Gear4music reported £42.5m of total FY2019 first half sales today, which represents a sizable, better than expected 36% increase on the first half of FY2018. UK sales increased by 34% to £24.0m and European sales by 39% to £18.5m. Based on the current run rates, European sales may become larger than domestic in the second half.

In terms of forecasts, we look to increase our own FY2019 sales estimate from £104.2m to £110.0m. If we are correct, the implied growth rates in the UK and Europe will be 25% and 50% respectively. The company separately announced that it will move from an end-February to an end-March year-end with FY2019 being a 13-month year. However, our forecasts continue to refer to a 12 months’ period. 

Underlying sales strength tends to be confirmed by a 40% increase in active customer numbers to 547,000. The company also cited that its German distribution centre fulfilled a 230% increase in orders. The new Swedish distribution centre is on-track to be operational by the end of October 2018. Optimism about UK H2 momentum remains intact.

Gear4music encountered some competitive pressures in the period, which may lead to some slippage in gross margins. However, further ahead the company is well placed to recover profitability through brisk sales growth, ongoing cost control and the inevitable margin benefits which arise from channel shift in favour of on-line. To be prudent we trim our FY2019 EBITDA forecast slightly from £4.975m to £4.900m. However, the central statement message is that EBITDA expectations are unchanged.

Overall, Gear4music looks well placed to continue to enjoy brisk, profitable sales growth and to be well rewarded in terms of its share price. The company’s optically high EV/EBITDA and P/E ratios are not unusual for on-line providers which deliver rapid sales growth. Moreover, the company’s EV/sales ratio does not appear particularly demanding. Interim results are due to be released on 16 th October 2018.