Equity research: West Marine, Inc.

Part 4

West Marine analysis: Must-know valuation and risks outlook

Valuation

WM has a book value of almost $12.00 per share. The stock is trading below that due to current disappointing results. That being said, the stock has stayed relatively range-bound between $11 and $12 despite the dramatic cut in guidance. With the rock-solid balance sheet and asset support, it’s hard to see this stock going too much lower. I believe the best public comps are Destination XL (DXLG) and Destination Maternity (DEST). Each of these is a category-killer specialty retailer in its respective niche (large-size men and pregnant women). There is very little top line square footage growth in either case given how mature their concepts are. They are each running their own store or real estate optimization programs, replacing many smaller stores with fewer larger stores.  Each is also focused on growing its eCommerce revenues.

One can also look at the valuations of the three public boat manufacturers or retailers. Brunswick is in other businesses aside from boats, but boating is a big part of its business.

West Marine CompetitionEnlarge Graph

DXLG and DEST saw nice moves in their stocks over the past year, as their strategy started to prove out and the comps turned nicely positive (also helped out by the economic pickup). BC, HZO, and MPX also had nice stock appreciation, as orders and sales grew with the economic pickup. WM is not too far behind. The company is now set up for very easy sales comparisons next season due to the difficult year it is experiencing this year and will likely benefit from the infrastructure investments it is making.

West Marine Competition 2Enlarge Graph

Risks

The obvious risk to this story is another economic slowdown hurting the consumer. A bigger risk, in my opinion, is continued increased online competition. Amazon and others are a threat—there is no denying that. But many category-killers have survived nicely right alongside Amazon. WM offers a loyalty program, ease of shipping and returning, competitive pricing, and knowledgeable boating salespeople.

Expectations and target price

The company has increased capital spending significantly this year to build an enhanced eCommerce platform and open some new large-format stores. These will all benefit WM next year, along with the easy sales comparisons. The company also has a great opportunity to expand its customer base through its merchandise expansion program and Port Supply business. Next year should also see a nice growth in the cash balance due to a combination of reduced capital spending and dramatically improved results. At some point, if cash continues to grow and the stock price stays stagnant (trading below book value), this business will start to show up on private equity screens if it hasn’t already. In 2006, WM had $63 million of net debt. Today, it has a net cash position of $45 million, which could double over the next three years. If you put a similar multiple on WM that any of the public comps receive, this stock could easily trade between $14 and $22 over time.

The Market Realist Take

The company’s eCommerce business saw total direct sales increase by 20.3% for 3Q 2013. The company expects to continue to invest in the eCommerce business and also grow its market share via the launch of a new portsupply.com website. The website should help the core products segment of the company’s business grow. Growth in core products has been slow (declined 80 basis points) in 3Q 2013, as it depends on boat use. The company will continue marketing its merchandise expansion categories, which grew 11% in 3Q 2013—including clothing accessories, footwear, and apparel to attract a broader group of customers.

West Marine is testing new product categories, and it included water life accessories in three of its remodelled stores in Seattle and Bellevue, Washington, and San Diego, California. Due to encouraging figures from these stores, the company is planning to further revitalize four additional stores and maintain the pace of its consolidation projects. The company said in its earnings call that it has noticed an uptick in holiday sales from its domestic eCommerce business and in flagship and large-format stores. So it will be testing a distortion of holiday products, supported by additional marketing, in 20 locations this year.

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