Cabela's Inc. Q3 2008 Earnings Call Transcript

| About: Cabela's Incorporated (CAB)

Cabela's Inc. (NYSE:CAB)

Q3 2008 Earnings Call Transcript

October 30, 2008, 4:30 pm ET

Executives

Chris Gay – Treasurer and IR Manager

Dennis Highby – President and CEO

Ralph Castner – VP and CFO, and Chairman of World’s Foremost Bank

Pat Snyder – SVP of Merchandising, Marketing and Retail Operations

Brian Linneman – SVP of Global Supply Chain Operations

Analysts

Paul Lejuez – Credit Suisse

Rick Nelson – Stephens

Jim Duffy – Thomas Weisel Partners

Reed Anderson – D.A. Davidson

Bob Simonson – William Blair

David Cumberland

Chris Svezia – Susquehanna Financial Group

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Cabela's Incorporated third quarter fiscal 2008 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator instructions) I will now turn the conference over to Chris Gay, Treasurer and Investor Relations Manager. Please go ahead sir.

Chris Gay

Good afternoon. I welcome everyone listening today both on the conference call and by web cast. This afternoon we issued our third quarter fiscal 2008 earnings press release. If you have not yet seen it, it is available in the Investor Relations section of our web site at www.cabelas.com. In addition, a replay of today's call will be archived on our Web site.

Leading our call today will be Dennis Highby, our President and Chief Executive Officer. Dennis will provide a high level review of our third quarter results and update everyone on our profit improvement initiatives. Also joining us this afternoon is Ralph Castner, our Vice President and Chief Financial Officer. Ralph will review our third quarter financial results in more detail. Additionally, Pat Snyder, Senior Vice President of Merchandising, Marketing and Retail Operations and Brian Linneman, Senior Vice President of Global Supply Chain Operations will be available during the question-and-answer portion of the call.

Before we get started, let me read the safe harbor language. This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identified by words such as "expect," "anticipate," "project," "intend," "plan," "believe," and "confident." Forward-looking statements are based on our current assumptions and expectations and are subject to risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements.

We encourage you to review the risks identified in our filings with the SEC including the information set forth in the risk factors section of the company's Form 10-K for the fiscal year ended December 29, 2007 and Form 10-Q for the fiscal quarter ended March 29, 2008.

Now, let me provide a summary of our third quarter results. Consolidated revenues increased 11.9% to $611.8 million. For the quarter, retail revenue increased 27.5%. For the quarter, comparable store sales declined 9%. For the quarter, direct revenue was $241.2 million compared to $241.9 million in the year ago quarter. For the quarter, financial services revenue declined 6.4% due to higher net charge-offs and lower net interest spread.

For the quarter, operating income was $20.8 million compared to $24.3 million in the year ago quarter and diluted earnings per share for the quarter were $0.15.

Now I'll turn the call over to Dennis Highby, our President and Chief Executive Officer.

Dennis Highby

Thanks, Chris. Let me start by providing a high level summary of what we’re seeing in the current retail environment. Clearly these are unprecedented times. The deteriorating macro environment, the unstable financial markets, falling consumer confidence and a decrease in consumer spending and traffic is affecting most retailers today. And we are obviously not immune to this.

It appears that consumers are being increasingly focused on quality and value in this environment. However, it is important to note that even though customers are more selective we continue to gain market share. We are closely monitoring our business and making the appropriate adjustments. As we continue to create and foster a unique and compelling shopping experience for our customers we remain focused on carefully managing our capital and operating expenses tightly controlling inventories and further executing on our profitability initiatives.

For the year-to-date period we have improved our cash from operations by $125 million through improvements in inventory management. Our liquidity position will allow us to continue to fund our growth and take market share from our competitors. At the end of the third quarter, we had approximately $205 million of capacity under our revolving line of credit. Given our current outlook and the strong cash flows that we generate in the fourth quarter we expect to be out of our line of credit at the end of the year. Now let me review the performance of our three main operating segments.

As we enter the final quarter of 2008 we main focused on our business and our initiatives to improve profitability and increase our market share.

First, I'd like to review our retail business which is our largest and fastest growing segment. Retail revenue increased 27.5% to $328 million. The 27.5% growth was driven by new stores. Recall that comp store sales in the third quarter a year ago were a positive 4.6% making for a difficult comparison. In this tough retail environment, comp store sales declined 9% for the quarter. Average ticket in our comp store base was consistent with the year ago quarter.

We continue to focus on improved outfitter training to increase average ticket. Our online customer shopper survey stores we call voice of the customer continue to show improvement.

