Cabela’s Inc. reported a better-than-expected profit for the third quarter, but issued guidance that indicated the fourth quarter would be softer than analysts originally estimated. In a conference call with analysts, management for the World’s Foremost Outfitter confirmed that previously-astronomical sales of firearms and ammunition have shown signs of curbing and fourth quarter numbers would struggle to anniversary against fourth quarter 2008 results that were inflated by guns and ammo sales.
CEO Tommy Millner said the outdoor retailer has seen growth rates in firearms sales “slow sequentially” as the “Obama factor” subsides and the recession continues to soften. “As demand for ammunition and firearms moderates, we expect customer spend(ing) to shift back to a more normalized merchandise mix
,” Millner said. “During the quarter, all four of our other categories improved sequentially at an accelerating rate, and this trend has continued into the fourth quarter.”
For the third quarter, management said merchandise gross margin, which declined 100 basis points, was impacted by the “ongoing mix shift” to lower-margin hardgoods categories, as well as efforts to liquidate unproductive inventory.
By segment, Retail store revenue increased 6.1% to $348.0 million led by a 3.5% increase in comparable store sales — the retailer’s fourth consecutive quarter of positive comps. Average ticket prices for the quarter increased 3.4%. Operating margins or the Retail segment increased 240 basis points to 11.6% as compared to 9.2% in the year-ago period as the company “improved labor utilization and advertising efficiency.” Labor costs as a percentage of revenue improved by 120 basis points.
Direct revenue decreased 6.2% to $226.2 million as the company lowered direct marketing costs 15.1%, resulting in increased revenue per catalog page. Operating margins in the Direct segment increased 120 basis points to 15.1% compared to 13.9% in the year-ago period as the company cut catalog and Internet marketing costs. In the future, management said Cabela’s would continue shifting spending from traditional paper catalogs to the Internet business. During the quarter traffic to cabelas.com increased 14.9%, a pattern that management expects to continue for the foreseeable future.
For the Financial Services segment, revenues, driven by higher interest rates and other fees, grew 15.0% to $48.2 million in Q3. Managed credit card loans increased 8.7% and average accounts grew the same amount while net charge-offs decreased sequentially to 5.02% from 5.24% in the previous quarter. CAB now expects charge-offs for the year to be between 5.1% and 5.3%, as compared to the previous guidance of between 5.1% and 5.5%.
CAB added that it will need to provide an additional $200 million to its financial services segment in Q1 2010 as it consolidates its credit card trust, but management said the company has accrued enough excess cash to accommodate the investment. Management also said they would be amending the credit facility in the fourth quarter of 200, since its current facility “limits further capital contributions to [the] financial services subsidiary.”
Regarding outlook, management expects diluted EPS for the year to increase at a mid-single digit rate with an opportunity to exceed these results should the strength seen in October continue for the remainder of the year. Direct revenue is expected to decline low- to mid-single digit rates while consolidated revenue growth and comps are expected to increase at a mid-single digit percentage rate.
