WMAR 2014 Q2 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
  
Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2014
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to      
                    
Commission file number 0-22512
 
 
WEST MARINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
77-0355502
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
500 Westridge Drive
Watsonville, CA 95076-4100
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (831) 728-2700
 
 
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). (Check one): 
Large accelerated filer
o
 
Accelerated filer
Q
 
 
 
 
 
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
At July 21, 2014, the number of shares outstanding of the registrant’s common stock was 24,303,763.



TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

WEST MARINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 28, 2014, DECEMBER 28, 2013 AND JUNE 29, 2013
(Unaudited and in thousands, except share data)
 
 
June 28,
2014
 
December 28,
2013
 
June 29,
2013
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
38,934

 
$
48,408

 
$
45,773

Trade receivables, net
10,970

 
6,441

 
10,008

Merchandise inventories
243,588

 
203,036

 
237,100

Deferred income taxes
4,276

 
5,012

 
5,292

Other current assets
22,149

 
19,360

 
23,533

Total current assets
319,917

 
282,257

 
321,706

Property and equipment, net
79,595

 
72,848

 
65,663

Long-term deferred income taxes
4,829

 
5,684

 
7,910

Other assets
3,595

 
3,454

 
3,381

TOTAL ASSETS
$
407,936

 
$
364,243

 
$
398,660

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
50,242

 
$
21,986

 
$
43,259

Accrued expenses and other
46,988

 
37,291

 
45,508

Total current liabilities
97,230

 
59,277

 
88,767

Deferred rent and other
16,020

 
16,382

 
16,521

Total liabilities
113,250

 
75,659

 
105,288

Commitments and Contingencies - see Note 5

 

 

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; 25,004,808 shares issued and 24,315,919 shares outstanding at June 28, 2014; 24,625,481 shares issued and 24,296,497 shares outstanding at December 28, 2013; and 24,387,175 shares issued and 24,356,285 shares outstanding at June 29, 2013
25

 
25

 
24

Treasury stock
(9,128
)
 
(4,405
)
 
(385
)
Additional paid-in capital
206,149

 
202,622

 
198,812

Accumulated other comprehensive loss
(556
)
 
(565
)
 
(662
)
Retained earnings
98,196

 
90,907

 
95,583

Total stockholders’ equity
294,686

 
288,584

 
293,372

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
407,936

 
$
364,243

 
$
398,660

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE 13 WEEKS AND 26 WEEKS ENDED JUNE 28, 2014 AND JUNE 29, 2013
(Unaudited and in thousands, except per share data)
 
 
13 Weeks Ended
 
26 Weeks Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net revenues
$
236,483

 
$
236,750

 
$
349,821

 
$
350,994

Cost of goods sold
154,205

 
149,487

 
242,620

 
238,417

Gross profit
82,278

 
87,263

 
107,201

 
112,577

Selling, general and administrative expense
49,715

 
49,612

 
93,756

 
91,114

Income from operations
32,563

 
37,651

 
13,445

 
21,463

Interest expense
115

 
114

 
223

 
223

Income before income taxes
32,448

 
37,537

 
13,222

 
21,240

Provision for income taxes
14,144

 
15,295

 
5,933

 
8,727

Net income
$
18,304

 
$
22,242

 
$
7,289

 
$
12,513

Net income per common and common equivalent share:
 
 
 
 
 
 
 
Basic
$
0.76

 
$
0.92

 
$
0.30

 
$
0.52

Diluted
$
0.75

 
$
0.90

 
$
0.30

 
$
0.51

Weighted average common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
24,142

 
24,248

 
24,141

 
24,098

Diluted
24,314

 
24,587

 
24,418

 
24,476

See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE 13 WEEKS AND 26 WEEKS ENDED JUNE 28, 2014 AND JUNE 29, 2013
(Unaudited and in thousands)
 
 
13 Weeks Ended
 
26 Weeks Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net income
$
18,304

 
$
22,242

 
$
7,289

 
$
12,513

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $(19), $0, $5 and $0
(32
)
 
70

 
9

 
129

Total comprehensive income
$
18,272

 
$
22,312

 
$
7,298

 
$
12,642

See accompanying notes to condensed consolidated financial statements.



5

Table of Contents

WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 26 WEEKS ENDED JUNE 28, 2014 AND JUNE 29, 2013
(Unaudited and in thousands)
 
 
26 Weeks Ended
 
June 28,
2014
 
June 29,
2013
OPERATING ACTIVITIES:
 
 
 
Net income
$
7,289

 
$
12,513

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
8,683

 
7,446

Share-based compensation
1,803

 
1,659

Excess tax benefit from share-based compensation
(225
)
 
(841
)
Deferred income taxes
479

 
1,159

Provision for doubtful accounts
71

 
39

Lower of cost or market inventory adjustments
1,263

 
880

Loss on asset disposals
220

 
104

Changes in assets and liabilities:
 
 
 
Trade receivables
(4,600
)
 
(3,324
)
Merchandise inventories
(41,815
)
 
(48,641
)
Other current assets
(2,789
)
 
(5,505
)
Other assets
(228
)
 
98

Accounts payable
28,717

 
23,698

Accrued expenses and other
9,795

 
5,313

Deferred items and other non-current liabilities
750

 
1,335

Net cash provided by (used in) operating activities
9,413

 
(4,067
)
INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of property and equipment
20

 
4,311

Purchases of property and equipment
(16,032
)
 
(15,133
)
Net cash used in investing activities
(16,012
)
 
(10,822
)
FINANCING ACTIVITIES:
 
 
 
Borrowings on line of credit
1,165

 
2,810

Repayments on line of credit
(1,165
)
 
(2,810
)
Proceeds from exercise of stock options
1,308

 
2,855

Proceeds from sale of common stock pursuant to Associates Stock Buying Plan
318

 
383

Excess tax benefit from share-based compensation
225

 
841

Treasury shares acquired
(4,723
)
 

