25 June 2024

Gear4music (Holdings) plc

Audited results for the year ended 31 March 2024

"Key financial and strategic objectives met in FY24; Refreshed growth strategy in place to drive profitable growth in FY25"

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 2024.

FY24 Highlights:

* Adjusted for £487,000 of one-off redundancy costs

·    FY24 revenues in line with market expectations reflecting prioritisation of increasing gross margins and cost base reductions to improve profitability, ahead of revenue growth

·    Gross margin of 27.3% (FY23: 25.7%; FY22: 27.8%)

·    Adjusted EBITDA of £9.9m is 34% ahead of FY23 and in line with market expectation

·    Continued progress in reducing net debt to £7.3m at year-end, reduced from £14.5m at 31 March 2023 and £24.2m at 31 March 2022, ahead of market expectation

·    First full year of second-hand business already demonstrating strong growth potential

·    Refreshed growth strategy in place, with enhanced product offering and operational efficiency to drive profitable growth in FY25

Post-period Board update:

The following Board changes will take effect from Friday 5 July 2024, as announced on 24 April and today:

·    Ken Ford to step down as Non-Executive Chair and retire from the Board

·    Dean Murray to step down as Non-Executive Director and retire from the Board

·    Andrew Wass to move from CEO to Executive Chair

·    Gareth Bevan, current CCO, to be appointed CEO

·    Neil Catto to join the board as Senior Independent Director and Audit Committee chair

·    Sharon Daly to join the board as Non-Executive Director

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

"We are pleased to be reporting FY24 financial results in line with market expectations**, with adjusted EBITDA of £9.9m representing a 34% increase on £7.4 million in FY23 highlighting the successful execution of our strategy to prioritise and protect margins.

The Group has also delivered on another strategy priority with net debt reducing to £7.3m as of 31 March 2024, almost halving since 31 March 2023 and being 0.7x FY24 adjusted EBITDA. In addition, we improved gross margins by 160bps to 27.3% during FY24 whilst at the same time reducing overhead costs, delivering a £1.5m improvement in adjusted profit before tax.

Having delivered the key objectives we set ourselves at the beginning of FY24, the Group is well positioned to relaunch its profitable growth strategy for FY25. This will focus on expanding sales verticals and channels to market whilst further enhancing and leveraging our unique bespoke e-commerce platform and product offering.

International revenue growth faced some localised challenges in FY24; however, the Board is confident that, through our ongoing actions and new initiatives, such as our second-hand proposition, European sales are set to start recovering in FY25.

The cost reductions implemented through FY24 are now delivering full-year benefits as we commence FY25. Alongside this, based on trading performance since our last update in April, the Board remains confident in delivering further improvements in financial performance during FY25 in line with market expectations."

** Gear4music believes that, prior to publication of this announcement, current consensus market expectations (i) for the year ended 31 March 2024 were revenue of £144.2 million, adjusted EBITDA of £9.8 million, adjusted profit before tax of £1.3 million, and pre-IFRS16 net debt of £9.4 million; and (ii) for the year ending 31 March 2025 were revenue of £154.8 million, EBITDA of £11.8 million, profit before tax of £2.8 million, and pre-IFRS16 net debt of £6.6 million. Note Gear4music believes that adjusted profit before tax consensus market expectations do not take into account foreign exchange gains or losses. £0.2m foreign exchange losses were recognised in FY24.

ENDS

Enquiries:

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

As we stated heading into the year, whilst our drive for long-term growth remains unabated, our focus in FY24 was on reducing our cost-base and increasing efficiency, and delivering working capital improvements to materially improve our net debt position.  This was reflective of a period of uncertainty for many retailers and consumers, with high inflation and interest rates weighing on consumer confidence and disposable income, and therefore we shifted our short-term focus accordingly to address these challenges.

Operational and Commercial progress

I am pleased that the Group has delivered the affirmative action that we set out to, delivering a cost reduction programme to improve underlying profitability, which puts us in a strong position to deliver our long-term profitable growth ambitions when markets return to more 'normal' conditions.

As a result of these actions the Group has delivered a second significant annual net debt reduction, from a year-end peak of £24.2m at 31 March 2022 down to £7.3m at 31 March 2024. With a committed £30m Revolving Capital Facility ('RCF') in place until at least June 2026 secured by £75.2m of assets including £7.6m of freehold properties, the Group has the certainty and resources required to take advantage of opportunities as and when they arise.

