WMAR 12.31.2011 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
(I.R.S. 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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.    Yes  o    No  Q
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act).    Yes  o    No  Q
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  Q    No  o
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  Q    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
  
Accelerated filer  x
Non-accelerated filer  o (Do not check if a smaller reporting company)
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  Q
As of July 1, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $238.4 million based on the closing sale price of $10.48, as reported on the NASDAQ Global Market on such date.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at March 1, 2012
Common stock, $.001 par value per share
  
22,972,874 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
  
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2012
  
Part II, Item 5 and Part III


Table of Contents


WEST MARINE, INC.
2011 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
PART III
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
PART IV
 
 
 
 
Item 15.
 


 



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PRELIMINARY NOTE
This report is for the year ended December 31, 2011. This report modifies and supersedes documents filed prior to this report. The Securities and Exchange Commission (the “SEC”) allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this report. In addition, information that we file with the SEC in the future automatically will update and supersede information contained in this report.
We undertake no obligation (other than that required by law) to publicly update or revise any disclosures contained in this report, whether as a result of new information, future events or otherwise. Website references throughout this report are for information only, and the content of these websites is not incorporated by reference and should not otherwise be considered a part of this report.
All references to 2011, 2010 and 2009 in this report refer to our fiscal years ended on December 31, 2011, January 1, 2011 and January 2, 2010, respectively. Fiscal years 2011, 2010 and 2009 were fifty-two week years.


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PART I
ITEM 1—BUSINESS
General
West Marine is the largest specialty retailer of boating supplies and accessories with 2011 net revenues of $643.4 million. Our business strategy is to offer a broad assortment of merchandise for the boat and for the boater that meets the needs of individual boaters and boating businesses, provide great customer experiences, and offer the convenience of multi-channel shopping.
We have three reportable segments: Stores; Port Supply, our wholesale segment; and Direct-to-Customer, which includes eCommerce, catalog and call center transactions. The Direct-to-Customer segment was formerly referred to as our Direct Sales segment. We consider our individual stores to be operating segments which we aggregate into one reportable segment. Our Stores segment generated approximately 90% of our 2011 net revenues. Our 319 Company-operated stores open at the end of 2011 are located in 38 states, Puerto Rico and Canada. We sell to both retail and wholesale customers in our Stores segment. In addition, we have three franchised stores in Turkey. Our Port Supply segment is one of the largest wholesale distributors of marine supply and equipment in the United States. Products shipped to Port Supply customers directly from our warehouses represented approximately 4% of our 2011 net revenues. Our Direct-to-Customer segment offers customers around the world approximately 75,000 products and accounted for the remaining 6% of our 2011 net revenues. Financial information about our segments appears in Note 10 to our consolidated financial statements, in Item 8 of this report.
West Marine, Inc. was incorporated in Delaware in September 1993 as the holding company for West Marine Products, Inc., which was incorporated in California in 1976. Unless the context otherwise requires, “West Marine,” “we,” “us,” “Company” and “our” refer to West Marine, Inc. and its subsidiaries. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700. Our two distribution centers are located in Rock Hill, South Carolina and Hollister, California.
Stores Segment
Since opening our first store in California in 1975, we have grown through internal expansion and through strategic acquisitions to 319 Company-operated locations open at the end of 2011.
During 2011, we continued to focus on our real estate optimization program pursuant to which we are evolving toward having fewer but larger stores. We opened six stores while closing 14 stores during fiscal 2011. We ended the year with an aggregate of 2.72 million total square feet of space for all Company-operated stores, up slightly from 2.69 million square feet at the end of fiscal 2010. In December 2011, we opened our Fort Lauderdale Boating Superstore, a 50,000 square foot flagship and the biggest store in our history. We had ten flagship stores open at the end 2011, ranging in size from 21,000 to 50,000 square feet, offering an expansive array of merchandise - typically about 16,000 items - as well as displays designed to help customers make informed product selections. These stores offer not only an extensive assortment of core boating hardware and supplies, but also present a broader selection of boating-related lifestyle products, such as apparel. The flagship stores feature unique visual design elements and fixtures with nautical themes, designed to create an exciting atmosphere that we believe appeals to our customers.
We also operate large format stores, standard-sized stores and smaller “Express” stores. Our large format stores range from 13,000 to 19,000 square feet and carry about 11,000 items. The standard-sized stores typically range from 6,000 to 12,000 square feet and carry over 6,000 items. Express stores typically range from 2,500 to 3,000 square feet and carry over 4,000 items, mainly hardware and other supplies needed for day-to-day boat maintenance and repairs. In 2012, we currently expect to open approximately five flagship stores, seven large format stores and one standard-sized store. These store openings will replace approximately 25 existing stores.
We regularly monitor and take steps to improve individual store performance, including remodeling or expanding stores, relocating stores to more profitable locations and closing lower-performing stores which, along with our flagship and large store concepts, form a part of our real estate optimization strategy. In 2011, we expanded one store and remodeled three stores. In 2012, we expect to expand two large format stores into flagships and to expand one standard-sized store into a large format store, and we will continue to pursue opportunities to consolidate multi-store markets with larger stores. We also will close stores as and when appropriate based on store operating data and as stores approach their lease end dates. To date, we have identified approximately six such locations to close in 2012.
Port Supply Segment
Port Supply, our wholesale segment, expands our market share across a broader customer base and leverages our

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purchasing and distribution efficiencies. In 2011, we distributed marine supplies to domestic and international wholesale customers. Our largest wholesale customer accounted for less than 1% of total Port Supply segment revenues. Port Supply customers include businesses involved in boat sales, boat building, boat commissioning and repair, yacht chartering, marina operations and other boating-related activities. In addition, Port Supply sells to government and industrial customers who use our products for boating and non-boating purposes. 
We serve the wholesale market through sales representatives, our stores, our call center and the Internet at portsupply.com. Our extensive store network gives Port Supply an advantage in serving wholesale customers seeking convenience and a larger assortment of products than those carried by typical distributors. We believe that with continued customer focus, expanded distribution capabilities with an emphasis on treating our larger stores in certain markets as hubs or regional distribution centers, and our breadth of product selection and availability, we will continue to be recognized as the preferred wholesale distributor in the industry.
Direct-to-Customer Segment
Our retail eCommerce website, direct mail catalogs, and virtual call center comprise the Direct-to-Customer segment. This channel complements the Stores segment by building brand awareness, acting as an additional marketing vehicle, and providing our customers with the option of shopping from around the globe, 24 hours a day.
Our eCommerce website provides our customers with access to a broad selection of approximately 75,000 products, unique product advisor tips and technical information, over 450 product videos and customer-submitted product reviews. We also believe our website is a cost-effective means of testing market acceptance of new products and concepts.
This segment also provides customers with access to knowledgeable technical advisors who can assist our customers in understanding the various uses and applications of the products we sell. We operate a virtual call center from which our associates assist our customers by taking calls from their homes or from our support center in Watsonville, California. Our virtual call center supports sales generated through our eCommerce website, catalogs and stores, and provides customer service offerings. Fulfillment of customer orders placed on the website or via our virtual call center is completed through our distribution centers, or in limited cases directly from the vendor to the customer.
We mail our catalogs to addresses from our proprietary customer list. In addition, we acquire potential customer names from a variety of sources. Our customer list is continually updated to include customer address changes and new customer prospects, and to eliminate non-responders and information of customers requesting to opt out of our marketing programs.
Foreign Sales
We promote and sell our marine products internationally through our Port Supply and Direct-to-Customer segments. Through our Stores segment, we operate ten stores located in Canada. In addition, we have three franchised stores in Turkey. For each of 2011, 2010 and 2009, revenues from outside of the United States represented less than 5% of our total net revenues.
Customer Service
Offering exceptional customer service has been the cornerstone of West Marine since our beginning. We remain focused on the customer and providing great customer experiences. Many of our selling associates receive advanced product and technical training, empowering them to take great care of our customers. We will continue to listen to our customers and refine our business to meet their needs.
Merchandising
West Marine is committed to a broad assortment of merchandise that provides what our customers want, when they want it. Our merchandising department is responsible for vendor and product selections; and our planning and replenishment department is responsible for purchasing and managing inventory levels in our distribution centers and our stores. We also offer our customers the ability to special order products that we do not keep in inventory in our stores or at our distribution centers.
We purchased merchandise from more than 900 vendors during 2011 and realized savings through quantity purchases and direct shipments. In 2011, no single vendor accounted for more than 10% of our merchandise purchases, and our 20 largest vendors accounted for approximately 41% of our merchandise purchases. Generally, we purchase merchandise from our vendors on an order-by-order basis.
We continued to offer private label merchandise in 2011, which typically features higher gross margins than comparable branded products. Private label products, which we sell under the “West Marine,” “Black Tip,” “Third Reef,” “Pure Oceans,” "Lifesling", "SeaVolt," and “Seafit” brand names, usually are manufactured in Asia, the United States and Europe. We have a

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limited number of long-term contracts with our manufacturing sources and we compete with other companies for production facilities and import quota capacity.
Logistics
We operate two full service multi-channel distribution centers: a 472,000 square foot facility in Rock Hill, South Carolina and a 240,000 square foot facility in Hollister, California. Generally, vendors ship products to our distribution centers where merchandise is inspected and prepared for shipment to stores or shipped directly to customers in order to fulfill inventory or outstanding customer orders for all of our business segments (Stores, Port Supply, and Direct-to-Customer). Some vendors ship products directly to our stores. We use various third-party domestic and international transportation methods, such as ocean, air and ground, including Company-owned vehicles. Our distribution centers utilize advanced material handling equipment and voice-picking technologies, as well as radio frequency systems, to enable real-time management of inventory.
Marketing
Our overall marketing objective is to provide a customer-driven marketing strategy that delivers compelling product offers that are designed to drive customer traffic and are aligned with the customers' needs and our mission statement, to acquire new customers and to increase sales and profit. Our approach is to integrate across shopping channels allowing the customer to choose where they prefer to research products and shop. We position the West Marine brand to stand for better selection, trust, friendly and knowledgeable service, product value and shopping convenience. We market our products and services through direct mail catalogs and flyers, email and advertisements in boating specialty publications, newspapers and on the Internet.
We believe our West Advantage loyalty programs rank among the best in outdoor recreational membership programs in the United States. Both the West Advantage free and paid memberships allow our customers to earn points on qualifying purchases for future discounts, exclusive offers and invitations to unique shopping events designed to reward our customers for their support and loyalty.
We are committed to working towards conserving marine resources, reducing our impact on the environment and promoting boating. West Marine is committed to being a leader in sustainability within the industry through our initiative "Blue Future" where we support marine conservation, promote “Green Boating” and support the communities in which we work. We participate in a number of boat shows and sponsor boating-related events each year that deliver the "Blue Future" message. These events are designed to encourage participation in boating, increase the number of people enjoying the boating lifestyle, promote environmental responsibility and improve West Marine’s brand recognition.
Competition
The market for marine supplies is highly competitive and our stores compete with other specialty boating supply stores, and a variety of local and regional specialty stores, sporting goods stores and mass merchants. Many of these competitors have stores in markets where we now operate. Also, we have a number of competitors engaged in the catalog, Internet and wholesale distribution of marine products. The principal factors of competition in our marketplace are selection, quality, availability, price, customer service, convenience and access to a wide variety of merchandise.
Trademarks and Service Marks
We own the trademarks and service marks “West Marine” and “Port Supply,” among others. These marks and a number of others are registered with the U.S. Patent and Trademark Office and in certain foreign countries. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal. We have a license to use the “BoatU.S.” tradename under a marketing agreement with the Boat Owners Association of the United States, although we have discontinued the use of the BoatU.S. tradename except in certain limited situations.
Associates
As of February 18, 2012, we had 4,043 associates, of whom 1,863 were full-time and 2,180 were part-time or temporary. A significant number of temporary associates are hired during the summer peak selling season. For example, West Marine employed 4,787 associates on July 2, 2011.
Available Information
West Marine’s Internet address is westmarine.com. We make available, free of charge through the “Investor Relations” portion of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Forms 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, including the exhibits

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thereto, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. Interested persons may also access copies of these reports through the SEC’s website, sec.gov. We will furnish to our stockholders any exhibit to this annual report upon the written request of such stockholder and the payment of a specified fee, which is limited to our reasonable expenses.
We have adopted a code of ethics for our associates and Board of Directors, as well as an additional code of ethics for our senior financial officers (including our principal executive officer, principal financial officer and principal accounting officer). Copies of these codes of ethics are available on our website at westmarine.com, or printed copies can be obtained by writing to the Secretary, West Marine, Inc., 500 Westridge Drive, Watsonville, California 95076. Any amendments to these codes of ethics, as well as any waivers that are required to be disclosed under the rules of the SEC or the NASDAQ Stock Market, are posted on our website.
ITEM 1A—RISK FACTORS
Our business faces many risks. The risks described below may not be the only risks we face. Additional risks of which we are not yet aware, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline.
Our ability to generate revenue could be significantly affected by prolonged economic uncertainty.
The global economic crisis that began in 2008 caused a general tightening in credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed-income markets. Continued softness in the U.S. or global economy, or an uncertain economic outlook, could adversely affect consumer spending habits, our ability to attract and retain customers and our operating results in the future. Because consumers often consider boats to be luxury items, our success depends upon a number of factors relating to consumer spending, including current and future economic conditions affecting disposable consumer income, consumer confidence, employment rates, business conditions, fuel prices, interest rates and tax rates. Our business opportunities are directly dependent upon the level of consumer spending on recreational boating supplies, a discretionary spending item. In addition, volatility in fuel and other energy prices and general weakness in housing markets and the economy in general has resulted in decreased discretionary consumer spending. Any period of adverse economic conditions, low consumer confidence or reduced discretionary spending could impact our ability to attract and retain customers, resulting in a material adverse effect on our sales, results of operations, business and financial condition.
An inability to find suitable new and expanded store sites or delays in new store openings could materially affect our financial performance.
In order to meet our growth objectives, we will need to secure an adequate number of suitable new or expanded store sites, typically near marinas or other locations readily accessible by boaters. We require that all proposed store sites satisfy our criteria regarding cost and location. In addition, we may experience increased competition for store sites and, at some point, exhaust available coastal locations for new stores. We cannot assure that we will be able to find a sufficient number of suitable new sites for any planned expansion in any future period.
Our expected financial performance is based on our new, remodeled, or expanded stores opening on expected dates. It is possible that events such as construction delays caused by permitting or licensing issues, material shortages, labor issues, weather delays or other acts of God, discovery of contaminants or accidents could delay planned new store openings beyond their expected dates or force us to abandon planned openings altogether. Any failure on our part to recognize or respond to these issues may adversely affect our revenue growth, which, in turn, may adversely affect our future operating results.
Higher fuel and energy costs can adversely affect our results.
Because consumers often consider boats, boat accessories, and boating to be luxuries, higher energy and fuel costs could potentially have an adverse effect on our results. Higher fuel prices may have an adverse effect on boating usage and, consequently, demand for marine retail products. Additionally, we may experience increases in operating expenses due to increases in our facilities costs and in the cost of shipping products to our distribution centers and to our customers.
We experience fluctuations in our comparable store sales.
Our comparable store sales have fluctuated significantly in the past on an annual and quarterly basis, and we expect that they will continue to fluctuate in the future. A variety of factors affect comparable store sales including boat usage, boating participation, current economic conditions, competition, the timing and release of new merchandise and promotional events,

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changes in our merchandise mix, the success of marketing programs and weather conditions. These factors and others may cause our comparable store sales, customer traffic, and average order values to differ materially from prior periods and from expectations. Failure to meet the expectations of investors in one or more future periods could reduce the market price of our common stock.
We have undertaken a number of strategies designed to build our long-term strength. If one or more of these initiatives is unsuccessful, our profitability could be adversely affected.
Over the past few years, we launched a number of initiatives designed to increase sales and lower costs. These initiatives include optimizing our supply chain and inventory levels, closing under-performing stores with corresponding workforce adjustments, expanding our merchandise assortments, accelerating development of West Marine private-label brands, expanding our wholesale business, improving the retail experience for our retail and wholesale customers, placing emphasis on driving comparable store sales, and investing in real estate optimization by expanding to more large format and flagship stores. Each of these initiatives carries a certain level of risk, primarily related to increased expenses or reduced sales, which, when combined, could be material. If we fail to successfully execute one or more of these strategies, our profitability could be adversely affected.
Our results of operations could be adversely affected if unseasonably cold weather, prolonged winter conditions, natural disasters, such as hurricanes or extraordinary amounts of rainfall, or man-made disasters occur, especially during the peak boating season in our second and third fiscal quarters.
Our business is highly seasonal. The majority of our revenues occur between the months of April and August, which represent the peak boating months in most of our markets. Our annual results would be materially and adversely affected if our net revenues were to fall below expected seasonal levels during this period. Our business also is significantly affected by weather patterns. Unseasonably cool weather, prolonged winter conditions, extraordinary amounts of rainfall or natural or man-made disasters may decrease boating use in the peak season, resulting in lower maintenance needs and, therefore, decreased revenues.
Intense competition in the boating supplies, apparel, and outdoor recreation markets could reduce our revenue and profitability.
The retail market for recreational boating supplies and apparel is highly competitive. Our stores compete with other specialty marine supply stores. Many of these competitors have stores in the markets in which we now operate and in which we plan to expand. We also compete, to a lesser extent, with sporting goods stores and mass merchants. Our Internet and call center operations compete with other Internet and catalog retailers. We also have a number of competitors in the wholesale distribution of marine products. In addition, a key competitive factor in the marine supplies market is price. Increased online shopping and the availability and use of smart-phones or mobile devices allow customers to compare prices more quickly than in the past. Competitive pricing pressures have adversely affected our gross margins, and such pressures are expected to continue. In addition, if our competitors increase their spending on advertising and promotions relative to our spending, or if our advertising and promotions become less effective than those of our competitors, we could experience a material adverse effect on our results of operations. There can be no assurance that we will not face greater competition from other retailers or that we will be able to compete successfully with existing and new competitors.
If any of our manufacturers, key vendors or third party service providers fail to supply us with merchandise or services, we may not be able to meet the demands of our customers or our business needs and our sales could decline.
We depend on merchandise purchased from our vendors, services provided by third parties, and merchandise sourced from third-party manufacturers to obtain products and services for our sales channels. Generally, we deal with our merchandise suppliers on an order-by-order basis and have limited long-term purchase contracts or other contractual assurances of continued supply or pricing. Accordingly, our vendors and manufacturers could discontinue selling products to us at any time. The loss of any key vendor or manufacturer for any reason could limit our ability to offer products that our customers want to purchase. In addition, we believe many of our vendors obtain their products from China, Taiwan, Korea, Mexico and other countries, and we source products from third-party manufacturers in these countries. A vendor could discontinue selling to us products manufactured in foreign countries at any time for reasons that may or may not be within our control or the vendor’s control, including foreign government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions, quotas, quality control, increased costs for raw materials, and trade issues. Also, there is a risk that certain of our vendors or third party service providers may experience financial difficulty resulting in inability to provide service or manufacture or deliver products or services to us in a timely manner. Additionally, changes in commercial practices of our key vendors or manufacturers, such as changes in vendor support and incentives or changes in credit or payment terms or inability or failure of our service providers to provide required services, could negatively impact our operating results. Our operating

