Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

AO World Plc is having its own Brexit moment. And like the U.K., the fallout may merely be delayed.

Underlying profits in for the U.K.-based online seller of home appliances are pulling away. Domestic sales, which generate the majority of group revenue, rose 19 percent to 295.1 million pounds ($367.1 million) in the six months to Sept. 30, but Ebitda more than doubled to 13.1 million pounds, the company said Tuesday.

Spin Cycle
AO's valuation on an enterprise value to forecast sales basis is powering ahead of its main rival
Source: Bloomberg Intelligence

Europe's a different story. There, Ebitda losses widened to 11.6 million pounds, even as revenue climbed to 29.6 million pounds.

The U.K. performance is commendable. Indeed, Numis, broker to AO, increased its forecast of full-year U.K. Ebitda by 18 percent to 27 million pounds.

But in Britain, this might just be as good as it gets. If consumers' incomes are squeezed next year with inflation running ahead of wage growth, then big-ticket items, such as a new fridge or television might be one of the first categories to suffer.

And the company may also feel a pinch. Price increases are set to come through next year, as the post-Brexit slump in sterling feeds through to the cost of goods sourced from suppliers in Asia, and paid for in dollars.

John Roberts, AO chief executive, says the full extent of price increases won't be clear until after Christmas, but with electrical retailers' notoriously thin margins, they will be coming. That could also affect demand.

Meanwhile, AO's European business remains challenging. Roberts expects Ebitda to break-even in 2020. That looks a tall task, given that full-year losses may worsen to 25.5 million pounds from a previous estimate of 21.5 million pounds, according to Numis.

Languishing
Shares in AO World have lost their sparkle since their debut in 2014
Source: Bloomberg

The company's shares have had a rollercoaster ride since its 1.2 billion-pound debut in February 2014. The brief increase in the price on Tuesday soon faded, and in any case was a drop in the ocean compared to the size of the decline since their initial listing.

AO's enterprise value is trading at 0.95 times forecast sales, more than double Dixons Carphone's 0.4 times. That looks as outsized as an American fridge, given that AO is still generating operating losses.

The company says it's investing in its next phase of growth -- attempting to replicate its U.K. business in Germany and the Netherlands. Investors need to believe that this will eventually feed through to increased profits and cash flow in the region. But even so, business in Europe is tiny compared to its home market, so it's hard to see how much that can offset any domestic deterioration. 

Some in Britain are longing for a soft Brexit. With AO's dependence on the U.K. consumer, it will be hoping that shoppers have a similar landing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net