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AO World – Full Year Results

Total Revenue +23.8% (£476.7m)
Total UK Revenue +22.3%
UK Website Sales +32.9%
UK Adjusted EBITDA +47.3%
(All results for the 52 weeks ended 31 March 2015.)

Our analysis

A challenging end its financial year which saw AO contending with the loss of a logistics contract, the cost of complying with new driver legislation and a Black Friday hangover which has subdued demand for electricals into the New Year, has seen the company post revenue growth in line with the guidance provided in February.

What’s more, AO’s travails in the face of investor scrutiny following its stock market flotation last year have shone the spotlight on its failure to generate a profit. Following a stellar IPO which saw the company valued at almost 72 times its projected earnings, AO fell into a familiar pattern for retail flotations, by trading below its float price for much of 2014. It came back to Earth with a bump in February this year as a Black Friday induced a profit warning chopped a third off its market value.

The £2.2m operating loss for the year will come as a disappointment to some investors, who had been hoping that the group would swing into marginal profitability. Encouragingly though, the UK arm of the business did post a significant improvement to its bottom line, coming in with profits of £8.8m; a 221% swing on the £7.2m loss of 2014.

The push to profitability is a goal that has eluded many an online retailer and in this respect, AO has not been helped by the margin eroding effects of Black Friday, which proved troubling even for many of the sector’s more established names.

A products came to the fore in festive promotions and despite presenting an important growth opportunity for AO, they are having a troubling effect on margins: the dilutive effect of these products was blamed for the group’s UK gross margin dropping by 0.3bpts from last year. With AV products set to grow as a proportion of AO’s product mix, the company warned that margin dilution is set to be an enduring trend.

Their effects on the margin aside, AV products, which were introduced to AO in May last year, do represent a substantial growth opportunity for the business. These products fit nicely with the key premise of the AO business model noted in its flotation prospectus, i.e. the ability to display a broad product range without taking up much store space, keeping costs down, as well as the fact that the size and bulk of many appliances necessitates a home delivery model rather than collect in store.

As things stand, the housing market recovery has ensured that white goods have been some of the standout performers from the electricals category in recent times, but with longer term economic and demographic trends threatening to make home ownership a struggle for younger consumers, further down the road, their breadwinning potential must at least be called into question.

AV products are not without their risks either, with the growth in on demand services encouraging more people to view shows on their mobile devices, rather than conventionally through a TV. Innovation in the category spearheaded by the rise of 4K sets, a new breed of curved TVs and greater connectivity is set to prove a compelling growth driver going forward though. An ongoing recovery in disposable incomes has come at just the right time for this new technology and we are now seeing the beginnings of a renewed consumer willingness to invest in just this kind of big ticket purchase. With this in mind, AO’s move into the category looks not just shrewd, but timely.

Another fillip for AO was its expansion into Germany ahead of schedule in October last year. With some investors anticipating that today’s results would focus on the German business and the opportunity for further international expansion, as it turned out detail on this was rather thin on the ground. AO appears to be making good progress with its German venture and is taking a measured approach, building a base of local resources and getting to know the preferences of the German consumer has put the retailer in a position to accelerate sales growth in the months ahead. Perhaps the shock to profits in February or the expense of building the German business has just stymied AO’s global ambitions slightly for the time being, as there was no mention of plans to expand into the Netherlands and Belgium, which had been expected in some quarters.

AO’s first year as a floated company has proved to be something of a baptism of fire. Meeting the long term requirements of a growing business with the short term demands of investors hungry for a profit is a tricky balancing act and one that the retailer will no doubt adjust to as it matures as a listed entity. Short term challenges aside, we believe that AO has the business model and the strategy in place to be a real disruptor to some of the more established names in electricals in the months and years ahead.

Source: Conlumino Viewpoint

June 2015

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