Net cash provided by (used in) financing activities
(2,872
)
 
4,079

Effect of exchange rate changes on cash
(3
)
 
41

NET DECREASE IN CASH
(9,474
)
 
(10,769
)
CASH AT BEGINNING OF PERIOD
48,408

 
56,542

CASH AT END OF PERIOD
$
38,934

 
$
45,773

Other cash flow information:
 
 
 
Cash paid for interest
$
148

 
$
146

Cash paid for income taxes, net of refunds of $1,391 and $30
(528
)
 
579

Non-cash investing activities
 
 
 
Change in property and equipment additions in accounts payable
(461
)
 
(1,514
)

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-six Weeks Ended June 28, 2014 and June 29, 2013
(Unaudited)

NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared from the records of West Marine, Inc. and its subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary to fairly state the financial position at June 28, 2014 and June 29, 2013, and the interim results of operations for the 13-week and 26-week periods then ended and cash flows for the 26-week periods then ended, have been included.
The condensed consolidated balance sheet at December 28, 2013 presented herein has been derived from the audited consolidated financial statements of the Company for the year then ended that was included in the Company's Annual Report on Form 10-K for the year ended December 28, 2013 (the “2013 Form 10-K”). These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the fiscal year ended December 28, 2013 that were included in the 2013 Form 10-K.
Accounting policies followed by the Company are described in Note 1 in the audited consolidated financial statements for the year ended December 28, 2013. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted for purposes of the condensed consolidated interim financial statements presented herein. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13-week and 26-week periods ended June 28, 2014 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending January 3, 2015. Historically, the Company's revenues and net income are higher in the second and third quarters and decrease in the first and fourth quarters of the fiscal year. The increase in revenues and earnings, principally during the period from April through August, is representative of the peak months for boat buying, usage and maintenance in most of the Company's retail markets.
The Company's fiscal year consists of 52  or 53 weeks, ending on the Saturday closest to December 31. The 2014 fiscal year consists of 53 weeks ending on January 3, 2015, and the 2013 fiscal year consisted of 52 weeks ending on December 28, 2013. All quarters of both fiscal years 2014 and 2013 consist of 13 weeks, other than the fourth quarter of 2014, which consists of 14 weeks. All references to years relate to fiscal years rather than calendar years.
Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prescribed under GAAP contains three levels, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of June 28, 2014, there were no financial instruments which require disclosure under the fair value hierarchy. The Company's cash and cash equivalents consist of cash on hand, bank deposits and amounts in transit from banks for customer credit card and debit card transactions. As of June 28, 2014, December 28, 2013 and June 29, 2013 cash balances were $38.9 million, $48.4 million and $45.8 million, respectively.
Reportable Segment
Based upon how the Company's chief executive officer (as the Company's chief operating decision maker) reviews operating results for the purposes of allocating resources and assessing performance, and our strategic focus on omni-channel retailing, the Company has one reportable segment. Revenues from customers are derived from merchandise sales and the Company does not rely on any individual major customer as a source of revenue.

7

Table of Contents

Merchandise Mix
The Company considers its merchandise expansion strategy to be strategically important to the future success of the Company and is providing the following product category information. The Company's merchandise mix for the period ended June 28, 2014 and June 29, 2013 is reflected in the table below:
 
13 Weeks Ended
 
26 Weeks Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Core boating products
82.7
%
 
84.8
%
 
82.7
%
 
84.6
%
Merchandise expansion products
17.3
%
 
15.2
%
 
17.3
%
 
15.4
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
The Company considers core boating products to be maintenance related products, electronics, sailboat hardware, anchors/docking/moorings, engine systems, safety, electrical, plumbing, boats, outboards, ventilation, deck hardware/fasteners, navigation, trailering, seating/boat covers and barbecues/appliances. The Company considers its merchandise expansion products to be comprised of apparel, footwear, clothing accessories, fishing, watersports, paddlesports, coolers, bikes and cabin/galley.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 provides a narrower definition of discontinued operations than under existing GAAP. The new guidance requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity's operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-08 to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016 with early application not permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-09 to have a material impact on the Company's consolidated financial statements.
Correction of Immaterial Errors
The Company previously reported vendor cash consideration for advertising and other selling expenses as a reduction to selling, general and administrative expense ("SG&A"). During the fourth quarter of 2013, management determined that such vendor cash consideration should have been classified as a reduction of inventory and ultimately as a reduction to cost of goods sold as the related inventory was sold, under the guidance in Accounting Standards Codification ("ASC") 605-50-45-15, Revenue Recognition, Customer Payments and Incentives, Other Presentation Matters, Consideration Is Reimbursement of Costs Incurred by the Customer. The prior period financial statements have also been revised to reflect the correction of certain other previously uncorrected immaterial prior period errors. The Company assessed the materiality of this misstatement on prior periods’ financial statements in accordance with SEC’s Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in ASC 250 ("ASC 250"), Presentation of Financial Statements, and concluded that the misstatement was not material to any prior annual or interim periods, but the cumulative adjustment necessary to correct the classification would have been material to the year ended December 28, 2013. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the financial statements as of June 29, 2013 and for the 13 weeks and 26 weeks ended June 29, 2013, which are presented herein have been revised. The following are selected line items from our financial statements illustrating the effect of the correction :


8

Table of Contents

Condensed Consolidated Balance Sheet
(in thousands)
 
June 29, 2013
 
As Reported
 
Adjustment
 
As Revised
Assets
 
 
 
 
 
Merchandise inventories
243,083

 
$
(5,983
)
 
237,100

Other current assets
21,896

 
1,637

 
23,533

Total current assets
326,052

 
(4,346
)
 
321,706

Long-term deferred income taxes
7,873

 
37

 
7,910

Total assets
402,969

 
(4,309
)
 
