.

0:38It's a better product, and the team behind Braze are unbelievable. And even better, it's incredibly cost-effective. For luxury escapes, comms with our customers is mission critical, and Braze does it better than anyone else. If you're serious about talking to your customers, take a look at Braze, just like we did. Link in the show notes. I'm Adam Schwab. I'm Adir Shifflin. And this is The Contrarians with Adam and Adir.

1:05And we are back, episode 236, our special Saturday Super Business special, where we wrap up some interesting business stories for the last week or so. Before we do, we know we love getting merch from Friends of the Pod. And my friend, Marty Curtis, who ex-Google, I met him at Google, he then moved to True Protein. So this is what I've got here, incredible True Protein. I've never been a big protein kind of person, And right now because it's a bit annoying and hard to take. And these true guys created this unbelievable product. I'm just going to have some now. And I think I've got one for you as well.

1:34It's like a Macca's thick shake, but with all this protein in it. It's unbelievable. I'm going to get ideas, expert take. But I thought, like, I'm pretty skeptical of this stuff usually. But this is bloody good. It's quite nice. Yeah, it doesn't feel like a protein drink. It feels like something you'd buy, like a Big M almost. Mike, what's your take on it? Yeah, it's very chocolatey. and it's, yeah, I see the Macca's thick shake comparison. Yeah. Or Big M as well, very Big Emmy. I've had a Big M in years. This is like a healthy Big M and there's no lactose in it. So for those who are lactose intolerant.

2:06So thank you to Marty and the great Australian business out of the Northern beaches of Sydney and they do really well. So thank you, True Protein guys. Moving on, another great friend of the pod, Kogan Release, was saying to be a really good earnings announcement last week with the business bucking the overall dark retail market reporting. Really impressive 16 % revenue growth, 18 % GP growth, showing wider margins, and a 22 % rise in underlying EBITDA to$45 million. The great result reversed a tough last year after the business was forced to write off a significant amount from its New Zealand business, Mighty Ape.

2:41The market punished Kogan, though, and this could be partially due to much-loved CFO and COO and Ruslan's co-founder, David Schaefer, announcing he'd be stepping aside from the business in the future at some point. Kogan's share price is down 20 % in the last month, despite the strong returns, albeit share price is pretty flat year on year. So that's an overall, I thought it was a really good number. We'll talk about it a bit more in a second, but probably Australia's best retailer, JB Hi-Fi, announced even more tepid results a couple of weeks ago and have been absolutely punished. And this has been, JB's been a market darling, really for probably three decades, one or two decades since it listed, one of Australia's best performers.

3:20JB announced that revenue was up 4.8 % last year and profit rose 6 % to$489 million. But investors were spooked by JB reporting that sales were actually down in July and this followed disappointing results from another great retailer, Nick Scarley, and also a disappointing result from Meijer. JB HiFi shares have dropped 17 % since the earnings announcement, actually down 42 % this year, which I was shocked by. This is really out of character, JB, which has again been Australia's best retailer for the last few decades. But JB is still up 65 % since COVID. So it has been a great sort of benchmark valuation and has been one of Australia's best performing retailers since then.

3:59But back to Kogan. And Kogan's business is really led by the form of its Kogan First subscription business. That continues to be really underrated by the market. Kogan First hit$60 million in revenue, up 14 % year on year. And if you look at the profit for tax, excluding the write-down last year, Kogan's PBT grew from$14 million to$19 million, which means it's trading on a profit before tax multiple of 18 times. If you compare it to West Farmers, which is probably the benchmark, West Farmers actually got some really good businesses, Kmart, Bunnings, Officeworks. That's trading on a 22.5 % multiple of profit before tax, and it only grew 3%.

4:37So you feel that West Farmers is overly loved and Kogan's overly hated here. So we know the Kogan guys really well. We love what they've done in a really competitive market. What's your view on how they performed? Well, let's think about the wider market because these businesses that you've mentioned, they're largely Australian businesses. So we could talk about Australian businesses. JB is pretty much an Australian business. Kogan, a bit of New Zealand that's Australian. Nick Scully, they've expanded to the UK but largely an Australian business. You can throw Temple and Webster into that mix.

5:13these are all consumer discretionary spending businesses and very reliant on effectively people changing houses that helps them a lot i think kogan even a bit less so but the other ones is much more defensive the other ones are all about that because he looked at retail in different categories right so this is consumer discretionary and it's largely what is called durable goods so things that don't kind of expire. And that's a hard market right now. In Australia, we've got lots of headwinds. We've got the people just feel poor in Australia at the moment, and it's not one particular thing. It's inflation headwind.

