- 2023 profit to be ‘around the top end’ of guidance
- Strategic pivot paying off
- AO feeling impact from cost-of-living crisis and supply chain issues
Shares in AO World (AO.) sparked up 14% to 59.5p after the struggling online electrical retailer insisted its ‘strategic pivot’ towards profitability and cash generation is accelerating and yielding results.
The fallen pandemic winner also said full year 2023 profit will be ‘around the top end’ of previous guidance, which broker Shore Capital believes provides a ‘significant amount of headroom for consensus to pivot into an upgrade cycle’.
AO World also issued 2024 profit guidance above the current consensus, although the laptops, televisions and fridges retailer continues to be impacted by the cost-of-living crisis and ongoing supply chain issues.
AO’S UK ARM IS GENERATING CASH
Whilst mindful of economic headwinds including the impact of inflation on consumers’ purchasing power, Bolton-based AO World sees this year’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) coming in around the top end of the £20 million to £30 million range.
‘During the first six months of the year, we’ve made good progress with our strategic realignment as we focus on profitability and cash generation, all of which is yielding the results we expected,’ commented founder and CEO John Roberts.
‘We’ve now closed the loss making and cash consumptive parts of our operations meaning the remaining UK business is cash generative, and are successfully closing our German business with a minimal cash impact to the wider group.’
IS AO WORLD REALLY ON A RECOVERY PATH?
Shares in the web-based white goods seller shares have plunged almost 90% since peaking at 429p in early 2021.
The lockdown boom in electricals spending has faded and consumers have tightened their belts, which contributed to AO having to renegotiate agreements with credit insurers this summer after they became skittish about the strain on its balance sheet.
AO World is on a cost-cutting drive and has simplified its UK arm, now the core focus following the closure of Germany, by focusing on more profitable lines of business.
Results for the six months to September 2022 hint that AO World is on the right track. UK sales were down 17.4% year-on-year to a better than expected £546 million and gross margin remained robust at 19.5%, while net debt of £19 million was down from £33 million at the March 2022 year-end.
WHAT ARE THE EXPERTS SAYING?
However, Julie Palmer, partner at Begbies Traynor (BEG:AIM), said the results ‘try to paint a positive picture of a business turning itself around as cost cuts and other self-help measures take hold - but losses still tripled to £12 million and sales are down almost a fifth. That’s not good news for a company that admits the cost-of-living crisis is going to hit its customers’ spending.’
Palmer also pointed out AO World generates most of its profits in the second half, so John Roberts will be hoping ‘that this week’s Black Friday bonanza is a blowout. He also needs it to be one that signals shoppers are willing to forget the current bleak financial outlook and hoping that the cost-of-living crisis eases as we get into 2023, meaning they splurge on deals right the way through to the key Christmas period and beyond.’
Russ Mould, investment director at AJ Bell, commented: ‘Given the pressures on household budgets, people are putting off purchases of new appliances where they can, though to some extent if your washing machine or fridge freezer breaks down, a replacement is a non-discretionary item.
‘This set of numbers from AO World is as messy as the bottom of a student’s fridge, but management guidance is notably robust, with full year earnings expected at the top end of expectations. Though it’s important to note this is largely being driven by cost cutting, rather than any inherent strength in the business.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) owns shares in AJ Bell.
