Form 10-Q
Table of Contents

 

 

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 July 2, 2011

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  x    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   ¨  (Do not check if a smaller reporting company)    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 July 25, 2011, the number of shares outstanding of the registrant’s common stock was 22,753,007.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page No.  
PART 1 – Financial Information   
Item 1.    Financial Statements   
  

Condensed Consolidated Balance Sheets as of July 2, 2011, January 1, 2011 and July 3, 2010

     3   
  

Condensed Consolidated Statements of Income for the 13 weeks ended July 2, 2011 and July 3, 2010 and the 26 weeks ended July 2, 2011 and July 3, 2010

     4   
  

Condensed Consolidated Statements of Cash Flows for the 26 weeks ended July 2, 2011 and July 3, 2010

     5   
  

Notes to Condensed Consolidated Financial Statements

     6   
  

Report of Independent Registered Public Accounting Firm

     11   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     17   
Item 4.   

Controls and Procedures

     18   
PART II – Other Information   
Item 1.   

Legal Proceedings

     19   
Item 1A.   

Risk Factors

     19   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     19   
Item 3.   

Defaults Upon Senior Securities

     19   
Item 4.   

[Removed and Reserved]

     19   
Item 5.   

Other Information

     19   
Item 6.   

Exhibits

     20   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

WEST MARINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JULY 2, 2011, JANUARY 1, 2011 AND JULY 3, 2010

(Unaudited and in thousands, except share data)

 

     July 2,
2011
    January 1,
2011
    July 3,
2010
 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 11,958      $ 22,019      $ 4,546   

Trade receivables, net

     8,428        5,605        8,702   

Merchandise inventories

     242,049        201,588        240,129   

Deferred income taxes

     7,204        2,997        1,299   

Other current assets

     21,091        16,739        20,493   
  

 

 

   

 

 

   

 

 

 

Total current assets

     290,730        248,948        275,169   

Property and equipment, net

     59,093        56,483        55,223   

Long-term deferred taxes

     10,314        —          —     

Other assets

     3,386        3,455        2,498   
  

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 363,523      $ 308,886      $ 332,890   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 43,351      $ 29,403      $ 40,665   

Accrued expenses and other

     50,288        42,929        44,302   

Current portion of long-term debt

     —          —          2,500   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     93,639        72,332        87,467   

Deferred rent and other

     13,905        14,793        13,156   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     107,544        87,125        100,623   
  

 

 

   

 

 

   

 

 

 

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; 22,780,249 shares issued and 22,749,359 shares outstanding at July 2, 2011; 22,656,083 shares issued and 22,625,193 shares outstanding at January 1, 2011; and 22,530,782 shares issued and 22,499,892 shares outstanding at July 3, 2010

     23        23        23   

Treasury stock

     (385 )     (385 )     (385

Additional paid-in capital

     183,853        181,891        179,752   

Accumulated other comprehensive loss

     (892 )     (749     (462 )

Retained earnings

     73,380        40,981        53,339   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     255,979        221,761        232,267   
  

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 363,523      $ 308,886      $ 332,890   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE 13 WEEKS AND 26 WEEKS ENDED JULY 2, 2011 AND JULY 3, 2010

(Unaudited and in thousands, except per share data)

 

     13 Weeks Ended     26 Weeks Ended  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Net revenues

   $ 235,963      $ 233,390      $ 349,780      $ 342,949   

Cost of goods sold

     151,117        150,903        240,253        235,425   
                                

Gross profit

     84,846        82,487        109,527        107,524   

Selling, general and administrative expense

     44,592        46,226        81,463        80,736   

Store closures and other restructuring recoveries

     (20     (77     (97     (185

Impairment of long-lived assets

     28        180        28        180   
                                

Income from operations

     40,246        36,158        28,133        26,793   

Interest expense

     273        156        440        261   
                                

Income before income taxes

     39,973        36,002        27,693        26,532   

Provision (benefit) for income taxes

     (4,770     884        (4,705     946   
                                

Net income

   $ 44,743      $ 35,118      $ 32,398      $ 25,586   
                                

Net income per share:

        

Basic

   $ 1.97      $ 1.56      $ 1.43      $ 1.14   

Diluted

   $ 1.92      $ 1.52      $ 1.39      $ 1.12   

Weighted average common and common equivalent shares outstanding:

        

Basic

     22,711        22,465        22,675        22,412   

Diluted

     23,258        23,053        23,250        22,939   

See accompanying notes to condensed consolidated financial statements.