In our direct business we focused -- excuse me we introduced four new catalog titles during the quarter. Total catalog circulation and pages mailed and booked decreased during the quarter.

For the third quarter revenue in our direct business was $241.2 million as compared to $214. 9 million in a year ago quarter. We continue to test a new specialty catalogs and catalog sizes to optimize both growth and profitability in our direct business. For example during the quarter we tested a new specialty catalog in conjunction with our larger master catalog targeted towards a specific customer base. We’re extremely encouraged with the results and will be expanding this marketing strategy throughout 2009.

We continue to see direct sales growth through most of U.S. and have particular strength in the Central and Northeast parts of the country. As we are previously discussed our direct business has been impacted where we have recently built the retail stores and areas of the country impacted by the housing crisis. Even with the current economic conditions, we’re encouraged with the customer trends we experienced in the third quarter. As I mentioned that during our last call one of the key indicators of a healthy direct company is the growth of its customer file.

Through the third quarter of 2008 acquisition of customers is ahead of 2007 and shows that we’re growing our customer base. Through the third quarter of 2008, retention of current customers and orders per customers are tracking ahead of 2007 levels.

These are the most positive trends in customer acquisition and retention we have seen in the last several years. Our strong acquisition, retention, and reactivation of customers are positive indicators that our multi channel platform is helping us to continue to take market share from our competitors and has positioned us well for current and future market share growth. These improvements are being offset by a slight decline in average transaction size, which can be expected given the current economic environment. Our industry leading Internet site is also a competitive advantage in this economic environment. We dominate our competition in the sporting goods earnings-commerce web site realm.

The most recent industry measures show that Cabela's has more than twice the traffic of our closest competitor. In fact of America’s largest retail websites Cabela's ranked 40th in annual sales regardless of industry. We believe that our financial services business is a competitive advantage given our other retail growth plans. During the third quarter we took steps to secure the necessary liquidity to allow for growth into 2009. An important aspect of our strategy is to continue the growth in Cabela's club members in order to further penetrate markets for existing direct and retail locations as well as markets where we will put future retail stores.

For the quarter financial services revenue declined 6.4% compared to prior year. Revenue growth was impacted by hard charge-offs and a lower net interest spread due to the lower prime rates.

We continue to monitor delinquencies and charge-offs closely and saw only a slight increase in bad debts quarter-over-quarter.

Now let me review the progress we’re making on our four initiatives to improve profitability. For everyone’s benefit the four initiatives are; first improving retail store productivity, second enhancing our merchandize planning and retail merchandizing, third improving inventory levels, and finally executing more effectively our retail advertising strategy.

With regard to store operations, despite the difficult environment we continue to make improvements in retail store productivity. For the quarter, despite the decline in comp store sales per labor hour in our comp store base were consistent with the prior year quarter. The improvements in labor productivity have been driven by improvements in several areas including more streamlined flow of goods to our retail stores and managing staffing levels at our stores. While we’re seeing customers trade down to somewhat lower price points average ticket in a comp stores was consistent with the year ago quarter. We continue to improve our merchandise planning and retail merchandising.

Our open to buy process continues to gain traction and does help significantly improve inventory levels. We continue to flex seasonal assortments in our stores, improve our visual merchandising and signage and improve the timing of our seasonal merchandise selection. We’re in the process of rolling out several initiatives that we believe will have a positive impact on overall contribution of our retail stores. These initiatives include enhanced check verification at cash registers and piloting new procedures for merchandize returns.

Another highlight of the quarter is the significant progress we have made with regard to inventory levels. For the quarter inventory decreased $20.4 million from the prior year quarter while sales increased 11.9%. As we discussed last quarter we expect to show significant improvements in inventory levels as we anniversary our new store openings from 2007. Even though we opened two stores during the year, we expect to end 2008 with slightly less inventory than we ended with in 2007.

For the quarter lift from retail advertising continued to increase from prior year. We’re continuing to analyze our media spend on a market-by-market basis and more effectively spend advertising dollars where they will produce the highest returns. Our marketing group leverages our extensive customer base to make better informed decisions to optimizing our marketing investment. As you’ve probably already seen earlier this month we announced a 10% workforce reduction at our corporate headquarters in Sidney, Nebraska. There are approximately 1400 people employed at our corporate headquarters. Two thirds of the reduction came from not filling open positions while one third of the reduction came from job eliminations.

Severance costs that we recognized in the fourth quarter are expected to be about $1.5 million, while we expect the annualized cost savings to be $4 million. We will continue to evaluate additional opportunities to drive efficiencies in all aspects of our business.

