Guitar Center will survive it's bankruptcy

Discussion in 'Bad Dog Cafe' started by warrent, Nov 16, 2020.

  1. warrent

    warrent Friend of Leo's

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    Guitar Center’s $2.0 Billion Education

    Brian T. Majeski
    Editor
    Music Trades
    brian@musictrades.com

    Guitar Center declared Chapter 11 on November 13, ending months of speculation about the retailer’s survival. A trip to the bankruptcy court is never cause for celebration, but in the case of Guitar Center, it’s actually good news. The pre-negotiated deal with creditors allows GC to shed nearly $800 million in debt, putting it on a path towards solvency. Private equity firms Ares Management, Brigade Capital Management, and Carlyle Group will also invest $165 million in equity capital to further shore up the balance sheet. In other positive news, GC will pay its industry vendors in full, no doubt because otherwise, it would head into December with poorly stocked stores. The fact that GC has retained a consultant to “evaluate” real estate options suggests landlords may not fare as well.


    The approximately 300 Guitar Center locations, 200 Music & Arts locations, and the Musician’s Friend and Woodwind & Brasswind websites generated about $2.3 billion in revenues in 2019. In a prepared statement, CEO Ron Japinga indicated that the Chapter 11 restructuring positions Guitar Center to “invest in operations,” and “better serve its customers.” He also noted that prior to the COVID pandemic, the company had racked up ten consecutive quarters of sales growth. Here’s hoping he’s right. While GC will never win a popularity contest with independent retailers, the company’s national footprint and extensive promotional activities play an important role in raising the visibility of music products. For that reason, its survival is a net positive for the industry.


    However, the fact that the survival of Guitar Center was ever in doubt is a scathing indictment of thirteen years of private equity stewardship. Highlights of the Bain Capital and Ares Management record include flatlining revenues, $2.0 billion in capital destroyed, and a succession of morale crushing “restructurings.” The fact the GC survived at all is a testament to the underlying strength of the business model and the ability of the staff. It could easily have been a casualty like other highly leveraged chains, including Toys R Us, Payless Shoes, Gymboree, and Radio Shack.


    To recap the sorry story: Bain Capital acquired Guitar Center in late 2007 for $2.1 billion, putting down $600 million of its own money and borrowing the rest. In the prior year, with 198 Guitar Center stores and 97 Music & Arts locations, the company had a net profit of $80 million on revenues just north of $2.0 billion. Finances were rock solid with long term debt at just $1.4 million and $100 million owed on a revolving credit line. Bain’s ambitious plans to revamp the retailer with high margin private label brands, the elimination of negotiated sales, and improved inventory management were quickly derailed by the 2008 financial crisis. What followed was a painful seven-year slog marked by layoffs, three different CEOs, and declining revenues.


    Unable to meet looming bond payments in 2014, Guitar Center went through a privately negotiated bankruptcy, otherwise known as a “reorganization.” Under the complex transaction, Ares Management took over Bain Capital’s ownership stake and debt was trimmed to $1.0 billion from $1.5 billion. The deal headed off liquidation, and by cutting interest payments, provided some financial relief. However, it still left GC saddled with an unmanageable debt burden, necessitating another “reorganization” in 2018. But for the COVID pandemic, GC might have limped along for several more years, but even under the best of conditions, operations would never have been able to generate the cash required to paydown $800 or $900 million in bonds.


    Guitar Center’s accrued losses over the past thirteen years can be attributed to overly optimistic forecasts, the financial crisis, increased online competition, and the COVID pandemic. But we think the fundamental problem lies with the richly compensated financial engineers who leveraged the company to the hilt in hopes of selling it later at a handsome profit. The debt burden they incurred effectively handicapped management. Energy that could have been expended on creating better retail operations was diverted to the pressing task of managing the razor thin margin separating cash flow and interest payments—something akin to trying to win a marathon while hauling a 75-pound weight.


    Successful businesses thrive by delivering a desirable product or service at a compelling price and financial management exists to support the basic mission of serving the customer. For the past thirteen years Guitar Center’s owners had this formula exactly backwards. In their world, the primary role of the retail operations was to meet outsized interest payments.


    Between 1964 and 2007, Guitar Center had an extraordinary run, expanding from a single location in Los Angeles to the industry’s first national chain. A talented team with a “do whatever it takes mentality,” committed to creating the best-looking stores, offering the best deals, and making happy customers drove the success. With a de-leveraged balance sheet and a chastened ownership, perhaps Guitar Center can relearn some of the lessons that made the company successful in the first place. But, if they do, it will have been an awfully expensive education.
     
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  2. Jakedog

    Jakedog Telefied Ad Free Member

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    Yeah, GC used to be a really cool company. Going public was the beginning of the end, and the Bain takeover made it into something I didn’t even recognize anymore outside of the logo.

    A classic of example of “if it ain’t broke, don’t fix it.” And of what happens when you do.
     
  3. burntfrijoles

    burntfrijoles Poster Extraordinaire

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    TLDR.. Of course it will survive.

    Bankruptcy is a tool that big corporations use to unload debt and start over with the consent of their lenders, etc.
    This isn't their first rodeo in restructuring. Big business doesn't need 'corporate responsibility" like individuals who are frequently admonished for not taking "personal responsibility".
     
  4. scooteraz

    scooteraz Friend of Leo's

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    Those two sentences leave one wondering who they are NOT paying. Who gave up over 3/4 Billion dollars?


    Expensive to whom would be the question.
     
