Cabela’s Reports Q1 Earnings Up 58%; Direct Segment Boosts Sales

Cabela’s Incorporated reported total revenue for the quarter of 2010, adjusted for divestitures, increased 5.1% to $559.6 million; retail store revenue decreased 1.5% to $271.3 million; direct revenue increased 2.1% to $222.7 million; and comparable store sales decreased 1.7%.

“We are encouraged with our revenue growth for the quarter, and in particular, revenue growth in our direct segment, which increased for the first time in six quarters due to growth in Internet sales,” said Tommy Millner, Cabela’s Chief Executive Officer. “As we anniversary the period of strong sales of firearms and ammunition, we have been pleased that sales declines in these two categories have been less than expected. Additionally, we are pleased with the sales increases we are seeing in other areas of our business, such as fishing and marine, camping, footwear, optics and gifts and furnishings.”

“We are very pleased with the operating results we achieved during the quarter and our continued progress on our areas of strategic focus,” Millner said. “As we have previously discussed, our strategic initiatives are to improve retail profitability, increase returns on invested capital, improve inventory turns and increase Cabela’s brand loyalty through the operations of World’s Foremost Bank. Internet sales were a special standout during the quarter. As the Internet continues to be the growing, preferred shopping channel for our direct customers, it is encouraging to see us capitalize on this trend. Additionally, ongoing improvements in catalog productivity as well as improved operating efficiencies in our retail stores contributed to expense reductions in the quarter.”

Merchandise gross margins were lower than last year, but improved sequentially throughout the quarter; a trend that has continued into the second quarter. The company continued to tightly manage inventory levels and realized a 22% reduction in inventory levels compared to the first quarter of 2009.

For the quarter, consolidated operating income increased 29.3% to $15.9 million compared to $12.3 million in the first quarter of 2009. Operating margins increased 50 basis points to 2.8% compared to 2.3% in the first quarter of 2009. Increases in operating profit were due to the strong performance of World’s Foremost Bank, improved catalog productivity in the direct segment and lower labor costs in retail stores. For the quarter, net income increased 57.8% to $8.1 million, or 12 cents per diluted share compared, to $5.1 million, or 8  cents per diluted share, in the first quarter of 2009.

During the quarter, World’s Foremost Bank received from the Federal Deposit Insurance Corporation a preliminary report related to a compliance examination conducted in the second quarter of 2009. This examination report expressed concerns that World’s Foremost Bank improperly assessed various overlimit fees, penalty interest rates and late fees over the past six years, and also used an improper collection practice. The company is currently in discussions with the FDIC to resolve these matters. In the event that the company is unable to resolve any of the issues raised in the preliminary examination report, the company estimates that its maximum financial liability is $12 million after-tax and has reserved that full amount as a special charge in its first quarter 2010 financial statements. The company eliminated or modified all of the practices of concern to the FDIC during the second half of 2009. The first quarter 2010 results include the impact of this $12 million after-tax special charge.

For the quarter, excluding the $12 million after-tax special charge, net income increased 122% to $20.0 million, or 29 cents per diluted share. This compares to net income of $9.0 million, or 13 cents per diluted share, in the first quarter of 2009, which excludes $3.9 million of special charges related to impairments and the valuation of interest only strips. A detailed reconciliation is provided at the end of this release.

For the quarter, managed financial services revenue as a percent of managed credit card loans improved 380 basis points due primarily to increased interest and fee income, lower provision for loan losses and lower interest expense. For the quarter, charge-offs were 4.96% compared to 4.72% in the first quarter of 2009. This is the lowest quarterly increase in net charge-offs in the past two years and the lowest absolute charge off rate in the past three quarters. As a result of continued favorable charge-off trends and a more favorable outlook for charge-offs for the remainder of the year, provision for loan losses for the quarter was $15.1 million.

As of April 3, 2010, inventories totaled $446 million, a decrease of 22% compared to inventories of $574 million as of March 28, 2009. Total debt as of April 3, 2010, was $351 million compared to $475 million as of March 28, 2009, a decrease of $124 million or 26%.

“We are pleased with our continued progress controlling costs, driving operational excellence, strengthening our balance sheet and increasing Cabela’s brand loyalty through the operations of World’s Foremost Bank,”Millner said. “Given our strong first quarter results, we expect earnings per share for 2010 to meet or exceed current expectations, even after absorbing the special charge taken in the first quarter. Additionally, given continued favorable trends related to charge-offs, we now expect average net charge-offs at World’s Foremost Bank to be between 5.25 and 5.75% for 2010 as compared to our previous guidance of 5.75 to 6.25%.”

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