Online electricals retailer AO World enjoyed its best ever trading period because of the pandemic but has warned of “significantly higher costs” to meet demand, rattling investors.
UK sales at the white goods retailer jumped 67 per cent to £457m in the three months to the end of December, while its German business finally turned a profit on revenues that were 77 per cent higher at €74m.
The group had incurred “significantly higher costs” from changes to comply with coronavirus regulations while the impact of the pandemic on consumers drove a “slightly increased” rate of cancellation of long-term contracts in mobile and warranties, the retailer said on Tuesday.
AO shares fell as much as 13 per cent before paring losses to sit about 6 per cent lower in London trading at lunchtime. The group’s recent sales growth has, however, led to its shares to quadrupling during the past 12 months.
Peel Hunt analysts downgraded their estimates for AO’s pre-tax profit for the year to March 2021, from £51m to £43.4m, due to the “incremental costs” but expect the active customer base to end this year with 50-60 per cent growth. They have upgraded their earnings expectations for the next financial year from £52m to £64m.
Analyst John Stevenson said he was “surprised” at the share slide “when we are looking at an upgrade in 2022, given that AO’s market position has improved materially”.
“They had a spectacular third quarter, with sales running at a higher level than we anticipated,” he added. “They weren’t planning to knock out 67 per cent sales growth in the UK.”
AO had to withstand higher coronavirus- and growth-related costs, doubling capacity for example with temporary warehouses, more fleet and additional staff while implementing Covid-19 compliant measures in warehouses. This meant workers were unable to load vehicles as efficiently as before, said Mr Stevenson.
In a statement John Roberts, AO founder and chief executive, hailed the company’s “strongest ever peak trading period” during a period when “we’ve seen 10 years of change in 10 months”, adding: “One of our biggest achievements this period is to have our German business profitable throughout the third quarter.”
AO had racked up operating losses since it moved into Germany in 2014 as the brand struggled to establish itself and Tuesday’s update was the first inkling that it had turned a profit in Europe’s biggest economy. The retailer had taken a decision in November 2019 to exit its Dutch operation to focus on its bigger neighbour.
“AO is looking at a profitable self-financing business in Europe and we expect them to go beyond Germany into other markets,” said Mr Stevenson. “The scale of opportunities is absolutely massive.”
The group expects to benefit from further demand for electrical products as more people continue to work from home, as well as “structural market changes” as consumers shift more purchases online.