Online musical instruments retailer Gear4music (G4M:AIM) remains ‘confident’ in the enduring consumer demand for its products and is targeting a return to ‘stronger profitable growth’ after pulling levers to protect margins and cut costs.

However, shares in the web-based drum kits-to-pianos seller crashed 8.3% lower to 110p after it reported wider losses for the half to 30 September 2023 and moderated full-year sales guidance to reflect a ‘continuing challenging retail environment, particularly in our European markets’.

SALES GUIDANCE CUT

Thanks to cost cutting and improved gross margins, the pianos-to-saxophones seller stuck with its profit expectations for the year to March 2024, with the consensus calling for adjusted pre-tax profits of £1.2 million.

But with the cost-of-living crisis dampening consumer demand and due to ‘actions taken to prioritise profits over growth’, Gear4music has moderated its full year sales forecast to £144 million, more than 10% below the £161.7 million called for by consensus and significantly behind the £152 million generated last year.

Continuing macro-economic uncertainties have impacted the consumer in the UK and across Europe, bemoaned the company, as first half results revealed a 6% drop in total revenues to £62.6 million amid a 15% plunge in European and Rest of World sales to £26.1 million, although UK sales improved by 3% to £36.5 million.

Pre-tax losses widened from £1 million to more than £1.9 million after higher finance charges caused by rising interest rates, so investors were relieved to see a £3.7 million year-on-year reduction in net debt to £18.1 million.

WHAT DID THE CEO SAY?

Chief executive Andrew Wass was pleased that his charge made ‘good progress during the period against our strategic objectives of increasing gross margins, reducing our cost base, and further enhancing our customer proposition with the launch of our Second-Hand system in Europe.’

Consumer demand has ‘remained subdued this year due to the weaker environment’, warned Wass, but he stressed the ‘decisive actions we have taken will ensure the business can return to stronger profitable growth by the next financial year, as we leverage efficiencies driven by AI, build upon our platform for growth, and diversify our channels to market.’

He added: ‘We are well prepared for our seasonal peak trading period with a range of recently-developed great value music products, and we look forward to providing a further trading update after Christmas on the 18 January 2024.’

BROKER VIEWS

Sticking with its ‘buy’ recommendation on Gear4music, Singer Capital Markets commented: ‘Spend on discretionary categories such as Gear4music’s is currently impacted by the cost-of-living crisis and rising mortgage costs but this may not continue indefinitely and could ease as real incomes start to recover and as the rate cycle peaks out.’

The broker insisted Gear4music now looks ‘well placed to navigate these near term headwinds and achieve profitable future growth, irrespective of the prevailing conditions.’

Progressive Equity Research said the results ‘clearly underline’ the shift in the business model laid out previously by the group. ‘With a clear focus on protecting profitability, Gear4music has been rebuilding gross margins and delivering a programme of cost savings to mitigate the impact of a weak consumer environment, most notably in Europe, and lower top-line revenues.’

LEARN ABOUT GEAR4MUSIC

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account.