 

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WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE 26 WEEKS ENDED JULY 2, 2011 AND JULY 3, 2010

(Unaudited and in thousands)

 

     26 Weeks Ended  
     July 2,
2011
    July 3,
2010
 

OPERATING ACTIVITIES:

    

Net income

   $ 32,398      $ 25,586   

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization

     7,026        7,758   

Impairment of long-lived assets

     28        180   

Share-based compensation

     1,171        1,258   

Tax benefit from equity issuance

     103        140   

Excess tax benefit from share-based compensation

     (103     (161 )

Deferred income taxes

     (16,107     —     

Provision for doubtful accounts

     78        33   

Lower of cost or market inventory adjustments

     1,749        1,240   

Loss (gain) on asset disposals

     (23     66   

Changes in assets and liabilities:

    

Trade receivables

     (2,901     (3,169 )

Merchandise inventories

     (42,210     (44,737

Other current assets

     (4,352     (688 )

Other assets

     (224     (153 )

Accounts payable

     15,069        7,735   

Accrued expenses and other

     7,353        933   

Deferred items and other non-current liabilities

     704        1,223   
  

 

 

   

 

 

 

Net cash used in operating activities

     (241     (2,756
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Proceeds from sale of property and equipment

     34        35   

Purchases of property and equipment

     (10,633 )     (6,573 )
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,599 )     (6,538 )
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Borrowings on line of credit

     27,639        44,179   

Repayments on line of credit

     (27,639 )     (41,679 )

Proceeds from exercise of stock options

     362        593   

Proceeds from sale of common stock pursuant to Associates Stock Buying Plan

     326        303   

Excess tax benefit from share-based compensation

     103        161   
  

 

 

   

 

 

 

Net cash provided by financing activities

     791        3,557   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (12     4   

NET DECREASE IN CASH

     (10,061     (5,733 )

CASH AT BEGINNING OF PERIOD

     22,019        10,279   
  

 

 

   

 

 

 

CASH AT END OF PERIOD

   $ 11,958      $ 4,546   
  

 

 

   

 

 

 

Other cash flow information:

    

Cash paid for interest

   $ 339      $ 198   

Cash refunded for income taxes

     (580 )     (3,834 )

Non-cash investing activities

    

Property and equipment additions in accounts payable

     344        634   

See accompanying notes to condensed consolidated financial statements.

 

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WEST MARINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Thirteen and Twenty-Six Weeks Ended July 2, 2011 and July 3, 2010

(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, 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) necessary to fairly present the financial position at July 2, 2011 and July 3, 2010, and the interim results of operations for the 13-week and 26-week periods then ended and cash flows for the 26-week periods then ended, have been included.

The condensed consolidated balance sheet at January 1, 2011 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 1, 2011 (the “2010 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 1, 2011 that were included in the 2010 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 1, 2011. 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 and 26-week period ended July 2, 2011 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending December 31, 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 2011 fiscal year and 2010 fiscal year consist of the 52 weeks ending on December 31, 2011 and January 1, 2011, respectively. All quarters of both fiscal years 2011 and 2010 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.

 

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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 1, 2011, $20.0 million of the Company’s cash equivalents consisted of a money market deposit account and was classified within Level 1 because it was valued using quoted market prices. As of July 2, 2011 and July 3, 2010, the Company did not have any Level 1 cash equivalents.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, Comprehensive Income, Presentation of Comprehensive Income. The new update impacts the presentation of comprehensive income. The presentation change requires comprehensive income to be presented either in a single statement or in two separate but continuous statements. Comprehensive income will no longer be presented in the statement of stockholders’ equity. This update will be effective in the first quarter of 2012.

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 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 for the 13-week period ended July 2, 2011 was (11.9)%, which resulted in a benefit of $4.8 million, while the effective tax rate for the 13-week period ended July 3, 2010 was 2.5%, which resulted in an expense of $0.8 million. The Company’s effective income tax rate for the 26-week period ended July 2, 2011 was (17.0)%, which resulted in a benefit of $4.7 million, while the effective tax rate for the 26-week period ended July 3, 2010 was 3.6%, which resulted in an expense of $0.9 million.

During the 13-week period ended July 2, 2011, the Company determined that it was more likely than not that it would have sufficient future taxable income to utilize the majority of its deferred tax assets and, as a result, released approximately $15.7 million of valuation allowance against these assets during the second quarter of 2011. The Company will continue to evaluate its ability to realize deferred tax assets on a quarterly basis and adjust the valuation allowance against these deferred tax assets accordingly. The Company evaluates its effective income tax rate on a quarterly basis and updates its estimate of the full-year effective income tax rate as necessary.

Circumstances leading management to conclude a release was appropriate included the Company’s recent cumulative history of profitability, a favorable near-term business forecast and utilization of net operating losses. The Company’s business is highly seasonal, and the second quarter is typically the most profitable quarter of the fiscal year. Despite the fact that fuel prices are much higher than last year, and reports continue that the overall economy is weak, the majority of the Company’s busiest season has passed and results exceeded expectations, which mitigated the previous uncertainty and allowed management to conclude that it would be more likely than not that the Company will be able to utilize its deferred tax assets. These items, taken collectively, lead management to believe the majority of the Company’s deferred tax assets will be realized. The Company continues to maintain a valuation allowance against South Carolina tax credits of $1.7 million that will begin to expire in fiscal 2013. This portion of the deferred tax assets will remain subject to a valuation allowance until future circumstances indicate they may be realized.

