Cabela's Inc (CAB)

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Cabela's (CAB)

Q2 2011 Earnings Call

July 28, 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


David Magee - SunTrust Robinson Humphrey, Inc.

Reed Anderson - D.A. Davidson & Co.

Jonathon Grassi - Longbow Research LLC

Aaron Goldstein - JP Morgan Chase & Co

Mark Smith - Feltl and Company, Inc.

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

N. Richard Nelson - Stephens Inc.



Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. Second Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this call is being recorded. I will now turn the conference over to Chris Gay, Director, Treasury, and Investor Relations. Please go ahead, sir.

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 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 at 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 and website to find the 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.

Our record second quarter financial results validate that our strategies are working. We realized strong results in retail revenue growth, record second quarter profitability on a consolidated basis as well as in each of our direct and retail segments, strong performance at our Cabela's CLUB Visa program, a higher merchandise gross margin and increases in market share. These components combined to help achieve increases in one of our vitally important metrics: after-tax return on invested capital.

Our Merchandising segments realized strong growth and profitability. For the quarter, comparable store sales increased 4.4% as a result of increases in average ticket. Retail operating margins increased to a second quarter record of 16.2%. This is the ninth consecutive quarter of increasing Retail segment profitability. We realized gains in 10 of 13 product categories during the quarter, with the strongest growth coming from firearms and power sports. Additionally, each of our clothing category and footwear realized strong growth.

Moving to our Direct business for the quarter. Adjusted for divestitures, Direct revenue declined 4.6%. Even more so than in the first quarter, the entire decline was a result of ammunition and shooting returning to more normalized levels. As you may recall, ammunition sales were at extraordinary levels last year. Despite difficult revenue comparisons, Direct segment operating margin improved to a second quarter record of 19.5%.

For the quarter, multichannel customers increased 3.5%, up from 2.5% in the first quarter, which is an important metric for the long-term health of our business. Merchandise gross margin increased 80 basis points in the quarter to 36.7%, our highest Q2 performance in the last 5 years. Improvements in Merchandise margins are a result of continued improvements in pre-season in planning, in-season management and vendor collaboration. We are continuing to see some increased cost from vendors and are successfully increasing prices to help mitigate these higher costs. Our initiatives to improve merchandise margin resumed their positive trends. And as a result, we expect to realize higher merchandise margins in both the third and fourth quarter of this year. Additionally, we remain confident in our ability to increase Merchandise margins 200 to 300 basis points over 2009 levels by the end of 2012.

On a consolidated basis, Merchandise mix did not have a significant impact on consolidated Merchandise gross margin. However, we did see a divergence between segments this quarter. Due to strength in firearms and power sports in our Retail segment, Merchandise margin was adversely impacted by mix. Despite the unfavorable mix shift, Merchandise margin did increase in our Retail segment.

In our Direct segment, however, where we don't sell firearms and boats and ammunition and shooting continued to return to more normal levels, mix helped quite a bit and Merchandise margin was up more than 150 basis points in this segment. This higher Merchandise margin helped lead to higher operating margins in our Direct segment.

Now let me update you on our new stores and future store opening plans. We have been very pleased with the initial performance of all of our recently opened next-generation stores. From a productivity standpoint, each of our new stores is generating sales and profitability per square foot higher than the corporate average, which provides us with even greater confidence to invest in more retail stores. As you might have already seen, this morning, we announced plans to open 2 more next-generation stores in 2012: one in Rogers, Arkansas, and the other in Charleston, West Virginia. This brings the total new store count for 2012 to 5 new stores, 4 in the United States and one in Canada. These 5 stores, will increase our retail square footage by nearly 10%. We're also excited that our second store in Canada will open in Edmonton next week, and we look forward to future expansion in this great market.

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