Stockholders of music retailer Guitar Center (NASDAQ:GTRC) continue to hear beautiful music played to the tune of strong income statement numbers. Today, the company's shares reacted positively to the company's sunny outlook for next year.

In preparation for a Web cast with investors, media, and others, the company last night discussed its projections for 2004. This is a good example of Regulation FD compliance, and while the company might have put the information discussed in the filing into a press release, they weren't obligated to. (The 8-K filing isn't one investors should be afraid of, and the detailed financial information provided is appreciated.)

Guitar Center's projections, which thoughtfully included a range of figures for sales and earnings rather than just single data points, encouraged investors today. Generally speaking, this is a familiar tune; Guitar Center has a history of sales growth and earnings growth. This has helped the company's shares perform well over the past 12 months despite falling after the release of Q3 figures.

But that doesn't change a few important factors that should temper investors' enthusiasm. The company carries significant leverage -- interest expenses eat up a large portion of pretax income each year. It has little history of strong free cash flow or, for that matter, operating cash flow in excess of reported net income. Matt Richey took a detailed look at some of these issues last year.

Since then, the company has managed to improve its financial picture by refinancing debt, which should help earnings by reducing interest expense. But the company also recently filed to raise as much as $150 million from stock and other sales. (Until it starts generating regular free cash flow, it has little choice.)

None of the issues mentioned above are necessarily red flags by themselves, particularly since growing retail companies can require significant capital expenditures to build, acquire, and stock stores. Debt, meanwhile, is a perfectly acceptable way to fund growth -- certainly better, for example, than using it to fund operations.

But despite its growth projections, Guitar Center's current multiple of about 22 times projected 2003 earnings seems rich for a company with net margins in the low single digits and no free cash flow. The story doesn't appear to have changed for investors already in the stock, but those looking in from the outside might want to hold back. Retail companies are best bought when out of favor, which is certainly not the case with Guitar Center at the moment.

Will Guitar Center continue playing a happy tune 12 months from now? Hear what Fools are saying on the Guitar Center discussion board.

Dave Marino-Nachison can be reached at