Significant improvement from its financial services segment and a direct business that has resurged on climbing Internet sales helped propel earnings for Cabela’s Inc. nearly 58% for the first fiscal quarter ended April 3, far exceeding most analysts’ forecasts.


Analysts and investors were initially concerned with a tough comps against a year-ago period that benefitted from inflated guns/ammo sales, but management for the self-proclaimed World’s Foremost Outfitter said sales declines in those categories have been “less than expected” and have been offset by strength from other categories. In a conference call with analysts, company CEO Tommy Milner said that despite a slip in same-store sales, Cabela’s has seen notable increases from fishing and marine, camping, footwear, optics, gifts and furnishings. Milner added that Cabela’s reported sales growth in ten of its 11 “non-firearm” categories while also improving retail store labor efficiencies and continuing efforts to clean out aged and “unproductive” inventory.


Adjusted for divestures, revenue for the quarter improved 5.1% to $559.6 million. The divestiture of Van Dyke’s taxidermy business and Wild Wings in late 2009 accounted for $7.1 million of revenue during the first quarter. In the first quarter of 2010, Cabela’s also recorded an estimated $12 million after tax special charge related to concerns the FDIC raised with regards to the way the retailer’s World’s Foremost Bank assessed certain over-limit fees, penalty interest rates and late fees over the past six years.   Management said they are working to “quickly resolve” the matter and added that the vast majority of the charge pertained to restitution.


By segment, monumental strength of the Financial Services business and a sales uptick from the Direct segment more than offset slight weakness from merchandise sales. Management said due to higher interest and fee income and lower provisions for loan losses, managed financial services revenue as a percentage of managed credit card loans was the highest since 2007. For the quarter, average accounts increased by 5.6% and management said the company continues to generate higher average spending and increase shopper frequency.


Charge-offs during the quarter were 4.96% compared to 4.72% in the first quarter of 2009, which management said 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.


Consolidated revenue for the financial services segment increased 77.0%, primarily due to higher interest and fee income of $9.0 million and a lower provision for loan losses of $8.0 million.


In the Retail segment, sales slipped 1.5% but management maintained that the company has improved labor efficiency and said the redesign of footwear departments in stores and the installation of self-service fixtures has boosted footwear margins on the floor. Cabela’s also elected to increase retail advertising for the first time in five quarters.


The average ticket at retail was up 4.9% while sales per labor hour were up 9.5% and total transactions slipped 6.4%. Operating profit for the Retail segment was essentially flat at $17.9 million, yielding a profit margin of 48.5% as compared to total revenue – down 150 basis points from last year’s first quarter.


In the Direct segment, a surge in Internet sales corresponding with increased focus on e-commerce drove overall Direct sales to 2.1% growth for the quarter, marking the first time in six quarters the Direct segment has reported growth.


Management said the company has spent the past 18 months redesigning and plans to launch the new site this summer.


“Our investment in this project of $10 million will ensure that our e-commerce position in the outdoor space will continue long in the future,” Milner said. Milner added that Cabela’s also continued to cut marketing costs by focusing on smaller catalogs and increased circulation. The retailer introduced three new catalogs during the quarter, all of which “performed well.” Operating profit in the Direct segment improved 2.9%, yielding a margin as a profit margin of 38.8%, down 200 basis points from last year.


As noted, management for Cabela’s said they continue to focus on tightly managing working capital and tightening inventory levels. Milner added that despite the fact that merchandise margins slipped during the quarter as Cabela’s clears out excess inventory, the long-term effects of merchandise management should reflect a 200 to 300 BPS improvement  by 2012. Cabela’s ended the first quarter with inventory levels of $445.7 million, about 22% better than the year-ago period.


Regarding outlook, CAB said that due to strong Q1 results, EPS are expected to “meet or exceed” current expectations for 12 cents per share for fiscal 2010.  Charge-offs at the World’s Foremost Bank are expected to be between 5.25% and 5.75% for the year as compared to previous guidance of 5.75% to 6.25%.