Guitar Center planning move into overseas markets.

Buoyed by strong domestic growth, Guitar Center Inc. is now hoping to strike a chord in international markets.

The Westlake Village-based retailer of musical instruments has named one of its longtime executives to head an effort to expand the business worldwide as part of its next growth phase.

The move is still two or three years away, but the company, which has primarily targeted working and aspiring musicians, has already developed an international reputation it hopes to capitalize upon in the future.

"If you look at some of the markets overseas like the U.K., Japan and Germany, they're very large markets and the Guitar Center brand is very well known among musicians overseas," said Sharon Zackfia, a research analyst with William Blair & Co., which has an investment banking relationship with Guitar Center. "So they feel they've got brand equity and sooner or later most retailers will look overseas."

Guitar Center last month appointed David Angress to the newly created post of executive vice president, international development and proprietary brands saying that he will be "responsible for spearheading and developing a plan for Guitar Center's expansion outside the U.S."

Angress, a music industry veteran, joined Guitar Center in 1996 as vice president of merchandise for high technology products. He was named senior vice president two years later and became executive vice president and general merchandise manager in 2000

Time frame

Officials at Guitar Center would not elaborate on their international plans further, but in a presentation at US Bancorp Piper Jaffrey, CFO Brace Ross said the company expected to make its move to international markets in two- to three-years time.

The company, which last year earned $64.3 million on revenues of $1.5 billion believes it still has considerable growth opportunity domestically both with its Guitar Center format and its newly acquired Music & Arts Center stores, which take the retailer into the beginning musician and music rental market for the first time.

Baltimore-based Music & Arts Center, which Guitar Center acquired earlier this year for about $90 million plus the assumption of some debt, currently operates 77 stores. Guitar Center expects that number will balloon as it moves to consolidate what has been a very fragmented market.

"There are 7,800 mom and pop storefronts (catering to beginners and instrument rentals)," Marty Albertson Guitar Center's chairman and CEO told a group at a William Blair & Company LLC growth stock conference late last month. "The majority of those owners are looking for exit strategies; growth in Music & Arts will be through consolidation."

The company also plans to step up its proprietary business, which includes accessories such as instrument covers and "anything a musician doesn't need a brand name on," said Ross, marketed under its own name.

Guitar Center is importing these products directly from China, and by doing so has increased the gross margins on these items to about 60 percent from a typical average of 30 percent to 35 percent.

The business currently accounts for about 5 percent of Guitar Center sales, but officials said that they expect that to increase to about 13 percent of the company's revenues.

Boost online

Similarly, the company's online and direct response business has grown dramatically. Online transactions nearly doubled between 2001 and 2003, officials said. although they expect the growth rate, averaging about 20 percent annually, will slow due to increased competition in the field.

The performance, along with a 342 percent growth in the company's share price since January, 2000, has pleased analysts, who generally rate the Guitar Center as a "buy."

"Guitar Center possesses the advantage associated with market leadership, enabling it to pass lower prices on to consumers and winning customer loyalty in the process," said Will Ashworth, writing for The Motley Fool. "... I believe the company is poised for even greater growth." Ashworth holds no position in Guitar Center.

Guitar Center, the largest musical instruments retailer in the country, already enjoys an 18 percent market share of the $7 billion musical instrument market. In major urban markets, such as Los Angeles and Chicago, that share ranges between 40 percent and 60 percent.

Adding in related businesses such as rentals, Guitar Center officials said the size of the market where the company now operates is closer to $13 billion.

"Today there is more than ample opportunity to sustain a 15 percent growth rate," officials told the Blair analysts.

Still, the move to international markets won't be automatic, analysts said.

"Whenever you go overseas you have different cultures, different real estate paradigms, different competitive sets," said Zackfia. "You may have different vendors. There may be differences in the synergies that you can get from the procurement point of view. I think the biggest challenge is the learning curve."

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