AO shares down 75% this year as shortages bite

Shares of Bolton-based online electrical retailer AO World plc fell another 17% on Tuesday after it cut its profit outlook and warned about “meaningful supply chain challenges with poor availability in certain categories.”

AO World shares have now fallen 75% so far this year.

The company cut its annual adjusted full-year core profit outlook to a £10 million-£20 million range — down from £35 million-£50 million.

Announcing results for the six months ended September 30, 2021, AO World said its revenue increased 6% to £759.6 million.

However, AO warned in its outlook: “At the start of our financial year in April, we planned for continued revenue growth and built up our cost base accordingly. 

“However, since then, growth in the UK has been impacted by the nationwide shortage of delivery drivers and the ongoing disruption in the global supply chain, and the German online market has seen significantly increased competition.

As we now look to the second half, we continue to see meaningful supply chain challenges with poor availability in certain categories, particularly in our newer products where we have less scale, experience and leverage. 

“In addition, shipping costs, material input prices and consumer price inflation remain challenging uncertainties.

As a result of these factors, the all-important current peak trading period is significantly softer than we anticipated only eight weeks ago.

“As a result, we now expect full year group revenue to be flat to minus 5% year on year, with group adjusted EBITDA in the range of £10m to £20m.

While a substantial amount of short-term uncertainty remains, we are taking decisive action to address and mitigate the issues and are confident in our ability to trade our way resiliently through this period.

“In the medium-term, our international expansion ambitions remain entirely unchanged.

“We remain confident about AO’s future prospects, based on the strength of our business model, the quality of our customer proposition, and the ongoing structural shift online.”

AO’s founder and CEO John Roberts said“Our results over this period have inevitably been affected by the constraints and uncertainty seen across our industry …

“We’re working hard to solve some of the current challenges that our industry is facing.

“We’ve recruited c.500 new drivers and are working closely with our manufacturer partners so that customers can get what they need.”

AJ Bell investment director Russ Mould wrote: “After being one of the best performing names on the UK stock market in 2020 with a 355% share price gain, AO has come back to earth with a bump.

“Its shares have been in freefall for some time and today’s warning means the stock is now down 78% year to date.

“Higher costs, stock availability issues and fierce competition in Germany are all to blame for its woes.

“The company remains optimistic these are short-term problems and that the structural shift in favour of e-commerce will ultimately benefit the company.

“However, when you’re only earning small margins, any increase in costs will have a big impact on profitability and so AO is really feeling the pain at present.

“Fundamentally AO’s proposition is sound – it offers a wide range of products at competitive prices and it has a good reputation for top notch customer service.

“These days if you order something online, you want the experience to be as painless as possible and that includes taking delivery of the item, and AO ticks the right boxes.

“The ongoing challenge to its business model is the fact there are so many other companies offering the same proposition via the internet.

“Not only does that mean competing on price, but it also means competing for online advertising space such as bidding for the favourite search terms, and that is one area where AO is incurring extra costs.

“AO has gone from being a lockdown winner to a post-vaccination era loser.

“It did so well during the early stages of the pandemic, selling computers to people working away from the office, freezers to people stocking up on food, and TVs to families looking for a sharper picture as they try to entertain themselves at home.

“Now some of those tailwinds have faded, and it has also been struck by supply chain issues meaning it can’t offer everything that people want.

“Having cracked the UK market pre-pandemic, a lot of AO’s growth story was pinned on success overseas, led by Germany.

“That’s now looking a bit shaky as Germany has proved to be a much harder market in which to excel.

“If AO decides it can’t expand profitably overseas, then a lot of investors are going to take a hard look at the business and its share price could experience even more pain.”