WMAR West Marine, Inc.

West Marine, Inc. (NASDAQ:WMAR) today reported financial results for the second quarter ended July 1, 2017. Second quarter 2017 net revenues were $247.2 million, a decrease of 1.7% compared to the same period last year. Comparable store sales were down 1.2%. Pre-tax income was $36.0 million, compared to $36.4 million last year in the comparable period. The company incurred expenses in the quarter of $1.4 million associated with the pending merger transaction described below and recorded a $0.6 million charge related to the reclassification of accumulated foreign currency translation balances to selling, general and administrative expense as a result of cessation of operations in Canada. These charges were partially offset by a $1.1 million credit related to a supplier refund for prior year over-billing. Adjusting for these unique events, the company improved second quarter pre-tax profit by $0.7 million. Earnings per share were $0.84, compared with $0.86 per share in the same period last year. Adjusted for the previously-mentioned, one-time expenses and credit, earnings per share were $0.86 per share.

Results for the Second Quarter of 2017

Net revenues for the quarter ended July 1, 2017 decreased by $4.4 million, or 1.7%, to $247.2 million compared to $251.6 million for the quarter ended July 2, 2016.  The decrease reflects net closures of retail stores and lower comparable store sales.  

Gross margin improved to 36.5%, compared to 35.5% during the same period in 2016. Lower promotional and clearance activity along with lower professional sales as a percentage of total revenue resulted in the improved margin. Selling, general and administrative expense increased year-over-year by $1.4 million, primarily due to $1.4 million of Merger-related expenses.

Net income for the second quarter was $21.2 million, or $0.84 per share, compared to net income of $21.6 million, or $0.86 per share, for the second quarter of 2016.

Inventory at the end of the second quarter was $243.4 million, down $10.2 million compared to the same period in 2016. As of July 1, 2017, the company had cash and cash equivalents totaling $113.3 million compared to $89.6 million at the same point in 2016.

Year-to-Date Results

Net revenues for the six months ended July 1, 2017 decreased by $5.7 million, or 1.5%, to $376.3 million compared to $382.0 million for the six months ended July 2, 2016.  The decrease reflects net closures of retail stores and lower comparable store sales. 

Gross margin improved to 32.7%, compared to 32.0% during the same period in 2016. Lower promotional and clearance activity along with lower professional sales as a percentage of total revenue resulted in the improved margin. Selling, general and administrative expense decreased year-over-year by $1.7 million, inclusive of $1.5 million of Merger-related expenses.

Net income for the first six months was $14.0 million, or $0.55 per share, compared to net income of $12.5 million, or $0.50 per share, for the first six months of 2016.

Pending Merger Transaction

As previously reported, the company and affiliates of Monomoy Capital Partners, a New York-based private equity fund (“Monomoy”), have entered into a definitive merger agreement (the “Merger Agreement”) pursuant to which a wholly-owned subsidiary of Monomoy will merge with and into West Marine, with West Marine as the surviving corporation in the merger (the “Merger”). Under the Merger Agreement, West Marine stockholders, other than those who do not vote in favor of the Merger and perfect their statutory appraisal right under Delaware law, will receive $12.97 per share in cash, which represents a total equity value of approximately $338 million. This price represents a premium of approximately 34.4% closing price of our common stock reported on the NASDAQ Global Select Market on June 29, 2017, the last full trading day before the entering into of the Merger Agreement, and approximately 31.7% over the average closing price of West Marine’s common stock reported on NASDAQ for the trading days during the 30-day period ended on June 29, 2017.

The company was granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”), by the Federal Trade Commission on July 25, 2017. The early termination of the HSR waiting period satisfies one of the conditions to the proposed Merger. Closing of the transaction remains subject to other closing conditions, including the affirmative vote in favor of the Merger by holders of a majority of the Company’s outstanding common stock and other customary closing conditions. It is anticipated that the special meeting of the Company’s stockholders to vote on the Merger will be held in the third quarter of this year and, if the transaction is approved, the Merger would be expected to close shortly thereafter. For more information regarding the proposed transaction with Monomoy, see the Form 8-K filed by the company on June 30, 2017 and the copy of the Merger Agreement filed as Exhibit 2.1 to this report. 

The company will not host a conference call to discuss second quarter 2017 results and does not plan to do so for future quarters while the transaction with Monomoy is pending. Pursuant to the Merger Agreement, the company has suspended payment of cash dividends. 

About West Marine

Each person has a unique connection to the water. At West Marine (westmarine.com) (NASDAQ:WMAR), our knowledge, enthusiasm and products prepare waterlife adventurers to foster that connection and explore their passions. With 248 stores located in 37 states and Puerto Rico, an eCommerce website reaching domestic and international customers and a wholesale business for our professional customers, West Marine is recognized as a leading Waterlife Outfitter for cruisers, sailors, anglers and paddlesports enthusiasts. Since first opening our doors in 1968, West Marine associates continue to share the same love for the water as our customers and provide helpful advice on the gear and gadgets our customers need to be safe and have fun.

