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Wednesday, December 1, 2021

Questor: AO World was a massive lockdown winner but can it maintain the momentum?

The sudden arrival of the virus and working from home did indeed prompt a burst of online buying, but that spending spree won’t be repeated every year – not because we will all go back to the high street but because many of the goods that AO World sells are infrequent purchases. 

It differs in this respect from retailers such as Pets at Home, which also reports interims on Tuesday: lockdown puppies need to be fed every day and if their owners prefer to buy their dog food online the fillip the company experienced last year will be maintained. 

However, seen in this light it is perhaps impressive that AO World is managing to grow its sales at all.

Unfortunately the struggle to maintain sales growth in this country is not the company’s only problem. It is trying to crack the German market but when it warned on profits last month it said it faced a “competitive online market” there. 

“AO World does not have a great record when it comes to overseas expansion,” says Dani. 

“It entered the Dutch market in 2016, made massive losses and gave up in late 2019. Now it is in Germany. But it is not a market leader there, and if you enter a country that already has a market leader you have to ask how long it will take to build up your share of that market. Meanwhile, the incumbents will not stand still.

“And AO World plans to enter three other countries, which it hasn’t named. But my question is: why not refine your playbook here in Britain first?”

AO World’s shares trade at a premium to those of its competitors, which are retailers that began as bricks-and-mortar outlets but expanded into online sales. They therefore allow their customers to touch and feel the products and can offer “hybrid” services such as click and collect and returning goods to shops.

“I think the multi-channel model makes sense,” says Dani. “I’m not sure you can really get the same experience online. I can’t see AO World being the winner in this market but its shares are still trading at a premium. I see room for a further derating [falls in the share price relative to profits].

“Meanwhile, the company has to face supply chain problems like everyone else. I would not be surprised to see another profits warning.”

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