Morning Mumble: The not so-exclusive with humour: AO World (AO.)

Good Morning,

AO World's final results are out and so is the Christmas card list yet again! A loss after tax credits (£364K) of £2.517m. Richard Rose's share sale just after IPO is looking very shrewd indeed. 

Its that time when analysts (specific ones) should learn the difference between operating profit, cashflow and EBITDA. With the exception of Panmure Gordon, (Michael Stewart who had just switched camps from Shore Capital at the time), recognised most of the white good/domestic appliances woes of the UK industry. Admittedly, Canaccord Genuity weren't far off the pace but it was somewhat ruined by a hold rating when it should have been a blatant sell. 

The loyalty within the domestic appliances sector is fractured, more so the limited offerings for TV's that are questionable whether they are the latest. The margins for the debacle known as "black Friday" were far from positive for AO World. It’s interesting that AO are also operating an eBay branded store. Unlike others, we always like to go one step further, so here's AO World on Ebay. No wonder the margins are under pressure if you're discounting your brand or worse competing against yourself. 

Group Adjusted EBITDA was £8.5m (2014: £11.2m) is irrelevant here. With cash depleting to £37.9m from £48.7m (2014) despite a significant increase in sales from £384.9m (2014) to 23.8% to £476.7m. AO world band around that their UK NPS remains at its historically high level of over 80; AO.de higher still. Not only do the NPS figures contradict the need for a lower margin entity of eBay, but more show that the operating style is engrained by low price offering with hope of and add-on via warranties.

Exclusively (ha ha), what was is missed, is AO's absence of separating the sales between their own site and ebay. AO (perhaps cunningly) incorporate AO Website sales to include their eBay offerings. One would be wise to consider as 'via a third party' offering, as margins are impacted a further 1-3.6% average and still include their name plate 'free delivery.' In essence, explaining the margins and decrease by 1.1 percentage points can be explained simply! 

Some analysts that were bemused by my statement about "well it depends on what UK portal AO are selling the most through as this will significantly impact on margins." When this was raised at a lunch in January it was surprising to see the limited physical research of the company's offerings. 

Sales of UK Website sales are without a doubt up 35% ish to near £381.5m from £287.1m (2014). The question is, if you're already one of the cheapest offerings, why cannibalising your margins by a further 3.5% by competing against yourself on ebay (assuming fees etc...) and that excludes additional discounts.

Not only is there an issue with paying third party commissions, but more importantly pricing. So to keep the matter live its wise to compare the offerings, there is "sometimes" a further discount applied to AO's products on eBay. a example being below from today! 

Samsung offering by AO.com UE58H5200 Price £549

Samsung offering via eBay UE58H5200 Price 529

Admittedly a lot of prices are similar or the same but without a doubt there are additional discounts applied on some items as above near 3.6% percent in addition to site costs and paypal etc..etc... The electronic offering does not bode well for warranty sales either, as they are easily dismissed by the purchasers where secondary/follow up 'attempts' to insure ones purchase are limited. 

See the financial reviews some items added in bold italics to grasp the issue. 

Financial Review

Revenue

For the year ended 31 March 2015 total Group revenue increased by 23.8% to £476.7m (2014: £384.9m) despite the impact of slower than anticipated year-on-year sales growth experienced in our final quarter as we didn't experience the benefit from our heightened publicity surrounding our IPO as we had in the previous year.

Growth achieved during the year was polarised towards our AO Websites which experienced a strong increase of 32.9% to £381.5m (2014: £287.1m).  This was driven by the continued migration of consumers to the online channel as our commitment to exceptional levels of customer service continues to stimulate repeat business and attract new customers. The introduction of the AV category, broadening our product range added to this growth. Sales from our German website, AO.de, contributed £5.8m to our revenue.  AO Website Sales (which includes AO.com, AO.de and AO branded eBay shops) now account for 81.3% of total Group revenue (2014: 74.6%).

Year ended (£m)	31 March 2015				31 March 2014		Change
	UK	Europe	Total		UK	Total	UK	Total
AO Website Sales	381.5	5.8	387.4		287.1	287.1	32.9%	34.9%
Third-party Website Sales	70.3	-	70.3		79.3	79.3	-11.4%	-11.4%
Third-party Logistics Services	19.0	-	19.0		18.5	18.5	2.8%	2.9%
Revenue	470.8	5.8	476.7		384.9	384.9	22.3%	23.8%

During the reporting period, the total number of completed orders from AO Website Sales and Third-Party Website Sales increased by 26.4% to 1,348k (2014: 1,066k) and products per order increased slightly.

In the absence of further drivers/sales increases and margin improvements, its wise to consider AO world valued at around 125-135 pence, assuming some common-sense. 

Atb Fraser (more later)

Disclaimer.