Guitar Center Sales Up 2.7%

...due to the $165.3 million tab for servicing the interest on $1.5 billion in debt incurred in the 2007 acquisition by Bain Capital. Full year 2012 revenues advanced 2.7% to $2.13 billion, compared to $2.08 billion a year ago and operating income, before interest charges, was $95.6 million, versus a loss of $97.0 million last year. 2011 results included a one-time $153 million non-cash write down of trademarks and goodwill for the Musician’s Friend direct response unit. After interest charges of $165.3 million 2012, the retailer posted a net loss $72.1 million. For the fourth quarter, Guitar Center sales advanced 2.6% to $682.2, compared to $612.5 for the same period a year ago. The fourth quarter loss narrowed dramatically to $1.5 million.

Heavy losses and periodic downgrades by credit agencies, have raised concerns about Guitar Center’s creditworthiness and long term viability. Given the debt repayment schedule, the concerns may be overblown. At current sales levels, Guitar Center has sufficient liquidity to meet its bond repayment schedule for the next three years while funding operations. Meeting the $983 million bond payment, due in 2017, will present more of a challenge, but management seems confident about securing the necessary cash or equity injection.

Results at Guitar Center’s three operating units were mixed. Net sales for the 245-store Guitar Center chain increased 4.3% to $1.596 billion in 2012 from $1.530 billion in 2011, due in large part to the addition of 16 new stores, which added $50.8 million in revenue. A 0.9% sales increase at stores opened for over 14 months added $12.6 million to the top line. Gross profit margin at the Guitar Center segment was 28.8% in 2012 compared to 29.3% in 2011, due to competitive pricing, particularly in the fourth quarter when the company adopted a “lowest price guarantee.” Sales from the Guitar Center.com website declined 1.2% to $91.6 million. Management attributed the decline to fewer promotional discounts.

Net sales from the direct response segment, which includes Musician’s Friend and Woodwind & Brasswind, decreased 5.5% to $353.3 million from $374.0 million in 2011. The decrease was primarily due to a 4.6% decrease in order count and a 0.6% decrease in average order value. Management attributes the declines to e-commerce competition, fewer new customers, and a lower rate of converting website visits into sales transactions. Gross profit margins held steady at 27.6% in 2012 and 2011.

Net sales for the 110 Music & Arts stores increased 6.3% to $189.8 million from $178.4 million in 2011. The sales increase was due to a 3.1% increase in bid sales to school districts and a 2.2% increase in retail store sales. The gross profit margin at Music & Arts was 45.3% in 2012 compared to 46.7% in 2011. The decrease was primarily due to the increase in lower margin bid sales.

Reflecting prevailing industry trends, Guitar Center’s sales performance slowed as 2012 progressed. First quarter sales were 5.1% ahead of the previous year. By the fourth quarter however, sales were up only 2.6% of 2011 results. Due to this slow down, the company only achieved 86% of its cash flow projections and top executives saw their bonuses reduced.