By Thomas J. Ryan

Cabela’s Inc. (NYSE:CAB) is now for sale – with some reports suggesting a potential merger with Bass Pro – the hunt-and-fish retailer perhaps gave its purchase price a little boost June 28, reporting its first quarter of positive comparable store sales since the third quarter of 2013. Cabela’s latest earnings came just short of Wall Street’s targets.

On a conference call with analysts, Cabela’s officials also noted that with the exception of the fourth quarter of 2015, internet and catalog sales grew for the first time since the third quarter of 2013. While the company nonetheless maintained its guidance for the year, other signs of progress included an improvement in expense leverage and growth in its financial services business.

“Our multiyear restructuring efforts, aimed at lowering operating expenses, have continued to exceed our expectations,” said Tommy Millner, Cabela’s CEO, on the call. As a result, Cabela’s invested the savings into customer-facing price and promotion activities to the benefit of sales growth.

“We used this opportunity to drive merchandise sales both in stores and online, improve inventory turns, grow market share, and sell through some of our slower-moving inventory,” said Millner.

For the quarter, total revenue increased 11.2 percent to $929.9 million. Revenue from retail store sales increased 13.3 percent to $644.9 million, internet and catalog sales increased 3.3 percent to $141.3 million and financial services revenue increased 8.1 percent to $135.1 million. U.S. comparable store sales grew 2 percent and consolidated comparable store sales increased 1.5 percent.

Net income decreased 5.7 percent to $37.8 million, or 55 cents a share. Adjusted for non-recurring items, earnings inched up 1.7 percent to $40.8 million, or 59 cents. The latest quarter’s net results included impairment and restructuring charges and other items amounting to 4 cents a share. Wall Street’s consensus estimate had been 61 cents.

The same-store gain at retail was attributable to strength in firearms, optics, fishing, shooting, camping, power sports and home and gift categories. While apparel and footwear categories “improved meaningfully from previous trends, we continued to face softness in these categories through the second quarter,” Millner said.

Internet and catalog growth likewise benefited from strength in shooting, optics, camping, home and gifts, power sports and fishing, as well as hunting apparel. Casual apparel and footwear categories remained soft, but sell-throughs have improved with heightened promotional activity.

Beyond the lower pricing, Millner said sales are benefiting from its Vision 2020 initiative, which in part features an increased emphasis on four categories – hunting, fishing, camping, and recreational shooting – as part of a refocus on core consumers. Said Millner, “We rolled out this new vision in the third quarter of 2015 and see the potential to continue expanding market share in the outdoor industry while growing organically through customer loyalty and by providing rich customer experiences in every channel.”

Merchandise gross margins in the quarter decreased 290 basis points to 32.9 percent as a result of the more aggressive pricing and increased discounts, as well as merchandise mix changes and the timing of promotions.

Cabela’s said the aggressive pricing was possible due to expense management initiatives, which led to selling, distribution and administrative (SD&A) expenses on a GAAP basis to be reduced 280 basis points in the quarter to 35.5 percent of sales. On a non-GAAP basis, SD&A expenses were reduced 330 basis points to 35 percent.

“Our expense and process improvement activities have exceeded our expectations,” Millner said. “It is important to note that the second quarter marks the third consecutive quarter of expense leverage at Cabela’s and the rate is accelerating. We have not only lowered our expense levels, but have also implemented process improvement activities to ensure that these savings are permanent. We are in the early stage of many of these initiatives and expect ongoing benefit in the balance of 2016 and beyond.”

As reported, Cabela’s has organized teams to evaluate new ways to reduce both its store operating cost and capital expenditures. These efforts include the new store opening process, from site selection to construction cost to operational efficiencies.

With the success in reducing expenses, Cabela’s indicated it has no plans to halt its expansion efforts, which had already been scaled back from the 13 opened in 2015. Said Millner, “We continue to believe that opening new stores will provide our shareholders with an attractive return on capital at the sales-per-square-foot performance we saw from our 2015 class of stores.”

Six new stores have opened so far this year, including Lexington, KY; League City, TX; Short Pump, VA; Centerville, HO; Farmington, UT and Abbotsford, British Columbia. The openings have mostly performed in line with expectations and two more stores will open in the third quarter in Avon, OH, and Ottawa, Ontario. Six more stores will be added in 2017, and Cabela’s still sees room to expand its retail footprint in North America to 200-225 stores. It ended the quarter with 77 stores, including 68 in the U.S. Millner also noted that with its continued expansion into new markets, it is not cannibalizing comps.

Cabela’s Club had a strong quarter despite an increase in the loan loss reserve. Due to higher delinquency rates, the reserve for loan losses increased by $9.2 million in the quarter. During the quarter, growth in the average number of active credit card accounts was 7.3 percent and growth in average balance per active credit card account was 7.7 percent. The average balance of credit card loans grew 15.5 percent to almost $5 billion. For the quarter, net charge-offs were 2.13 percent. The overall 8.1 percent gain in financial services revenue was driven by increases in interest and fee income as well as interchange income, both of which were partially offset by the increase in the provision for loan losses.

Looking ahead, Cabela’s said it continues to expect a high-single-digit growth rate in revenue and a high-single-digit or low-double-digit growth rate in EPS as compared to full-year 2015 adjusted earnings per diluted share of $2.88.

Regarding the sales talks, Millner again said the company won’t be talking about the process until the review is completed. In December Cabela’s board noted that it had initiated a process to explore strategic alternatives.

“That process has continued and is ongoing,” stated Millner. “I hope you can appreciate that we will have no further comments related to the review unless further disclosure is appropriate or required.”

The New York Post reported in mid-July that Cabela’s was about to be acquired by Bass Pro Shops. Back in April, reports arrived that Bass Pro has partnered with Goldman Sachs to explore a bid. The sales talks came after activist hedge fund investor Elliott Management disclosed an 11 percent stake in Cabela’s last year and began pushing for a sale or divestiture of its ancillary operations, such as its credit card business.

Asked in the Q&A session whether the heightened promotional cadence in the quarter was in part due to liquidation efforts at Sports Authority, Millner said it was a “purposeful decision” to boost sales.

“We knew we were accelerating our savings as a result of all the hard work folks have done in our company for the last year,” Millner said. “And we just made a purposeful decision to get competitive across the board, both in promotion and in price, to drive top line.”

As a result, Cabela’s operating margin rate improved 40 basis points and the sales picked up broadly across categories. Added Millner, “Our customers really reacted favorably in transaction trends, retention rates and multichannel customer visits. All of those things reacted really well to our decision to get very competitive.”

Regarding Sports Authority, Millner said he doesn’t believe Cabela’s hasn’t felt any pressure on sales, in part because Sports Authority had a heavy concentration of locations in California and Florida, where Cabela’s has no stores. But he also believed that Sports Authority “served a different customer” and was never a direct competitor to Cabela’s.

Lead photo courtesy Cabela’s