Brexit-related supply chain challenges have brought Gear4music back down to earth with a bump, a year on from pandemic lockdowns that gave an “exceptional” boost to sales. The retailer today says that full-year sales and profits are likely to be lower than previously flagged, as a result of those supply chain issues.
However, it says that as previously-announced new hubs in Ireland and Spain scale up, those issues should be largely resolved within its current financial year.
The update came as Gear4music today reported revenues of £64.7m in the six months to September 30 2021. That’s down 8% from £70.2m a year earlier – but 31% higher than the £49.4m it reported at the same time in pre-pandemic 2019. UK revenue was flat compared to last time, but international sales were down 16% as European orders fell “as a result of the ongoing disruption caused to supply chains and order fulfilment post-Brexit.” Website user numbers fell year-on-year by 11% to 13.5m; visits to UK sites were 5% down and down by 15% to its 19 international websites.
At the bottom line it has reported pre-tax profits of £1.9m, down by 66% from the £5.7m it posted a year ago.
Andrew Wass, chief executive of Gear4music, says the figures follow an “exceptional period” a year earlier, when locked down shoppers went online to buy musical instruments and equipment. Stronger than expected first-quarter figures led the retailer to raise its full-year revenue profit expectations in June. Now supply chain issues have hit home, and today it says it is trading below the expectations it set in June. Gear4music believes the market expected revenues of £152.3m and earnings before interest, tax and one off costs (EBITDA) of £11.5m until the June update, when they raised to £156.6m and £14m respectively. Now the company expects EBITDA will come in at £12m.
“Brexit-related supply chain challenges are persisting for longer than we had previously anticipated, and European Q3 sales to date have been slower than previously expected,” says Wass. “As a result the group is trading below FY22 consensus market expectations, with the board now expecting that FY EBITDA will not be less than £12m.
“As our new hubs in Ireland and Spain scale-up to build upon our existing European infrastructure, we are confident that the remaining Brexit-related challenges will be resolved by FY22 Q4 and our European customer proposition will be significantly strengthened.”
The retailer’s acquisition of AV Distribution is set to complete in December, to be relaunched as AV.com in January. That, says Wass, will expand the retailer’s potential market. At the same time, it plans to upgrade its ecommerce platform during its next financial year, and Wass says Gear4music is still “confident in our profitable growth strategy”.
Gear4music says that it was well prepared ahead of Brexit, but the cost, administrative burden and the time it now takes to deliver products to European customers have all “significantly increased as a result of the Brexit deal announced on 24 December 2020, causing our overall customer proposition to decline across these cross-border SKUs.”
It responded by scaling the stock it holds in its existing Swedish and German distribution centres and in September 2021 added 15,000 sq ft of space in Ireland and 45,000 sq ft in Spain. The new hubs are taking longer to scale-up than originally anticipated and Brexit challenges are also affecting it for longer than expected. “Whilst factored into our expectation, the impact on FY22 H1 revenue was significant with a marked decline in cross UK-EU border sales,” says Gear4music in today’s statement.
It adds: “These operational challenges have continued to impact our business post period end. However, in line with strategy we now have a European distribution infrastructure capable of handling over £120m of sales per annum meaning that the group remains well positioned to capitalise on the medium-term growth opportunity.”
Gear4music says 65% of users now visit from mobile devices – up from 58% last time – and that mobile website development is now “an important focus area” for the business. However, mobile conversion rates fell to 2.3% from 2.6% last time, as UK conversion improved to 6.4% from 6.1%, and European conversion fell to 2.4% from 2.6%.
Gear4music is a Top350 retailer in RXUK Top500 research.