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#1
madsplash

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GC Public Again--An Inside Look At Its Financial Data

A NEW BOND ISSUE has once again made Guitar Center a "public company," and its recently released financial statements provide insights into how the retailer is faring after its heavily leveraged acquisition by Bain Capital and the recession.


Reflecting the challenging economy and a $1.56 billion debt burden, Guitar Center reported a $27.8 million loss on sales of $488.1 million for the third quarter ended September 30, 2011. For the same period a year earlier, the parent of Guitar Center, Music & Arts, and Musician's Friend posted a $23.0 million loss on sales of $465.0 million. For the first nine months of 2011, sales advanced 3% to $1.47 billion, from $1.41 billion a year ago. Losses for the nine-month period in 2011 were $64.7 million compared with $54.1 million a year ago. The losses were increased by restructuring charges of $684,000 for Guitar Center Stores and $2.9 million associated with corporate overhead. A $5.2 million loss was also incurred in moving the Musician's Friend sales and administrative offices from Medford, Oregon to Guitar Center headquarters in Westlake Village.


The steep losses mask the underlying viability of the Guitar Center businesses. For the third quarter, the company generated earnings before interest, depreciation, and amortization of $37.0 million, which compares favorably with other large chain operations. However, the EBITDA was insufficient to cover the $40 million in quarterly interest charges.
Assessing the company's three divisions, the 221 Guitar Center stores posted an 8% sales increase to $358 million for the third quarter compared with $329.2 million for the same period a year ago. For the first nine months, sales were $1,074 million, an increase of 5.7% over last year's level of $1,016. Seven new stores provided $10 million of the increase, while existing stores posted a 4.3% year-over-year revenue gain. Sales for the 102 Music & Arts stores totaled $44.7 million for the quarter, an increase of 0.9% from $44.3 million last year. For the nine-month period, Music & Arts sales increased 0.9% to $127.0 million from $125.9 million a year ago. The Musician's Friend Direct Response division saw sales decline 6.7% in the third quarter to $85.3 million from $91.4 million a year ago. For the first nine months of the year, sales were $268.6 million, a decrease of 1% from last year's level of $271.3 million. The decline was caused by increased competition from a variety of online retailers. In addition, sales in California were adversely impacted because the company now has to collect sales tax due to the relocation of its headquarters.


Guitar Center's gross margin has improved to 30.3% for the first nine months of the year versus 29.6% a year ago. The improvement was largely offset by higher sales, general, and administrative costs, which advanced to 28.8% of sales versus 27.2% last year.


Like most other retailers, GC has felt the sting of the economic downturn. In July 2007, Bain Capital paid $2.1 billion for Guitar Center, putting up $540 million, and borrowing $1.56 billion. The private equity firm based its rich valuation on GC's leading market position, its strong balance sheet, and its consistent profitability. For the second quarter of 2007, the last period that financial data was available before the company went private, GC posted revenues of $518 million, 6% higher than the most recent quarter. In the 2007 second quarter, GC had $9.5 million in net income and boasted shareholder equity of $995 million. Five years after the Bain transaction, the quarterly net loss was $27.8 million and shareholder equity had declined to $95 million.

Edited by madsplash, 22 November 2011 - 03:55 PM.

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#2
JimV

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Hi Madsplash -

Can you post a link to the original story?

Thanks! -

Jim V
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#3
franke

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Any music retailer who can achieve a gross margin of above 30% in this economy is doing something right. Most independents who advertise the "we beat any advertised deal" can barely eke out 25%.

The problem GC has is that they are taking a beating on the interest and other ongoing reorganization costs. However, this situation is (relatively-speaking) short-term, and going public would be the best way of their getting out of this predicament and getting sufficient cash to better position themselves.

If GC were to ever "go under" they would take a substantial portion of the MI business with them, as no doubt a large part of their inventory was obtained via extended terms and the fact that they have an overwhelming retail presence to sell as much as they do (i.e. don't assume that the vacuum created by no more GC would therefore translate in their sales being automatically transferred and divided among Sam Ash and the other larger independents).
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#4
Thumper

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Again, the magic of leverage reveals it's darker side...
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#5
Timekeep69

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Guitar Center....too big to fail?
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#6
ARGuy

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If GC were to ever "go under" they would take a substantial portion of the MI business with them, as no doubt a large part of their inventory was obtained via extended terms and the fact that they have an overwhelming retail presence to sell as much as they do (i.e. don't assume that the vacuum created by no more GC would therefore translate in their sales being automatically transferred and divided among Sam Ash and the other larger independents).


Great observation. The failure of MARS Music set a lot of MI manufacturers back, and if GC failed it would be even worse. I don't want to see them fail; I'd just like to see them become less influential.
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#7
nickg

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the b!tch part is, look how many mom and pop/independent stores they already put out of business. if GC went under there'd be VERY few and far places to try out equipment "hands on".
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#8
Matt Middleton

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the b!tch part is, look how many mom and pop/independent stores they already put out of business. if GC went under there'd be VERY few and far places to try out equipment "hands on".


