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 September 29, 2001
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 (IRS Employer
Incorporation or Organization) 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 [ ]
At October 26, 2001, the number of shares outstanding of the registrant's common
stock was 17,930,537.
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of
September 29, 2001, December 30, 2000 and
September 30, 2000 .......................................... 2
b) Condensed Consolidated Statements of Income
for the 13-weeks ended September 29, 2001
and September 30, 2000 and the 39-weeks ended
September 29, 2001 and September 30, 2000 ................... 3
c) Condensed Consolidated Statements of Cash Flows
for the 39-weeks ended September 29, 2001 and
September 30, 2000 .......................................... 4
d) Notes to Condensed Consolidated Financial Statements ........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 8
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K ................................ 9
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WEST MARINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2001, DECEMBER 30, 2000 AND SEPTEMBER 30, 2000
(Unaudited, in thousands, except share data)
September 29, December 30, September 30,
2001 2000 2000
-------- -------- --------
ASSETS
Current assets:
Cash....................................................... $ 2,691 $ 2,654 $ 5,281
Accounts receivable, net................................... 5,178 4,964 5,899
Merchandise inventories, net............................... 185,642 180,563 180,391
Prepaid expenses and other current assets.................. 10,886 9,879 8,267
-------- -------- --------
Total current assets..................................... 204,397 198,060 199,838
Property and equipment, net.................................. 74,870 73,481 71,960
Intangibles and other assets, net............................ 36,167 36,241 36,725
-------- -------- --------
TOTAL ASSETS................................................. $315,434 $307,782 $308,523
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 39,898 $ 42,341 $ 47,535
Accrued expenses........................................... 29,537 17,735 20,133
Current portion of long-term debt.......................... 8,765 8,729 8,430
-------- -------- --------
Total current liabilities................................ 78,200 68,805 76,098
Long-term debt............................................... 48,072 66,500 56,326
Deferred items and other non-current obligations............. 3,544 4,217 2,709
-------- -------- --------
Total liabilities......................................... 129,816 139,522 135,133
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; issued and outstanding: 17,747,644
at September 29, 2001, 17,321,521 at December 30, 2000
and 17,267,397 at September 30, 2000...................... 18 17 17
Additional paid-in capital................................... 109,417 107,987 107,579
Retained earnings............................................ 76,183 60,256 65,794
-------- -------- --------
Total stockholders' equity................................ 185,618 168,260 173,390
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $315,434 $307,782 $308,523
======== ======== ========
See notes to condensed consolidated financial statements.
2
WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share and store data)
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales................................................. $144,058 $139,065 $422,040 $420,402
Cost of goods sold, including buying and occupancy........ 102,823 100,849 297,441 302,322
-------- -------- -------- --------
Gross profit.............................................. 41,235 38,216 124,599 118,080
Selling, general and administrative expense............... 31,197 29,946 94,151 91,709
-------- -------- -------- --------
Income from operations.................................... 10,038 8,270 30,448 26,371
Interest expense, net..................................... 958 1,165 3,905 4,460
-------- -------- -------- --------
Income before income taxes................................ 9,080 7,105 26,543 21,911
Income taxes.............................................. 3,632 2,913 10,617 8,985
-------- -------- -------- --------
Net income................................................ $ 5,448 $ 4,192 $ 15,926 $ 12,926
======== ======== ======== ========
Net income per share:
- Basic.................................................. $0.31 $0.24 $0.90 $0.75
======== ======== ======== ========
- Diluted................................................ $0.30 $0.24 $0.89 $0.74
======== ======== ======== ========
Weighted average shares outstanding:
- Basic.................................................. 17,703 17,265 17,631 17,234
======== ======== ======== ========
- Diluted................................................ 18,271 17,581 17,820 17,579
======== ======== ======== ========
Stores open at end of period.............................. 240 232 240 232
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
39 Weeks 39 Weeks
Ended Ended
September 29, September 30,
