Interims justify FY2019 profit expectations
Gear4music sells own-brand musical instruments and music equipment alongside premium third-party brands including Fender, Yamaha and Roland, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and, more recently, into the Rest of the World.Their interim results were released this morning and reconfirmed both underlying sales growth for the business and a view that full year profits will meet expectations. The company’s second half includes the all-important Christmas period. Moreover, international sales appear set to nudge ahead of UK in the six months. Clearly, sales trends remain strongly positive, which should benefit both future profit growth and valuation.
Despite a half-year fall in EBITDA to £652k from £717k a year before, Gear4music reaffirmed FY2019 expectations. This optimism about full year profitability is driven by recent revenue growth and a gross margin drop contained to only c. 100 basis points. Moreover, the company has made ongoing operational and commercial progress. We expect FY2019 H2 margins to be 25.3% compared with 22.7% in H1 and 25.6% in the same period last year.
Gear4music’s commitment to marketing spend also augurs well for sales growth momentum. As a portion of sales it was 8.2% in the half, slightly higher than the 8.1% a year earlier. Labour costs increased by 31% to £3.75m. However, they decreased as a portion of sales from 9.2% to 8.8% - this is consistent with an overall commitment to cost control. Importantly, both marketing and labour spend drive business.
Encouragingly, the group generates its revenue in mature markets – where economic risks are relatively low – and maintains a strong growth momentum. Its ambition to be a leading global musical instruments retailer appears justified by today’s results and update.
Based on our full year revenue and EBITDA forecasts, which we updated at the time of 7th September trading update, Gear4music trades on a 1.0x EV/sales ratio which looks undemanding.
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