Our store in Rapid City, South Dakota, opened August 8th and we are very pleased with the initial results of this location. This is our first next generation store. Remember our next generation store format is designed to be smaller, more efficient with higher returns in invested capital as compared to our more traditional stores.

Let me now update you on our new store opening plans for 2009. We expect to open two stores. The first store will be in Billings, Montana, which is expected to open in the second quarter of 2009. This store will be one of our next generation store formats. The other store expected to open next year is in East Rutherford, New Jersey. We expect this store to open in the fourth quarter.

We expect the sales environment to remain difficult in the fourth quarter and into 2009 but our entire team remains energized and focus. I would like to again express how proud I am of our employees and how they continue to step up to meet the challenges of the tough consumer climate. I sincerely thank them for their ongoing dedication to this company.

Now I'll turn the call over to Ralph Castner to review our financials in more detail.

Ralph Castner

Thank you, Dennis. Despite the challenges that we are currently facing in the market place, we’re very pleased with our ability to continue to capture market share and drive meaningful improvements in both inventory levels and cash flow from operations during the quarter.

During the quarter, consolidated revenue increased to 11.9% to $611.8 million compared to $546.8 million in the third quarter of 2007. Direct revenue for the quarter was $241.2 million compared to $241.9 million in the same quarter a year ago. Even with the opening of the nine new stores in the last 12 months and the challenging macroeconomic environment our direct business is holding up extremely well.

Retail revenue for the quarter increased 27.5% to $328 million compared to $257.3 million in the same period last year. The increase is due to our new store openings.

Comparable store sales declined 9% in the quarter. Comparable store sales continue to be impacted by the challenging macro economic environment.

Now, looking at the financial services segment, which encompasses our largest loyalty rewards program. In the third quarter revenue, average managed credit card loans increased 24.4% and average active accounts increased 16.8% to 1.1 million loyal customers. For the quarter, the average account balance increased 6.5% compared to prior year quarter. For the quarter revenue was $41.9 million versus $44.7 million in the third quarter last year. For the quarter charge-offs increased from 2.76% to 2.91% sequentially. We began to see a stabilization in the increase in charge-offs.

Fortunately we had the ability to reprice our portfolio to reduce the volatility of our profitability. We have and will continue to adjust prices as market conditions change. We measure the performance of our financial services segment on a non-GAAP basis. A reconciliation of these measurements to GAAP was provided in our earnings release.

Now, turning to consolidated gross profit. Gross profit for the quarter increased 5.1% to $235.7 million versus $224.2 million in the year ago quarter. Consolidated gross margin was 38.5% in the quarter compared to 41% in the same quarter a year ago. Our merchandise gross margins were 33.8% in the third quarter of 2008 versus 35.4% in the same quarter last year. The decrease in merchandise gross margin is primarily attributable to greater mark downs, particularly in our direct segment.

One of our initiatives is to improve our inventory levels and inventory turns. We are now being more aggressive in managing inventory levels in season.

Now, let's look at operating income. Consolidated operating income for the quarter was $20.8 million as compared to $24.3 million in the same quarter last year. On a consolidated basis, operating margins were 3.4% as compared to 4.5% in the third quarter last year. The decrease is mostly due to low merchandize gross margins and higher charge-offs in our financial services business.

Operating margins in our direct segment were 13.9% versus 16.9% in the same quarter a year ago. Results here were adversely impacted by lower gross margins and to a lesser extent, reduced marketing fees paid to the direct segment from the financial services segment, and deleverage of direct marketing costs.

Direct marketing costs were 15.1% of direct revenue in the third quarter of 2008 as compared to 14.7% of direct revenue in the year ago quarter. Operating margins in our retail segment were 9.3% as compared to 10.5% in the same quarter a year ago. The change in retail operating margins is primarily attributable to higher advertising expense, lower marketing fees paid to the retail segment from the financial services segment and lower gross margin. These higher costs were partially offset by improvements in salary and wages and depreciation expense.

Corporate overhead and other expenses increased to 0.3% in the quarter. Corporate overhead and other expenses as a percent of total revenue declined 100 basis points to 9.2% of sales from 10.2% of sales in the year ago quarter. Leverage of these expenses came mostly from a decline in incentive compensation, reduced equipment and software expense and lower depreciation.

Moving onto the effective tax rate, for the third quarter our effective tax rate was 35% as compared to 37.5% in the year ago quarter. We continue to expect our effective tax rate for the full year to be approximately 36% as compared to 36.9% in 2007.