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income............................................................ $ 15,926 $ 12,926
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................................... 13,414 11,972
Gain on sale of fixed assets........................................ ( 5) 0
Provision for doubtful accounts..................................... 280 240
Changes in assets and liabilities:
Accounts receivable............................................... (494) (1,038)
Merchandise inventories........................................... (5,079) (14,553)
Prepaid expenses and other current assets......................... (1,007) 761
Other assets...................................................... (783) 34
Accounts payable.................................................. (2,443) 16,725
Accrued expenses.................................................. 11,802 6,972
Deferred items.................................................... (673) 249
-------- --------
Net cash provided by operating activities....................... 30,938 34,288
-------- --------
INVESTING ACTIVITY -
Purchases of property and equipment................................... (13,940) (17,026)
-------- --------
FINANCING ACTIVITIES:
Net repayments on line of credit...................................... (17,850) (15,200)
Repayments on long-term debt and capital leases....................... (542) (576)
Proceeds from issuance of common stock................................ 1,431 564
-------- --------
Net cash used by financing activities........................... (16,961) (15,212)
-------- --------
NET INCREASE IN CASH.................................................. 37 2,050
CASH AT BEGINNING OF PERIOD........................................... 2,654 3,231
-------- --------
CASH AT END OF PERIOD................................................. $ 2,691 $ 5,281
======== ========
See notes to condensed consolidated financial statements.
4
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirty-Nine Weeks Ended September 29, 2001 and September 30, 2000
(Unaudited)
NOTE 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of West Marine, Inc. without audit, and in the opinion
of management, include all adjustments (consisting only of normal recurring
items) necessary to fairly present the financial position at September 29, 2001
and September 30, 2000, and the interim results of operations and cash flows for
the 13-week and the 39-week periods then ended. The results of operations for
the 13-week and 39-week periods presented herein are not necessarily indicative
of the results to be expected for the full year.
The consolidated balance sheet at December 30, 2000, presented herein, has been
derived from the audited consolidated financial statements of West Marine for
the year then ended, included in West Marine's annual report on Form 10-K.
Accounting policies followed by West Marine are described in Note 1 to its
audited consolidated financial statements for the year ended December 30, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted for purposes of the condensed consolidated interim financial
statements. The condensed consolidated interim financial statements should be
read in conjunction with the audited consolidated financial statements,
including the notes thereto, for the year ended December 30, 2000, included in
West Marine's annual report on Form 10-K.
NOTE 2: Accounting Policies
On December 31, 2000, West Marine adopted Statement of Financial Accounting
Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS 137 and SFAS 138. SFAS 133 requires all
derivative financial instruments to be recognized on the balance sheet at fair
value. The effect of adopting SFAS 133 was immaterial. During 2000 and the
first nine months of 2001, West Marine did not enter into any derivative
financial instruments.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141,
"Business Combinations". SFAS 141 requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. West Marine does not believe that the adoption of
SFAS 141 will have a significant impact on its financial position and results of
operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets",
which is effective December 30, 2001. SFAS 142 requires, among other things,
the discontinuance of goodwill amortization. In addition, SFAS 142 includes
provisions for the reclassification of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires West Marine to
complete a transitional goodwill impairment test six months from the date of
adoption. West Marine is currently assessing the impact of SFAS 142 on its
financial position and results of operations.
NOTE 3: Segment Information
West Marine has three divisions - Retail, Wholesale and Catalog (including
Internet) - which all sell aftermarket recreational boating supplies directly to
customers. The customer base overlaps between our Retail and Wholesale
divisions, and between our Retail and Catalog divisions. All processes for the
three divisions within the supply chain are commingled, including purchases from
merchandise vendors, distribution center activity, and customer delivery.
