AO World swings to a loss in a post-lockdown world

Shares in AO World (AO.) increased in value by as much as 15 per cent in early trading on results day, although its full-year figures would fall under the general heading of ‘not quite as dismal as expected’.

Even after the partial retracement, the shares have still lost 47 per cent of their value over the last six months, a downward spiral which triggered a £40mn investor cash call.

Yet the market was gladdened by news that adjusted profits for fiscal 2023 should outstrip analyst consensus by a sizeable margin. And the online white goods hawker also confirmed that cash costs from the closure of its German business would be no more than £5mn, against a possible £15mn hit previously flagged.

Many of the problems faced by the retailer are beyond its control, specifically supply chain disruption, increased shipping and freight costs, and the inflationary spiral. However, management probably overestimated the duration of the surge in consumer spending brought about by lockdowns, even though repeat purchase rates continue to outperform pre-Covid levels.

Intuitively, you would think that householders are now more reluctant to unfasten their purse strings but it could be argued that purchases of white goods can’t really be defined as discretionary spending. This is where the level of discounting becomes important. Veteran hedge fund manager, Crispin Odey has recently suggested that Currys (CURY), in which he has a significant stake, should ditch its price lock commitment to underpin earnings, but consumers can always trade down during economic slumps.

Despite the reported loss, the gross margin ticked up slightly through the period, but bosses are planning to cut back central costs significantly to bolster the financial performance. But beyond the relief rally, it’s difficult to identify any near-term price catalysts. Sell.

Last IC View: Sell, 102p, 27 Jan 2022