Summary Business:

musical instrument retailer

Headquarters:

Agoura Hills

CEO:

Larry Thomas and Martin Albertson

Market Cap:

$360 million Dividend Yield: N/A*

Total Liabilities:

$149.8 million P/E Ratio: 15.6

Long-Term Debt:

$67.4 million

* Guitar Center does not pay dividends.

Guitar Center Inc. has hit the wrong chords with investors in the last couple of weeks by its disclosure that second quarter earnings would be lower than expected. But analysts expect a fall in the stock to be short-lived because same-store sales growth remains strong.

Instead of the 19 to 21 cents projected by Agoura Hills-based Guitar Center in its first quarter report, and the 20 cents projected by Thomson Financial, the retailer now expects earnings to be between 17 cents and 18 cents per diluted share. The July 9 announcement brought down the stock to $16, from $23 earlier this month.

"I think people were surprised they had to pre-announce because a lot of people were assuming they were shielded from the market," said Justin Cable, an analyst with B. Riley & Co. in Los Angeles. "But they are a retailer, so it's almost expected they should have some exposure to the weakness [of the economy]. It just took a little longer for the customer to cut back on spending habits."

Guitar Center sells guitars, amplifiers, percussion instruments, keyboards and recording equipment. Its product lines include Fender, Roland, Yamaha and Sony.

Given the troubles in the retail sector, those pre-announcement numbers could have been worse. Martin Albertson, the company's president and co-chief executive, said Guitar Center is shielded somewhat because 80 percent of its revenues come from professional musicians, who generally are a more reliable customer segment than hobbyists.

Other hits on earnings were due to the company's direct response business, which it acquired in 1999 when it bought Musician's Friend, a catalog and e-commerce company that accounts for about 20 percent of overall company revenue. Absorbing the company into Guitar Center operations proved more costly than expected mainly due to logistical difficulties in filling catalog and e-commerce orders.

During the second quarter of 2001, the company closed two distribution centers in Medord, Ore., and Knoxville, Tenn. and consolidated them into an existing Kansas City facility. As a result, second quarter earnings were expected to be reduced by two cents to accommodate for the shut-down costs.

"We got a little clogged in the last three or four days and weren't able to ship out all our back orders in the last two or three days of June," Albertson said. "That cost $2 million in revenue at the direct response division. That $2 million did ship in July. But the $2 million would have netted our earnings to get us to the low end of the earnings range of 19 to 21 cents a share."

Guitar Center also acquired American Music Group Ltd. on April 17 for $33 million in cash, stock and assumed debt. American Music is expected to generate $30 million of the company's anticipated revenues this year of $950 million, covering acquisition costs. It sells band instruments and products to elementary, junior and high schools.

For the first quarter ended March 31, Guitar Center reported net income of $5 million (22 cents per diluted share), compared with $4.1 million (19 cents) in the like year-earlier quarter. First-quarter revenues were $213.2 million vs. $175.8 million in the first quarter 2000.

Second-quarter results are due July 31.

About $6 million of second quarter revenue came from American Music Group.

Despite the stock fall, Guitar Center's same-store sales continue to grow at a quarterly 5 percent to 7 percent clip. Guitar Center opened five additional stores nationwide in the first quarter. The company is expecting to open three new stores in coming weeks, giving it a total of 91 locations nationwide.

Among the new stores are smaller format locations for secondary markets, the first of which opened in late 2000.

Last week, the firm filed with the Securities and Exchange Commission to sell up to $100 million in stock which will help fund acquisitions

The company continues to be the leader in the retail music industry, topping private firms Mars Music Inc. and Sam Ash Music. Mars Music entered the Los Angeles market last fall with the opening of two stores, one each in Torrance and Cerritos.

Guitar Center stock had been on a relative upswing since the beginning of the year, jumping from less than $11 a share in January to its $23 a share peak at the beginning of July. Albertson said he credits the increasing share price to enhanced market share, consistent growth and a slowdown among its competitors.

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