The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 29, 2007. All references to the third quarter and the first nine months of 2008 mean the 13-week and 39-week periods ended September 27, 2008, respectively, and all references to the third quarter and first nine months of 2007 mean the 13-week and 39-week periods ended September 29, 2007, respectively. Unless the context otherwise requires, "West Marine," "we," "us" and "our" refer to West Marine, Inc. and its subsidiaries.

Overview

West Marine is one of the largest boating supplies retailers in the world. We have three reportable segments - Stores, Port Supply (wholesale) and Direct Sales (catalog and Internet) - all of which sell aftermarket recreational boating supplies directly to customers. At the end of the third quarter of 2008, we offered our products through 361 stores in 38 states, Puerto Rico, Canada and a franchised store located in Turkey; on the Internet (www.westmarine.com and www.boatus-store.com); and through catalogs. We are also engaged, through our Port Supply division, in our stores and on the Internet (www.portsupply.com), in the wholesale distribution of boating products to commercial customers. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831)728-2700.

Restatement

As discussed in our Annual Report on Form 10-K for the year ended December 29, 2007, we restated our consolidated financial statements for the fiscal years ended December 31, 2005 and December 30, 2006, all quarters for fiscal year 2006 and the first three quarters of fiscal year 2007. Please see Note 2 to our condensed consolidated financial statements for the unaudited restated interim period financial statement line item data for the 13-week and 39-week periods ended September 29, 2007. The determination to restate was made on management's recommendation following the identification of errors related to: (i) the reserves for estimated workers' compensation claims which were understated;
(ii) several other errors that individually were not material but, in the aggregate, required correction relating to, among other things, inventory reserves, vendor allowances, capitalized indirect costs, sales and use tax accruals, sales return reserves, software development costs, software asset impairments, foreign currency translation gains/losses, deferred income taxes and share-based compensation; (iii) certain items that were incorrectly presented on a net basis in our consolidated statements of cash flows, including changes in merchandise inventories, repayments and borrowings on our line of credit, and the non-cash portion of fixed assets purchases; and (iv) our segment information disclosure, as required information regarding assets, capital expenditures and depreciation for our reportable segments was incorrectly excluded. The following discussion reflects restated results for the 13-week and 39-week periods ended September 29, 2007.

Recent Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements in Item 1 of this report.

Critical Accounting Policies and Estimates

Our unaudited financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information pursuant to Regulation S-X. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's application of accounting policies. We have identified certain policies that require the application of significant judgment by management. Our most critical accounting policies are those related to inventory valuations including allowances, reserves and capitalization of indirect costs, vendor allowances receivable, costs associated with exit activities (e.g. store closures), impairment of long-lived assets, uncertain tax positions, deferred tax assets and applicable valuation allowance, liabilities for self-insurance and share-based compensation. Goodwill is no longer included as a critical accounting policy item due to the total impairment of the balance at December 29, 2007. These critical accounting policies are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 29, 2007 (the 2007 Form 10-K). This discussion and analysis should be read in conjunction with such discussion and with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this report.

Results of Operations

The following table sets forth certain statement of operations components
expressed as a percent of net revenues:



                                             13 Weeks Ended                           39 Weeks Ended
                                    September 27,       September 29,       September 27,        September 29,
                                        2008                2007                2008                 2007
Net revenues                                100.0 %             100.0 %             100.0 %              100.0 %
Cost of goods sold                           72.4                69.3                71.0                 69.5

Gross profit                                 27.6                30.7                29.0                 30.5
Selling, general and
administrative expense                       24.4                24.8                26.9                 25.3
Store closures and other
restructuring costs                           0.9                 0.0                 0.3                  0.0
Impairment of long-lived assets               0.1                 0.0                 0.5                  0.1

Income from operations                        2.2                 5.9                 1.3                  5.1
Interest expense, net                         0.2                 0.3                 0.3                  0.5

