Guitar Center, Inc. (Nasdaq GS: GTRC) today announced financial
results for the first quarter ended March 31, 2007. Consolidated
net sales increased 13.5% to $534.5 million in the first quarter
from $470.7 million in the prior year period. Net income in the
first quarter was $17.2 million, or $0.57 per diluted share, versus
net income of $15.7 million, or $0.55 per diluted share, in the
prior year period. Net income in the first quarter of 2007 included
stock-based compensation expense under the Company�s long-term
incentive plans (LTIP) of $0.3 million after-tax, or $0.01 per
diluted share. Net income in the prior year period included
stock-based compensation expense under the LTIP of $2.0 million
after-tax, or $0.07 per diluted share, as well as a charge of $0.9
million after-tax, or $0.03 per diluted share, resulting from the
retirement of the Company�s previous Chief Financial Officer. Erick
Mason, Executive Vice President and Chief Financial Officer,
stated, �We are pleased with our results for the quarter, which
exceeded our expectations. Our Guitar Center retail division
generated solid sales and operating income, with new stores largely
driving our growth in this division. We continued to execute on our
store expansion plans with the opening of 12 new Guitar Center
stores, including the acquisition of the former Victor�s House of
Music location in Paramus, New Jersey. In our direct response
division, we achieved better than expected sales from
GuitarCenter.com, which continues to generate strong results and
enhance Guitar Center�s brand equity. In addition, both the
integration of Woodwind and Brasswind as well as the new direct
response fulfillment center are proceeding in line with our plans.
Finally, our Music & Arts division generated better than
expected sales growth primarily as a result of strong instrument
sales.� Guitar Center Stores During the quarter, the Company opened
five primary format Guitar Center stores, including one primary
format store as a result of the Victor�s House of Music
acquisition, as well as seven secondary format stores. Net sales
from Guitar Center stores increased 11.6% to $378.5 million from
$339.3 million in the first quarter 2006, with sales from new
stores contributing $37.0 million and representing 94.4% of the
total increase. Comparable store sales for the Guitar Center stores
increased 0.7%. Gross profit was 27.1% in the first quarter
compared to 27.2% in the same period last year. The decrease
primarily reflects higher occupancy costs partially offset by a
higher selling margin. Selling, general and administrative expenses
for the Guitar Center stores were 21.0% of net sales, compared to
21.1% of net sales in the first quarter of 2006. Direct Response
Direct response net sales for the quarter increased 18.4% to $116.4
million from $98.3 million in last year�s first quarter. Net sales
of the existing direct response business increased 9.1% over 2006,
representing 49% of the year-over-year sales increase. Woodwind and
Brasswind, which was acquired on February 9, 2007, contributed 51%
of the increase in direct response net sales. Gross profit improved
to 29.9% for the quarter compared to 29.2% in the prior year
period, reflecting a higher selling margin. Selling, general and
administrative expenses for the first quarter were 23.4% of net
sales compared to 22.9% in the same period last year. The increase
primarily reflects the effects of the Woodwind and Brasswind
acquisition. Music & Arts Net sales from the Company�s Music
& Arts division increased 19.3% to $39.6 million in the first
quarter from $33.2 million in the first quarter of 2006. Comparable
sales for the Music & Arts division increased 2.6% in the
quarter. First quarter gross profit for Music & Arts was 42.9%
compared to 46.5% in the same period last year, reflecting a lower
selling margin due to a shift in product mix and higher occupancy
costs. Selling, general and administrative expenses were reduced to
43.3% of net sales compared to 45.1% in the first quarter of 2006,
primarily reflecting reduced intangibles amortization and lower
expense under the LTIP. Business Outlook In the second quarter to
date, the Company has opened one secondary format store in Killeen,
Texas. Based on current business and economic conditions, the
Company continues to anticipate consolidated net sales in the
second quarter of 2007 will range between $520 million and $535
million. Comparable store sales for the Company�s Guitar Center
stores are expected to be approximately flat to an increase of 2%.
