10-K 1 wmar201310-k.htm 10-K WMAR 2013 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
(I.R.S. 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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.    Yes  o    No  Q
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act).    Yes  o    No  Q
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  Q    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  Q    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
  
Accelerated filer  x
Non-accelerated filer  o (Do not check if a smaller reporting company)
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  Q
As of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $267.9 million based on the closing sale price of $11.00, as reported on the NASDAQ Global Market on such date.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at March 3, 2014
Common stock, $.001 par value per share
  
24,364,509 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
  
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2014
  
Part II, Item 5 and Part III



WEST MARINE, INC.
2013 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
PART III
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
PART IV
 
 
 
 
Item 15.
 


 



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PRELIMINARY NOTE
This report is for the year ended December 28, 2013. This report modifies and supersedes documents filed prior to this report. The Securities and Exchange Commission (the “SEC”) allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this report. In addition, information that we file with the SEC in the future automatically will update and supersede information contained in this report.
We undertake no obligation (other than that required by law) to publicly update or revise any disclosures contained in this report, whether as a result of new information, future events or otherwise. Website references throughout this report are for information only, and the content of these websites is not incorporated by reference and should not otherwise be considered a part of this report.
All references to 2013, 2012 and 2011 in this report refer to our fiscal years ended on December 28, 2013, December 29, 2012 and December 31, 2011, respectively. Fiscal years 2013, 2012 and 2011 were fifty-two week years.


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PART I
ITEM 1—BUSINESS
General
West Marine was founded in 1968 by a sailor and has grown to become the largest omni-channel specialty retailer exclusively offering boating supplies, gear, apparel, footwear and other waterlife-related products to anyone who enjoys recreational time on or around the water. With 287 stores located in 38 states, Puerto Rico and Canada as of the end of 2013 and an eCommerce website reaching domestic and international customers, West Marine is recognized as the dominant waterlife outfitter for cruisers, sailors, anglers and paddle sports enthusiasts. We strive to provide exceptional customer experiences and offer the convenience of omni-channel shopping.
West Marine, Inc. was incorporated in Delaware in September 1993 as the holding company for West Marine Products, Inc., which was incorporated in California in 1976. Unless the context otherwise requires, “West Marine,” “we,” “us,” and “our” refer to West Marine, Inc. and its subsidiaries. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700. Our two distribution centers are located in Rock Hill, South Carolina and Hollister, California.
Business Strategy
We are a leading specialty retailer serving people who enjoy recreating on or around the water. We offer a broad selection of core boating and water recreation products, primarily serving the needs of boat owners. We do this through physical stores and an eCommerce web site, making us a leading omni-channel specialty retailer in our sector. Our strategies are designed to reposition West Marine into a broader waterlife outfitter, while maintaining our position as the leading boat parts specialty retailer. In support of our omni-channel business strategy, we will continue our current focus on growing revenues from core boating products and accelerating our investment in our three growth strategies, with a goal of executing our "15/50 plan."
eCommerce - The first number in the 15/50 plan refers to our objective to grow our eCommerce business to 15% of total sales.
Over the past couple of years, we have been investing in our retail eCommerce website. Our investments have resulted in a 25% increase in domestic eCommerce revenues this year. We are pleased with this increase, and we have been working behind the scenes on a new website platform for westmarine.com that launched during the first quarter of 2014. This upgraded platform gives us the capability to offer additional information about the products and to offer a wider breadth of product offerings, including our merchandise expansion categories. We believe these enhancements will continue to drive growth and strengthen our omni-channel position. Also, in an effort to accelerate our eCommerce business, we have invested in people and systems to expedite the launch of a new portsupply.com website in 2014. This website serves the professional (or wholesale) customer, and similar to other business-to-business websites, we believe portsupply.com should help this channel grow more rapidly, but with smaller overall potential than our retail consumer site.
Store Optimization - The second number in the 15/50 plan reflects our goal that sales derived from consolidated or revitalized stores will grow to 50% of total sales. For the past five years, our store optimization program has consisted of store consolidations, by which we have been evolving to having fewer, larger stores that offer a better shopping experience in our major markets. These stores drive sales and profitability by allowing us to offer an improved shopping experience with greatly expanded product assortments in better store locations. The larger scale of these locations, typically greater than 13,000 square feet, also allows us to staff the stores with sales associates having more specialized product knowledge. In 2014, we will continue to consolidate markets and we will be expanding this strategy to include revitalizing our existing stores that range between 8,000 square feet and 13,000 square feet. A store revitalization consists of some light remodeling, space optimization, product assortment changes, new product category introduction, and associate training. These changes allow us to offer merchandise expansion products, appeal to a broader base of customers, and provide the space and flexibility to appropriately transition products as the seasons change. In connection with the store consolidation component of our store optimization strategy during 2013, we opened 11 stores and expanded the selling square footage of one store while closing other stores in those same markets. We ended the year with an aggregate of 2.69 million total square feet of space for all stores, up slightly from 2.67 million square feet at the end of fiscal 2012. We also tested revitalization in seven stores during 2013 and expect to revitalize 20 more locations during 2014, increasing the pace as we gain experience with this aspect of our strategy.
Merchandise Expansion - Our eCommerce and store optimization strategies are supported by our growth objectives in our merchandise expansion product categories. This strategy welcomes a broader base of customers who are passionate about recreating on and around the water by providing these customers with a broader selection of footwear, apparel, clothing accessories, fishing products, waterlife accessories, and paddlesports equipment. We are currently offering this expanded assortment in our larger-format stores and on our eCommerce website. During 2013, sales of this group of products increased by 6.1% and comprised approximately 16.5% of our revenues, compared to approximately 15.3% last year. In an effort to accelerate our merchandise expansion strategy, we are further increasing the balance of products in categories such as footwear,

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clothing, and paddlesports in key locations. Additionally, we are testing new product categories to find merchandise with which we can continue to better serve our customers and further position West Marine as the foremost authority for all waterlife needs and wants.
Merchandising
Our merchandise mix over the last three years is reflected in the table below:
 
2013
 
2012
 
2011
Core boating products (1)
83.5
%
 
84.7
%
 
86.1
%
Merchandise expansion products (2)
16.5
%
 
15.3
%
 
13.9
%
Total
100.0
%
 
100.0
%
 
100.0
%
(1) 
Core boating products are comprised of maintenance, electronics, sailboat hardware, anchors/docking/moorings, engine systems, safety, electrical, plumbing, boats/outboards, ventilation, deck hardware/fasteners, navigation, trailering, seating/boat covers and barbecues/appliances.
(2) 
Merchandise expansion products are comprised of apparel, footwear, clothing accessories, fishing, watersports, paddlesports, coolers, bikes and cabin/galley.
West Marine is committed to offering a broad assortment of merchandise that provides our customers what they want, when they want it. As we grow revenues through our merchandise expansion strategy, we expect that core boating products will continue to grow, but at a slower pace than merchandise expansion products. Our merchandising department is responsible for vendor and product selections and works closely with our planning and replenishment department, which is responsible for purchasing and managing inventory levels in our distribution centers and our stores. We also offer our customers the ability to special order products that we do not stock in our stores or at our distribution centers.
We purchased merchandise from more than 800 vendors during 2013 and realized savings through quantity purchases and direct shipments. In 2013, no single vendor accounted for more than 9% of our merchandise purchases, and our 20 largest vendors accounted for approximately 42% of our merchandise purchases. Generally, we purchase merchandise from our vendors on an order-by-order basis.
We continued to offer private label merchandise in 2013, which typically have higher gross margins than comparable branded products. Private label products, which we sell under the “West Marine,” “Black Tip,” “Third Reef,” “Pure Oceans,” "Lifesling," and “Seafit” brand names, usually are manufactured in Asia, the United States and Europe. We have a limited number of long-term contracts with our manufacturing sources, and we compete with other companies for production facilities and import quota capacity.
Omni-channel Shopping Experience
Our strategy is to offer a seamless omni-channel shopping experience to retail and professional customers through our stores, eCommerce websites, and our catalog and call center operations. Although we sell through all of these channels, our primary sales channel remains our stores.
Stores
The following table shows the number of stores opened and closed in each of our last three fiscal years:
 
Fiscal 2013
 
Fiscal 2012
 
Fiscal 2011
 
Flagship
 
Large-Format
 
Standard
 
Total
 
Flagship
 
Large-Format
 
Standard
 
Total
 
Flagship
 
Large-Format
 
Standard
 
Total
Beginning stores
13

 
29

 
258

 
300

 
9

 
23

 
287

 
319

 
5

 
25

 
297

 
327

New stores
3

 
8

 

 
11

 
3

 
6

 
1

 
10

 
4

 
1

 
1

 
6

Closed stores

 

 
(24
)
 
(24
)
 

 

 
(29
)
 
(29
)
 
(1
)
 
(2
)
 
(11
)
 
(14
)
Expansion

 
1

 
(1
)
 

 
1

 

 
(1
)
 

 
1

 
(1
)
 

 

Ending stores
16

 
38

 
233

 
287

 
13

 
29

 
258

 
300

 
9

 
23

 
287

 
319

(1)
Flagship stores range in size from more than 20,000 sq. ft. to 50,000 sq. ft.
(2)
Large-format stores range in size from 13,000 sq. ft. up to 19,000 sq. ft.

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(3) 
Standard stores range in size from 6,000 sq. ft. to approximately 12,000 sq. ft. Included in the standard stores in the table above are 12 Express stores that range from 2,500 to 3,000 sq. ft. and carry mainly hardware and other supplies needed for day-to-day boat maintenance and repairs.
At the end of 2013, we had 287 stores, compared to 300 company-operated stores and five franchised stores in Turkey at the end of 2012. While store count declined by 4.3% year-over-year, selling square footage increased by 0.8%.
Our flagship and large-format stores offer an expansive array of merchandise, an enhanced customer experience, a more appealing selling environment, and displays designed to help customers make informed product selections. These stores not only offer an extensive assortment of core boating hardware and supplies, but also present a broader selection of waterlife products, such as paddlesports, clothing, footwear and accessories. Because these stores are larger, they provide more flexibility to accommodate seasonal product changes and the ability to welcome a broader group of customers who enjoy recreating on or around the water.
Our standard-sized stores focus on carrying core boating products and support our omni-channel strategy by providing our customers with access to merchandise expansion and waterlife products through other shopping channels.
In 2014, we expect to open three to four flagship stores and approximately seven large-format stores. These store openings will replace approximately 13 existing stores.
Our extensive store network gives us an advantage in serving all of our customers, including professional customers seeking convenience and a larger assortment of products than those carried by typical distributors. We believe that with continued professional customer focus, expanded distribution capabilities, with an emphasis on treating our larger stores in certain markets as hubs or regional distribution centers, and broad product selection and availability, we will continue to be recognized as the preferred wholesale distributor in the industry. Our professional customers include businesses involved in boat sales, boat building, boat commissioning and repair, yacht chartering, marina operations and other boating-related activities. In addition, we sell to government and industrial customers who use our products for boating and non-boating purposes. 
Direct-to-consumer
Our eCommerce websites at westmarine.com and portsupply.com, direct mail catalogs, and call center comprise the direct-to-consumer sales channel. This channel complements our stores by building brand awareness, acting as an additional marketing vehicle, and providing our customers with the option of shopping from around the globe, 24 hours a day. We offer a return-to-store option for direct-to-consumer orders and an in-store delivery service for on-line orders, which our customers are increasingly embracing.
Our retail eCommerce website provides our customers with access to a broad selection of approximately 85,000 products, unique product advisor tips and technical information, over 16,000 product videos and customer-submitted product reviews. We also believe our website is a cost-effective means of testing market acceptance of new products and concepts.
The retail eCommerce website, direct mail catalogs, and call center also provide customers with access to knowledgeable technical advisors who assist our customers in understanding the various uses and applications of the products we sell. We operate a call center from which our associates take customer calls from their homes or from our support center in Watsonville, California. Our call center supports sales generated through our eCommerce website, catalogs and stores, and provides enhanced customer service.
Through our loyalty program, West Advantage, we have built an extensive and proprietary customer list which allows us to provide compelling and relevant offers to our customers. In addition, we acquire potential customer names from a variety of sources. Our customer list is continually updated to include customer address changes and new customer prospects, and to eliminate non-responders and requests from customers to opt out of our marketing programs.
Customer Service
Since our founding, offering exceptional customer service has been the cornerstone at West Marine. Our focus on delivering an outstanding customer experience is accomplished through advanced product and technical training for our associates and then empowering them to resolve transactions or customer issues on their own. Through listening to our customers, we continually refine our business processes to meet their needs.
Marketing
Our customers generally have a passion for water recreation. Our marketing objective is to deliver intelligent, consistent, actionable, relevant content and customer experiences across all touch points. Our approach includes a seamless omni-channel customer experience, personalization and retention strategies through a fully-integrated marketing program that includes direct

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mail, email, traditional and digital advertising, such as paid search and digital display ads, digital radio, social media and mobile technology. We position the West Marine brand to stand for extensive product selection and value, friendly and knowledgeable service and shopping convenience, whether on-line or in a store. The goal of this work is to expand our customer base and drive business growth, sales and profit.
Our loyalty program, West Advantage, includes both free and paid memberships that allow our customers to earn points on qualifying purchases for future discounts, exclusive offers and invitations to unique shopping events designed to reward our customers for their support and loyalty.
We are committed to conserving marine resources, reducing our impact on the environment and promoting boating participation. West Marine is dedicated to being a leader in sustainability within our industry, through our “Blue Future®" initiative. We support BlueFuture in our daily operations by reducing our carbon footprint year after year by offering our customers environmentally preferable products and by focusing our community and charitable efforts on youth boating, preserving the marine environment and maintaining healthy fish stocks. These important initiatives are designed to encourage participation in boating and related water activities, promote environmental responsibility and improve West Marine’s brand perception and recognition.
Logistics and Distribution
We operate two full-service, multi-channel distribution centers: a 472,000 square foot facility in Rock Hill, South Carolina and a 240,000 square foot facility in Hollister, California. Generally, vendors ship products to our distribution centers where merchandise is received and prepared for shipment to stores or shipped directly to customers. We also fulfill orders for our professional customers with the goal of same day or next day van delivery through our larger stores in certain markets, which locations serve as hubs or regional distribution centers. Some vendors ship products directly to our stores. We use various third-party domestic and international transportation methods, such as ocean, air and ground, including Company-owned vehicles. Our distribution centers utilize advanced material handling equipment and voice-picking technologies, as well as radio frequency systems, to enable real-time management of inventory.
Competition
The market for marine supplies is highly competitive. Our stores compete with other specialty boating supply stores, and a variety of local and regional specialty stores, sporting goods stores and mass merchants. Many of these competitors have stores in markets where we now operate. Also, we have a number of competitors engaged in the catalog, Internet and wholesale distribution of marine products. The principal factors of competition in our marketplace are selection, quality, availability, price, customer service, convenience and access to a wide variety of merchandise.
Trademarks and Service Marks
We own the trademarks and service marks “West Marine®” and “Port Supply®,” among others. These marks and a number of others are registered with the U.S. Patent and Trademark Office and in certain foreign countries. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal.
Associates
As of February 28, 2014, we had 3,783 associates, of whom 1,813 were full-time and 1,970 were part-time or temporary. A significant number of temporary associates are hired during the summer peak selling season. For example, West Marine employed 4,721 associates on June 29, 2013.
International Sales
We promote and sell our marine products internationally primarily through our wholesale and direct-to-consumer sales channels. We also operate ten stores in Canada. In addition, in 2013, we had five franchised stores in Turkey; however, our franchise agreement terminated as of January 14, 2014, and these stores are transitioning to professional customers and will operate pursuant to a trademark license agreement. For each of 2013, 2012 and 2011, revenues from outside of the United States represented less than 5% of our total net revenues.
Available Information
West Marine’s Internet address is westmarine.com. We make available, free of charge through the “Investor Relations” portion of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Forms 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, including the exhibits thereto, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. Interested persons may also access copies of these reports through the SEC’s website, sec.gov. We will furnish to our stockholders any exhibit to this annual report upon the written request of such stockholder and the payment of a specified fee, which is limited to our reasonable expenses.

