AO World shares plunge as update reveals supply chain pressures

The company said group revenues for the six months to September 30 grew 5% year on year and 66% on a two year basis. AO added that it expected revenue growth in the second half at a similar rate to the first six months.

In the UK, first-half revenues rose 6% against forecasts of 10% as the nationwide shortage of delivery drivers and ongoing disruption in the global supply chain took its toll. Revenue growth of 3% in Germany was well below the full-year estimate of 35% pencilled in by analysts at broker Jefferies due to competitive pressures.

AO guided for adjusted core earnings to be £35m - £50m, below forecasts of £54m, pinning its hopes on the key third quarter which takes in Christmas. Jefferies said this would mark an 8 percentage point slowing in revenue growth from its estimates of 13.5% and a £10m downgrade, or 20%, to earnings before interest, tax, depreciation and amortisation (EBITDA) from its estimates of £53m.

"The challenging market dynamics in both the UK and Germany resulted in lower volumes than expected which affected operational leverage, particularly in the second quarter," AO World said on Friday.

"Whilst the macro-outlook remains uncertain, we have confidence in the proven resilience of our business model and are well placed to meet customer demand in our peak third quarter sales period."

"Modelling growth of 6% through the full year versus our current estimate of 10% would see a revenue impact of £60m to the UK business for 2022 with a 5% drop-through and some deleverage, this could equate to a £5m EBITDA impact," Jefferies analyst Andrew Wade wrote in a note.

GERMAN PRESSURE POSES PROBLEMS

"The commentary regarding Germany is more limited but, in our view, of more pressing concern. While the statement simply notes a 'competitive online market', we understand that competitive intensity has stepped up markedly with, in particular, Amazon and Otto pushing hard on customer acquisition and price."

He said German growth of 3% into the second half would result in a revenue downgrade of £70m, and could equate to a £5-10m EBITDA impact.

AJ Bell investment director Russ Mould said the shortage the current crisis has shown that "online retail is more complicated than you might have thought. It’s a job in itself to run warehouses and logistics operations as well as making products and marketing them".

“AO’s UK revenue growth has fallen short of analyst expectations. Its German operations have fared even worse, with the company fighting for space in a highly competitive online market. Having cracked the UK, winning overseas is a crucial part of AO’s strategy and it cannot afford to have any setbacks on this front," he said.

“Selling fridges, TV and washing machines online is a low margin business and success is down to achieving high sales volumes. With cost pressures intensifying and sales volumes disappointing, AO faces a big squeeze on profits.”