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WMAR > SEC Filings for WMAR > Form 10-Q on 29-Jul-2013All Recent SEC Filings

Show all filings for WEST MARINE INC

Form 10-Q for WEST MARINE INC


29-Jul-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 second quarter and the first six months of 2013 mean the 13-week and 26-week periods ended June 29, 2013,respectively, and all references to the second quarter and the six months of 2012 mean the 13-week and 26-week periods ended June 30, 2012,respectively. 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 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 began 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 channels. 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 second quarter of 2013, we offered our products through 295 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                      26 Weeks Ended
                              June 29, 2013     June 30, 2012     June 29, 2013     June 30, 2012
Net revenues                          100.0 %           100.0 %           100.0 %           100.0 %
Cost of goods sold                     65.1              64.8              69.4              68.4
Gross profit                           34.9              35.2              30.6              31.6
Selling, general and
administrative expense                 18.9              19.4              24.1              24.0
Restructuring costs
(recoveries)                              -               0.1                 -                 -
Income from operations                 16.0              15.7               6.5               7.6
Interest expense                        0.1               0.1               0.1               0.1
Income before income taxes             15.9              15.6               6.4               7.5
Provision for income taxes              6.5               6.3               2.6               3.0
Net income                              9.4 %             9.3 %             3.8 %             4.5 %


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Thirteen Weeks Ended June 29, 2013 Compared to Thirteen Weeks Ended June 30, 2012
Net revenues for the second quarter of 2013 were $236.8 million, a decrease of $6.8 million, or 2.8%, compared to net revenues of $243.6 million in the second quarter in 2012. The decrease primarily was due to a $6.3 million, or 2.7%, decrease in comparable store sales. Our second quarter revenues were impacted by continued unfavorable boating weather during the quarter in many markets, resulting in reduced boating usage this year as compared to last year. We saw lower sales of usage-based items and, as we moved through the second quarter, we saw that customers were forgoing typical spring commissioning activities on their boats in order to get them into the water to take advantage of as much of the shortened season as possible.
While our net revenues decreased in the second 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 channel increased by 12.0% during the second quarter of 2013. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) were up 4.3%. We experienced 3.5% lower sales in our core categories, during the second quarter. Merchandise expansion products represented 15.1% of our second quarter total sales. Finally, with respect to our store optimization strategy, sales from stores in our optimized markets, where we have moved to a larger format store from multiple, smaller locations, were up 24.2% during the quarter.
We experienced increased sales to wholesale customers for the second 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 295 company-operated stores and five franchised stores in Turkey open at the end of the second quarter of 2013, compared to 307 company-operated stores and five franchised stores in Turkey at the end of the second quarter of 2012. While the number of company-operated stores declined by 3.9% year-over-year, selling square footage decreased by only 1.9%. Gross profit decreased by $3.3 million, or 3.8%, to $82.6 million in the second quarter of 2013, compared to $85.9 million for the same period last year. Gross profit decreased as a percentage of net revenues to 34.9% in the second quarter of 2013, compared to 35.2% for the same period last year. This was driven by lower raw product margin, which decreased by 0.6%, primarily due to a shift in balance of sales from retail customers, where transaction counts were down with less boat usage and reduced commissioning activities, and a shift toward sales from wholesale customers given the success of our wholesale growth strategy. Wholesale customers receive discounts on products based on purchase volumes that are not consistently offered to retail customers. The reduction in gross profit margin rate was partially offset by the leveraging of occupancy expense by 0.3% primarily due to a $1.4 million store closure reserve recorded last year as a result of our real estate optimization strategy. However, there was no similar expense incurred this year.
Selling, general and administrative expense ("SG&A") was $44.8 million, a decrease of $2.6 million, or 5.5%, compared to $47.4 million for the same period last year. SG&A decreased as a percentage of net revenues to 18.9% in the second quarter of 2013, compared to 19.4% for the same period last year. The primary drivers of lower SG&A were reduced compensation-related expenses given the lower sales performance; with $1.6 million of the variance driven by lower accrued bonus expense as profit level expectations fell below the threshold for performance based payouts, and $0.8 million of the variance driven by lower store payroll as a result of the lower sales.
Net income for the 13-week period ended June 29, 2013 was $22.3 million, a $0.3 million decrease when compared to the same period last year. Our effective income tax rate for the 13-week period ended June 29, 2013 was 40.7%, which resulted in a provision of $15.3 million, while the effective tax rate for the 13-week period ended June 30, 2012 was 40.6%, which resulted in a provision of $15.4 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.
Twenty-six Weeks Ended June 29, 2013 Compared to Twenty-six Weeks Ended June 30, 2012
Net revenues for the first 26 weeks of 2013 were $351.0 million, a decrease of $14.0 million, or 3.8%, compared to net revenues of $365.0 million in the first 26 weeks of 2012. The decrease primarily was due to a $13.6 million, or 4.0%, 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. Therefore, the launch of our season started much later than expected and continued unfavorable boating weather during the quarter exacerbated the late start set-back. Our second quarter trend improved somewhat over the first quarter, however, the results were weaker than we expected, as outlined above.
Consistent with the results noted above for the second quarter, while our net revenues decreased in the first half 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 channel increased by 13.4% during the first half of 2013. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) were up 3.1%. We experienced 4.8% lower sales in our core categories, during the


