More on Guitar Center's Bankruptcy this time with Numbers

It was destroyed before Bain Capital.

And I will stand by the opinion that it appears even Bain underestimated how bad the business really was.
Otherwise, it would be liquidated already.

Does anyone really think Bains plan was to rebuild and maintain?
Thats not what they do.

They dress up the pig. Give it a new coat of lipstick. Sell the debt to a bunch of investors based on their "reputation"
Then they pull the plug.
Looks like it didnt work as planned this time.

Now what? The debt load and dysfunctional business has been passed on to another hapless suitor. And thats not going so well...
Surprise!

Then they blame it on the economy. The markets. The collapse of the price of tea in.... Somewhere.

Bad news is... This was a giant over-fattened pig in good times.
A LONG time ago.

 

Yeah but I was talking about in the context of affecting other guitar companies. People were saying GC was going to drag down other companies that supply them if they close their stores.

Their guitar suppliers don't care about the used market other than maybe selling replacement parts which can be sold easily online.

 

That's exactly what happened to the local Gibson dealer in my area around that time. They're still around, though.

Imagine a world in which GC is bought out by Thomann.

 

I'm neither from Europe or the USA but I would think from a retail perspective Thomann would be better off starting from scratch than buying into the mess that appears to be GC.

Just carrying over staff attitude sounds like it would spell disaster, let alone the old, damaged, worn stock, lack of customer goodwill, overheads, public perception in general ....?

 

Normally when you buy a company you’re looking for some unique competitive advantage that they have that would be hard to replicate. Ideally complementary to what you already got underway. Could be brand equity, amazing logistics, great software, stellar management, or talented personnel. Strategically located real estate also used to be valuable but now not so much. You look at GC and I don’t see any aspect that would be worth buying.

 

The thing to remember is that GC is a viable business, it's just that they're massively overleveraged and will likely never get out from under their debts. If their vulture capitalist owners decide to throw in the towel and liquidate the company to stop hemorrhaging money, it might make an interesting opportunity.

Thomann would basically be getting a name, a bunch of inventory on the cheap and a bunch of storefronts (many of which they would likely close). Sam Ash liquidated a large portion of the MARS music chain this way about 20 years ago. Since Sam Ash were already established in the US market they didn't need the name, but Thomann could definitely benefit from taking over an existing brand. As much as everyone seems to love to hate GC (and so do I), they still make money. The combined company would then have enough volume with manufacturers to cut some nice deals (also because AFAIK, Thomann actually pays its suppliers).

This is unlikely to actually happen, but fun to conjecture about on a guitar forum. I'm also the guy who thinks Fender should buy G&L, in order to let Fender be the "legacy brand" of Teles and Strats, and operate G&L as the "modern brand" with all the new designs and ideas.

 

The only thing really worth having (other than whatever inventory is left) is the established brand name, which could be a valuable asset to the right buyer at the right price.

 

N=1, but I got a great deal at GC on a "used" cherryburst Squier Standard Strat with the plastic still on the pickguard. Really nice instrument. Just sayin'.

 

Ok, in that case I agree. Life will go on without them.

Personally I haven’t shopped at GC in over twelve years. I find them too predictable.

 

Oh yah, for sure there are guitars in GC that are very nice and there are very nice used deals there too. I also have really appreciated their discount on a new item when you traded something in. That can really work to your favor if you do something like trade in a cheap Boss pedal you bought used and turn around and use the discount to buy a brand new tube amp or nice guitar.

GC (the ones I've been in) also just have a lot of stuff on the floor marked "new" that you would never see on the floor at most smaller stores. Most smaller stores anything being sold as "new" looks absolutely pristine.

Best case I'd love to see GC survive and improve, not disappear. I haven't been going in this year but a lot of the time I like trading in pedals there. If the pedal is cheap enough and low enough demand it's hard for me to justify the reverb song and dance to get just a teeny bit more money than just walking into GC and being done with it.

 

Guitar Center is in real trouble. They just missed a payment on their debt.

 

They missed the payment intentionally.

The value of the brand name, aka brand equity, has largely been squandered due to poor customer experience in recent years.

