Electricals retailer Ao.com revealed a first-half loss today after pumping investment into European expansion and a new marketing campaign.

The feisty chief executive of Ao.com, John Roberts, insists that he’s delivered on all the promises made at the time of the IPO, although the significant fall in the share price since the excitable days of March 2014 shows that the City has had some second thoughts about the business model.

AO.com___John_Roberts_forklift

AO.com___John_Roberts_forklift

Ao boss John Roberts, insists that the retailer has delivered on the promises made at the time of its IPO

The sluggish first-quarter trading update issued on July 21 certainly revived fears about the strength of competition in the UK from Dixons Carphone and Amazon, but Ao has confirmed today with its interim results that the second quarter saw a strong pick-up in UK sales growth, with the 6 months to September seeing Ao website sales up by a healthy 24% overall.

It would be interesting to know how much the range extensions into TV and small appliances contributed to that growth, over and above the core business of major domestic appliances (white goods), but Ao has not broken that out for competitive reasons, although they sound pleased with the way the new ranges have been improved and received by customers.

It’s also worth flagging that UK sales growth has been boosted by a big step-up in marketing – notably the join a million happy customers campaign – but higher advertising costs resulted in a disappointing fall in first-half EBITDA in the UK business from £7.3m to £5.1m, despite a 50bps increase in the still modest gross margin to 19.3% and the strong sales growth.

It’s also a bit odd to hear Ao say that when sales returned to more usual levels through the summer, “the rapid growth was managed with a customer-first outlook, which meant we did not benefit to the fullest extent from this sales growth”.  

Peak period

However, top-line growth is everything for an online retailer and Ao say that “the second half has started well, although we still have peak trading ahead of us, including Black Friday later this week”.

Ao jpg

Ao jpg

Ao.com launched its Black Friday promotions last night

John Roberts likes to call Black Friday “the Eric Morecambe of retailing”, a reference to the comedian’s famous crack that “I’m playing all the right notes, but not necessarily in the right order”, as there is little evidence that over a 4 month view consumer spending is necessarily improved by the Black Friday discounting.

But consumers clearly now want to spend money on deals this way before Christmas, particularly in electricals, so Ao will join in and offer a great shopping experience for customers who want to avoid any ugly scenes in stores. 

Despite his reservations about so much business being bunched up into one big spending spike, John Roberts says that Ao was the only online player last Black Friday that didn’t have website or warehouse or delivery problems.

Like other retailers, Ao decided to go early this year with a week of deals and promotions and they have clearly planned to take their share of the demand, despite fears that they will be a Black Friday “loser”.

International performance

If the core UK business seems to be going reasonably well for Ao, the jury is still out on its expansion into Europe – especially after the revelation today that gross margin was negative in the start-up business in Germany over the first half.

Ao maintained this reflected “the early purchasing prices achieved in that operation, compounded with inefficient deliveries while volumes are small”.

“The Netherlands launch is quite useful in terms of press coverage, as it means the headlines are all about Ao going to Holland rather than Ao cutting guidance again”

Nick Bubb

Ao professes to be delighted with the response from customers in Germany, but the annual run-rate of sales is only €60m (£42.4m), so its market share is tiny and many investors would no doubt have preferred them to try and prove that the business model really works in Germany before announcing today that they are launching into a new country, the Netherlands, in spring 2016 (even if some of the logistics can be shared).

As one pundit put it today, the Netherlands launch is quite useful in terms of press coverage, as it means the headlines are all about Ao going to Holland rather than Ao cutting guidance again.

Nevertheless, Ao Germany lost nearly £10m in the first half and, with more heavy investment in marketing to drive revenue growth, Ao warned today “we expect to maintain at least the level of net investment made in the first half of the year in Germany through the second half”, so the City has had to increase its forecasts for full-year losses in Germany, as well as trim UK EBITDA forecasts.

On the back of all that, the Ao share price has taken another lurch down today, by more than 10%, although it is still capitalised at nearly £600m, which some people feel is a generous valuation, notwithstanding Ao’s excellent customer service metrics.  

  • Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank