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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarter ended July 4, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission file number 0-22515
WEST MARINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 77-035-5502
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
500 Westridge Drive, Watsonville, CA 95076-4100
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(Address of Principal Executive Offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code (831) 728-2700
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N/A
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Former Name, Former Address and Former Year, if Changed Since Last Report
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by a check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act subsequent to the distribution of securities under a plan confirmed
by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
At July 4, 1998, the number of shares outstanding of the registrant's common
stock was 16,912,756.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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<CAPTION>
JULY 4, JANUARY 3,
ASSETS 1998 1998
------ ------------ --------------
(Unaudited)
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Current assets:
Cash $ 2,580 $ 1,010
Accounts receivable, net 7,833 5,003
Merchandise inventories 179,615 166,290
Prepaid expenses and other current assets 13,262 11,660
--------- ----------
Total current assets 203,290 183,963
Property and equipment, net 59,846 50,815
Intangibles and other assets, net 40,514 41,110
--------- ----------
Total assets $ 303,650 $ 275,888
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 42,360 $ 26,629
Accrued expenses 13,491 5,456
Deferred current liabilities 796 788
Current portion of long-term debt 1,772 1,848
--------- ----------
Total current liabilities 58,419 34,721
Long-term debt 89,365 92,960
Deferred items and other non-current obligations 2,014 1,889
Stockholders' equity:
Preferred stock, $.001 par value: 1,000,000 shares
authorized; no shares outstanding
Common stock, $.001 par value: 50,000,000 shares
authorized; issued and outstanding 16,912,756
and 16,494,205 at July 4, 1998 and
January 3, 1998, respectively 17 17
Additional paid-in capital 105,214 103,245
Retained earnings 48,621 43,056
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Total stockholders' equity 153,852 146,318
--------- ----------
Total liabilities and stockholders' equity $ 303,650 $ 275,888
========= =========
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts and store data)
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13 WEEKS 13 WEEKS 26 WEEKS 26 WEEKS
ENDED ENDED ENDED ENDED
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales $ 159,368 $ 141,499 $ 243,541 $ 216,524
Cost of goods sold including
buying and occupancy 112,338 94,453 174,665 149,743
--------- --------- --------- ---------
Gross profit 47,030 47,046 68,876 66,781
Selling, general and administrative
expenses 30,205 27,344 53,085 48,106
Expenses related to DC move - 3,284 -
--------- --------- --------- ---------
Income from operations 16,825 19,702 12,507 18,675
Interest expense 1,345 1,017 3,073 1,884
--------- --------- --------- ---------
Income before income 15,480 18,685 9,434 16,791
taxes
Provision for income taxes 6,347 7,527 3,868 6,791
--------- --------- --------- ---------
Net income $ 9,133 $ 11,158 $ 5,566 $ 10,000
========= ========= ========= =========
Net income per common and common
equivalent share:
Basic $ 0.54 $ 0.67 $ 0.33 $ 0.60
========= ========= ========= =========
Diluted $ 0.52 $ 0.63 $ 0.31 $ 0.57
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding:
Basic 16,894 16,622 16,852 16,575
========= ========= ========= =========
Diluted 17,643 17,617 17,683 17,630
========= ========= ========= =========
Stores open at end of period 205 167
========= =========
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See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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26 WEEKS 26 WEEKS
ENDED ENDED
JULY 4, JUNE 28,
1998 1997
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Cash flows from operating activities:
Net income $ 5,566 $ 10,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,444 3,979
Loss on sale of assets (85) 0
Provision for deferred income taxes 8 0
Provision for doubtful accounts 217 0
Accounts receivable, net (3,047) (3,149)
Merchandise inventories (13,325) (37,472)
Prepaid expenses and other assets (1,602) (4,968)
Other assets (52) 0
Accounts payable 15,731 16,173
Accrued expenses 8,725 7,901
Deferred item 125 166
--------- ---------
Net cash provided by (used in) operating activities 17,705 (7,370)
Cash flows from investing activities:
Purchases of property and equipment (11,198) (10,994)
--------- ---------
Net cash used in investing activities (11,198) (10,994)
Cash flows from financing activities:
Net (repayments) borrowings from line of credit (4,500) 19,100
Net repayments of long-term debt (1,716) (881)
Sale of common stock pursuant to
Associate stock purchase plan 428 467
Exercise of stock options 851 1,135
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Net cash (used in) provided by financing activities (4,937) 19,821
--------- ---------
Net increase in cash 1,570 1,457
Cash:
Beginning of period 1,010 894
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End of period $ 2,580 $ 2,351
========= =========
See notes to condensed consolidated financial statements.
