Gear4music shares fall 50% amid sales ‘constraints’

Shares of York-based Gear4music, the online retailer of musical instruments and equipment, fell about 50% on Friday after it said its full-year earnings would be hit by constraints at its distribution centre.

In a trading update for the four months December 31, 2018, Gear4music said sales rose 41% year-on-year to £48.7 million — but warned it “expects FY19 EBITDA to be slightly below FY18 levels.”

Gear4music said in the update: “Further sales growth in excess of expectations was constrained by our York distribution centre, which reached maximum capacity during the peak trading period between Black Friday and Christmas.

“Whilst there was an improvement in margins in the period compared to H1 FY19, these capacity constraints prevented further sales growth compensating for the lower gross margins and, as a result, the board now expects FY19 EBITDA to be slightly below FY18 levels.”

Gear4music CEO Andrew Wass said: “We are pleased to have delivered strong sales growth of 41% over the last four months, building on the 36% sales growth achieved in the first half of the year.

“In addition, our strategic initiative to expand in to Europe has shown further good momentum, with sales growth of 47% in the period, an increase from 39% at the half year. 

“We have seen high levels of consumer demand alongside positive margin momentum, but sales growth has been constrained by our UK logistics operation reaching maximum capacity during our peak trading period between Black Friday and Christmas.

“This capacity limitation means that sales growth during the period has not fully compensated for the lower product margins as we hoped.

“We are already working on plans to further expand our UK distribution capacity ahead of our peak trading period next year and we are confident that this can be achieved by Autumn 2019. 

“During the period we successfully relocated our Swedish operation into a larger facility, and now have significant capacity headroom at both European locations, supporting the strong consumer demand we are seeing.

“We expect this high consumer demand and strong sales momentum to continue over the remaining three months of the financial period and into the next financial year.

“Our focus has been on gaining market share in what has been a highly competitive environment, and in support of this target and following a period of planned investment, margins during the period began to return towards historical levels.

“We are confident of further improvements as we progress through FY20. 

“We remain confident that our approach of building a larger business as quickly as possible will put us in a strong position, as the market undergoes further consolidation going into FY20 and beyond.

“We will also continue to invest in building scale and improving our customer proposition with planned investment in our logistics, systems, products and websites.

“We have a clear strategy of targeted expansion and remain confident of the continued long-term growth opportunity alongside an expectation of a return to increasing profitability.”