Cabela’s Incorporated reported comparable stores sales grew in U.S. in the second quarter ended June 27, the first time in a year, thanks in part to a mid-single-digit increase in gun sales that may indicate a long awaited turn in the firearms market has begun.
While a 10 percent increase in NICS background checks marked the biggest growth in gun permit applications in two years, Cabela's has long said it sees no correlation between that data and its own firearms sales.
“There's just a lot of noise in the NICS data,” said President and CEO Tommy Millner. “I'll just tell you that our gun business is really good.”
Nevertheless, second quarter results fell short of expectations. The fall came as a result of softer-than-anticipated merchandise sales, prompting the retailer to spend more on promotions than originally planned in a bid to protect its market share. Incentive compensation and labor costs, however, exceeded expectations. As a result, total revenue increased 9.9 percent to $836.3 million, or about $17 million short of the average analyst estimate. Despite assurance the company would still hit its fiscal year goals, CAB's stock price fell 11.5 percent on the news Thursday.
CAB reported Retail store revenue increased 13.9 percent to $570.1 million and Direct revenue decreased 7.0 percent to $136.8 million, as ammo sales shifted back to the bricks-and-mortar channel. Financial Services revenue increased 14.2 percent to $124.9 million. Cabela's said its average number of active credit card accounts grew 7.0 percent during the quarter, while average balance per active account grew 5.5 percent and the average balance of credit card loans grew 12.9 percent to $4.3 billion. Figures indicate core customers are spending more despite federal data that indicate American's are putting most of their savings from lower gas prices into their savings accounts.
Canada and apparel drag down retail results
Consolidated comparable store sales decreased 0.9 percent as compared with a 1.3 percent decline a year earlier. Currency-related declines in Canada more than offset a 0.8 percent increase at U.S. stores, where comparable store sales were fueled by higher comps of lower margin hunting equipment, camping, fishing, firearms, ammunition, power sports and home/gifts.
CFO Ralph Castner said new store openings continue to drive down comparable store sales by about 100 basis points. High-ticket items such as boats, tractors and marine electronics benefited from “very, very inexpensive, perhaps even free, financing.”
Transactions were down 2 percent on top of a 2.4 percent decline in the first quarter, while ticket was up 1.1 percent.
A shift in ammunition sales from the Direct channel to the Retail channel, combined with further pressure from new retail square footage, contributed to the 7.0 percent decrease in Direct revenue for the quarter, when half of e-commerce traffic came from mobile devices.
Weak soft goods sales trigger promotions
Strong performance in hardline categories such as power sports, firearms and ammunition and weaker performance in soft goods and apparel categories, combined with a more aggressive promotional cadence, contributed to the 120 basis point decrease in merchandise gross margin for the quarter.
“About two-thirds of it was our more aggressive promotional posture,” Millner said. “And the reason we did that was that the second quarter is by far our lowest seasonal revenue period. There's not a lot being hunted. Certainly, fishing and camping are in play, but we really wanted to protect our market position, knowing that in the back half of the year we've got a lot of good things going for us. Our vendors are very supportive in the back half of the year.”
Millner attributed lower apparel sales to softness in hunting apparel, which he said appears to be affecting the entire industry for reasons that are not clear. He said he was particularly pleased to see continued direct channel growth in the camping category, following a major product launch this spring that was accompanied by national television ads encouraging people to go camping. He also noted that while next-generation stores in the comp base continued to perform, new store sales were softer than expected. Performance continued to improve at Outpost stores, which are designed for more rural markets, possibly reflecting a higher mix of national brands.
“I don't think that's a negative comment on Cab-branded product at all,” said Millner. “I think it's that customer in those small towns don't have a place to buy North Face, Under Armour, Carhartt, Columbia, Danner boots, etc.”
Operating profit decreased by 190 basis points for the second quarter, as a result of an increase in certain fixed costs, such as incentive compensation, new stores, pre-opening costs and distribution in Canada. Net income was $40.1 million, compared to $43.5 million in the year ago quarter, and earnings per diluted share were 56 cents, compared to 61 cents a year earlier.
New costing cutting program helps affirm full year guidance
CAB reaffirmed its full year guidance, which calls for low-double-digit sales growth rate and a high-single to low-double-digit growth rate in diluted earnings per share for full-year 2015, as compared to full-year 2014.
With improving trends in certain apparel categories and fewer promotions, CAB expects merchandise gross margins to stabilize at year earlier levels in the second half of 2015.
The increase in second quarter gun sales, which has continued in the current quarter, should also drive traffic into stores and help stabilize margins in the critical fourth quarter as hunting season kicks into high gear.
“And, probably no surprise, we have some cautious optimism that as we get into an election cycle that heightens interest in these categories,” Millner added. “And if it does, it's a good thing for our business. Traffic lessens the need to be more promotional.”
Results will be aided by a 53rd week of sales in the fourth quarter that will add $60-to-$70 million in sales and $5-to-$6 million in operating profit, as well as lower incentive compensation costs, store openings and a new cost cutting initiative aimed at freeing up dollars should the promotional environment and margins not improve in the fourth quarter and 2016.
