Profits surprise at revitalised AO World

AO World (LSE:AO.)’s strategic and decisive actions to focus on profit and cash generation are now fully washing through, after the group reshaped its business model.

In particular, the previous decisions to exit the German business and remove its non-core channels and loss-making sales were difficult but necessary actions. Challenges were compounded by a weakening of consumer sentiment, as well as a slight shift away from online purchases as customers reverted to physical shopping, as evidenced by many retailers over recent months. 

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

As such, revenues were down by 9%  compared to the previous year at £1.04 billion, in line with expectations, although returning to growth in the final quarter. However, adjusted pre-tax profit of £34.3 million represented an increase of 186% over the corresponding period, and was above the company’s own previous range of between £28 million and £33 million.

In terms of financial health, the focus on cash generation left the group with net funds of £34.4 million, a notable improvement from the £3.6 million at the last year end.

The group’s lack of a store portfolio means that in comparison with more traditional retailers, AO World is a relatively capital light business, and its warehousing operations are also largely owned by the group. It is now concentrating on these overheads having previously streamlined its warehousing operations, while at the same time a decision to implement delivery charges on all orders boosted service revenue without a material impact on sales.

The company is now fully focused on cash and profit generation, underpinned by its core UK sales of Major Domestic Appliances (MDA), where the group is squeezing its advantages wherever possible, while also considering other appliance avenues of growth.

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• Election manifestos 2024: the impact on your personal finances

In addition, AO World now offers ancillary services such as the installation of new products and the recycling of old ones, in an overall addressable market in the UK which the company believes to be in excess of £28 billion. In terms of UK MDA overall, the company estimates a market share of 15% which reflects the fact that the group remains a well-known and well-established brand, partly helped by its relatively high-profile advertising campaigns.

With much of the heavy lifting now completed in revitalising the business, AO World can now move on to the next phase of its development, although its mobile operations will need some care and attention.

The unit is currently loss-making due to soft consumer demand and a fall in connections, While the business represents a relatively small part of the overall group income, AO World is continuing to run with its potential and in an effort to provide additional sales channels, the group acquired two web domain names in the period, with the strategic focus being on selling its full range of its products to its customers.

There are also signs of light in terms of brand awareness and loyalty, with 600,000 new customers using its services over the year bringing its historic total to 12 million. Equally promisingly, repeat customers represented over half of income for the year, suggesting that the suite of products and service levels are sufficiently attractive to draw customers back for their new purchases.

The outlook is upbeat, with double-digit revenue growth and adjusted pre-tax profit of between £36 million and £41 million expected in the coming financial year. The share price has reacted accordingly of late, with an increase of 34% over the last year comparing to a gain of 13.3% for the wider FTSE250.

• Stockwatch: UK takeover interest shifts to quality consumer brands
• Target upgrade for Rolls-Royce as confidence grows
• What next for Nvidia stock after losing top spot?

In historic terms, however, there is a gulf between the current price and the heady heights of January 2021 when the company was trading at levels of over 430p at the peak of the pandemic and indeed perceived prospects for the company.

As such, the shares are down by 54% over the last three years, although significant progress has since been made, the scale of which has prompted the market consensus to have risen to a buy on renewed growth prospects.