20 June 2023

Gear4music (Holdings) plc

Audited results for the year ended 31 March 2023

"Laying the foundation for long-term success"

Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its financial results for the year ended 31 March 2023.

FY23 Highlights ⁽¹⁾:

·    FY23 revenues were 3% ahead of FY22 in a difficult consumer environment, and 26% ahead of FY20

·    Gross margin of 25.7% reflects a significant reduction in inventory through a challenging period for discretionary retail

·    Reported EBITDA of £7.4m is 34% below FY22 and 5% below FY20

·    Net debt at year end of £14.5m reduced from £24.2m at 31 March 2022

·    Committed borrowing facility renewed with HSBC at £30m for a further 3 years

·    Active customers of 0.81m is 6% behind FY22 and 7% ahead of FY20

·    Conversion decreased to 4.0% from 4.1% in FY22, and 70bps ahead of 3.3% in FY20

⁽¹⁾ FY20 shown for comparison as FY21 was exceptional due to the positive impact of Covid lockdowns.

Commenting on the results, Andrew Wass, Chief Executive Officer said:

"I am pleased to be reporting FY23 full year results that are in line with guidance provided in April, with the business generating revenues of £152m and EBITDA of £7.4m.

Throughout what has been a challenging year, we continued to make good progress in building the technical and operational infrastructure required for our long-term success as the UKs leading retailer of musical instruments and equipment. A particular recent highlight has been the launch of our second-hand system, which whilst still in 'soft launch' stage, has traded over 1,000 products within the first three months.

We have continued to make good progress in reducing our bank debt and to provide certainty and headroom for the medium term, we have renewed our committed borrowing facility with HSBC at £30m for a further three-years.

Market conditions have continued to be challenging since our last update in April, and we are taking the appropriate and necessary actions to ensure our business is correctly configured, resourced and positioned strategically for long term success. To ensure the Group can return to profitability during FY24 H2, we will focus on product margins, efficiency and overhead cost reduction ahead of revenue growth, whilst we continue to develop new growth initiatives for the longer term."

ENDS

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About Gear4music (Holdings) plc

Operating from a Head Office in York, Distribution Centres in York, Bacup, Sweden, Germany, Ireland & Spain, and showrooms in York, Bacup, Sweden & Germany, the Group sells own-brand musical instruments and music equipment alongside premium third-party brands including Fender, Yamaha and Roland, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and the Rest of the World.

Having developed its own e-commerce platform, with multilingual, multicurrency websites delivering to over 190 countries, the Group continues to build its overseas presence.

Chairman's Statement

The year ended 31 March 2023 was a difficult period for many retailers, with high levels of inflation and increasing interest rates impacting consumer confidence and disposable income. Whilst our drive for long-term growth remains unchanged, in response to these macro-economic challenges our focus has been on debt reduction and disciplined cost-management to provide the platform for the Group to return to profitable growth.

Operational and Commercial progress

Whilst the last 12 months have been challenging, the Group has increased its addressable market, and refocused on operational efficiency and the customer journey. Taking a longer term view the Group has made significant progress and we believe we are well positioned to deliver our long-term profitable growth ambitions. Since FY20, the Group has:

-     increased revenue by 26% to £152m led by a 70bps increase in conversion and 7% increase in active customers;

-     added three new distribution centres including operations in Spain and Ireland to further enhance our localised customer proposition in mainland Europe, creating an operational infrastructure capable of delivering revenue in excess of £250m;

-     extended our target addressable market through strategic acquisitions in the AV-market, in particular, through the purchase of AV.com, opening up an estimated additional addressable market of £2.7bn;

-     leveraged our significant software development capability to deliver several growth and efficiency focused projects, including various Brexit mitigations, the launch of AV.com and most recently the launch of our second-hand platform; and

-     navigated periods of worldwide supply chain disruption, cost price inflation, and weakening consumer confidence, underlining the Group's resilience.

