Gear4music matched market expectations in FY2019 after encountering well reported turbulence in the second half of its financial year. A combination of greater focus on customer satisfaction and strong financial resources augurs well for an improved profit performance and associated shareholder value creation in FY2020. The new fiscal year started well.
Gear4music’s preliminary results statement confirmed full year sales of £118.2m in the 13 months to 31st March 2019, which was consistent with the company’s 2nd April 2019 trading statement and compared with £80.1m in FY2018’s 12-month period. Adjusted sales data – i.e. excluding March 2019 - showed a 37.2% gain in overall sales with UK and International revenue advancing by 33.0% and 42.5% respectively.
Overall, profitability in FY2019 was in line with our own and market expectations and we leave our FY2020 sales and EBITDA forecasts broadly unchanged. Gross profits in the 13-month period were £26.9m, compared with £20.3m in the 12-months of FY2018. However, gross margins fell by 260 basis points to 22.8%, which reflected the intensified well-flagged market competitiveness. EBITDA was £2.3m, compared with £3.5m in FY2018. However, inferred H2 EBITDA margins rose from H1.
The company’s balance sheet shows net assets of £18.7m little changed from a year earlier at £18.9m. Net debt rose to £7.5m from £5.0m at the end of FY2018. The balance remains tilted towards the longer term with only £3.2m due within one year.
Profitability prospects look brighter in FY2020 as Gear4music looks to target margin expansion. Inventory investment is expected to be more selective while more profitable own-brand sales will be targeted. Similar to last year, we do not include any expectation of a dividend in our numbers.
We welcome the company’s increased focus on profitability and the positive implications that will have on free cash flow. In our view, an EV/sales ratio around 0.6x compared with the current 0.4x represents a realistic first stage of re-rating. Based on our 2020 forecasts, the shares would have to rise to 350p to achieve this higher ratio.