Upbeat News Hits Right Chord With Guitar Center Investors

The Christmas season has left executives at Guitar Center Inc. playing a happy tune.

Shares of the Westlake Village-based retailer of guitars and other music equipment soared $3.94, or 23%, to $20.80 Tuesday on Nasdaq, a day after alerting Wall Street that it was raising its fourth-quarter earnings estimate after strong holiday sales boosted quarterly revenue to a record $335 million.

Guitar Center, with 108 stores nationwide, was one of the few retailers to see a significant sales gain this holiday season. Helped by a strong December, the company said its crucial same-store sales jumped 7% during the fourth quarter.

“We sold a lot of low-end keyboards, drum sets and guitar packages,” Chief Executive Larry Thomas said.

Guitar Center also is selling more home studio equipment as technological improvements lower the cost of recording music and producing compact discs.

“As the record industry has gone down in recent years the home-recording business has gone up,” Thomas said. “A musician’s ability to record music is at an all-time low in terms of price and has become very popular.”

Three of four Guitar Center customers are believed to be professional musicians, who, as a group, are continuing to purchase equipment even in a slow economy, said Justin Cable, a music industry analyst with B. Riley & Co. in Los Angeles.

He said Guitar Center has posted increases in same-store sales each quarter for the last five years and has done a good job of expanding its catalog and Internet businesses.

“They have also benefited from a lack of viable competition in the music business,” Cable said.

During the fourth quarter, Mars Music Inc. liquidated its business. The Fort Lauderdale, Fla.-based company, which had 37 stores when it filed for bankruptcy protection in October, had more than $300 million in annual sales and was one of Guitar Center’s largest rivals.

Hicksville, N.Y.-based Sam Ash Music Corp., Guitar Center’s biggest competitor, is a private company and growing slowly, he added.

“Otherwise they compete with a lot of small mom-and-pop shops that don’t have the scale of Guitar Center,” Cable said.

On Monday, Guitar Center told Wall Street that it anticipates its fourth-quarter earnings to fall in a range of 52 cents to 55 cents a share, about a penny higher than previous estimates. The company is scheduled to report earnings Feb. 12. Revenue in 2002 jumped 16% to $1.1 billion compared with $949 million in 2001, the company said.