Net revenues attributable to West Marine's stores division decreased $7.5 million to $159.8 million in the third quarter ended Sept. 27, 2008, a 4.5% decrease compared to the third quarter of 2007, primarily due to a $7.5 million decrease in comparable store sales. Comparable store sales decreased 4.7%, compared to a comparable store sales increase of 0.3% in the third quarter last year. The company stated it believes the decreased comparable store sales were driven primarily by the weak economy and higher fuel prices. West Marine continued to experience lower year-over-year sales of core boating products and discretionary items, which continued the trend of reduced boat usage and cautious customer spending on large-ticket items.
361 stores opened at the end of the third quarter of 2008 compared to 372 stores at the end of the third quarter of 2007. Wholesale (Port Supply) net sales through the company's distribution centers decreased $0.2 million, or 1.6%, to $10.0 million in the third quarter of 2008 compared to 2007, primarily due to lower sales to boat dealers. Net sales at the direct sales division decreased $0.4 million, or 4.0%, to $10.5 million in the third quarter of 2008 compared to 2007, primarily due to lower sales performance on catalog mailings and less promotional offers this year.
Gross profit decreased by $8.2 million, or 14.1%, to $49.7 million in the third quarter of 2008, compared to $57.9 million for the same period last year. Gross profit decreased as a percentage of net revenues to 27.6% in the third quarter of 2008, a 310 basis point decrease compared to 30.7% for the same period last year. Gross profit as a percentage of revenues decreased primarily due to lower raw product margin, down 108 basis points, driven by promotional activity and store closing clearance sales. Gross profit was also lower as a percentage of sales by 80 basis points due to occupancy expense. Occupancy is the company's largest fixed expense and its impact on gross margin is driven by sales results and the fixed nature of the expense. Buying and distribution costs contributed to a decrease of 72 basis points and recognized vendor allowances also de-leveraged, down 54 basis points, driven by the reduced inventories and reduced purchases in line with lower sales.
Selling, general and administrative expenses decreased $3.0 million, or 6.4%, to $43.9 million in the third quarter of 2008, compared to $46.8 million for the same period last year, and decreased as a percentage of sales to 24.4% in the third quarter of 2008, compared to 24.8% for the same period last year. The decrease in selling, general and administrative expenses was primarily due to $2.8 million in lower payroll, marketing and other variable expense, reflecting lower sales, reduced store count and lower professional services expenses for information technology projects. West Marine also received a $0.4 million benefit related to the timing of professional services.
Impairment of long-lived assets was $0.2 million in the third quarter of 2008 and related to four stores. Last year, impairment for information technology products was less than $0.1 million.
As previously disclosed, the company anticipated closing a small number of stores this year, which was originally estimated to be in the range of 10 to 15 locations. These closures were primarily due to relocation, or consolidation of smaller stores into fewer, larger stores to better serve the markets. During the second quarter, management conducted a more detailed analysis of store operations, particularly in light of deteriorating boating market conditions, and concluded that additional underperforming stores should be closed, bringing the total to between 25 and 30 stores. The stores identified for closure are spread across several major boating markets. West Marine said it used specific criteria to identify these stores, including cash flow projections by store as compared to the net book value of long-lived assets by store. During the third quarter, management also decided to close the distribution center located in Hagerstown, MD, and the call center located in Largo, FL. Restructuring expenses were estimated around $1.7 million consisting of $0.9 million for store closures, $0.1 million for Port Supply, $0.5 million for the distribution center, and severance costs of $0.2 million for reductions in force at the Watsonville Support Center. The company expects to recognize approximately $14.0 million in total restructuring charges during 2008.
Interest expense decreased $0.2 million, or 36.5%, to $0.3 million in the third quarter of 2008, compared to $0.5 million for the same period last year. The decrease in interest expense was due to both lower interest rates and lower average outstanding bank borrowings in the third quarter of 2008, compared to the same period last year.
Nine Months Ended Sept. 27, 2008
Net revenues for the first nine months of 2008 were $520.2 million, a decrease of $41.1 million, or 7.3%, compared to net revenues of $561.3 million in the first nine months of 2007, primarily due to a decrease of $33.3 million in comparable store sales and $6.9 million in sales attributable to stores that were closed in 2007. Net loss for the first nine months of 2008 was $9.8 million compared to net income of $15.6 million in the first nine months of 2007.
Net sales attributable to the stores division decreased $36.1 million to $456.5 million in the first nine months of 2008, a 7.3% decrease compared to the first nine months of 2007, primarily due to a $33.3 million decrease in comparable store sales. Comparable store sales decreased 7.1% in the first nine months of 2008, compared to a comparable store sales decrease of 1.7% in the first nine months last year. Comparable store sales for the first nine months were driven primarily by the weak economy and higher fuel prices. For the first nine months of the year, purchases of core products and discretionary items declined, continuing the trend of reduced boat usage and cautious customer spending on large-ticket items. Wholesale (Port Supply) net sales through the distribution centers decreased $2.1 million, or 6.1%, to $31.8 million in the first nine months of 2008 compared with 2007, primarily due to increased sales to Port Supply customers through the company's store locations, which are included in Stores sales. Net sales through the Port Supply division were also impacted by lower sales to boat dealers. Net sales of Direct Sales division decreased $2.9 million, or 8.3%, to $31.9 million in the first nine months of 2008 compared to 2007, primarily due to lower sales performance on catalog mailings, less promotional offers during the first nine months of this year, and fewer catalog mailings in 2007 that had an impact on first quarter 2008 sales.
