Shares in online electrical retailer AO World (AO.), the lockdown winner turned post-vaccination era loser, slumped 25% to 93.4p after the fridges-to-flatscreen TVs seller lowered guidance again.

With industry-wide supply chain disruption persisting, trading has proved weaker than expected during the Christmas run-in and management now expects full year group revenue to be flat to minus 5% year-on-year.

Annual group adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) is now forecast to come in between £10 million and £20 million, a massive downgrade on the previously guided £35 million to £50 million range.

SUPPLY CHAIN PAIN PERSISTS

AO World continues to encounter ‘meaningful’ supply chain challenges with ‘poor availability’ in certain categories, ‘particularly in our newer products where we have less scale, experience and leverage’.

In addition, shipping costs, material input prices and consumer price inflation ‘remain challenging uncertainties’, said the company.

As a result of these factors, the Bolton-headquartered retailer warned the all-important current peak trading period is ‘significantly softer than we anticipated only eight weeks ago’.

LAPPING TOUGH COMPS

Results for the first half to September revealed group sales up 6% year-on-year to £760 million, well below previously communicated guidance for double-digit growth as AO lapped strong Covid comparatives, although sales were 67% ahead versus the pre-pandemic period two years ago.

UK sales grew by just 7% to £661 million, with growth impacted by the nationwide delivery driver shortage and global supply chain disruption, while revenues in Germany were down 2% to £99 million amid rising competition in the online electricals market.

CEO John Roberts said: ‘Our results over this period have inevitably been affected by the constraints and uncertainty seen across our industry’, though he insisted his charge has ‘materially cemented the progress of last year, with a step change in scale and consumer behaviour - and the fundamentals of the business are in place for sustained growth.’

THE EXPERTS’ TAKE

‘Higher costs, stock availability issues and fierce competition in Germany are all to blame for its woes,’ explained AJ Bell investment director Russ Mould.

‘The company remains optimistic these are short-term problems and that the structural shift in favour of e-commerce will ultimately benefit the company. However, when you’re only earning small margins, any increase in costs will have a big impact on profitability and so AO is really feeling the pain at present.’

Fundamentally AO’s proposition is sound, said Mould, as the company offers a wide range of products at competitive prices and boasts a good reputation for top notch customer service.

And yet, the ongoing challenge to its business model ‘is the fact there are so many other companies offering the same proposition via the internet. Not only does that mean competing on price, but it also means competing for online advertising space such as bidding for the favourite search terms, and that is one area where AO is incurring extra costs.

‘Having cracked the UK market pre-pandemic, a lot of AO’s growth story was pinned on success overseas, led by Germany. That’s now looking a bit shaky as Germany has proved to be a much harder market in which to excel. If AO decides it can’t expand profitably overseas, then a lot of investors are going to take a hard look at the business and its share price could experience even more pain.’

Shore Capital added: ‘Investors were left disappointed in October when the company downgraded its FY22 guidance, mainly because Germany was supposed to be the engine of growth going forward.

‘The recent under performance in the country leaves us with a fundamental question mark around the international playbook roll out and where we see the valuation in the future.’

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Issue Date: 23 Nov 2021