Environmental, Social and Governance

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 impacts that our business has, and what we are doing to improve outcomes, and this year we are pleased to include our first TCFD-aligned Climate Report for the financial year ending 31 March 2024. We aim to improve the depth and quality of our reporting over the coming years, better informing and enabling us to reduce our environmental impact wherever there is the opportunity.

Board Changes

Having served the Group since IPO in 2015 and been part of the remarkable growth journey in that time, I am approaching the end of my nine-year tenure and intend to step down on 5 July 2024. It has been an honour and privilege to serve and want to extend my heartfelt thanks to Andrew and the Board, our whole team, and all stakeholders for their commitment to the business and enthusiasm. Looking back, this period has seen significant growth with challenges to overcome along the way but, today, our business stands significantly stronger, a testament to the collective efforts and dedication of our team.

Having also served as a Non-Executive Director for over nine years, Dean Murray has decided to retire from the Board. I wish Dean well for the future and on behalf of the whole Gear4music team thank him for his significant contributions dating back to 2012, and particularly for his efforts since IPO as Audit Committee Chair and as a member of the Remuneration and Nomination Committees.

Ahead of these changes the Board and Nominations committee diligently evaluated revised board structures to ensure the best outcomes for all stakeholders and, having consulted with our advisors and certain of the Company's major shareholders, we concluded matters and announced that Andrew Wass will move from CEO to Executive Chair and Gareth Bevan, current CCO, will move to CEO. Chris Scott's and Harriet Williams' (CFO and NED respectively) roles and responsibilities remain unchanged.

To underpin the new structure and provide strong, independent challenge and support, I am delighted to report that Neil Catto and Sharon Daly have agreed to join the Board as Senior Independent Director and Non-Executive Director respectively. Both bring significant relevant experience, and skills that will complement and improve the capability of the existing Board.

I am confident that the diverse skills and experience of the restructured Board will continue to drive transformative change. I extend my best wishes to the new team on their journey towards sustainable and profitable growth and I am confident that they will continue to drive Gear4music forward.

Outlook

The Board is confident that the Group's customer proposition, operational infrastructure and balance sheet will enable the Group to achieve its long-term business objectives, namely delivering profitable growth and maintaining its market leading position in the UK and Europe.

Ken Ford

Chairman

24 June 2024

Chief Executive's Statement

Financial KPIs

*             See note 2 of the Financial Information

**           Defined as Reported EBITDA less one-off redundancy costs. See note 1.3 to the Financial Information

***        See notes 13 and 14 of the Financial Information

Commercial KPIs

Business review

I am incredibly grateful to our entire team for their outstanding performance in achieving our key objectives during FY24. Our primary goals were to enhance our margins and profitability and at the same time reduce net debt and lower our cost base. Thanks to their dedication and hard work, we have successfully met these targets.

At the beginning of FY24, we communicated our intention to prioritise these objectives over revenue growth. Having now achieved two consecutive years of significant Net Debt reduction, the Group is well-positioned to focus on growth initiatives, whilst continuing to improve profitability.

A highlight of the year was the launch of our unique Second-Hand proposition in March 2023. From a standing start, we have acquired over 7,500 second-hand items from consumers. The resale of these products is already a high-growth sales vertical in FY25, with significant potential for expansion.

We also implemented several significant upgrades to our website throughout the year. These enhancements include improved on-site search functionality and an upgraded customer review platform. With a view to boosting productivity, we integrated multiple AI-based systems and process enhancements.

The expansion of our in-house product design and development capacity allowed us to launch 485 new own-brand products. This aligns with our strategy of enhancing our proposition and improving product margins, further reinforcing the strength of our market position.

In summary, FY24 has been a year of strategic progress and laying the groundwork for future growth. We are well-equipped to pursue our growth initiatives from a solid foundation of reduced debt, enhanced efficiency, and a strong product offering.

Strategy

Our refreshed Profitable Growth Strategy for FY25 is built on four key pillars designed to drive growth and enhance our market position:

1.    Transform our platform by integrating artificial intelligence at its core

2.    Enhance our product offerings

3.    Diversify our channels to market

4.    Expand our sales verticals by establishing new operations in Europe

Transform our platform by integrating artificial intelligence at its core

This will boost productivity and elevate the customer experience through unique solutions in our market, such as our innovative second-hand system, which we expect to significantly increase our market share.

