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WMAR > SEC Filings for WMAR > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Quarterly Report

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 December 29, 2012 (the "2012 Form 10-K"). All references to the first quarter of 2013 mean the 13-week period ended March 30, 2013, and all references to the first quarter of 2012 mean the 13-week period ended March 31, 2012. Unless the context otherwise requires, "West Marine," "we," "us" and "our" refer to West Marine, Inc. and its subsidiaries. Overview
West Marine is the largest specialty retailer of boating supplies and accessories. Historically, we have reported three segments - Stores, Port Supply (wholesale) and Direct-to-Consumer (eCommerce, catalog and call center transactions). With our new Chief Executive Officer, we have changed the way in which we view and manage our business, by making organizational changes, integrating systems and concentrating our strategic focus on omni-channel retailing. As a result of these changes, beginning in the first fiscal quarter of this year, we are reporting one reportable segment (for additional information refer to Note 4, Segment Information in Part I, Item 1 of this report).
We also have changed the definition of comparable store sales by now including sales from our Direct-to-Consumer and Port Supply divisions. As before, store sales are included in comparable store sales in the fiscal period in which they commence their 14th full month of operations. Stores that were closed or substantially remodeled (i.e., resulting in an increase or decrease of 40% or more of selling square footage) are still excluded.
At the end of the first quarter of 2013, we offered our products through 296 company-operated stores in 38 states, Puerto Rico and Canada and five franchised stores located in Turkey, on our eCommerce website, and through our catalogs and call center. We also are engaged 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 condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States 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 valuation adjustments and capitalization of indirect costs), vendor allowances receivable, costs associated with exit activities, impairment of long-lived assets, income taxes, liabilities for self-insurance or high-deductible losses, and share-based compensation. These critical accounting policies are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2012 Form 10-K. The following discussion and analysis should be read in conjunction with such description of critical accounting policies and with our unaudited 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 percentage of net revenues:
                                                                       13 Weeks Ended
                                                             March 30, 2013       March 31, 2012
Net revenues                                                       100.0     %          100.0     %
Cost of goods sold                                                  78.2                 75.7
Gross profit                                                        21.8                 24.3
Selling, general and
administrative expense                                              34.9                 32.9
Loss from operations                                               (13.1 )               (8.6 )
Interest expense                                                     0.1                  0.1
Loss before income taxes                                           (13.2 )               (8.7 )
Income tax benefit                                                  (5.3 )               (3.6 )
Net loss                                                            (7.9 )   %           (5.1 )   %

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Thirteen Weeks Ended March 30, 2013 Compared to Thirteen Weeks Ended March 31, 2012
Net revenues for the first quarter of 2013 were $114.2 million, a decrease of $7.2 million, or 5.9%, compared to net revenues of $121.5 million in the first quarter in 2012. The decrease primarily was due to a $7.3 million, or 6.6%, decrease in comparable store sales. Our first quarter revenues were impacted by a much colder spring hitting many parts of the country compared to last year. With boats remaining under snow in the northeast and wind conditions stalling usage in the southeast, the launch of our season is starting much later than expected. Also, in 2012 we sent our direct marketing materials to customers earlier in March. However, in 2013 we moved the circulation to later in the year with the intent of being more effective with our investment and to drive sales in the second quarter. We believe there may have been some impact to sales in the first quarter from these shifts in our marketing plans.
While our net revenues decreased in the first quarter of 2013 compared to the comparable period last year, we saw some offset and positive sales growth from our three key strategies: eCommerce; merchandise expansion; and store optimization. Sales through our Direct-to-Consumer division increased sales by 15.8% during the first quarter of 2013. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) were up 0.5%. We experienced 7.3% lower sales in our core categories, during the first quarter. The merchandise expansion categories of product represented 15.7% of our first quarter sales. Finally, with respect to our store optimization strategy, sales from stores in our optimized markets were up 15.4% during the quarter.
We experienced increased sales to wholesale customers for the first quarter, primarily through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through our store locations. We had 296 company-operated stores and five franchised stores in Turkey open at the end of the first quarter of 2013, compared to 315 company-operated stores and three franchised stores in Turkey at the end of the first quarter of 2012. While the number of company-operated stores declined by 6.0% year-over-year, selling square footage decreased by only 2.6%. Gross profit decreased by $4.6 million, or 15.4%, to $24.9 million in the first quarter of 2013, compared to $29.5 million for the same period last year. Gross profit decreased as a percentage of net revenues to 21.8% in the first quarter of 2013, compared to 24.3% for the same period last year. This was driven by lower raw product margin, which decreased by 1.5%, primarily due to a shift from core maintenance and usage based products given the late start to the boating season discussed above. Gross profit rate was also lower due to the de-leveraging of occupancy expense by 0.6% on lower sales. An additional driver of the decrease in gross profit percentage was a 0.6% increase in inventory shrinkage as a percentage of revenues.
Selling, general and administrative expense ("SG&A") was $39.9 million, which was essentially unchanged when compared to the same period last year. SG&A increased as a percentage of net revenues to 34.9% in the first quarter of 2013, compared to 32.9% for the same period last year. Payroll expenses in our sales channels were favorable to last year as we reduced our spending given the lower net revenues. However, this was offset by the investments we are making in the strategic growth initiatives discussed above, as well as expenses related to our technology infrastructure investments.
Net loss for the 13-week period ended March 30, 2013 was $9.0 million, a $2.8 million increase when compared to the same period last year. Our effective income tax rate for the 13-week period ended March 30, 2013 was 40.3%, which resulted in a benefit of $6.1 million, while the effective tax rate for the 13-week period ended March 31, 2012 was 41.2%, which resulted in a benefit of $4.4 million. 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. Liquidity and Capital Resources
We ended the first quarter of 2013 with $22.5 million of cash, compared to $2.2 million at the end of the first quarter of 2012. Working capital (the excess of current assets over current liabilities) increased to $217.2 million at the end of the first quarter of 2013, compared to $193.0 million last year. The increase in working capital primarily was attributable to higher cash at the end of the period this year.
Operating Activities
During the first three months of 2013, net cash used in operating activities was $38.4 million, compared to $39.7 million of cash used in operating activities during the same period last year. The decrease in cash used by operating activities year over year primarily was due to changes in operating assets and liabilities offset by the change in net loss. Investing Activities
Net cash provided by investing activities was $1.3 million for the first quarter of 2013 compared to net cash used of $3.4 million for the first quarter of 2012. The increase in cash provided by investing activities year-over-year primarily was due to cash received from the sale of the Ft. Lauderdale property during the first quarter of 2013.

