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Cabela's Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 5, 2010 04:00PM

Cabela's Inc. (CAB) filed Quarterly Report for the period ended 2010-10-02. Cabela's Inc. has a market cap of $1.56 billion; its shares were traded at around $23.04 with a P/E ratio of 14 and P/S ratio of 0.6. Cabela's Inc. had an annual average earning growth of 0.1% over the past 5 years.

CAB is in the portfolios of Wallace Weitz of Weitz Wallace R & Co, John Buckingham of Al Frank Asset Management, Inc., James Barrow of Barrow, Hanley, Mewhinney & Strauss, Paul Tudor Jones of The Tudor Group, Jim Simons of Renaissance Technologies LLC, Kenneth Fisher of Fisher Asset Management, LLC.

Highlight of Business Operations:

Revenues in the three months ended October 2, 2010, totaled $643 million, an increase of $19 million, or 3.0%, over the three months ended September 26, 2009. Revenue in our merchandising business increased $13 million comparing the respective periods. The net increase in total merchandise sales comparing the three months ended October 2, 2010, to the three months ended September 26, 2009, was due to sales from our new retail store that opened in Grand Junction, Colorado, on May 20, 2010, and to a net increase of 2.4% in comparable store sales, led by increases in the hunting equipment and clothing and footwear categories. These increases were partially offset by a decrease in Direct revenue, which included $5 million of revenue in the three months ended September 26, 2009, from our non-core taxidermy and Wild Wings businesses that we divested in the fall of 2009. Financial Services revenue increased $5 million, or 10.9%, in the three months ended October 2, 2010, compared to the three months ended September 26, 2009, primarily due to an increase in interchange income, lower loan losses, and growth in the number of active accounts and average balance per account. On a managed basis, this net increase in Financial Services revenue is also due to a lower provision for loan losses partially offset by lower interest and fee income due to the implementation of the CARD Act.

Revenues in the nine months ended October 2, 2010, increased $16 million, or 0.9%, to $1.7 billion compared to the nine months ended September 26, 2009. Revenue in our merchandising business decreased $29 million comparing the respective periods. The net decrease in total merchandise sales comparing the nine months ended October 2, 2010, to the nine months ended September 26, 2009, was due to a decrease in Direct revenue, which included $18 million of revenue in the nine months ended September 26, 2009, from our non-core taxidermy and Wild Wings businesses that we divested in the fall of 2009, and to a net decrease of 1.1% in comparable store sales. These decreases were partially offset by an increase in sales from our new retail store that opened in Grand Junction, Colorado, on May 20, 2010. Financial Services revenue increased $44 million, or 34.6%, in the nine months ended October 2, 2010, compared to the nine months ended September 26, 2009, primarily due to lower loan losses, increases in interchange income and interest and fee income, and growth in the number of active accounts and average balance per account, partially offset by higher customer reward costs. On a managed basis, this net increase in Financial Services revenue is also due to a lower provision for loan losses and a decrease in interest expense.

We have improved our retail store merchandising processes, management information systems, and distribution and logistics capabilities. We have also improved our visual merchandising within the stores and coordinated merchandise at our stores by adding more regional product assortments. To enhance customer service at our retail stores, we have implemented management training and mentoring programs for our next generation managers. In addition, in the three months ended October 2, 2010, we hired and began training additional employees to ensure superior customer service in preparation for the holiday season. Operating income for our Retail business segment increased $11 million and $18 million in the three and nine months ended October 2, 2010, over the respective fiscal 2009 periods to total $52 million and $111 million, respectively. In addition, operating income as a percentage of Retail business segment revenue increased to 14.1% in the three months ended October 2, 2010, up 250 basis points compared to the three months ended September 26, 2009, and up 190 basis points to 11.9% in the nine months ended October 2, 2010, compared to the nine months ended September 26, 2009. We continue to improve our retail store merchandising processes through pre-season planning, in-season management, vendor collaboration, and unproductive inventory reduction.