Moving onto earnings, for the quarter net income was $9.7 million as compared to $13.2 million in the third quarter last year. Diluted earnings per share were $0.15 in the third quarter compared to $0.20 in the same period last year.

Turning now to cash flow metrics, for the year-to-date period we made significant improvements in cash generated from operations. Cash flow used in operations for the nine months ended September was nearly $33 million. This is a $125 million improvement over cash used in operations in the comparable period last year. For the quarter, we incurred capital expenditures totaling $12.6 million. For 2008, we expect capital expenditures, including purchases of economic development bonds to be in the $100 million to $125 million range.

Given the current state of the financial markets, we’re spending a significant amount of time planning our liquidity needs for 2009 and beyond. We have a $430 million revolving credit facility which expires June 30, 2012, with nine financial institutions. These financial institutions in order of commitment are U.S. Bank, Wells Fargo, Bank of America, Wachovia, Comerica, JPMorgan Chase, Sovereign, Sun Trust and Bank of the West. We do not anticipate any of the recent activities in the commercial banking sector to affect our credit agreement between now and 2012.

With respect to World's Foremost Bank, you saw that we recently completed a $200 million term securitization transaction in September 2008. Additionally in July we completed $200m variable funding conduit and in October renewed a $350 million variable funding conduit. We expect to have sufficient liquidity for the first half of 2009.

While we’re pleased that the securitizations markets were open to us we incurred borrowing costs of approximately 250 to 400 basis points higher than historical levels. Due to these higher costs in the securitization market, we made the decision to fund more of our portfolio through lower cost certificates of deposit. We expect our funding strategy to shift to certificates of deposit from securitizations when the securitization market returns to a more normalized level.

As you know the FDIC insurance limit was recently raised to $250,000. This could make raising money in the CD market more efficient. Like I mentioned before, we have made and will continue to make pricing adjustments to offset these higher costs.

One of our strategic advantages is our strong loyalty program. We’ll continue to add new Cabela's Club members to gain market share from our competition. As you may have already seen Moody’s Investor Services placed the notes issued by the Cabela's Credit Card Master Note Trust on watch. We continue to believe that we have a very strong credit quality portfolio with a substantially higher than industry average principal payment rate, a higher than industry average yield, and a lower than industry average charge-off rate. We intend to work diligently with Moody’s during this process and look forward to a resolution in the near future.

Additionally beginning with October data we’ll begin posting Master Trust performance data on Bloomberg on a monthly basis. In addition for those without access to Bloomberg we will also report the performance in an 8-K with the SEC. The monthly performance will include performance data such as delinquencies, charge-offs, payments rates, yields, and excess spread.

Now, with regard to annual guidance, in light of the current economic environment for fiscal 2008, we now expect to generate high single digit percentage revenue growth. Additionally, we expect a low to mid-teen percentage decline in earnings per share for fiscal 2008. This guidance reflects our view of the uncertain consumer environment in the fourth quarter and incorporates the following assumptions.

We now expect same store sales for the full year to be down 7% to 10% as compared to our prior guidance of down 5% to 7%. We continue to expect direct revenue growth to be flat to slightly down.

Given recent portfolio trends, we now expect bad debt levels to be between 2.9% and 3% for the year as compared to our prior guidance of 2.7% to 2.9%. We continue to expect to see pressure on merchandise margins throughout the remainder of the year.

Now let me turn the call back over to Dennis for some closing comments.

Dennis Highby

Thanks, Ralph. During the quarter we have made significant progress managing our inventory levels and improving cash flow from operations as we continue to gain market share from our competitors. Additionally, we believe we have sufficient liquidity to get us through these tough times. We remain focused on managing factors within our control including executing on our profit improvement initiatives, implementing additional cost reductions, aggressively managing inventory levels, and perhaps most importantly making sure our entire team remains up-to-date and motivated.

As we enter our busiest season of the year, we will focus on continuing to drive sales and aggressively increase our market share. With our strong liquidity position, we believe that we are a preferred retailer for many of our vendors. We’re seeing more opportunities from vendors regarding special buys and exclusive merchandise offers pick. Vendors are telling us that in this tough environment they prefer dealing with us because we continue to pay our bills on time. We’re confident that our profitable multi-channel selling platform, strong brand and superior customer service are a competitive advantage unmatched by anyone in our industry and will serve us well for many years to come.

With that, operator, let's open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) And we have our first question from Paul Lejuez with Credit Suisse.

Paul Lejuez - Credit Suisse

Hi guys, Paul Lejuez.

Dennis Highby

How are you doing Paul?

