21 June 2022

Gear4music (Holdings) plc

Audited results for the year ended 31 March 2022

"Good progress following an exceptional prior year"

Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its financial results for the year ended 31 March 2022.

FY22 Highlights ⁽¹⁾:

·    Gross profit of £41.1m was 11% below an exceptional, Covid boosted FY21 and 32% ahead of FY20

·    Reported EBITDA ⁽²⁾ of £11.2m is 43% below FY21 and 44% ahead of FY20

·    Net debt at year end of £24.2m (31 March 2021: net cash £2.7m) with new £35m RCF, partially used for M&A (£11.4m) and an increase in stock (£17.1m) to protect the business against supply chain issues and price inflation. Net debt expected to reduce in FY23 with reduction in stock.

·    Active customers of 0.92m is 13% behind FY21 and 14% ahead of FY20

·    Conversion improved to 4.1% from 3.7% in FY21 and 3.4% in FY20

·    Trading in line with consensus market expectations for FY23

⁽¹⁾ FY20 shown for comparison as FY21 was exceptional due to the positive impact of COVID-19 lockdowns.

⁽²⁾ Includes £0.2m of one-off M&A costs and £0.3m share option costs.

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

"During FY21, Gear4music was reportedly the world's fastest growing large online retailer of musical instruments and music equipment*, being uniquely positioned to serve customers during Covid lockdowns. As previously reported, this meant our FY21 financial results were exceptional, and comparing FY22 against FY20 pre-pandemic levels provides a better indication of the progress the business has made.

I am pleased to be reporting FY22 full year results today that are slightly ahead of our previous expectations, with EBITDA of £11.2m and pre-tax profit of £5m. These results are a significant improvement on FY20 pre-pandemic levels, showing the continued growth and development of our business, and are a testament to the hard work and determination of our talented teams.

In April 2021, we agreed a new £35m borrowing facility with HSBC which, as planned, was partially utilised by making acquisitions totalling £11.4m to help drive future growth. We also deliberately invested over £17m into additional short-term inventory, to ensure continuing high levels of customer service and strong website conversion during what has been a prolonged period of supply chain disruption. We continue to have a significant amount of headroom within our banking facilities and covenants, and during FY23 we expect the additional inventory will reduce, and our year-end net debt position will decrease accordingly.

We have a strong pipeline of growth orientated projects due to be deployed during FY23, including the launch of AV.com into Europe and our second-hand platform, alongside multiple new product releases, including from the recently acquired Premier brand which celebrates its 100th anniversary.

As previously stated, weaker consumer confidence across the broader retail landscape is likely to continue impacting our progress during H1, although alongside careful overhead cost management we believe our growth initiatives will help offset these headwinds and provide opportunities for stronger growth during H2. We continue to trade in line with market expectations for FY23** and remain confident in our medium and long-term profitable growth strategy."

* Source = Music Trades: Worldwide largest 20 online retailers; 2021 sales data

** Gear4music believes that consensus market expectations for the year ending 31 March 2023 are currently revenue of £163.9 million and EBITDA of £11.9 million.

ENDS

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About Gear4music (Holdings) plc

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.

Chairman's statement

I am pleased to report on what we consider to be a strong set of results during what has been an unusual and challenging period. The year started with us all having to come to terms with life post Covid, and ended with war in Eastern Europe and the highest rate of inflation seen in recent times, impacting on consumer confidence and discretionary spending.

Operational and Commercial progress

The FY22 financial results were always going to pale in comparison to what was an exceptional FY21, but represent continued improvement relative to a more normal trading period in FY20. Achieving these results reflects on the significant efforts of the Executive and Senior Management team, and the hard work, passion and dedication of all our colleagues across the business.

Post Covid, we remain vigilant and have rolled out a phased return to the office as we strongly believe working closely together across teams and departments, collaborating and communicating together, is best done in person and is fundamental to the long-term success of our Group. We have retained some flexible working practices and are well set to respond to any future developments.

The addition of a committed three-year £35m Revolving Credit Facility in April 2021 enabled the Group to progress acquisition opportunities and make investments positioning the Group well to be able to thrive in the future. The addition of the Premier brand to the growing own-brand stable, and the diversification into the large Audio-Visual ('AV') market, albeit early stage, makes for exciting times ahead.

In FY22, the Group faced and addressed lingering challenges of the UK leaving the EU. The addition of two new distribution centres in Europe has improved the Group's European proposition, increased capacity and puts the Group in a stronger position heading into FY23.

