[West Marine Letterhead]
August 27, 2007
VIA FACSIMILE: (202) 772-9203
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attention: William Choi, Branch Chief
Scott Ruggiero, Staff Accountant
Re: West Marine, Inc.
Form 10-K for the fiscal year ended December 30, 2006
File No. 0-22512
----------------------------------------------------
Dear Mr. Choi and Mr. Ruggiero:
We have received your comments with respect to the above-referenced filing set
forth in a letter dated August 9, 2007. The remainder of this letter contains
the text of your comments followed by our corresponding responses.
Form 10-K for Fiscal Year Ended December 30, 2006
General
1. In future filings, please file Schedule II - Valuation and Qualifying
Accounts for the activity related to product returns and deferred tax assets.
Refer to Rules 5-04 and 12-09 of Regulation S-X.
RESPONSE
In future filings, we will include required information regarding
balances and activity during the period for significant
valuation and qualifying accounts in the notes accompanying our
consolidated financial statements.
Selected Consolidated Financial Data, page 12
2. In future filings, please revise your selected consolidated financial
data, management's discussion and analysis (MD&A) and notes to your financial
statements to remove all references to the per share impact of items included
in net income. Per share discussion of these items cannot logically be related
to the common shareholder without adjustment and are not items that accrue
directly to the benefit of the owner of a part of the common equity.
RESPONSE
We believe the presentation of clearly defined per share components of
operating results can provide useful and important information to
investors for interpreting and comparing our operating results. In
future filings, however, we will omit references to the per share
impact of items included in net income.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, page 13
Critical Accounting Policies and Estimates, page 14
General
3. Please tell us and disclose your accounting policy for goodwill impairment
here and in the notes to your financial statements. Please tell us if goodwill
is tested annually for impairment, and if not, why? If goodwill is tested for
impairment annually, please tell us the results of the most recent impairment
test. Please also expand your discussion in future filings to discuss the
specific accounting estimates, assumptions and uncertainties underlying such
estimates related to your assessment. Explain how the assumptions that you have
made compare to other assumptions that could have reasonably been made, under
the circumstances, and address the specific uncertainties that are reasonably
likely to give rise to material effects in the course of resolution.
RESPONSE
In the third quarter of each year, or sooner if conditions indicate an
impairment could exist, we evaluate goodwill at the reporting unit
level, as required under Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." Our
reporting units are our Stores, Port Supply and Direct Sales operating
segments. The evaluation compares the carrying amount of the goodwill
to the estimated implied fair value of the goodwill. Our estimate of
fair value is determined by considering market prices of comparable
businesses and the present value of expected future cash flows. Any
excess of the carrying value over the estimated fair value would be
recognized as an impairment loss. As of December 30, 2006 and
December 31, 2005, we had goodwill of $50,982 and $51,812,
respectively. Based on our evaluations, no goodwill impairment loss
was recorded in 2007, 2006 or 2005.
We will expand future filings to include the specific material
accounting estimates, assumptions and uncertainties underlying such
estimates related to our goodwill assessment and explain how the
assumptions we have made compare to other assumptions that could have
reasonably been made and address the specific uncertainties that are
reasonably likely to give rise to material effects in the course of
resolution.
4. Please expand your disclosure in future filings to identify the specific
accounting assumptions underlying your estimates for each critical
accounting policy you identify. For example, in your discussion of
stock-based compensation we note that you have not identified the
assumptions you use to determine the estimated fair value of stock-based
awards. Explain how the assumptions that you have made compare to other
assumptions that could have reasonably been made, under the circumstances,
and address the specific uncertainties that are reasonably likely to give
rise to material effects in the course of resolution. Please provide
information about the quality and potential variability of your earnings
and cash flow so that investors may ascertain the extent to which your
reported financial information is indicative of your future results. We
generally find that disclosures including both sensitivity analyses and
discussions of historical experience in making the critical estimates are
effective in meeting this Management's Discussion and Analysis objective.
Please refer to the guidance in Section 501.14 of the SEC's Financial
Reporting Codification for further clarification.
RESPONSE
We will review our disclosure regarding each critical accounting
policy and, in future filings, we will identify specific material
accounting assumptions underlying estimates for each identified
critical accounting policy, explain how our assumptions compare to
other assumptions that could have reasonably been made and address
the specific uncertainties that are reasonably likely to give rise to
material effects in the course of resolution. To the extent material
and relevant to a particular critical accounting estimate, we will
provide appropriate sensitivity and historical experience disclosure,
as contemplated under Section 501.14 of the SEC's Financial Reporting
Codification.