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first six months. Merchandise expansion products represented 15.3% of our sales results for the first half of the year. Finally, with respect to our store optimization strategy, sales from stores in our optimized markets were up 20.2% during the first six months.
Gross profit decreased by $7.8 million, or 6.8%, to $107.5 million in the first 26 weeks of 2013, compared to $115.4 million for the same period last year. Gross profit decreased as a percentage of net revenues to 30.6% in the first 26 weeks of 2013, compared to 31.6% for the same period last year. This was driven by lower raw product margin, which decreased by 0.8%, primarily due to the shift in balance of sales from retail customers toward wholesale customers this year, as discussed above. An additional driver of the decrease in gross profit percentage was a 0.2% increase in inventory shrinkage as a percentage of revenues.
SG&A was $84.7 million, a decrease of $2.6 million, or 3.0%, compared to $87.3 million for the same period last year. SG&A increased as a percentage of net revenues to 24.1% in the first 26 weeks of 2013, compared to 23.9% for the same period last year. Compensation-related expenses were $3.4 million lower than last year, with $2.1 million of that variance due to lower accrued bonus expense and $1.3 million attributed to lower store productive payroll as we reduced our spending given the lower net revenues. We also reduced expenses related to discretionary areas, such as supplies, travel and small equipment purchases, by $0.6 million. However, this was partially offset by $1.4 million for the investments in our strategic growth initiatives discussed above, as well as expenses related to technology infrastructure investments.
Net income for the 26-week period ended June 29, 2013 was $13.3 million, a $3.0 million decrease when compared to the same period last year. Our effective income tax rate for the 26-week period ended June 29, 2013 was 41.0%, which resulted in a provision of $9.3 million, while the effective tax rate for the 26-week period ended June 30, 2012 was 40.3%, which resulted in a provision of $11.1 million.
Liquidity and Capital Resources
We ended the second quarter of 2013 with $45.8 million of cash, compared to $37.1 million at the end of the second quarter of 2012. Working capital (the excess of current assets over current liabilities) increased to $236.9 million at the end of the second quarter of 2013, compared to $216.1 million last year. The increase in working capital primarily was attributable to higher cash, lower accounts payable and lower accrued expenses at the end of the period this year. Operating Activities
During the first six months of 2013, net cash used in operating activities was $4.1 million, compared to $0.5 million of cash used in operating activities during the same period last year. The increase in cash used by operating activities year over year primarily was due to changes in operating assets and liabilities and the change in net income. Investing Activities
Net cash used by investing activities was $10.8 million for the first six months of 2013, compared to net cash used of $8.8 million for the first six months of 2012. The increase in cash used by investing activities year-over-year primarily was due to cash used for purchases of property and equipment during the first six months, partially offset by cash received from the sale of the Ft. Lauderdale property during the first quarter of 2013.
We spent $15.1 million on capital expenditures during the first six months of 2013, which was a $6.3 million increase compared to the same period in the prior year. During the first six months of 2013, we opened two large-format stores, as compared to three flagship stores, four large-format stores and one standard-format store during the first six months of 2012. During the remaining six months of 2013, we expect to spend approximately $12.0 million on additional capital expenditures, mainly for our store 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 $4.1 million for the first six months 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