Paul Lejuez - Credit Suisse

Good thanks. You’re talking about inventory in units rather than dollars. How does that look year-over-year as there is a discrepancy between the two? Also where did the decrease come from and I guess what I’m really asking is what are in-store inventories looking like. And then second question, I’m just wondering if the corporate layoffs impacted the third quarter at all and then I have a couple of follow ups if I can.

Dennis Highby

Sure. You know we feel good about the inventory levels that we have right now. You know Paul I don’t know as far as units, we didn’t do any looking at that. Do you have an opinion on that Brian?

Brian Linneman

No I don’t think the units have changed in relationship to a comparison to last year.

Dennis Highby

Paul in regard to our inventory in our stores and now we have seen a reduction of our inventory in all of our stores. As far as the corporate layoffs what was the question there?

Paul Lejuez - Credit Suisse

If that had any impact on the third quarter?

Dennis Highby

Ralph.

Ralph Castner

No.

Paul Lejuez - Credit Suisse

Okay, and then did you see any sort of a falloff in credit card spending at the end of the month consistent with what is going on in the economic environment?

Ralph Castner

You know I don’t track that information week to week. So I don’t know of it. We look it month to month and clearly it has been down. I don’t know that I gave you a comment on how it changed throughout September.

Paul Lejuez - Credit Suisse

Okay but even month to month it was good enough. So it did get weaker is September is kind of what I was asking.

Ralph Castner

Yes.

Paul Lejuez - Credit Suisse

Okay and can you just go through the cases of debt that you’ve got on your balance sheet right now. You kind of clump it all together. Can you just walk us through that again?

Ralph Castner

Yes. Let me pull up the Q, so I got the right page. Sorry, I will be taking just a second Paul. There is 500 -- the actual debt line is actually $560.9. A $198.7 of that is our revolver, which as both Dennis and I said we expect to be out of that by the end of the year. There is $25 million of a note that is due next September of ‘09. There is $215 million that is due in 2016. That is $60 million due in 2007 and there is $57 million that is due -- $57 million that is due in 2012 to 2008. That is the preponderance of the debt.

Paul Lejuez - Credit Suisse

What was the one before the 57?

Ralph Castner

60.

Paul Lejuez - Credit Suisse

And when is that due.

Ralph Castner

2017.

Paul Lejuez - Credit Suisse

Got you. Okay, thanks and good luck guys.

Dennis Highby

Thank you.

Operator

And we’ll take our next question from Rick Nelson with Stephens.

Rick Nelson - Stephens

Thank you. I’m curious if you were seen any change in store traffic since the gas price has come down?

Dennis Highby

You know I don’t think we’re going to comment on how things are in the fourth quarter but I think fuel prices are very encouraging for us right now.

Rick Nelson - Stephens

Can you speak to store traffic in the third quarter, may be how it progressed as well as ticket in the quarter?

Dennis Highby

Pat, you want to take that?

Pat Snyder

Sure. Our comp sales in the third quarter were down about 9% and this was compared to about 4.6% positive comp the previous year and there is no question we saw reduced traffic in our stores. We saw our customer was clearly focused on value items or value merchandize. So I would say it was fairly consistent throughout the third quarter.

Rick Nelson - Stephens

Traffic and ticket were down?

Pat Snyder

Ticket was flat.

Rick Nelson - Stephens

Got you. Implied fourth quarter guidance I am calculating $0.70 to $0.74 in EPS, would that assume a comp decline along the lines of the third quarter?

Dennis Highby

You know Rick I think we’re anticipating that you know, the fourth quarter is going to be a very difficult environment again and we should be different than that. But we’re looking at this fourth quarter even though it is a big quarter for us; it is still going to have pressure.

Rick Nelson - Stephens

And are you satisfied that the costs that you have taken out to date will allow you to achieve these objectives?

Dennis Highby

No. Rick we’ve been spending a lot of time looking at all of our expense reductions. I mean it is a tough economic climate out there. We’re getting rid of all nonessential expenditures, anything that is not really adding value we’re not spending money on. Ralph I don’t know if you want to add anything to that.

Ralph Castner

Now I think that’s it Dennis. We’re working to control expenses tightly to try to manage what we think is going to be a tough retail environment.

Rick Nelson - Stephens

Ralph you talked about stabilization in charge-offs but yet they were up sequentially. I was wondering what you are referring to there?

Ralph Castner

Well I think they were -- they were up sequentially from 276 to 291 and really I guess what I was referring to there is trends that we’re seeing in delinquencies and you -- and we were up -- you know, we have been up obviously year-over-year about 100 basis points. We’ve started to see that increase as well.