Earnings per diluted share for the second quarter are expected to
be $0.35 to $0.41, including an expense of approximately $0.01 to
$0.02 per diluted share related to the LTIP. In addition, while our
guidance for the balance of the year remains unchanged from that
provided on February 26, 2007, we have updated our full year
expectations to take into consideration our better than expected
first quarter results. We currently anticipate consolidated net
sales in 2007 will range between $2.302 billion and $2.355 billion
and diluted earnings per share for the year will range between
$2.52 and $2.71, inclusive of stock-based compensation expense in
the range of $0.28 to $0.30 per diluted share. The comments
regarding future financial performance in the immediately preceding
paragraph 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.� Teleconference and Webcast
Guitar Center will host a conference call and webcast today, May 7,
at 2:00 p.m. PT (5:00 p.m. ET) to discuss first 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 the Company�s corporate web site at
www.guitarcenter.com. To access the call, please dial 888-791-6347
(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
May 14, 2007 and can be accessed approximately one hour after the
end of the call by dialing 800-642-1687 (domestic) or 706-645-9291
(international); pin number 6795157. A replay of the webcast will
be available at www.guitarcenter.com. About Guitar Center Guitar
Center is the leading United States retailer of guitars,
amplifiers, percussion instruments, keyboards and pro-audio and
recording equipment. Our retail store subsidiary presently operates
more than 210 Guitar Center stores across the United States. In
addition, our Music & Arts division operates more than 95
stores specializing in band instruments for sale and rental,
serving teachers, band directors, college professors and students.
We are also the largest direct response retailer of musical
instruments in the United States through our wholly owned
subsidiary, Musician�s Friend, Inc., and its catalogs and websites,
including www.musiciansfriend.com, www.guitarcenter.com,
www.wwbw.com and www.music123.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 2007. Sales and earnings trends are affected by many factors
including among others, world and national political events,
general economic conditions, the effectiveness of our promotion and
merchandising strategies, our ability to integrate and profitably
operate acquired businesses such as Woodwind and Brasswind, 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 addition, during the
recent past we have experienced greater fluctuations in weekly and
monthly operating results than has been our historic experience and
this volatility has, and is likely to continue to, reduce the
reliability of our future revenue and earnings guidance. 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 �Risk
Factors� in our Annual Report on Form 10-K for the year ended
December 31, 2006, 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) GUITAR
CENTER, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited) � March 31,2007 December 31,2006 Assets
Current assets: Cash and cash equivalents $ 13,879� $ 15,153�
Accounts receivable, net 50,899� 53,916� Merchandise inventories
609,356� 578,082� Prepaid expenses and other current assets 17,138�
16,178� Deferred income taxes � 22,203� � 22,739� Total current
assets 713,475� 686,068� Property and equipment, net 212,329�
201,986� Goodwill 20,067� 18,507� Intangible assets, net 7,907�
7,612� Other assets, net � 13,460� � 13,305� Total assets $
967,238� $ 927,478� Liabilities and stockholders� equity Current
liabilities: Cash overdraft $ 18,467� $ 20,243� Accounts payable
113,042� 93,717� Accrued expenses and other current liabilities
84,756� 117,595� Merchandise advances 24,877� 26,830� Borrowings
under revolving line of credit � 135,000� � 101,144� Total current
liabilities 376,142� 359,529� Other long-term liabilities 18,701�
17,292� Deferred income taxes 4,671� 5,165� Long-term debt � 1,064�
� 1,416� Total liabilities 400,578� 383,402� Minority interest
1,209� 1,339� Stockholders� equity: Preferred stock �� �� Common
stock 295� 295� Additional paid-in capital 469,706� 464,217�
Retained earnings � 95,450� � 78,225� Total stockholders� equity �
565,451� � 542,737� Total liabilities and stockholders� equity $
967,238� $ 927,478� GUITAR CENTER, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share
data) (Unaudited) � Three months ended March 31, 2007� 2006� Net
sales $ 534,483� $ 470,747� Cost of goods sold, buying and
occupancy � 380,107� � 334,241� Gross profit 154,376� 136,506�
Selling, general and administrative expenses � 124,037� � 109,114�
Operating income 30,339� 27,392� Interest expense, net � 1,793� �
1,852� Income before income taxes 28,546� 25,540� Income taxes
11,419� 9,833� Minority interest in loss � (98) � �� Net income $
17,225� $ 15,707� Net income per share: Basic $ 0.58� $ 0.60�
Diluted $ 0.57� $ 0.55� Weighted average shares outstanding: Basic
� 29,507� � 26,176� Diluted � 30,165� � 29,863�
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