19 November 2024

Gear4music (Holdings) plc

Interim results for the six months ended 30 September 2024

"Return to growth in Q2 demonstrates early progress in executing Growth strategy"

Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its unaudited financial results for the six months ended 30 September 2024 ("the Period").

 

£m	6-months ended 30 Sept 2024 ('FY25 H1')	6-months ended 30 Sept 2023 ('FY24 H1')	Change on FY24 H1
UK Revenues	38.7	36.5	+6%
European & Rest of World revenues	23.0	26.1	(12%)
Total revenues	61.7	62.6	(1%)
Gross profit	16.5	17.0	(3%)
Gross margin	26.7%	27.1%	-40bps
EBITDA*	2.9	2.4	0.5m
Operating loss	(0.5)	(0.9)	0.4m
Loss before tax	(1.2)	(1.9)	0.7m

* EBITDA is defined as 'Earnings before interest, tax, depreciation and amortisation'. In FY24 H1 adjusted EBITDA of £2.9m excluded £0.5m one-off exceptional redundancy costs.

FY25 H1 Highlights:

-      Results reflect early progress in starting to deliver our refreshed Growth Strategy:

o  A return to revenue growth in FY25 Q2 (+1%) following a 4% decrease in FY25 Q1

o  Disciplined cost control resulted in £1.0m reduction in Admin expenses

o  Reported EBITDA improved by £0.5m

o  Loss before tax improved by £0.7m

-      Net bank debt of £14.4m was £3.7m lower than last year (30 September 2023: £18.1m), and includes the normal build of inventory ahead of the peak trading period.

-      Gross margin of 26.7% (FY24 H1: 27.1%; FY23 H1: 26.3%), reflecting early-stage challenges with the implementation of a new outsourced AI-based marketing system impacting own-brand revenues which are now resolved.

Trading Outlook:

-      5% revenue growth achieved during FY25 H2 trading to date, in what continues to be a challenging consumer environment, particularly in our European markets

-      Well-positioned and prepared for the upcoming peak seasonal trading period

-      Full-year outlook remains in-line with consensus market expectations**

 

 

Commenting on the results, Andrew Wass, Executive Chair said:

"We are pleased to report progress in executing our refreshed growth strategy announced in June 2024, resulting in improvements in our financial performance during FY25 H1. Building on our return to sales growth in FY25 Q2, we have achieved a 5% increase in revenue during FY25 H2 trading to date, following the resolution of the challenges associated with the initial roll-out of our new outsourced AI-based marketing platform.

Aware of the potential for ongoing weakness in the European consumer retail environment, we maintained a disciplined approach to cost management during FY25 H1, contributing to a further reduction in our net debt. While the recent UK budget will introduce additional employment costs from FY26 onwards estimated at £0.3m, we are confident these can be largely mitigated through further cost-saving measures.

Our second-hand sales platform continued to gain significant traction during FY25 H1, with sales growing by 286% to £1.4m in the Period. We anticipate sustained strong growth in this area as we expand consumer awareness and our channels to market.

Our long-term focus remains on growing higher-margin revenues, and we will continue to invest in areas that support this objective, such as the Studiospares acquisition announced on 22 October 2024, our second-hand platform, and our own-brand product offering, teams and infrastructure.

Our full-year outlook remains in-line with consensus market expectations, we are well prepared for our seasonal peak trading period, and look forward to providing a further trading update after the Christmas period on 21 January 2025."

** Gear4music believes that current consensus market expectations for the year ending 31 March 2025 are revenues of £154.7 million, EBITDA of £11.7 million and profit before tax of £2.8 million.

