AO World sees FY earnings at lower end of market views

Online electrical goods retailer AO World said on Tuesday that adjusted earnings for the year are expected to be towards the lower end of market views, as it swung to a loss in the first half.

In the six months to the end of September, the company recorded an adjusted earnings before interest, tax, depreciation and amortisation loss of £6.3m versus a £1.5m profit in the same period a year ago. This came despite a 13.3% rise in revenue to £368m, mainly due to increased marketing expenditure.

Website sales for AO in the UK were up 9.9% in the period to £282.5m, while total UK revenue was up 7.4% to £316.8m. The UK saw adjusted EBITDA of £7.4m versus £13.1m in the first half last year, while in Europe, the company saw adjusted EBITDA losses of €15.6m, up from €14.3m as it continues to invest in expansion and build scale. Revenue in Europe was 60.5% higher at €58.1m.

Chief executive officer Steve Caunce said: "We continued to improve and add to our customer journey, including the launch of our transactional app. We are broadly on track with our plans for the year as a whole - with the positive impact of improving sales growth through the first half of the year combined with the first half biased phasing of our marketing spend - in spite of the challenging UK market conditions.

"Our European operations continue to perform in line with the plan we've previously set out notwithstanding the adverse impact of foreign exchange rates on our reported performance. The AO culture is firmly embedding in Germany and The Netherlands and our foundations for growth are fully established. We are also building a number of exciting new vertically integrated capabilities under the AO banner, including our state-of-the-art recycling facility in Telford. This is another great example of how we have applied the AO Way to an underinvested section of the market and it should make an exciting contribution to the business in the future."

The group said its outlook for the full year remains within the range of market expectations for adjusted EBITDA towards the lower end, reflecting the continuing momentum in its UK business despite challenging market conditions and the adverse impact of foreign exchange rates on the translation of its European operations' reported performance.

Shore Capital said: "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. We reiterate our sell rating on this company."

Numis said that while AO achieved a solid sales trend through Q2, commentary that the FY outcome is likely to be towards the bottom end of the range sees it lower its FY18 group EBITDA estimate from £2m to a loss of £2.5m.

"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."

At 0915 GMT, the shares were down 2% to 112.75p.