Cabela's Inc (CAB)

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Cabela's (CAB)

Q3 2010 Earnings Call

November 02, 2010 11:00 am ET

Executives

Chris Gay - Treasurer

Thomas Millner - Chief Executive Officer, President and Director

Ralph Castner - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chairman of World's Foremost Bank

Analysts

Rick Nelson - Stephens Inc.

Reed Anderson - D.A. Davidson & Co.

Jonathon Grassi - Longbow Research LLC

Mark Smith - Feltl and Company, Inc.

Derek Leckow - Barrington Research Associates, Inc.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Stephen Gregory - Mandalay Research

David Magee - SunTrust Robinson Humphrey Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. Third Quarter Fiscal 2010 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Chris Gay, Director, Treasury and Investor Relations. Please go ahead.

Chris Gay

Good morning. I welcome everyone listening today, both on the conference call and by webcast. A replay of today's call will be archived on our website at www.cabelas.com.

With me on today's call are Tommy Millner, Cabela's Chief Executive Officer and Ralph Castner, Cabela's Executive Vice President and Chief Financial Officer.

This conference call will include forward-looking statements. These statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance. Actual events or results may differ materially from those statements. For information about certain factors that could cause such differences, investors should consult our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Special Note Regarding Forward-Looking Statements.

Additionally, this conference call will include certain non-GAAP financial measures. Please refer to our earnings release to find reconciliations of these non-GAAP financial measures to GAAP.

Now onto the financial results. For the quarter, adjusting for divestitures, consolidated revenues increased 3.9% to $643 million, retail revenue increased 6% to $369 million and direct revenue decreased 1.1% to $219 million.

For the quarter, financial services revenue increased 10.9% to $53 million as compared to $48 million in the year ago quarter. The increase in financial services revenue was due to lower provision for loan losses, higher interchange income and lower interest expense. Operating income increased 16.8% to $37 million in the quarter as compared to $32 million in the year ago quarter. And earnings per share increased 3.6% to $0.29 in the quarter compared to $0.28 in the year ago quarter.

Third quarter 2010 results include a $3 million pretax impairment charge related to our sale of Van Dyke's Restorers. Third quarter 2009 results included impairment and other special items netting to just $397,000 pretax. Excluding these items in each quarter, earnings per share for the third quarter of 2010 were $0.31 compared to $0.28 in the third quarter of 2009. Now I will turn the call over to Tommy Millner, Cabela's Chief Executive Officer.

Thomas Millner

Thank you, Chris, and good morning, everyone. We are pleased to report record third quarter financial results, which reflect the continued progress we're making in our areas of strategic focus, improved results at World's Foremost Bank and a keen focus on the balance sheet and return on invested capital.

Let me start with the progress we continue to make on our areas of strategic focus. We are particularly pleased with the improvement in merchandise gross margin we realized in the quarter. For the quarter, merchandise gross margins increased 170 basis points, our second consecutive quarterly increase and the biggest increase we've seen in more than three years. The improvements were broad based as margins increased in 11 of 13 merchandise subcategories. Improvements in merchandise gross margin are a result of better preseason planning, greater vendor collaboration and improvements in in-season management.

We're still in the early stages of our gross margin expansion initiatives, which provides us with greater confidence that we will continue to see margin expansion for the remainder of this year and into next year and that we are on track to improve merchandise gross margins 200 to 300 basis points by the end of 2012 compared to 2009.

Primarily due to improvements in gross margin and reducing expenses as a percent of sales, Retail segment operating profit increased $11.4 million. We are particularly pleased with these results as marketing fees paid from the bank to the Retail segment contributed just $1 million of the $11.4 million increase. Retail segment operating margins increased 250 basis points in the quarter to 14.1%. This is the sixth consecutive quarter of increases in Retail segment operating margin.

Increasing retail profitability is a key component of our retail expansion strategy, and this margin expansion combined with early successes at our next-generation stores enhances our confidence in future retail expansion opportunities. I'm also pleased to report that two weeks ago, we completed the sale of Van Dyke's Restorers business. As we previously discussed, part of our strategy is to sell assets which are not essential to our mission of providing outstanding outdoor products and services to our customers.

This is one of several non-strategic businesses we've sold over the past 14 months. These sales have allowed us to simplify operations, raise cash, increase return on invested capital and more sharply focus on our strategic initiatives.

Moving to direct revenue. Growth rebounded nicely from the prior quarter as fill rates in the Direct business improved significantly compared to the second quarter. We were especially pleased with direct merchandise performance as we move from spring-summer merchandise to fall-winter goods.

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