Guitar Center received the big warning from Moody's, letting the media know that the party is over for the big retailer. Change is coming. It is only a matter of time and the form of change. It seems odd to focus on one suffering firm, but this is emblematic of the problem with our FIRE economy and where things are moving in the future.
Guitar Center (GC) was in a really strong position a decade ago. Don't take my word for it, read this Fortune blurb from late 2006. Revenue was soaring, they were expanding online and they were going to expand in meatspace up to 420 stores. The stock was $43/share then, so when Bain organized an LBO at $63/share it was rich, but hey the debt was available and investor pool willing.
The excitement ended. Nothing good happened. Expansion? It did not happen. They went from 170 stores to 270, and have been cutting employee count for years now. They've let roughly half their employees go in the last three years out of what was 16,000 full time employees. They are down to 6000. Their employee turnover is high, they switched to having a bunch of ees slide under the 30 hours per week line and it's a rough atmosphere even if you like music. Now lenders are getting antsy.
The company has half of its debt coming up in the next two years and needs to refinance. Its junk status hurts the terms they can get, but this should be doable in the yield chasing atmosphere of today. The timing of the LBO by Bain is the problem. They loaded up on debt to overpay for a retailer as the e-shopping revolution was ongoing, which no one in the entire decision chain thought would be an issue. They thought if they went online they could fix it.
Problem is these retailers do not get that no one cares where they get it from just that they get what they ordered and that they got the best deal. Manufacturers are even figuring this out and looking for direct sales and alternative marketing ideas. GC's buyers thought the name would mean something for purchasing music equipment, especially expensive equipment, but they failed to understand online shopping. They also failed to anticipate the secondary market forming online that would cut into their sales to casual consumers.
This firm will refinance and then cut back their brick and mortar footprint or worse, lenders will see more value in letting them fail and scavenging the wreckage. Does the brand have cache? Does it matter? At this point with low interest rates, GC will most likely get that refinancing with a promise of a new management team (would be 4th CEO in as many years) that will cut back even more employees to keep those debt coupon payments flowing to the creditors.
This is just delaying the inevitable though. Maybe the eventual retail fight is Amazon vs. Walmart with no one left. Wholesalers and retailers alike will get squeezed to nothing, shedding even more jobs in our economy, so where does it end? Do we get the fully automated luxury communism with a UBI? They'll make it universal basic consumption though so you have to spend the money they hand you to keep their game going.
Maybe the future is a bit more like The Diamond Age and you'll see the 3D printing, automated products of the future but the hand crafted, artisanal products will be luxury items. Services would follow a similar path, but maybe indentured servitude will make a comeback for the promise of a safe life in a big home. Whatever the future, it is hard to see big, but niche retailers like Guitar Center existing in it.