Rick Nelson - Stephens

I got it. Okay, thank you. Good luck.

Dennis Highby

Thank you.

Operator

The next is Jim Duffy with Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

Thanks hello. Ralph question for you. Looking at that cash on the balance sheet what is kind of the minimum that you will need in that line item or the lowest that it could go. Put another way kind of what can you need in there to run the business?

Ralph Castner

Well cash in the balance sheet is a little bit -- let me spend a little time on that because that is important. We had -- we left the year with a significant amount of cash in the bank. Virtually all of that money and that you see there on cash on hand is related to cash at World’s Foremost Bank. For all practical purposes, the merchandising business had no cash. What we’re doing at the bank is continuing to raise money through CDs just to manage through our liquidity situation we have in the bank. So I guess the answer to your question is particularly in September when we’re out of the line the minimum number at the merchandising business is zero and at the bank we’re now trying to issue CDs to raise -- just to raise cash so we can continue to grow our portfolio and gain market share.

Jim Duffy - Thomas Weisel Partners

Okay that is helpful. And you expect to be out of the revolver by the fourth quarter and then you need to lean on that again in the first and second quarters I presume?

Ralph Castner

You know I am not; yes I think that is a likely scenario but we’re going to continue to do things. We have generated a lot of cash from operations this year. We expect to generate cash from operations for next year. So I guess our intent is to rely on U.S. next year than what we did this year but I think it’ll be naïve to think we wouldn’t be into it in some regard during the middle of the year.

Jim Duffy - Thomas Weisel Partners

I think the revolver has the covenant of three to one debt-to-trailing EBITDA. Are you concerned that you are going to be bumping up against that?

Ralph Castner

Yes it is something we look at. Again there was strong cash from operations. One thing you may see us do in the back half of the year is pay some of that debt earlier as we have cash from operations or continue to watch. And I don’t know that I have used the word concerned.

Jim Duffy - Thomas Weisel Partners

Okay, thanks very much.

Ralph Castner

Thank you.

Operator

And our next question is from Reed Anderson with D.A. Davidson.

Reed Anderson - D.A. Davidson

Hi, good afternoon. Pat you know you frequently give a little bit more color on just categories and stuff. I wonder if you could do that. But also fold in there any thoughts on your Cabela's branded product performance versus maybe some of the more nationally branded products you have been putting in in a lot of the stores? Just any flavor on that would be helpful.

Dennis Highby

So our category strengths are really -- continue to be in the hunting equipment area. It has been a strong category for us all year. In the third quarter camping specifically was very strong for us. And then we saw some of our soft goods categories pick up also. Well when you start to look at the Cabela's brand product, I think naturally we sell more of that or a higher percentage of that in the third and fourth quarter because we see the soft good sales become a little stronger portion of the mix.

Reed Anderson - D.A. Davidson

And so was that in line with what you expected or because that tends to be at a little bit of a value price, but would you seen that even tick up a little bit more.

Dennis Highby

I’m talking about on the --

Reed Anderson - D.A. Davidson

On the soft goods side in the Cabela's brand.

Dennis Highby

Yes we think it started a little later than we normally would but we have seen pretty good soft good sales recently.

Reed Anderson - D.A. Davidson

Okay and then Ralph on the CDs just curious any thoughts on kind of what rates you are having to issue those or terms just a little color on that piece of the funding side?

Ralph Castner

Well what we’re doing is we’re not trying to lock in long-term money just to manage our liquidity. We’re seeing rates there somewhat dependent on how long you are on term. It is not much higher than 5% and somewhat lower than that as you bring in the term. One of the things that has been somewhat helpful is raising the FDIC insurance limit to $250,000 just gives us an opportunity to bring in bigger chunks.

Reed Anderson - D.A. Davidson

In turmoil [ph] and you will be going out three years that sort of thing?

Ralph Castner

No, generally 3 and 5.

Reed Anderson - D.A. Davidson

3 and 5, okay. And then those are brokered out through banks that sort of thing.

Dennis Highby

Generally yes.

Reed Anderson - D.A. Davidson

Okay, and then Rapid City, on that store, I mean just order of magnitude you know, what your thought would be on what kind of productivity you could get either on a per foot bases or return on capital. Just kind of how we would think about that store.

Dennis Highby

You know Ralph might want to add something or Pat but we are pleased with how that store opened up. It is an 80,000 square foot store and a great market for us. I think it is too early to tell what the sales per square foot are but we are encouraged right now.

Reed Anderson - D.A. Davidson

And in the two new stores you will open in the next year what size wise are those two?

