Sales Surge By Almost 60% At Online Retailer AO World But Brexit Worries Weigh

Booming revenue growth at European online electrical retailer AO World has been tempered by concern over post-Brexit supplies which have encouraged the company to built up inventory in case of shortages.

Sales of electrical and digital goods ranging from mobile phones and computers to cookers and washing machines drove sustained growth of 58% in both the United Kingdom—AO’s biggest market, and in Germany. In the six months to September revenue hit £717 million ($806 million).

AO, based in Bolton, England and listed on the London Stock Exchange, also generated group profit (before tax) of £18.3 million after a loss of £5.9m in the same period last year, despite the burden of extra costs from Covid-19 and warehousing expansion.

Chairman Geoff Cooper said the company had “a game-changing performance in Europe” thanks to a partial revamp of the group in the last financial year. This allowed for a doubling of in-house logistics capacity—which had been previously constrained—to improve service to both suppliers and customers while also creating 800 new jobs.

The results failed to impress investors and the company’s stock fell by almost 10% to £3.78 at the London market close, most likely due to supply worries related to Brexit. The fall is less concerning in the context of AO’s capitalization this year—to date the share price has soared by 280% from £0.86, driven by online demand for electronic products during Covid-19 lockdowns.

This week’s Black Friday event will offer another boost. A survey from GlobalData finds that electricals and technology is the most sought after category with 54% of consumers intending to make a purchase. Retail analyst Emily Salter commented: “Black Friday will be most popular among younger shoppers persuaded by the extended discounting period among many retailers—Amazon
AMZN
offered deals throughout November and Dixons Carphone started discounting on November 10.”

Keeping supply lines safe

High demand may lead to order backlogs and extended delivery times, but AO had already faced these challenges at the height of the first lockdown and is prepared.

On the effects of the pandemic and Brexit, chief financial officer Mark Higgins told analysts today: “Inventory has been increased to 33 days at the end of September as we prepare for our biggest ever peak period both in the U.K. and Germany. We also aim to have a high stock balance as we go into an uncertain Brexit period.

“Supply of product has been a challenge—and is expected to be challenging going forward. Therefore we will continue to buy stock in the short-term regardless of efficiencies within our overall model.”

In a statement, AO’s founder and CEO John Roberts, added: “This has been a half year like no other. Online is now the dominant retail channel for customers and manufacturers alike.”

While online is increasing its market share, the CEO conceded that it will never reach 100% which is why the group has been running a test concept with Tesco to bring the AO proposition—including same-day delivery—to customers of the U.K.’s biggest grocery retailer. Five locations should be open by Christmas.

Fixes for the European business

AO appears to have rectified some issues in its German business that have been a drag on the overall group performance. Both sales and operating profitability improved in the half-year—revenue jumped by 85% to £101 million and EBITDA losses narrowed from £10 million to £4 million.

The German market is a much bigger prize than the U.K. and led by the giant €21.5 billion turnover electronics retailer MediaMarktSaturn. For AO, Germany is now expected to achieve monthly profitability on an adjusted EBITDA basis during peak trading periods and from the next financial year starting in April 2022.

“We have taken huge strides forward on our commitment to fix the fundamentals of our European business and we now have a profitable platform from which to accelerate growth,” said Roberts.

On the overall AO business he added: “We’ve been running at normal peak trading levels for every one of the past six months but we’re pushing on again. Now really is our time.”