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 Quarterly Report on Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 3, 2009 (the "2008 Form 10-K"). All references to the first quarter of 2009 mean the 13-week period ended April 4, 2009, respectively, and all references to the first quarter of 2008 mean the 13-week period ended March 29, 2008. 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 supply retailers in the world. We have three reportable segments: - Stores, Port Supply (wholesale) and Direct Sales (Internet and call center) - all of which sell aftermarket recreational boating supplies directly to customers. At the end of the first quarter of 2009, we offered our products through 341 company-owned stores in 38 states, Puerto Rico and Canada and one franchised store located in Turkey; on the Internet; and through our call center channel. We also are engaged, through our Port Supply division, in our stores and on the Internet, 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.

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 and capitalization of indirect costs, costs associated with exit activities (e.g. store closures), impairment of long-lived assets and deferred tax assets and applicable valuation allowance. These critical accounting policies are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2008 Form 10-K. The following discussion and analysis should be read in conjunction with such description of critical accounting policies 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
                                                     April 4,      March 29,
                                                       2009          2008
      Net revenues                                      100.0 %        100.0 %
      Cost of goods sold                                 78.3           80.1

      Gross profit                                       21.7           19.9
      Selling, general and administrative expense        36.5           41.4
      Store closures and other restructuring costs        0.1            0.0
      Impairment of long-lived assets                     0.0            0.2

      Loss from operations                              (14.9 )        (21.7 )
      Interest expense                                    0.3            0.8

      Loss before income taxes                          (15.2 )        (22.5 )
      Provision (benefit) for income taxes                0.4           (6.9 )

      Net loss                                          (15.6 )%       (15.6 )%

Thirteen Weeks Ended April 4, 2009 Compared to Thirteen Weeks Ended March 29, 2008

Net revenues for the first quarter of 2009 were $101.0 million, a decrease of $12.3 million, or 10.9%, compared to net revenues of $113.3 million in the first quarter of 2008, primarily due to a $6.1 million decrease in comparable store sales and a $3.7 million decrease attributable to stores closed in 2008 and the first quarter of 2009.

Net revenues attributable to our Stores division decreased $8.8 million to $88.3 million in the first quarter of 2009, a 9.1% decrease compared to the first quarter of 2008, primarily due to a $6.1 million decrease in comparable store sales and a $3.7 million decrease attributable to stores closed in 2008 and the first quarter of 2009. Comparable store sales decreased 6.8% in the first quarter of 2009, compared to a comparable store sales decrease of 9.4% in the first quarter last year. The decline in comparable store sales reflects lower sales of higher-priced discretionary items and lower in-store traffic levels throughout the quarter. Sales of usage-based products, such as fishing and watersports equipment, declined at a rate greater than the overall comparable store decrease. We believe this is indicative of reduced boating activity and we expect consumers to continue to reduce spending on both discretionary and needs-based boating supplies at a rate similar to that of the first quarter in the second quarter. The overall comparable store trends were consistent across the country and we do not expect them to improve until there is a general improvement in the economy. We had 341 stores open at the end of the first quarter of 2009 compared to 370 stores at the end of the first quarter of 2008. Wholesale (Port Supply) net sales through our distribution centers decreased $2.3 million, or 24.9%, to $6.8 million in the first quarter of 2009 compared to 2008, primarily due to lower sales to boat dealers and boat builders. Net sales at our Direct Sales division decreased $1.2 million, or 17.6%, to $5.8 million in the first quarter of 2009 compared to 2008, primarily due to lower call center volume and lower sales of big ticket discretionary items.

Gross profit decreased by $0.6 million, or 2.6%, to $21.9 million in the first quarter of 2009, compared to $22.5 million for the same period last year. Gross profit increased as a percentage of net revenues by 180 basis points to 21.7% in the first quarter of 2009, compared to 19.9% for the same period last year. Gross profit as a percentage of revenues increased primarily due to a 149 basis point increase in product margin driven by less promotional and clearance activity during the quarter, as well as a shift in balance of sales to higher margin categories. Additionally, inventory shrinkage improved by 70 basis points and buying and distribution improved by 63 basis points. These improvements were partially offset by occupancy which deleveraged 125 basis points due to its fixed nature and given the decline in revenues.

