UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 3, 2010
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-22512
WEST MARINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 77-0355502 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
500 Westridge Drive
Watsonville, CA 95076-4100
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (831) 728-2700
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). (Check one):
| Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At April 30, 2010, the number of shares outstanding of the registrant’s common stock was 22,411,312.
PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 3, 2010, JANUARY 2, 2010 AND APRIL 4, 2009
(Unaudited and in thousands, except share data)
| April 3, 2010 |
January 2, 2010 |
April 4, 2009 |
||||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 8,246 | $ | 10,279 | $ | 12,259 | ||||||
| Trade receivables, net |
7,525 | 5,566 | 6,679 | |||||||||
| Merchandise inventories |
242,809 | 196,631 | 257,677 | |||||||||
| Deferred income taxes |
1,299 | 1,299 | — | |||||||||
| Other current assets |
23,514 | 19,805 | 15,977 | |||||||||
| Total current assets |
283,393 | 233,580 | 292,592 | |||||||||
| Property and equipment, net |
55,051 | 56,278 | 59,013 | |||||||||
| Intangibles, net |
106 | 116 | 144 | |||||||||
| Other assets |
2,454 | 2,263 | 2,316 | |||||||||
| TOTAL ASSETS |
$ | 341,004 | $ | 292,237 | $ | 354,065 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable |
$ | 51,768 | $ | 32,591 | $ | 50,707 | ||||||
| Accrued expenses and other |
41,748 | 43,369 | 44,150 | |||||||||
| Current portion of long-term debt |
39,065 | — | — | |||||||||
| Total current liabilities |
132,581 | 75,960 | 94,857 | |||||||||
| Long-term debt |
— | — | 75,751 | |||||||||
| Deferred rent and other |
12,807 | 11,933 | 8,956 | |||||||||
| Total liabilities |
145,388 | 87,893 | 179,564 | |||||||||
| Stockholders’ equity: |
||||||||||||
| Preferred stock, $.001 par value: 1,000,000 shares authorized; no shares outstanding |
— | — | — | |||||||||
| Common stock, $.001 par value: 50,000,000 shares authorized; 22,441,130 shares issued and 22,410,240 shares outstanding at April 3, 2010; 22,376,873 shares issued and 22,345,983 shares outstanding at January 2, 2010; and 22,153,349 shares issued and 22,125,777 shares outstanding at April 4, 2009 |
22 | 22 | 22 | |||||||||
| Treasury stock |
(385 | ) | (385 | ) | (366 | ) | ||||||
| Additional paid-in capital |
178,487 | 177,459 | 174,597 | |||||||||
| Accumulated other comprehensive income (loss) |
(729 | ) | (506 | ) | 648 | |||||||
| Retained earnings (deficit) |
18,221 | 27,754 | (400 | ) | ||||||||
| Total stockholders’ equity |
195,616 | 204,344 | 174,501 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 341,004 | $ | 292,237 | $ | 354,065 | ||||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL QUARTERS ENDED APRIL 3, 2010 AND APRIL 4, 2009
(Unaudited and in thousands, except per share data)
| 13 Weeks Ended | ||||||||
| April 3, 2010 |
April 4, 2009 |
|||||||
| Net revenues |
$ | 109,559 | $ | 100,965 | ||||
| Cost of goods sold |
84,522 | 79,054 | ||||||
| Gross profit |
25,037 | 21,911 | ||||||
| Selling, general and administrative expense |
34,510 | 36,884 | ||||||
| Store closures and other restructuring costs |
(108 | ) | 77 | |||||
| Loss from operations |
(9,365 | ) | (15,050 | ) | ||||
| Interest expense |
105 | 331 | ||||||
| Loss before income taxes |
(9,470 | ) | (15,381 | ) | ||||
| Provision for income taxes |
62 | 397 | ||||||
| Net loss |
$ | (9,532 | ) | $ | (15,778 | ) | ||
| Net loss per common and common equivalent share - |
||||||||
| Basic and diluted |
$ | (0.43 | ) | $ | (0.71 | ) | ||
| Weighted average common and common equivalent shares outstanding - |
||||||||
| Basic and diluted |
22,359 | 22,117 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL QUARTERS ENDED APRIL 3, 2010 AND APRIL 4, 2009
(Unaudited and in thousands)
| 13 Weeks Ended | ||||||||
| April 3, 2010 |
April 4, 2009 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (9,532 | ) | $ | (15,778 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
3,964 | 4,025 | ||||||
| Share-based compensation |
603 | 554 | ||||||
| Excess tax deficiency from share-based compensation |
(35 | ) | — | |||||
| Provision for doubtful accounts |
50 | 169 | ||||||
| Lower of cost or market inventory adjustments |
