Equity research: West Marine, Inc.

Part 2

West Marine analysis: CEO Matt Hyde gave the company new direction

Management history and strategy

West Marine, or WM, brought in Matt Hyde, 50, as president and CEO in May 2012. The company needed direction in the new integrated world of offline and Internet retailing with heightened online competition. Matt had been an EVP for REI, a national retailer of outdoor gear and clothing. He was responsible for REI’s stores, direct-to-consumer/eCommerce marketing and real estate. In an earlier position, he repositioned and successfully grew the company’s private label brand. He also sits on the board of Zumiez (a specialty retailer of action- sports-related apparel), and the YMCA.

Tom Moran, 52, is the CFO. He joined the company seven years ago and has a strong consumer background with Carmax and Limited Brands.

Matt Hyde and the management team have introduced three key strategies to grow the business: eCommerce, merchandise expansion, and store optimization.

West Marine Store Count HistoryEnlarge Graph

eCommerce

Matt successfully led REI’s eCommerce business from 0 to $100 million. At WM, he initiated a major investment program in 2013 to support information technology investments for network and website improvements, and to replace aging software and hardware. Sales through the direct channel increased 13% in 2013. The company’s eCommerce website offers customers 75,000 products (compared to 8,000 to 18,000 SKUs in the stores), unique advisor tips and technical information, and over 12,000 product videos and customer reviews. The company runs a virtual call center to assist sales generated through its website, catalogs, and stores. Fulfillment of direct orders is completed through its distribution centers. The company changed its promotional strategies (reduced hurdle for free shipping) and improved the buy-online-ship-to-store offering.

Merchandise expansion

WM’s merchandise expansion strategy aims to attract a broader base of customers who enjoy recreational water sports and lifestyle. The company wants to be known as a lifestyle retailer and not just a parts retailer. The company expanded its selection of footwear, apparel, clothing accessories, fishing products, and paddle sports equipment. These products are available in the larger stores and online. The merchandise expansion categories comprise over 15% of total revenues and have comped significantly higher than the core products. For the first half of 2013, core categories declined 3.5%, whereas the merchandise expansion categories comped positive 4.3%. Private label runs about 22% of total sales.

Store optimization

WM’s real estate optimization strategy focuses on increasing ROIs on store assets. The company is evolving to have fewer, larger, and more dominant stores in their major markets. These stores allow for an improved shopping experience with greatly expanded assortments in better locations. Store associates also have more specialized product knowledge. Net square footage for the company is staying constant as larger stores replace multiple smaller stores, but sales per square foot in optimized markets are growing. Almost all new stores are meeting or exceeding the 15% incremental ROI hurdle and the four-wall contribution is accretive in the first year. During the first half of 2013, sales in stores in optimized markets increased 20%.

WM operates large-format stores (13,00 to 19,000 square feet), standard-sized stores (6,00 to 12,000 square feet), and express stores (2,500 to 3,000 square feet). Flagship stores can range from 20,000 to 50,000 square feet, depending on the market size. The overall company average is currently 9,000 square feet. The company is over 50% completed on its real estate optimization process. Today, it runs 47 optimized markets spearheaded by 13 flagships and 34 large-format stores. To put this in some perspective, in 2007, WM had 372 stores and today it has 295. Square footage is relatively unchanged throughout. The remaining markets will be completed over time depending on lease expirations, cash flow availability to fund capital expenditures, and real estate opportunities. There are still a few major markets left to do (Miami, San Francisco). Above is a history of store count.

Wholesale

WM also has a thriving wholesale business called Port Supply. The company offers same-day delivery to domestic and international wholesale customers out of 21 large stores, which serve as hubs. It offers three pricing tiers (gold, silver, and bronze), depending on volume of business. Gold is the most competitive price on annual sales for volumes over $25,000 a year. Bronze is only slightly better than retail. The largest wholesale customer represents less than 1% of total Port Supply revenues. Customers include businesses involved in boat sales, boat building and repair, yacht chartering, and marina operations. Port Supply also sells to some government and industrial customers. The wholesale business helps leverage the company’s purchasing and distribution operations.

The bulk of WM’s customers are members of its West Advantage Loyalty program. Customers fall into two levels. Gold membership costs $19 per year and gives a customer a free membership in Boat U.S., a towing service. Customers receive promotions through email and earn loyalty points based on their spending levels. Silver membership is free, and customers also receive loyalty points, albeit at a slower rate.

The Market Realist Take

The company said its 3Q 2013 revenues were encouraging because of promotional activity and the success of its merchandise expansion strategy. Gross profit for the third quarter was $54.9 million, a decrease of $5.4 million compared to the third quarter of 2012. The decrease was due to slightly lower sales of core boating-related products, which tend to be usage-driven. The company had faced sales challenges earlier in the year due to the late onset of spring weather, leading to lower boat use. Sales to wholesale customers increased for the third quarter, primarily through its store locations. Part of the decline in gross profit was also from higher occupancy expenses during 3Q 2013, which were mostly due to store closure reserves recorded as a result of West Marine’s store optimization strategy.

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