Concerns over competition, margin pressure, the inflationary squeeze on discretionary spending and the company’s net debt in a higher rates environment have sent Gear4music (G4M:AIM) close to all-time lows, with shares in the online musical instruments seller down more than 80% over five years.

However, the drum kits-to-pianos retailer rallied 15% to 101p today (8 September) on the news trading for the first five months of the financial year was in-line with expectations.

The company also insisted it is making progress with increasing gross margins, cutting costs and improving profitability.

PRE-OWNED’S POSITIVE START

In a trading update that struck a positive tone, CEO Andrew Wass explained the web-based guitars, ukuleles and saxophones seller is on course to achieve the £161.2 million of sales and £10 million of earnings before interest, tax, depreciation and amortisation (EBITDA) called for by consensus for the year to March 2024.

York-headquartered Gear4music is prioritising gross margin uplifts and cost reductions to improve profitability ahead of less profitable revenue growth and Wass is pleased with the progress being made in these areas, which has included ‘driving significant cost efficiencies in our software development unit’.

Gear4music, which sells own-brand instruments and equipment alongside premium third-party brands including Fender, Yamaha and Roland to beginners and professionals alike, said its recently launched second hand system is off to a good start.

The company’s first move into pre-owned products is going well and the platform ‘continues to show signs of being a long-term growth driver, having successfully facilitated several thousand trade-ins since its March 2023 debut’, said Gear4music.

In the last few weeks, the AIM-listed company has also launched the system into its European markets and is ‘confident it will evolve to become a meaningful component of the group’s future revenue portfolio.’

WELL-PREPARED FOR PEAK

Singer Capital Markets’ retail sage Matthew McEachran, who has a 182p price target for Gear4music, said the development of the second-hand business ‘looks timely given the cost-of-living crisis has boosted the circular economy. In the plausible event profit forecasts are delivered via higher profit margins (a pivotal issue) on less sales, this may be a catalyst for rating expansion with the share price near its all-time low.’

There was also relief as Gear4music said it is ‘well prepared for the upcoming seasonal peak trading period’, backed by robust working capital availability, and the board remains confident in the group’s ‘medium and longer-term profitable growth strategy’.

For the current year, McEachran sees the online retailer swinging from losses of £200,000 to adjusted pre-tax profits of £1.1 million on sales of £162.3 million, ahead of pre-tax profits improvement to £2.7 million on £174.2 million turnover for the year to March 2025.

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