Having successfully reduced net debt by £9.7m to £14.5m at 31 March 2023, since the year-end the Group has renewed its committed Revolving Capital Facility ('RCF') at £30m for a further three-year period, enabling the Group to plan into the medium term with certainty and take advantage of opportunities as and when they arise.

Environmental, Social and Governance

As a business and Board, we are committed to having a positive impact on our society, the environment, and our team.  We acknowledge there is increasing interest from a wide range of stakeholders on the various positive impacts that the business has and what we are doing to improve outcomes. We will report under TCFD in the financial year ending 31 March 2024.

The launch of our second-hand platform in March 2023 is our timely advancement into recycling and the circular economy, offering customers the opportunity to sell their pre-loved musical instruments and equipment quickly and easily.

Outlook

Customer demand across our markets remains volatile and difficult to predict, reflecting the continuing impact of geo-political and macro-economic uncertainties affecting consumer confidence across Europe. Nevertheless, having delivered several development-led growth initiatives in FY23 and markedly reduced net debt, the Board is confident that the Group's customer proposition, enhanced operational infrastructure and balance sheet will enable the Group to achieve its long-term business objectives, namely taking market share and delivering operational efficiencies providing the platform for profitable growth.

Ken Ford

Chairman

19 June 2023

Chief Executive's Statement

Financial KPIs

*             See note 2 of the Financial Information

**           See notes 13 and 14 of the Financial Information

Commercial KPIs

Note: Change on FY20, three years ago, compares current trading to the pre-pandemic period to give a better understanding of performance when compared to the growth and characteristics of trade which continued to be distorted by pandemic-related factors in FY22.

Business review

During FY23 we made good progress with our long-term objective of making musical instruments and equipment accessible and affordable for as many people as possible, delivering a wide range of customer centric improvements throughout the business.

Progress has included improving our consumer finance proposition, upgrading our digital downloads sales platform, launching AV.com in Europe, alongside what has been our largest and most ambitious development project to date - our second-hand system.

Our second-hand system simplifies the process for consumers of selling used musical instruments and equipment and provides value and peace of mind for our customers when buying second hand products. It ensures the lifespan of products is maximised, whilst enabling enhanced margin opportunities for the business.

These new growth initiatives will strengthen our position as the UK's leading retailer of musical instruments and equipment. However, due to the current environment of squeezed discretionary consumer spending, FY23 proved to be a commercially challenging year for Gear4music and across the industry.

Reducing our net debt and inventory level has been a priority, and achieving these objectives in challenging market conditions is testament to the tenacity of our teams, whilst still generating revenue growth and limiting the impact on margin.

Strategy

Whilst FY23 was a period of rapid unwinding of inventory, our focus for FY24 will be to improve efficiency and product margins.

We intend to leverage our operational infrastructure to launch our second-hand system across Europe, increasing the number of markets we trade in, expanding the products available and launching the system on AV.com later in the year.

In addition to the second-hand system, we have a wide range of further initiatives planned to support product margins, including significant own-brand product launches, licencing agreements and system improvements.

Whilst we continue to develop and launch longer term growth initiatives, our short-term focus will be on overhead cost reduction, efficiency, and improving productivity by adopting the latest technologies. Further net debt reduction will be targeted by optimising inventory, reducing development costs and limiting capital expenditure, as we diversify our sales and fulfilment channels.

Outlook

Anticipating the persistence of challenging market conditions throughout FY24, we continue to take proactive measures to ensure the business is well configured to withstand further economic headwinds and remain well positioned for the future.

With a new three-year banking facility agreed, we are confident in our strategic vision, making the most of recent acquisitions and new initiatives, alongside an emphasis on optimising inventory, product margins, and implementing efficiency and cost reduction strategies.

As consumer confidence returns in the UK and mainland Europe, we look forward to capitalising on the opportunities in our markets, serving our customers and continuing our journey of long-term profitable growth.

