16 November 2021

Gear4music (Holdings) plc

Interim results for the six months ended 30 September 2021

Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its unaudited financial results for the six months ended 30 September 2021 ("the Period").

Highlights:

Commenting on the results, Andrew Wass, Chief Executive Officer said:

"I am pleased to report that following the exceptional period of trading during FY21, Group financial performance during FY22 H1 was in-line with the Board's expectations, retaining strong margins and achieving significantly improved profitability compared with the more comparable FY20 H1 trading period.

FY22 Q1 sales were stronger than expected, which provided the basis for the Board to upgrade its expectations on 22 June 2021. However, Brexit related supply chain challenges are persisting for longer than we had previously anticipated, and European Q3 sales to date have been slower than previously expected.  As a result, the Group is trading below FY22 consensus market expectations*, with the Board now expecting that FY22 EBITDA will be not less than £12m.

As our new hubs in Ireland and Spain scale-up to build upon our existing European infrastructure, we are confident that the remaining Brexit related challenges will be resolved by FY22 Q4 and our European customer proposition will be significantly strengthened.

With the acquisition of AV Distribution Ltd due to complete in December 2021 followed by the launch of AV.com in January 2022, which will significantly increase our addressable market size, alongside multiple planned upgrades to our E-Commerce platform during FY23, we remain confident in our profitable growth strategy."

* Gear4music believes that consensus market expectations for the year ending 31 March 2022 (i) prior to release of this announcement are currently revenue of £156.6 million and EBITDA of £14 million; and (ii) before 22 June 2021 were revenues of £152.3 million and EBITDA of £11.5 million.

Gear4music will issue a trading statement on 20 January 2022.

Investor presentation

Andrew Wass, Chief Executive Officer, and Chris Scott, Chief Financial Officer, will provide a live presentation relating to the results on 17 November 2021 at 4.30pm GMT.

The presentation is open to all existing and potential shareholders. Investors can sign up to Investor Meet Company for free and add themselves to the meeting via: https://www.investormeetcompany.com/gear4music-holdings-plc/register-investor.

Investors who already follow Gear4music on the Investor Meet Company platform will be automatically invited.

Enquiries:

About Gear4music.com

Operating from a Head Office in York, Distribution Centres in York, Sweden, Germany, Ireland & Spain, and showrooms in York, Sweden & Germany, the Group 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 the Rest of the World.

Having developed its own e-commerce platform, with multilingual, multicurrency websites delivering to over 190 countries, the Group continues to build its overseas presence.

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"). Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

Business Review

The business reports the Group's results for the six months to 30 September 2021, and updates on the strategic and commercial progress made in the Period.

Strategy

As previously reported our FY21 results were exceptional, as store-based competitors were adversely impacted by COVID lockdowns, and e-commerce transactions significantly increased as people took up activities in which to participate whilst spending more time at home. Gross margins also increased as prices were managed relative to stock levels, and marketing returns particularly in FY21 Q1 were strong as marketing was curtailed to manage already high levels of demand, and we transformed our distribution centres to be COVID-secure.

The UK leaving the EU on 1 January 2021 brought a number of cross-border challenges that have impacted our business, manifesting in a decline of European sales that would previously have been fulfilled from our UK distribution centre. Complementing our existing Swedish and German hubs and to address these issues more substantially and improve our European customer proposition, we opened Irish and Spanish distribution centres in September 2021, which will be fully operational by FY22 Q4.

We continue to deliver on our commitment to sustain strong gross margins, and our FY22 H1 gross margin of 28.0% compares favourably to an exceptional 28.6% in FY21 H1, and 25.2% in FY20 H1.

In FY21 a significant proportion of our software development resource was focused on preparing for Brexit, and in FY22 this resource was redeployed to work on growth-related projects, preparing to integrate AV Distribution Ltd, and launching AV.com.

We continue to make progress against the three pillars of our progressive e-commerce strategy, and outline developments in each area below:

E-commerce Excellence

* Active customers are those that have purchased products within the last 12 months

** Repeat customers are those that have made a purchase in the defined period and have historically made at least one purchase 

Revenue in the Period totalled £64.7m, £5.5m (8%) lower than the exceptional FY21 H1, and £15.3m (31%) ahead of a more normal FY20 H1 trading period. UK revenue was flat on FY21 H1 and international revenue down 16% largely due to a fall-off in European orders as a result of the on-going disruption caused to supply chains and order fulfilment post-Brexit. The Group continues to actively monitor and manage the evolving situation and, outside of our existing sites in Sweden and Germany, the setting-up and rapid scaling of our new Irish and Spanish distribution centres will further localise and enhance our customer offer, and are expected to remedy the current challenges in FY22 Q4 and beyond.

Website user numbers decreased by 11% to 13.5m year-on-year, with visitors to the UK site decreasing by 5% and visitor numbers to the Group's 19 international websites decreasing by 15%.

