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Guitar Center Sales Up 4.8%, Margin Pressure Continues

...fell to $1.1 million from $15.9 million a year ago, largely due to intensified price competition. Gross profit for the quarter was trimmed to 28.3% compared to 29.7% a year ago. The declining margins and earnings drop prompted a $360 million goodwill writedown for the Guitar Center stores unit. Management said, “Based on a forward projection of our recent operating performance, we determined that if current trends were to continue there would be uncertainty as to when or whether our Guitar Center business would be able to achieve historical operating results. Given these uncertainties, we revised our projections of future cash flows and concluded” that a goodwill impairment charge was necessary.

Net sales for the Guitar Center segment for the third quarter increased 6.2% to $389.4 million, compared to $366.6 million for the same period in 2012. The increase was primarily driven by new stores and comparable store sales growth. New stores open less than 14 months contributed $12.8 million in incremental net sales during the quarter, and comparable retail store sales increased 2.8%, or $9.9 million. Gross profit margin was 27.3% for the third quarter of 2013, compared to 28.2% for the same period in 2012. Net sales from the Guitar Center website were flat compared to the same period last year. Comparable store sales benefited from a 2.3% increase in the total number of transactions, resulting from marketing and pricing strategies during the quarter.

Net sales from the direct response segment, which includes Musician’s Friend, for the third quarter of 2013 decreased 6.4% to $60.9 million, compared to $65.1 million for the same period in 2012. The decrease was due to lower average order size, resulting from a 4.8% decrease in average unit price and a 2.4% decrease in items sold per order. Management believes these decreases were the result of promotional offers during the quarter, such as free shipping and special merchandise promotions that increased total number of orders, but not sufficiently to offset the decrease in average order size. Gross profit margin for the division was 27.9% for the third quarter, compared to 31.5% in 2012. The decrease was due to lower selling margin of 2.4% and higher freight costs of 0.8%. Management concluded, “Our direct response segment continues to be affected by the increasingly competitive e-commerce landscape, which has made it more difficult to attract and retain customers.”

Net sales from the Music & Arts segment for the third quarter of 2013 increased 9.0% to $70.4 million, compared to $64.6 million for the same period in 2012. The increase was primarily due to retail store sales growth and continued success at increasing high-volume bid sales to school districts. Gross profit margin was 34.3% for the quarter, compared to 35.7% for the same period in 2012. The decrease was due to lower selling margin of 1.5% resulting from a shift in sales channel mix, with increased high-volume bid sales to school districts at lower margins than rental and retail sales.







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