AO, let’s go, as online electrical retailer’s pivot pays off

Rationalisation at Bolton-based online electrical retailer, AO World, has resulted in a return to profit.

The group published annual results for the year to March 31, 2023, which revealed a £7.6m pre-tax profit, against a £10.5m pre-tax loss the previous year.

This was despite a 17% fall in revenues of £1.139bn.

Adjusted EBITDA was £45m, achieving an adjusted EBITDA margin of four per cent.

The group had overall liquidity of £89m, against £50m the previous year, with net funds of £4m, compared with a £33m net debt a year ago. The balance sheet position was strengthened with a £40m share placing, while an £80m Revolving Credit Facility was renewed, expiring in April 2026.

AO said the profits recovery was driven by its actions to remove non-core channels and loss-making sales, a strategy which has attracted the likes of Mike Ashley, founder of Sports Direct, now Frasers Group, who has built up an AO shareholding now exceeding 22%, making him the group’s biggest shareholder.

Among the measures taken to turn AO around were the ditching of non-core business lines, operational efficiencies and overhead reductions.

These included the closure of the German business, the introduction of delivery charges to help ease pressure on the logistics business, and a new pricing structure which has delivered on profitability and cash generation ahead of schedule

AO has also undergone a major staffing restructure, which has seen a significant reduction in headcount and subsequent saving in the cost of senior and middle management layers.

And the group revised its office footprint, resulting in the closure of three of its sites.

The group is confident about prospects for the current fiscal year, saying it expects to deliver on its five per cent EBITDA ambition in the short term and return to top line growth in the medium term.

Its strategy now is to invest prudently in the business, seize the significant market opportunities that it sees in front of it, leveraging its growing and loyal customer base, which grew by more than 800,000 new clients in the 2023 financial year.

AO’s founder and chief executive, John Roberts, said: “We are delighted with the demonstrable progress that we’ve made with the strategic realignment of AO towards profitability and cash generation.

“The significant improvement in our profit performance speaks for itself and has been achieved by focusing on our core strengths and simplifying our operations, while still delivering the outstanding customer service for which we’re famous.”

He added: “Looking ahead, we intend to continue with this focus whilst also retaining the flexibility to drive growth through disciplined investment at the right pace and at the right time.

“Over five million new customers experienced the AO Way over the last three years, during which time we’ve maintained our ‘excellent’ Trustpilot rating from more than 400,000 Trustpilot reviews, making AO the most trusted electricals retailer in the UK.”

And he said: “I’m also grateful to our manufacturer partners for their continued support as we navigate this hugely unpredictable trading period together.”

Russ Mould, investment director at Manchester investment platform, AJ Bell, said: “AO nudged up 0.2% after showing that efficiency and cost-cutting measures were having a positive impact on profits. Despite recording a 17% decline in full-year revenue, AO swung from an £11m loss to an £8m pre-tax profit.

“Mike Ashley will be happy, given that Frasers recently took a 22% stake in the business, saying the investment will help it benefit from AO’s expertise in the electricals market and two-man delivery. Frasers will no doubt be looking at ways to improve the efficiency of delivering bulky goods like fitness bikes from Sports Direct and three-piece suites from Sofa.com, two of its many brands.

“It also seems to be interested in dipping its toes into the electricals sector given an additional investment in Currys in recent weeks.

“AO’s decision to streamline its business has so far paid off, given the shift back to profit. It has closed operations in Germany, ended a trial with Tesco and ceased working with housebuilders, effectively saying it wasn’t worth the time and effort. An internal rejig of teams and a simplified product range are some of the other initiatives undertaken to right-size AO into a more profitable entity.

“It’s a good start, but the proof in the pudding will be sustained profit growth, and the market won’t be able to judge its success until well into next year.”