West Marine, Inc. (NASDAQ:WMAR)
Q1 2016 Results Earnings Conference Call
April 28, 2016, 04:30 PM ET
Deb Ajeska - Controller
Matt Hyde - CEO
Jeff Lasher - CFO
Joe Pulford - Divisional Vice President of Financial Planning and Analysis
Jimmy Baker - B. Riley & Company
Anthony Lebiedzinski - Sidoti & Company
Good day. My name is Skinner and I will be your conference operator. At this time, I would like to welcome everyone to West Marine's First Quarter 2016 Operating Results Conference Call. [Operator Instructions]
I would now turn the call over to Deb Ajeska, who will read the forward-looking statement.
Thank you, Skinner. On the call today we will be making forward-looking statements either in our prepared remarks or in the associated question-and-answer session, which may include financial projections and other statements of the company's expectations, plans, objectives or intentions. The company's actual results may differ materially from those projected in any forward-looking statements due to a variety of factors, risks and uncertainties which are discussed in detail in our filings with the SEC. The company does not undertake to update or revise any forward-looking statements which speak only as of the time they are made.
And now, I would like to turn the call over to Matt Hyde, our Chief Executive Officer.
Thank you, Deb and good afternoon.
Joining me on the call today are Jeff Lasher, our Chief Financial Officer, Joe Pulford, our Divisional Vice President of Financial Planning and Analysis; and Deb Ajeska, our Former Controller. I'm happy to announce that Deb has recently been promoted to our Vice President of Human Resources. After some brief remarks on the quarter's performance, Jeff will take you through our key financial and operating metrics. And finally, we will open the call to your questions.
I'm pleased to report that for the first quarter of 2016, our comparable store sales were up 2.7% with our direct business leading the way with a 32% increase. We grew our core boating and merchandize expansion products for the quarter and we improved our operating results driven by stronger gross margin of 400 basis points.
We were particularly satisfied with the results as we are up against a 7% comparable increase for the first quarter of 2015. For the first quarter sales were lifted by year-over-year conversion rate increases both in-store and online.
Regionally, northern districts had stronger sales in the southeast mainly driven by weather. This pattern is typical during a [linear] [ph] year where cooler weather and wind year weather has softened both usage in many of our southern districts.
The success of the quarter was a nice back drop for last month by annual store manager sales training an event we call West Marine University. We had more than 400 West Marine Associates at the training allowing us to set the vision and expectations for the next few year, as well as learn from our teams about how to better serve our retail and professional customers across the country.
West Marine University emphasized for me the magnitude of change that we've driven through the company since the last event two years ago. Across many dimensions of our company, the positioning of West Marine as a waterlife outfitter has made it almost unrecognizable from where we are at just two short years ago, and our customers are embracing this change.
Looking at the work we've done to improve our store fleet in the past two years, we've made dramatic shifts in many markets. As an example, in Chicago, we closed the store that primarily sold both parts in C grade real estate. Today we operate one of our waterlife stores that conveniently serves everyone who enjoys recreating on the water in the Chicago land area.
Compared to the previous location sales are less seasonal and since opening the new store revenues have almost doubled. We continue to work in the first quarter of 2016 opening a new flagship store in San Juan, Puerto Rico and completing store revitalizations in five other locations. We are pleased with the early results from this work but a note, our San Juan store is starting up particularly strong.
Two years ago have re-launched our eCommerce system on a new platform that enables us deliver a best-in-class experience. This experience includes fast page loads, accurate search, and quick check-out and functionality such as ship from store that provides our customers' access to most of the $269 million worth of inventory that exist at West Marine.
Our technology also allowed us to launch the west web experience in the industry for the professional customer with our site portsupply.com. In the first quarter of 2016, our eCommerce team has redesigned and improved our apparel pages, updated our store locator pages and added video functionality to our mobile website. Additionally the team is working behind the scenes on a significant launch that we expect to soon unveil.
And finally in the past 24 months our product mix has changed dramatically with both our core boating and merchandise expansion categories. Our merchandise expansion products which include pedal sports, fishing gear and apparel are helping to redefine West Marine as a broader watelife outfitter.
During the first quarter of 2016 our merchandise expansion product assortments include several new brands to West Marine such as prAna and ExOfficio for clothing, [Ho Sports] [ph] for bags and travel and [indiscernible].
