Guitar Centre Chain - 15th Nov potential day that they will file for Chapter 11

guitars4you

Just in

https://www.nytimes.com/2020/10/23/business/guitar-center-is-preparing-for-a-possible-bankruptcy-filing.html

guitars4you

According to a report in the New York Times, the US Guitar Center retail chain is once again facing bankruptcy, with the possibility that it will file for protection as early as next month. The company, which is reported to have missed a $45 million interest payment in October, leaving it with a 30 day 'grace period that could end in default...' is no stranger to financial difficulties. In January 2018 USA Today claimed it had about 18 months to refinance more than $900 million in debt scheduled to mature in 2019.  Earlier this year, having missed an interest payment, GC agreed a 'distressed debt exchange' resulting in rating agency Moody's downgrading it yet again, saying: 'The CFR, PDR and unsecured notes downgrades reflect the increased probability of a debt restructuring due to the capital markets disruption caused by the coronavirus outbreak, as well as expected significant earnings declines in 2020 due to temporary store closures and declines in discretionary consumer spending. In Moody's view these factors, together with the company's high leverage and approaching 2021 secured notes maturity, raise the company's probability of default'. While the immediate concern will be the fate of Guitar Center's nearly 300 stores and its employees, industry observers have called attention to the potentially devastating effect a bankruptcy could have on the MI industry as a whole if manufacturers, already suffering due to the effects of the global pandemic, suffered significant losses.  Overall, Guitar Center is reported to be carrying a total debt of $1.3 billion. While it might be tempting to attribute its problems to the difficulties faced by all 'bricks and mortar' stores in recent years - and the intensification of those problems during lockdown - the company's precarious position cannot have been helped by the huge debts incurred from a highly leveraged buyout by Bain Capital in 2007, which left it with a reported $1.6 billion debt. Although the eventual takeover of the lead role in the company's ownership by Ares Management in 2014 reduced its debt by a reported £500 million and its interest payment by a claimed $70 million a year (see pitchbook.com) industry insiders say that however well a musical instrument retail chain performs, servicing, let alone repaying, a debt of that magnitude looks like a Herculean task.

Whitecat

Guitar Center owes an insane amount of money to both Gibson and Fender... they are both probably eyeing this extremely nervously. Will make a big splash if it happens. 

fretmeister

Give it a few weeks and Fender & Gibson will be owned by Behringer!

stickyfiddle

They've been leveraged up to the eyeballs for far too long. 

Not surprising that while the guitar industry is actually doing well with everyone sat at home, this isn't helping GC as the USA is one of the places people aren't having such a good time. 

guitars4you

Stats from the USA from 2019 regarding sales revenue - Just to show how large GC is in the USA - $2.3 Billion compared to $804 Million in 2nd place - 3 x larger

So imagine the impact this will have on the supplier/manufactures - Both regarding sales and debt

There was talk a while ago that the largest market for suppliers/manufactures was

a) GC
b) rest of the USA
c) Europe - mainly Germany + UK
d) Japan 

GC + Rest of the USA accounted for over 50% of the market 

1	1	Guitar Center, Inc.	$2,300,000,000
2	3	Sweetwater	$804,000,000
3	2	Sam Ash Music Corp.	$385,000,000
4	4	American Musical Supply	$350,000,000
5	5	Full Compass Systems, Ltd.	$140,000,000
6	6	B&H Photo & Video	$101,000,000
7	7	Washington Music	$100,650,000
8	9	J.W. Pepper	$90,000,000
9	8	Steinway Hall Retail	$65,000,000
10	10	Alto Music	$58,845,000

guitars4you

Ref those USA sales above - Just to give you an idea, Thomann sales revenue was around 700/800 Million Euros a year or so ago - Gear4Music in the UK is around £120 million

guitars4you

Just an interesting exercise on bricks 'n' mortar v box shifting

GC revenue $2,300,000,000 with 10.900 staff - Equates to  $211,000 sales per member of staff
Sweetwater $804,000.000 with 1691 staff - Equates to $475,000 sales per member of staff

guitars4you

stickyfiddle said:

They've been leveraged up to the eyeballs for far too long. 

 

Indeed -I think this is relevant -  industry insiders say that however well a musical instrument retail chain performs, servicing, let alone repaying, a debt of that magnitude looks like a Herculean task.

Ever since Bain Capital, venture capitalist, purchased GC it has been loaded with such hefty debt servicing costs - That surely limits what the business can accomplish, how it can adapt and move forward, as the fight to survive appears to be No 1 priority  

mudslide73

This is great data @guitars4you - thanks. What's the likelyhood they'll go? There's the ripple effect stated above but also their inventory must be mind bogglingly large. I worked for a doomed IT trade distributor in the 90s and the stock devaluation during the receivership/liquidation process was harrowing. Seeing everything you'd worked for reduced to mixed item pallets going for virtually nothing was soul destroying.

guitars4you

Whitecat said:

Guitar Center owes an insane amount of money to both Gibson and Fender... they are both probably eyeing this extremely nervously. Will make a big splash if it happens. 