Income before income taxes                    2.0                 5.6                 1.0                  4.6
Income taxes                                  0.1                 2.3                 2.9                  1.8

Net income (loss)                             1.9 %               3.3 %              (1.9 )%               2.8 %

Three Months Ended September 27, 2008 Compared to Three Months Ended September 29, 2007

Net revenues for the third quarter of 2008 were $180.2 million, a decrease of $8.1 million, or 4.3%, compared to net revenues of $188.4 million in the third quarter of 2007, primarily due to a $7.5 million decrease in comparable store sales. Net income for the third quarter of 2008 was $3.4 million compared to net income of $6.2 million in the third quarter of 2007.

Net revenues attributable to our Stores division decreased $7.5 million to $159.8 million in the third quarter of 2008, a 4.5% decrease compared to the third quarter of 2007, primarily due to a $7.5 million decrease in comparable store sales. Comparable store sales decreased 4.7% in the third quarter of 2008, compared to a comparable store sales increase of 0.3% in the third quarter last year. We believe decreased comparable store sales were driven primarily by the weak economy and higher fuel prices. We continued to experience lower year-over-year sales of core boating products and discretionary items, which continues the trend of reduced boat usage and cautious customer spending on large-ticket items. We had 361 stores open at the end of the third quarter of 2008 compared to 372 stores at the end of the third quarter of 2007. Wholesale (Port Supply) net sales through our distribution centers decreased $0.2 million, or 1.6%, to $10.0 million in the third quarter of 2008 compared to 2007, primarily due to lower sales to boat dealers. Net sales at our Direct Sales division decreased $0.4 million, or 4.0%, to $10.5 million in the third quarter of 2008 compared to 2007, primarily due to lower sales performance on catalog mailings and less promotional offers this year.

Gross profit decreased by $8.2 million, or 14.1%, to $49.7 million in the third quarter of 2008, compared to $57.9 million for the same period last year. Gross profit decreased as a percentage of net revenues to 27.6% in the third quarter of 2008, a 310 basis point decrease compared to 30.7% for the same period last year. Gross profit as a percentage of revenues decreased primarily due to lower raw product margin, down 108 basis points, driven by promotional activity and store closing clearance sales. Gross profit was also lower as a percentage of sales by 80 basis points due to occupancy expense. Occupancy is our largest fixed expense and its impact on gross margin is driven by sales results and the fixed nature of the expense. Buying and distribution costs contributed to a decrease of 72 basis points and recognized vendor allowances also de-leveraged, down 54 basis points, driven by the reduced inventories and reduced purchases in line with lower sales.

Selling, general and administrative expenses decreased $3.0 million, or 6.4%, to $43.9 million in the third quarter of 2008, compared to $46.8 million for the same period last year, and decreased as a percentage of sales to 24.4% in the third quarter of 2008, compared to 24.8% for the same period last year. The decrease in selling, general and administrative expenses was primarily due to $2.8 million in lower payroll, marketing and other variable expense, reflecting lower sales, reduced store count and lower professional services expenses for information technology projects. We also received a $0.4 million benefit related to the timing of professional services.

Impairment of long-lived assets was $0.2 million in the third quarter of 2008 and related to four stores. Last year, impairment for information technology products was less than $0.1 million.

As previously disclosed, we anticipated closing a small number of stores this year, which we originally estimated to be in the range of 10 to 15 locations. These closures were primarily due to relocation, or consolidation of smaller stores into fewer, larger stores to better serve our markets. During the second quarter, management conducted a more detailed analysis of store operations, particularly in light of deteriorating boating market conditions, and concluded that additional underperforming stores should be closed, bringing the total to between 25 and 30 stores. The stores identified for closure are spread across several major boating markets. We used specific criteria to identify these stores, including cash flow projections by store as compared to the net book value of long-lived assets by store. During the third quarter, management also decided to close our distribution center located in Hagerstown, Maryland, and our call center located in Largo, Florida. We recognized restructuring expenses of $1.7 million consisting of $0.9 million for store closures, $0.1 million for Port Supply, $0.5 million for the distribution center, and severance costs of $0.2 million for reductions in force at the Watsonville Support Center. We expect to recognize approximately $14.0 million in total restructuring charges during 2008.