398,660

Liabilities
 
 
 
 
 
Accrued expenses and other
45,919

 
(411
)
 
45,508

Total current liabilities
89,178

 
(411
)
 
88,767

Deferred rent and other
16,502

 
19

 
16,521

Total liabilities
105,680

 
(392
)
 
105,288

Stockholders' Equity
 
 
 
 
 
Retained earnings
99,500

 
(3,917
)
 
95,583

Total stockholders' equity
297,289

 
(3,917
)
 
293,372

Total liabilities and stockholders' equity
402,969

 
(4,309
)
 
398,660


Condensed Consolidated Statement of Income
(in thousands)
 
13 Weeks Ended
 
26 Weeks Ended
 
June 29, 2013
 
June 29, 2013
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Cost of goods sold
$
154,189

 
$
(4,702
)
 
$
149,487

 
$
243,490

 
$
(5,073
)
 
$
238,417

Gross profit
82,561

 
4,702

 
87,263

 
107,504

 
5,073

 
112,577

Selling, general and administrative expense
44,796

 
4,816

 
49,612

 
84,674

 
6,440

 
91,114

Income from operations
37,765

 
(114
)
 
37,651

 
22,830

 
(1,367
)
 
21,463

Income before income taxes
37,651

 
(114
)
 
37,537

 
22,607

 
(1,367
)
 
21,240

Provision for income taxes
15,342

 
(47
)
 
15,295

 
9,279

 
(552
)
 
8,727

Net income
22,309

 
(67
)
 
22,242

 
13,328

 
(815
)
 
12,513

Net income per common and common equivalent share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.92

 
$

 
$
0.92

 
$
0.55

 
$
(0.03
)
 
$
0.52

Diluted
0.91

 
(0.01
)
 
0.90

 
0.54

 
(0.03
)
 
0.51


Condensed Consolidated Statement of Comprehensive Income
(in thousands)
 
13 Weeks Ended
 
26 Weeks Ended
 
June 29, 2013
 
June 29, 2013
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Net income
$
22,309

 
$
(67
)
 
$
22,242

 
$
13,328

 
$
(815
)
 
$
12,513

Total comprehensive income
22,379

 
(67
)
 
22,312

 
13,457

 
(815
)
 
12,642



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Table of Contents

Condensed Consolidated Statement of Cash Flows
(in thousands)
 
 
 
26 Weeks Ended
 
 
 
June 29, 2013
 
 
 
 
 
 
 
As Reported
 
Adjustment
 
As Revised
Net income
 
 

 
 
 
$
13,328

 
$
(815
)
 
$
12,513

Tax benefit from equity issuance
 
 
 
 
 
 
527

 
(527
)
 

Deferred income taxes
 
 
 
 
 
 
1,158

 
1

 
1,159

Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Merchandise inventories
 
 

 
 
 
(49,631
)
 
990

 
(48,641
)
Other current assets
 
 

 
 
 
(5,535
)
 
30

 
(5,505
)
Accounts payable
 
 

 
 
 
23,699

 
(1
)
 
23,698

Accrued expenses and other
 
 

 
 
 
4,991

 
322

 
5,313


NOTE 2: INCOME TAXES
The Company calculates its interim income tax provision by estimating the annual effective tax rate and applying that rate to its year-to-date ordinary earnings. The Company's effective income tax rate for the 13-week period ended June 28, 2014 was 43.6%, which resulted in a provision of $14.1 million, while the effective tax rate of the 13-week period ended June 29, 2013 was 40.7%, which resulted in a provision of $15.3 million. The Company's effective income tax rate for the 26-week period ended June 28, 2014 was 44.9%, which resulted in a provision of $5.9 million, while the effective tax rate for the 26-week period ended June 29, 2013 was 41.1%, which resulted in a provision of $8.7 million. The increase in the effective tax rate is largely due to changes in Puerto Rico tax rates.
The Company continues to maintain a valuation allowance against its California Enterprise Zone ("CA EZ") credits in the amount of $4.2 million, in addition to a $1.3 million valuation allowance against South Carolina state tax credits. The Company continues to monitor and adjust these valuation allowances based on current evaluation of its ability to realize these tax credits.
During the second quarter of 2014, the Company favorably settled an audit from the State of California for the years 2009 through 2010. The result of the audit settlement was the release of a $1.5 million reserve for uncertain tax benefits against the CA EZ credits. The Company placed an additional $1.7 million valuation on these credits.
During the three months ended June 28, 2014, the change in the gross amount of unrecognized tax benefits and accrued interest and penalties was not significant.
The Company files income tax returns in the U.S. federal jurisdiction, various states and cities, and Puerto Rico and Canada. The Company has substantially settled all federal income tax matters through 2008, as well as all state and foreign jurisdictions through 2007 and 2006, respectively, with the exception of an open audit of Michigan for the years 2009 through 2011.
NOTE 3: SHARE-BASED COMPENSATION
The Company recognized share-based compensation expense of $0.9 million for the 13-week period ended June 28, 2014 and $0.9 million for the 13-week period ended June 29, 2013, the majority of which was recorded as SG&A expense. The Company recognized share-based compensation expense of $1.8 million for the 26-week period ended June 28, 2014 and $1.7 million for the 26-week period ended June 29, 2013, the majority of which was recorded as SG&A expense. The tax benefits associated with share-based compensation expense for the 13-week and 26-week periods ended June 28, 2014 were $0.1 million and $0.2 million, respectively, which were recognized as excess tax benefits in additional paid-in capital. The tax benefit associated with share-based compensation expense for the 13-week and 26-week periods ended June 29, 2013 were $0.2 million and $0.8 million, respectively, which were recognized as excess tax benefits in additional paid-in capital. The Company began a new performance-based restricted stock unit program during the first quarter of 2014. The related compensation expense is included in the share-based compensation amount for the period ended June 28, 2014.
The Manager Share Appreciation Plan ("MSAP") compensation expense for the 13-week and 26-week periods ended June 28, 2014 was minimal. The corresponding liability at June 28, 2014 was $0.1 million. The MSAP compensation expense for the 13-week and 26-week periods ended June 29, 2013 was minimal and $0.1 million, respectively. The corresponding liability at June 29, 2013 was $0.1 million.
NOTE 4: COMPREHENSIVE INCOME (LOSS)

