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Gear4Music strikes confident note as margins start to recover

Published: 21:16 16 Oct 2018 AEDT

Violin
The margin declined as the company fiddled with the product mix

Online music gear retailer Gear4Music (Holdings) PLC has seen “very strong revenue growth” in the second half of the current financial year.

Revenue in the six months to the end of August rose 36% to £42.52mln from £31.22mln the year before, with sales to the UK up 34% year-on-year while international sales were up 36%.

READ: Gear4Music reports first-half sales jump as customer numbers surge

The gross margin, however, fell to 22.7% from 25.0% in the first half of the previous financial year, while the average order value declined 3.2% to £127.48 from £131.66, feeding through to a dip in underlying earnings (EBITDA) to £652,000 from £717,000 the year before.

Gear4Music said the decline in the gross margin was part of a strategy to gain market share of the branded products segment during a highly competitive period. Encouragingly, the group said there are early signs that the margin will increase in the second half of the year.

Peel Hunt, which is a joint broker to the company, said the gross margin was down a lot more than it had been expecting – 2.3 percentage points versus the broker’s forecast of 2.1 points. The broker said the decline was due, to a degree, to the switch in the mix towards branded products away from own-label.

The loss before tax widened to £545,000 from £69,000 the year before, reflecting an increase in administrative expenses to £9.64mln from £7.81mln the previous year.

Total unique website visitors in the first half of the current financial year soared 41% to 10.04mln from 7.10mln the year before, with the conversion rate – the percentage of site visitors who actually buy something before leaving the site – rising to 3.22% from 2.84% the year before.

The number of active customers – musos who have bought a bit of kit in the last 12 months – rose 9% to 789,160 from 725,594 a year earlier.

Trading in the second half of the year encompasses the Christmas trading period and “is very significant to our results for the year as a whole”, the company said.

Given recent revenue growth and improving gross margin, coupled with on-going operational and commercial progress, the board considers the group to be well-placed to deliver EBITDA for the full-year in-line with expectations.

“As the market for musical instruments and music equipment continues to transform and consolidate, we have strengthened our position as the UK's leading retailer within the market, having invested into our customer proposition, market leading e-commerce platform, and scalable infrastructure,” said the chief executive officer, Andrew Wass (not Was).

Mark Brumby at Langton Capital noted the firm had made a loss per share of 1.8p, versus flat earnings in the same period of last year.

“The business is clearly seasonal but the market is expecting a rebound to 10.4p for the full year implying 12.2p in H2 [second half of the fiscal year] compared with the 6.7p earned in H2 last year. This is looking a bit of a stretch. The group trades on an EPS multiple of about 50x,” Brumby observed.

Broker Peel Hunt said the company had delivered steady first-half numbers.

“Industry competitive forces seem to be quietening (a bit) and management has committed to a strong inventory buy, so we don’t see a repeat of the margin downside of H1, but we do see a strong top line showing, which overall means an unchanged forecast, and that is not what the shares were expecting,” Peel Hunt said.

“They [the shares] now trade on growth multiples for bricks and mortar stocks, not a rapidly expanding on line player: that is an opportunity not to be missed,” it added.

“Sales growth, however, has begun the half in rude health and whilst there are no numbers behind today’s statement, we expect that the pick up has been marked from H1’s 36%. It is relatively early days in the half, and there’s a part of us that wouldn’t want to get carried away before Christmas was in the bag. On the other hand, management has been aggressive with the buy, and has secured some highly attractive prices, so it is likely that the margin will stay robust in H2,” the broker said.

Shares in Gear4Music were up 3.6% at 500p in mid-morning trading.

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