NOTE 3: SHARE-BASED COMPENSATION

The Company recognized share-based compensation expense of $0.6 million for the 13-week period ended July 2, 2011 and $0.7 million for the 13-week period ended July 3, 2010, the majority of which was recorded as selling, general and administrative expense. The Company recognized share-based compensation expense of $1.2 million for the 26-week period ended July 2, 2011 and $1.3 million for the 26-week period ended July 3, 2010, the majority of which was recorded as selling, general and administrative expense. The tax benefits associated with share-based compensation expense for the 13-week and 26-week periods ended July 2, 2011 were $0.1 million and $0.1 million, respectively, each of which was recognized as an excess tax benefit in additional paid-in capital. The tax benefits associated with share-based compensation expense for the 13-week and 26-week periods ended July 3, 2010 were 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.

In addition to the Company’s 10 stores located in Canada and the three franchised stores located in Turkey, 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 website and call center. The Company operates primarily in the United States with foreign revenues representing less than 5% of total net revenues during each of the 13-week and 26-week periods ended July 2, 2011 and July 3, 2010, and foreign long-lived assets totaling less than 2% of long-lived assets at each of these dates.

 

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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 information technology 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     26 Weeks Ended  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3,
2010
 

Net revenues:

        

Stores

   $ 214,842      $ 212,658      $ 315,000      $ 309,020   

Direct Sales

     12,683        11,476        19,847        17,967   

Port Supply

     8,438        9,256        14,933        15,962   
                                

Consolidated net revenues

   $ 235,963      $ 233,390      $ 349,780      $ 342,949   
                                

Contribution:

        

Stores

   $ 53,015      $ 51,810      $ 53,534      $ 54,264   

Direct Sales

     2,568        2,611        3,585        3,933   

Port Supply

     (241     (2     (1,122     (647
                                

Consolidated contribution

   $ 55,342      $ 54,419      $ 55,997      $ 57,550   
                                

Reconciliation of consolidated contribution to net income:

        

Consolidated contribution

   $ 55,342      $ 54,419      $ 55,997      $ 57,550   

Less:

        

Indirect costs of goods sold not included in consolidated contribution

     (6,974     (8,132     (12,467     (13,509

General and administrative expense

     (8,122     (10,129     (15,397     (17,248

Interest expense

     (273     (156     (440     (261

Benefit (provision) for income taxes

     4,770        (884     4,705        (946
                                

Net income

   $ 44,743      $ 35,118      $ 32,398      $ 25,586   
                                
     13 Weeks Ended     26 Weeks Ended  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3,
2010
 

Assets:

        

Stores

       $ 30,419      $ 32,797   

Port Supply

         7,784        7,779   

Direct Sales

         445        834   

Unallocated

         324,875        291,480   
                    

Total assets

       $ 363,523      $ 332,890   
                    

Capital expenditures:

        

Stores

   $ 4,156      $ 3,031      $ 8,161      $ 4,648   

Port Supply

     —          —          —          —     

Direct Sales

     27        —          27        —     

Unallocated

     1,188        1,183        2,445        1,925   
                                

Total capital expenditures

   $ 5,371      $ 4,214      $ 10,633      $ 6,573   
                                

Depreciation and amortization:

        

Stores

   $ 2,269      $ 2,402      $ 4,584      $ 4,958   

Port Supply

     9        30        21        61   

Direct Sales

     34        66        68        134   

Unallocated

     1,207        1,296        2,353        2,605   
                                

Total depreciation and amortization

   $ 3,519      $ 3,794      $ 7,026      $ 7,758   
                                

 

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NOTE 5: COMPREHENSIVE INCOME

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income 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 consists of net income and foreign currency translation adjustments for all periods presented, and did not differ significantly from the reported net income.

NOTE 6: CONTINGENCIES

The Company is party to various legal and administrative proceedings, claims and litigation arising from normal business activities. We believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole.

U.S. Customs and Border Protection (CBP) has completed its “focused assessment” of the Company’s import practices and procedures for fiscal 2008. The Company has agreed that it will implement improved processes and procedures and review these corrective measures with CBP. The final results of the audit were consistent with what was disclosed in the Company’s Annual Report on Form 10-K for the year ended January 1, 2011. For more information, see Item 3, “Legal Proceedings” in the 2010 Form 10-K.

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 in which 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 26-week period ended July 2, 2011, the Company reduced 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 July 2, 2011 were $1.5 million.

