Gear4Music’s (G4M) historical sacrifice of margins to capture market share created problems for the group in January of this year. At the time, shares in the online musical retailer plunged after it warned on profits – noting that it had endured capacity constraints in the lead-up to Christmas, which limited sales growth and failed to compensate for lower margins.
Management is now focusing on repairing these margins, although this will somewhat constrain top-line growth. For the 13 months to March 2019, the gross margin declined by 260 basis points. But the group is allocating more of its marketing budget to higher-margin products, including its own-brand offering. While this area currently accounts for around a quarter of overall sales, growth here is outstripping other product lines.
A rise in marketing costs from £6.7m to £9.8m during the respective period contributed to a 47 per cent increase in total administrative expenses to £27m. In turn, Gear4Music swung to a small pre-tax loss.
Turning to the balance sheet, inventories ticked up slightly – stemming from the group’s tendency to buy items when opportunities arise. That said, stock as a percentage of revenues still declined overall.
Broker Panmure Gordon forecasts adjusted EPS of 3.5p for FY2020, against a loss per share of 0.8p in FY2019.
| GEAR4MUSIC (G4M) | ||||
| ORD PRICE: | 213p | MARKET VALUE: | £44m | |
| TOUCH: | 210-215p | 12-MONTH HIGH: | 733p | LOW: 158p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 90p | NET DEBT: | 40% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 24.2 | -0.8 | -5.4 | nil |
| 2016 | 35.5 | neg | -0.2 | nil |
| 2017 | 56.1 | 2.6 | 11.5 | nil |
| 2018 | 80.1 | 1.5 | 6.7 | nil |
| 2019 | 118 | -0.6 | -0.8 | nil |
| % change | +48 | - | - | - |
| Ex-div: | na | |||
| Payment: | na | |||
| *The current period lasted 13 months, prior years ended 28 February | ||||