5:50Inflation is the biggest single issue. Definitely what's happened to the property market has affected the psyche of Australians a lot. When property prices are going up a lot, people calculate how much their house is worth, and they feel rich, and they spend more money. It's very perverse because they're not really richer. Definitely their cash flow is not improved. That's what happens. It's got the wealth effect. Yeah, the wealth effect, exactly. And now the reverse is happening. And so what we've seen is Temple and Webster barely grew and actually went backwards in the first few months. July was 40 % down, I think.

6:22It's just shocking. Like, Kogan grew 12%, so that's actually pretty strong growth. JB barely grew. So you're talking about last year or July? Oh, so last year Temple did grow. Yeah, it grew, but like... I'm talking about July, which is where they all are now, like Scarley, JB. All down in July. Yeah, next comes up to the budget and interest rates potentially going up again. So it's the perfect storm for housing movements as being as bad as it's ever been in our lifetimes. And so I think we're about to get a whole lot of buying opportunities in the retail market, but the buying opportunities are not going to emerge in the next few months because I think...

7:00Do you think the property market will turn around? No, I don't. I think we're going to go into a slide in consumer discussionary retail. So why will these businesses come back then? So first, I think it's going to be pain. Now, some of the pain is factored in. If you look at – you said Kogan is flat over the year. Nick Scully is down. His share price. Yeah, share price. JB is way down. 42%. A lot of the – look, investors are not dumb. They know that this negative sentiment in spending is going to affect these companies. Which would be less impacted by the housing stuff than Temple and Scali, who are completely impacted by that.

7:39Yeah. Scali especially. Well, my hierarchy would be furniture is at the top. Yeah. And then, well, actually, you know who's at the top, a non-retailer. Pexa, who is just doing conveyancing. And they've got issues with them monopoly being busted because they're just rapacious. That's the problem. What could be worse? What business could have it worse than a business? 100 % linked to property transactions, right? Yeah. So that would be the worst. then there's all this consumer discretionary. I think the worst is the furniture, then maybe it's a step down to JB, then it's a step down to Kogan. JB sells a lot of white goods and a lot of TVs and stuff like that.

8:12It's all home stuff. There's a lot of Apple stuff which is immune. Agree. And then on the other end of the spectrum, you have things like quick service restaurants, like GYG, that might have a bump as a result of people feeling poorer. And then you have things like Skin Candy, who kind of sit in the middle, right? Yeah, and so it's pretty cheap. It's mostly younger people that are not exposed to a lot of the headwinds. That's right. So that's what the kind of landscape looks like. And then you think about these businesses in the landscape. I don't think it's going to be good for any of them in the short term is the bottom line.

8:47Is there an argument that Kogan, being a discounter, benefits from bad times? Yeah, I think Kogan is well known for being reliable at a cheap price. I would say the best equivalent… But if you downgrade from something you buy at Temple or JB or Scali to a Kogan, which is a logic for the same thing. Well, JB, definitely there's a logical downgrade to Kogan. I've said this to you before. My washing machine and dryer are Kogan. I bought them temporarily while waiting. I was going to buy Millet. And Schaefer said to me, don't swap. You're going to be totally happy with these. Don't waste your money.

9:17He was right. Probably the same factory. I was very – I think – I actually know which factory. It's why I don't want to say because I don't want to give it away. It's not Millet, but it is a big brand. Yeah. And so, like, I think – Like a Westinghouse Electrolux. There's only so many manufacturers out there. And so I think your downgrade argument's interesting. One of the questions for Kogan will be whether the headwinds – their Kogan First has got two headwinds. One is people having less money. But I think most people – Even in the subscription business specifically. Yeah, yeah. I think people have less money.

9:46But I think most people will buy Kogan First when they're going to buy a Kogan product. They get free shipping, a bit of a discount. They sign up to it. And the churn for Kogan First is pretty low. I know. So I don't think – The other thing is, you know, a piece of their business now is the same as the LMCT Plus business, which is win, get entries into a contest. You saw that Adrian Pateli just moved to Dubai. That category of business has got some problems. I think it's about to be run out of town, which is quite surprising to me. You don't think so? I don't think that will be. I'll be surprised if they do because I don't see there's much political upside in running them out of town.

