Gear4Music

“Stocks are bouncing back after yesterday’s Apple-inspired bout of weakness, but the S&P 500 in the US is still on course for its worst first week back after the New Year since 2016 when fears of a currency crisis in China led to significant volatility. And this follows on from the worst December for the index since the Great Depression. “The fortunes of the Chinese economy, amid an ongoing trade war with the US, are central to investors’ current fears. However, the FTSE managed to soldier ahead on Friday, gaining 0.6% to 6,729.50 on hopes that next week’s talks between the US and China can help temper the tensions on trade. In the context of today’s fragile recovery, non-farm payrolls data later could also be key to determining the next major move in markets. “Employment data is a central factor behind the decisions made by the US Federal Reserve, and its plan to stick with at least two rate hikes in 2019 has been a significant catalyst for the flight from equities in recent weeks,” says AJ Bell Investment Director Russ Mould.

GEAR4MUSIC

“Fast growth sometimes isn’t enough in the cruel world of investing. The market has given the thumbs down to the musical instrument retailer’s latest trading update, sending its shares crashing to their lowest point since October 2016.

“Total sales growth of 41% in the final four months of 2018 is a reflection of strong customer demand and expansion in multiple geographies. Sadly it is growing too fast and didn’t have the capacity to fulfil full sales expectations, thus earnings will fall short of market forecasts.

“Analysts had expected £4 million EBITDA (earnings before interest, tax, depreciation and amortisation) for the year to 28 February 2019, up from £3 million a year earlier. Gear4Music now says the current financial year’s figure will be less than the previous 12-month period.

“That’s a real setback as analysts had forecast steady progress with EBITDA going from £4m in the current year to £5 million in 2020 and £6 million in 2021. These estimates will almost certainly be downgraded in the wake of the latest news.

“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.

“We’ve seen a similar situation in the past year or so with the likes of ASOS and Just Eat whose shares plummeted after laying out investment plans to help grow their operations.

“Investors are failing to consider the longer-term benefits of reinvesting in a business. They are simply fixated on the short-term and punishing anyone who isn’t delivering faultless growth in revenue, profit and cash flow.”

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