15 November 2022

Gear4music (Holdings) plc

Interim results for the six months ended 30 September 2022

 

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 2022 ("the Period").

 

£m	6-months ended 30 Sept 2022 ('FY23 H1')	6-months ended 30 Sept 2021 ('FY22 H1')	Change on FY22 H1
Revenue	66.3	64.7	+2%
Gross profit	17.4	18.1	(4%)
Gross margin	26.3%	28.0%	-170bps
EBITDA	2.7	4.8	(44%)
Operating (loss)/profit	(0.3)	2.4	(2.7)
Net (loss)/profit	(1.1)	1.1	(2.2)

FY23 H1 Highlights:

·    Revenue growth of 2% includes a 3% decrease in UK sales due to a strong FY22 H1 comparative and a more normalised trading environment post Covid

·    Stronger European growth of 10% reflects an improving localised customer proposition

·    As previously reported, gross margins reflect targeted stock reductions and challenging market conditions during July and August in particular

·    EBITDA was in-line with the Board's revised expectations at £2.7m. This was £2.1m behind FY22 H1 but reflects 35% growth on FY20 H1 (£2.0m), being the last full uninterrupted H1 trading period pre-Covid

·    Net debt of £21.8m (31 March 2022: £24.2m, 30 September 2021: £13.4m)

·    £13.2m cash headroom within the Group's banking facilities at Period end, at what is historically a low point in the annual cash cycle

Trading Outlook:

·    Improved trading momentum during FY23 H2 has continued into November, maintaining the Board's expectation of a return to pre-Covid, H2 weighted trading seasonality*

·    Net debt and on-hand inventory expected to reduce by 31 March 2023

·    Full-year outlook in-line with consensus market expectations**

 

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

"Our FY23 H1 trading results reflect previously reported challenges, including inflationary pressures on our cost base, the cost-of-living crisis affecting consumer confidence, unusually hot weather during the summer months, and comparison to the last of the Covid-enhanced figures in FY22 Q1.

Whilst we have adapted to the challenges of the last six months, we have also remained focused on our longer-term growth strategy, delivering a wide range of customer centric improvements throughout the business.  Progress has included several website upgrades, such as the ability for customers to create their own customised audio packages and cables, extending evening cut-off times for next day delivery, improving our consumer finance proposition, and upgrading our digital downloads sales platform.

I am pleased to report that we have seen a consistent improvement in trading momentum during the last two months, despite continuing macro volatility. We are also well prepared for our peak seasonal trading period. The board therefore remains confident that results for the full financial year will be in-line with current consensus market expectations**."

* H1 sales as % of full-year sales were 44% in FY22, 45% in FY21, 41% in FY20, 36% in FY19 and 39% in FY18.

** Gear4music believes that current consensus market expectations for the year ending 31 March 2023 are revenue of £155.1 million, EBITDA of £8.9 million and profit before tax of £1.1 million.

The Group plans to issue a trading statement for the three months ending 31 December 2022 on 19 January 2023.

 

Enquiries:

 

Gear4music Andrew Wass, Chief Executive Officer Chris Scott, Chief Financial Officer	+44 (0)20 3405 0205
Singer Capital Markets - Nominated Adviser and Joint Broker Peter Steel/Amanda Gray, Corporate Finance Tom Salvesen, Corporate Broking	+44 (0)20 7496 3000
Investec Bank plc - Joint Broker David Flin Alex Wright Alice King	+44 (0)20 7597 5970
Alma PR - Financial PR David Ison Lily Soares Smith Joe Pederzolli Josh Royston	+44 (0)20 3405 0205 Gear4music@almapr.co.uk

 

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.

 

Business Review

 

The business reports the Group's results for the six months to 30 September 2022, and updates on the strategic and commercial progress made in the Period.

Strategy

Our focus in FY22 H1 has been on managing the business to meet the impacts that the current macro-economic situation is having on consumer confidence and spending across Europe, through cost control and working capital management. This has included a focus on stock management and active reduction of slower moving product lines that impacted gross margins, particularly in Q1. These measures have contributed to an improvement in the cash position since the financial year-end, resulting in net debt of £21.8m at 30 September 2022, relative to a £35m facility at what is traditionally a low point in the annual cash cycle.