 

Man this sucks. I do hope they recover. I've done untold 1000's and 1000's of $$$ in business with them over 20 years and they always did right by me. I've bought and sold with them more times than I can count, and we always made the best deals for each other and were always happy in the end. I really wish for their speedy recovery.

 

This is the right way to time or sequence a Re-org.

Things look better, from the market standpoint - profit per unit is up and sales are not tumbling down.

This is what we tried to instill in people filing personal bankruptcies. Get the worst of the worst behind you, have that new job or whatever established and THEN file the papers. Don't simply file out of desperation. You have to have a plan for what happens the day after the proceedings are done.

Thanks, Warrent!

 

Bain Capital, money lenders in general, wall street deep pockets ............ ugh. Earning money through investing in money is centsless.

 

I'm not happy this has become the case, but it seems par for the course these days to forgive outfits and entrepreneurs when they just stop paying. Once upon a time it was the worst thing a businessman could do. Now, you're not a genuine Superstar if you haven't stiffed a whole lot of people, and forced many others to file suit to be paid.

I think this gives the Bad Boys and their acolytes an unfair advantage. I'm not sure the term "brand equity" means anything these days. Any news, bad news included, is better than being lost in the ruckus. I remember several times last year, shopping with people I knew and the product they chose, wasn't based on a favorable past experience. They just recognized the name - and even when they knew the name had been "bought" from someone else, they still had to have that brand name. Even a bad experience with a brand name was better than no familiarity at all.

Also, I don't think GC ever had a spotless reputation in the musicians community in the first place. A big box is......

 

I traded in a '90's Dunlop Rotovibe in that transaction that I never really got on with. Coulda gotten more for it selling it on my own, but time is money.

I dunno...I like GC--kids working there have never been anything but nice to me, they all love music, and get other kids stoked on music. It's a big playground for rock 'n roll stuff in a time when there isn't a whole lot of rock n' roll anymore. Most of my visits there are to poke around and browse, and don't feel pressured to do anything but that. It's no surprise that they're having trouble paying their bills.

 

Forget GC and switch to Sweetwater. I did business with GC since 1990 and they ONCE were a great company. That time has past for several years in my part of the Country.
Poor Inventory and lots of Sales floor folks that have very little detailed knowledge [or no knowledge in some cases] about guitars and amps. My GC 10 years ago they mainly had gigging musicians working the sales floor who were very knowledgeable about guitars-amps-PA's. Now it seems they have 18-21 yr olds who can't even go into bars legally in most states.
Feel very fortunate if you still have a good GC in your area of the country.

I also do some business with Mom and Pop shops in my area.

It is still much easier to Log In and Point and Click than to go to GC in person and especially [mod redaction]

 

I was traveling through Boise back in July and visited every music store in the area including GC. I have to say it was a very well run store even including their table set outside the front door with clear instructions on the do's and don'ts as they relate to our virus. Once inside, the staff was friendly and knowledgeable. I asked about any vintage gear they might have and the guy knew exactly what they had and offered to show me. I spent a few minutes talking with the sales guy who was super friendly.
I posted here about how crappy the store is in Roseville, CA. but Boise is a good one in my limited experience. Sacramento has been good the few times I've been there.

 

As PastorJay and others have noted, and as highlighted by the excellent piece originally posted by warrent, if Guitar Center files for bankruptcy it will be to (try to) reorganize rather than to liquidate.

GC is now private so I wasn't able to find any public information about its current or recent financial situation. However, having seen many other situations like this, and as noted in the OP, almost certainly GC is overleveraged (i.e. not enough cash flow to satisfy all of its debts as they become due).

In an LBO, as others have noted, the original owner sells the company to a new owner (Bain, in this case) and the new owner "pays" the purchase price by causing the purchased company borrow the funds, with the new creditors expecting that the company, under new ownership, will be able to repay the debt; the debt incurred by the company to finance the LBO usually consists of loans, the repayment of which is secured by collateral (typically receivables, inventory and other assets of the company), and unsecured debt (which could be bonds as well as obligations owing to trade creditors (e.g. Fender, Gibson etc.)). In short, and as noted by others, LBOs frequently reward the sellers and management while saddling the new company with debt that is difficult to pay; LBOs are often justified by rosy forecasts that frequently turn out to be unreasonably optimistic or fail to account for downturns.

