Description

West Marine (WMAR) is a perennial underperformer, trading at 45 times the midpoint of management’s 2015 earnings estimate despite years of declining sales and missed earnings forecasts.  Management has pitched a turnaround story based on a) increasing on-line sales to 15% of revenue, b) generating 50% of sales from renovated stores, and c) expanding the company’s product mix to include paddleboards, apparel and other items that will in the company’s words “enable it to evolve from a boating supply retailer to a broader water life retailer”.

While there have clearly been exogenous issues over the last decade that disproportionately impacted WMAR, such as Katrina, Macondo, and the Great Recession, the fundamental issue is that the company competes in an industry that is in secular decline. The typical boater is aging, and using their boat less.  The number of registered boats (excluding canoes) peaked at 12.9 million in 2005, and is currently at 12.1 million. 

West Marine is a category killer focused on the recreational boating industry.  At the end of 2014, the company operated 279 stores plus an e-commerce business.  Store count has declined consistently since 2005 (when the company operated 404 stores) as the company has closed smaller units in favor of larger “flagship” units.

The recreational boating industry is in a slow secular decline. Boat registrations peaked at 12.9 million in 2005, and have declined by about 7% to 12.1 million in 2012.  The average number of days that a boat was used dropped from 33 in 2005 to 20 in 2012, before rebounding to 23 days in 2013.  This combination has led to stagnation in the sales of WMAR, which have fallen from $692 million in 2005 to $676 million in 2014.  (West Marine’s primary retail competitor Boater’s World fared even worse, closing its 129 stores when its parent company filed for bankruptcy in 2009.)

Despite the closing of a major competitor, and the economic recovery, WMAR’s financial performance has been deteriorating over the past 5 years.

As you would expect, with declining income and increasing capital expenditures, returns on capital have also been consistently declining.

Management has guided to improved performance in 2015, and investors seem to agree.  Management has estimated EBITDA of $26 to $31 million, pretax income of $6 to $11 million and EPS of $.14 to $.27.  At the midpoint of management’s estimates, WMAR is trading at a seemingly modest 8.2 times EBITDA, and a whopping 45 times earnings.  While the EBITDA multiple seems reasonable, remember that this is a very mature retailer with negative free cash flow. (The 2015 capital budget is $22 to $25 million.)

Another reason for skepticism is management’s track record in estimating financial performance.  Management originally estimated 2014’s EBITDA at $35 to $37.5 million (actual came in at $22.6 million), and EPS at $.39 to $.45 (actual was $.08).

Adding products geared to customers outside the company’s core boating constituency brings WMAR up against a wide range of sporting goods competitors such as Dick’s, Cabela’s and Bass Pro Shops.

Risks

The company’s 71-year old founder and chairman, Randy Repass controls 27% (6.5 million shares) of the company.  At some point, Mr. Repass could seek to sell the company, although there are no true strategic buyers, and at today’s price, the metrics most likely wouldn’t work for a financial buyer.

Comparable store sales have shown improvement over recent quarters.  In fact, WMAR had 13% comps in the company’s first quarter.  The company attributes 6 points of the Q1 comps to the calendar shift caused by last year’s 53 week year. (A week at the end of March 2015 replaced a week at the beginning of January making for a favorable seasonal comparison.  Two additional points of the comp were attributed to a March “Super Sale” this year which replaced a smaller promotion last year. The company expects the calendar shift to continue to boost comps in Q2, but to hurt comps in the second half.

The company has no debt, so this is unlikely to be a “short-to-zero”.

Catalyst

I view WMAR as a value trap with most likely a continued slow decline.

The second quarter, which is when WMAR does 35% of sales and more than 100% of its annual profit is underway.  The average estimate of the two analysts who follow the company is for earnings of $.94 versus $.75 last year.  Because of the seasonal nature of the business, the company would be hard pressed to make up any shortfall in Q2 of this year until next year.

The company has already guided to soft comps in the second half, but the price suggests a fair amount of optimism.

Higher oil prices and/or a weaker economy could have a severe impact on WMAR.