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WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-six Weeks Ended July 4, 1998 and June 28, 1997 (unaudited)
NOTE 1- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of the Company without audit, and in the opinion of
management, include all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position at July 4, 1998 and
June 28, 1997; and the interim results of operations and cash flows for the 13
weeks and 26 weeks then ended. The condensed consolidated balance sheet at
January 3, 1998, presented herein, has been derived from the audited
consolidated financial statements of the Company for the fiscal year then ended.
The results of operations for the 13 week and 26 week periods presented herein
are not necessarily indicative of the results to be expected for the full year.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the fiscal year ended January 3,
1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted for purposes of the condensed
consolidated interim financial statements. The condensed consolidated financial
statements should be read in conjunction with the audited condensed consolidated
financial statements, including the notes thereto, for the year ended January 3,
1998.
NOTE 2 - CAPITALIZED INTEREST
The Company's policy is to capitalize a portion of interest incurred on its debt
during the course of major construction projects. Interest capitalized in the
second quarter of 1998 was $216,000 and was not material in the second quarter
of 1997.
NOTE 3 - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 3, 1998, West Marine, Inc. adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Comprehensive income
does not differ from net income for West Marine, Inc. for the second quarter of
1998 and 1997.
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Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations
General
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West Marine distributes its merchandise through three divisions, Stores (retail
and wholesale) and Catalog (retail) under the names of West Marine and E&B
Discount Marine as well as Port Supply (wholesale). West Marine operated 205
stores in 32 states as of July 4, 1998, compared to 167 stores in 29 states as
of June 28, 1997.
Results of Operations
- ---------------------
Net sales increased $17.9 million, or 12.6%, from $141.5 million during the
second quarter of fiscal 1997 to $159.4 million during the second quarter of
fiscal 1998. This increase was attributable to an increase in net sales from
the Company's Stores and Port Supply divisions partially offset by a decrease in
net sales in the Company's Catalog division. Store net sales increased $19.0
million, or 16.7%, to $132.7 million during the second quarter of fiscal 1998.
Net sales from comparable stores increased 4.6% and contributed $5.2 million of
the increase in net sales. Catalog net sales decreased $1.7 million, or 10.2%,
to $15.2 million. Catalog net sales have been negatively impacted by new store
openings by the Company and its competitors. Port Supply net sales increased
$574,000, or 5.3%, to $11.4 million. Stores, Catalog and Port Supply net sales
represented 83.3%, 9.6% and 7.1%, respectively, of the Company's net sales for
the second quarter of fiscal 1998 compared to 80.4%, 12.0% and 7.6%,
respectively, of the Company's net sales for the second quarter of fiscal 1997.
Management expects the current negative sales trend in its catalog business to
continue through the end of 1998.
Net sales increased $27.0 million, or 12.5%, from $216.5 million during the
first six months of fiscal 1997 to $243.5 million during the first six months of
fiscal 1998. This increase was attributable to an increase in net sales from
the Company's Stores and Port Supply divisions partially offset by a decrease in
net sales in the Company's Catalog division. Store net sales increased $27.6
million, or 16.0%, to $200.0 million during the first six months of fiscal 1998.
Net sales from comparable stores increased 4.2% and contributed $7.1 million of
the increase in net sales. Catalog net sales decreased $1.9 million, or 7.6%,
to $23.4 million. Port Supply net sales increased $1.3 million, or 7.2%, to
$20.1 million. Stores, Catalog and Port Supply net sales represented 82.1%,
9.6% and 8.3%, respectively, of the Company's net sales for the first six months
of fiscal 1998 compared to 79.6%, 11.7% and 8.7%, respectively, of the Company's
net sales for the first six months of fiscal 1997.
Gross profit was $47.0 million in the second quarter of fiscal 1998 which was
comparable to the second quarter of fiscal 1997. As a percentage of net sales,
gross profit was 29.5% in the second quarter of fiscal 1998 compared to 33.2% in
the same period last year. The decrease in gross profit, as a percentage of net
sales, was primarily due to increased distribution costs. Management expects
this trend to continue through the remaining two quarters of the year due to the
opening of the east coast distribution center, located in Rock Hill, South
Carolina, which began operations in January 1998.
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Gross profit increased $2.1 million, or 3.1%, in the first six months of fiscal
1998 compared to the first six months of fiscal 1997. As a percentage of net
sales, gross profit was 28.3% in the first six months of fiscal 1998 compared to
30.8% in the same period last year. The decrease in gross profit, as a
percentage of net sales, was primarily due to increased distribution costs.