The Retail division qualifies as a reportable segment under SFAS 131 as it is
the only division that represents 10% or more of the combined revenue of all
operating segments when viewed on an annual basis. Segment assets are not
presented, as West Marine's assets are commingled and are not available by
segment. Contribution is defined as net sales, less product costs and direct
expenses. The following is financial information related to West Marine's Retail
business segment (in thousands):
5
39 Weeks 39 Weeks
Ended Ended
September 29, September 30,
2001 2000
-------- --------
Net sales:
Retail.................................................................. $351,958 $346,529
Other................................................................... 70,082 73,873
-------- --------
Consolidated net sales................................................ $422,040 $420,402
======== ========
Contribution:
Retail................................................................ $ 55,570 $ 53,079
Other................................................................. 13,889 14,594
-------- --------
Consolidated contribution........................................... $ 69,459 $ 67,673
======== ========
Reconciliation of consolidated contribution to net income:
Consolidated contribution................................................. $ 69,459 $ 67,673
Less:
Cost of goods sold not included in consolidated contribution.......... (24,157) (25,698)
General and administrative expenses................................... (14,854) (15,604)
Interest expense...................................................... (3,905) (4,460)
Income tax expense.................................................... (10,617) (8,985)
-------- --------
Net income........................................................ $ 15,926 $ 12,926
======== ========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
West Marine is the largest specialty retailer of recreational and commercial
boating supplies and apparel in the United States. At the end of the third
quarter, West Marine offered its products through 240 stores in 38 states and in
Puerto Rico, on the Internet at westmarine.com and through catalogs which it
distributes several times each year. West Marine's business strategy is to
offer an extensive selection of high-quality marine supplies and apparel to the
recreational aftermarket for both sailboats and powerboats at competitive prices
in a convenient, one-stop shopping environment emphasizing customer service and
technical assistance. West Marine is also engaged in the wholesale distribution
of products to commercial customers and other retailers.
All references to the third quarter and first nine months of 2001 refer to the
13-week and 39-week periods, respectively, ended September 29, 2001 and all
references to the third quarter and first nine months of 2000 refer to the 13-
week and 39-week periods, respectively, ended September 30, 2000.
Seasonality
Historically, West Marine's business has been highly seasonal. Our expansion
into new markets has made us more susceptible to seasonality, as an increasing
percentage of our store sales occur in the second and third quarters of each
year. In 2000, 63.8% of our net sales were generated during the second and third
quarters, principally during the period from April through July, which
represents the peak boating months in most of our markets. We expect net sales
to continue to be susceptible to seasonality and weather as we expand our
operations.
Results of Operations
Net sales increased $5.0 million, or 3.6%, to $144.1 million for the third
quarter of 2001, compared to $139.1 million for the third quarter of 2000,
primarily due to increases in net sales at our stores. Retail net sales were
$122.8 million for the third quarter of 2001, an increase of $6.0 million, or
5.1%, over the $116.8 million recorded for the same period a year ago. During
the third quarter of 2001, no new stores were opened and no stores were closed.
Net sales in new stores opened since the third quarter of 2000 and remodeled
stores not included in comparable sales were $8.3 million. Third quarter net
sales from comparable stores increased 2.5%, or $2.8 million. Wholesale sales
decreased by $0.3 million, or 3.0%, to $11.1 million for the third quarter of
2001, compared to $11.4 million for the same period a year ago. Catalog
(including Internet) sales decreased by $0.8 million, or 7.0%, to $9.8 million
for the third quarter of 2001, compared to $10.6 million for the third quarter
of 2000. Retail, Wholesale and Catalog (including Internet) sales represented
85.3%, 7.7% and 6.8%, respectively, of our net sales for the third quarter of
2001, compared to 84.0%, 8.2% and 7.6%, respectively, of our net sales for the
third quarter of 2000.