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Table of Contents

Comprehensive income (loss) consists of net income (loss) 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 consists of net income and foreign currency translation adjustments for all periods presented.
NOTE 5: CONTINGENCIES
The Company is party to various legal and administrative proceedings, claims, product recalls, 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 and/or fiscal year 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, changes in current facts or circumstances and/or 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 any claims, legal or administrative 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 any such matters where a loss is reasonably possible, the range of estimated loss is not material, individually and in the aggregate.
NOTE 6: 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 0.8 million and 0.3 million shares of common stock that were outstanding for the quarters ended June 28, 2014 and June 29, 2013, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive. Options to purchase approximately 0.3 million and 0.3 million shares of common stock that were outstanding for the first 26-weeks ended June 28, 2014 and June 29, 2013, 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 (in thousands):
 
13 Weeks Ended
 
June 28, 2014
 
June 29, 2013
 
Shares
 
Net Income
Per Share
 
Shares
 
Net Income
Per Share
Basic
24,142

 
$
0.76

 
24,248

 
$
0.92

Effect of dilutive stock options
172

 
(0.01
)
 
339

 
(0.02
)
Diluted
24,314

 
$
0.75

 
24,587

 
$
0.90

 
 
 
26 Weeks Ended
 
June 28, 2014
 
June 29, 2013
 
Shares
 
Net Income
Per Share
 
Shares
 
Net Income
Per Share
Basic
24,141

 
$
0.30

 
24,098

 
$
0.52

Effect of dilutive stock options
277

 

 
378

 
(0.01
)
Diluted
24,418

 
$
0.30

 
24,476

 
$
0.51

 
NOTE 7: STOCK REPURCHASE PROGRAM
As previously announced in March 2013, the Company’s Board of Directors approved the repurchase by the Company of up to $10 million of its common stock through open market or privately negotiated transactions. For the three months ended June 28, 2014, the Company did not repurchase any shares. For the six months ended June 28, 2014, the Company had repurchased 359,905 shares in the aggregate for a total purchase price of approximately $4.8 million and an average price per share of $13.45. The shares repurchased during this period included 31,731 shares that were repurchased, but had not settled at December 28, 2013.



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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2013 (the “2013 Form 10-K”), as supplemented in Part II, Item 1A of this report. All references to the second quarter and the first six months of 2014 mean the 13-week and 26-week periods ended June 28, 2014, respectively, and all references to the second quarter and the six months of 2013 mean the 13-week and 26-week periods ended June 29, 2013, respectively. Unless the context otherwise requires, “West Marine,” “we,” “us” and “our” refer to West Marine, Inc. and its subsidiaries.
Overview
West Marine was founded in 1968 by a sailor and has grown to become the largest omni-channel specialty retailer exclusively offering boating supplies, gear, apparel, footwear and other waterlife-related products to anyone who enjoys recreational time on or around the water. With 282 stores located in 38 states, Puerto Rico and Canada as of the end of the second quarter of 2014 and an eCommerce website reaching domestic and international customers, we are recognized as the dominant waterlife outfitter for cruisers, sailors, anglers and paddle sports enthusiasts. We strive to provide exceptional customer experiences and offer the convenience of omni-channel shopping. In support of our omni-channel business strategy, we will continue our current focus on growing revenues from core boating products and accelerating our investment in our three growth strategies.
Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States for interim financial information pursuant to Regulation S-X. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We have identified certain policies that require the application of significant judgment by management. Our most critical accounting policies are those related to inventory valuations (including valuation adjustments and capitalization of indirect costs), vendor allowances receivable, costs associated with exit activities, impairment of long-lived assets, income taxes, liabilities for self-insurance or high-deductible losses, and share-based compensation. These critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2013 Form 10-K. The following discussion and analysis should be read in conjunction with such description of critical accounting policies and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report.
Results of Operations
The following table sets forth certain statement of operations components expressed as a percentage of net revenues: 
 
13 Weeks Ended
 
 
26 Weeks Ended
 
 
June 28, 2014
 
 
June 29, 2013
 
 
June 28, 2014
 
 
June 29, 2013
 
Net revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of goods sold
65.2
 
 
63.1
 
 
69.4
 
 
67.9
 
Gross profit
34.8
 
 
36.9
 
 
30.6
 
 
32.1
 
Selling, general and administrative expense
21.0
 
 
21.0
 
 
26.8
 
 
26.0
 
Income from operations
13.8
 
 
15.9
 
 
3.8
 
 
6.1
 
Interest expense
0.1
 
 
 
 
 
 
 
Income before income taxes
13.7
 
 
15.9
 
 
3.8
 
 
6.1
 
Provision for income taxes
6.0
 
 
6.5
 
 
1.7
 
 
2.5
 
Net income
7.7
%
 
9.4
%
 
2.1
%
 
3.6
%

Thirteen Weeks Ended June 28, 2014 Compared to Thirteen Weeks Ended June 29, 2013
Net revenues for the second quarter of 2014 were $236.5 million, a decrease of $0.3 million, or 0.1%, compared to net revenues of $236.8 million in the second quarter in 2013. Comparable store sales decreased 0.7%. The lower sales resulted from another

