Guitar Center (NASDAQ:GTRC) is strumming the blues. The music-gear retailer is drowning out better-than-expected fourth-quarter results with uninspiring guidance for 2007.
For the December quarter, revenue climbed 11.7% higher to hit $628.5 million. Earnings fell from $1.17 a share to $1.11 a share, before charges, but that was ahead of the $1.07 per share that analysts had been targeting.
Why did earnings dip, despite the top-line gain? It wasn't the markups. They proved to be generous, as Guitar Center posted improved gross margins at all three of its divisions -- its namesake guitar havens, its Musician's Friend consumer-direct service, and its nusic and arts division, which sells and rents band gear in educational markets. No, what forced Guitar Center to skip a beat were higher corporate overhead expenses.
That's forgivable. Remember that Wall Street was already looking for a bottom-line dip. The problem is that Guitar Center is now looking for earnings to continue to fade lower through 2007.
Relocating its Musician's Friend warehouse, upgrading its computer systems, and spending to fix its recent Woodwind & Brasswind acquisition will weigh heavily on Guitar Center this year.
The company is looking to earn between $2.41 and $2.65 a share this year. That includes $0.28 to $0.30 a share in stock-based compensation, but where's the growth? It we adjust earnings for both 2005 and 2006, Guitar Center earned just $2.79 per share in each period. If we tack the stock-based compensation back on (which is fair, because it's included in the $2.79 adjusted figure), we get an earnings-per-share range between $2.69 and $2.95.
Guitar Center knows the market wants more. Why else would it sprinkle its 2007 outlook with expectations of 30% in diluted earnings growth for 2008? Surely, Guitar Center doesn't have the kind of vision that is required to look two years ahead. It has a history of not even being able to project the current quarter.
It's a shame, because Guitar Center really could have something here. Music gear is too deep a category for discount department-store titans such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) to dive into, beyond a few token instruments. Then you also have the digital revolution, where sites such as News Corp.'s (NYSE:NWS) MySpace, Google's (NASDAQ:GOOG) YouTube, and CNET's (NASDAQ:CNET) MP3.com should be inspiring garage bands everywhere to go global.
The next time you see the rest notation on a sheet of music, Guitar Center, please do us a favor and play right on through.
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Longtime Fool contributor Rick Munarriz really did play in a band that eventually got signed to Columbia Records. His band sold a few records before he traded in one keyboard for another -- the one attached to his computer. 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.