For the first nine months of 2001, net sales increased $1.6 million, or 0.4%, to
$422.0 million, compared to $420.4 million for the first nine months of 2000,
primarily due to increases in net sales in our Retail division. Retail net sales
were $352.0 million for the first nine months of 2001, an increase of $5.4
million, or 1.6%, compared to the $346.5 million recorded for the same period a
year ago. Net sales in new stores opened since the third quarter of 2000 and
remodeled stores not included in comparable sales were $19.9 million. Net sales
from comparable stores for the first nine months of 2001 decreased 0.7%, or $2.3
million. Wholesale sales decreased by $1.3 million, or 3.4%, to $36.3 million
for the first nine months of 2001 from $37.6 million for the same period a year
ago. Catalog (including Internet) sales decreased by $2.7 million, or 7.7%, to
$32.8 million for the first nine months of 2001, compared to $35.5 million for
the same period last year. Retail, Wholesale and Catalog (including Internet)
sales represented 83.4%, 8.6% and 7.8%, respectively, of our net sales for the
first nine months of 2001, compared to 82.4%, 8.9% and 8.4%, respectively, of
our net sales for the first nine months of 2000.
6
Our gross profit increased by $3.0 million, or 7.9%, to $41.2 million for the
third quarter of 2001, compared to $38.2 million for the third quarter of 2000.
Gross profit margins were 28.6% in the third quarter of 2001, compared to 27.5%
in the same period a year ago. Our gross profit was $124.6 million for the first
nine months of 2001, an increase of $6.5 million, or 5.5%, compared to gross
profit of $118.1 million for the same period a year ago. Gross profit margins
were 29.5% for the first nine months of 2001, compared to 28.1% in the same
period last year. Gross profit margins increased for the third quarter and the
first nine months of 2001 compared to the prior year primarily because we
reduced operating costs at our distribution centers and shifted to a more
profitable product mix.
Selling, general, and administrative expenses increased by $1.3 million, or
4.2%, to $31.2 million for the third quarter of 2001 compared to $29.9 million
for the same period last year. Selling, general, and administrative expenses
represented 21.6% of net sales for the third quarters of both 2001 and 2000. For
the first nine months of 2001, selling, general, and administrative expenses
increased by $2.5 million, or 2.7%, to $94.2 million compared to $91.7 million
for the same period last year. Selling, general, and administrative expenses
represented 22.3% of net sales for the first nine months of 2001 compared to
21.8% for the same period a year ago. The increase in selling, general and
administrative expenses for both the third quarter and the first nine months of
2001 is primarily due to operating costs associated with the seven additional
stores opened in 2001.
Interest expense was $1.0 million in the third quarter of 2001, a decrease of
$0.2 million over the same period a year ago. For the first nine months of
2001, interest expense decreased by $0.6 million, to $3.9 million from $4.5
million. The decrease in interest expense for both the third quarter and the
first nine months of 2001 is primarily due to lower average outstanding
indebtedness and lower average interest rates compared to last year.
Liquidity and Capital Resources
Historically, our primary sources of liquidity are cash flows from operations
and bank borrowings. During the first nine months of 2001, our primary source
of liquidity was from operations. Net cash provided by operations during the
first nine months of 2001 was $30.9 million, consisting primarily of net income
of $15.9 million and an increase in accrued expenses of $11.8 million, partially
offset by a $5.1 million increase in inventory. The inventory increase reflects
our commitment to increasing fill rates, which enhance sales, as well as
stocking of merchandise at stores during the peak boating season. The change in
accrued expenses primarily reflects an increase in accrued income taxes.
West Marine's primary cash requirements are related to repayments of debt,
capital expenditures for new stores and remodeling existing stores, including
leasehold improvement costs and fixtures, for information systems enhancements,
and for merchandise inventory for stores. In the first nine months of 2001, we
spent $18.4 million to repay outstanding indebtedness and $13.9 million for
capital expenditures. We expect to spend an additional $5.0 to $6.0 million on
capital expenditures for the remainder of 2001. We intend to pay for our
expansion through cash generated from operations and bank borrowings.