1,133 | 1,384 | ||||||
| Loss (gain) on asset disposals |
(2 | ) | 40 | |||||
| Changes in assets and liabilities: |
||||||||
| Trade receivables |
(2,009 | ) | (1,024 | ) | ||||
| Merchandise inventories |
(47,310 | ) | (36,460 | ) | ||||
| Other current assets |
(3,709 | ) | 392 | |||||
| Other assets |
(459 | ) | 258 | |||||
| Accounts payable |
18,867 | 23,768 | ||||||
| Accrued expenses and other |
(1,621 | ) | 1,894 | |||||
| Deferred items and other non-current liabilities |
874 | 28 | ||||||
| Net cash used in operating activities |
(39,186 | ) | (20,750 | ) | ||||
| INVESTING ACTIVITIES: |
||||||||
| Proceeds from sale of property and equipment |
4 | 12 | ||||||
| Purchases of property and equipment |
(2,359 | ) | (3,284 | ) | ||||
| Net cash used in investing activities |
(2,355 | ) | (3,272 | ) | ||||
| FINANCING ACTIVITIES: |
||||||||
| Borrowings on line of credit |
40,862 | 33,566 | ||||||
| Repayments on line of credit |
(1,797 | ) | (4,815 | ) | ||||
| Proceeds from exercise of stock options |
425 | 46 | ||||||
| Excess tax benefit from share-based compensation |
35 | — | ||||||
| Net cash provided by financing activities |
39,525 | 28,797 | ||||||
| Effect of exchange rate changes on cash |
(17 | ) | 11 | |||||
| NET INCREASE (DECREASE) IN CASH |
(2,033 | ) | 4,786 | |||||
| CASH AT BEGINNING OF PERIOD |
10,279 | 7,473 | ||||||
| CASH AT END OF PERIOD |
$ | 8,246 | $ | 12,259 | ||||
| Other cash flow information: |
||||||||
| Cash paid for interest |
$ | 8 | $ | 313 | ||||
| Cash paid (refunded) for income taxes |
230 | (14 | ) | |||||
| Non-cash investing activities |
||||||||
| Property and equipment additions in accounts payable |
604 | 929 | ||||||
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended April 3, 2010 and April 4, 2009
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared from the records of West Marine, Inc. and its subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring items, except as discussed in Notes 2 and 7 below) necessary to fairly present the financial position at April 3, 2010 and April 4, 2009, and the interim results of operations for the 13-week periods and cash flows for the 13-week periods then ended, have been included.
The condensed consolidated balance sheet at January 2, 2010 presented herein has been derived from the audited consolidated financial statements of the Company for the year then ended that was included in the Company’s Annual Report on Form 10-K for the year ended January 2, 2010 (the “2009 Form 10-K”). These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the fiscal year ended January 2, 2010, that were included in the 2009 Form 10-K.
Accounting policies followed by the Company are described in Note 1 in the audited consolidated financial statements for the year ended January 2, 2010. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted for purposes of the condensed consolidated interim financial statements presented herein. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13-week period ended April 3, 2010 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending January 1, 2011. Historically, the Company’s revenues and net income are higher in the second and third quarters and decrease in the first and fourth quarters of the fiscal year. The increase in revenues and earnings, principally during the period from April through August, is representative of the peak months for boat buying, usage and maintenance in most of our retail markets.
The Company’s fiscal year consists of 52 weeks, ending on the Saturday closest to December 31. The 2010 fiscal year and 2009 fiscal year consist of the 52 weeks ending on January 1, 2011 and January 2, 2010, respectively. All quarters of both fiscal years 2010 and 2009 consist of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events were evaluated through the date these condensed consolidated financial statements were issued.
6
Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prescribed under GAAP contains three levels, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of January 2, 2010, $8.0 million of the Company’s cash equivalents consisted of a money market deposit account and certificates of deposits and are classified within Level 1 because they are valued using quoted market prices. As of April 3, 2010, the Company did not have any money market deposit accounts or certificates of deposits.
