Last week, we published a series of internal emails detailing layoffs at Guitar Center’s corporate offices, and now we are starting to hear that things are pretty crazy at GC HQ – more jobs are getting cut, people are under intense pressure to perform at all levels, and GC’s new CEO is attempting to maintain calm while the company’s stock continues to tank.
Sources initially told us that around 40 people lost their jobs – but in the second wave of firings, that number is now closer to 180. Following those reports, Eric Garland, a financial analyst and managing director of Competitive Futures who has been following the Guitar Center story for quite a while, published his forecast for the company, “The End of Guitar Center,” in which he wrote about how in addition to these firings, if you take a look at the company’s books and outstanding debt it looks as if they’re in a precarious position. That forecast was picked up by ZeroHedge and Naked Capitalism — the MetalSucks and Metal Injection of independent financial analysis — and began to circulate around Guitar Center.
The financial mumbo-jumbo that’s been going on with Guitar Center over the last few years can sometimes sound basically like what it actually sounds like inside a Guitar Center, but the story at this point is pretty simple. There are really only two things you need to know: last year, the company was basically acquired by its majority bondholder, Ares Capital Management, and as of three months ago, the Ares-helmed Guitar Center put a new man in the CEO chair, Darrell Webb, whose resume includes stints at JoAnn Fabrics and The Sports Authority (but who has little experience in the music business).
So, Guitar Center is barely a year under its new ownership, and less than two months under new corporate management, and reports from sources inside the company say that chaos is starting to break loose. The firings, which took place in two phases, included some people at the senior level, vice presidents and other assorted veterans. One former employee who was part of this most recent round of layoffs and who spoke to Gear Gods on the condition of anonymity tells us that Guitar Center is now a “company run by non-music people,” and that after the firings, our subsequent coverage, and Garland’s grim predictions, it’s a madhouse at their corporate HQ in Westlake.
According to sources, “no one’s job is safe,” not even some of the most senior people at the company. The first major firing of these was Gene Joly, the former president of Musicians Friend and well-respected music industry professional, who was let go two days before Christmas. Others include heads of several divisions in the company, including the vice president of GC Pro, Guitar Center’s Gear/Advice/servicing branch. The thing is, guys like Joly are among the top individual account earners for Guitar Center, so these firings would appear to be less about making money than plugging every single cash-hole in Guitar Center’s ship. Meanwhile, the company is reeling from Fender’s announcement that they are about to start selling their products directly to consumers, and from souring relationships with some of their top vendors, like Behringer. So they can’t make money, they’re losing some top-tier products, and they can’t afford to pay the people who make the company money. Oof. Which is a far cry from what used to be, according to one former employee, a place where you’d come to work at 7AM and Van Halen would be blasting. In other words, this is a crisis-mode company that is being restructured, top to bottom.
Which, as Eric Garland pointed out in his analysis, makes perfect sense. Ares Management is a massive financial services firm whose primary concern in this instance is protecting themselves against losses from Guitar Center, their unsustainable music retail investment. And in Webb, a guy who has no background whatsoever in the music industry — and who, sources say, couldn’t tell a Marshall from a corporal — they’ve chosen a proven financial services veteran who can turn Guitar Center into a manageable, profitable little music shop. So the world’s biggest music retailer, on top of all the problems its had over the years, is cleaning house on the few remaining people who actually care about music, in order to keep this runaway business from going off the rails.
At least, Ares hopes, it can keep Guitar Center from tanking. Garland sees the scenario differently:
There has not been a single public comment from an Ares employee since 2014 about the future vision for Guitar Center and I suspect that one does not exist. Go look through Ares’ quarterly reports and press releases and search for the word “guitar.” Perhaps that will provide a perspective on the relative importance of this transaction to a company with a much larger financial play in the works.
This is pure speculation, but given the size of their investment I imagine they see Guitar Center as a deal they made back in the mid-2000s before the crisis, one that Bain screwed up. They probably took the equity as the best way to perhaps get something instead of pennies on the dollar. These days, they’re more busy reopening factories in Europe along with national partners. They have better things to worry about than this sad scene, but this is a conclusion that will be very uncomfortable for members of the musical instrument industry who will not want to feel quite so unimportant.
Further, after we broke the news that the company had laid off senior staff, and then following Garland’s dire predictions for the company’s future, Darrell Webb forwarded another email to all of Guitar Center’s corporate employees in which he basically said that the press is blowing the company’s troubles out of proportion, that the company will “continue to seek efficiencies” and that they are on track to meet their quarterly goals in 2015. But what do the numbers say?
Guitar Center’s secured bonds have been tanking since last July, and are taking a pretty consistent hit each day, according to data from the Financial Industry Regulation Authority. Just yesterday investors pulled $11 million out of the company, the kind of hit that is highly abnormal in this sort of bond market. It’s too early to call this a “run” on GC’s bonds, but it sure looks like a heck of a lot of people are starting to jump ship. And of course, once word starts to go around that the company’s not looking so hot, and that it’s a mess at the highest rungs of power, and then one investor pulls out… well, then another one pulls out, and then another, and another, and another, and another.
According to an earnings call from December 2014, Guitar Center was down to $34 million in total holdings, with just $10 million of that number in cash. That same month, Forbes reported the company is on a Distressed Debt and restructuring watchlist, noting that the company has a bond payment, which some analysts estimate at nearly triple what Guitar Center has in cash, due in April 2015. Garland’s got a take on what happens when GC reports back to its bondholders in three weeks that well, shit, they might need a couple million I-O-U’s:
The fact is, the die is cast. In a couple of weeks, Guitar Center will need to report its Christmas performance to its bondholders. If things do not look good, its bonds will be ripped apart like Radio Shack’s. Moreover, if I had to guess, the $10 million in Guitar Center’s coffers will not be enough to make the payment to their bondholders due in April 2015. In advance of that, they will need to seek protection under Chapter 11 of the bankruptcy code. Maybe they have another ultra-complex trick to bring out of the private equity playbook, but this whole thing is a waste of time.
Their CEO, who is in a mad rush to cut costs and trim unnecessary staff members to keep his company from being run into the ground, is trying to maintain some level of calm among the remaining members of his ranks. But the sense that’s leaking through the cracks of emails and testimonies of current and former employees and industry analysts is that everyone knows it’s the end. Ares hired Webb because of his experience with reviving failing companies. The question at this point, given how desperate some of Webb’s teams’ restructuring efforts are, is whether their efforts are too little, too late.
So we’ll see what happens come bond-payments time in April. The madhouse that used to be Radio Shack, by the way, is as of last week a carcass being chipped away at by Amazon and Sprint.