A beneficiary of multiple UK lockdowns, today’s results from online musical instrument retailer Gear4music (LSE: G4M) help explain why I think this is one of the best UK growth stocks going.
“Exceptional financial performance”
Today, G4M said the company had delivered an “exceptional financial performance” despite the hurdles caused by Covid-19 and our exit from the EU.
Thanks, in part, to high street retailers being forced to shut up shop, revenue jumped 31% to £157.5m in the 12 months to the end of March. The number of active customers served by G4M’s multilingual, multicurrency websites grew by almost the same percentage, to 1.06 million.
It gets better. Earnings before interest, tax depreciation and amortisation (EBITDA) soared 154% to £19.8m. The latter was ahead of what analysts were expecting the AIM-listed firm to deliver.
So, what does the future hold for Gear4music? Well, here’s where things get interesting.
Beating expectations
Since more UK lockdowns look very unlikely, G4M’s management doesn’t expect trading in the first six months of FY22 to match that seen in FY21. As a consequence, profits will likely be lower.
Taken on its own, this might be enough to generate a drop in the share price. After all, the company is effectively saying it’s hit a high note and all the good news is now priced in. However, the opposite has actually happened this morning. I think there are three reasons for this.
First, the UK growth stock had already flagged the possibility that trading would moderate, helping to cushion the blow as/when it happens.
Second, it was announced today that trading in the first quarter had been “stronger than the Board previously expected.” As a result, the company went on to say that financial results for the FY22 would now be better than first thought.
Third, G4M’s growth strategy remains compelling. It is now preparing to launch two new distribution hubs in Ireland and Spain. These will complement those it already has in North Yorkshire, Sweden and Germany.
On top of organic growth, the company has also begun making acquisitions. Drum brand Premier and bass amp brand Eden have already been snapped up. I wouldn’t be surprised if the company continues adding to its portfolio over the next 12 months. Finances are certainly solid enough to allow this (it held net cash of £2.7m in March).
Risks
G4M’s shares were up over 4% in early trading. The question is, will these gains stick? I’m bullish for the reasons mentioned above. However, the shares are certainly not devoid of risk.
Unlike some retailers, G4M doesn’t strike me as one that most people will visit on a weekly basis. More generally, shoppers will be wanting to spend their cash on things they’ve not been able to do. Both need to be borne in mind by prospective investors. This is even more important given the frothy-looking valuation (44 times forecast earnings, before markets opened).
I also suspect a few investors will decide to bank some profit. After all, the stock has climbed over 200% in just one year! The fact that G4M’s stock is less liquid than those higher up the market spectrum might exacerbate any downward pressure as well.
On balance however, I think G4M remains a very promising UK growth stock and one I’d be happy to hold for the long term.
