Thursday is proving to be another wash-out trading session for online washing machines, TVs and computers seller AO World (AO.). Shares in the company have slumped 8.6% to 88.7p after an update on full year trading left investors unimpressed.
The company, which surprised the market with the return of founder John Roberts as chief executive in January, says that its year to 31 March 2019 performance is expected to ‘fall within the range of current market forecasts’. But the market seems to think this is coded language designed to soften investors up for more disappointment.
Sales in the year increased 13% to around £900m, but profitability not growth has been the bigger worry for investors. Exceptional customer satisfaction and healthy repeat purchases through its lower cost online sales channel are encouraging.
Yet frustratingly for shareholders, the company remains loss-making, a state of affairs Shares addressed in December’s in-depth Under The Bonnet look at the company.
Nothing seems to have changed on that front today with AO World guiding that adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) will come in at the ‘lower end of market expectations’.
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DAMPENING DOWN EXPECTATIONS
This appears to be because of product stock piling as Brexit uncertainty stubbornly drags on. Around £15m worth of extra fast moving goods were taken on in the last quarter, which presumably sell less profitably, squeezing gross margins.
Consensus before today was already wide, suggesting limited visibility. EBITDA estimates ranged from a £2m profit to a £0.4m loss.
The reassuring news is AO World remains a growth company. It is guiding towards 2019 group turnover of around £900m, with sales up roughly 9% excluding the acquisition of Mobile Phones Direct; UK revenue rose 9.8% year-on-year to circa £748m, while Europe sales shot up 32.3% to around €174m.
‘Over the last eight weeks we have created a mindset shift from the numbers delivered in full year 2019; we are setting about realising our opportunities with pace and energy,’ insists Roberts, who is ‘delighted by the reaction of AO’ers and their passion for our future’ and recently announced ‘that we are testing a genuinely disruptive rental proposition’, which refers to AO’s trial of a £2-a-week washing machine.
‘We have also expanded categories further into garden and DIY ready for the season and we are accelerating AO Mobile to launch later this year in readiness for peak trading,’ enthuses Roberts.
THE ANALYSTS’ VIEW
‘Today’s trading update will reassure the market that trading performance is in line with consensus forecasts,’ says Shore Capital, reiterating its ‘sell’ rating on AO World while continuing to be ‘impressed with both the infrastructure and service-led culture that management has built.
‘That said, the company remains loss making and will incur further exceptional costs of £2.5m in full year 2019 from charges for a loss-making contract that the company is unable to terminate in Germany, in addition to the exceptional charges incurred with the acquisition of Mobile Phones Direct.
‘In our view, AO World is at a critical phase in its development. We have been highlighting for some time that the company remains sub-scale, despite the investment thesis at the time of the IPO back in 2014, that it would disrupt the UK white goods market. In our view, the UK electrical market has become even more competitive.’
Even house broker Numis Securities, which you might expect to retain a positive view of the stock, has slashed its 2019 EBITDA estimate, from a £1.4m profit to a £0.4m loss.
‘AO has reported a mixed fourth quarter update, with UK trading as expected - and a more positive tone too - but EU gross margin falling short. We expect returning CEO John Roberts to focus on the EU gross margin as a priority but have limited visibility on the rate at which progress can be made,’ the broker says.
Numis concludes that it still believes AO World to be a good quality business, with a leading customer service proposition and considerable scope for growth. We shall see.
