Guitar Center Gets Boost as It Turns Up Volume on Growth By JACQUELINE FOX Staff Reporter Guitar Center Inc.’s growth strategy is playing well. A string of successful new store openings coupled with a spike in online sales for the 2002 holiday season have helped the Westlake Village-based company beat analysts as well as their own expectations. Guitar Center spent much of 2002 in rollout mode, opening a total of 20 new stores across the country and, so far, shows no signs of slowing down. The company opened three large format stores in the first quarter of this year, one in Cerritos, Scottsdale, Ariz., and Warwick, R.I. and plans to add three more to the list by July 1. First quarter revenues from retail stores grew 10.8 percent to $227.6 million, compared to $205.5 million for the same quarter in 2002. Same store sales rose 4 percent overall, with new stores generating $13.1 million, or 59.4 percent of the increases. Net income for the three months ending March 31 soared 53 percent to $5.3 million or $0.22 cents per diluted share on revenues of $287.5 million, compared to net income of $3.4 million or $0.15 cents per diluted share on revenues of $254.8 million for the same quarter a year ago. The company saw a brief dip in sales immediately following the start of the war in Iraq. “We were slow for a short time there at the start of the war but we are pleased with our performance this year so far,” said Bruce Ross, Guitar Center’s chief financial officer. “We have already opened one large format store in Memphis this quarter and have plans for two more smaller format stores, one in Florida and one in Virginia. And we intend to continue on the same path.” The nation’s No. 1 retailer of guitars, amplifiers, drums, keyboards and pro audio equipment now operates 96 Guitar Center stores and 18 American Music stores, which specialize in band and orchestra instruments. Technical upgrades completed at the beginning of 2002 at fulfillment centers for the company’s online division, Musician’s Friend, coupled with the acquisition last November of the assets of former competitor MarsMusic.com and an extended holiday shopping period have boosted e-sales. Online revenues for the first quarter this year rose 21.5 percent to $59.9 million, compared to $49.3 million in the same period in 2002. Revenues from the division jumped 23.9 percent to $209 million in 2002 compared to $168.5 million in 2001. “This year on-line sales for the Christmas season had a longer tail into the new year than normal,” said Ross. “We are also more efficient at our fulfillment centers now and, going forward, I think our direct response division will continue to grow in the 15 to 20 percent range.” Analysts agree. “Guitar Center has made so many investments in their online-fulfillment center since it was introduced in 1999, the company is now able to leverage its costs a lot more efficiently and generate higher profits,” said Justin Cable, who covers the industry for Los Angeles-based B. Riley & Co. “Guitar Center has also had a long history of consistent single digit comparable store increases, quarter over quarter, so certainly rolling out new stores has been a good strategy for them.” Guitar Center’s 52-week high was $23.60 on April 25 with a low of $13.70 last July 24. The stock closed May 8 at $22.90 per share. Mars Music, which operated both brick- and-mortar as well as e-tail outlets, said Cable, suffered to a large degree because it attempted to open up too many stores too quickly. “My sense was that they were growing aggressively so that they could show that growth and complete an IPO, but never did,” said Cable. “They didn’t have the earnings to back it up, even though they certainly had a big store format with a lot of retail space and were going right into guitar center markets.” Should officials at Guitar Center be concerned that their company, too, could get into trouble with expansion? Not according to Ross. He said Mars Music stores were too big and, unlike Guitar Center, which caters primarily to professional musicians, the company tried to spread itself across too many markets. “The Mars Music stores were around 30,000 square feet, while most of our large stores are only about 17,000 square feet,” said Ross. “They also catered to all groups, and you can’t do that and weather the downturns as well.” Cable agreed. “Guitar Center was certainly impacted by 9-11 and the fallout from the stock slump, but they turned around very quickly,” said Cable. “Because roughly 75 percent of their retail customers are professional musicians, they just are not impacted so much by the general market conditions for retail.”
