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California and the West

Guitar Center's Stock Drops 17%

October 27, 2005|Leslie Earnest | Times Staff Writer

Investors whacked 17% off the price of Guitar Center Inc. shares Wednesday, one day after the retailer posted lower-than-expected third-quarter sales and said margins were lower in its hotly competitive Internet business.

The Westlake Village-based company's stock closed at $50.92, down $10.23.

"I think there's going to be continued pressure on the stock due to investors' worries about the business" and about consumers' mood, said analyst Paul Swinand at Stephens Inc.

But Swinand said he believed that the concerns were overblown. Industry sales are strong, he said, and there's a "demographic bubble of teenagers" to buy the products. Further, sales have remained solid in Guitar Center's core business, its bricks-and-mortar stores, he said.

"We actually think that even if the stock drifts lower, it's still a healthy business and could provide an attractive entry point," he said.

Guitar Center sells musical instruments and accessories on the Web and through its 157 U.S. stores. With annual sales exceeding $1.5 billion, it is the nation's largest retailer of guitars, amplifiers, drums and other music products.

The company said Tuesday that revenue for the quarter was $421.1 million, 18.6% more than in the same period last year but less than the $429 million analysts expected.

Profit rose 16.1% to $14.4 million, or 51 cents a share -- in line with analysts' estimates -- compared with $12.4 million, or 45 cents,, a year earlier.

Gross margins in the Internet and catalog business slipped to 29.1% from 31.3%, partly because of lower shipping and handling revenue, the company said. Competitors in this industry try to draw buyers with special promotions and reduce, or eliminate, shipping fees, putting pressure on profits, analysts say.

Some investors also worried about the cost of a new stock compensation program that the company announced this year, said Joan Storms, an analyst with Wedbush Morgan Securities. They also fretted over higher inventory levels that the company said it had incurred to avoid stock shortages it experienced during last year's holiday season.

"I've talked to clients all day, and I really think the stock is oversold," Storms said.

In a conference call with analysts Tuesday, Chief Executive Marty Albertson predicted a strong holiday-season quarter.

Company executives reaffirmed earlier projections for fourth-quarter sales of $555 million to $569 million and per-share earnings of $1.16 to $1.23, excluding costs of the management incentive program.

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