Dennis Highby

The store in Billings, Montana is 80,000 square feet and again that is the next generation store. Now, the store in East Rutherford is 144,000 square feet.

Reed Anderson - D.A. Davidson

Okay great. That is it from me. Thank you.

Dennis Highby

Thank you.

Operator

And our next question is from Bob Simonson with William, Blair.

Bob Simonson - William Blair

Hi, good afternoon.

Dennis Highby

Good afternoon.

Bob Simonson - William Blair

Ralph I think you said CapEx this year might be 100 to 125.

Ralph Castner

That is correct Bob.

Bob Simonson - William Blair

About the same next year with two stores in each year?

Ralph Castner

Yes, I think that is fair. Maybe a little bit less than that but something I suppose direction of that. We are not prepared to give a lot of guidance here in 2009, but obviously with the same number of stores you should expect a similar amount of CapEx.

Bob Simonson - William Blair

Okay, is there a significant variability in stores how they’re doing either by region or by size of stores. I think you said Dennis that where there is crumbling housing markets they are struggling a little bit more?

Dennis Highby

You know thankfully we don’t have a lot of stores in some of those areas but, you know, I think in general the stores are seeing pressure. You can tell that from the 9% down comp. But there is not any one particular market that is either better or worse, I don’t think.

Ralph Castner

I think Dennis has regionalized comments earlier into the direct business. And that is what we have really seen in the West and Southeast where you hear a lot about the housing market. We’re not doing as well there. In the Midwest we’re doing great.

Dennis Highby

I mean from North Dakota to Texas we’re doing great and from Wyoming to New York City we’re doing great.

Bob Simonson - William Blair

Okay, and Ralph did I hear you correctly or am I interpreting like you said correctly that this year you would expect your cash from operations to be a plus not a minus number. Now would it add to your cash balance?

Ralph Castner

Well, yes, let me make sure I’m clear on this. We clearly expect to generate a lot of cash from operations and at this point we expect it to be more than our CapEx. So yes, we would build cash in 2008. That is obviously absent if we make any debt payments or anything to pay that down in addition to what our contractual payments are. We have no more contractual payments due between now and the end of the year. So --

Bob Simonson - William Blair

I’m thinking of the change in networking capital.

Ralph Castner

Yes that could be positive.

Bob Simonson - William Blair

And more positive next year than this year as you complete these programs or is it?

Ralph Castner

I don’t think I’m prepared to give any direction on that beyond what I have on 2009.

Bob Simonson - William Blair

Okay, thank you very much.

Ralph Castner

Thank you.

Operator

(Operator instructions) And our next question comes from David Cumberland.

David Cumberland

Good afternoon. Ralph can you clear from the upcoming 10-Q what the long-term time deposits balance is?

Ralph Castner

I can. The long-term time deposits balances -- I am sorry, long-term time deposit is 142. We had $142 million of long-term time deposits and $122 million of short term. And that just relates to what I said -- my earlier comments about we’re trying to (inaudible) deposits that lock in liquidity for long periods of time.

David Cumberland

Thanks and then earlier you referred to delinquency numbers, can you provide those?

Ralph Castner

Yes, greater than 30 day delinquencies is 1.35%. The 60 day delinquencies are 0.76% and the 90 day delinquencies are 0.36%.

David Cumberland

Thank you and where there any land sales of any meaning.

Ralph Castner

There were none in the third quarter of ‘08. I believe there was one in the third quarter of ‘07 that was small, maybe it lifted, I believe, a penny a share in ’07.

David Cumberland

Thank you.

Dennis Highby

Thank you.

Operator

Our last question comes from Chris Svezia with Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

Hi good afternoon gentlemen. I was wondering Ralph can you can maybe just update us on you know, in the past you talked about plans in terms of looking at roughly $200, $250 million in assets in terms of land sales and securities that you could possibly sell off in terms of raising capital over the next 3 years, can you just give us an update on that?

Ralph Castner

Well, I think you saw one of the things we’ve always talking about is about improving inventory terms and I think you saw a lot of improvement in that in the quarter. That was probably the biggest source of that. I believe it is either in the second quarter or third quarter we had a small sale of bonds. It was $3 million to $4 million, not a huge number and that is something we are continuing to work on. It is obviously slowed a little bit with the economy and the overall liquidity situation with the buyers but it is still a major focus for us in 2009.

Chris Svezia - Susquehanna Financial Group

Okay. And as you guys just on your direct consumer business, just unclear when you guys talk about being roughly flat. Can you maybe add some color between the Internet piece and catalog piece in terms of growth or contraction one way or the other?

