Good morning!

Some updates worth looking at today:


Gear4music (LON:G4M)

  • Share price: 500p (+4%)
  • No. of shares: 21 million
  • Market cap: £105 million

Interim Results

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 31 August 2018 ("the Period").

Paul has provided lots of coverage of this share - see his piece for the September trading update.

Key points:

  • Revenues up 36% but competitive pressure reduced gross margins, so gross profit is up by just 23%.
  • Own-brand sales grew at a slower pace than 3rd party sales (I value own brand sales higher than 3rd party sales, so I view this as a negative).
  • The move to the new distribution centre in Sweden is going according to plan
  • Trading is in line to meet full year expectations, due to very strong revenue growth so far in H2.

The company's confidence in the full-year result has evidently produced some firmness for the share price today.

Despite the loss suffered in H1, Equity Development has published a note suggesting that full-year net income could be £1.9 million, on the basis that gross margin will recover in H2.

Remember that there is a very heavy weighting of sales to H2, so it's the H2 result that really matters.

This bit is important:

Efforts are on-going to improve gross margins including negotiations with certain suppliers, potentially removing very low margin products, and taking advantage of any tactical buying opportunities as and when they arise. Early indications in FY19 H2 are that gross margins are improving.

I have a few concerns:

  • The company is changing its accounting year end-date (probably for good reasons, but I hate dealing with accounts that aren't for 12 months!)
  • Lower gross margins could be a recurring threat to profitability, if not in H2 then in H1 next year.
  • Software development costs are being capitalised faster than amortisation (£1.1 million…

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