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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 and Executive Vice President

Analysts

Reed Alan Anderson - Northland Capital Markets, Research Division

Seth Sigman - Crédit Suisse AG, Research Division

N. Richard Nelson - Stephens Inc., Research Division

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

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

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

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

Charles Edward Cerankosky - Northcoast Research

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Cabela's Incorporated (CAB) Q4 2012 Earnings Call February 14, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. Fourth Quarter and Full 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 Chris Gay, Director of Treasury and Investor Relations. Please go ahead.

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 will 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 fourth quarter financial results validate that our dominant Omni-Channel model is working well, and our next generation stores continue to generate superior returns on capital.

For the quarter, we realized strong growth in comp store sales, increases in Direct revenue, solid growth in our Cabela's CLUB Visa program and exceptional performance from our next-generation stores. This strong performance led to record fourth quarter earnings and further increases in return on invested capital.

We are particularly pleased with the exceptional performance we're seeing from our next-generation stores. During the quarter, our next-generation stores were at least 40% more productive than our legacy stores in both sales and profit per square foot. This is extremely encouraging as we continue to accelerate Retail store expansion.

Additionally, our next-generation stores are performing better than our legacy stores as they enter the comp base. In the quarter, our next-generation stores had comp store sales roughly 50% higher than the existing store base. In addition to the strength of our next-generation stores, we continue to be pleased with the performance of our first Outpost store in Union Gap, Washington. The results from this store are very encouraging, as it is outperforming our expectations on a sales and profit per-square-foot basis. Due to the emphasis on softgoods and Cabela's brand products, merchandise margin is several hundred basis points higher than consolidated merchandise gross margin.

Our second Outpost store located in Saginaw, Michigan opened this morning to a large crowd. And we are very excited to be able to service our customers in this region with one of our new format stores.

For 2013, we expect to open 6 domestic next-generation stores, 1 Canadian next-generation store and 3 Outpost stores, including our new Saginaw, Michigan store. Additionally, we will be relocating our existing Winnipeg store to a more desirable location and we'll increase the size from 44,000 square feet to 70,000 square feet.

Our scheduled store openings for 2013 represent a 13% growth rate in Retail square footage. We plan to open 2 next-generation stores during the first quarter in Columbus Ohio and Grandville, Michigan. In the second quarter, we plan to open one next-generation store in Louisville, Kentucky, along with our Winnipeg relocation.

In the third quarter, we plan to open 3 next-generation stores with locations in Green Bay, Wisconsin; Thornton, Colorado; and Lone Tree, Colorado.

In the fourth quarter, we plan on opening another Canadian store in Regina, Saskatchewan, as well as 2 more Outpost stores, one of which we have just announced today in Waco, Texas. We plan to announce the other Outpost store location in the near future.

In January, we announced plans to add 2 next-generation stores in 2014 in Greenville, South Carolina and Woodberry, Minnesota. This brings the total to 5 announced next-generation stores for 2014 with plans for up to 3 more domestic next-generation stores. We are also planning on opening up to 3 new next-generation stores in Canada in 2014. Our current locations have yielded outstanding results and we are very excited about further expansion of our Canadian footprint.

With regard to Outpost stores, I am pleased to report that given the strong initial performance of our first Outpost store in Union Gap, Washington, our Board of Directors has recently approved funding for 10 new Outpost stores to be opened through 2017.

As a result, we now expect to open up to 3 Outpost locations in 2014.

In addition to strong new store performance, we also realized continued strength in comp store sales, which increased 12% in the quarter. The increase in comp store sales was broad-based, as sales increased in 32 of our 33 comp stores.

For the quarter, average ticket increased nearly 12.5% and transactions declined less than 1%. Late in the quarter, we experienced a surge in the sale of firearms and ammunition. Assuming a more normalized firearms and ammunition growth rate, comp store sales still increased at a mid-single-digit rate. Multichannel customers increased 7.1% compared to the same quarter a year ago. We are encouraged by the increase in the percentage of new customers we are seeing among firearms purchasers. 2 years ago, about 16% of firearms buyers were new customers. Over time, this percentage has increased and in the fourth quarter of this year, 21% of firearms purchasers were new to Cabela's. This is extremely powerful as we now have an opportunity to market our entire product assortment to these new customers in future years.

Another benefit we are realizing as a result of the increased demand for firearms and ammunition is the positive benefit on our consumer franchise, as we believe we are getting preferred allocation of high demand firearm and ammunition products. Having these products more often than our competitors reinforces why we are the world's foremost outfitter.

For the quarter, merchandise gross margin decreased 20 basis points to 36.2%. The entire decline is due to a greater shift to lower margin firearms and ammunition. The headwind from this adverse mix shift nearly doubled in the quarter. In fact, for the quarter, merchandise margin increased in each of our 13 merchandise subcategories, including firearms and ammunition. Excluding firearms and ammunition, merchandise margin increased 60 basis points.

