Gear4music (G4M) has fulfilled the strong expectations of its four-month Christmas trading period. Revenue growth of 42% is consistent with H1 and is in line with expectations, both in the UK and faster growing international markets. This means that the online model continues to take share, achieving growth far ahead of consumer fundamentals and building on its market-leading position. We retain our forecast and reiterate our valuation stance, which sees upside based on the rate of development of international markets.
G4M reports 42% y-o-y growth in total sales for the four months from September to December, its important pre-Christmas sales period. That is reassuringly close to the 44% growth in the first half, with trading in line with expectations. Growth for each of the geographies was also close to H1 levels. The UK (25% vs 30%) continued to provide substantial sales growth, and international sales (69% vs 70%) are powering ahead based on increased capacity and localised delivery options provided by the Swedish and German hubs. Active customer numbers were 38% up at 450,000, and are already 15% higher than at the half year. Website conversion, which is characteristically strong in this period, was up from 3.0% a year ago to 3.3%.
G4M comments that two-year revenue growth of 120% is ahead of the same stage last year at 114%. This looks through the upward blip in September to December 2016 (+55%), which was supported by investment in stock at pre-referendum rates, as well as the upsurge in own-brand products following investment in the wake of the IPO. A year before (September to December 2015) growth had been 38%. The inference is that growth is returning to underlying strong rates.
We commented at the half year that we expected second-half revenue to grow by similar rates to the first. That is the case, and we are not changing our forecast.
We reiterate our valuation stance. Short-term P/E and EV/EBITDA multiples remain top of the range of pure-play online retailers. G4M’s current share price implies around six years to reach market share of 6% in mainland Europe. Achieving that one year earlier would imply 1,110p. Alternatively, overlaying a 1% share of the US market developed over the next 10 years would be equivalent to a share price of 967p. The two combined would be equivalent to a share price of 1,274p.