AO World - The Short Story

Sunday, Mar 18 2018 by

AO World (LON:AO.) is an online electrical retailer. It describes its mission as "to be the best electrical retailer in Europe. It may well be succeeding in that mission, claiming industry-leading scores on customer review websites and very high net promoter scores. The price of delivering that level of service, however, as I will set out below, is that is a loss-making business that seems structurally incapable of ever delivering a profit.

AO started out in the UK business, and the chart below shows revenue and gross margin progression for this division.


As can be seen, revenue has grown consistently period on period, although this growth is showing signs of running out of steam in the last twelve months, with 2017 H2 just 8% ahead the corresponding prior period, and 2018 H1 just 7% ahead. Margins are reasonable and have averaged over 20% for the last four half year periods. The growing importance of "Black Friday" to this business can be seen in the escalating seasonality in the chart, with an H2 peak in revenue and fall in gross margin.

The Europe division serves Germany and The Netherlands and is performing to a much lower level than the UK division, as illustrated below.


Revenue is rising rapidly, at a far greater rate than the UK, but gross margins have been consistently negative.

Pause a moment to consider the implications of that: it costs AO more money to source the products and deliver them to the customer than the customer pays them for it. In other words, even before allowing for overheads, they are selling their products for less than they cost them. Not much wonder revenue is growing so strongly.

Now, turning to expenses, this are split into three categories: advertising, warehousing and other expenses. For the last category, I have backed out share-based payment charges, "strategic post go-live costs", depreciation and amortisation, to try and arrive at a level of underlying cash expenses. These three categories are charted below, relative to revenue. I have also added a trend line for each one.


Remarkably, all three of these expense categories are trending up. AO manages to achieve reverse operational gearing in every component of its overheads.

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AO World Plc is an online retailer of electrical products. The Company operates through two segments: online retailing of domestic appliances to customers in the UK, and online retailing of domestic appliances to customers in Europe (excluding the United Kingdom). The Company offers over 5,500 stock keeping units (SKUs) in the United Kingdom, approximately 2,000 in Germany and over 600 in the Netherlands. The Company offers a range of ancillary services, such as customer finance options, an unpack and recycle service, product care packs, and disposal and connection services. In the United Kingdom, the Company operates in approximately three categories: Major Domestic Appliances (MDA), Small Domestic Appliances (SDA) and Audio Visual (AV). The MDA market offers built-in appliances, such as dishwashers. The SDA market comprises small appliances, food preparation and floor care. The AV market includes television, audio, set-top boxes, digital versatile disc (DVD) and Blu-Ray players. more »

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19 Posts on this Thread show/hide all

Effortless Cool 6th Apr '18 1 of 19

A very mediocre trading statement this morning. Revenue marginally above expectations, adjusted EBITDA marginally below. I might have been worried had it been the other way round but, to my mind, there is still nothing to indicate that AO World (LON:AO.) will ever be a viable business. I can't see any reason why anyone would want to hold these shares.

To my mind, the short thesis remains intact and I am happy to maintain my short position.

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JohnEustace 7th Apr '18 2 of 19
2 is showing 4.45% short interest. I'm surprised it isn't higher but it is growing.

I've been long only on individual stocks but I think it's time to learn the shorting game - do you mind me asking which service you use for shorts?

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jonesj 7th Apr '18 3 of 19

I also recently decided it is time to start learning about shorting, 3 decades after my first long position.

Simon Cawkwell seems to recommend spread betting for shorting, so I opened an IG account. I hope other more experienced short sellers can offer more valuable advice, since I have a lot to learn about this game.

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gus 1065 7th Apr '18 4 of 19

In reply to post #350793

Hi jonesj.

If you’re looking for an introduction to spread betting, you could do a lot worse than pick up a copy of Robbie Burns’ Guide to Spread Betting. It’s a bit dated now and a revised version is due to be released this June (link to an introductory offer in the second para) if you can wait that long. Nice and simple but plenty of sound commentary for the newcomer.

If you’re a new client of IG I think they will still put you on guaranteed stops for an introductory period. Costs a few pennies per trade but worthwhile peace of mind in my opinion. Take care with your stake size until you get a feel for the game. Easy to get carried away especially when shorting on margin (i.e. leverage).


