The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 3, 2009 (the "2008 Form 10-K"). All references to the third quarter and the first nine months of 2009 mean the thirteen-week and thirty-nine-week periods ended October 3, 2009, respectively, and all references to the third quarter and the first nine months of 2008 mean the thirteen-week and thirty-nine-week periods ended September 27, 2008, respectively. Unless the context otherwise requires, "West Marine," "we," "us" and "our" refer to West Marine, Inc. and its subsidiaries.

Overview

West Marine is one of the largest boating supply retailers in the world. We have three reportable segments - Stores, Port Supply (wholesale) and Direct Sales (Internet and call center) - all of which sell aftermarket recreational boating supplies directly to customers. At the end of the third quarter of 2009, we offered our products through 337 company-operated stores in 38 states, Puerto Rico and Canada and two franchised stores located in Turkey, on the Internet and through our call center channel. We also are engaged, through our Port Supply division, in our stores and on the Internet, in the wholesale distribution of boating products to commercial customers. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP for interim financial information pursuant to Regulation S-X. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's application of accounting policies. We have identified certain policies that require the application of significant judgment by management. Our most critical accounting policies are those related to inventory valuations, including allowances and capitalization of indirect costs, costs associated with exit activities (e.g., store closures), impairment of long-lived assets and deferred tax assets and applicable valuation allowance. These critical accounting policies are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2008 Form 10-K. The following discussion and analysis should be read in conjunction with such description of critical accounting policies and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report.

Results of Operations

The following table sets forth certain statement of operations components
expressed as a percentage of net revenues:



                                                13 Weeks Ended                       39 Weeks Ended
                                        October 3,       September 27,       October 3,       September 27,
                                           2009              2008               2009              2008
Net revenues                                 100.0 %             100.0 %          100.0 %             100.0 %
Cost of goods sold                            71.8                72.4             70.6                71.0

Gross profit                                  28.2                27.6             29.4                29.0
Selling, general and administrative
expense                                       22.9                24.4             23.9                26.9
Store closures and other
restructuring costs                           (0.1 )               0.9              0.0                 0.3
Impairment of long-lived assets                0.0                 0.1              0.0                 0.5

Income from operations                         5.4                 2.2              5.5                 1.3
Interest expense, net                          0.1                 0.2              0.2                 0.3

Income before income taxes                     5.3                 2.0              5.3                 1.0
Income taxes                                   0.3                 0.1              0.1                 2.9

Net income (loss)                              5.0 %               1.9 %            5.2 %              (1.9 )%

Thirteen Weeks Ended October 3, 2009 Compared to Thirteen Weeks Ended September 27, 2008

Net revenues for the third quarter of 2009 were $168.2 million, a decrease of $12.1 million, or 6.7%, compared to net revenues of $180.2 million in the third quarter of 2008. Net revenues were unfavorably impacted by $12.4 million related to a fiscal calendar shift. Since our sales typically build week-over-week leading up to the peak of boating season, the fiscal calendar shift from a 53-week fiscal year last year meant that there were fewer peak season days in the third quarter of this year, which negatively affected comparable store sales comparisons. In addition, the move of the Fourth of July holiday from the third fiscal quarter in 2008 to the second fiscal quarter in 2009 further affected the quarter. Apart from these shifts, we experienced some favorable impacts on our business, including continued improvement in boat usage, continued movement towards do-it-yourself projects, favorable results from our product expansions and larger store formats, and favorable weather conditions in most markets. We believe we have also benefited from changes in the competitive landscape and from lower gas prices versus the same period last year. We had 337 company-operated stores and two franchised stores in Turkey open at the end of the third quarter of 2009 compared to 361 company-operated stores and one franchise store in Turkey at the end of the third quarter of 2008.

Net revenues attributable to our Stores division decreased $8.4 million to $151.4 million in the third quarter of 2009, a 5.2% decrease compared to the third quarter of 2008. Comparable store sales declined by $6.3 million, or 4.3%, from last year. Store revenues also decreased by $8.9 million due to store closures during the third and fourth quarters of 2008 and the first three quarters of 2009. However, this sales decrease was partially offset by $5.9 million of revenues from new stores opened during the same period of time. Wholesale (Port Supply) net revenues through our distribution centers decreased $2.4 million, or 24.3%, to $7.5 million in the third quarter of 2009 compared to 2008, primarily due to lower sales to boat dealers and boat builders, which remain very challenged in this economy. Net revenues in our Direct Sales division decreased $1.3 million, or 12.4%, to $9.2 million in the third quarter of 2009 compared to 2008, primarily due to lower revenues from international customers driven by fluctuations in the exchange rates and lower revenues through our call center related to the fiscal calendar shift.