Special Note Regarding Forward-Looking Statements

This press release includes “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995), including statements that are predictive or express expectations that depend on future events or conditions that involve risks and uncertainties. Among other risks and uncertainties, there can be no guarantee that the Merger will be consummated, or if it is consummated, that it will close within the anticipated time frame. Additional risks and uncertainties relating to the Merger include: the company may be unable to obtain the approval of the company stockholders required for the Merger; other conditions to the closing may not be satisfied or waived; the Merger may involve unexpected costs, liabilities or delays; the company’s business may suffer as a result of uncertainty surrounding the proposed Merger, including due to disruption of current plans and operations and the potential difficulties in employee retention as a result of the proposed transaction; the outcome of any legal proceedings related to the proposed transaction; and the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement. Other risks and uncertainties include, among other things, expectations that our growth strategies will continue to drive profitability and improve margins, expectations related to our ability to manage costs, as well as facts and assumptions underlying these expectations, and the risk factors set forth in West Marine’s annual report on Form 10-K for the fiscal year ended December 31, 2016. Except as required by applicable law, West Marine assumes no responsibility to update any forward-looking statements as a result of new information, future events or otherwise.

Non-GAAP Financial Information

This release references certain financial information not calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), including EBITDA and earnings per share adjusted for certain one-time events that occurred during the quarter, including expenses related to the pending Merger. We believe EBITDA provides a helpful picture of the operating performance of the business by eliminating the effects of depreciation and interest expense and adjusted earnings per share is helpful by adjusting for expenses associated with the potential Merger, a currency translation adjustment charge related to cessation of our Canadian operations and a credit from a supplier for prior year overbilling. EBITDA and adjusted earnings per share are not measures of financial performance under GAAP and may not be defined and calculated by other companies in the same manner. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Management has reconciled these non-GAAP financial measures to the most directly comparable GAAP financial measures in the tables set forth below. For more information, see our Current Report on Form 8-K filed August 7, 2017.

West Marine, Inc.
Condensed Consolidated Balance Sheets
(Unaudited and in thousands, except share data)
					July 1, 2017				July 2, 2016
ASSETS
Current assets:
	Cash and cash equivalents				$	113,271			$	89,551
	Trade receivables, net					10,341				10,649
	Merchandise inventories, net					243,408				253,635
	Other current assets					21,378				19,686
		Total current assets				388,398				373,521
	Property and equipment, net					77,832				80,508
	Long-term deferred income taxes					3,718				4,017
	Other assets					4,431				4,501
TOTAL ASSETS					$	474,379			$	462,547
LIABILITIES AND STOCKHOLDERS' EQUITY
	Current liabilities:
	Accounts payable				$	73,172			$	77,186
	Accrued payroll					15,532				16,879
	Accrued expenses and other					41,331				37,243
		Total current liabilities				130,035				131,308
	Deferred rent and other					20,609				18,193
		Total liabilities				150,644				149,501
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; 25,967,831 shares issued and 25,278,942
	shares outstanding at July 1, 2017, and 25,628,645 shares issued and 24,939,756 shares outstanding
	at July 2, 2016.					26				26
	Treasury stock					(9,698	)			(9,411	)
	Additional paid-in capital					216,900				213,137
	Accumulated other comprehensive loss					(57	)			(552	)
	Retained earnings					116,564				109,846
		Total stockholders' equity				323,735				313,046
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY					$	474,379			$	462,547

 

West Marine, Inc.
Condensed Consolidated Statements of Income
(Unaudited and in thousands, except per share data)
		13 Weeks Ended
		July 1, 2017					July 2, 2016
Net revenues		$	247,238	100.0	%		$	251,599	100.0	%
Cost of goods sold			156,979	63.5	%			162,369	64.5	%
	Gross profit		90,259	36.5	%			89,230	35.5	%
Selling, general and administrative expense			54,156	21.9	%			52,718	21.0	%
	Income from operations		36,103	14.6	%			36,512	14.5	%
Interest expense			99	0.0	%			116	0.0	%
	Income before income taxes		36,004	14.6	%			36,396	14.5	%
Provision for income taxes			14,784	6.0	%			14,812	5.9	%
	Net income	$	21,220	8.6	%		$	21,584	8.6	%
Net income per common and common equivalent share:
	Basic	$	0.84				$	0.87
	Diluted	$	0.84				$	0.86
Weighted average common and common equivalent
shares outstanding:
	Basic		25,235					24,884
	Diluted		25,338					24,958
		26 Weeks Ended
		July 1, 2017					July 2, 2016
Net revenues		$	376,301	100.0	%		$	382,004	100.0	%
Cost of goods sold			253,120	67.3	%			259,869	68.0	%
	Gross profit		123,181	32.7	%			122,135	32.0	%
Selling, general and administrative expense			99,044	26.3	%			100,761	26.4	%
	Income from operations		24,137	6.4	%			21,374	5.6	%
Interest expense			210	0.0	%			221	0.1	%
	Income before income taxes		23,927	6.4	%			21,153	5.5	%
Provision for income taxes			9,977	2.7	%			8,682	2.2	%
	Net income	$	13,950	3.7	%		$	12,471	3.3	%
Net income per common and common equivalent share:
	Basic	$	0.55				$	0.50
	Diluted	$	0.55				$	0.50
Weighted average common and common equivalent
shares outstanding:
	Basic		25,141					24,825
	Diluted		25,287					24,910