Selling, general and administrative expenses decreased $9.9 million, or 21.2%, to $36.9 million in the first quarter of 2009, compared to $46.8 million for the same period last year, and decreased as a percentage of revenues to 36.5% in the first quarter of 2009, compared to 41.4% for the same period last year. The decrease in selling, general and administrative expenses was primarily due to $7.4 million in lower payroll, marketing and other variable expenses, reflecting lower revenues, reduced store count and lower professional services expenses, as well as a $1.6 million reduction in costs related to the SEC investigation.

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 rate for the first quarter of 2009 was a provision of 2.6% for state taxes compared with an effective tax rate benefit of 30.6% for the same period last year. The change in our effective tax rate was largely due to management's decision to establish a full valuation allowance on our net deferred tax assets in the second quarter of 2008. For more information, see Note 2 to our condensed consolidated financial statements included in this report.

Net loss for the first quarter of 2009 was $15.8 million compared to net loss of $17.7 million in the first quarter of 2008.

Liquidity and Capital Resources

We ended the first quarter of 2009 with $12.3 million of cash, a slight increase from $12.0 million at the end of the first quarter of 2008. Working capital, the excess of current assets over current liabilities, decreased to $197.7 million at the end of the first quarter, compared with $228.3 million for the same period last year. The decrease in working capital was primarily driven by lower inventory year-over-year of $29.2 million.

Our Seattle, Washington store is expected to be relocated at the end of August 2009 due to an eminent domain petition for a construction project filed by the City of Seattle in the Superior Court of the State of Washington for King County on or about August 14, 2008. We entered into a settlement agreement on April 21, 2009 with the City of Seattle and the owner of the property pursuant to which the City will pay the owner an award of "just compensation" as a result of the taking of the property, and West Marine and the owner will engage in binding arbitration to determine our allocable share of such just compensation. As a result, our liquidity may increase in the period in which our share of the just compensation award is paid, depending upon the amount finally awarded. This increase may be offset partially by additional costs associated with our move to, and our capital investment in, a new location.

Operating Activities

During the first quarter of 2009, net cash used in operating activities was $20.8 million, compared to $26.1 million for the same period last year. Net cash used in operating activities improved year-over-year by $5.3 million and was primarily driven by lower inventory purchases which resulted in lower accounts payable. The decrease in accounts payable was partially offset by increased accrued expenses for accruals related to the 2008 store closures and restructuring charges. Inventory changes were consistent year-over-year with our seasonal inventory increases from year-end into the first quarter as we prepare for the boating season.

Investing Activities

We spent $3.3 million on capital expenditures during the first quarter of 2009, a $1.3 million decrease from the prior year, primarily due to lower spending on production improvements at our distribution centers partially offset by investment in our two new prototype flagship stores that launched during the first quarter of 2009. We have opened three stores (including the two flagship stores) and remodeled one store during the first quarter of 2009.

Financing Arrangements

Net cash provided by financing activities was $28.8 million for the first three months of 2009, consisting of net borrowings under our credit facility.

We have a credit facility for up to $225.0 million that expires in December 2010. Borrowing availability is based on a percentage of our inventory (excluding capitalized indirect costs) and certain accounts receivable. At our option, subject to certain conditions and restrictions, our loan agreement provides up to $25.0 million in additional financing during the term. The credit facility is guaranteed by our subsidiaries and is secured by a security interest in all of our accounts receivable and inventory and that of our 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. The credit facility also includes a sub-limit of up to $20.0 million for same day advances.

At our election, borrowings under the credit facility will bear interest based upon one of the following rates: (1) the prime rate announced by Wells Fargo Bank, National Association at its principal office in San Francisco, California or (2) 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 United States. 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 facility. The loan agreement also imposes a commitment fee on the unused portion of the revolving loan facility. For the first quarter of 2009 and 2008, the weighted average interest rate on all of our outstanding borrowings was 1.8% and 4.8%, respectively.

