West Marine (WMAR) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 0-22512

WEST MARINE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	77-0355502
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

500 Westridge Drive

Watsonville, CA 95076-4100

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (831) 728-2700

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At April 28, 2007, the number of shares outstanding of the registrant’s common stock was 21,736,717.

TABLE OF CONTENTS

		Page No.
PART I – Financial Information
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of March 31, 2007, December 30, 2006 and April 1, 2006	3
	Condensed Consolidated Statements of Operations for the 13 weeks ended March 31, 2007 and April 1, 2006	4
	Condensed Consolidated Statements of Cash Flows for the 13 weeks ended March 31, 2007 and April 1, 2006	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4.	Controls and Procedures	12
PART II – Other Information
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
Item 5.	Other Information	13
Item 6.	Exhibits	13

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

WEST MARINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2007, DECEMBER 30, 2006 AND APRIL 1, 2006

(Unaudited and in thousands, except share data)

	March 31, 2007			December 30, 2006			April 1, 2006
ASSETS
Current assets:
Cash	$	10,493		$	6,223		$	12,341
Trade receivables, net		7,708			5,713			7,789
Merchandise inventories		279,969			254,017			345,505
Deferred income taxes		7,454			7,372			6,570
Other current assets		29,576			22,794			36,121
Total current assets		335,200			296,119			408,326
Property and equipment, net		69,486			70,781			81,816
Goodwill		56,905			56,905			56,905
Intangibles		220			230			258
Other assets		3,696			4,053			3,671
TOTAL ASSETS	$	465,507		$	428,088		$	550,976
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	57,200		$	37,945		$	92,887
Accrued expenses		42,357			41,824			36,080
Total current liabilities		99,557			79,769			128,967
Long-term debt		95,553			69,027			148,384
Deferred items and other non-current liabilities		7,892			6,939			9,576
Total liabilities		203,002			155,735			286,927
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; 21,731,951 shares issued and 21,712,795 shares outstanding at March 31, 2007; 21,572,521 shares issued and 21,553,365 shares outstanding at December 30, 2006; and 21,338,875 shares issued and outstanding at April 1, 2006		22			22			21
Treasury stock		(282	)		(282	)		—
Additional paid-in capital		166,200			164,632			160,399
Accumulated other comprehensive income (loss)		(358	)		(427	)		48
Retained earnings		96,923			108,408			103,581
Total stockholders’ equity		262,505			272,353			264,049
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	465,507		$	428,088		$	550,976

See notes to condensed consolidated financial statements.

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WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share data)

	13 Weeks Ended
	March 31, 2007			April 1, 2006
Net sales	$	126,052		$	132,641
Cost of goods sold		99,232			101,405
Gross profit		26,820			31,236
Selling, general and administrative expense		43,836			48,130
Loss from operations		(17,016	)		(16,894	)
Interest expense		1,423			1,859
Loss before income taxes		(18,439	)		(18,753	)
Benefit from income taxes		(7,194	)		(6,827	)
Net loss	$	(11,245	)	$	(11,926	)
Net loss per share – basic and diluted	$	(0.52	)	$	(0.56	)
Weighted-average common and common equivalent shares outstanding – basic and diluted		21,596			21,330

See notes to condensed consolidated financial statements.

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WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

	13 Weeks Ended
	March 31, 2007			April 1, 2006
OPERATING ACTIVITIES:
Net loss	$	(11,245	)	$	(11,926	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,983			5,634
Provision for (benefit from) deferred income taxes		252			(1,252	)
Tax benefit from equity issuance		311			80
Excess tax benefit from stock-based compensation		(312	)		—
Stock-based compensation		336			276
Provision for doubtful accounts		16			90
Loss on asset disposals		17			11
Changes in assets and liabilities:
Accounts receivable		(2,011	)		(1,754	)
Merchandise inventories		(25,952	)		(67,574	)
Prepaid expenses and other current assets		(6,782	)		(6,745	)
Other assets		37			(167	)
Accounts payable		19,304			55,227
Accrued expenses		533			531
Deferred items and other non-current liabilities		712			7
Net cash used in operating activities		(19,801	)		(27,562	)
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment		194			—
Purchases of property and equipment		(3,882	)		(4,589	)
Net cash used in investing activities		(3,688	)		(4,589	)
FINANCING ACTIVITIES:
Net borrowings on line of credit		26,526			31,384
Payment of loan costs		—			(102	)
Proceeds from exercise of stock options		921			152
Excess tax benefit from stock-based compensation		312			—
Net cash provided by financing activities		27,759			31,434
NET INCREASE (DECREASE) IN CASH		4,270			(717	)
CASH AT BEGINNING OF PERIOD		6,223			13,058
CASH AT END OF PERIOD	$	10,493		$	12,341

See notes to condensed consolidated financial statements.

