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Already-lean companies still streamlining

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Brunswick says its cuts are working; West Marine, MarineMax both plan more store closings

Results for the most recent quarter were disappointing for marine-related companies, though all have outlined plans to streamline operations and cope with sluggish economic conditions.

Brunswick Corp., West Marine and MarineMax each reported a drop in sales and revenue for the last quarter, with company executives citing a weak market as the reason behind the slump.

“We had a solid quarter in a difficult economic climate,” Brunswick chairman and CEO Dustan McCoy said. “The actions we are taking are working. We’re well-positioned to handle this tough market.”

Brunswick had previously announced significant job cuts, plant closures and the discontinuation of some of its boat brands to help reduce costs.

West Marine announced its plans to close 25-30 stores and one of its distribution centers in its efforts to keep costs under control.

“We believe West Marine remains in good shape to not only ride out these challenging times, but also to win additional market share as we improve our ability to succeed in the short- and long term,” CEO Geoff Eisenberg said.

MarineMax also announced its intention to close stores and reduce its orders for 2009 models by about 40 percent.

Chairman, president and CEO William H. McGill, Jr. called the economic climate “one of the most challenging periods on record.”

The following is an overview of each company’s earnings reports:

Brunswick Corp.
Brunswick reported a 2 percent drop in sales and a net loss of $6 million for the second quarter. For the quarter ending June 28, Brunswick had net sales of $1.48 billion, down from $1.52 billion a year earlier.

“Increased sales of commercial fitness equipment, bowling products and from our retail bowling centers, as well as 19 percent growth in non-U.S. sales, helped offset the decline in sales of marine products in the United States,” McCoy explained.

The company reported a net loss of $6 million, or 7 cents per share, down from net earnings of $57.3 million, or 63 cents per share for the second quarter of 2007. The second quarters of 2008 and 2007 include restructuring charges of $83.1 million, or 59 cents per share, and $1.1 million, or 1 cent per share, respectively. The 2008 charges are primarily for costs associated with resizing the company and reducing fixed costs by $300 million versus 2007 spending levels by the end of 2009.

The Brunswick Boat Group reported a 6 percent decline in net sales for the second quarter of 2008 to $687.9 million, from $732.8 million in the 2007 quarter.

Net sales in the marine engine segment were down 4 percent to $643.5 million in the second quarter, compared to $669.6 million a year ago.

Analysts said Brunswick is doing well despite the weak market, but they remain cautious and unsure about the industry’s overall recovery. They also said Brunswick’s revenues of $1.2 billion for the 2008 quarter came in above expectations.

“Brunswick is performing admirably under challenging conditions,” said Tim Conder, managing director of leisure equity research for Wachovia Capital Markets.

Ed Aaron, director of equity research for RBC Capital Markets, agreed.

“The company continues to execute relatively well despite weak industry conditions,” said Aaron.

Analysts say the broader question is: What will be the shape of the U.S. marine recovery?

“We feel the answer to this is more gradual and protracted than most anticipate with [the second half of 2009] the earliest for stabilization in the U.S. marine market and ’10 the earliest for the beginning of a sustainable gradual recovery,” said Conder.

“The acceleration of the decline in the U.S. boat market as dealer inventories swell heading into the offseason, leaves us cautious nearer-term,” said RBC’s Aaron.

West Marine
West Marine reported net sales for the second quarter ending June 28 of $226.7 million, compared to net sales of $247.1 million for the same quarter last year. Same-store sales declined 7.8 percent in the second quarter versus the same period a year ago.

Gross profit for the 13 weeks ending June 28 was $78.4 million, a decrease of $7.5 million compared to 2007.

In addition to closing stores and a Maryland distribution center, West Marine also plans to close its Largo, Fla., call center by the end of the year.

The company’s previously announced Jacksonville, Fla., flagship store is set to open next year, along with an additional flagship store in Brick, N.J. This fits with West Marine’s goal of moving toward fewer stores with a larger footprint.

For the year, same-store sales are expected to decline 7 percent to 8.5 percent, versus the previously estimated decline of 3.5 percent to 5 percent. Total company sales are expected to range from $625 million to $635 million, versus prior guidance of $660 million to $670 million.

Analysts praised West Marine’s restructuring plans, saying they should improve West Marine’s balance sheet.

“We are encouraged by the scope of restructuring efforts that we think will dramatically improve West Marine’s profit potential in 2009 and beyond,” Laura Richardson, of BB&T Capital Markets, said. “By our calculation, restructuring should enable West Marine to be modestly profitable on sales well below its peak of $717 million in 2006.”

MarineMax
Revenue at MarineMax declined by more than $108 million in the third quarter, which ended June 30, compared to the same period of 2007, the company announced.

Revenue was $271.3 million for the quarter, compared with $379.8 million for the comparable quarter last year. Same-store sales declined about 27 percent compared with a 9 percent decrease in the comparable quarter last year.

Net loss for the quarter was $113.3 million, or $6.15 a share.

As a result of its falling stock market valuation, MarineMax was required to write off its “intangible” assets. The company recognized a non-cash charge of $122.1 million, or about $6.33 per share. This write-off does not impact the cash available to run the business.

Excluding the non-cash charge described above, earnings per diluted share were 18 cents for the three-month period ending June 30. The company reported earnings per diluted share of 73 cents for the comparable quarter last year.

Analysts were not surprised by MarineMax’s earnings report, with one saying the company was managing well despite weak market conditions.

“We think MarineMax is managing well through the industry downturn, which we expect to continue into 2009, albeit at a lesser rate than 2008,” said Richardson of BB&T Capital Markets, who maintained the hold rating on MarineMax stock, which has “potential for patient investors.”

Factoring in store closings and other information, BB&T maintained its fourth-quarter 2008 earnings-per-share estimate at 15 cents.

RBC Capital Markets estimates a fiscal 2008 earnings-per-share loss of 29 cents versus a loss of 44 cents previously anticipated. The fiscal 2009 forecast is unchanged at a loss of 13 cents.

“Trading at a 50 percent discount to tangible book, we believe this is a cheap stock,” wrote RBC’s Aaron. “However, we need to see negative trends stop accelerating and inventory improve before revisiting [MarineMax] as a 12-month investment idea.”

This article originally appeared in the September 2008 issue.

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