NOTE 2: INCOME TAXES
The Company calculates its interim income tax provision by estimating the annual effective tax rate and applying that rate to its year-to-date ordinary earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in tax laws, rates or status is recognized in the interim period in which the change occurs.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income (loss) for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision (benefit) for income taxes may change as events occur, additional information is obtained or as the tax environment changes.
The Company’s effective income tax rate was (0.7)%, resulting in expense of $0.1 million for the 13 weeks ended April 3, 2010, while an effective tax rate of (2.6)% resulted in expense of $0.4 million for the 13 weeks ended April 4, 2009.
Under GAAP, when the Company’s results demonstrate a pattern of future profitability and reverse the current cumulative loss trend, the Company’s valuation allowance may be adjusted and may result in the reinstatement of all or a part of the net deferred tax assets.
NOTE 3: SHARE-BASED COMPENSATION
The Company recognized share-based compensation expense of $0.6 million for each of the 13-week periods ended April 3, 2010 and April 4, 2009, primarily impacting selling, general and administrative expense. The tax benefit associated with share-based compensation expense for the 13-week periods ended April 3, 2010 and April 4, 2009 was not significant.
NOTE 4: SEGMENT INFORMATION
The Company has three reportable segments—Stores, Port Supply (wholesale) and Direct Sales (Internet and call center)—all of which sell merchandise directly to customers. The customer base overlaps between the Company’s Stores and Port Supply segments, and between its Stores and Direct Sales segments. All processes for the three segments within the supply chain are commingled, including purchases from vendors, distribution center activity and customer delivery.
Revenues are attributed to geographic locations based on the location to which the Company ships its products. Through the Direct Sales segment, the Company promotes and sells products internationally through both its websites and call center. The Company operates primarily in the United States with foreign revenues representing 5% or less of total net revenues during each of the 13-week periods ended April 3, 2010 and April 4, 2009, and foreign long-lived assets representing less than 2% of long-lived assets at each of these dates.
7
Segment assets are those directly allocated to an operating segment’s operations. For the Stores segment, assets primarily consist of leasehold improvements, computer assets, fixtures, land and buildings. For the Port Supply and Direct Sales segments, assets primarily consist of computer assets. Unallocated assets include merchandise inventory, shared technology infrastructure, distribution centers, corporate headquarters, prepaid expenses, deferred taxes and other assets. Capital expenditures and depreciation expense for each segment are allocated to the assets assigned to the segment. Contribution is defined as net revenues less product costs and direct expenses.
Following is financial information related to the Company’s business segments (in thousands):
| 13 Weeks Ended | ||||||||
| April 3, 2010 |
April 4, 2009 |
|||||||
| Net revenues: |
||||||||
| Stores |
$ | 96,362 | $ | 88,305 | ||||
| Direct Sales |
6,491 | 5,843 | ||||||
| Port Supply |
6,706 | 6,817 | ||||||
| Consolidated net revenues |
$ | 109,559 | $ | 100,965 | ||||
| Contribution: |
||||||||
| Stores |
$ | 2,454 | $ | (3,356 | ) | |||
| Direct Sales |
1,322 | 1,320 | (1) | |||||
| Port Supply |
(645 | ) | (419 | ) | ||||
| Consolidated contribution |
$ | 3,131 | $ | (2,455 | ) | |||
| Reconciliation of consolidated contribution to net loss: |
||||||||
| Consolidated contribution |
$ | 3,131 | $ | (2,455 | ) | |||
| Less: |
||||||||
| Indirect costs of goods sold not included in consolidated contribution |
(5,377 | ) | (3,539 | )(1) | ||||
| General and administrative expense |
(7,119 | ) | (9,056 | ) | ||||
| Interest expense |
(105 | ) | (331 | ) | ||||
| Provision for income taxes |
(62 | ) | (397 | ) | ||||
| Net loss |
$ | (9,532 | ) | $ | (15,778 | ) | ||
|
(1) Includes a $0.5 million reclassification of call center expense from Indirect cost of goods sold not included in consolidated contribution. There is no impact to the stated net loss for the period.