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We have adopted a code of ethics that we call "Living our Values - West Marine Code of Ethics" for our associates, contractors, officers, and Board of Directors, which includes a ethical standards for our senior financial officers (including our principal executive officer, principal financial officer and principal accounting officer). A copy of this code of ethics is available on our website at westmarine.com, or a printed copy can be obtained by writing to the Secretary, West Marine, Inc., 500 Westridge Drive, Watsonville, California 95076. Any amendments to this code of ethics, as well as any waivers that are required to be disclosed under the rules of the SEC or the NASDAQ Stock Market, will be posted on our website at westmarine.com.
ITEM 1A—RISK FACTORS
Our business faces many risks. The risks described below may not be the only risks we face. Additional risks of which we are not yet aware, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline.
If we are not able to respond to trends emerging in the boating industry and attract a more diverse customer base, our revenues and operating results could materially suffer.
We have identified mega-trends impacting the boating industry including:
Recent sales growth in mid-to-larger size boats used by our core customers is well below pre-recession levels.
The average age of our core customer base ranges from 50 to 54 years old for power boaters and from 60 to 64 years old for sailors.
We believe there is increasing competition for our customers' time, and we do not expect a meaningful change in this longer-term trend.
If we are not able to implement our growth strategies which we believe will enable us to attract a more diverse customer base our revenues and operating results could materially suffer.
We are significantly increasing our investments in a number of strategies designed to build our long-term strength. If one or more of these strategies is unsuccessful, our profitability could be adversely affected.
Over the past few years, we have launched a number of strategies designed to increase sales and lower costs. These strategies include:
investing in our eCommerce website;
expanding our merchandise assortment;
investing in store optimization in our major markets;
revitalizing existing stores with space optimization and new product category introductions in other markets;
expanding our wholesale business; and,
improving the retail experience for our retail and professional customers.
To support these growth strategies, we are significantly increasing our investments in store development, information technology infrastructure, adding key positions to our eCommerce and information technology departments, and making investments in marketing to attract a more diverse customer base. Each of these initiatives carries a certain level of risk, primarily related to increased expenses or reduced revenues, which, when combined, could be material. If we fail to successfully execute one or more of these strategies, our profitability could be adversely affected.
Our business is highly seasonal and weather dependent and our results of operations could be adversely affected if unseasonably cold weather, prolonged winter conditions, sustained high winds, natural disasters, such as hurricanes or extraordinary amounts of rainfall, or man-made disasters occur, particularly during the peak boating season in our second and third fiscal quarters.
The majority of our revenues and profits occur between the months of April and September, which represent the peak boating months in most of our markets. Our results would be materially and adversely affected if our net revenues were to fall below expected seasonal levels during this period. Our store optimization and merchandise expansion strategies include a focus on providing the space and flexibility to appropriately transition products as the seasons change. If we are not able to successfully implement these strategies, we will continue to experience net losses in the first and fourth quarters of each fiscal year.
Our business is also significantly affected by weather patterns. Unseasonably cool weather, prolonged winter conditions, sustained high winds, extraordinary amounts of rainfall or natural or man-made disasters may decrease boating use in the peak season, resulting in lower maintenance needs and boat usage and, therefore, decreased revenues.

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Economic conditions in the U.S. and key international markets or other conditions leading to a decline in consumer discretionary spending may materially adversely impact our operating results.
We sell products and services that consumers tend to view as discretionary items rather than necessities. As a result, our results of operations tend to be more sensitive to changes in macroeconomic conditions that impact consumer spending, including discretionary spending. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, consumers' ability to obtain credit, as well as fuel and energy costs could reduce consumer spending or change consumer purchasing habits. In the recent past, many of these factors adversely affected consumer spending and, consequently, our business and results of operations. A slowdown in the U.S. or global economy, continued economic and financial instability in Europe or an uncertain economic outlook could materially adversely affect consumer spending habits and our operating results in the future.
The domestic and international political climate also affects consumer confidence. The threat or outbreak of domestic or international terrorism, civil unrest or other hostilities could lead to a decrease in consumer spending. Similarly, an overly anti-business climate or sentiment could potentially lead consumers to decrease or shift their spending habits. Any of these events and factors could cause a decrease in revenue or an increase in inventory markdowns or certain operating expenses, which could materially adversely affect our results of operations.
An inability to find suitable new and expanded store sites or delays in new store openings could materially affect our store optimization strategy and, consequently, our financial performance.
In order to meet our growth objectives, we will need to secure an adequate number of suitable new or expanded store sites, typically near marinas or other locations readily accessible by boaters. We require that all proposed store sites satisfy our criteria regarding cost and location. In addition, we may experience increased competition for store sites and, at some point, exhaust available coastal locations for new stores. We cannot assure that we will be able to find a sufficient number of suitable new sites for any planned expansion in any future period.
Our expected financial performance is based on our new, remodeled, or expanded stores opening on expected dates and on budget. It is possible that events such as construction delays caused by permitting or licensing issues, material shortages, labor issues, weather delays or other acts of God, discovery of contaminants or accidents could delay planned new store openings beyond their expected dates, give rise to cost overruns, or force us to abandon planned openings altogether. Any failure on our part to recognize or respond to these issues may adversely affect our revenue growth, which, in turn, may adversely affect our operating results.
We experience fluctuations in our comparable store sales.
Our comparable store sales have fluctuated significantly in the past on an annual and quarterly basis, and we expect that they will continue to fluctuate in the future. A variety of factors affect comparable store sales including boat usage, boating participation, current economic conditions, competition, the timing and release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions. These factors and others may cause our comparable store sales, customer traffic, and average order values to differ materially from prior periods and from expectations. Failure to meet the expectations of investors in one or more future periods could reduce the market price of our common stock.
Our eCommerce operations subject us to numerous risks that could have an adverse effect on our operating results.
We are pursuing a heightened focus on technology to enhance our website and eCommerce business by broadening the selection of our on-line merchandise offering, improving product search performance, and increasing the overall speed of our website. Although revenues generated by eCommerce constitute a small, but increasing portion of our overall revenues, our eCommerce operations subject us to certain risks that could have an adverse effect on our operating results, including: diversion of traffic and sales from our stores; liability for on-line content; and risks related to the computer systems that operate our website and related support systems, such as computer viruses, electronic break-ins and similar disruptions. Changing regulations and laws governing the Internet and eCommerce transactions (including taxation, user privacy, data protection, pricing and electronic communications) could impede the growth of our eCommerce business and increase our cost of doing business.  In addition, other risks beyond our control, such as entry of our vendors in the eCommerce business in competition with us and on-line security breaches could have an adverse effect on our results of operations.
If we are not able to anticipate and respond to changing consumer preferences in a timely manner, our merchandise expansion strategy and our operating results could materially suffer.
Our merchandise expansion strategy focuses on growing sales in the categories that are not tied to boat ownership, such as apparel, footwear, clothing accessories, fishing, cabin/galley and paddlesports equipment. These categories differ from our core merchandise categories, which are more directly related to owning and caring for a boat, the supply and demand of which typically is based on the frequency and duration of boat usage. This merchandise expansion strategy depends, in large part, on our ability to successfully attract a more diverse waterlife consumer and to introduce new products to all of our customers, as well as the level of consumer acceptance. Consumers continue to have a wide variety of choices in terms of how and where they purchase

6


these products. Failure to accurately predict and adapt to constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions, or to effectively address consumer concerns, could have a material adverse effect on our revenue, results of operations and reputation with our customers.
Intense competition in the boating supplies, apparel, and outdoor recreation markets could reduce our revenue and profitability.
The retail market for recreational boating supplies and apparel is highly competitive. Our stores compete with other specialty marine supply stores, sporting goods stores and mass merchants. Our eCommerce and call center operations compete with other eCommerce and catalog retailers. We also have a number of competitors in the wholesale distribution of marine products. In addition, a key competitive factor in the marine supplies market is price. Increased online shopping and the availability and use of smart-phones or other mobile devices allow customers to compare prices more quickly than in the past. Online retail shopping is rapidly evolving, and we expect competition in the eCommerce market to intensify in the future as the Internet facilitates competitive entry and comparison shopping. Competitive pricing pressures have adversely affected our gross margins, and such pressures are expected to continue. In addition, if our competitors increase their spending on advertising and promotions relative to our spending, or if our advertising and promotions become less effective than those of our competitors, we could experience a material adverse effect on our results of operations. If we are unable to remain competitive in the key areas of customer service, the shopping experience across all channels, quality of products, depth of selection or store environment and location, we may lose market share to our competitors and our sales and profitability could suffer.
If any of our manufacturers, key vendors or third-party service providers fail to supply us with merchandise or services, we may not be able to meet the demands of our customers or our business needs and our sales could decline.
We depend on merchandise purchased from our vendors, services provided by third parties, and merchandise sourced from third-party manufacturers to obtain products and services for our sales channels. Generally, we deal with our merchandise suppliers on an order-by-order basis and have limited long-term purchase contracts or other contractual assurances of continued supply or pricing. Accordingly, our vendors and manufacturers could discontinue selling products to us at any time. The loss of any key vendor or manufacturer for any reason could limit our ability to offer products that our customers want to purchase. In addition, we believe many of our vendors obtain their products from China, Taiwan, Korea, Mexico and other countries, and we source products from third-party manufacturers in these countries. A vendor could discontinue selling products manufactured in foreign countries to us at any time for reasons that may or may not be within our or the vendor’s control, including foreign government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions, quotas, quality control, increased costs for raw materials, and trade issues. Also, there is a risk that certain of our vendors or third party service providers may experience financial difficulty resulting in inability to provide service or manufacture or deliver products or services to us in a timely manner. Additionally, changes in commercial practices of our key vendors or manufacturers, such as changes in vendor support and incentives, changes in credit or payment terms or inability or failure of our service providers to provide required services, could negatively impact our operating results. Our operating results also could suffer if we are unable to promptly replace a vendor, manufacturer or service provider who is unwilling or unable to satisfy our requirements with a vendor, manufacturer or service provider providing equally appealing products or services.
Our results of operations could materially deteriorate if we fail to attract, develop and retain qualified associates, or if we lose key management.
Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified associates, including general managers, assistant managers, eCommerce associates and store associates, who understand retail, appreciate boating, the boating lifestyle, and the varied product lines we carry, and are able to communicate knowledgeably with our customers. Qualified individuals of the requisite caliber and in the numbers needed to fill these positions may be in short supply in some areas. Historically, turnover rates in the retail industry are high in comparison to other industries. In particular, the relatively rural location of our support center in Watsonville, California, has on occasion limited our ability to attract and recruit candidates with required background and experience in the retail, information technology and eCommerce fields.
Additionally, competition for qualified associates could require us to pay higher wages to attract a sufficient number of associates. An inability to recruit and retain a sufficient number of qualified individuals in the future may delay the planned openings of new stores. Any such delays, any material increases in associate turnover rates at existing stores or any increases in labor costs could have a material adverse effect on our business, financial condition or operating results.
Also, if we are unable to hire and retain associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our merchandise, our business could be materially adversely affected. Although none of our associates currently are covered by collective bargaining agreements, we cannot guarantee that our associates will not elect to be represented by labor unions in the future, which could increase our labor costs.
Our performance also depends largely on the efforts and ability of our senior management. We do not maintain any key-man life insurance for our senior management, including Matthew Hyde, our President and Chief Executive Officer. If we do not

