Retailer’s share price plunges by 50% after profit warning
Shares in music retailer Gear4Music slumped by more than 50% in early trading this morning after it issued a profit warning caused by capacity issues at its York distribution centre.
The drop followed a trading update which revealed full-year earnings at the York-headquartered business would be “slightly below” last year’s level of £3.46m, disappointing investors who had been forecasting EBITDA of £4m.
The sell-off by investors this morning accelerates a downward trend in its share price which stretches back 15 months.
Gear4Music’s had already fallen 40% from the peak of 865p reached in October 2017 to last night’s close of 510p. The fall to below 240p this morning means the company has lost more than £120m from its market value in little more than a year.
This has been despite the expanding retailer delivering significant increases in its sales.
Its last full-year figures, to February 2018, showed a 43% increase as revenues rose to £80m. It has maintained that momentum with sales up 36% in the first six months of the year and, as revealed this morning, up 41% for the following four months, to December 31.
However it “reached maximum capacity” during the peak trading period between Black Friday and Christmas.
The constraints on capacity capped its ability to improve its margins, leading to the profit warning.
“Fast growth sometimes isn’t enough in the cruel world of investing,” said Russ Mould, investment director at AJ Bell.
“While having strong demand is a nice situation to be in, Gear4Music’s situation is a reminder that you still have to spend money to make money. It will have to increase capacity to avoid a repeat of the constraints which led to the latest profit warning.”
