Shares in music firm fall after warning

Distribution woes lead to Gear4music profits alert

SHARES IN musical instruments retailer Gear4music plunged over 50 per cent after the group warned that annual earnings will be lower than the previous year.

The York-based firm reported strong sales growth over the festive period, but warned that capacity constraints at its York distribution centre will knock back full-year earnings.

The firm, which is the UK’s biggest online retailer of musical instruments and music equipment, said it is working on plans to expand its UK distribution capacity ahead of its peak trading period next year.

However, the group’s shares closed the day down 53 per cent on the news, falling 270p to 235p.

Analyst Jonathan Pritchard at Peel Hunt said: “Sales growth is strong at Gear4music and the customer numbers and online metrics continue to progress.

“However, there have been problems at the warehouse (the November/December spikes were too much for it to cope with) and – more worryingly – the pricing pressures that we thought we’d seen the last of have reemerged, leaving gross margins needing a reset.”

He said it is clear that Gear4music is resonating with customers “better than ever”.

“However, the persistence of the pricing competition will concern investors, and with big downgrades to the bottom line today it may take a while for the shares to regain their poise,” he added, changing his ‘buy’ recommendation to ‘hold’.

Gear4music’s sales rose 41 per cent to £48.7m in the four months to December 31, driven by a 36 per cent rise in UK sales and a 47 per cent increase in overseas sales. Active customer numbers rose 47 per cent to 666,000.

The firm said that sales growth in excess of expectations was constrained by its York distribution centre, which reached maximum capacity during the peak trading period between Black Friday and Christmas.

While there was an improvement in margins, these capacity constraints prevented further sales growth compensating for the lower gross margins and, as a result, the board now expects 2019 EBITDA to be slightly below 2018 levels.

Gear4music’s chief executive Andrew Wass said: “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.”