Shares in MusicMagpie (MMAG:AIM) plunged 27% to 119p after the smartphones-to-computers recycler and reseller downgraded margin guidance for the current year to November 2022, prompting material earnings downgrades for this year and next.
The recommerce specialist warned trading momentum has moderated during the first quarter of 2022 amid a normalisation of trading, with the business being hit by wider consumer trends of reduced online retail sales as well as increased competition.
Trading as musicMagpie in the UK and Decluttr in the US, MusicMagpie is an online reseller of used electronic products, games, CDs and DVDs.
Pitching the green angle, since it gives ‘second life’ to used products like smartphones and tablets, the company listed on the stock market in April 2021, raising £15 million of new money at 193p.
Results for the year to November 2021 revealed revenues of £145.5 million and adjusted EBITDA of £12.2 million, down 5% and 12% as expected, as the company lapped Covid-boosted comparatives whilst delivering strong progress in its new device rental subscription service.
MOMENTUM MODERATES
However, the shares slumped as MusicMagpie warned that trading momentum has moderated in the first quarter of 2022 and massaged down gross margin guidance for the current year amid reduced consumer demand and rising competition.
While first quarter consumer tech revenues have been ‘in line with management expectations’, the company warned a trend towards ‘lower sales volume at a higher average selling price and an increase in the proportion of products sourced from intermediary wholesale partners, is currently expected to compress the gross margin on outright sales in the category in the current year by circa 4 percentage points’ compared with 2021.
Not only have market conditions softened, but Shore Capital pointed out MusicMagpie has been more price competitive in the quarter and faces stiff competition from the likes of Back Market, a Paris-based refurbished electronics marketplace which is having a growing impact on the UK consumer tech market.
MASSIVE DOWNGRADES
Following the update, Shore Capital downgraded its full year 2022 EBITDA estimate by 30% to £10 million and slashed its 2023 EBITDA forecast by 38% to £11.4 million.
To date, said the broker, MusicMagpie has been ‘a consistent deliverer of robust financial development and so the magnitude of today’s surprise will need to be understood and digested by the market from this inspired player in the recommerce industry.
‘So, in the short term, this announcement makes for all the greater disappointment to us.’
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould commented: ‘MusicMagpie calls this a normalisation in trading after the pandemic, when presumably people had more time to go through their old gadgets and sell them through the platform.
‘The company makes money by taking unwanted products and using its proprietary technology to optimise the sales price for every item, simultaneously listing them across multiple sales sites, including the MusicMagpie and Decluttr websites and apps, as well as Amazon and eBay.
‘If the group isn’t getting as many items listed then it can’t grow as fast, and it is slightly worrying that it has had to rely on intermediary wholesale partners to populate the platform.’
Mould added: ‘MusicMagpie is looking to diversify by renting out devices and has signed up 19,000 subscribers to the service.
‘However, this shift will depress headline revenue growth in the short term as the company earns smaller monthly revenue over the life of a device, rather than deriving an upfront fee.
‘In theory MusicMagpie should do well from a tougher consumer environment as people look to realise cash from the unwanted tech sitting in drawers and shoppers are more prepared to buy second hand as a belt tightening exercise. However, the company needs to execute properly if it is to win back the market’s faith.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