10:23Who cares? It seems like politicians are pretty committed to trying to stop this pseudo-raffle business, basically. But I think your overall argument, which is Kogan should be less affected by the downturn and discretionary spending and might get a bit of a tailwind, I think there's some truth to that. Plus, Kogan generates free cash, plus they pay dividends. Yeah. They had a buyback as well. They had a buyback. So I think out of all of these, there's a lot to like. I mean, I'll say this to Ruz and I'll say this to Schaefer. like it's better if Schaefer stays they should give him Schaefer's one of the best executives they should like they should give him more money like they should just say how much do we have to pay you to stay he's like a very wealthy guy I'm not sure it's money I'm sure it's not money he stayed for the last three years when the money was irrelevant I know but like anyway I think they should try and hang on to him if they can't like they'll survive but like he's a very good operator it's more interesting to think about you know some of these other ones I think like in the other Brisbane the team doesn't do as well like it's inevitable that you're going to see a drop off.

11:24But so I think Nick Scully is a great operator. It's a great business, Nick Scully. Nick Scully, I always say with Nick Scully, because obviously I know this category well because of my Eva involvement. Nick Scully sells furniture that has, in my view, a much higher perceived quality and thus a much higher price than actual quality of the furniture itself. That is the brand doing real heavy lifting. And I think that is their magic. You know, their stores are not, like I've pushed Eva very hard to have these beautiful stores that feel like you're in a home Nick Scully is like everyone else they've just got these boxes it doesn't matter people it's a really well run good business excellent website as well that site's amazing I agree with you so that's great and then you look at JB also historically a very well run business especially on the cost side and so I think you'll get buying opportunities for these really high quality businesses I think JB's feeling feels pretty good actually he's only 15 yeah markup of 7 billion so yeah so it's getting a lot cheaper than it's been definitely these good businesses are going to fall too low like that's the trend in these and so usually i'm very enamored by getting into the extreme detail of like financial statements but actually in this sector right now what my what my view is is that um you pick the companies that you think are the best run companies just wait for them to get to a cheap price and don't worry too much about the individual financials inside the business because they'll be fine.

12:49I mean – JB's got great power. This is a Charlie Munger slash Buffett all over it. Like it's great powers. It's got great scale, strong brand. It's a really good retailer and the market will eventually turn. It's freaked out. But JB at 15 multiple, that feels good. Yeah. I mean there's a few – I agree with you. And there's a few interesting retail events going on at the moment. One is the turnaround of Adairs. Yep. So I've had shares for Adairs in Adairs for years. Is Brett Blundie still a shareholder? I don't think so. Like they've gone through a CEO transition and repositioning and I think they'll get there because like their membership program is unbelievable.

13:27But, you know, that's a business that like they'll also have some headwinds in the market now, right? Basically people feel poor and they're spending less money. And so on that topic, just to round this out, I think Templeton Webstar is like that's not the good one in this category at all. so that's one you know we think we should avoid that one but remember we said at the time Temple was at 3 billion and Kogan was at 400 million I said I've never seen a better pair trade buy Kogan and sell Temple Kogan hasn't spot on Kogan hasn't really moved but Temple's dropped 80 % so Kogan should go up which is exactly the purpose of a pair trade I mean so and so let's just talk about Koala briefly since we're talking about this retail stuff so did you look at their numbers have a look at their numbers I saw that my good friend Raj at Allium who's been a big supporter of Koala had just recently just sold out his stake so congratulations to Raj and the team it was a great trade they bought in super early so yeah so they sold out and I told you that on the last episode I said PFG sold out their warrants it looks like Coal has had a great great little war we thought this was a good business I've watched this business for a very long time as a competitor yeah it's up from three bucks to four dollars obviously after the announcement last week so they've been a really good really good so they IPO'd I thought they were reasonable value at the IPO yep we both thought it was good great management They then plummeted.

14:43Yep. Well, it went down. 10%, 20%. And so they just got better value. And I think what we've seen, I mean, it's a bit hard to see some of the detail on their NPAT, net profit, because they got weird tax treatment. And so they made a profit, but then they recorded a gain in income tax. We look at profitable tax, it's the better way to do it. That's what I look at. But if you look at this business, we said at the IPO time, I've watched this business for a long time. I thought it was run as badly as all of the direct-to-consumer version one businesses were run, which is go and pour all your money and build it and they will come.

