Interactive Investor

Electric goods boom gives AO World a jolt – but can it continue?

24th November 2020 11:17

Richard Hunter from interactive investor

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Online retailer benefits from lockdown and consumers’ need for distraction, but faces competition from physical rivals.

Companies suffering from the impact of the pandemic are easy to find, particularly in the retail space. On the other hand, for those reaping extreme benefits it is unnecessary to look any further than electrical goods retailer AO World (LSE:AO.).

Comfortably the best performer in the FTSE 350, the shares have risen by an extraordinary 365% in the year to date.

Bulls of the stock will also be heartened to hear that the company believes the growth in online purchases, particularly for its major domestic appliances, represents a permanent shift in consumer habits.

Products outside of major appliances also enjoyed significant sales growth of 112% in the six months to the end of September. This is because enforced working from home led to a spike in the purchases of small appliances, audio-visual, computing and gaming products.

The surge in revenues, which were ahead by 58%, led to a pre-tax profit of £18.3 million, as opposed to the £5.9 million loss of the previous comparative period. Meanwhile, net debt reduced to £20.7 million from a previous figure of £82.8 million, propelled by cash generation of £78.4 million.

Indeed, as the company reinstated its TV campaign given cheaper advertising slots, revenues were capped in the period only by physical capacity restraints as sales soared. 

This is something which AO World is now addressing as a matter of urgency, with infrastructure investment, including warehousing, vehicles and drivers, enabling the next stage of growth.

There are some signs of caution, as can be expected given the rate of growth. 

The mobile business is currently being refocused due to a number of contract cancellations, while the German business, which represents around 14% of group revenues, is not expected to be fully profitable until 2022. 

For the group as a whole, there may be some doubts as to whether the exponential growth can be maintained post-pandemic, as bricks and mortar competitors find their feet once more. The financial impacts of Covid-19 and Brexit are also likely to lead the UK towards some turbulent economic times.

Even so, the company has made great strides and has also reported that further year-on-year growth has been experienced in October, given increased capacity, stock availability and efficiencies. 

It remains to be seen whether the meteoric rise can be continued, but for the moment an increase in the share price of 382% over the last year, as compared to a dip of 4.4% for the wider FTSE 250, has rewarded shareholders handsomely. 

Even though this can partially explain an inevitable bout of strong profit-taking on these numbers, the market consensus of the shares as a ‘buy’ remains in place despite the blistering outperformance overall.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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