Revenue recognition, page 15
5. We note your disclosure related to gift cards. Please tell us the amount
of gift cards you sold or exchanged in fiscal 2006 and 2005. Please tell
us and disclose in future filings your revenue recognition policy for
unredeemed gift cards and the methodology you use to recognize the related
revenue. If material, your disclosure should specify the line item where
breakage is recorded in your statement of operations.
RESPONSE
Aggregate sales of gift cards were $16.0 million in fiscal year
2006 and $14.5 million in fiscal year 2005. Sales of gift cards are
deferred and treated as a liability on our balance sheet either
until redeemed by customers in exchange for products or until we
determine that future redemption of the card by the customer is
remote, also called "breakage."
Breakage for unused gift cards is recognized using the "redemption
recognition method." Under this method, we estimate breakage based on
company specific data by analyzing historical experience and deriving
a rate that represents the amount of gift cards that are expected to
go unused and that are not subject to escheatment. This rate is then
applied, and breakage is recognized in income, over the period of
redemption. Gift card breakage income was $1.0 million in 2006 and
$0.3 million in 2005 and is included in net sales in our operating
results. We will disclose this information in future filings as
requested.
Impairment of long-lived assets, page 16
6. We note your statement that you "may also accelerate depreciation over the
asset's revised useful life, if appropriate." Please confirm to us and
clarify in future filings that such accounting treatment only applies to
those assets identified for replacement and therefore viewed as "held and
used" until disposal. If this is not the case, please explain.
RESPONSE
Estimated useful lives are revised only for assets identified for
replacement or abandonment at a specific future date - such as the
expected closure date of a store location - and therefore viewed as
"held and used" until disposal. We will clarify this in future filings.
Results of Operations-Compared to 2005, page 17
General
7. In future filings, please expand your discussion to describe all of the
significant underlying causes of the changes in your results of operations
and provide a more detailed analysis of material year-to-year changes and
trends. For example, you have primarily attributed the increase in the
Stores division net sales from 2005 to 2006 to a 2.4% increase in
comparable store sales, but you did not address the impact that new,
closed, and remodeled stores had on this change. Please also quantify the
amount of the increase or decrease attributed to each factor. For further
guidance please refer to Item 303(a)(3) of Regulation S-K and the
Commission's Interpretative Releases on MD&A, Release 33-8350 and
Section III.D of Release 33-6835, both of which are available on our
website at www.sec.gov. Please be advised that this comment should not be
limited to the example provided, but should be applied to each category
you discuss. Please include a draft of your proposed revisions with
your response.
RESPONSE
In response to your comment, a sample of our revised discussion of
2006 results compared to 2005 results appears on Exhibit A to this
letter. We will include similarly detailed disclosure in our
future filings.
Consolidated Statements of Stockholders' Equity, page 27
8. We note that the excess tax benefit of $357,000 presented in your statement
of cash flows is not presented in your statements of stockholders' equity.
Please revise or advise.
RESPONSE
The excess tax benefit of $357,000 presented in our statement of cash
flows represents "excess tax benefits from settlement of equity
compensation" (grants that produce "windfalls"). This amount
represents options granted and fully vested prior to the adoption of
SFAS No. 123(R), "Share-Based Payment," but exercised subsequent to
the adoption of SFAS No. 123(R). For such awards, the entire tax
benefit resulting from the exercise of the award is recorded in
additional paid-in capital ("APIC") and, therefore, presented in our
statement of stockholders' equity as "tax benefit from equity
issuance." The amount recorded in APIC and presented in stockholders'
equity as tax benefit from equity issuance of $342,000 reflects the
net adjustment for actual tax benefit for settlement of equity
compensation that produced windfalls and for settlement that produced
shortfalls (i.e., actual tax benefit earned from release of restricted
stock was less than the deferred tax asset established as the expense
for those grants was recognized). Although shortfalls are netted with
windfalls in the amount recorded in APIC, the amount shown in the
statement of cash flows as excess tax benefit from stock-based
compensation includes windfall amounts only. In future filings, we
will present the excess tax benefit from equity compensation on a
separate line in the statement of stockholders' equity.
Notes to Consolidated Financial Statements, page 29
Note 1: Summary of Significant Accounting Policies, page 29
Impairment of Long-Lived Assets, page 30
9. We note your disclosures of impairment charges in 2006 and 2005. In
future filings, for each impairment charge, please expand your disclosure
to include the following:
o A more detailed description of each asset and the facts and
circumstances leading to the impairment;
o The method or methods for determining fair value of the related
assets; and
o The segment in which the impaired asset is reported under
SFAS No. 131.
