Cabela's Inc (CAB)

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Cabela's (CAB)

Q4 2010 Earnings Call

February 17, 2011 11:00 am ET


Chris Gay - Director of Treasury & Investor Relations and 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


Reed Anderson - D. A. Davidson

Rick Nelson - Stephens Inc.

Christian Buss - ThinkEquity LLC

Jonathon Grassi - Longbow Research LLC

Mark Smith - Feltl and Company, Inc.

Derek Leckow - Barrington Research Associates, Inc.

Aaron Goldstein - JP Morgan

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

Mitchell Kaiser - Piper Jaffray Companies

David Magee - SunTrust Robinson Humphrey Capital Markets



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

Chris Gay

Thanks. 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

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 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 really excited to report on our record fourth quarter financial results and the progress we've made on our strategic initiatives to expand merchandise gross margins, improve retail profitability, increase return on capital and grow our Cabela's CLUB Visa program. These strategic initiatives are not just working but are accelerating, as evidenced by our fourth quarter results.

Let's begin with merchandise margins, which I am very pleased to report increased for the third consecutive quarter, and the improvement was broad-based, as margins increased in 10 of 13 subcategories. Ongoing improvements in pre-season planning and in-season management led to our 70 basis point gain. We expect these initiatives plus better inventory quality to support future margin improvements.

We're also delighted by our retail operating performance. Operating profit in our Retail segment improved $24 million in the quarter. More than half of the improvement arose from the strong performance from Black Friday through Christmas. Our merchants, marketing and retail operations teams planned for success, with wider and deeper inventory on key items, increases in store outfitter labor, sharper advertising, which increased customer urgency and great execution in all aspects of in-store customer service. Additionally, improvements in our Cabela's CLUB Visa program provided the other half of our operating performance.

In total, Retail segment operating margins increased 460 basis points in the quarter. This is our seventh consecutive quarter of increases in Retail segment operating margins.

During 2010, we found that certain areas of the store such as the gun counter and footwear would realize significant sales increases, with additional investments in store labor. And during the fourth quarter, we made these very productive investments, which was a significant contributor to our increase in comp store sales. We expect to continue to make these investments in the first half of 2011.

This nearly two-year trend in retail profitability is increasing our confidence in accelerating new store deployment. We recently announced plans to open a new store in Wichita, Kansas in 2012 and are actively seeking additional sites for 2012 and beyond.

Our commitment in 2011 is also exciting, with stores opening in Springfield, Oregon; Allen, Texas; and Edmonton, Canada. The combination of accelerating performance and market share gains increases our confidence in this acceleration of retail square footage growth.

We feel return on invested capital is a critical measure of our success, so we are excited by our full year increase of 210 basis points to 13.1%, our highest level in five years. The improvements we're seeing in our business provides confidence in our ability to exceed the high end of our ROIC goal of 14%.

Moving to our Direct business. We saw double-digit gains in our Internet business and plan declines in our catalog revenues. These results were encouraging, in light of greater-than-expected challenges with two systems implementations, the new website and a new customer relationship management system at our call centers. While the customer issues are largely behind us now, at times in the fourth quarter, our customers experience longer-than-average wait times and slow response times while placing orders. Thus, to actually grow our Direct business was encouraging. Despite these issues for the quarter, multichannel customers increased 8.7%, which is an important metric for the long-term health of our business.

Now let's review revenue and merchandising trends during the quarter. We're very pleased in the breadth of improvement by category, as 10 of our 13 merchandise subcategories grew, with the apparel and footwear categories showing the strongest increases.

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