A Sour Note for Guitar Center as It Loses Gibson as a Supplier

Also, why did Solectron bury its Brazilian losses in the balance sheet and its 10-Q, when rival SCI took it as a hit to earnings?
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Guitar Center


a few weeks ago, the key issue was whether its superstore concept was viable for a public company. The


thing anybody, including short-sellers, thought was that it would lose its relationship with one of its most important suppliers.

But that's just what happened.

Gibson Musical Instruments

, which produces one of the top-selling guitars, severed its relationship with Guitar Center last month. Gibson, which is neck-and-neck with




as the leading guitar maker, announced the change in a press release that wasn't picked up by the investment community because Gibson is private. So are



Sam Ash

, two music chains with which Gibson said it has established "a partnership."

In the release, Gibson CEO Henry Juszkiewicz said that because of the expanded relationships with MARS and Sam Ash, "We have made the difficult decision to terminate our longstanding relationship with the Guitar Center chain." He added that "in the past couple of years we have found our business philosophies to become increasingly divergent. While they are a major player in the music retail world we feel this decision is necessary to maintain the integrity and our vision for Gibson in the future."

It's unclear what philosophical differences he was talking about, but speculation is that Guitar Center didn't want to carry as many Gibson items as Gibson desired. MARS and Sam Ash, by comparison, have agreed to carry the full Gibson line.

Gibson is believed to have accounted for around 5% of Guitar Center's guitar sales, which last year accounted for roughly 20% of the company's total sales of $392 million.

Guitar Center officials couldn't be reached. Analysts expect the company to address the issue during a conference call this Tuesday, after releasing its earnings.

Burying the evidence?:

On March 24

SCI Systems

(SCI) - Get Report

, known best as a PC assembler, reported that revenues and earnings per share for last quarter would be below Wall Street expectations. Specifically, it said it would be 8 cents per share light on earnings because of the devaluation of the Brazilian real.

Meanwhile, a week earlier, SCI rival



reported earnings that were just in line with expectations. A lower-than-expected tax rate, and lower-than-expected revenues, put a cloud over the quality of the earnings and the company's actual performance.

What about Brazil, where Solectron does a good chunk of its business? The company didn't mention it in its earnings release or, according to one analyst who listened, a conference call.

However (and this is what you're waiting for, folks): Buried on page 24 of a 33-page 10-Q (not including amendments), under "International Operations," the company says, oh, by the way, it recorded a $77.7 million cumulative foreign exchange translation loss on its balance sheet, "primarily the result of the recent devaluation of the Brazilian real." The ole "put it on the balance sheet instead of the income statement" trick.

Perfectly legitimate. Perfectly legal. Perfectly GAAP.

And perfectly aggressive.

Assuming Brazil accounts for around $65 million, as some analysts have suggested, inquiring minds might want to know how that would translate into earnings per share? One money manager, who did the calculation, figures it would've shaved reported earnings by around 6 cents per share. In other words, Solectron would've missed estimates.

Pretty nifty, huh?

Solectron officials couldn't be reached.


I'm outta here for a week of sanity. (I know what you Lernahoulians are thinking ...


! (Flattery will get you everywhere!) The column, if I decide to return, will resume a week from tomorrow.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides commentary for CNBC.