Gear4music 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.
It reported strong first half sales growth in its trading statement today as both UK and Europe made brisk gains and the combined H1 figure beat current expectations. A higher full year number than originally envisaged seems likely, although the company did encounter some margin pressure.
First half sales were £42.5m, 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.
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.
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.