We have continued our measured investment in our European distribution centres and improved our proposition to customers in those and adjacent territories with a broader on-hand stock offering and more and improved delivery options, resulting in relatively high growth in these markets.

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

 

	FY23 H1	FY22 H1	Change on FY22 H1
Revenue	£66.3m	£64.7m	+2%
Total unique website users	9.1m	13.5m	-32%
Mobile site unique users (inc. tablet)	6.6m	8.7m	-25%
Conversion rate	4.90%	4.00%	+90bps
Average order value	£151	£128	+19%
Active customers *	903,000	993,000	-9%
Proportion of repeat customers **	26.5%	24.4%	+210bps
Email subscriber database	1,408,200	725,000	+94%
Trustpilot rating	4.8/5	4.8/5	-

* 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 of £66.3m was £1.6m (2%) ahead of last year, £3.9m (6%) behind an exceptional Covid period in FY21 H1, and £16.9m (34%) ahead of a more normal and comparable, pre-Covid, FY20 H1 trading period.

 

UK revenue was 3% down relative to a strong FY22 H1 comparative, and international revenues were 10% ahead of last year reflecting an improved local customer proposition in Europe as our new distribution centres became increasingly well established.

 

Website user numbers decreased by 32% to 9.3m, with visitors to the UK sites decreasing by 26% and visitor numbers to the Group's international websites decreasing by 36% reflecting a drop-off in browsing and visits from low-intent to purchase prospective customers. This trend has contributed to a marked improvement in conversion rate from 4.0% to 4.9%, delivered by our targeted, return-based approach to investment in marketing. The introduction of further consumer finance options on a non-recourse basis to the business has made products more accessible to more people.

 

Conversion in the UK fell from a peak of 6.4% last year to 5.8%, still well ahead of a pre-pandemic rate of 4.8%, whilst European conversion improved significantly from 2.4% to 4.2%, reflecting good stock availability and improved and lower cost delivery options in mainland Europe. Mobile conversion also improved from 2.3% to 2.8%.

 

'Costs-per-Click' ('CPC') have increased in the Period as competitors compete for less ad space and traffic in the current economic climate. We use automated models to maximise revenue at any defined level of return on investment, and as such marketing costs as a proportion of revenue were held flat on last year at 6.9%, and the proportion of visitors from organic and direct sources increased from 38% to 46%.

 

Growth in mobile continues to be a major theme with the proportion of users from this channel increasing from 65% last year to 72% this year, and mobile site development is a priority focus in all our development work.

 

'Average Order Value' ('AOV') increased by 19% from £128 in FY22 H1 to £151, reflecting inflationary price increases and proportionally less own-brand sales that are typically at lower price points.

 

The Group served 384,000 customers in the Period (-5% on FY22 H1) and 'Active customers', being those that have purchased products within the last 12 months, similarly decreased by 9%.

 

The proportion of repeat customers increased to 26.5% (FY22 H1: 24.4%), reflecting proportionally less paid-for new customers. The level of repeat custom is lower than in other e-commerce sectors, reflecting the nature of the Group's product range and high average order value, and re-affirms the importance of the Group being profitable from the first customer transaction.

 

The number of subscribers on our email database increased to 1.4 million and we continue to make improvements to our email retargeting with the objective of increasing the number of repeat customers.

 

We continue to invest in our customer proposition and service teams, resulting in a great overall customer experience, reflected in Gear4music.com's Trustpilot score of 4.8 and 'Excellent' rating from over 111,000 reviews.

 

The Group invested £2.8m in its e-commerce platform in the Period (FY22 H1: £2.0m) representing a peak level, and annualised costs will start to reduce from FY22 H2. Deployments to the date of this report include:

 

·    Digital downloads extension

·    Updated consumer finance

·    Customer bundle builder

·    Custom cable builder

Development of key growth-related projects remains on-going, including investment into our second-hand platform and enabling AV.com European launch.

