AUG. 8 | GUITAR CENTER | FINANCE
GC Q2 Consolidated Net Sales Below Expectations

Guitar Center’s consolidated net sales increased 13.3 percent to $518.9 million in the second quarter, ended June 30, from $458 million in the prior year period. Transaction expenses related to the proposed merger with affiliates of Bain Capital Partners were $1.7 million after-tax, or $0.06 per diluted share. Excluding these transaction expenses, the company’s net income would have been $0.37 per diluted share.

Net income in the second quarter included stock-based compensation expense under GC’s long-term incentive plans of $0.3 million after-tax, or $0.01 per diluted share.

“While consolidated net sales for the second quarter were below our expectations, we achieved adjusted net income in line with our guidance,” said Erick Mason, executive vice president and chief financial officer of GC. “Sales at our Guitar Center stores were slightly below plan due to a challenging retail environment. However, we were encouraged by improved demand for guitars.”

During the quarter, the company opened two secondary format GC stores. Net sales from GC stores increased 9.2 percent to $371.1 million in the second quarter from $339.8 million in the same period last year. Sales from new stores contributed $31.4 million in the second quarter and represented all of the increase. Comparable store sales declined 0.1 percent for the quarter. Gross margin was 27 percent in the second quarter, compared to 26.7 percent in the same period last year. This increase primarily resulted from higher selling margins, partially offset by an increase in occupancy costs. Selling, general and administrative expenses in the second quarter for the GC stores were 22 percent of net sales, compared to 21.3 percent of net sales in the same period last year. The increase is primarily due to the transaction costs associated with the merger.

Direct response net sales for the second quarter increased 28.1 percent to $110.6 million from $86.3 million in the same period last year. Net sales of the existing direct response business increased 2.4 percent over 2006, representing 8.5 percent of the year-over-year sales increase. Woodwind & Brasswind, which was acquired on February 9, contributed 91.5 percent of the increase in direct response net sales. Gross margin was 29.4 percent for the second quarter, compared to 30.8 percent in the prior year period. The decrease reflects the impact of the Woodwind & Brasswind business, which historically has had a lower selling margin than the core Musician’s Friend business.

Excluding the effects of the Woodwind & Brasswind business, gross margin for the second quarter in the direct response division increased to 32.6 percent from 30.8 percent in the same period last year, principally due to higher selling margins. Selling, general and administrative expenses for the second quarter were 27.1 percent of net sales, compared to 24.3 percent in the same period last year. The increase primarily reflects the effects of the fulfillment center transition.

Net sales from the company’s Music & Arts division increased 16.9 percent to $37.2 million in the second quarter from $31.8 million in the same period last year. Comparable sales for the Music & Arts division decreased 1 percent in the quarter. Second quarter gross margin for Music & Arts was 37.7 percent, compared to 43.7 percent in the same period last year, reflecting higher shrink and occupancy costs. Selling, general and administrative expenses were reduced to 44.6 percent of net sales, compared to 45.6 percent in the second quarter of 2006, primarily resulting from a reduction of amortization expense and lower compensation expenses.

guitarcenter.com