Costs and obligations (included in “Accrued liabilities” in the Company’s condensed consolidated balance sheets) recorded by the Company in 2011, 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  

Beginning 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 in charges

     (45     (216     (261

Payments

     (252     (1,771     (2,023
                        

Ending balance, January 1, 2011

   $ 293      $ 1,949      $ 2,242   

Reduction in charges

     —          (98     (98

Payments

     (97     (520     (617
                        

Ending balance, July 2, 2011

   $ 196      $ 1,331      $ 1,527   
                        

 

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NOTE 8: NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income 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 1.8 million and 1.4 million shares of common stock that were outstanding for the quarters ended July 2, 2011 and July 3, 2010, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive. Options to purchase approximately 1.8 million and 2.1 million shares of common stock that were outstanding for the first 26 weeks ended July 2, 2011 and July 3, 2010, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive.

The following is a reconciliation of the Company’s basic and diluted net income per share computations (shares in thousands):

 

     13 Weeks Ended  
     July 2, 2011     July 3, 2010  
     Shares      Net Income
Per  Share
    Shares      Net Income
Per  Share
 

Basic

     22,711       $ 1.97        22,465       $ 1.56   

Effect of dilutive stock options

     547         (0.05     588         (0.04
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

     23,258       $ 1.92        23,053       $ 1.52   
  

 

 

    

 

 

   

 

 

    

 

 

 
     26 Weeks Ended  
     July 2, 2011     July 3, 2010  
     Shares      Net Income
Per  Share
    Shares      Net Income
Per  Share
 

Basic

     22,675       $ 1.43        22,412       $ 1.14   

Effect of dilutive stock options

     575         (0.04     527         (0.02
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

     23,250       $ 1.39        22,939       $ 1.12   
  

 

 

    

 

 

   

 

 

    

 

 

 

NOTE 9: SUBSEQUENT EVENTS

On July 15, 2011, West Marine Products, Inc., a wholly-owned subsidiary of West Marine, Inc., and the landlord for our Watsonville Support Center, entered into the fifth amendment of the lease for the Company’s Watsonville Support Center. The fifth amendment specifically relates to certain storage space at the Watsonville Support Center. The landlord, Watsonville Freeholders, L.P. is a related party as Randolph K. Repass, Chairman of the Company’s board of directors, is a general partner of Watsonville Freeholders and, together with certain members of his family, owns substantially all of the partnership interests in Watsonville Freeholders. Additionally, Geoffrey A. Eisenberg, the Company’s chief executive officer and president, is a 7.5% limited partner of Watsonville Freeholders.

The fifth amendment extends the term of the lease agreement for the storage space for an additional five years commencing November 1, 2011 and continuing through October 31, 2016, reduces the square footage of the storage space to approximately 9,042 square feet, and further reduces the base rent for the storage space to a fixed monthly rate of $6,148.56 ($73,782.72 annually), which amount includes common area maintenance, insurance and real estate taxes. The reduction of rent is effective immediately. Additionally, Watsonville Freeholders will provide a one-time rent abatement of $5,000 for November 2011 to offset the cost of improvements to be made in the storage space. The fifth amendment did not change any other terms of the lease agreement. As a result of the new lease, our related contractual obligation will decrease by immaterial amounts for fiscal years 2011 through 2016.

 

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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 sheets of West Marine, Inc. and subsidiaries as of July 2, 2011 and July 3, 2010, and the related condensed consolidated statements of income for the 13-week periods ended July 2, 2011 and July 3, 2010 and the condensed consolidated statements of income and cash flows for the 26-week periods then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews 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 reviews, 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.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of West Marine, Inc. and subsidiaries as of January 1, 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 14, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 1, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ GRANT THORNTON LLP

San Francisco, California

August 3, 2011

 

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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 1, 2011 (the “2010 Form 10-K”). All references to the second quarter and the first six months of 2011 mean the 13-week and 26-week periods ended July 2, 2011, and all references to the second quarter and first six months of 2010 mean the 13-week and 26-week periods ended July 3, 2010. 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 second quarter of 2011, we offered our products through 322 company-operated stores in 38 states, Puerto Rico and Canada and three franchised stores located in Turkey, on the Internet and through our call center. 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 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 (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 2010 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  
     July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

Net revenues

     100.0     100.0     100.0     100.0

Cost of goods sold

     64.0        64.7        68.7        68.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     36.0        35.3        31.3        31.4   

Selling, general and administrative expense

     18.9        19.7        23.3        23.6   

Store closures and other restructuring recoveries

     0.0        0.0        0.0        (0.1

Impairment of long-lived assets

     0.0        0.1        0.0        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     17.1        15.5        8.0        7.8   

Interest expense, net

     0.2        0.1        0.1        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     16.9        15.4        7.9        7.7   