7


effectively implement our strategic and business planning processes to attract, retain, train and develop future leaders, our business may suffer. We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace. If unexpected leadership turnover occurs, the loss of the services of these individuals could negatively impact our ability to be able to successfully manage our business or achieve our growth objectives.
We must successfully order and manage our inventory to reflect customer demand in a volatile market and anticipate changing consumer preferences and buying trends or our revenues and profitability will be adversely affected.
Our success depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner. The retail consumer industry, by its nature, is volatile and sensitive to numerous factors, including consumer preferences, competition, market conditions and general economic conditions. None of these factors are within our control. We cannot predict consumer preferences with certainty, and consumer preferences often change over time. We usually must order merchandise well in advance of the selling season. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends, increases in customer demand or changes in prices. If we misjudge either the market for our merchandise or our customers’ purchasing habits, our revenues may decline significantly and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins.
A natural disaster or other disruption at our support center or either of our distribution centers could cause us to lose merchandise or inhibit our ability to process orders and, therefore, make us unable to effectively deliver to our customers and retail stores.
We rely on the continuous operation of our support center in Watsonville, California, and our distribution centers in Hollister, California, and Rock Hill, South Carolina. Any natural disaster or other serious disruption to these operations due to fire, flood, earthquake, hurricane, terrorism or any other unforeseen circumstance could materially impair our ability to do business and adversely affect our financial position and future operating results.
Any failure to maintain the security of the information relating to our business, customers, employees and vendors, whether as a result of cybersecurity attacks or otherwise, could damage our reputation with customers, employees and vendors, could cause us to incur substantial additional costs, including fines and penalties, and to become subject to litigation, and could adversely affect our operating results.
We receive certain personal information about our customers, associates and vendors. We also rely on business partners to provide services to us that may include the sharing of important business information or data about our customers, associates and vendors. In addition, our point of sale at stores and online operations depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. While we maintain security measures to protect and to prevent unauthorized access to such information, it is possible that unauthorized parties (through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means) might compromise our security measures or those of our service providers and obtain the personal information of customers, associates and vendors that we hold or other confidential Company data. Such an occurrence could adversely affect our reputation with our customers, associates, and vendors, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of fines and penalties. Moreover, a security breach could require that we expend significant additional resources to upgrade further the security measures that we employ to guard such important personal information against cyberattacks and other attempts to access such information and could result in a disruption of our operations.
In addition, states and the federal government are increasingly enacting laws and regulations to protect consumers against identity theft.  These laws will likely increase the costs of doing business and, if we fail to comply with these laws and regulations or to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these new laws, we could be subject to potential claims for damages and other remedies, which could harm our business.
If we are unable to implement, maintain and/or upgrade our information systems and software programs or if we are unable to convert to alternate systems in an efficient and timely manner, our operations may be disrupted or become less efficient and our key growth strategies may not be successful.
We depend on information systems for many aspects of our business. We rely on certain software vendors to implement, maintain and periodically upgrade many of these systems so that we can continue to support our business. We could be materially adversely affected if our information systems are disrupted or if we are unable to implement, improve, upgrade, maintain and expand systems, particularly in light of the contemplated continued omni-channel growth strategies.
The success of our key growth strategies designed to increase our sales and improve margin is dependent in varying degrees on the timely delivery and the functionality of information technology systems to support them. Extended delays or cost overruns

8


in securing, developing and otherwise implementing technology solutions to support the strategic business initiatives would delay and possibly even prevent us from realizing the projected benefits of those initiatives.
Our founder and Chairman, Randolph K. Repass, beneficially owns approximately 27% of our common stock. and his interests may differ from that of our other stockholders.
Randolph K. Repass, our founder and the Chairman of our Board of Directors, beneficially owns approximately 27% of our common stock. As a result, Mr. Repass has substantial influence in the election of our directors and, in general, the outcome of any matter submitted to a vote of our stockholders, including mergers, consolidations or the sale of all or substantially all of our assets. Due to his significant ownership position, Mr. Repass may be able, in concert with others, to prevent or to cause a change in control of West Marine. The interests of Mr. Repass in any matter to be voted on or in any transaction with us may be different than those of other stockholders.
We face periodic reviews, audits and investigations by government agencies and independent third parties, and these audits could have adverse findings, which may negatively impact our business.
We are subject to various routine and non-routine reviews, audits and investigations by various federal and state governmental regulators, including consumer protection, environmental, tax and customs agencies. Violation of the laws and regulations governing our operations, or changes in interpretations of those laws, could result in the imposition of civil or criminal penalties, the suspension or revocation of our licenses, or the revision and recoupment of past payments made based on audit findings. In addition, certain third-party service suppliers have rights under their contracts with us to review and audit our use of their licensed products, and an unfavorable audit could result an adverse and possibly material claim for payment. Many proceedings and audits raise complex factual and legal issues and are subject to uncertainties. If we become subject to material fines or other payments due and owing, the cost of defense, or if other sanctions and/or corrective actions are imposed upon us or if we incur significant costs to refute or defend against any such fine, claim or other sanction, our results of operations may be negatively impacted.
Our business and financial results may be adversely affected by global climate change or by legal, regulatory or market responses to such change.
The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Changing weather patterns, along with the increased frequency or duration of extreme weather conditions, especially during our peak boating season, could reduce boat usage, the sale of our products or materially affect our store locations, which are primarily located in coastal areas, through storm damage, reduced traffic, or increased insurance rates. Additionally, concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers which, if adopted, may adversely affect the boating industry and the suppliers of our retail products. Laws enacted may increase production costs for many of our retail products and, therefore, the prices we pay to stock such products may increase. We may not be able to pass along these increased prices to our customers, which could adversely impact our business and financial results.
Our failure to comply with certain environmental regulations could adversely affect our business.
We sell paints, varnishes and other products that are subject to federal and state environmental laws and regulations concerning, among other things, registration, storage, distribution, transportation, handling and waste management of hazardous materials. Environmental laws and regulations continue to evolve and we may become subject to increasingly stringent environmental standards in the future. Our failure to comply with these regulations could result in injunctions and/or fines and penalties and could have an adverse impact on our business. In addition, we have indemnified certain of our landlords for any hazardous waste which may be found on or about our leased properties. If any such hazardous waste were to be found on property that we occupy, a significant claim giving rise to an indemnity obligation could adversely impact our operating results.
Because we self-insure against certain risks and maintain high deductibles on certain of our insurance policies, our operating results may be adversely affected if we suffer a substantial casualty.
We believe that insurance coverage is prudent for risk management, and we expect that our insurance costs will continue to increase. For certain types or levels of risk, including medical care, we have decided to limit our purchase of relevant insurance, choosing instead to self-insure. With medical insurance, we have individual and aggregate stop loss insurance to protect us from large claims. In other cases, we have elected to retain a higher portion of the risk in the form of higher deductibles. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could have a material adverse effect on our business and operating results.
In 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act were signed into law. These laws changed the way health care is financed and extend medical benefits and coverage. Any taxes, fees, or health care changes required by these acts are expected to, directly or indirectly, in increased health care costs. It remains

9


difficult to predict the cost impact of health care reform and at this time, we cannot quantify the impact, if any, that the legislation may have on us due to the changing regulatory environment around this legislation and due to the government’s requirement to issue future unknown regulatory rules. There is no assurance that we will be able to absorb and/or pass through the costs of such legislation in a manner that will not adversely impact our results of operations.
In addition, we insure our workers’ compensation losses through a high deductible program. This high per-claim deductible permits us to maintain low premium rates but may result in unexpectedly high costs if actual losses greatly exceed the expected losses in a year, with a corresponding negative effect on our operating results.
We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
Our consolidated financial statements as of December 28, 2013 fairly present, in all material respects, the financial position, results of operations and cash flow of our company in conformity with generally accepted accounting principles ("GAAP"). However, we have identified a material weakness in internal control over financial reporting related to the application of GAAP for certain cash consideration received from vendors for our “Key Season Program.” . For more information, please refer to Item 8, "Management's Report on Internal Control Over Financial Reporting," of this annual report on Form 10-K. If we are unable to successfully remediate this material weakness or if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.
Failure to comply with the SEC’s permanent injunction entered on consent against us could subject us to further SEC enforcement actions, which could adversely affect our business.
As previously disclosed, we reached a consensual resolution of the SEC’s civil complaint resulting in a permanent injunction (the “SEC Injunction”) entered on August 31, 2009 in the U.S. District Court for the Northern District of California, San Jose Division. In agreeing to the entry of the SEC Injunction, we neither admitted nor denied the allegations in the SEC’s complaint. The SEC Injunction, by its terms, permanently restrains and enjoins us from, among other things, (1) filing with the SEC any report under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and rules and regulations adopted under the Exchange Act, that contains any untrue statement of a material fact, which omits to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or that omits any information required to be disclosed, (2) failing to make and keep accurate books, records or accounts which, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets, and/or (3) failing to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. Our failure to comply with any of the provisions of the SEC Injunction could adversely affect our business as a result of further SEC investigations, enforcement action, and/or criminal prosecution and penalties, which could be significant.
The price of our common stock may be subject to volatile fluctuations based on fluctuations in our quarterly results, general economic and market conditions and by our ability to meet market expectations.
The market price of our common stock may be subject to significant fluctuations in response to operating results, comparable store sales announcements, announcements by competitors, our ability to meet market expectations and other factors. Variations in the market price of our common stock may also be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors. These market fluctuations, as well as general economic conditions, may adversely affect the market price of our common stock. We cannot assure that the market price of our common stock will not fluctuate or decline significantly in the future.
Fluctuations in currency exchange rates may adversely impact our cash flows and earnings.
We operate retail stores located in Canada and, therefore, our cash flows and earnings are exposed to currency exchange rate fluctuations between the U.S. dollar and the Canadian dollar. Our currency exchange gains or losses may adversely impact our cash flows and earnings. Additionally, adverse movements in currency exchange rates could result in a reduction in growth of international direct-to-customer sales, impacting our cash flows and earnings.
We might be involved in claims or disputes related to intellectual property that require us to protect our rights or defend against claims of infringement.
We take precautionary measures to protect our brand, including registering our various trademarks in the United States and internationally and by relying on trade secret, patent, copyright and trademark laws and confidentiality agreements with our associates and other third parties, all of which offer only limited protection. We do not know whether the U.S. Patent & Trademark Office or corresponding foreign agencies will grant registrations based on our pending trademark applications. Even if registrations are granted to us, our trademark rights may be challenged. It is also possible that our competitors or others will adopt trademarks

10


similar to ours, thus impeding our ability to build brand identity and possibly leading to customer confusion. Despite our efforts, the steps we have taken to protect our intellectual proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the United States. Protecting against the unauthorized use of our trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could be costly and divert management resources, either of which could harm our business.
Furthermore, from time to time we have received communications from other parties asserting the existence of patent rights, copyrights, trademark rights or other intellectual property rights which they believe cover certain products we have developed or purchased for resale, as well as technology and/or services that we use in, or are relevant to, our business. The rate of patent infringement assertions both by operating entities and third party non-practicing entities (sometimes referred to as "patent trolls") is increasing, particularly in the United States and Canada.
We can be adversely affected by litigation, other proceedings or claims either brought by us to protect our rights or brought against us or against our manufacturers, suppliers or service providers alleging infringement of third party proprietary rights. Intellectual property disputes are often expensive to prosecute, defend or conduct, can be time-consuming, divert the time and attention of our technical and management personnel, and result in costly litigation. Additionally, claims against us, if successful, could require us to: pay substantial damages or royalties; comply with an injunction or other court order that could prevent us from offering certain of our products; seek a license for the use of certain intellectual property, which may not be available on commercially reasonable terms or at all; or obtain non-infringing products and/or technology, which could require significant effort and expense and ultimately may not be successful. There can be no assurance regarding the outcome of future legal proceedings, claims or investigations. The instigation of legal proceedings or claims, our inability to favorably resolve or settle such proceedings or claims, or the determination of any adverse findings against us in connection with such proceedings or claims could materially and adversely affect our business, financial condition and results of operations, as well as our business reputation.
We face the risk of exposure to product quality issues, product liability claims, product recalls and adverse publicity.
We contract to manufacture, market and distribute products purchased from third-party suppliers, including products which are marketed and resold under our private label brands. We may inadvertently resell product(s) that contain a defect which may cause property damage or personal injury to our end-user customers, which therefore exposes us to the risk of adverse publicity, product quality issues, product liability claims, and product recalls or other regulatory or enforcement actions, including those initiated by the U.S. Consumer Product Safety Commission, by state regulatory authorities or through private causes of action. We generally seek contractual indemnification and insurance coverage from our suppliers and we carry our own insurance. However, if the insurance coverage is not provided or adequate and/or the contractual indemnification is not provided by or enforceable against the supplier, product liability claims relating to the quality of or to defective and/or recalled products could have a material adverse effect on our ability to successfully market our products and on our business, financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the costs associated with defending such claims and/or the negative publicity surrounding a product recall or any assertion that our products caused property damage or personal injury, could damage our brand identity and our reputation with existing and potential customers and have a material adverse effect on our business, financial condition and results of operations.
Changes in, or failure to comply with, laws and regulations could increase our cost of doing business and/or adversely impact the boating industry.
We are subject to a wide variety of laws and regulations in the United States and the other countries and jurisdictions in which we operate, and changes in the level of government regulation of our business have the potential to materially alter our business practices and/or our profitability. Changes in U.S. or foreign law that change our operating requirements with respect to sourcing or reselling products could increase our costs of compliance or make it too expensive for us to offer such products, which could lead to a reduction in revenue. Also, changing regulations and laws governing the Internet and eCommerce transactions (including taxation, user privacy, data protection, pricing and electronic communications) could impede the growth of our eCommerce business and increase our cost of doing business. In addition, changes in interpretations of laws or regulations, including interpretations as to what constitutes personally identifiable information, could adversely impact industry practices related to the collection and use of customer information. Any changes we make in the manner in which we collect and/or use such information could add significant costs, expose us to litigation, impact our marketing efforts, impede growth of our customer database and limit our customer-service offerings. Furthermore, changes in federal or state wage requirements (including changes in minimum wage requirements, entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation) could adversely impact our ability to achieve our financial targets.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC promulgated final rules regarding disclosure of the use of certain minerals (tantalum, tin, gold and tungsten) known as conflict minerals, which are mined from the

