Today’s Gear4music trading statement reports a buoyant end to the 2019 calendar year with sales advancing by 7%. Moreover, higher gross margins confirmed the benefit of a raised focus on profitable growth while fully invested logistics and warehousing augurs well going forward. Given a reassuringly positive message on full year FY2020 figures, valuation looks supportive.
Gear4music’s latest trading statement refers to the two months to 31st December 2019. These key Christmas trading months saw brisk sales growth in both the UK and Continental Europe, which advanced by 6% and 7% respectively to generate a 7% overall gain. Overseas business edged up slightly as a portion of group sales to 47.8%. Consistent with what we highlighted in our 12th November 2019 report “Profitability Takes Centre Stage,” gross margins increased in the two month period to 26.5% from 23.9% a year earlier while gross profit overall rose by 18% to £8.0m. Importantly, the company achieved this previously stated objective while still gaining market share.
None of last year’s unusually disruptive logistics and warehousing problems appear to have recurred in this year’s key trading period. In particular, the company’s upgraded logistics and IT infrastructure has coped well with the intensity of Black Friday/Cyber Monday. Dispatched consignments rose 34% from the comparable weekend in 2018.
Looking ahead, Gear4music is comfortable that its three distribution locations enjoy sufficient capacity headroom to enable the company to grow volume at a sustainable brisk pace without needing significantly higher spending on tangible assets.
Gear4music states that full year FY2020 profits should be at least in line with the board’s expectations. Furthermore, investors should in our view note that a number of other UK consumer facing companies reported demand headwinds in this year’s Christmas trading period. Whilst Gear4music references a focus back toward growth-oriented projects, it also appears well placed to deliver mature economy – i.e. lower risk – growth on profitable, cash flow basis using its new economy online distribution channel. Having upgraded our forecasts in the November report, we leave them unchanged.
However, the company’s apparent comfort with consensus estimates and its warehouse capacity augurs well. To us, a rise from the current 0.5x to 0.8x in Gear4music’s EV/sales valuation makes sense, implying a 450p share price.
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