Income taxes

     (2.1     0.4        (1.4     0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     19.0     15.0     9.3     7.5
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Thirteen Weeks Ended July 2, 2011 Compared to Thirteen Weeks Ended July 3, 2010

Net revenues for the second quarter of 2011 were $236.0 million, an increase of $2.6 million, or 1.1%, compared to net revenues of $233.4 million in the second quarter of 2010, primarily due to $15.8 million in sales attributable to stores opened in 2010 and the first six months of 2011, partially offset by the impact of stores closed during the same periods, which effectively reduced net revenues by $13.2 million. The majority of these closures occurred in connection with our ongoing real estate optimization program to evolve to fewer, larger stores. Another driver of the sales growth was gains in sales to wholesale customers through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through our store locations. In certain markets, our larger stores serve as mini-distribution centers that offer enhanced assortments and service, convenience and competitive pricing, as well as more delivery options for wholesale customers. During the quarter we saw increased sales of discretionary items, such as apparel and electronics, partially offset by lower sales of product categories that were driven last year by efforts to clean up the oil spill in the Gulf of Mexico. We had 322 company-operated stores and three franchised stores in Turkey open at the end of the second quarter of 2011, compared to 330 company-operated stores and two franchise stores in Turkey at the end of the second quarter of 2010. While the number of company-operated stores declined year-over-year, selling square footage increased by 1.3%.

Net revenues attributable to our Stores segment increased $2.2 million to $214.8 million in the second quarter of 2011, a 1.0% increase compared to the second quarter of 2010. The primary driver of the higher revenues was an increase of $15.8 million in sales from stores opened in 2010 and the first six months of 2011, partially offset by $13.2 million from the impact of stores closed during the same periods. Wholesale (Port Supply) net revenues through our distribution centers decreased $0.8 million, or 8.8%, to $8.4 million in the second quarter of 2011 compared to 2010, primarily due to a shift in sales to Port Supply customers through the Stores segment. Net revenues in our Direct Sales segment increased $1.2 million, or 10.5%, to $12.7 million in the second quarter of 2011, compared to 2010. The increase in the Direct Sales segment were primarily from higher sales through the Internet channel as we compared against unfavorable results during the second quarter of 2010 following the launch of our updated website during that period last year.

Gross profit increased by $2.3 million, or 2.9%, to $84.8 million in the second quarter of 2011, compared to $82.5 million for the same period last year. Gross profit increased as a percentage of net revenues to 36.0% in the second quarter of 2011, compared to 35.3% for the same period last year, primarily due to a 0.3% increase in raw product margin driven by less promotional and clearance activity and a 0.3% improvement resulting from lower unit buying and distribution costs. Additionally, gross margin benefited by 0.1% from improved shrinkage results.

Selling, general and administrative expense decreased by $1.6 million, or 3.5%, to $44.6 million in the second quarter of 2011, compared to $46.2 million for the same period last year. Selling, general and administrative expense decreased as a percentage of net revenues to 18.9% in the second quarter of 2011, compared to 19.7% for the same period last year. The lower selling, general and administrative expense was primarily driven by a decrease in bonus expense of $2.3 million due to increased bonus target thresholds compared to the prior year, partially offset by $0.6 million in higher than expected information technology spending for the ongoing implementation our new point-of-sale and order entry systems.

Our effective income tax rate for the 13-week period ended July 2, 2011 was a benefit of $4.8 million or (11.9)%, compared to a provision of $0.9 million or 2.5% for the 13-week period ended July 3, 2010. The year-over-year change in our effective tax rate was primarily due to a valuation allowance release of $15.7 million, which represents the majority of the valuation allowance against our deferred tax assets. Given that our recent improved financial performance has been sustained into our busiest season, we concluded that, with evidence of current and future financial performance improving, it is more likely than not that we will be able to utilize the majority of our net deferred tax assets and, therefore, release of a significant portion of the valuation allowance was appropriate. 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; therefore, we currently anticipate the estimated annual tax rate for fiscal year 2011, including the impact of the release of the valuation allowance, will be in the range of a benefit of 31% to 37%.

Net income for the second quarter of 2011 was $44.7 million compared to a net income of $35.1 million for the second quarter of 2010.