Enhance our product offerings

This includes scaling up our second-hand and digital download propositions, developing and launching a greater number of best-in-class own-brand products, and exploring additional strategic brand partnerships. These initiatives are designed to ensure value for money while simultaneously strengthening our market share. Additionally, we will evaluate opportunities to acquire legacy brands as they arise, such as Premier, to further broaden our own-brand portfolio.

Diversifying our channels to market

We will integrate with new European marketplaces and develop affiliate programs, leveraging influencers to expand our reach. Where appropriate, these efforts will be driven and informed by AI to maximise their effectiveness.

Expand our sales verticals by establishing new operations in Europe

This expansion, focused on our hub network, aims to drive market share in Europe and enhance our purchasing, marketing, and fulfilment operations within the region. Furthermore, we will explore new opportunities in the USA, India, and Southeast Asia to broaden our global footprint.

Board Changes

I would like to extend my heartfelt thanks to Ken and Dean for their invaluable contributions over the past nine years. Their wise counsel and dedication have been instrumental to our success, and we are deeply appreciative of their service.

We are excited to welcome Neil Catto as Senior Independent Director and Sharon Daly as a Non-Executive Director, effective 05 July 2024. We are eager to work with Neil and Sharon and are confident that their expertise and insights will significantly enhance our Board's capabilities.

Additionally, I look forward to collaborating with Gareth in his new role as CEO. The transition will ensure seamless continuity within our leadership team, and after twelve years of working with Gareth in his role as Chief Commercial Officer, I firmly believe there is no better person to be Gear4music's CEO.

In my new role as Executive Chair, I will continue to spearhead our strategic initiatives and oversee our growth strategy. I am committed to providing support to our team and stakeholders wherever needed, ensuring that we achieve our goals and maintain our long-term trajectory of success.

Thank you for your continued support during this exciting transition.

Outlook

During FY24, we implemented a wide range series of strategic actions designed to mitigate the impact of a weaker consumer environment. This was the right thing to do, and these measures have paid off, strengthening our foundation ensuring we are well positioned to capitalise on emerging opportunities and leaving us well-prepared for the future.

We are optimistic about our prospects for further profitable growth during FY25 and have launched our refreshed growth strategy with strategic priorities aligned to driving growth and continuing our commitment to driving innovation, expanding our market reach, and delivering exceptional value to our customers. Our strategic initiatives are beginning to bear fruit, and our efforts to strengthen our financial position and operational capabilities have set the stage for sustainable long-term growth.

Andrew Wass

Chief Executive Officer

24 June 2024

Chief Financial Officer's statement

Overview

As stated in our FY23 Financial Review, and against a continuing backdrop of higher inflation and interest rates than has historically been the case, it was important that we built on the good work done in FY23 in terms of reducing our cost base and inventory levels to reflect demand, sustainably improving gross margins, and materially reducing net debt. In FY24 we delivered on these priorities:

-     notwithstanding inflationary pressures, Administrative expenses (excluding redundancy costs) remained 4% lower than FY23 broadly in line with sales as average headcount was reduced by 89 (16%);

-     investment in software development was reduced to £3.7m (FY23: £5.3m) following the successful delivery of a number of large projects in FY23; and

-     inventory reduced by £8.8m (25%) further to an £11.1m reduction in FY23.

These improvements combined to generate a £7.2m reduction in net bank debt, down to £7.3m representing 0.7x FY24 adjusted EBITDA (£9.9m) and secured by £7.6m of freehold properties within the Group.

Our underlying cost base is lower heading into FY25 and until the macro-economic climate and consumer confidence show sustained signs of recovery, tight cost control will remain a priority.

Revenue

Revenue decreased £7.6m (5%) on FY23 with a 6% decrease in H1 and 5% in H2.

UK revenue of £83.1m was £1.1m (1%) ahead of last year reflecting the strength of brand and proposition in our most mature market, and new initiatives such as second-hand being launched in the UK first. This takes our estimated UK market share to 9.5% (FY23: 9.1%).

European revenues of £59.2m were £7.8m (12%) behind FY23, reversing the £5.0m increase last year and reflecting a challenging market in certain European territories.

Revenues from sales outside of Europe accounted for 1.4% of total revenue (FY23: 2.0%).

Own-brand revenue of £37.6m was 3% (£1.3m) down on FY23, slightly better than the overall result, and accounted for 26.0% of total revenue (FY23: 25.6%) from 8.5% (FY23: 8.0%) of SKUs. It is our ambition to grow our own-brand business and to support this we have invested in our own-brand team.

Other brand revenue of £100.4m was £5.8m (5%) behind FY23.