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WEST MARINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Thirteen Weeks Ended March 31, 2007 and April 1, 2006

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of West Marine, Inc. and its subsidiaries (collectively, “the Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary to fairly present the financial position at March 31, 2007 and April 1, 2006, and the interim results of operations and cash flows for the 13-week periods then ended have been included.

The condensed consolidated balance sheet at December 30, 2006, presented herein, has been derived from the audited consolidated financial statements of the Company for the year then ended that was included in the Company’s Annual Report on Form 10-K.

Accounting policies followed by the Company are described in Note 1 to its audited consolidated financial statements for the year ended December 30, 2006. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted for purposes of the condensed consolidated interim financial statements presented herein. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the fiscal year ended December 30, 2006, that were included in the Company’s Annual Report on Form 10-K.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13-week period ended March 31, 2007 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending December 29, 2007.

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity). The Company’s comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments for all periods presented.

NOTE 2: INCOME TAXES

In June 2006, the Financial Accounting Standards Board (“FASB”) issued interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

West Marine adopted FIN 48 on December 31, 2006, and as a result, the Company determined that approximately $3.2 million of tax benefits previously recognized should be considered uncertain tax positions, of which $1.9 million would impact the Company’s effective tax rate, if recognized. The difference between the total amount of uncertain tax positions and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets, and the federal tax benefit of state income tax items. Accordingly, the Company recorded a $0.2 million reduction to retained earnings as of December 31, 2006 (the beginning of fiscal year 2007). As of December 31, 2006, the Company had $0.2 million of accrued interest and penalties related to uncertain tax positions. There were no significant changes to any relevant amounts during the first quarter of 2007. The Company’s policy is to recognize interest and penalties related to unrecognized tax positions as part of its provision for income taxes.

As of March 31, 2007, $0.6 million in current liabilities and $1.0 million in deferred items and other non-current liabilities related to uncertain tax positions were reflected on the Company’s consolidated balance sheet. The amount classified as a current liability represents the Company’s anticipated payment of cash in settlement of uncertain tax positions within one year.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states, Puerto Rico and Canada. The statute of limitations for income tax return examinations is three years for U.S. federal, four years for Puerto Rico, seven years for Canada and varies by state and local jurisdiction.

NOTE 3: STOCK-BASED COMPENSATION

West Marine follows the accounting provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123 (R)), using the estimated grant date fair value method of accounting for awards of stock options and restricted shares under the Omnibus Equity Incentive Plan (the Plan) and issuances under the Company’s associate stock purchase plan. Stock-based compensation expense for the first quarters of 2007 and 2006 was approximately $0.3 million in both periods and is included in selling general and administrative expense; related tax benefits are included in the Company’s condensed consolidated statements of operations. In the first quarters of 2007 and 2006, the Company recognized excess tax benefits of $0.3 million and $0.1 million, respectively.

West Marine awards options to purchase shares of common stock to certain eligible associates employed at the time of the grant. Options awarded under the Plan generally vest over four years and expire five years following the grant date. During the first quarter of 2006, the Company granted 50,000 options with a weighted average exercise price of $16.72 and an average grant date fair value of $5.83. At March 31, 2007, the total compensation cost related to unvested awards not yet recognized was $2.2 million with a weighted-average expense recognition period of 4.2 years.

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NOTE 4. SEGMENT INFORMATION

The Company has three segments—Stores, Port Supply (wholesale) and Direct Sales (catalog and Internet)—all of which sell merchandise directly to customers. The customer base overlaps between the Stores and Port Supply segments, and between the Stores and Direct Sales segments. All processes for the three segments within the supply chain are commingled, including purchases from vendors, distribution center activity and customer delivery.