Early days - But the package is hinting at the possibility that they will re-emerge in 2021 - How much of the financial debt to the banks/markets can be released/written off or restructured, to ease the burden on servicing that debt

Plus what will the % of debt re-payment likely be to the trade - There would have to be something sensible and acceptable, as GC would still need strong supplier relations after a re-structure - You obviously don't see Fender, etc etc etc accepting 10p in the £, then offering a new account to the new re-structured GC

guitars4you

mudslide73 said:

This is great data @guitars4you - thanks. What's the likelyhood they'll go? There's the ripple effect stated above but also their inventory must be mind bogglingly large. I worked for a doomed IT trade distributor in the 90s and the stock devaluation during the receivership/liquidation process was harrowing. Seeing everything you'd worked for reduced to mixed item pallets going for virtually nothing was soul destroying.

See my above comment ^^^^^ with @Whitecat - Story suggest a possible new GC - Still assuming bankruptcy happens

Ref all that stock - I recall somewhere around 2000, MARS Music went into liquidation - They were a new rival to Sam Ash and GC with many stores across the USA - The liquidators had to clear all the stock - What was interesting at the time, was the trade was heavily discounting and competing with each other, hence reduced margin - Yet the liquidators, managed to sell many products for more than other shops, and indeed Mars Music, were selling them - It was though the shop prices had become to low and under valuing what the market place would actually allow - I recall something like an SM58 mic sold in the shops for $69 - Yet the liquidators acquired an $89 sale - Maybe that was easier to do in the days before WWW and customers instant access to the best price

Strat54

Amazon Guitar Center.....

stickyfiddle

guitars4you said:

stickyfiddle said:

They've been leveraged up to the eyeballs for far too long. 

 

Indeed -I think this is relevant -  industry insiders say that however well a musical instrument retail chain performs, servicing, let alone repaying, a debt of that magnitude looks like a Herculean task.

Ever since Bain Capital, venture capitalist, purchased GC it has been loaded with such hefty debt servicing costs - That surely limits what the business can accomplish, how it can adapt and move forward, as the fight to survive appears to be No 1 priority  

Exactly. It’s a lot like Toy R Us - an otherwise viable business model except for the shareholders taking on massive amounts of debt to maximise short term equity returns at the expense of the long term viablilty of the company. 

The outlook here is probably better than TRU because they’re at the top of the market and there is still scope for growth in the sector. 

My guess is half the debt will be written off and Amazon will buy them. 

guitars4you

Strat54 said:

Amazon Guitar Center.....

guitars4you said:

Just an interesting exercise on bricks 'n' mortar v box shifting

GC revenue $2,300,000,000 with 10.900 staff - Equates to  $211,000 sales per member of staff
Sweetwater $804,000.000 with 1691 staff - Equates to $475,000 sales per member of staff

But would they want a bricks and mortar business, when you look at the 'sales per staff employed' ratio of a box shiftier like Sweetwater - Yet maybe an interesting option in that Amazon, as a non bricks 'n' mortar operation, don't have access to large accounts like Yamaha, Fender, Boss/Roland etc - So this would give them access to such markets/supplies, if they wanted them - Yet they also know, with their Gibson exercise 2/3 years ago, that the return on capital in our trade is poor 

In fairness to GC - They don't have an issue selling products - It is the level of debt they have, both to the trade and the bank/Wall St etc and their ability to reduce this debt and indeed service the interest on the debt

Think it is going to be an interesting few months, with many observers and of course any potential changes in the route to market for the suppliers/manufactures as well

PhilKing

Guitar Center have a mail order company here in the States, called Musicians Friend.  They have been around a long time and started with strings, before branching out into everything else. They were acquired by GC around 2000.  It would be interesting to see what proportion of GC's business is the MF contribution.

guitars4you

PhilKing said:

Guitar Center have a mail order company here in the States, called Musicians Friend.  They have been around a long time and started with strings, before branching out into everything else. They were acquired by GC around 2000.  It would be interesting to see what proportion of GC's business is the MF contribution.

I've not seen any break down of GC v MF - Am aware of MF and obviously a competitor to Sweetwater - I know the above figures, posted earlier, are for the GC group, so will include MF

Obviously GC can sell - But you do see many negative comments on various forums about them - But you'll get that in any media today - I've not seen a GC store for a while now - But when I first went to the flag ship store on Sunset in LA, the first visit was wow - But felt subsequent visits were watered down - I'm talking about layout, stock, prices, display etc and not as a buying customer - It was an inspiration first time I went - But thought it was far more mundane as I went back a few years later

Not sure if you have one near you and what you think to them - But even that needs to be looked at as a main stream best selling stock, v boutique and even vintage 

Alterlifeson

PhilKing said:

Guitar Center have a mail order company here in the States, called Musicians Friend.  They have been around a long time and started with strings, before branching out into everything else. They were acquired by GC around 2000.  It would be interesting to see what proportion of GC's business is the MF contribution.

Never knew MF was part of GC, I had assumed they were separate entities and the GC just had virtually no online presence! Makes perfect sense now.

Bork

PhilKing said:

Guitar Center have a mail order company here in the States, called Musicians Friend.  They have been around a long time and started with strings, before branching out into everything else. They were acquired by GC around 2000.  It would be interesting to see what proportion of GC's business is the MF contribution.

It strikes me that,  depending on how the company is structured, MF could buy GC equity given the mail order business is potentially more efficient. It's an eye watering amount of debt regardless but the prudent strategy has to involve making the best use of income generating assets as possible. 

JayGee

There seem to have been reports of them being on the brink pretty much as long as the FB has existed...

impmann

Genuinely, if anyone is shocked... 

The writing has been on the wall so long that Ivy has grown over it.