Marine Aftermarket Outlook COVID-19 Edition – Interview with Ken Seipel, CEO of West Marine
Monomoy Marine Aftermarket Outlook: COVID-19 Edition
- What were the first indications that COVID-19 was going to have an impact on West Marine?
We began tracking the virus in late December when we started hearing about supply chain disruptions in China. It was still early stages, but it was pretty clear that China was going to go through quite a bit of disruption that could have a negative impact on our product flow in the spring, which is when we are ramping up for boating season. In early January, we started to monitor our key vendors and the specific impact this would have on our supply chain. For example, a top selling summer boating item are inflatables that people tow behind their boats, and it was early on that we recognized about 40% of our summer order was trapped in China and may not make it to us in time.
- Given the early indications of potential supply disruption, how did you respond to remain flexible?
We spent a great deal of time trying to alternatively source items. We immediately turned our attention to domestic supply opportunities to determine if we could make alternative items work for us. There were some items that were just irreplaceable, so we began to forecast that we may have a business downturn in certain categories or products because of their exclusive sourcing from China. In late February and early March, we also began to see what was happening as the virus was starting to spread through Italy and Western Europe, and it was pretty clear that we were probably going to be impacted in the US. At that point, we started to think through contingent scenarios on how to reduce expenses and prepare for a softer business climate. We built two different downside scenarios and put together action plans for both. We looked closely at expense reductions we could put in place to ensure we offset demand impacts as well as ensure our shareholder value creation remained intact.
- As you began to realize that COVID-19 was going to have a material impact on the United States, and specifically on your business, how did you think about taking steps to protect the company’s long term financial stability and preserve cash and liquidity?
For West Marine, the COVID-19 crisis became real on March 10th. We were notified by our store in Fort Lauderdale that we had one of the very first cases of COVID-19 in Florida. By midday we closed our highest volume store and dealt with several media outlets camped out in the parking lot. Soon thereafter, San Francisco enacted a six-county shelter in place ordinance that was quickly adopted throughout the nation. We had to shut down our HQ in Watsonville, CA over a period of a few hours and figure out how to work remotely for an undetermined length of time. It was clear at that point that business as usual was no longer possible and we had to accelerate risk mitigation to protect the health and safety of our employees, and protect our near-term and long-term business health.
- What was the low point for sales over the last two months (% down YoY)? What were sales last week (% YoY)? What does next monthsâ sales picture look like (% YoY)?
The low point of sales was week one and week two of April with sales down 41%. Sales picked up in week three and four with April ending down 26%. May sales were close to flat versus last year, and month to date June sales (historically our largest sales month) are trending up north of 20% over last year.
- Was West Marine able to operate its stores during the state lockdown period?
West Marine is an essential retailer and as we remained open, we made sure to prioritize the health and safety of our workers. We were able to operate 190 of our 242 stores due to our 9,000 accounts with various government agencies including FEMA, the Coast Guard, local law enforcement and fire departments.
- What is the operating status of your stores/distribution centers? How much of the workforce have you brought back?
As of May 18, we had nearly all of our stores fully operational and our distribution about 80% operational. One of our bigger challenges was quickly staffing and training our seasonal employees in stores and at distribution centers prior to Memorial Day. Our Headquarters team is working remotely through July 6 with a small group of executives and key personnel rotating in and out of the office until July. Through this process, we were able to reduce Headquarters operating staff by about 20%, and we expect that to be maintained going forward.
- How has COVID impacted your strategy and prioritization of e-commerce?
Our business in e-commerce has nearly doubled due to demand during the crisis. We believe the majority of the increased trend will remain as customers continue to adjust shopping habits to digital as a supplement to shopping in our stores. Digital growth is a part of our long range growth strategy and we have recently accelerated initiatives to ensure we capitalize on increased demand now and in the future. In addition, we have improved our digital marketing efforts and we have been pleased with the response. We are elevating our message to inspire boating and provide education on products with less reliance on promotional discounting. As a result, during May and June we have seen significant growth of traffic from new customers and improved margin rates.
- What does the demand picture look like going forward and how are you modeling that? When do you think demand in your business will return to pre-COVID levels?
We started to see consumer demand begin to return towards the end of April. By May 1st, we began to see sales close to prior year, and they have continued to trend above prior year levels through the month of May and June. We are expecting strong demand through the summer boating season. We may see a little slow down this fall after the season, but it’s hard to see what’s going to happen in Q4 given the potential impact of a second wave of coronavirus and the subsequent economic slow-down.
- How have you seen COVID affect your customers/end markets?
The marine industry is seeing an influx of new customers as both first time and upgrading boat owners. Due to the lack of large gatherings at concerts, sporting events and concerns over long distance travel, customers are turning to boating and local recreation this summer.
- How has managing the business through the crisis helped improve the business long term?
We made some foundational shifts to the operations of our business, reduced our expense base by over $30M and lowered our working capital needs by over $25M on an annual run rate basis. The crisis forced us to step back and take a hard look at everything we’re doing and ask, “Is this expense really necessary or is there a less costly approach?” We streamlined our organization charts and eliminated roles that did not support our future strategies, and we made decisions to reduce our inventory and working capital needs. We reviewed a number of reduction initiatives and made the best possible decisions in the moment, knowing we could course correct later if a mistake was made. At this time, the majority of changes appear to be on point and will have a significant impact on creating shareholder value this year and in the future.
- What were some lessons or insights you gathered over the past few months that will stay with you going forward?
A key lesson from the crisis is that we learned how to accelerate decision making and increase our speed of execution. I believe we can use those lessons learned to make quick decisions in the future, which will advance the business. The other important lesson for us is understanding that people work differently, and this new world of remote work is actually working very well for the company. I have to be honest and say that I’m surprised about how well we operated during this period working remotely. It makes me think about the utilization of talent, where I can access talent and how I might use some of the best talents available in the marketplace whether they are or arenât located in our Headquarters. I also believe that the consumer mindset and shopping habits will shift and change. Much like we experienced in 2010, it is likely that there will be an increased emphasis on value for the money. We are focused on over-delivering value in our product and shopping experience.
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