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GC to Sell?

Shares of Guitar Center climbed 11 percent on May 29, jumping from $5.04 to $52.47 a share. The increase came after speculation that GC had recently experienced a decrease in earnings and hired an advisor to study a possible sale, according to Bloomberg News.

Goldman Sachs analyst Matthew Fassler said in a client note he still expects the company to see earnings recover in 2008, according to an Associated Press report. This would be achieved via investment spending, improved capital allocation and benefits from GC’s acquisition of Woodwind & Brasswind.

“We also believe Guitar Center is optimally positioned for a sale, given its dominant competitive position and capital allocation opportunities, as well as a savvy shareholder base that is likely increasingly weighing in with the board and management, but continue to view this as a fallback strategy,” Fassler wrote.

Private-equity buyouts have become more common in retail lately. In the past two years, private-equity groups forged deals with such national retailers as Neiman Marcus, Tommy Hilfiger and Mervyn’s.

“Guitar Center is often mentioned as a likely candidate [for a private-equity buyout] because they dominate their market, and they are debt free,” said William Armstrong, an analyst at CL King in Albany, N.Y.

Despite GC’s possibility of decreased earnings, its first quarter consolidated net sales increased 13.5 percent to $534.5 million, as compared to $470.7 million in the prior year period. Net income in the first quarter was $17.2 million, versus $15.7 million in the prior year period.

Comparable store sales for the GC stores increased 0.7 percent. Gross profit was 27.1 percent in the first quarter compared to 27.2 percent in the same period last year. The decrease primarily reflected higher occupancy costs partially offset by a higher selling margin. Selling, general and administrative expenses for the GC stores were 21 percent of net sales, compared to 21.1 percent of net sales in the first quarter of 2006.

Net income in the first quarter of 2007 included stock-based compensation expense under the company’s long-term incentive plans (LTIP) of $0.3 million after-tax.

GC currently operates 210 stores.