The AO World (LSE: AO) share price has fallen by almost 40% this week, after the online electrical retailer launched a £40m cash call to shore up its finances.
This week’s drop means that AO shares have fallen by 80% over the last 12 months. The stock’s collapse is a bitter blow for shareholders who bought into the AO story when the shares were trading at pandemic highs.
However, I’m wondering if AO’s new focus on lean, UK-only growth may have created a buying opportunity. Should I consider adding this stock to my Stocks and Shares ISA as a turnaround play?
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Why is AO raising cash?
A newspaper report last weekend flagged up the risk that AO might need to raise cash to strengthen its financial position with trade suppliers.
The shares tanked on Monday, but by Wednesday, we had the news — AO was going to raise £40m by selling new shares at 43p.
A fundraising like this is never ideal for existing shareholders, but I think it’s a sensible decision.
Like most electrical retailers, AO is dependent on having a good credit rating with its suppliers. This allows AO to sell much of its stock before it pays for it.
If this credit relationship broke down, AO could find itself unable to buy stock in sufficient quantities. That could be disastrous for the business.
Updated growth strategy
AO had already confirmed plans to close its loss-making German operations in June. This week we’ve got more detail on the company’s updated strategy for its core UK business.
Founder and chief executive John Roberts plans to fine tune AO’s product range by expanding into some new product lines, while discontinuing others. The company also expects to make improvements to its operations in order to cut costs.
Overall, AO expects to achieve £25m of savings by March 2025. That’s equivalent to nearly 10% of last year’s operating costs, so it’s a worthwhile saving in my view.
Will AO turn a profit next year?
AO reported a record £18m profit in 2020/21, thanks to a surge in online shopping during the pandemic. But apart from this one exceptional year, AO has only reported a profit on three other occasions in its 11 years as a listed company.
I’ve often been critical of AO’s lack of profitability, suggesting that it’s too small to compete with larger rivals such as Currys and Amazon. However, I’m impressed by AO’s new focus on costs and UK growth. I think this could finally see the company become a consistently profitable business.
AO’s financial results for the year to 31 March have been delayed this year due to its strategic review. However, broker forecasts suggest a loss is likely for 2021/22 and 2022/23.
Although I’m more optimistic about AO, I’m not ready to buy the shares just yet. I want to get a clearer picture of the company’s financial position and its current performance before I make a decision. For now, AO stays on my watch list.
