Cabela’s Q3 Earnings Hit By Shipping Issues…

Cabela’s saw a strong third quarter driven by store expansion, positive comp-store sales gains, a better in-stock position, and increased store traffic caused by lower gas prices. Every division saw top-line gains during the quarter, and key infrastructure upgrades are expected to drive better bottom line performance going forward. Excluding the Owatonna store, same-store sales would have been up a positive 6% in the third quarter. Some of Cabela’s larger stores generated better than average comps during the quarter.

Key categories driving sales included hunting, optics, archery, select footwear categories, casual clothing, and camping. Management also said sales of The North Face have “been very important to us over the last short period of time.” Other strong brands during the quarter included Spyder and Columbia.

The company said that the effect of lower gas prices has been very positive for store traffic, but the company is not counting on this trend continuing. Going forward, Cabela’s is planning stores closer to larger urban populations to mitigate any negative impact of rising fuel prices.

During the quarter, Cabela’s opened three new stores, one in Glendale, Arizona; one in Boise, Idaho; and one in Richfield, Wisconsin. Pre-opening expenses increased by $1.8 million over the same quarter a year ago. For 2006, the company will end the year with 18 stores in operation, with total retail square footage of nearly 2.7 million square feet, representing a 29% increase over 2005. Cabela’s expects to increase this square footage number by roughly 45% in 2007. As the company builds stores closer together, management is anticipating some cannibalization. With the stores opening next year, two will likely be “impacted slightly.”

While many of Cabela’s competitors are fighting legal battles to prevent public funding of Cabela’s retail locations, the company has seen no impact on their individual store opening expenses. The total dollar amount does continue to climb, but this number is reportedly in-line with their accelerated opening plan. The company anticipates roughly 30% of their opening expenses to be funded with economic incentives.

“On my desk, several times a week, I continue to receive proposals from different communities across the United States and Canada,” Dennis Highby, Cabela's president and chief executive officer said during a conference call with analysts and the media. “A lot of these incentives are very similar to what we have received in the past.”

Gross margins remained relatively flat during the quarter due to increased promotional activity and reduced shipping margin in the direct segment, due to higher freight and shipping expenses. Gross margins would have been up 30 basis points, had it not been for these shipping problems caused by the implementation of Cabela’s warehouse management system, which prevented the company from consolidating a customer's order into one package. The new system was fully implemented last week and Cabela’s expects to see some up-side in Q4.

SG&A increased year-on-year due to increases in depreciation related to several IT initiatives and additional pre-opening expenses. This brought the company’s consolidated operating margin down to 5.1% in the third quarter of 2006 versus 6.1% in 2005. This, in turn caused the declines in net income and earnings per share.

Cabela’s now expects fiscal 2006 earnings per share results to be at the high end of their mid-teens growth rate. Operating margins should approach 7% for the full year, compared to 6.4% last year.