Shares in Gear4music (G4M:AIM) slumped more than 26% to a 12-month low of 265p after the online musical instrument retailer warned sales and earnings for the year to March 2022 came in ‘slightly lower’ than consensus expectations of £149.2 million and £12 million respectively.
The keyboard, drum kit and guitar purveyor pinned the blame for the earnings alert on weaker than expected consumer demand during February and March 2022 and warned it was moderating growth expectations for fiscal 2023 to reflect broader consumer uncertainty and operating cost inflation.
TUNING DOWN GUIDANCE
The largest UK-based online musical instruments and equipment seller now expects to post full year 2022 EBITDA, or earnings before interest, tax, depreciation and amortisation, of £11 million, below the consensus estimate and well short of the previous year’s £19.8 million haul.
Total sales were down 6% year-on-year at £147.6 million against an exceptional, Covid-inflated comparative as UK sales growth slowed to 5% and international sales fell by 18% amid Brexit-related supply chain issues, although the York-headquartered retailer still delivered strong revenue and profitability growth compared with pre-pandemic levels.
MARGIN GAINS RETAINED
‘Although full year 2022 financial performance has been impacted by weaker consumer demand during February and March, we retained a significant proportion of the exceptional gross margins that benefited from Covid lockdowns during full year 2021,’ stressed chief executive Andrew Wass.
‘We also achieved a 41% improvement in EBITDA compared with full year 2020 despite the impact of Brexit. This clearly demonstrates our long-term strategy, focusing on profitable growth, is on track and working well.’
GROWTH GUIDANCE MODERATED
However, Wass also warned ‘short term’ inflation-linked overhead cost pressures and weaker consumer confidence across the broader retail landscape will mean ‘the best opportunities for stronger growth’ during full year 2023 are likely to be in the second half.
Accordingly, Gear4music is ‘moderating our overall growth expectations for the new financial year, which we believe is the prudent approach in the current environment.’
Following the update, Investec Securities downgraded its 2023 and 2024 EBITDA estimates from £14.8 million and £17.7 million to £11.6 million and £14 million respectively.
Progressive Equity Research felt it ‘prudent’ to downgrade its EBITDA forecasts for 2023 and 2024 by 21% and 22% to £11.9 million and £14 million respectively.
Analyst David Jeary explained the shorter-term outlook for Gear4music is ‘characterised by the pincer effect of weaker consumer expenditure and operating cost inflation. Discretionary consumer expenditure is under pressure from price inflation in food, energy and tax increases in the UK. These inflationary pressures are in turn fuelling wage inflation for all retailers, which like consumers are also having to cope with increased energy and other costs.’
