Whether you're a professional musician or just beginning to play, you're probably familiar with Guitar Center Inc.
Guitar Center helps musicians of all capabilities to become better ones, while producing a handsome profit. In four years it has doubled sales to $1.5 billion, almost tripled pre-tax income to $102 million, and upped pre-tax margins from 4.5% to 6.7%. Meanwhile, it cut its debt to equity ratio from 65% down to 33%. And that's only the beginning.
Last week the company held a conference call with analysts and investors to discuss its 2005 business plan in further detail. We learned that it opened 14 stores in all of 2004; in 2005, it has already opened 10 stores, with between 22 and 26 still to come. These store openings don't come cheap, but provided they deliver mid- to high-single-digit comparable-store sales growth, they'll likely stand to produce more profits down the road.
The average musical products store has 5,100 square feet and produces $1.1 million in annual sales. By comparison, Guitar Center's large-format stores vary from 12,000 to 30,000 square feet, with annual sales right around $10 million. On a square-foot basis, this is more than double the industry average.
Not one to rest on its laurels, Guitar Center has entered a new demographic with the acquisition of Music & Arts Centers earlier this year. By doing so, it has added 62 stores on the East Coast that focus almost exclusively on the beginner musician. Offering equipment rentals, music lessons, and the sale of band instruments to high schools, the company is poised to tap a huge market.
Guitar Center is the closest comparison I know to one of my all-time favorite stocks, SCP Pools
Since January 2000, SCP Pools' stock has grown 300% versus a negative return of 12% for the S&P 500 index. In the same time period, Guitar Center's stock grew by 342%.
What does this mean for the future? I believe the company is poised for even greater growth. As for its current stock price, it's valued similarly to its peers. Return on equity is 20%, compared with 14% for the industry as a whole. (Guitar Center's largest competitors are private corporations, so their ratios are not included in industry averages.) Trailing P/E is the same as the industry's, and pre-tax profit margins are 7%, which is 2.2% higher than the average. Given its leadership position in the industry, an above-average valuation seems justified.
Should management execute their plan, Guitar Center's stock will play a beautiful tune indeed.
Will Ashworth lives in the Great White North. He does not own either stock mentioned but does welcome your comments at firstname.lastname@example.org.