Organic and direct website traffic accounted for 38% of total visitors (FY21 H1: 42%; FY20 H1: 38%) as the growth in mobile continues, and competition for screen space increases the relevance of 'Pay-per-Click' ('PPC'). In line with our stated strategy, improved PPC returns were maintained above pre-FY21 levels and marketing spend equated to 6.9% of sales compared to an exceptional 5.3% last year that reflected a lower PPC spend to manage capacity during COVID lockdowns, and 8% in FY20 H1 and 8.2% in FY19 H1.

The increasing prominence of mobile continues to be a key theme with the proportion of users from this channel increasing from 58% last year to 65% of all users this year (FY20 H1: 65%), with last year's temporary decrease reflecting COVID lockdown and an associated rise in desktop use. Mobile website development remains an important focus area for the Group.

Conversion rates improved again from 3.9% last year to 4.0% (FY20 H1: 3.0%) reflecting an on-going targeted, higher return approach to marketing, and less people browsing. Conversion in the UK improved from 6.1% last year to 6.4% (FY20 H1: 4.8%) whilst European conversion decreased from 2.6% to 2.4% (FY20 H1: 2.1%). Mobile conversion fell from 2.6% to 2.3% (FY20 H1: 2.0%).

The Group served 404,000 customers in the Period (-16%) through its websites and Active customers, being those that have purchased products within the last 12 months, increased by 4% reflecting a strong FY21 H2. The proportion of repeat customers was 24.4% (FY21 H1: 24.9%; FY20 H1: 26.9%) reflecting the 328,000 new customers that purchased during the Period.  The level of repeat custom reflects the Group's product range and high average order value, and re-affirms the important differentiator that the Group is profitable from the first customer transaction.

The number of subscribers on our email database increased to 725,000 (+2%). Further segmentation improvements to our email retargeting platform are being developed with the objective of increasing the number of repeat customers.

We continue to invest in our customer proposition and service teams, resulting in a positive overall customer experience, reflected in Gear4music.com's Trustpilot score of 4.8 and 'Excellent' rating from over 97,000 reviews.

The Group invested £2.0m in its e-commerce platform in the Period (FY21 H1: £1.4m; FY20 H1: £1.4m) which included on-going Brexit related projects, and work ahead of the integration of the soon to be acquired AV business. Deployments in the Period included:

Development into key growth-related projects remains on-going.

Supply Chain Evolution

Retaining strong gross margins remains a key business objective, and much of last year's improvement has been retained with gross margin in the Period of 28.0% compared to 28.6% last year, and 25.2% in FY20 H1.

Product margins decreased 80bps from 32.8% to 32.0% (FY20 H1: 29.6%), reflecting a 30bps decrease in both own-brand and other-brand product margins, and a sales mix effect as own-brand sales accounted for 24.9% of total product sales compared to 27.6% last year (FY20 H1: 27.3%; FY19 H1: 21.9%).

The number of SKUs listed increased from 55,200 at 30 September 2020 to 57,900 at 31 March 2021 and 60,500 at 30 September 2021, representing a net 15% increase in 12 months.

The number of own-brand products increased from 3,600 at 30 September 2020 to 3,900 at 30 September 2021, with own-brand revenue accounting for 24.9% of total product sales from just 6.5% of SKUs reflecting the effort expended in developing our range of high-quality instruments and equipment at affordable prices. New products continue to be developed and during the Period we launched:

Progress continues to be made in developing the Premier brand that we acquired earlier in the year, with the imminent launch of Premier digital drum kits. We have also been shaping the future of Premier Acoustic Drum Kits with several exciting new ranges due to launch Summer/Autumn 2022 to coincide with Premier's centenary celebrations.

We have deliberately and significantly increased stock by £8.7m (30%) from £28.7 million at 30 September 2020, to £37.5 million, to put the business in a strong position heading into peak trading, and as a precautionary measure against potential supply chain issues and increased container costs.

International Expansion

Although we were well prepared ahead of Brexit, the cost, administrative burden and time to deliver products to our European customers from the UK significantly increased as a result of the Brexit deal announced on 24 December 2020, causing our overall customer proposition to decline across these cross-border SKUs.

To help mitigate these challenges, we further scaled and invested into stock in our Swedish and German distribution centres, and in September 2021 added 15,000 square feet of distribution space in Ireland and 45,000 square feet in Spain. Whilst factored into our expectation, the impact on FY22 H1 revenue was significant with a marked decline in cross UK-EU border sales.

These operational challenges have continued to impact our business post period end. However, in line with strategy we now have a European distribution infrastructure capable of handling over £120m of sales per annum meaning that the Group remains well positioned to capitalise on the medium-term growth opportunity.

Current trading and outlook

As planned, our new European hubs in Ireland and Spain became operational in September, but due to some short-term supply chain challenges, these new hubs are taking longer to scale-up than we originally anticipated. As a result, ongoing Brexit related challenges are impacting for longer than we had hoped, and our European Q3 sales to date have been lower than previously expected. As such the Board believes that results for the financial year will be lower than recently upgraded consensus market expectations.

The Board is confident that the Group now has the European infrastructure to resolve these issues, and further localise and improve our customer proposition in mainland Europe.