Refer to paragraph 26 of SFAS No. 144 and paragraph 46 of SFAS No. 142.
Please include a draft of your proposed revisions with your response.
RESPONSE
In response to your comment, a sample of our revised disclosure
appears on Exhibit B to this letter. We will include similarly
expanded disclosure in future filings that include an impairment
charge. Because assets are commingled and not available by operating
segment, impaired assets are not presented, consistent with the
provisions of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Note 2: Restatement of Prior Periods, page 34
10. Please revise future filings to include the cumulative effect of the
change on retained earnings or other appropriate components of equity or
net assets in your January 2, 2005 balance sheet. Refer to paragraph 26b
of SFAS No. 154.
RESPONSE
In the Form 10-Q for our third quarter 2007 and in the Form 10-K for
fiscal year 2007, as well as in filings subsequent to this Form 10-K,
we would not expect to present the January 1, 2005 balance sheet.
However, when an accounting change is reported in future filings, we
will present the cumulative effect on retained earnings as prescribed
in paragraph 26b of SFAS No. 154.
Note 3: Share-Based Compensation, page 35
11. We note that in your table on page 38 of additional information for
options outstanding as of December 30, 2006, you present more exercisable
shares than shares outstanding for the "$7.06-$10.75" and "$16.11-$22.00"
range of exercise prices. Please revise future filings to correct this
apparent error.
RESPONSE
We will revise future filings as suggested.
Note 11: Segment Information, page 44
12. We note your disclosure that segment assets are not presented owing to
the Company's assets being commingled. Please tell us how you were able
to assign goodwill to your reporting units and in future filings, disclose
the amount of goodwill assigned to each reporting unit.
RESPONSE
All goodwill is assigned to the Stores reporting unit. In each
business combination that resulted in the recording of goodwill, the
amount of the purchase price in excess of the fair value of acquired
assets was attributed by management to the synergistic value of the
acquired store operations. We will add clarifying disclosure to
future filings in accordance with paragraph 32 of SFAS No. 131.
Controls and Procedures, page 47
13. We note that your management has concluded that your disclosure controls
and procedures were effective as of December 30, 2006 to ensure that
information required to be disclosed in your reports filed or submitted
under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms. Please confirm
to us, if true, and revise future filings to disclose that your
management has also concluded that your controls and procedures were
effective to ensure that information required to be disclosed under the
Act is accumulated and communicated to the issuer's management, including
its principal executive and principal financial officers or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Refer to Rule 13a-15(e).
RESPONSE
We confirm to you that our management concluded that as of
December 30, 2006 and March 31, 2007, our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e), were
effective. In this regard, please note that we have revised this
disclosure in our Form 10-Q for the quarter ended June 30, 2007,
filed August 3, 2007. Our revised disclosure defines our disclosure
controls and procedures as those set forth in Rules 13a-15(e) and
15d-15(e), and we respectfully submit that this change should address
the concern expressed by your comment. We will continue using this
new disclosure in our future filings.
Exhibits 31.1 and 31.2
14. We note the identification of the certifying individuals at the beginning
of the certifications required by Exchange Act Rule 13a-14(a) also
includes the titles of the certifying individuals. In future filings, the
identification of the certifying individuals at the beginning of the
certification should be revised so as not to include the individuals'
titles.
RESPONSE
We will revise the certifications filed as Exhibits 31.1 and 31.2 in
future filings as requested.
* * * * *
As requested, we acknowledge that:
o we are responsible for the adequacy and accuracy of the disclosure in our
SEC filings;
o SEC staff comments or changes to disclosure in response to staff comments
do not foreclose the SEC from taking any action with respect to our
filings; and
o we may not assert staff comments as a defense in any proceeding initiated
by the SEC or any person under the federal securities laws of the
United States.
We hope you will find this letter responsive to your comments. If you have
questions regarding our responses, please contact me at 831-761-4489.
Sincerely,
/s/ Thomas R. Moran
--------------------------------
Thomas R. Moran
Senior Vice President and
Chief Financial Officer
cc: Peter L. Harris
Pamela J. Fields
David L. Kral, Deloitte & Touche, USA LLP
Thomas D. Twedt, Dow Lohnes, PLLC - VIA FACSIMILE: (202) 776-4941
EXHIBIT A
Results of Operations-2006 Compared to 2005
Net sales for 2006 were $716.6 million, compared to net sales of $692.3
million for 2005. Net loss for 2006 was $7.1 million, or ($0.33) per share,
compared to net loss for 2005 of $2.3 million, or ($0.11) per share. Net loss
for 2006 included a $14.5 million pre-tax charge for store closures and other
restructuring costs. Net loss for 2005 included approximately $14.3 million in
pre-tax charges related to unusual items, as further described in "-Results of
Operations-2005 Compared to 2004."