Enquiries:

 

Gear4music Andrew Wass, Executive Chair Gareth Bevan, Chief Executive Officer Chris Scott, Chief Financial Officer	+44 (0)20 3405 0205
Singer Capital Markets - Nominated Adviser and Broker Peter Steel/Sam Butcher, Corporate Finance Tom Salvesen, Corporate Broking	+44 (0)20 7496 3000
Alma Strategic Communications - Financial PR Rebecca Sanders-Hewett Joe Pederzolli David Ison	+44 (0)20 3405 0205 Gear4music@almastrategic.co.uk

 

About Gear4music.com

Gear4music is the largest retailer of musical instruments and music equipment in the UK, delivering to 190 countries across Europe and the Rest of the World.

 

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.

 

Operating from a Head Office in York, the Group has Distribution Centres in York, Bacup, Sweden, Germany, Ireland & Spain, and showrooms in York, Bacup, Sweden & Germany.

 

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

Business Review

 

The Group reports its results for the six months to 30 September 2024, and updates on the Strategic, Commercial and Financial progress made in the Period.

Overview

Further to the announcement of our refreshed Growth Strategy in June 2024, our focus in FY25 H1 has been on investing in the people, processes and structures to lay the foundations to deliver sustained profitable revenue growth, and pleasingly we report a return to revenue growth in FY25 Q2 accelerating post year-end in FY25 Q3 to date. As previously highlighted, during the Period we encountered challenges with the implementation of a new outsourced AI-based marketing system, which adversely impacted own-brand and European sales. We have resolved these issues.

Consumer confidence remains low in many European markets, which at times has created unusually price competitive situations for certain branded products. Our approach continues to be to maintain a disciplined approach to product pricing.

The Board is also continuing its focus on further reducing net debt through cost reduction, core business cash generation, and actively managing inventory levels across our six distribution centres.

Growth Strategy

Our priority in FY23 and FY24 was to reduce net debt and increase profitability to ensure the Group is leaner and more resilient, and in FY25 we are now re-focused on growth. Whilst early days we update on progress below:

-      Brand acquisitions - Studiospares

On 1 October 2024 we acquired the brand, IP, and certain other assets of Studiospares Europe Limited for £150,000 from the liquidator. As part of the transaction, we acquired £148,000 of inventory.

Studiospares has a well-established and strong reputation for high-quality studio equipment and accessories and in the year-ended 31 December 2023 generated own-brand sales and gross profit of £1.5m and £0.8m respectively.

-      Second-hand - Continuing significant growth

Our second-hand sales platform continues to gain traction with 286% revenue growth to £1.4m in the Period and is on-track to deliver FY25 revenue of £4m.

-      Recruitment

In September 2024 we recruited a new experienced Marketing Director with a background in e-commerce, and a proven track record in developing broader marketing channels and reducing reliance on 'Pay-per-Click' ('PPC').

We also recruited a European Commercial Director in September to lead European purchasing and support expansion of marketing channels across Europe.

Our own-brand team increased from 21 to 25 over the Period as we recruited into roles to support product development, efficient purchasing and inventory management across our distribution centres, and help us increase own-brand revenue into the medium term.

Current trading and outlook

 

Whilst macro-economic uncertainties continue to weigh on consumers in the UK and across Europe, we have seen a return to revenue growth and maintained a disciplined approach to cost control. We are well-prepared ahead of the seasonal peak trading period and our full-year outlook remains in-line with current consensus market expectations.

 

We remain confident in the enduring consumer demand for Gear4music products, and we are well-placed to benefit once the consumer discretionary spend environment improves.

 

The Group plans to issue a Christmas trading update on 21 January 2025.

 

 

Commercial Review

 

	FY25 H1	FY24 H1	Change on FY24 H1
Revenue	£61.7m	£62.6m	(1%)
Total unique website users	9.3m	9.8m	(5%)
Mobile site unique users	7.0m	6.6m	+6%
Conversion rate	4.03%	3.97%	+6bps
Average order value	£153	£161	(5%)
Active customers *	805,000	823,000	(2%)
Proportion of repeat customers **	26.6%	26.3%	+30bps
Email subscriber database	1,919,000	1,720,000	+12%
Trustpilot rating	4.7/5	4.7/5	-

* Active customers are those that have purchased products within the last 12 months

** Repeat customers are those that have made a purchase in the Period and have historically made at least one purchase

 

UK revenue in the Period was 6% ahead of last year (FY24 H1: +3%), reflecting the strength of G4M's brand and proposition into the UK market, which is proving more resilient than other territories, and initiatives such as second-hand being launched in the UK first.