The acquisition of AV Distribution Ltd is expected to complete in December 2021 and the launch of AV.com in January 2022, alongside planned upgrades to our e-Commerce platform during FY23, provides the Board with the basis for reiterating its confidence in the Group's growth strategy.

The Group will issue a Christmas trading update on 20 January 2022.

Financial Review

Revenue

Revenue in the six months to 30 September 2021 decreased by 8% on a COVID-boosted exceptional trading period last year, when revenue increased by 42%. FY22 H1 revenue of £64.7m was £15.3m (31%) ahead of a more normal FY20 H1 trading period.

Revenue from the UK market was maintained at £36.7m taking our estimated share of the UK market to 8.9% (FY21 H1 estimate: 8.6%).

Revenue into international markets has been hampered by Brexit related factors and decreased by £5.5m (16%) to £28.0m (FY20 H1: £24.6m), accounting for 43% of Group revenue compared to 48% in FY21 H1 and 50% in FY20 H1.

Gross Profit

The Group considers changes in gross profit, being a function of strong sales growth and gross margins that make good commercial sense, to be the primary measure of growth.

Gross profit decreased by £2.0m (10%) from the exceptional £20.1m last year, to £18.1m, as the Group sought to retain much of the FY21 H1 gross margin improvement, with an FY22 H1 margin of 28.0% being just 60bps down on last year.

Operating Profit and Administrative Expenses

Operating profit of £2.4m represents a £4.0m decrease on an exceptional FY21 H1, reflecting a £2.0m decrease in gross profit driven by lower revenue, and a £2.0m increase in administrative costs.

The increase in administrative costs of £2.0m (15%) includes a £0.7m (19%) increase in marketing costs, a £0.6m (11%) increase in labour costs, a £0.3m increase in depreciation and amortisation and increases in other activity-linked variable costs.

Marketing and labour costs continue to be key business drivers and the main component parts of our cost base, accounting for a combined 67% of total administrative expenses in the Period (FY21 H1: 67%).

In FY21, H1 marketing costs as a percentage of revenue reached 5.3% compared to 6.9% in FY22 H1, with expenditure in the prior period restricted particularly in FY21 Q1 to help manage capacity as new health and safety measures were introduced into our warehouses. FY22 H1 has been a more 'normal' trading period with a focus on maintaining a strong, pre-defined return on investment.

Total labour costs increased by £0.6m (11%) on last year reflecting pay increases, recruitment to respond to Brexit, and the full-year effect of FY21 new hires.

European distribution centre local administrative expenses increased by £0.3m (24%) on FY21 H1, to £2.0m.

Depreciation and amortisation in the Period totalled £2.4m (FY21 H1: £2.1m) including £1.1m (FY21 H1: £0.9m) of amortisation relating to our bespoke e-commerce platform, and £0.6m depreciation of 'Right of Use' assets (FY21 H1: £0.6m).

Net Profit

Financial expenses of £0.5m include £0.2m bank interest (FY21 H1: £0.1m), £0.2m interest on lease liabilities (FY20 H1: £0.2m), and a small foreign exchange loss (FY21 H1: £0.3m loss).

Net profit of £1.1m (FY21 H1: £4.9m; FY20 H1: £0.1m loss) represents a good result to take into the second half of the financial year. The business reported a net profit in every month in FY22 H1.

Cash Flow and Balance Sheet

September generally represents a low point in the annual cash cycle as stock builds ahead of the peak Christmas trading period, and this has been amplified in response to potential supply chain issues. Nevertheless, net bank debt of £13.4m (30 September 2020: £5.7m), leaves headroom of £21.6m including £18m within the Group's £35m RCF three-year committed Revolving Credit Facility ('RCF') with HSBC Bank plc.

In the Period the business has utilised its debt facility to significantly invest in stock (+£8.7m), make £4.7m of brand and domain acquisitions (AV.com domain £3.0m; Premier business and certain assets £1.7m), and invest £2.0m in software development.

The carrying value of stock at 30 September 2021 was £37.5m (30 September 2020: £28.7m) including £6.2m of inbound stock-in-transit (30 September 2020: £5.1m) arriving ahead of peak trading.

Trade and other payables decreased from £18.7m last year to £15.6m as stock was brought in and suppliers paid earlier, and includes the associated liability for the £6.2m of inbound stock-in-transit (30 September 2020: £5.1m).

Capitalised software development costs totalled £2.0m in the Period taking total spend to date to £15.5m. Amortisation in the Period was £1.1m leading to a £0.9m increase in net book value since the start of the financial year.

Property, plant and equipment capital expenditure was £0.7m in the Period (FY21 H1: £0.5m), relating principally to the new Irish and Spanish distribution centres.

Dividend Policy

Consistent with its previous approach, the Group repeats its intention to revisit its shareholder distribution policy periodically, including at the end of this financial year.

Unaudited consolidated interim statement of profit and loss and other comprehensive income

Unaudited consolidated interim statement of financial position