Posted by mieke at 12 February , 2009

Guitar sales are climbing charts

Earnings at Guitar Center Inc. are climbing quicker than a Jimi Hendrix riff. The company’s stock has nearly tripled in the past five years, and the run looks far from topping out.

That’s because guitar sales are climbing the charts. “Music Trades,” an industry publication, says a record 3.3 million acoustic and electric guitars worth a total of $1.2 billion were sold in the U.S. last year. One reason for the boom: changing attitudes toward rock ‘n’ roll. Rock is no longer seen as the music of “hippies, freaks and drug addicts,” says Jack Sonni, Guitar Center’s marketing chief.

Guitar center sells aggressively to professional and aspiring musicians through radio stations, mailings and music contests. The Westlake Village, Calif., company stocks stores with a wide variety of gear — it’s the nation’s leading retailer of guitars, amplifiers, drums, keyboards and professional audio and recording equipment — and hires salespeople who are usually musicians themselves. Sonni, who played guitar for Dire Straits in the 1980s, says that pros and aspiring pros account for two-thirds of sales, which should hit $2.1 billion this year.

Expansion should fuel future growth. The company expects the number of Guitar Center stores to grow from 170 to 420 within five years. The stores account for about three-fourths of sales. The company is also trying to apply its formula for success to its Music & Arts subsidiary, a less-profitable chain of 81 stores that sells and rents band and orchestra instruments. And because rock is an international language, the company has begun exploring overseas expansion.

Guitar Center stores tend to be more profitable than mom-and-pop music stores because the company has more efficient distribution and uses its rock-star status in the industry to cut deals with manufacturers. For example, it nabbed half of the 300 Hendrix- replica Flying V guitars made by Gibson and sold them for $8,000 each earlier this year.

Yet Guitar Center’s stock (symbol GTRC) is hardly off the charts. At $41 in mid-July, it traded at 14 times estimated 2006 earnings of $2.91 per share, according to Thomson First Call. Analysts see profits rising 18 percent next year. Because of the company’s position as a “category killer,” Stephens Inc. analyst Rick Nelson expects the price-earnings ratio to expand and thinks the stock can reach $71 over the next year. That’s sweet music to investors.

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