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JOHN COLLINGRIDGE: INSIDE THE CITY

AO World needs stains to come out in the wash

Bolton based AO.Com at their distribution centre in Crewe Pictured inside the plant
John Collingridge would buy dishwasher from AO, but steers clear of shares in the online retailer
ALAMY

Should AO World feel hard done by? One of Britain’s fastest-growing online retailers, it has amassed a 20% share of the white goods market from a standing start.

You want a washing machine delivered tomorrow? No problem. Laptop? It does those too.

Founded in 2000 by John Roberts, it is expanding into Europe. A trading update on Thursday should show more strong growth. But AO has not recovered from a profit warning two years ago and, at 180p, the share price is less than half the 400p-plus level achieved after it floated in 2014.

The problem is that selling white goods is not a particularly lucrative activity, even with the swankiest website and delivery service.

Fortunately, AO has a handy sideline earning commission on the sale of third-party warranties. So handy, in fact, that some wonder whether it’s an insurance agent with an online retailer attached. Harsh, perhaps, but the market is sceptical of a company valued at more than 80 times its estimated 2018 earnings.

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AO doesn’t break down exactly how it makes its profits, which totalled £13m in the UK in the six months to September 30, but a good chunk comes from these commissions.

Analysts at Panmure Gordon reckon warranty sales are the real driver of AO’s profits — not washing machines.

Then there’s the curious way it accounts for commission. While customers typically pay monthly for four or five-year warranties, AO books all this commission up front on day one, in what Panmure calls “incredibly aggressive” accounting.

AO may soon have to turn down the spin cycle. A tough new accounting standard, IFRS 15, kicks in next January and could force it to spread warranty profits over several years.

AO helpfully admitted on page 85 of last year’s annual report that it is reviewing the impact of the new rule. Should it be forced to dance to the accountants’ tune, profits will tank.

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I would buy a dishwasher from AO, but I wouldn’t buy its shares just now. Sell.

john.collingridge@sunday-times.co.uk

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