Online electrical retailer AO World (AO.) sparks up 7.4% to 144.3p on a strong first quarter trading update that shows UK growth rates trending ahead of forecasts and gross margins towards the top end of analysts' expectations.
For the uninitiated, Bolton-headquartered AO World is the leading online major domestic appliance (MDA) retailer in the UK. It has also expanded into small domestic appliances (SDAs) and TVs and flagged a launch into computing this year. The John Roberts-bossed retailer is also exporting the AO brand into Europe (Germany and the Netherlands).
For the quarter to June, total UK sales grew 25%, a strong performance, although delivered against the weakest comparative quarter of the prior financial year. Revenue acceleration was driven by AO's own website, growing brand awareness reflecting a ramp up in marketing investment in the previous financial year to March and driving further gains in the domestic electricals market.
Encouragingly, AO World also reports continuing momentum on UK gross margin, up 80 basis points to 19.8% last year. Over in Europe, local currency revenue growth doubled year-on-year, albeit from a low base.
Besides revitalisation of UK revenue growth, today's share price spike reflects relief surrounding the fact there's no major Brexit impact on guidance. Brexit may see consumers tighten their belts and weaker sterling driving up costs for suppliers. Given the slim margins in electricals, such product cost increases are likely to be passed on to customers by all players in the market.
Outgoing chairman Richard Rose, who hands over to Geoff Cooper at today's annual meeting (AGM), comments: 'We are mindful of recent economic uncertainty following Brexit and its potential effect on consumer confidence and foreign exchange exposure of our suppliers but, despite this, our expectations for the UK business, over the whole financial year, remain unchanged.'
AO World's investment thesis is compelling; it is primed to increase market share in the electricals market as online penetration grows and consumers warm to, in Roberts' own words, AO's 'unbeatable prices, huge range and amazing service'. Yet the business is still investing heavily to capture growth in Europe, there are undeniable risks associated with Brexit, UK comparatives over the next couple of quarters are strong and there's also a premium rating for investors to ponder.
For the year to March 2017, Numis Securities forecasts a narrowing of pre-tax losses from £8.4 million to £6.3 million off a top line £719.5 million (2016: £599.2 million), ahead of a return to the black to the tune of £6.1 million by March 2018. Based on the latter year's 1.1p earnings per share estimate, AO World trades on more than 130 times prospective earnings, a rating that would make a value investor's eyes water.