GC failing to make the interest payment is typical pre-petition behavior: GC is attempting to conserve cash as much as possible and cut expenses. I assume the missed interest payment related to GC unsecured bonds, which often have a grace period (depends on what the bond indenture provides). Hence the speculation about a filing by 11-15-20, presumably when either the creditors can sue for payment or another debt payment is due. Struggling companies will also "stretch the trade" meaning pay vendors more slowly in order to conserve cash - I don't know but I'm guessing Rickenbacker's decision to stop selling to GC was a reaction to GC slow paying invoices; or possibly Rickenbacker started to demand cash payment on delivery (COD).

In a "traditional" chapter 11 bankruptcy (corporate reorganization), the company will continue to operate in bankruptcy until a plan of reorganization is approved by the requisite parties (including creditors). Typically employees will continue to be paid and, in retail bankruptcies, usually the company will seek court approval to honor certain customer programs. The idea is that the company wants to encourage customers to continue to buy product.

Trade vendors that provide goods or services to the company while it is in bankruptcy are entitled to protections - basically obligations incurred *during* the bankruptcy will be repaid before any obligations incurred by the company prior to the bankruptcy. The idea is to encourage the trade to continue to provide product to the company in bankruptcy, so that customers have something to buy and the company in bankruptcy can continue to operate until it reorganizes.

Employees have some statutory protections under the bankruptcy code for pre-petition wages (although they are limited). But, as long as GC is trying to reorganize in bankruptcy, it will need employees in its stores or for its online operations, and those employees will be paid for their work during the bankruptcy case.

Another important piece of a retail bankruptcy will be the real property leases. Leases for the most profitable locations will probably be assumed (i.e. survive) while the "over market" leases (i.e. lease rent exceeds the current market) will likely be rejected (rejection of a lease will still mean that the landlord is entitled to receive damages under the lease, subject to some bankruptcy code limitations). I would guess that GC has a number of valuable leases that it might want to assume, or assume and assign, in order to try to improve its prospects for reorganization. Leases for underperforming stores, or leases that are above market, may be rejected (or landlords may be willing to negotiate improved lease terms for GC).

The plan of reorganization details how the company will emerge from bankruptcy and must be approved by the bankruptcy judge and a sufficient number of creditors (as provided in the bankruptcy code). The plan of reorganization will describe, among other things, the treatment of the company's pre-petition debt: typically the unsecured creditors are paid cents on the dollar, or might receive a new note ("IOU") to be paid by the company after it emerges from bankruptcy, while the equity owners (e.g. Bain) are wiped out. Sometimes the creditors become the new owners of the company, again with the old equity owners wiped out. The reorganization could include a sale of assets or even the entire business.

Another possibility - in fact I would guess likelihood - is that GC is currently negotiating with all creditors, or at least its key constituents, to try to organize what a bankruptcy would look like (or negotiating a forbearance or out-of-court restructuring agreement, although reorganization is usually easier - but much more expensive - in bankruptcy). GC might even be trying to negotiate a "pre-pack" (or at least a "pre-arranged" bankruptcy) in which GC's stay in bankruptcy might be relatively short.

A successful bankruptcy process requires a great deal of effort and compromise by most parties, but the company that emerges from bankruptcy should have less debt on its books, which in turn should mean it can compete more easily and invest more in the business (e.g. buy more inventory, improve the stores, hire employees, etc.).

With all that being said - for those of you still awake - many retail bankruptcies fail; ToysRUs is one recent example, but there are many others. If the bankruptcy fails, typically the company will end up liquidating.

If GC files there will certainly be an adverse impact on its unsecured creditors such as suppliers who have shipped on credit (and in turn creditors of GC's suppliers may also feel ripple effects - the same happened when GM and Chrysler filed in 2009, where numerous automotive suppliers also filed for bankruptcy). No doubt each current creditor of GC is assessing its credit exposure to GC and whether it is willing to continue shipping to GC with the prospect of a bankruptcy filing looming. Competitors of GC, such as Sam Ash and Sweetwater, may benefit in the near term, while smaller/local shops may be less affected.