AO woe as £200m is wiped off group’s value following trading update

AO World shareholders have reacted badly to its trading update today (October 1), with the stock plummeting 20% this morning, wiping around £200m off its value.

By 10.30 stock in the online electricals retailer had fallen by 39.80p to 177.60p per share.

It followed an update for the six month period to September 30, that showed limited progress for its operations, both in the UK and Germany.

UK revenues increased by approximately six per cent, with growth impacted by the nationwide shortage of delivery drivers and ongoing disruption in the global supply chain.

In Germany, revenues in local currency rose by around three per cent, despite the competitive online market.

The Bolton business also added a note of caution regarding the second half of the fiscal year, which includes the all-important Christmas period. The business remains at the mercy of the volatile transport sector, where logistics operators are scrambling to hire drivers to maintain their deliveries.

It is estimated there is a 100,000 shortfall of HGV drivers in the UK, currently, evidenced by shortages at petrol stations and on supermarket shelves, caused by the impact of Brexit, and delays in HGV testing due to the pandemic.

Prior to Brexit, AO had surged following the effects of lockdown, as householders switched to online purchases. The business has been busy investing in extra warehousing capacity throughout the region. But AO is now contemplating a rougher ride as business conditions worsen.

In an April trading update earlier this year, AO said it would continue to see double-digit growth this year, despite tough comparatives, having added two million new customers.

Founder and chief executive, John Roberts, said at the time: “I believe that these market dynamics will stick and, whilst there is inevitable uncertainty, the direction of travel is firmly with AO and the business model we have spent more than 20 years building.

“I expect that we will continue to be a double-digit growth business in the year ahead, even now as we lap the tough comparatives from last year with physical stores open. I look forward to providing more detail at our full year results in June.”

Today, AO said it expects revenue growth in the second half to record a similar growth rate to the first half of this year and anticipates that group adjusted EBITDA for the full year to be between £35m and £50m, with profits more heavily weighted than usual towards the second half of the year driven by the peak trading period.

In July 2020, AO World launched a long-term incentive plan for its employees to support the online retailer’s high growth strategy. It said it will share 10% of the value created above a market value of £2.5bn.

It said the rewards will be shared between all AO employees, with the “overwhelming majority” to be distributed to employees. Awards to executive directors will be capped at £20m, but that would require a market cap of £4.5bn by March 2025, that is then sustained for at least two more years.

Following this morning’s drop, the company is valued at around £776.83m.

Russ Mould, investment director at Manchester investment platform AJ Bell, said: “It’s astonishing how fortunes can change in the matter of a year. AO was struggling, then hit the ground running with considerable success, and now it is back to darker times again.

Russ Mould

“Online operators were the envy of the retail world as the pandemic took hold, many already having a proven platform capable of meeting extra demand.

“Now, being an online operator means having to contend with shortages of drivers to get the goods to the customer, as AO has found out.

“Physical retailers are still affected, as supply chain issues can still mean delays getting items to their stores. Yet on a bigger scale, the current crisis has shown that online retail is more complicated than you might have thought.

“It’s a job in itself to run warehouses and logistics operations as well as making products and marketing them.

“AO’s UK revenue growth has fallen short of analyst expectations. Its German operations have fared even worse, with the company fighting for space in a highly competitive online market.

“Having cracked the UK, winning overseas is a crucial part of AO’s strategy and it cannot afford to have any setbacks on this front.”

He added: “Selling fridges, TV and washing machines online is a low margin business and success is down to achieving high sales volumes. With cost pressures intensifying and sales volumes disappointing, AO faces a big squeeze on profits.”