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slow start to the boating season this year, particularly in the Northeast and Great Lakes regions. The sales in these two regions were partially offset by higher sales in the Southeast. Core products, which represented 82.7% of our total sales and tend to be dependent upon boat-usage, were down 2.4% during the second quarter as compared to the same period last year. During the second quarter last year, core products represented 84.8% of total sales.
We remain focused on our three key strategies: eCommerce; merchandise expansion; and store optimization. During the second quarter, our eCommerce sales decreased by 2.3% and represented 6.6% of our revenues, as compared to 6.8% last year. We believe the initial transition to our eCommerce platform negatively impacted eCommerce results in the second quarter of 2014 and, during the quarter, we focused on completing the remediation of our post-launch defects. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) grew by 13.9%. Merchandise expansion products represented 17.3% of our second quarter total sales, as compared to 15.2% last year. Finally, with respect to our store optimization strategy, sales from stores in our optimized markets, where we have moved to a larger format store from multiple, smaller locations, were up $17.2 million, or 22.1%, during the quarter.
We experienced increased sales to our professional services customers during the second quarter, primarily through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through our store locations. We had 282 company-operated stores open at the end of the second quarter of 2014, compared to 295 company-operated stores and five franchised stores at the end of the second quarter of 2013. While store count declined by 4.4% year-over-year, selling square footage increased by 1.2%.
Gross profit decreased by $5.0 million, or 5.7%, to $82.3 million in the second quarter of 2014, compared to $87.3 million for the same period last year. Gross profit decreased as a percentage of net revenues to 34.8% in the second quarter of 2014, compared to 36.9% for the same period last year. This was driven by lower raw product margin, which decreased by 0.8%, primarily due to the shift in balance of sales between retail and professional services customers; gross profit rate was also impacted by 0.8% due to higher unit buying and distribution costs. We also saw higher occupancy expense, which increased 0.5% as a result of lease reserves associated with stores closed as part of our store optimization strategy.
Selling, general and administrative expense ("SG&A") was $49.7 million, an increase of $0.1 million, or 0.2%, compared to $49.6 million for the same period last year. SG&A was flat as a percentage of net revenues at 21.0% in both the second quarter of 2014 and 2013. We incurred some increase in support expense related to our key growth strategies, which primarily consisted of investments in information technology and our eCommerce website. These costs were offset by cost savings from streamlined business processes.
Net income for the 13-week period ended June 28, 2014 was $18.3 million, a $3.9 million decrease when compared to the same period last year. Our effective income tax rate for the 13-week period ended June 28, 2014 was 43.6%, which resulted in a provision of $14.1 million, while the effective tax rate for the 13-week period ended June 29, 2013 was 40.8%, which resulted in a provision of $15.3 million. The increase in the effective tax rate is largely due to changes in Puerto Rico tax rates. Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary.
Twenty-six Weeks Ended June 28, 2014 Compared to Twenty-six Weeks Ended June 29, 2013
Net revenues for the first 26 weeks of 2014 were $349.8 million, a decrease of $1.2 million, or 0.3%, compared to net revenues of $351.0 million in the first 26 weeks in 2013. Comparable store sales decreased 1.1%. Core products, which represented 82.7% of our total sales and tend to be dependent upon boat-usage, were down 2.2% during the first half of the year as compared to the same period last year. During the first two quarters last year, core products represented 84.6% of total sales.
As compared to the same period last year, we saw positive sales growth from our three key strategies: eCommerce; merchandise expansion; and store optimization. Our eCommerce sales increased by 0.5% and represented 7.2% of our revenues for the first half of this year, as well as last year. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) grew by 12.1%. Merchandise expansion products represented 17.3% of our total sales this year, as compared to 15.4% last year. Finally, with respect to our store optimization strategy, sales from stores in our optimized markets, where we have moved to a larger format store from multiple, smaller locations, were up $25.8 million, or 21.6%, during the first half of this year compared to last year.
Gross profit decreased by $5.4 million, or 4.8%, to $107.2 million in the first 26 weeks of 2014, compared to $112.6 million for the same period last year. Gross profit decreased as a percentage of net revenues to 30.6% in the first 26 weeks of 2014, compared to 32.1% for the same period last year. This was driven by lower raw product margin, which decreased by 0.3%, primarily due to the shift in balance of sales between retail and professional services customers; gross profit rate was also impacted by 0.6% due to higher unit buying and distribution costs. This also was driven by higher occupancy expense, which increased 0.6% due to lease reserves incurred for stores closed as part of our store optimization strategy.