Unfortunately, the hands on approach to buying drums is vastly diminishing in importance to many drummers. Ebay and mail order have conditioned the buying public to research more (a good thing IMO) before buying, but in a lot of ways, you're still taking a chance. Brick and mortar retailers have been losing ground to the net for a while. Even the average GC has a lot less inventory on its floor than it used to and customers don't seem to care for the most part.
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#9
guitarsophist

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I was in a Guitar Center today to pick up some used 13" New Beats that I ordered online. The cymbals were in a store in Brooklyn and they shipped them to a store in Southern California for pickup. The system worked well, and the GC employees were all helpful and very polite. My recent experiences in GC have been pretty good, so I would be sad if they folded, or closed a lot of stores. However, I noticed that all the kits that were set up to play in the drum room were cheap ones, and the cymbals were ZBT's, B8's or worse. Of course, there was better stuff available, but it seemed like what they were really trying to sell was real low end stuff. That is probably a sign of the times.

John
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#10
Pounder

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Maybe they should be bailed out, for the good of all musicians out there.;)
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#11
Andy@MIT

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Any music retailer who can achieve a gross margin of above 30% in this economy is doing something right. Most independents who advertise the "we beat any advertised deal" can barely eke out 25%.

The problem GC has is that they are taking a beating on the interest and other ongoing reorganization costs. However, this situation is (relatively-speaking) short-term, and going public would be the best way of their getting out of this predicament and getting sufficient cash to better position themselves.

If GC were to ever "go under" they would take a substantial portion of the MI business with them, as no doubt a large part of their inventory was obtained via extended terms and the fact that they have an overwhelming retail presence to sell as much as they do (i.e. don't assume that the vacuum created by no more GC would therefore translate in their sales being automatically transferred and divided among Sam Ash and the other larger independents).


Not really. It is far from impossible to maintain a gross margin of 30% in this industry. What is killing GC (both the group holdings and the retail stores themselves) is a net margin of less than 2%. It is amazing (to me at least) that Bain has allowed GC to continue to expand in the face of mounting losses and a stagnating economy. I can say for certain, that no independent could come close to keeping their doors open for very long with a net margin of 2%. At that level, there is nothing to re-invest in the business once your people and overhead are taken care of.

How would going public help them? Sure an IPO generates cash, but I don't see any major investors (think CalPERS / other institutional investors) lining up to buy a piece. Who else will buy stock? Even if their were enough musicians out there to buy millions of shares of GC stock, the few that have the resources (knowledge + money) to invest in the market are probably not going to throw their (relatively small) weight behind GC.

On your last point, you are correct, that an overnight shuttering of GC (like the recent Daddy's episode) would seriously compromise a number of major manufacturer's, the reality is that the pain would be short-lived. The "pie" (drum market) isn't going to shrink. Drummers will still have money to spend. They will just have to spend it in different places. Sure it means more online sales, but at least in major markets (where GC has primary store formats), existing independents will have a field day, which could allow them to reinvest in their storefronts, inventory and staff and will create new demand for independent retailers in many places.

To this day, I still can't believe no one has opened a pro drum shop in Phoenix (I should have skipped grad school!). Not only is it very much underserved, if one or two (Scottsdale and Avondale come to mind) GC's were to close their doors, the market will be even more ripe.

For those with the patience to sort through a wall of text, there is more info here or if you just like the raw numbers, go here.

Edited by Andy@MIT, 23 November 2011 - 06:33 AM.

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#12
Matt Middleton

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... I noticed that all the kits that were set up to play in the drum room were cheap ones, and the cymbals were ZBT's, B8's or worse. Of course, there was better stuff available, but it seemed like what they were really trying to sell was real low end stuff. That is probably a sign of the times.


Typically, 80% or more of the kits sold this time of year are to first time buyers as holiday gifts, hence the emphasis on entry level gear.


On your last point, you are correct, that an overnight shuttering of GC (like the recent Daddy's episode) would seriously compromise a number of major manufacturer's, the reality is that the pain would be short-lived. The "pie" (drum market) isn't going to shrink. Drummers will still have money to spend. They will just have to spend it in different places.


Agreed.

Manufacturers survived when MARS went, they survived Brook Mays, and they'll survive Daddy's and the rest of the independents shuttering their doors. If GC goes (which I doubt) they'll survive that too. Keep in mind, these companies work on a global scale. One US retailer, even the biggest one, isn't likely to undo them.

...existing independents will have a field day, which could allow them to reinvest in their storefronts, inventory and staff and will create new demand for independent retailers in many places.


