GTRC Guitar Center (MM)

Guitar Center, Inc. (Nasdaq:GTRC) today announced financial results for the third quarter ended September 30, 2005. Consolidated net sales increased 18.6% to $421.1 million from $354.9 million in the third quarter of last year. Consolidated net income increased 16.1% to $14.4 million, or $0.51 per diluted share, from $12.4 million, or $0.45 per diluted share. The Company's third quarter net income includes stock-based compensation expense of $883,000 after-tax, or $0.03 per diluted share, resulting from the Company's new long-term incentive plan adopted in the third quarter. Excluding this charge, third quarter net income would have been $15.3 million, or $0.54 per diluted share. No similar expense was recorded in the 2004 period. Third quarter weighted average number of diluted shares outstanding was 29.9 million compared to 29.2 million in the same period of 2004. Commenting on third quarter results, Bruce Ross, Chief Financial Officer of Guitar Center, stated, "Our bottom line results for the quarter excluding the charge related to our new long-term incentive plan exceeded our expectations. We maintained momentum in our Guitar Center stores as we generated comparable store sales growth of 7%, at the high end of our expected range. In addition, we successfully opened seven new stores during the quarter including our 150th grand opening in July. At Musician's Friend, we continued to focus on our advertising and promotional activities to drive online traffic and grow our business in the continuing competitive environment. Finally, we remain pleased with the performance of our Music & Arts division, and particularly with the smooth integration of the former American Music stores to the Music & Arts brand and store format." Guitar Center Stores During the quarter, we opened two large format and five small format Guitar Center stores. Net sales from Guitar Center stores increased 13.9% to $310.1 million from $272.3 million in the third quarter of 2004, with sales from new stores contributing $19.2 million, or 50.9% of the increase. Comparable store sales for the Guitar Center stores increased 7%. Gross margin, after buying and occupancy costs, increased to 28.1% from 26.4% in the third quarter last year. The increase is primarily due to a higher selling margin, partially offset by increased freight expense. Margins also benefited from a reduction in certain reserves. Selling, general and administrative expenses for the Guitar Center stores, inclusive of corporate general and administrative expenses and stock-based compensation costs resulting from the long-term incentive plan, were 20.7% of net sales compared to 20.8% in the year-ago period. Musician's Friend Direct response net sales for the quarter increased 12.5% to $80.8 million from $71.8 million in last year's third quarter. Gross margin for the quarter was 29.1% compared to 31.3% in the prior year period, reflecting a lower selling margin due to reduced shipping and handling revenue which is a result of the competitive environment, partially offset by improved inbound freight costs. Selling, general and administrative expenses for the third quarter were 24.3% of net sales versus 21.1% in the comparable period last year. The increase primarily reflects additional payroll costs, inclusive of stock-based compensation costs resulting from the long-term incentive plan, as well as an increase in promotional expenses. Music & Arts We completed our acquisition of Music & Arts Center, Inc. on April 15, 2005 and the acquired business and our former American Music business were combined into a new division that operates under the Music & Arts name. Third quarter 2005 results reflect the combined operations of Music & Arts and American Music while third quarter 2004 results only include results from American Music. Net sales from our Music & Arts division were $30.1 million compared to $10.7 million in the third quarter of 2004. Comparable store sales for the Music & Arts division decreased 6%. Among other things, this decrease reflects a later school calendar shifting some sales into the fourth quarter, and our decision to discontinue the former American Music Group's historical business of direct sales to educational institutions at very low margins. Third quarter gross margin for Music & Arts increased to 44.2% versus 33.6% in the same period last year. Selling, general and administrative expenses for Music & Arts were 48.5% of net sales compared to 45.6% in the third quarter of 2004. Business Outlook To date in the fourth quarter we have opened one large format store in