Cabela's Incorporated saw its comp store sales fall nearly 22 percent in the first quarter as it comped against last year’s unprecedented surge in gun and ammo sales and contended with harsh winter weather in many of its markets.
CAB’s total revenue decreased 9.6 percent to $725.8 million; Retail store revenue decreased 9.4 percent to $440.9 million; Direct revenue decreased 20.3 percent to $179.4 million; and Financial Services revenue increased 14.9 percent to $98.6 million. Comparable store sales decreased 21.7 percent, due to primarily to the significant decline in firearms, ammunition and other shooting-related categories.
Merchandise gross margin decreased 120 basis points to 34.4 percent primarily due to lower margins in firearms, ammunition and shooting products, as demand for those categories returned to pre-surge levels, supplies improved. The company estimated margins on firearms products increased 400 basis points during the height of the boom. CAB said cold weather also hurt margins as the mix of end-of-season, cold-weather apparel and gear increased after Feb. 15, when it had planned to switch over to spring floor sets.
“With the harshness of the winter that just wouldn't go away, we were left with selling – it seemed like forever – end-of-season, cold-weather products, from packed foods to 4-way parkas and base layer,” said CAB CEO Tommy Millner. “We were we're just trying to stretch into a spring that didn't come until April.”
While tight expense control and strong profits from Cabela’s loyalty program and financial services segment offset weaker revenue and lower merchandise margin, net income fell 48.4 percent to $25.7 million, or 36 cents per diluted share, compared to 70 cents in the year ago quarter.
Comparable store sales of firearms and ammunition declined 39 percent and 32 percent, respectively, causing overall comps to declined 25 percent to 30 percent through the first six weeks of the quarter. Comparable store sales improved each month through the quarter and are expected to continue improving throughout the second quarter.
Comp store sales of softgoods and general outdoors declined at a high single-digit rate. Footwear comped down slightly; while hunting apparel, powersports and women's and children's apparel, comped down mid-single digits. Men's apparel, hunting equipment, home and gifts and archery, all comped down low teens. While difficult to measure, Millner said much of the broad decline was due to declining traffic as firearms traffic subsided. The late start to spring also challenged comp store sales in both softgoods and general outdoors categories.
Direct, or online and catalog, sales of ammunition and other shooting related categories also dropped sharply, although online sales of hunting equipment, hunting apparel and footwear were encouraging. Conversion rates from both desktop and mobile devices increased.
Millner said the retailer gave up hundreds of basis points of margin on modern sporting rifles and other firearms categories to try to stimulate sales early in the quarter only to find they remained flat when it scaled back promotions later.
“In the first quarter, we anniversary the most difficult comparisons versus the firearms and ammunition surge last year,” said Millner. “The obvious downdraft of traffic year-over-year from the surge was just something we knew was going to happen, and we knew it would affect the other categories of our business. I think what we didn't expect was a winter that simply wouldn't end. And our stores were set for spring on February 15.”
Still, Millner pointed out the many things that went right during the quarter including astounding performance at the company’s new stores, increased penetration of Cabela’s branded softgoods and growth in our Cabela’s Club loyalty program.
Average sales per square foot reached $497 at 14 new stores opened in the trailing 12 month period, outperforming legacy stores by an astounding 46 percent. Profit per square foot at those stores hovered just below the comparable figure for 2013.
“It is important to note that the sales penetration of firearms and ammunition within each of our store formats is nearly identical,” noted Millner.
The performance ensures CAB will move ahead with its retail store expansion program which calls for opening approximately one million square feet per year of new stores for the next several years.
CAB opened its first stores in August, GA; Greenville, SC and Anchorage, AK during the quarter.
Cabela’s branded product penetration in softgoods and footwear accelerated increased 470 basis points to 58.7 percent during the quarters as consumers embraced such new products as the XPGTM (Extreme Performance Gear) softgoods and footwear, Cabela’s Guidewear, and Wildlife and Land Management products.
CAB was able to limit growth in operating expenses to 4.7 percent even as it increased retail square footage by 14 percent compared with the first quarter of 2013. Expenses are expected to grow in the mid- to high-single digit expense range in each of the remaining quarters of the year.
Millner said the company began strategizing on where to cut costs last year because “we knew this Mt. Everest of Q1 and Q2 was facing us. The company has permanently eliminated positions at its retail stores, trimmed incentive compensation, and cut travel expenses by $2 million, but shielded its new store and omnichannel retail initiatives.
Finally, while the number of Club Visa transactions declined 15 percent during the quarter, the number of retained accounts declined only 5 percent. That indicates that many of the customers who got a Cabela’s brand Visa card to finance a gun purchase over the last two years continue to buy other products from the retailer.
CAB reaffirmed its previous full year guidance, which calls for 2014 revenue to increase at a mid to high single-digit rate and earnings per diluted share to increase at a high single-digit to low double-digit rate versus 2013 adjusted earnings per diluted share of $3.32. Revenues are expected to grow at a low single-digit rate in the second quarter and accelerate to a low double-digit rate in the third quarter as the company finally laps the gun boom. Earnings per diluted share are forecast to hit 45 to 55 cents in the second quarter and 85 to 95 cents in the third quarter.
The guidance assumes expense growth will accelerate to the mid to high single-digit range in the remaining quarters in 2014 and improving merchandise margin in the second half of the year, when CAB expects to introduced new softgoods and more normalized firearm and ammunition promotions and have more new stores operating.