MARCH 6 | BALANCE SHEET | GUITAR CENTER
Guitar Center Posts Lackluster Fourth

Even though Guitar Center’s fourth quarter net sales increased 11.7 percent to $628.5 million, the company experienced a loss of $40 million or $1.36 per diluted share.

That includes a non-cash, after-tax impairment charge of $73.2 million related to a write-down of goodwill associated with the company’s Music & Arts division.

“Although we continue to be committed to the Music & Arts business and the band and orchestra segment of our industry, the competitive landscape for this division has changed, and we have decided to focus our attention on improving operating efficiencies and reducing working capital needs of the business,” said Erick Mason, executive vice president and chief financial officer. “As a consequence, we plan to moderate the growth of this division, which resulted in an impairment of the goodwill from Music & Arts.”

Excluding the impairment charge and other special items, net income in the fourth quarter was $33.2 million, which is still $1.1 million less than Guitar Center’s adjusted income in the fourth quarter of 2005. For the year, net income was $400,000. Adjusted for special items, it was $81.7 million, up about 1.5 percent from 2005’s adjusted income of $80.5 million.

Guitar Center stores
The company opened four new Guitar Center stores in the fourth quarter, bringing the total store count to 198. Net sales from Guitar Center stores increased 12.7 percent to $461.7 million. Comparable store sales increased only 1.3 percent. Compared to last year, gross margin decreased from 29.6 percent to 29.4 percent, which was due primarily to increased occupancy and freight costs that were only partially offset by higher selling margins, the company said.

Musician’s Friend
Direct-response net sales increased 5.4 percent in the quarter, from $114.8 million last year to $121 million this year. Gross margins were up from 28.8 percent to 30.7 percent, which the company attributed to higher selling margins.

Music & Arts
Net sales from the company’s band and orchestra division increased 20.2 percent in the quarter to $45.8 million. The increase is due primarily to increased revenue from new acquisitions. Comparable store sales increased on 0.2 percent. Gross margin increased from 41.1 percent to 44 percent, which the company attributed to better rental instrument recovery and, therefore, lower shrinkage.

Business Outlook
“Due to a softer sales environment experienced by our Guitar Center retail and Musician’s Friend divisions, we recently reported that our sales and net income results for the fourth quarter were lower than previously expected,” Mason said. “While the musical instruments industry experienced certain challenges in 2006, we continue to increase our market share for musical instruments through sales growth at existing stores, new store openings, the growth of our educational division and increased visits to our direct response Web sites throughout the year. We are very pleased to have launched our Web site www.guitarcenter.com as an e-commerce site in the second half of the year. In addition, we successfully executed a number of systems and infrastructure initiatives in each of our divisions designed to position the company for improved efficiency and growth over the long-term.”

In 2007, Guitar Center plans to open 16–19 new Guitar Center stores, including five or six primary-format stores, nine to 11 secondary-format stores and up to two tertiary-format stores. Most of these openings will occur in the first half of 2007.

The company anticipates consolidated net sales of $2.28 billion to $2.35 billion in 2007.

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