Northridge, California. Prior to year-end 2005, we are scheduled to open another two large format Guitar Center stores in Las Vegas, Nevada and Brooklyn, New York as well as one small format store in Chattanooga, Tennessee and our first tertiary market store in Pueblo, Colorado. Based on current business and economic conditions, we continue to anticipate fourth quarter 2005 consolidated net sales will be in the range of $555 million and $569 million and diluted earnings per share, excluding the impact of stock-based compensation expense resulting from the new long-term incentive plan, will be between $1.16 and $1.23. The comments regarding future financial performance in the immediately preceding paragraphs constitute forward-looking statements and are made in express reliance on the safe harbor provisions contained in Section 21E of the Securities Exchange Act of 1934. This information, as well as other forward-looking information provided, should be read in conjunction with the information under the caption "Business Risks and Forward-Looking Statements" below. Teleconference and Webcast Guitar Center will host a conference call and webcast tomorrow, October 26th, at 5:30 a.m. PT (8:30 a.m. ET) to discuss third quarter financial results. Certain financial and other statistical information expected to be presented on the conference call, along with information required under SEC Regulation G, may be accessed on the investor relations section of our corporate web site at www.guitarcenter.com. To access the call, please dial 800-627-7250 (domestic) or 706-645-9246 (international). The webcast will be available on the Company's web site at www.guitarcenter.com or at www.earnings.com. A replay of the call will be available through November 2, 2005 and can be accessed by dialing (800) 642-1687 (domestic) or (706) 645-9291 (international); pin number 1185904. A replay of the webcast will be available at www.guitarcenter.com. About Guitar Center Guitar Center is the nation's leading retailer of guitars, amplifiers, percussion instruments, keyboards, live-sound/DJ and recording equipment. We presently operate 157 Guitar Center stores, with 124 stores in 50 major markets and 33 stores in secondary markets across the U.S. In addition, our Music & Arts division operates 79 retail locations and eight educational support centers specializing in band instruments for sale and rental, serving thousands of teachers, band directors, college professors and students. Guitar Center is also the largest direct response retailer of musical instruments in the U.S. through our wholly owned subsidiary, Musician's Friend, Inc., and its catalog and web site, www.musiciansfriend.com. More information on Guitar Center can be found by visiting the Company's web site at www.guitarcenter.com. Business Risks and Forward-Looking Statements This press release contains forward-looking statements relating to, among other things, results deemed to be achievable by management in the fourth quarter of 2005, and store opening plans. Sales and earnings trends are also affected by many other factors including, among others, world and national political events, including general economic conditions, the effectiveness of our promotion and merchandising strategies, our ability to integrate and profitably operate acquired businesses, the efficient operation of our supply chain, including the continued support of our key vendors, our effective management of business risks, including litigation, and competitive factors applicable to our retail and direct response markets. In light of these risks, the forward-looking statements contained in this press release are not guarantees of future performance and in fact may not be realized. Our actual results could differ materially and adversely from those expressed in this press release. Further, the statements made by us above represent our views only as of the date of this press release, and it should not be assumed that the statements made herein remain accurate as of any future date. We do not presently intend to update these statements prior to our next quarterly earnings release and undertake no duty to any person to effect any such update under any circumstances. Investors are also urged to review carefully the discussion under the caption "Risks Related to the Business" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, which has been filed with the Securities and Exchange Commission and may be accessed through the EDGAR database maintained by the SEC at www.sec.gov. (Tables follow) -0- *T Guitar Center, Inc. and subsidiaries Consolidated Balance Sheets (In