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results also could suffer if we are unable to promptly replace a vendor, manufacturer or service provider who is unwilling or unable to satisfy our requirements with a vendor, manufacturer or service provider providing equally appealing products or services.
If we lose key management or are unable to attract and retain the talent required for our business, our operating results and financial condition could suffer.
Our future performance is substantially dependent upon the continued services of certain members of our senior management. We do not maintain any key-man life insurance for our senior management, including Geoff Eisenberg, our President and Chief Executive Officer. The loss of the services of any key members of senior management could have a material adverse effect upon us. In addition, our continued growth depends on our ability to attract and retain skilled executives. There can be no assurance that we will be able to retain our existing personnel or attract additional qualified executives in the future or that our current management team will be successful in executing our planned strategies or continue to operate West Marine in a profitable manner.
Our business depends on our ability to meet our labor needs.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified associates, including general managers, assistant managers, call center associates and store associates, who understand and appreciate boating and the boating lifestyle and are able to communicate knowledgeably with our customers. Qualified individuals of the requisite caliber and in the numbers needed to fill these positions may be in short supply in some areas. Historically, turnover rates in the retail industry are high in comparison to other industries.
If we are unable to hire and retain sales associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our merchandise, our business could be materially adversely affected. Although none of our associates currently are covered by collective bargaining agreements, we cannot guarantee that our associates will not elect to be represented by labor unions in the future, which could increase our labor costs. Additionally, competition for qualified associates could require us to pay higher wages to attract a sufficient number of associates. An inability to recruit and retain a sufficient number of qualified individuals in the future may delay the planned openings of new stores. Any such delays, any material increases in associate turnover rates at existing stores or any increases in labor costs could have a material adverse effect on our business, financial condition or operating results.
We must successfully order and manage our inventory to reflect customer demand in a volatile market and anticipate changing consumer preferences and buying trends or our revenues and profitability will be adversely affected.
Our success depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner. The retail consumer industry, by its nature, is volatile and sensitive to numerous economic factors, including consumer preferences, competition, market conditions and general economic conditions. None of these factors are within our control. We cannot predict consumer preferences with certainty, and consumer preferences often change over time. We usually must order merchandise well in advance of the following selling season. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends, increases in customer demand or changes in prices. If we misjudge either the market for our merchandise or our customers’ purchasing habits, our revenues may decline significantly and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins.
A natural disaster or other disruption at our support center or either of our distribution centers could cause us to lose merchandise or inhibit our ability to process orders and, therefore, make us unable to effectively deliver to our customers and retail stores.
We rely on the continuous operation of our support center in Watsonville, California, and our distribution centers in Hollister, California, and Rock Hill, South Carolina. Any natural disaster or other serious disruption to these operations due to fire, flood, earthquake, hurricane, terrorism or any other unforeseen circumstance could materially impair our ability to do business and adversely affect our financial position and future operating results.
Reliance on our information technology systems exposes us to potential risks.
Reliance on our information technology systems exposes us to potential risks, such as interruptions due to natural disasters, cyber-attacks, unplanned data center and system outages, fraud perpetrated by malicious individuals or other causes. Our information technology systems and processes are hosted in two locations: our support center in Watsonville, California and at a co-location site outside of the state of California managed by a third-party provider. We intend to increase our reliance on information technology systems in order to improve our business processes and supply chain efficiencies and this includes

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implementation of new software and hardware. Any unmitigated interruption of our information technology systems may have a negative impact on future financial results.
The implementation of new systems or business process change is frequently disruptive to the underlying business of an enterprise and can be time consuming and expensive. These implementations often require an increase in management responsibilities and could divert management attention. Any disruptions relating from our new processes and systems, or from any problems associated with the implementation, particularly any disruptions impacting our operations or our ability to accurately report our financial performance on a timely basis during the implementation period, could adversely affect our business in a number of respects.
During 2009, we began a technology project to develop a new integrated point of sale and order entry management system with new associated business processes designed to provide multi-channel and cross-channel capabilities and functionality. We launched the system in the fourth quarter of 2011 and have rolled it out to all stores in the first quarter of 2012, and we anticipate that additional enhancements to this system will be rolled out during 2012. The integration of these new processes and technology systems into our business was disruptive and more costly than we anticipated. Should we be unable to successfully complete the implementation of the additional enhancements as planned, our financial position and results of operations could be materially negatively impacted.
Security breaches, such as data breaches, data theft, unauthorized access or hacking, or inadvertent mishandling of sensitive data by our associates could compromise sensitive information belonging to us or our customers and could harm our business and reputation.
Our success depends, in part, on the secure and uninterrupted performance of our information technology systems. Our technology systems, as well as those of our service providers, are vulnerable to damage from a variety of sources including network and telecommunication failures, power outages, viruses, malicious human acts, natural disasters and human error. Sustained or repeated system outages that interrupt our ability to process orders and deliver products to our customers and our stores in a timely manner could have a material adverse effect on our results of operations and financial condition.
We store sensitive data, including our proprietary business information, customer and vendor information, and confidential associate information, in our on-site and co-location data centers and on our networks. Despite our security measures, our information technology and infrastructure, or that of our third party providers, may be vulnerable to attacks by hackers, cyber-attacks, or breached due to associate error, malfeasance or other disruptions that could result in unauthorized disclosure or loss of sensitive information. Any such security breach could cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could adversely affect our business. Improper activities by third parties, advances in computer and software capabilities and encryption technologies, new tools and discoveries, and other new events or developments, may facilitate or result in a compromise or breach of our computer systems. Any such compromises or breaches could cause interruptions in our operations, damage our reputation, subject us to costs, fines or liabilities, and potentially hurt sales, revenues and profits.
Credit card issuers have promulgated credit card security guidelines as part of their ongoing effort to battle identity theft and credit card fraud. We continue to work with our third-party providers and credit card issuers to assure that our products and services comply with the credit card association’s security regulations. There can be no assurances, however, that our processes and systems, or those of our third-party providers, are invulnerable to unauthorized access or hacking. Unauthorized intrusion into portions of our computer systems, or those of our third-party providers that process and store information related to our customer transactions, may result in a data breach and theft of customer data.
We rely on processes, proprietary and commercially available systems as well as software, tools and monitoring to provide information technology security for processing, transmitting and storing confidential customer information, such as customer’s payment cards and personal information. Furthermore, the systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are determined and legally mandated by payment card industry standards, not by us. Compliance with these continually changing requirements may result in cost increases due to necessary system changes, security changes, administrative processes or technology changes, and such costs could adversely affect our financial position or results of operations.
Our founder and Chairman, Randolph K. Repass, beneficially owns approximately 32% of our common stock. As a result, his interests may differ from that of our other stockholders.
Randolph K. Repass, the Chairman of our Board of Directors, beneficially owns approximately 32% of our common stock. As a result, Mr. Repass has substantial influence in the election of directors of West Marine and, in general, the outcome of any matter submitted to a vote of our stockholders, including mergers, consolidations or the sale of all or substantially all of

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our assets. Due to his significant ownership position, Mr. Repass may be able, in concert with others, to prevent or to cause a change in control of West Marine.
We face periodic reviews, audits and investigations by government agencies and independent third parties, and these audits could have adverse findings, which may negatively impact our business.
We are subject to various routine and non-routine reviews, audits and investigations by various federal and state governmental regulators, including environmental, tax and customs agencies. Violation of the laws and regulations governing our operations, or changes in interpretations of those laws, could result in the imposition of civil or criminal penalties, the suspension or revocation of our licenses, or the revision and recoupment of past payments made based on audit findings. In addition, certain third party suppliers have rights under their contracts with us to review and audit our use of their products, and an unfavorable audit could result an adverse and possibly material claim for payment. Many proceedings and audits raise complex factual and legal issues and are subject to uncertainties. If we become subject to material fines or other payments due and owing, the cost of defense, or if other sanctions and/or corrective actions are imposed upon us or if we incur significant costs to refute or defend against any such fine, claim or other sanction, our results of operations may be negatively impacted.
Our business and financial results may be adversely affected by global climate change or by legal, regulatory or market responses to such change.
The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Changing weather patterns, along with the increased frequency or duration of extreme weather conditions, especially during our peak boating season, could reduce the sale of our products or materially affect our store locations, which are primarily located in coastal areas, through storm damage, reduced traffic, or increased insurance rates. Additionally, concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers which, if adopted, may adversely affect the boating industry and the suppliers of our retail products. Laws enacted may increase production costs for many of our retail products and, therefore, the prices we pay to stock such products may increase. We may not be able to pass along these increased prices to our customers, which could adversely impact our business and financial results.
Our failure to comply with certain environmental regulations could adversely affect our business.
We sell paints, varnishes and other products. The registration, storage, distribution, transportation and disposal of some of these products are subject to a variety of federal and state environmental regulations. Our failure to comply with these regulations could have an adverse impact on our business. In addition, we have indemnified certain of our landlords for any hazardous waste which may be found on or about the particular property or operation. If any such hazardous waste were to be found on property that we occupy, a significant claim giving rise to our indemnity obligation could adversely impact our operating results.
Because we self-insure against certain risks and maintain high deductibles on certain of our insurance policies, our operating results may be adversely affected if we suffer a substantial casualty.
We believe that insurance coverage is prudent for risk management, and we expect that our insurance costs will continue to increase. For certain types or levels of risk, including medical care, we have decided to limit our purchase of relevant insurance, choosing instead to self-insure. With medical insurance, we have individual and aggregate stop loss insurance to protect us from large claims. In other cases, we have elected to retain a higher portion of the risk in the form of higher deductibles. For example, during fiscal year 2011, we experienced higher year-over-year health care claims. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could have a material adverse effect on our business and operating results.
In 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, which changed the way health care is financed and which extends medical benefits and coverage. Any additional extended coverage and/or any further changes in health care legislation may significantly increase our health care costs, which could have an adverse impact on our results of operations.
In 1999, we began insuring our workers’ compensation losses through a high deductible program. This high per-claim deductible permits us to maintain low premium rates but may result in unexpectedly high costs if actual losses greatly exceed the expected losses in a year, with a corresponding negative effect on our operating results.
Our workers’ compensation expense is tied directly to the frequency and severity of workplace injuries to our associates. The costs associated with our workers’ compensation program include case reserves for reported claims up to the

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per claim deductible, an additional expense provision for unanticipated increases in the cost of open injury claims and for claims incurred in prior periods but not reported, as well as fees payable for claims administration. We recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by accruing liabilities on an actuarial basis which represent estimates of future amounts necessary to pay claims and related expenses with respect to covered events that have occurred. It is possible that our actual future workers’ compensation obligations may exceed the amount of its accrued liabilities, with a corresponding negative effect on future earnings, due to such factors as unanticipated adverse loss development of known claims, and the effect, if any, of claims incurred but not reported.
Failure of our internal control over financial reporting could harm our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States (“GAAP”). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot provide assurance that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly-traded companies.
Failure to comply with the SEC’s permanent injunction entered on consent against us could subject us to further SEC enforcement actions, which could adversely affect our business.
As previously disclosed, we were the subject of a formal investigation by the SEC’s Division of Enforcement. We reached a consensual resolution of the SEC’s civil complaint resulting in a permanent injunction (the “SEC Injunction”) entered on August 31, 2009 in the U.S. District Court for the Northern District of California, San Jose Division. In agreeing to the entry of the SEC Injunction, we neither admitted nor denied the allegations in the SEC’s complaint. The SEC Injunction, by its terms, permanently restrains and enjoins us from, among other things, (1) filing with the SEC any report under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and rules and regulations adopted under the Exchange Act, that contains any untrue statement of a material fact, which omits to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or that omits to disclose any information required to be disclosed, (2) failing to make and keep accurate books, records and accounts, and (3) failing to devise and maintain an adequate system of internal accounting controls and procedures. Our failure to comply with any of the provisions of the SEC Injunction could adversely affect our business as a result of further SEC investigations, enforcement action, criminal prosecution and penalties, which could be significant.
The price of our common stock may be subject to volatile fluctuations based on fluctuations in our quarterly results, general economic and market conditions and by our ability to meet market expectations.
The market price of our common stock may be subject to significant fluctuations in response to operating results, comparable store sales announcements, announcements by competitors, our ability to meet market expectations and other factors. Variations in the market price of our common stock may also be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors. These market fluctuations, as well as general economic conditions, may adversely affect the market price of our common stock. We cannot assure that the market price of our common stock will not fluctuate or decline significantly in the future.
Fluctuations in currency exchange rates may adversely impact our cash flows and earnings.
We operate retail stores located in Canada, and therefore our cash flows and earnings are exposed to currency exchange rate fluctuations between the U.S. dollar and the Canadian dollar. While we may attempt to limit our exposure to exchange rate changes by entering into short-term currency exchange contracts, there is no assurance that we will hedge or will be able to hedge such foreign currency exchange risk or that our hedges will be successful. Our currency exchange gains or losses may adversely impact our cash flows and earnings. Additionally, adverse movements in currency exchange rates could result in a reduction in growth of international Direct-to-Customer sales, impacting our cash flows and earnings.
We face the risk of exposure to product liability claims, product recalls and adverse publicity.

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We market and distribute products purchased from third-party suppliers, including products which are marketed and resold under our private label brands. We may inadvertently resell product(s) that contain a defect which may cause property damage or personal injury to our end-user customers, which therefore exposes us to the risk of adverse publicity, product liability claims, and product recalls or other regulatory or enforcement actions, including those initiated by the U.S. Consumer Product Safety Commission, by state regulatory authorities or through private causes of action. We generally seek contractual indemnification and insurance coverage from our suppliers and we carry our own insurance. However, if the insurance coverage is not provided or adequate and/or the contractual indemnification is not provided by or enforceable against the supplier, product liability claims relating to defective and/or recalled products could have a material adverse effect on our ability to successfully market our products and on our business, financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the costs associated with defending such claims and/or the negative publicity surrounding a product recall or any assertion that our products caused property damage or personal injury, could damage our brand identity and our reputation with existing and potential customers and have a material adverse effect on our business, financial condition and results of operations.
Changes in laws and regulations could increase our cost of doing business.
We are subject to a wide variety of laws and regulations in the United States and the other countries and jurisdictions in which we operate, and changes in the level of government regulation of our business have the potential to materially alter our business practices and/or our profitability. Changes in U.S. or foreign law that change our operating requirements with respect to sourcing or reselling products could increase our costs of compliance or make it too expensive for us to offer such products, which could lead to a reduction in revenue. Also, changing regulations and laws governing the Internet and eCommerce transactions (including taxation, user privacy, data protection, pricing and electronic communications) could impede the growth of our Internet business and increase our cost of doing business. In addition, changes in interpretations of laws or regulations, such as a recent California Supreme Court decision holding that zip codes constitute personally identifiable information could adversely impact industry practices related to collecting customer information. Any changes we make as a result of this decision could add significant costs, expose us to litigation, impact our marketing efforts, impede growth of our customer database and limit our customer-service offerings. Furthermore, changes in federal or state wage requirements (including changes in entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation) could adversely impact our ability to achieve our financial targets.
We are subject to governmental export and import controls that could subject us to liability.
Many of the products sold in our stores are sourced by our vendors and, to a limited extent, by us, in many foreign countries. As a result, we are subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as: potential disruptions in supply; changes in duties, tariffs, quotas and voluntary export restrictions on imported merchandise; strikes and other events affecting delivery; consumer perceptions of the safety of imported merchandise; product compliance with laws and regulations of the destination country; concerns about human rights, working conditions and other labor rights and conditions in foreign countries where merchandise is produced; compliance with laws and regulations concerning ethical business practices, such as the U.S. Foreign Corrupt Practices Act; and economic, political or other problems in countries from or through which merchandise is imported. Furthermore, in 2010, U.S. Customs and Border Protection completed its focused assessment related to our import practices during which certain deficiencies were identified. Although we have enhanced policies and procedures to address these deficiencies and to facilitate compliance with laws and regulations relating to doing business in foreign markets and importing merchandise from, and exporting merchandise abroad, such laws and regulations are highly complex and there can be no assurance that our associates, contractors, agents, vendors or other third parties with whom we do business will not violate such laws and regulations or our policies, which could adversely affect our operations or operating results.
Changes in accounting standards, interpretations or applications of accounting principles, and subjective assumptions, estimates and judgments by management related to complex accounting matters, could significantly affect our financial results.
GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business including, but not limited to, inventory valuation adjustments, capitalized indirect costs, costs associated with exit activities, impairment of long-lived assets, workers’ compensation reserves, and valuation allowances against our deferred tax assets, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. Additionally, changes in accounting principles and related accounting pronouncements, their interpretation and/or their application to our financial statements, particularly in light of the ongoing convergence of GAAP and International Financial Reporting Standards, could result in material charges to our financial statements.

