AO World issues "slight" profit warning as UK market proves difficult

Online white goods retailer AO World has warned that a tougher UK market since Christmas will mean revenues and earnings will be "slightly below" market forecasts as the fanfare around its public listing died down.

On the anniversary of its first day of dealings, the FTSE 250 group said achieving the level of expected growth in the fourth quarter had been "difficult" as it had become apparent that some of the revenue growth in the second half and going into the new financial year "was due to the extra publicity surrounding the company at that time".

This saw shares in AO plummet by as much as 45% at one stage on Wednesday, having recently bounced back towards the near-400p high that was reached immediately after their flotation in February last year.

Revenue for the year to 31 March is now guided to between £470m and £475m and adjusted earnings before interest, tax, depreciation and amortisation for the UK operation will come in at roughly £16.5m.

House broker JP Morgan Cazenove said that, "given the relatively low level of profitability currently being achieved by the group - including losses in Germany", this represented a massive 44% downgrade to its 2015 top-of-the-range EBITDA forecast.

"This is driven by the slowdown in trading but we also assume that opex spend, and in particular marketing spend, has been less efficient than we had anticipated," analysts wrote, slashing their revenue and earnings forecasts for 2016 and 2017

AO World, which trades via the AO.com website, had cautioned in January of the loss of a logistics contract, the cost impact of driver legislation changes and the adverse effects of Black Friday, which condensed sales into a shorter time period and did not increase sales for the company.

However, the company stressed now that across the group it continued to enjoy strong year-on-year revenue growth and was "confident that the company's fundamental business model remains strong".

Trading in Germany, a new market where operations were launched in October, ahead of plan, was "advancing well" and giving management confidence to examined other countries for potential international expansion, while the introduction of the audio-visual (AV) category in the UK was "developing well".

Cazenove cut its UK revenue growth forecasts for 2016 and 2017 to circa 20% per annum from circa 25% previously that, due to gross margin deterioration, drove a considerable 30% reduction to its estimates for 2016 UK EBITDA to £22m and a 34% reduction for 2017 to £28m.

Broker Shore Capital's Clive Black said: "In our view, this will no doubt halt some of traction that the share price gained at the start of the calendar year, however we still believe firmly this is a high quality business."

Independent retail analyst Nick Bubb noted that Seb James, CEO of rival Dixons Carphone, "has always said that [AO's] valuation was crazy and the AO.com business model was suspect".

Broker Panmure Gordon recently began its coverage on AO World with a 'sell' recommendation, arguing that shares in the white goods e-tailer are "grossly overvalued" and trading for double their intrinsic worth.

Panmure acknowledged that AO is a "high quality e-commerce business" but that the UK retail market for major domestic appliances (MDAs) is a "notoriously difficult" market to operate in due to limited brand loyalty, fierce competition and elastic demand together all stifling the industry’s profitability.