Segment assets are not presented, as the Company’s assets are commingled and are not available by segment. Contribution is defined as net sales, less product costs and direct expenses. Following is financial information related to the Company’s business segments (in thousands):

	13 Weeks Ended
	March 31, 2007			April 1, 2006
Net sales:
Stores	$	106,820		$	114,102
Port Supply		10,435			10,526
Direct Sales		8,797			8,013
Consolidated net sales	$	126,052		$	132,641
Contribution:
Stores	$	(2,146	)	$	(4,431	)
Port Supply		507			1,318
Direct Sales		908			1,299
Consolidated contribution	$	(731	)	$	(1,814	)
Reconciliation of consolidated contribution to net loss:
Consolidated contribution	$	(731	)	$	(1,814	)
Less:
Indirect costs of goods sold not included in consolidated contribution		(6,697	)		(7,259	)
General and administrative expense		(9,588	)		(7,821	)
Interest expense		(1,423	)		(1,859	)
Benefit from income taxes		7,194			6,827
Net loss	$	(11,245	)	$	(11,926	)

7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

West Marine, Inc.

Watsonville, California

We have reviewed the accompanying condensed consolidated balance sheets of West Marine, Inc. and subsidiaries as of March 31, 2007 and April 1, 2006, and the related condensed consolidated statements of operations and cash flows for the 13-week periods then ended. These interim financial statements are the responsibility of West Marine’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of West Marine, Inc. and subsidiaries as of December 30, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 27, 2007, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standard No. 123(R),Share-Based Payment. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 30, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

May 10, 2007

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 30, 2006. All references to the first quarter of 2007 mean the 13-week period ended March 31, 2007, and all references to the first quarter of 2006 mean the 13-week period ended April 1, 2006. Unless the context otherwise requires, “West Marine,” “we,” “us” and “our” refer to West Marine, Inc. and its subsidiaries.

General

West Marine is one of the largest boating supplies retailers in the world. We have three divisions — Stores, Port Supply (wholesale) and Direct Sales (catalog and Internet) – all of which sell aftermarket recreational boating supplies directly to customers. At the end of the first quarter of 2007, we offered our products through 379 stores in 38 states, Puerto Rico and Canada; on the Internet ( www.westmarine.com and www.boatus-store.com ); and through catalogs. We are also engaged, through our Port Supply division, our stores and the Internet ( www.portsupply.com ), in the wholesale distribution of boating products to commercial customers. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” West Marine adopted FIN 48 on December 31, 2006 (the beginning of fiscal year 2007) and recorded a cumulative adjustment of $0.2 million as a reduction in beginning retained earnings. For more information, see Note 2 to our condensed consolidated financial statements in Item 1 of this report.

In June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task Force (“EITF”) in Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross Versus Net Presentation).” EITF 06-3, which is effective for interim and annual reporting periods beginning after December 15, 2006, requires disclosure of an entity’s accounting policy regarding the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer including sales, use, value added and some excise taxes. We present such taxes on a net basis (excluded from net sales). The adoption of EITF 06-3 did not have a material effect on our financial position, cash flows or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly does not require any new fair value measurements. The provisions of SFAS 157 are to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. We are in the process of determining the impact that the adoption of SFAS 157 will have on our financial position and results of operations.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of West Marine’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results inevitably will differ from our estimates. Such differences could be material to the financial statements.

We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. We have identified certain critical accounting policies which are described below.

Lease accounting. Our accounting practices and policies with respect to leasing transactions include: recording rent expense starting on the date we gain possession of leased property, conforming the lease term used in calculating straight-line rent expense with the term used to amortize improvements on leased property; and recording tenant improvement allowances received from landlords as an adjustment to deferred rent, reducing straight-line rent expense. Certain of our operating leases contain periods of free or reduced rent or contain predetermined fixed increases in the minimum rent amount during the lease term. For these leases, we recognize rent expense on a straight-line basis over the expected minimum life of the lease, generally about ten years, including periods of free rent, and record the difference between the amount charged to rent expense and the rent paid as deferred rent. Tenant improvement allowances received from landlords generally are treated as deferred rent adjustments, reducing straight-line rent expense over the life of the lease.

