Cabela's Inc (CAB)

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Cabela's Incorporated (CAB)

Q4 2009 Earnings Call Transcript

February 18, 2010 11:00 am ET

Executives

Chris Gay – Treasurer & IR Manager

Tommy Milner – President and CEO

Ralph Castner – EVP and CFO

Pat Snyder – EVP and Chief Marketing Officer

Analysts

Reed Anderson – D.A. Davidson

Jim Duffy – Thomas Weisel Partners

Tom Shaw – Stifel Nicolaus

Derek Leckow – Barrington Research

Kristine Koerber – JMP Securities

Mark Smith – Feltl and Company

Paul Lejuez – Credit Suisse

Christopher Horvers – J.P. Morgan

Jim Chartier – Monness Crespi Hardt

Jonathon Grassi – Longbow Research

Presentation

Operator

Good morning, ladies and gentlemen, welcome to the Cabela’s Incorporated fourth quarter and full fiscal year 2009 earnings conference call. At this time all participant are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question. (Operator instructions).

I would like to remind everyone this call is being recorded. I will turn the call over to Chris Gay, Treasurer and Investor Relations Manager. 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 Web site at www.cabelas.com.

With me on today’s call are Tommy Milner, 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 Web site 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 measures. Please refer to our earnings release to find reconciliations of these non-GAAP measures to GAAP.

Now, on to the financial results. Let me first note that our fourth fiscal quarter and fiscal year ended January 2nd 2010 includes 14 weeks and 53 weeks respectively while our fourth fiscal quarter and fiscal year ended December 27, 2008 included 13 weeks and 52 weeks respectively.

For the quarter, adjusting for divestitures, consolidated revenues increased 5.5% to $918 million. Retail revenue increased 8% to $464 million and direct revenue increased 1.3% to $406 million.

During the quarter we reduced direct marketing cost of 4%. Direct marketing cost as a percent of direct revenue decreased to 14.2% as compared to 14.7% in the year ago quarter.

The impact of the extra week generated incremental $17 million of revenue in our Direct segment and incremental $34 million of revenue in our Retail segment, as it relates to the net income, the extra week accounted for $0.02 to $0.03 of earnings per share for the quarter.

For the quarter, financial services revenue increased 18.6% to $45 million as compared to $38 million in a year ago quarter. The increase of the financial services revenue was due to higher interest and other fee income.

As many of you already know our financial services subsidiary is on a true calendar year and therefore results are not impacted by the additional week. For the quarter we recognized impairment and other special charges of $52.8 million primarily related to the non-cash write-down to fair value of certain property and equipment. Excluding these items, for the quarter, diluted earnings per share were $0.77.

Now, I will turn the call over to Tommy Milner, Cabela’s Chief Executive Officer.

Tommy Milner

Thank you, Chris. Good morning, everyone. 2009 was extremely productive, as we met or exceeded nearly all of our objectives for the year. Accomplishments we’re particularly pleased with include for the year, we generated a record $294 million of cash flow from operations by tightly managing our balance sheet.

During the year, we divested two non-core businesses, improved working capital and significantly reduced inventory levels. Cash flows from operations significantly exceeded our expectations for the year.

In 2009, we reduced inventory levels $78 million compared with year-end 2008, ending the year with $440 million of inventory. This is the second consecutive year we reduced inventory levels as we focused more heavily on reducing aged and unproductive inventory. Inventory turns increased from 2.5 turns at the end of 2008 to 3 turns at the end of this year. We feel very good about our current inventory position and plan to focus on improving inventory turns through higher sales over the next several years.

The combination of strong cash flows and tightly managing our balance sheet allowed us to significantly improve return on invested capital for the year which is a key focus of ours. Return on invested capital at year end improved 150 basis points to 11.1% from 9.6% at the end of 2008. As we have previously mentioned, our long-term goal is to improve ROIC to achieve a 12% to 14% return on capital over the next several years and we’re confident we have sufficient opportunities to streamline operations and better manage our balance sheet to achieve this goal.

Another strategic initiative is improving retail profitability for the quarter and year, operating margins in our Retail segment increased 70 basis points as we improved labor utilization and advertising efficiency in our stores.

We realized the biggest improvement from improved labor productivity in our stores. Improvements in labor productivity are due to more streamlined flow of goods to our retail stores and better management of retail staffing levels. For the quarter, sales per labor hour increased 9.6%.

Improvements in retail advertising also contributed to operating margin improvements. For the year, retail advertising as a percent of retail revenue decreased 70 basis points. Improvements in advertising were due to increased localization of category-driven promotions, more effective broadcast placement and improvements in multi-channel promotions.

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