AO.com owner AO World is raising its profit forecast as its strategy of simplifying the business and trading more efficiently is producing results faster than expected. The pureplay electricals retailer says it has delivered faster than expected in reducing its costs, and profit margins have improved as a result.
It is now raising its profit forecast and says it expects to see adjusted earnings before income, tax and one-off costs (EBITDA) come in at between £37.5mn and £45mn in the current year. This is the second raised forecast in two months; in January it raised expectations to between £30m and £40m from between £20m and £30m previously.
“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,” says AO World in a trading update today. “The steps we have taken to simplify the business and become more efficient have outperformed expectations and been delivered quicker than we expected. Mobile RPI price increases have also been slightly higher than our prudent forecast.”
The increases follow a strategy of more profitable sales and cost reductions under the leadership of returning founder John Roberts. In November, the retailer said it was taking a “laser focus” to profits and cash when selling – deciding to continue to operate only profitable sales channels and to sell products only at a profit. In accordance with that strategy it has closed its German business – after digital marketing costs in the market continued to rise even as shoppers returned in-store to buy – ended a trial with Tesco and closed its housebuilding sector business. It charges for delivery on all of its orders and has cut back on warehousing space.
But while profitability has increased sales have tended to be lower. In November it reported first half revenues of £546m – 17% lower than a year earlier – while that trend continued in its January third-quarter statement.