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.