Guitar Center Is Well-Tuned

You'll find plenty of frets at Guitar Center (Nasdaq: GTRC) -- but no fretting. Guitar Center had a rocking good holiday season that now has the musical gear specialist boosting its fourth-quarter targets. The company expects to have earned between $0.89 and $0.92 a share in its final quarter, well above the range of $0.80 to $0.88 a share that it reported back in October.

How good are things at Guitar Center? It wrapped up the year with $1.5 billion in sales, a healthy 19% improvement over the previous year's showing. Comps were up a sharp 10% during both the December quarter and the year as a whole.

Guitar Center has come a long way since being shorted during the summer of 2002 in our now-dormant Rule Breaker Portfolio. Back then, the company was playing with broken strings because of widening debt, increasing inventory levels, falling margins, and large rounds of insider selling. These days, the company is playing a much merrier tune.

As a musician, I've always had a soft spot for Guitar Center. After all, the next generation of garage band dreamers, budding disc jockeys, and home recording enthusiasts are being armed with picks and axes (well, guitar picks and guitar "axes," anyway) with the company's help.

It also has a pretty cozy niche. Remember how discounters like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) carved into Toys "R" Us (NYSE: TOY) territory and dethroned it as the leading toy seller? I can't fathom walking into the department store empire that Sam Walton built to find a row of Gibson guitars stacked up against a shelf of Marshall amplifier stacks and Mackie mixers.

Remember, too, how Amazon (Nasdaq: AMZN) smoked booksellers like Barnes & Noble (NYSE: BKS) and Borders (NYSE: BGP) online? Well, most musicians like to physically handle the instruments they're about to purchase. Some types of gear, such as effect pedals and synthesizer modules, are probably popular sellers sight unseen, but Guitar Center is already on the case: Its MusiciansFriend.com website and mail-order business accounted for more than a fifth of Guitar Center's 2004 sales.

Guitar Center's performance echoes what happened in 2003, when a strong holiday selling season had the company raising its fourth-quarter profit guidance. Heeding the earlier bearish sentiment, I argued that short sellers should follow the lead of a tribute band and go for a cover. The stock has risen by better than 50% over the past year, and the pieces are in place for 2005 to be another solid year. 

So, do you think Guitar Center is finally ready to jam with the big boys, or will it be unplugged? What will drive this year's market for musical instruments and related gear? Know how to play the six-string axe? All this and more -- in the Guitar Center discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz really did play in a band. Paris By Air was even signed to Columbia Records and sold a few albums before he traded in one keyboard for another. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.