 

Supply Chain Evolution

 

	FY23 H1	FY22 H1	Change on FY22 H1
Own-brand product sales	£15.0m	£15.3m	-2%
Other brand product sales	£48.3m	£46.2m	+5%
Product margin	30.9%	32.0%	-110bps
Products listed	62,500	60,500	+3%
Brands listed	1,109	951	+17%

 

FY23 H1 gross margin of 26.3% was 170bps below FY22 H1's result of 28.0% that reflected some Covid-related upside particularly in the earlier months, but is 90bps ahead of the last pre-Covid comparative (FY20 H1) of 25.2%. Achieving higher gross margins is critical to the overall profitability of the Group and as such remains a key business objective. In FY23 Q1 this was balanced with targeted reductions in certain slower moving stock lines, and reflects a sales mix effect across the Period, with own-brand products accounting for 23.6% of total product sales compared to 24.9% in FY22 H1 as demand for entry-level products slowed.

 

Product margins decreased 110bps from 32.0% last year to 30.9%, and compares to 29.6% in pre-Covid FY20 H1. This reflects a 180bps decrease in own-brand product margin to 43.9% as certain slower moving lines were moved through in FY23 Q1, and a 60bps decrease in other-brand margin to 26.9% reflecting heightened competition in the market at the start of the Period.

 

The number of SKUs listed increased from 60,500 at 30 September 2021 to 62,400 at 31 March 2022 and 62,500 at 30 September 2022, representing a net 3% increase in 12 months.

 

We reduced stock by £2.1m from £45.5m at 31 March 2022 to £43.4m at 30 September 2022 which provides good availability across our distribution centres heading into peak and, subject to demand, levels will be actively managed to ensure we have an appropriate level of stock heading into January 2023 and FY24.

 

The number of our own-brand products increased from 3,900 at 30 September 2021 to 4,250 at 30 September 2022, with own-brand revenue accounting for 23.6% of total product sales from just 6.8% of SKUs, reflecting the significant on-going efforts of our in-house team in developing our range of high-quality instruments and equipment at affordable prices.

 

Product development has been focused on bringing Premier to market and longer-term projects that will come to fruition in FY24 and improve our offering at both the value and premium end of the scale with our new G4M brand. Products launched during the Period include:

 

·    Further development of our new look electronic drum kit range

·    First products in our VISIONKEY keyboard range

·    Hartwood Sonata electro acoustic guitars

·    SubZero HICAST column PA system

Premier

 

Ahead of Premier celebrating its 100-year anniversary, our focus has been on the design, development and marketing of a revamped acoustic kit offering, with launch to coincide with the centenary celebrations.

 

Four core ranges from entry-level to professional kits, incorporating attributes that reimagine original Premier features, alongside some special centenary edition variants and a UK-made limited edition collector's snare drum, were brought to market.

 

The launch was supported by an extensive content project including the launch of new dedicated brand website https://www.premier-percussion.com/, drawing on resources from multiple departments, including video, photography, UX, copy and marketing, culminating in a successful and far-reaching launch that was received very positively by the market.

 

Our efforts to establish a global distribution network are ongoing.

 

 

International Expansion

As we reported last year our European business has been adversely impacted by the UK leaving the EU. In response we added new distribution centres in Ireland and Spain, increased the breadth and depth of stock held across all our European distribution centres, and added more local delivery options to restore a comparable customer proposition in mainland Europe. The Group estimates it has a European distribution infrastructure capable of handling £150m of revenue per annum, and is well placed to capitalise on the medium-term growth opportunity.

In FY23 H2 the Group plans to launch fully-translated and localised European versions of AV.com.

 

Current trading and outlook

 

Whilst mindful of the current heightened macro-economic uncertainties and the impact on the consumer in the UK and across Europe, trading in October and November to date gives the Board further confidence that results for the financial year will be in line with the recently updated consensus market expectations.

 

The Group plans to issue a Christmas trading update on 19 January 2023.