 

Teething problems with an outsourced AI-based marketing system during the Period led to cost-allocation inefficiencies and marketing over-spend, also impacting the mix between own-brand and other-brand sales. This has since been rectified. 'Cost-per-Click' ('CPC') continues to be high relative to where it has historically been, with competition for less traffic in a challenging economic climate. A primary focus will be to reduce our reliance on CPC/PPC going forward.

 

International revenue in the Period was 12% down on last year (FY24 H1: down 15%) as certain markets became highly price competitive at times and we took the decision to maintain pricing levels in-line with our strategy. European sales were also impacted for a period by marketing under-investment as we transitioned to a new AI based marketing platform.

 

Website user numbers decreased 5% to 9.3m being the net of a 10% increase in UK traffic and a 19% decline in international traffic, in part reflecting PPC under-investment in European markets. The shift to mobile continues with 75% of users coming through this channel (FY24 H1: 68%).

 

Conversion rates were stable at 4.0% with a fall in UK conversion from 4.4% to 4.2% as European conversion improved from 3.6% to 3.8%. Mobile conversion increased from 2.4% to 2.5%.

 

It is important we enhance our organic and direct marketing capabilities, which in the longer term should underpin our ambition to reduce marketing spend as a proportion of sales - users from direct and organic sources accounted for 59% of all users (FY24 H1: 51%). We also received positive results from our initial own-brand influencer marketing initiative.

 

'Average Order Value' ('AOV') decreased 5% to £153 partly reversing a 7% increase last year, reflecting proportionally less high value sales and competitive pricing pressures on some SKUs in certain territories.

 

The Group served 348,000 customers in the Period (+2% on FY24 H1) and 'Active customers', being those that have purchased products within the last 12 months, decreased by 2%.

 

The proportion of repeat customers increased to 26.6% (FY24 H1: 26.3%) reflecting a proportionally lower level of paid-for new customers. The level of repeat custom is lower than in other e-commerce sectors, reflecting the nature of the Group's product range and high average order value, and re-affirms the importance of the Group being profitable from the first customer transaction.

 

Our email subscriber database increased 0.2 million to 1.9 million and we are continuously refining our email retargeting strategies to cost-effectively boost the number of repeat customers.

 

We continue to invest in our customer proposition and service teams, resulting in an excellent overall customer experience, reflected in Gear4music.com's Trustpilot score of 4.7/5 and 'Excellent' rating from over 134,000 reviews.

 

Product and Supply Chain

 

	FY25 H1	FY24 H1	Change on FY24 H1
Own-brand product sales	£14.0m	£15.2m	(8%)
Other brand product sales	£45.3m	£44.7m	+1%
Product margin	30.9%	30.9%	-
Products listed	63,300	63,900	(1%)
Brands listed	1,111	1,134	(2%)

 

Achieving strong gross margins is important to the profitability of the Group and is a key business objective. FY25 H1 gross margin of 26.7% is 40bps behind FY24 H1 reflecting:

-      a flat product margin as a 320bps improvement in own-brand margin to 47.3% was offset by proportionally less own-brand sales (22.6% of total sales v 24.3% in FY24 H1), and other-branded margin challenges particularly in certain European markets (25.9% v 26.4% in FY24 H1); and

-      a 40bps increase in net shipping costs reflecting lower AOV, and carrier inflationary costs that are expected to be partially mitigated by new carrier deals done ahead of peak.

We traditionally report higher gross margins in H2 than H1 and we expect that trend to continue in the current financial year.

