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CAB > SEC Filings for CAB > Form 10-Q/A on 5-May-2014All Recent SEC Filings

Show all filings for CABELAS INC

Form 10-Q/A for CABELAS INC


5-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains "forward-looking statements" that are based on our beliefs, assumptions, and expectations of future events, taking into account the information currently available to us. All statements other than statements of current or historical fact contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "plan," and similar statements are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance, or financial condition to differ materially from the expectations of future results, performance, or financial condition we express or imply in any forward-looking statements. These risks and uncertainties include, but are not limited to:
• the state of the economy and the level of discretionary consumer spending, including changes in consumer preferences, demand for firearms and ammunition, and demographic trends;

• adverse changes in the capital and credit markets or the availability of capital and credit;

• our ability to successfully execute our omni-channel strategy;

• increasing competition in the outdoor sporting goods industry and for credit card products and reward programs;

• the cost of our products, including increases in fuel prices;

• the availability of our products due to political or financial instability in countries where the goods we sell are manufactured;

• supply and delivery shortages or interruptions, and other interruptions or disruptions to our systems, processes, or controls, caused by system changes or other factors;

• increased or adverse government regulations, including regulations relating to firearms and ammunition;

• our ability to protect our brand, intellectual property, and reputation;

• our ability to prevent cybersecurity breaches and mitigate cybersecurity risks;

• the outcome of litigation, administrative, and/or regulatory matters (including a Commissioner's charge we received from the Chair of the U. S. Equal Employment Opportunity Commission ("EEOC") in January 2011), audits by tax authorities, and compliance examinations by the Federal Deposit Insurance Corporation ("FDIC"));

• our ability to manage credit, liquidity, interest rate, operational, legal, regulatory capital, and compliance risks;

• our ability to increase credit card receivables while managing credit quality;

• our ability to securitize our credit card receivables at acceptable rates or access the deposits market at acceptable rates;

• the impact of legislation, regulation, and supervisory regulatory actions in the financial services industry, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"); and

• other risks, relevant factors, and uncertainties identified in our filings with the Securities and Exchange Commission ("SEC") (including the information set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, and in Part II, Item 1A, of this report), which filings are available at the SEC's website at www.sec.gov.

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Our forward-looking statements speak only as of the date of this report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

The following discussion and analysis of financial condition, results of operations, liquidity, and capital resources should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, as filed with the SEC, and our unaudited interim condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Cabela's Incorporated and its wholly-owned subsidiaries are referred to herein as "Cabela's," "Company," "we," "our," or "us."

Critical Accounting Policies and Use of Estimates

Our critical accounting policies and use of estimates utilized in the preparation of the condensed consolidated financial statements as of March 29, 2014, remain unchanged from December 28, 2013.


Cabela'sŪ

We are a leading specialty retailer, and the world's largest direct marketer, of hunting, fishing, camping, and related outdoor merchandise. We provide a quality service to our customers who enjoy an outdoor lifestyle by supplying outdoor products through our multi-channel retail business consisting of our Retail and Direct segments. Our Retail business segment currently consists of 53 stores, including the three stores that we opened in 2014 to date located in:
• Augusta, Georgia, on March 20, 2014,

• Greenville, South Carolina, on April 3, 2014, and

• Anchorage, Alaska, on April 10, 2014.

We now have 49 stores located in the United States and four in Canada with total retail square footage of 6.1 million, an increase of 4.1% compared to the end of 2013.

Our Direct business segment is comprised of our highly acclaimed website and supplemented by our catalog distributions as a selling and marketing tool. World's Foremost Bank ("WFB," "Financial Services segment," or "Cabela's CLUB") also plays an integral role in supporting our merchandising business. The Financial Services segment is comprised of our credit card services, which reinforce our strong brand and strengthen our customer loyalty through our credit card loyalty programs.