11


Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer's efforts to identify the sourcing of such minerals and metals produced from those minerals. These requirements required due diligence efforts in 2013 and continuing into 2014, with initial disclosure requirements effective in May 2014. There are costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities. We may also face reputational challenges if we are unable to verify the origins for any or all conflict minerals used in our products, or if we are unable to certify that our products are "conflict free."
We do not control our vendors or the manufacturers that produce the products we buy from them, nor do we control the labor practices of our vendors and these manufacturers. The violation of labor by any of our vendors or these manufacturers or the divergence of the labor practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt, the shipment of finished products to us or damage our reputation. Additionally, failure to comply with laws and regulations concerning ethical business practices by these vendors or manufacturers, such as the U.S. Foreign Corrupt Practices Act, could have a material adverse effect on our financial condition and results of operations.
Additionally, certain of our products are subject to regulation and regulatory standards set by various governmental authorities with respect to quality and safety. These regulations and standards may change from time to time. Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales. Issues with the quality and safety of merchandise we sell, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls and increased costs.
We are subject to governmental export and import controls that could subject us to liability.
Many of the products we sell are sourced by our vendors and, to a limited extent, by us, in many foreign countries. In addition, we export merchandise to international customers. As a result, we are subject to the various risks of doing business in foreign markets and importing merchandise from abroad or exporting merchandise to customers abroad, such as: potential disruptions in supply; changes in duties, tariffs, quotas on imported and exported merchandise; strikes and other events affecting delivery; consumer perceptions of the safety of imported merchandise; concerns about human rights, working conditions and other labor rights and conditions in foreign countries where merchandise is produced; disruptions of shipping and international trade caused by natural and man-made disasters; significant delays in the delivery of cargo due to security considerations; and economic and political conditions or terrorist acts, or other problems in countries from or through which merchandise is imported and exported. Although we have enhanced policies and procedures to address these deficiencies and to facilitate compliance with laws and regulations relating to doing business in foreign markets and importing merchandise from, and exporting merchandise abroad, such laws and regulations are highly complex and there can be no assurance that our associates, contractors, agents, vendors or other third parties with whom we do business will not violate such laws and regulations or our policies, which could adversely affect our operations or operating results.
Changes in accounting standards, interpretations or applications of accounting principles, and subjective assumptions, estimates and judgments by management related to complex accounting matters, could significantly affect our financial results.
GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business including, but not limited to, inventory valuation adjustments, capitalized indirect costs, costs associated with exit activities, impairment of long-lived assets, workers’ compensation reserves, and valuation allowances against our deferred tax assets, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. Additionally, changes in accounting principles and related accounting pronouncements, their interpretation and/or their application to our financial statements, particularly in light of the ongoing convergence of GAAP and International Financial Reporting Standards, could result in material charges to our financial statements.
ITEM 1B—UNRESOLVED STAFF COMMENTS
None.
ITEM 2—PROPERTIES
Our executive offices and support center are located in a 104,000 square foot facility in Watsonville, California, which we occupy under a lease that expires in 2016. We operate a 240,000 square foot distribution center located in Hollister, California, under a lease that expires in 2021. We also operate a 472,000 square foot distribution center located in Rock Hill, South Carolina, under a lease that expires in 2017. At December 28, 2013, our 287 stores comprised an aggregate of approximately 2.7 million square feet of space. All but one of our stores are leased, typically for a five-year or 10-year initial term, with options to renew

12


for at least one five-year period. In some leases, we pay a fixed rent, in others we have a period of fixed rent and then a rent charge that is either fixed, determined by fair market rent or determined by a consumer price index calculation. Substantially all of our leases require us to pay insurance, utilities, real estate taxes, repair and maintenance expenses and common area maintenance.
ITEM 3—LEGAL PROCEEDINGS
We are involved in various legal and administrative proceedings, claims and litigation and regulatory compliance audits arising in the ordinary course of business. Accordingly, material adverse developments, settlements or resolutions may occur and negatively impact our results in the quarter and/or fiscal year in which such developments, settlements or resolutions are reached. Based on the facts currently available, we do not believe that the disposition of any claims, regulatory compliance audits, legal or administrative proceedings that are pending or asserted, individually and in the aggregate, will have a material adverse effect on our financial position. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact our results of operations in any given period.
For any claims, regulatory compliance audits, legal or administrative proceedings where we have determined that a loss is probable, there is no material difference between the amount accrued and the reasonably possible amount of loss. For any such matters where a loss is reasonably possible, the range of estimated loss is not material individually and in aggregate.
ITEM 4—MINE SAFETY DISCLOSURE
None.

13


PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Select Market tier of the NASDAQ Stock Market (effective January 3, 2011) under the symbol “WMAR”. The following table sets forth, for the periods indicated, the high and low closing sales prices for our common stock, as reported by the NASDAQ Stock Market.
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
2013
 
 
 
 
 
 
 
High
$
13.18

 
$
12.43

 
$
12.30

 
$
14.23

Low
$
10.61

 
$
11.00

 
$
10.58

 
$
11.25

2012
 
 
 
 
 
 
 
High
$
13.41

 
$
12.41

 
$
12.22

 
$
10.75

Low
$
10.35

 
$
9.94

 
$
9.67

 
$
9.39

As of March 3, 2014, there were approximately 6,283 holders of record of our common stock, and the last sale price reported on the NASDAQ Global Select Market was $12.21 per share. We have not paid any cash dividends on our common stock, and we do not anticipate doing so in the foreseeable future.
Issuer Purchases of Equity Securities
As previously reported, West Marine's Board of Directors approved a $10 million share repurchase program in March 2013. Through December 28, 2013, we repurchased 298,094 shares under this program for a total cost of $4.0 million. As of December 28, 2013, we were authorized to repurchase additional shares of our common stock with an aggregate cost of approximately $6.1 million. Please refer to Note 11 to our consolidated financial statements in this annual report on Form 10-K for more information regarding the share repurchase program.
Any further repurchases may be made from time to time in the open market, in privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors. The program does not obligate West Marine to acquire any additional common stock and the program may be suspended at any time at our discretion.
The following table presents details of our share repurchase transactions during the three months ended December 28, 2013:
Period
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar value of shares that may yet be purchased under the plans or programs
September 29 - October 26
 
610

 
$
11.33

 
610

 
$
9,445,495

October 27 - November 23
 
56,267

 
$
12.77

 
56,267

 
$
8,726,687

November 24 - December 28
 
192,358

 
$
13.40

 
192,358

 
$
6,149,238

Total
 
249,235

 
$
13.25

 
249,235

 
$
6,149,238

 
 
 
 
 
 
 
 
 

The information required by this item with respect to securities authorized for issuance under equity compensation plans is incorporated by reference from our definitive proxy statement for our 2014 annual meeting of stockholders.

14


The following graph compares the five-year cumulative total stockholder return on West Marine common stock with the five-year cumulative total return of (i) the NASDAQ Composite Index and (ii) peer companies in the Morningstar Industry Group—Specialty Retail index. The graph showing the Morningstar Industry Group—Specialty Retail was compiled and prepared for West Marine by Zacks Investment Research. We have been advised by Morningstar that Zacks Investment Research is the exclusive provider of Morningstar industry data for total return performance graphs. The index presented below consists of 201 specialty retailers.
 
Fiscal Year End:
1/3/2009
 
1/2/2010
 
1/1/2011
 
12/31/2011
 
12/29/2012
 
12/28/2013
West Marine, Inc.  
$
100.00

 
$
176.75

 
$
232.02

 
$
255.04

 
$
234.43

 
$
310.09

Specialty Retail
100.00

 
140.43

 
165.89

 
164.58

 
189.99

 
270.30

NASDAQ Composite Index
100.00

 
166.89

 
215.45

 
207.54

 
265.47

 
384.57

The performance graph set forth above will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or under the Exchange Act, except to the extent that we specifically incorporate it by reference, and will not otherwise be deemed to be soliciting material or to be filed under such Acts.

15


ITEM 6—SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated balance sheet data for 2013 and 2012 and consolidated statement of operations data for 2013, 2012 and 2011 have been derived from our consolidated financial statements for the fiscal years appearing elsewhere in this report and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and notes thereto in Item 8. The consolidated balance sheet data for 2011, 2010 and 2009 as well as the statement of operations data for 2010 and 2009 are derived from audited consolidated financial statements and the notes thereto that are not included in this annual report on Form 10-K.
(in thousands, except per share and operating data)
2013
 
2012
(1)
2011
(1)
2010
(1)
2009
(1)
Consolidated Statement of Operations Information:
 
 
 
 
 
 
 
 
 
 
Net revenues
$
663,174

 
$
675,251

 
$
643,443

 
$
622,290

 
$
588,739

  
Income (loss) from operations
15,743

 
25,298

 
22,789

 
14,846

 
10,813

 
Income (loss) before income taxes
15,309

 
24,457

 
21,871

 
14,209

 
10,007

 
Net income (loss)
7,837

 
14,719

 
32,753

(2)
13,189

 
12,844

 
Net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
$
0.32

 
$
0.63

 
$
1.44

(2)
$
0.59

 
$
0.58

 
Diluted
0.32

 
0.62

 
1.41

(2)
0.57

 
0.57

 
Consolidated Balance Sheet Information:
 
 
 
 
 
 
 
 
 
 
Working capital
$
222,980

 
$
217,750

 
$
194,707

 
$
171,106

 
$
151,997

  
Total assets
364,243

 
350,979

 
332,948

 
304,433

 
287,611

  
Long-term debt, net of current portion

 

 

 

 

  
Operating Data:
 
 
 
 
 
 
 
 
 
 
Stores open at year-end
287

 
300

 
319

 
327

 
335

  
Comparable stores net sales increase (decrease) (3)
(1.8
)%
 
3.1
%
 
2.3
%
 
5.5
%
 
(5.7
)%
 
 
(1)
Prior periods have been revised, primarily to reflect immaterial corrections of cash consideration received from vendors that participate in our Key Season Program. Amounts received from vendors were previously reported as a reduction of advertising expense under selling, general and administrative expense and are now reflected as a reduction of cost of goods sold. The impact of the revision to 2010 and 2009 was a reduction of cost of goods sold of $8.9 million and $8.0 million and an increase of $8.5 million $7.2 million to selling, general and administrative expense for 2010 and 2009, respectively. See Note 1 to our consolidated financial statements for further discussion.
(2)
Includes a $18.4 million non-cash benefit from the release of substantially all of our valuation allowance against deferred tax assets (see Note 8 to our consolidated financial statements for further discussion).
(3)
Comparable store sales are calculated by including net sales of stores that have been open at least 13 months. Therefore, a store is included in the comparable store sales in the fiscal period in which they commence their 14th month of operations. Stores that were closed or substantially remodeled (i.e., resulting in an increase or decrease of 40% or more of selling square footage) are excluded from the comparable store sales base. Beginning in fiscal 2013 and in line with our omni-channel focus, we reported comparable store sales results to include sales from our direct-to-consumer and wholesale channels. For fiscal years 2012, 2011, 2010 and 2009, previously reported comparable store sales, which excluded direct-to-consumer and wholesale sales were 3.3%, 2.3%, 6.3% and (3.6)%, respectively.




16


ITEM 7—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 supplementary data in Item 8 of this annual report on Form 10-K.
Forward-Looking Statements
The statements in this Form 10-K that relate to future plans, events, expectations, objectives or performance (or assumptions underlying such matters) are forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, among other things, statements that relate to our future plans, expectations, objectives, performance and similar projections, such as:
future earnings and growth in sales and profitability;
our efforts to reposition West Marine from a boating equipment and accessories retailer to a water life outfitter with a broader product offering targeting a larger customer base, which requires the success of our key growth strategies: eCommerce expansion, store optimization, and merchandise expansion; and
our ability to continue to manage our expenses and execute on our growth strategies in a relatively flat boating equipment market, as well as facts and assumptions underlying these statements or projections.
These forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance in future periods to be materially different from any future results or performance suggested by the forward-looking statements in this report. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that actual results will not differ materially from these expectations. These risks, uncertainties and other factors are discussed under risk factors in Item 1A of this report.
Readers are cautioned not to place undue reliance on forward-looking statements, which are based only upon information available as of the date of this report. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Overview
We are the largest omni-channel specialty retailer exclusively offering boating supplies, gear, apparel and footwear to anyone who enjoys recreational time on or around the water with 2013 net revenues of $663.2 million and net income of $7.8 million. Providing great customer experiences and a consistent brand is important to us regardless of the sales channel the customer uses. Our 287 stores open at the end of 2013 are located in 38 states, Puerto Rico and Canada and together with our eCommerce website reaching domestic and international customers, we are recognized as the dominant waterlife outfitter for cruisers, sailors, anglers and paddle sports enthusiasts.
We have focused on the following key growth strategies during 2013 and will continue to focus on and invest in these strategies in 2014 (for additional information refer to Item 1. Business of this report):
eCommerce
store optimization
merchandise expansion
We have and will continue to invest significant resources in support of these key growth strategies. This will include additional capital investments to continue to improve our eCommerce websites and to upgrade our information technology infrastructure to further support our omni-channel retail model, designed to provide a seamless customer experience across all shopping channels. We will also incur additional investments in staffing to support execution in key areas, such as information technology and eCommerce. In addition, there will be incremental investments in marketing which, along with a reallocation of some of our traditional media spending, is intended to attract a more diverse group of customers and, thereby, grow our customer base. These strategies and investments are expected to better position us to deliver incremental sales and operating margin improvement over time.
We have corrected immaterial errors in our prior period financial statements primarily related to vendor cash consideration for advertising and other selling expenses as described in Item 8, Note 1 to our consolidated financial reports of this report. Please refer to Note 1 to our consolidated financial statements in Item 8 of this annual report on Form 10-K for additional information on the corrections.

