Gear4music : Final Results

RNS Number : 2620D

Gear4music (Holdings) PLC

25 June 2019

25 June 2019

Gear4music (Holdings) plc

Results for the period ended 31 March 2019

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 13 months ended 31 March 2019. Comparative information is on a 12 months basis unless stated, and as such may not be directly comparable.

Highlights:

	13 months ended	12 months ended	Change
£'000	31 March 2019	28 February 2018
Revenue	118,155	80,100	+48%
Gross profit	26,916	20,319	+32%
EBITDA	2,281	3,458	-34%
Net (loss)/profit	(163)	1,386

• Continuing strong revenue growth across the business: 37% in the twelve months ended 28 February 2019
• Gross margin of 22.8% is down 260bps primarily reflecting a highly competitive market
• Active customers up 53% to 727,000
• Conversion increased from 3.25% to 3.40%
• Confident of continued strong growth and delivering profit improvement in FY20

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

"Alongside delivering strong revenue growth in the period, we have worked hard to implement a number of commercial and operational initiatives to address the previously reported issues.

Our FY20 H1 focus is on improving gross margins and ensuring a robust operational infrastructure is in place ahead of our peak H2 trading period, and I am pleased to report these actions are already yielding positive results.

We are confident that we have the right strategy, customer proposition, financial resources and focus, to overcome the challenges of FY19, and achieve our objectives of maximising customer satisfaction and delivering value to shareholders."

	ENDS
Enquiries:
Gear4music	[phone]
Andrew Wass, Chief Executive Officer
Chris Scott, Chief Financial Officer
N+1 Singer - Nominated Adviser and Broker	[phone]
Peter Steel/Justin McKeegan, Corporate Finance
Tom Salvesen, Corporate Broking
Alma - Financial PR	[phone]
Josh Royston	[e-mail]
Rebecca Sanders-Hewett
Helena Bogle

About Gear4music (Holdings) plc

Operating from a Head Office in York, and Distribution Centres and showrooms in York, Sweden and 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, more recently, into the Rest of the World.

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

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No. 596/2014.

Chairman's statement

We announced in September 2018 that we were changing our financial year-end from 28 February to 31 March and this has resulted in us reporting on a 13-month accounting period ended 31 March 2019 ('FY19') and as such, unless otherwise stated, numbers may not be directly comparable.

With continuing strong growth taking revenue to £118m in FY19 (FY18: £80m, up 48%), the Group continues to rapidly gain market share, although, overall, it proved to be a challenging year. Despite another year of strong revenue growth and further expansion of our customer base, it was disappointing to announce that the Group's profits for the period would be materially below previous expectations.

It has been reassuring however to see the Executive Directors and management team reacting swiftly, and taking the decisions and actions necessary as outlined in our Chief Executive Officer Andrew Wass's report, to ensure the challenges arising during FY19 are appropriately addressed.

Since Gear4music listed on AIM in 2015, annual revenues have grown from £24m to £110m in the 12 months to 28 February 2019 and £118m in FY19. We have achieved this growth by implementing our core strategy of best-in-class customer service, e-commerce excellence, bespoke platform development, international expansion, and supply chain evolution. Like any rapidly growing business, the challenges faced in FY19 have provided the Executive team and Board an opportunity to review all aspects of the business to ensure that we are correctly positioned to achieve our next leg of growth and rebuild shareholder value.

Operating in a fragmented niche market, our customer proposition continues to be fundamental to our success, and it is pleasing to note the significant uplift in overall website visits, customer conversion and high levels of satisfaction evidenced on review sites such as TrustPilot.co.uk.

This high level of customer satisfaction, and the implementation of our growth strategy, have only been possible because of the passion and dedication of our staff, and on behalf of the Board I would like to thank all of our employees for their continued energy and commitment. We continue to look forward to the future with confidence.

Corporate Governance

It is the Board's responsibility to ensure that the Group has a corporate governance framework that is effective whilst dynamic, as a foundation for a sustainable growth strategy, and identifying, evaluating and managing risks and opportunities that will underpin long-term value creation.