Executive Overview



                                         Three Months Ended
                                     March 29,        March 30,         Increase
                                       2014              2013          (Decrease)       % Change
                                     (Dollars in Thousands Except Earnings Per Diluted Share)
Revenue:
Retail                            $     440,949     $    486,749     $     (45,800 )      (9.4 )%
Direct                                  179,416          225,158           (45,742 )     (20.3 )
Total                                   620,365          711,907           (91,542 )     (12.9 )
Financial Services                       98,578           85,772            12,806        14.9
Other revenue                             6,880            4,818             2,062        42.8
Total revenue                     $     725,823     $    802,497     $     (76,674 )      (9.6 )

Operating income                  $      40,853     $     79,115     $     (38,262 )     (48.4 )

Net income                        $      25,749     $     49,847     $     (24,098 )     (48.3 )

Earnings per diluted share        $        0.36     $       0.70     $       (0.34 )     (48.6 )

Revenues presented in the table above are consistent with our presentation for segment reporting. Revenues in the three months ended March 29, 2014, totaled $726 million, a decrease of $77 million, or 9.6%, over the three months ended March 30, 2013. The net decrease in total merchandise sales comparing the three month periods was primarily due to a decrease of $100 million, or 21.7%, in comparable store sales that extended across all product categories, led by a decrease in the hunting equipment product category. Sales of firearms and ammunition, which are in the hunting equipment product category, decreased significantly comparing the three months ended March 29, 2014, to the three months ended March 30, 2013. The decrease of $46 million in Direct revenue was primarily due to a decrease in the hunting equipment product category, primarily due to a substantial decrease in ammunition sales compared to the first quarter of 2013.


Partially offsetting the decreases in comparable store sales and Direct sales was an increase in Retail revenue from new stores of $51 million in the three months ended March 29, 2014, compared to the three months ended March 30, 2013. Our new retail store formats continue to generate a significant increase in sales per square foot compared to our legacy stores. In addition, our Cabela's branded products continue to be a core focus for us, as we saw growth in Cabela's branded softgoods and footwear in the in the three months ended March 29, 2014, compared to the three months ended March 30, 2013.

Financial Services revenue increased $13 million, or 14.9%, in the three months ended March 29, 2014, compared to the three months ended March 30, 2013. These increases in Financial Services revenue were primarily due to increases in interest and fee income and interchange income, partially offset by higher customer rewards costs due to the increase in active accounts and increased interest expense due to the issuances of securitizations to fund growth.

Operating income decreased $38 million, or 48.4%, in the three months ended March 29, 2014, compared to the three months ended March 30, 2013, and operating income as a percentage of revenue decreased 430 basis points over the same periods. The decreases in total operating income and total operating income as a percentage of total revenue were primarily due to decreases in revenue from our Retail and Direct business segments as well as a decrease in our merchandise gross profit. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. We plan to continue our retail expansion, our omni-channel initiatives, and our Cabela's branded product investments as we focus on expense management and emphasize corporate frugality.

Our vision is to be the best omni-channel retail company in the world by creating intense customer loyalty for our outdoor brand. This loyalty will be created through two pillars of excellence: highly engaged outfitters and shareholders who support our short and long term goals. We continue to focus on these areas to achieve our vision:
• Intensify Customer Loyalty. We will deepen our customer relationships, aggressively serve current and developing market segments, and increase our innovation in Cabela's products and services.

• Grow Profitably and Sustainably. Through sustaining and adapting our culture, we will continuously seek ways to improve profitability and increase revenue in all business segments.

• Enhance Technology Capability. We will implement a strategic technology road map, streamline our systems, and accelerate customer-facing technologies.

• Simplify Our Business. As we focus on our priorities, we will align our goals to foster collaboration and streamline cross-functional processes.

• Improve Marketing Effectiveness. We will optimize all marketing channels and expand our digital and e-commerce capabilities while continuing to strengthen the Cabela's brand.

Improvements in these areas have led to an increase in our return on invested capital, an important measure of how effectively we have deployed capital in our operations in generating cash flows. Increases in our return on invested capital, on an after-tax basis, indicate improvements in our use of capital, thereby creating value in our Company.