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ITEM 1B—UNRESOLVED STAFF COMMENTS
None.
ITEM 2—PROPERTIES
Our executive offices and support center are located in a 106,000 square foot facility in Watsonville, California, which we occupy under a lease that expires in 2016. We operate a 240,000 square foot distribution center located in Hollister, California, under a lease that expires in 2021. We also operate a 472,000 square foot distribution center located in Rock Hill, South Carolina, under a lease that expires in 2017. At December 31, 2011, our 319 stores comprised an aggregate of approximately 2.7 million square feet of space. Nearly all of our stores are leased, typically for a five-year or 10-year initial term, with options to renew for at least one five-year period. In some leases, we pay a fixed rent, in others we have a period of fixed rent and then a rent change that is either fixed or determined by a consumer price index calculation. Substantially all of our leases require us to pay insurance, utilities, real estate taxes, repair and maintenance expenses and common area maintenance.

ITEM 3—LEGAL PROCEEDINGS
We are involved in various legal and administrative proceedings, claims and litigation and regulatory compliance audits arising in the ordinary course of business. Accordingly, material adverse developments, settlements or resolutions may occur and negatively impact our results in the quarter in which such developments, settlements or resolutions are reached. Based on the facts currently available, we do not believe that the disposition of legal or administrative proceedings that are pending or asserted, individually and in the aggregate, will have a material adverse effect on our financial position. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact our results of operations in any given period.
For legal proceedings where we have determined that a loss is probable, there is no material difference between the amount accrued and the reasonably possible amount of loss. For legal proceedings where a loss is reasonably possible, the range of estimated loss is not material.
ITEM 4—MINE SAFETY DISCLOSURE
Not applicable.

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PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Select Market tier of the NASDAQ Stock Market (effective January 3, 2011) under the symbol “WMAR”. The following table sets forth, for the periods indicated, the high and low closing sales prices for our common stock, as reported by the NASDAQ Stock Market.
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
2011
 
 
 
 
 
 
 
High
$
13.36

 
$
11.00

 
$
10.43

 
$
11.63

Low
$
9.80

 
$
9.85

 
$
7.70

 
$
7.01

2010
 
 
 
 
 
 
 
High
$
11.70

 
$
13.05

 
$
11.48

 
$
11.05

Low
$
8.16

 
$
9.44

 
$
8.42

 
$
8.99


As of March 1, 2012, there were approximately 6,248 holders of record of our common stock, and the last sale price reported on the NASDAQ Global Select Market was $10.70 per share. We have not paid any cash dividends on our common stock, and we do not anticipate doing so in the foreseeable future.
The information required by this item with respect to securities authorized for issuance under equity compensation plans is incorporated by reference from our definitive proxy statement for our 2012 annual meeting of stockholders.

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The following graph compares the five-year cumulative total stockholder return on West Marine common stock with the five-year cumulative total return of (i) the NASDAQ Composite Index and (ii) peer companies in the Morningstar Industry Group—Specialty Retail index. The graph showing the Morningstar Industry Group—Specialty Retail was compiled and prepared for West Marine by Zacks Investment Research. We have been advised by Morningstar that Zacks Investment Research is the exclusive provider of Morningstar industry data for total return performance graphs. The index presented below consists of 75 specialty retailers.
 
 
12/30/2006
 
12/29/2007
 
1/3/2009
 
1/2/2010
 
1/1/2011
 
12/31/2011
West Marine, Inc.  
$
100.00

 
$
52.23

 
$
26.40

 
$
46.67

 
$
61.26

 
$
67.34

Specialty Retail
100.00

 
108.86

 
63.96

 
105.96

 
135.15

 
129.65

NASDAQ Composite Index
100.00

 
111.58

 
68.74

 
96.54

 
114.06

 
113.16


The performance graph set forth above will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or under the Exchange Act, except to the extent that we specifically incorporate it by reference, and will not otherwise be deemed to be soliciting material or to be filed under such Acts.

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ITEM 6—SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated balance sheet data for 2011 and 2010 and consolidated statement of operations data for 2011, 2010 and 2009 have been derived from our consolidated financial statements for the fiscal years appearing elsewhere in this report and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and notes thereto in Item 8.
 
(in thousands, except per share and operating data)
2011
 
2010
 
2009
 
2008
 
 
2007
 
Consolidated Statement of Operations Information:
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
643,443

 
$
622,802

 
$
588,416

 
$
631,258

  
 
$
679,561

  
Income (loss) from operations
22,139

(1)
14,884

 
10,345

 
(22,932
)
(2)
 
(51,107
)
(4)
Income (loss) before income taxes
21,221

(1)
14,247

 
9,539

 
(25,270
)
(2)
 
(55,069
)
(4)
Net income (loss)
29,662

(1)
13,227

 
12,376

 
(38,800
)
(2)(3)
 
(49,976
)
(4)
Net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.30

(1)
$
0.59

 
$
0.56

 
$
(1.76
)
(2)(3)
 
$
(2.30
)
(4)
Diluted
1.27

(1)
0.57

 
0.55

 
(1.76
)
(2)(3)
 
(2.30
)
(4)
Consolidated Balance Sheet Information:
 
 
 
 
 
 
 
 
 
 
 
Working capital
$
197,930

 
$
176,616

 
$
157,620

 
$
183,223

  
 
$
207,722

  
Total assets
335,657

 
308,886

 
292,237

 
314,592

  
 
368,318

  
Long-term debt, net of current portion

 

 

 
47,000

  
 
52,338

  
Operating Data:
 
 
 
 
 
 
 
 
 
 
 
Stores open at year-end
319

 
327

 
335

 
344

  
 
372

  
Comparable stores net sales increase (decrease)
2.3
%
 
6.3
%
 
(3.6
)%
 
(6.8
)%
 
 
(1.9
)%
 
 
(1)
Includes a $15.7 million non-cash benefit from the release of substantially all of our valuation allowance against deferred tax assets (see Note 8 to our consolidated financial statement for further discussion).
(2)
Includes the following items on a pre-tax basis: a $10.7 million charge for store closures and other restructuring costs (see Note 3 to our consolidated financial statements for further discussion); a $2.9 million non-cash charge for impairment of long-lived assets; and $2.2 million of costs related to the settled SEC investigation.
(3)
Includes the impact of a $23.2 million non-cash charge to provide a full valuation allowance against all net deferred tax assets, including 2008 additions to deferred tax assets.
(4)
Includes the following items on a pre-tax basis: a $56.9 million non-cash charge for impairment of goodwill; $2.7 million of costs related to the settled SEC investigation; $1.3 million of termination severance payments to our former chief executive officer; a $1.3 million non-cash charge for impairment of long-lived assets; and a $0.6 million charge for store closure and other restructuring costs.


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ITEM 7—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 supplementary data in Item 8.
Forward-Looking Statements
The statements in this Form 10-K that relate to future plans, events, expectations, objectives or performance (or assumptions underlying such matters) are forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, among other things, statements that relate to our future plans, expectations, objectives, performance and similar projections, such as statements regarding our earnings and growth in profitability and expectations relating to our ability to continue to manage our expenses and execute on our strategies in a relatively flat boating equipment market, as well as facts and assumptions underlying these statements or projections. These forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance in future periods to be materially different from any future results or performance suggested by the forward-looking statements in this report. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that actual results will not differ materially from these expectations. These risks, uncertainties and other factors are discussed under risk factors in Item 1A of this report.
Readers are cautioned not to place undue reliance on forward-looking statements, which are based only upon information available as of the date of this report. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Overview
We are the largest specialty retailer of boating supplies and accessories with 2011 net revenues of $643.4 million and net income of $29.7 million. Our business strategy is to offer a broad assortment of merchandise for the boat and for the boater that meets the needs of individual boaters and boating businesses, provides great customer experiences and offers the convenience of multi-channel shopping.
A few of the new or continuing key strategies we are implementing or building upon during 2012 include:
Expanding our merchandise selection, including adding product assortment throughout our wide range of merchandise categories and accelerating development of West Marine private-label brands across a number of categories.
Continuing to focus on our real estate optimization program pursuant to which we are evolving toward having fewer but larger stores.
Growing our Port Supply wholesale business by continuing to leverage our store network as a complement to delivering goods out of our distribution centers, with an emphasis on treating our larger stores in certain markets as hubs or regional distribution centers that offer assortment and convenience with personal service and more delivery options.
Driving sales growth by improving the on-line experience for our retail and wholesale customers with expanded assortments, more and better content, improved search capabilities, faster speed and other new features. We believe the websites drive traffic and sales in all segments.
Placing emphasis on driving comparable store sales by increasing associate knowledge through technical training, promoting the option of buying on-line and picking up in a store, and encouraging customers to join and benefit from our West Advantage loyalty membership programs.
We have three reportable segments: Stores; Port Supply; and Direct-to-Customer. Our Stores segment generated approximately 90% of our 2011 net revenues. Our 319 Company-operated stores open at the end of 2011 are located in 38 states, Puerto Rico and Canada. In addition, we have three franchised stores in Turkey. Our Port Supply segment is one of the largest wholesale distributors of marine equipment in the United States. Products shipped to Port Supply customers directly from our distribution centers represented approximately 4% of our 2011 net revenues. Our Direct-to-Customer segment, which includes our retail eCommerce, direct mail catalogs and call center operations, offers customers around the world approximately 75,000 products, and it accounted for the remaining 6% of our 2011 net revenues.

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Results of Operations
The following table sets forth certain income statement components expressed as a percent of net revenues:
 
 
2011
 
2010
 
2009
Net revenues
100.0
 %
 
100.0
%
 
100.0
 %
Cost of goods sold
71.2
 %
 
71.8
%
 
72.7
 %
Gross profit
28.8
 %
 
28.2
%
 
27.3
 %
Selling, general and administrative expense
25.4
 %
 
25.8
%
 
25.8
 %
Store closures and other restructuring costs
 %
 
%
 
(0.3
)%
Impairment of long-lived assets
 %
 
%
 
 %
Income from operations
3.4
 %
 
2.4
%
 
1.8
 %
Interest expense
0.1
 %
 
0.1
%
 
0.2
 %
Income before income taxes
3.3
 %
 
2.3
%
 
1.6
 %
Provision (benefit) for income taxes
(1.3
)%
 
0.2
%
 
(0.5
)%
Net income
4.6
 %
 
2.1
%
 
2.1
 %
Fiscal 2011 Compared with Fiscal 2010
Net revenues for 2011 were $643.4 million, an increase of 3.3%, compared to net revenues of $622.8 million for 2010. Sales increased in the electronics and fishing categories, which are primarily discretionary items, as well as in the apparel categories, which we attribute to our merchandise expansion strategy. During the first half of the year, sales of usage-based items, such as maintenance, engine parts and electrical products, were lower than the prior due to inclement weather in many markets; however, as we progressed through the remainder of the fiscal year, we saw increased sales and ended the year with higher sales in these categories. We expect consumers to continue to carefully evaluate their needs-based boating purchases and their spending on discretionary items. We believe that economic uncertainty, including fuel prices, could continue to have an impact on our sales, with corresponding risks to our earnings and cash flow in 2012. In response, we will continue to focus on managing expenses, while making prudent investments in growth and emphasizing working capital management. Net income for 2011 was $29.7 million compared to net income for 2010 of $13.2 million. The increase in net income was attributable to the release of substantially all of our valuation allowance discussed below under “Income taxes” and net revenues growth outpacing the costs of goods sold.
Segment revenues
Net revenues for the Stores segment increased $18.4 million, or 3.3%, to $578.9 million in 2011, primarily due to an $11.6 million, or 2.3%, increase in comparable store sales. A driver of the comparable store sales increase was higher sales to wholesale customers through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through store locations. In certain markets, our larger stores serve as hubs or regional distribution centers that offer better assortments and convenience with personal service and more delivery options for wholesale customers. Real estate activity connected with our store optimization strategy drove an $8.9 million increase in net revenues as stores opened during the fourth quarter of 2010, and stores opened during 2011 generated $39.9 million in sales, whereas stores closed during these same periods effectively reduced net revenues by $31.0 million.
During 2012, we expect to open approximately five flagship stores, seven large format stores, and one standard-sized store and close approximately 25 existing stores in connection with our real estate optimization strategy of evolving to having fewer, larger stores in many of our key markets. As a result of these actions, we expect that our overall store counts will decline slightly, while our total selling square footage will increase slightly. In addition, we will continue with our practice of monitoring the operating performance and economics of all store locations and evaluating for closure any underperforming stores when the economics favor doing so.
Port Supply segment net revenues through our distribution centers decreased $0.9 million, or 3.0%, to $27.5 million in 2011 compared to 2010. However, sales to the wholesale customer group increased in our Stores segment. We believe the shift from Port Supply to Stores was driven by our ongoing efforts to better serve our wholesale customers through our store locations.
Net revenues from our Direct-to-Customer segment, which we formerly referred to as our Direct Sales segment, increased $3.1 million, or 9.2%, to $37.1 million from higher sales through our website. The increased sales resulted from technology upgrades completed in 2010, expanded marketing offerings and product assortments, which drove higher traffic to

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the website and resulted in higher average order values per transaction.
Comparable store sales
Comparable store sales for 2011 increased by 2.3%, or $11.6 million, compared to 2010. Comparable store sales changes during the first, second, third and fourth quarters of 2011 were 2.7%, 0.0%, 3.9% and 4.3%, respectively. The overall comparable store trends were positive across geographic regions, with the strongest growth in the Southeast. Our merchandise expansion strategy resulted in positive comparable store sales across all regions, with the strongest results in the for-the-boater categories. We believe the sales results by category in the Southeast were consistent with higher boat usage demonstrated by higher sales of maintenance-related products in that region. Also, we identified an opportunity in the Southeast to expand our fishing assortments and delivered sales growth in that category. While it appears the economy has stabilized generally, there remains some uncertainty about the market for boating supplies and related merchandise.

Gross profit
Gross profit increased by $9.3 million, or 5.3%, to $184.9 million in 2011, compared to $175.6 million for 2010, primarily due to higher sales. Gross profit increased as a percentage of net revenues by 0.6% to 28.8% in 2011, compared to 28.2% in 2010, primarily due to a 0.3% reduction in unit buying and distribution costs and a 0.2% improvement in inventory shrink. Additionally, increased revenues allowed us to leverage our relatively fixed occupancy expenses by 0.1%. These improvements were partially offset by lower raw product margin, down 0.1%, driven by a shift in revenues to lower-margin categories, such as electronics.
Selling, general and administrative expense
Selling, general and administrative (“SG&A”) expense for 2011 was $162.9 million, an increase of $2.0 million, or 1.3%, compared to $160.8 million for last year. SG&A decreased as a percentage of revenues to 25.4% in 2011, compared to 25.8% in 2010. Drivers of higher SG&A expense included: a $2.6 million loss contingency accrual related to a recently-finalized software license audit; $1.3 million in higher information technology spending, including costs to implement our new point-of-sale and order entry systems; a variable selling expense increase of $1.2 million primarily due to higher store payroll supporting the higher sales year-over-year; a $0.7 million increase in benefits costs, including higher year-over-year health care claims; and a $0.6 million unfavorable impact versus last year of foreign currency exchange. These increases in SG&A were partially offset by a $4.4 million reduction in accrued bonus expense in 2011 due to increased bonus target thresholds, reflecting improved performance expectations when compared to the target thresholds for fiscal 2010.
Interest expense
Interest expense increased $0.3 million, or 44.1%, to $0.9 million in 2011, compared to $0.6 million in 2010. The increase in interest expense was due to both higher commitment fees and higher average interest rates, although average outstanding bank borrowings were lower in 2011, compared to 2010. Cash provided by operating activities funded property and equipment investments with excess cash being used to pay down our seasonal use of debt. This was the primary driver of the lower average outstanding bank borrowings in 2011.
Income taxes
Our effective income tax rate for 2011 was a benefit of 39.8%, compared to a provision of 7.2% in 2010. The year-over-year change in our effective tax rate was primarily due to the release of substantially all of our valuation allowance during the second quarter of 2011, resulting in a $15.7 million benefit. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in past fiscal years and our forecast of future taxable income in the jurisdictions in which we have operations. Given our improved financial performance and expectations of future results, we determined that there was sufficient positive evidence to support the release of the majority of the valuation allowance against our deferred tax assets in the second quarter of 2011. Our effective tax rate is subject to change based on the mix of income from different state and foreign jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We currently anticipate the effective tax rate for fiscal year 2012 will be a provision of approximately 39.5%. For more information, see Note 8 to our consolidated financial statements.
Fiscal 2010 Compared with Fiscal 2009
Net revenues for 2010 were $622.8 million, an increase of 5.8%, compared to net revenues of $588.4 million for 2009. We believe that net revenues in fiscal year 2010 were favorably affected by changes in the competitive landscape that occurred during fiscal year 2009, as well as favorable weather throughout much of the boating season. However, we believe there was a

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general softening in the boating equipment market after the Fourth of July. Our mix of business in the Southeast during the second quarter was impacted by the effects of the oil spill in the Gulf of Mexico. While not significant, we did experience a decrease in sales of merchandise typically used by recreational boaters and fishermen in the affected areas of the Southeast. However, this decrease was offset by increased sales of products to customers engaged in fighting the effects of the spill. There did not appear to be any significant sales impact for the third and fourth quarters related to the oil spill. Net income for 2010 was $13.2 million compared to net income for 2009 of $12.4 million.
Segment revenues
Net revenues for the Stores segment increased $35.1 million, or 6.7%, to $560.5 million in 2010, primarily due to a $30.7 million, or 6.3%, increase in comparable store sales. A driver of the comparable store sales increase was higher sales to wholesale customers through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through store locations. In certain markets, our larger stores serve as regional distribution centers that offer better assortments, convenience, and competitive pricing with better service and more delivery options for wholesale customers. The increase in net revenues was across most merchandise categories and sales benefited from our expanded assortments in clothing, as well as increased sales for electronics and maintenance-related products. Real estate activity connected with our store optimization strategy drove a $4.6 million increase in net revenues as stores opened during the fourth quarter of 2009, and stores opened during 2010 generated $30.4 million in sales, whereas stores closed during these same periods effectively reduced net revenues by $25.8 million.
Additionally, early in 2010, we began to see signs that customers were preparing their boats for usage as reflected by our increase in sales during the first quarter of 2010, led by growth in maintenance-related products. We also saw recovery in demand for our higher-priced items, such as electronics.
Port Supply net revenues through our distribution centers decreased $0.6 million, or 2.2%, to $28.3 million in 2010 compared to 2009. However, sales to the wholesale customer group increased in our Stores segment.
Net revenues from our Direct-to-Customer segment decreased $0.1 million, or 0.2%, to $34.0 million. We began to see the decrease in this segment following the launch of our updated website in the second quarter of 2010. The transition to the updated site negatively affected sales. However, this decline was temporary, and we began to see a rebound in the sales performance of this segment late in the third quarter and continuing through the fourth quarter.
Comparable store sales
Comparable store sales for 2010 increased by 6.3%, or $30.7 million, compared to 2009. Comparable store sales changes during the first, second, third and fourth quarters of 2010 were 8.4%, 9.4%, 3.7% and 1.6%, respectively. The overall comparable store trends were consistent across the geographic regions. The increase in comparable store sales was across most merchandise categories and, in particular, we continued to experience increased sales for electronics and maintenance-related products.