Store closures and other restructuring costs
On August 4, 2006, our Board of Directors approved management's recommendation
to close between 30 and 40 stores that management identified as having no
reasonable expectation of significant positive cash flow over the near term.
During 2006, we closed 33 stores in conjunction with this initiative and
consolidated certain Direct Sales call center operations, incurring $14.5
million in related costs. For more information, see "Critical Accounting
Policies and Estimates-Impairment of long-lived assets" and "-Asset retirement
obligations and facility closing costs."
Division sales
Net sales attributable to our Stores division increased $28.6 million, or 4.8%,
to $629.9 million in 2006, primarily due to a $13.7 million increase in
comparable store sales. Net sales not included in comparable
store sales during 2006 included $14.4 million in sales from new stores and $4.2
million in sales from remodeled or expanded stores, partially offset by a $3.2
million sales decrease from closed locations. Port Supply sales through our
distribution centers decreased $4.6 million, or (9.6%), to $43.5 million in
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 $0.3 million, or 0.8%, to $43.2 million, primarily due
to $2.3 million in increased sales from our Internet website, which we believe
is partially offset by reduced direct sales in areas where we have opened new
stores.
Comparable store sales
Comparable store sales increased in 2006 by 2.4%, or $13.7 million, with an
increase reported in each fiscal quarter. Comparable store sales increases
during the first, second, third and fourth quarters of 2006 were 4.8%, 2.3%,
2.4% and 0.2%, respectively. Increased sales to Port Supply customers through
our store locations represented an $18.3 million increase in 2006 comparable
store sales. We believe that comparable store sales increased partly due to
milder weather compared to last year.
Gross profit
Gross profit increased $3.9 million, or 1.9%, in 2006, compared to 2005,
primarily due to higher sales. Gross profit as a percentage of net sales
decreased to 28.8% in 2006 from 29.2% in 2005, primarily due to an
$8.6 million, or 120 basis point, change in the level of indirect costs and
vendor allowances that were capitalized in inventory value in 2005, which
decreased gross profit in 2006 as the related products were sold, partially
offset by a $6.4 million, or 90 basis point, improvement in raw product margin
and inventory shrinkage.
Selling, general and administrative (SG&A) expense
Our future profitability is largely dependent on our ability to increase sales
and gross profit while containing SG&A expense. In 2006, SG&A expense decreased
by $4.4 million, or 2.2%, compared to last year. SG&A expense decreased to
27.3% of net sales in 2006, compared to 28.9% of net sales in 2005, an
improvement of 160 basis points over last year. The decrease in SG&A expense
compared to last year was primarily due to $10.6 million, or 150 basis points,
included in 2005 SG&A expense for cancelled software development projects and
discontinuing our use of the BoatU.S. tradename. SG&A expense in 2006 was also
lower by an additional $2.6 million, or 40 basis points, compared to 2005 as a
result of our cost cutting initiatives implemented during 2006. These expense
savings were partially offset by $8.5 million, or 120 basis points, for
spending on investments in initiatives intended to improve profitability over
the long term, including upgrading our Internet platform, expanding our Port
Supply marketing teams, training our store selling associates and localizing or
specializing certain store merchandise assortments.
Loss from operations
Loss from operations in 2006 was $3.9 million, representing a $6.2 million
change when compared to income from operations of $2.3 million in
2005. This loss was primarily due to an $8.6 million change in the level of
indirect costs and vendor allowances that were capitalized in inventory value in
2005, which decreased gross profit in 2006 as the related products were sold,
partially offset by reduced SG&A expense in 2006.
Interest expense
Interest expense increased $0.1 million, or 2.0%, in 2006, compared to 2005,
primarily due to $1.5 million from higher average interest rates partially
offset by $1.3 million from lower average borrowings.
