Guitar Center's downward spiral

Not sure whether this really fits well in the D&D or over in the Hangout.

Personally, I've never been a huge fan of Guitar Center (typical big box store where the employees are underpaid and rarely very knowledgable, the guitars and amps for sale in the stores are often poorly maintained, etc.). Given the choice, I've always been willing to pay a little more for something and buy it at Rockin' Robin, Fuller's, or Infinity Guitars. If GC does go down financially, they'll probably be blowing out inventory before too long... so if you're eyeing a guitar or something there, you might want to wait a bit. The story does really suck for the manufacturers that sell so much of their inventory through GC, but perhaps it does mean a return to the mom & pop stores and internet sales.

The D&D angle is that it's another "success" story for Bain Capital. And yes, I realize that some of the company's distress has little to do with Bain's actions.

http://thetoneking.com/wp/life-support-how-long-until-they-pull-the-plug-on-guitar-center/

Marc Johnson for TheToneKing.com

From all sides, it looks like Guitar Center may be in a slow spiral into oblivion. That sounds harsh, but things aren’t going well for the company and haven’t been for years. Moody’s downgraded them…again. S&P Downgraded them…again. They haven’t posted a net profit in several years. They’re getting screwed in loan interest. And, to top it all off, rumors are circulating that manufacturers are getting antsy with GC’s poor performance.

A bit of history is in order.

Guitar Center was founded in California in 1959 by a dude named Wayne Mitchell. Originally an organ dealer named The Organ Center, they started finding more money in Vox guitars and amps. Changing their name to The Vox Center in 1964. The name didn’t last too long, and by 1970, Mitchell finally changed the name to Guitar Center.

But the big story behind GC is the name Larry Thomas. Starting out as a salesman in 1977 in the San Francisco store, Larry made his way up to CEO and President in less than 20 years. After taking over in 1991, Larry was the guy who made GC “The largest music retailer in the world.

It’s a great American story. A young man starts off at the bottom of the ladder, works his way up, and ushers his company into greatness.

If only it had stopped there.

On June 27, 2007 GC was bought out by Bain Capital for $1.9 billion plus assumed debt. With the debt, Bain had written a $2.1 billion dollar check for Guitar Center and all of its subsidiaries.

For those who don’t know, Bain Capital is a private equity and venture capital group that was founded in 1984 by current presidential nominee Mitt Romney. Basically, Bain buys companies, restructures them, and then sells them off at a profit. There are some success stories, and some no-so-success stories.

Unfortunately, when it came to Guitar Center, Bain hasn’t had much luck. One of the common complaints among GC employees after the restructuring involves their compensation. It’s hard to believe, but Guitar Center used to offer comprehensive pension and benefit plans. It’s the usual story. Outsource IT to India, freeze raises for years, increase management but cutting back on sales personnel by making them part-time, making it difficult to keep the floor covered.

And being hit by a recession right after the buy out didn’t help matters any.

Where are we now?

Guitar Center is more than 1.6 billion dollars in debt. I’ll say that again so that you can fully grasp what I’m saying. Guitar Center owes 1,600,000,000.00 dollars to other people. As of March of last year, they had been on their knees begging to get a 2.5 year extension on $650 million of that total debt load. For an extension to April 2017, GC agreed to a 9.9% total interest rate.

An interest rate of 9.9% means that GC needs to pay back $64,350,000 dollars in interest on that $650 million dollar loan. And that’s only one loan! They have another for $622 million that they’re asking for an 18-month deferment on 50% of the interest payments. Who knows what the interest is on that b*stard.

Even though GC murdered its competition by having over $2 billion in sales in 2011 – Doubling Sam Ash’s sales at the no. 2 spot – they still don’t have enough cash flow to cover even the interest in its debts. Which is explained in the Moody’s downgrade.

So, how does the world’s top seller of music gear end up not making enough money to cover their debt?

First, you need to know that that $2 billion figure is not just GC’s brick and mortar stores. That figure includes Musician’s Friend, Harmony Central, Music and Arts, and all of their subsidiaries.

That $2 billion ain’t profit. To give you an idea of the costs of running the GC empire: According to Moody’s, in May of 2011, Guitar Center’s earnings, before “interest, taxes, depreciation, and amortization,” was estimated at $170 million. Dropping down from $2 billion to $170 million is one hell of a kick to the head.

From here it gets a bit harder to follow.

You see, in the business world, earnings aren’t the same thing as profit. According to Guitar Center’s filings for 2011, their Gross Profit is about 30% of their total sales or $60 million. “Interest, taxes, depreciation, and amortization” must be damn expensive if it took them from $170 million to $60 million.

To add to the cluster-frak sundae that is Guitar Center’s finances, according to their 2011 filings, Guitar Center had a Net loss of 7.4% or $111 million. My guess is that number includes payments on taxes and loan interest. Either way, if GC continues working with a Net loss of $111 million with a $1.6 billion dollar debt load, they might as well put their heads between their legs and kiss their ass goodbye.

Recently Moody’s has downgraded Guitar Center’s liquidity rating to Speculative Liquidity Grade – 3. Basically, it means that GC doesn’t have enough money to cover its interest expenses. On top of that, Moody’s is pretty sure that GC’s performance won’t improve over the next 12 months.

What’s going to happen now?

Well, that’s a tough question to answer. There are too many companies that have their hats in the ring to let Guitar Center go into bankruptcy so easily. Also, manufacturers are getting pissed at GC. Most of that mounting debt is probably due to them for product. And Guitar Center has been telling a lot of the manufacturers to piss off. But, most of these manufactures can’t simply jump ship. They sell too much of their stuff through GC. Most of them are probably just sitting quietly and trying to ride out the storm. But if things get much worse, don’t be surprised if you seen big brands pulling their lines.

Guitar Center’s reaction seems to be to get further into debt by opening more brick and mortar stores. They’re trying to make themselves look pretty, like nothing’s wrong. “Don’t worry. We’re expanding. Everything’s great.” All the while, they’re only burying themselves deeper under a mountain of debt.

Much of Guitar Center’s debt is coming due in April of 2013, which is not that far away. I guess we’ll just have to see what happens then. I would be surprised if Guitar Center didn’t go down. But if there are enough people who are willing to throw money at them, then I guess they’ll stay in business. If they do go down, I just hope they don’t take the rest of us with them.