We have expanded relevant product categories for our customers such as the new travel shops that we have opened in 47 locations offering a dominant assortment of waterproof duffels, rolling bags and accessories from leading specialty brands. Our continued work on merchandise expansion assortments provides our customers with new reasons to shop West Marine.
On the core side we made improvement with our boat product offerings in 220 stores. This was an expansion of last year's successful initiative of expanding assortments, deepening key departments and ensuring our customers have everything to complete their projects.
The past two years have been a critical turning point as we continued to position the company as a waterlife outfitter, across all of our different areas retail, online marketing, merchandising and our professional business our associates have made significant changes that improve the customer experience. I am energized by what the entire team has accomplished across the company.
As a result of this work, we've lifted both sales and active customers. For the quarter, active customer count increased by 6% on a year-over-year basis. The majority of our active customer growth was driven from our waterlife stores and eCommerce.
While we are pleased with our progress and the results for the first quarter, we know that West Marine continues to be closely tied to both usage. For us to continue to win, we are staying focused on finding areas to grow sales that are less seasonal and less both usage dependent, while managing both the long term profit and the growth of West Marine.
We also know that we are operating in a tough retail environment. Working closely with our CFO Jeff Lasher, we are executing on trimming expenses, increasing our profitability and continuing to push forward our initiatives that are differentiating us in the marketplace.
To hear more about this, I'll turn the call over to Jeff.
West Marine had a quarter that exceeded expectations on several fronts. And we've made progress to improve profitability in future quarters. We've also made strides to improve cash flow from operations to improve balance sheet initiatives. I'll walk you through each item in a little bit more detail.
In the first quarter the company had positive same-store sales and importantly improved margin dollar production from comparable stores which outpace revenue growth. This margin improvement coupled with increased revenue drove higher gross margin of 400 basis points in the quarter.
About a quarter of that increase came from improved first margin performance with the remaining improvement resulting from a combination of more efficient supply chain operation, lower shrinkage in the quarter and a leverage on our fixed expenses.
Overall, revenue in the quarter was $130.4 million, up 2.6% compared to the same period last year, with same-store sales up 2.7%. Results were augmented by a very strong eCommerce sales representing a 32.3% growth rate.
Our sales and margin results reflected strong performance of merchandise expansion products which improved 6.9% compared to last year including strong sales results in accessories and fishing equipment for waterlife activities.
Core boating product sales also increased compared to the last year in the period. Let me detail to you the P&L results for Q1. Net revenues for the quarter were $130.4 million. Cost to goods sold was $97.5 million. Gross profit was $32.9 million for a gross margin of 25.2% compared to last year's gross margin of 21.2%.
Selling, general, and administrative expenses was $48,043,000 or 36.8% of sales. Our loss from operation was $15,138,000 an improvement from last year's $17,993,000 loss from operations.
Our interest expense was $105,000. Our loss before income taxes was $15,243,000. Our income tax benefit was $6,130,000. And we had a net loss of $9,113,000 which is improvement compared to last year's $10,259,000 loss.
On a common share base of 24,766,000 shares, we had a net loss per common and common equivalent share of $0.37 compared to last year's $0.42 per share loss.
On the balance sheet, we ended the quarter with $22,351,000. We have trade receivables of $9,076,000. We had merchandise inventories of $268,594,000 and other current assets of $27,141,000. Our total current assets were $327,162,000.
Current liabilities included accounts payable of $66,905,000 up from last year's $53,525,000. We had accrued payroll of $13,627,000 and accrued expenses and other expenses of $28,595,000 for a total current liabilities of $109,127,000.
Cash flow used in operating activities was $19,378,000 as compared to last year's usage of cash of $32,696,000. Operating results improved $2.9 million compared to last year and as a result of improved gross margins offset by timing of training expenses and additional healthcare benefit costs.
Administrative expenses declined slightly compared to the prior year but those savings were more than offset by unfavorable year-over-year increases in healthcare expenses. And as Matt mentioned, we held our WMU in the first quarter this year which is an incremental expense compared to 2015.
As we enter into the 2016 boarding season, the company is fined its focus on improved profitability. To that end we are reviewing multiple areas of our business to improve return on sales.
As an example, in the first quarter the growth of our professional services sales lowered compared to prior quarters. In future quarters, the Company's top line sales may be impacted due to a focus on profitability over revenue growth in the sector.
