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Guitar Center Sales And Cash Flow Up

...3.6% to $659 million versus $635 million for the same period a year ago. Earnings before interest, taxes, depreciation, and amortization (EBITDA) also improved, advancing 8.5% to $58.6 million versus $54 million a year ago. However, gross profit in the fourth quarter declined to 27.6% versus 29.2% last year. Fourth quarter EBITDA was bolstered by a $21 million one-time gain, related to the disposition of aged inventory through a third-party liquidator.

For the full year, Guitar Center revenues were up 2.1% to $2.23 billion versus $2.19 billion in 2013. Full year EBITDA in 2014 was $129 million, up slightly over projections but down from last year’s level of $158.4 million. Sales at Guitar Center locations open for more than 12 months were up 0.2%, with the additional growth delivered by new stores. Management reported that for the full year, the Music & Arts school music division was the top performer, posting a 9.5% sales gain. Sales at the Guitar Center stores were up approximately 0.5% and the direct response division, which includes Musician’s Friend, Woodwind & Brasswind, and Music 123, experienced revenue declines.

At year end, Guitar Center had $17 million in cash on the balance sheet, and $144 million available to draw from a revolving asset backed loan. The company ended last year with $170 million in cash on the books.

Guitar Center bonds, which are thinly traded, rallied on the EBITDA improvement. Five-year unsecured bonds advanced seven points to $74, while the five-year secured notes gained 3.5 points to $89.25. However, the $21 million gain on distressed inventory raised skepticism, which was heightened by the fact that management did not disclose the details of the transaction. One bond analyst called it “an accounting trick,” adding, “It doesn’t add up. Gross profit is down 160 basis points, cash on hand is down, and they pull this one-time gain out of the hat to make EBITDA look better. Any reasoned analysis excludes the inventory gain and marks EBITDA down to $37.5 million, not the reported $58.5 million.”

Guitar Center management also announced plans to continue rolling out new stores. Seven to ten new stores are planned in 2015, supported by a $60 million capital expense budget. Some bond holders have argued that, given Guitar Center’s high leverage, the company should put off plans for new stores, trim its capital expenditure budget, and conserve cash. But one analyst explained, “There is an inherent tension between the bond holders and Ares (the private equity firm with a controlling stake). The bond holders just want to get paid back, Ares wants to show growth so they can take the company public and successfully exit. It looks like Ares, for the time being, is getting its way.”

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