Online electrical retailer AO World (AO.) reported a surge in sales for the third quarter including Christmas as the pandemic-induced ‘significant increase in demand’ for its products continued to drive growth in the UK and Germany.
Yet shares in the clear lockdown winner were the biggest fallers on the FTSE All-Share, off 6.5% to 353p following a fantastic run, as AO World warned it has incurred ‘significantly higher’ costs in ramping up warehousing and delivery capacity and handling returns amid bumper demand, all while remaining Covid compliant.
VERY MERRY CHRISTMAS
For the three months to December 2020, the web-based white goods purveyor’s UK revenue rose 67.2% to £457.3 million, marking an acceleration on the first half growth rate, while Germany revenue shot up 77.4% to €73.6 million and the German business traded profitably throughout the third quarter.
Bossed by founder and chief executive John Roberts, the Bolton-headquartered retailer said it experienced its strongest ever peak trading period over the Black Friday period and in the run up to Christmas.
AO World continued to benefit from the structural shift online as well as the shuttering of the physical stores of rival electrical retailers under Covid lockdowns.
‘SIGNIFICANTLY HIGHER’ COSTS
However, AO World has also incurred ‘significantly higher’ costs as it invests to deliver elevated levels of revenue growth, including on extra warehouse workers and delivery drivers and on negotiating ‘some of the operational challenges of working in a Covid compliant environment, particularly in the reverse supply chain’.
AO World has also seen ‘a slightly increased rate of cancellation’ of mobile phone contracts and warranties amid Covid-19 driven changes in customers’ behaviour.
AO World said it is looking forward to the last quarter and the next financial year ‘with confidence as the structural shift to online is cemented in consumers’ minds by the outstanding service millions of new customers have received in 2020. This is compounded by the ongoing tailwinds we expect to be driven by working from home and associated usage and appreciation of electrical products so essential to our day to day lives’.
THE EXPERTS’ VIEW
‘A key question for investors to weigh is the extent to which these costs and benefits are a one-off,’ said AJ Bell investment director Russ Mould.
‘Will the structural changes accelerated by the pandemic continue to support growing market share for the business? Or will shoppers decide they’ll “AO let’s go” somewhere else once we have returned to a measure of a normality?
‘And with the investment in its infrastructure and processes made, will costs start to come down again?
‘AO will certainly find the current financial year a hard act to follow in terms of sales growth and there will be plenty of attention on its trading through the course of 2021 to see if the position carved out through the coronavirus crisis can be sustained.’
Shore Capital commented: ‘Full year 2021 has been a great year for the company with the sales momentum and structural shift online but also increased operating costs too.
‘Germany is scaling nicely and will be EBITDA profitable during FY2022. For now, we reiterate our “Hold” rating and believe that the next catalyst could be the Q1 growth rate later in the Spring.’