Gross profit
Gross profit increased by $14.7 million, or 9.2%, to $175.6 million in 2010, compared to $160.9 million for 2009, primarily due to higher sales. Gross profit increased as a percentage of net revenues by 0.9% to 28.2% in 2010, compared to 27.3% in 2009, primarily due to a 0.5% increase in raw product margin driven by more effective promotions, less clearance activity and a shift in revenues to higher-margin core boating categories, such as maintenance. Additionally, increased revenues allowed us to leverage our relatively fixed occupancy expenses by 0.4%.
Selling, general and administrative expense
SG&A expense for 2010 was $160.8 million, an increase of $8.5 million, or 5.6%, compared to $152.3 million for 2009. Expenses as a percentage of revenues remained flat at 25.8%. Drivers of the higher SG&A expense included: a variable selling expense increase of $4.2 million primarily due to selective investments in additional staffing in our stores during the second and third quarters, our busiest quarters; a $1.5 million unfavorable comparison versus fiscal year 2009 due to the impact of foreign currency exchange; $1.3 million in higher information technology spending to implement our new point-of-sale and order entry systems; and $1.2 million related to West Marine University, our national sales meeting held every other year. SG&A expense in 2009 was reduced by $1.0 million upon receipt of an insurance reimbursement related to costs associated with the SEC investigation which closed during that year. The increase in SG&A was partially offset by a $0.7 million reduction in bonus expense in 2010 when compared to 2009.
Store closure and other restructuring costs

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Store closure and other restructuring costs for 2010 changed by $1.5 million when compared to 2009. During the fourth quarter of 2009, we reached an agreement to sublease a location which had a large associated termination obligation. The terms of this particular agreement were more favorable than what we originally estimated and resulted in a $1.7 million reversal in 2009 of the previously accrued estimated costs. For additional information, see Note 3 to our consolidated financial statements.
Interest expense
Interest expense decreased $0.2 million, or 21.0%, to $0.6 million in 2010, compared to $0.8 million in 2009. The decrease in interest expense was due to both lower interest rates and lower average outstanding bank borrowings in fiscal 2010, compared to fiscal 2009. Cash provided by operating activities funded property and equipment investments with excess cash being used to pay down debt. This was the primary driver of the lower average outstanding bank borrowings in 2010.
Income taxes
Our effective income tax rate for 2010 was a provision of 7.2%, compared to a benefit of 29.7% in 2009. The year-over-year change in our effective tax rate was primarily due to the recognition of a $3.7 million benefit in 2009 related to a tax law change that increased the number of historical years in which companies are permitted to carry back prior period net operating losses. Similar to 2009, in 2010 we were able to use timing differences that were not previously benefited due to the valuation allowance to reduce the statutory tax rate. Given that our improved financial performance had been for a limited time period combined with the continued economic uncertainty with respect to the general state of the economy and rising fuel costs, in fiscal 2010 we concluded that, while evidence related to current and future financial performance was improving, there remained sufficient economic uncertainty that it would have been premature to assert that it was more likely than not that we would be able to utilize all net deferred tax assets and release some or all of the partial valuation allowance. For more information, see Note 8 to our consolidated financial statements.
Liquidity and Capital Resources
Funds generated by operating activities, available cash and our credit facility are our largest sources of cash. Our primary uses of cash include merchandise inventory purchases, occupancy costs, personnel-related expenses and investments in property and equipment. At the end of both 2011 and 2010, we were debt free. However, we expect to continue to borrow against our credit facility during the first half of each year as we build inventory levels in preparation for the key boating season.
Working capital, the excess of current assets over current liabilities, increased to $197.9 million at the end of 2011, compared to $176.6 million at the end of 2010. The increase in working capital primarily was attributable to a $22.0 million higher cash balance at the end of 2011. Neither our access to, nor the value of, our cash equivalents was materially affected by the liquidity problems experienced by certain financial institutions over the past several years.
Our cash needs for working capital are supported by a secured credit facility. There is risk to this capital resource stemming from current market conditions in that the amount we have available to borrow under our loan agreement primarily is driven by the estimated liquidation value of our inventory. External factors, such as increased liquidations and bankruptcies in the marketplace, could put downward pressure on this liquidation value and thus our associated borrowing availability. However, we continue to take steps to mitigate this risk. First, we are focusing on maximizing cash flow and minimizing borrowing needs. We expect to accomplish this by: (i) increasing inventory turnover, which will require lower working capital to maintain fresh and adequate inventory at our stores; (ii) continuing to focus on expense control, including continual re-engineering efforts to simplify and streamline administrative, inventory and other business processes, and to shrink or eliminate overhead costs as and when necessary or appropriate; and (iii) being prudent with our capital spending and concentrating on investments with a demonstrable financial return. Second, we are improving the quality of our inventory by controlling the proportion of overstocked or discontinued goods. Third, we are maintaining communications with our lenders to keep them apprised of our business plans.
Operating activities
During 2011, our primary source of liquidity was cash flow from operations. Net cash provided by operating activities increased year-over-year by $12.3 million to $37.2 million in 2011, compared to $24.9 million last year. The increase in cash provided by operating activities was due primarily to increases in cash provided by net income and reduced inventory levels, partially offset by an increase in cash used for accrued expenses. Cash used for inventory was lower due primarily to our continued focus on inventory management and ensuring the correct product assortment in each store based on customer demographics. Cash used for accrued expenses partially offset the increase in cash primarily as a result of lower accrued bonus expense given our increased bonus target thresholds in 2011 as compared to accrued bonus and related thresholds in fiscal 2010.

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During 2010, our primary source of liquidity was cash flow from operations. Net cash provided by operating activities decreased year-over-year by $37.7 million to $24.9 million in 2010, compared to $62.6 million in 2009. The major driver of this cash flow reduction was a $6.9 million increase in merchandise inventories during 2010, compared to a $23.4 million reduction in the prior year as we focused on necessary inventory reductions in 2009. The increased inventory in 2010 was driven by our strategy to bring in additional inventory earlier in the season and to maintain safety stocks to help ensure in-stock position and to help fulfill customer needs and maximize sales throughout the boating season. A $4.4 million decrease in accounts payable during 2010, compared to a $6.1 million increase in accounts payable during 2009, also contributed to the decline in cash provided by operating activities.
Capital growth
In 2011, our capital expenditures were $17.6 million, primarily for new stores, store remodels, information technology and investment in supply chain efficiencies. We opened six new stores and remodeled four stores in 2011. During 2012, we expect to increase capital spending somewhat, primarily in support of strategic growth initiatives which include new stores, store remodels and expansions, and information technology enhancements. We intend to fund our expansion through cash generated from operations and, if necessary, credit facility borrowings.
Financing arrangements
Net cash provided by financing activities was $2.4 million in 2011, attributed entirely to an increase in cash related to associate share-based compensation plans. Net cash provided by financing activities was $0.9 million in 2010, primarily consisting of $1.9 million increase in cash related to associate share-based compensation plans, partially offset by $1.0 million in cash used to pay loan costs associated with our amended and restated loan agreement.
In August 2010, we entered into a four-year 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.
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.Federal funds rate, as in effect from time to time, plus one-half of one percent;
b.LIBOR rate for a one-month interest period plus one percent; or
c.The rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate,” or
2.The LIBOR rate quoted by the British Bankers Association for the applicable interest period.
In each case, the applicable interest rate is increased by a margin imposed by the loan agreement. The applicable margin for any date will depend upon the amount of available credit under the revolving credit facility. The margin range for option (1) above is between 1.5% and 2.0% and for option (2) above is between 2.5% and 3.0%.
The loan agreement also imposes a commitment fee on the unused portion of the revolving credit facility available. For 2011, 2010 and 2009, the weighted-average interest rate on all of our outstanding borrowings was 3.1%, 1.5% and 1.8%, respectively.
Although the loan agreement contains customary covenants, including, but not limited to, restrictions on our ability to incur liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our revolving credit facility at any given time is determined by the estimated value of these assets as determined by the lenders’ appraisers. Additionally, we must maintain a minimum revolving credit availability equal to the greater of $7 million or 10% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the

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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 December 31, 2011, we were in compliance with the covenants under our loan agreement.
At the end of 2011 and 2010, there were no amounts outstanding under our revolving credit facilities, and we had $86.9 million and $89.9 million, respectively, available for future borrowings. At the end of 2011 and 2010, we had $8.3 million and $5.6 million, respectively, of outstanding commercial and stand-by letters of credit. We strategically manage our debt over the course of our fiscal year. We incur seasonal fluctuations in our cash flows and, therefore, we incur debt as we build up our inventories for spring in order to maintain stock levels sufficient to fulfill customer needs and maximize sales during the main boating season. Additionally, we hire a significant number of temporary associates during the summer, our peak selling season. Our weighted average outstanding balances for the first quarters of 2011 and 2010 were $6.1 million and $17.0 million, respectively. For our second quarters of 2011 and 2010, the weighted average outstanding balances were $13.4 million and $19.3 million, respectively, and at the end of our third quarters of 2011 and 2010, the weighted average outstanding balances were less than $0.1 million and $0.1 million, respectively. The fourth quarter weighted average outstanding balances for both 2010 and 2009 were not material.
Our aggregate borrowing base cannot exceed $140.0 million. Our borrowing base at each of our last two fiscal year-ends consisted of the following (in millions):
 
 
2011
 
2010
Accounts receivable availability
$
4.6

 
$
3.6

Inventory availability
106.6

 
108.3

Less: reserves
(5.6
)
 
(5.8
)
Less: minimum availability
(10.6
)
 
(10.6
)
Total borrowing base
$
95.0

 
$
95.5


Our aggregate borrowing base was reduced by the following obligations (in millions):
 
Ending loan balance/(overpayment)
$
(0.2
)
 
$

Outstanding letters of credit
8.3

 
5.6

Total obligations
$
8.1

 
$
5.6


Accordingly, our availability as of fiscal year end 2011 and 2010, respectively, was (in millions):
 
Total borrowing base
$
95.0

 
$
95.5

Less: obligations
(8.1
)
 
(5.6
)
Total availability
$
86.9

 
$
89.9


Contractual obligations
Aggregate information about our unconditional contractual obligations as of December 31, 2011 is presented in the following table (in thousands).

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Payments due by period
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Contractual cash obligations:
 
 
 
 
 
 
 
 
 
Operating leases(1)
$
258,837

 
$
44,968

 
$
69,644

 
$
50,414

 
$
93,811

Purchase commitments(2)
27,254

 
27,254

 

 

 

Bank letters of credit
8,326

 
8,326

 

 

 

Other long-term liabilities
1,736

 
1,412

 
324

 

 

 
$
296,153

 
$
81,960

 
$
69,968

 
$
50,414

 
$
93,811

 
(1)
Operating lease amounts in this table represent minimum amounts due under existing agreements and exclude costs of insurance, taxes, repairs and maintenance.
(2)
All but a limited number of our purchase commitments are cancelable by us without penalty; however, we do intend to honor these commitments.
We are party to various arrangements that are conditional in nature and obligate us to make payments only upon the occurrence of certain events, such as delivery of functioning software products. Because it is not possible to predict the timing or amounts that may be due under these conditional arrangements, no such amounts have been included in the table above.
Off-balance sheet arrangements
Operating leases are the only financing arrangements not reported on our 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 December 31, 2011, we are not involved in any unconsolidated special purpose entities or variable interest entities.
Seasonality
Historically, our business has been highly seasonal. In 2011, 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 compared to 2008, 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, based on increased sales during the first quarter of 2010 and led by an early Spring and growth in maintenance-related products. 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. 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. Also, later in the second quarter and into the third 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 and continuing into the third quarter, whereas many parts of the country were cooler and rainier than normal earlier in the second quarter. The fourth quarter brought favorable weather, which we believe drove boat usage and benefited sales. Early in the year, we began to experience sales growth in higher-ticket merchandise, such as electronics, and this strength carried throughout the remainder of the year. In fiscal 2011, we experienced double-digit growth in our soft goods categories, reflecting the success of our merchandise expansion strategy, which was partially offset by lower sales when compared to 2010 in product categories that were higher in fiscal 2010 due to efforts to clean up the oil spill in the Gulf of Mexico. As 2011 progressed, we saw increasing impact of our real estate optimization strategy, which drove total sales increases that exceeded comparable store sales growth. We believe sales in the fourth quarter of 2011 also reflected success of our key item strategy

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during the holiday shopping period.
In 2012, in addition to focusing on implementing and building upon our key strategies as outlined in the "Overview" discussion above, we also will continue to manage our business conservatively from an operating expense standpoint, while taking 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 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.
Although we believe we have seen some recovery in customer boat usage and demand for higher-priced items, we believe that the ongoing uncertainty in economic conditions has had, and 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 2012 (see the “Fiscal 2011 Compared with Fiscal 2010 — Segment Revenues” discussion included above). For 2012, we will continue to control expense growth and maximize cash flow by:
continuing to control our operating expenses through variable expense management, along with reengineering and streamlining business processes, where applicable;
continuing to improve the quality of our inventory by tightly controlling overstocked or discontinued goods;
proceeding with our ongoing real estate optimization program, evolving to having fewer, larger stores with anticipated improved store economics;
managing the business to the budget established for 2012, which reflects prudent investment in growth while focusing on expense control and emphasizing working capital management; and
exploring methods and strategies to drive traffic, sales, conversion, and market presence.
More broadly, in order to better meet the needs of our customers and provide a better customer experience, 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. The system has been deployed company-wide, and we anticipate that additional enhancements to this system will be rolled out during 2012.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of West Marine’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to our consolidated financial statements, in Item 8 of this report.
Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the audit committee of our board of directors.
 

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Description
  
Judgments and Uncertainties
  
Effect if Actual Results Differ From
Assumptions
Inventory—Valuation Adjustments
  
 
  
 
We value our merchandise inventories at the lower of the cost or market value on an average cost basis. Inventory cost is written down to market value when cost exceeds market value, which we estimate using current levels of aged and discontinued product and historical analysis of items sold below cost. Lower of cost or market adjustments included in ending inventory at December 31, 2011 and January 1, 2011 were $3.4 million and $4.8 million, respectively.
  
Our lower of cost or market adjustments contain uncertainties because the calculations require management to make assumptions and to apply judgment regarding forecasted consumer demand, the promotional environment, technological obsolescence and consumer preferences.
  
We have not made any material changes in our inventory valuation methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our lower of cost or market adjustments. However, if estimates regarding consumer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses that could be material. If we had to take additional markdowns of 10% on all items included in merchandise inventory write-downs at December 31, 2011, net income would be affected by approximately $0.2 million in the fiscal year then ended.
 
 
 
Inventory—Capitalized Indirect Costs
  
 
  
 
Inventory cost includes certain indirect costs related to the purchasing, transportation and warehousing of merchandise. Capitalized indirect costs include freight charges for moving merchandise to warehouses or store locations and operating costs of our merchandising, replenishment and distribution activities. We recognize indirect costs included in inventory value as an increase in cost of goods sold as the related products are sold. Indirect costs included in inventory value at December 31, 2011 and January 1, 2011 were $17.8 million and $18.3 million, respectively.
  
Our capitalized indirect costs contain uncertainties because the calculations require management to make assumptions and to apply judgment relating to factors of our cost accounting system, the soundness of the underlying principles and their consistent application. In interim periods, the calculation of capitalized indirect costs requires management to estimate capitalized indirect costs, merchandise purchases and inventory levels for the full fiscal year.
  
We have not made any material changes in our capitalized indirect cost methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future assumptions or estimates we use to calculate our capitalized indirect costs. However, if our assumptions or estimates are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in our expenses included in capitalized indirect costs at December 31, 2011 would have affected net income by approximately $1.1 million in the fiscal year then ended.

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Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Vendor Allowances Receivable
 
 
 
 
We establish a receivable and reduce inventory cost for income generated from vendor-sponsored programs, or vendor allowances, that is earned but not yet received from our vendors, which we calculate based on provisions of the programs in place. Due to the complexity of the individual agreements with vendors, we perform detailed analyses and review historical trends to determine an appropriate level for the vendor allowances receivable. Our receivable for vendor allowances at December 31, 2011 and January 1, 2011 was $3.0 million and $3.2 million, respectively, and is included in other current assets.
 
Our vendor allowances receivable contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding a number of factors, including our ability to collect amounts due from vendors and in interim periods requires management to estimate future inventory purchases.
 
We have not made any material changes in the accounting methodology used to establish our vendor allowances receivable during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our vendor allowances receivable. However, if our assumptions or estimates are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in our estimate of our ability to collect vendor allowances at December 31, 2011 would have affected net income by approximately $0.1 million in the fiscal year then ended.
 