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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 second quarter of 2013 and 2012, the weighted-average interest rate on all of our outstanding borrowings was 3.8% and 4.8%, respectively. For first six months 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 June 29, 2013, we were in compliance with the covenants under our loan agreement, had no amounts outstanding under our revolving credit facility and $115.8 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 June 29, 2013 and $140.0 million at June 30, 2012. Our borrowing base at the periods then ended consisted of the following (in millions):

                                  June 29,     June 30,
                                    2013         2012
Accounts receivable availability $   12.2     $   12.2
Inventory availability              154.9        159.5
Less: reserves                       (5.5 )       (5.5 )
Less: minimum availability          (16.2 )      (16.6 )
Less: suppressed availability       (25.4 )       (9.6 )
Total borrowing base             $  120.0     $  140.0

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

Ending loan balance/(overpayment)                        $      (0.3 )   $      (0.2 )
Outstanding letters of credit                                    4.5             4.9
Total obligations                                        $       4.2     $       4.7

Accordingly, our availability as of June 29, 2013 and
June 30, 2012, respectively, was (in millions):
Total borrowing base                                     $     120.0     $     140.0
Less: obligations                                               (4.2 )          (4.7 )
Total availability                                       $     115.8     $     135.3

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 June 29, 2013, we are not involved in any unconsolidated special purpose entities or variable interest entities.


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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 that year, we benefited from a relatively warm and dry spring in many of our markets, which drove sales of maintenance and other core usage-related merchandise categories. During the first half of 2013, our sales results were lower than expected, which we believe was driven primarily by unusually cold, rainy and windy weather in many of our markets, which in turn drove a reduction in boat usage. In seasonal markets, some customers did not complete typical Spring commissioning of their boats in order to get them into the water quickly and take advantage of as much of the shortened season as possible. We have been able to partially offset the lower sales results this year in regions experiencing more typical weather and with our growth strategies, outlined below:

eCommerce: Sales originated in our Direct-to-Consumer channel grew by 13.4%. These sales represented 6.1% of total sales in the first half of this year, up from 5.2% for the first half of 2012.

Merchandise Expansion: Sales in our "merchandise expansion" categories (including soft goods, fishing and paddle sports) grew by 3.1% in the first six months of this year versus last year, whereas sales in our core categories declined by 4.8% given the reduced boat usage.

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 20.2% for the first half of this year.

For the remainder of 2013, we will continue to drive sales, while controlling expenses and maximizing 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 appropriately given the reduced sales, 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.

More broadly, in order to better meet the needs of our customers and provide a better customer experience, in 2013 we have been investing, and will continue to invest, 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.
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 for the remainder of 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 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 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, sec.gov. Forward-Looking Statements


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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 or rainy weather and high wind conditions, expectations related to our earnings and growth and profitability, particularly with a shortened boating season, statements that relate to West Marine's future plans, expectations, objectives and business strategies, including our ability to: improve our Direct-to-Consumer 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; increase sales through all sales channels and control operating expenses in a challenging environment; successfully implement our share repurchase program; as well as facts and assumptions underlying these statements or projections. Actual results . . .

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