|
| |||||||
| 13 Weeks Ended | ||||||||
| April 3, 2010 |
April 4, 2009 |
|||||||
| Assets: |
||||||||
| Stores |
$ | 35,357 | $ | 35,568 | ||||
| Port Supply |
6,513 | 6,147 | ||||||
| Direct Sales |
1,425 | 1,528 | ||||||
| Unallocated |
297,709 | 310,822 | ||||||
| Total assets |
$ | 341,004 | $ | 354,065 | ||||
| Capital expenditures: |
||||||||
| Stores |
$ | 1,617 | $ | 2,616 | ||||
| Port Supply |
— | 26 | ||||||
| Direct Sales |
— | — | ||||||
| Unallocated |
742 | 642 | ||||||
| Total capital expenditures |
$ | 2,359 | $ | 3,284 | ||||
| Depreciation and amortization: |
||||||||
| Stores |
$ | 2,556 | $ | 2,433 | ||||
| Port Supply |
31 | 60 | ||||||
| Direct Sales |
68 | 91 | ||||||
| Unallocated |
1,309 | 1,441 | ||||||
| Total depreciation and amortization |
$ | 3,964 | $ | 4,025 | ||||
8
NOTE 5: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity. The Company’s comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments for all periods presented, and did not differ significantly from the reported net loss.
NOTE 6: CONTINGENCIES
The Company is party to various legal and administrative proceedings, claims and litigation arising from normal business activities. Based on the facts currently available, the Company does not believe that the disposition of matters that are pending or asserted, individually or in the aggregate, will have a material adverse effect on future financial results. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact the Company’s results of operations in any given period.
In addition, the Company is subject to various routine and non-routine reviews, audits and investigations by various federal and state governmental regulators, including customs, environmental and tax authorities in the jurisdictions where it conducts business, which may result in assessments of additional taxes, penalties, interest or the revision and recoupment of past payments made based on audit findings. The Company accrues a liability for this type of contingency when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company believes it has adequately provided for obligations that would result from these legal and sales and use tax proceedings where it is probable it will pay some amounts and the amounts can be estimated; in some cases, however, it is too early to predict a final outcome. The Company is currently under audit for sales taxes in several jurisdictions. The tax periods open to examination by the major taxing jurisdictions for sales and use taxes are fiscal 2001 through fiscal 2009. Management believes that the ultimate resolution of these matters will not have a material effect on the Company’s future financial condition or results of operations. Additionally, the Company was advised that it was selected by the U.S. Customs and Border Protection for a “focused assessment” of the Company’s import practices for fiscal 2008, to review and evaluate our adherence to the agency’s rules and regulations regarding trade compliance matters such as product classification, valuation and origin. The Company is cooperating with the agency and has begun the pre-assessment survey phase of the focused assessment. In this regard, the Company has committed that it will report, and tender any associated duties and fees, resulting from identified errors. The Company also will be identifying improvement in processes and procedures in areas where errors are found and review these corrective measures with the agency. At this time, the Company does not believe that any deficiencies in processes or controls, or unanticipated costs or unpaid duties associated with this matter will have a material adverse effect on the Company or its results of operations.
NOTE 7: STORE CLOSURE AND OTHER RESTRUCTURING COSTS
Restructuring charges include severance costs, lease termination fees, legal and professional fees paid for lease termination negotiations, and other costs associated with the closure of facilities. Severance benefits are detailed in approved severance plans, which are specific as to number, position, location and timing. In addition, severance benefits are communicated in specific detail to affected employees and are unlikely to change when costs are recorded. Costs are recognized over the period services are rendered, otherwise they are recognized when they are communicated to the employees. Other associated costs, such as legal and professional fees, are expensed as incurred.
During the thirteen weeks ended April 3, 2010, the Company reduced net reserves by $0.1 million for lease contract termination obligations and other store closure costs due to favorable lease negotiations. Accrued liabilities related to costs associated with restructuring activities outstanding as of April 3, 2010 were $3.8 million.