 

The number of 'Stock-Keeping-Units' ('SKUs') listed decreased from 63,900 at 30 September 2023 to 63,000 at 31 March 2024 and increased back to 63,300 at 30 September 2024, representing a net 1% decrease in 12 months, as we de-list less profitable, slow-moving SKUs.

 

Own-brand

 

Expanding on last year's efforts to elevate brand identity, we are focused on brand and range development and growing our in-house product and engineering teams to enable us to create wider appeal and innovative product offering.

 

Operationally we now have a tried and tested outsourced consolidation infrastructure within China, enabling us to increase SKU coverage across our distribution centres whilst minimising the working capital investment. This also helped maintain strong product margins despite increased sea freight shipping costs.

 

Product highlights include:

-      Expansion of our affordable VISION musical instruments range offering the perfect starting point for beginners of all ages

-      Launched Premier NXT GEN - an exciting spin-off of Premier offering great value educational, marching and orchestral percussion instruments

-      Launched G4M Sonori and Keynote Digital Pianos

-      G4M Solus Electric String Instruments which were recently awarded 'Gold' at the prestigious New York Product Design Awards

-      Expansion of our Hartwood Acoustic Guitars range providing premium, retro inspired acoustic instruments

The number of own-brand SKUs increased from 5,200 at 30 September 2023 to 5,510 (+6%) at 30 September 2024, with own-brand revenue accounting for 23.5% of total product sales (FY24 H1: 25.4%) from 8.7% of total SKUs (FY24 H1: 8.1%), reflecting the significant on-going efforts of our in-house team in developing our range of high-quality instruments and equipment at affordable prices.

 

Software Development

 

We continue to leverage a combination of in-house capability with a team of 32 developers, and the outsourcing of one distinct project to external contractors.

 

The Group invested £1.6m (FY24 H1: £2.4m) in its e-commerce platform in the Period with deployments including:

-      Improved site search

-      Customer Service AI chatbot launched

-      Various platform infrastructure upgrades

The next major project in the pipeline that will have a significant impact on our business, is our 'AI-based Forecasting and Purchasing platform' that is on-track for delivery by Spring 2025.

 

 

 

Financial Review

 

	FY25 H1	FY24 H1	Change on FY24 H1
Revenue	£61.7m	£62.6m	(1%)
Gross profit	£16.5m	£17.0m	(3%)
Gross margin	26.7%	27.1%	-40bps
Unadjusted EBITDA	£2.9m	£2.4m	21%
Exceptional item - Redundancy costs	-	(£0.5m)	£0.5m
Adjusted EBITDA	£2.9m	£2.9m	-
Adjusted EBITDA margin	4.7%	4.6%	+10bps
Operating loss	(£0.5m)	(£0.9m)	£0.4m
Marketing costs	£4.5m	£4.3m	(5%)
Marketing costs as % of revenue	7.3%	6.9%	+40bps
Total Labour costs	£6.4m	£6.9m	(7%)
Total Labour costs as % of revenue	10.3%	11.0%	-70bps

Revenue

 

The Group returned to revenue growth in FY25 Q2 with 1% growth on FY24 Q2, further to year-on-year decreases of 4% in FY25 Q1 and 5% in FY24 H2. Growth has increased in FY25 H2 to date.

 

Revenue of £61.7m was £0.9m (1%) lower than last year. UK revenue was up 6% taking our estimated share of a flat UK market to 9.7% (FY24 H1: 9.3%). International revenues of £23.0m were 12% down on last year reflecting difficult trading conditions and an under-investment in European marketing for a period. International revenue accounted for 37% of the Group total revenue compared to 42% in FY24 H1.

Gross Margin and Gross Profit

As outlined in the 'Commercial Review' gross margin decreased 40bps from 27.1% last year to 26.7%, reflecting a flat product margin, and a 40bps increase in net delivery costs reflecting increasing costs and a lower AOV.