Gross profit decreased by $2.2 million, or 4.6%, to $47.5 million in the third quarter of 2009, compared to $49.7 million for the same period last year. However, gross profit increased as a percentage of net revenues to 28.2% in the third quarter of 2009, compared to 27.6% for the same period last year. Approximately 0.5% of this increase was due to lower unit buying and distribution costs given the reduced inventory levels during the period and approximately 0.4% from improved inventory shrinkage results. These improvements were partially offset by the deleveraging of store occupancy costs, which had an unfavorable gross margin impact of approximately 0.4%, as revenues decreased relative to the fixed nature of these expenses.

Selling, general and administrative expense decreased $5.3 million, or 11.9%, to $38.6 million in the third quarter of 2009, compared to $43.9 million for the same period last year, and decreased as a percentage of net revenues to 22.9% in the third quarter of 2009, compared to 24.4% for the same period last year. The decrease in selling, general and administrative expense primarily was due to a $2.1 million reduction related to reduced store count, $1.6 million in lower payroll, marketing and other variable expenses reflecting lower revenues and $1.5 million in selling and support expense, including a $0.9 million reduction in costs related to the now-settled SEC investigation. These decreases were partially offset by a $1.2 million increase in accrued bonus expense reflecting performance above budgeted expectations.

Store closure and other restructuring charges were adjusted by $0.2 million during the third quarter of 2009 to reflect lease negotiations that resulted in favorable settlements, which essentially resulted in these charges decreasing by $1.9 million compared to the same period last year. During the third quarter of 2008, we recognized restructuring expenses of $1.7 million consisting of charges for store closures, Port Supply restructuring, the closure of our Hagerstown, Maryland distribution center, and severance costs for reductions in force at the Watsonville Support Center.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax rate for the third quarter of 2009 was 5.5% compared with an effective tax rate of 7.2% for the same period last year. The change in our effective tax rate largely was due to the release in the third quarter of 2009 of a $0.4 million reserve for an uncertain tax position because the applicable statute of limitations expired.

Net income for the third quarter of 2009 was $8.5 million compared to net income of $3.4 million in the third quarter of 2008. The improvement in net income was primarily attributable to lower net buying and distribution costs, selling, general and administrative expense reductions and lower store closure and restructuring costs in the current year.

Thirty-Nine Weeks Ended October 3, 2009 Compared to Thirty-Nine Weeks Ended September 27, 2008

Net revenues for the thirty-nine weeks of 2009 were $484.5 million, a decrease of $35.7 million, or 6.9%, compared to net revenues of $520.2 million in the thirty-nine weeks of 2008.

Net revenues attributable to our Stores division decreased $22.1 million to $434.4 million in the first thirty-nine weeks of 2009, a 4.8% decrease compared to the first thirty-nine weeks of 2008. Comparable store sales declined by 3.4% and accounted for $14.4 million of the decrease. The decline in comparable store sales reflects lower sales of discretionary items partially offset by increased sales of core boating parts and accessories. While we have seen increased boat usage in some markets, we expect consumers to carefully evaluate their needs-based boating purchases and continue to reduce spending on discretionary items. Store revenues also decreased by $22.7 million from store closures in 2008 and the first nine months of 2009. However, this decline was partially offset by $13.8 million net revenues from new stores. Wholesale (Port Supply) net revenues through our distribution centers decreased $8.6 million, or 26.9%, to $23.2 million in the first nine months of 2009 compared to 2008, primarily due to lower sales to boat dealers and boat builders, which remain very challenged in this economy. Net revenues at our Direct Sales division decreased $5.0 million, or 15.7%, to $26.8 million in the first thirty-nine weeks of 2009 compared to 2008, primarily due to lower revenues from international customers, lower revenues through our call center and lower revenues from higher-priced discretionary items. Net revenues comparisons for the thirty-nine weeks ended October 3, 2009 were not affected materially by the fiscal calendar shift referenced above.

Gross profit decreased by $8.1 million, or 5.4%, to $142.5 million in the thirty-nine weeks of 2009, compared to $150.6 million for the same period last year. However, gross profit increased as a percentage of net revenues by 0.4% to 29.4% in the first thirty-nine weeks of 2009, compared to 29.0% for the same period last year. Gross profit as a percentage of net revenues increased primarily due to a 0.9% increase in product margin driven by less promotional and clearance activity during the first nine months of 2009 and a shift in sales to higher-margin core boating categories, such as maintenance. Additionally, inventory shrinkage improved by 0.2%. Improvements were partially offset by the deleveraging of buying and distribution costs and occupancy which had an unfavorable impact of 0.7% due to the fixed nature of these expenses in relation to the decline in revenues.