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  5. Whatizitman

    Whatizitman Poster Extraordinaire

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    Cue 10 pages of "I hate GC! They're gonna close all of their stores next week. Good riddance!!" :confused::D
     
  6. bgmacaw

    bgmacaw Poster Extraordinaire

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    Exactly. A few years ago I used to work for a company that got bought by one of these financial genius companies who proceeded to run it into the ground with their brilliant ideas. Of course, the top execs faired quite well financially. Everyone else, not so much.
     
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  7. USian Pie

    USian Pie Tele-Holic

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    I mean... it's good news if you aren't one of the people owed part of that $800 million.

    But hey, real estate owners aren't part of the "music trade" and don't have to make a living so f 'em, right?

    Folks seem to want to pick the good guys and bad guys in this. Are you sure there are any good guys?
     
    Last edited: Nov 16, 2020
  8. Ed Storer

    Ed Storer Tele-Afflicted Gold Supporter

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    It's been more than a year since I've been in a Guitar Center store. The store moved because it sat on a valuable piece of land (South Lake Union, Seattle) and I moved. There's a store in Lynnwood that I'll go to one of these days.
     
  9. BigDaddyLH

    BigDaddyLH Tele Axpert Ad Free Member

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    What's all this, then? "Guitar Center will survive it is bankruptcy"?

     
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  10. MatsEriksson

    MatsEriksson Tele-Afflicted

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    It's been almost 2 years now since I visited any GC store. But, granted, it was the first time too, and probably the last! :)

    Since I am from Sweden and did my only visit to GC in N.Y.C. It sure wasn't a bucket list thing, travelling all across the pond just to visit GC, it was a lot of other things. Seeing the last Dixie Dregs reunion tour/show in NYC was one of them, together with a whole lot of other things one can do in NYC at the same time. Nope, didn't buy anything at GC. Same prices as here, and no oddball stuff that can't be bought over here. I couldn't care less if they go belly up or not.
     
  11. stantheman

    stantheman Doctor of Teleocity

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    Bain, that’s “The Bad Guys.”
    ‘Nuff said.
     
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  12. loopfinding

    loopfinding Friend of Leo's

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    i think the last time i bought something over 15 dollars at a GC was probably in 2005
     
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  13. Quixotic

    Quixotic TDPRI Member

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    I genuinely hope so! Those clowns at GC hardly know what comes through their used department! Have you seen some of the stuff on their website in the used section? I almost bought a Gibson GA-5 for $300 SHIPPED! They just had a used silverface Champ up there for $400 too. It's like the concept of scalping is nonexistant over there because they get their money through other avenues anyway. I'm just scrolling through right now and it looks like you can get a real 60's Ampeg Jet for $500 along with a myriad of 50's and older folk instruments and 60's Silvertone and Kay guitars. Still not great pricing on them in general... but sure beats Reverb!
     
  14. Middleman

    Middleman Friend of Leo's

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    GC will survive because they have cockroach DNA. When most of the population is gone from the earth, the board of GC will be toasting the opportunity to repopulate the earth to pay off that nagging debt.
     
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  15. jvin248

    jvin248 Doctor of Teleocity

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    "Bain Capital acquired Guitar Center in late 2007 for $2.1 billion, putting down $600 million of its own money and borrowing the rest.

    In the prior year, with 198 Guitar Center stores and 97 Music & Arts locations, the company had a net profit of $80 million on revenues just north of $2.0 billion. Finances were rock solid with long term debt at just $1.4 million and $100 million owed on a revolving credit line.
    "

    No .. that's not rock solid to earn 4% on sales in a great year, running up the peak of a bull market and economy run. Long term rate of return for investors "just sticking their money in the stock market" is 10%. As one company CEO once said, "they should dissolve the company and give the cash back to the owners to invest more wisely on their own".

    So instead they put a loan of $1.5 Billion at some interest rate double or triple (because it's a risky loan) the earnings rate in GC's very best year.

    It's really shameful the bankers keep signing up for equity for debt swaps and refinancing.

    It's also amazing how Gibson, Fender, and on and on, wants to work with them on that fragile edge of financial risk. It would be easy for the guitar factories to call up Sweetwater and Thomann and say 'hey, we'll float you guitars and warehouse space to start taking all GC's sales volume. Six months they could have redirected all of GC's volume to other vendors. Perhaps even rethink their Mom & Pop minimum order arrangements. Otherwise when GC goes down on its own the guitar factories will be left hanging on the wall.

    .
     
    Last edited: Nov 16, 2020
  16. BigDaddyLH

    BigDaddyLH Tele Axpert Ad Free Member

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    I suppose, over the burning landscape, with black ominous clouds scuttling by, Keef and GC will find each other.
     
  17. Viejo

    Viejo Tele-Afflicted Silver Supporter

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    Yeah but how many of their suppliers will not survive
     
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  18. bgmacaw

    bgmacaw Poster Extraordinaire

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    I am a bit concerned about how retailers failing might affect the part of my retirement portfolio that's invested in a REIT.
     
  19. Fiesta Red

    Fiesta Red Poster Extraordinaire

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    Oh Lord...Not this crap again...:confused:
     
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  20. loco gringo

    loco gringo Tele-Afflicted Gold Supporter

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    GC is not the only outlet to sell music gear. Any vendor that chooses to sell gear through GC and to extend GC credit is making a business decision. Time will tell if it was a good or bad business decision. Good and bad business decisions are made every day.

    The article above says all the vendors are going to be paid in full. Seems like some banks and financial institutions are going to take in the shorts, maybe? Any bank or financial institution that extends credit to GC is making a business decision.

    Where it hurts is when you drill down to local economy level and jobs are lost either at GC or their vendors.
     
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