Now, let me turn to Retail profitability, which is a key initiative in our Retail growth strategy. For the quarter, Retail profitability increased 110 basis points to 21.7%, a new fourth quarter record. This is the 15th consecutive quarter of Retail profit contribution improvement. Improvements in Retail profitability were mostly due to our ability to further leverage labor cost in our Retail stores. We were able to leverage Retail labor despite strength in firearms, which is a more labor-intensive sale.

Another highlight of our Retail business, with which we are particularly pleased, is our customer satisfaction scores, which reached a company record of 88.7% for 2012. We are also pleased with the improved performance of our Direct business, which saw sales increase 1.7% in the quarter. Improvements in the Direct business were driven by a 2.8% increase in orders, offset by a 1% decrease in average order size.

Visitors to cabela's.com increased 21% over the prior year quarter. The success we are seeing in our Direct business was helped by significant investments in our Omni-Channel marketing strategy. These investments are positively impacting all aspects of our business. We are encouraged with the initial results in our Direct business and have numerous strategic initiatives to ensure we maintain and even grow our dominant market position in the Direct business.

Now let's take a look at our Cabela's CLUB Visa program, which had another exceptional quarter. We continue to see strong growth in average active accounts, lower funding costs and improvements in delinquencies and net charge-offs.

For the quarter, average active accounts increased 9.4%. We also realized significant improvements in net charge-offs, which were just 1.91% and are 21 basis points lower than charge-offs in the same quarter a year ago.

With the backdrop of low funding cost, accelerating account growth and favorable delinquencies and net charge-offs, we are very confident that the Cabela's CLUB Visa program will have a very strong performance in 2013.

Let's take a look at guidance. So far this year, our revenue and profit growth remains strong. This growth, along with the strong performance of our new stores, makes us comfortable with the external earnings estimates for 2013. This outstanding quarter and year has been a testament to the quality of our Cabela's Outfitters and the exemplary service they provide. I want to personally thank each and every one of our Outfitters for their hard work, dedication and effort in cherishing and delighting our customers each and every day.

Now, I'll turn the call over to Ralph Castner to review in more detail, among other things, performance of our Cabela's CLUB Visa program.

Ralph W. Castner

Thanks, Tommy. Following up on Tommy's remarks, we're very pleased with our fourth quarter performance, including the particularly strong performance of our next-generation stores, improvement in our Direct business and solid performance of our Cabela's CLUB Visa program. For the quarter, non-GAAP earnings per share increased 17.9% to $1.25 compared to $1.06 a year ago.

Fourth quarter 2012 non-GAAP reconciled items include impairment charges of $20.3 million, primarily related to land held for sale and a $12.5 million reduction -- revenue reduction related to the Visa antitrust settlement. Fourth quarter 2011 non-GAAP items include impairment charges of $7.8 million, mostly related to the value of economic development bonds.

On July 13, 2012, a Memorandum of Understanding was entered into to settle the Visa antitrust litigation. On November 9, 2012, the settlement received preliminary court approval. The proposed several includes: a cash payment of $6 billion [ph] to class plaintiffs, including Cabela's, by Visa MasterCard; distribution to class plaintiffs, including Cabela's, of an amount equal to 10 basis points of interchange for a period of 8 consecutive months; and a modification of Visa's rules to prevent retailers to impose a surcharge on credit transactions, which we, at Cabela's, do not expect to do. As a result of the preliminary court approval, we accrued the 10 basis point reduction in interchange income for our Cabela's CLUB Visa program. We estimate the impact to be $12.5 million and recorded this liability as a reduction in interchange income in the quarter.

Upon final approval, we expect that the company's merchandising business will benefit from this interchange reduction. Additionally, we expect to receive our share of the cash payment related to the settlement agreement. Neither of these future benefits have been accrued.

We're very pleased with the performance of our next-generation and Outpost stores and expect to continue to grow Retail square footage at a 10% to 15% annual rate. While we expect to fund most of this growth with cash flow from operations, we're also taking a more aggressive approach to liquidate land held for sale. As part of this process, we received an appraisal on the majority of the property that we have held for sale. The appraisal on some of our properties were significantly below our expectations. However, as a result of the appraisal and our new strategies to not develop our own real estate properties, we wrote down the carrying value of these properties, which accounted for almost 20 -- for most of the $20.3 million impairment. We're optimistic we will ultimately sell the property for more than the appraised value. We do not expect further significant write-downs on land held for sale.

For the quarter, non-GAAP Financial Services revenue increased 7.2% to $83.2 million. The increase in Financial Services revenue was primarily due to higher interest and fee income, increased interchange income and lower interest expense. For the quarter, net charge-offs as a percentage of average credit card loans, improved 21 basis points to 1.91% compared to 2.12% in the fourth quarter last year.

Additionally, we continue to see improvements in delinquencies. Greater than 38 delinquencies were just 0.72% as compared to 0.87% a year ago. Greater than 60 day delinquencies were 0.46% as compared to 0.53% a year ago. And greater than 90 day delinquencies were 0.24% as compared to 0.27% a year ago.

Now let me highlight the future funding plans of our Cabela's CLUB Visa program. Our next term securitization doesn't mature until January of 2015. In the first quarter of 2013, we expect to complete a term securitization of $250 million to $500 million to fund growth. And we expect to complete another term securitization during the second half of the year.

