Cabela’s Q3 Profits Expand 17 Percent

Retail store revenue increased 20.8 percent to $550.9 million; Direct revenue increased 0.9 percent to $198.6 million; and Financial Services revenue increased 14.5 percent to $98.4 million. Comparable store sales increased 3.9 percent.
“In today's difficult marketplace, the strong performance of our next-generation stores continues to be a competitive advantage,” said Tommy Millner, Cabela's Chief Executive Officer. “Growing our retail footprint through our next-generation store format provides an exciting vision into the future of our Company. In the third quarter, 14 of our 18 next-generation stores were open for the full period and outperformed our legacy store base by approximately 50 percent in sales per square foot and approximately 60 percent in profit per square foot. Based on this, we plan to expand retail square footage at a low to mid-teens rate over the next several years with our next-generation and Outpost store formats.”

The 3.9 percent increase in comp store sales is the eighth consecutive quarter of comp store sales increases. Excluding firearms, comp store sales increased 5.3 percent as sales of firearms significantly moderated during the quarter. The eight next-generation stores in the comp base at the end of the quarter generated comp store sales of 6.7 percent. Ammunition sales, while still above prior year levels, slowed during the quarter. We saw strong performance in men’s apparel, hunting apparel and general outdoors.

“Although Direct revenue increased for the fourth consecutive quarter, the results fell short of our expectations,” Millner said. “These results were caused by a deceleration in ammunition sales and Internet traffic, lower average ticket and a more cautious consumer. Since we expect these trends to continue, our Direct business in the fourth quarter is anticipated to decline at a mid-single digit rate. During the quarter, we continued to enhance our omni-channel efforts through greater use of digital marketing and the limited roll out of omni-channel fulfillment. In the fourth quarter, we will continue to expand our omni-channel fulfillment capabilities and will implement a number of improvements to our mobile platform.”

For the quarter, merchandise gross margin improved 10 basis points to 37.3 percent compared to the prior year quarter. Merchandise mix declines from ammunition sales were more than offset by margin improvement due to the elimination of free shipping to CLUB members and increased penetration of Cabela's brand merchandise.

“Starting in August, we saw a significant deceleration in the sales of firearms and ammunition as well as a challenging consumer environment across all business channels,” Millner said. “To compensate, we increased marketing and advertising spending by several million dollars. In addition, we took an aggressive approach to managing other costs to levels consistent with how our business performed and will continue to manage those costs accordingly through the rest of the year.”

“In the fourth quarter of last year, comp store sales increased a very strong 12.0 percent, which, at the time, was our largest increase ever as a public company. Due to this very difficult comparison, we expect comp store sales to decline at a mid-single digit rate in the fourth quarter. We believe that we have managed expense levels consistent with these expectations.”

The Cabela's CLUB Visa program had another solid quarter. During the quarter, growth in average active credit card accounts accelerated to 10.1 percent due to increases in new customers, primarily in the Retail and Internet channels. For the quarter, net charge-offs remained at extremely low levels and were 1.72 percent compared to 1.71 percent in the prior year quarter. Increased Financial Services revenue was driven by increases in interest and fee income as well as interchange income. With 2008 restructured credit card loans approaching their five year statutory maturity, and additional history on loans restructured subsequent to 2008, we are now able to perform additional analysis regarding performance of the restructured loan portfolio. As a result of this analysis, the allowance for loan losses was reduced by $5.1 million during the quarter, compared to a $1.3 million reduction in the third quarter last year.

In the fourth quarter last year, a $12.5 million charge related to the Visa antitrust settlement was recognized. We recently received notification from Visa that the impact of the proposed settlement had been reduced causing a decrease in our estimate of $1.7 million. Additional adjustments were made for certain employee related expenses in the quarter. The net impact of these items was a benefit of $0.01 to earnings per share for the quarter. See the supporting schedules to this earnings release labeled “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of the GAAP to non-GAAP financial measures.

The tax rate for the quarter was 31.3 percent compared to 32.3 percent in the year ago quarter due to more effective tax planning. The fourth quarter tax rate is expected to be between 31.5 percent and 32.5 percent, which is slightly below our previous guidance of between 32.5 percent and 33.5 percent. For 2014, the tax rate is expected to be between 31.5 percent and 33.5 percent.

“Return on invested capital improved by 110 basis points over the same quarter a year ago,” Millner said. “With our strong operational improvements, we are confident in our ability to generate even further improvements in return on invested capital.”

“Although the consumer environment is difficult, we continue to be very pleased with the strong performance of our next-generation stores, omni-channel progression and growth in our Cabela's CLUB loyalty program,” Millner said. “Our retail stores are performing at very high levels, and we have adjusted expenses to be more in line with current business trends. As a result, we are comfortable with the current external earnings estimates for the fourth quarter of 2013. While our 2014 budget is not yet finalized, we expect 2014 earnings per share to be the sixth consecutive year of double-digit earnings per share growth.”