Gear4Music (G4M) has been pursuing a strategy of cutting prices to capture market share in recent years. However, a lack of capacity to deal with the rapid rise in sales during the Christmas trading period of last year has forced the musical equipment retailer to warn that adjusted cash profits for the year to February 2019 are likely to be below the prior year's levels.
The group’s York distribution centre could not handle the volume of orders during the peak trading period between Black Friday and Christmas, constraining sales growth. Growth in revenues had been ahead of expectations – up 41 per cent in the four months to December – but the capacity trouble prevented it from compensating for lower gross margins.
Management is looking at ways to improve its distribution capacity to prevent a repeat this year and has said it is confident it will be able to bulk up by Autumn. Chief executive Andrew Wass noted this was likely to happen through expansion of the existing facilities, rather than by replacing them and incurring substantial attendant costs.
The group had owned the York distribution centre since before its initial public offering in 2015 and had previously said it had the capacity for business worth around £50m. It has since supplemented its UK facilities with distribution centres in Sweden - recently expanded to handle around £35-40m of business - and Germany - about the same size.
The market’s reaction has been unforgiving. Shares were down 49 per cent in early trading following the announcement, and analysts have cut forecasts. Peel Hunt downgraded its adjusted pre-tax profits forecast to £800,000 for FY2019, from £2.6m.