Selling, general and administrative expense decreased $23.6 million, or 16.9%, to $116.0 million in the first thirty-nine weeks of 2009, compared to $139.6 million for the same period last year, and decreased as a percentage of net revenues to 23.9% in the first thirty-nine weeks of 2009, compared to 26.9% for the same period last year. The decrease in selling, general and administrative expense primarily was due to $11.3 million in lower support and selling overhead, including a $3.1 million reduction in costs related to the now-settled SEC investigation, $8.3 million in lower payroll, marketing and other variable expenses reflecting lower revenues and a $5.0 million reduction due to the reduced store count. These decreases were partially offset by a $3.4 million increase in accrued bonus expense reflecting performance above budgeted expectations.

Non-cash impairment of long-lived assets was $2.4 million in the first nine months of 2008, compared to no impairments during the first nine months of 2009. During the third quarter of 2008, management decided to close our distribution center located in Hagerstown, Maryland, and our call center located in Largo, Florida. We recognized restructuring expenses of $1.7 million consisting of charges for store closures, Port Supply restructuring, the distribution center closure, and severance costs for reductions in force at the Watsonville Support Center.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax rate for the first nine months of 2009 was a provision of 2.7% and related to state taxes and changes in uncertain tax positions. The prior year's tax provision was significantly higher driven by the valuation allowance established during the second quarter of 2008. For more information, see Note 2 to our condensed consolidated financial statements included in this report.

Net income for the thirty-nine weeks of 2009 was $25.2 million compared to a net loss of $9.8 million in the thirty-nine weeks of 2008. The improvement in net income was primarily attributable to lower net buying and distribution costs and reductions in selling, general and administrative expense.

Liquidity and Capital Resources

We ended the third quarter of 2009 with $22.3 million of cash, an increase from $6.1 million at the end of the third quarter of 2008. Working capital, the excess of current assets over current liabilities, decreased to $167.2 million at the end of the third quarter, compared with $189.2 million for the same period last year. Lower merchandise inventories, down $45.3 million, was the primary driver of the decrease in working capital, partially offset by a decrease of $11.8 million in accounts payable.

Operating Activities

During the first nine months of 2009, net cash provided by operating activities was $71.0 million, compared to $33.9 million for the same period last year. Net cash provided by operating activities improved year-over-year by $37.1 million and primarily was driven by improved operating results and lower inventory purchases, resulting in lower accounts payable. The decrease in accounts payable was partially offset by increased expense for accruals related to fiscal 2008 store closures and restructuring charges and by increased accrued bonus expense reflecting performance above budgeted expectations.

Investing Activities

We spent $9.7 million on capital expenditures during the first nine months of 2009, a $1.8 million decrease from the prior year period, primarily due to lower spending on production improvements at our distribution centers and lower spending on information technology projects, partially offset by investment in our two new prototype flagship stores that launched during the first quarter of 2009. We have opened eight stores (including the two flagship stores) and remodeled two stores during the first nine months of 2009.

Financing Arrangements

Net cash used in financing activities was $46.5 million for the first nine months of 2009, consisting of net repayments under our credit facility.

We have a credit facility with a bank syndicate for up to $225.0 million that expires in December 2010. Borrowing availability is based on a percentage of our inventory (excluding capitalized indirect costs) and certain accounts receivable. At our option, subject to certain conditions and restrictions, our loan agreement provides up to $25.0 million in additional financing during the term. The credit facility is guaranteed by our subsidiaries and is secured by a security interest in all of our accounts receivable and inventory and that of our subsidiaries, certain other assets related thereto, and all proceeds thereof. The credit facility includes a $50.0 million sub-facility available for the issuance of commercial and stand-by letters of credit. The credit facility also includes a sub-limit of up to $20.0 million for same-day advances.

At our election, borrowings under the credit facility will bear interest based upon one of the following rates: the prime rate announced by Wells Fargo Bank, National Association at its principal office in San Francisco, California, or the interest rate per annum at which deposits in U.S. dollars are offered by reference lenders to prime banks in designated markets located outside the United States. In each case, the applicable interest rate is increased by a margin imposed by the loan agreement.

The applicable margin for any date will depend upon the amount of available credit under the revolving facility. The loan agreement also imposes a commitment fee on the unused portion of the revolving loan facility. For the third quarter of 2009 and 2008, the weighted-average interest rate on all of our outstanding borrowings was 1.5% and 3.8%, respectively.

