Annual results from AO World (AO.) showed the online electrical retailer swinging back into the black as its pivot towards profitability and cash generation began to pay off.

Retail magnate Mike Ashley will be pleased with AO World’s performance, since Frasers has amassed a 22% stake in the fridges, laptops and smartphones seller in the belief the investment will help it benefit from AO’s electricals market expertise.

Shares in AO World have rallied the best part of 55% year-to-date after regularly upping forecasts, but they softened 0.5% to 80.5p in early dealings today on the absence of upgrades to sales and earnings targets.

ADJUSTED EARNINGS DOUBLED

Results for the year ended 31 March 2023 showed Bolton-headquartered AO World swinging from an £11 million loss to an £8 million pre-tax profit after rationalising and simplifying the business.

Cost-cutting measures undertaken included a significant headcount reduction, the closure of its German operation, ending a trial with Tesco (TSCO) and terminating partnerships with housebuilders to provide goods for new-builds, all of which helped adjusted earnings before interest, tax, depreciation and amortisation to more than double year-on-year to £45 million.

WHITE GOODS DEMAND WEAKENS

A 17% drop in sales to £1.14 billion reflected efficiency measures including exiting non-core channels and loss-making sales, as well as weaker demand for white goods as consumers struggled with the cost-of-living crisis and the market normalised after the lockdown boom.

Founder and CEO John Roberts commented: ‘We are delighted with the demonstrable progress that we’ve made with the strategic realignment of AO towards profitability and cash generation.

‘The significant improvement in our profit performance speaks for itself and has been achieved by focusing on our core strengths and simplifying our operations, while still delivering the outstanding customer service for which we’re famous.’

As for Frasers, taking stakes in AO and its rival Currys (CURY) provides a foot in the door for the electronics sector and should give the FTSE 100 retail giant a broader understanding of the challenges around selling tech hardware.

Last month, Frasers’ CEO Michael Murray said AO is ‘a fantastic business with a clear strategy which is leading the market in online-only electricals. Through this investment, Frasers will benefit from AO’s valuable know-how in electricals and two-man delivery, helping us to drive growth in our bulk equipment and homeware ranges. In turn, AO will have the opportunity to benefit from Frasers’ expertise and ecosystem.’

EXPERT VIEWS

Begbies Traynor’s (BEG:AIM) Julie Palmer explained that ‘stripping out costs, focusing on more profitable products and ditching underperforming markets has delivered for AO World.

‘It’s an impressive turnaround and return to profit despite lower revenue for the electricals business which stumbled after the lockdown boom.’

Palmer added: ‘AO World recognised the economic challenges ahead and took action to strengthen itself against them, and the Frasers tie-up will only help.

‘The real challenge is whether consumers can continue to spend on new fridges, freezers and TVs at the same rate as they face soaring mortgage bills. AO World is determined to treat customers like family and if the cost-of-living crisis continues to bite it might have to with discounts and deals for those struggling to pay.’

Russ Mould, investment director at AJ Bell, said AO’s decision to streamline its business has ‘so far paid off, given the shift back to profit. It has closed operations in Germany, ended a trial with Tesco and ceased working with housebuilders, effectively saying it wasn’t worth the time and effort. An internal rejig of teams and a simplified product range are some of the other initiatives undertaken to right-size AO into a more profitable entity.

‘It’s a good start, but the proof in the pudding will be sustained profit growth, and the market won’t be able to judge its success until well into next year.’

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Martin Gamble) own shares in AJ Bell.

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