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Guitar Center Cash Flow Up On Lower Sales Volume

...of liquidating outdated inventory. For the three-monthsperiod ended September 30, 2015, the retailer reported revenues of $509.5 million, compared with $528.5 million for the same period a year ago. Sales at stores open for more than a year declined by 7.9%. However, management reported that gross profit margins improved by 2.1%, because of improved discipline on the sales floor. An anonymous bond trader said that “Last year, the company was basically giving things away for free to clear out inventory, so the top line being down was to be expected.”

Guitar Center’s cash flow, or earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 72% to $31 million for the third quarter ended September 30, compared with $18 million in EBITDA a year ago. The improved third quarter EBITDA margin, at 6% of sales, brought the company back to 2013 performance levels. Full-year EBITDA in 2013 was $163 million, or 7.4% of revenues of $2.1 billion.

Guitar Center’s management, under the leadership of Darrell Webb, CEO, has telegraphed its intentions to put profitability ahead of sales growth. Reflecting the new priorities, the retailer also reported that it had trimmed promotional expenses by 20% year-over-year because, as discussed in a conference call with bond investors, “analytics research revealed that earlier ad campaigns weren’t optimizing sales.”

Guitar Center shoulders approximately $1.1 billion in debt with annual interest costs of $110 million. After the earnings report, its 6.5% senior secured note due 2019 changed hands at 93.25, yielding 8.831%, down slightly from 93.5 pre-earnings. The 9.625% unsecured notes due 2020 last traded at 84 to yield 14.63% on October 26.

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