17


Results of Operations
The following table sets forth certain income statement components expressed as a percent of net revenues:
 
 
2013
 
2012
 
2011
Net revenues
100.0
%
 
100.0
%
 
100.0
 %
Cost of goods sold
71.1
%
 
69.3
%
 
69.9
 %
Gross profit
28.9
%
 
30.7
%
 
30.1
 %
Selling, general and administrative expense
26.5
%
 
27.0
%
 
26.6
 %
Store closures and other restructuring costs
%
 
%
 
 %
Impairment of long-lived assets
%
 
%
 
 %
Income from operations
2.4
%
 
3.7
%
 
3.5
 %
Interest expense
0.1
%
 
0.1
%
 
0.1
 %
Income before income taxes
2.3
%
 
3.6
%
 
3.4
 %
Provision (benefit) for income taxes
1.1
%
 
1.4
%
 
(1.7
)%
Net income
1.2
%
 
2.2
%
 
5.1
 %
Fiscal 2013 compared with Fiscal 2012
Revenues
Net revenues for 2013 were $663.2 million, a decrease of $12.2 million or 1.8%, compared to net revenues of $675.3 million for 2012. This decrease primarily was due to a $11.5 million or 1.8% decrease in comparable store sales. Comparable store sales changes during the first, second, third and fourth quarters of 2013 were (6.6)%, (2.7)%, 0.9% and 0.5%, respectively.
Core products, which represented 83.5% and 84.7% of our total revenues for 2013 and 2012, respectively, were down 2.9% during 2013 as compared to the same period last year, primarily as a result of reduced boat usage. These reductions year-over-year were partially offset by increased sales from promotional activity and successes in our three key growth strategies, which remain a relatively small portion of our overall business and are discussed below.
As compared to the same period last year, we saw positive sales growth from our three key strategies: eCommerce; merchandise expansion; and store optimization. Sales through our direct-to-consumer channel, driven by domestic eCommerce growth, increased by 15.7%. The direct-to-consumer channel represented 6.5% of our 2013 revenues, as compared to 5.5% last year. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) were up 6.1%. Merchandise expansion products represented 16.5% of our 2013 revenues, as compared to 15.3% last year. Finally, with respect to our store optimization strategy, sales from stores in our optimized markets, where we have moved to a larger format store from multiple, smaller locations, were up 4.4%, during 2013. We also experienced increased sales to professional customers during 2013, primarily through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through our store locations.
Gross profit
Gross profit decreased by $15.9 million, or 7.6%, to $191.6 million in 2013, compared to $207.5 million for 2012, primarily due to lower sales. Gross profit decreased as a percentage of net revenues to 28.9% in 2013, compared to 30.7% in 2012. This was driven by lower raw product margin rate, which decreased by 1.1%, primarily due to promotional offers and a shift in balance of sales from our retail customers, where transaction counts were down due to less boat usage and reduced commissioning activities, and a shift toward sales from professional customers given the success of our wholesale growth strategy. Professional customers receive discounts on products based on purchase volumes that are not consistently offered to retail customers. Gross profit rate was also lower by 0.5% due to higher occupancy expenses during the year, primarily due to store closure reserves recorded as a result of our store optimization strategy and by 0.2% primarily due to higher inventory shrinkage.
Selling, general and administrative ("SG&A") expense
SG&A expense for 2013 was $175.9 million, a decrease of $6.2 million, or 3.4%, compared to $182.1 million last year. SG&A decreased as a percentage of revenues to 26.5% in 2013, compared to 27.0% in 2012. Drivers of lower SG&A expense included: a $4.4 million reduction in bonus expense due to increased bonus target thresholds that were not achieved; a $1.9 million reduction in store payroll expense; a $1.7 million reduction in support expense; and a $1.2 million reduction related to Chief Executive Officer transition costs incurred in 2012. This was partially offset by a $2.9 million increase in support expense related to our key growth strategies, which includes investments in information technology infrastructure and our eCommerce website.

18


Interest expense
Interest expense was $0.4 million in 2013, down from $0.8 million in 2012. This expense consists primarily of the amortization of commitment fees, as our borrowings were minimal in 2013. Cash provided by operating activities funded property and equipment investments.
Net Income
Net income for 2013 was $7.8 million compared to net income for 2012 of $14.7 million. Our effective income tax rate for 2013 was 48.8%, compared to 39.8% in 2012. The year-over-year change in our effective tax rate was primarily due to the change in gross valuation allowance against state tax credits in the amount of $2.2 million; this change increased our annual effective tax rate by 9.3%. Our effective tax rate is subject to change based on the mix of income from different state and foreign jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. Our foreign earnings are not indefinitely reinvested outside the U.S. and are subject to current U.S. income tax. For more information, see Note 8 to our consolidated financial statements.
Fiscal 2012 compared with Fiscal 2011
Revenues
Net revenues for 2012 were $675.3 million, an increase of 4.9%, compared to net revenues of $643.4 million for 2011. This increase was primarily due to a $16.7 million, or 3.1%, increase in comparable store sales.
Core products, which represented 84.8% and 86.1% of our total revenues for 2012 and 2011, respectively, and tend to be dependent upon boat-usage, were up 3.5% during 2012 as compared to the same period last year. These increases year-over-year were driven by an earlier than normal start to the boating season in the Northeast and Great Lakes regions, as well as favorable boating conditions throughout the year for other areas of the country. Additionally, we continued to see successes in our three key growth strategies which remain a relatively small portion of our overall business and are discussed below.
As compared to the same period in the prior year, we saw positive sales growth from our three key strategies in 2012: eCommerce; merchandise expansion; and store optimization. Sales through our direct-to-consumer channel, driven by domestic eCommerce growth, increased by 4.4%. The direct-to-consumer channel represented 5.5% of our 2012 revenues, as compared to 5.4% of 2011 revenues. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) were up 15.2%. Merchandise expansion products represented 15.3% of our 2012 revenues, as compared to 13.9% in 2011. Finally, with respect to our store optimization strategy, sales from stores in our optimized markets, where we have moved to a larger format store from multiple, smaller locations, were up 22.0%, during 2012. We also experienced increased sales to professional customers during 2012, primarily through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through our store locations.
Gross profit
Gross profit increased by $13.8 million, or 7.1%, to $207.5 million in 2012, compared to $193.7 million for 2011, primarily due to higher sales. Gross profit increased as a percentage of net revenues by 0.6% to 30.7% in 2012, compared to 30.1% in 2011, primarily due to the leveraging of occupancy expense by 0.5% on higher sales and a 0.1% improvement in shrink. These improvements were partially offset by a 0.1% increase in unit buying and distribution costs.
Selling, general and administrative expense
SG&A expense for 2012 was $182.1 million, an increase of $11.2 million, or 6.6%, compared to $170.9 million for last year. SG&A increased as a percentage of revenues to 27.0% in 2012, compared to 26.6% in 2011. Drivers of higher SG&A expense included: a $3.2 million increase in support expense related to our key growth strategies, which includes investments in information technology infrastructure and the eCommerce website; $3.1 million in higher store project expense reflecting the opening of ten stores this year compared to six stores last year; $1.4 million in higher training costs including West Marine University, our biennial Company-wide training event and store associate training programs; $1.3 million in higher advertising to support additional circulation of marketing materials, to perform market tests and for Grand Openings at our new locations; and $1.2 million in additional expense related to our Chief Executive Officer transition.
Interest expense
Interest expense was $0.8 million in 2012, slightly down from $0.9 million in 2011. This expense consists primarily of the amortization of commitment fees, as our borrowings were minimal in 2012. Cash provided by operating activities funded property and equipment investments with excess cash being used to pay down our seasonal use of debt. This was the primary driver of the outstanding bank borrowings in 2012.
Net Income

19


Net income for 2012 was $14.7 million compared to net income for 2011 of $32.8 million. Lower net income in 2012 was primarily attributable to the release of substantially all of our valuation allowance in 2011. Our effective income tax rate for 2012 was a provision of 39.8%, compared to a benefit of 49.8% in 2011. The year-over-year change in our effective tax rate was primarily due to the release of substantially all of our valuation allowance during the second quarter of 2011, resulting in a $18.4 million benefit in that year. For more information, see Note 8 to our consolidated financial statements.
Liquidity and Capital Resources
Our cash was used to fund working capital, operating expenses, debt service, share repurchases and capital expenditures, primarily related to the build-out of new stores and improvements in our information technology infrastructure, which support our store optimization and eCommerce strategic growth strategies. Funds generated by operating activities, available cash and our credit facility are our largest sources of cash. At the end of both 2013 and 2012, we were debt free. However, we may borrow against our credit facility during the first half of each year as we build inventory levels in preparation for the key boating season.
Working capital, the excess of current assets over current liabilities, increased to $223.0 million at the end of 2013, compared to $217.8 million at the end of 2012. The increase in working capital primarily was attributable to a $13.7 million higher merchandise inventory balance which is in support of our growth strategy of merchandise expansion and a reduction of $3.4 million in accrued expenses at the end of 2013. Partially offsetting these improvements in working capital were a $4.3 million reduction in assets held for sale, and an $8.1 million lower cash balance.
Operating Activities
During 2013, our primary source of liquidity was cash flow from operations. Net cash provided by operating activities decreased year-over-year by $12.4 million, to $13.6 million in 2013, compared to $26.0 million last year. The decrease in cash provided by operating activities was due primarily to changes in operating assets and liabilities, including increases of merchandise inventories compared to the prior year, and decreases in accounts payable resulting from the timing of payments to vendors. Additionally, we experienced net income of $7.8 million in 2013 versus net income of $14.7 million in 2012. Non-cash charges to earnings in 2013 included depreciation and amortization of $15.0 million, stock-based compensation of $3.2 million and deferred income taxes of $3.5 million.
During 2012, our primary source of liquidity was cash flow from operations. Net cash provided by operating activities decreased year-over-year by $10.7 million to $26.0 million in 2012, compared to $36.7 million in 2011. The decrease in cash provided by operating activities was due primarily to changes in operating assets and liabilities, including increases of prepayments and other receivables compared to the prior year and decreases in accounts payable resulting from the timing of payments to vendors. Prepayments and other receivables increased due to payments for sales taxes and bank fees. Additionally, we experienced net income of $14.7 million in 2012 versus net income of $32.8 million in 2011. Non-cash charges to earnings in 2012 included depreciation and amortization of $15.3 million, stock-based compensation of $3.1 million and deferred income taxes of $4.6 million.
During 2011, our primary source of liquidity was cash flow from operations. Net cash provided by operating activities increased year-over-year by $11.8 million to $36.7 million in 2011, compared to $24.9 million in 2010. The increase in cash provided by operating activities was due primarily to increases in cash provided by net income and reduced inventory levels, partially offset by an increase in cash used for accrued expenses. Cash used for inventory was lower due primarily to our continued focus on inventory management and ensuring the correct product assortment in each store based on customer demographics. Cash used for accrued expenses partially offset the increase in cash primarily as a result of lower accrued bonus expense given our increased bonus target thresholds in 2011 as compared to accrued bonus and related thresholds in fiscal 2010.
Investing Activities
In 2013, our capital expenditures were $24.2 million, primarily for new stores, store remodels, eCommerce website, information technology and investment in supply chain efficiencies. We opened 11 new stores and remodeled one store in 2013. During 2014, we expect to increase capital spending, primarily in support of strategic growth initiatives which include store optimization and our eCommerce website.  Additionally, we will continue to invest in enhancements to our information technology infrastructure. We intend to fund our expansion through cash generated from operations and, if necessary, credit facility borrowings.
In 2012 and 2011, our capital expenditures were $17.8 million and $17.2 million, respectively, mostly for new stores, store remodels, information technology and investment in supply chain efficiencies. We opened 10 new stores and remodeled four stores in 2012 and in 2011, we opened six new stores and remodeled four stores.
Financing Activities
Net cash provided by financing activities was $2.4 million in 2013, primarily consisting of a $6.5 million increase in cash from associate share-based compensation plans, partially offset by $4.0 million in cash used toward share repurchases. Net cash

20


provided by financing activities was $4.4 million in 2012, primarily consisting of a $4.9 million increase in cash from associate share-based compensation plans, partially offset by $0.6 million in cash used to pay loan costs associated with the first amendment to our amended and restated loan agreement. Net cash provided by financing activities was $2.4 million in 2011, attributed entirely to an increase in cash related to associate share-based compensation plans.
Credit Agreement
Our current loan and security agreement, as amended, with Wells Fargo Bank, National Association and the other lenders signatory thereto provides a maximum available borrowing capacity of $120.0 million. In addition, at our option and subject to certain conditions, we may increase our borrowing capacity up to an additional $25.0 million. The amount available to be borrowed is based on a percentage of our inventory (excluding capitalized indirect costs) and accounts receivable.
The revolving credit facility is available for general working capital and general corporate purposes. At our election, borrowings under the revolving credit facility will bear interest at one of the following options:
1.The prime rate, which is defined in the loan agreement as the highest of:
a.Federal funds rate, as in effect from time to time, plus one-half of one percent;
b.LIBOR rate for a one-month interest period plus one percent; or
c.The rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate,” or
2.The LIBOR rate quoted by the British Bankers Association for the applicable interest period.
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 credit facility. The margin range for option (1) above is between 0.5% and 1.0% and for option (2) above is between 1.5% and 2.0%.
The loan agreement also imposes a fee on the unused portion of the revolving credit facility available. For 2013, 2012 and 2011, the weighted-average interest rate on all of our outstanding borrowings was 3.8%, 4.7% and 3.1%, respectively.
Although the loan agreement contains customary covenants, including, but not limited to, restrictions on our ability to incur liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our revolving credit facility at any given time is determined by the estimated value of these assets as determined by the lenders’ appraisers. Additionally, we must maintain a minimum revolving credit availability equal to the greater of $7 million or 10% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date and the revolving credit facility could be terminated. As of December 28, 2013, we were in compliance with the covenants under our loan agreement.
At the end of 2013 and 2012, there were no amounts outstanding under our revolving credit facilities, and we had $98.8 million and $91.7 million, respectively, available for future borrowings. At the end of 2013 and 2012, we had $4.6 million and $5.1 million, respectively, of outstanding commercial and stand-by letters of credit. We strategically manage our debt over the course of our fiscal year. We incur seasonal fluctuations in our cash flows and, therefore, we incur debt as we build up our inventories for spring in order to maintain stock levels sufficient to fulfill customer needs and maximize sales during the main boating season. Additionally, we hire a significant number of temporary associates during the summer, our peak selling season. Our weighted-average outstanding balances for the first quarters of 2013 and 2012 were less than $0.1 million and $0.1 million, respectively. For our second quarters of 2013 and 2012, the weighted-average outstanding balances were not material and $0.1 million, respectively, and the third quarter weighted-average outstanding balances for both 2013 and 2012 were not material. The fourth quarter weighted-average outstanding balances for both 2013 and 2012 were not material.
We may borrow against our aggregate borrowing base up to the maximum revolver amount, which was $120.0 million at both year-end 2013 and 2012. Our borrowing base at each of our last two fiscal year-ends consisted of the following (in millions):
 
 
2013
 
2012
Accounts receivable availability
$
5.1

 
$
4.4

Inventory availability
115.6

 
108.3

Less: reserves
(6.0
)
 
(5.4
)
Less: minimum availability
(11.5
)
 
(10.7
)
Total borrowing base
$
103.2

 
$
96.6


21


Our aggregate borrowing base was reduced by the following obligations (in millions):
Ending loan balance/(overpayment)
$
(0.2
)
 
$
(0.2
)
Outstanding letters of credit
4.6

 
5.1

Total obligations
$
4.4

 
$
4.9


Accordingly, our availability as of fiscal year end 2013 and 2012, respectively, was (in millions):
Total borrowing base
$
103.2

 
$
96.6

Less: obligations
(4.4
)
 
(4.9
)
Total availability
$
98.8

 
$
91.7

Contractual obligations
Aggregate information about our unconditional contractual obligations as of December 28, 2013 is presented in the following table (in thousands).
 