Interest expense decreased $0.2 million, or 36.5%, to $0.3 million in the third quarter of 2008, compared to $0.5 million for the same period last year. The decrease in interest expense was due to both lower interest rates and lower average outstanding bank borrowings in the third quarter of 2008, compared to the same period last year.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective tax rate for the third quarter of 2008 was 7.2%, compared with 41.5% for the same period last year. The change in our effective tax rate was due to management's decision to establish a full valuation allowance during the second quarter on the net deferred tax assets. For more information, see Note 3 to our consolidated financial statements.

Nine Months Ended September 27, 2008 Compared to Nine Months Ended September 29, 2007

Net revenues for the first nine months of 2008 were $520.2 million, a decrease of $41.1 million, or 7.3%, compared to net revenues of $561.3 million in the first nine months of 2007, primarily due to a decrease of $33.3 million in comparable store sales and $6.9 million in sales attributable to stores that were closed in 2007. Net loss for the first nine months of 2008 was $9.8 million compared to net income of $15.6 million in the first nine months of 2007.

Net sales attributable to our Stores division decreased $36.1 million to $456.5 million in the first nine months of 2008, a 7.3% decrease compared to the first nine months of 2007, primarily due to a $33.3 million decrease in comparable store sales. Comparable store sales decreased 7.1% in the first nine months of 2008, compared to a comparable store sales decrease of 1.7% in the first nine months last year. Comparable store sales for the first nine months were driven primarily by the weak economy and higher fuel prices. For the first nine months of the year, purchases of core products and discretionary items declined, continuing the trend of reduced boat usage and cautious customer spending on large-ticket items. Wholesale (Port Supply) net sales through our distribution centers decreased $2.1 million, or 6.1%, to $31.8 million in the first nine months of 2008 compared with 2007, primarily due to increased sales to Port Supply customers through our store locations, which are included in Stores sales. Net sales through the Port Supply division were also impacted by lower sales to boat dealers. Net sales of our Direct Sales division decreased $2.9 million, or 8.3%, to $31.9 million in the first nine months of 2008 compared to 2007, primarily due to lower sales performance on catalog mailings, less promotional offers during the first nine months of this year, and fewer catalog mailings in 2007 that had an impact on first quarter 2008 sales.

Gross profit decreased by $20.3 million, or 11.9%, to $150.6 million in the first nine months of 2008, compared to $170.9 million for the same period last year. Gross profit decreased as a percentage of net revenues to 29.0% in the first nine months of 2008, a 150 basis point decrease compared to 30.5% for the same period last year. Gross profit as a percentage of revenues decreased primarily due to occupancy expense and lower vendor allowances recognized. Occupancy is our largest fixed expense and its impact on gross margin is largely driven by sales results, and the fixed nature of the expense de-leveraged gross margin by 96 basis points due to the year-over-year decline in sales. Reduced vendor allowances contributed to a decrease of 44 basis points and was due to reduced purchases in line with lower sales.

Selling, general and administrative expenses decreased $2.1 million, or 1.5%, to $139.5 million in the first nine months of 2008, compared to $141.7 million for the same period last year, and increased as a percentage of revenues to 26.9% in the first nine months of 2008, compared to 25.3% for the same period last year. The decrease in selling, general, and administrative expenses is primarily due to a decrease of $7.2 million in payroll, marketing and variable expenses. These reductions, which were driven by lower sales and the reduction in store count, were partially offset by $2.1 million associated with cooperating with the ongoing SEC investigation and $0.5 million expense related to West Marine associate training held in February 2008.

