Cabela’s Plans to Add One Million Sq Feet in 2007; Sees Cannibalization Impact Sales…

Cabela’s second quarter was bolstered by strong sales from the addition of four new locations and healthy single-digit growth in the company’s consumer direct business. While comparable store sales slipped slightly, about one percentage point of the decline was attributable to a missed day of business due to the Easter Holiday, which was in the second quarter this year compared to the first quarter last year.

Additionally, comps would have been up 2.4% without the effect of their Owatonna, Minn. store seeing some sales cannibalization by the company’s Rogers, Minn. store. The company has been seeing this cannibalization effect since last October, when the Rogers store opened, but management does not seem concerned with the impact. In fact, the opening of the Rogers store was said to have “increased [Cabela’s] market share in the state of Minnesota by a tremendous amount” and Owatonna is still running slightly ahead of management expectations so far this year.

“There’s naturally going to be some cannibalization of existing stores as we open them, but I think if we look at it as growing our market share in any given region of the country, and that’s far more important to us than maintaining comps at any expense,” said Mike Callahan, Cabela’s SVP of retail operations and marketing.

Last year, Cabela’s installed a new labor scheduling system. In the first quarter of 2006, the company installed the first phase of a new replenishment system which addresses replenishment between distribution centers and retail stores. As a result of this new system, inventory levels at comparable stores decreased 11% at the end of the second quarter.

The combination of the two systems helped Cabela’s achieve a 190 basis point improvement in store-level operating expenses at their comp store base. The next phase of the inventory replenishment system will improve distribution center inventory levels, and should result in further operating margin improvements.

While overall gross margins increased, merchandise gross margins were 34.6% in the second quarter of 2006, versus 35.8% in the same quarter last year, impacted by increased promotional activity in the quarter, as well as higher freight and shipping expenses.

For 2006, Cabela’s will open four new stores, adding 588,000 square feet. The company’s Glendale, Ariz. location opened last week and management said they are “very encouraged by the initial results” with roughly 2,000 people in line, waiting for the doors to open on the day of the grand opening. Boise, Ida. will open later this month; Richfield, Wisc. will open in late September; and La Vista, Neb., near Omaha, will open in time for Thanksgiving. For 2007, Cabela’s expects to open eight stores, adding over one million square feet of retail space.

While gas prices do not appear to be impacting Cabela’s retail environment –- currently management says that store traffic is up — the company is taking them into consideration when planning new stores. All of Cabela’s newer stores are located closer to major population centers than the older locations.

The company’s direct business was impacted by higher catalog expenses and more expensive freight. Operating margins were 14.7% versus 16.1%. Catalog costs as a percent of direct revenue increased 40 basis points to 14% in Q2 from 13.6% last year.

For the second half of the year, Cabela’s management reiterated its guidance of top and bottom line mid-teens growth targets.