FEB. 21 I GUITAR CENTER I BY ALAN FRIEDMAN
Decoding Guitar Center's MAP Letter

I just read a copy of the controversial "MAP letter" Guitar Center sent to its vendors, which triggered several thoughts in my aged brain. Some of these thoughts may surprise you, and some will only serve to reconfirm what many of us know as undeniable truths from our years of experience in music retailing. Here are a few comments from that little voice in my head, which some might argue is the beginning of my dementia.

First, I remembered the $2.1 billion Bain Capital paid for Guitar Center five years ago, representing a 26-percent premium to the stock's closing price prior to the announcement. Back then, I used to think Wall Street investment bankers and the investors who followed their leads were way smarter than us dumb-ass old accountants. My calculations, based on the last published operating income in the financial statements of publicly held Guitar Center, told me Bain overpaid for GC by more than $1,000,000,000. (I thought I'd type those zeros rather than write $1 billion to emphasize my view of Bain's miscalculation ... or perhaps they knew something I didn't.)

Next, I considered all that debt Bain had saddled GC with and the tens of millions in interest expense now annually eroding profitability. And then I pondered whether GC was suffering from the same downturn in sales and gross profits that most of my firm's music store clients have experienced. Frankly, I wasn't thinking about Music & Arts — a well-run, growing division, in my opinion — or Musician's Friend — a division that, in my opinion, has raised the bar of selling music products online. What I thought about was whether the jobs lost, homes foreclosed upon and retirements now put on hold were hurting GC store sales.

As Bob Dylan once sang, "You don't need a weatherman to know which way the wind blows."

And now we have this MAP letter, which I can assure you was written by some very smart person with some very smart people signing off on it. Guitar Center did not become a music retailing giant without some very knowledgeable, experienced and business-savvy people in its management.

So what does this letter mean? One of three things: It's Guitar Center's way of telling vendors that it's simply going to ignore all dealer agreements and MAP policies because it can (highly unlikely); it's Guitar Center's way of telling vendors to start doing a better job of policing their MAP policies (more likely); or it's Guitar Center's polite way of telling vendors that it, too, is suffering financially as much as, if not more than, everyone else, and it needs vendors' assistance in figuring out what to do with cash-sapping, overstocked, slow-moving inventory (most likely).

I want to summarize this whole rambling with a few short remarks. Bigger is not smarter. Guitar Center = smart; Bain Capital = not sure. Bad economies affect everyone, and I mean everyone. It's a dangerous game to overextended yourself and financially bank on the future unless you can predict it with absolute certainty. And lastly (the same advice I gave a decade ago when Mars Music was invading the music retailing marketplace), keep your head down, your nose to the grindstone and your eye on the ball, and you'll be OK no matter what happens to Guitar Center, MAP policies and my dementia. MI

Alan Friedman, CPA, provides accounting and financial services to music industry clients. He is a frequent speaker at NAMM U seminars and can be reached at 860-677-9191 or email. Visit his Web site, fkco.com.