 

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Twenty-six Weeks Ended July 2, 2011 Compared to Twenty-six Weeks Ended July 3, 2010

Net revenues for the first 26 weeks of 2011 were $349.8 million, an increase of $6.9 million, or 2.0%, compared to net revenues of $342.9 million in the first 26 weeks of 2010, primarily due to a $2.4 million increase in comparable store sales and $22.6 million in sales attributable to stores opened in 2010 and the first six months of 2011, partially offset by the impact of stores closed during the same periods, which effectively reduced net revenues by $18.0 million. The majority of these closures occurred in connection with our ongoing real estate optimization program to evolve to fewer, larger stores. Another driver of the sales growth was gains in sales to wholesale customers through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through our store locations. In certain markets, our larger stores serve as mini-distribution centers that offer enhanced assortments and service, convenience and competitive pricing, as well as more delivery options for wholesale customers. During the first quarter of 2011 we saw increased sales of higher-ticket but lower-margin items, such as electronics, and lower sales of higher-margin maintenance-related items, with the latter primarily resulting from inclement weather in many markets during the first half of the year that caused a delay in the start of the key boating season as compared to last year. As we progressed into the second quarter we saw increased sales of discretionary items such as apparel and electronics, partially offset by lower sales of product categories that were driven last year during the quarter by efforts to clean up the oil spill in the Gulf of Mexico.

Net revenues attributable to our Stores segment increased $6.0 million to $315.0 million in the first 26 weeks of 2011, a 1.9% increase compared to the first 26 weeks of 2010. The primary driver of the higher revenues was an increase of $22.6 million in sales from stores opened in 2010 and the first six months of 2011, partially offset by $18.0 million from the impact of stores closed during the same periods. Comparable store sales increased by 0.9% for the first 26 weeks of 2011 versus the same period last year. Wholesale (Port Supply) net revenues through our distribution centers decreased $1.0 million, or 6.4%, to $14.9 million in the first 26 weeks of 2011 compared to 2010, primarily due to a shift in sales to Port Supply customers through the Stores segment. Net revenues in our Direct Sales segment increased $1.9 million, or 10.5%, to $19.8 million in the first 26 weeks of 2011, compared to 2010 primarily from higher sales through the Internet channel as we compared against unfavorable results during the second quarter following the launch of our updated website during that period last year.

Gross profit increased by $2.0 million, or 1.9%, to $109.5 million in the first 26 weeks of 2011, compared to $107.5 million for the same period last year. Gross profit decreased as a percentage of net revenues to 31.3% in the first 26 weeks of 2011, compared to 31.4% for the same period last year, primarily due to a 0.3% reduction in raw product margins, partially offset by lower unit buying and distribution costs of 0.2%. The reduction in raw product margin was mainly due to a shift from higher-margin maintenance-related items toward lower-margin discretionary-type products such as apparel and electronics.

Selling, general and administrative expense increased by $0.8 million, or 0.9%, to $81.5 million in the first 26 weeks of 2011, compared to $80.7 million for the same period last year. Selling, general and administrative expense decreased as a percentage of net revenues to 23.3% in the first 26 weeks of 2011, compared to 23.6% for the same period last year. The increase in selling, general and administrative expense primarily was due to $1.3 million in higher than anticipated information technology spending for the ongoing implementation of our new point-of-sale and order entry systems; $1.2 million in marketing costs due to timing and some additional expense to drive higher sales; and a $0.7 million increase in higher health care benefit costs, including higher year-over-year health care claims experience. These increases were partly offset by $2.5 million of lower bonus expense as compared to last year.

Our effective income tax rate for the 26-week period ended July 2, 2011 was a benefit of $4.7 million or (17.0)%, compared to a provision of $0.9 million or 3.6% for the 26-week period ended July 3, 2010. The year-over-year change in our effective tax rate was primarily due to a valuation allowance release of $15.7 million, which represents the majority of the valuation allowance against our deferred tax assets.

Net income for the first 26 weeks of 2011 was $32.4 million compared to a net income of $25.6 million for the first 26 weeks of 2010.

 

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Liquidity and Capital Resources

We ended the second quarter of 2011 with $12.0 million of cash, an increase from $4.5 million at the end of the second quarter of 2010. Working capital, the excess of current assets over current liabilities, increased to $197.1 million at the end of the second quarter of 2011, compared with $187.7 million for the same period last year. The increase in working capital primarily was attributable to higher cash versus the same period last year driven by the improvements in our operating results that allowed us to pay-down borrowings under our credit facility earlier during the second quarter of this year. Higher deferred income taxes also contributed to higher working capital and resulted from the release of the valuation allowance against our deferred tax assets (see the discussion in the “Thirteen Weeks Ended July 2, 2011 Compared to Thirteen Weeks Ended July 3, 2010” of this report for more information).

Operating Activities

During the first six months of 2011, net cash used in operating activities was $0.2 million, compared to $2.8 million of cash used in operating activities during the same period last year. Net cash used in operating activities decreased year-over-year by $2.6 million, which primarily was driven by improvements in our business performance and higher accounts payable. The accounts payable increase was driven by higher inventory receipts occurring later during the second quarter compared to the same period last year.

