Shares in AO World (AO) sparked up 3.8% to 200.5p on Thursday as the online electrical retailer said the trading momentum announced at the time of its preliminary results in July has continued, even after brick and mortar rivals re-opened stores post-lockdown.
Bolton-headquartered AO World insisted that the significant change in demand for its products and services driven by the Covid-19 pandemic had been maintained.
Consumers are continuing to spend on technology, fridges, freezers and other electrical items, although news the company is incurring higher costs combined with a rather mellow outlook statement kept a lid on the shares.
In a trading update to accompany its annual general meeting, the web-based white goods, television and mobile phone retailer reported strong year-on-year revenue growth for the four months ended 31 July 2020.
In the UK, sales surged 58.9% higher to £401.3 million, while sales in Germany grew by 91.5% to €74.3 million; AO World closed its loss-making Netherlands business in March.
COUNTING THE COSTS
While we are encouraged to see such rapid revenue growth being delivered, profit is what really matters and there was no mention of it in today’s update.
The lockdown beneficiary also pointed out it has ‘made investments to strengthen our teams and our infrastructure to ensure the business remains resilient and that we maintain our high levels of customer service during ongoing periods of strong demand’.
‘What this quite means for the scope of the group to harvest positive operational gearing from the strong top-line progress is, therefore, up for debate, but perhaps tempers upgrade potential,’ said Shore Capital.
AO World went onto state that it is ‘investing in our capacity and capability to serve customer ever more in the AO way’, which implied it is incurring additional costs too.
UNCERTAIN OUTLOOK
AO World assured investors the demand for its products and services has been sustained since competitor stores started to re-open at the beginning of July. ‘This reaffirms our belief that this is a structural shift in demand where customers have found a better way to shop the electricals category’, said the company, although the outlook was cautious in tone.
‘We remain cognisant of the significant level of economic and customer uncertainty driven by both Covid-19 and the prospect of Brexit in December and the impact this may have on demand for electricals in the medium term,’ warned AO World.
THE EXPERTS’ TAKE
‘So, a statement that commences with strong and welcome top-line progress goes on to talk of further investment and, we suggest, higher costs, whilst signalling caution about future market developments,’ commented Shore Capital.
‘As such net, net we see this as a quite neutral statement for AO World, and so feel comfortable to reiterate our HOLD stance on the stock.’
Russ Mould, investment director at AJ Bell, said this year’s share price rally suggests the market has become more confident about AO’s ability to start generating a profit at the group level.
‘Its proposition is good: selling a wide range of items online and offering superior levels of customer service. However, this is still a highly competitive market and AO cannot afford to undercut rivals by a large amount.
‘AO faces the hard test later this year if its 2020 sales boom has been a one-off driven by people spending a lot of time at home and wanting to ensure their mod cons are up to scratch. As people return to offices to work and spend less time at home, one has to wonder if sales growth starts to moderate.’