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We spent $3.0 million on capital expenditures during the first quarter of 2013, which was a $0.4 million decrease compared to the same period in the prior year. During the first quarter of 2013, we opened one large-format store, as compared to three flagship stores and one standard-format store during the first quarter of 2012. During the remaining nine months of 2013, we expect to spend approximately $24.0 million on additional capital expenditures, mainly for store development and our real estate optimization strategy of moving to fewer larger stores in markets where we believe this is beneficial, and for a heightened focus on information technology investments for network improvements, enhancements to our website functionality and capabilities, and replacement of aging software and hardware.
Financing Arrangements
Net cash provided by financing activities was $3.0 million for the first quarter of 2013, mostly attributable to proceeds from the exercise of stock options. Credit Agreement
We maintain an asset backed line of credit with Wells Fargo Bank, N.A., which provides us with a secured revolving credit facility until November 30, 2017 of up to $120 million. In addition, at our option and subject to certain conditions, we may increase our borrowing capacity up to an additional $25.0 million. The amount available to be borrowed is based on a percentage of our inventory (excluding capitalized indirect costs) and accounts receivable. The revolving credit facility is available for general working capital and general corporate purposes. At our election, borrowings under the revolving credit facility will bear interest at one of the following options:
1.The prime rate, which is defined in the loan agreement as the highest of:
a.Federal funds rate, as in effect from time to time, plus one-half of one percent;
b.LIBOR rate for a one-month interest period plus one percent; or
c.The rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its "prime rate," or
2.The LIBOR rate quoted by the British Bankers Association for the applicable interest period. 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 credit facility. The margin range for option (1) above is between 0.5% and 1.0% and for option (2) above is between 1.5% and 2.0%. The loan agreement also imposes a fee on the unused portion of the revolving credit facility available. For first quarter of 2013 and 2012, the weighted-average interest rate on all of our outstanding borrowings was 3.8% and 4.8%, respectively. Although 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, 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 revolving credit facility at any given time is determined by the estimated value of these assets as determined by the lenders' appraisers. Additionally, we must maintain a minimum revolving credit availability equal to the greater of $7 million or 10% 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 and the revolving credit facility could be terminated. As of March 30, 2013, we were in compliance with the covenants under our loan agreement, had no amounts outstanding under our revolving credit facility and $114.5 million available for future borrowings. We may borrow against the aggregate borrowing base up to the maximum revolver amount, which was $120.0 million at March 30, 2013 and $140.0 million at March 31, 2012. Our borrowing base the 13-week periods then ended consisted of the following (in millions):

                                                  March 30,      March 31,
                                                     2013           2012
Accounts receivable availability                 $      8.1     $      8.4
Inventory availability                                168.2          175.2
Less: reserves for outstanding letters of credit       (5.3 )         (5.4 )
Less: minimum availability                            (17.1 )        (17.8 )
Less: suppressed availability                         (33.9 )        (20.4 )
Total borrowing base                             $    120.0     $    140.0

