Cabela’s Incorporated (CAB) reported net income for the third quarter ended Sept. 26 fell short of Wall Street expectations due to lackluster sales of fall apparel and footwear. The retailer is cutting costs and considering selling assets to raise cash to for stock buybacks.
The retailer reported total revenue increased 4.6 percent to $926.5 million in third quarter ended Sept. 26, when income at its financial arm grew twice as fast as its retailing business.
Retail store revenue increased 6.5 percent to $637.8 million; Direct revenue decreased 7.9 percent to $161.6 million; and Financial Services revenue increased 13.3 percent to $123.6 million. During the period, consolidated comparable store sales decreased 4.2 percent.
For the quarter, adjusted for certain items, net income decreased 13.8 percent to $50.3 million compared to $58.3 million in the year ago quarter, and earnings per diluted share were 71 cents compared to 81 cents in the year ago quarter. The company reported GAAP net income of $43.7 million and earnings per diluted share of $0.62 as compared to GAAP net income of $53.8 million and earnings per diluted share of $0.75 in the year ago quarter.
Third quarter 2015 GAAP results included restructuring charges and other items of $0.09 in earnings per diluted share. The results did not meet Wall Street expectations. The average estimate of 13 analysts surveyed by Zacks Investment Research was for earnings of 73 cents per share.
Camping, powersports, firearms and ammo up
“Continued strong performance in many of our key merchandise categories and exceptional performance at Cabela’s CLUB were not sufficient to offset the significant weakness in our fall apparel and footwear product lines,” said Tommy Millner, Cabela’s Chief Executive Officer. “During the quarter, we did take substantial and sustainable actions on our expense base, which will benefit 2016 and beyond.”
“Consolidated comparable store sales were down 4.2 percent for the quarter,” Millner said. “U.S. comparable store sales were down 3.3 percent. In both the United States and Canada, our customers have been slow to transition to fall apparel and footwear products. We were encouraged by positive comp performance in many of our core categories, including camping, powersports, home and gifts, firearms, and ammunition.”
Newest stores underperform
“Our new format stores continue to significantly outperform our legacy stores in sales and profit per square foot, yet our U.S. stores opened in 2015 have underperformed our expectations,” Millner said. “Accordingly, we are evaluating our 2016 and 2017 store opening schedule. At this time, we plan to open seven stores in 2016 and no more than that in 2017. We have a number of initiatives underway to improve new store productivity and profitability, which gives us confidence in our long-term goal of 225 stores in North America.”
A shift in ammunition sales from the Direct channel to the Retail channel, continued softness in apparel and footwear categories, and further pressure from new retail square footage contributed to the 7.9 percent decrease in Direct channel revenue for the quarter.
Merchandise margins decreased 70 basis points in the quarter. Stronger hardline sales and weaker softline sales created a mix impact that accounted for approximately half of the decrease, while the other half was driven by a slightly higher markdown cadence across the assortment.
Cost cutting program launched, assets sales targeted
During the third quarter, the company launched a major multi-year corporate restructuring project aimed at lowering its expense base to increase return on invested capital. The company has already identified meaningful savings opportunities across the enterprise that are expected to result in a reduction of operating expenses as a percentage of total revenue by 75 to 150 basis points over the next three years.
In addition to its initiatives to reduce costs, the company has begun a process to optimize its balance sheet. As part of this process, the company plans to reduce working capital and sell unproductive assets. The proceeds from this balance sheet improvement will be used to help fund the company’s previously announced $500 million share repurchase program.
The Cabela’s CLUB Visa program had another excellent quarter. During the quarter, growth in the average number of active credit card accounts was 6.6 percent. Growth in the average balance per active credit card account was 6.9 percent, and growth in the average balance of credit card loans was 13.9 percent to $4.6 billion. For the quarter, net charge-offs remained at historically low levels of 1.70 percent. Increased Financial Services revenue was driven by increases in interest and fee income as well as interchange income.
“With the revenue shortfall we experienced in the third quarter, we have reevaluated our fourth quarter and full-year expectations,” Millner said. “As a result, we expect a high-single-digit growth rate in revenue and approximately flat non-GAAP earnings per diluted share for full-year 2015 as compared to full-year 2014 non-GAAP diluted earnings per share of $2.88.”
| CABELA’S INCORPORATED AND SUBSIDIARIES | ||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||
| (Dollars in Thousands Except Earnings Per Share) | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 26, 2015 |
September 27, 2014 |
September 26, 2015 |
September 27, 2014 |
|||||||||||||
| Revenue: | ||||||||||||||||
| Merchandise sales | $ | 798,455 | $ | 773,438 | $ | 2,202,177 | $ | 2,040,501 | ||||||||
| Financial Services revenue | 123,633 | 109,132 | 371,489 | 317,074 | ||||||||||||
| Other revenue | 4,435 | 3,432 | 16,209 | 15,451 | ||||||||||||
| Total revenue | 926,523 | 886,002 | 2,589,875 | 2,373,026 | ||||||||||||
| Cost of revenue: | ||||||||||||||||
| Merchandise costs (exclusive of depreciation and amortization) | 514,494 | 492,492 | 1,433,707 | 1,306,585 | ||||||||||||
| Cost of other revenue | – | 8 | 220 | 1,398 | ||||||||||||
| Total cost of revenue (exclusive of depreciation and amortization) | 514,494 | 492,500 | 1,433,927 | 1,307,983 | ||||||||||||