Payments due by period
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Contractual cash obligations:
 
 
 
 
 
 
 
 
 
Operating leases(1)
$
291,863

 
$
48,902

 
$
85,070

 
$
58,186

 
$
99,705

Purchase commitments(2)
70,476

 
69,776

 
700

 

 

Bank letters of credit
4,235

 
4,235

 

 

 

Other long-term liabilities
4,403

 
2,833

 
1,570

 

 

 
$
370,977

 
$
125,746

 
$
87,340

 
$
58,186

 
$
99,705

 
(1)
Operating lease amounts in this table represent minimum amounts due under existing agreements and exclude costs of insurance, taxes, repairs and maintenance.
(2)
All but a limited number of our purchase commitments are cancelable by us without penalty; however, we do intend to honor these commitments.
We are party to various arrangements that are conditional in nature and obligate us to make payments only upon the occurrence of certain events, such as delivery of functioning software products. Because it is not possible to predict the timing or amounts that may be due under these conditional arrangements, no such amounts have been included in the table above. This table does not include amounts related to our uncertain tax positions of $2.5 million. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions.
Off-balance sheet arrangements
Operating leases are the only financing arrangements not reported on our consolidated balance sheets. 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 December 28, 2013, we are not involved in any unconsolidated special purpose entities or variable interest entities.
Stock repurchase program
In August 2013, we entered into a written trading plan (the “10b5-1 Plan”) under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to facilitate the repurchase of shares of our common stock in accordance with our share repurchase authorization. As previously announced in March 2013, our Board of Directors approved the repurchase of up to $10 million of our common stock through open market or privately-negotiated transactions.
The 10b5-1 Plan allowed our broker to repurchase common stock on our behalf pursuant to the terms and limitations specified in the Plan, including to the extent such purchases were permitted pursuant to Regulation M and Rule 10b-18 of the Exchange Act.
As of December 28, 2013, we had repurchased 298,094 shares at an aggregate price of approximately $4.0 million and an average price per share of $12.92 under the repurchase plan.

22


Seasonality
Historically, our business has been highly seasonal. In 2013, approximately 65% 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 markets.
Business Trends
Our 2013 financial results represented a challenging year, with a total sales decline of 1.8% and comparable store sales declining by 1.8%. We believe our lower sales results during the first half of the year were primarily driven by unusually cold, rainy and windy weather in many of our markets which, in turn, drove a reduction in boat usage, and in certain seasonal markets, caused some customers to entirely forgo typical Spring commissioning of their boats. During the second half of 2013, we experienced a modest recovery in our sales trends as somewhat better weather conditions returned in many of our markets, which in turn led to improved boat usage and sales in our core categories.
We also believe that there are fundamental trends continuing to emerge in our industry that are affecting our customers and their purchase patterns. These trends reinforce our realization that the core boat parts and accessories business is not going to be sufficient to meet our performance goals of achieving steady, profitable growth. We believe that we can accomplish our goals by accelerating the execution of our growth strategies to achieve a repositioning of West Marine into a broader waterlife outfitter, as well as, the leading boat parts specialty retailer. This repositioning will expand our potential market and is expected to reduce our dependence on weather.
The following is a summary of the main identified trends together with our actions in response to them:
Sales growth in mid-to-larger size boats used by our core customers are well below pre-recession levels, and we do not expect a meaningful change in this longer-term trend. Therefore, as previously disclosed, we are evolving to serve both core boaters and the coastal lifestyle in order to appeal to a more diverse group of customers who like to recreate on and around the water.
Secondly, we are experiencing aging demographics. The average age of our core customer base now stands at approximately 50-54 years for power boaters and 60-64 years for sailors. Therefore, we are targeting younger customers through broader lifestyle products, relevant marketing campaigns, and by, delivering the products and the shopping experience they desire.
Finally, we believe that there is increasing competition for the consumer’s time. Therefore, we must offer products that allow for recreation in shorter spans of time. For us to build the activity of boating, we have to clearly identify gateway activities that can be done a short period of time, such as paddlesports. This should allow us to grow a base of customers who are passionate about their life on the water.
Our key growth strategies, including our 15/50 plan, have delivered encouraging early results, but they remain a relatively small part of our business. As we continue to test and learn, our confidence in these strategies has increased to the point we believe it is time to ramp up our investments, as outlined below:
eCommerce: Sales which originated in our direct-to-consumer channel grew by 15.7% during 2013, which was much higher than the 4.7% growth we experienced in 2012. These sales represented 6.5% of total sales in 2013, up from 5.5% for the corresponding period in 2012. Our three to five-year goal is for eCommerce to represent 15% of sales.
Store optimization: Up through 2013, our efforts at store optimization focused on store consolidation (evolving to having fewer, larger stores with broader selection, improved shopping experience, and anticipated improved store economics). We expect this activity to continue for the next two to three years. During 2013, we began testing a new element of store optimization, which is “revitalization” of stores where we currently have suitable store footprints and locations. These projects are intended to increase sales by bringing new store design elements featuring an expanded merchandise assortment, and an improved shopping experience to a broader and more diverse group of potential customers. In 2013, 35% of our total sales came through optimized stores. Our three to five year goal is to deliver 50% of our total sales through optimized stores.
Merchandise expansion: Sales in our merchandise expansion categories (including soft goods, fishing, paddle sports, and accessories) support the eCommerce and store optimization strategies and grew by 6.1% during 2013, whereas sales in our core categories declined by 2.9%, primarily as a result of reduced boat usage. Sales of merchandise expansion products represented 16.5% of total sales for 2013, up from 15.3% in 2012.
We continue to see evidence of positive interplay and a strong inter-dependence across our growth strategies. Specifically, our eCommerce and store optimization strategies are being driven by merchandise expansion product offerings and all of our strategies are designed to attract new customers and build upon our customer base. For full-year 2013, 24.3% of our eCommerce sales growth and 63.6% of the sales growth in our stores optimized year-to-date have come from our merchandise expansion strategy.
Given the early success of our growth strategies, and the need to drive them at a faster pace in order to reposition our business

23


to provide steady profitable growth, our financial plans for 2014 reflect the investment of significant resources in support of our key growth strategies, including $30 to $34 million of capital investments for the year. Approximately half of these investments are targeted toward our expanded store optimization program, which will include approximately 12 store consolidation projects and 20 store revitalizations. We will direct approximately 35% of our capital investments to deliver further improvements to our eCommerce website and to continue to upgrade our information technology infrastructure. Both, the eCommerce and store optimization strategies, will allow us to continue to increase sales in our merchandise expansion strategy.
In addition to the capital expenditures impact, our profit and cash flow expectations for 2014 also reflect incremental expense impact of activities directed toward furthering our growth strategies. These strategies and investments support our shift toward becoming an omni-channel retail model designed to provide a seamless customer experience across all shopping channels and to better position us to deliver incremental sales and operating margin improvement, both in the short and long term.
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, actual results could differ from our assumptions and estimates, and such differences could be material.
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, in Item 8 of this report.
Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the audit committee of our board of directors.
 

24


 
 
 
 
 
Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Inventory—Valuation Adjustments
 
 
 
 
We value our merchandise inventories at the lower of the cost or market value on an average cost basis. Inventory cost is 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 items sold below cost. Lower of cost or market adjustments included in ending inventory at December 28, 2013 and December 29, 2012 were $3.0 million and $2.7 million, respectively.
 
Our lower of cost or market adjustments contain uncertainties because the calculations require management to make assumptions and to apply judgment regarding forecasted consumer demand, the promotional environment, technological obsolescence and consumer preferences.
 
We have not made any material changes in our inventory valuation methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our lower of cost or market adjustments. However, if estimates regarding consumer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses that could be material. If we had to take additional markdowns of 10% on all items included in merchandise inventory write-downs at December 28, 2013, net income would be affected by approximately $0.6 million in the fiscal year then ended.
 
 
 
Inventory—Capitalized Indirect Costs
 
 
 
 
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 locations and operating costs of our merchandising, replenishment and distribution activities. We recognize indirect costs included in inventory value as an increase in cost of goods sold as the related products are sold. Indirect costs included in inventory value at December 28, 2013 and December 29, 2012 were $18.9 million and $18.7 million, respectively.
 
Our capitalized indirect costs contain uncertainties because the calculations require management to make assumptions and to apply judgment relating to factors of our cost accounting system, the soundness of the underlying principles and their consistent application. In interim periods, the calculation of capitalized indirect costs requires management to estimate capitalized indirect costs, merchandise purchases and inventory levels for the full fiscal year.
 
We have not made any material changes in our capitalized indirect cost methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future assumptions or estimates we use to calculate our capitalized indirect costs. However, if our assumptions or estimates are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in our expenses included in capitalized indirect costs at December 28, 2013 would have affected net income by approximately $1.2 million in the fiscal year then ended.

25


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Vendor Allowances Receivable
 
 
 
 
We establish a receivable and reduce inventory cost for income generated from vendor-sponsored programs, or vendor allowances, 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 of the individual agreements with vendors, we perform detailed analyses and review historical trends to determine an appropriate level for the vendor allowances receivable. Our receivable for vendor allowances at December 28, 2013 and December 29, 2012 was $3.4 million and $3.1 million, respectively, and is included in other current assets.
 
Our vendor allowances receivable contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding a number of factors, including our ability to collect amounts due from vendors and in interim periods requires management to estimate future inventory purchases.
 
We have not made any material changes in the accounting methodology used to establish our vendor allowances receivable during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our vendor allowances receivable. However, if our assumptions or estimates are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in our estimate of our ability to collect vendor allowances at December 28, 2013 would have affected net income by approximately less than $0.1 million in the fiscal year then ended.
 
 
 
Costs Associated With Exit Activities
 
 
 
 
We occasionally vacate stores prior to the expiration of the related lease. For vacated locations that are under long-term leases, we record an expense for the net present value of the difference between our future lease payments and related costs (e.g., real estate taxes and common area maintenance) from the date of closure through the end of the remaining lease term, net of expected future sublease rental income.
 
Our estimate of future cash flows is based on our analysis of the specific real estate market, including input from real estate firms; and economic conditions that can be difficult to predict. Costs associated with exit activities included in accrued expenses at December 28, 2013 and December 29, 2012 were $0.7 million and $0.9 million, respectively.
 
Our location closing liability contains uncertainties because management is required to make assumptions and to apply judgment to estimate the duration of future vacancy periods, the amount and timing of future settlement payments and the amount and timing of potential sublease rental income. When making these assumptions, management considers a number of factors, including historical settlement experience, the owner of the property, the location and condition of the property, the terms of the underlying lease, the specific marketplace demand and general economic conditions.
 
We have not made any material changes in the accounting methodology used to establish our location closing liability during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our location closing liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our location closing liability or to our estimated sub-lease income at December 28, 2013 would have affected net earnings by approximately less than $0.1 million in the fiscal year then ended.


















26


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Impairment of long-lived assets
 
 
 
 
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are reviewed and evaluated quarterly.
 
When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future undiscounted cash flows. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. We may also accelerate depreciation over the asset’s revised useful life if it is identified for replacement or abandonment at a specific future date.
 
In both fiscal years 2013 and 2012 we did not have any non-cash charges for impairment of long-lived assets.
 
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate future cash flows and asset fair values, including forecasting useful lives of the assets. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We don't believe impairment charges for long-lived assets are reasonably possible within the next twelve months.
 
We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.
 
 
 
 
 
 
 
 

27


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Income Taxes
 
 
 
 
The Company computes its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized. Our effective tax rate is subject to change based on the mix of income from different state and foreign jurisdictions that tax at different rates, as well as the change in status or outcome of tax audits. Our income tax returns are periodically audited by the taxing authority in the jurisdictions in which we operate; these audits include questions regarding our tax filings, including the timing and amount of deductions and allocation of income among the various jurisdictions.
 
Significant judgments are required in order to determine the realizability of deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies.  Furthermore, the application of income tax law is inherently complex.
Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our effective tax rate and our income tax exposure. Our effective income tax rate is affected by changes in tax law in the jurisdictions in which we currently operate, tax jurisdictions of new stores, company earnings and the results of tax audits.
 
Interpretations of and guidance surrounding income tax laws and regulations change over time. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.



28


 
 
 
 
 
 
 
 
Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Liabilities for Self Insurance or High Deductible Losses
 
 
 
 
We are self-insured for certain losses, including those related to employee healthcare. However, we obtain third-party insurance coverage to limit our exposure to these claims. In other cases, we purchase commercial insurance, such as for workers’ compensation and general liability claims. We insure workers’ compensation losses through a high-deductible program, and we recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by accruing liabilities on an actuarial basis which represent estimates of future amounts necessary to pay claims and related expenses with respect to covered events that have occurred.
 
When estimating our liabilities relating to self-insurance or high-deductible insurance programs, we consider a number of factors, including historical claims experience, severity factors and actuarial analysis.
 
Periodically, management reviews its assumptions and the valuations provided by actuarial analysis to determine the adequacy of our self-insured liabilities.
 
Liabilities for our self-insured losses or high-deductible insurance programs contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date.
 
We have not made any material changes to our self-insurance accrual methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate these liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.

A 10% change in our self-insured liabilities and loss reserves relating to high-deductible insurance programs at December 28, 2013, would have affected net income by approximately $0.3 million in the fiscal year then ended.


29


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From
Assumptions
Share-Based Compensation
 
 
 
 
We have a share-based compensation plan under which we award non-qualified stock options and restricted stock. We also have an associate stock buying plan. For more information, see Note 2 to our consolidated financial statements in Item 8 of this report.
 
We determine the fair value of our non-qualified stock option awards at the date of grant using the Black-Scholes Merton option-pricing model.
 
We determine the fair value of our restricted stock awards and associate stock buying plan purchases using similar valuation techniques and the closing market price of our common stock.
 
The fair value of our restricted stock units is based on the closing market price of our common stock.
 
Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate.
 
We have not made any material changes in our methodology for determining fair value of stock options during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine share-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based compensation expense that could be material.
 
If actual results are not consistent with the assumptions used, the share-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the share-based compensation.
 