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SG&A was $93.8 million, an increase of $2.6 million, or 2.9%, compared to $91.1 million for the same period last year. SG&A increased as a percentage of net revenues to 26.8% in the first 26 weeks of 2014, compared to 26.0% for the same period last year. The primary driver of the higher SG&A was $1.3 million associated with our biannual West Marine University sales training conference and a $1.3 million increase in support expense related to our key growth strategies, which primarily consisted of investments in information technology and our eCommerce website.
Net income for the 26-week period ended June 28, 2014 was $7.3 million, a $5.2 million decrease when compared to the same period last year. Our effective income tax rate for the 26-week period ended June 28, 2014 was 44.9%, which resulted in a provision of $5.9 million, while the effective tax rate for the 26-week period ended June 29, 2013 was 41.1%, which resulted in a provision of $8.7 million.
Liquidity and Capital Resources
We ended the second quarter of 2014 with $38.9 million of cash, compared to $45.8 million at the end of the second quarter of 2013. Working capital (the excess of current assets over current liabilities) decreased to $222.7 million at the end of the second quarter of 2014, compared to $232.9 million last year. The decrease in working capital primarily was attributable to lower cash as we executed our stock repurchase plan and invested in property and equipment.
Operating Activities
During the first six months of 2014, net cash provided by operating activities was $9.4 million, compared to $4.1 million of cash used in operating activities during the same period last year. The increase in cash provided in operating activities year-over-year primarily was due to changes in merchandise inventories, other current assets and higher accounts payable and accrued expenses, partially offset by a decrease in net income. A key driver for the increase in our merchandise inventories is the seasonal nature of our business, as we ramp up for our busy season period of April through May. Additionally, the increase in accrued expenses was primarily due to accruals related to our store optimization and revitalization projects.
Investing Activities
Net cash used in investing activities was $16.0 million for the first six months of 2014, compared to net cash used of $10.8 million for the first six months of 2013. The increase in cash used in investing activities year-over-year primarily was due to cash used for investment in our key growth strategies, including investment in our information technology infrastructure.
We spent $16.0 million on capital expenditures during the first six months of 2014, which was a $0.9 million increase compared to the same period in the prior year. During the first six months of 2014, we opened one flagship store and one large-format store and completed 11 store revitalization projects, as compared to opening two large-format stores during the first six months of 2013. During the remaining six months of 2014, we expect to spend an additional $13.0 million on capital expenditures, mainly for our store optimization program, store consolidations and information technology enhancements. We will continue to invest in eCommerce and network infrastructure, but at a slower pace than in 2013, when the bulk of the web re-platform work was completed. Additionally, in the first six months of 2013, there was an increase in cash provided by investing activities due to cash received from the sale of our Ft. Lauderdale property.
Financing Activities
Net cash used in financing activities was $3.0 million for the first six months of 2014, mostly attributable to stock repurchases and partially offset by proceeds from the exercise of stock options. For the first six months of 2013, net cash provided by financing activities was $4.1 million, mostly attributable to proceeds from the exercise of stock options.
Credit Agreement
We maintain an asset backed line of credit with Wells Fargo Bank, N.A., which provides us with a secured revolving credit facility until November 30, 2017 of up to $120 million. In addition, at our option and subject to certain conditions, we may increase our borrowing capacity up to an additional $25.0 million. The amount available to be borrowed is based on a percentage of our inventory (excluding capitalized indirect costs) and accounts receivable. The revolving credit facility is available for general working capital and general corporate purposes. At our election, borrowings under the revolving credit facility will bear interest at one of the following options:
1.The prime rate, which is defined in the loan agreement as the highest of:
a.Federal funds rate, as in effect from time to time, plus one-half of one percent;
b.LIBOR rate for a one-month interest period plus one percent; or
c.The rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate,” or
2.The LIBOR rate quoted by the British Bankers Association for the applicable interest period.
In each case, the applicable interest rate is increased by a margin imposed by the loan agreement. The applicable margin for any date will depend upon the amount of available credit under the revolving credit facility. The margin range for option (1) above is between 0.5% and 1.0% and for option (2) above is between 1.5% and 2.0%. The loan agreement also imposes a fee on the

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unused portion of the revolving credit facility available. For second quarter of 2014 and 2013, the weighted-average interest rate on all of our outstanding borrowings was 3.8% and 3.8%, respectively. For the first six months of 2014 and 2013, the weighted-average interest rate on all of our outstanding borrowings was 3.8% and 3.8%, respectively.
Although the loan agreement contains customary covenants, including, but not limited to, restrictions on our ability to incur liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our revolving credit facility at any given time is determined by the estimated value of these assets as determined by the lenders’ appraisers. Additionally, we must maintain a minimum revolving credit availability equal to the greater of $7 million or 10% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date and the revolving credit facility could be terminated. As of June 28, 2014, we were in compliance with the covenants under our loan agreement, had no amounts outstanding under our revolving credit facility and $115.6 million available for future borrowings.
We may borrow against the aggregate borrowing base up to the maximum revolver amount, which was $120.0 million at June 28, 2014 and December 28, 2013 and June 29, 2013. Our borrowing base at the periods then ended consisted of the following (in millions): 
 
June 28,
2014
 
December 28, 2013
 
June 29,
2013
Accounts receivable availability
$
13.0

 
$
5.1

 
$
12.2

Inventory availability
160.5

 
115.6

 
154.9

Less: reserves
(7.4
)
 
(6.0
)
 
(5.5
)
Less: minimum availability
(16.6
)
 
(11.5
)
 
(16.2
)
Less: suppressed availability
(29.5
)
 

 
(25.4
)
Total borrowing base
$
120.0

 
$
103.2

 
$
120.0

Our aggregate borrowing base was reduced by the following obligations (in millions): 
Ending loan balance/(overpayment)
$
(0.2
)
 
$
(0.2
)
 
$
(0.3
)
Outstanding letters of credit
4.6

 
4.6

 
4.5

Total obligations
$
4.4

 
$
4.4

 
$
4.2

 
 
 
 
 
 
Accordingly, our availability as of June 28, 2014, December 28, 2013 and June 29, 2013, respectively, was (in millions):
 
 
 
 
 
Total borrowing base
$
120.0

 
$
103.2

 
$
120.0

Less: obligations
(4.4
)
 
(4.4
)
 
(4.2
)
Total availability
$
115.6

 
$
98.8

 
$
115.8


Off-Balance Sheet Arrangements
Operating leases are the only financing arrangements not reported on our condensed consolidated balance sheets. We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. As of June 28, 2014, we were not involved in any unconsolidated special purpose entities or variable interest entities.
Substantially all of the real property used in our business is leased under operating lease agreements, as described in Item 2, “Properties” and Note 7 to our consolidated financial statements in the 2013 Form 10-K.
Seasonality
Historically, our business has been highly seasonal. In 2013, 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.

