Executives
Jeff Eisenberg - President and Chief Executive Officer
Analysts
Jeff Blaeser – Morgan Joseph
Laura Richardson – BB&T Markets
Anthony Lebiedinski - Sidoti
West Marine Inc. (WMAR) Q4 2007 Update Call January 10, 2008 11:30 AM ET
Operator
I would like to welcome everyone to the fourth quarter 2007 sales and expected impact of certain events conference call. (Operator Instructions)
I am going to read the forward-looking statements. The statements in this conference call that relate to future plans, events, expectations, objectives or performance are forward-looking statements that are predictive or express expectations that depend on future events or conditions that involve risks and uncertainties.
These forward-looking statements include, among other things, statements that relate to West Marine’s future plans, expectations, objectives, performance and similar projections as well as facts and assumptions underlying these statements or projections.
These forward-looking statements which are included in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 may involve known and unknown risks and uncertainties, including management’s further review and refinement of fourth quarter and fiscal year 2007 results and finalizing evaluation of West Marine’s assets with our third-party appraisal firms.
The audit being conducted by West Marine’s independent registered public accounting firm and other factors that may cause West Marine’s actual results and performance to be materially different from any preliminary expectations expressed by the forward-looking statements in this conference call.
Factors that may affect future plans, results and performance include risks associated with West Marine’s expansion strategy and related initiatives, the company’s ability to manage inventory and operating expenses, including legal and administrative costs related to West Marine’s restatement of prior year’s earnings and unseasonably cold weather or natural disasters, as well as the other factors set forth in Item 1(a) of West Marine’s Form 10-K for the fiscal year ended December 30, 2006 as updated in its Form 10-Q for the fiscal quarter ended September 29, 2007.
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.
At this time, I would like to turn the call over to Mr. Eisenberg, President and Chief Executive Officer.
Jeff Eisenberg
Thank you. Good morning and thank you for joining us. I am Jeff Eisenberg, West Marine’s CEO. With me today are Tom Moran, our Chief Financial Officer; Peter Van Handel, our Chief Accounting Officer; and Deb Ajeska, our Assistant Vice President of Financial Planning and Analysis.
We’ve scheduled this call today not only to communicate our sales results for the fourth quarter of 2007 but we also want to present and discuss a number of specific items which we expect will have a significant effect on our earnings for the quarter when those are released next month.
We’ve prepared some remarks and then we will take your questions afterwards.
West Marine’s results for the fourth quarter reflect the continuing challenges in our industry and they fell short of our expectations. The Southeast region turned in the weakest performance, led by the Florida market.
From a category perspective, softness in core categories such as maintenance and safety were only partly offset by strength in electronics, which reflected increased promotional activity as we responded to marketplace conditions. Pricing was particularly competitive on street navigation products during the holiday period.
Overall net sales for the 13 weeks ended December 29, 2007 were $117.8 million compared to net sales of $123.8 million for the same period a year ago. The primary drivers of lower sales in the fourth quarter were the impact of closed stores including 33 underperforming stores closed during the second half of 2006, as well as comparable store sales decrease of 3%.
At the end of 2007, West Marine operated 372 stores versus 377 at the end of 2006. Net sales for the 52 weeks ended December 29, 2007 were $679.1 million compared to net sales of $716.6 million for the same period a year ago. The key drivers of lower sales in fiscal year 2007 were the impact of store closures primarily in 2006, followed by a comparable store sales decrease of 1.9%.
Net sales in the store segment for fiscal year 2007 were $593.8 million, a decrease of $36.1 million or 5.7% compared to fiscal year 2006. Port supply, our wholesale segment sales through the distribution centers for fiscal year 2007 were $41.6 million, which is a decrease of $2.0 million or 4.5% compared to fiscal year 2006. Port supply sales to wholesale customers through store locations are included in the store segment. Finally, net sales in the direct sales segment for fiscal year 2007 were $43.8 million and this was an increase of $0.6 million or 1.3% compared to fiscal year 2006.