Revenue recognition. We recognize revenue at the time the products are received by the customers in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” as amended by SAB 104, “Revenue Recognition.” Revenue is recognized for store sales at the point at which the customer receives and pays for the merchandise at the register. For direct sales, revenue is recognized at the time the customer receives the product. Customers typically receive goods within three days of shipment. Shipping charges billed to customers are included in net sales.

We record a reserve for estimated product returns based on historical return trends. If actual returns are greater than those projected, additional sales returns may be recorded in the future. Discounts offered to customers consist primarily of point of sale markdowns and are recorded at the time of the related sale as a reduction of revenue. Gift cards sold or issued for store credit in exchange for returned goods are carried as a liability and revenue is recognized as amounts under the gift card are redeemed. The value of points and awards under our loyalty programs are recorded as a liability and deducted from revenue at the time the points and awards are earned, based on historical conversion and redemption rates. The associated revenue is recognized when the rewards are redeemed or expire.

Stock-based compensation. Effective January 1, 2006, we adopted SFAS 123(R), “Share-Based Payment,” and began recognizing compensation expense for share-based payments based on the fair value of the awards under the modified prospective application method. Share-based payments consist of stock option grants, restricted share awards and associate stock purchase plan issuances. The effect of the adoption of SFAS 123(R) on future results will depend, among other things, on levels of stock-based payments granted in the future, actual forfeiture rates and the timing of option exercises. For more information, see Note 3 to our condensed consolidated financial statements in Item 1 of this report.

Merchandise inventories and vendor allowances. Our merchandise inventories are carried at the lower of cost or market on a first-in, first-out basis. Inventory cost includes certain indirect costs related to the purchasing, transportation and warehousing of merchandise. Capitalized indirect costs include freight charges for moving merchandise to warehouses or store selling locations and operating costs of our merchandising, replenishment and distribution activities. Indirect costs included in inventory value at March 31, 2007 and April 1, 2006 were $26.7 million and $33.7 million, respectively. We recognize indirect costs included in inventory value as an increase in cost of goods sold as the related products are sold.

9

We make certain assumptions based upon historical experience and current information to adjust inventory value for estimated shrinkage and to adjust inventory value to the lower of cost or market. Our reserve for estimated inventory shrinkage is based on historical shrinkage rates determined by our physical merchandise inventory counts and cycle counts and was $1.8 million and $2.0 million at fiscal quarter-end March 31, 2007 and April 1, 2006, respectively. Inventories are written down to market value when cost exceeds market value, which we estimate using current levels of aged and discontinued product and historical analysis of inventory sold below cost. Our reserve for estimated inventory market value below cost at fiscal quarter-end March 31, 2007 and April 1, 2006 was $5.3 million and $3.4 million, respectively.

We receive consideration from a variety of vendor-sponsored programs and arrangements such as volume rebates, markdown allowances, promotions and payment terms discounts. Vendor allowances related to merchandise purchases are treated as a reduction of inventory value and recognized as a reduction in cost of goods sold as the related products are sold.

We establish a receivable for income generated from vendor-sponsored programs that is earned but not yet received from our vendors, which we calculate based on provisions of the programs in place. Due to the complexity and diversity of the individual agreements with vendors, we perform detailed analyses and review historical trends to determine an appropriate level of the receivable.

Impairment of long-lived assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate the recoverability of long-lived assets annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recorded, if required, for the portion of the asset’s carrying value that exceeds the asset’s estimated fair value. We may also accelerate depreciation over the asset’s revised useful life, if appropriate. When evaluating long-lived assets for potential impairment, we group and evaluate assets at the lowest level at which individual cash flows can be identified. We group and evaluate store assets for impairment at the individual store level. We compare asset carrying values to the store’s estimated future cash flows.

Asset retirement obligations and facility closing costs. In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” we estimate the fair value of our obligations to clean-up and restore leased properties under our agreements with landlords and record the amount as a liability when incurred. We account for closed store and warehouse lease termination costs in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In the period we close a store or warehouse, we write off the book value of any abandoned leasehold improvements and record as an obligation the present value of estimated costs that will not be recovered. These costs include future lease payments, less any expected sublease income. These costs could increase or decrease based upon general economic conditions, circumstances in specific locations, our ability to sublease facilities and the accuracy of our related estimates.