The competitive retail landscape in musical instruments and equipment is seeing a continued channel shift to online, albeit understandably at lower online penetration levels than during lockdowns. We expect the current challenging economic environment will add further pressure to less agile competitors already struggling post-Covid, thereby allowing us to take further market share. This, in turn, may present future growth opportunities for the Group.

Environmental, Social and Governance

We understand the importance of sustainable business practices on our physical and social environments and the role we must play. We acknowledge there is increasing interest from a wide range of stakeholders on the various impacts that the business has, and what it is doing to improve the outcomes.

During the year, we combined all of the relevant work already being done across our business and formalised it in our ESG policy. We look forward to reporting continued progress in FY23.

Outlook

Against a backdrop of significant geo-political and macro-economic uncertainties affecting consumer confidence across Europe, and having just come out of a global pandemic makes predicting the year ahead less straightforward. Nevertheless, alongside our new growth initiatives, the Board remains confident that our customer proposition, enhanced operational infrastructure and balance sheet will enable the Group to achieve its business objectives, namely accelerating market share gains and delivering operational efficiencies, during the current financial year and beyond.

Ken Ford             

Chairman            

20 June 2022

Chief Executive's Statement

Financial KPIs

*             See note 3 of the Financial information

**           See notes 14 and 15 of the Financial information

Commercial KPIs

Business review

Compared with pre-pandemic levels, the business made solid progress during FY22, with tangible improvements in revenues, margins and profitability being achieved despite the challenging macro environment and significant operational difficulties that were created by the new UK-EU customs border, as a result of Brexit.

During the year, we have had to navigate a period of worldwide supply chain disruption, cost price inflation, and weakening consumer confidence, which makes the level of retained gross margins following the exceptional FY21 a notable achievement that reflects the tenacity of our commercial teams.

Highlights from the year included securing a new £35m committed banking facility that enabled the acquisitions of AV distribution Ltd and Premier, the opening of two new distribution hubs in Ireland and Spain, and launching AV.com, our new retail brand focusing on the Home Audio Visual market.

Revenues were supported through FY22 by a good recovery in live-sound categories such as PA, DJ and Lighting products as musicians return to gigging and festivals have opened up again. Our Home Audio Visual category has also grown following the launch of AV.com in January 2022.

We deliberately invested into additional inventory during FY22, utilising our banking facilities, to help mitigate the consequences of supply chain disruption. Alongside funding acquisitions, this meant our levels of borrowing increased during the period, and we expect to see this reducing as the financial year progresses.

We look forward to building on the progress of FY22 and maintaining the high levels of service our new and returning customers have come to expect, supported by the deployment of multiple e-commerce platform upgrades and ongoing growth initiatives.

Growth Strategy & Acquisitions

Development of our bespoke platform remains central to our digital growth strategy, and during FY23 we plan to launch some significant new features and developments.  Having grown our in-house team of software developers to 90 people, we are in a strong position to evolve and improve our customer proposition at pace.

Our second-hand platform is due to launch during FY23 and is designed to extend the lifecycle of musical instruments and equipment by providing a quick and easy way for customers to release value from products they no longer use, whilst making good quality, warrantied second hand products accessible to those who may not necessarily want or be able to purchase a new product. Helping us achieve a more circular and environmentally sustainable business, this platform has the potential to significantly increase our addressable market size.

Following a successful UK launch, AV.com will be launched across Europe, utilising our existing European e-commerce platform, localisation technology and distribution infrastructure to significantly increase our addressable market size.

With own-brand products generating over £38m in sales last year we have a proven track record of success in sourcing and developing unique products that fit alongside the world's best-known brands. Following on from the acquisitions of Premier and Eden, we will further refine and accelerate our own-brand strategy with the launch of G4M, a new premium own-brand range suitable for worldwide distribution, and AVCOM, featuring products focused on the Home Audio Visual market.

Trading outlook

As a result of Brexit, Covid, and now the war in Ukraine, the general outlook for many retailers during 2022 remains challenging and difficult to predict, with increasing product and overhead costs forcing up product retail prices and potentially impacting profits.

To help combat these challenges, we have a strong pipeline of growth orientated projects launching in FY23, and we will retain a sharp focus on productivity, efficiency and overhead cost control.

Inflationary pressures and weaker consumer confidence are likely to constrain growth in profitability in the short term. However, with the strategies and actions we are taking, along with our strong balance sheet and significant working capital headroom, we believe we remain well positioned to take market share and are confident in our medium and longer-term profitable growth strategy.

Andrew Wass

Chief Executive Officer

20 June 2022 

Chief Financial Officer's statement

Overview

As an online retailer, following on from an exceptional FY21 trading period boosted by the effects of COVID lockdowns was always going to be a tough act to follow. However, relative to FY20, a more normal trading period, our FY22 results are strong and show good improvement, with revenue growth of 23%, a gross margin improvement of 200bps, and an increase of £3.4m and £1.9m in EBITDA and PBT respectively.