9
Costs and obligations (included in “Accrued liabilities” in the Company’s condensed consolidated balance sheets) recorded by the Company in 2010 and 2009 in conjunction with the store closures and other restructuring costs are as follows (in thousands):
| Termination Benefits and Other Costs |
Store Lease Termination Costs |
Total | ||||||||||
| Balance, December 29, 2007 |
$ | — | $ | 1,988 | $ | 1,988 | ||||||
| Charges |
3,023 | 7,664 | 10,687 | |||||||||
| Payments |
(1,954 | ) | (1,652 | ) | (3,606 | ) | ||||||
| Ending balance, January 3, 2009 |
1,069 | 8,000 | 9,069 | |||||||||
| Reduction in charges |
(158 | ) | (1,588 | ) | (1,746 | ) | ||||||
| Payments |
(321 | ) | (2,476 | ) | (2,797 | ) | ||||||
| Ending balance, January 2, 2010 |
590 | 3,936 | 4,526 | |||||||||
| Reduction of charges |
(4 | ) | (104 | ) | (108 | ) | ||||||
| Payments |
(160 | ) | (476 | ) | (636 | ) | ||||||
| Ending balance, April 3, 2010 |
$ | 426 | $ | 3,356 | $ | 3,782 | ||||||
NOTE 8: NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution that could occur if unvested restricted shares vest and outstanding options to purchase common stock were exercised. Options to purchase approximately 1.7 million and 2.7 million shares of common stock that were outstanding for the quarters ended April 3, 2010 and April 4, 2009, respectively, have been excluded from the calculation of diluted loss per share because inclusion of such shares would be anti-dilutive.
The following is a reconciliation of the Company’s basic and diluted net loss per share computations (shares in thousands):
| 13 Weeks Ended | ||||||||||||
| April 3, 2010 | April 4, 2009 | |||||||||||
| Shares | Net Loss Per Share |
Shares | Net Loss Per Share |
|||||||||
| Basic |
22,359 | $ | (0.43 | ) | 22,117 | $ | (0.71 | ) | ||||
| Effect of dilutive stock options |
— | — | — | — | ||||||||
| Diluted |
22,359 | $ | (0.43 | ) | 22,117 | $ | (0.71 | ) | ||||
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
West Marine, Inc.
Watsonville, California
We have reviewed the accompanying condensed consolidated balance sheet of West Marine, Inc. and subsidiaries as of April 3, 2010, and the related consolidated statements of operations and cash flows for the 13-week period ended April 3, 2010. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
San Francisco, California
May 12, 2010
11
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 January 2, 2010 (the “2009 Form 10-K”). All references to the first quarter of 2010 mean the thirteen-week period ended April 3, 2010, and all references to the first quarter of 2009 mean the thirteen-week period ended April 4, 2009. 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 boating supply retailer 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 our customers. At the end of the first quarter of 2010, we offered our products through 334 company-operated stores in 38 states, Puerto Rico and Canada and two franchised stores 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 condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP 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, vendor allowances receivable, costs associated with exit activities (e.g., store closures), impairment of long-lived assets, deferred tax assets and applicable valuation allowance, 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 2009 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 | ||||||
| April 3, 2010 |
April 4, 2009 |
|||||
| Net revenues |
100.0 | % | 100.0 | % | ||
| Cost of goods sold |
77.1 | 78.3 | ||||
| Gross profit |
22.9 | 21.7 | ||||
| Selling, general and administrative expense |
31.5 | 36.5 | ||||
| Store closures and other restructuring costs |
(0.1 | ) | 0.1 | |||
| Loss from operations |
(8.5 | ) | (14.9 | ) | ||
| Interest expense |
0.1 | 0.3 | ||||
| Loss before income taxes |
(8.6 | ) | (15.2 | ) | ||
| Provision for income taxes |
0.1 | 0.4 | ||||
| Net loss |
(8.7 | )% | (15.6 | )% | ||
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Thirteen Weeks Ended April 3, 2010 Compared to Thirteen Weeks Ended April 4, 2009
Net revenues for the first quarter of 2010 were $109.6 million, an increase of $8.6 million, or 8.5%, compared to net revenues of $101.0 million in the first quarter of 2009, primarily due to a $6.9 million increase in comparable store sales and $5.0 million in sales attributable to stores opened in 2009 and the first quarter of 2010. Stores closed during the first quarter of 2010 and fiscal year 2009 generated reduced net revenues by $3.9 million in sales in the first quarter of 2009. The majority of these closures occurred in connection with our ongoing real estate optimization program. The increase in net revenues was driven by increased sales of maintenance-related products. We saw recovery in demand for higher-ticket items, such as boats, motors and electronics, and our expansion in the assortment of clothing and technical apparel is receiving good customer response. We also experienced favorable weather conditions in several markets during the first quarter. We had 334 company-operated stores and two franchised stores in Turkey open at the end of the first quarter of 2010 compared to 341 company-operated stores and one franchise store in Turkey at the end of the first quarter of 2009.
