Fast-forward 12 months and AO World, the online white goods retailer, could be proven an Icarus-like over-reacher or vindicated as the victim of a short-sighted market. In the meantime, though, pumping cash into increasing warehouse capacity and improving IT to capture a shift by customers online has made a slowdown in revenue growth sting even more sharply for the former stock market darling.
A shortage in products and delivery drivers, along with rising competition in the fledgling German business, mean that revenue this year is expected to be, at best, flat on last year and potentially 5 per cent lower. On the back of 6 per cent revenue growth in the first six months of the year — behind the double-digit rate expected by analysts — that implies a reduction of 10 per cent during the second half, according to Jefferies, the broker.
Higher shipping bills, staff wage inflation and rising input costs have forced the company to point to lower earnings before tax and other charges this year than had been expected, at between £10 million and £20 million. That’s the second profit warning in less than two months. The shares were punished severely as a result, closing more than 14 per cent lower yesterday. The fashion for digital and technology stocks insulated from lockdowns made AO World the best-performing large-cap share in London last year, but while the stock has lost three quarters of its value since the start of 2021, a price equivalent to 28 times forecast earnings next year leaves plenty of room for further pain.
Some slowdown in revenue growth on an annual basis was inevitable and, on a two-year basis, that metric was up by just over two thirds. In Britain, issues around supply chain disruption look shorter-term, but that doesn’t mean there’s not the potential for a third profit warning. The retailer might have hired an extra 500 drivers to tide over its core delivery service, but there are still challenges around hiring enough drivers that also carry out additional services such as installation.
Slowing revenue in a German market pegged as the engine for growth is more unsettling. Growing sales volumes will come from gaining market share, rather than the overall size of the white goods market expanding, so rising competition is an issue. Post-pandemic, a greater number of bricks-and-mortar retailers have clocked on to the longer-term benefits of offering online shopping.
The upfront cost of establishing a nationwide delivery infrastructure has been felt more keenly because of lower scale within that market — the gross margin was 7.6 per cent during the first half, against 19.7 per cent in the UK. The company’s share of the German major domestic appliance market slipped to 2.6 per cent, against 3.1 per cent in the same period last year, while even more ground was lost in the country’s online arena. Note, too, that its share of UK online was also lower than the pre-pandemic level. Any further slowdown in revenue growth could erode margins in Germany further.
Tougher competition calls into question whether the rollout of the business in other foreign markets will go ahead at the same scale or pace. In July AO World set out ambitions to move into five countries in five years, which would include expanding to France, Spain and Italy. There’s now the possibility that will be delayed.
Setting aside the individual challenges, rising inflation and an expectation of a steady increase in interest rates has taken the shine off stocks priced for high growth. The sell-off in AO World’s shares looks more like the market coming to its senses than a rash over-reaction.
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Telecom Plus
Bang goes energy company Bulb — and so, too, should the “seven-year destructive price war” that has made life harder for suppliers, according to Andrew Lindsay, co-chief executive of Telecom Plus. He thinks that plans by Ofgem, the energy regulator, to tighten requirements relating to suppliers’ financial risk management and resilience should give the group, which trades under the Utility Warehouse brand, a better chance of shining once the race to the bottom on cost is removed. Energy supply accounts for about three quarters of revenue, after all.
Growth in the number of customers is expected to accelerate in the second half of the year to 10 per cent and at a double-digit rate annually thereafter. That’s more than double the rate of growth recorded during each of the three years preceding the pandemic. Wholesale pricing pressures had tamed previously aggressive suppliers and reduced the level of customer churn to only 0.7 per cent over the first half of the year, compared with 1.2 per cent at the same time last year.
Yet that promise hasn’t been truly reflected in the share valuation, which, at 19 times forecast earnings for next year, is below the average notched up over the past five years.
The FTSE 250 group aims to be a one-stop shop for a customer’s utility needs, including energy, broadband and insurance. Lower back-office costs such as cutting back on call centres benefits margins. About a third of customers have opted for two or more services, a proportion that rises to 60 per cent for those signed up over the past 12 months.
In the near term, the higher distribution costs that accompany more customers means adjusted pre-tax profit guidance has been maintained at £60 million for this year. So, too, has the annual dividend, pledged at 57p a share, which leaves the stock offering a liberal 3.8 per cent dividend yield even after a double-digit bump in price on results day.
Further out, management expects the benefits of greater scale to translate into profit growth that outpaces the rise in revenue. There’s decent income on offer and grounds to believe that there will be further momentum in the share price.
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