Guitar Center to Purchase School-Band Instrument Supplier

Musical instrument retailer Guitar Center Inc., looking for new ways to maintain its fast-paced growth in a slowing economy, said Wednesday that it’s marching into the school-band business with the purchase of American Music Group Ltd. for $33 million.

Band sales represent about a $1-billion market domestically, though Syracuse, N.Y.-based American Music has only a small slice, about $30 million last year. Its main customers are students, who either rent or purchase instruments, and to a lessor extent, band directors and music teachers. Brass and woodwinds account for more than half of the market.

Selling to students is an especially lucrative portion of the music business, with profit margins topping 40%, according to executives at Agoura Hills-based Guitar Center, the nation’s largest instrument retailer.

Much of the profit comes from the way school-band instruments are sold. American Music relies heavily on a team of sales representatives who go after band directors and music teachers, who in turn route a steady stream of youthful customers to the company’s stores.

But parents, reluctant to spend hundreds of dollars on an instrument their children might give up after a year or less of instruction, often opt to rent. Instrument makers typically finance much of American Music’s rental inventory, not requiring payment for at least nine months after delivery.

That lets American Music recoup most of an instrument’s cost through rental payments before it pays the vendor. About 55% of the renters eventually purchase the instrument, using their rental payments as a credit to offset the price.

Larry Thomas, Guitar Center’s chairman and co-chief executive, said his company plans to expand the American Music chain business rapidly. The band-instrument market is fragmented, with hundreds of mom-and-pop, single-owner stores, and without any major national chains.

The acquisition “is part of our strategy of putting the pieces in place to build a foundation of strong earnings growth,” said Marty Albertson, president and co-CEO.

Thomas described the proposed acquisition as complementary to the 87-store Guitar Center’s core audience of professional and aspiring-professional musicians. Guitar Center stores sell guitars, drums, keyboards, amplifiers and accessories.

Guitar Center would pay $14.4 million in cash and $2.5 million in stock and assume $16 million in debt to gain control of American Music. The 12-store chain and catalog business would operate as a stand-alone division. David Fleming, its president and chief operating officer, would remain with the company. The deal is expected to close next month.

Shares of Guitar Center rose 25 cents Wednesday to close at $16.06 on Nasdaq.

Guitar Center shares have risen by 41% this year, bucking the sell-off of retailing shares in the recent bear market. The company’s resiliency has come from continued growth in profit and sales. For the fourth quarter, the company posted a 7% increase in same-store sales, a key measure of financial health for retailers. Overall, fourth-quarter net income rose 30% to $10 million and sales rose 25% to $240 million.

“They have performed much better than almost any of the retailers we follow,” said George Sutton, an analyst at Dain Rauscher Wessels in Minneapolis. “A lot of that relates to the fact that Guitar Center serves a specialized market.”

The company also has seen strong sales growth through its catalog and Internet divisions.

Sutton said Guitar Center’s business is less affected by the economy than by new products in the music industry. One example is computer-based digital audio mixers that let musicians create small studios at a fraction of their former cost.

Some of these machines sell for as little as $600, making them affordable to aspiring professionals, said Sutton, who expects Guitar Center’s shares to rise to $22 over the next year.