Interim results: Strong trading, reloading for next stage
Expected investment and positioning for further expansion
After a first half focused on expected investment and positioning for the next stage of expansion, G4M has reported interim results with strong revenue growth of 44% y-o-y to £31.2m and pre- and post-tax profit at break-even levels.
£000s |
|
|
H117 |
|
H118 |
|
Growth |
Revenue |
|
|
21,609 |
|
31,219 |
|
44.5% |
Gross profit |
|
5,754 |
|
7,811 |
|
35.7% |
Gross margin (%) |
|
26.6% |
|
25.0% |
|
(1.6)pp |
EBITDA |
|
|
1,366 |
|
746 |
|
(45.4%) |
EBITDA margin |
|
6.3% |
|
2.4% |
|
(3.9)pp |
Operating profit |
|
916 |
|
57 |
|
(93.8%) |
Operating margin (%) |
|
4.2% |
|
0.2% |
|
(4.0)pp |
PBT |
|
|
994 |
|
(40) |
|
(104.0%) |
PAT |
|
|
778 |
|
33 |
|
(95.8%) |
Source: G4M, Edison Investment Research. Note: EBITDA, operating profit and PBT are before exceptional costs, share-based payments and non-recurring interest charges.
Underlying momentum was strong both in the core UK market, up 30%, and particularly in the strategic focus market of Europe, up 70%, including maiden full trading periods at the two new distribution centres in Sweden and Germany. The company’s own branded products grew by 61%, faster than other branded products (41%), to reach a level of 24% of total sales.
Margin pressure mitigated
Gross margin eased 1.6 percentage points to 25.0% as the company managed cost increases. Its own-brand products are purchased in US dollars, against which the GB pound was 8% weaker in the period. Purchases of other brand products, although mainly negotiated in GB pounds, are also inevitably affected by sterling weakness. These pressures were mitigated in part through investment in the customer proposition and in part by the higher margin associated with relatively stronger growth of its own products.
Operating costs reflect European footprint
Operating costs totalling £7.8m rose from £4.9m at H117, an increase from 22.5% to 24.9% of revenue. That overall increase was largely accounted for by the two European hubs, at 2.2 percentage points of the total 2.4 point increase.
Exhibit 2: Operating costs
Operating cost analysis |
H117 |
% of revenue |
H118 |
% of revenue |
£000s |
|
|
|
|
|
|
Marketing costs |
|
1,760 |
8.1% |
2,538 |
8.1% |
UK labour costs |
|
1,730 |
8.0% |
2,612 |
8.4% |
Depreciation and amortisation |
450 |
2.1% |
689 |
2.2% |
European hub costs |
|
|
|
701 |
2.2% |
Other costs |
|
926 |
4.3% |
1,243 |
4.0% |
Total |
|
|
4,866 |
22.5% |
7,783 |
24.9% |
Source: G4M, Edison Investment Research
Investment in necessary management
As flagged in the full-year results and at pre-close, the first half, which included the £4.2m fund-raise in May 2017, was a period of investment into the proposition and infrastructure that increased operational costs. During the period, needed hires were made, particularly in the sales and buying functions, and the half also bore the full-period costs of senior hires in the second half of FY17. Marketing costs continued at 8.1% of revenue, and depreciation and amortisation rose as a result of continued investment into the software platform.
Performance indicators: Progression across the board
Customer KPIs demonstrate underlying progression across the board:
|
|
|
|
H116 |
FY16 |
H117 |
FY17 |
H118 |
Unique visitors (m) |
|
|
4.41 |
10.1 |
5.6 |
12.6 |
7.1 |
y-o-y growth |
|
|
|
|
27% |
25% |
27% |
UK conversion rate (%) |
|
|
2.45 |
3.08 |
3.20 |
3.64 |
3.59 |
Change y-o-y (ppts) |
|
|
|
|
0.75 |
0.56 |
0.39 |
European conversion rate (%) |
|
0.86 |
1.21 |
1.49 |
1.82 |
2.14 |
Change y-o-y (ppts) |
|
|
|
|
0.63 |
0.61 |
0.65 |
Total conversion rate (%) |
|
1.79 |
2.28 |
2.38 |
2.75 |
2.84 |
Change y-o-y (ppts) |
|
|
|
|
0.59 |
0.47 |
0.46 |
Average order value (£) |
|
|
115.67 |
115.74 |
125.64 |
124.02 |
131.66 |
y-o-y growth |
|
|
|
|
9% |
7% |
5% |
Active customers |
|
|
187,840 |
226,000 |
272,340 |
340,000 |
390,790 |
y-o-y growth |
|
|
|
|
45% |
50% |
43% |
Proportion of repeat customers (%) |
|
28.4 |
25.5 |
28.2 |
23.7 |
25.8 |
Change y-o-y |
|
|
|
|
(0.2) |
(1.8) |
(2.4) |
Trustpilot rank |
|
|
9.5 |
9.5 |
9.5 |
9.6 |
9.6 |
Change y-o-y |
|
|
|
|
0.0 |
0.1 |
0.1 |
E-mail subscriber database |
|
|
325,937 |
306,000 |
601,011 |
650,000 |
725,594 |
y-o-y growth |
|
|
|
|
84% |
112% |
21% |
Source: G4M reports and presentations
Unique visitors to the website continue to grow at a substantial and consistent rate, reflecting the bias to new users, also apparent in the reduced proportion of repeat customers. G4M achieves payback on customer acquisition costs from the first transaction, on average.
Conversion rates continue to move upwards, as they have in every half-year reporting period over the past two years. They grew particularly strongly in Europe, and the convergence of European with UK rates represents a sizeable opportunity. Similarly, average order value continues to increase year-on-year, and at £132 indicates that customers are using the website for purchases of serious value. G4M maintains its high-quality Trustpilot score of 9.6, achieved for FY17. And the email database continues to grow significantly at 21%, on top of the transformative 84% a year ago.
European hubs – one year in
The Swedish hub near Stockholm opened in November 2016 and the German one near Dusseldorf in February 2017. It is therefore nearly a year since the physical move to continental Europe was launched. In May, we noted that the German centre was at an early stage of trading and was likely to remain inefficient during H118. However, by August 2017 both the centres were making positive contributions to central costs, a promising position to be in ahead of the busier second half. With half-year costs of £0.7m and assuming similar gross margin to the rest of the business, it could be inferred that run-rate annual revenue from the centres is currently £5-6m, or some 7% of revenue.
This profitable position is significant in that it indicates that the process of setting up the international centres has been successfully executed. This is no small achievement for a business that was previously purely UK-based. It is an important result for a business that targets international markets. It has been a significant learning phase for management that reduces the risks associated with further international expansion. It puts the international operation in a strong position ahead of the busy second-half trading period.
Investment in the balance sheet
Having raised £4.2m net cash in May 2017, G4M has invested in stock as planned, supporting continuing revenue growth. Stock increased from £9.3m at August 2016 to £13.0m at 31 August 2017, although the 39% increase is lower than the rate of increase in revenue, and we forecast a further increase to £15.5m by year-end. This should be partly mitigated by a reduction in receivables, which was inflated at August by prepaid stock on water, cash-in-transit and funds lodged with payment providers, as well as property-related prepayments. We forecast receivables reducing from £2.3m at interim to £2.0m at year-end.
The company also invested £5.6m in its UK Head Office freehold in York, although this was debt-financed via term loans of £5.5m. As a result, net debt was £3.7m against net cash of £0.9m at August 2016.