I would like to believe this is true. In my experience, the success of GC is due largely to the failure of independents to stay current with market trends, merchandising, technology, etc. Would they have an epiphany and see the end of GC as a second chance? or would they declare it a victory, rest on their laurels, and thus lay the foundation for the next MI mega Mart?

Edited by Matt Middleton, 23 November 2011 - 09:10 AM.

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#13
SamS

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Their continued low net margin signals a market share strategy. It's done on purpose. They maintain that low margin to increase market share by putting price pressure on the competition. It is working - the competition is folding. It's a tried and true strategy for a mature industry with low growth. Whoever has the best financial backing and can sustain losses in the medium term wins. The theory is that once they really dominate the retail landscape they can then begin to increase retail prices while at the same time demanding lower costs from the manufacturers. It's risky but, that's the plan. Look for the other larger retail chains to fold within the next 1-5 years if GC can support the continued losses. Being privately held gives them a big advantage in supporting the continued losses as long as the private equity investors have deep pockets.
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#14
jeannie

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isn't GC related to musicians' friend, and music 1-2-3 etc? thought it was all the same peopke basically.
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#15
Snaffoo

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It all stinks of a big bank to me....

I miss the days of GC vs. Mars and before that E.U. Wurlitzer vs. Daddy's Junky Music vs. the Mom and Pop stores in the Boston area...

Scott
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#16
drummerbill

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Their continued low net margin signals a market share strategy. It's done on purpose. They maintain that low margin to increase market share by putting price pressure on the competition. It is working - the competition is folding. It's a tried and true strategy for a mature industry with low growth. Whoever has the best financial backing and can sustain losses in the medium term wins. The theory is that once they really dominate the retail landscape they can then begin to increase retail prices while at the same time demanding lower costs from the manufacturers. It's risky but, that's the plan. Look for the other larger retail chains to fold within the next 1-5 years if GC can support the continued losses. Being privately held gives them a big advantage in supporting the continued losses as long as the private equity investors have deep pockets.


So true !! This is exactly what Home Depot did in the tri-state area. It took a while but they put at least 3 retail chains of hardware stores out of business not including a bunch of momma poppa stores. Now their prices are not a great bargain, they sell a lot of crap that my friends in the home construction business laugh about, and it's hard to get quality advice from the now constantly rotating staff.
I'm sure the GC "secret insider" here @ DF is laughing as he reads this thread. :idea1: :rolleyes:
I miss the days when I could go into the Paramus Sam Ash store and they actually had a whitewash finish Noble + Cooley Horizon set on the floor along with other hi-end kits and a nicely stocked hi-end cymbal room. Now if I want to sample a decent selection of hi-end {Not starter packs !} cymbals from the big 5 manufacturers, I have to drive to NYC {Maxwells} or an hour away to Richies Music. Thats sad, considering there are three GC's and a Sam Ash within a 15 minute ride. :rolleyes:
FYI... Richies actually has a guy {George} running the drum department that has been in the business for decades, offers quality non sales driven advice and they stock decent pro-quality cymbals. {Meinl, Paiste, Zildjian, Sabian, Dream, and also a selection of off brand Chinese made cymbals.} The three local GC's and Ash have almost exactly the same aprox. 75 cymbal collection on the floor plus the requisite B8 starter packs. Also I can go in Richies, and their prices are always better besides the vastilly superior pro level service.
Geeze GC and Ash, I know where I can run out and get Sabian Raw bell dry rides and Zildjian Sweet rides, I guess this is what you think we all aspire to ? Or is this what you are required to push ?
"Come n' get um kidz "
Oh and by the way, I think the Sabian RBDR and the Zil Sweet Rd are fine examples, just saying...what about some real selection in the tri-state area ?
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#17
franke

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Any music retailer who can achieve a gross margin of above 30% in this economy is doing something right. Most independents who advertise the "we beat any advertised deal" can barely eke out 25%.

The problem GC has is that they are taking a beating on the interest and other ongoing reorganization costs. However, this situation is (relatively-speaking) short-term, and going public would be the best way of their getting out of this predicament and getting sufficient cash to better position themselves.

If GC were to ever "go under" they would take a substantial portion of the MI business with them, as no doubt a large part of their inventory was obtained via extended terms and the fact that they have an overwhelming retail presence to sell as much as they do (i.e. don't assume that the vacuum created by no more GC would therefore translate in their sales being automatically transferred and divided among Sam Ash and the other larger independents).


Not really. It is far from impossible to maintain a gross margin of 30% in this industry. What is killing GC (both the group holdings and the retail stores themselves) is a net margin of less than 2%. It is amazing (to me at least) that Bain has allowed GC to continue to expand in the face of mounting losses and a stagnating economy. I can say for certain, that no independent could come close to keeping their doors open for very long with a net margin of 2%. At that level, there is nothing to re-invest in the business once your people and overhead are taken care of.