While we are still in the process of finalizing earnings results for fiscal year 2007, we feel it’s appropriate to discuss at this time several significant events which are expected to impact earnings for the fourth quarter and fiscal year.
The first and by far the largest of these relates to an updated assessment of goodwill which we conducted in the fourth quarter as required by Statement of Financial Accounting Standards 142. This is expected to result in a non-cash impairment charge as approximately $56.9 million pre-tax or $2.31 per share after tax. The after-tax per share equivalent impacted this impairment charge is disproportionately high due to the non-deductibility for tax purposes of certain goodwill components.
Next, our continued cooperation with the previously announced SEC informal inquiry is expected to result in expenditures that exceed the company’s previous fourth quarter estimate by approximately $1.7 million pre-tax or $0.05 per share after tax. The status of this enquiry has not changed and we are cooperating fully with the SEC’s request for information.
As we’ve previously disclosed, the departure of the company’s former chief executive officer is expected to result in related severance costs in the fourth quarter of approximately $1.3 million pre-tax or $0.04 per share after-tax.
Finally, the company’s ongoing evaluation of individual store performance is expected to result in a non-cash impairment charge in the fourth quarter of approximately $0.9 million pre-tax or $0.03 per share after-tax.
We are scheduled to release earnings results for the 2007 fourth quarter and fiscal year on Thursday February 28. At this point, it appears that in addition to these significant events, we anticipate that lower sales during the fourth quarter will result in operating earnings modestly lower than our previously communicated expectations. Keep in mind that we are early in our year-end close process and we are therefore further reviewing and refining our fourth quarter and fiscal year 2007 results.
Operator, we are now ready to take questions.
Question-and-Answer Session
Operator
Our first question comes from Jeff Blaeser – Morgan Joseph.
Jeff Blaeser – Morgan Joseph
Thank you and good morning. Couple of quick question, one on the goodwill assessment. Can you give us little bit more detail as to the change or the reasoning for the writedown? It looks like it’s probably Boat US acquisitions, previous acquisitions?
Jeff Eisenberg
That’s correct, Jeff. The goodwill is a result of a number of acquisitions that West Marine had done over the years. The two most recent and largest ones were the E&B Marine and then the Boat US acquisition. We do the impairment test for goodwill annually during Q3 and there was no impairment indicator when we last did that test.
However, the change in circumstances which we considered to be a triggering event was the lowering of our guidance in October and then combining with that expectations of lower cash flow and also the market values of our benchmark companies as reflected by their stock price indicated that impairment might exist and so therefore, we were required to retest.
The results of the testing which are still being finalized indicate at this point that we would need to impair the entire amount of goodwill which is the $56.9 million.
Jeff Blaeser – Morgan Joseph
On the core and the maintenance side which you mentioned was a little bit weak, do you think that was more due to boats coming off the docks earlier or competitive pressures or a combination of everything including the environment?
Jeff Eisenberg
A combination of everything, the environment, I would point to that.
Jeff Blaeser – Morgan Joseph
No further update on other anticipated costs associated with the SEC inquiry?
Jeff Eisenberg
Not at this time. The important point is that the status hasn’t changed, it’s still an informal inquiry. We have not received anything that would indicate that the investigation is changing to any other type of level. We are cooperating fully and we don’t have any future view of the total cost at this time.
Operator
Your next question comes from Laura Richardson – BB&T Markets.
Laura Richardson – BB&T Markets
I have a couple of questions tied to this specific release but I just thought since now you have a little bit more time to reflect and strategize for West Marine, I want to get a sense of some things you might do differently in the future? Specifically expense wise, SG&A wise, any thoughts about hunkering down there going forward?
Jeff Eisenberg
What we expect to do, Laura, is when we talk on February 28, we will talk about our plans for 2008. What I would like to do is hold off setting any expectations at this point until then.
Laura Richardson – BB&T Markets
I certainly understand in terms of specific numbers. I was hoping to just get some broad strokes about your thinking expense-wise and big picture in the boating environment?