We offer our customers integrated opportunities to access and use our retail store, website, and catalog channels. Our in-store pick-up program allows customers to order products through our catalogs, website, and store kiosks and have them delivered to the retail store of their choice without incurring shipping costs, thereby helping to increase foot traffic in our stores. Conversely, our expanding retail stores introduce customers to our website and catalog channels. We are capitalizing on our omni-channel model by building on the strengths of each channel, primarily through improvements in our merchandise planning system. This system, along with our replenishment system, allows us to identify the correct product mix in each of our retail stores, maintain the proper inventory levels to satisfy customer demand in both our Retail and Direct business channels and improve our distribution efficiencies. We continue to enhance our omni-channel efforts through greater use of digital marketing, the limited roll out of omni-channel fulfillment, and the improvements to our mobile platform.


We continue to work with vendors to negotiate the best prices on products and to manage inventory levels, as well as to ensure vendors deliver all products and services as expected. Our efforts continue in detailed pre-season planning, in-season monitoring of sales, and management of inventory to focus product assortments on our core customer base. However, our merchandise gross margin as a percentage of merchandise revenue decreased 120 basis points to 34.4% in the three months ended March 29, 2014, compared to 35.6% in the three months ended March 30, 2013. The decrease in the merchandise gross profit as a percentage of merchandise sales comparing the respective periods was primarily due to lower margin in firearms, ammunition, optics, and the shooting product categories as supply has improved in the three months ended March 29, 2014, compared to the three months ended March 30, 2013.

We have improved our retail store merchandising processes, information technology 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. Our outfitters also benefited through the launch of our new retail product information application which is available via hand held devices. This provides quick and convenient access to product information, allowing outfitters to be more efficient and engaging with customers. In addition, to enhance customer service at our retail stores, we have continued our management training and mentoring programs for our retail store managers.

Comparing Retail segment results for the three months ended March 29, 2014, to the three months ended March 30, 2013:
• revenue decreased $46 million, or 9.4%;

• operating income decreased $32 million, or 38.2%;

• operating income as a percentage of Retail segment revenue decreased 550 basis points to 11.9%; and

• comparable store sales decreased 21.7%.

Retail revenue decreased primarily due to a decrease of $100 million in comparable store sales. Retail revenue from new stores increased $51 million in the three months ended March 29, 2014, compared to the three months ended March 30, 2013.

Our Retail business segment currently consists of 53 stores. Our new store formats generate higher sales per square foot and higher returns compared to our legacy stores which will help to increase our return on invested capital. Our total retail store square footage was 6.1 million at March 29, 2014, an increase of 4.1% compared to the end of 2013.

For the remainder of 2014, we plan to open new retail stores located as follows:
• Christiana, Delaware; Woodbury, Minnesota; Edmonton, Alberta, Canada; Missoula, Montana; Lubbock, Texas; Barrie, Ontario, Canada; Acworth, Georgia; Cheektowaga, New York; Tualatin, Oregon; Nanaimo, British Columbia, Canada; and Bowling Green, Kentucky.

For 2015 and thereafter, we currently have plans to open new retail stores located as follows:

•         Berlin, Massachusetts; Sun Prairie, Wisconsin; Garner, North Carolina;
          Fort Mill, South Carolina; Bristol, Virginia; Moncton, New Brunswick,
          Canada; Ammon, Idaho; Fort Oglethorpe, Georgia; Short Pump, Virginia;
          and Noblesville, Indiana.

The retail stores planned for 2014 represent approximately one million square footage of new retail space or 17% square footage growth over 2013. It is expected that the planned openings of our new stores will continue to generate an increase in profit per square foot compared to the legacy store base.

