Member Info for KillerJoe

The 13% volume growth in major domestic appliances suggests that their marketing is still bringing in an increasing number of customers, so good for further growth. But profit performance may flatline until their market picks up. To the extent share price is linked to profit performance it may be fairly static for a while after the current fall.

Today we have the positive news that trading is in line with forecast. Not that the forecasts are terribly good, showing for FY24 and FY25 combined turnover of £335m generating a small net profit of £4.1m. This turnover growth is not much more than inflationary and, once av.com and the second hand stuff are taken into account, probably shows no growth for the core online MI retail market. The days of high growth rates are over. (There is plenty to go at – market leader Thomann is likely turning over in excess of €1 billion – but G4M has no real competitive advantage to make inroads. Online MI retail seems to have reached maturity.)

That being the case G4M needs to make money out of the business its already doing. It seems to be making progress but isn’t talking about being ahead of the very modest profit levels in the forecast.

The statement says that they have been “driving significant cost efficiencies in out software development unit”. Their comparatively high spend on this has always been promoted as a competitive advantage for G4M. Reducing it suggests that the real beneficial work on software development has been done and its benefits are already largely in the figures and forecasts.

While today’s statement is positive it is still difficult to see where a real increase in profits or opportunities are coming from to increase the market valuation in the short term. Share price will probably drift around current levels.

I think they wanted ‘av.com’ as they wanted it to be a multi-language pan European website, so a simple name language dependent. To date only the UK and German website are up and running so too early to say how much its worth (although with Go Daddy currently advertising ‘av.tech’ and ‘av.store’ at £5141 pa, £3m does seem pricey). They also paid £2.516m goodwill for the av.com business.

Revenue by product category is given on page 2 of the FY23 accounts. AV.com will be in the ‘Other’ category of 4% of turnover (FY22 3%). The FY22 accounts split this 'other' category into ‘Home Audio & Visual’ 2% and ‘other’ 1%. From this a very rough calculation can be done. My guess is that av.com was in the region of £4.5m FY23, £3m FY22. For av.com FY22 was only included for the last 4 months so sales would appear to have fallen. In the last full year under its previous ownership sales were in excess of £8m, so I don’t expect G4M to be highlighting it in their reports.

With the av.com website offering nothing that their established online competitors don’t also offer I would expect progress at av.com to be slow.

I think it is very difficult for them to get customer loyalty, or to upsell a customer or to get a customer to buy add-ons. And I think they are already doing what they can.

Online shopping is so much less hassle than bricks and mortar shopping making it much easier to shop around. So if they manage to suggest to you that the product you are buying (x) goes well with something else (y) all you need to do is open another tab and find who is selling product y the cheapest and buy it from them. No need to buy x and y from the same retailer. No need to walk a mile to see how much someone else is selling it for, its just a few clicks away.

An online retailer doesn’t get to talk to the customer face to face so they are very difficult to influence, very difficult to affect the sales lifetime value. Almost everything is dominated by price (if you and your competitors are competent in customer delivery).

They bought av.com as their ‘platform supports multiple verticals’. They have said very little about it but Progressive Research think its off to a slow start. Almost whatever area they more into they will be up against others with developed online retail platforms so will find it no easier that musical instrument retail.

Bar cutting costs I don’t know how they produce profit for shareholders. This kind of online retail isn’t as profitable as it was a few years ago when most of your competitors had physical shops to support. So I don’t think the shares are currently undervalued.

The latest long term incentive plan and grant of options (announced 24/07/23) shows just how far below expectations of a few years ago the company is performing.

The 2023 scheme for management replaces the 2018 and 2021 schemes. The 2018 target for the share price at the end of FY2026 was £35, amended to £17 in October 2020. It’s now £3.

In 2021 the target fully diluted EPS for FY25 was 61p. The current forecast from Progressive Research is 9.3p.

The fundamental structure of the markets they are in hasn’t changed much in the last five years.

