Long term prospects remain good, says online electrical retailer AO World

“One of the most challenging operating environments we’ve weathered as a company” is how Bolton-based online electrical retailer AO World founder and chief executive John Roberts describes the group’s current circumstances.

Releasing annual results for the year to March 31, 2022, today, it revealed its revenues fell from £1.661bn in 2021 to £1.557bn, while last year’s pre-tax profit of £20.2m was transformed into a pre-tax loss of £37.2m this year.

However, the business said it has confidence in its long term growth opportunities in the UK.

It said, given the exceptional operating environment over the past 24 months, its performance in the comparable period in financial year 2020 provides a more meaningful overview of its business performance than a simple comparison with 2021.

On that basis, it points to group revenue growth of 52% over the two-year period since 2020 and a resilient performance in the UK business with a one year on year decline of five per cent against an extraordinary comparative performance during COVID in 2021, when home deliveries soared due to lockdowns.

The group has overall liquidity of £50m, compared with £143m in 2021, with a net debt of £33m, against £58m of net funds a year ago.

A capital-raising post year-end in July successfully secured additional liquidity of £40m, with an £80m revolving credit facility extended until April 2024.

AO said the new financial year marks a period of realignment for the business as it executes a strategic pivot to focus on cash and profit generation.

It now estimates the closure cash costs of its German business will be no more than £5m, at the lower end of its original estimate of nil to £15m.

The £40m of equity raised in July strengthens the balance sheet and provides the flexibility to capitalise on significant long term growth opportunities in the UK, it said.

Also, its addressable market in the UK has grown to £23.4bn as it extends into new categories such as televisions, laptops, audio visual and small domestic appliances (SDA). The online segment of the market in those categories remains AO’s key opportunity as the long term structural migration to online retailing continues.

AO said it is successfully leveraging its logistics and recycling platform and has signed a new five-year contract with Homebase to supply appliances and installation and recycling service to its customers, including, on an exclusive basis, MDA and audio-visual appliances. It is discussing similar partnerships with other kitchen retailers.

Trading through the first quarter of fiscal year 2023 has remained broadly in line with the board’s expectations, with revenues in the approximate range of £1bn to £1.25bn and group adjusted EBITDA for the full year in the range of £20m-£30m, with the usual weighting towards the second half of the year.

In the short term, AO said it expects its strategic pivot and business realignment will reduce both sales and costs, but in the medium term its ambition is to deliver average revenue growth of 10+% per annum with an EBITDA margin of 5+% and improved cash generation.

Chief executive, John Roberts, said: “AO was founded on the belief that online is a better way to buy electricals. That belief is as strong as ever, even – and especially – as we go through one of the most challenging operating environments we’ve weathered as a company.

“The past 12 months has been a turbulent time for business and for retail in particular, and AO hasn’t been immune to those effects. Looking ahead, we certainly have more volatility to navigate, but the core fundamentals of our business remain strong.

“We entered the new financial year with a period of strategic realignment, and a focus on cash and profit generation.”

He added: “AO has become the destination for electricals for millions of customers through our absolute obsession with amazing service, and that will remain our guiding star. I’d like to thank the AO team, our chair and the board, as well as our committed investors and stakeholders, for their continued support and passion in helping us deliver for our customers.”

Julie Palmer, partner at Manchester-based insolvency specialist, Begbies Traynor, said: “Product shortages, rising shipping rates and spiralling costs meant AO World was under pressure even before inflation started racing away over the past few months.

“The online retailer’s results also reveal it was wrong footed after the lockdown-fuelled boom in consumer spending, with management saying they geared up for continued higher demand, only to see customers’ purchasing power cut as the cost-of-living crisis began to bite.

“Although much of AO World’s product range is ‘necessity purchases’ – if your cooker or freezer breaks you can’t go without it – trading down to budget models is likely to become a factor as consumers look for economies.

“The business encountered further difficulties last month when a credit insurer cut cover for some suppliers to AO, meaning the company faced the prospect of having to pay the providers of the household electric goods it sells upfront, further straining its finances and contributing to a £40m fundraising to shore up its balance sheet.

“Management have revealed plans to carve out tens of millions of costs from the business, but with consumers facing an ever tighter squeeze on their wallets, AO World might need to seek further savings as belts are tightened even more in the face of a looming recession.”