We are focusing on improving our customers' digital shopping experiences on Cabelas.com and via mobile devices. Our marketing focus continues to be on developing a seamless omni-channel experience for our customers regardless of their transaction channel. Our digital transformation continues with efforts around enhancing our website to support the Direct business. The amount of traffic coming through mobile devices is growing significantly. As a result, we continue to utilize best-in-class technology to improve our customers' digital shopping experiences and build on the advances we have made to capitalize on the variety of ways customers are shopping at Cabela's today. We have seen early successes in our social marketing initiatives and now have over 3 million fans on Facebook. Our omni-channel marketing efforts are resulting in increases in new customers, as well as in customer engagement with a consistent experience across all channels. Our goal is to create a digital presence that mirrors our customers' in-store shopping experience.


Continuing into 2014, we realized improvements in our website traffic, growth in multi-channel customers, and very early progress in our print-to-digital transformation. We have developed a multi-year approach to reverse the downward trend in our Direct segment and transform our legacy catalog business into an omni-channel enterprise supporting transformation to digital, e-commerce, and mobile while optimizing the customer experience with our growing retail footprint. We are in the very early stages of this effort. Near term efforts have been focusing on our print-to-digital transformation and testing targeted shipping offers.

Comparing Direct segment results for the three months ended March 29, 2014, to the three months ended March 30, 2013:
• revenue decreased $46 million, or 20.3%;

• operating income decreased $12 million; and

• operating income as a percentage of Direct segment revenue decreased 140 basis points to 18.5%.

The decrease of $46 million in Direct revenue was primarily due to a decrease in the hunting equipment product category, primarily due to a substantial decrease in ammunition sales compared to the first quarter of 2013.
We are planning to build a 590,000 square foot distribution center in Tooele, Utah, to support our planned growth. We expect to have this distribution center operational by April 2015. At March 29, 2014, construction was in its initial stages. As of August 2013, we have leased a 325,000 square foot distribution center in Tooele, Utah, which is expected to be in use through the third quarter of 2015.

Cabela's CLUB continues to manage credit card delinquencies and charge-offs below industry average by adhering to our conservative underwriting criteria and active account management. Comparing Cabela's CLUB results for the three months ended March 29, 2014, to the three months ended March 30, 2013:
• Financial Services revenue increased $13 million, or 14.9%;

•         the number of average active accounts increased 7.9% to 1.8 million,
          and the average balance per active account increased $82;


•         the average balance of our credit card loans increased 12.3% to $3.8
          billion; and


•         net charge-offs as a percentage of average credit card loans decreased
          six basis points to 1.80%.

During the three months ended March 29, 2014, the Financial Services segment completed a term securitization totaling $300 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million.

Current Business Environment

Worldwide Credit Markets and Macroeconomic Environment - Beginning in August 2013, and continuing through the first quarter of fiscal 2014, we experienced a significant deceleration in the sales of firearms and ammunition as well as a challenging consumer environment across all business channels. To address these trends, we increased our promotional spending and implemented operating expense controls to levels consistent with how our business is performing. We will continue to manage our operating costs accordingly through the remainder of fiscal 2014. The Financial Services segment continues to monitor developments in the securitization and certificates of deposit markets to ensure adequate access to liquidity. We expect our charge-off rates and delinquency levels to remain below industry averages.

Visa Litigation Settlement - In June 2005, a number of entities sued Visa and several member banks, and other credit card associations, alleging, among other things, that Visa and its member banks violated United States antitrust laws by conspiring to fix the level of interchange fees. In July 2012, the parties to this litigation entered into a settlement agreement to resolve the claims brought by the class members. On December 13, 2013, the settlement received final court approval. Among other things, the settlement agreement required the distribution to class merchants of an amount equal to 10 basis points of default interchange across all credit rate categories for a period of eight consecutive months, which otherwise would have been paid to issuers like WFB. At March 29, 2014, the remaining liability balance for this settlement was $1.0 million compared to $4.7 million at December 28, 2013, and $12.5 million at March 30, 2013.


