Guitar Center finds growth resonates with Wall Street. (Corporate Focus).The stock market is at its lowest point in four years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time economy is in a two-year funk, and one of the few bright spots among publicly held companies is ... a guitar store? At a recent price of $17.40, shares of Guitar Center Inc., the Westlake Village-based retailer known for its riff-filled radio ads, are up 25 percent year to date, and 50 percent in the past year. The stock is trading at a still up-tempo price-earnings ratio Price-earnings ratio Shows the multiple of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). of 25. "They're a company that is by far a leader in their industry," said Justin Cable, a B. Riley & Co. analyst who's had a buy rating on the stock for about a year. He doesn't own the shares, and his firm hasn't done any recent investment banking business with Guitar Center. Fans of Guitar Center see it as the musical version of Home Depot The Home Depot (NYSE: HD) is an American retailer of home improvement and construction products and services. Headquartered in Vinings, just outside Atlanta in unincorporated Cobb County, Georgia, Home Depot employs more than 355,000 people and operates 2,164 big-box -- a category killer Category Killer Large companies that put less efficient and highly specialized merchants out of business. Category killers can attain this status by being cheaper, easier, bigger, or more popular than the competition. that's aiming to reshape the $7.1 billion musical instrument market the way Home Depot closed out the neighborhood hardware store. Since 1996, Guitar Center has grown to 104 stores from 30, expanding into Chicago, Cleveland and Miami, as well New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of and New Jersey. The company expects to grow its revenues, now at about $1 billion annually, by 18 percent to 20 percent a year, said Chief Financial Officer Bruce Ross Bruce Ross is an Canadian poet, author, humanities educator and past president of the Haiku Society of America. He was born in Burlington, Ontario. Ross has taught Japanese poetry (in translation) and painting forms for many years at a number of institutions, including . It plans to add about 18 to 20 stores per year until it has about 160 "large-box" stores and 160 smaller ones. "There's a lot of under-served markets out there," Ross said. "As we go into some of these markets, we're going to grow the industry at the same time." How big? Guitar Center, which does not sell pianos, organs and certain types of sheet music, has about 20 percent of the remaining market, said Brian Majeski, editor of The Music Trades, a trade magazine in Engelwood, N.J. After subtracting the keyboard and sheet music markets, he estimates the relevant market at $5.3 billion. The jury is still out on whether Guitar Center can reach its aggressive goals, Majeski said. "They have taken market share and they've pounded a lot of other businesses," he said. "What everyone asks is, 'How big can they get?"' In anticipation of future growth, a 500,000-square-foot distribution center was recently opened in Indianapolis. Like Home Depot and Wal-Mart Stores Inc. before it, Guitar Center is seeking price reductions from instrument manufacturers, reasoning that it should recoup a portion of the savings that result from shipping and billing to one location instead of 100. Lower pricing also means more pressure on smaller competitors that can't match Guitar Center's efficiencies. Not surprisingly, the strategy is controversial. Instrument manufacturers are resisting the cuts, fearing a shift in pricing power Pricing Power An economic term referring to the effect that a change in a firm's product price has on the quantity demanded of that product. Pricing power ties in with the "Price Elasticity of Demand. that's similar to what's happened with apparel, toys and building products. "It is premature to comment" on potential cost savings, Ross said. "Those discussions are going on daily right now. We might not get something from all of them but I think we'll get a good portion of them." Guitar Center has a couple of advantages. Most of its competition is from mom-and-pop stores already having trouble matching its prices. Guitar Center's two largest competitors, privately held Sam Ash Sam Ash was founded in 1924, and is the largest chain of privately owned stores in the United States that sell musical instruments, electronics, and related supplies. Ash Family History Music of Hicksville, N.Y., and Mars Music Mars Music was a now defunct chain of music stores based in Florida. The company was founded in 1996 by former Office Depot president Mark Begelman, who created the store chain to combine his love of music with a new business venture. (Ft. Lauderdale, Fla.), each have less than half its revenues. They haven't been growing, either. Sam Ash opened one store in 2001 and two stores this year, while venture-backed Mars Music closed 11 stores in the first quarter, after quickly building up to around 50. Critics of Guitar Center say the company's rising debt, its declining profits despite surging revenues, and its rising inventories all point to a growth plan -- and a stock price -- with little margin for error. Another issue: newer stores aren't performing as well as older ones. Ross counters that the company is simply building the infrastructure it needs to support its growth, and its stores become more profitable as they mature. "Our long term objective is about a 40 percent market share," he said. "We're cautiously optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op about that. It's aggressive, but I think it's being done in other retail spaces." [GRAPH OMITTED]
Guitar Center Inc.
Stock Prices
Sept. 25, 2001 $10.98
Sept. 25, 2002 $17.40
Note: Table made from line graph
YEAR (Dec. 31)
2001 2000
Revenue (millions) $938.1 $785.7
Total Expenses (millions) 892 737.4
Operating Income (millions) 46.2 48.2
Net Income (millions) 17 22.4
Earnings Per Share $0.75 $1.01
SUMMARY Business: Musical instrument retailer Headquarters: Westlake Village Ca-CEOs: Larry Thomas, Marty Albertson Market Cap: $391.3 million Dividend Yield: N/A * Total Liabilities: $291.9 million P/E Ratio P/E ratio Current stock price divided by trailing annual earnings per share or expected annual earnings per share. Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25.50 = 10 times $2.55. XYZ stock sells for ten times earnings. : 24.8 Long-Term Debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. : $66.8 million * Company does not pay a dividend Financial Editor Anthony Palazzo pa·laz·zo n. pl. pa·laz·zi or pa·laz·zos A large splendid residence or public building, such as a palace or museum. [Italian, from Latin Pal can be reached at 323-549-5225, ext. 224. or at tpalazzo@labusinessjournal.com. |
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