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Forget AO World! Here’s my plan for making a million on the stock market instead

Many companies have tried to earn a living flogging white goods such as washing machines, cookers, tumble dryers and fridges, and brown/black/silver (depending on fashion) goods such as radios, TVs, computers and music centres.  

Retailers in the area come and go, but mostly go. And the big problem is bigger-ticket items like that have become commoditised over the last 30 or so years. Have you ever looked back and realised you just paid around the same price for your new appliance you paid three decades ago for one?

Built to fail?

It used to be that big appliances were built to last, and there was a whole industry dedicated to service and repair so the equipment could keep running for years. The ticket price used to justify the maintenance activity because repairing was often more economical than replacing the item.

Those days are gone. Now, a repair will often cost more than the value of a new appliance. So the servicing industry has declined and most faulty appliances end up at the recycling centre.

But people have to dispose of their appliances much sooner than they used to. Today, it seems many appliances are built to fail rather than being built to last. They’ve been changed into commodity items for using up and replacing while being sold for a price point much lower than they used to.

That’s bad news for those who aim to retail them. Sure, they get more repeat business, but the profit margins are so low  its hardly worth going to all the effort to sell appliances in the first place. I think that’s true for traditional bricks-and-mortar appliance merchants and for online operations such as AO World (LSE: AO), which delivered its full-year results report today.

Dire figures

The figures are grim. Although revenue grew by just over 13% during the trading year to 31 March compared to the previous year, the diluted loss per share rose almost 30% to just under 4p per share.

A glance at the cash flow statement reveals just how strained the company’s activities are. Cash used in operations rose to £34.5m, up from £15.4m the year before, much of the money going into inventories and receivables. But even if you strip out movements in working capital, AO lost £3.6m from operations, up from a loss of £2.9m the year before. Whichever way you look at it, it’s losing money instead of making it.

But this problem isn’t new. In five years as a public limited company, the firm has consistently lost money despite increasing sales and revenue. So I’d avoid the company’s shares.

Instead, my plan for making a million on the stock market would involve looking for well-diversified gains from investing in a basket of solid, profitable, dividend-growing companies. Or by putting money into a share-backed fund such as a low-cost index tracker following the fortunes of an index like the FTSE 100 and others.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.