At September 29, 2001, we had outstanding a $32.0 million senior guarantee note,
which matures on December 23, 2004, and requires annual principal payments of
$8.0 million. The note bears interest at 7.6%. The note is unsecured, and
contains certain restrictive covenants including fixed charge coverage and debt
to capitalization ratios and minimum net worth requirements.
We have an $80.0 million credit line, which expires on January 2, 2003.
Depending on our election at the time of borrowing, the line bears interest at
either the bank's reference rate or LIBOR plus a factor ranging from 1.0% to
2.25%. At the end of the third quarter of 2001, we had $23.3 million
outstanding under our credit line, which amount accrued interest at the weighted
average rate of 4.5%.
In addition, we have available a $2.0 million revolving line of credit with a
bank, expiring January 2, 2003. The line bears interest at the bank's reference
rate, which was 6.0% at the end of the third quarter of 2001, and has a ten-day
paydown requirement. At the end of the third quarter of 2001, no amounts were
outstanding under the revolving line of credit.
Both credit lines are unsecured and contain various covenants that require
maintaining certain financial ratios, including debt to earnings and current
ratios. The covenants include minimum levels of net worth and limitations on
levels of certain investments. These covenants also restrict the repurchase or
redemption of our common stock and payment of dividends, investments in
subsidiaries and annual capital expenditures.
At the end of the third quarter of 2001, we had $1.2 million outstanding in
stand-by letters of credit.
We believe existing credit facilities and cash flows from operations will be
sufficient to satisfy liquidity needs through 2002.
7
Special Note Regarding Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements include, among other things, statements that relate to West Marine's
future plans, earnings, expectations, objectives, performance, and similar
projections, as well as facts and assumptions underlying these statements or
projections. Actual results may differ materially from the results expressed or
implied in these forward-looking statements, due to various risks, uncertainties
or other factors. The following are important factors that could cause our
actual results to differ materially from those expressed in any forward-looking
statements:
. Because consumers often consider boats to be luxury items, the market is
subject to change in consumer confidence and spending habits. Recent slowing
of the domestic economy may adversely affect sales volumes, as well as our
ability to maintain current gross profit levels.
. Our operations could be adversely affected if unseasonably cold weather,
prolonged winter conditions or extraordinary amounts of rainfall were to
occur during the peak boating season.
. Our Catalog division (including Internet) has faced market share erosion in
areas where stores have been opened either by us or by our competitors.
Management expects this trend to continue.
. Our growth has been fueled principally by our store operations. Our continued
growth depends to a significant degree on our ability to continue to expand
our operations through the opening of new stores and to operate these stores
profitably, as well as increasing net sales at existing stores. Our planned
expansion is subject to a number of factors, including the adequacy of our
capital resources and our ability to locate suitable store sites and
negotiate acceptable lease terms, to hire, train and integrate employees and
to adapt our distribution and other operations systems.
. Our expansion plans include potential acquisitions of existing businesses.
Acquisitions involve a number of risks, including the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired business, potential adverse short-term effects on our operating
results and amortization of acquired intangible assets.
. The markets for recreational water sports and boating supplies are highly
competitive. Competitive pressures resulting from competitors' pricing
policies are expected to continue.
Additional factors which may affect our financial results include inventory
management issues, the impact of e-commerce, fluctuations in consumer spending
on recreational boating supplies, environmental regulations, demand for and
acceptance of our products and other risk factors disclosed from time to time in
our SEC filings. 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 believe there has been no material change in our exposure to market risk from
that discussed in our 2000 annual report on Form 10-K.
8
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed for the period being reported.
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: November 13, 2001 WEST MARINE, INC.
By: /s/ John Edmondson
------------------
John Edmondson
President and Chief Executive Officer
By: /s/ Russell Solt
----------------
Russell Solt
Executive Vice President and Chief
Financial Officer
By: /s/ Eric Nelson
---------------
Eric Nelson
Vice President, Finance and Chief
Accounting Officer
9