AO expecting higher profits after raising delivery charges

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AO is expecting to achieve higher profits than it previously thought after raising delivery charges.

The Bolton-headquartered online electricals giant issued an unscheduled update to investors in which it upped its earnings outlook for the third time in just over three months.

AO said its profits had seen a better-than-expected improvement as it drives cost savings thanks to a “resilient” customer base.

But experts at City analyst firm Panmure Gordon said they believe the decision to raise how much it charges for delivery to be the “largest factor” in AO’s profits boost.

AO is now expecting its underlying earnings to be in the range of £37.5m to £45m for its full financial year, up from the £30m to £40m it forecast last month.

The group had already increased earnings guidance in November and again in January as its turnaround plan to strip out costs has been bearing fruit.

In a statement to the London Stock Exchange, AO said: “The steps we have taken to simplify the business and become more efficient have outperformed expectations and been delivered quicker than expected.”

“Margin improvement initiatives coupled with a continued resilient underlying customer base has driven higher retail gross margins than previously expected and we anticipate that this will continue for the remaining five weeks of the financial year,” it added.

It comes after AO World slumped to a £12m loss in its first half, with shares hammered last year following a series of profit warnings as the cost crisis hit consumer spending on white goods, and due to labour shortages and supply chain disruption.

The company started its turnaround plan with a £40m fundraising round last summer in a bid to strengthen its balance sheet amid fears of a cash crunch.

AO has closed its loss-making German operation as part of the shake-up and has launched action to save at least £30m a year by 2023-24 – including by recently axing senior and middle management jobs.

The firm has also ditched unprofitable products while introducing delivery charges and cutting cashback incentives to reduce the cost of sales.

On the increase in forecast profits, experts at Panmure Gordon said: “This has resulted from a combination of previously announced cost containment programmes, margin enhancements and marketing efficiencies all being achieved ahead of initial company estimates.

“But we believe that the decision to increase delivery charges has been the largest factor.

“The company has been helped by relative strength in its core major domestic appliances (MDA) market and a generally benign competition position in the UK.

“Running the business for profit in a difficult market is clearly a sensible proposition.

“But investors need to wait for further indications on business strategy outside this stabilisation phase before making any big calls at AO in our view.”

The firm added: “It is clearly always good to be able to upgrade profit estimates, especially in this case with AO’s history of performance volatility. But we are not sure how much it means.

“Ultimately AO needs to demonstrate the ability to grow while achieving profitability and the limiting factor is likely to be its high online MDA market share which will channel its growth into lower margin areas.

“These debates have been live for a long time now and we are pleased that AO has pulled itself back from the severe instability around trade financing from earlier in the year. We await further evidence of an investment case after this stabilisation phase.”

Full article here:

Author: Jon Robinson, North West Business Editor, Business Live

Georgia Pettman

Associate, Research, Retail

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