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Effortless Cool 8th Apr '18 5 of 19

I'm afraid I don't feel qualified to advise anyone on shorting. I'm good a identifying over-valued businesses, but rather less good at making money from that ability by shorting them. I may well pick up the Naked Trader book, so thank for the link to that, gus.

For what it's worth, I short through a spread betting account with IG. I have found them very good; they offer a lot of markets and the app is excellent. Quite often they quote short prices but won't open a position because there is no borrow. However, persistent attempts may allow you to catch brief windows when the markets open up again.

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Mike888 8th Apr '18 6 of 19

My advice on shorting and spread betting generally (ditto CFD's) is to be careful, you could lose your shirt and if it's not in your account the broker may well come looking for it.

Recognise that you have daily interest to pay on daily funded bets(DFB) or larger spreads on bets that run further out. As such they are not suitable for hanging on to for a long time as interest payments\wide spreads will eat into your profits or even create a loss-making situation.

Spread bets do not necessarily accurately reflect the underlying market, DFB's are likely to be close to it, but anything other than DFB's will be different.

Steer well clear of illiquid stocks, the likelihood is you may not be able to get a position on them anyway, but nevertheless, they are too dangerous to touch.

Consider how volatile a stock is, high volatility means big gains and big losses quickly, my recommendation is not to touch high volatility stocks until you have a lot of experience under your belt

ALWAYS take a guaranteed stop, especially on a short, if your stock gaps up you could be in serious trouble without one if you are over-leveraged. If you are long you know how much you could lose, if you are short, in theory, your losses are limitless. You may not be able to get a guaranteed stop on all positions, my advice is if you can't get one walk away unless you are happy with riding the potential for big losses.

For IG, if your guaranteed stop is triggered you will be charged, therefore don't wait for it to happen.

Read up about what happens on ex-dividend days, IG has articles on their website in respect to this, for some reason, which I can't explain or even understand, I always end up loosing on ex-dividend days if I'm shorting, so I never hold on an ex-divi day.

Although brokers will provide you leverage of quite substantial amounts for large caps, reducing for small caps, don't get greedy. If you over leverage yourself it will add heightened emotion to your trades and with that the risk of bad decisions. My advice is to hold enough in the account to cover an unleveraged position, then you know that is what you are really playing with. I don't do this and I know I really ought to.

Don't just use fundamentals when entering a spread bet, given that timelines should be considered shorter, use technical analysis to help you gauge entry and exit points.

Hope this helps a little, just tread very carefully is my only real advice

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Effortless Cool 18th May '18 7 of 19

Mmm .... not going too well at the moment ....

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fredericktug 3rd Oct '18 8 of 19

Stockopedia today reports a technical analysis "death cross" - this is where the 50 day moving average falls below the 200 day MA. It supposedly predicts or suggests a period of SP under-performance from that point, though by how much and for how long I don't know. I'm starting to have regard for some basic TA in my analysis but it's early days and I'll always be driven by fundamentals as I'm a longer term (value.income/GARP) investor, not a trader.

I'm with our Paul Scott on AO World (LON:AO.) : "selling other peoples' generic products, on wafer thin margins, against stiff competition, just isn't a good business model".

Or as one analyst one famously put it when headlining his research on the then Mirror Group Newspapers: "Can't Recommend A Purchase"!

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Effortless Cool 9th Nov '18 9 of 19

Now AO World (LON:AO.) are going to sprinkle their magic dust over the mobile phones market and "the Board believes full year results will fall within the range of its expectations, albeit more second half weighted than previously anticipated".

Frittering away their cash pile on a secondary product line in an already highly competitive sector and playing catch-up on profits this year. I'm happy with that.

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Effortless Cool 9th Nov '18 10 of 19

The H1 revenues published this morning represent a reasonably material shortfall against expectations, with both the UK and Europe showing further weakening in their growth trends. I reckon we are now heading for £869m revenue (before MPD) for full-year 2019, versus the previous £888m consensus. If they do catch up with their increased second half weighting, I suspect it will be at the expense of increased marketing spend.