Selling, general and administrative expenses increased $2.9 million, or 10.5%,
in the second quarter of fiscal 1998 compared to the second quarter of fiscal
1997, primarily due to increases in direct expenses related to the growth in
Stores and increased advertising costs in the Catalog division. Stores direct
expenses and Catalog advertising costs represented approximately 62% or $1.8
million of the increase. As a percentage of net sales, selling, general and
administrative expenses decreased to 19.0% in the second quarter of fiscal 1998
compared to 19.3% in the second quarter of fiscal 1997. This decrease was
primarily due to the Company's cost containment efforts in the quarter. The
Company expects selling, general and administrative expenses to remain at a
similar rate, as a percentage of sales, to that of the second quarter of fiscal
1997 through the end of 1998.
Selling, general and administrative expenses increased $5.0 million, or 10.4%,
in the first six months of fiscal 1998 compared to the first six months of
fiscal 1997, primarily due to increases in direct expenses related to the growth
in stores. Stores direct expenses represented approximately 60% or $3.0 million
of the increase. As a percentage of net sales, selling, general and
administrative expenses decreased to 21.8% in the first six months of fiscal
1998 compared to 22.2% in the first six months of fiscal 1997. This decrease
reflected the Company's cost containment efforts during the first six months of
fiscal 1998.
Expenses related to DC move, in the first six months of fiscal 1998, included
$3.3 million of expenses for the relocation and consolidation of West Marine's
two east coast distribution facilities into one located in Rock Hill, South
Carolina.
Interest expense increased $328,000 in the second quarter of fiscal 1998
compared to the second quarter of fiscal 1997, primarily as a result of higher
average borrowings under the Company's line of credit.
Interest expense increased $1.2 million in the first six months of fiscal 1998
compared to the first six months of fiscal 1997, primarily as a result of higher
average borrowings under the Company's line of credit.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of capital have been income from operations and
borrowings under its line of credit. Net cash provided from operations during
the first six months of 1998 was $17.7 million, consisting primarily of $5.6
million in net income, a $24.5 million increase of payables and other accrued
expenses and a $5.4 million of non-cash depreciation and amortization. These
increases were partially offset by a $13.3 million increase in inventory, a $3.0
million increase in receivables and a $1.6 million increase in prepaid expenses
and other assets. The increase in accounts payable and inventory was
primarily attributable to the seasonal build-up of inventory at West Marine and
E&B Marine locations, as well as the addition of 21 new stores in the first six
months of fiscal 1998.
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Net cash used in investing activities was $11.2 million primarily spent on new
store construction, the Rock Hill distribution center and software upgrades.
Net cash used in financing activities during the first six months of fiscal 1998
was $4.9 million, consisting primarily of repayments under the Company's line of
credit and long-term debt, offset in part by cash proceeds from the exercise of
stock options. Due to decreased profitability related to the distribution
center, the Company expects to renegotiate certain debt covenants related to its
borrowings within the next quarter. The Company expects that the borrowings will
be renegotiated at substantially the same rates as the current line. Management
believes that the cash flow from operations, together with the renegotiated bank
debt financing will be sufficient to fund the Company's operations through the
next year.
Year 2000
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The Company has developed a plan to deal with the Year 2000 (Y2K) issue. The
plan covers systems and vendor issues that will be generated by the change of
the year from 1999 to 2000. The portion of the plan relating to the Company's
systems includes a detailed survey of the current systems and associated
upgrades, as well as options relating to the replacement or reprogramming of
current systems that will be required to bring the Company's systems into
compliance with the Y2K issue. The Company expects the majority of the system
changes to be complete by early 1999, with final system and vendor issues
resolved by late summer 1999. There can be no guarantee that the Company's
systems will be timely converted or that the failure of such systems to be Y2K
compliant will not have a material adverse effect on the Company's results of
operations, financial condition or liquidity.
The plan developed to address vendor issues covers product and systems issues
and includes product certification, systems integration, testing, and
communication strategies. The Company is in the process of reviewing vendor
compliance with regards to the Y2K issue. There can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted or that the failure of such systems to be Y2K compliant will not have
a material adverse effect on the Company's results of operations, financial
condition or liquidity.
The Company does not expect expenditures related to the Y2K issue to be material
and as such, costs associated with Y2K are not expected to have a significant
impact on the Company's results of operations, financial condition or liquidity.
The Company is confident that it will meet the deadlines related to the Y2K
issue. However, the Company is in the process of developing a contingency plan
should it not meet these deadlines. The contingency plan is expected to be
completed by fiscal year end 1998.
