AO World beats profit guidance despite revenue slide

Electrical retailer AO World (AO.) delivered annual profits ahead of guidance despite a drop in revenue, as its "strategic pivot to focus on profit and cash generation" paid off.

Adjusted pre-tax profit almost tripled to £34.3mn, beating the company's forecast range of £28mn-£33mn. The retailer, which sells domestic appliances such as fridges and TVs, has simplified its operations and exited underperforming areas. It shut its German business in the previous year, and has ended trials with Tesco (TSCO) and housebuilders.

The revenue decline of almost 10 per cent was no surprise, given the strategy shift, cost of living pressures hitting demand and a weak mobile performance. Revenue at the key product division was down 8.7 per cent, and sales fell 18.1 per cent at the second-biggest unit, commission. 

Despite consumer headwinds, the company reported new customer numbers of 600,000 and said repeat customers were contributing an increased share of business at around 54 per cent. However, its share of the UK major domestic appliances market fell 0.7 per cent to 15.1 per cent. 

Analysts at Investec argue that the company "is likely to benefit from the surge in new customers won during the pandemic who are on the cusp of returning to AO World in a UK electricals market that is more ‘rational’ and ripe for recovery". 

Elsewhere, a doubling of cash and the repayment of borrowings brought down the net debt level. Management is looking to build up the cash balance in the coming years. Cash generated from operating activities rose £37.2mn to £61.6mn in the year. 

Guidance is for double-digit revenue growth and adjusted pre-tax profit of £36mn-£41mn in 2025. The shares are valued at 22 times forward consensus earnings. Hold. 

Last IC view: Hold, 83p, 21 Nov 2023