15:18And like they come, they just don't come back. And they come for a high price. But I think that they've done a great job in turning this business into a high-quality brand that has expanded successfully into Japan. Like I think Koala is one of the few retail businesses in Australia that has recorded genuinely profitable growth. Kogan is another one great D2C business great D2C business Danny and Mitch are great operators credit to them for for bucking the trend nobody thought these guys would get the float away at all let alone be up and now what's it it's now worth I think it's up 10-15 % from IPO yeah it's one year turns 11 % so great result to get 11 % after listing that's pretty rare these days that you don't have busted IPOs in a tough retail environment really tough it's another business that benefits from actually it's offensive business plus offshore revenue yeah exactly And you look compared to a temple, which is a bit more full price, like Koala's kind of caught the slightly off-priced version and just done a great job.

16:16The last thing I'll say about this is Koala probably would not like to be compared to Nick Scully, but they do have this in common. Well, Nick Scully's a great business. I'd be happy to come in. It is, but I think Koala thinks of themselves as being like, yeah, and more whatever. And so their brand is very different to Nick Scully's brand, but the truth is they have this in common. The price of the furniture has been rising, very impressive by Koala. I don't think it matches the quality. Obviously I'm biased because like Eva, but look, cause I know what goes into making these things. I love my ever bad, it's great.

16:44Yeah, like, and so I know what goes into it. And I think that, you know, both of those businesses have built a very good margin business. Nick Scully is pushing 70 % gross margins. Like they've built great high margin businesses, same as Koala's in the 60s, because they've found a way to build furniture that's fine, rep a really good brand around it and increasingly sell it for premium pricing right like they've done a really good job koala has no stores yeah it's a really interesting model yeah it's a great model let's go super quick break back with a great story after this don't turn off

17:24the contrarians is brought to you by acquire intelligence an idea it's a problem we see all the time especially as your businesses get bigger they just become more bloated and often these huge enterprises may be successful on paper, but I think below the surface, they're really struggling under the weight of their own complexity. Have you found that with your investee businesses? I completely agree with you. As the size of the business grows, the complexity increases in a non-linear way and definitely adding staff at some point is a massive step up in the level of complexity in a business. And this is where Acrya Intelligence changes the game.

18:02Now, of course, Australian owned and managed and operate at a massive global scale. We're talking 9.5 thousand people all over the world. That's bigger than even your business, isn't it? I'm happy to say that is very substantially larger than any business that I've ever been involved in. That is an awful lot of people. And of course, Acquire was founded by my good mate, Scott Stavaridis, one of the best CEOs in Australia. He started Acquire Intelligence and spent 20 years helping everyone from ambitious startups, including yourself and us and a lot of my investee businesses, some of the world's biggest brands move fast and operate more intelligently through outsourcing and AI.

18:38At the core, it's a three-step play. Eliminate, automate, and reallocate. Eliminate means finding and killing wasted processes that are dragging you down. They automate by using AI to handle the busy work with measurable outcomes, and they help you reallocate your time and resources by shifting the heavy lifting to that global team located across the Philippines, the Dominican Republic and the US, freeing up your team to focus on the bigger picture. Acquire Intelligent is so confident in their processes. They provide 100 % ROI guarantee on consulting and implementation, which means if you don't see a result, you don't pay.

19:15This sounds like your kind of setup. Well, I can say that this is one of those businesses where hand on heart, I've been a customer of this business in one of the previous companies I'm involved with, and I can speak about them in the first person and what they do. And we work with them at NOC as well, one of the businesses I'm a director of, and they've done an unbelievable job scaling up that business. I can't speak more highly of them. So stop scaling the burden and start scaling the results. Eliminate, automate, and reallocate with Acquire Intelligence. Visit acquire.ai forward slash contrarians.

19:51We're back, and Satire is now really off-Broadway, given the business has been basically reduced to rubble with its market cap. slash 95 % in the past two years to only$89 million. But the odious luxury goods reseller has managed to release another set of questionable financials. Two years ago, there would have been countless articles written about Dean Mintz's latest profit announcement, but the business today has really been ignored by everybody but us, so we're going to give you the lowdown. Or by you, we should say. You love it. The results, as expected, were an absolute disaster. The business reported a ballooning net loss of$8.5 billion, up from$2.7 billion last year.