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Business Trends
We believe that there are fundamental trends continuing to emerge in our industry that are affecting our customers and their purchase patterns. These trends reinforce our realization that the core boat parts and accessories business is not going to be sufficient to meet our performance goals of achieving steady, profitable growth. We believe that we can accomplish our goals by accelerating the execution of our growth strategies to reposition West Marine as a broader waterlife outfitter, as well as, the leading boat parts specialty retailer. This repositioning will expand our potential market and is expected to reduce our dependence on weather.
Our key growth strategies, including our 15/50 plan, have delivered encouraging early results, but they remain a relatively small part of our business. As we continue to test and learn, our confidence in these strategies has increased, and we have continued to invest in them during 2014. Prior year results for these strategies were:
eCommerce: Sales from eCommerce grew by 15.7% during 2013, which was much higher than the 4.7% growth we experienced in 2012. These sales represented 7.6% of total sales in fiscal year 2013, up from 6.5% for the corresponding period in 2012. Sales from eCommerce grew by 0.5% for the first 26 weeks ended June 28, 2014 and represented 7.2% of total sales this year and last year as well. We remain committed to our three to five-year goal is for eCommerce to represent 15% of sales.
Store optimization: Up through 2013, our efforts at store optimization focused on store consolidation, evolving to having fewer, larger stores with broader selection, improved shopping experience, and anticipated improved store economics. We expect this activity to continue for the next two to three years. During 2013, we began testing a new element of store optimization, which is “revitalization” of stores where we currently have suitable store footprints and locations. These projects are intended to increase sales by bringing new store design elements, featuring an expanded merchandise and an improved shopping experience, to a broader and more diverse group of potential customers. In 2013, 35% of our total sales came through optimized stores. For the first half of 2014, sales through optimized stores represented 41.5% of total sales, compared to 34.0% through the second quarter of 2013. This year-over-year increase is in line with our three to five year goal to deliver 50% of our total sales through optimized stores.
Merchandise expansion: Sales in our merchandise expansion categories (including soft goods, fishing, paddle sports, and accessories) support the eCommerce and store optimization strategies and grew by 6.1% during 2013, whereas sales in our core categories declined by 2.9%, primarily as a result of reduced boat usage. Sales of merchandise expansion products represented 16.5% of total sales for 2013, up from 15.3% in 2012. Sales from merchandise expansion categories grew by 12.1% for the first 26 weeks ended June 28, 2014, whereas sales from our core categories declined by 2.2% during the same period.
We continue to see evidence of positive interplay and a strong inter-dependence across our growth strategies. Specifically, our eCommerce and store optimization strategies are being driven by merchandise expansion product offerings and all of our strategies are designed to attract new customers and build upon our customer base. For full-year 2013, 24.3% of our eCommerce sales growth and 63.6% of the sales growth in our stores optimized came from our merchandise expansion strategy.
Given the early success of our growth strategies and the need to drive them at a faster pace in order to reposition our business, our financial plans for 2014 reflect the investment of significant resources in support of our key growth strategies, including $28 to $32 million of capital investments for the year. Approximately half of these investments are targeted toward our expanded store optimization program, which will include approximately 12 store consolidation projects and 11 store revitalizations. Seperately, we were recently advised that the lease for our Toronto, Canada store will not be renewed by the landlord, and we are evaluating our options in Toronto and the implications for our Canadian operations. We will direct approximately 35% of our capital investments to deliver further improvements to our eCommerce website and to continue to upgrade our information technology infrastructure. Both the eCommerce and store optimization strategies will allow us to continue to increase sales in our merchandise expansion strategy.
In addition to the capital expenditures impact, our profit and cash flow expectations for 2014 also reflect incremental investments in activities directed toward furthering our growth strategies. These strategies and investments in them support our fully realizing an omni-channel retail model, designed to provide a seamless customer experience across all shopping channels, and better position us to deliver incremental sales and operating margin improvement, both in the short and long term.
During the first half of 2014, we experienced sales that were below expectations. Based on regional trend differences, we believe the softness early in the year was largely weather-related because in areas with more favorable weather, we had better sales trends. As we moved into the second quarter, which is our peak season, we saw expected solid growth in sales to our wholesale customers, however, this was offset by modest declines in retail sales which were lower than our expectations. From a product category perspective, we saw strong growth in our merchandise expansion categories, however, sales of core products declined modestly. Given the sales softness thus far, we are managing expenses and merchandise inventories, yet we remain committed to investing in our growth strategies.

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For more information see the "Overview," “Fiscal 2013 Compared with Fiscal 2012 - Revenues,” and "Business Trends" discussions in "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations” in the 2013 Form 10-K.
Internet Address and Access to SEC Filings
Our Internet address is westmarine.com. Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in the “Investor Relations” portion of our website as well as through the Securities and Exchange Commission’s website, sec.gov.
Forward-Looking Statements
All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” and similar expressions also identify forward-looking statements. These forward-looking statements include, among other things, expectations related to our earnings, growth and profitability, statements that relate to West Marine's future plans, expectations and objectives; expectations and projections with respect to our ability to appropriately invest in, and execute on, our strategic growth strategies, including our ability to: improve our Direct-to-Consumer business, including our eCommerce website; experience increased sales from expanded merchandise assortments; continue to successfully execute our store optimization strategy; continue to invest in our technology infrastructure, inventory, maintain in-stock levels and improve financial performance; increase sales through all sales channels and control operating expenses in a challenging environment; as well as facts and assumptions underlying these statements or projections. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.
West Marine's operations could be adversely affected if the current soft economic conditions and the decreased spending in the boating industry continues or worsens, if fuel prices were to increase, or if unseasonably cold weather, prolonged winter-like conditions, natural disasters such as hurricanes, man-made disasters or extraordinary amounts of rainfall occur during the peak boating season in the second and third quarters. Risk factors that may affect our operating results in the future include the risk factors set forth in the 2013 Form 10-K, as supplemented in Part II, Item 1A of this report, and those risks which may be described from time to time in West Marine's other filings with the Securities and Exchange Commission. Except as required by applicable law, West Marine assumes no responsibility to update any forward-looking statements as a result of new information, future events or otherwise.
Recently Issued Accounting Pronouncements
Please see Note 1 to our condensed consolidated financial statements in this report for a discussion of new and recently-issued accounting pronouncements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not undertake any specific actions to diminish our exposure to interest rate or currency rate risk, and we are not a party to any interest rate or currency rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in the 2013 Form 10-K.
At the end of the second quarter ended June 28, 2014, we had no outstanding long-term debt and as such would not be impacted by a change in interest rates. We have up to $120.0 million in borrowing capacity under our credit facility. There are various interest rate options available, as described above.
Our only significant risk exposure is from U.S. dollar to Canadian dollar exchange rate fluctuations. 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 $0.5 million over the next year.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
West Marine’s management, including our chief executive officer ("CEO") and chief financial officer ("CFO"), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of June 28, 2014, due to the existence of the material weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