Although our loan agreement contains customary covenants, including but not limited to, restrictions on our ability and that of our subsidiaries to incur debt, grant liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our loan agreement at any given time is determined by the estimated liquidation value of these assets as determined by the lenders' appraisers. Additional loan covenants include a requirement that we maintain minimum revolving credit availability equal to the lesser of $15.0 million or 7.5% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date. A default under our loan agreement also could significantly and adversely affect our ability to obtain additional or alternative financing. For example, the lenders' obligation to extend credit is dependent upon our compliance with these covenants. As of October 3, 2009, we were in compliance with our bank covenants.

At October 3, 2009, there were no amounts outstanding under this credit facility, and $91.9 million was available for future borrowings. At September 27, 2008, borrowings under this credit facility were $29.3 million, bearing interest at rates ranging from 3.5% to 5.0%, and $102.7 million was available to be borrowed. The decrease year-over-year in credit availability primarily was due to lower inventory levels which serve as collateral for the credit facility. At October 3, 2009 and September 27, 2008, we had $7.2 million and $5.7 million, respectively, of outstanding commercial and stand-by letters of credit.

Our borrowing base at October 3, 2009 and September 27, 2008 consisted of the following (in millions):

                                                          October 3,         September 27,
                                                             2009                2008
Accounts receivable availability                         $        6.0       $           6.8
Inventory availability                                          105.8                 146.2
Less: reserves                                                   (4.7 )                (4.2 )

Total borrowing base                                     $      107.1       $         148.8


Our aggregate borrowing base was reduced by the
following obligations (in millions):

Ending loan balance                                      $         -        $          29.3
Outstanding letters of credit                                     7.2                   5.7

Total obligations                                        $        7.2       $          35.0


Accordingly, our availability as of October 3, 2009
and September 27, 2008, respectively, was (in
millions):

Total borrowing base                                     $      107.1       $         148.8
Less: obligations                                                (7.2 )               (35.0 )
Less: minimum availability                                       (8.0 )               (11.1 )

Total availability                                       $       91.9       $         102.7

Off-Balance Sheet Arrangements

Substantially all of the real property used in our business is leased under operating lease agreements, as described in Item 2 -Properties and Note 7 to the consolidated financial statements in the 2008 Form 10-K.

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

Seasonality

Historically, our business has been highly seasonal. In 2008, approximately 64% of our net sales and all of our net income occurred during the second and third quarters, principally during the period from April through August, which represents the peak months for boat buying, usage and maintenance in most of our markets.

Business Trends

Our research indicates that the U.S. boating industry continues to experience a down cycle, as evidenced by lower year-over-year sales in each of our business segments, lower new and used boat sales, and lower boat registrations in key states. There are a number of steps we are taking to respond to this challenging industry climate and lower sales expectations to ensure orderly management of the business and preserve our financial strength to survive the current downturn and maximize our opportunity when the marketplace recovers. We remain focused on reducing expenses and maximizing cash flow by:

• controlling our operating expenses through variable expense management, as well as reengineering and streamlining business processes;

• continuing to improve the quality of our inventory by reducing overstocked or discontinued goods;

• executing the conservative budget we created for 2009, which focuses on reduced capital spending, expense control and cash management; and

• further exploring methods and strategies to drive sales and market presence.

While we have seen sales increases in boat usage product categories in some markets during the third quarter of 2009, we expect consumers to carefully evaluate their needs-based boating purchases and to continue to reduce spending on discretionary items.

We believe current economic conditions and continued uncertainty in the financial markets have adversely impacted discretionary consumer spending and sales to our boat dealer and boat builder customers in an already challenging climate for the boating industry, and we believe that this economic weakness will continue to have a depressing effect on our sales revenue, with corresponding risks to our earnings and cash flow in 2009 (see the "Overview" and "Fiscal 2008 Compared with Fiscal 2007 - Segment revenues" sections of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2008 Form 10-K).

Internet Address and Access to SEC Filings

Our Internet address is www.westmarine.com. Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in the "Investor Relations" portion of our website as well as through the Securities and Exchange Commission's website, www.sec.gov.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements within the "safe harbor" provisions of the Section 21E of the Exchange Act. All statements other than those that are purely historical are forward-looking statements. Words such as "expect," "anticipate," "believe," "estimate," "plan," "project," and similar expressions also identify forward-looking statements. These forward-looking statements include, among other things, statements that relate to West Marine's future plans, expectations, objectives, business strategies, our ability to improve financial performance in a softening industry and challenging economic environment, performance and similar projections, as well as facts and assumptions underlying these statements or projections. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.

. . .