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Gear4Music swings to loss but says tune is changing in new year

Underlying earnings fell 34% to £2.3mln even though sales grow 48% to £118.2mln

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While it is early in the piece, Gear4Music said “we are beginning to see positive trends establishing themselves”

Online music shop Gear4Music Holdings PLC (LON:G4M) said it had made “swift strategic and operational changes” to change the tune after slipping to a loss in its past financial year.

Even though the retailer had one extra month, as its year end was moved from 28 February to 31 March, helping sales grow 48% to £118.2mln, underlying earnings (EBITDA) fell 34% to £2.3mln.

READ: Gear4Music hits bum note as trading update implies lower full year earnings

At the statutory level, G4M reported a loss before tax of £0.6mln compared to a £1.5mln profit the previous time.

There was £5.3mln cash at hand at the year-end, up 51% over the past 13 months

G4M had warned of lower underlying profits in January and April due to operational and commercial issues, including its distribution centre in York reaching maximum capacity during the peak trading period between Black Friday and Christmas.

Wass up

Chief executive Andrew Wass hailed the strong revenue growth and significant market share gain throughout the year but acknowledged the internal issues the company had faced and the challenging external retail environment.

“In response we have undertaken a thorough review of all aspects of the business, and are confident that the swift strategic and operational changes being made will significantly reduce the risk of these issues reoccurring in the year ahead,” he said. 

While it is early in the current financial year, he said “we are beginning to see positive trends establishing themselves”.

Shares down

Shares in G4M were down 16% to 195p in early trading on Tuesday, before rallying to 217p by mid-afternoon.

Even though investors were prepared for a bum note thanks to the big warning earlier this year, Russ Mould at AJ Bell said the numbers were still disappointing, which was likely to be due to the pressure on gross margins, references to a highly competitive market and warning over weak consumer confidence.

“Gear4Music has grown rapidly, perhaps a little too fast. Arguably this raised expectations to unsustainable levels and some of the company’s recent issues relate to bumping up against capacity constraints," he said.

“Selling musical instruments and equipment over the internet seems a perfectly reasonable proposition but arguably the only barrier to entry is the strength of the company’s brand."

He said the business needs to avoid any repeats of the failure of its York distribution centre last Christmas.

“These struggles are a reminder that online retailers do not operate free of costs and actually have significant expenses around infrastructure, delivery and returns.

“Management say they are now ready for vital second half trading in the current financial year (encompassing the festive period) and they will have to be if the company is to get back on song.”

-- Adds broker comment --

Quick facts: Gear4Music PLC

Price: 196.55 GBX

AIM:G4M
Market: AIM
Market Cap: £41.17 m
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