Guitar/LSP/mike1st/mark2nd

LISA STEEN PROCTOR

Staff Reporter

Pony-tailed rockers scan the hundreds of electric guitars that line the wall from floor to ceiling. A group of teens in baggy shorts and T-shirts wanders among the amps stacked in the vast showroom. A tattooed man from a local rock band sits behind one of the amps, getting a feel for a Tobias bass guitar.

There’s no shortage of action at Guitar Center Inc.’s original flagship music store on Sunset Boulevard in Hollywood. It’s a long way from the button-down world of Wall Street, but that’s exactly where Guitar Center is going to expand its growing musical empire, which today consists of 28 stores.

After 34 years of selling instruments to aspiring and professional musicians, Guitar Center is going public.

The music retail chain is offering 6.75 million shares of common stock at an estimated price of between $14 and $16 a share, which the company estimates could raise $94.3 million (and as much as $107.5 million if the underwriter’s over-allotment option is exercised).

Guitar Center plans to use $37.9 million of the proceeds to reduce outstanding debt, $22.9 million to buy back all shares of the company’s preferred stock from affiliates of Donaldson, Lufkin & Jenrette Securities Corp. (underwriter of the offering), $18.4 million to buy back shares of common stock held by management and other employees of the company, and the balance for general corporate purposes.

After these payments are made, the company would still have $66.7 million in outstanding long-term debt, identified as “significant financial leverage” in the stock offering registration document.

Company officials are in a 30 day “quiet period” because of the offering and therefore unavailable for comment.

Despite the remaining debt load, Guitar Center plans to continue a strategy of aggressive expansion, an expansion it put into high gear in 1996.

It opened seven stores in 1996 (most of them outside California) and expects to open about 16 more stores over the next two years. Guitar Center is also looking to acquire existing music retailers.

The new strategy of aggressive expansion is a departure from its comparatively conservative growth in the years following the opening of its original Hollywood store in 1964.

That 33,000-square-foot flagship store has become something of a local landmark packed with new and vintage guitars, keyboards, amplifiers, and even a souvenir shop. A Rock Walk memorializes rock music stars is a frequent stop for tour buses.

The company waited eight years before opening its second store in San Francisco in 1972. Over the next two decades, it moved into other states but still grew at a conservative pace, opening no more than three stores a year.

In 1996, the company posted sales of $213.3 million, but reported a net loss of more than $72.4 million (due in part to a $69.9 million charge related to the purchase and exchange of stock options held by management and the cancellation of the company’s prior stock option program).

In 1995, sales were only $170 million, but the company was well into the black posting net income of $10.1 million.

The increase in sales in 1996 was not solely due to new stores; existing stores also posted sales increases. In 1996, Guitar Center stores that had been open for at least 14 months saw a 10.2 percent increase in sales.

The chain’s current growth rate compares well to the industry as a whole, said Brian Majeski, editor of The Music Trade, a trade magazine for music retailers.

“Growth in the industry has definitely slowed down. Sales were up 10 percent in 1995, but were much slower in 1996 probably about 2 to 2.5 percent,” said Majeski.

He and other experts said a change in demographics bodes well for the industry.

“If you look at Guitar Center and the industry, the bulk of the business comes from people age 12 to 24,” said Majeski. “In the mid-’70s to mid-’80s, before baby boomers had children, the industry felt an absence of people in that age group. Now that chunk of the population is growing.”

Larry Linkin, president of the International Music Products Association, pointed to another phenomenon baby boomers who were rockers in their youth and who are now getting back into playing.

“Wannabes who were in garage bands in the ’60s and ’70s and now have real jobs are looking for something to do,” said Linkin. “They have a little money, and when they go to music stores, they buy the good stuff.”