I am therefore pleased to confirm that, in compliance with the AIM Rules for Companies, the Board formally adopted the 2018 QCA Corporate Governance Code with effect from 26 September 2018. Enhanced disclosures in this regard will be included in the various sections of this year's Annual Report, and made available on the Group's website.

Outlook

The Board has taken decisive action to address the underlying causes of the profitability challenges in FY19. Pleasingly, many of the issues faced are within our grasp to resolve and we are already starting to see the benefits of a more rigorous focus on margin. In parallel with these initiatives, we continue to see a significant opportunity to continue to win market share in the UK and across Europe.

With over £5m cash on hand at 31 March 2019, the Directors remain confident that the Group has the financial resources required to achieve its business objectives during the next financial period.

I believe the Group will emerge from this period as a stronger and leaner business, well prepared and better placed for the next phase of our exciting growth journey.

Ken Ford

Chairman

25 June 2019

Chief Executive's Statement

Business Review

Financial and Commercial KPIs in our fourth year as a listed business are set out below:

Financial KPIs

	FY19 (13m)		FY18 (12m)	Change
Revenue *	£118.2m		£80.1m	+48%
UK Revenue *	£63.7m		£44.3m	+44%
International Revenue *	£54.5m		£35.8m	+52%
Gross margin	22.8%	25.4%	-260bps
Total Admin expenses *	£26.9m		£18.4m	+46%
European Admin expenses *	£2.8m		£1.5m	+87%
EBITDA	£2.3m		£3.5m	-34%
Cash at year end	£5.3m		£3.5m	+51%
Net debt	£7.5m		£5.0m	+50%
Commercial KPIs
	FY19 (13m)		FY18 (12m)	Change
Website visitors	27.1m		16.9m	+60%
Conversion rate	3.40%		3.25%	+15bps
Average order value	£117		£127	-8%
Active customers	727,000		475,000	+53%
Products listed	51,500		44,700	+15%

Footnote: Revenue tables bridging from audited periods to non-GAAP accounting periods:

FY18 Revenue reconciliation

	FY18 Audited	March 2018	13m to 31 Mar 18
	12m to 28 Feb 18
UK Revenue *	£44.3m	£3.7m	£48.0m
International Revenue *	£35.8m	£2.9m	£38.7m
Total Revenue *	£80.1m	£6.6m	£86.7m
FY19 Revenue reconciliation
	12m to 28 Feb 19	March 2019	FY19

			13m to 31 Mar 19
UK Revenue *	£58.9m	£4.8m	£63.7m
International Revenue *	£51.0m	£3.5m	£54.5m
Total Revenue *	£109.9m	£8.3m	£118.2m

* See note 2

Business review

Gear4music has con nued to grow revenue quickly and has gained significant addi onal market share throughout FY19, although as previously reported, the Group has been impacted by a number of opera onal and commercial issues, in what continues to be a challenging retail environment.

In response we have undertaken a thorough review of all aspects of the business, and are confident that the swi strategic and opera onal changes being made will significantly reduce the risk of these issues reoccurring in the year ahead.

Our core growth strategy of con nually improving our customer proposi on remains valid and appropriate, but in addi on we will focus on margin improvement and distribu on efficiency to ensure the business is effec vely configured to achieve a sustainable level of profitable growth.

Targeted margin growth

The FY19 gross margin of 22.8% was well below historical averages, and margin recovery is a primary objec ve for FY20 and beyond. To achieve this, we will focus on more selec ve inventory investment where we see higher margin poten al, alongside accelera ng own-brand sales growth rela ve to other brands. As first reported in April, product margins continue to recover, and we are confident of further progress in the year ahead.

These ac ons will be supported by a review of our courier rela onships and returns policies, alongside more targeted marketing campaigns designed to support greater profitability as well as revenue growth.

The combined effect of the ac ons that we have taken will likely lead to a lower rate of H1 sales growth than recent years, par cularly against FY19 H1 when gaining market share was priori sed over profitability. This will ensure that our margins are realigned ahead of the H2 peak trading period and help us to operate profitably and sustainably within any retail environment.