 

West Marine, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited and in thousands)
					26 Weeks Ended
					July 1, 2017				July 2, 2016
OPERATING ACTIVITIES:
	Net income				$	13,950			$	12,471
	Adjustments to reconcile net income to net cash provided in operating activities:
		Depreciation and amortization				11,648				10,987
		Share-based compensation				1,550				1,449
		Realized cumulative foreign currency translation adjustment				580				-
		Deferred income taxes				1,124				973
		Provision for doubtful accounts				63				100
		Lower of cost or market inventory adjustments				1,136				1,119
		Loss on asset disposals				82				166
	Changes in assets and liabilities:
		Trade receivables				(3,990	)			(3,607	)
		Merchandise inventories				(32,438	)			(31,901	)
		Other current assets				(902	)			3,656
		Other assets				(66	)			(392	)
		Accounts payable				41,083				51,999
		Accrued payroll				(77	)			(4,627	)
		Accrued expenses and other				11,760				9,737
		Deferred items and other non-current liabilities				375				193
	Net cash provided by operating activities					45,878				52,323
INVESTING ACTIVITIES:
		Proceeds from sale of property and equipment				19				23
		Purchases of property and equipment				(7,845	)			(11,111	)
	Net cash used in investing activities					(7,826	)			(11,088	)
FINANCING ACTIVITIES:
		Borrowings on line of credit				345				820
		Repayments on line of credit				(317	)			(820	)
		Cash dividend paid				(1,262	)			-
		Proceeds from exercise of stock options				250				-
		Proceeds from sale of common stock pursuant to Associates Stock Buying Plan				310				287
		Treasury shares acquired				(236	)			(125	)
	Net cash provided by (used in) financing activities					(910	)			162
	Effect of exchange rate changes on cash					(12	)			(5	)
NET INCREASE IN CASH						37,130				41,392
CASH AT BEGINNING OF PERIOD						76,141				48,159
CASH AT END OF PERIOD					$	113,271			$	89,551
Other cash flow information:
	Cash paid for interest				$	141			$	156
	Cash paid for income taxes, net of refunds of $30 and $2,947					161				(2,753	)
Non-cash investing activities:
		Property and equipment additions in accounts payable				1,542				570

	West Marine
	Reconciliations of Non-GAAP Information
	Net Income to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
	(Unaudited and in millions)
			13 Weeks Ended						26 Weeks Ended
			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
	GAAP Net Income		$	21.2		$	21.6		$	14.0		$	12.5
	Add Back:
	Interest Expense (1)			0.1			0.1			0.2			0.2
	Depreciation and Amortization (2)			5.8			5.5			11.5			10.9
	Income Tax Expense			14.8			14.8			10.0			8.7
				20.7			20.4			21.7			19.8
	EBITDA		$	41.9		$	42.0		$	35.7		$	32.3
	(1) Amortization of deferred financing costs related to our revolving credit facility are included in interest expense.
	(2) Included in cost of goods sold and selling, general and administrative expense.