Andrew Wass

Chief Executive Officer

19 June 2023

Chief Financial Officer's statement

Overview

The financial year ended 31 March 2023 was a difficult period for many retailers of discretionary products, and against a backdrop of cost-led inflation and increasing interest rates it was important we delivered on our stated ambition of bringing down our net debt and taking a disciplined approach to cost management. Until the macro-economic climate and consumer confidence show sustained signs of recovery, cost control will continue to be a priority through FY24.

FY23 profitability was impacted by our active reduction in stock levels during a period of weak demand contributing to a lower than planned gross margin, and by cost-base inflation across marketing, labour and energy. Relative to FY20, the last normal trading period unaffected by the pandemic, our results show good revenue growth at a comparable gross margin, but lower operating profits and profitability reflecting the increased size and scale of the business reinforced by the aforementioned inflationary factors.

Since the year-end we have renewed our banking facilities with HSBC to provide a £30m committed facility to 2026, giving us certainty and confidence to plan into the medium term.

Revenue

Revenue increased £4.4m (3%) on FY22 and £31.7m (26%) relative to a more normal trading period in FY20, equating to compound growth of 8.1% per annum.

UK revenue of £82.0m was £0.6m (1%) behind FY22 and £20.2m (33%) ahead of FY20, reflecting cost-of-living challenges impacting sales of discretionary products. This takes our estimated UK market share to 9.1% (FY22: 9.2%; FY20: 7.2%).

International revenues of £70.0m were £5.0m (8%) ahead of FY22 and £11.5m (20%) higher than FY20 reflecting the distribution centres we opened in Ireland and Spain last year becoming increasingly well-established and offering an improved localised customer proposition in those and adjacent markets.

Revenues from sales outside of Europe accounted for 2.0% of total revenue in FY23 compared to 1.4% in FY22 and 1.3% in FY20.

Own-brand revenue of £38.9m was up £0.8m (2%) on FY22 and £3.5m (10%) on FY20, and accounted for 25.6% of total revenue from 8% of total SKUs, which is a lower proportion than has historically been the case (FY20: 29.4%). This is in part due to a post-Covid slow-down in demand for entry-level products, and secondly due to increased competition from Far East manufacturers selling direct into Europe through Amazon. We have responded by increasing own-brand SKU count from 4,200 to 4,900 including revamped entry level and premium ranges, and the expansion of Premier branded-products.

Other brand revenue was £3.7m (4%) ahead of FY22 and £26.8m (34%) ahead of FY20.

Carriage income was broadly flat on FY22 and £1.3m ahead of FY20, representing 4.1%, 4.3% and 4.1% of sales in FY23, FY22 and FY20 respectively, reflecting the Group offering more localised, cheaper delivery options and less cross UK-EU border shipments in FY23 and FY22 than was possible in FY20.

Other revenue comprises paid for extended warranty income, and commissions earned on facilitating point-of-sale credit for retail customers. The proportion of revenues coming from these sources was 0.5% of total revenue in FY23, FY22 and FY20.

Gross profit

In FY22 we built-up a high level of stock for precautionary and opportunistic reasons. In FY23 with a return to reliable supply, higher interest rates and against a backdrop of weaker customer demand, our focused moved to reducing stock to a more appropriate level through resetting re-ordering levels and involved targeted price reductions. These factors contributed to a 210bps decrease in product margin to 30.0%.

In a similar vein to FY22, product margin in FY23 was impacted by sales mix with relatively lower sales of higher margin own-brand products (26% of total sales) than has historically been the case (FY20: 29%).

The Group benefits from buying scale relative to its UK competitors, and its ability to source other-branded products in Swedish Krona and Euros and receive product directly into its European distribution centres is a point of differentiation. The Group purchases its own-brand products in US Dollars and product margin can be impacted by exchange rate fluctuations.

Administrative expenses and Operating profit

Operating profit of £1.3m is £4.8m below FY22 and £2.8m below FY20, reflecting a low gross margin and a larger cost base reflecting the size and scale of the business.