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In connection with preparing the 2013 Form 10-K, we identified a material weakness in internal control over financial reporting that continues to exist as of June 28, 2014. The material weakness relates to the application of generally accepted accounting principles in the United States ("GAAP") related to certain cash consideration received from vendors under our "Key Season Program." We offer our vendors the option of participating in our “Key Season Program,” in which the participating vendor provides cash consideration to West Marine that is not directly connected to the purchase of product for resale, but is intended to offset certain advertising expenditures. The Key Season Program includes, but is not limited to, direct mail advertising (circulars, flyers, catalogs, and promotional literature), email advertising, wholesale (Port Supply) advertising, in-store product placement (endcaps and floorstacks), vendor-specific product training for our associates, and inclusion in regional marketing campaigns.
We did not design and maintain effective controls over the accuracy and presentation and disclosure for certain cash consideration received from vendors under the Key Season Program. Specifically, we did not design controls related to the application of GAAP for certain cash considerations received from vendors that resulted in the cash consideration being recorded as a reduction to selling, general and administrative expense instead of a reduction to merchandise inventories and cost of goods sold.
The material weakness resulted in an audit adjustment to merchandise inventories, cost of goods sold, and selling, general and administrative expense and a revision for each of the two years in the period ended December 29, 2012 and for each of the related interim condensed consolidated financial statements filed on Forms 10-Q for the years ended December 28, 2013 and December 29, 2012. Additionally, this material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Despite the existence of this material weakness and in light of the remedial measures discussed below, management concludes that the financial statements included in this report fairly represent, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Remediation Efforts Related to Material Weakness
We are in the process of performing the following remediation activities:
A comprehensive analysis of the application of GAAP related to our Key Season Program.
Improve and enhance training for key accounting associates related to the underlying processes for recording cash consideration received under our Key Season Program.
We consider the remediation efforts for the material weakness in our internal control over financial reporting to be a significant priority for us. We took immediate action and implemented the changes in our controls outlined above. In addition, as we continue to evaluate our disclosure controls and procedures and internal control over financial reporting, we may implement additional measures in the future or otherwise modify the remedial measures described above, if and as we deem necessary or appropriate.
Changes in Internal Control Over Financial Reporting
The changes in our internal control over financial reporting described under "Remediation Efforts Related to Material Weakness" have occurred during the quarter ended June 28, 2014 and have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS
We are involved in various legal and administrative proceedings, claims, product recalls, 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 and/or fiscal year in which such developments, settlements or resolutions are reached. Based on the facts currently available, we do not believe that the disposition of any claims, regulatory compliance audits, 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 any claim, regulatory compliance audits, legal or administrative 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 any such matters where a loss is reasonably possible, the range of estimated loss is not material individually and in aggregate. There has been no material change in any of the matters referenced in Item 3 of the 2013 Form 10-K, and no new matters have commenced since the filing of the 2013 Form 10-K that would be required to be disclosed. For more information, see Item 3, “Legal Proceedings” in the 2013 Form 10-K.
ITEM 1A – RISK FACTORS
We have included in Part I, Item 1A of the 2013 Form 10-K, a description of certain risks and uncertainties that could affect our business, future performance or financial condition, referred to as “Risk Factors.” Investors should consider these Risk Factors prior to making an investment decision with respect to our common stock. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in the 2013 Form 10-K.
Non-compliance with the Payment Card Industry Data Security Standard (“PCI DSS”) may subject us to fines, penalties and civil liability.
We are subject to compliance with PCI DSS, an information security standard for organizations that handle cardholder information from major debit and credit card companies. Currently, we are in the process of finalizing steps to achieve PCI DSS compliance. Our efforts to comply with PCI DSS may result in significant expenses and any failure to fully comply with PCI DSS may subject us to fines, penalties and civil liability, and, in extreme circumstances, could result in the loss of our ability to accept debit and credit card payments or prohibit us from processing transactions through American Express, MasterCard, VISA and other card and payment networks. Even if we are compliant with PCI DSS or other applicable security standards, we still may not be able to prevent security breaches involving customer transaction data.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURE
None.
ITEM 5 – OTHER INFORMATION
None.

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ITEM 6 – EXHIBITS
 
 
3.1
Certificate of Incorporation of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to 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 Current Report on Form 8-K dated December 6, 2012 and filed on December 11, 2012).
 
 
4.1
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 2012).
 
 
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.
 

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the condensed consolidated balance sheets as of June 28, 2014, December 28, 2013 and June 29, 2013; (ii) the condensed consolidated statements of income for the 13 weeks ended June 28, 2014 and June 29, 2013 and 26 weeks ended June 28, 2014 and June 29, 2013; (iii) the condensed consolidated statements of comprehensive income for the 13 weeks ended June 28, 2014 and June 29, 2013 and 26 weeks ended June 28, 2014 and June 29, 2013; and (iv) the condensed consolidated statements of cash flows for the 26 weeks ended June 28, 2014 and June 29, 2013. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:
July 29, 2014
 
WEST MARINE, INC.
 
 
 
 
 
 
 
 
By:
/s/ Matthew L. Hyde
 
 
 
 
Matthew L. Hyde
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
 
By:
/s/ Thomas R. Moran
 
 
 
 
Thomas R. Moran
 
 
 
 
Chief Financial Officer

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