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Gear4Music tuned up for growth

The group's investment has delivered significant revenue growth while cutting deeply into profits
May 15, 2018

Gear4Music (G4M) touted the year to February 2018 as one of investment in the business and it shows. The musical equipment retailer increased headcount by 49 per cent and poured money into the e-commerce platform and marketing. This led to a marked step-up in revenues, but profits were constricted due to an accompanying 47 per cent increase in admin costs, combined with a 160 basis point contraction in the gross margin – largely the result of currency-linked cost-push inflation. However, analysts are forecasting a return to profit growth in 2019 as the recent investment begins to deliver. Peel Hunt is expecting adjusted pre-tax profit of £2.8m, giving EPS of 11.2p (up from £1.5m and 6.7p in 2018).

IC TIP: Buy at 717p

Sales in the international division were up 69 per cent to £35.8m, partly thanks to the development of dedicated European distribution centres. These needed to be stocked, which, combined with a 20 per cent increase in the number of products available online, resulted in a 46 per cent increase in inventory, broadly in-line with revenue growth.The growth strategy is largely predicated on the development of its data platform and e-commerce offering. Meaningful progress was made in FY2018, with visits to the group’s website up by a third, and average order value also on the rise. 

GEAR4MUSIC (G4M)   
ORD PRICE:717pMARKET VALUE:£150m
TOUCH:710-724p12-MONTH HIGH:886pLOW: 575p
DIVIDEND YIELD:NILPE RATIO:107
NET ASSET VALUE:90pNET CASH:£3.5m
Year to 28 FebTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2014*17.7-0.4nana
201524.2-0.8-5.4nil
201635.5neg-0.2nil
201756.12.611.5nil
201880.11.56.7nil
% change+43-42-42-
Ex-div:na   
Payment:na   
*Pre-IPO figures