Even £3 seems challenging. Their online musical instruments retail business would seem to be mature with the website developed and the own brand stocking model being in place but it’s not making profit.

Until at least 22 June they had Liontrust Investment Partners buying shares effectively supporting a £1 per share price. Without that support this still looks overvalued. In FY23 sales of £150m generated no profit for shareholders. Where is the profit going to come from? Can they carve out large costs and still sustain the business? A mature business that cannot generate profit in normal trading years has little value.

In a retail market where the drift from bricks and mortar to online seems to be largely complete and the online retailers all have access to the same brands (which they can list without actually stocking) it will be very difficult for any retailer to differentiate itself. So, unless one can get into a monopolistic position, we shouldn’t really expect much profit. But making nothing on £150m sales seems a particularly poor performance especially when there are no real exceptional items.
They talk about having to increase stock early in the period due to shipping delays. In an inflationary environment buying early should increase reported margin. That they have said they have had to discount some to shift it suggests that they haven’t just accelerated buying strong selling lines but have taken risks on a significant amount of lines without strong sales history and got their fingers burnt. Poor buying?
Unless we can find out the results of their main competitors for the same period we can’t tell if online musical instruments retail has become a low profit game or if G4M are just not particularly good at it.

The fall of £1.2M to £1.6M in EBITDA is on estimates given only 11 weeks ago. As they have a March year end all of that reduction should relate to trading from 19 Jan (last update) to 31 March. With no other reason given other than market conditions they must have had a very weak 11 weeks.

EBITDA £1.2m to £1.6m down on expectations. With net profit expectation having been £1m they would appear to be trading at a loss.
Sales up 3% yoy at a time of inflation of at least 6% (for manufactured goods) in their markets so a drop in sales volume. No end in sight to reduced consumer confidence. Quite possible in line with their competitors.
Pinning some growth hopes on AV.com but that is a market that already has established bricks and clicks players some of whom are trading online successfully through their own websites and Amazon marketplace and ebay and are properly financed and know their trade. G4M don't have the finances for a price war so growth at av.com likely to be slow.
Net debt down and manageable but could be thin gruel for shareholders for some time.

The problems are that the musical instruments and AV retail markets in western Europe are very settled with all the big players doing a competent job. There is no reason for G4M’s market share to change much one way or the other. Even the UK’s main bricks and mortar retailer in the sector (PMT) has returned to its pre Covid sales level so there is no evidence of online retailers increasing their market share rapidly. AV.com is a slow burn at best as there are other established online players in the sector. They talk about own brand but at the cheap end there is loads of China factory direct stuff on Amazon, in the mid-market there are established worldwide brand names, the more specialist product requires top online and magazine reviews to sell (very difficult to get consistently with OEM and ODM product) and the high end is a hobbyists market that won’t buy own brand. So AV.com has no competitive advantage.
Net debt, while manageable, Is too high to allow other ventures. So it maybe a quiet couple of years from G4M while they pay down debt.
No reason for the market to change its valuation.

With no statement due from the company until the year end update (probably late April) I suspect that this share will just drift about a bit until then. I notice from the accounts (to April 22) of PMT - their main UK bricks and mortar competitor - that PMT's sales have recovered to pre Covid levels so the move to online buying in this market place may be at or close to maturity. So difficult to see where G4M will get good growth from this year to move the share price substantially.

They bought AV Distribution (now AV.com) last year just after the peak of the Covid related online sales boom but don’t mention it in the trading update. Richer Sounds (UK market leader in the AV.com target market) says in its accounts to April 22 in a report dated 16 Dec 22 that “since the year end macro-economic conditions have worsened and retail spend has slowed down further”. So the av.com results and short term prospects maybe unspectacular.
The acquisition struck me as G4M not expecting rapid sales growth in their traditional market.
Av.com sales would be included in the Q3 2022/3 figures but not in the comparatives. Under the last year of its previous ownership AV Distribution UK sales were c£8m, so G4M like for like UK sales will have fallen a bit despite inflation.
It looks fairly secure but flat.