Cabelas Inc. said earnings slid 35.4% on a 16.6% rise in sales due largely to higher net charge offs of bad debt in its credit card business-a major source of profits for the retailer that is now masking improvements at it retail operations. Total revenues reached $526.0 million, buoyed by a 37.1% increase in retail sales to $273.6 million. The increase was due primarily to new stores, as comparable store sales slipped 1.6% – a big improvement from the first quarter when same store sales fell 8.4%. Direct sales rose 1.5% to $207 million.
President and CEO Dennis Highby attributed the improved comp performance to more effective and increased advertising. Higher ad spending helped push up average ticket at comp stores by 3%. Still, VP and CFO Ralph Castner said that given the difficult retail environment, he now expects same-store sales to fall 5% to 7% for the year, compared to negative 2% to 3% previously forecast. He said he
expects direct revenue to be flat or down slightly for the year.
Executives said fishing was slow and camping was “a great category.” Hunting sales have been strong all year, in part because people snatched up guns and ammo in anticipation the Supreme Court might restrict gun ownership. Apparel sales were up over the prior year.
Gross profits rose 9.7% to $209.6 million, while consolidated gross margin fell 260 basis points to 39.8% of sales. Merchandise gross margins slipped 140 basis points to 34.5%. The decrease in merchandise gross margin was primarily due to greater mark downs, particularly in the direct segment. Consolidated operating income fell 26.7% for the quarter to $14.9 million, while operating margins fell 170 basis points to 2.8% from 4.5% in the year earlier quarter.
In the retail segment, operating margins fell 290 basis points to 8.2% due to higher advertising expenses, lower fees from credit card sales and higher depreciation expense. Consolidated SG&A expenses fell 90 points to 37% of sales, or $194.7 million.
The company reported net income of $7.3 million, or 11 cents per share, down from $11.3 million, or 17 cents per share, in the same quarter a year ago.
By quarters end, inventory was 20.4% above the end of Q2 last year, a marked improvement over the fourth and first quarters when inventory was up 26% and 23%, respectively. On a comp store basis, inventory per square foot was reduced nearly 7% to $60 per square foot. The company expects to further reduce inventory growth in the back half of the year, in part by marking down slow selling items in-season, rather than waiting until end-of-season closeout sales.
The decline in financial services income was due to net charge offs climbing to 2.76% from 2.53% in the first quarter and 1.65% in the year ago quarter. Castner said he expects bad debt levels to be roughly 2.7% to 2.9% for the year, up from prior guidance of 2.6%.
“The bank marketing fees are actually masking a lot of our improvement at retail,” said Castner, acknowledging that credit card income had countered the steep decline in comp sales in the first quarter. To rein in rising charge-offs, Cabelas no longer grants credit line increases automatically.
Castner said CAB is confident it can generate mid-teens revenue growth and mid-single digit earnings per share growth for 2008. “While we expect a challenging sales environment for the remainder of the year, most of our growth in profits will be in the third and fourth quarters,” he said.
