Guitar Center’s Earnings Surge 50%

Guitar Center Inc. reported Tuesday a 50% increase in second-quarter profit on the strength of such high-margin products as vintage guitars and keyboards sold through its Musician’s Friend catalog and Web site, as well as continuing sales growth at its retail locations.

The Westlake Village-based retailer of musical instruments and recording equipment said profit jumped to $6.2 million, or 25 cents a share, from $4.1 million, or 18 cents, a year earlier. The results beat analysts’ estimates of 19 cents, according to a Thomson First Call survey.

Sales climbed 15% to $291.6 million. Sales in the catalog and Web division increased 30% to $60.4 million, in part because of improved initial order-fill rates and fewer cancellations and returns, as well as less discounting.

The results, combined with a 5% rise in same-store sales, helped Guitar Center offset higher-than-anticipated expenses in the company’s American Music stores, which specialize in sales and rental of band instruments to music teachers and their students. Same-store sales, or sales at stores open at least a year, are an important financial indicator for a retailer.

The company’s stock price reached a 52-week high of $30.60 a share in intraday trading before closing at $29.70 on Nasdaq. The stock has surged 80% this year.

Guitar Center executives said they would take their time building a stable infrastructure for the school sales division to enable future acquisitions. Thousands of mom-and-pop stores sell musical instruments in an industry some analysts feel is ripe for consolidation.

The company operates 117 Guitar Center stores and 19 American Music stores nationwide. In the second quarter, Guitar Center opened stores in Memphis, Tenn.; Lakeland, Fla.; and Fredericksburg, Va. The stores contributed $12.9 million, or 54%, of the total increase in retail sales.

Guitar Center plans to open 14 to 16 outlets this year.

Given the results of the second quarter, “we are confident in our ability to achieve our business objectives for the year,� said co-Chief Executive Marty Albertson.

Company executives held firm on their guidance for third-quarter sales of $298 million to $304 million with earnings per share in the range of 22 cents to 24 cents, and full-year earnings per share in the range of $1.43 to $1.49.

While nearly 75% of Guitar Center’s retail customers are professionals for whom musical instruments are not a discretionary purchase, at least half of its catalog and Web site purchasers are hobbyists.

“You would think they would be impacted by the economy,� said Justin Cable, an analyst with B. Riley & Co. in Los Angeles.

“I think Guitar Center has done the right things to keep sales growing in that division,� he said. “Even in the past two or three years in this sluggish economy, they have posted pretty consistent single-digit [same-store] sales growth.�

Last month, the company completed a $100-million offering of senior convertible notes, the proceeds of which would be used to reduce interest expense.