Income taxes
Our effective tax rate for 2006 was a benefit of 31.1%, compared to
a benefit of 51.8% in 2005. The lower benefit in 2006 was primarily due to a
$1.0 million increase in valuation allowances related to state tax loss carry
forwards imposed in 2006, which effectively eliminated the 2006 statutory state
tax benefit and instead resulted in net state income tax expense of $0.2
million, after applying enterprise zone benefits of $0.3 million. The following
table summarizes the components of income taxes as reported in our statement of
operations for 2006 and 2005 (dollars in thousands):
2006 2005
----------------------------- -------------------------------
Loss before income tax $(10,297) 100.0% $(4,796) 100.0%
-------------- -------------- --- --------------- ---------------
-------------- -------------- --- --------------- ---------------
Federal income tax benefit at statutory rate of 35% $ (3,604) -35.0% $(1,679) -35.0%
State income tax benefit at statutory rate of 4% $ (412) - 4.0 (192) -4.0%
Provision (benefit) for foreign income taxes 187 1.8% (174) -3.6%
Non-deductible Associate Stock Purchase Plan compensation 135 1.3% -
Valuation allowance assigned to state net operating loss 988 9.6% -
carryfforwards
Enterprise zone benefits (306) - 3.0% (451) -9.4%
Non-deductible permanent items & other (186) - 1.8% 14 0.3%
-------------- -------------- --------------- ---------------
Income tax benefit $(3,198) - 31.1% $(2,482) -51.8%
-------------- -------------- --------------- ---------------
EXHIBIT B
STORE CLOSURES AND OTHER RESTRUCTURING COSTS
In 2006, West Marine closed 35 stores, including 33 lower-performing stores that
management had identified as having no reasonable expectation of significant
positive cash flow over the near term. Additionally, the Company consolidated
most call center operations in its Largo, Florida facility. In conjunction with
these actions, the Company recognized charges of $14.5 million in 2006,
comprised of $6.3 million for estimated lease contract termination obligations,
a $3.5 million impairment charge to reduce the carrying value of long-lived
assets- primarily leasehold improvements, fixtures and equipment at
lower-performing stores slated for closure , $1.7 million for termination
severance benefits, $1.1 million for disposal of unsaleable merchandise, $1.5
million for other store closure costs, such as site cleanup and repairs and
related transportation costs, and $0.4 million for relocating call center
operations. Accrued liabilities related to store closure costs outstanding at
year-end 2006 were $3.0 million. In 2005 and 2004, West Marine closed 11 stores
and four stores, respectively, generally as the underlying lease contracts
expired. Store closure costs in 2005 and 2004 were not significant and no
related liabilities were outstanding at year-end 2005 and 2004.
Costs and obligations recorded by the Company in 2006 in conjunction with the
store closures and call center relocation, excluding a $3.5 million impairment
charge for store long-lived assets, are as follows:
Termination Store Lease
Benefits and Termination
Other Costs Costs Total
------------------- ------------------ ------------------
Beginning balance, January 1, 2006 $ --- $ --- $ ---
Charges (1) 4.7 6.3 11.0
Payments and settlements (4.2) (3.8) ( 8.0)
------------------- ------------------ ------------------
Ending balance, December 30, 2006 (2) $ 0.5 $ 2.5 $ 3.0
------------------- ------------------ ------------------
(1) Included in "Store closure and other restructuring costs" in the Company's 2006 consolidated statement of
operations.
(2) Estimated future cash outlays, included in "Accrued liabilities" in the Company's 2006 consolidated balance
sheet.
ASSET IMPAIRMENT CHARGES
In the second quarter of 2006, as part of a major new initiative to identify
under-performing locations for possible closure, management performed a
comprehensive study of individual store profitability - including consideration
of seasonality, cannibalization of nearby store sales, lease terms and possible
strategies for improving future results. Based on the resulting assessment of
expected future cash flows and management's decision to close up to 40 store
locations, the Company recorded a $3.5 million impairment charge for store
long-lived assets. The impairment charge reduced the carrying value of leasehold
improvements, fixtures and equipment at lower-performing stores slated for
closure and expected to then be abandoned to the fair value indicated by their
service potential during the remaining period of store operation. The store
asset impairment charge is included in "Store closure and other restructuring
costs" in the Company's 2006 consolidated statement of operations. Because
assets are commingled and not available by operating segment, impaired assets
are not presented in our segment information, consistent with the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
At year-end 2005, management evaluated the carrying values of computer software
assets in light of significant cost overruns, programming difficulties and
uncertainties about the future use of certain programs being developed
internally. Management determined that five major development projects,
including applications for marketing, merchandising and replenishment purposes,
were no longer expected to be completed. Accordingly, the Company recognized an
$8.6 million impairment charge in the fourth quarter of 2005, primarily for
capitalized labor costs and consulting fees for development activities,
including programming costs, of software projects that were not expected to be
completed and therefore had no value. Also in the fourth quarter of 2005, we
incurred a $2.0 million pre-tax impairment charge upon discontinuing our use of
the BoatU.S. tradename, which therefore was reduced to zero value. The asset
impairment charges are included in "Selling, general and administrative expense"
in the Company's 2005 consolidated statement of operations.