Cabela's Inc (CAB)

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Cabela's (CAB)

Q4 2011 Earnings Call

February 16, 2012 11:00 am ET


Chris Gay - Director of Treasury & Investor Relations and Treasurer

Thomas Charles Dobson 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


Reed Alan Anderson - Northland Securities Inc., Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Jonathon N. Grassi - Longbow Research LLC

Mark E. Smith - Feltl and Company, Inc., Research Division

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

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Aaron Goldstein - JP Morgan Chase & Co, Research Division



Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. Fourth Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference 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, 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'll turn the call over to Tommy Millner, Cabela's Chief Executive Officer.

Thomas Charles Dobson Millner

Thank you, Chris. And good morning, everyone. A record fourth quarter and full-year financial results validate that our strategies are working and provide us with the confidence required to accelerate retail store expansion. For the quarter, we realized strong growth in merchandise margin, retail and direct segment operating margin; improved performance in our Cabela's CLUB Visa program; and increases in market share.

This strong performance led to our highest level of return on capital in more than 6 years. We ended the year with return on capital of 14.3% compared to return on capital of 9.6% just 3 years ago.

Improvements in return on capital are due to our continuing efforts on balance sheet management and significant improvements in profitability.

With regard to profitability, we are particularly pleased with the improvements in retail profitability we have realized over the last 2 years, which has been a key focus of ours and a prerequisite to accelerating store growth. For the year, retail profitability increased 240 basis points to 17%. This compares to retail profitability of just 11.7% 2 years ago. As a result of the progress we have made, improving retail profitability and return on capital, we are accelerating our retail store expansion.

Additionally, as a part of our retail expansion strategy, we believe a unique competitive opportunity exists to penetrate markets with less than 250,000 people around the United States and Canada. In order to serve these markets, we have developed a new Cabela's Outpost store format. These stores will be 40,000 square feet and will bring the excitement of the Cabela's retail experience to customers in these underserved markets. The stores will be designed to have an innovative, flexible floor plan, a plan we internally call Core-Flex, which will provide our customers an ever-changing visual look at the center core of the store, complemented by a revolutionary digital signage concept.

Our Outpost stores will initially target the Western United States, the upper Midwest, and Canada and are designed to be additive to our growth plans for larger next-generation stores. As a result, we now expect to open a total of 6 stores in 2012: 4 next-generation stores in the United States; 1 next-generation store in Canada; and our first Outpost store in Union Gap, Washington slated to open in the fall of 2012. Looking forward to 2013, we expect to open 6 next-generation stores in the U.S., and as many as 3 Outpost stores.

Earlier this morning, we announced several of these locations, and we are very excited to enter these new markets. Additionally in 2013, we intend to relocate our existing Winnipeg store. Now, turning to merchandise gross margin, which is another key initiative of ours.

For the quarter, merchandise gross margin increased 40 basis points to 36.4%. During the quarter, we saw a significant strength in the Firearms and Shooting categories, which caused a significant mixed shift into these lower-margin categories. For the quarter, this adverse mix, resulted in a 50-basis point headwind to merchandise margin.

As you will recall, 2 years ago we introduced strategic initiatives focused on improving retail profitability. We set these initiatives in place because we needed to significantly improve retail profitability for our retail model to work. As we stated several times, we set a goal to exit 2012 with consolidated gross margin 200 to 300 basis points above 2009 levels. This initiative is a critical component of improving retail profitability to make our retail model work and to accelerate store expansion. Since 2009, we've raised consolidated merchandise gross margin by 100 basis points. However, what is more important, is that in our Retail segment, merchandise gross margin has increased 190 basis points from 2009 levels. The improvement in retail merchandise margin has been a significant contributor to the increases in retail profitability over the last 2 years, and is one of the reasons we are accelerating retail store expansion.

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