Dennis Highby

You know our internet business continues to be very strong but again it is driven by people that receive these catalogs. So they work in conjunction but we are exited about the continued traffic. Remember it is twice as much as our nearest competitor and it is a big part of our business.

Chris Svezia - Susquehanna Financial Group

Okay, you are trying to say that the catalog piece was down during the quarter?

Dennis Highby

I mean just the way I described it, we look at it as our direct business, maybe some day we will disclose what the internet is but we don’t choose to do that right now.

Chris Svezia - Susquehanna Financial Group

Okay, and just last question, I guess for Ralph, just to go back to the commercial paper and the CDs, and the funding, just unclear, you got some things like you have a securitization I think that comes due in March of next year, (inaudible) $250 million, I mean what you are doing right now provides enough liquidity and funding so that you won’t have to go back and securitize those receivables again.

Ralph Castner

That is correct.

Chris Svezia - Susquehanna Financial Group

Okay.

Dennis Highby

Yes, and what we are preparing, I mean that is why if you -- to give you a little bit more color on that. There is two commercial paper conduits that come due in June and July of next year. One of those we either will have to renew or get CDs to replace it and that is kind of what we are focused on now. We will be on that March time frame. There is no need to do a renewal in March 2009.

Chris Svezia - Susquehanna Financial Group

Okay and then how do you -- when you look at this gap when you talk about the 250 to 400 basis points in terms of the higher borrowing costs, how quickly can you offset some of the higher borrowing costs just seen as it relates to the credit card portfolio on the other side whether it is fees or rates or how quickly does that start to fall in.

Dennis Highby

We can act very quickly there. You mean by changing by changing pricing or do they adjust pursuant to the normal terms.

Chris Svezia - Susquehanna Financial Group

I guess the actual terms, in other words, as you start to see the spreads over here as you look on the other end of the piece on the consumer end.

Dennis Highby

We can change pricing with 30 days normally.

Chris Svezia - Susquehanna Financial Group

Okay. All right. Thank you very much.

Dennis Highby

By the way just an important point on that. What we are seeing about that widening of 250 to 400 basis points, I mean that is obviously not on the whole portfolio.

Ralph Castner

Right, it is a small piece broadly speaking.

Dennis Highby

Relatively small piece.

Chris Svezia - Susquehanna Financial Group

All right. Thank you guys. I appreciate it.

Operator

And we will take a follow up question from Paul Lejuez with Credit Suisse.

Paul Lejuez - Credit Suisse

Hi guys. Ralph last quarter you gave us the change in the marketing fees paid by the bank in the other segment, can you provide that again this quarter?

Ralph Castner

I mean, yes, in each segment they decline between $1.5 million and $2 million per segment.

Paul Lejuez - Credit Suisse

Got you. Thank you.

Operator

And a follow up question from Bob Simonson with William, Blair.

Bob Simonson - William Blair

Ralph, both of you have talked about taking market share, can you give us some kind of an assessment. You don’t have to put names on it, but how you assess the competitive environment out there. Obviously everything is pretty competitive in retailing but in terms of distressed inventory et cetera.

Dennis Highby

Sure, I mean we have seen some of our competitors close some stores. You know just listening to the vendors, you know, we feel comfortable that we are getting our fair share of business. Our traffic even though it is down, it is not down like our competition is. Our direct business I think we feel very excited about that, you know, just our activation of customers, retention, and when this economy turns around we are going to have a very strong direct business and a strong retail business.

Bob Simonson - William Blair

Are you seeing better buys or more aggressive selling to you from the vendors?

Dennis Highby

I think in the prepared remarks you know, I said that vendors love us because we pay our bills. I think that is enough said on that, I mean, you can’t pay your bills sometimes -- competitors when it is not a good deal for them.

Bob Simonson - William Blair

Is your mark on improving because of they’re being so pleased with you paying the bills?

Dennis Highby

You know, I don’t know if Pat wants to add something to that --

Pat Snyder

We continue to go out and make special buys. We use this primarily as promotional merchandize. You know our margins for the quarter, gross margins have declined and most of that is really attributed to our retail advertising where we have been aggressive with value merchandize and we have also been very aggressive in liquidating end season product and overstock product.

Bob Simonson - William Blair

Thank you very much.

Dennis Highby

Thank you.

Operator

And with no further questions in the queue, I will turn the call back over to Mr. Gay.

Chris Gay

Just like to thank you very much for joining us today and look forward to talking to you again soon.

Operator

That does conclude today’s conference. Thank you for attending and have a wonderful day.

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