 
 
Costs Associated With Exit Activities
 
 
 
 
We occasionally vacate stores prior to the expiration of the related lease. For vacated locations that are under long-term leases, we record an expense for the net present value of the difference between our future lease payments and related costs (e.g., real estate taxes and common area maintenance) from the date of closure through the end of the remaining lease term, net of expected future sublease rental income.
 
Our estimate of future cash flows is based on our analysis of the specific real estate market, including input from real estate firms; and economic conditions that can be difficult to predict. Costs associated with exit activities included in accrued expenses at December 31, 2011 and January 1, 2011 were $1.1 million and $2.2 million, respectively.
 
Our location closing liability contains uncertainties because management is required to make assumptions and to apply judgment to estimate the duration of future vacancy periods, the amount and timing of future settlement payments and the amount and timing of potential sublease rental income. When making these assumptions, management considers a number of factors, including historical settlement experience, the owner of the property, the location and condition of the property, the terms of the underlying lease, the specific marketplace demand and general economic conditions.
 
We have not made any material changes in the accounting methodology used to establish our location closing liability during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our location closing liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our location closing liability or to our estimated sub-lease income at December 31, 2011 would have affected net earnings by approximately $0.1 million in the fiscal year then ended.


















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Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Impairment of long-lived assets
 
 
 
 
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are reviewed and evaluated quarterly.
 
When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future undiscounted cash flows. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. We may also accelerate depreciation over the asset’s revised useful life if it is identified for replacement or abandonment at a specific future date.
 
In fiscal years 2011 and 2010, we recorded non-cash charges of less than $0.1 million and $0.2 million, respectively, for impairment of long-lived assets.
 
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate future cash flows and asset fair values, including forecasting useful lives of the assets. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We believe we have approximately $0.1 million in net carrying value of assets held for use where an impairment charge is reasonably possible within the next twelve months.
 
We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.
 
 
 
 
 
 
 
 

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Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Income Taxes
 
 
 
 
We estimate our annual tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the year's taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Our effective tax rate is subject to change based on the mix of income from different state and foreign jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in past fiscal years and our forecast of future taxable income in the jurisdictions in which we have operations. In fiscal 2011, we released $15.7 million, representing the majority of the valuation allowance against our deferred tax assets.
 
The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our effective tax rate and our income tax exposures. The need to record or release a valuation allowance also contains uncertainties because management is required to make assumptions and apply judgment, primarily whether we will have future taxable income, to estimate the future realization of net deferred tax assets.
 
Interpretations of and guidance surrounding income tax laws and regulations change over time. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.



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Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Liabilities for Self Insurance or High Deductible Losses
 
 
 
 
We are self-insured for certain losses, including those related to employee healthcare. However, we obtain third-party insurance coverage to limit our exposure to these claims. In other cases, we purchase commercial insurance, such as for workers’ compensation and general liability claims. We insure workers’ compensation losses through a high-deductible program, and we recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by accruing liabilities on an actuarial basis which represent estimates of future amounts necessary to pay claims and related expenses with respect to covered events that have occurred.
 
When estimating our liabilities relating to self-insurance or high-deductible insurance programs, we consider a number of factors, including historical claims experience, severity factors and actuarial analysis.
 
Periodically, management reviews its assumptions and the valuations provided by actuarial analysis to determine the adequacy of our self-insured liabilities.
 
Liabilities for our self-insured losses or high-deductible insurance programs contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date.
 
We have not made any material changes to our self insurance accrual methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate these liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
 
A 10% change in our self-insured liabilities and loss reserves relating to high-deductible insurance programs at December 31, 2011, would have affected net income by approximately $0.3 million in the fiscal year then ended.


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Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Share-Based Compensation
 
 
 
 
We have a share-based compensation plan under which we award non-qualified stock options and restricted stock. We also have an associate stock buying plan. For more information, see Note 2 to our consolidated financial statements in Item 8 of this report.
 
We determine the fair value of our non-qualified stock option awards at the date of grant using the Black-Scholes Merton option-pricing model.
 
We determine the fair value of our restricted stock awards and associate stock buying plan purchases using similar valuation techniques and the closing market price of our common stock.
 
The fair value of our restricted stock units is based on the closing market price of our common stock.
 
Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate.
 
We have not made any material changes in our methodology for determining fair value of stock options during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine share-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based compensation expense that could be material.
 
If actual results are not consistent with the assumptions used, the share-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the share-based compensation.
 
A 10% change in our assumptions, such as volatility or expected term, for share-based compensation expense for the fiscal year ended December 31, 2011, would have affected net income by approximately $0.1 million in the fiscal year then ended.

ITEM 7A—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.
At the end of the 2011, we had no outstanding long-term debt and as such would not be impacted by a change in interest rates. In the third quarter of 2010, we entered into a four-year, amended and restated loan and security agreement pursuant to which the Company has up to $140.0 million in borrowing capacity. There are various interest rate options available, for more information, see Note 5 to our consolidated financial statements in Item 8 of this report.
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 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements due to error or fraud on a timely basis. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making its assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management has concluded that our internal control over financial reporting was effective as of December 31, 2011, based on the criteria set forth in Internal Control—Integrated Framework issued by the COSO.
Our internal control over financial reporting as of December 31, 2011 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which is included in this report.
 
 
 
 
/S/    GEOFFREY A. EISENBERG        
 
/S/    THOMAS R. MORAN        
Geoffrey A. Eisenberg
 
Thomas R. Moran
President and Chief Executive Officer
(principal executive officer)
 
Senior Vice President and Chief Financial Officer
(principal financial officer)
 
 
 
March 7, 2012
 
March 7, 2012

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
West Marine, Inc.
We have audited West Marine, Inc. (a Delaware Corporation) and Subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). West Marine, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, West Marine, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of West Marine, Inc. and Subsidiaries as of December 31, 2011 and January 1, 2011, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2011, and our report dated March 7, 2012 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
San Francisco, CA
March 7, 2012

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
West Marine, Inc.
We have audited the accompanying consolidated balance sheets of West Marine, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 2011 and January 1, 2011, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of West Marine, Inc. and Subsidiaries as of December 31, 2011 and January 1, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), West Marine, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 7, 2012 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
San Francisco, CA
March 7, 2012

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WEST MARINE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND JANUARY 1, 2011
(in thousands, except share data)
 
 
Fiscal Year-End
 
2011
 
2010
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,966

 
$
22,019

Trade receivables, net of allowances of $301 in 2011 and $431 in 2010
5,771

 
5,605

Merchandise inventories
193,375

 
201,588

Deferred income taxes
7,118

 
2,997

Other current assets
13,792

 
16,739

Total current assets
264,022

 
248,948

Property and equipment, net
60,746

 
56,483

Long-term deferred taxes
7,800

 

Other assets
3,089

 
3,455

TOTAL ASSETS
$
335,657

 
$
308,886

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
25,085

 
$
29,403

Accrued expenses and other
41,007

 
42,929

Total current liabilities
66,092

 
72,332

Deferred rent and other
13,922

 
14,793

Total liabilities
80,014

 
87,125

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; 23,022,654 shares issued and 22,991,764 shares outstanding at December 31, 2011 and 22,656,083 shares issued and 22,625,193 shares outstanding at January 1, 2011
23

 
23

Treasury stock
(385
)
 
(385
)
Additional paid-in capital
186,089

 
181,891

Accumulated other comprehensive loss
(727
)
 
(749
)
Retained earnings
70,643

 
40,981

Total stockholders’ equity
255,643

 
221,761

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
335,657

 
$
308,886





See notes to consolidated financial statements.

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WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2011, JANUARY 1, 2011 AND JANUARY 2, 2010
(in thousands, except per share data)
 
 
2011
 
2010
 
2009
Net revenues
$
643,443

 
$
622,802

 
$
588,416

Cost of goods sold
458,444

 
447,161

 
427,501

Gross profit
184,999

 
175,641

 
160,915

Selling, general and administrative expense
162,860

 
160,838

 
152,303

Restructuring costs (recoveries) (Note 3)
(50
)
 
(261
)
 
(1,746
)
Impairment of long-lived assets (Note 1)
50

 
180

 
13

Income from operations
22,139

 
14,884

 
10,345

Interest expense
918

 
637

 
806

Income before taxes
21,221

 
14,247

 
9,539

Provision (benefit) for income taxes
(8,441
)
 
1,020

 
(2,837
)
Net income
$
29,662

 
$
13,227

 
$
12,376

Net income per common and common equivalent share:
 
 
 
 
 
Basic
$
1.30

 
$
0.59

 
$
0.56

Diluted
$
1.27

 
$
0.57

 
$
0.55

Weighted average common and common equivalent shares outstanding:
 
 
 
 
 
Basic
22,762

 
22,492

 
22,215

Diluted
23,286

 
23,014

 
22,347



See notes to consolidated financial statements.

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WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2011, JANUARY 1, 2011 AND JANUARY 2, 2010
(in thousands, except share data)
 
 
Common
Shares
Outstanding
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Total
Comprehensive
Income (Loss)
Balance at January 3, 2009
22,115,377

 
$
22

 
$
(366
)
 
$
173,997

 
$
15,377

 
$
590

 
$
189,620

 
$
(37,883
)
Net income
 
 
 
 
 
 
 
 
12,376

 
 
 
12,376

 
$
12,376

Foreign currency translation adjustment, net of tax of ($34)
 
 
 
 
 
 
 
 
 
 
(1,096
)
 
(1,096
)
 
(1,096
)
Common stock issued under equity compensation plan
88,393

 
 
 
 
 
2,704

 
 
 
 
 
2,704

 
 
Tax benefit (deficiency) from equity issuance, including excess tax benefit of $52
 
 
 
 
 
 
46

 
 
 
 
 
46

 
 
Treasury shares acquired
(3,318
)
 
 
 
(19
)
 
 
 
 
 
 
 
(19
)
 
 
Sale of common stock pursuant to associates stock buying plan
145,531

 
 
 
 
 
712

 
 
 
 
 
712

 
 
Balance at January 2, 2010
22,345,983

 
$
22

 
$
(385
)
 
$
177,459

 
$
27,754

 
$
(506
)
 
$
204,344

 
$
11,280

Net income
 
 
 
 
 
 
 
 
13,227

 
 
 
13,227

 
$
13,227

Foreign currency translation adjustment, net of tax of $0
 
 
 
 
 
 
 
 
 
 
(243
)
 
(243
)
 
(243
)
Common stock issued under equity compensation plan
195,758

 
1

 
 
 
3,522

 
 
 
 
 
3,523

 
 
Tax benefit (deficiency)from equity issuance, including excess tax benefit of $283
 
 
 
 
 
 
292

 
 
 
 
 
292

 
 
Sale of common stock pursuant to associates stock buying plan
83,452

 
 
 
 
 
618

 
 
 
 
 
618

 
 
Balance at January 1, 2011
22,625,193

 
$
23

 
$
(385
)
 
$
181,891

 
$
40,981

 
$
(749
)
 
$
221,761

 
$
12,984

Net income
 
 
 
 
 
 
 
 
29,662

 
 
 
29,662

 
$
29,662

Foreign currency translation adjustment, net of tax of $0
 
 
 
 
 
 
 
 
 
 
22

 
22

 
22

Common stock issued under equity compensation plan
282,813

 
 
 
 
 
3,733

 
 
 
 
 
3,733

 
 
Tax benefit (deficiency) from equity issuance, including excess tax benefit of $347
 
 
 
 
 
 
(204
)
 
 
 
 
 
(204
)
 
 
Sale of common stock pursuant to associates stock buying plan
83,758

 
 
 
 
 
669

 
 
 
 
 
669

 
 
Balance at December 31, 2011
22,991,764

 
$
23

 
$
(385
)
 
$
186,089

 
$
70,643

 
$
(727
)
 
$
255,643

 
$
29,684


See notes to consolidated financial statements.

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WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2011, JANUARY 1, 2011 AND JANUARY 2, 2010
(in thousands)
 
 
2011
 
2010
 
2009
OPERATING ACTIVITIES:
 
 
 
 
 
Net income
$
29,662

 
$
13,227

 
$
12,376

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
14,314

 
14,926

 
17,030

Impairment of long-lived assets
50

 
180

 
13

Share-based compensation
2,394

 
2,506

 
2,410

Tax benefit (deficiency) from equity issuance
(204
)
 
292

 
46

Excess tax benefit from share-based compensation
(347
)
 
(283
)
 
(52
)
Deferred income taxes
(12,745
)
 
(825
)
 
(580
)
Provision for doubtful accounts
54

 
80

 
375

Lower of cost or market inventory adjustments
1,154

 
1,966

 
2,580

Loss (gain) on asset disposals
(13
)
 
192

 
160

Changes in assets and liabilities:
 
 
 
 
 
Trade receivables
(220
)
 
(119
)
 
(117
)
Merchandise inventories
7,059

 
(6,922
)
 
23,389

Other current assets
2,946

 
3,066

 
(3,436
)
Other assets
112

 
(582
)
 
(1,037
)
Accounts payable
(4,610
)
 
(4,358
)
 
6,077

Accrued expenses and other
(2,330
)
 
(440
)
 
1,113

Deferred items and other non-current liabilities
(47
)
 
1,987

 
2,286

Net cash provided by operating activities
37,229

 
24,893

 
62,633

INVESTING ACTIVITIES:
 
 
 
 
 
Proceeds from sale of property and equipment
64

 
71

 
32

Purchases of property and equipment
(17,710
)
 
(14,139
)
 
(13,755
)
Net cash used in investing activities
(17,646
)
 
(14,068
)
 
(13,723
)
FINANCING ACTIVITIES:
 
 
 
 
 
Borrowings on line of credit
28,758

 
46,890

 
36,537

Repayments on line of credit
(28,758
)
 
(46,890
)
 
(83,537
)
Payment of loan costs

 
(980
)
 

Proceeds from exercise of stock options
1,339

 
1,017

 
294

Proceeds from sale of common stock pursuant to Associates Stock Buying Plan
669

 
618

 
712

Excess tax benefit from share-based compensation
347

 
283

 
52

Treasury shares acquired

 

 
(19
)
Net cash provided by (used in) financing activities
2,355

 
938

 
(45,961
)
Effect of exchange rate changes on cash
9

 
(23
)
 
(143
)
NET INCREASE IN CASH
21,947

 
11,740

 
2,806

CASH AT BEGINNING OF PERIOD
22,019

 
10,279

 
7,473

CASH AT END OF PERIOD
$
43,966

 
$
22,019

 
$
10,279

Other cash flow information:
 
 
 
 
 
Cash paid for interest
$
645

 
$
475

 
$
810

Cash paid (refunded) for income taxes
3,547

 
(2,325
)
 
1,929

Non-cash investing activities
 
 
 
 
 
Property and equipment additions in accounts payable
1,757

 
1,465

 
295



See notes to consolidated financial statements.

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS—West Marine Inc. and its consolidated subsidiaries (“West Marine” or the “Company,” unless the context requires otherwise) is a specialty retailer of boating supplies and has three reportable segments—Stores, Port Supply (wholesale) and Direct-to-Customer (retail eCommerce, direct mail catalogs, and call center)—which all sell aftermarket recreational boating supplies directly to customers. At December 31, 2011, West Marine offered its products through 319 Company-operated stores in 38 states, Puerto Rico, Canada and three franchised stores in Turkey, through its call center channel and on the Internet. The Company is also engaged, through its Port Supply division and its stores, in the wholesale distribution of products to commercial customers and other retailers.
West Marine was incorporated in Delaware in September 1993 as the holding company for West Marine Products, Inc., which was incorporated in California in 1976. The Company’s principal executive offices are located in Watsonville, California.
PRINCIPLES OF CONSOLIDATION—The consolidated financial statements include the accounts of West Marine, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany balances and transactions are eliminated in consolidation.
YEAR-END—The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday closest to December 31. Fiscal years 2011, 2010 and 2009 consisted of the 52 weeks ended December 31, 2011, January 1, 2011 and January 2, 2010, respectively. References to 2011, 2010 and 2009 are to the fiscal years ended December 31, 2011, January 1, 2011 and January 2, 2010, respectively.
ACCOUNTING ESTIMATES—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the following: useful lives and recoverability of fixed assets; inventory obsolescence and shrinkage reserves; capitalized indirect inventory costs; allowance for doubtful accounts receivable; calculation of accrued liabilities, including workers’ compensation and other self-insured liabilities; sabbatical liability, sales returns reserves, unredeemed gift cards and loyalty program awards; vendor consideration earned; fair value of share-based compensation instruments, income tax valuation allowances and uncertain tax positions; goodwill impairment; legal liabilities and other contingencies; and asset retirement obligations. Actual results could differ from those estimates.
INVENTORIES—Merchandise inventories are carried at the lower of cost or market on an average cost basis. Capitalized indirect costs include freight charges for transporting merchandise to warehouses or store locations and operating costs incurred for merchandising, replenishment and distribution activities. Indirect costs included in inventory value at the end of fiscal years 2011 and 2010 were $17.8 million and $18.3 million, respectively. Indirect costs included in inventory value are recognized as an increase in cost of goods sold as the related products are sold.
Inventories are written down to market value when cost exceeds market value, based on historical experience and current information. Reserves for estimated inventory shrinkage based on historical shrinkage rates determined by the Company’s physical merchandise inventory counts and cycle counts were $2.3 million and $2.9 million at the end of fiscal years 2011 and 2010, respectively. Reserves for estimated inventory market value below cost, based upon current levels of aged and discontinued product and historical analysis of inventory sold below cost, were $3.4 million and $4.8 million at the end of fiscal years 2011 and 2010, respectively.
DEFERRED CATALOG AND ADVERTISING COSTS—The Company capitalizes the direct cost of producing and distributing its catalogs. Capitalized catalog costs are amortized, once a catalog is mailed, over the expected net sales period, which is generally from one month to 11 months. Advertising costs, which are included in selling, general and administrative (“SG&A”) expense, are expensed as incurred and were $6.0 million, $5.6 million and $5.8 million in 2011, 2010 and 2009, respectively. The capitalized value of prepaid catalog and advertising costs on the Balance Sheet was immaterial as of December 31, 2011 and January 1, 2011, respectively.
PROPERTY AND EQUIPMENT—Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the various assets, as follows:

