Online musical instrument and equipment retailer Gear4music sees share price cut in half after profit warning
- Analysts expected Gear4music to book £4m profit for the year to February 2019
- But the company said it is on course to be lower than last year’s £3.5m
- This is despite sales rising by 41% to £48.7m in the final four months of 2018
Gear4music, the largest online music specialist retailer in the UK, saw its share price more than halve today after it warned over profits.
The company, which sells more than 50,000 music products – from guitars and pianos to microphones and DJ paraphernalia – said annual profits will be lower than expected because it did not have the capacity to satisfy rising demand for its products over Black Friday and Christmas season.
Shares in Gear4music, which floated on the stock market in 2015, crashed by more than 52 per cent to 240p following the trading update, hitting their lowest point since October 2016.
Gear4music sells more than 50,000 music products – from guitars and pianos to microphones and DJ paraphernalia
Sales rose by an impressive 41 per cent to £48.7million in the final four months of 2018, but the company did not have the capacity to fulfill full sales expectations, hence it said profits will be short of market forecasts.
Analysts had expected £4million profits before interest, tax, depreciation and amortisation for the year to February 2019. But Gear4music now said profits would be lower than last year’s £3.5million.
Chief executive Andrew Wass promised to expand capacity this year to avoid the same fate.
He 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.
‘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.’
The group ships to 190 countries, as far afield as Mauritius and Hong Kong, but sales are concentrated closer to home, particularly Britain, Germany and Scandinavia.
In the UK, sales rose 36 per cent to £25.5million, while Europe and the rest of the world booked increased turnover of 47 per cent to £23.2million.
Active customer numbers were up 47 per cent to 666,000 by the end of 2018, and both own-brand and other-brand product sales rose 41 per cent.
Share price crash: Gear4music shares fell 52% today, hitting their lowest since October 2016
But AJ Bell investment director Russ Mould said fast growth sometimes isn’t enough in the cruel world of investing.
He commented: ‘While having strong demand is a nice situation to be in, Gear4Music’s situation is a reminder that you still have to spend money to make money. It will have to increase capacity to avoid a repeat of the constraints which led to the latest profit warning.
‘We’ve seen a similar situation in the past year or so with the likes of ASOS and Just Eat whose shares plummeted after laying out investment plans to help grow their operations.
‘Investors are failing to consider the longer-term benefits of reinvesting in a business. They are simply fixated on the short-term and punishing anyone who isn’t delivering faultless growth in revenue, profit and cash flow.’