A 10% change in our assumptions, such as volatility or expected term, for share-based compensation expense for the fiscal year ended December, 28, 2013, would have affected net income by less than $0.1 million in the fiscal year then ended.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not undertake any specific actions to diminish our exposure to interest rate or currency rate risk, and we are not a party to any interest rate or currency 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.
At the end of the 2013, we had no outstanding long-term debt and as such would not be impacted by a change in interest rates. In the fourth quarter of 2012, we entered into a five-year, amended and restated loan and security agreement pursuant to which we have up to $120.0 million in borrowing capacity, There are various interest rate options available, for more information, see Note 5 to our consolidated financial statements in Item 8 of this report.
Our only significant risk exposure is from U.S. dollar to Canadian dollar exchange rate fluctuations. A 10% increase in the exchange rate of the U.S. dollar versus the Canadian dollar would have an effect of reducing our pre-tax income and cash flows by approximately $0.6 million over the next year.

30


ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified a material weakness related to the application of GAAP related to certain cash consideration received from vendors under our "Key Season Program." We offer our vendors the option of participating in our “Key Season Program,” in which the participating vendor provides cash consideration to West Marine that is not directly connected to the purchase of product for resale, but is intended to offset certain advertising expenditures. The Key Season Program includes, but is not limited to, direct mail advertising (circulars, flyers, catalogs, and promotional literature), email advertising, wholesale (Port Supply) advertising, in-store product placement (endcaps and floorstacks), vendor-specific product training for our associates, and inclusion in regional marketing campaigns.
We did not design and maintain effective controls over the accuracy and presentation and disclosure for certain cash consideration received from vendors under the Key Season Program. Specifically, we did not design controls related to the application of GAAP for certain cash considerations received from vendors that resulted in the cash consideration being recorded as a reduction to selling, general and administrative expense instead of a reduction to merchandise inventories and cost of goods sold.
The material weakness resulted in an audit adjustment to merchandise inventories, cost of goods sold, and selling, general and administrative expense and a revision for each of the two years in the period ended December 29, 2012 and for each of the related interim condensed consolidated financial statements filed on Forms 10-Q for the years ended December 28, 2013 and December 29, 2012. Additionally, this material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Because of the material weakness described above, management has concluded that our internal control over financial reporting was not effective as of December 28, 2013. In making its assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission.Our internal control over financial reporting as of December 28, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in this annual report on Form 10-K.
 
 
 
 
/S/    MATTHEW L. HYDE        
 
/S/    THOMAS R. MORAN        
Matthew L. Hyde
 
Thomas R. Moran
President and Chief Executive Officer
(principal executive officer)
 
Executive Vice President and Chief Financial Officer
(principal financial officer)
 
 
 
March 12, 2014
 
March 12, 2014

31


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
West Marine, Inc.
In our opinion, the accompanying consolidated balance sheet as of December 28, 2013 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended present fairly, in all material respects, the financial position of West Marine, Inc. and its subsidiaries at December 28, 2013, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America ("GAAP"). In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)2 for the year ended December 28, 2013 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to the application of GAAP for certain cash considerations received from vendors existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the accompanying Management's Report on Internal Control Over Financial Reporting. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 12, 2014



32


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
West Marine, Inc.
We have audited the accompanying consolidated balance sheet of West Marine, Inc. (a Delaware corporation) and Subsidiaries (the “Company”) as of December 29, 2012, and the related consolidated statements of income, stockholders’ equity, comprehensive income, and cash flows for the two years in the period ended December 29, 2012. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2) for the two years ended December 29, 2012. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of West Marine, Inc. and Subsidiaries as of December 29, 2012, and the results of their operations and their cash flows for the two years ended December 29, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule for the two years in the period ended December 29, 2012, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP
San Francisco, CA
March 7, 2013

33


WEST MARINE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 2013 AND DECEMBER 29, 2012
(in thousands, except share data)
 
 
Fiscal Year-End
 
2013
 
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
48,408

 
$
56,542

Trade receivables, net of allowances of $243 in 2013 and $277 in 2012
6,441

 
6,723

Merchandise inventories
203,036

 
189,339

Deferred income taxes
5,012

 
4,622

Assets held for sale

 
4,283

Other current assets
19,360

 
18,038

Total current assets
282,257

 
279,547

Property and equipment, net
72,848

 
59,532

Long-term deferred income taxes
5,684

 
8,429

Other assets
3,454

 
3,471

TOTAL ASSETS
$
364,243

 
$
350,979

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,986

 
$
21,075

Accrued expenses and other
37,291

 
40,722

Total current liabilities
59,277

 
61,797

Deferred rent and other
16,382

 
13,876

Total liabilities
75,659

 
75,673

Commitments and Contingencies - Note 7

 

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; 24,625,481 shares issued and 24,296,497 shares outstanding at December 28, 2013 and 23,777,030 shares issued and 23,746,140 shares outstanding at December 29, 2012
25

 
24

Treasury stock
(4,405
)
 
(385
)
Additional paid-in capital
202,622

 
193,388

Accumulated other comprehensive loss
(565
)
 
(791
)
Retained earnings
90,907

 
83,070

Total stockholders’ equity
288,584

 
275,306

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
364,243

 
$
350,979





See notes to consolidated financial statements.

34


WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
(in thousands, except per share data)
 
 
2013
 
2012
 
2011
Net revenues
$
663,174

 
$
675,251

 
$
643,443

Cost of goods sold
471,528

 
467,733

 
449,770

Gross profit
191,646

 
207,518

 
193,673

Selling, general and administrative expense
175,892

 
182,121

 
170,884

Restructuring costs (recoveries) (Note 3)
11

 
99

 
(50
)
Impairment of long-lived assets (Note 1)

 

 
50

Income from operations
15,743

 
25,298

 
22,789

Interest expense
434

 
841

 
918

Income before income taxes
15,309

 
24,457

 
21,871

Provision (benefit) for income taxes
7,472

 
9,738

 
(10,882
)
Net income
$
7,837

 
$
14,719

 
$
32,753

Net income per common and common equivalent share:
 
 
 
 
 
Basic
$
0.32

 
$
0.63

 
$
1.44

Diluted
$
0.32

 
$
0.62

 
$
1.41

Weighted-average common and common equivalent shares outstanding:
 
 
 
 
 
Basic
24,259

 
23,312

 
22,762

Diluted
24,601

 
23,771

 
23,286



See notes to consolidated financial statements.

35


WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
(in thousands)
 
2013
 
2012
 
2011
Net income
$
7,837

 
$
14,719

 
$
32,753

Other comprehensive income (loss), net of tax
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $74, $0 and $0
226

 
(64
)
 
22

Total comprehensive income
$
8,063

 
$
14,655

 
$
32,775



See notes to consolidated financial statements.

36


WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
(in thousands, except share data)
 
 
Common
Shares
Outstanding
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Balance at January 1, 2011
22,625,193

 
$
23

 
$
(385
)
 
$
181,891

 
$
35,598

 
$
(749
)
 
$
216,378

 
Net income
 
 
 
 
 
 
 
 
32,753

 
 
 
32,753

 
Foreign currency translation adjustment, net of tax of $0
 
 
 
 
 
 
 
 
 
 
22

 
22

 
Common stock issued under equity compensation plan
282,813

 

 
 
 
3,733

 
 
 
 
 
3,733

 
Tax deficiency from equity issuance, including excess tax benefit of $347
 
 
 
 
 
 
(204
)
 
 
 
 
 
(204
)
 
Sale of common stock pursuant to Associates Stock Buying Plan
83,758

 
 
 
 
 
669

 
 
 
 
 
669

 
Balance at December 31, 2011
22,991,764

 
$
23

 
$
(385
)
 
$
186,089

 
$
68,351

 
$
(727
)
 
$
253,351

 
Net income
 
 
 
 
 
 
 
 
14,719

 
 
 
14,719

 
Foreign currency translation adjustment, net of tax of $0
 
 
 
 
 
 
 
 
 
 
(64
)
 
(64
)
 
Common stock issued under equity compensation plan
667,281

 
1

 
 
 
6,990

 
 
 
 
 
6,991

 
Tax deficiency from equity issuance, including excess tax benefit of $380
 
 
 
 
 
 
(389
)
 
 
 
 
 
(389
)
 
Sale of common stock pursuant to Associates Stock Buying Plan
87,095

 
 
 
 
 
698

 
 
 
 
 
698

 
Balance at December 29, 2012
23,746,140

 
$
24

 
$
(385
)
 
$
193,388

 
$
83,070

 
$
(791
)
 
$
275,306

 
Net income
 
 
 
 
 
 
 
 
7,837

 
 
 
7,837

 
Foreign currency translation adjustment, net of tax of $74
 
 
 
 
 
 
 
 
 
 
226

 
226

 
Common stock issued under equity compensation plan
765,809

 
1

 
 
 
7,646

 
 
 
 
 
7,647

 
Tax benefit from equity issuance, including excess tax benefit of $1,240
 
 
 
 
 
 
807

 
 
 
 
 
807

 
Treasury shares acquired
(298,094
)
 
 
 
(4,020
)
 
 
 
 
 
 
 
(4,020
)
 
Sale of common stock pursuant to Associates Stock Buying Plan
82,642

 
 
 
 
 
781

 
 
 
 
 
781

 
Balance at December 28, 2013
24,296,497

 
$
25

 
$
(4,405
)
 
$
202,622

 
$
90,907

 
$
(565
)
 
$
288,584

 

See notes to consolidated financial statements.

37


WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
(in thousands)
 
 
2013
 
2012
 
2011
OPERATING ACTIVITIES:
 
 
 
 
 
Net income
$
7,837

 
$
14,719

 
$
32,753

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
14,960

 
15,302

 
14,019

Impairment of long-lived assets

 

 
50

Share-based compensation
3,207

 
3,128

 
2,394

Excess tax benefit from share-based compensation
(1,240
)
 
(380
)
 
(347
)
Deferred income taxes
3,466

 
4,614

 
(15,528
)
Provision for doubtful accounts
81

 
223

 
54

Lower of cost or market inventory adjustments
1,499

 
925

 
1,154

Loss (gain) on asset disposals
172

 
103

 
(13
)
Changes in assets and liabilities:
 
 
 
 
 
Trade receivables
201

 
(1,175
)
 
(220
)
Merchandise inventories
(15,196
)
 
(1,622
)
 
7,076

Other current assets
(1,332
)
 
(4,502
)
 
3,268

Other assets
18

 
(164
)
 
112

Accounts payable
1,108

 
(4,768
)
 
(5,472
)
Accrued expenses and other
(2,624
)
 
(266
)
 
(2,534
)
Deferred items and other non-current liabilities
1,395

 
(96
)
 
(26
)
Net cash provided by operating activities
13,552

 
26,041

 
36,740

INVESTING ACTIVITIES:
 
 
 
 
 
Proceeds from sale of property and equipment
4,372

 
122

 
64

Purchases of property and equipment
(28,553
)
 
(17,953
)
 
(17,221
)
Net cash used in investing activities
(24,181
)
 
(17,831
)
 
(17,157
)
FINANCING ACTIVITIES:
 
 
 
 
 
Borrowings on line of credit
3,812

 
5,224

 
28,758

Repayments on line of credit
(3,812
)
 
(5,224
)
 
(28,758
)
Payment of loan costs

 
(561
)
 

Proceeds from exercise of stock options
4,440

 
3,863

 
1,339

Proceeds from sale of common stock pursuant to Associates Stock Buying Plan
781

 
698

 
669

Excess tax benefit from share-based compensation
1,240

 
380

 
347

Treasury stock
(4,020
)
 

 

Net cash provided by financing activities
2,441

 
4,380

 
2,355

Effect of exchange rate changes on cash
54

 
(14
)
 
9

NET INCREASE (DECREASE) IN CASH
(8,134
)
 
12,576

 
21,947

CASH AT BEGINNING OF PERIOD
56,542

 
43,966

 
22,019

CASH AT END OF PERIOD
$
48,408

 
$
56,542

 
$
43,966

Other cash flow information:
 
 
 
 
 
Cash paid for interest
$
293

 
$
693

 
$
645

Cash paid for income taxes, net of refunds of $37, $111 and $1,014
5,048

 
7,222

 
3,547

Non-cash investing activities
 
 
 
 
 
Property and equipment additions in accounts payable
1,197

 
999

 
1,757

Unsettled share repurchases
447

 

 



See notes to consolidated financial statements.

38


WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS—West Marine Inc. and its consolidated subsidiaries (“West Marine” or the “Company,” unless the context requires otherwise) is the largest waterlife outfitter in the United States. At December 28, 2013, West Marine offered its products through 287 stores in 38 states, Puerto Rico and Canada, through its call center channel and on the Internet. The Company is also engaged, through its wholesale channel in the wholesale distribution of marine equipment serving boat manufacturers, marine services, commercial vessel operations and government agencies.
West Marine was incorporated in Delaware in September 1993 as the holding company for West Marine Products, Inc., which was incorporated in California in 1976. The Company’s principal executive offices are located in Watsonville, California.
PRINCIPLES OF CONSOLIDATION—The consolidated financial statements include the accounts of West Marine, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany balances and transactions are eliminated in consolidation.
YEAR-END—The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday closest to December 31. Fiscal years 2013, 2012 and 2011 consisted of the 52 weeks ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively. References to 2013, 2012 and 2011 are to the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively.
ACCOUNTING ESTIMATES—The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the following: useful lives and recoverability of fixed assets; inventory obsolescence and shrinkage reserves; capitalized indirect inventory costs; allowance for doubtful accounts receivable; calculation of accrued liabilities, including workers’ compensation and other self-insured liabilities; sabbatical liability, sales returns reserves, unredeemed gift cards and loyalty program awards; vendor consideration earned; fair value of share-based compensation instruments, income tax valuation allowances and uncertain tax positions; goodwill impairment; legal liabilities and other contingencies; and asset retirement obligations. Actual results could differ from those estimates.
INVENTORIES—Merchandise inventories are carried at the lower of cost or market on an average cost basis. Capitalized indirect costs include freight charges for transporting merchandise to warehouses or store locations and operating costs incurred for merchandising, replenishment and distribution activities. Indirect costs included in inventory value at the end of fiscal years 2013 and 2012 were $18.9 million and $18.7 million, respectively. Indirect costs included in inventory value are recognized as an increase in cost of goods sold as the related products are sold.
Inventories are written down to market value when cost exceeds market value, based on historical experience and current information. Reserves for estimated inventory shrinkage based on historical shrinkage rates determined by the Company’s physical merchandise inventory counts and cycle counts were $2.4 million and $2.0 million at the end of fiscal years 2013 and 2012, respectively. Reserves for estimated inventory market value below cost, based upon current levels of aged and discontinued product and historical analysis of inventory sold below cost, were $3.0 million and $2.7 million at the end of fiscal years 2013 and 2012, respectively.
DEFERRED CATALOG AND ADVERTISING COSTS—The Company capitalizes the direct cost of producing and distributing its catalogs. Capitalized catalog costs are amortized, once a catalog is mailed, over the expected net sales period, which is generally from one month to 11 months. Advertising costs, which are included in selling, general and administrative (“SG&A”) expense, are expensed as incurred and were $5.0 million, $6.4 million and $6.0 million in 2013, 2012 and 2011, respectively. The capitalized value of prepaid catalog and advertising costs on the Balance Sheet was immaterial as of December 28, 2013 and December 29, 2012, respectively.
PROPERTY AND EQUIPMENT—Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the various assets, as follows:

