By Staff Reporter Guitar Center Inc., the Agoura Hills-based music store operator, appears to be striking a sweeter chord with investors. The stock started to rebound in February after the company surprised analysts with stronger-than-expected fourth-quarter 1999 earnings. It has come on even stronger in recent weeks as investors began bailing out of over-inflated tech shares and into “clicks-and-mortar” companies like Guitar Center. Investor enthusiasm was further buoyed on April 23 when the company released its first-quarter earnings report, logging a 64 percent increase in net income for the quarter. The shares, which were trading just under $9 in early February, had risen to around $14 as of late April. “The biggest thing that’s happening across the board is that money has flown out of Internet plays and flown back into Old Economy stocks like ours,” said company co-Chief Executive Larry Thomas. “People are going back and taking a look at us in terms of a value play, and they like what they see.” Guitar Center is the nation’s No. 1 retailer of guitars, amplifiers, drums, keyboards and pro audio equipment. The company opened 13 superstores last year and another five so far this year, bringing the total to 69. Guitar Center is on track to open 14 to 16 new stores in 2000, company officials said. “It’s a fragmented industry, and Guitar Center has the best business model,” said N. Richard Nelson Jr., an analyst with Stephens Inc. “Their stores are bigger than the typical mom-and-pop retailer, with entire walls devoted to 250 guitars.” Nelson noted that the average Guitar Center store has 15,000 to 20,000 square feet of space, compared to 3,000 square feet for the average independent. “They have specialists in each department who actually play the instruments they sell. You don’t see that in the mom-and-pop stores,” Nelson added. “If I were an independent music store owner, I wouldn’t be sleeping well at night. I’d definitely be having dreams of streamrollers.” The company hit a rough patch last year when its second-quarter earnings disappointed analysts. Investors also appeared to be reacting to an erosion of comparable-store sales and the acquisition of Musician’s Friends Inc., an e-commerce instrument retailer that also operated nine stores. At the time, Guitar Center appeared to be having trouble assimilating the Musician’s Friends stores and e-commerce business, but Nelson said the fourth-quarter 1999 results offered evidence that Guitar Center had successfully integrated the acquired operations. Net sales from retail stores grew 29 percent to $164 million during the fourth quarter ended Dec. 31, 1999. Expansion of the chain contributed to the bulk of the increase, but comparable-store sales rose a healthy 11 percent. “That’s well above inflation and indicative of the market share gains they’ve seen for each of their stores,” said Nelson. “Certainly, they’re back on track.” In the first quarter ended March 31, net income rose to $4.1 million (19 cents per diluted share), compared to pro forma net income of $2.5 million (11 cents) for the same period in 1999. The prior-period results were restated to include the results of Musician’s Friend. Net sales climbed 30 percent in the first quarter of 2000 to $175.8 million, vs. $135.4 million for the comparable period last year. “We have gotten off to a strong start this year,” said Marty Albertson, president and co-CEO of Guitar Center. “Our direct-response sales were higher than expected for the quarter, driven by solid increases in both Internet and catalog (sales).” Industrywide sales of music products total about $6 billion annually, and the market is growing at about 7 percent to 8 percent a year. While Guitar Center is at the head of the pack, the company does face a competitive threat from two other up-and-coming music chains, Mars Inc. and Sam Ash, said Nelson. Founded in 1995, Ft. Lauderdale-based Mars already has 33 stores throughout the United States with plans for 17 more in the coming year. Sam Ash has more than 30 musical instrument megastores located in New York, New Jersey, Connecticut, California, Pennsylvania, Ohio, Florida, Ohio, Illinois and Tennessee. “In my opinion, Guitar Center has the best store format in the industry, and I think they’ll stay on top provided they continue to find good people at the store level and continue executing their plan well,” Nelson said.