Our aim is to leverage West Marines retail locations that provide a strategic advantage to the professional customer segment of the marine industry. We will couple this focus with exceptional service capabilities from our ship from store network, improved eCommerce functionality and distribution centers.
We also are working to improve product margins and decrease the cost of our supply chain. In the first quarter we made progress on both fronts as margin improved and we streamlined cost as a supply chain, serviced the stores, interacted consumer shipments. We successfully converted to a new ground shipping solution that lowers our variable expenses structure, as well as other initiatives to reduce the cost to serve our stores with replenishment orders.
Finally we are in the process of reviewing our infrastructure expenses and leveraging indirect purchases to reduce costs and streamline operations. We look forward to providing more details of our successes in this area.
In the first quarter we closed three stores and opened one new location. Two of the closures were related to our market optimization efforts. We ended the first quarter of 2016 with 261 stores down from 263 stores at year end 2015.
Turning to the balance sheet as mentioned we ended the quarter with $22.4 million of cash as compared to $6.6 million of cash as of April 4, 2015. Inventory levels increased to $268.6 million up from $256. 6 million same time last year but accounts payable increased $13.4 million to offset the inventory increases reflecting the efforts to improve terms with our trade vendor community.
As Matt mentioned, the sales results for the company often are influenced by weather. While first quarter saw favorable year-over-year results, the month of April started off slow to the company as general weather and boarding conditions were unfavorable.
While our future quarters may not exceed expectations on as many fronts as we experienced in the first quarter, we still expect that our revenue will grow in 2016 by 1% to 4% overall and pre-tax profit growth of 50% over last year. This represents comparable sales of 2% to 5% while dealing with the 1% headwind from closed stores in Canada.
This concludes our prepared comments and we are now ready to take questions.
[Operator Instructions] Our first question comes from Jimmy Baker from B. Riley & Company.
Hi, good afternoon Matt, good afternoon Jeff and congrats Deb. So Matt maybe I can just start here, you talked quite a bit - I guess not just on this call but over time about moving towards reduced seasonality or reduced dependency on boat owners. And I guess in the context of this Q1 outperformance, do you think this could be kind of an established trends where your off season quarters are going to shelve more pronounced improvement, and I guess conversely might we see more muted results in the peak quarters?
Well over time that is absolutely our plan and I think really we started seeing this in the fourth quarter of 2015 where we had nice comps during the holiday season, and we still see lots of upsides for continuing to drive that fourth quarter business. And then the first quarter of this year as well, we were pleased with our 2.7% comp.
That said, I want to make sure that everybody knows the growth of core boarding products for West Marine are still extremely important, they are extremely important to us. So we need to grow both core boarding, as well as the merchandise expansion products but the merchandise expansion products really do give us that opportunity to be a little bit less seasonal, serve our customers more broadly, get customers in the store more frequently and be a little bit less tight to boat usage.
Okay, that's helpful. And I think it was - maybe Jeff had mentioned specifically that the quarter exceeded expectations that was certainly the case on our end but then your guidance is unchanged and I guess actually the pretax profit language changed from growing more than 50% to growth of 50%. Is that just semantics or you have actually less optimistic about profit growth for the full year?
Our optimism remains the same. We saw 400 basis point improvement in margins in the quarter, about a quarter of that came from improved first margin results, the rest came from leverage of our building expenses, our supply chain, we had improved shrinkage performance, all of those things translated to the 400 basis points.
At this time because we are early in the year, we are staying with the guidance that we came out with in February related to the 1% to 4% overall and 50% growth of pre-tax profits.
At this point you know we are still early in the year $130 million of revenue for Q1 but you know on an annual basis that only represents a much lower than 25% of the sales revenue for the calendar year.
Sure, understood. And was just hoping you could maybe breakdown the gross margin upside a little bit for us between merchandise mix and then you know channel mix DIY versus port supply and then how your eCom margins are trending versus brick-and-mortar?
So if you look at our business we had 32% growth rate on the eCommerce side. Our port supply business grew in 2016 over 2015 for the Q1 period but not at the rate of growth of our overall retail expansion that we saw when you include the eCommerce for retail. So from a growth rate perspective eCommerce kind of led the way with that improvement in the retail space translating to the $130.4 million of revenue.