20:27Remember this business it used to make, this business was basically valued on EBITDA. It allegedly made$28 million in this basically fraudulent EBITDA. What was its peak market cap? I think it was$2 billion. Right. Give or take, could have been just above, but in the ballpark of$2 billion. The business basically blamed everyone but its own terrible business model for its ills. It pointed to the Trump tariffs and the removal of the minimus exemption, which allowed Satie to essentially undercut retailers by not charging duty on its products. The company stated that revenue had dropped 3 % but conveniently neglected to note that its margins got smashed even worse because gross profit was down 9%.

21:08The business, to its credit, did manage to reduce marketing which is basically how it kept the lights on with marketing down from$36 million to$23 million. Given the business only has$28 million cash left, it basically would have died without reducing that marketing by the looks of it. interestingly staff costs increased from 10 to 16 million which was significant and unexplained rise and this doesn't include a staggering 16 million dollars in capitalized wages which is just an outrageous breach of accounting standards god knows how ASIC allows them to do this year on year they they capitalize 100 % of tech spend this is just completely outrageous um the business reported amortization though of 11 million so it's the 5 million gap which you have to add to the sort of loss.

21:48So their real loss was$12.5 million. But there's more. On an analyst call after results, embattled CFO Tim Ford revealed that the loss also included a$9 million reported gain on tariff refunds, which have not yet been received and are also, of course, a one-off. So the real loss was really$22 million when you back out the tariff refunds. And while the business appeared to be basically insolvent, SETI's directors continued with the charade and claimed the business was a going concern. Of course, the balance sheet begs to differ with the company stating they had cash of$28 million and trade receivables of$16 million versus current liabilities of$101 million.

22:26Even worse, this is a business that eventually lost$22 million last year. What's most of their liabilities? Pre-payments? Trade creditors. I don't think there's that much in prepayments. There's a bunch of different... I mean, I don't really disagree about them being a going concern because we don't know who's committed to providing capital. Dean took$300 million off the table. He might have said he's going to continue funding it if it needs cash calls, then it would be a going concern. Well, we haven't got audit sign-off yet, which is the big question. So what's more relevant is does an auditor think it's a going concern?

22:58And as a friend of the pod, Wee Wang Chen, noted, he's obviously at RBC, said how he expects to receive an audit report containing a material uncertainty related to going concern paragraph. So audit is not quite so confident. Why is RBC still following this? Like, what's it worth, this thing? $89 million. I mean... I think Wing Wing just does it for old times' sake. I don't think there's any great investor interest in the business anymore. Why is Dean Mintz still bothering with this business? The question is why he doesn't just buy it out. Well, because he doesn't want to pay$100 million. It's the money he took off the table because he thinks it's worthless, presumably.

23:30He took out$330 million and put it back in. Yeah, pay tax. Yeah. And so I think... I mean, you know, I just want to say it. So he took out 330. He would have paid 80-odd mil of tax, but he would have paid 160 under the new tax regime. Yeah, probably. Your take. Yeah, so it would have been pretty close to 50%. That's how crazy what's going on is, right? And by the way, I know this is a slight digression, but that extra 80 mil he would have paid, it's not like that would have gone to the greater good. It would have just been 80 mil not available to invest in the economy and lost through government waste.

24:05Like we would have never seen the benefit of that 80 mil, right? And like I'm not saying that I think Dean Mintz is the most deserving recipient of$330 million, right? But it's better than the world's worst example. Well, no, the government is the world's worst example. On par, I think. But the thing is, what is going to happen to this thing? Well, there's still a little bit, one final little point to note is there was a mysterious case of CTT reporting$600 ,000 in interest paid, but not reporting any external debt on the balance sheet, which is really bizarre. So the only rationale – there's two explanations.

24:39One is they just lied on the balance sheet. I don't think they did that. The other explanation is they actually had to take out debt during the half to keep the lights on and then repaid it before balance day. Or they could be off balance sheet debt that funds the inventory, although they've got big inventory liabilities, right? They've never had interest before, and they claim they've got no debt. So I think the only explanation is they basically ran out of cash, had to desperately borrow, got some cash in from whatever, and basically hand-to-mouth, day-to-day at the moment, trying to keep the lights on.

25:09Yeah, yeah. It's hard to know what's going to happen to this thing. Well, I think we know what's going to happen to this thing. You said from the start – I mean, we did a pod for our old From Zero podcast. We had you on the founder, and we had you on the first time. This is in probably, what, 2022? Yeah. We said this thing just made no sense to us in 2022. I think you had more – like, I think I felt that and agreed with you, but to give you credit, you had complete clarity about this business from day one. And also, as much clarity as anyone about the fact that, I thought about something weird was going on.