Interactive Investor

AO World's hard work rewarded with big boost to profits

5th July 2023 08:09

by Richard Hunter from interactive investor

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This fallen star has been busy restructuring its business, and the results are impressive. Our head of markets looks at what is now a different and developing prospect.

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Changing horses in midstream is no mean feat at the best of times, but AO World (LSE:AO.) is showing signs that its decisive recent actions are beginning to take hold.

The group’s 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 came at a time of weakening consumer sentiment as well as a slight shift back to offline white good purchases by potential customers. As such, revenues saw a decline of 17% in the financial year ended 31 March 2023, but that is only part of the story.

AO World also changed some of its warehousing operations, implemented staff cuts and bore down on a cost savings programme. At the same time, it implemented delivery charges on all orders without a material effect on sales, thereby increasing its service revenues by 11.7%. The supply chain issues which had blighted the first part of the year were materially resolved in the second half.

The group moved further to underpin its core UK sales of Major Domestic Appliances (MDA) by squeezing its advantages wherever possible. 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 £23 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.

As a result of the combined actions taken, adjusted earnings more than doubled and the adjusted margin came in at 4%, in sight of the group’s nearer term target of 5%. A pre-tax profit of £7.6 million compared with a loss of £10.5 million the year previous, while a share placing of £40 million left the group with a net cash position of £4 million at year end, as opposed to net debt of £33 million a year before.

AO World has now done much of the heavy lifting which was required to revitalise the business, and the next phase is one where the company will be concentrating on growth, cash generation and profit.

Despite a parlous economic backdrop, there are already some promising signs, such as 800,000 new customers having been added during the year, and with repeat customers also making a significant contribution. At the same time, an increase in the gross margin from 19.3% to 20.9% shows that the group is carefully pulling the correct levers as it negotiates its changing business model.

The economic backdrop is not currently showing many signs of improvement in the UK, although there have been some indications of resilience which are softening the blow. For AO World, this environment will be a continuing challenge and the marginal loss in market share which the company suffered over the year is proof, if it were needed, that the retailing market remains one where competition is rife.

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 45% over the last year, as compared to a hike of 6% for the wider FTSE All-Share index.

However, the gulf between the current price and the heady highs of January 2021 when the company was trading at levels of over 430p is marked and may not be recovered for many years, if ever. That said, AO World is in a revised form and the market consensus of the shares as a 'buy' is perhaps recognition that the company is now a rather different and developing prospect.

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