Self insurance. We are self-insured for certain losses related to employee medical claims, workers’ compensation and general liability. Our reserve is developed based on historical claims data and includes an assessment of self-insured losses that are incurred but not reported as of the end of the period. The resulting estimate is recorded as a liability. Our assumptions are reviewed periodically and compared with actual claims experience and external benchmarks to ensure that our reserves are appropriate.

Income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. While we have considered future taxable income, state tax apportionment and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Our tax filings are subject to audit by authorities in the jurisdictions where we conduct business, which may result in assessments of additional taxes, penalties and interest. We believe we have adequately provided for obligations that would result from legal and/or tax proceedings that result from these audits where it is probable we will pay some amounts and the amounts can be estimated; in some cases, however, it is too early to predict a final outcome.

Results of Operations

The following table sets forth certain statement of operations components expressed as a percent of net sales:

	13 Weeks Ended
	March 31, 2007		April 1, 2006
Net sales	100.0	%	100.0	%
Cost of goods sold	78.7		76.5
Gross profit	21.3		23.5
Selling, general and administrative expense	34.8		36.2
Loss from operations	(13.5	)	(12.7	)
Interest expense	1.1		1.4
Loss before income taxes	(14.6	)	(14.1	)
Benefit from income taxes	(5.7	)	(5.1	)
Net loss	(8.9	)	(9.0	)

Three Months Ended March 31, 2007 Compared to Three Months Ended April 1, 2006

Net sales for the first quarter of 2007 were $126.1 million, a decrease of $6.6 million, or 5.0%, compared to net sales of $132.6 million in the first quarter of 2006, due to the closure of under-performing stores in 2006. Net loss for the first quarter of 2007 was $11.2 million, or $0.52 per share, compared to net loss of $11.9 million, or $0.56 per share, in the first quarter of 2006.

Net sales attributable to our Stores division decreased $7.3 million to $106.8 million in the first quarter of 2007, a 6.4% decrease compared to the first quarter of 2006, primarily due to the closure of under-performing stores during the latter half of 2006. Comparable store sales decreased 2.1% in the first quarter of 2007, compared to a comparable sales increase of 4.8% in the first quarter last year. Wholesale (Port Supply) net sales through our distribution centers decreased $0.1 million, or 0.9%, to $10.4 million in the first quarter of 2007 compared with 2006, primarily due to increased sales to Port Supply customers through our store locations, which are included in Stores sales. Net sales of our Direct Sales division increased $0.8 million, or 9.8%, to $8.8 million in the first quarter of 2007 compared to 2006, primarily due to increased sales from our westmarine.com Internet website.

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Gross profit decreased by $4.4 million, or 14.1%, to $26.8 million in the first quarter of 2007, compared to $31.2 million for the same period last year. Gross profit decreased as a percentage of net sales to 21.3% in the first quarter of 2007, a 220 basis point decrease compared to 23.5% for the same period last year, mainly due to increased clearance activity in the first quarter of 2007 compared to the prior year.

Selling, general and administrative expenses decreased $4.3 million, or 8.9%, to $43.8 million in the first quarter of 2007, compared to $48.1 million for the same period last year, and decreased as a percentage of sales to 34.8% in the first quarter of 2007, compared to 36.2% for the same period last year, primarily due to the closure of under-performing stores during the latter half of 2006 and the impact of cost cutting initiatives implemented during 2006.

Interest expense decreased $0.5 million, or 23.5%, to $1.4 million in the first quarter of 2007, compared to $1.9 million for the same period last year. The decrease in interest expense primarily was due to lower average outstanding bank borrowings in the first quarter of 2007, compared to the same period last year, primarily due to lower inventory levels compared to last year.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax benefit rate for the first quarter of 2007 was approximately 39.0%, compared with approximately 36.4% for the same period last year. The change in our effective tax rate was largely due to increased recognition of state enterprise zone tax credits in the first quarter of 2007.