The net result of revenue and gross margin movements was gross profit of £16.5m, which was £0.5m (3%) behind last year.

Operating Loss and Administrative Expenses

The operating loss of £0.5m represents a £0.4m improvement on FY24 H1, being the net of a £0.5m reduction in Admin expenses reflecting tight cost control offsetting the £0.5m fall in gross profit, and £0.5m exceptional costs last year.

Underlying Admin expenses (excluding exceptional costs) decreased from 28.5% of revenue in FY24 H1 to 28.1% in FY25 H1.  Marketing and labour costs continue to be key components of our cost base, accounting for a combined 63% of total administrative expenses in the Period and prior year:

Marketing

Marketing costs of £4.5m (FY24 H1: £4.3m) equated to 7.3% of sales (FY24 H1: 6.9%). Our marketing continues to be heavily PPC-focused, accounting for 88% of total marketing spend (FY24 H1: 87%) targeting a pre-defined and measurable return on investment. In FY25 H1 we experienced challenges with the rollout of a new outsourced AI-based marketing system which temporarily increased marketing costs resulting in an estimated £0.2m over-spend, and also adversely impacted our own-brand and European sales. These issues have now been resolved.

Labour costs

Total labour costs decreased £0.5m (7%) on FY24 H1 to £6.4m reflecting a full-period impact of the FY24 H1 redundancies:

-      FY25 H1 average headcount of 414 is 71 (9%) lower than FY24 H1; and

-      FY25 H1 average cost per head is 8% higher than FY24 H1.

Total headcount at 30 September 2024 is 434, the same as at 30 September 2023.

Other Administrative expenses

European distribution centre local expenses decreased £0.1m (5%) on FY24 H1 to £2.4m reflecting cost reductions linked to reduced activity net of inflationary cost increases.

Depreciation and amortisation in the Period totalled £3.4m (FY24 H1: £3.3m) including amortisation of £2.0m (FY24 H1: £1.8m) relating to our bespoke e-commerce platform, and £0.8m depreciation of 'Right of Use' assets (FY24 H1: £0.9m).

Last year we reported one-off non-recurring costs of £0.5m relating to redundancy costs incurred during the restructure of various Head Office teams, principally Software Development.

An FY25 H1 EBITDA margin of 4.7% compares to an EBITDA margin (excluding redundancy costs) of 4.6% last year and 4.1% in FY23 H1.

Net Loss and Financial Expenses

 

Net financial expenses of £0.7m include £0.5m net bank interest (FY23 H1: £0.8m) reflecting a lower debt level, and £0.2m interest on lease liabilities (FY24 H1: £0.2m).

 

A tax charge has arisen following adjustments to reflect the Corporate Income Tax position of the Group's overseas subsidiaries per their latest local statutory audits.

 

We report a loss in the Period of £1.2m compared to a £1.6m net loss in FY24 H1.

 

 

 

 

Cash Flow and Balance Sheet

 

Net bank debt at 30 September 2024 was £14.4m (FY24 H1: £18.1m) at what is historically a low point in the annual cash cycle as we invest in inventory ahead of peak seasonal trading. This provides significant headroom of £15.6m within the Group's £30m RCF, and further reductions are expected by 31 March 2025.

 

	FY25 H1	FY24 H1	Change on FY24 H1
	£m	£m	£m
Opening cash	4.7	4.4	0.3
Net cash (used in)/from Operating Activities	(3.8)	0.4	(4.2)
Net cash used in Investing Activities	(1.7)	(2.4)	0.7
Net cash from Financing Activities	7.4	3.5	3.9
Closing cash	6.6	5.9	0.7
Net bank debt	(14.4)	(18.1)	3.7

 

Reported inventory of £40.1m (FY24 H1: £39.0m) includes £7.6m of inbound stock-in-transit (FY24 H1: £4.4m) as we are utilising our warehouse capacity to pull-forward intake to provide certainty and reduce pressure during peak to focus on fulfilling orders.

