Interactive Investor

AO World: decisive actions are taking effect

The retailer has upgraded its own profit forecast and it is now a rather different and developing prospect compared to the recent past, says Richard Hunter.

21st November 2023 08:52

by Richard Hunter from interactive investor

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AO World’s decisive actions to reshape its business model are beginning to take effect, resulting in the group upgrading its own profit forecast for the full year.

In particular, the decision to exit the German business, remove its non-core channels and loss-making sales were difficult but necessary decisions. To add to the challenge, these have been compounded by a more recent weakening of consumer sentiment, as well as a slight shift away from online purchases as customers revert to physical shopping, as evidenced by many retailers over recent months. As such, revenues saw a decline of 12% for the half-year, but that is only part of the story.

AO World (LSE:AO.) has streamlined some of its warehousing operations, where costs fell from £31.3 million to £25.5 million in the period. The overall focus on outgoings also resulted in a reduction of 14% to £56 million to admin expenses, which includes staff and office costs. The previous decision to implement delivery charges on all orders without a material effect on sales helped propel an increase of 30.5% to its service revenues.

The group 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. In terms of UK MDA overall, the company estimates a market share of 16% and 30% of online, 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. Despite a parlous economic backdrop, there are already some promising signs, such as 290,000 new customers having been added during the period, accompanied by a higher repeat customer percentage rate. The removal of unprofitable sales, the boost from delivery charges and lower costs have all combined to increase the group’s gross margin for the period to 23.5% from 19.5%, demonstrating that the business is carefully pulling the correct levers as it negotiates its changing business model.

The impact is also being felt at the headline level, where pre-tax profit for the half came in at £13 million, as compared to a loss of £12 million last year. Indeed, the half-year result of £13 million has already eclipsed the £7.6 million made for the entirety of the previous year, while the improving situation has prompted the group to raise its pre-tax profit forecast for this year to a range between £28 million and £33 million.

One area of disappointment among the business transformation has been the performance of the mobile phone unit, where contract sales decreased by 13%. This came alongside higher acquisition costs and a fiercely competitive market and while the business is not a material contributor to overall revenues, the group has stated that the trailing performance will be an area of focus for the remainder of the year.

Even so, the speed, decisiveness and relative early success of its actions have had a positive impact on the AO World share price, which has risen by 59% over the last year, as compared to a marginal rise of 0.7% for the wider FTSE All-Share index. However, the 80% gulf between the current price and the heady highs of January 2021 when the company was trading at levels of over 430p is marked with a full recovery currently a distant dream. In the meantime, AO World is in a revised form and while the market consensus of the shares has eased slightly of late to a strong hold, there is clearly some recognition that the company is now a rather different and developing prospect compared to the recent past.

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