Liquidity and Capital Resources

Our cash needs primarily are for working capital to support our inventory requirements and capital expenditures for new and remodeled stores. We believe our existing credit facility and cash flow from operations will be sufficient to satisfy our liquidity needs over the next 12 months.

Operating Activities

During the first three months of 2007, net cash used by operating activities was $19.8 million, primarily due to an increase in merchandise inventories of $26.0 million. Inventory value decreased by 19.0% and inventory per square foot decreased by 13.7% at the end of the first quarter of 2007, compared to the same period last year, primarily due to the implementation of inventory management initiatives.

Investing Activity

We spent $3.9 million on capital expenditures during the first three months of 2007, a $0.7 million decrease from $4.6 million spent during the same period in the prior year, primarily due to a reduction in new store openings. We expect to spend a total of $20.0 million to $25.0 million on capital expenditures during 2007, primarily for new and remodeled stores and information systems improvements. We expect to open approximately ten stores during fiscal year 2007, two of which we have already opened. We intend to pay for our expansion through cash generated from operations and bank borrowings.

Financing Arrangements

Net cash provided by financing activities was $27.8 million for the first three months of 2007, primarily consisting of $26.5 million of net borrowings under our credit facility, primarily to build inventories in anticipation of the start of boating season. We received $0.9 million from the exercise of vested stock options granted under our Omnibus Equity Incentive Plan during the first three months of 2007, compared to $0.2 million received for the same period last year.

We have a $225.0 million credit agreement with a group of lenders that expires in December 2010. Borrowing availability is based on a percentage of our inventory and accounts receivable. At our option, subject to certain conditions and restrictions, the agreement provides up to $25.0 million in additional financing during the term. The credit facility is guaranteed by West Marine and its subsidiaries and is secured by a security interest in all of the accounts receivable and inventory of West Marine and its subsidiaries, certain other assets related thereto, and all proceeds thereof. The credit facility includes a $50.0 million sub-facility available for the issuance of commercial and stand-by letters of credit. The credit facility also includes a sub-limit of up to $20.0 million for same day advances.

At our election, borrowings under the loan facility will bear interest at one of the following rates: (1) the prime rate announced by Wells Fargo Bank, National Association at its principal office in San Francisco, California or (2) the interest rate per annum at which deposits in U.S. dollars are offered by reference lenders to prime banks in designated markets located outside the U.S. In each case, the applicable interest rate is increased by a margin imposed by the loan agreement.

The applicable margin for any date will depend upon the amount of available credit under the revolving loan facility. The loan agreement also imposes a commitment fee on the unused portion of the revolving loan facility. For the first quarter of 2007, the weighted average interest rate on all of our outstanding borrowings was 6.6%.

The loan agreement contains customary covenants, including but not limited to, restrictions on the ability of West Marine and its subsidiaries to incur liens, make acquisitions and investments, pay dividends and sell or transfer assets. As of March 31, 2007, we were in compliance with our bank covenants. Additionally, a minimum revolving credit availability equal to the lesser of $15.0 million or 7.5% of the borrowing base must be maintained.

At March 31, 2007, borrowings under this credit facility were $95.5 million, bearing interest at rates ranging from 6.4% to 8.3%, and $109.7 million was available to be borrowed. At April 1, 2006, borrowings under this credit facility were $148.4 million, bearing interest at rates ranging from 5.7% to 7.8%. At March 31, 2007, we had $5.5 million of outstanding stand-by letters of credit and $0.1 million of outstanding commercial letters of credit, compared to $5.2 million outstanding stand-by letters of credit at the end of the first quarter last year.

Off-Balance Sheet Arrangements

Substantially all of the real property used in our business is leased under operating lease agreements, as described in Item 2 – Properties and Note 8 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 30, 2006.

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. As of March 31, 2007, we were not involved in any unconsolidated special purpose entities or variable interest entities.

Seasonality

Historically, our business has been highly seasonal. In 2006, 64% of our net sales and all of our net income occurred during the second and third quarters, principally during the period from April through August, which represents the peak months for boat buying, usage and maintenance in most of our retail markets.

Business Trends

Our research indicates that the U.S. boating industry currently is experiencing a down cycle, as evidenced by lower new and used boat sales and declining boat registrations in key states. In 2007, we plan to respond to this challenging industry climate by controlling our operating expenses, increasing specialized and localized product assortments in our stores, and continuing to grow our Port Supply and Internet businesses.

