Cabela's' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Cabela's (CAB)

Q1 2012 Earnings Call

April 26, 2012 11:00 am ET

Executives

Chris Gay - Director of Treasury & Investor Relations and Treasurer

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

Analysts

Reed Alan Anderson - Northland Securities Inc., Research Division

Joe Edelstein - Stephens Inc., Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

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

Jared W. Madlin - Piper Jaffray Companies, Research Division

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Jonathon N. Grassi - Longbow Research LLC

Lee J. Giordano - Imperial Capital, LLC, Research Division

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

Seth Sigman - Crédit Suisse AG, Research Division

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

Unknown Analyst

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Incorporated First Quarter Fiscal 2012 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 Mr. Chris Gay, Director of 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 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 may include certain non-GAAP financial measures. Please refer to our 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 first quarter financial results validate that our growth strategy is working and working well.

For the quarter, we realized strong growth in comparable store sales, merchandise margin, Retail and Direct segment operating margin, improved performance at our Cabela's CLUB Visa program and increases in market share. This strong performance led a record first quarter earnings and further increases in return on invested capital.

We are particularly pleased with continued strength in comparable store sales, which increased 4.2% in the quarter. This is on top of an 8.9% comp store sales increase we realized in last year's first quarter. These strong results are mostly due to our store Outfitters, providing outstanding service to our customers.

Over time, we've invested significant resources in additional training and enhanced tools to ensure our Outfitters have everything they need to provide extraordinary service to our customers. And the results speak for themselves. For the quarter, average ticket increased roughly 5%.

In addition to comparable store sales, we are also very pleased with our merchandise gross margin performance in the quarter, which is one of our key initiatives. For the quarter, merchandise gross margin increased 150 basis points to 34.5%. This is the highest first quarter merchandise margin in the last 3 years. Similar to last quarter, we continued to see significant strength in the Firearms and Shooting categories, which caused a material mix shift into these lower margin categories.

For the quarter, this adverse mix resulted in roughly a 60-basis point headwind to merchandise margin. As a result of hard work from our merchants and planners managing inventory levels, we were able to avoid significant end of season markdowns as we transitioned from fall to spring goods during the quarter.

Additionally, with the unusually warm weather, we transitioned to our spring merchandise sets about 45 days early, enabling us to sell new merchandise at full margin.

Now let me turn to retail profitability, which is a key initiative in our retail growth strategy. For the quarter, retail profitability increased 120 basis points to 12.8%, a new first quarter record. This is the 12th consecutive quarter of retail profit contribution improvement. Improvements in retail profitability were due to higher merchandise margin and continued improvements in labor productivity.

Last quarter, we discussed in depth our retail expansion growth strategy. Since that call, we've opened 2 next-generation stores: one in March in Wichita, Kansas; and the other, last week in Tulalip, Washington. Both of these stores had tremendous openings with thousands of passionate Cabela's customers waiting in line to witness the ribbon cutting and shop these very exciting stores. If you have never been to a Cabela's opening, I encourage you to attend. It is truly a unique event. While it is still early, I am delighted to report that both stores have exceeded our expectations, which validates everything we said last quarter with regard to accelerating retail store expansion. As a reminder, we expect to increase retail square footage 10% this year and up to 13% in 2013.

Additionally, earlier this morning, we announced 2 store locations in the Denver market scheduled to open in 2013. Given the number of Cabela's customers and the abundance of outdoor opportunities in the Denver region, we are very excited to enter this market with 2 stores. In addition to these stores for 2013, we have announced plans to open next-generation stores in Louisville, Kentucky, Columbus, Ohio and Grandville, Michigan.

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