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Gear4music – overall sales growth “ahead of our expectations”… so why a share price decline?

By Steve Moore | Friday 7 September 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

A trading update from online musical instruments and equipment retailer Gear4music (G4M) includes “sales growth during the period of 36% being ahead of our expectations”… so why a current approaching 5% share price fall, below 600p?

It is noted that “European sales growth reflects a slower than anticipated build-up of inventory at our European distribution hubs, particularly in Sweden”. However, “completion of the move into our new higher capacity Swedish distribution centre by the end of October, combined with the recent expansion of our European purchasing team will mean that the range and depth of inventory at both of our European locations will be increased ahead of peak season”.

“Impact on short term gross margins”. Ah, here we go...

These are being hit by “an increase in competitive pressures across our industry”. The company though states “confident that strong sales growth alongside a controlled overhead cost base will compensate for short term gross margin compromise. The board expects EBITDA for the full financial year to be in line with our expectation”. Hmmm.

The issue is that, at 600p, the shares are on a prospective price/earnings multiple of not far off 60x and comfortably more than 1x forecast sales. Such a rating demands at least growth as anticipated; not “slower than anticipated” roll-out, “gross margin compromise” and potentially worse – and, even without all that, is still likely highly dependent on a continued bullish stock market. As such, at this juncture, I avoid.

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