It was a tough summer for many consumer stocks. Even darlings like Cheesecake Factory Inc. lost their luster. And the specialty store Guitar Center Inc. wasn't any more fortunate.


Guitar Center of Westlake Village, the leading retailer in the $7 billion musical instrument industry, has long been a favorite among investors for its consistent double-digit growth just as its wide range of guitars and amps continue to be the mainstay of its musically-inclined customer base. Beginners can find low-priced instruments to learn on, gear heads can swoon over the range of amps, and indie rockers love the vintage selection.


Guitar Center has also been bolstered in recent years by software improvements that have dropped the average price of a home recording studio to about $2,500 from $10,000. Would-be garage band members have traded in their golf clubs for an ax, an amp and a bag of picks.


But with high gasoline prices in the spring and summer, investors bet that consumers would cut discretionary spending. Indeed, Guitar Center's stock dropped from $54 in May to as low as $36 in mid-August.


However, gasoline prices began dropping after Labor Day and the company's stock rebounded. It traded last week in the $46 range. It's certainly not all the way back; it is still 26 percent off its 52-week high in October.


Sharon Zackfia, an analyst at William Blair & Co., points to Guitar Center stock's resurgence since August as a sign that the decrease in gas prices has consumers and investors getting back into the retail groove.


"The reality has been this summer there appeared to be a slowdown in consumer spending that until recently muted enthusiasm for consumer stocks," Zackfia said. "But since Labor Day, with gas prices retracting we've seen some retail stocks rebounding. And Guitar Center is one of them."


Summer swoon
Guitar Center's summer stock swoon was repeated at some other L.A. County companies that also depend on the consumer's discretionary dollars. For example, Cheesecake Factory of Calabasas traded in the upper $30s during the first quarter of the year but drooped to the low $20s by mid-August. It has rebounded a bit in September.


Mattel Corp. has introduced technological products and has enjoyed a good year, but it wasn't immune to the August dip, either. Its stock got down to below $16 then, although it bounced up to between $19 and $20 last week.


Guitar Center executives did not return calls for comment.


Zackfia maintains there's little to worry about.


"There are very few retailers that came through the summer saying things were better than expected," she said. "There have been a lot of retailers that have had to revise expectations because of the slowdown." Zackfia has an "outperform" rating on the stock.


The company recently reported second quarter earnings of $13.4 million, or 4 percent higher than the same quarter last year. Total revenues were up 14 percent to $458 million.


That's better than the first quarter, when Guitar Center's net income fell slightly to $15.7 million despite an 18 percent sales increase.


But along with the good news of the second quarter, the company indicated full-year earnings would be at the low-end of expectations.


Rick Nelson, analyst for Stephens Inc., has an "overweight" rating on the stock. However, he was sanguine when he wrote, "Solid 2Q06 EPS and healthy comps in a challenging retail environment provided more evidence of (Guitar Center's) competitive advantage. While downward guidance revisions are usually not well received, we think investors can now be confident that estimates are conservative and consumer concerns are fully incorporated."


As for the future, the company seems to be banking that its new Web site, which allows customers to buy guitars online, could help sales and the company stock get back to its zenith.


The company operates about 180 Guitar Center stores and 90 Music and Arts Center stores, which specialize in bank instruments for teachers and students. It has about 8,100 employees.


"The fundamental story hasn't changed dramatically from this time last year," Zackfia said. "They seem a little bit conservative. But from a brick-and-mortar perspective, they're still a foundation player in the industry. It's a competitive landscape."

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