Impairment of long-lived assets was $2.4 million in the first nine months of 2008, compared to $0.4 million impairment for the same period last year. In addition to the third quarter 2008 store impairments discussed above, we impaired 36 stores during the first six months of this year. The impairment charge noted for last year was recorded for information technology assets that were superseded by the launch of new e-commerce assets. During the third quarter of this year, management also decided to close our distribution center located in Hagerstown, Maryland, and our call center located in Largo, Florida. We recognized restructuring expenses of $1.7 million consisting of $0.9 million for store closures, $0.1 million for Port Supply, $0.5 million for the distribution center, and severance costs of $0.2 million for reductions in force at the Watsonville Support Center.

Interest expense decreased $1.3 million, or 39.7%, to $1.9 million in the first nine months of 2008, compared to $3.2 million for the same period last year. The decrease in interest expense was due to both lower interest rates and lower average outstanding bank borrowings in the first nine months of 2008, compared to the same period last year.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax expense rate for the nine months of 2008 was 293.5%, compared with 39.0% for the same period last year. The change in our effective tax rate was largely due to management's decision to place a full valuation allowance on the net deferred tax assets.

Liquidity and Capital Resources

Our cash needs primarily are for working capital to support our inventory requirements and capital expenditures for new and remodeled stores. We believe our existing credit facility and cash flow from operations will be sufficient to satisfy our liquidity needs over the next 12 months.

Operating Activities

During the first nine months of 2008, net cash provided by operating activities was $34.0 million, compared to $49.8 million for the same period last year. The decline is driven by lower operating results and we expect this trend to continue through the fourth quarter. The net cash provided by operating activities this year includes an $8.2 million increase in accounts payable due to timing of payments and a $3.3 million decrease in other current assets due to timing of tax payments. This was partially offset by a decrease in accrued expenses and other of $3.6 million for the change in gift card liabilities consistent with seasonal activity and an increase in accounts receivable of $1.6 million also due to seasonal sales activity.

Investing Activity

We spent $11.5 million on capital expenditures during the first nine months of 2008, a $3.3 million decrease from the prior year, primarily due to lower spending on information technology projects partially offset by investment in building and production improvements at our distribution centers. We expect to spend between $15.0 million and $18.0 million on capital expenditures during 2008, mainly for store development activities, including new stores, a flagship store, remodels and expansions, and information technology. We have opened three stores and expect to open one additional store during fiscal year 2008. We intend to fund our investments through cash generated from operations and bank borrowings.

Financing Arrangements

Net cash used in financing activities was $22.6 million for the first nine months of 2008, representing net repayments under our credit facility. We received a de minimis amount from the exercise of vested stock options during the first nine months of 2008, compared to $2.9 million received for the same period last year.

We have a $225.0 million credit agreement with a group of lenders that expires in December 2010. Borrowing availability is based on a percentage of our inventory and accounts receivable. At our option, subject to certain conditions and restrictions, the agreement provides up to $25.0 million in additional financing during the term. The credit facility is guaranteed by West Marine and its subsidiaries and is secured by a security interest in all of the accounts receivable and inventory of West Marine and its subsidiaries, certain other assets related thereto, and all proceeds thereof. The credit facility includes a $50.0 million sub-facility available for the issuance of commercial and stand-by letters of credit and a sub-limit of up to $20.0 million for same-day advances.

At our election, borrowings under the loan facility will bear interest at one of the following rates: the prime rate announced by Wells Fargo Bank, National Association at its principal office in San Francisco, California; or the interest rate per annum at which deposits in U.S. dollars are offered by reference lenders to prime banks in designated markets located outside the U.S. In each case, the applicable interest rate is increased by a margin imposed by the loan agreement.

The applicable margin for any date will depend upon the amount of available credit under the revolving loan facility. The loan agreement also imposes a commitment fee on the unused portion of the revolving loan facility. For the third quarter of 2008, the weighted-average interest rate on all of our outstanding borrowings was 3.8%.