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

 
 
 
 
 
 
 
  
Estimated
Useful
Lives
 
 
Furniture and equipment
  
3–7 years
  
 
Computer software and hardware
  
3–7 years
  
 
Buildings
  
25 years
  

Leasehold improvements are amortized over the lesser of the expected lease term or the estimated useful life of the improvement which is usually about 10 years.
CAPITALIZED INTEREST—The Company capitalizes interest on major capital projects. The Company capitalized $0.1 million in each of the years 2011 and 2010.
CAPITALIZED SOFTWARE COSTS—Capitalized computer software, included in property and equipment, reflects costs related to internally-developed or purchased software that are capitalized and amortized on a straight-line basis, generally over a period ranging from three to seven years.
INTANGIBLE ASSETS—The Company completes an impairment test annually or more frequently if evidence of possible impairment arises. No impairment was recognized in 2009, 2010, or 2011. Amortization expense for other intangible assets was less than $0.1 million in each of the years 2011, 2010 and 2009. Amortization expense in each of the next three years is not deemed significant.
ASSET RETIREMENT OBLIGATIONS—The Company estimates the fair value of obligations to clean up and restore leased properties under agreements with landlords and records the amount as a liability when incurred. Liabilities for asset retirement obligations were $0.8 million as of December 31, 2011, $0.7 million as of January 1, 2011 and $0.4 million as of January 2, 2010. There were no significant changes attributable to the following components during the reporting period: liabilities incurred in 2011, liabilities settled in 2011, accretion expense, and revisions in estimated cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS—The Company reviews long-lived assets, including intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the long-lived asset are less than the carrying value, a loss equal to the difference between carrying value and the fair market value of the asset is recorded. The Company recorded asset impairment charges of less than $0.1 million in fiscal 2011, $0.2 million in 2010 and less than $0.1 million in 2009.
FACILITY CLOSING COSTS—The Company records an obligation for the present value of estimated costs that will not be recovered in the period a store, distribution center or other facility is closed. These costs include employment termination benefits, lease contract termination costs and the book value of abandoned property. For more information, see Note 3.
SELF-INSURANCE OR HIGH DEDUCTIBLE LOSSES—The Company uses a combination of insurance and self-insurance for a number of risk management activities including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by its associates. Liabilities associated with these risks are estimated primarily based on amounts determined by actuarial analysis, and accrued in part by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Any actuarial projection of losses is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
DEFERRED RENT—Certain of the Company’s operating leases contain periods of free or reduced rent or contain predetermined fixed increases in the minimum rent amount during the lease term. For these leases, the Company recognizes rent expense on a straight-line basis over the expected life of the lease, generally about 10 years, including periods of free rent, and records the difference between the amount charged to rent expense and the rent paid as deferred rent. Tenant improvement allowances received from landlords are deferred and amortized to reduce rent expense over the expected life of the lease.
INCOME TAXES—Income taxes are accounted for using the asset and liability method. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is recorded to reduce deferred tax assets to the amount estimated as more likely than not to be realized. The Company also accounts for uncertainties in income taxes recognized in its financial statements. For more information, see Note 8.

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

SALES AND USE TAX—Net revenues are recorded net of sales and use taxes. Net sales and use taxes are collected and remitted to all jurisdictions in which the Company has a physical presence in accordance with state, provincial and local tax laws.
FAIR VALUE OF FINANCIAL INSTRUMENTS—Fair value of financial instruments represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
The fair value hierarchy prescribed under accounting principles generally accepted in the United States, or 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 December 31, 2011, the entire $44.0 million of the Company's cash consisted entirely of cash on hand and bank deposits and is classified within Level 1 because they are valued using quoted market prices. As of January 1, 2011, $20.0 million of the Company’s cash equivalents consisted of a money market deposit account and is classified within Level 1 because it is valued using quoted market prices.
REVENUE RECOGNITION—Sales, net of estimated returns, are recorded when merchandise is purchased by customers at store locations. Revenue is recognized when merchandise shipped from a warehouse is received by the customer, based upon the estimated date of receipt by the customer. Reserves for sales returns were as follows:
 
 
2011
 
2010
 
2009
 
 
 
(in thousands)
 
 
Reserve for product sales returns—beginning balance
$
(995
)
 
$
(924
)
 
$
(809
)
Additions
(1,792
)
 
(1,614
)
 
(1,326
)
Deductions
1,705

 
1,543

 
1,211

Reserve for product sales returns—ending balance
$
(1,082
)
 
$
(995
)
 
$
(924
)

ACCOUNTS RECEIVABLE—Accounts receivable consists of amounts owed to West Marine for sales of services or goods on credit for our wholesale customers. We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. We determine this allowance based on overall estimated exposure. Factors impacting the allowance include the level of gross receivables, the financial condition of our customers and the economic risks for certain customers. The allowances for doubtful accounts receivable were as follows:
 
 
2011
 
2010
 
2009
 
 
 
(in thousands)
 
 
Allowance for doubtful accounts receivable—beginning balance
$
(431
)
 
$
(580
)
 
$
(625
)
Additions
(687
)
 
(701
)
 
(781
)
Deductions and other adjustments
817

 
850

 
826

Allowance for doubtful accounts receivable—ending balance
$
(301
)
 
$
(431
)
 
$
(580
)

The Company's policy for writing off uncollectible trade accounts receivables consists of systematic follow-up of delinquent accounts (over 90 days past the customer's terms of sale) and management review of accounts over a set dollar amount.

UNREDEEMED GIFT CARDS—Aggregate sales of gift cards for fiscal years 2011, 2010 and 2009 were $15.4 million, $14.4 million and $13.1 million, respectively. Sales of gift cards are deferred and treated as a liability on our balance sheet either until redeemed by customers in exchange for products or until we determine that future redemption of the card by

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

the customer is remote, also called breakage. Breakage for unused gift cards is recognized using the redemption recognition method. Under this method, we estimate breakage based on Company-specific data by analyzing historical experience and deriving a rate that represents the amount of gift cards that are expected to be unused and not subject to escheatment. This rate is then applied, and breakage is recognized in income, over the period of redemption. Gift card breakage income for 2011, 2010 and 2009 was $0.6 million, $0.5 million and $0.2 million, respectively, and is included as net revenues in our operating results.
WEST ADVANTAGE CUSTOMER LOYALTY PROGRAMS—The Company has a customer loyalty program which allows members to earn points on qualifying purchases. Points earned entitle members to receive certificates that may be redeemed on future purchases through any retail sales channel. A liability is recognized and recorded as a reduction of revenue at the time the points are earned, based on the retail value of certificates projected to be redeemed, less the applicable estimate of breakage based upon historical redemption patterns.
COST OF GOODS SOLD—Cost of goods sold includes costs related to the purchase, transportation and storage of merchandise, shipping expense and store occupancy costs. Consideration in the form of cash or credits received from vendors is recorded as a reduction to cost of goods sold as the related products are sold.
COMPREHENSIVE INCOME (LOSS)—Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity. The Company’s comprehensive income (loss) in the Consolidated Statements of Stockholders’ Equity consists of net loss and foreign currency translation adjustments for all periods presented.
FOREIGN CURRENCY—Translation adjustments result from translating foreign subsidiaries’ financial statements into U.S. dollars. West Marine Canada’s functional currency is the Canadian dollar. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. Resulting translation adjustments are included as a component of other comprehensive income in the Consolidated Statements of Stockholders’ Equity. Gains (losses) from foreign currency transactions included in SG&A expense for 2011, 2010 and 2009 were $(0.2) million, $0.4 million and $1.9 million, respectively.
ACCRUED EXPENSES—Accrued expenses consist of the following (in thousands):
 
 
2011
 
2010
Accrued compensation and benefits
$
10,617

 
$
10,637

Accrued bonus
3,560

 
8,384

Unredeemed gift cards
6,585

 
6,232

Other accrued expense
20,245

 
17,676

Accrued expenses
$
41,007

 
$
42,929


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 common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if unvested restricted shares and outstanding options to purchase common stock were exercised. Options to purchase approximately 2.2 million shares, 2.1 million shares and 1.7 million shares of common stock that were outstanding in 2011, 2010 and 2009, 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):
 
 
2011
 
2010
 
2009
 
Shares
 
Net Income
Per  Share
 
Shares
 
Net Income
Per  Share
 
Shares
 
Net Income
Per  Share
Basic
22,762

 
$
1.30

 
22,492

 
$
0.59

 
22,215

 
$
0.56

Effect of dilutive stock options
524

 
(0.03
)
 
522

 
(0.02
)
 
132

 
(0.01
)
Diluted
23,286

 
$
1.27

 
23,014

 
$
0.57

 
22,347

 
$
0.55



40

Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

DERIVATIVE INSTRUMENTS—The Company did not purchase or hold any derivative financial instruments during the three years ended December 31, 2011.
CASH AND CASH EQUIVALENTS—Cash consists entirely of cash on hand and bank deposits, of which approximately $42.6 million exceeded FDIC insurance limits as of December 31, 2011. As of December 31, 2011, the Company had no cash equivalents. As of January 1, 2011, $20.0 million of the Company's cash equivalents consisted of a money market deposit account.
We had no outstanding checks in excess of funds on deposit (book overdrafts) at December 31, 2011. Outstanding checks in excess of funds on deposit (book overdrafts) totaled $0.8 million at January 1, 2011, and are reflected as accounts payable in the consolidated balance sheet.
SABBATICAL LEAVE—Certain full-time associates are eligible to receive sabbatical leave after each 10 years of continuous employment. The estimated sabbatical liability is based on a number of factors, including actuarial assumptions and historical trends. In both fiscal years 2011 and 2010, the Company had a recorded liability of $0.9 million as an estimate of accumulated sabbatical leave as of the respective balance sheet dates.
NEW ACCOUNTING PRONOUNCEMENT—In June 2011, the Financial Accounting Standards Board ("FASB") issued new guidance requiring the presentation of other comprehensive income in a statement presented with equal prominence to the other primary financial statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholder's equity and requires one of two alternatives for the presentation of items of net income and other comprehensive income: in a single continuous statement referred to as the statement of comprehensive income; or in two separate, but consecutive statements. Under either alternative, each component of net income and each component of other comprehensive income, together with totals for each, as well as total comprehensive income would need to be displayed. The new guidance is effective beginning with the filing of our Form 10-Q for the three months ending March 31, 2012, with retrospective application required. As the new guidance only affects the presentation of other comprehensive income, it will not have any impact on the Company's results of operations, financial condition or cash flows.
NOTE 2: SHARE-BASED COMPENSATION
West Marine’s Omnibus Equity Incentive Plan (the “Plan”) is intended to provide flexibility to the Company in its ability to motivate, attract and retain the services of associates and non-employee directors upon whose judgment, interest and special effort the successful conduct of its operation is largely dependent. The Plan permits a variety of compensation methods, including non-qualified stock options, incentive stock options, restricted stock, restricted stock units and other share-based awards. All associates and non-employee directors are eligible to participate under the Plan, with the exception of Randolph K. Repass, Chairman of the Company’s Board of Directors and a significant, but not controlling, stockholder. At year-end 2011, 10,300,000 shares of common stock had been reserved under the Plan and 1,831,614 shares were available for future issuance. 
The Company recognizes compensation expense for share-based payments based on the grant date fair value of the awards. Share-based payments consist of stock option grants, restricted share awards, restricted stock units and Associates Stock Buying Plan ("Buying Plan") issuances, each as described further below.
On December 22, 2005, our Board of Directors, upon the recommendation of the Governance and Compensation Committee, approved the acceleration of vesting of all stock options then held by current associates, making all of the outstanding stock options at December 31, 2005 vested and exercisable, primarily to avoid recognition of compensation expense in future periods. The additional pre-tax expense that, absent the accelerated vesting, would have been reflected in the Company’s consolidated statements of income for 2009 was approximately $1.4 million.
Share-based compensation expense for 2011, 2010 and 2009 was approximately $2.4 million, $2.5 million and $2.4 million, respectively, of which expense for stock options was $1.8 million, $2.2 million and $2.0 million in 2011, 2010 and 2009, respectively. In 2011, the Company recognized $0.3 million in tax benefits from stock options exercised, restricted stock vested and disqualifying Buying Plan transactions, of which $0.3 million was recognized as excess tax benefits in additional paid-in capital and $0.3 million was recognized as cash flow from financing activities. In 2010, the Company recognized $0.3 million in tax benefits from stock options exercised, restricted stock vested and disqualifying stock purchase plan transactions, of which $0.3 million was recognized as excess tax benefits in additional paid-in capital and $0.3 million was recognized as cash flow from financing activities. In 2009, the Company recognized $0.1 million in tax benefits from stock options exercised, restricted stock vested and disqualifying Buying Plan transactions, of which $0.1 million was recognized as excess tax benefits in additional paid-in capital and $0.1 million was recognized as cash flow from financing activities. The tax benefit was included in the Company’s consolidated statement of operations for the same period. Share-based compensation of $0.4 million was included in capitalized indirect inventory in both 2011 and 2009 and $0.3 million in 2010.

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Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

Included in cost of goods sold and SG&A expense is share-based compensation expense, net of estimated forfeitures, that have been included in the statements of operations for all share-based compensation arrangements as follows:
 
(in thousands)
2011
 
2010
 
2009
Cost of goods sold
$
409

 
$
334

 
$
409

Selling, general and administrative expense
1,985

 
2,172

 
2,001

Share-based compensation expense
$
2,394

 
$
2,506

 
$
2,410


Stock Options
West Marine awards options to purchase shares of common stock to its non-employee directors and to certain eligible associates employed at the time of the grant. For fiscal 2007 through 2010, options granted to associates under the Plan vest over three years and expire five years following the grant date. Grants in 2006 vested over four years and generally expired five years from the grant date. Grants in 2011 vest over three years and expire seven years from the grant date. Prior to 2011, options granted to non-employee directors vested after six months and expire five years from the grant date. Options granted to non-employee directors in 2011 vest after six months and expire seven years from the grant date. The Company has determined the fair value of options awarded by applying the Black-Scholes Merton option pricing valuation model and using following assumptions:
 
 
2011
 
2010
 
2009
Expected price volatility
49
%
 
51
%
 
44
%
Risk-free interest rate
1.4
%
 
0.9% - 1.7%

 
1.2% - 1.9%

Weighted-average expected term (years)
4.5

 
3.5

 
3.3

Dividend yield

 

 


Expected price volatility: This is the percentage amount by which the price of West Marine common stock is expected to fluctuate annually during the estimated expected life for stock options. Expected price volatility is calculated using historical daily closing prices over a period matching the weighted-average expected term, as management believes such changes are the best indicator of future volatility. An increase in expected price volatility would increase compensation expense.
Share issuance: The Company’s policy is to issue new shares of common stock for purchase under the Plan. Shares of common stock are authorized by the Company’s Board of Directors, subject to stockholder approval, for issuance under the Plan. Subject to adjustment, the maximum number of shares currently available for grant under the Plan may not exceed 10,300,000 shares.
Risk-free interest rate: This is the U.S. Treasury zero-coupon rate, as of the grant date, for issues having a term equal to the expected life of the stock option. An increase in the risk-free interest rate would increase compensation expense.
Expected term: This is the period of time over which stock options are expected to remain outstanding. The Company calculates expected term based on the average of the vesting period and the full contractual term. An increase in the expected term would increase compensation expense.
Dividend yield: The Company historically has not made any dividend payments nor does it expect to pay dividends in the foreseeable future. An increase in the dividend yield would decrease compensation expense.
A summary of the Company’s stock option activity in 2011, 2010 and 2009 is as follows:
 

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Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Option
Grant Date
Fair Value
Outstanding at year-end 2008 (2,100,069 stock options exercisable at a weighted-average price of $18.57)
3,731,583

 
13.89

 
7.52

Granted
724,375

 
5.82

 
1.89

Exercised
(60,969
)
 
4.82

 
2.31

Forfeited
(100,970
)
 
7.49

 
2.63

Expired
(657,447
)
 
20.49

 
11.98

Outstanding at year-end 2009 (1,969,741 stock options exercisable at a weighted-average price of $15.32)
3,636,572

 
11.37

 
5.80

Granted
734,875

 
10.95

 
4.12

Exercised
(184,995
)
 
5.49

 
2.82

Forfeited
(79,856
)
 
8.11

 
2.89

Expired
(354,795
)
 
18.84

 
12.00

Outstanding at year-end 2010 (2,238,084 stock options exercisable at a weighted-average price of $12.85)
3,751,801

 
10.93

 
5.08

Granted
452,887

 
10.36

 
4.27

Exercised
(270,721
)
 
4.95

 
1.77

Forfeited
(96,340
)
 
8.56

 
3.18

Expired
(303,087
)
 
13.71

 
5.57

Outstanding at year-end 2011 (2,492,684 stock options exercisable at a weighted-average price of $11.72)
3,534,540

 
11.14

 
5.24


The weighted-average grant date fair value of options granted in 2011, 2010 and 2009 was $4.27, $4.12 and $1.89 per share, respectively. The aggregate fair value of options vested during 2011, 2010 and 2009 was $4.2 million, $5.4 million and $3.5 million, respectively.
As of market close December 31, 2011, the aggregate intrinsic value for stock options outstanding was $9.2 million in the aggregate, and $7.2 million for options exercisable. The total intrinsic value of options actually exercised was $1.3 million in 2011, $0.9 million in 2010 and $0.2 million in 2009. In 2011, the weighted-average grant date fair value of options granted was $4.27 per share. There were 1,839,059 options that vested in 2011 with an aggregate grant date fair value of $4.2 million. At December 31, 2011, unrecognized compensation expense for stock options, net of expected forfeitures, was $3.0 million, with a weighted-average expense recognition period of 1.9 years.
Additional information for options outstanding at year-end 2011 is as follows:
 
 
Outstanding Options
 
Exercisable Options
Range of Exercise Prices
Shares
Underlying
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Weighted
Average
Exercise
Price
 
Exercisable
Shares
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Weighted
Average
Exercise
Price
$        0 – $  7.00
1,344,587

 
1.7

 
$
5.59

 
1,152,122

 
1.6

 
$
5.55

7.01 –   10.75
453,449

 
6.3

 
10.33

 
4,290

 
2.8

 
9.02

10.76 –   15.54
1,021,936

 
2.4

 
12.39

 
621,704

 
1.7

 
13.31

15.55 –   22.00
525,343

 
0.6

 
16.77

 
525,343

 
0.6

 
16.77

22.01 –   29.70
189,225

 
2.2

 
29.51

 
189,225

 
2.2

 
29.51

$       0 –   29.70
3,534,540

 
2.4

 
$
11.14

 
2,492,684

 
1.5

 
$
11.72


At December 31, 2011, there were 2,698,715 stock options expected to vest in the future, with an intrinsic value of $11.3 million, a weighted-average exercise price of $7.55 per share and a weighted-average remaining contractual term of 0.7 years.

