Gear4music (G4M) – Is the music playing a different tune?
Personally, I do not think this is a great update. Are there positives? Of course. Sales are 36% ahead of expectations. “Good progress” made with European distribution. Active customer numbers are up by 40%.
But looking a little closer, sales are 4% below customer numbers. This means that basket size is getting smaller, or margins are pressured. Indeed, the company does mention competitive pressures as having an impact on short term gross margins, and almost infer that they remain best focused on serving our customers by discounting the price!
Dig deeper, and they’ve used a high percentage growth number of 230% for the German distribution centre orders. This is meaningless, as we are left to guess what the actual sales orders were. Selling 330 units would be a 230% increase on selling 100 but it’s still pitiful. It could be that sales have been mentioned before and we could calculate it, but I always assume that management try to hide things on purpose and so I would argue they are rubbish.
“The Board expects EBITDA for the full financial year to be in line with our expectation.”
EBITDA is a fiddly number, and not really very helpful either. Furthermore, they use the board’s expectations rather than market expectations! How are we supposed to know what these are, if they don’t tell us? A lot of companies are guilty of this, and it’s really irritating.
Change of Accounting Reference Date
This is a warning sign. It’s bizarre that companies never seem to make these shorter. Is it a coincidence that the longer period numbers would look better at first glance? I recall Paul Scott mentioning that when he was an FD he changed the accounting period by adding another four months. This turned a loss into a profit, and nobody noticed. I’m not suggesting that this is the case at G4M, but it is a warning sign.
Possibly the only thing that really matters is the chart – it doesn’t really matter to me if a company makes a profit or a horrific loss if the price is going up and it makes me money. If you’re an investor, you may argue that the chart doesn’t matter to you as you’re investing for the long term. That’s fair enough, but both traders and investors are here to make money, and I’d say it’s foolish to ignore price action.
The problem here is that G4M is well off its high. That means plenty of trapped buyers, and the lower it falls, the more people are underwater on the stock. That means there is a lot of stock to churn through as the price rallies, making it a lot more difficult. When a stock is going up and making new highs there is nobody to sell, and as long as the price is going up there are more and more buyers. The PE of 45 is looking lofty too. It’s expensive, and if growth shows any signs of growing, the PE will deflate and so will the price. I’ve got G4M on the watchlist to short.