 

 

Financial Review

 

	FY23 H1	FY22 H1	Change on FY22 H1
Revenue	£66.3m	£64.7m	+2%
Gross profit	£17.4m	£18.1m	-4%
Gross margin	26.3%	28.0%	-170bps
EBITDA	£2.7m	£4.8m	-44%
EBITDA margin	4.1%	7.4%	-330bps
Operating (loss)/profit	-£0.3m	£2.4m	-£2.7m
Marketing costs	£4.6m	£4.4m	+3%
Marketing costs as % of revenue	6.9%	6.9%	-
Total Labour costs	£7.0m	£6.1m	+14%
Total Labour costs as % of revenue	10.5%	9.4%	+110bps
Cash	£7.2m	£3.6m	+£3.6m
Net bank debt	£21.8m	£13.4m	+£8.4m

Revenue

 

Revenue in the Period of £66.3m was £1.6m (2%) higher than last year and included growth in both Q1 and Q2. We maintain our expectation of a return to a pre-Covid, H2 weighted trading seasonality.

 

UK revenue was down 3% relative to a strong FY22 H1 comparative that included the last Covid-boosted months, and represents growth of 43% on pre-Covid FY20 H1 numbers taking our estimated share of the UK market to 9.1% (FY22 H1: 8.9%).

 

In FY23 H1 Europe and Rest of the World revenues of £30.8m were 10% ahead of FY22 H1, reflecting an improved local customer proposition in Europe, and accounting for 47% of Group revenue compared to 43% in FY22 H1. Growth of 25% relative to pre-Covid FY20 H1 numbers is lower than achieved in the UK as it took time to adapt our business to the UK being outside of the EU.

Gross Margin and Gross Profit

As outlined above in the 'Business Review' gross margin decreased 170bps from 28.0% last year to 26.3%, reflecting a 110bps decrease in product margin and a reduction in delivery cost borne by the customer, reflecting part-absorption of cost inflation.

Gross profit of £17.4m is £0.7m (4%) lower than last year and compares to £12.5m in the more normal pre-Covid FY20 H1.

 

 

Operating Loss and Administrative Expenses

An operating loss of £0.3m represents a £2.7m decrease on FY22 H1, reflecting a £2.0m increase in administrative costs including a £0.9m increase in labour costs, £0.5m increase in depreciation and amortisation, and a £0.2m increase in marketing costs

Marketing and labour costs continue to be the main component parts of our cost base, accounting for a combined 65% of total administrative expenses in the Period (FY22 H1: 67%).

Our marketing spend continues to be heavily invested in direct 'Pay-per-click' ('PPC') marketing and our approach focuses on delivering a strong, pre-defined return on investment. In a period of increasing cost-per-click it is important we invest in enhancing our organic and direct marketing capabilities which in the longer term will support our ambition to reduce marketing spend as a proportion of sales, and we have made two senior appointments to support our plans.

Total labour costs increased 14% on FY22 H1 reflecting an estimated 6% increase in average salary, and an increase in headcount of 37.

European distribution centre local administrative expenses increased by £0.4m (18%) on FY22 H1, to £2.4m reflecting the addition of two new distribution centres in FY22 H2.

Depreciation and amortisation in the Period totalled £3.0m (FY22 H1: £2.4m) including amortisation of £1.4m (FY22 H1: £1.1m) relating to our bespoke e-commerce platform, and £0.8m depreciation of 'Right of Use' assets (FY22 H1: £0.6m).

EBITDA margin of 4.1% compares to 7.4% in FY22 H1, and 4.0% in pre-Covid FY20 H1.

 

Net Loss

 

Financial expenses of £0.8m include £0.5m bank interest (FY22 H1: £0.2m) reflecting the level of debt in the business, £0.2m interest on lease liabilities (FY22 H1: £0.2m), and a small foreign exchange loss.

 

A net loss of £1.1m in the Period (FY22 H1: £1.1m net profit) reflects a return to a more normal seasonal pattern where the majority of our profits are made in H2.

