Cabela’s Says Vendor Collaboration Helped it Capitalize on Early Spring Weather in Q1

Cabela's Inc. reported net income for the first quarter grew 62 percent to $28.8 million, or 40 cents a share, compared to $17.8 million, or 25 cents, in the year ago quarter. Total revenue increased 6.3 percent to $623.5 million. First quarter comparable store sales were up 4.2 percent on top of 8.9 percent comps in the same quarter a year earlier.

The comp growth was fueled by very strong demand for firearms, ammunition and fishing equipment, which was spurred by the unusually warm spring weather. Strong sales of ATVs to hunters also helped elevate the average ticket by 5 percent during the quarter.

For the quarter, Retail store revenue increased 14.4 percent to $345.3 million; Direct revenue decreased 8.3 percent to $190.2 million; and Financial Services revenue increased 15.3 percent to $83.5 million. Operating expenses grew more slowly than revenue for the second quarter in a row, a trend the company expects to sustain for the full year. Many of those gains are coming from CAB’s distribution centers.

 

Retail segment operating margin expanded for the 12th consecutive quarter increasing 120 basis points to 12.8 percent. Direct segment operating margin expanded for the sixth consecutive quarter, increasing 70 basis points to 18.0 percent. Margins in both of segments set first quarter records.

The Cabela's Club Visa program also posted record results as net charge-offs decreased 74 basis points to 2.0 percent, or the lowest level in more than four years. Primarily due to higher interest and fee income and reduced interest expense, Financial Services revenue increased 15.3 percent in the quarter to $83.5 million. For the quarter, the allowance for loan losses was reduced by $6.3 million compared to an $8.1 million reduction in the first quarter last year.

“Virtually all the lines on the income statement are moving in the right direction,” said CEO Tommy Milner. “Revenue is up, merchandise margin increased, expenses as a percentage of revenue are down, earnings are up and after-tax return on invested capital rose nicely.”

Specifically, CAB worked with vendors to shorten lead times on seasonal product. That enabled it to significantly reduce its inventory of winter goods by the end of December and bring in many seasonal spring products 45 days earlier than usual when the weather remained unusually warm. That helped CAB avoid significant end-of-season markdowns as it transitioned from fall to full-margin spring merchandise.

Increases in merchandise margin were broad based as margin increased in 10 of 13 merchandise sub-categories and improved in both our Direct and Retail segments.

Milner emphasized how the success of CAB’s next-generation stores validates the company’s strategy to accelerate B&M retail expansion. Data analytics indicate Cabela’s customers with longer drive times were not dissuaded by higher gas prices from shopping at its stores during the quarter.

“In the first quarter we saw gas prices rise 10 percent on top of a 27 percent increase last year,” said Milner. “And what we noticed was that we couldn't draw any correlation to drive times to our stores which we monitor very carefully.”

“We are extremely pleased with the progress on our strategic initiatives and our increasing profitability,” Milner said. “It is clear our strategies are working, and our retail stores are achieving superior results. Accordingly, we continue to expect strong full year 2012 results with a meaningful portion of our first quarter over performance carrying through to our full year bottom line results.”

The one miss in the quarter came at the Direct segment, where revenue fell 8.3 percent, as shrinking catalog and call center orders more than offset growth in online sales. After falling significantly more than planned in January, Direct sales improved sequentially in February and March and are on track to be down in the single digits in April.

“In January, many competitors reduced prices sharply as they liquidated excess winter inventory, which we did not need to do,” said Milner, noting that fill rates, Internet traffic and profitability all improved during the quarter. He acknowledged that the Direct business has struggled for five years, but said better site navigation, a more robust mobile offering and a greatly enhanced social media presence will spur e-commerce sales and restore Direct sales growth to the low single digits for the year.

Despite the assurance, investors punished CAB for the miss, pushing down its stock price nearly 10 percent within hours of the earnings release. The stock had recovered half that ground when markets closed Friday. As reported in The B.O.S.S last month (1214), CAB’s new brick-and-mortar stores typically reduce its direct sales in a market by 7 percent.