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Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

Restricted Share Awards
The Plan also provides for awards of shares to eligible associates and non-employee directors that are subject to restrictions on transfer for a period of time (“restricted shares”). Vesting of restricted shares for eligible associates and non-employee directors is subject to continuing service to West Marine. Restricted shares granted to non-employee directors in 2011 vest 100% one year after the grant date. No other restricted shares have been awarded. Compensation expense for restricted share awards was $0.1 million in 2011. Unrecognized compensation expense for unvested restricted share awards, net of expected forfeitures, was $0.1 million in 2011. A summary of restricted share activity in 2011, 2010 and 2009 is as follows:
 
 
Number of
Shares
 
Weighted
Average
Grant
Date Fair
Value
Unvested at year-end 2008 (weighted-average remaining vesting period of 0.4 years)
19,829

 
10.28

Granted
8,030

 
5.97

Vested
(20,420
)
 
9.95

Forfeited
(414
)
 
16.58

Unvested at year-end 2009 (weighted-average remaining vesting period of 0.4 years)
7,025

 
5.97

Granted
7,303

 
10.60

Vested
(7,025
)
 
5.97

Forfeited

 
 
Unvested at year-end 2010 (weighted-average remaining vesting period of 0.5 years)
7,303

 
10.60

Granted
13,347

 
9.95

Vested
(7,303
)
 
10.60

Forfeited

 
 
Unvested at year-end 2011 (weighted-average remaining vesting period of 0.5 years)
13,347

 
9.95


The weighted-average grant date fair value of restricted shares granted in 2011, 2010 and 2009 was $9.95, $10.60 and $5.97 per share, respectively. The total fair value of restricted shares vested in 2011 was $0.1 million, while 2010 was less than $0.1 million and $0.2 million in 2009.
Restricted Stock Units
The Plan also provides for awards of restricted stock units (“RSU's”) to eligible associates and non-employee directors that are subject to the recipient's continuing service to the Company. RSU's granted to eligible associates in 2011 vest over a three-year period at the rate of 33%, 33% and 34% on the anniversary of the grant date. No other RSU's have been awarded. Compensation expense for RSU's was $0.2 million in 2011. Unrecognized compensation expense for unvested RSU's, net of expected forfeitures, was $1.1 million in 2011. A summary of RSU activity in 2011 is as follows:
 
 
Number of
RSU's
 
Weighted
Average
Grant
Date Fair
Value
Unvested at year-end 2010

 
 
Granted
134,544

 
10.36

Vested

 
 
Forfeited
(1,406
)
 
10.36

Unvested at year-end 2011 (weighted-average remaining vesting period of 2.4 years)
133,138

 
10.36


The weighted-average grant date fair value of RSU's granted in 2011 was $10.36 per share. No RSU's vested in 2011.
Associates Stock Buying Plan
The Company has a Buying Plan under which all eligible associates may elect to participate on semiannual grant dates. Participating associates purchase West Marine shares at 85% of the lower of the closing price on (a) the grant date or (b) the

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

purchase date. Effective November 2009, the Company amended the Buying Plan to include a twelve calendar month holding period for all purchases beginning on the date on which shares are purchased by participants under the Buying Plan. The number of shares purchased under the Buying Plan in 2011, 2010 and 2009 were 83,758, 83,452 and 145,531, respectively. Expense recognized in each of the years 2011, 2010 and 2009 was $0.3 million. Shares available for future issuance under the Buying Plan at the end of 2011, 2010 and 2009 were 591,838, 675,596 and 759,046, respectively. Assumptions used in determining the fair value of shares issued under the Buying Plan during 2011, 2010 and 2009 were as follows:
 
 
2011
 
2010
 
2009
Expected price volatility
36%-67%

 
52%-60%

 
55%-70%

Risk-free interest rate
0.1
%
 
0.2%-0.3%

 
0.2%-0.3%

Weighted-average expected term (years)
0.5

 
0.5

 
0.5

Dividend yield

 

 

NOTE 3: STORE CLOSURES AND OTHER RESTRUCTURING COSTS
Restructuring charges include severance costs, lease termination fees, legal and professional fees paid for lease termination negotiations, and other costs associated with the closure of facilities. Severance benefits are detailed in approved severance plans, which are specific as to number, position, location and timing. In addition, severance benefits are communicated in specific detail to affected employees and are unlikely to change when costs are recorded. Costs are recognized over the period services are rendered, otherwise they are recognized when they are communicated to the employees. These costs are not material to any reportable segment. Other associated costs, such as legal and professional fees, are expensed as incurred.
During fiscal 2009, the Company reached an agreement to sublease a location which had a large lease termination obligation. The terms of this particular agreement were favorable as compared to the original estimate. This resulted in a $1.7 million reversal in 2009 of previously accrued estimated costs.
Costs and obligations (included in “Accrued liabilities” in the Company’s consolidated balance sheets) recorded 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
Ending balance, January 3, 2009
$
1,069

 
$
8,000

 
$
9,069

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

Charges (reduction in charges)
19

 
(69
)
 
(50
)
Payments
(152
)
 
(976
)
 
(1,128
)
Ending balance, December 31, 2011
$
160

 
$
904

 
$
1,064

NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at fiscal year-end 2011 and 2010 (in thousands):
 

45

Table of Contents


 
At Year-End
 
2011
 
2010
Furniture and equipment
$
65,430

 
$
61,854

Computer software and hardware
90,492

 
94,117

Leasehold improvements
68,359

 
63,432

Land and building
7,439

 
7,439

Property and equipment, at cost
231,720

 
226,842

Accumulated depreciation and amortization
(170,974
)
 
(170,359
)
Property and equipment, net
$
60,746

 
$
56,483


Depreciation and amortization expense for property and equipment was $14.0 million, $14.7 million and $16.7 million in 2011, 2010 and 2009, respectively.
NOTE 5: LINES OF CREDIT AND LONG–TERM DEBT
The Company has up to $140.0 million in borrowing capacity under a loan and security agreement that remains in effect through August 2014. At the Company’s option, and subject to certain conditions set forth in the loan agreement, the Company may increase its 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 the Company's inventory (excluding capitalized indirect costs) and accounts receivable.
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 the Company’s election, borrowings under the revolving credit facility will bear interest at one of the following options:
1.The prime rate, which is defined in the loan agreement as the highest of:
a.Federal funds rate, as in effect from time to time, plus one-half of one percent;
b.LIBOR rate for a one-month interest period plus one percent; or
c.The rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate;” or
2.The LIBOR rate quoted by the British Bankers Association for the applicable interest period.
In each case, the applicable interest rate is increased by a margin imposed by the loan agreement. The applicable margin for any date will depend upon the amount of available credit under the revolving credit facility. The margin range for option (1) above is between 1.50% and 2.00% for option (2) above is between 2.5% and 3.0%.
The loan agreement also imposes a commitment fee on the unused portion of the revolving credit facility available. For 2011, 2010 and 2009, the weighted-average interest rate on all of our outstanding borrowings was 3.1%, 1.5% and 1.8%, respectively.
Although the loan agreement contains customary covenants, including, but not limited to, restrictions on the Company’s 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, the loan is asset-based (which means the Company’s lenders maintain a security interest in the Company’s inventory and accounts receivable which serve as collateral for the loan), and the amount the Company may borrow under its revolving credit facility at any given time is determined by the estimated value of these assets as determined by the lenders’ appraisers. Additionally, the Company must maintain 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

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

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 this loan agreement also could significantly and adversely affect the Company’s ability to obtain additional or alternative financing. As of December 31, 2011, the Company was in compliance with the covenants under this loan agreement.
At the end of fiscal year 2011, there were no amounts outstanding under this revolving credit facility, $86.9 million was available for future borrowings, and there was $0.6 million in unamortized loan costs. At the end of fiscal year 2010, there were no amounts outstanding under this credit facility, $89.9 million was available to be borrowed, and there was $0.9 million in unamortized loan costs. At the end of fiscal years 2011 and 2010, the Company had $8.3 million and $5.6 million of outstanding commercial and stand-by letters of credit, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
West Marine had one related party transaction that terminated in 2011 and one that it plans to terminate in 2012. The Company had leased its store in Palo Alto, California from a trust, for which Randolph K. Repass is the trustee since February 2002. Prior to that, the Company leased its Palo Alto store directly from Randolph K. Repass. When it closed this store, the Company opened a nearby store in the general vicinity of Palo Alto and the new store is leased from a party not related to the Company. As a result of the store closure, the final lease payment to the related party for the Palo Alto store location was processed in February 2011. The Company leased its store in New Bedford, Massachusetts from a corporation of which Mr. Repass’ brother is the President and his father is a member of the board of directors and a major stockholder. The New Bedford lease expired in February 2012, and the Company currently is operating on a month-to-month tenancy. The Company expects to terminate the New Bedford lease on or around June 2012 in connection with a new store in the neighboring area to be leased from a party unrelated to the Company.
In addition, the Company leases its Watsonville, California support center and its stores in Santa Cruz, California and Braintree, Massachusetts from three partnerships. Mr. Repass is a general partner of each partnership and, together with certain members of his family, owns substantially all of the partnership interests in such partnerships. Geoffrey A. Eisenberg, the Company’s Chief Executive Officer, is a 7.5% limited partner in the two partnerships from which the Company leases its Watsonville, California support center and its store in Santa Cruz, California. In July 2011, a lease amendment was signed which reduced the amount of Watsonville, California support center storage space leased to West Marine and extended the storage space lease from November 2011 to October 2016. Due to the lease amendment, the Company's related contractual obligation decreased by immaterial amounts for fiscal years 2011 through 2016. Pursuant to these leases, West Marine paid rent to the above-related parties during fiscal years 2011, 2010 and 2009 in the aggregate amount of approximately $1.6 million, $1.5 million and $1.6 million, respectively. As of December 31, 2011, there were no amounts due from related parties. 
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment, and space for its retail stores, its distribution centers and its support center. The Company also sublets space at various locations with both month-to-month and non-cancelable sublease agreements. The operating leases of certain stores provide for periodic rent adjustments based on store revenues, the consumer price index and contractual rent increases.
The aggregate minimum annual contractual payments under non-cancelable leases, reduced for sublease income, in effect at fiscal year-end 2011 were as follows (in thousands):
 
 
 
2012
$
44,968

2013
38,047

2014
31,597

2015
27,104

2016
23,310

Thereafter
93,811

Minimum non-cancelable lease payments, net
$
258,837


No assets of the Company were subject to capital leases at fiscal year-end 2011, 2010 and 2009. All but a limited number of the Company’s purchase commitments, which are not material, are cancelable without payment and, therefore, have been excluded from the table.

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

Following is a summary of rent expense by component (in thousands):
 
 
2011
 
2010
 
2009
Minimum rent
$
46,578

 
$
44,273

 
$
43,826

Percent rent
88

 
87

 
98

Sublease income
(43
)
 
(68
)
 
(76
)
Rent paid to related parties
1,550

 
1,528

 
1,608

Total rent expense
$
48,173

 
$
45,820

 
$
45,456


The Company is party to various legal and administrative proceedings, claims and litigation and regulatory compliance audits arising from normal business activities. Additionally, many of these proceedings and audits raise complex factual and legal issues and are subject to uncertainties. The Company cannot predict with assurance the outcome of these matters. Accordingly, material adverse developments, settlements, or resolutions may occur and negatively impact results in the quarter in which such developments, settlements, or resolutions are reached.
Based on the facts currently available, the Company does not believe that the disposition of matters that are pending or asserted, individually or in the aggregate, will have a material adverse effect on future financial results. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact the Company’s results of operations in any given period.
For legal proceedings where the Company has determined that a loss is probable, there is no material difference between the amount accrued and the reasonably possible amount of loss. For legal proceedings where a loss is reasonably possible, the range of estimated loss is not material.
The Company is subject to various routine and non-routine reviews, audits and investigations by various federal and state governmental regulators, including customs, environmental and tax authorities in the jurisdictions where it conducts business, which may result in assessments of additional taxes, penalties, interest or the revision and recoupment of past payments made based on audit findings. In addition, certain third party suppliers have rights under their contracts with the Company to review and audit its use of their products, and an unfavorable audit could result in an adverse and possibly material claim for payment. The Company accrues a liability for this type of contingency when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company believes it has adequately provided for obligations that would result from these legal and sales and use tax proceedings where it is probable it will pay some amounts and the amounts can be estimated; in some cases, however, it is too early to predict a final outcome. The Company is currently under audit for sales taxes in several jurisdictions. The tax periods open to examination by the major taxing jurisdictions for sales and use taxes are fiscal 2007 through fiscal 2011. Management believes that the ultimate resolution of these matters will not have a material effect on the Company’s future financial condition or results of operations. At December 31, 2011, accrued liabilities included a loss contingency accrual of $2.6 million related to a recently-finalized software license audit.
NOTE 8: INCOME TAXES
Following is a summary of the (benefit) provision for income taxes (in thousands):
 
 
2011
 
2010
 
2009
Currently payable:
 
 
 
 
 
Federal
$
4,112

 
$
1,379

 
$
(2,828
)
State
879

 
341

 
463

Foreign
(136
)
 
125

 
108

 
4,855

 
1,845

 
(2,257
)
Deferred:
 
 
 
 
 
Federal
(3,161
)
 
(996
)
 
(371
)
State
(7,597
)
 

 

Foreign
(2,538
)
 
171

 
(209
)
 
(13,296
)
 
(825
)
 
(580
)
Income tax (benefit) expense
$
(8,441
)
 
$
1,020

 
$
(2,837
)

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 


Following is a summary of the difference between the effective income tax rate and the statutory federal income tax rate:
 
 
2011
 
2010
 
2009
Statutory federal tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal tax benefit
5.2

 
1.6

 
7.2

Non-deductible permanent items
0.7

 
0.6

 
0.3

Valuation allowance reversal
(73.9
)
 

 
(42.1
)
Valuation allowance on net deferred tax assets

 
(33.4
)
 
(40.3
)
Uncertain tax positions
(4.7
)
 
1.1

 
11.7

Other
(2.1
)
 
2.3

 
(1.5
)
Effective tax rate
(39.8
)%
 
7.2
 %
 
(29.7
)%

Deferred tax assets and liabilities are recognized for the expected tax consequences of the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. Following is a summary of the tax effects of temporary differences that give rise to significant components of deferred tax assets and liabilities (in thousands):
 
 
2011
 
2010
Current:
 
 
 
Accrued expenses
$
4,993

 
$
5,252

Deferred compensation costs
1,860

 
1,873

Prepaid expenses
(1,487
)
 
(1,551
)
Capitalized inventory costs
1,048

 
999

Federal effect of state and foreign deferred items
(1,414
)
 
(383
)
Net operating loss carryforwards
1,597

 

Change in tax accounting method
(825
)
 
(829
)
Other
1,661

 
1,756

Total current
7,433

 
7,117

Non-current:
 
 
 
Deferred rent
2,408

 
2,001

Fixed assets
(4,869
)
 
(3,487
)
Intangible assets
4,012

 
4,691

Charitable contribution carryforward
27

 
504

Net operating loss carryforwards
1,517

 
2,961

State tax credits
5,120

 
5,302

Federal effect of state and foreign deferred items
(2,072
)
 

Share-based compensation
2,162

 
2,145

Change in tax accounting method
(2,447
)
 
(1,657
)
Other
2,551

 
(1,298
)
Total non-current
8,409

 
11,162

Valuation allowance
(1,692
)
 
(16,874
)
Total deferred tax assets
$
14,150

 
$
1,405

Net deferred tax assets were in the accompanying consolidated balance sheet, as follows (in thousands):
 

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

 
2011
 
2010
Current deferred income taxes
$
7,118

 
$
2,997

Non-current deferred income tax assets
7,800

 

Non-current (included in Deferred rent, and other)
(768
)
 
(1,592
)
Total deferred tax assets
$
14,150

 
$
1,405


In evaluating the Company's ability to recover its deferred tax assets, it considers all available positive and negative evidence, including past operating results, the existence of cumulative losses in past fiscal years and the Company's forecast of future taxable income in the jurisdictions in which it has operations. A valuation allowance must be provided if, based on all available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on historical profits and expectations of future results, 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 that there was sufficient positive evidence to support the release of the valuation allowance against all but a portion of its U.S. federal and state deferred tax assets in the second quarter of fiscal 2011. The Company, therefore, released $15.7 million of its valuation allowance in that quarter. The Company continues to maintain a valuation allowance in the amount of $1.7 million against its South Carolina state tax credits until sufficient positive evidence exists to support the reversal of this valuation allowance. In 2010 and 2009, the Company maintained a full valuation allowance against all federal, state and Canadian deferred tax assets in the amounts of $16.9 million and $23.2 million, respectively.
At year-end 2011, the Company had no federal income tax net loss carryforwards and $29.4 million of state income tax net loss carryforwards that expire between 2012 and 2029. In addition, the Company had California state enterprise zone credits of $3.4 million that may be used for an indefinite period of time and South Carolina tax credits of $1.7 million that expire between 2013 and 2017. These carryforwards are available to offset future state taxable income. At year-end 2011, the Company had foreign net loss carryforwards of $1.2 million that expire between 2012 and 2029.
Following is a summary of the change in valuation allowance (in thousands):
 
 
2011
 
2010
 
2009
Valuation allowance—beginning of year
$
16,874

 
$
23,195

 
$
33,900

Valuation allowance reductions
(15,182
)
 
(6,321
)
 
(10,705
)
Valuation allowance—end of year
$
1,692

 
$
16,874

 
$
23,195


The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states, Puerto Rico and Canada. The federal statute of limitations for examination by authorities is open for the years 2008 through 2010. With few exceptions, the statute of limitations for state jurisdictions is open for the years 2007 through 2010. The statute of limitations for income tax return examinations is six years for Puerto Rico and seven years for Canada.
Unrecognized tax benefits activity for the fiscal years ending is summarized below (in thousands):
 
 
2011
 
2010
 
2009
Unrecognized tax benefit—beginning of year
3,268

 
3,254

 
2,293

Additions based on tax positions related to the current year

 

 
57

Additions for tax positions of prior years
69

 
49

 
990

Reductions for tax positions of prior years
(218
)
 
(4
)
 
(27
)
Settlements

 
(22
)
 
(46
)
Lapse of statutes of limitations
(823
)
 
(9
)
 
(13
)
Unrecognized tax benefit—end of year
2,296

 
3,268

 
3,254

 
Included in the balance of unrecognized tax benefits at December 31, 2011 and January 1, 2011 are $2.0 million and $2.9 million, respectively, of tax benefits that, if recognized, would affect the Company’s effective tax rate.
In 2011, additions to uncertain tax positions related to prior years amounted to $0.1 million. These positions related to reserves for store closures. In 2010, additions to uncertain tax positions related to prior years amounted to less than $0.1 million.

