Is Europe the answer for this retail laggard?

Apart from a brief honeymoon period following its over-subscribed flotation in 2014, AO World (AO.) shares have been a tale of frustration for investors.

They are currently near to a record low as the market struggles to buy into AO World’s European expansion story, whilst there are also worries about the electrical retailer’s prospects in an ultra-competitive UK market.

Today the company offered some encouragement by stating that it had reached an “inflection point” in the financial performance of its loss-making European operations, where it is confident of achieving further progress.

As well as revenues growth of 55% in Germany and the Netherlands in the year to March, AO World said UK revenues were expected to be in the region of £680 million. That’s a decent 8% rise in tough conditions, but still represents a decline from the 11.4% improvement seen in the third quarter.

AO World pointed out that it had resorted to less promotional activity during the fourth quarter than in the previous year.

Following today’s update, Numis Securities is now expecting a full-year underlying loss of £3.5 million rather than the £2.5 million forecast previously.

However, Numis analyst Andrew Wade still retains his positive stance on the stock, which he believes has the potential to reach 200p.

He said: “We see considerable value in the EU expansion and continue to believe the UK operation is largely a victim of cyclical pressures.”

Wade described the UK operation as a “very good business”, adding that the European operation is building “clear momentum”.

Peel Hunt recently included AO World in its list of value shares for 2018. They said that the performance of the retailer in Germany and the Netherlands offered proof that the AO concept can work overseas.

Analyst James Lockyer said: “The progress gives us confidence it can replicate the model further. The more countries on board, the less risky the next one becomes.”

AO started selling domestic appliances in Germany in October 2014 before its February 2016 launch in the Netherlands.

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