 

Trade and other payables of £21.1m were £0.8m (4%) higher than last year and includes £1.1m of customer prepayments (30 September 2022: £1.4m).

 

Capitalised software development costs totalled £1.6m in the Period (FY24 H1: £2.4m) compared to amortisation of £2.0m, resulting in a £0.4m decrease in net book value since the start of the financial year.

 

Property, plant and equipment capital expenditure was limited to £123,000 in the Period (FY24 H1: £0.04m) principally being investment in solar panels at our Head Office.

 

Dividend Policy

 

The Board does not recommend the payment of a dividend (FY24 H1: nil). Consistent with its previously stated approach, the Group will revisit its shareholder distribution policy at the appropriate time.

 

 

 

 

Unaudited consolidated interim statement of profit and loss and other comprehensive income

 

			Note			6 months ended 30 September 2024 (unaudited)		6 months ended 30 September 2023 (unaudited)	Year ended 31 March 2024 (audited)
						£000		£000	£000
Revenue			3			61,742		62,641	144,384
Cost of sales						(45,247)		(45,656)	(104,947)
Gross profit						16,495		16,985	39,437
Administrative expenses			3,4			(17,360)		(18,324)	(37,609)
Other income			4			374		407	935
Operating (loss)/profit before exceptional items			4			(491)		(445)	3,250
Exceptional items			5			-		(487)	(487)
Operating (loss)/profit after exceptional items						(491)		(932)	2,763
Financial expenses			7			(763)		(981)	(2,223)
Financial income			7			50		-	44
(Loss)/profit before tax						(1,204)		(1,913)	584
Taxation			8			(25)		353	67
(Loss)/profit for the Period						(1,229)		(1,560)	651
Other comprehensive income
Items that will not be reclassified to profit or loss:
Deferred tax movements						104		-	150
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation differences - foreign operations						44		272	177
Total comprehensive (loss)/profit for the Period						(1,081)		(1,288)	978
(Loss)/profit per share attributable to equity shareholders of the company
Basic (loss)/profit per share		6				(5.9p)		(7.4p)		3.1p
Diluted (loss)/profit per share		6				(5.9p)		(7.4p)		3.0p

 

Unaudited consolidated interim statement of financial position

 

				30 September 2024 (unaudited)	30 September 2023 (unaudited)	31 March 2024 (audited)
		Note		£000	£000	£000
	Non-current assets
	Property, plant and equipment	9		10,461	11,326	10,862
	Right-of-use assets	10		7,283	9,088	8,099
	Intangible assets	11		21,689	22,616	22,049
				39,433	43,030	41,010
	Current assets
	Inventories	12		40,065	38,954	25,643
	Trade and other receivables	13		3,049	4,083	3,079
	Corporation tax receivable			505	371	768
	Cash and cash equivalents			6,553	5,919	4,696
				50,172	49,327	34,186
	Total assets			89,605	92,357	75,196
	Current liabilities
	Trade and other payables	15		(21,086)	(20,303)	(13,478)
	Lease liabilities	16		(1,790)	(1,057)	(1,794)
				(22,876)	(21,360)	(15,272)
	Non-current liabilities
	Interest bearing loans and borrowings	14		(21,000)	(24,000)	(12,000)
	Other payables	15		(30)	(89)	(91)
	Lease liabilities	16		(6,865)	(9,215)	(7,599)
	Deferred tax liability			(1,546)	(1,679)	(1,868)
				(29,441)	(34,983)	(21,558)
	Total liabilities			(52,317)	(56,343)	(36,830)
	Net assets			37,288	36,014	38,366
	Equity
	Share capital			2,098	2,098	2,098
	Share premium			13,286	13,286	13,286
	Foreign currency translation reserve			147	198	103
	Revaluation reserve			1,171	1,203	1,171
	Retained earnings			20,586	19,229	21,708
	Total equity			37,288	36,014	38,366