AO World delivers strong results as profits soar

Photo: Pavlo Gonchar/SOPA Images/LightRocket via Getty Images.

These record results have delivered a number of new milestones, underscoring the discipline and focus on which AO World (LSE:AO.) is based.

Adjusted pre-tax profit of £50.5 million represented a 16.1% improvement from the previous year, and was marginally higher than the £45 million to £50 million range which the group had estimated. Revenues rose by 11.4% to £1.27 billion, again slightly over the group’s expected 11% improvement. Retail revenues were ahead by 9.5% to £911 million, while the adjusted profit margin of around 4% moved further towards the 5% medium-term target.

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In addition, the mobile business is showing some signs of life from its previous loss-making past. The success of the AO Membership scheme has been and will be enhanced through offers such as its Switch 24 and AO Mobile offerings. While revenue fell in the period, this was attributed to a shift towards profit generation, including but not limited to tighter cost discipline and margin optimisation.

Even so, a softer market for new mobile contracts will need to be addressed. Elsewhere, its other lines are showing signs of progress such as the “recommerce” business, bolstered by the musicMagpie acquisition and involving the reconstitution of products and appliances. Revenue growth of 180% to £119.5 million means that the unit now accounts for more than 9% of group sales, which is material.

The group’s lack of a store portfolio means that in comparison to more traditional retailers, AO World is a relatively capital-light business, and its warehousing operations are also largely owned by the group. The group is now concentrating on these overheads having streamlined its operations, with a third-party warehousing solution and a decision to implement delivery charges on all orders previously boosted service revenue without a material impact on sales. The former decisions to exit the German business and remove its non-core channels and loss-making sales were difficult but necessary actions. To add to the challenge, these were compounded by a weakening of consumer sentiment, as well as a slight shift away from online purchases as customers reverted to physical shopping, where the likes of rival Currys (LSE:CURY) have an edge given its store portfolio and indeed overseas presence.

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AO World 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. 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. Repeat customers remain a differentiator in addition to which over 720,000 new customers were added over the period. For another milestone, AO World states that it is the first retailer in the world to exceed one million Trustpilot reviews, and with an average rating of 4.9 out of 5. The company reiterates that while this number does not sit on the balance sheet, it is one of its most valuable assets.

The improving outlook has led to significant improvements across the piece. Free cash flow rose by 152% to £66.4 million and net debt of £35.9 million was transformed into net cash of £16.4 million, leaving the balance sheet in good shape. Indeed, as a result the group has announced a further £10 million share buyback programme as well as a special dividend which will also amount to £10 million. This cost discipline is likely to continue, and AO World is confident of hitting market estimates for the coming year of £1.34 billion of revenues and £54.5 million of adjusted pre-tax profit.

At no time has the group appeared complacent on the economic backdrop and its outlook comments reflect this ongoing caution. More recently of course geopolitical volatility has been a headwind, leading to inflationary pressures which could impact both consumer sentiment and input costs. This is in addition to the discretionary nature of some of its products – replacing a fridge may well be an unavoidable expenditure, but upgrading a mobile or laptop less so.

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For all the progress, the share price of late has been running to keep still. Despite a bounce of 6% over the last three months, the shares remain down by 3.5% over the last year as compared to a gain of 9.8% for the wider FTSE 250 and a rally over the Christmas period completely evaporated. 

Of equal note is that the price remains some 77% off the peak of December 2020 at the height of the pandemic, when perceived prospects for the company were at heady highs. Nonetheless, the shares have responded positively to this update where the company has clearly delivered. On a valuation basis the shares are at a level which is undemanding historically and the immediate outlook is brightening, such that the market consensus of the shares as a buy is likely to remain in place on further growth prospects.