Unloved online electrical retailer AO World (AO.) sparked up 7.8% to 61.6p as long-suffering investors welcomed a retreat from Holland and first half results which showed positive progress in a tough domestic market.
Founder John Roberts, who returned to the Bolton-headquartered business as chief executive officer (CEO) in February on a mission to rekindle its ‘growth mindset’ and focus on profit over price discounts, expects AO World to be cash generative at a group level by the end of next March, slightly earlier than expected.
DOMESTIC PROGRESS
For the half year to 30 September, the web-based washing machines-to-TVs seller’s adjusted EBITDA (earnings before interest, tax, depreciation and appreciation) loss widened from £5.4m to £6.2m with UK profit growth masked by a poor European performance.
On home turf, AO World’s total UK sales grew 20.3% to £402.7m with encouraging like-for-like growth of 4.5% (stripping out the acquired Mobile Phones Direct business). Heading into Christmas, the UK electrical market remains challenging amid fragile consumer confidence and cut-throat competition, yet AO is winning share in a declining major domestic appliances (MDA) market thanks to its standout customer proposition.
DECISIVE DUTCH ACTION
European revenues fell by 3.4% to €75.7m in the half, with losses on the continent widening. However following a review, AO will beat a retreat from the Netherlands by the end of the current financial year at a cost of around £3m. Decisive Roberts doesn’t believe AO World has the bandwidth to turn around its loss-making Dutch business and its German operations at the same time.
‘There are encouraging green shoots of profitable growth across our UK business, including within our core MDA offer and we will continue to invest to drive this further,’ he commented.
‘Our relentless focus to accelerate profitability in Europe continues and as part of this, we have today announced the closure of our Netherlands operation. This will enable us to concentrate on the transformation of our German business, where we have increased confidence in, and visibility of, the three core drivers of the business model that will put us on the path to profitability.’
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Shore Capital commented: ‘In our view, the retreat from the Netherlands is perhaps long overdue as the company was spreading its jam too thinly. The company was subscale and burning cash from its European operations. In some respects it was like a reverse “Dad’s army” taking a UK brand into Europe, perhaps well before it was “battle ready”.’
AJ Bell investment director Russ Mould said: ‘AO’s UK interests continue to grow sales but the group as a whole remains loss-making as the European arm is struggling. However, gross margins are improving in Germany which offers some hope on future performance.
‘If AO was a UK-only business everyone would be applauding its growth and saying how well it was doing in a difficult environment, by finding new sources of customers via Amazon and Ebay as well as directly through its own website.
‘Sentiment has been poor towards AO because of its desire to obtain greater scale through having a Continental Europe presence which means group profit continues to be an aspiration rather than a reality.
‘However today’s share price rally suggest there are the beginnings of a potential change in sentiment. AO now needs to deliver the goods to truly win the market’s favour.’
