AO losses increase despite sales growth

Despite growth in sales, online electrical retailer saw a substantial increase in its group half-year operating losses to £12 million from £2.8m in 2016.

The company blamed increased brand expenditure in the UK and investment in Europe for the losses in the six months to September 30.

Group losses before interest, taxes, depreciation and amortisation (EBITDA) amounted to £6.3m against a profit in 2016 of £1.5m.

European adjusted EBITDA losses of €15.6m were a result, it said, of continued investment in European expansion.

However, it fared rather better in the UK, showing EBITDA profits of £7.4m, although these were still significantly down on 2016’s figure of £13.1m.

In terms of turnover, AO saw total revenue increase by 13.3% to £368m in both the UK and Europe.

Website sales for the UK were up by 9.9% to £282.5m, with Q2 growth of 13.2% – Q1 was up by 6.2% and benefited from changes to stamp duty.

Total UK revenue increased by 7.4% to £316m, revenue in Europe also saw growth, up by 60.5% to €58.1m (€36.2m), despite minimal traditional marketing activity.

AO chief executive Steve Caunce (pictured) said: “AO has made a good start to the year. We delivered further steady progress against our strategy – growing revenues across all countries, maintaining high customer satisfaction levels and adding even more categories to our offer, all underpinned by our unique culture. We continued to improve and add to our customer journey, including the launch of our transactional app. We are broadly on track with our plans for the year as a whole – with the positive impact of improving sales growth through the first half of the year combined with the first half biased phasing of our marketing spend – in spite of the challenging UK market conditions.

“Our European operations continue to perform in line with the plan we’ve previously set out, notwithstanding the adverse impact of foreign exchange rates on our reported performance. We are also building a number of exciting new vertically-integrated capabilities under the AO banner, including our state-of-the-art recycling facility in Telford.

Eleanor Parr
Eleanor Parr, retail analyst. GlobalData

“We will continue to evolve our brand strategy, underpinned by our commitment to make things easy for our customers because we simply care more. While we are mindful of macroeconomic factors, we remain confident that we are on track with our plans to be the best electrical retailer in Europe.”

Looking to the future, the company said it expected to see continued growth, despite an uncertain trading period.

“While we continue to anticipate uncertainty in the macroeconomic environment, we remain focused on delivering value for all our stakeholders,” Mr Caunce added. “Our outlook for the full year remains within the range of market expectations for adjusted EBITDA towards the lower end, reflecting the continuing momentum in our UK business, despite challenging market conditions and the adverse impact of foreign exchange rates on the translation of our European operations’ reported performance.”

Eleanor Parr, retail analyst at GlobalData, commented: “AO World has once again outperformed the challenging UK electrical goods market with domestic sales growing 7.4% versus last year to reach £316.8m in H1 2017/18, in a sector that is only forecast to increase by 0.5% this year. However, year-on-year growth rates continue to slow, signifying a maturing of its UK proposition and the difficult macroeconomic climate retailers are trading in, with low consumer confidence discouraging shoppers from investing in big-ticket items.

“Profits for the retailer continue to tumble with UK EBITDA at £7.4m, down from £13.1m in 2016 and adjusted group operating loss falling by £8.9m since 2016. Furthermore, shares have continuously declined since the brand floated in 2014 and the current value is less than one-third of what it was four years ago, with basic loss per share over its H1 2017/18 at 1.9p vs 0.11p earnings for the same period in 2016. However, AO World highlights that this remains in line with expectations and is driven by essential investment in its blossoming European operation and marketing for its UK site.

“The retailer is relentlessly expanding its electrical assortment, recently introducing SIM-free mobile phones, gaming consoles, cameras and smart home on its UK website. Diversifying its UK range will improve customer appeal and awareness of the brand, however with gaming consoles and mobile phones notoriously offering extremely low margins, these sales are likely to further dilute the retailer’s already poor profits.

“AO World launched a transactional app in the past six months in an effort to improve the customer shopping journey – a smart move for the retailer as competitor Dixons Carphone is yet to offer this. With spend on electricals via mobile phones forecast to rise 15.8% in the UK this year, the retailer is in prime position to capitalise on this growth.”

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