Cabela’s Inc. second quarter fiscal 2010 earnings nearly doubled as improved operating results in the Financial Services and Retail groups at the self-proclaimed World’s Foremost Outfitter more than made up for challenges in the Direct business. Company CEO Tommy Millner attributed declining online sales in part to the company’s moving too aggressively to reduce inventory, particularly of its own branded apparel goods, which generate a high ratio of its online sales.
“Fill rates just got clobbered because we didn't have enough inventory to support the demand in Cabela's men's and women's private label product,” Millner said. Longer lead times for Cabela's branded products will likely mean inventory levels will continue to weigh on direct sales revenue until the fourth quarter.
To avoid a repeat this fall, Cabela’s has doubled the number of container loads it will import so it can bulk up on core items. Millner said he does not anticipate any late deliveries of fall merchandise from offshore vendors.
Online ammunitions sales, which spiked a year earlier on fears the Obama Administration and Democratic Congress might restrict them, also declined as supplies returned to normal. In the Retail channel, men’s apparel, footwear, archery and tree stands were among the strongest categories. Comp store sales declined 4.6% for the quarter, due to a big dip in April. Comps have since been running flat.
The company said net income increased 97.6% to $18.0 million, or 26 cents per diluted share, compared to $9.1 million, or 14 cents per diluted share, in the second quarter of 2009. CAB attributed a 240-basis point increase in operating margins to 5.8% to strong performance at the World’s Foremast Bank, higher merchandise gross margins and lower impairment and restructuring charges.
After adjusting for divestitures, total revenue decreased 3.3% to $526 million; Retail store revenue decreased 2.5% to $294 million and Direct revenue decreased 11.7% to $171.5 million. Financial Services revenue increased 28.0% to $56.5 million.
“While the number of transactions at retail was lower than our expectations during the quarter, we are pleased that average ticket in our Retail business was up nearly 5%,” explained Millner. “For the quarter, Retail profitability improved 270 basis points, return on invested capital improved 120 basis points and overall company operating margin expanded 240 basis points.”
Merchandise margins expanded 80 basis points to 35.9% of sales in the quarter, the biggest increase in recent years. Margins increased in 11 of 13 merchandise subcategories during the quarter thanks to better inventory management, which reduced the need to mark down product. Improvements in vendor collaboration and advancements in price optimization also helped. The improvements should continue to drive margin expansion throughout this year and next and prompted Cabela’s to confirm its guidance for the year.
Cabela’s ended the second quarter with $513 million in inventory, a decrease of 13% from a year earlier that occurred mostly in the Direct channel.
Excluding impairment and other special charges, for the quarter, net income was $19.4 million compared to $11.2 million in the second quarter of 2009 and diluted earnings per share were 28 cents compared to 17 cents in the second quarter of 2009.