Distribution efficiency

As previously reported, during our FY19 peak Christmas trading period, our York distribu on centre reached maximum capacity within its configura on at that me. This restricted addi onal revenue growth, and resulted in higher than anticipated labour and distribution costs.

Improving the efficiency and scalability of our distribu on and logis cs management systems has become a priority for the current year, alongside planning for 24/7 opera ons during the peak Christmas period, with con ngency arrangements in place for outsourced inventory storage if required.

Our strategy of establishing a physical footprint in Europe con nues to benefit the Group and provides a solid pla orm for growth in the future. As our European business con nues to grow, we are expec ng to fulfil a higher propor on of orders from our European distribution centres located in Sweden and Germany, which have significant spare capacity.

As previously no fied, courier costs during FY19 were notably higher, par cularly during the peak trading period. We con nue to take ac on to ensure more robust and commercially viable arrangements with our courier partners are in place for the future, for instance through renegotiation of contracts.

Trading outlook

We have taken quick and decisive ac on to address the opera onal and commercial issues that impacted profitability in FY19. Whilst early in the current year, we are beginning to see posi ve trends establishing themselves which give us confidence in our refocused growth strategy. Alongside this, we will con nue to develop our excellent e-commerce pla orm, expand our customer base in the UK and interna onally, extend and refine our product ranges, and deliver the market leading service and value that has made us a leading European retailer of musical instruments and equipment in such a short space of time.

Whilst the on-going Brexit uncertainty and its impact on consumer confidence is unhelpful, we remain well posi oned to benefit from further consolida on within our market. We believe we are well placed to deliver on our strategic objec ves with a solid financial base and a be er organised and refocused opera onal structure, giving us confidence in our trading outlook for the new financial year.

Andrew Wass

Chief Executive Officer

25 June 2019

Chief Financial Officer's statement

Overview

In FY19 the Group delivered con nued strong revenue growth but, as Andrew has detailed in his CEO's report, profitability has been adversely impacted primarily by a highly compe ve market contribu ng to lower gross margins as well as operational issues now being addressed.

Revenue

	FY19	FY18
	13m	12m
	£000	£000
UK Revenue	63,672	44,258
International Revenue	54,483	35,842
Revenue	118,155	80,100

Revenue increased by £29.8m (37%) over comparable 12-month periods to the end of February 2019, and £31.5m (36%) on comparable 13-month periods to the end of March 2019. This builds on growth of 43% in FY18 and 58% in FY17.

UK revenue growth was 33% on both a 12-month and 13-month basis, taking Gear4music's UK market share to an estimated 6.9% (FY18: 5.9%).

European growth con nues to represent a significant opportunity and interna onal revenue growth of 42% on a 12- month basis / 41% on a 13-month basis followed 69% growth in FY18 and 124% growth in FY17. Revenues from sales outside of Europe accounted for 1.3% of total revenue (FY18: 1.0%).

	FY19	FY18
	13m	12m
	£000	£000
Other-brand product revenue	82,125	56,075
Own-brand product revenue	31,289	20,947
Other revenue	4,741	3,078
Revenue	118,155	80,100

We con nue to make good progress in our own-brand business with revenue growth again over-delivering on the Group's ambition of keeping pace with the growth in other-brands.

In FY19 own-brand revenue accounted for 26.5% of total revenue compared to 26.2% in FY18 and 25.7% in FY17, with these sales generated from just 3,218 SKUs representing 6% of the total range (FY18: 2,629 SKUs; FY17: 2,411 SKUs).

Other revenue comprises carriage income, warranty revenue, and commissions earned on facilita ng point-of-sale credit for retail customers. These revenues accounted for 4.0% of total revenue in the period (FY18: 3.8%).

Gross profit

	FY19		Change
	13m	FY18
		12m
	£000	%
		£000
Product sales (£'000)	113,414	77,022
Product profit (£'000)	31,558	23,197
Product margin	27.8%	30.1%	-2.3ppts