I don't believe there is any significant affinity between selling fridges and selling mobile phones. In my view, they should be sorting out their main product lines so they make money, rather than diversifying. Potentially, this acquisition is tacit acknowledgment that their principal business model is failing.

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countless 12th Nov '18 11 of 19

Excellent read. Thank you.

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countless 12th Nov '18 12 of 19


AO. cannot afford the drop in revenue from this type of sale but will go for it nonetheless.

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countless 15th Nov '18 13 of 19

At current valuation AO. will be demoted from the FTSE 250 on the quarterly review due 5 December 2018 with changes to take effect from 24 December.

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countless 20th Nov '18 14 of 19

Another year of losses and they say they will only break even in 2021 - hopefully!

This jumped off the page - smacks of happy to present figures to best suit us!

Our operating loss for the period was GBP11.7m, with losses decreasing by GBP0.3m from GBP12.0m in the prior period including the GBP1.4m of MPD acquisition costs recognised in the period
However, when reviewing profitability, the Board of Directors use an adjusted measure of EBITDA in order to give a meaningful year on year comparison and it is a performance criteria for the purposes of both the Executive management's annual bonus and LTIP awards and, more recently, the single incentive award. Whilst we recognise that the measure is an alternative (non Generally Accepted Account Practice ("non-GAAP")) performance measure which is also not defined within IFRS, this measure is important and should be considered alongside the IFRS measures.
Group Adjusted EBITDA losses were GBP5.4m (2017: GBP6.3m) after allowing for GBP12.3m of Europe Adjusted EBITDA losses (2017: GBP13.7m loss).

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countless 22nd Nov '18 15 of 19


Interim results from online white goods retailer AO World (AO.) were enough to send the shares down 9 per cent in early trading - something we anticipated with our recent sell call on the shares. The group blamed a declining appliances market in the UK as well as intense competition for widening losses The reported cash profit loss of £5.4m looks paltry compared to analysts’ expectations for £4m in profit by the year-end, even if numbers are expected to be second-half weighted. Broker Peel Hunt called the figures “disappointing”. We remain sellers.

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Effortless Cool 11th Jan 16 of 19

I seem to have managed to short the only stupidly over-priced growth stock that hasn't tanked in the last few months. Oh well, there's still time ....

The q3 numbers out today show another drop off in the growth rate to 8.2% in q3, from 9.9% in H1. Although they say they are on track to meet full year expectations, broker consensus for 2019 is for 10.9% revenue growth, which will certainly be missed. A top line downgrade from £883m to ~£869m looks inevitable. The only bright spot for shareholders is the statement that UK margins improved (from last year) in q3.

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countless 11th Jan 17 of 19

AO. is priced as a growth company yet it's growth is stalling and it is still not making a profit. I fail to see why the market attaches the high valuation of £586m. These figures says it all:-

Q3 2017 Q3 2018 Growth Reduction
Group Revenue Increase 16.1% 8.8% 45.3%
UK Revenue Increase 11.4% 4.4% 58.7%
Europe Revenue Increase 58.4% 31.3% 46.4%

These are nothing to be proud of when your overheads eats all your profits. Especially when you have the longest Black Friday, in November, that will eat into your margin and produce your busiest month!

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Effortless Cool 20th Mar 18 of 19

Steve Caunce "decided to step down" as CEO on 31 January 2019.

The last AO World (LON:AO.) annual report told us that he held 51,975,815 shares on 31 March 2018 (page 88).

However, we today learn that he sold 4,830,000 shares on 23 March 2018, and actually held just 47,145.815 shares at year-end, i.e. the information given in the annual report was false.

Also today, we find out that he sold a further 600,000 shares on 17 December 2018.

Nothing short of disgraceful, in my view.

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Effortless Cool 12th Jun 19 of 19

I have closed my short at 84.01p, for a decent profit.

I am still working through my projections but my reasoning is the strong performance on control of expenses in the second half of 2019. If this is sustainable and they can continue growing top line, then there may be a business here after all. Additionally, I am not clear on the effect that the purchase of Mobile Phones Direct will have on various key ratios and I would prefer to be off risk until I see the next interims and can get a better feel for this.

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