Cabela’s saw strong top line gains boost earnings in spite of a slight comps decline during the second quarter. The sales growth was primarily due to new store openings as decreased store traffic in established markets more than offset higher ticket prices. The biggest contribution to the bottom line was better merchandise margins in the company’s direct business, spurred by more efficient shipping.


Management is focused on store productivity, while at the same time aggressively pursuing square footage growth. While comps were down 0.8% for the period, CAB is trying to boost that by three percentage points and get into consistently positive quarterly comp sales results.


During the first quarter, Cabela’s fishing department was one of the primary causes for slower sales, but the category rebounded somewhat during Q2. However, the category is still not at the level they would like to see. Other strong categories included hunting, camping and marine, offset by slow sales in re-loading, and paintball.


Looking at Q3, Cabela’s is counting on strong results from Columbia, TNF and Under Armour. Cabela’s mentioned that they have started rolling out Under Armour branded shop-in-shops in select locations and they are waiting to see how the concept works.


The direct segment saw strong growth in the camping, automotive and gift categories. For the quarter, Internet business increased 28%, while circulation of catalog pages increased “only modestly.”


Improvements in merchandise gross margin were attributable to two specific items. First, CAB made considerable improvements in shipping margin due to issues experienced last year related to the “package merge process,” which combines two orders from the same customer into one package. The company expects to benefit from improved shipping margin in the third quarter as well for this same reason. Improvements in shipping margin accounted for nearly half of the improvement in merchandise gross margins.


Secondly, CAB has been able to increase gross merchandise margins through better merchandising practices like reduction of obsolete and slow moving inventories as a percent of sales. This second factor has also brought overall inventories down. As of June 30, 2007 inventory levels increased 13.5% compared to the year ago period, while merchandise sales increased 16.4%.


Operating margins increased 70 basis points to 4.5% from 3.8% in the same quarter last year. The increase is mostly related to improvements in the direct segment. Operating margins in the direct segment increased 200 basis points to 16.7%. These results were impacted by improvements in merchandise gross margin. Direct marketing costs were flat at 14% of direct revenue.


Operating margins in the retail segment increased 20 basis points to 11.1% as compared to 10.9% in the same quarter a year ago. The increase in retail operating margins is primarily attributable to higher gross margins. This margin gain brought net income up 34.8% in the quarter to $11.3 million versus $8.4 million in the second quarter of last year. Diluted EPS were 17 cents compared to 13 cents last year.


Cabela’s will be able to open several new stores two to three weeks ahead of schedule. This slight acceleration has pushed more pre-opening costs into the third quarter. However, the associated revenue generated from the earlier than planned openings will have a positive impact in the fourth quarter. Management is expecting mid-teens revenue, net income and earnings per share growth in 2007.