Online electrical retailer AO World (AO.) cheapens 7% to 102.3p as full year results reveal a business still mired in the red due to a disappointing showing in Europe and amid tough times in the domestic retail market.
Back at the helm of the Bolton-headquartered business he founded almost two decades ago, chief executive officer (CEO) John Roberts also hints at significant changes to come as embattled AO World seeks to leverage its ‘eco-system of complementary competencies’.
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Results for the year ended 31 March from the web-based washing machines, TVs and computers seller reveal continued sales growth in both the UK and Europe. That is creditable considering fragile consumer confidence and cut-throat competition, especially in the UK where AO World delivered double digit revenue growth and the customer base has grown to almost 6.5m.
Unfortunately, AO World incurred group operating losses of £15.2m, a modest reduction from the previous year’s £16.2m deficit, with growth in UK operating profits offset by an increase in European operating losses.
Investors are also unplugging from the stock due to a widening of the pre-tax loss from £13.5m to £18.9m, struck after £7.3m of exceptional restructuring and acquisition-related costs and charges for an onerous contract the company was unable to exit in Germany.
‘Adjusted EBITDA losses in Europe have increased slightly against the prior year with progress hampered somewhat by driver challenges in Germany and a lack of real improvement in product margin and customer acquisition costs,’ bemoans Roberts.
However, he says ‘we are working to address these issues’ and has made changes to the management of AO’s international operations.
While sales continue to grow in Europe, AO World’s business in Germany and Holland remains sub-scale and loss making, although Roberts says the ambition is to be ‘run-rate profitable in Europe’ during the 2021 financial year.
Yet with the core business struggling to make profitable progress, AO World is targeting new customers in third-party logistics and has also begun to build a plastics recycling plant with a further plant planned for this growth area.
Roberts stresses that: ‘The AO model is an eco-system of complementary competencies across retail, mobile, recycling and logistics through to financial services and business-to-business (B2B) trade. We have huge structural advantages when these capabilities operate in harmony.
'So, we have enhanced structure with informality and a renewed mindset and are now releasing the immense unrealised value we’ve created. We’ve started to see this in the last few months and it will be an important driver for the year ahead.’
THE EXPERT’S VIEW
Nevertheless, broker Shore Capital is sticking with negative stance on the stock: ‘We have been highlighting that AO remains at a critical phase in its development.
'The company remains sub-scale, despite the investment thesis at the time of the IPO back in 2014, that it would disrupt the UK white goods market. In our view, the UK electrical market has become even more competitive in recent years.’
Russ Mould, investment director at AJ Bell, says:
‘Like something out of a Greek myth, online white goods retailer AO World keeps pushing the ball up the hill in terms of growing customer numbers, yet the losses continue to mount up.
‘Surely by now the patience of its management will be wearing thin, let alone long suffering shareholders, with the stock at a big discount to the 285p ticket price from a February 2014 IPO.
‘The company may be pointing to a smaller underlying loss this morning but its statutory loss was materially higher year-on-year - reflecting finance charges and the costs of management changes.
‘And an improvement in underlying profit in its UK division was partly a reflection of reduced marketing spend, action which needs to be balanced against the requirement to maintain brand awareness.
‘The need for action to bring its European business up to speed is evident in these results with margins under pressure.
‘Founder John Roberts, who returned as CEO in January, has an ambition to make trading in Europe profitable by 2021 but, unlike its products, this doesn’t come with a warranty and will likely be treated with a healthy dose of scepticism until it can be delivered.
‘Roberts’ plan appears to be focused on getting the entire “eco-system” of the group - retail, mobile, recycling, logistics, financial services and business-to-business trade - into greater harmony.
‘Rock band AC/DC are not necessarily known for their tunefulness, but investors would definitely settle for Roberts changing the record to Back in Black.’
