Shares in online electricals retailer AO World (AO.) have jumped 3.5% to 129p despite reporting a slight sales growth slowdown for its third quarter including Christmas.
So why are the shares rising in value? Well, investors are relieved as AO World has maintained full year guidance a matter of weeks after half year results triggered another round of earnings downgrades. This is reassuring in the context of profit warnings from rivals following an extremely tough Christmas period for retailers.
Bolton-headquartered AO World has reported 8.2% sales growth for the three months to 31 December, marking a modest slowdown on the 9.9% growth delivered in the six months ended 30 September.
The good news is the UK business generated positive 4.4% growth in the so-called ‘golden quarter’ for retailers, with customers responding well to the washing machines, TVs and laptops seller’s Black Friday offer.
‘Our offering of Black Friday deals over a longer time period in November was well received by customers, sales flow was smoother and our margins improved,’ explains AO World.
Investors should also like the 31.3% sales growth put up by the European business. This marked a return to growth following a second quarter impacted by changes to the German driver operating model following changes to the EU working time directive, yet bears still point out AO World’s business in Germany and Holland remains loss making and sub-scale.
CEO Steve Caunce comments: ‘Against a challenging backdrop, Q3 represents a solid performance across the AO Group.’
MUCH TO LIKE ABOUT AO
As we recently explained in our in-depth Under the Bonnet article, there is much to like about AO as a business, guided by a forthright, entrepreneurial management team and operating in the structurally advantaged online channel. Yet the retailer has consistently struggled to generate a profit at the all-important pre-tax line.
Shore Capital arguing the shares are too richly valued given the company’s track record, present performance and short-to-medium term prospects.
The broker writes: ‘There no change to our previously downgraded forecasts for AO. We continue to respect both the service culture and infrastructure that management has developed in recent years. Our issue is that the company remains sub-scale, particularly in Europe and will only be EBITDA breakeven towards the end of full year 2021.
‘In the UK the company is facing into a more competitive market given Dixons Carphone’s (DC.) strategic review and an altogether uncertain consumer outlook given the “Brexit fog” that clouds at least the next three months.’
Russ Mould, investment director at AJ Bell, says there are some positive in the latest update but also points out the earnings conundrum.
He says: ‘If you had to pick a retailer vulnerable to a poor Christmas trading update, AO World would have certainly made the list for many people given its troubled history. However, it somewhat surprises with a fairly decent performance in the last three months of 2018.
‘Record sales in November were linked to running Black Friday deals for a longer period in November. Normally heavy discounting would have a greater benefit to revenue than profit. However, AO World says margins improved in the trading period. European sales growth also improved quarter-on-quarter.
‘The key issue remains the lack of profit in the business. Sales growth is only positive if there is something left for the company after covering costs of goods and running the business. It still needs to increase scale in Europe and the UK market remains highly competitive which means a lot of money will have to be spent on marketing to make sure its brand is front and centre when consumers are thinking about where to buy their electrical goods.
‘At the moment analysts don’t expect AO to a report a pre-tax profit until the financial year ending 31 March 2020. Investors have been patiently waiting for this magic earnings breakthrough moment even since the business joined the stock market five years ago.
‘For now, investors should be very relieved there is no reason to downgrade earnings forecasts and that there is a new sense of momentum in the business.’
