Share of the week: Recovery begins

AO World has struggled ever since a shock 2015 profits warning collapsed the electricals retailer's market value just one year after its IPO. But the loss-making group is slowly making operational progress and, after avoiding the bullets ricocheting from the Brexit fall-out, is up 11%, making it one of this week's top FTSE 350 performers.

Of course, the economic risk is nowhere near over and the consumer dependent group is heavily exposed. However, we've just heard that AO branded UK sales jumped 29% in the opening quarter, with total revenue surging 25%. This beat City expectations and marks an acceleration in growth after a softer previous closing quarter.

The firm, whose ad campaign changed iconic lyrics by American punk rockers The Ramones to "A! O! Let's Go!", has seen momentum has continued in the UK, with progress in gross margin and marketing costs. Investment here will slow the top-line run-rate in the second half of the year, though. AO also remains on track to launch its UK computing and German audio-visual services later this year.

"We are mindful of recent economic uncertainty following Brexit and its potential effect on consumer confidence and foreign exchange exposure of our suppliers but, despite this, our expectations for the UK business, over the whole financial year, remain unchanged," outgoing chairman Richard Rose said this week. As previously announced, Geoff Cooper took his job after Thursday's AGM.

Euro-based revenue has more-than doubled on the year and AO's European gross margin is growing with better control of costs. With everything ticking along as planned, AO has started deliveries from its new Regional Distribution Centre in Bergheim, Germany, which should be fully up and running by the end of the first half. We'll get a more detailed low-down in November's results.

Of course, there is still room for Brexit to dent consumer confidence or suppliers' currency exposure, but full-year forecasts have been left alone. Numis Securities analyst Andrew Wade reckons revenue will jump by a fifth to £719.5 million in the year to March 2017, although he still expects a £6.3 million loss. This should swing to a £6.1 million profit in 2018, giving earnings per share of 1.1p.

"In our view, AO is firmly back on the front foot in the UK, taking significant market share and driving efficiencies, and we remain confident that the factors weighing on European contribution (product margin and drop densities) will come in time," says Wade. "We retain our positive stance, confident that AO's leading customer proposition can support long term profitable growth in the UK and internationally."

Last year's major profits warning wiped two-thirds off the group's market value in five months. Gains made at the beginning of 2016 have been largely unwound, although this week's double-digit rally breaks the shares through the bearish trading channel established at the beginning of last month to an intra-day high of 150p. Wade reckons the shares are worth two-thirds more at 250p, although this is still a way below AO's 285p IPO price. There's a lot of work still to do, but it's on the right track.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.