AO World was the London market’s top-performing large cap last year with a gain of 339 per cent. Not that John Roberts will be too bothered. The electrical retailer’s founder and chief executive was quoted in 2015 as saying that he never looks at the share price and “couldn’t give a shit” about the views of prospective investors.
A trading update on Tuesday from AO followed the now-familiar pattern for online retail. UK sales jumped 67 per cent to £457m in the final three months of 2020 as forced closures of rivals meant record-breaking peak trading over Black Friday and Christmas. Germany, previously a money pit, reached underlying earnings profitability in the quarter as sales grew 77 per cent to €74m.
All this success comes at a price, however. AO doubled warehouse capacity and expanded its delivery fleet. Tuesday’s update also flagged cancellations of extended warranties and long-term mobile contracts, though the company won’t give detail on how much they contribute, as well some Covid-related operating costs. Untangling it all requires the help of broker Peel Hunt, which cut its forecast for adjusted pre-tax profit for the year to March 2021 from £51m to £43.4m.
A 14 per cent profit downgrade at the end of an exceptional year? It’s somewhat at odds with investors’ belief that AO will exit the pandemic delivering improved profitability on rapidly slowing sales growth. Mr Roberts’ return to the CEO role at the start of 2019 helped the group shake a reputation of jam tomorrow that had hung around since its 2014 float — but cost-cutting may not come naturally to a man whose guiding principle for business decisions is whether they would make his mother proud.
Recent AO experiments have included white goods rental, so tenants can avoid the sky-high APRs charged by the likes of Brighthouse, and full-service installations for corporate customers while the pandemic shuttered their usual distributors. A spirit of generosity also extends to AO’s bonus scheme, introduced between lockdowns last year, which could reward staff with a lump sum worth up to 18 months’ salary by 2025 based on share price performance alone.
All this missionary zeal loops back to Mr Roberts’ belief that a well-installed fridge makes a friend for life. New customers will be hooked after “their first experience of the AO Way”, he says. New investments are to “cement that change by raising the bar on our service and proposition in ways that only AO can deliver”.
He may be right. But with AO now valued at more than 50 times the downgraded 2021 earnings forecasts, it’ll be tough to keep both customers and investors happy — and it’s hard to shake an impression that he much prefers the former.
Premier Foods: ain’t she sweet
Breaking America, as any music manager will tell you, is no mean feat. After The Beatles’ “British invasion”, many popular UK acts, notably Britpop bands such as Blur and Pulp, have struggled to repeat the trick, writes Ian Smith.
Mr Kipling, another product of the 60s, is having a fresh crack at it. After previous flirtations with selling the cake range — known for its Cherry Bakewells and French Fancies — to American consumers, Premier Foods has signed a distribution agreement with supplier Weston Foods. Canada-based Weston has 40 facilities across North America and ready-made relationships with big retailers.
Admittedly, it is Premier Foods’ home market that dictates its share price, and here extended lockdowns have fed demand. An update on Tuesday showed a 9 per cent year-on-year rise in group revenues for the three months to December 26 and another standout performance for Sharwood’s cooking sauces.
But the much smaller international segment, about 5 per cent of revenues, also merits a mention after a rough couple of years. A move to put more boots on the ground seems to be working. Overseas turnover rose 43 per cent in constant-currency terms in the period, as US and Australian consumers proved partial to curry sauces, while the latter also gobbled down Mr Kipling and Cadbury branded cakes. Premier also launched Nissin’s Soba noodle blocks in Ireland: another step in its strategic partnership with the Japanese group, its largest shareholder.
When that deal was done four years ago, some shareholders were aggrieved that Premier did not accept a 65p-per-share proposed bid from US group McCormick instead. Now the share price is above £1. Long-term shareholders who were sniffy about the Nissin deal, and Premier’s own growth prospects, look short-termist.
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That might be uncharitable. The remarkable run in the shares, more than triple where they were before the Nissin announcement, is undoubtedly a response to an unforeseeable crisis. All the same, the surge in cash flow has changed the business, allowing Premier to pay down some debt. Net borrowings should be back below two times ebitda by the end of the year. Rocketing online sales bode well for the stock, given the tendency for repeat purchases.
Post-crisis revenue figures will be judged against near-impossible comparators, while Premier’s shares have been bid up to 10 times future earnings. Other sources of growth will become more important: whether Americans swallow British stodge more readily than 90s indie music will provide one signal. A market test in Canada for Mr Kipling “performed well”, management said. Not quite “exceedingly good”.
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