Guitar Center, Inc., the world’s largest retailer of guitars, drums, amplifiers, and lighting equipment, is quietly looking to restructure its $1.3-billion debt as the company struggles with consumers’ growing demand for online shopping.
The Westlake Village, California-based company is just the latest brick-and-mortar retailer to face financial woes as its stores look to compete with online stores and big box retailers like Wal-Mart Stores Inc (NYSE:WMT).
While the musical instrument industry has been recovering since the Great Recession, sales are up nine percent at $7.1 billion over the last five years, retail sales are still well below the 2005 height of $7.7 billion.
In addition to competition form online giants like Amazon.com, Inc. (NASDAQ:AMZN) and specialty online music stores, fewer people are actually taking up the guitar–that is, if the Billboard top 20 is an indicator of musical preferences.
That said, Guitar Center is a specialty retailer, and a guitar aficionado wouldn’t be able to find as knowledgeable a staff at a big box retailer like Wal-Mart. Nor would they be able to test drive an $18,000 Gibson Customer Super 400 Electric Holowbody at a big box retailer, either.
And Guitar Center has taken steps to differentiate itself from competitors, providing music lessons, instrument sales, and free workshops, something you won’t get from an online store or big box retailer.
That said, musicians can buy high-end guitars and other musical instruments online from Sweetwater Sound and actual guitar makers like Fender Musical Instrument Corp. Guitar Center might have more than 280 stores across the U.S., but without a strong online presence, Guitar Center may not be able to compete in the long-run.
This might explain why Ares Management L.P. (NASDAQ:ARES), a private equity firm that is a majority owner of Guitar Center, has been in conversations with investment banks and law firms about hiring advisers to help address its capital structure. Guitar Center has $615.0 million in secured debt that comes due in 2019.
Restructuring efforts at Guitar Center could ease the company’s burdens, but lenders would need to approve of any restructuring plans. And that doesn’t always happen. Debt restructuring can also hurt a retailer’s debt rating, which makes it more costly to borrow.
For now, though, Guitar Center’s debt is trading at a big discount to its face value. The company’s $325.0 million in unsecured bonds, due in 2020, are trading at approximately $0.59. The previously mentioned $615.0 million, in secured bonds, are trading at about $0.87.
Despite the company’s dwindling sales and concerns about its long-term viability, more than 100 Guitar Center employees at four stores (New York City, Chicago, Las Vegas, and Danvers) recently ratified their first union contract.
According to the Retail, Wholesale, and Department Store Union, under the new contract, workers will receive a guaranteed base wage increase over the next three years, as well as access to union-provided healthcare.
However, how long they’ll be able to enjoy the fruits of their labor is open for debate.
“U.S. retailer Guitar Center explores debt restructuring – sources,” Reuters, July 12, 2017.
“Corporate Relations,” Guitar Center, Inc., last accessed July 14, 2017.
“More Than 100 Guitar Center Employees Ratify Their First Union Contract,” vice.com, July 11, 2017.