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Internet Address and Access to SEC Filings

Our Internet address is www.westmarine.com. Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, in the “Investor Relations” portion of our website as well as through the Securities and Exchange Commission’s website, www.sec.gov ..

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” and similar expressions also identify forward-looking statements. 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. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.

West Marine’s operations could be adversely affected if unseasonably cold weather, prolonged winter-like conditions, natural disasters such as hurricanes, or extraordinary amounts of rainfall occur during the peak boating season in the second and third quarters. Risk factors that may affect our earnings in the future include the risk factors set forth in West Marine’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006, and those risks which may be described from time to time in West Marine’s other filings with the Securities and Exchange Commission. 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.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not undertake any specific actions to diminish our exposure to interest rate risk, and we are not a party to any interest rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in our last Annual Report on Form 10-K.

Based on our operating results for the year ended December 30, 2006, a 67 basis point change in the interest rate (10% of our weighted-average interest rate) affecting our floating financial instruments would have an effect of reducing our pretax income and cash flows by approximately $0.7 million over the next year, and would have an immaterial effect on the fair value of our fixed-rate financial instruments (see Note 6 to the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for fiscal year 2006).

ITEM 4 – CONTROLS AND PROCEDURES

West Marine’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this review, management, including the Chief Executive Officer and the Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of March 31, 2007 to ensure that information required to be disclosed in our reports filed and submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

We are a party to legal proceedings that are ordinary and incidental to our business. We do not expect that any of these legal proceedings currently pending will have a material adverse impact on our consolidated financial position, consolidated results of operations or cash flows.

Currently and from time to time, we are a party to various legal proceedings that are incidental to the conduct of our business, including inquiries or notices that we receive from time to time from regulatory authorities, which we respond to in the ordinary course of business. In our opinion, after consultation with legal counsel responsible for these matters, the ultimate liability with respect to those proceedings is not presently expected to materially affect the financial position, results of operations or cash flows of West Marine.

ITEM 1A – RISK FACTORS

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None

(b) None

(c) None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5 – OTHER INFORMATION

As previously reported in West Marine’s proxy statement for its 2007 annual meeting of stockholders, in April 2007, West Marine entered into an executive termination and compensation agreement with Peter Van Handel, the company’s Chief Accounting Officer, that provides Mr. Van Handel with certain rights if he is subjected to an adverse job change for reasons other than cause, death or disability. An adverse job change consists of a substantial reduction in Mr. Van Handel’s job responsibilities, title, position or full-time employment. Under the agreement, if the adverse job change occurred in the second half of the West Marine’s fiscal year, Mr. Van Handel will be entitled to a prorated bonus for the year that included the adverse job change. In addition, for a period of nine months following an adverse job change, Mr. Van Handel will be entitled to receive his base salary and group health insurance benefits, and he will be able to continue to exercise any stock options which were vested on the date of the adverse job change for a period of one year following the date of such a change. This summary of Mr. Van Handel’s agreement is qualified by reference to the full agreement that is being filed with this report as Exhibit 10.1.

ITEM 6 – EXHIBITS

3.1	Certificate of Incorporation of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to West Marine’s Annual Report of Form 10-K filed March 18, 2004).
3.2	Bylaws of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.2 to West Marine’s Annual Report of Form 10-K filed March 18, 2004).
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to West Marine’s Registration Statement on Form S-1 (Registration No. 33-69604)).
10.1	Executive Termination Compensation Agreement, dated April 2, 2007, between West Marine, Inc. and Peter Van Handel.
15.1	Letter regarding Unaudited Interim Financial Information.
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended.

* Indicates a management contract or compensatory plan or arrangement within the meaning of Item 601(b)(10)(iii) or Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 10, 2007	WEST MARINE, INC.
	By:	/s/ Peter L. Harris
		Peter L. Harris
		Chief Executive Officer
	By:	/s/ Thomas R. Moran
		Thomas R. Moran
		Senior Vice President and Chief Financial Officer
		Chief Executive Officer
	By:	/s/ Peter Van Handel
		Peter Van Handel
		Vice President and Chief Accounting Officer

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