Carriage income of £5.8m was £0.4m (6%) behind last year, representing 4.0% of total sales compared to 4.1% last year, reflecting the Group offering more localised, cheaper delivery options.

Other revenue comprises paid for extended warranty income, and commissions earned on facilitating point-of-sale credit for retail customers. The proportion of revenue coming from these sources was 0.4% of total revenue in FY24, compared to 0.5% in FY23.

Gross profit

Notwithstanding a 5% decrease in revenue, gross profit was ahead of last year, reflecting improved product margins. In FY24 we benefited from the work done in FY23 on reducing stock and were able to further reduce inventory through resetting re-ordering levels rather than through price reductions, resulting in a product margin of 31.3%, 130 basis points ahead of FY23.

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 £2.8m is £1.5m ahead of FY23 reflecting an improved gross margin and a tightly controlled cost base and includes £0.5m of one-off, non-recurring redundancy costs.

Adjusted EBITDA of £9.9m was £2.5m (34%) ahead of FY23, equating to an adjusted EBITDA margin of 6.9%.

Administrative expenses decreased by £1.6m (4%) on FY23 in-line with the 5% decrease in revenue, increasing slightly as a % of sales up from 25.5% in FY23 to 25.7%.

Combined marketing and labour costs of £23.6m (FY23: £25.0m) accounted for 64% of administrative expenses (FY23: 65%):

-              Marketing expenditure decreased 5% in FY24 to £10.1m (FY23: £10.6m) equating to 7.0% of revenue in both FY24 and FY23; and

-              Labour costs decreased £0.9m (6%) in FY24 to £13.5m (FY23: £14.4m) reflecting a 16% decrease in average headcount. Labour costs accounted for 9.4% of revenue (FY23: 9.5%).

Other expenses and net profit

Financial expenses of £2.2m (FY23: £1.7m) include £1.5m bank interest (FY23: £1.1m) reflecting higher SONIA interest rates, £0.4m of IFRS16 lease interest (FY23: £0.4m), and a £0.2m net foreign exchange loss (FY23: £0.2m loss).

The Group reports a profit before tax of £0.6m (FY23: loss before tax of £0.4m) that after tax translates into basic profit per share of 3.1p and diluted profit per share of 3.0p (FY23: 3.1p basic and diluted loss per share).

Cash-flow

Net debt halved from £14.5m at the start of the year down to £7.3m, representing 0.7x FY24 adjusted EBITDA (£9.9m), and secured by two freehold properties with a combined carrying value of £7.6m.

In June 2023 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 net debt was actively managed down by £7.2m (50%) to £7.3m following a £9.7m reduction last year, driven in large part by an £8.7m reduction in inventory. Year-end net debt peaked at £24.2m at 31 March 2022 reflecting an £11.4m investment in acquisitions, and a £17.1m investment in inventory that has been unwound in FY23 and FY24.

Net cash outflow in investing activities has been reduced to £3.9m (FY23: £6.7m outflow) including £3.7m of capitalised software development costs (FY23: £5.3m) and £0.2m property, plant and equipment additions (FY23: £1.0m). Depreciation and amortisation of £6.6m (FY23: £6.0m) is added back in 'net cash from operating activities'.

Net cash outflow from financing activities of £10.5m (FY23: £12.4m outflow) represents a £7.0m lower RCF drawdown (FY23: £9.0m decreased drawdown), £1.4m payment of lease liabilities (FY23: £1.7m), and £2.1m interest paid (FY23: £1.7m).

Balance sheet

Capital expenditure on property, plant and equipment totalled £0.2m across all sites.

Right-of-use assets increased to £8.1m reflecting the conclusion of a rent review at our York distribution centre in July 2023. This lease expires in 2033.

The Group capitalised £3.7m (FY23: £5.3m) of software development costs relating to our bespoke e-commerce platform, of which £2.4m was in H1 and £1.3m in H2 reflecting the reduced team-size going forward. Platform amortisation in the year of £3.7m (FY23: £3.0m) was split £1.8m in H1 and £1.9m in H2. Year-end net book value of our software platform remained at £12.8m.

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

Inventory of £25.6m is £8.8m (26%) lower than at 31 March 2023 reflecting planned reductions. The Board considers this to be an appropriate level to take into FY25, providing breadth and depth across categories across our distribution centres.

The Group carried net bank debt of £7.3m at the year-end (31 March 2023 net bank debt: £14.5m).

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.

Chris Scott                                           Chief Financial Officer                                    24 June 2024

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