Although our loan agreement contains customary covenants, including but not limited to, restrictions on our ability and that of our subsidiaries to incur debt, grant liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our loan agreement at any given time is determined by the estimated liquidation value of these assets as determined by the lenders' appraisers. Additional loan covenants include a requirement that we maintain minimum revolving credit availability equal to the lesser of $15.0 million or 7.5% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date. A default under our loan agreement also could significantly and adversely affect our ability to obtain additional or alternative financing. For example, the lenders' obligation to extend credit is dependent upon our compliance with these covenants. As of April 4, 2009, we were in compliance with our bank covenants.

At April 4, 2009, borrowings under this credit facility were $75.8 million, bearing interest at rates ranging from 1.8% to 3.3%, and $86.6 million was available for future borrowings. At March 29, 2008, borrowings under this credit facility were $89.0 million, bearing interest at rates ranging from 3.5% to 5.0%, and $98.2 million was available to be borrowed. At April 4, 2009 and March 29, 2008, we had $5.5 million and $5.8 million, respectively, of outstanding commercial and stand-by letters of credit. The credit facility does not require a daily sweep lockbox arrangement except in specific circumstances, such as the occurrence of an event of default.

Our aggregate borrowing base cannot exceed $225.0 million and was $181.5 million and $208.0 million as of April 4, 2009 and March 29, 2008, respectively. Our borrowing base at April 4, 2009 and March 29, 2008 consisted of the following (in millions):

                                                                 April 4,                March 29,
                                                                   2009                     2008
Accounts receivable availability                               $         6.9         $              8.9
Inventory availability                                                 179.0                      204.1
Less: reserves                                                          (4.4 )                     (5.0 )

Total borrowing base                                           $       181.5         $            208.0

Our aggregate borrowing base was reduced by the following obligations (in millions):

Ending loan balance                                            $        75.8         $             89.0
Outstanding letters of credit                                            5.5                        5.8

Total obligations                                              $        81.3         $             94.8

Accordingly, our availability as of April 4, 2009 and March 29, 2008, respectively, was (in millions):

Total borrowing base                                           $       181.5         $            208.0
Less: obligations                                                      (81.3 )                    (94.8 )
Less: minimum availability                                             (13.6 )                    (15.0 )

Total availability                                             $        86.6         $             98.2

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 7 to the consolidated financial statements in the 2008 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 business has been highly seasonal. In 2008, approximately 64% of our net sales 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 markets.

Business Trends

Our research indicates that the U.S. boating industry continues to experience 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. There are a number of steps we are taking to respond to this challenging industry climate and lower sales expectations to ensure orderly management of the business and preserve our financial strength to survive the current downturn and maximize our opportunity when the marketplace recovers. We remain focused on reducing expenses and maximizing cash flow by:

• controlling our operating expenses through variable expense management, as well as reengineering and streamlining business processes;

• continuing to improve the quality of our inventory by reducing overstocked or discontinued goods;

• establishing a conservative budget for 2009, which focuses on reduced capital spending, expense control and cash management; and

• further exploring methods and strategies to drive domestic and international sales and market presence.

We believe worsening economic conditions and turmoil in the financial markets have adversely impacted discretionary consumer spending in an already challenging climate for the boating industry, and we believe that this economic weakness will continue to have a depressing effect on our sales revenue, with corresponding risks to our earnings and cash flow in 2009 (see the "Overview" and "Fiscal 2008 Compared with Fiscal 2007-Segment revenues" sections of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2008 Form 10-K).

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 differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.

West Marine's operations could be adversely affected if the current economic conditions, the decline in spending in the boating industry and/or the turmoil in the financial markets, continue or worsen, or if unseasonably cold weather, prolonged winter-like conditions, natural disasters such as hurricanes, or extraordinary amounts of rainfall occur during the peak boating season in the second and third quarters. Risk factors that may affect our earnings in the future include the risk factors set forth in the 2008 Form 10-K, and those risks which may be described from time to time in West Marine's other filings with the Securities and Exchange Commission. Except as required by applicable law, West Marine assumes no responsibility to update any forward-looking statements as a result of new information, future events or otherwise.