How would going public help them? Sure an IPO generates cash, but I don't see any major investors (think CalPERS / other institutional investors) lining up to buy a piece. Who else will buy stock? Even if their were enough musicians out there to buy millions of shares of GC stock, the few that have the resources (knowledge + money) to invest in the market are probably not going to throw their (relatively small) weight behind GC.

On your last point, you are correct, that an overnight shuttering of GC (like the recent Daddy's episode) would seriously compromise a number of major manufacturer's, the reality is that the pain would be short-lived. The "pie" (drum market) isn't going to shrink. Drummers will still have money to spend. They will just have to spend it in different places. Sure it means more online sales, but at least in major markets (where GC has primary store formats), existing independents will have a field day, which could allow them to reinvest in their storefronts, inventory and staff and will create new demand for independent retailers in many places.

To this day, I still can't believe no one has opened a pro drum shop in Phoenix (I should have skipped grad school!). Not only is it very much underserved, if one or two (Scottsdale and Avondale come to mind) GC's were to close their doors, the market will be even more ripe.

For those with the patience to sort through a wall of text, there is more info here or if you just like the raw numbers, go here.


I didn't say that it was "impossible" to achieve a gross margin of 30%, just that it was difficult. Unless a store either owns their building outright or is locked into a very long lease at far below market rates, a 30% margin is a hard trick to pull off. Exception would be if a store's sales were mostly accessories - cables, strings, heads, ect. - which even when discounted provide a hefty margin, or if they truly were the only game in town and were impervious to online competition, but such an example would be quite an anomaly.

In a combo music store - guitars, amps, pro audio, keyboards, drums - drums and percussion have the highest markup yet, on average, account for about 15% of a store's total sales. Gross margins on the remainder, after the normal MAP discount or slightly below MAP discount (i.e. beat competitor's MAP price), is in the 23-25% range. When one considers the cost of rent, salaries, insurance, advertising, phones, web presence, etc., it's easy to see how the net margin would lie somewhere between 9-15%.

In retail this low net margin is offset by turn rates (how fast a store turns over its inventory), high turn rates is how stores that sell CE, that typically has a 3% net margin, stay in business. GC's overwhelming footprint enables them to have higher-than-average turn rates. Moreover, this footprint, particularly in areas where there is no other retailer, creates customers. GC opening more stores in a stagnant economy supports the strategy of an ever-increasing footprint ala big box store like Best Buy, Home Depot, etc.

GC accounts for roughly 40% of all sales in the combo division in the US. They are bigger than Mars Music ever was. Most manufacturers are tooled up and have orders with their OEM's in place to support the sales that GC generates. The disappearance of GC would be an unprecedented disaster for the whole MI industry, and one that some would not recover from. It would be several years before the remaining retailers began to even come close to the sales the GC does now, and many manufacturers - due to their relative low capitalization - would be unable to wait out the transition.

As to who would buy GC stock, equities in undervalued companies who have had a consistent record of profitability are a good bargain, and there would be quite a few institutional investors out there willing to jump in. Trust me on this: the closing price of GC stock will be higher than its opening.

Edited by franke, 23 November 2011 - 08:56 PM.

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#18
drumnhands

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One strategy that GC uses to hit higher margins is by focusing on it's house brand items. Sound Percussion, Simmons, OCDP are all push brands and since there is no middle man between them and the factory they make xtremely high margins on that stuff. That helps make up for those deals that are less profitable when they drop their pants to take a deal from a competitor.

I don't think anyone wants to see GC fold. While the big manufacturer's would take a hit but probably survive, there are some of the smaller companies that they deal with that might not make it even though it seems GC does less business with those companies than they used to.
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#19
DanC

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G.C. MUST survive. Where else will I buy sticks?


$1.5bb in debt, debt service of $46mm against profit of a little more. The debt service payments represent no reduction in principle, only interest. If they do a public offering to generate cash to retire the debt, dividends paid to shareholders will absorb all of the profit, leaving that tiny $2-3mm net. Returns that low will do nothing to support the share price, and the market for those shares will atrophy. Also, the M.I. business being an unknown to most investors will make them a little more wary.
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#20
franke

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G.C. MUST survive. Where else will I buy sticks?


$1.5bb in debt, debt service of $46mm against profit of a little more. The debt service payments represent no reduction in principle, only interest. If they do a public offering to generate cash to retire the debt, dividends paid to shareholders will absorb all of the profit, leaving that tiny $2-3mm net. Returns that low will do nothing to support the share price, and the market for those shares will atrophy. Also, the M.I. business being an unknown to most investors will make them a little more wary.


Good points, but not all stocks pay dividends. Many stocks return value through increasing share prices or when the stock is sold. Also, while investors may not fully understand the MI industry they can read a balance sheet and determine whether or not there is long term value in a company.
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