Cabela’s Inc., in its first report since announcing plans to merge with Bass Pro, said heightened markdowns caused adjusted earnings in the third quarter ended October 1 to slide 26.8 percent, falling well short of Wall Street targets.
The company accelerated the timing of its earnings press release so that it could provide financial information to certain third parties in connection with the pending acquisition of the company by Bass Pro Shops. Subject to regulatory and Cabela’s shareholder approvals, the merger is expected to close during the first half of 2017.
For the quarter, total revenue at Cabela’s increased 7.6 percent to $996.5 million; revenue from retail store sales increased 8.1 percent to $688.6 million; Internet and catalog sales increased 3.6 percent to $167.4 million; and Financial Services revenue increased 8.8 percent to $134.5 million. During the period, adjusted for the shift in weeks, U.S. comparable store sales decreased 1.8 percent and consolidated comparable store sales decreased 2.3 percent.
For the quarter, net income decreased 35.4 percent to $28.2 million compared to $43.7 million in the year ago quarter, and earnings per diluted share were 41 cents compared to 62 cents in the year ago quarter. Third quarter 2016 GAAP results included impairment and restructuring charges and other items totaling a 12 cents reduction in earnings per diluted share.
Adjusted for certain items, the company reported third quarter net income of $36.8 million and earnings per diluted share of 53 cents as compared to net income of $50.3 million and earnings per diluted share of 71 cents in the year ago quarter. Wall Street’s consensus estimate had been 81 cents a share.
“During the third quarter, we successfully drove sales growth in several of our key merchandise categories through an aggressive promotional and markdown cadence; however, these promotional activities also resulted in a decrease in merchandise gross margins and were the primary contributor to the profitability shortfall,” said Tommy Millner, Cabela’s chief executive officer. “Importantly, we saw the success of a variety of expense leverage efforts, and we continue to be excited about the company’s announcement of our combination with Bass Pro Shops, which is expected to be completed in the first half of 2017.”
For the quarter, consolidated comparable store sales decreased 2.3 percent and U.S. comparable store sales decreased 1.8 percent as compared to the same quarter a year ago. Comparable store sales strength in firearms and shooting related categories as well as the camping, powersports, and optics categories was more than offset by continued softness in our apparel categories. Internet and catalog sales increased 3.6 percent in the quarter as a result of strength in fishing, camping, optics, powersports and shooting related categories.
Merchandise gross margins decreased by 420 basis points in the quarter to 31.4 percent compared to 35.6 percent in the same quarter a year ago. This decrease was primarily attributable to more aggressive pricing, increased discounts, merchandise mix, and efforts to right size inventory levels. A more aggressive approach to price, promotion and discounting was responsible for approximately 230 basis points of the overall decrease in merchandise gross margin. Merchandise mix was responsible for approximately 90 basis points of the overall decrease and efforts to right size inventory levels were responsible for approximately 50 basis points of the overall decrease.
Expense leverage initiatives continued to generate meaningful contributions to profitability. For the quarter, GAAP basis SD&A expenses as a percentage of total revenue decreased 20 basis points to 35.8 percent as compared to 36.0 percent in the same quarter a year ago. On a non-GAAP basis SD&A expenses as a percentage of total revenue decreased 90 basis points to 34.6 percent as compared to 35.5 percent in the same quarter a year ago.
“We have been very pleased with our expense and process improvement initiatives which have continued to exceed our expectations,” Millner said. “It is important to note that the third quarter marks the fourth consecutive quarter of expense leverage at Cabela’s. These efforts span across the entire organization and I commend our teams for executing the implementation of these profitability enhancing improvements throughout the business.”
Cabela’s CLUB had an “excellent quarter” despite an increase in the loan loss reserve, according to the statement. Due to higher delinquency rates, the reserve for loan losses increased by $18.5 million in the quarter. For the quarter, growth in the average number of active credit card accounts was 6.8 percent and growth in average balance per active credit card account was 7.6 percent as compared to the same period a year ago. The average balance of credit card loans grew 14.8 percent to over $5.2 billion as compared to $4.6 billion in the year ago quarter. For the quarter, net charge-offs were 2.21 percent. Third quarter Financial Services revenue increased 8.8 percent over the year ago quarter. This increase was primarily driven by increases in interest and fee income as well as interchange income, both of which were partially offset by increases in the provision for loan losses as well as interest expense.
As Cabela’s will not host a conference call with analysts and investors or provide guidance in connection with the results and does not plan to do so for future quarters while the acquisition of the company by Bass Pro Shops is pending.