Jeff Eisenberg
We think there is lots of opportunity in terms of running the company and we are carefully trying to analyze the boating environment that we are in. It has been challenging and we will give you an update on what our view is, but we are looking very carefully at it, I assure you.
Laura Richardson – BB&T Markets
West Marine from the beginning and it sees to me -- I wasn’t a boater back then, but I have been following this industry in recent years -- that the boater has changed and maintenance, the boats have become more high-end and less do it yourself and the company struggled with how to deal with that. Do you need to start dealing with that issue again?
Jeff Eisenberg
I would say that there are different segments of the industry, different segments of the boating world that I would agree with your statement on. There are still a significant amount of people who love to work on their boats and do work on their boats. It’s true that many people have moved up to larger boats and it has changed how they deal with their boats. We do believe there are opportunities for dealing with that from West Marine’s point of view and we are working on those.
Operator
Your next question comes from Anthony Lebiedinski - Sidoti.
Anthony Lebiedinski - Sidoti
I was wondering if you could provide us with the same-store sales by region, give us a little bit more quantification as to what you saw in Southeast versus Northeast, West Coast and so on?
Jeff Eisenberg
Anthony, we don’t normally disclose the comp sales by region, but what we can say is that if you look at the quarterly performance of minus 3% that the Southeast region was a little bit softer than the average and that the Northeastern and the West were a little bit better than the average, so that just gives you a little bit of the slant.
Anthony Lebiedinski - Sidoti
It sounds like you guys are really not yet prepared to talk about any early thoughts regarding 2008?
Jeff Eisenberg
Correct.
Anthony Lebiedinski - Sidoti
You closed some stores and you did take down some prices for your products, so I was just wondering hypothetically if you guys had not lowered your prices on many of your products do you think you still would have had to close these stores?
Jeff Eisenberg
I am trying to understand the question.
Anthony Lebiedinski - Sidoti
Under Peter Harris’ direction, the company took down prices for many of its products and then you guys had closed some stores. I am just wondering hypothetically if you had maintained your pricing strategy the way it was, do you think you still would have had to close those stores?
Jeff Eisenberg
I don’t think that the amount that we changed prices, which was not all that much, had much linkage to the decision to close the stores.
Anthony Lebiedinski - Sidoti
So you would have closed the stores regardless?
Jeff Eisenberg
If we would have done something considerably different with prices than we did maybe that would have impacted things, but I’d have to say no I don’t think it would have, based on our question, I don’t think it would have changed anything. It was really a function of individual store economics, some of the different location challenges and that type of thing.
Anthony Lebiedinski - Sidoti
What is your thought process as far as product pricing? Are you looking to still maintain that or change that at some point?
Jeff Eisenberg
We are active, we are very actively looking through our competitive price situation now and our big season is coming up and we expect to be well prepared price-wise for that.
Operator
Your next question comes from R.J. Hottovy – Next Generation Equity Research.
R.J. Hottovy – Next Generation Equity Research
Just one quick question in discussion with the ongoing evaluation of the individual store performances, again recognizing that you probably are not going to give us much information on ‘08 until the next conference call, but just if you can give us any thoughts on what you are seeing on the evaluation prospects of maybe additional store closures next year?
Jeff Eisenberg
One of the things that we did that we are talking about here was going through the GAAP requirement to impair stores. That’s not necessarily connected with an intention to close it because we look at the individual economics. So, at this point we are still evaluating that, but the impairment charge that we are talking about and taking in Q4 related to about ten stores in total, but we don’t see that that necessarily is connected to needing to close those stores because again, that’s a separate net present value analysis.
So, we continue to evaluate that, but would also talk about that when we get back together next month.
R.J. Hottovy – Next Generation Equity Research
Any thoughts on the product mix or is it again, too early just to get a sense if there is going to be any change in the product mix? Are you seeing some category do better than others this particular period?
Jeff Eisenberg
For 2008?
R.J. Hottovy – Next Generation Equity Research
Going forward.
Jeff Eisenberg
Let’s just say for now not much change in the mix and we will comment on that in February.
Operator
This concludes today’s conference call. You may now disconnect your lines.
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