Cabela’s Q3 Profit Climbs on 2.4% Comp Gain

Financial services revenue increased 10.9% to $53 million.

For the quarter, consolidated operating income increased 15% to $36.6 million compared to $31.9 million in the third quarter of 2009. Operating margins increased 60 basis points to 5.7% compared to 5.1% in the third quarter of 2009. Increases in operating profit were due to higher merchandise gross margins and strong comparable store sales. For the quarter, net income increased 5% to $19.7 million, or 29 cents per diluted share, compared to $18.8 million, or 28 cents per diluted share, in the third quarter of 2009.

Cabela's recently completed the sale of its non-strategic Van Dyke's Restorer's business and in the process took a third quarter non-cash impairment charge of 3 cents per diluted share. Exclusive of impairment charges, for the quarter, net income was $21.6 million compared to $19.0 million in the third quarter of 2009 and diluted earnings per share were 31 cents compared to 28 cents in the third quarter of 2009. A detailed reconciliation is provided at the end of this release.

“We are focusing on improving merchandise gross margins, expanding retail operating margins and improving return on invested capital,” said Tommy Millner, Cabela's chief executive officer. “In the third quarter, we were very pleased with the significant improvements in merchandise gross margins and retail operating margins, while managing working capital, which led to a 90 basis points improvement in return on invested capital.”

“We are particularly pleased with the improvement in merchandise gross margins, which expanded 170 basis points to 34.5% in the quarter, our second consecutive increase and the biggest increase we have seen in more than three years,” Millner said. “These improvements were broad based as margins improved in all five of our merchandise categories. Three ongoing initiatives contributed to margin expansion in the quarter: better pre-season planning, greater vendor collaboration and improvements in in-season management. These broad-based improvements give us confidence that merchandise gross margin expansion will continue throughout this year, and we expect to achieve our three year goal of improving merchandise gross margins 200-300 basis points by the end of 2012.”

“Profitability in our retail segment improved 250 basis points in the quarter,” Millner said. “This is the sixth consecutive quarter of improvement in retail segment profitability. The increase in retail operating margins is primarily due to increases in merchandising gross margins and reducing expenses as a percentage of sales.”

“As a result of the significant improvements in profitability during the quarter, we chose to make additional investments in direct marketing costs and retail labor,” Millner said. “In our direct business, we mailed additional catalogs and increased circulation further building our market position and heightening our brand awareness and loyalty. In our retail stores, in preparation for the holiday season, we hired additional employees to ensure we build on our industry leading customer service levels.”

For the quarter, managed financial services revenue as a percentage of average managed credit card loans improved 40 basis points primarily due to lower provision for loan losses, higher interchange and lower interest expense. For the quarter, average net charge-offs were 3.85% compared to 5.02% in the third quarter of 2009. This is the lowest absolute charge-off rate realized in the last six quarters. Given continued favorable trends related to charge-offs, average net charge-offs at World's Foremost Bank are expected to be between 4.25 and 4.50% for 2010 as compared to previous guidance of 5.00 to 5.50%.

“We believe the improvements in our business are sustainable,” Millner said. “As a result of the progress we have made on our strategic initiatives and the strength of our business in the third quarter, we expect our full year 2010 earnings to meet or exceed current expectations. Furthermore, we expect earnings for 2011 to grow at a double digit rate.”