Meaty share-price gains over the past fortnight meant the electrical retail giant grabbed back all ground lost during the cross-market, coronavirus-related selloff that kicked off in late February. Today’s further rise now takes it to its most expensive since the first days of January. It’s an extraordinary development given that AO World’s short-to-medium-term profits outlook has worsened considerably since the turn of 2020.
A reassuring release…
So why have share pickers piled in en masse again today? Well they’ve been buoyed by news that, despite the impact of lockdown measures and greater consumer caution following the Covid-19 outbreak, AO World has kept its guidance for the financial year to March unchanged.
Even more encouragingly, the small-cap says trading has remained robust since the close of the period. While demand across many product categories has declined more recently, AO World says it has “grown market share and seen increased demand and sales across all categories since the lockdown measures came into force.”
It’s clear the retailer’s internet-based model has enabled it to thrive during the lockdown period. It’s a quality that should allow AO World to perform better than many of its bricks and mortar competitors too. It comments that “we would expect the online market in electricals to maintain a higher share than prior to Covid-19.”
…but hold on!
Forgive my scepticism but I fear market makers have been getting a bit too giddy following this latest release. Sales of expensive home electricals, like televisions, games consoles and kitchen appliances, have boomed in recent weeks as Britons have prepared for lockdown. I fear though that sales of these items will begin to slump as a painful and prolonged global recession comes hurtling down the tracks.
The problems of Dixons Carphone during the period following the 2008/09 banking crisis illustrate what the likes of AO World might be facing. The group, variously known as DSG and Dixons Retail during that time, saw underlying profits tank by four-fifths in the 2009 fiscal year. They continued to struggle thereafter. Why? Nosediving shopper spending power allied with a landscape of intense competition.
A wise ISA buy?
We’re more than a decade down the line, but similar rounds of frantic, profits-crushing discounting may be required across the sector. There’s likely to be plenty of fresh blood on the floor. That’s because major operators such as Dixons, AO World, John Lewis, Argos and Amazon (to name just a handful) will go toe-to-toe in what will likely prove to be a rapidly-declining market.
It’s clear the coronavirus has hastened the adoption of e-commerce. But I doubt this will be enough to save AO World’s bacon. Today, the retailer trades on an elevated price-to-earnings (P/E) ratio of 53.8 times. It’s a reading that fails to reflect the approaching storm that’ll likely prompt a painful share price reversal. This is one stock I won’t be buying for my personal ISA.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. 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.