Online electrical retailer AO World’s (AO.) in-line half year results fail to spark the share price into life, the stock marked down another 6.6% to 107.4p this morning.
This is because the Bolton-headquartered white goods purveyor warns results for the year to March 2018 will be towards the bottom end of the previously guided earnings before interest, taxation, depreciation and amortisation (EBITDA) range (-£2.6m to +£2.2m).
Shares in AO World have fallen steadily this year amid tough trading conditions in the retail sector and rising competition in the white goods market.
Investors have grown impatient with AO World’s tale of rising revenues twinned with substantial losses, while the flagging of ‘challenging UK market conditions’ ahead of Christmas hardly helps improve sentiment towards the stock this morning.
JAM TOMORROW
Half year results to 30 September reveal total sales up 13.3% to £368m as growth in the UK and Europe continued, although AO World’s group operating loss widened from £2.8m to £12m amid investment in its German and Dutch operations.
Also at play was increased expenditure to raise brand awareness in the UK, where big beast competitors include Dixons Carphone (DC.).
AO World’s UK division saw AO websites sales up 9.9% to £282.53m, growth strengthening to 13.2% in the second quarter versus 6.2% in the first quarter, when AO traded up against tough comparatives.
In Europe, AO World racked up adjusted EBITDA losses of €15.6m (2016: €14.3m), reflecting ongoing investment in expansion and foreign exchange headwinds.
GUIDANCE DOWNGRADED (AGAIN)
AO World’s outlook statement assures that ‘the improved sales momentum we saw in the second quarter against the first has continued into the second half of the year as we head towards our peak sales period’.
Yet AO World adds: ‘Our outlook for the full year remains within the range of market expectations for Adjusted EBITDA towards the lower end,’ another profit warning in short, ‘reflecting the continuing momentum in our UK business despite challenging market conditions and the adverse impact of foreign exchange rates on the translation of our European operations' reported performance.’
WHAT THE ANALYSTS ARE SAYING
House broker Numis Securities, a buyer with a 200p price target, lowers its full year EBITDA estimate from a positive £2m haul to a £2.5m loss accordingly.
‘While UK demand headwinds and marketing investment have clearly impacted results in the short term, AO continues to improve its business, expand its range, and take market share.
Meanwhile, the EU operation is making strong progress, ahead of our expectations. Further out, we continue to believe that the business has a significant, and profitable, long-term growth opportunity in both the UK and Europe.’
Over at Shore Capital, Clive Black reiterates his ‘sell’ stance. ‘Whilst the headline European growth looks impressive, total UK revenues were up 7% and this suggests to us that AO does not have a significant competitive advantage in its chosen product categories, despite scoring highly in terms of customer satisfaction.
Given the inability to deliver cash generation and the absence of earnings momentum, we continue to believe there is more downside risk to warrant our bearish stance.'