We started the year by securing a £35m RCF facility with HSBC to enable us to capitalise on M&A opportunities as and when they arose, and to invest in stock during a period of supply chain uncertainty and ahead of inflationary price increases. We report good progress on both fronts putting us in a strong position heading into FY23.

Post-Brexit challenges limited our ability to cost-effectively ship products from the UK to customers in Europe in a timely manner. This materially affected our UK-EU cross-border revenue, contributing to a reduction in international revenue of £13.8m (18%) during FY22. We responded by opening new distribution centres in Ireland and Spain in H2 and we expect to see a meaningful impact in FY23.

In December 2021, we acquired AV Distribution Ltd and re-platforming on to and the launch of AV.com is an exciting first step diversifying into the significant Audio-Visual market.

Revenue

Revenue decreased £9.9m (6%) on an exceptional FY21 period that had benefited from unusually high demand as physical stores closed during COVID lockdowns and the benefits of playing musical instruments and equipment on mental health and wellbeing were recognised. Revenue increased £27.3m (23%) relative to a more normal trading period in FY20, equating to compound growth of 10.8% per annum.

UK revenue continued to grow, being less impacted by Brexit and temporarily boosted by European competitors facing similar shipping challenges into the UK. UK revenue of £82.6m was £3.9m (5%) ahead of a COVID impacted FY21, and £20.8m (34%) ahead of FY20. This takes our estimated UK market share up to 9.2% (FY21: 8.9%; FY20: 7.2%).

After the UK left the EU, our European sales that would previously have been fulfilled from the UK markedly decreased as it took longer and cost more to ship to European customers, weakening our proposition relative to local retailers. As a consequence, international revenue decreased by £13.8m (18%) on FY21 and increased £6.5m (11%) on FY20. The addition and scaling up of two new distribution centres in Ireland and Spain has improved our proposition heading into FY23.

Revenues from sales outside of Europe accounted for 1.4% of total revenue in FY22 compared to 1.3% in both FY21 and FY20.

Revenue in H1 was considered a stronger result by management, being just 8% down on peak COVID numbers and 31% up on FY20 H1, whereas H2 revenue was 5% down against a weaker comparative and 17% up on FY20 H2.

We continue to make good progress in our own-brand business with revenues of £38.1m accounting for 26% of total revenue (FY21: 29%) from just 4,200 SKUs representing 7% of the total range (FY21: 3,800 SKUs). The addition of the Premier brand in particular is an exciting addition and opportunity heading in to its centenary year.

Own-brand revenue was £7.3m (16%) below an exceptional FY21 which was boosted by high demand for beginner-level products during COVID lockdowns, and limited availability of certain other-branded products. Furthermore, many bulky own-brand packs would traditionally have been shipped from the UK into Europe, and this was a category impacted post-Brexit and has since improved with increased stock held locally in Europe and more, better local carrier options. Relative to a more normal trading period, own-brand sales were £2.7m (8%) up on FY20.

Other brand revenue was £1.7m (2%) down on FY21 and £23.1m (29%) up on FY20.

Carriage income decreased by £0.8m (11%) to £6.3m linked to lower product sales, and less cross UK-EU border shipments.

Other revenue comprises paid for extended warranty income, and commissions earned on facilitating point-of-sale credit for retail customers. The proportion of revenues coming from these sources was 0.5% of total revenue in FY22, FY21 and FY20.

Gross profit

In FY22, we maintained our pricing discipline established in FY20 and carried through FY21, and delivered a gross margin of 27.9% which was 250bps behind an exceptional FY21 period where prices were increased to manage demand, and 200bps ahead of FY20.

We significantly invested in stock throughout the year as a precautionary measure against supply chain disruption, and to lock in cost prices early in a period of increasing cost-price inflation. This created margin opportunities in FY22 and puts us in a strong position heading into FY23.

Product margin in FY22 was impacted by sales mix, with relatively less own-brand sales (26% of total sales) than in FY21 and FY20 (both 29%).

The Group benefits from buying scale relative to its UK competitors, and its ability to source other-branded products in Swedish Krona and Euros, and receive product directly into its European distribution centres is an important point of differentiation.

The Group purchases its own-brand products in US Dollars and product margin can be impacted by exchange rate fluctuations.

Gear4music includes 'costs of delivery' within cost of sales which is a different accounting treatment to some other e-commerce retailers. Delivery costs were £10.3m in the period and represented 7.0% of total revenue (FY21: 7.4%), and an illustrative adjusted gross margin would be 34.9% (FY21: 36.8%).