Net revenues attributable to our Stores division increased $8.1 million to $96.4 million in the first quarter of 2010, a 9.1% increase compared to the first quarter of 2009. Comparable store sales increased by $6.9 million, or 8.4%, from last year. Store revenues also increased by $5.0 million due to store openings during 2009 and the first quarter of 2010. This increase was partially offset by $3.9 million of revenues attributable to stores closed during those same periods. The majority of closures occurred in connection with our ongoing real estate optimization program. Wholesale (Port Supply) net revenues through our distribution centers decreased $0.1 million, or 1.6%, to $6.7 million in the first quarter of 2010 compared to 2009, primarily due to lower sales to boat builders. Net revenues in our Direct Sales division increased $0.6 million, or 11.1%, to $6.5 million in the first quarter of 2010 compared to 2009, and were higher year-over-year in both domestic and international sales.
Gross profit increased by $3.1 million, or 14.3%, to $25.0 million in the first quarter of 2010, compared to $21.9 million for the same period last year. Gross profit increased as a percentage of net revenues to 22.9% in the first quarter of 2010, compared to 21.7% for the same period last year, primarily due to a 0.9% improvement from the leveraging of store occupancy costs. Occupancy is our largest fixed expense, and its impact on gross margin rate is largely driven by changes in revenue given the fixed nature of the expense. An additional 0.3% of the gross margin rate increase was from an increase in product margin driven by less promotional and clearance activity.
Selling, general and administrative expense decreased by $2.4 million, or 6.4%, to $34.5 million in the first quarter of 2010, compared to $36.9 million for the same period last year, and decreased as a percentage of net revenues to 31.5% in the first quarter of 2010, compared to 36.5% for the same period last year. The decrease in selling, general and administrative expense primarily was due to $0.9 million in lower associate-related health care benefits costs including lower year-over-year health care claims experience, a $0.7 million favorable impact of foreign currency translation gains in the first quarter of 2010 compared to the first quarter of 2009, and a $0.5 million reduction in accrued bonus expense.
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 2010 was (0.7)% compared with an effective tax rate of (2.6)% for the same period last year.
Net loss for the first quarter of 2010 was $9.5 million compared to net loss of $15.8 million in the first quarter of 2009. The improvement was primarily attributable to increased revenues and corresponding gross profit, and lower selling, general and administrative expense.
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Liquidity and Capital Resources
We ended the first quarter of 2010 with $8.2 million of cash, a decrease from $12.3 million at the end of the first quarter of 2009. Working capital, the excess of current assets over current liabilities, decreased to $150.8 million at the end of the first quarter, compared with $197.7 million for the same period last year. At the end of the first quarter and because our multi-year credit facility expires at the end of this year, borrowings under our credit facility are now classified as current portion of long-term debt and, as a result, the $39.1 million outstanding under the credit facility at April 3, 2010 was the primary driver of the decrease in working capital. We are currently in discussions with various parties and expect to secure a new credit facility before the expiration of our current facility.
Operating Activities
During the first quarter of 2010, net cash used in operating activities was $39.2 million, compared to $20.8 million for the same period last year. Net cash used in operating activities increased year-over-year by $18.4 million and primarily was driven by higher inventory purchases during the first quarter compared to the same period last year and lower accrued expenses. The decrease in accrued expenses year-over-year related to a reduction in fiscal 2008 store closure and restructuring charges.
Investing Activities
We spent $2.4 million on capital expenditures during the first quarter of 2010, a $0.9 million decrease from the prior year period. During the first quarter of 2010, we opened two large-format stores compared to two new prototype flagship stores opened during the first quarter of 2009.
Financing Arrangements
Net cash provided by financing activities was $39.5 million for the first quarter of 2010, which represents net borrowing under our credit facility.
We have a credit facility that allows for borrowings of up to $225.0 million and 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 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 borrowing 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 2010 and 2009, the weighted-average interest rate on all of our outstanding borrowings was 1.4% and 1.8%, 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. As of April 3, 2010, we were in compliance with our bank covenants.