When you look at the margin business, the margin performance we had a good margins in the retail business and our margins improved across the aggregated business as we look at it. We ended up with 400 basis points of improvement about a quarter of that like I mentioned is associated with first margin performance improvements, 300 basis points goes to leverage which is lesser of an impact in the second and third quarter, you have more revenue during those quarters.
So you already were decreasing the percentage of your supply chain cost as a percentage of revenue in those quarters. And then the third issues, we had some timing related to strong favorable performance in our shrinkage accounts and some other items that influenced our overall margin performance in the quarter.
Okay. Last one for me just wondering when you look at the core usage products those with higher commodity content, are you seeing some cost deflation there, it is just something we are hearing from some of the auto aftermarket retailers just curious if that's impacting your P&L at all?
In some of those usage categories we are seeing some better pricing from our vendors. That is a small portion of our sales but definitely the merchants have been working with our vendors on better first pricing on some of those items.
Okay, thanks for the color. Appreciate it.
Our next question comes from Anthony Lebiedzinski from Sidoti & Company.
Good afternoon, thank you for taking the question. First can you just comment - as far as your sales trends, was there any notable variation on a monthly basis for your same store sales?
March was a little bit stronger than January and then as Jeff said as April turned the quarter, we were a little bit softer in the beginning of April, added strength as we have gone through the month. But I would say that each month in the quarter was relatively uniform.
Got it, okay. And Matt you have mentioned in your opening remarks that your customer base increased 6%. So can you just quantify like as far as your active customer base, however you define your customer base, where are you at this present moment?
We don’t quantify the actual number but the way we count the active customer base is, anybody who shop with West Marine on a rolling 12-month basis is very typical of how retailers count active customers. And for the last few several quarters now we’ve had a growth, this last quarter we had 6% growth in our active customers, and most of those new customers are coming out of our waterlife stores and our eCommerce business.
And what's encouraging for us is when you look at the segment of brand new to West Marine customers, those customers tend to be little bit younger and we are seeing a higher percentage of women than our traditional customer base.
Okay. And I think Matt you've mentioned also addition of some new brands helping you. Just curious about the Yeti how did that do and are there any other brands like that you like to getting your stores?
Yeti is a phenomenon and we were really pleased with the results particularly in the first quarter but its filled into the first quarter as well. And we feel like our brand just fit perfectly with the Yeti brand that we have dominant assortment. So it's been very good to us.
But new sales in retail and our merchants are doing a good job particularly on the merch expansion side of bringing in new brands. Some of these brands wouldn't even sell to West Marine a few years ago, but as we have repositioned the company, we haven’t seen any resistance and we are super excited about that early results on the new brands that we have brought into West Marine.
Got it, okay. Certainly first quarter you showed very good gross margin expansion, how should we think about the gross margins through the rest of the fiscal year?
Anthony as we said about quarter of the 400 basis points improvement related to first margin performance that we expect to continue throughout the year. We are doing some things on the cost to service our customers including shipping, savings and some other opportunities on that side and that should improve our margins as well and above that same level of basis point improvements 50 to 100 basis points for both of those categories.
On the other hand, we do see some SG&A increases on a year-over-year basis as we have the West Marine University expense in 2016 that we do not have in 2015. We have some additional variable compensation expenses, as well as some added benefit cost on a year-over-year basis throughout the country.
So we have some SG&A pressures that were trying to offset in our effort as we look at our profitability, but in the near term we should expect to see some gross margin expansion to offset those pressures on SG&A.
Got it, okay. So in the quarter you did have the training meeting and higher benefit expenses, is it possible for you to quantify the impact of those two items?
A little less than half for both so we had a $4 million increase in SG&A in on a year-over-year basis and there were about equally weighted between the healthcare expenses and WMU expense. And then we had some other minor issues that were a little bit higher than last year.
So that's kind of how you can think about it about $1.5 million for both of those two category.
$1.5 in total or $1.5 each?
Okay, got it. And lastly just a quick housekeeping item, what was the square footage at the quarter end?
We ended the quarter with 2.61 million square feet that's down from 2.68 million square feet or 2.67% from last year.
Okay. Thanks very much.
And at this time we have no further questions from the phone lines. I'd now like to turn the call back to Matt Hyde for closing comments.
Okay. Well thank you for joining us today. Our earnings conference call to discuss second quarter of 2016 results is currently scheduled for July, 28 2016 and we will look forward to speaking with everybody then. Thank you very much.
This does conclude today's call. You may now disconnect. Thank you for your participation.
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