Administrative expenses and Operating profit

Operating profit of £6.1m is £9.3m (60%) below FY21, and a £2.0m (49%) improvement on FY20.

Total administrative expenses increased by 13% (£4.3m) on FY21 relative to a revenue decrease of 6%, principally due to a more normal marketing return and continued investment in our people.

Combined marketing and labour costs of £23.9m (FY21: £21.5m) accounted for 67% of total administrative expenses (FY21: 68%):

-              Marketing expenditure increased in FY22 to £10.8m (FY21: £9.2m) equating to 7.3% of revenue compared to 5.9% last year and 7.7% in FY20, as the business returned to more normal trading and competitive conditions; and

-              Labour costs increased 7% in FY22 to £13.1m (FY21: £12.3m) reflecting an 8% increase in average headcount. Labour costs accounted for 8.9% of revenue (FY21: 7.8%).

FY22 EBITDA of £11.2m is £8.6m lower than FY21 and £3.4m higher than FY20.

Other expenses and net profit

Financial expenses of £1.1m (FY21: £0.8m) include £0.5m bank interest as the new RCF was increasingly utilised as the year progressed (FY21: £0.2m), £0.4m of IFRS16 lease interest (FY21: £0.4m), and a £0.2m net foreign exchange loss (FY21: £0.2m loss).

The Group reports profit before tax of £5.0m (FY21: £14.6m) that after tax translates into a basic EPS of 17.8p (FY21: 60.3p) and diluted EPS of 17.3p (FY21: 59.7p).

Cash-flow

In April 2021 the Group secured a £35m RCF with its bankers, HSBC, to enable it to invest in opportunities if, as and when they arose.

Group indebtedness increased £26.9m from a £2.7m net cash position at the start of the year to a £24.2m net debt position at the end, reflecting acquisitions totalling £11.4m and a deliberate £17.1m increase in stock:

-              Acquisitions: The Group acquired the Premier drum brand for £1.7m, the AV.com domain for £3.0m, and AV Distribution Ltd for £7.1m (£0.4m deferred); and

-              Stock: the business actively invested in stock throughout the year to protect against potential supply chain disruption, secure cost prices ahead of inflationary price increases, and increase stock in European distribution centres. This higher level of stock is a response to broader market and macro uncertainties rather than a structural requirement, and is expected to decrease in the normal course of business in FY23.

Reported net cash outflow from investing activities of £16.5m includes £7.4m of business acquisitions, net of cash acquired, including a £1.3m freehold property acquired with AV Distribution Ltd, £4.4m of capitalised software development costs (FY21: £3.2m), the £3.0m acquisition of the AV.com domain, and £1.8m tangible fixed asset additions. Depreciation and amortisation of £3.7m (FY21: £3.2m) is added back in 'net cash from operating activities' with respect to these asset categories.

Net cash inflow from financing activities of £21.7m (FY21: £12.0m outflow) represents a £28.0m RCF drawdown net of £3.5m repayment of borrowings (FY21: £9.9m repayment), £1.9m payment of lease liabilities (FY21: £1.4m), and £0.9m interest paid (FY21: £0.7m).

Balance sheet

Capital expenditure on property, plant and equipment of £3.1m includes the addition of a freehold warehouse valued at £1.3m as part of the AV Distribution Ltd acquisition, £0.8m investment on the new distribution centres in Ireland and Spain, and £0.6m and £0.4m investment in the UK and Sweden respectively.

The Group capitalised £4.4m (FY21: £3.2m) of software development costs relating to our bespoke e-commerce platform, including projects linked to the opening of new distribution centres, the re-platforming of the AV Distribution Ltd business and launching AV.com. Platform amortisation in the year was £2.3m (FY21: £1.9m) taking net book value to £10.5m (31 March 2021: £8.4m).

Other intangible assets include £5.3m goodwill and £3.0m of domains.

The Group had net debt of £24.2m at the year-end (31 March 2021 net cash: £2.7m) having used its facilities to invest in acquisitions and stock.

Dividends

The Board is confident in the prospects for the business and recognises the importance of generating and retaining cash reserves to support future growth, and as such, the Board does not consider it appropriate to declare a dividend at this time but will continue to review this position on an annual basis.

On behalf of the Board

Chris Scott           Chief Financial Officer    20 June 2022

Consolidated Statement of Profit and Loss and Other Comprehensive Income

The accompanying notes form an integral part of the consolidated financial report.

Consolidated Statement of Financial Position

The notes 1 to 19 form part of the consolidated financial report.

Company registered number: 0778670.