 

Cash Flow and Balance Sheet

 

The business has deliberately maintained a high level of stock through FY22 and FY23 to date and as such the usual increase in September ahead of the peak Christmas trading period has not been required. Reported stock has decreased £2.1m since 31 March 2022 and is planned to decrease further by the end of FY23 H2. Stock at 30 September 2022 of £43.4m (30 September 2021: £37.5m) includes £4.1m of inbound stock-in-transit (30 September 2021: £6.2m) scheduled to arrive ahead of peak trading.

 

Net bank debt was £21.8m, at what has historically been a low point in the annual cash cycle, leaving headroom of £13.2m within the Group's £35m Revolving Credit Facility ('RCF'), and is expected to reduce further by 31 March 2023.

 

Trade and other payables of £18.9m were £3.3m (21%) higher than last year and £0.2m (1%) higher than 30 September 2020, and included a £1.3m increase in customer prepayments and stock deals on pre-agreed terms.

 

Capitalised software development costs totalled £2.8m in the Period (FY22 H1: £2.0m) taking total capitalisation to date to £22.5m. Amortisation in the Period was £1.4m leading to a £1.4m increase in net book value since the start of the financial year to £11.9m.

 

Property, plant and equipment capital expenditure was £0.6m in the Period (FY22 H1: £0.7m), relating principally to the on-going development of our distribution centres.

 

Dividend Policy

 

Consistent with its previous approach, the Group repeats its intention to revisit its shareholder distribution policy periodically.

 

 

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

 

		Note						6 months ended 30 September 2022 (unaudited)	6 months ended 30 September 2021 (unaudited)	Year ended 31 March 2022 (audited)
								£000	£000	£000
Revenue		3						66,305	64,694	147,630
Cost of sales								(48,892)	(46,573)	(106,500)
Gross profit								17,413	18,121	41,130
Administrative expenses		4						(17,679)	(15,728)	(35,061)
Operating (loss)/profit		4						(266)	2,393	6,069
Financial expenses		6						(777)	(463)	(1,055)
(Loss)/profit before tax								(1,043)	1,930	5,014
Taxation		7						(66)	(850)	(1,291)
(Loss)/profit for the period								(1,109)	1,080	3,723
Other comprehensive income
Items that will not be reclassified to profit or loss:
Deferred tax movements								-	(120)	(109)
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation differences - foreign operations								(101)	(36)	(23)
Total comprehensive income for the period								(1,210)	924	3,591
(Loss)/profit per share attributable to equity shareholders of the company
Basic profit per share			5				(5.3p)		5.2p	17.8p
Diluted profit per share			5				(5.3p)		5.1p	17.3p

 

Unaudited consolidated interim statement of financial position

 

			30 September 2022 (unaudited)	30 September 2021 (unaudited)	31 March 2022 (audited)
	Note		£000	£000	£000
Non-current assets
Property, plant and equipment	8		12,805	11,289	12,958
Right of use assets	9		7,438	8,953	8,235
Intangible assets	10		21,184	15,901	19,812
			41,427	36,143	41,005
Current assets
Inventories	11		43,378	37,452	45,516
Trade and other receivables	12		4,289	3,317	3,841
Cash and cash equivalents			7,199	3,648	3,903
			54,866	44,417	53,260
Total assets			96,293	80,560	94,265
Current liabilities
Interest bearing loans and borrowings	13		-	-	-
Trade and other payables	14		(18,912)	(15,591)	(16,183)
Lease liabilities	15		(1,171)	(1,158)	(1,229)
			(20,083)	(16,749)	(17,412)
Non-current liabilities
Interest bearing loans and borrowings	13		(29,000)	(17,000)	(28,000)
Other payables	14		(81)	(78)	(64)
Lease liabilities	15		(7,822)	(9,221)	(8,455)
Deferred tax liability			(2,335)	(2,206)	(2,298)
			(39,238)	(28,505)	(38,817)
Total liabilities			(59,321)	(45,254)	(56,229)
Net assets			36,972	35,306	38,036
Equity
Share capital			2,098	2,098	2,098
Share premium			13,286	13,286	13,286
Foreign currency translation reserve			(175)	(87)	(74)
Revaluation reserve			1,589	1,640	1,606
Retained earnings			20,174	18,369	21,120
Total equity			36,972	35,306	38,036