West Marine turnaround becoming less volatile

WATSONVILLE, Calif. – Boating supplies retailer West Marine, Inc. (Nasdaq: WMAR) has faced many challenges while undergoing a turnaround in recent years. But there are signs in its recent earnings report of stabilization.

While fourth quarter net sales were down from last year, comparable store sales were up slightly. And while the company reported a net loss for the quarter, the loss was much lower than the same quarter of last year – and lower than analysts had anticipated. For the year ended December 30, net sales and comparable store sales were up, and gross profit had also improved. In addition, working capital has improved and inventory has declined.

“The decision to cut excessive costs, close 35 stores and further reduce inventories is helping to stabilize a very volatile turnaround process that is entering year-three,” commented analysts from RBC Capital Markets.

With that said, analysts aren’t sure whether to accept the company’s predictions for fiscal 2007. West Marine said it expects an increase in comparable store sales ranging from 1 to 2 percent, while net sales are expected to range from $706 million to $716 million for fiscal year 2007, also reflecting growth in its Port Supply wholesale and Direct Sales (including Internet) business segments.

While a +2.8 percent comparison does not sound particularly daunting, West Marine has not experienced back-to-back years of positive comps since 1999-2000,” reported RBC analysts. “Given the relatively tougher comparisons, as well as difficult market conditions and indications of softness in the seasonally slower months of January and February, we think some skepticism is still warranted.”

Fiscal year 2006 results

Pre-tax income for the fifty-two weeks ended December 30, 2006 was $4.2 million, excluding a $14.5 million charge for store closures and other restructuring costs, in order to better reflect the operating results of the ongoing business, compared to pre-tax income of $9.5 million, excluding unusual items totaling $14.3 million, for the same period last year, according to West Marine.

Net loss was $7.1 million, or ($0.33) per share, compared to a net loss of $2.3 million, or ($0.11) per share for the same period last year. Earnings for fiscal year 2006 were $0.12 per share, excluding store closures and other restructuring costs of $0.46 per share.

Net sales for the fiscal year were $716.6 million, compared to net sales of $692.3 million for the fifty-two weeks ended December 31, 2005. Comparable store sales increased 2.4 percent compared to the same period a year ago.

Gross profit was $206.3 million, an increase of $3.9 million compared to the same period last year. For fiscal year 2006, gross profit as a percentage of net sales was 28.8 percent, a decrease of 40 basis points compared to 29.2 percent last year. The decrease was driven by a change of $8.4 million, or 120 basis points, in capitalized costs and allowances as a result of lowering its inventory levels, according to West Marine. This 120 basis point decrease in gross margin was partly offset by better initial product margin and improved inventory shrinkage. Gross profit for fiscal year 2005 also included a $2.9 million pre-tax charge for reducing inventory value.

Selling, general and administrative expense was $195.7 million for the year, a decrease of $4.4 million compared to $200.1 million for the same period last year. SG&A for fiscal year 2005 included $10.6 million for cancelled software development projects and discontinued use of a trade name. SG&A as a percentage of sales for fiscal year 2006 was 27.3 percent, a decrease of 160 basis points compared to 28.9 percent last year. Excluding unusual items, SG&A leveraged slightly compared to last year as a result of cost cutting initiatives implemented throughout 2006, partially offset by targeted investments in initiatives intended to improve profitability over the long-term, according to West Marine.

Cash provided by operating activities increased to $53.4 million for the full fiscal year 2006, compared to $44.2 million last year. Free cash flow increased to a record high of $38.7 million for the full fiscal year 2006, compared to $12.2 million last year, the company reported. Free cash flow, defined as net cash from operating activities less capital expenditures, indicates the amount of cash generated during the year that is available for expansion or repayment of debt. Merchandise inventories were reduced by $23.9 million, or 8.6 percent, to $254.0 million at the end of fiscal year 2006, compared to $277.9 million at the end of 2005, as West Marine continued to improve its merchandising and supply chain strategies.

“The results our team of nearly 5,000 talented, passionate West Marine associates delivered in 2006 demonstrate continued focus on the customer and progress in making structural changes to improve the business, even in this tough boating industry climate,” said Peter Harris, West Marine CEO. “We are very proud of what was accomplished during the year and believe that we are well positioned to provide broad targeted merchandise assortments, service beyond customers’ expectations, and the convenience of multi-channel retailing, yielding growth in revenues and profitability.”

Fourth quarter 2006 results

Net loss for the fourth quarter ended December 30, 2006 was $6.0 million, or ($0.28) per share, excluding a $9.4 million pre-tax, or ($0.29) per share after-tax, charge for store closures and other restructuring costs, compared to a net loss of $12.5 million, or ($0.59) per share, excluding $14.3 million of pre-tax, or ($0.41) per share after tax, unusual charges for the fourth quarter last year.

Net sales for the fourth quarter of 2006 were $123.8 million, compared to net sales of $124.8 million for fourth quarter last year. Comparable store sales for the fourth quarter of 2006 increased 0.2 percent compared to the same period a year ago.

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