For the fourth quarter, net revenues increased 20% to $563 million. Operating income jumped 27% to $57 million. GAAP net income rose 24% to $33.5 million, or $1.14 per share. Excluding some one-time benefits and charges related to legal settlements and other events that occurred both this year and last, net income would have risen by 21%, coming in at $34.3 million, or $1.17 per diluted share.
For the full year, net sales increased 18% to $1.8 billion. Operating income appreciated 23% to $132 million. GAAP net income was $76.7 million, or $2.67 per diluted share, good for a growth rate of 21%. Excluding acquisition charges for 2005 and a charge in 2004 for another event, net income would have grown 25% to $80.5 million, or $2.80 per diluted share.
Whether you choose to play this song in the tune of GAAP or non-GAAP, Guitar Center experienced excellent growth for the year. The Guitar Center chain itself did 13% more in sales in the fourth quarter than in the comparable time frame one year ago; gross margins improved, as well. Same-store sales increased 4.6% -- a decent clip -- especially in relation to comps in the Music and Arts operation, which came in at a more anemic 2.9%. That said, the segment more than tripled its net sales revenues for the quarter, because of the combination of Guitar Center's American Music asset and an acquired business called Music and Arts Center. It also saw an improvement in gross margins.
The direct-response unit, Musician's Friend, unfortunately saw declining margins because to a lesser take of shipping/handling revenue. Still, Musician's Friend achieved nearly 22% growth in its top line.
Double-digit growth rates -- you gotta love 'em. Investors always want to know about the guidance, so let's see how that number is shaping up. Guitar Center believes it can take in somewhere between $2.06 billion and $2.1 billion in revenues for 2006 and generate diluted per-share income between $2.72 and $2.98 from those sales.
As Fools can see, the growth rates might not be as robust next year. Here's another thing to consider if you're in a bearish mood and want to reject the company's demo: According to the 10-Q filed in November, net cash from operations declined by more than 50%, to $4.3 million, for the nine-month period ended Sept. 30. There was no free cash, either; capital expenditures and acquisition costs devoured the operational cash as easily as Simon Cowell crushes the spirit of hopeful singers.
As for me, I still believe Guitar Center makes for a compelling long-term bet. I concede that I'd like to see some free cash and better sales growth, but I think the long-term thesis of supplying wannabe rockers with the tools they need is a good one. The analogy I like to invoke is Adobe Software -- that company should do well over time, supplying wannabe filmmakers and photo editors with their necessities. Should you let Guitar Center join your portfolio's pool of talent? Do some more digging before awarding it the gig.
Nostalgic for the oldies? Here are a few on Guitar Center:
- Guitar Center Makes Beautiful Music
- Guitar Center Is Well-Tuned
- Let's take you way back to the summer of 2002 -- when Guitar Center was actually an idea for shorting.