thousands, except per share data) (Unaudited) September 30, December 31, 2005 2004 ------------- ------------ Assets Current assets: Cash and cash equivalents $ 7,768 $ 60,453 Investments in marketable securities - 3,810 Accounts receivable, net 28,326 27,627 Merchandise inventories 456,384 314,961 Prepaid expenses and deposits 18,747 13,367 Deferred income taxes 5,137 5,552 ------------ --------- Total current assets 516,362 425,770 Property and equipment, net 140,471 97,349 Investments in marketable securities - 16,997 Goodwill 76,138 26,474 Deposits and other assets, net 11,960 8,003 ------------ --------- $ 744,931 $ 574,593 ============ ========= Liabilities and Stockholders' equity Current liabilities: Accounts payable $ 98,259 $ 49,771 Accrued expenses and other current liabilities 67,305 83,606 Merchandise advances 18,543 22,534 Revolving line of credit 74,004 - ------------ --------- Total current liabilities 258,111 155,911 Other long-term liabilities 11,220 6,943 Deferred income taxes 7,411 5,057 Long-term debt 100,000 100,000 ------------ --------- Total liabilities 376,742 267,911 Stockholders' equity: Preferred stock; 5,000 authorized, none issued and outstanding - - Common Stock, $0.01 par value, authorized 55,000 shares, issued and outstanding 25,992 at September 30, 2005 and 25,359 at December 31, 2004 260 254 Additional paid in capital 323,602 305,305 Retained earnings 44,327 1,123 ------------ --------- Stockholders' equity 368,189 306,682 ------------ --------- $ 744,931 $ 574,593 ============ ========= Guitar Center, Inc. and subsidiaries Consolidated Statements of Income (In thousands, except per share data) (Unaudited) Three months ended September 30, 2005 2004 ---------- ---------- Net sales $ 421,061 $ 354,909 Cost of goods sold, buying and occupancy 297,243 256,968 --------- --------- Gross profit 123,818 97,941 Selling, general and administrative expenses 98,366 76,628 --------- --------- Operating income 25,452 21,313 Interest expense, net 2,021 1,294 --------- --------- Income before income taxes 23,431 20,019 Income taxes 9,022 7,608 --------- --------- Net income $ 14,409 $ 12,411 ========= ========= Net income per share Basic $ 0.55 $ 0.49 ========= ========= Diluted $ 0.51 $ 0.45 ========= ========= Weighted average shares outstanding Basic 25,975 25,211 ========= ========= Diluted 29,946 29,235 ========= ========= Guitar Center, Inc. and subsidiaries Consolidated Statements of Income (In thousands, except per share data) (Unaudited) Nine months ended September 30, 2005 2004 ----------- ----------- Net sales $1,219,743 $1,044,234 Cost of goods sold, buying and occupancy 869,413 757,397 ---------- ---------- Gross profit 350,330 286,837 Selling, general and administrative expenses 275,266 224,146 ---------- ---------- Operating income 75,064 62,691 Interest expense, net 4,811 4,082 ---------- ---------- Income before income taxes 70,253 58,609 Income taxes 27,049 22,274 ---------- ---------- Net income $ 43,204 $ 36,335 ========== ========== Net income per share Basic $ 1.67 $ 1.47 ========== ========== Diluted $ 1.52 $ 1.43 ========== ========== Weighted average shares outstanding Basic 25,819 24,698 ========== ========== Diluted 29,836 26,905 ========== ========== Guitar Center, Inc. and subsidiaries Supplemental Financial Data (In thousands, except per share data) Three months Three months ended ended September 30, September 30, 2005 2004(c) -------------- -------------- (in thousands, except per share amounts) Calculation of diluted earnings per share Net income $ 14,409 $ 12,411 Add back interest, net of tax, on 4% Senior Convertible Notes (a) 727 733 ------------- ------------ Net income excluding interest expense on 4% Senior Convertible Notes 15,136 13,144 ------------- ------------ Basic weighted average shares outstanding 25,975 25,211 Dilutive effect of stock options outstanding 1,079 1,132 Incremental shares on assumed conversion of 4% Senior Convertible Notes (b) 2,892 2,892 ------------- ------------ Diluted weighted average shares outstanding 29,946 29,235 ============= ============ Diluted net income per share $ 0.51 $ 0.45 ============= ============ (a) Represents the interest expense, including amortization of deferred financing costs, on the 4% Senior Convertible Notes, net of tax, using an effective tax rate for 2005 of 38.5% and for 2004 of 38.0%. (b) Represents the number of incremental common shares resulting from the conversion of the 4% Senior Convertible Notes. (c) Financial data for the three months ended September 30, 2004 has been restated to conform to EITF 04-08 issued in November 2004. *T