Analyst remains cautious about West Marine

WATSONVILLE, Calif. – Net income for West Marine, Inc. (Nasdaq:WMAR) increased 81 percent during the third quarter ended Sept. 29 to $5.3 million, compared to net income of $2.9 million for the same period last year, the company reported in a statement yesterday.

Despite what is clearly good news for the boating supplies retailer, at least one analyst remains cautious abut the company’s outlook.

Ed Aaron of RBC Capital Markets said in a report today that while West Marine beat third quarter estimates, it lowered its full-year guidance and “profitability continues to lag despite substantial progress with cost reduction.”

On top of that is uncertainty over whether the marine market has hit the bottom of the recent downturn, with no signs of a recovery in sight.

“Given our concern that industry conditions might not improve in 2008, we believe [West Marine’s] earnings will remain depressed next year,” Aaron stated.

West Marine’s comparable store sales increased 0.3 percent for the 13 weeks ended September 29, according to the retailer. Net sales were $187.5 million, a decrease of 4.1 percent from net sales of $195.6 million for the same period a year ago. West Marine operated 372 stores during the third quarter of 2007, compared to 402 stores during the third quarter of 2006.

Net income for the 39 weeks ended September 29 was $14.1 million, compared to net income of $5.2 million for the same period last year, which included a $5.1 million pre-tax charge for store closure costs. Comparable store sales decreased 1.7 percent for the 39 weeks ended September 29, 2007. Net sales were $561.4 million, a decrease of 5.3 percent from net sales of $592.8 million for the same period a year ago.

“Despite continuing challenges arising from lower boat usage and boating market softness, the company has reported earnings progress year over year,” said Peter Harris, West Marine’s chief executive officer. “This growth reflects the results of continuing improvements in store merchandise assortments, store teams focused on customer service and steps to reduce costs. Results also reflect a previously discussed change in the timing of compensation-related expense accruals, which have a favorable impact on the quarter and year to date comparisons with last year until the fourth quarter. Sales results vary dramatically by geographic area and channel as we observe the impact of promotions, local economic conditions, seasonality and changing customer needs and wants.”

West Marine said it’s revising its full year 2007 earnings guidance downward to be in the range of $0.14 to $0.18 per share compared to $0.12 for full year 2006, excluding 2006 store closings and other restructuring costs, the impact of which was a negative $0.46 last year. The previously issued 2007 guidance range was $0.24 to $0.34 per share. For the year, comparable store sales guidance is narrowed to a decrease of between 1.5 percent and 2.0 percent. Previous guidance reflected a decrease of between 1.5 percent and 2.5 percent.

Sales in the direct channel are anticipated to be lower than previously forecasted, yielding total company sales of approximately $681 million to $684 million as compared to previous guidance of $683 million to $688 million, according to West Marine. In addition to lower sales, the guidance reduction also reflects a reduction in gross profit margins and higher than anticipated expenses.

In further explaining the lower guidance, Harris said, “We continue to invest with gross margin in promotions, inventory freshness and pricing to maintain our strong and improving long term market position. Port Supply store sales remain strong and are at a lower margin than sales directly to boaters in the retail channel.

“While having implemented the aggressive and successful expense reduction activity of the last year, expenses for the year are higher than previously forecasted. Revised guidance includes additional legal and administrative costs related to our earlier restatement of prior years’ earnings. Additionally, the direct channel has experienced higher than planned costs and slowed implementation of anticipated customer facing and infrastructure website improvements. At a higher expense, we are processing more merchandise through our distribution centers to stores as we distribute more lower-priced merchandise to achieve the same sales, and keep store shelves more full for customers.”

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