Q3 2011 Earnings Call
October 27, 2011 11:00 am ET
Thomas L. Millner - Chief Executive Officer, President and Director
Ralph W. Castner - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chairman of World's Foremost Bank
Chris Gay - Director of Treasury & Investor Relations and Treasurer
N. Richard Nelson - Stephens Inc., Research Division
Aaron Goldstein - JP Morgan Chase & Co, Research Division
Mark E. Smith - Feltl and Company, Inc., Research Division
David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division
Sean P. Naughton - Piper Jaffray Companies, Research Division
Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division
Reed Alan Anderson - D.A. Davidson & Co., Research Division
Jonathon N. Grassi - Longbow Research LLC
Previous Statements by CAB
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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 and website 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 L. Millner
Thank you, Chris, and good morning, everyone. Our record third quarter financial results validate that our strategies are working. We realized strong growth in merchandise margin, Retail and Direct segment operating margin, strong performance at our Cabela's CLUB Visa program, 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.
Merchandise gross margin increased 140 basis points in the quarter to 35.9%, our highest third quarter performance in the last 5 years. During the quarter, we deliberately reduced promotional discounts through the elimination of an unprofitable retail promotion. The lower promotional discounts in our Retail segment resulted in significant acceleration in merchandise margin improvements.
Our initiatives to improve merchandise margins are on track and as a result, we remain confident in our ability to increase merchandise margins, 200 to 300 basis points over 2009 levels by the end of 2012.
Over the past several years, we have spent significant time and resources improving all aspects of our Retail operation. This includes: Significantly reducing and improving inventory levels; restructuring our merchandising organization; developing our next-generation store format; instituting new technologies in our retail stores; improving vendor collaboration; and instituting rigorous discipline around preseason planning and in-season management.
With a solid foundation in place for improving both Retail operations and merchandise performance, we have begun to focus on improving our discipline around promotions and sales discounts as we continue to strive to become a best-in-class retailer. This quarter, we made the decision to eliminate an unprofitable retail promotion at the expense of comparable store sales. It is always difficult to consciously sacrifice revenue in a quarter. However, it was clearly the correct long-term decision for the company. Using each promotional dollar more effectively is crucial over the long-term to maximize our growth and retail profitability.
At the merchandise level, we saw a strength in firearms, power sports, footwear, fishing and men's apparel, while archery and tree stands were soft. In spite of a lift of margin as a result of fewer discounts, merchandise mix was a slight headwind in the quarter due to strength in firearms.
Now let's look at our Direct business, which showed improved results in the quarter. Direct revenues were unaffected by the retail promotion decisions, and improved from the prior several quarters. For the quarter, adjusted for divestitures, Direct revenue declined just 1.7%, our best performance in 4 quarters. Even more encouraging is that despite the modest decline in revenue, Direct segment operating margin improved 320 basis points to a third quarter record 17.6%. For the quarter, multichannel customers increased 1.9%.
In our Retail segment for the quarter, average ticket increased nearly 3%, offset by slight declines in transactions. Retail operating margins increased to a third quarter record 16.8%. This is the 10th consecutive quarter of increasing Retail segment profitability.
We also continue to be pleased with the performance of all of our recently opened next-generation stores. During the quarter, we opened a new store in Edmonton, Alberta, Canada, and the results are exceeding our expectations. Our next-generation stores, opened since 2009, are outperforming our legacy stores on a sales per square foot and profit per square foot basis by 30% to 40%, and have meaningfully higher return on capital. As a result, we expect to accelerate Retail store expansion in the United States and Canada in 2013, beyond the 2012 level of 5 stores.