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At April 3, 2010, borrowings under this credit facility were $39.1 million bearing interest at rates from 1.2% to 3.0%, and $113.8 million was available for future borrowings. At April 4, 2009, borrowings under this credit facility were $75.8 million, bearing interest as rates ranging from 1.8% and 3.3%, and $86.6 million was available to be borrowed. The increase year-over-year in credit availability primarily was due to lower outstanding borrowings. At April 3, 2010 and April 4, 2009, we had $5.6 million and $5.5 million, respectively, of outstanding commercial and stand-by letters of credit.
Our borrowing base at April 3, 2010 and April 4, 2009 consisted of the following (in millions):
| April 3, 2010 |
April 4, 2009 |
|||||||
| Accounts receivable availability |
$ | 9.2 | $ | 6.9 | ||||
| Inventory availability |
167.8 | 179.0 | ||||||
| Less: reserves |
(5.7 | ) | (4.4 | ) | ||||
| Total borrowing base |
$ | 171.3 | $ | 181.5 | ||||
| Our aggregate borrowing base was reduced by the following obligations (in millions): |
||||||||
| Ending loan balance |
$ | 39.1 | $ | 75.8 | ||||
| Outstanding letters of credit |
5.6 | 5.5 | ||||||
| Total obligations |
$ | 44.7 | $ | 81.3 | ||||
| Accordingly, our availability as of April 3, 2010 and April 4, 2009, respectively, was (in millions): |
||||||||
| Total borrowing base |
$ | 171.3 | $ | 181.5 | ||||
| Less: obligations |
(44.7 | ) | (81.3 | ) | ||||
| Less: minimum availability |
(12.8 | ) | (13.6 | ) | ||||
| Total availability |
$ | 113.8 | $ | 86.6 | ||||
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 2009 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 2009, 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
Our research and experience indicates that the U.S. boating industry experienced a down cycle in 2009, as evidenced by lower sales trends in each of our business segments compared to 2008, lower new and used boat sales, and declining boat registrations in key states. More recently we are beginning to see signs that customers are preparing their boats for usage this year as sales increases during the first quarter of 2010 were led by growth in maintenance-related products. We also are seeing recovery in demand for our bigger-ticket items, such as boats, motors and electronics. Further, we believe we are benefitting from changes in the competitive landscape, including the closure of the Boater’s World chain of stores during the mid-part of last year. While we continue to manage our business conservatively from an operating expense standpoint, we are taking steps to maximize opportunity in demand recovery. Specifically, these actions include:
| • | making prudent strategic investments in additional core inventory items to maintain in-stock levels in the event improved sales continue; and |
| • | hiring additional store Associates to maintain customer service levels while leveraging payroll expense as a percentage of sales. |
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We believe that the uncertainty in economic conditions has adversely impacted discretionary consumer spending in an already challenging climate for the boating industry, and we believe that this economic uncertainty could continue to have an impact on our sales revenue, with corresponding risks to our earnings and cash flow in 2010 (see the “Overview” and “Fiscal 2009 Compared with Fiscal 2008 — Segment Revenues” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2009 Form 10-K). Therefore, we will continue to constrain expense growth and maximize 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 tightly controlling overstocked or discontinued goods; |
| • | proceeding with our ongoing real estate optimization program, evolving to having fewer, larger stores with anticipated improved economics; |
| • | managing the business to the conservative budget established for 2010, which focuses on expense control and emphasizes working capital management; and |
| • | exploring methods and strategies to drive sales and market presence. |
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 (the “Exchange Act”), in the “Investor Relations” portion of our website as well as through the Securities and Exchange Commission’s website, www.sec.gov.
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, statements that relate to West Marine’s future plans, expectations, objectives, business strategies, our ability to improve financial performance in a softening industry and challenging economic environment, 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 and/or the decline in spending in the boating industry 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 this quarterly report on Form 10-Q and the 2009 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.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not undertake any specific actions to diminish our exposure to interest rate or currency rate risk, and we are not a party to any interest rate or currency rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in the 2009 Form 10-K.
Based on our operating results for the first quarter ended April 3, 2010, a 14-basis point change in the interest rate (10% of our weighted-average interest rate) affecting our floating financial instruments would have an effect of reducing our pre-tax income and cash flows by less than $0.1 million over the next year (see Note 5 to the notes to consolidated financial statements in the 2009 Form 10-K).