The loan agreement contains customary covenants, including but not limited to, restrictions on our ability to incur liens, make acquisitions and investments, pay dividends and sell or transfer assets. Additionally, minimum revolving credit availability equal to the lesser of $15.0 million or 7.5% of the borrowing base must be maintained. As of September 27, 2008, we were in compliance with our bank covenants.

At September 27, 2008, borrowings under this credit facility were $29.3 million, bearing interest at rates ranging from 3.5% to 5.0%, and $98.8 million was available to be borrowed. At September 29, 2007, borrowings under this credit facility were $30.3 million, bearing interest at rates ranging from 6.4% to 8.3%. At September 27, 2008, we had $4.7 million of outstanding stand-by letters of credit and $1.0 million of outstanding commercial letters of credit, compared to $6.0 million outstanding stand-by letters of credit and $0.3 million of outstanding commercial letters of credit at the end of the third quarter last year.

Off-Balance Sheet Arrangements

Substantially all of the real property used in our business is leased under operating lease agreements, as described in Item 2 - Properties and Note 9 to the consolidated financial statements in the 2007 Form 10-K.

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

Seasonality

Historically, our consolidated revenues and net income are higher in the second and third quarters and decrease in the first and fourth quarters of the fiscal year. In 2007, 64% of our net revenues and all of our net income occurred during the second and third quarters, principally during the period from April through August, which represents the peak months for boat buying, usage and maintenance in most of our retail markets.

Business Trends

Our research indicates that the U.S. boating industry currently is experiencing a down cycle, as evidenced by lower sales trends in each of our business segments compared to last year, lower new and used boat sales, and declining boat registrations in key states. We have been and are responding to this challenging industry climate by:

• controlling our operating expenses and emphasizing specialized and localized product assortments in our stores;

• opening a small number of stores, closing 25 to 30 stores and remodeling, expanding or significantly re-merchandising up to 25 stores;

• reducing overhead by re-engineering and streamlining business processes;

• closing our Maryland distribution center by year-end;

• implementing service model changes in the Port Supply business which emphasizes growing sales profitably;

• moving to a shared services model;

• closing our call center in Largo, Florida by year-end and moving to a virtual call center structure, enabling our associates to operate from their homes for maximum flexibility and optimization of customer service levels;

• continuing to invest in our e-commerce business in order to ensure customers are provided with better than expected customer service; and

• further exploring franchising and other growth vehicles to drive domestic and international sales and market presence.

We believe worsening economic conditions and turmoil in the financial markets may have further adversely impacted discretionary consumer spending in an already challenging climate for the boating industry. It is unclear the extent to which these circumstances will persist and what overall impact they will have on future discretionary consumer spending.

During the third quarter of 2008, we incurred restructuring charges of $0.9 million for store closures, $0.1 million for Port Supply restructuring, and $0.5 million related to closing our Maryland distribution center. We also incurred severance costs of $0.2 million for reductions in force at the Watsonville Support Center. We expect costs for store closures in the fourth quarter of 2008 to be between $4.1 million and $6.8 million, most of which will be cash charges for lease terminations. We also expect to incur costs associated with the closure of our Largo, Florida call center between $1.0 million and $2.0 million. Finally, we expect to record additional charges of approximately $2.4 million to $3.5 million related to closing of our Maryland distribution center.

Internet Address and Access to SEC Filings

Our Internet address is www.westmarine.com. Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as amended, in the "Investor Relations" portion of our website as well as through the Securities and Exchange Commission's website, www.sec.gov.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements within the "safe harbor" provisions of the Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than those that are purely historical are forward-looking statements. Words such as "expect," "anticipate," "believe," "estimate," "plan," "project," and similar expressions also identify forward-looking statements. These forward-looking statements include, among other things, statements that relate to West Marine's future plans, expectations, objectives, performance and similar projections, as well as facts and assumptions underlying these statements or projections. Actual results may . . .