Market snapshot: new data plus latest from AO World

Global market direction remains clouded by tariffs, complicated by the Middle East conflict and confounded by the lack of any obvious positive catalysts.

US markets succumbed to another weak showing as retail sales data added to the mix, with a fall of 0.9% in May versus an expected 0.6% decline. While the figure could be due to normalisation as consumers had previously rushed to buy cars ahead of the tariff implementations, it could also be a sign of retrenchment given the uncertain economic outlook.

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The data probably comes too late to influence the Federal Reserve’s decision on interest rates, where no action is expected until September based on consensus. In the meantime, the uncertainty is weighing on the market’s recent recovery, leaving the Dow Jones down by 0.8% so far this year, while the S&P500 and Nasdaq are maintaining unspectacular gains of 1.7% and 1.1% respectively.

The UK inflation rate, while stable, is most unlikely to sway the Bank of England from its expected no-change decision on interest rates tomorrow. Further out, a softening labour market, weakening GDP growth, domestic cost increases and general global uncertainty may force its hand to reduce rates and provide a boon for an ailing UK economy, but for the moment its generally cautious and conservative attitude is likely to prevail.

Meanwhile, investors were undecided in the absence of any further major developments, with the FTSE100 making limited but unconvincing progress at the open. The premier index has struggled to form a new base camp from which to build on its recent record highs. Even so, a rise of 8.3% so far this year puts it in prime position compared to many developed markets, with its previously untouchable reputation increasingly being eroded.

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AO World

For the most part, the benefits of AO World (LSE:AO.)’s previously decisive strategic actions are gaining traction, although pockets of concern remain.

At first glance, the numbers show real progress. Adjusted pre-tax profit of £45 million represented a 32% improvement from the previous year, and was marginally higher than the £39 million to £44 million range which the group had estimated. Revenues including the recent musicMagpie acquisition rose by 9% to £1.14 billion, again slightly over the group’s expected £1.09 billion to £1.13 billion range. Retail revenues were ahead by 12% to £832 million, while the adjusted profit margin of 4.1% moved further towards the 5% medium term target.

Less positively, the mobile business risks becoming something of a thorn in the side. Revenues of £94.4 million, or 8% of the group total, represented a decline of 11.2% as consumer demand softened and a lack of handset innovation drove up acquisition costs. As a result, the group has taken an impairment for the unit amounting to £19.6 million, with the strategic outlook under review.

Even so, 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 previously streamlined its operations, with a third-party warehousing solution which went live in April, while at the same time a decision to implement delivery charges on all orders previously boosted service revenue without a material impact on sales.

The previous 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. In terms of UK MDA overall, the company estimates a market share of 16%, up from a previous 14.9%. Repeat customers represented more than 60% of orders, with 600,000 new customers also having appeared. The product range was also expanded by 1,500 new lines, including anything ranging from drones to cameras, and from health and beauty to fitness.

While the share price remains some 75% off the peak of around 430p at the height of the pandemic in January 2021, when perceived prospects for the company were at heady highs, progress has been slow and steady. Over the last year, the shares have struggled, with a decline of 7% comparing to a rise of 4% for the wider FTSE250. Nonetheless, on a valuation basis the shares are at a level which is undemanding historically, the outlook has been raised for the coming year to adjusted pre-tax profit between £40 million and £50 million and there has been some significant progress. As such, the market consensus remains at a buy on growth prospects.