Gear4Music’s (G4M) trading performance has been constrained, not only by the well-documented challenges faced by UK retailers, but also structural changes in demand for musical instruments (note: this year's chapter 11 proceedings for US guitar maker Gibson). So management has decided to pursue a volume trade, sacrificing (short-term) margins in pursuit of market share.
The group has been competing on price, investing in its operations and riding out the wave of consolidation. But the main point is that inventory is up by nearly two-thirds on the 2017 half-year. It suggests that management expects further increases in the top line, but it also locks in extra capital. The effect on the gross margin has not been pretty – down 230 basis points to 22.7 per cent in these numbers, following a 160 basis point contraction in the previous full year. But management expects the trend to reverse in the second half of the year, buoyed by the start of the school year and Christmas. It's worth noting that second-half margins increased by 60 basis points and 130 basis points respectively over the past two accounting years.
Broker Peel Hunt is forecasting adjusted pre-tax profits of £2.6m in February 2019, giving EPS of 10.3p (£1.5m and 6.7p in 2018).
| GEAR4MUSIC (G4M) | ||||
| ORD PRICE: | 550p | MARKET VALUE: | £115m | |
| TOUCH: | 540-560p | 12-MONTH HIGH: | 886p | LOW: 455p |
| DIVIDEND YIELD: | nil | PE RATIO: | 112 | |
| NET ASSET VALUE: | 88p | NET DEBT: | 41% | |
| Half-year to 31 Aug | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2017 | 31.2 | -0.07 | na | nil |
| 2018 | 42.5 | -0.55 | -1.80 | nil |
| % change | +36 | - | - | - |
| Ex-div: | na | |||
| Payment: | na | |||