Total administrative expenses increased by £2.8m (8%) on FY22 relative to a revenue increase of 3%, including a £1.3m (10%) increase in labour costs, £0.9m (18%) increase in depreciation and amortisation, and a £0.5m (24%) increase in card processing costs.

Admin expenses have increased from 23.0% of sales in FY20 and 24.3% in FY22, to 25.5% in FY23.

Combined marketing and labour costs of £25.0m (FY22: £23.9m) accounted for 65% of total administrative expenses (FY22: 67%):

-     Marketing expenditure decreased in FY23 to £10.6m (FY22: £10.8m) equating to 7.0% of revenue compared to 7.3% last year and 7.7% in FY20, as the business targeted a higher return on investment; and

-     Labour costs increased 10% in FY23 to £14.4m (FY22: £13.1m) reflecting a 3% increase in average headcount. Labour costs accounted for 9.5% of revenue (FY22: 8.9%).

FY23 EBITDA of £7.4m was £3.8m lower than FY22 and £0.4m lower than FY20.

Other expenses and net profit

Financial expenses of £1.7m (FY22: £1.1m) include £1.1m bank interest (FY22: £0.5m) reflecting higher interest rates, £0.4m of IFRS16 lease interest (FY22: £0.4m), and a £0.2m net foreign exchange loss (FY22: £0.1m loss).

The Group reports a small loss before tax of £0.4m (FY22: profit before tax of £5.0m) that after tax translates into a basic and diluted loss per share of 3.1p (FY22: 17.8p basic profit per share; 17.3p diluted profit per share).

Cash-flow

Post year-end the Group renewed its RCF at £30m for three more years with its bankers, HSBC, providing the headroom to invest in opportunities as and when they arise.

Group indebtedness decreased by £9.7m to £14.5m (40%) largely down to the deliberate and planned £11.1m reduction in stock. Net debt of £24.2m at 31 March 2022 was a peak year-end figure reflecting an £11.4m investment in acquisitions in FY22, and a £17.1m investment in stock that was largely unwound in FY23.

Reported net cash outflow in investing activities of £6.7m includes £5.3m of capitalised software development costs (FY22: £4.4m) and £1.0m property, plant and equipment additions (FY22: £1.8m). Depreciation and amortisation of £4.4m (FY22: £3.7m) is added back in 'net cash from operating activities' with respect to these asset categories.

Net cash outflow from financing activities of £12.4m (FY22: £21.8m inflow) represents a £9.0m lower RCF drawdown (FY22: £24.6m net inflow), £1.7m payment of lease liabilities (FY22: £1.9m), and £1.7m interest paid (FY22: £0.9m).

Balance sheet

Capital expenditure on property, plant and equipment totalled £1.0m spread across all eight sites.

The Group capitalised £5.3m (FY22: £4.4m) of software development costs relating to our bespoke e-commerce platform, including projects linked to AV.com, third-party fulfilment, and the launch of our second-hand platform. Platform amortisation in the year was £3.0m (FY22: £2.3m) taking net book value to £12.8m (31 March 2022: £10.5m).

Other intangible assets include £5.3m goodwill and £3.0m domain names.

Stock of £34.4m is £11.1m (24%) lower than at 31 March 2022 reflecting planned reductions. The Board considers this to be a good level to take into FY24, providing breadth and depth across categories across our distribution centres.

The Group carried net debt of £14.5m at the year-end (31 March 2022 net debt: £24.2m), having reduced stock by £11.1m (24%) over FY23.

Dividends

The Board is confident in the prospects for the business and recognises the importance of generating and retaining cash reserves to support future growth, and as such the Board does not consider it appropriate to declare a dividend at this time but will continue to review this position on an annual basis.

On behalf of the Board                 

Chris Scott                                           Chief Financial Officer                                    19 June 2023

Consolidated Statement of Profit and Loss and Other Comprehensive Income

The accompanying notes form an integral part of the consolidated financial report.

Consolidated Statement of Financial Position

The notes 1 to 18 form part of the consolidated financial report.

Company registered number: 07786708