West Marine Inc. reported sales dropped 4.3% in the third quarter ended Sept. 27, to $180.2 million. Comparable store sales were down 4.7%. The boating retailer also reported a 45.2% drop in earnings and lowered its guidance for the year.
The boating retailer’s net income fell to $3.4 million, or 16 cents a share, from $6.2 million, or 28 cents, a year ago. The latest period included pretax charges of $1.66 million related to store closings and other restructuring moves.
Adjusted net income reached $4.8 million, or 23 cents, versus $6.2 million, or 28 cents, a year earlier, a decline of 22.6%. West Marine said the adjusted pre-tax earnings decline was driven primarily by lower sales and gross profit, partially offset by expense reductions.
Gross profit for the thirteen weeks ended September 27, 2008 was $49.7 million, a decrease of $8.2 million compared to 2007. As a percentage of net sales, gross profit was 27.6%, a decrease of 310 basis points compared to the gross profit of 30.7% last year. The decrease in gross profit as a percentage of sales was primarily the result of increased promotional activity, store closure clearance sales and reduced purchases, which led to reduced vendor allowances as well as deleveraging of buying and distribution expense. In addition, occupancy costs, which are relatively fixed in nature, de-leveraged on the sales decline.
Selling, general and administrative expense (SG&A) for the quarter was $43.9 million, a decrease of $3.0 million compared to $46.8 million for the same period last year. Expenses leveraged by 40 basis points, at 24.4% of sales. Included in SG&A was a $0.9 million unfavorable Canadian foreign currency exchange adjustment. Excluding this item, expenses decreased by $3.9 million and leveraged 90 basis points, driven by reductions across most expense categories.
Income taxes were significantly lower than last year. Excluding the impact of the full valuation allowance against our net deferred tax assets, management anticipated an effective tax rate of about 3.0% for the year.
2008 YEAR-TO-DATE RESULTS
For the thirty-nine weeks ended September 27, 2008:
* Adjusted pre-tax income (excluding the impact of the significant events) was $11.3 million versus $26.0 million for the corresponding period last year.
* Adjusted net income (excluding the impact of the significant events) was $8.8 million and $0.40 per share versus $15.9 million and $0.72 per share last year.
* Reported pre-tax income (including the impact of the significant events) was $5.1 million versus $25.6 million last year.
* Reported net loss (including the impact of the significant events) was $9.8 million and $0.45 per share versus net income of $15.6 million and $0.71 per share last year.
Net sales for the thirty-nine weeks ended September 27, 2008 were $520.2 million, compared to net sales of $561.3 million for the thirty-nine weeks ended September 29, 2007. Comparable store sales declined 7.1% versus the corresponding period a year ago.
Gross profit for the thirty-nine weeks ended September 27, 2008 was $150.6 million, a decrease of $20.3 million compared to the corresponding period last year. As a percentage of net sales, gross profit for the first thirty-nine weeks was 29.0%, a decrease of 150 basis points versus the corresponding period last year. The decrease in gross profit as a percentage of sales was primarily the result of de-leveraging occupancy costs and lower vendor allowances.
SG&A for the first thirty-nine weeks was $139.5 million, a decrease of $2.1 million versus the corresponding period last year. SG&A as a percentage of sales for the first thirty-nine weeks was 26.9%, an increase of 160 basis points over the corresponding prior year period. Included in these expenses were $2.1 million in SEC investigation expense and a $2.3 million unfavorable impact of Canadian foreign currency exchange rates. Excluding these items, expenses decreased by $6.5 million but de-leveraged 70 basis points, driven by the impact of lower sales.
Significantly higher income taxes versus last year were driven by the valuation allowance established during the second quarter, and increased slightly in the third quarter, with a $14.8 million impact year-to-date.
Net cash flow provided by operating activities for the thirty-nine weeks ended September 27, 2008 was $34.0 million.
Geoff Eisenberg, chief executive officer of West Marine, commented, “Our financial results for the third quarter of 2008 reflected continuing sales softness stemming from reduced boating activity, combined with weakness and uncertainty in the economy in general. As weve communicated to you during prior discussions, we remain focused on managing the business very carefully in order to maintain our financial strength and flexibility. This emphasis on controlling expenses and maximizing cash flow has kept us in a strong position of liquidity.
“Even with the market challenges weve faced this year, our fundamentals remain strong. We are pleased to have once again been able to reduce debt levels versus this time last year, and our access to untapped liquidity remains at approximately $100 million. We have multi-year availability on our credit facility, which runs well into 2010 before it needs to be renewed.”
2008 EARNINGS GUIDANCE UPDATE
West Marine also announced that it is revising its full year 2008 earnings guidance downward, from a previously-communicated earnings range of an after-tax loss of 32 cents to 42 cents per share to a revised after-tax loss range of 55 cents to 65 cents per share. The revised range does not include the following:
— Estimated non-recurring restructuring charges of 40 cents per share, which includes costs associated with:
— closing underperforming stores;
— closing one of three distribution centers;
— implementing staffing and service model changes in the Port Supply wholesale business;
— closing of the Largo, Florida call center; and
— expense cuts and process streamlining in support and overhead functions.
— A decrease in our anticipated effective tax rate to 3.0% because of limitations on our ability to benefit from loss carrybacks, resulting in an expected expense charge of 52 cents per share.
— The $14.8 million non-cash valuation allowance recorded year-to-date, resulting in an expected charge of 67 cents per share.
Including the above items, West Marine anticipates an after-tax loss of $2.14 to $2.24 per share. As previously disclosed, the impact of the ongoing SEC investigation is not being included in guidance but will be reported separately.
For the year, management said the company is maintaining sales guidance of $625 million to $635 million. The company will adjust forecast comparable store sales up slightly due to the impact on the comparable store base of underperforming store closures, together with a sales shift to the Stores segment. Revised comparable store expectations range is a decline of 6.5% to 8.0%, versus a previously-communicated decline of 7.0% to 8.5%.
In further explaining the lower earnings guidance, Eisenberg said, “We do expect continued softness in our industry in the near term, and our updated expectations reflect additional gross profit pressures as we adjust promotion levels and reduce inventory purchases. Our planning for next year reflects sizing the company for the realities of the current market, while continuing to invest prudently in the future. We are making good progress in executing the restructuring program announced back in July, and these actions will further strengthen our foundation as we move into next year. Though we are currently assuming that 2009 will remain tough for boating, we will continue to improve our operational execution, remain focused on cash flow and a strong balance sheet, and will aggressively pursue market share gains in all of our business channels.”