Our Direct revenue decreased $8 million, or 3.4%, in the three months ended October 2, 2010, compared to the three months ended September 26, 2009, and decreased $38 million, or 5.9%, in the nine months ended October 2, 2010, compared to the nine months ended September 26, 2009. Direct revenue in the three and nine months ended September 26, 2009, included $5 million and $18 million, respectively, of revenue from our non-core taxidermy and Wild Wings businesses. For comparative purposes, Direct revenue in the three and nine months ended October 2, 2010, compared to the three and nine months ended September 26, 2009 (adjusted for the effect of these divestitures), would have resulted in decreases of 1.1% and 3.3%, respectively. Direct revenue also decreased due to inventory reduction initiatives in the first half of 2010, which effected inventory levels resulting in fill rates being lower comparing the respective periods, and due to a decrease in the sales of ammunition and reloading supplies as supply has caught up to demand and consumers are now able to find ammunition at retail stores.

Operating income for our Direct business segment was $32 million and $92 million in the three and nine months ended October 2, 2010, respectively, compared to $34 million and $96 million in the three and nine months ended September 26, 2009. Operating income as a percentage of our Direct business segment revenue decreased to 14.4% in the three months ended October 2, 2010, down 70 basis points compared to the three months ended September 26, 2009, and up 30 basis points to 15.1% in the nine months ended October 2, 2010, compared to the nine months ended September 26, 2009. In the three months ended October 2, 2010, compared to the three months ended September 26, 2009, catalog-related and Internet marketing costs increased $3 million as we made additional investments in these operations to build on our market position and further increase our brand awareness and loyalty. As a percentage of Direct revenue, catalog-related costs increased 170 basis points to 15.3% compared to 13.6% in the three months ended September 26, 2009. During the nine months ended October 2, 2010, the managed reduction in catalog pages circulated resulted in a decrease of $3 million in catalog-related costs compared to the nine months ended September 26, 2009. However, as a percentage of Direct revenue, catalog-related costs increased 30 basis points to 13.8% compared to 13.5% in the nine months ended September 26, 2009. As a result of our focus on smaller, more specialized catalogs, we reduced the number of catalog pages mailed but increased total circulation.

Developments in Legislation and Regulation - On March 5, 2010, WFB received a preliminary report related to a compliance examination conducted in the second quarter of 2009 from the Federal Deposit Insurance Corporation (the “FDIC”). WFB received the final version of this report from the FDIC on May 19, 2010. The FDIC's findings were that certain WFB practices regarding the assessment of overlimit fees, late fees, and penalty interest charges and contacting delinquent cardholders at their place of employment were improper because such practices were unfair and/or deceptive under applicable law. The FDIC has indicated that it intends to require WFB to reimburse cardholders who paid improper fees and/or interest charges and has also indicated that it will seek to impose on WFB a monetary penalty as a result of the improper practices. The FDIC has also indicated that any settlement regarding these matters will be in the form of a formal written agreement, and that in the event a settlement could not be reached the FDIC would initiate a proceeding to enforce civil monetary penalties, as well as a cease and desist proceeding against WFB. WFB is currently in discussions with the FDIC to resolve these matters. The final amount of any reimbursement and monetary penalty and the nature of any other relief the FDIC may seek to obtain from WFB have not yet been determined. In the event that the Company is unable to resolve the issues raised in the examination report, the Company estimates that its financial liability would be $18 million ($12 million after tax), and the Company has accrued that amount as a selling, distribution, and administrative expense in our condensed consolidated financial statements in the first quarter of fiscal 2010. In addition, the practices cited by the FDIC in its examination report as improper were eliminated in 2009 and will not be reimposed. We do not expect that WFB will substantially change its business model or that its profitability will be materially negatively affected in 2010 and beyond by these matters. We also expect that WFB will continue to be well capitalized after these matters are resolved with the FDIC. The expenses incurred by WFB in resolving the matters cited by the FDIC were reflected in a reduced marketing fee paid by the Financial Services segment to the Direct and Retail segments pursuant to the contractual arrangement.

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