Gross profit decreased by $20.3 million, or 11.9%, to $150.6 million in the first nine months of 2008, compared to $170.9 million for the same period last year. Gross profit decreased as a percentage of net revenues to 29.0% in the first nine months of 2008, a 150 basis point decrease compared to 30.5% for the same period last year. Gross profit as a percentage of revenues decreased primarily due to occupancy expense and lower vendor allowances recognized. Occupancy is WMAR's largest fixed expense and its impact on gross margin is largely driven by sales results, and the fixed nature of the expense de-leveraged gross margin by 96 basis points due to the year-over-year decline in sales. Reduced vendor allowances contributed to a decrease of 44 basis points and was due to reduced purchases in line with lower sales.
Selling, general and administrative expenses decreased $2.1 million, or 1.5%, to $139.5 million in the first nine months of 2008, compared to $141.7 million for the same period last year, and increased as a percentage of revenues to 26.9% in the first nine months of 2008, compared to 25.3% for the same period last year. The decrease in selling, general, and administrative expenses is primarily due to a decrease of $7.2 million in payroll, marketing and variable expenses. These reductions, which were driven by lower sales and the reduction in store count, were partially offset by $2.1 million associated with cooperating with the ongoing SEC investigation and $0.5 million expense related to West Marine associate training held in February 2008.
Impairment of long-lived assets was $2.4 million in the first nine months of 2008, compared to $0.4 million impairment for the same period last year. In addition to the third quarter 2008 store impairments discussed above, we impaired 36 stores during the first six months of this year. The impairment charge noted for last year was recorded for information technology assets that were superseded by the launch of new e-commerce assets. During the third quarter of this year, management also decided to close the distribution center located in Hagerstown, Maryland, and the call center located in Largo, Florida. We recognized restructuring expenses of $1.7 million consisting of $0.9 million for store closures, $0.1 million for Port Supply, $0.5 million for the distribution center, and severance costs of $0.2 million for reductions in force at the Watsonville Support Center.
Interest expense decreased $1.3 million, or 39.7%, to $1.9 million in the first nine months of 2008, compared to $3.2 million for the same period last year. The decrease in interest expense was due to both lower interest rates and lower average outstanding bank borrowings in the first nine months of 2008, compared to the same period last year.
13 Weeks Ended
As Restated (1)
September 27, 2008 September 29, 2007
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Net revenues $ 180,249 100.0% $ 188,391 100.0%
Cost of goods sold 130,518 72.4% 130,475 69.3%
------------------ ------------------
Gross profit 49,731 27.6% 57,916 30.7%
Selling, general and
administrative expense 43,853 24.4% 46,835 24.8%
Store closures and other
restructuring costs 1,660 0.9% - 0.0%
Impairment of long-lived assets 206 0.1% 36 0.0%
------------------ ------------------
Income from operations 4,012 2.2% 11,045 5.9%
Interest expense 327 0.2% 515 0.3%
------------------ ------------------
Income before taxes 3,685 2.0% 10,530 5.6%
Income taxes 264 0.1% 4,370 2.3%
------------------ ------------------
Net income $ 3,421 1.9% $ 6,160 3.3%
================== ==================
Net income per common and common
equivalent share:
Basic $ 0.16 $ 0.28
Diluted $ 0.16 $ 0.28
Weighted average common and
common equivalent shares
outstanding:
Basic 22,020 21,815
Diluted 22,024 21,959
West Marine, Inc.
Condensed Consolidated Statements of Operations
(Unaudited and in thousands, except share data)
39 Weeks Ended
As Restated (1)
September 27, 2008 September 29, 2007
------------------ ------------------
Net revenues $ 520,193 100.0% $ 561,265 100.0%
Cost of goods sold 369,566 71.0% 390,353 69.5%
------------------ ------------------
Gross profit 150,627 29.0% 170,912 30.5%
Selling, general and
administrative expense 139,546 26.9% 141,665 25.3%
Store closures and other
restructuring costs 1,660 0.3% - 0.0%
Impairment of long-lived assets 2,423 0.5% 446 0.1%
------------------ ------------------
Income from operations 6,998 1.3% 28,801 5.1%
Interest expense 1,935 0.3% 3,211 0.5%
------------------ ------------------
Income before income taxes 5,063 1.0% 25,590 4.6%
Income taxes 14,862 2.9% 9,980 1.8%
------------------ ------------------
Net income (loss) $ (9,799) -1.9% $ 15,610 2.8%
================== ==================
Net income (loss) per common and
common equivalent share:
Basic $ (0.45) $ 0.72
Diluted $ (0.45) $ 0.71
Weighted average common and
common equivalent shares
outstanding:
Basic 21,962 21,725
Diluted 21,962 21,977
