Press 'stop' on AO World

AO World is hoping that by improving its brand awareness customers will be encouraged to make repeat purchases. After all, it's axiomatic that, in order to thrive sooner or later, any retail operation will need its existing customers to come back for more. But, in our view, customers are more likely to make a quick return to AO World for services such as product insurance rather than an additional big-ticket item. In addition, management's recent decision to expand its product range, and specifically into computers, is concerning since that consumer-spending category hasn't always held up well in frugal times.

In its determined bid to expand its market share, as well as roll out the brand across Europe, development spending at AO World remains pretty high. At the end of March, the company's net cash had fallen to £25.4m from £37.9m a year earlier and, since then, it has arranged a new £30m revolving credit facility. Total administrative expenses rose 30 per cent to £117m during 2015-16, while the amount spent on advertising and marketing rose from 4.1 per cent to 4.3 per cent of sales. In Europe, sales, general and administrative costs rose to represent 44.4 per cent of sales. As a result of these rising costs, losses widened considerably over the course of the last financial year; this was not helped by problems with shifting some lines of stock which, according to management, "caused some cost inefficiencies". In our view, that puts the kibosh on any potential dividend payment in the near term.

Rising costs and aggressive growth plans aside, analysts at broker Shore Capital have downgraded forecasts for revenue and gross cash profit for this financial year and next to take account of cautious customer spending in these years. Questions still exist over whether the UK will drop into recession in the wake of the Brexit vote, but Shore's analysts see reason to err on the side of caution.