Frasers holds up thanks to acquisitions and AO still enjoying a sweet spot

“A sea of red greeted investors on Thursday with equities falling across Europe and Asia, mirroring the performance on Wall Street last night. Markets didn’t like the US Federal Reserve’s latest comments where it said there were still risks to economic recovery,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fell 0.9% to 6,057 with miners, financials, telecoms and energy the worst performing sectors. It was certainly a risk-off day, with investors shifting their focus to more defensive areas such as utilities and healthcare.

“In Germany, the DAX fell by 0.8% and in Hong Kong the Hang Seng declined by 1.4%.

“Gold found some support in the wake of the equities sell-off with the precious metal nudging up to $1,934 per ounce."

Frasers

“If you exclude Frasers’ non-UK and European retail operations, its full-year results weren’t that bad considering they included a few months of lockdown disruption. However, sales growth has principally been driven by acquisitions which begs the question of how Frasers would fare in a year when it can’t find anything to buy.

“Unsurprisingly the online channel is getting a greater focus with a £100 million-plus investment. While there is no doubting that online is the way forward for retailers, one must question if Frasers’ consumers would load their virtual basket with as many items as they would browsing a physical store.

“Frasers’ pile ‘em high, sell ‘em cheap model worked wonders in the old world of retail, but scrolling through pages of items on a website can become tiresome unless the customer is in the right mindset to want to do a sizeable shop. That might explain why Frasers is paying more attention to the premium market.

“This strategy is likely to improve gross margins as it shifts towards the sale of higher-priced products, as well as opening new flagship stores and taking existing stores upmarket in order to make them more appealing to third party brands, notably Nike and Adidas.”

AO

“It’s been quite a year for AO thanks to strong demand for fridges, freezers and other electrical items during lockdown. The sales momentum appears to have continued with AO issuing yet another bullish trading update. That’s given its share price another leg up, meaning the stock has risen 135% year-to-date.

“While encouraging to see rapid revenue growth, profit is what really matters and there is no mention of it in the latest update. In July, full-year results to the end of March showed that the business still wasn’t making money. It reported a £3.8 million operating loss, albeit narrowed from the previous year’s £13 million loss.

“This year’s share price rally would suggest the market has become more confident about AO’s ability to start generating a profit at the group level.

“Its proposition is good: selling a wide range of items online and offering superior levels of customer service. However, this is still a highly competitive market and AO cannot afford to undercut rivals by a large amount.

“Obtaining commission from a partner selling insurance is an important driver of earnings for AO yet this is a sensitive area. Customers may have been happy with the ordering and delivery service but their opinion of the brand, and therefore willingness to buy again, can easily be soured by AO’s representatives giving the hard sell on warranties.

“AO faces the hard test later this year if its 2020 sales boom has been a one-off driven by people spending a lot of time at home and wanting to ensure their mod cons are up to scratch. As people return to offices to work and spend less time at home, one has to wonder if sales growth starts to moderate.”

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