AO World posts strong results as profitability drive pays off

Shares in AO World PLC (LSE:AO.) were searching for direction on Wednesday morning after the online electricals retailer posted full-year results showing a notable improvement in profitability and a continued recovery in margins.

Broker Peel Hunt said the results were in line with its upgraded forecasts and landed at the top end of AO’s own guidance.

Adjusted pre-tax profit came in at £43.5 million, a 27% increase on last year, while earnings per share rose 33% to 5.7p.

Sales were already flagged ahead of time, with consumer revenues up 12% and total group revenue up 7% to £1.1bn, excluding contributions from the now-sold stake in second-hand goods retailer Music Magpie.

Stripping out £1.7 million of losses from that business, AO’s underlying profit margin hit 4.1%, double the peak achieved during the pandemic.

Peel Hunt points to a 90-basis-point improvement in gross margin, now at 24.3%, driven by AO walking away from unprofitable promotions and activities.

This marks a cumulative five percentage point gain over the past three years: a clear sign that management’s focus on profitability is working.

The company is taking a firm stance on its underperforming mobile phone arm.

While mobiles are seen as potentially important, AO says if it does not return its non-core mobile sites to profit this year, it will shut them down.

Around £20 million of goodwill and other intangibles tied to this part of the business have already been written off.

Despite no changes to guidance, house broker Peel Hunt remains upbeat, forecasting earnings per share to grow by about 9% in the year ahead.

AO is also investing in its membership offering, which the broker believes could help double its market share and deliver five times more profit in the longer term.

Peel reiterated its 'buy' rating with a 137p target price, noting that shares are trading on a price/earnings multiple of 16, suggesting the stock is reasonably valued given its growth outlook.

The shares opened 1% higher at 101.8p, before falling to a 4% deficit at 96.7p.