Gear4music Regulatory News (G4M)

2 April 2019

Gear4music (Holdings) plc

Trading Update

Gear4music (Holdings) plc ("Gear4music" or "the Group"), the largest UK based online retailer of musical instruments and music equipment, today announces a trading update for the 13 months from 1 March 2018 to 31 March 2019 ("the Period").

Highlights:

· Sales in the period increased by 36% with continuing strong growth in the UK and Europe

· Sales in the 12 months to 28 February 2019 were £109.9m, up 37%

· Active Customer numbers increased by 53% to 727,400

· Website conversion improved to 3.40%, up from 3.25% last financial year

· On hand cash at 31 March 2019 of over £5.0m (28 February 2018: £3.5m)

[1] Active customers are customers of the Group who have purchased item(s) at least once in the last year

Overview

As previously reported, during the period the Group was impacted by lower gross margins than has historically been the case. In addition, our York distribution centre reached maximum capacity during our peak Christmas trading period which affected anticipated sales growth and also resulted in higher than expected distribution costs.

Whilst decisive management action has been taken and product margins have improved during H2, as a result of a combination of the additional distribution costs, some short-term courier cost inflation and a clean-up of overstocked and slower moving inventory in recent months, the Board now expects EBITDA in the Period to be not less than £2m.

However, the Board is confident that having undertaken a thorough review of the business, including a strong emphasis on margin growth, the Group will return to a more profitable growth trajectory during the new financial year.

Continued significant revenue growth

Gear4music revenues have grown from £12m to £110m in just six years, including international growth in the same period from £1m to over £50m, strengthening our position as the number one retailer of musical instruments and equipment in the UK and making us Europe's second largest.

The momentum in sales growth has continued both in the UK and Europe, remaining strong through FY19, against a backdrop of consumer uncertainty and notwithstanding the impact of the unexpected capacity constraints during the peak Christmas trading period.

Improvement in product margin

As previously highlighted, product margins during a highly competitive period have been the largest contributing factor to the lower profitability. Due to our targeted operational improvements we have made progress in returning towards historic product margin levels, improving from 27.5% during H1, to 28.6% during the six months to 28 February 2019. This was despite selling through some over-stocked inventory, alongside a clean-up of slower moving and lower margin inventory purchased earlier in FY19. Pleasingly, we enter the current financial year with a healthier inventory profile that will support our renewed focus on margin optimisation.

In addition, own brand sales growth outpaced other brand sales growth during the last five months, and we expect product margins will improve further as the new financial year progresses and we focus on sales of higher margin products.

Distribution costs

During H2, gross margins were negatively impacted by higher distribution costs, partially as a result of the previously reported capacity constraints during the FY19 peak Christmas trading period which we are confident will not recur, and also due to higher than anticipated courier cost inflation. Some courier cost reductions have subsequently been agreed, alongside changes made to optimise delivery cost recoverability. We are confident that overall delivery costs will return to a normalised level going into FY20. This higher level of cost has offset the recent product margin improvements but is not expected to impact to the same extent in the new financial year.

Increasing capacity

The Group has sustained very strong revenue growth over a number of years and further enhancing our systems and processes to help support our future growth will be a key focus of FY20. After careful consideration, in the short term, we are now planning to alleviate peak trading capacity constraints by improving the efficiency of our distribution and logistics management systems. Where applicable, we will optimise our load balancing and order fulfilment within our European distribution centres, where we have significant capacity headroom. This will delay the need to expand the footprint of our UK warehouse operations, and ensure our longer-term commitments in the UK are minimised during a time of political uncertainty.

Confident outlook

We continue to see a significant opportunity to win market share in the UK and across Europe. Although profitability for this financial period has been impacted by a combination of growth-related factors, we have taken decisive action to address the underlying causes, and we are confident that these will not recur in the new financial year. Consequently, we will continue to focus on growing margins and believe our long-term growth strategy remains firmly on track.

With over £5m cash on hand at 31 March 2019, the Directors are confident the Group has the financial resources required to achieve its business objectives. Net debt at the Period-end is expected to be below the Board's previous expectations with adequate headroom against our asset-backed banking facilities supporting the funding requirements of the business. Despite the challenges of FY19, the Board remains confident the Group will continue to quickly grow revenues and return to more profitable growth in the new financial year.

- Ends -

Enquiries:

About Gear4music.com

Operating from a Head Office in York, and Distribution Centres and showrooms in York, Sweden and Germany, the Group sells own-brand musical instruments and music equipment alongside premium third-party brands including Fender, Yamaha and Roland, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and, more recently, into the Rest of the World.

Having developed its own e-commerce platform, with multilingual, multicurrency websites delivering to over 190 countries, the Group has rapidly expanded its database and continues to build its overseas presence.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No. 596/2014.