AO's sales rose by 11.4% to £1.27bn. Its core business, selling washing machines, fridges, small appliances and other electricals to consumers, grew by 9.5% to £911m. The company also said it gained market share in its main categories.
Adjusted pre-tax profit rose 16.1% to £50.5m. Statutory pre-tax profit also reached £50.5m because there were no adjusting items this year, unlike last year, when statutory profit was weighed down by one-off and non-cash items, including costs and impairments linked to musicMagpie.
Margins are still modest. AO's pre-tax profit margin was about 4%, meaning that for every £100 of sales it kept roughly £4 before tax. The company's medium-term target is 5%. That may sound small, but retail is a low-margin business. Selling large appliances online means paying for warehouses, vans, drivers, customer service and returns. A one-point gain in margin can make a large difference to profit.
Gross margin rose to 25.0% from 24.3%, which shows AO is not merely buying growth with discounts. Still, costs are rising. Warehousing costs and marketing both increased. The company has tried to offset wage inflation and other pressures with outsourcing, automation and tighter discipline.
From rescue work to returns
The company has spent recent years narrowing its focus. It exited Germany, stopped chasing unprofitable volume in parts of mobile, and bought musicMagpie, the used-electronics and recommerce business. That acquisition initially added complexity, but AO now says musicMagpie is profitable on an annualised run-rate basis after restructuring, closing its loss-making US operation and improving sourcing.
The balance sheet has improved sharply. AO ended March with net funds of £16.4m, compared with net debt of £35.9m a year earlier. Free cash flow rose to £66.4m, from £26.3m: that explains the proposed £20m return. AO already completed a £10.1m buyback during the year. The new plan is half special dividend and half buyback.
The price of progress
With AO's market capitalisation recently around £513m-£540m, the shares trade at roughly 0.4 times annual sales. On earnings, the picture is less obviously cheap. Basic earnings per share were 6.36p. At a share price in the low-to-mid 90p range, that implies a price-to-earnings ratio of about 15 times. On free cash flow, however, the valuation looks more generous: the £66.4m of free cash flow equals a double-digit yield on the recent market value. That is attractive only if the cash generation proves repeatable.
The market’s negative reaction is a reminder that shareholder returns do not automatically lift a share price. AO had already signalled strong trading, and its guidance for the new financial year is only in line with current expectations. The proposed £20m return is welcome, but the 3% fall suggests investors may have wanted either a larger upgrade, more evidence that margins can keep rising, or reassurance that cost pressures will not eat into the next stage of growth.
There are reasons for caution. AO still operates in a difficult UK retail market. Big-ticket electricals are partly necessary purchases, but consumers can delay upgrades when household budgets are tight. Wage costs, delivery costs and marketing costs remain a burden. The company also has large contract assets from product-protection plans and mobile commissions, which depend on estimates of future customer behaviour.
There are also reasons for guarded optimism. The mobile business is now profitable after better commercial terms and lower customer-acquisition costs. The recommerce operation gives AO a role in trade-ins, refurbishment and recycling, markets that may grow as consumers seek cheaper devices and regulators push circular-economy rules. Its in-house logistics and recycling operations give it more control than a pure online storefront would have.