50

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision (benefit) for income taxes. During fiscal year 2011, the Company recognized a benefit for interest and penalties of $0.2 million, while in 2010, interest and penalties expense was $0.2 million. At December 31, 2011, the Company had an accrued interest balance of $0.3 million and penalties totaling less than $0.1 million. At January 1, 2011, the Company had an accrued interest balance of $0.4 million and penalties totaling $0.1 million. The Company is unable to make a determination as to whether or not recognition of any unrecognized tax benefits will occur within the next 12 months nor can we make an estimate of the range of any potential changes to the unrecognized tax benefits.
NOTE 9: EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan covering all eligible associates. The Company matches 33% of an employee’s contribution up to 5% of the employee’s annual compensation, subject to statutory limitations. The Company’s contributions to the plan were $0.5 million for fiscal year 2011 and $0.6 million for fiscal years 2010 and 2009. Plan participants may choose from an array of mutual fund investment options. The plan does not permit investments in West Marine common stock.
NOTE 10: SEGMENT INFORMATION
The Company has three reportable segments—Stores, Port Supply (wholesale) and Direct-to-Customer (which we formerly referred to as Direct Sales)—all of which sell merchandise directly to customers. The Stores segment sells products through the Company's store locations. The Port Supply segment sells products directly to wholesale customers through our wholesale website and our call center. The Direct-to-Customer segment sells products through our retail eCommerce website, direct mail catalogs and our call center. The customer base overlaps between the Company’s Stores and Port Supply segments, and between its Stores and Direct-to-Customer segments. All processes for the three segments within the supply chain are commingled, including purchases from vendors, distribution center activity and customer delivery. Revenues from external customers are derived from merchandise sales, and the Company does not rely on any major customers as a source of revenue.
The Company considers its individual stores to be operating segments. Each store's operating performance has been aggregated into one reportable segment. The Company's individual store operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas: economic characteristics; class of consumer; nature of products; and distribution methods. The Company recorded non-cash asset impairment charges of less than $0.1 million in fiscal 2011, $0.2 million in 2010 and less than $0.1 million in 2009 primarily related to the Stores segment. The Company believes that disaggregating its operating segments would not provide meaningful additional information.
In addition to the Company’s 10 stores located in Canada and 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-to-Customer 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 fiscal years 2011, 2010 and 2009, and foreign long-lived assets totaled less than 2% of long-lived assets at each of these dates.
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-to-Customer 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):
 

51

Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

 
2011
 
2010
 
2009
Net revenues:
 
 
 
 
 
Stores
$
578,863

 
$
560,482

 
$
525,392

Port Supply
27,450

 
28,309

 
28,936

Direct-to-Customer
37,130

 
34,011

 
34,088

Consolidated net revenues
$
643,443

 
$
622,802

 
$
588,416

Contribution:
 
 
 
 
 
Stores
$
81,827

 
$
77,591

 
$
64,239

Port Supply
(3,020
)
 
(2,809
)
 
(1,736
)
Direct-to-Customer
6,266

 
5,942

 
6,829

Consolidated contribution
$
85,073

 
$
80,724

 
$
69,332

Reconciliation of consolidated contribution to net income:
 
 
 
 
 
Consolidated contribution
$
85,073

 
$
80,724

 
$
69,332

Less:
 
 
 
 
 
Indirect costs of goods sold not included in consolidated contribution
(28,148
)
 
(30,413
)
 
(26,688
)
General and administrative expense
(34,786
)
 
(35,427
)
 
(32,299
)
Interest expense
(918
)
 
(637
)
 
(806
)
Benefit (provision) for income taxes
8,441

 
(1,020
)
 
2,837

Net income
$
29,662

 
$
13,227

 
$
12,376

 
 
2011
 
2010
 
2009
Assets:
 
 
 
 
 
Stores
$
40,266

 
$
34,722

 
$
37,659

Port Supply
4,980

 
4,771

 
4,414

Direct-to-Customer
44

 
112

 
412

Unallocated
290,367

 
269,281

 
249,752

Total assets
$
335,657

 
$
308,886

 
$
292,237

Capital expenditures:
 
 
 
 
 
Stores
$
13,937

 
$
10,246

 
$
9,354

Port Supply

 

 
26

Direct-to-Customer
55

 

 

Unallocated
3,718

 
3,893

 
4,375

Total capital expenditures
$
17,710

 
$
14,139

 
$
13,755

Depreciation and amortization:
 
 
 
 
 
Stores
$
9,395

 
$
9,506

 
$
10,385

Port Supply
32

 
96

 
190

Direct-to-Customer
109

 
229

 
324

Unallocated
4,778

 
5,095

 
6,131

Total depreciation and amortization
$
14,314

 
$
14,926

 
$
17,030



52

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WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

NOTE 11: QUARTERLY FINANCIAL DATA
(Unaudited and in thousands, except per share data)
 
 
2011
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net revenues
$
113,817

 
$
235,963

 
$
180,269

 
$
113,394

Gross profit
24,681

 
84,846

 
54,691

 
20,781

Selling, general and administrative expense
36,871

 
44,592

 
41,789

 
39,608

Income (loss) from operations
(12,113
)
 
40,246

 
12,890

 
(18,884
)
Net income (loss)
(12,345
)
 
44,743

 
11,216

 
(13,952
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.55
)
 
$
1.97

 
$
0.49

 
$
(0.61
)
Diluted
(0.55
)
 
1.92

 
0.48

 
(0.61
)
Stock trade price:
 
 
 
 
 
 
 
High
$
13.36

 
$
11.00

 
$
10.43

 
$
11.63

Low
9.80

 
9.85

 
7.70

 
7.01

 
 
 
 
 
 
 
 
 
2010
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net revenues
$
109,559

 
$
233,390

 
$
172,544

 
$
107,309

Gross profit
25,037

 
82,487

 
49,574

 
18,543

Selling, general and administrative expense
34,510

 
46,226

 
41,817

 
38,284

Income (loss) from operations
(9,365
)
 
36,158

 
7,787

 
(19,695
)
Net income (loss)
(9,532
)
 
35,118

 
7,426

 
(19,785
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.43
)
 
$
1.56

 
$
0.33

 
$
(0.88
)
Diluted
(0.43
)
 
1.52

 
0.32

 
(0.88
)
Stock trade price:
 
 
 
 
 
 
 
High
$
11.70

 
$
13.05

 
$
11.48

 
$
11.05

Low
8.16

 
9.44

 
8.42

 
8.99



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ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A—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 December 31, 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 quarter ended December 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B—OTHER INFORMATION
None.

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PART III
ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from our definitive proxy statement for the 2012 annual meeting of stockholders.
ITEM 11—EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from our definitive proxy statement for the 2012 annual meeting of stockholders.
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from our definitive proxy statement for the 2012 annual meeting of stockholders.
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from our definitive proxy statement for the 2012 annual meeting of stockholders.
ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference from our definitive proxy statement for the 2012 annual meeting of stockholders.

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PART IV
ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
 
1 & 2.
  
Reports of Independent Registered Public Auditing Firm
 
 
 
  
Consolidated Balance Sheets as of fiscal year-end 2011 and 2010
 
 
 
  
Consolidated Statements of Operations for fiscal years 2011, 2010 and 2009
 
 
 
  
Consolidated Statements of Stockholders’ Equity for fiscal years 2011, 2010 and 2009
 
 
 
  
Consolidated Statements of Cash Flows for fiscal years 2011, 2010 and 2009
 
 
 
  
Notes to Consolidated Financial Statements
 
 
3

  
Exhibits:




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Table of Contents


Exhibit Index
 
Exhibit
Number
  
Exhibit
 
 
3.1
  
Certificate of Incorporation of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company'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 the Company'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 the Company's Registration Statement on Form S-1 (Registration No. 33-69604)).
 
 
10.1
  
Form of Indemnification Agreement between West Marine, Inc. and its directors and officers (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 2002).
 
 
10.2*
  
West Marine, Inc. Omnibus Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
 
 
10.2.1*
  
Form of Notice of Grant of Stock Options and Stock Option Agreement for Associates (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
 
 
 
10.2.2*
 
Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement for Associates (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
 
 
10.2.3*
  
Form of Notice of Grant of Stock Options and Stock Option Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
 
 
10.2.4*
 
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 the Company's Current Report on Form 8-K dated May 19, 2011 and filed on May 20, 2011).
 
 
 
10.2.5*
  
Notice to holders of West Marine, Inc. stock options regarding accelerated vesting (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated December 22, 2005 and filed on December 29, 2005).
 
 
10.3*
  
West Marine, Inc. Associates Stock Buying Plan, as amended and restated effective November 1, 2009 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 3, 2009).
 
 
10.4
  
Lease Agreement, dated as of January 28, 2011, by and between PanCal West Marine 287 LLC and West Marine Products, Inc., for the Hollister, California distribution facility (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated January 28, 2011 and filed on January 31, 2011).
 
 
10.4.1
  
Addendum to Lessor, dated as of January 28, 2011, to the Lease Agreement for the Hollister, California distribution facility (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated January 28, 2011 and filed on January 31, 2011).
 
 
10.5
  
Lease Agreement, dated as of March 11, 1997, between Cabot Industrial Venture A, LLC, as successor to Cabot Industrial Properties, L.P., as successor to W/H No. 31, L.L.C, and West Marine, Inc., for the Rock Hill, South Carolina distribution facility and other agreements thereto (incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997).
 
 
10.5.1
  
First Amendment, dated as of August 11, 1998, to the Lease Agreement for the Rock Hill, South Carolina distribution facility and other agreements thereto (incorporated by reference to Exhibit 10.11.1 to the Company's Annual Report on Form 10-K for the year ended December 29, 2001).

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Exhibit
Number
  
Exhibit
 
 
10.5.2
  
Second Amendment, dated as of April 18, 2000, to the Lease Agreement for the Rock Hill, South Carolina distribution facility and other agreements thereto (incorporated by reference to Exhibit 10.11.2 to the Company's Quarterly Report on Form 10-K for the year ended December 29, 2001).
 
 
10.5.3
  
Third Amendment, dated as of July 26, 2004, to the Lease Agreement for the Rock Hill, South Carolina distribution facility (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated October 4, 2004 and filed on October 8, 2004).
 
 
10.6
  
Lease Agreement, dated June 26, 1997, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997).
 
 
10.6.1
  
First Amendment of Lease, dated July 27, 2005, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.14 to the Company's Current Report on Form 8-K dated July 27, 2005 and filed on July 28, 2005).
 
 
10.6.2
  
Second Amendment of Lease, dated December 22, 2005, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated December 22, 2005 and filed on December 29, 2005).
 
 
10.6.3
  
Third Amendment of Lease, dated November 30, 2006, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated July 29, 2009 and filed on July 30, 2009).
 
 
10.6.4
  
Fourth Amendment of Lease, dated July 29, 2009, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated July 29, 2009 and filed on July 30, 2009).
 
 
 
10.6.5
 
Fifth Amendment of Lease, dated July 15, 2011, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K dated July 15, 2011 and filed on July 20, 2011).
 
 
10.7
  
Amended and Restated Loan and Security Agreement, dated as of August 23, 2010, by and among West Marine Products, Inc., each of the other persons that are signatories thereto as borrowers, each of the persons that are signatories thereto as guarantors, the lenders that are signatories thereto, Wells Fargo Retail Finance, LLC, as agent for the lenders, and Wells Fargo Capital Finance, LLC, as sole lead arranger and sole bookrunner (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 23, 2010 and filed on August 27, 2010).
 
 
10.7.1
  
Loan and Security Agreement dated as of December 29, 2005, among West Marine Products, Inc., each of the persons identified as borrowers, and each of the persons identified as guarantors and each of the persons identified as lenders (incorporated by reference to Exhibit 10.1 to West Marine’s Current Report on Form 8-K dated December 29, 2005 and filed on January 4, 2006).
 
 
10.8
  
Marketing Agreement, dated as of January 14, 2003, by and among Boat America Corporation, the Boat Owners Association of The United States and West Marine Products, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 2004).
 
 
10.8.1
  
Amendment, dated as of April 7, 2005, to Marketing Agreement, dated as of January 14, 2003, by and among Boat America Corporation, the Boat Owners Association of The United States and West Marine Products, Inc. (incorporated by reference to Exhibit 10.1.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 2, 2005).
 
 
10.9*
  
Letter Agreement, dated as of December 10, 2007, by and between West Marine, Inc. and Geoffrey A. Eisenberg (incorporated by reference to Exhibit 10.1 to West Marine’s Current Report on Form 8-K dated December 10, 2007 and filed on December 14, 2007).

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Exhibit
Number
  
Exhibit
 
 
10.9.1*
  
Confidentiality and Non-Solicitation Agreement, dated as of December 14, 2007, by and between West Marine, Inc. and Geoffrey A. Eisenberg (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated December 10, 2007 and filed on December 14, 2007).
 
 
10.9.2*
  
First Amendment to Letter Agreement, dated as of November 7, 2008, by and between West Marine, Inc. and Geoffrey A. Eisenberg (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 7, 2008 and filed on November 13, 2008).
 
 
10.10*
  
Executive Employment Agreement, dated as of December 11, 2006, by and among West Marine, Inc., West Marine Products, Inc. and Thomas Moran (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated December 11, 2006 and filed on December 12, 2006).
 
 
10.10.1*
  
First Amendment to Executive Employment Agreement, dated as of September 27, 2007, by and among West Marine, Inc., West Marine Products, Inc. and Thomas Moran (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 2007).
 
 
10.11*
  
Executive Termination Compensation Agreement, dated as of September 9, 2004, by and between West Marine, Inc. and Bruce Edwards (incorporated by reference to Exhibit 10.15 of the Company's Annual Report on Form 10-K for the year ended December 31, 2005).
 
 
10.12*
  
Offer Letter, dated as of February 7, 2006, to Ronald Japinga from West Marine, Inc. (incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).
 
 
10.12.1*
  
Executive Termination Compensation Agreement, dated as of February 13, 2006, by and between West Marine, Inc. and Ronald Japinga. (incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).
 
 
 
10.13*
 
Executive Officer Serverance Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 16, 2011 and filed on March 22, 2011).
 
 
 
21.1
  
List of Subsidiaries.
 
 
23.1
  
Consent of Grant Thornton LLP.
 
 
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.DEF†
 
XBRL Taxonomy Extension Definition 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 consolidated balance sheets as of December 31, 2011 and January 1, 2011; (ii) the consolidated statements of operations for the fiscal years ended December 31, 2011, January 1, 2011 and January 2, 2010; and (iii) the consolidated statements of cash flows for the fiscal years ended December 31, 2011, January 1, 2011 and January 2, 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 Section 13 or 15(d) 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:
March 7, 2012
 
WEST MARINE, INC.
 
 
 
 
 
 
 
 
 
By:
/s/    GEOFFREY A. EISENBERG        
 
 
 
 
 
Geoffrey A. Eisenberg
 
 
 
 
 
President and Chief Executive Officer

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Power of Attorney
West Marine, Inc. a Delaware corporation, and each person whose signature appears below, constitutes and appoints Geoffrey A. Eisenberg and Thomas R. Moran, and either of them, with full power to act without the other, such person’s true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this annual report on Form 10-K and any and all amendments to such annual report on Form 10-K and other documents in connection therewith, and to file the same, and all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of West Marine, Inc. and in the capacities and on the dates indicated.
 
Signature Capacity
 
/s/    GEOFFREY A. EISENBERG        
Geoffrey A. Eisenberg
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 7, 2012
 
/s/    THOMAS R. MORAN        
Thomas R. Moran
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
March 7, 2012
 
/s/    RANDOLPH K. REPASS        
Randolph K. Repass
Chairman of the Board and Director
March 7, 2012
 
/s/    DENNIS MADSEN        
Dennis Madsen
Director
March 7, 2012
 
/s/    DAVID MCCOMAS        
David McComas
Director
March 7, 2012
 
/s/    BARBARA RAMBO        
Barbara Rambo
Director
March 7, 2012
 
/s/    ALICE M. RICHTER        
Alice M. Richter
Director
March 7, 2012
 
/s/    PETER ROY        
Peter Roy
Director
March 7, 2012
 
/s/    CHRISTIANA SHI        
Christiana Shi
Director
March 7, 2012

61