West Marine Continues Its Recovery

By Will Ashworth | March 12, 2012 AAA
Boaters will recognize the name West Marine (Nasdaq:WMAR), the largest specialty retailer of boating supplies and accessories, with 320 stores in the US, Canada and Turkey. It hit a rough patch between 2005 and 2008, suffering four consecutive years with an operating loss. In February, it announced its 2011 results and they were more than satisfactory. In fact, 2011 was its third consecutive operating profit and it looks like it will soon be back to its heady days in the early 2000s. With its stock down 19.4% in the last month, now is the time to buy.
Stock Price
West Marine has been a public company since 1993. In that time, its stock has traded over $30 just twice. The first time was in August 1996, when it hit an all-time high of $41.50, and the second time was eight years later in April 2004, when it peaked at $33.57. Both prices are substantially above its March 7 closing price of $10.69. To understand why its stock was trading so much higher on both of these occasions, we need to examine the financial results from those years. Its 1996 revenues were $323.3 million with an operating profit of $21.2 million. In 2004, it generated $683.2 million in revenue, with $40.2 million in operating profits. Its operating margins in 1996 and 2004 were 6.6 and 5.9%, respectively. In 2011, its operating margin was 3.4%. Clearly, its stock benefited from those strong margins. The important thing to remember at this point is that they are going in the right direction, 100 basis points higher than in 2010 and 164 basis points higher than in 2009. Put another way, it improved its operating margin by 37% in 2010 and 42% in 2011. If it can manage to repeat this in 2012 and 2013, operating margins will be identical to those in 1996. An improving economy will certainly help. I suspect it has a better than 50% chance of doing so. Whether this translates to a $41.50 stock price is up to Mr. Market.

Insider Ownership
When it comes to micro-caps and small-caps, I always prefer companies with high insider ownership. West Marine's Chairman and founder, Randy Repass, owns 7.3 million shares or 32.1% of the company. In an effort to right the ship, Repass has foregone his annual salary of $100,000 in both 2010 and 2011. Furthermore, he doesn't receive an annual bonus and hasn't been granted any stock options since West Marine's IPO in 1993. Lastly, he didn't sell any shares in 2011 and only $200,000 worth in 2010. This is someone committed to his business and most certainly aligned with the interests of shareholders. No one will benefit more if its stock price hits $40 once again, and that's a good thing.

West Marine and Peers

Company

P/S

West Marine (Nasdaq:WMAR)

0.38

Marinemax (NYSE:HZO)

0.34

AutoNation (NYSE:AN)

1.07

CarMax (NYSE:KMX)

0.74

(Table)

Looking Ahead
Highlights in 2011 include pretax income increasing 49% to $21.2 million, revenues up 3.3% to $643.4 million on the back of 2.3% same-store sales growth, net cash of $44 million, a 4.9% reduction in inventory per square foot and an 81% increase in free cash flow to $19.5 million. All told, it was a solid year. In 2012, look for it to increase its private label offerings across a number of categories, a continuing evolution to larger stores, a dedication to improving the online experience and driving same-store sales. I believe one of its biggest opportunities is in its direct-to-customer segment, where it generates just 6% of its overall revenue. Furthermore, its direct-to-consumer contribution margin is just 17%, approximately 500 basis points less than Williams-Sonoma (NYSE:WSM). While boaters might be a more difficult sell, when you get right down to it, there's not a huge difference. You either sell efficiently or you don't. If it can get direct-to-customer revenue to 10% of its total with 20% contribution margins, a $40 stock is a given.
The Bottom Line
In West Marine's 20th year as a public company, it has traded below $10 for more than one month on just two occasions. The first was between 1999 and 2001 and the second between 2008 and early 2010. That's about 25% of the time and even then, it never got below $4. Unless Randy Repass and company forget how to retail, I'm confident the downside here is minimal. The upside, on the other hand, is awfully tantalizing.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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