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MUSIC—Guitar Center Beats Competitors to E-tailing Success

Bucking the recent trend of south-heading e-tailers, Guitar Center, Inc. has shown a 123 percent jump in Internet sales, with more of the same forecast for the rest of the year. According to its most recent numbers, the Agoura Hills-based musical instruments retailer’s Internet business showed $16.5 million in sales during the fourth quarter of 2000 a substantial increase over the same period in 1999 when it raked in $7.4 million. Analysts expect that strength to carry over into the new year. “One of the things that Guitar Center differs from other retailers in is the demographics of its customers,” said Justin Cable, an analyst with B. Riley & Co. in West Los Angeles, which tracks the company. “The customers they serve are often musicians who are in the music business, who like to try out the latest products regardless of how much it may cost and that carries over into their e-business.” The company’s year-end figures showed growing strength in the market, despite an overall slowing economy nationwide. Total net sales for the company in 2000 were $786 million, a 27 percent jump from 1999’s $620 million. Larry Thomas, the company’s chairman and co-chief executive officer, credited the upsurge to successful promotional and marketing efforts along with competitive pricing of top-of-the-line musical equipment. “We were able to successfully counter the recent retail industry softness and December weather-related impacts throughout many regions of the country through aggressive promotional and marketing activities,” he said. Bruce Ross, chief financial officer, said the company’s expansion and increased presence in the market place is borne out by the year-end numbers. “We saw sales growth in every aspect of the company while at the same time we were opening new stores,” he said. Last year, Guitar Center opened 14 new stores, bringing its total to 83 in 25 states. This year, the company plans to open 12 new stores. The first opened its doors last week in Philadelphia. The company’s Internet sales site was one of the company’s brightest spots in 2000, racking up $45 million in net sales, a 171 percent increase over the $17 million it sold in 1999. Partly responsible for that is the high-end nature of the business, said analyst Justin Cable. “Their customers are musicians and they’re technology-oriented and they’re taking advantage of the Internet,” he said. The e-business success comes as the company joins forces with Musician.com, a new web site founded by music industry professionals, allowing musicians to create, manufacture and distribute their music via the Internet. Under a Dec. 14 agreement, Guitar Center and Musician.com will cross-market products directly. Guitar Center has invested $3 million in the new venture. Store sales, however, still took the biggest part of overall net sales with $652 million, a 22 percent increase over the $537 million the company took in during 1999. Sales from new stores added $79 million, accounting for 69 percent of the overall increase in store sales. The company’s catalog department also showed strength in 2000 with a 33 percent net sales jump, going to $88 million from $67 million in 1999. Cable said Guitar Center’s key position in the market is encouraging to investors, but he cautioned that competition is intensifying from the privately-owned Mars Music stores and Sam Ash Music is continuing to grow. “Mars Music doesn’t have as many stores, but they have a lot more square footage than Guitar Center stores, so their sales figures aren’t as high as Guitar Center’s, but they’re getting close,” he said. Mars Music, which does operate an Internet sales site, would not comment on its sales figures. Sam Ash does not have on-line sales. Sam Ash stores are also taking aim at Guitar Center with a moderate expansion of its own, with plans to open several new stores this year, Cable said. “But their competition is mainly mom and pop music stores in many markets,” Cable said. Despite these upturns, Cable does not consider the company a “buy” just yet. Guitar Center’s $56 million debt, which includes a line of credit, along with $67 million in long-term debt, is reason for caution, he said. “If they had less debt, they’d get my recommendation,” he said. Meanwhile, the company is poised to continue its expansion with plans to open 12 new stores, including some in New Jersey, Pennsylvania and California.

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