West Marine, Inc.
Reconciliation of Non-GAAP Finanical Measures
(Unaudited and in thousands, except per share data)
		As Reported			As Adjusted				As Reported
		13 Weeks Ended			13 Weeks Ended				13 Weeks Ended
		July 1, 2017			July 1, 2017				July 2, 2016
GAAP Net income		$	21,220		$	21,220			$	21,584
	Add Back: transaction expense 1		-			1,637				-
	Add Back: Canadian translation adjustment 2		-			581				-
	Remove: supplier refund 3		-			(1,107	)			-
	Add Back: income tax expense		14,784			14,784				14,812
Non-GAAP income before transaction expense, Canadian translation adjustment, supplier refund and taxes			36,004			37,115				36,396
	Less: income tax expense at 41.1%		14,784			15,240				14,812
Non-GAAP adjusted net income		$	21,220		$	21,875			$	21,584
		As Reported			As Adjusted				As Reported
		13 Weeks Ended			13 Weeks Ended				13 Weeks Ended
		July 1, 2017			July 1, 2017				July 2, 2016
GAAP Net income per diluted share		$	0.84		$	0.84			$	0.86
	Add Back: transaction expense 1		-			0.06				-
	Add Back: Canadian translation adjustment 2		-			0.02				-
	Remove: supplier refund 3		-			(0.04	)			-
	Add Back: income tax expense		0.58			0.58				0.59
Non-GAAP income before transaction expense, Canadian translation adjustment, supplier refund and taxes per diluted share			1.42			1.46				1.45
	Less: income tax expense at 41.1%		0.58			0.60				0.59
Non-GAAP adjusted net income per diluted share		$	0.84		$	0.86			$	0.86
		As Reported			As Adjusted				As Reported
		26 Weeks Ended			26 Weeks Ended				26 Weeks Ended
		July 1, 2017			July 1, 2017				July 2, 2016
GAAP Net income		$	13,950		$	13,950			$	12,471
	Add Back: transaction expense 1		-			1,805				-
	Add Back: Canadian translation adjustment 2		-			581				-
	Remove: supplier refund 3		-			(1,107	)			-
	Add Back: income tax expense		9,977			9,977				8,682
Non-GAAP income before transaction expense, Canadian translation adjustment, supplier refund and taxes			23,927			25,206				21,153
	Less: income tax expense at 41.1%		9,977			10,510				8,682
Non-GAAP adjusted net income		$	13,950		$	14,696			$	12,471
		As Reported			As Adjusted				As Reported
		26 Weeks Ended			26 Weeks Ended				26 Weeks Ended
		July 1, 2017			July 1, 2017				July 2, 2016
GAAP Net income per diluted share		$	0.55		$	0.55			$	0.50
	Add Back: transaction expense 1		-			0.07				-
	Add Back: Canadian translation adjustment 2		-			0.02				-
	Remove: supplier refund 3		-			(0.04	)			-
	Add Back: income tax expense		0.39			0.39				0.35
Non-GAAP income before transaction expense, Canadian translation adjustment, supplier refund and taxes per diluted share			0.94			0.99				0.85
	Less: income tax expense at 41.1%		0.39			0.41				0.35
Non-GAAP adjusted net income per diluted share		$	0.55		$	0.58			$	0.50
	1 Transaction expense consists of costs related to the pending Merger, and all such expense is reported as part of selling, general and administrative expense.
	2 Canadian translation adjustment represents the charge associated with the reclassification of accummulated foreign currency translation balances following the cessation of operations in Canada.
	3 Supplier refund represents a credit received for prior year over-billing.

Important Information For Investors and Stockholders

This communication is being made in respect of the proposed merger transaction involving Monomoy and West Marine. This communication does not constitute an offer to sell or the solicitation of an offer to buy our securities or the solicitation of any vote or approval. The proposed merger will be submitted to the stockholders of West Marine for their consideration. In connection therewith, West Marine intends to file relevant materials with the SEC, including a definitive proxy statement. However, such documents are not currently available. The definitive proxy statement will be provided to the stockholders of West Marine. Before making any voting or any investment decision, investors and security holders are urged to read the definitive proxy statement regarding the proposed transaction and any other relevant documents filed or to be filed with the SEC carefully and in their entirety when they become available because they will contain important information about the proposed transaction. Investors and security holders may obtain free copies of the definitive proxy statement, any amendments or supplements thereto and other documents containing important information about Monomoy and West Marine, once such documents are filed with the SEC, at the SEC’s Internet site at www.sec.gov. Copies of the documents filed with the SEC by West Marine will be available free of charge on West Marine’s website at www.westmarine.com under the heading “Investor Relations.” Stockholders of West Marine may also obtain a free copy of the definitive proxy statement and the filings with the SEC that will be incorporated by reference in the proxy statement by contacting our Secretary at 500 Westridge Drive, Watsonville, California 95076, Phone: 831-728-2700.

West Marine and its directors, executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies of West Marine’s stockholders in connection with the proposed transaction. Information about the directors and executive officers of West Marine is set forth in West Marine’s annual report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the SEC on February 28, 2017, and its proxy statement for its 2017 annual meeting of stockholders, which was filed with the SEC on April 21, 2017 and in subsequent documents filed with the SEC, each of which can be obtained free of charge from the sources indicated above. Other information regarding the participants in the proxy solicitation of the stockholders of West Marine and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the preliminary and definitive proxy statements and other relevant materials to be filed with the SEC when they become available.

Contact: West Marine, Inc.
Jeffrey Lasher, Executive Vice President and Chief Financial Officer  
(831) 761-4229