Gear4Music Holdings PLC (LON:G4M) shares plunged in early trading Friday after it warned its underlying earnings (EBITDA) for 2019 were now expected to be “slightly below” 2018 levels as capacity constraints held back sales growth.
In a trading update for the four months to 31 December, the online musical instruments retailer reported total sales growth of 41% year-on-year to £48.7mln, with UK and Rest of World sales rising 36% to £25.5mln and 47% to £23.2mln respectively.
READ: Gear4Music strikes confident note as margins start to recover
The group said the strong uptick in sales had been driven by “significant customer demand”, however sales growth in excess of its expectations had been held back by its distribution centre in York which reached maximum capacity during the firm’s peak trading period between Black Friday and Christmas.
While the period had seen an improvement in margins compared to the first half of the 2019 fiscal year, the capacity limitations prevented sales growth compensating for the lower gross margins.
As a result, Gear4Music said it now expected the 2019 fiscal year EBITDA to be “slightly below” 2018 levels.
Andrew Wass, the company’s chief executive, said the capacity issues had not “fully compensated for the lower product margins as we hoped” and that the firm was working on plans to expand its UK distribution capacity ahead of the peak trading period next year, adding that they were “confident” this could be achieved by Autumn 2019.
Wass added that the company expected the “high consumer demand and strong sales momentum” seen in its European locations to continue over the rest of the fiscal year as well as into the next.
“Our focus has been on gaining market share in what has been a highly competitive environment, and in support of this target and following a period of planned investment, margins during the Period began to return towards historical levels. We are confident of further improvements as we progress through FY20”.
The CEO also said the firm remained confident of “the continued long-term growth opportunity alongside an expectation of a return to increasing profitability”.
Shares were down 38.7% at 312.5p.
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