Operations Review
The three months ended March 29, 2014, and March 30, 2013, each consisted of 13
weeks. Our operating results expressed as a percentage of revenue were as
follows for the periods presented.
                                                            Three Months Ended
                                                          March 29,    March 30,
                                                             2014         2013

Revenue                                                    100.00  %    100.00  %
Cost of revenue                                             56.21        57.16
Gross profit (exclusive of depreciation and amortization)   43.79        42.84
Selling, distribution, and administrative expenses          38.16        32.98
Operating income                                             5.63         9.86
Other income (expense):
Interest expense, net                                       (0.51 )      (0.67 )
Other income, net                                            0.29         0.19
Total other income (expense), net                           (0.22 )      (0.48 )
Income before provision for income taxes                     5.41         9.38
Provision for income taxes                                   1.86         3.17
Net income                                                   3.55  %      6.21  %

Results of Operations - Three Months Ended March 29, 2014, Compared to March 30, 2013

Revenues

Retail revenue includes sales realized and customer services performed at our retail stores, sales from orders placed through our retail store website kiosks, and sales from customers utilizing our in-store pick-up program. Direct revenue includes sales from orders placed through our website, over the phone, and by mail where the merchandise is shipped to non-retail store locations. Financial Services revenue is comprised of interest and fee income, interchange income, other non-interest income, interest expense, provision for loan losses, and customer rewards costs from our credit card operations. Other revenue sources primarily include fees for our hunting and fishing outfitter services, fees for our full-service travel agency business, real estate rental income, and land sales.

Comparisons and analysis of our revenues are presented below for the three months ended:

                     March 29,                    March 30,                     Increase
                        2014            %            2013            %         (Decrease)      % Change
                                                  (Dollars in Thousands)

Retail             $    440,949        60.8 %   $    486,749        60.6 %   $    (45,800 )      (9.4 )%
Direct                  179,416        24.7          225,158        28.1          (45,742 )     (20.3 )
Financial Services       98,578        13.6           85,772        10.7           12,806        14.9
Other                     6,880         0.9            4,818         0.6            2,062        42.8
Total              $    725,823       100.0 %   $    802,497       100.0 %   $    (76,674 )      (9.6 )


Product Sales Mix - The following table sets forth the percentage of our merchandise revenue contributed by major product categories for our Retail and Direct segments and in total for the three months ended March 29, 2014, and March 30, 2013.

                           Retail              Direct               Total
                       2014      2013      2014      2013      2014      2013

Hunting Equipment      52.3 %    60.2 %    39.3 %    47.7 %    48.6 %    56.3 %
General Outdoors       27.2      22.5      32.3      27.2      28.7      24.0
Clothing and Footwear  20.5      17.3      28.4      25.1      22.7      19.7
Total                 100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

The hunting equipment merchandise category includes a wide variety of firearms, ammunition, optics, archery products, and related accessories and supplies. The general outdoors merchandise category includes a full range of equipment and accessories supporting all outdoor activities, including all types of fishing and tackle products, boats and marine equipment, camping gear and equipment, food preparation and outdoor cooking products, all-terrain vehicles and accessories for automobiles and all-terrain vehicles, and gifts and home furnishings. The general outdoors merchandise category also includes wildlife and land management products and services, including compact tractors and tractor attachments. The clothing and footwear merchandise category includes fieldwear apparel and footwear, sportswear, casual clothing and footwear, and workwear products.

Retail Revenue - Retail revenue decreased $46 million, or 9.4%, in the three months ended March 29, 2014, compared to the three months ended March 30, 2013, primarily due to a decrease of $100 million in comparable store sales. Comparable store sales were down across all product categories comparing the three months ended March 29, 2014, to the three months ended March 30, 2013, but primarily in firearms and ammunition, hunting equipment, men's apparel, archery, optics, and home and gifts. We believe the decreases in firearms and ammunition sales have begun to level out and are expected to return to more normalized levels for the remainder of fiscal 2014.

Retail revenue from new stores increased $51 million in the three months ended . . .

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