ii view: AO World’s profit outlook keeps recovery on track

Full-year trading update to 31 March

• Expects sales of £1.04 billion, down from £1.14 billion
• Expects adjusted pre-tax profit to be at least at the top end of a £28-£33 million range

Guidance:

• Confident in delivering 10% to 20% revenue growth for the year ahead
• Reiterating medium-term target of 5% adjusted pre-tax profit margin

Chief Executive John Roberts said:

"I'm pleased with the clear progress that we're making after pivoting our focus to profit and cash generation during the 2023 financial year. As we expected at our half year results, we returned to revenue growth in our core business during Q4 and, as a result, we're entering the new financial year with good momentum.”

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ii round-up:

Online electrical retailer AO World (LSE:AO.) today detailed optimism about prospects as it continued its focus on profitability and cash generation. 

Adjusted pre-tax profit for the year ending March are now expected to be ‘at least’ at the top end of its previously estimated range of between £28 million and £33 million. 

Shares in the FTSE 250 company rose 12% in UK trading having come into this latest trading update down around a tenth year-to-date. That compares to a one-fifth gain at former takeover target Currys (LSE:CURY) and a near 1% gain for the FTSE 250 index itself. 

AO World sells items ranging from kitchen white goods to TVs, laptops, and mobile phones purely via its website. 

Sales in its latest 2023/2024 financial year are expected to come in at around £1.04 billion, down from £1.14 billion but with AO returning to sales growth during the final quarter of the year, as expected.

The Bolton headquartered company also flagged an extension of its £80 million credit facility with its existing lenders and on the same terms to April 2027. 

Year-end net funds on a pre IFRS16 basis stood at £30 million, up from net funds of £16 million as of late September and its interim results. 

Full-year results to 31 March are due to be announced on 26 June. 

ii view:

Started in 2000 by its current chief executive John Roberts, AO World today has a customer base of over 11 million. Product sales generate its biggest slug of sales at around three-quarters, followed by commissions for warranty sales and mobile phones at around a tenth, and service revenues for product delivery and installation at about 6%. Group competitors include Currys, John Lewis, and Amazon.com Inc (NASDAQ:AMZN).

For investors, the tough backdrop for its customers including heightened mortgage and rental costs cannot be dismissed. Initiatives such as introducing delivery charges initially hindered sales, competition across the electrical goods arena remains intense, while AO currently pays no dividend, unlike Argos owner Sainsbury (J) (LSE:SBRY).  

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More favourably, AO’s drive to focus on profits and cash generation continues to shine through. Sales are growing again as of the latest quarter, a high focus on costs persists, while the share price-to-net asset value ratio remains comfortably below the three-year average, suggesting potentially good value.   

On balance, and while the going remains tough for retail companies across the board, this rejuvenated and wholly UK-focused business is likely to remain of interest to investors wanting a long-term play on the sector.  

Positives: 

• Without the costs of a store portfolio
• Refocused on its UK business

Negatives:

• Not yet paying a dividend
• Uncertain economic outlook

The average rating of stock market analysts:

Strong hold