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

Ending loan balance/(overpayment)                        $         -     $      (0.2 )
Outstanding letters of credit                                    5.5             7.8
Total obligations                                        $       5.5     $       7.6

Accordingly, our availability as of March 30, 2013 and
March 31, 2012, respectively, was (in millions):
Total borrowing base                                     $     120.0     $     140.0
Less: obligations                                               (5.5 )          (7.6 )
Total availability                                       $     114.5     $     132.4

Off-Balance Sheet Arrangements
Operating leases are the only financing arrangements not reported on our condensed consolidated balance sheets. 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. As of March 30, 2013, we are not involved in any unconsolidated special purpose entities or variable interest entities.
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 2012 Form 10-K. Seasonality
Historically, our business has been highly seasonal. In 2012, approximately 65% 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
During 2012, we delivered consistent sales growth in each fiscal quarter. We believe this resulted from a combination of external and internal factors. Early in the year, we benefited from a relatively warm and dry spring in many of our markets, which drove sales of maintenance and other usage-related merchandise categories. We also saw a significant impact on results from our key growth strategies in eCommerce, merchandise expansion and real estate optimization last year. During the first quarter of 2013, our sales results were lower than expected, which we believe was driven primarily by unusually cold and windy weather in many of our markets, which in turn drove a reduction in boat usage. In seasonal markets, Spring commissioning of boats was delayed with many boats still in winter storage at the end of the quarter. On the other hand, in those markets where the weather was more normal (primarily in California), we saw solid growth. We also believe there may have been some impact to sales in the first quarter from the shifts in our marketing plans described above, which may have had a greater-than-expected impact.
Against this backdrop, our growth strategies continue to gain traction:
eCommerce: Sales originated in our eCommerce channel grew by 15.8% despite the decline experienced in the balance of the company. These sales represented 6.8% of total sales in the first quarter of this year, up from 5.5% for the first quarter of 2012.

Merchandise Expansion: Sales in our "merchandise expansion" categories (including soft goods, fishing and paddle sports) grew by 0.5% in the first quarter of this year versus last year, whereas sales in our core categories declined by 7.3%.

Store Optimization: Sales in markets where we optimized (evolving to having fewer, larger stores with anticipated improved store economics) during the past year delivered overall sales growth of 15.4%.

For 2013, we will continue to drive sales while controlling expenses and maximize cash flow by:
prioritizing our allocation of investment toward the key growth strategies of eCommerce, merchandise expansion and store optimization;

continuing to control our operating expenses through variable expense management, along with re-engineering and streamlining business processes, where applicable;

continuing to improve the quality of our inventory by tightly controlling overstocked or discontinued goods;

managing the business to the budget established for 2013, which reflects prudent investment in growth while focusing on expense control and emphasizing working capital management; and

exploring additional methods and strategies to drive traffic, sales, conversion and market presence.

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More broadly, in order to better meet the needs of our customers and provide a better customer experience, in 2013 we will be investing significant resources in support of our key growth strategies, including a 40% to 60% increase in our capital investments as compared to 2012. The majority of these additional investments are targeted to improve our eCommerce website and to continue to upgrade our information technology infrastructure. These strategies and investments support our shift toward an omni-channel retail model designed to provide a seamless customer experience across all shopping channels and to better position us to deliver incremental sales and operating margin improvement over time.
Although we believe we have seen some recovery in customer boat usage and demand for higher-priced items, we believe that the ongoing uncertainty in economic conditions has had, and may continue to have, an adverse impact on discretionary consumer spending in an already challenging climate for the boating industry, and we believe that economic uncertainty could continue to have an impact on our sales, with corresponding risks to our earnings and cash flow in 2013. For more information see the "Overview," "Fiscal 2012 Compared with Fiscal 2011
- Segment Revenues," and "Business Trends" discussions in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2012 Form 10-K.
Internet Address and Access to SEC Filings Our Internet address is Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in the "Investor Relations" portion of our website as well as through the Securities and Exchange Commission's website, Forward-Looking Statements
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, risks related to continued unseasonably cold weather and high wind conditions, expectations related to our earnings and growth in profitability, particularly in a delayed boating season, statements that relate to West Marine's future plans, expectations, objectives and business strategies, including our ability to:
improve our Direct-to-Customer business, including our eCommerce website; experience increased sales from expanded merchandise assortments; continue to successfully execute our store optimization strategy; continue to invest in inventory, maintain in-stock levels and improve financial performance; experience increased sales and control operating expenses in a challenging environment; continue to grow sales to our wholesale customers; successfully implement our share repurchase program; 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 soft economic conditions and the decreased spending in the boating industry continue or worsen, if fuel prices were to increase, or if unseasonably cold weather, prolonged winter-like conditions, natural disasters such as hurricanes, man-made disasters 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 2012 Form 10-K, and in this report in Part II, Item IA, 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.

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