Investing Activities

We spent $10.6 million on capital expenditures during the first six months of 2011, which was a $4.1 million increase compared to the same period in the prior year. During the first six months of 2011, we opened three flagship stores, one large-format store, and one standard-format store compared to five large stores and one flagship store during the first six months of 2010. During the remaining six months of 2011, we expect to spend approximately $9.4 million on additional capital expenditures, mainly for store development and real estate optimization plan activities of moving to fewer larger stores, as well as for information technology enhancements, including our new point of sale and order entry systems.

Financing Arrangements

Net cash provided by financing activities was $0.8 million for the first six months of 2011, primarily driven by the exercise of stock options.

In August 2010, we entered into a four-year amended and restated loan and security agreement pursuant to which we have up to $140.0 million in borrowing capacity. At our option and subject to certain conditions set forth in the loan agreement, we may increase our borrowing capacity up to an additional $25.0 million during the term. The amount available to be borrowed is based on a percentage of certain of our inventory (excluding capitalized indirect costs) and accounts receivable. This loan agreement amended and superseded our previous loan and security agreement that would have expired at the end of last year.

The revolving credit facility is guaranteed by West Marine, Inc. and West Marine Canada Corp. (an indirect subsidiary of West Marine, Inc.) and secured by a security interest in all of our accounts receivable and inventory, certain other related assets, and all proceeds thereof. 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) the federal funds rate, as in effect from time to time, plus one-half of one percent; (b) the 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, and the margin range is between 1.5% and 2.0% for option (1) and between 2.5% and 3.0% for option (2). The loan agreement also imposes a commitment fee on the unused portion of the revolving credit facility available. For the second quarter of 2011 and 2010, the weighted-average interest rate on all of our outstanding borrowings was 3.2% and 1.6%, respectively. For the first six months of 2011 and 2010, the weighted-average interest rate on all of our outstanding borrowings was 3.1% and 1.5%, 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. These events of default include, after the expiration of any applicable grace periods, payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, material payment defaults (other than under the loan agreement), voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA events, change of control and other customary defaults. A default under our loan agreement also could significantly and adversely affect our ability to obtain additional or alternative financing. As of July 2, 2011, we were in compliance with the covenants under our loan agreement.

 

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Table of Contents

At July 2, 2011, we had no amounts outstanding under our revolving credit facility and $133.5 million available for future borrowings. At July 2, 2011, the calculated borrowing base was $148.2 million, which exceeded the maximum borrowing capacity of $140.0 million. At July 3, 2010, we had $2.5 million of outstanding borrowings bearing interest at rate of 3.0% and $138.4 million available to be borrowed. At July 2, 2011 and July 3, 2010, we had $6.5 million and $5.1 million, respectively, of outstanding commercial and stand-by letters of credit.

Our borrowing base at July 2, 2011 and July 3, 2010 consisted of the following (in millions):

 

     July 2,
2011
    July 3,
2010
 

Accounts receivable availability

   $ 13.7      $ 13.0   

Inventory availability

     157.0        151.2   

Less: reserves

     (6.1     (6.3 )

Less: minimum availability

     (16.4     (11.9

Less: suppressed availability

     (8.2     —     
                

Total borrowing base

   $ 140.0      $ 146.0   
                

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

 

Ending loan balance

   $ —        $ 2.5   

Outstanding letters of credit

     6.5        5.1   
                

Total obligations

   $ 6.5      $ 7.6   
                

Accordingly, our availability as of July 2, 2011 and July 3, 2010, respectively, was (in millions):

    

Total borrowing base

   $ 140.0      $ 146.0   

Less: obligations

     (6.5 )     (7.6 )
                

Total availability

   $ 133.5      $ 138.4   
                

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 July 2, 2011, 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 2010 Form 10-K.

Seasonality

Historically, our business has been highly seasonal. In 2010, 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 in each of our business segments during that year, lower new and used boat sales, and declines in boat registrations in key states. Early in 2010, we began to see signs that customers were preparing their boats for usage, we also saw recovery in demand for our higher-priced items, such as electronics. As we progressed through 2010, we observed that proportionately more sales growth was coming from our Port Supply wholesale business, particularly in sales to Port Supply customers through our stores. These particular sales increases allowed us to leverage our relatively fixed store occupancy expenses. In 2010, we experienced favorable weather conditions throughout most of the boating season; however, we believe there was a general softening in the boating equipment market after the Fourth of July. During the first quarter of 2011, we saw a decline in gross profit primarily as a result of lower product margins due to a sales mix shift toward lower-margin items, such as electronics, and away from higher-margin maintenance related items. We believe this shift was caused by inclement weather in most of the country during the first half of the year, which did not prompt boaters to prepare for the key boating season as early as they did last year, when better weather prevailed during the first quarter. We saw encouraging signs in the first quarter of 2011, including strength in the southeastern part of the country, which was less affected by weather. As we progressed into the second quarter we saw increased sales of discretionary items such as apparel and electronics, partially offset by lower sales of product categories that were higher during the second quarter last year, because they related to efforts to clean up the oil spill in the Gulf of Mexico. Also, later in the second quarter of 2011, our general sales trend strengthened somewhat. We believe this was due to the weather warming up to seasonal levels later in the second quarter, whereas many parts of the country were cooler and rainier than normal earlier in the second quarter.