39

Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

 
 
 
 
 
 
 
  
Estimated
Useful
Lives
 
 
Furniture and equipment
  
3–7 years
  
 
Computer software and hardware
  
3–7 years
  
 
Buildings
  
25 years
  
Leasehold improvements are amortized over the lesser of the expected lease term or the estimated useful life of the improvement which is usually about 10 years.
ASSETS HELD FOR SALE—On September 28, 2012, the Company entered into an agreement to sell the land and building of its former Ft. Lauderdale store for a purchase price of $4.5 million. The location was vacated when the Company's new Ft. Lauderdale flagship store opened in November 2011. The sale closed in March 2013, and the loss on the sale recognized by the Company was de minimis.
CAPITALIZED INTEREST—The Company capitalizes interest on major capital projects. The Company did not capitalize interest in 2013 and 2012.
CAPITALIZED SOFTWARE COSTS—Capitalized computer software, included in property and equipment, reflects costs related to internally-developed or purchased software that are capitalized and amortized on a straight-line basis, generally over a period ranging from three to seven years.
INTANGIBLE ASSETS—The Company completes an impairment test annually or more frequently if evidence of possible impairment arises. No impairment was recognized in 2011, 2012 or 2013. Amortization expense for other intangible assets was not material in 2013 and less than $0.1 million in each of the years 2012 and 2011. Amortization expense in each of the next five years is not expected to be significant.
ASSET RETIREMENT OBLIGATIONS—The Company estimates the fair value of obligations to clean up and restore leased properties under agreements with landlords and records the amount as a liability when incurred. Liabilities for asset retirement obligations were $0.7 million as of December 28, 2013, $0.8 million as of December 29, 2012 and $0.8 million as of December 31, 2011. There were no significant changes attributable to the following components during the 2013, 2012 or 2011 reporting periods: liabilities incurred, liabilities settled, accretion expense, and revisions in estimated cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS—The Company reviews long-lived assets, including intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated undiscounted future cash flows from the long-lived asset are less than the carrying value, a loss equal to the difference between carrying value and the fair market value of the asset is recorded. The Company recorded no asset impairment charges in both 2013 and 2012, and less than $0.1 million in 2011.
FACILITY CLOSING COSTS—The Company records an obligation for the present value of estimated costs that will not be recovered in the period a store, distribution center or other facility is closed. These costs include employment termination benefits, lease contract termination costs and the book value of abandoned property. For more information, see Note 3.
SELF-INSURANCE OR HIGH DEDUCTIBLE LOSSES—The Company uses a combination of insurance and self-insurance for a number of risk management activities including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by its associates. Liabilities associated with these risks are estimated primarily based on amounts determined by actuarial analysis, and accrued in part by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Any actuarial projection of losses is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
DEFERRED RENT—Certain of the Company’s 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, the Company recognizes rent expense on a straight-line basis over the expected life of the lease, generally about 10 years, including periods of free rent, and records the difference between the amount charged to rent expense and the rent paid as deferred rent. Tenant improvement allowances received from landlords are deferred and amortized to reduce rent expense over the expected life of the lease.
INCOME TAXES—Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between existing financial statement

40

Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

carrying amounts and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured at the tax rate expected to be in effect for the taxable years in which we expect those temporary differences to be recovered or settled. We recognize the effect of changes in tax rates on deferred tax assets and liabilities in the period that includes the enactment date of the change. A valuation allowance is recorded to reduce deferred tax assets to the amount estimated as more likely than not to be realized. The Company also accounts for uncertainties in income taxes recognized in its financial statements. For more information, see Note 8.
SALES AND USE TAX—Net revenues are recorded net of sales and use taxes. Net sales and use taxes are collected and remitted to all jurisdictions in which the Company has a physical presence in accordance with state, provincial and local tax laws.
FAIR VALUE OF FINANCIAL INSTRUMENTS—Fair value of financial instruments represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
The fair value hierarchy prescribed under accounting principles generally accepted in the United States ("GAAP") contains three levels, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of December 28, 2013, the entire $48.4 million of the Company's cash consisted of cash on hand and bank deposits and was classified within Level 1 because they were valued using quoted market prices. As of December 29, 2012, the entire $56.5 million of the Company's cash consisted of cash on hand and bank deposits and was classified within Level 1 because they were valued using quoted market prices.
REVENUE RECOGNITION—Sales, net of estimated returns, are recorded when merchandise is purchased by customers at store locations. Revenue is recognized when merchandise shipped from a warehouse is received by the customer, based upon the estimated date of receipt by the customer. The Company reserves for sales returns through estimates based on historical experience. The sales return reserve for fiscal years 2013, 2012, and 2011 was $(1.6) million, $(1.1) million and $(1.1) million, respectively.
ACCOUNTS RECEIVABLE—Accounts receivable consists of amounts owed to West Marine for sales of services or goods on credit for our wholesale customers. The Company maintains an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. The Company determines this allowance based on overall estimated exposure. Factors impacting the allowance include the level of gross receivables, the financial condition of our customers and the economic risks for certain customers. The allowances for doubtful accounts receivable were as follows:
 
 
2013
 
2012
 
2011
 
 
 
(in thousands)
 
 
Allowance for doubtful accounts receivable—beginning balance
$
(277
)
 
$
(301
)
 
$
(431
)
Additions
(325
)
 
(788
)
 
(687
)
Deductions and other adjustments
359

 
812

 
817

Allowance for doubtful accounts receivable—ending balance
$
(243
)
 
$
(277
)
 
$
(301
)
The Company's policy for writing off uncollectible trade accounts receivables consists of systematic follow-up of delinquent accounts (over 90 days past the customer's terms of sale) and management review of accounts over a set dollar amount.
UNREDEEMED GIFT CARDS—Aggregate sales of gift cards for fiscal years 2013, 2012 and 2011 were $18.1 million, $18.7 million and $15.4 million, respectively. 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 be unused and not subject to escheatment. This rate is then applied, and breakage is recognized in income, over the period of redemption. Gift card breakage income for 2013, 2012 and 2011 was $0.8 million, $0.8 million and $0.6 million, respectively, and is included as net revenues in the Company's operating results.

41

Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

WEST ADVANTAGE CUSTOMER LOYALTY PROGRAMS—The Company has a customer loyalty program which allows members to earn points on qualifying purchases. Points earned entitle members to receive certificates that may be redeemed on future purchases through any retail sales channel. A liability is recognized and recorded as a reduction of revenue at the time the points are earned, based on the retail value of certificates projected to be redeemed, less the applicable estimate of breakage based upon historical redemption patterns.
COST OF GOODS SOLD—Cost of goods sold includes costs related to the purchase, transportation and storage of merchandise, shipping expense and store occupancy costs. Consideration in the form of cash or credits received from vendors is recorded as a reduction to cost of goods sold as the related products are sold.
COMPREHENSIVE INCOME (LOSS)—Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes 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 consists of net income and foreign currency translation adjustments for all periods presented.
FOREIGN CURRENCY—Translation adjustments result from translating foreign subsidiaries’ financial statements into U.S. dollars. West Marine Canada’s functional currency is the Canadian dollar. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. Resulting translation adjustments are included as a component of other comprehensive income in the Consolidated Statements of Stockholders’ Equity. Gains (losses) from foreign currency transactions included in selling, general and administrative ("SG&A") expense for 2013, 2012 and 2011 were $(0.6) million, $0.1 million and $(0.2) million, respectively.
ACCRUED EXPENSES—Accrued expenses consist of the following (in thousands):
 
 
2013
 
2012
Accrued compensation and benefits
$
7,251

 
$
7,915

Accrued paid time off
4,125

 
4,269

Accrued bonus
7

 
4,705

Unredeemed gift cards
6,854

 
6,765

Other accrued expenses
19,054

 
17,068

Accrued expenses
$
37,291

 
$
40,722

NET INCOME PER SHARE—Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if unvested restricted shares and outstanding options to purchase common stock were exercised. Options to purchase approximately 0.2 million shares, 0.5 million shares and 2.2 million shares of common stock that were outstanding in 2013, 2012 and 2011, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive.
The following is a reconciliation of the Company’s basic and diluted net income per share computations (shares in thousands):
 
2013
 
2012
 
2011
 
Shares
 
Net Income
Per  Share
 
Shares
 
Net Income
Per  Share
 
Shares
 
Net Income
Per  Share
Basic
24,259

 
$
0.32

 
23,312

 
$
0.63

 
22,762

 
$
1.44

Effect of dilutive stock options
342

 

 
459

 
(0.01
)
 
524

 
(0.03
)
Diluted
24,601

 
$
0.32

 
23,771

 
$
0.62

 
23,286

 
$
1.41

DERIVATIVE INSTRUMENTS—The Company did not purchase or hold any derivative financial instruments during the three years ended December 28, 2013.
CASH AND CASH EQUIVALENTS—Cash consists entirely of cash on hand and bank deposits, of which approximately $46.3 million exceeded FDIC insurance limits as of December 28, 2013. As of December 29, 2012, approximately $54.3 million exceeded FDIC insurance limits.

42

Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

The Company classifies amounts in transit from banks for customer credit card and debit card transactions as cash and cash equivalents as the banks process the majority of these amounts within three to five business days. The amounts due from banks for these transactions classified as cash and cash equivalents totaled $2.8 million and $2.6 million at December 28 2013 and December 29, 2012, respectively
We had no outstanding checks in excess of funds on deposit (book overdrafts) at December 28, 2013 and December 29, 2012.
SABBATICAL LEAVE—Certain full-time associates are eligible to receive sabbatical leave after each 10 years of continuous employment. The estimated sabbatical liability is based on a number of factors, including actuarial assumptions and historical trends. In fiscal years 2013 and 2012, the Company had a recorded liability of $1.0 million and $1.0 million, respectively, as an estimate of accumulated sabbatical leave as of the respective balance sheet dates.
CORRECTION OF IMMATERIAL ERRORS—The Company previously reported vendor cash consideration for advertising and other selling expenses as a reduction to SG&A. During the fourth quarter of 2013, management determined that such vendor cash consideration was incorrectly included as a reduction of SG&A. It should have been classified as a reduction of inventory and ultimately as a reduction to cost of goods sold ("COGS") as the related inventory was sold, under the guidance in Accounting Standards Codification ("ASC") 605-50-45-15, Revenue Recognition, Customer Payments and Incentives, Other Presentation Matters, Consideration Is Reimbursement of Costs Incurred by the Customer. The correction of this misstatement increased the amount of the valuation allowance in fiscal 2010 which then impacted the reversal in fiscal 2011 by releasing a valuation allowance on the deferred tax asset ("DTA") for the additional book capitalized inventory costs associated with the vendor cash considerations which was recorded when the Company placed a full valuation allowance on its DTA's. The financial statements have also been revised to reflect the correction of certain other previously uncorrected immaterial prior period errors. The Company assessed the materiality of this misstatement on prior periods’ financial statements in accordance with SEC’s Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in ASC 250, ("ASC 250"), Presentation of Financial Statements, and concluded that the misstatement was not material to any prior annual or interim periods, but the cumulative adjustment necessary to correct the classification would be material to the year ended December 28, 2013. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the financial statements as of December 29, 2012 and December 31, 2011 and the two years ended December 29, 2012, which are presented herein have been revised. The following are selected line items from our financial statements illustrating the affect of the correction thereon:

Consolidated Balance Sheet
(in thousands)
 
2012
 
As Reported
 
Adjustment
 
As Revised
Assets
 
 
 
 
 
Merchandise inventories
$
194,332

 
$
(4,993
)
 
$
189,339

Other current assets
16,371

 
1,667

 
18,038

Total current assets
282,873

 
(3,326
)
 
279,547

Long-term deferred income taxes
8,392

 
37

 
8,429

Total assets
354,268

 
(3,289
)
 
350,979

Liabilities
 
 
 
 
 
Accrued expenses and other
40,928

 
(206
)
 
40,722

Total current liabilities
62,002

 
(205
)
 
61,797

Deferred rent and other
13,858

 
18

 
13,876

Total liabilities
75,860

 
(187
)
 
75,673

Stockholders' Equity
 
 

 
 
Retained earnings
86,172

 
(3,102
)
 
83,070

Total stockholders' equity
278,408

 
(3,102
)
 
275,306

Total liabilities and stockholders' equity
354,268

 
(3,289
)
 
350,979



43

Table of Contents                 
WEST MARINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 

Consolidated Statement of Income
(in thousands)
 
2012
 
2011
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Cost of goods sold
$
477,145

 
$
(9,412
)
 
$
467,733

 
$
458,444

 
$
(8,674
)
 
$
449,770

Gross profit
198,106

 
9,412

 
207,518

 
184,999

 
8,674

 
193,673

Selling, general and administrative expense
172,837

 
9,284

 
182,121

 
162,860

 
8,024

 
170,884

Income from operations
25,170

 
128

 
25,298

 
22,139

 
650

 
22,789

Income before income taxes
24,329

 
128

 
24,457

 
21,221

 
650

 
21,871

Provision (benefit) for income taxes
8,800

 
938

 
9,738

 
(8,441
)
 
(2,441
)
 
(10,882
)
Net income
15,529

 
(810
)
 
14,719

 
29,662

 
3,091

 
32,753

Net income per common and common equivalent share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.67

 
$
(0.04
)
 
$
0.63

 
$
1.30

 
$
0.14

 
$
1.44

Diluted
0.65

 
(0.03
)
 
0.62

 
1.27

 
0.14

 
1.41


Consolidated Statement of Comprehensive Income
(in thousands)
 
2012