Shares in online music retailer Gear4Music (G4M:AIM) flew 7% higher to 725p after it once again increased full-year profit guidance ahead of the important Christmas trading.

Founder Andrew Wass said trading into November continued to be very strong and he now expects results for the financial year will be ahead of the recently upgraded consensus market expectations.

PROFITABLE GROWTH

Wass told Shares that the focus over the past year has been on delivering ‘profitable growth’ and the first-half performance didn’t disappoint with the business capturing 400,000 new customers, driving revenues up 42% to £70.2 million and gross profits up 61% to £20.1 million.

The surge in online sales during the first lockdown meant that the company didn’t need to spend as much on marketing and this in addition to targeting higher margin branded product resulted in improved efficiency with marketing costs down 5% in absolute terms. As a result, operating profits improved to £6.4 million from £0.2 million last year.

KEY DIFFERENTIATION

Own branded revenues grew 43% which was 2% higher than branded growth in the period, representing around 28% of overall product sales, which is impressive given that own brands only represent 6.5% of all products on the site.

The presence of own brands provides competitor differentiation, a broader choice for customers at different price points while also providing Gear4Music with higher margins than third-party branded products. Own-branded products generate around 40% of gross profits.

However, Wass explained that a lot of the improvement in the gross margin during the period was the result of a more targeted approach to the marketing of branded products.

The Christmas trading period is the busiest time of the year for the company and given the current lockdown online trading is expected to play a key role. The company seems well prepared and has used its strong cash flows to increase inventories.

Research group Progressive Equity commented: ‘This should translate into better customer conversion and fulfilment of customer orders, compared with competitors with less stock on hand.’

Broker N1+Singer said: ‘After factoring in the latest upgrades, Gear4Music trades on a March 21 EV/EBITDA multiple of only 11.8. This is based on conservative full year forecast assumptions, where risk potentially remains to the upside.’

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Issue Date: 17 Nov 2020