In the near future, while we will continue to manage our business conservatively from an operating expense standpoint, we will also take steps to remain flexible and to maximize sales in the face of varying marketplace demand. Specifically, these actions will 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 as needed to maintain customer service levels, while leveraging payroll expense as a percentage of sales.

 

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Although we believe we have seen some recent recovery in customer boat usage and demand for higher-priced items, we believe that the ongoing uncertainty in economic conditions has had, and will 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 2011 (see the “Fiscal 2010 Compared with Fiscal 2009 — Segment Revenues” discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2010 Form 10-K). Therefore, we will continue to control 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 but larger stores with anticipated improved store economics;

 

   

managing the business to the budget established for 2011, which continues our focus on expense control and our emphasis on working capital management; and

 

   

exploring additional methods and strategies to drive sales and market presence.

More broadly, in order to better meet the needs of our customers and provide a better customer experience, we have invested in a strategic project to replace our aging point-of-sale and order management systems. The new platform is intended to enable an integrated cross-channel selling experience for the customer, including faster sales checkout, improved product search capability, integrated customer information and order management, and simplified policy application. This system is currently in its initial pilot phase and we anticipate launching the system in 2011. While we are approaching this project in a measured and methodical manner, the precise timing for company-wide roll-out of the system can not be determined, and the integrity and efficiency of the system are not assured, at this time.

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 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, 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 and business strategies, including our ability to continue to invest in inventory, maintain in-stock levels and improve financial performance; to experience increased sales and to control operating expenses in a challenging environment; to continue to successfully execute our real estate optimization program; and to develop an expanded merchandise and private label assortment, 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 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 2010 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 2010 Form 10-K.

Based on our operating results for the second quarter ended July 2, 2011, a 31-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 our consolidated financial statements in the 2010 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 $0.9 million over the next year.

 

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ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on our evaluation, we concluded that, as of July 2, 2011, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the second quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

We are involved in various legal and administrative proceedings, claims and litigation arising in the ordinary course of business. There has been no material change in any of the matters set forth in Item 3 of the 2010 Form 10-K, and no new matters have commenced since the filing of the 2010 Form 10-K that would be required to be disclosed.

U.S. Customs and Border Protection (CBP) has completed its “focused assessment” of our import practices and procedures for fiscal 2008. We have agreed that we will implement improved processes and procedures and review these corrective measures with CBP. The final results of the audit were consistent with what was disclosed in our Annual Report on Form 10-K for the year ended January 1, 2011. For more information, see Item 3, “Legal Proceedings” in the 2010 Form 10-K.

ITEM 1A – RISK FACTORS

We have included in Part I, Item 1A of the 2010 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. Investors should consider these Risk Factors prior to making an investment decision with respect to our common stock.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM  4 – [REMOVED AND RESERVED]

ITEM 5 – OTHER INFORMATION

None.

 

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ITEM 6 – EXHIBITS

 

    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)).
  10.1*    West Marine, Inc. Omnibus Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to West Marine’s Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
  10.2*    Form of Notice of Grant of Stock Options and Stock Option Agreement for Associates (incorporated by reference to Exhibit 10.2 to West Marine’s Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
  10.3*    Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement for Associates (incorporated by reference to Exhibit 10.3 to West Marine’s Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
  10.4*    Form of Notice of Grant of Stock Options and Stock Option Agreement for Non-employee Directors (incorporated by reference to Exhibit 10.4 to West Marine’s Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
  10.5*    Form of Notice of Grant of Restricted Stock Award and Restricted Stock Award Agreement for Non-employee Directors (incorporated by reference to Exhibit 10.5 to West Marine’s Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
  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.
101.INS†    XBRL Instance Document.
101.SCH†    XBRL Taxonomy Extension Schema Document.
101.CAL†    XBRL Taxonomy Calculation Linkbase Document.
101.LAB†    XBRL Taxonomy Label Linkbase Document.
101.PRE†    XBRL Taxonomy Presentation Linkbase Document.

 

* Indicates a management contract or compensatory plan or arrangement within the meaning of Item 601(b)(10)(iii) of Regulation S-K.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the condensed consolidated balance sheets as of July 2, 2011, January 1, 2011 and July 3, 2010; (ii) the condensed consolidated statements of income for the 13 weeks ended July 2, 2011 and July 3, 2010 and 26 weeks ended July 2, 2011 and July 3, 2010; and (iii) the condensed consolidated statements of cash flows for the 26 weeks ended July 2, 2011 and July 3, 2010. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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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: August 3, 2011     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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