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Seasonality
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Historically, the Company's business has been highly seasonal. As a result of
the acquisition of E&B Marine in June 1996, the Company is even more susceptible
to seasonality as a larger percentage of E&B Marine stores' sales occur in the
second and third quarters of the year. During 1997, 61.9% of the Company's net
sales and an even higher percentage of its net income occurred during the second
and third quarters, principally during the period from April through July which
represents the peak boating months in most of the Company's markets. The Company
expects sales will become more susceptible to seasonality and weather as it
continues to expand its operations.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
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1995:
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The statements in this filing or in documents incorporated by reference herein
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. Set forth below are certain important
factors that could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements.
The Company's growth has been fueled principally by the E&B Marine acquisition
and the Company's new and existing store operations. The Company's Catalog
division has faced market share erosion in markets where stores have been
opened by either the Company or its competitors. Management expects this trend
to continue. The consolidation of the Company's east coast distribution
facilities has resulted in costs and inefficiencies which have adversely
affected gross profit during the first half of 1998, and are expected to
continue. The Company's continued growth depends to a significant degree on its
ability to continue to expand its operations through the opening of new stores
and to operate those stores profitably, as well as to increase sales at its
existing stores. The Company's planned expansion is subject to a number of
factors, including the adequacy of the Company's capital resources and the
Company's ability to locate suitable store sites and negotiate acceptable lease
terms, to hire, train and integrate employees and to adapt its distribution and
other operations systems. In addition, acquisitions involve a number of risks,
including the diversion of management's attention to the assimilation of the
operations and personnel of the acquired business, potential adverse short-term
effects on the Company's operating results and amortization of acquired
intangible assets.
The market for recreational boating supplies is highly competitive. Competitive
pressures resulting from competitors' pricing policies have adversely affected
the Company's gross profit in the past. In addition, the Company's operations
could be adversely affected if unseasonably cold weather, prolonged winter
conditions or extraordinary amounts of rainfall were to occur during the peak
boating season in the second and third quarters.
Additional factors which may affect the Company's financial results include
consumer spending on recreational boating supplies, environmental regulations,
demand for and acceptance of the Company's products and other risk factors
disclosed from time to time in the Company's SEC filings.
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Part II - Other Information
Item 5. Other Information
Management Proxies
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In accordance with Rule 14a-4(c)(1) promulgated by the Securities and Exchange
Commission, management proxies intend to use their discretionary voting
authority with respect to any shareholder proposal raised at the Company's
annual meeting as to which the proponent fails to notify the Company on or
before February 24, 1999.
Management Changes
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On July 8, 1998, the Company announced that Randy Repass, the Company's founder
and Chairman of the Board, had assumed the role of interim chief executive
officer. Mr. Repass served as the Company's chief executive officer from 1968
to April 1995. Mr. Repass replaced Crawford Cole, the Company's previous
president and chief executive officer, who resigned for personal reasons. Mr.
Cole will continue with the Company as a consultant.
The Company also announced that Richard Everett had been promoted to President -
Store Division. Mr. Everett, who is the Company's Chief Operating Officer and
oversees the stores, real estate and construction functions, has been with the
Company for 17 years.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed for the period being reported.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 17, 1998 WEST MARINE, INC.
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By: /s/ Randolph K. Repass
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Randolph K. Repass
Chairman of the Board and Chief Executive
Officer
By: /s/ John Zott
---------------------------
John Zott
Senior Vice President, Chief Financial
Officer
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENT DATED JULY 4, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
<CASH> 2,580
<SECURITIES> 0
<RECEIVABLES> 7,833<F1>
<ALLOWANCES> 325
<INVENTORY> 179,615
<CURRENT-ASSETS> 203,290
<PP&E> 59,846<F2>
<DEPRECIATION> 28,215
<TOTAL-ASSETS> 303,650
<CURRENT-LIABILITIES> 58,419
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 153,835
<TOTAL-LIABILITY-AND-EQUITY> 303,650
<SALES> 159,368
<TOTAL-REVENUES> 159,368
<CGS> 112,338
<TOTAL-COSTS> 112,338
<OTHER-EXPENSES> 30,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,345
<INCOME-PRETAX> 15,480
<INCOME-TAX> 6,347
<INCOME-CONTINUING> 9,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,133
<EPS-PRIMARY> .54
<EPS-DILUTED> .52
<FN>
<F1>AMOUNT REPRESENTS RECEIVABLES NET OF THE ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>AMOUNT REPRESENTS PP&E NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
