Following a first quarter that saw management voice concern over an increase in bad debt expenses, Cabela’s Inc. rebounded mightily in  the second quarter to post better-than-expected profits as delinquent accounts decreased in every classification and charge-offs were at their lowest levels since February.  Second quarter results included an $8.5 million (8 cents) improvement from a pre-tax benefit related to the residual interest in credit card receivables and an $11.7 million (11 cents) charge from a real estate write-down.


Consolidated revenues for the World’s Foremost Outfitter increased 4.4% as Retail division revenues jumped 10.2% on a 6.1% boost in comps that marked Cabela’s third straight quarter of positive gains. Operating margins for the Retail segment improved 310 basis points to 11.3% and compared to 8.2% in last year’s second quarter as the retailer reduced labor costs and improved advertising efficiency.
On a conference call with analysts, management credited an increase in consumer demand for hunting equipment — driven primarily by continued strength in ammunition and firearms — that more than offset weakness from the retailer’s Power Sports division. Management also noted strength in comping stores from archery products, tree stands, optics, camping, fishing and reloading.


Direct revenue for Cabela’s slid 3.6% despite the retailer cutting marketing costs by 10.1%, but operating margins improved 360 basis points from 12.7% to 16.3% due to improvements in direct marketing expenditures, higher gross margin and more efficient advertising. Traffic at Cabelas.com increased 18.6% in the quarter.


For the World’s Foremost Bank, the company’s wholly-owned subsidiary, average managed credit card loans increased 11.5% while average accounts grew 9.8%.  Financial Services revenue increased 15.4% to $44.1 million. Management attributed the growth to higher interest rates, an increase in the valuation of the residual interest in credit card receivables, and other fee income.  The company said it recently completed a competitive pricing analysis of its credit card portfolio and has made the decision to re-price the portfolio based on this analysis and changing market conditions. Management said these pricing changes are expected to take effect in the third quarter.  As a result, the valuation of the company’s interest-only strip associated with its securitized credit card receivables increased by $8.5 million in the quarter, which increased earnings by 8 cents per diluted share in the quarter.  In June, Cabela’s announced that Wachovia Bank renewed its $225.0 million commitment issued by Cabela’s Credit Card Master Note Trust. The commitment is for one year.


CEO Tommy Millner said in the conference call that response for the new “next of generation” stores has been positive. CAB said the next generation stores – the first of which opened in August of 2008 – are smaller and more efficient. The latest next generation store opened in Billings, MT in May.


As the company enters what is traditionally the strongest quarter for hunting and fishing retailers, Millner said the surge in gun sales has been decelerating but that management expects ammunition expects to remain strong in the back-half of 2009.


Regarding outlook, Millner expects total revenue growth and same-store sales to increase low-single-digits as opposed to the original forecast for sales and comps to be roughly flat. Direct revenue is expected to decline low to mid-singles and net charge-offs are expected to be between 5.1% and 5.5%.