A 10% increase in the exchange rate of the U.S. dollar versus the Canadian dollar would have an effect of reducing our pre-tax income and cash flows by approximately $1.2 million over the next year.
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ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
West Marine’s management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this review, management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that our disclosure controls and procedures were not effective as of April 3, 2010, due to the existence of the following material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with preparing our Annual Report on Form 10-K for the year ended January 2, 2010, we identified a deficiency in our process for accruing estimated freight charges. Specifically, the reconciliation performed by our finance department with respect to this account as of January 2, 2010, did not identify an error in the period-end accrual for this account.
Despite the existence of this material weakness, management believes that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
The following changes in our internal control over financial reporting have occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
| • | We reevaluated the account level thresholds that trigger additional analysis. |
| • | We improved our monitoring control in order to bolster our peer review process of account reconciliations on a periodic basis, including the reconciliation of estimated freight charges. |
| • | We engaged external accounting resources to assist in our review of the first quarter reconciliations, including accounts related to freight charges. We expect to hire additional internal accounting resources over the coming months to broaden our review of accounts requiring further analysis. |
We consider this remediation of our material weakness in our internal control over financial reporting to be a significant priority for us. We have taken immediate action to implement the above changes in our controls, and we will test their effectiveness during the second fiscal quarter of 2010. Completion of testing with positive results will enable management to establish that remediation has been effective.
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We are involved in various legal and administrative proceedings, claims and litigation arising in the ordinary course of business. Based on the facts currently available, we do not believe that the disposition of matters that are pending or asserted, individually and in the aggregate, will have a material adverse effect on our financial position. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact our results of operations in any given period.
Additionally, U.S. Customs and Border Protection has advised us that it will be performing a “focused assessment” of our import practices for fiscal 2008. We are cooperating with the agency and have begun the pre-assessment survey phase of the focused assessment. At this time, we do not believe that any deficiencies in processes or controls, or unanticipated costs or unpaid duties associated with this matter will have a material adverse effect us or our results of operations.
We have included in Part I, Item 1A of our 2009 Form 10-K, a description of certain risks and uncertainties that could affect our business, future performance or financial condition, referred to as “Risk Factors.” These risk factors have not materially changed, other than as set forth below. Investors should consider these risk factors prior to making an investment decision with respect to our common stock.
Our results of operations could be adversely affected if unseasonably cold weather, prolonged winter conditions, natural disasters such as hurricanes or extraordinary amounts of rainfall or manmade disasters occur, especially during the peak boating season in the second and third fiscal quarters.
Our business is highly seasonal. The majority of our revenues occur between the months of April and August, which represent the peak boating months in most of our markets. Our annual results would be materially and adversely affected if our net revenues were to fall below expected seasonal levels during this period. Our business also is significantly affected by weather patterns. Unseasonably cool weather, prolonged winter conditions, extraordinary amounts of rainfall or natural or manmade disasters may decrease boating use in the peak season, resulting in lower maintenance needs and, therefore, decreased revenues.
In particular, the oil platform explosion in the Gulf of Mexico in April 2010 and resulting underwater leaks have caused an oil spill that may have substantial impact on boating usage in the area. As we are entering into peak boating season, the continuing underwater leaks and resulting oil spill may have adverse effects on our results of operations by reducing demand for our marine products because of reduced boating activity in the area.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – [REMOVED AND RESERVED]
None.
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| 3.1 | Certificate of Incorporation of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to West Marine’s Annual Report on Form 10-K filed March 18, 2004). | |
| 3.2 | Bylaws of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to West Marine’s Annual Report on Form 10-K filed March 13, 2007). | |
| 4.1 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to West Marine’s Registration Statement on Form S-1 (Registration No. 33-69604)). | |
| 15.1 | Letter regarding Unaudited Interim Financial Information. | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 12, 2010 | WEST MARINE, INC. | |||||
| By: | /s/ Geoffrey A. Eisenberg | |||||
| Geoffrey A. Eisenberg | ||||||
| Chief Executive Officer | ||||||
| By: | /s/ Thomas R. Moran | |||||
| Thomas R. Moran | ||||||
| Chief Financial Officer | ||||||
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