European downturn puts Gear4music out of tune

Gear4music (G4M) struck the wrong chord with investors as it revealed steep drops in revenue and operating profit in its half-year results to 30 September. While the online musical instrument and equipment retailer’s headline results were in line with last month’s market update, it is now trading below consensus market expectations.

It was always going to be a struggle against lockdown comparatives. Gear4music’s revenues were up by a third in the 2021 fiscal year as stay-at-home restrictions led to a boom in music-related purchases. The group’s online business model fared well against the pandemic’s e-commerce trend. It is not, then, a surprise to see performance fall back in the half-year results as economies reopen. Revenue is still up on pre-pandemic figures. 

But the results also reveal that the group is struggling mightily with the post-Brexit trading environment. While UK revenues remained steady, Europe and ROW (rest of world) sales plunged by 17 per cent. Management said this was driven by “ongoing disruption caused to supply chains and order-fulfilment post-Brexit”. New distribution centres in Spain and Ireland struggled with getting up to speed, with logistical issues exacerbated by supply-chain headwinds.

Peel Hunt reduced its Ebitda forecasts by £2m in FY2022 and by £3m in both FY2023 and FY2024. The broker now expects adjusted EPS of 22.7p for this fiscal year, a steep drop from 2021’s 60.3p. Improving the European trading situation and cracking the supply-chain code is imperative: a solid inventories position and management predictions of a resolution in the second half looks positive on this front. Hold.

Last IC view: Hold, 747p, 19 Nov 2020