Additionally, we will work to early renew one of our conduit facilities. These facilities, of which we have 3, all have 3-year terms. By early renewing 1 of the 2 facilities that will mature in 2014, we'll have only 1 of our 3 conduit facilities mature in any 1 year.

Now let's turn to inventory. Inventory increased 11.7% or $58 million year-over-year to $553 million. The increase in inventory is mostly attributable to new stores. We feel very good about our inventory levels. Additionally, the shot of cold weather we've seen so far in the first quarter has further helped clear winter inventory as we prepare for our seasonal spring roll late this quarter. As a result, we expect to have a very clean and efficient season roll.

Gift instruments and credit card reward points increased nearly 15.5% or $35.2 million over the same period last year to $263 million. This cash flow is an often-overlooked benefit as the Cabela's CLUB Visa program pays for the points when earned rather than when redeemed.

For the full year, cash flow from operations was $237 million and capital expenditures were $234 million. With our accelerating store growth plans, we expect full-year 2013 capital expenditures to be between $300 million and $325 million.

We ended the year with about $200 million of cash in our merchandising business. This cash, combined with our cash flow from operations, which is expected to approach $300 million in 2013, should allow us to internally fund store growth through 2014. Again this year, Cabela's is authorized to repurchase shares to offset shareholder dilution resulting from granting of equity-based compensation awards. The company intends to repurchase up to 750,000 shares of its common stock in open market transactions through February of 2014. Now, I'll turn the call over to Tommy for some final comments.

Thomas L. Millner

Thanks, Ralph. I hope you can all tell we are very pleased with our record financial results, both for the fourth quarter and or the full year, and in particular, the strong performance of our next-generation stores and improvements in our Direct business. We are also very excited about our future growth opportunities and making sure we cherish and delight our customers every day.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Reed Anderson from Northland Securities.

Reed Alan Anderson - Northland Capital Markets, Research Division

Tommy, let's start with you. Just kind of focusing on kind of the quarterly trend, if you will. Obviously, a great comp number for the quarter. I'm just curious, though, if you can provide a little context, you maybe don't want to get too specific, but just kind of how it progressed from a monthly basis, because obviously, you had a big sort of event in December to really ramp that up. And then also though, related to that, from a margin standpoint, I know coming out of 3Q, you were planning to -- for a very promotional environment. And if you strip off firearms and look what you actually did for margins, it looks it wasn't quite as bad as you're thinking or you planned appropriately. So just some commentary on that regard, please.

Thomas L. Millner

Absolutely. Reed, I think one of the things we are very pleased with, in both the Direct and the Retail channel, is the consistency we had through the quarter. In Retail, October was a very good month. November was even better. And it's quite interesting now, we're at the 14th of February, it's like Black Friday is a distant memory. We had a great Black Friday in both channels. And we had a great Cyber Monday and Cyber Week in the Direct channel. And in Retail, we were comping over large numbers from the prior year. So good consistency, and particularly, the consistency in the Direct business. If anything has been a frustration, it's been the lack of consistency as we've been working hard to improve the Direct business. And we finally saw consistency during the fourth quarter from month-to-month. And for those who follow our story, we don't sell firearms in the Direct business. So having consistency, especially across the majority of our merchandise categories in both channels, was very satisfying and I think a testament to everything we've been working on for 1.5 years. As to margin, we definitely signaled that we were going to be more promotional as we came in to the Black Friday through Christmas period. As it turned out, we elected not to be as price promotional but instead, invest more marketing dollars and advertising dollars in what -- next to our employees, our greatest asset as a company, which is our customers. So we saw business was better and we took advantage of the opportunity to spend several million dollars in enhanced media across the gamut of media that we use, as well as some things that I'm not going to talk about for competitive reasons, and that drove new customer acquisition up 9% in the quarter. We had reactivation rates of 12%, and I don't think we've had that since I've been with the company. And retention was even positive. So we think those investments, albeit, may not have flowed as much to the bottom line as we could've. We think those investments, short-term and long-term, are going to pay off in market share for our company. And we would do it all over again.

Reed Alan Anderson - Northland Capital Markets, Research Division

And that's great color. And then related to your comments on Direct, I was curious, too, because it was nice to see that grow finally again. To the extent -- you don't sell firearms there, but ammo is something I know you can sell Direct. Was that a meaningful impact of growing that? Or was it actually just, broadly speaking, your Direct business was up?

Thomas L. Millner

Broadly speaking, the Direct business was very good. Obviously, we saw a surge in ammo very late in the quarter. But the Direct business was good before that.

Reed Alan Anderson - Northland Capital Markets, Research Division

Okay, super. And then on inventories, kind of approaching 12% growth there. Given the comp, you might -- some might think that's on the high-end of the expectations. It's not out of whack, but I guess, my thought was, given your spring lineup, that maybe reflects some timing of receipts, et cetera, just some commentary on kind of quality inventory heading into the first quarter here.

Ralph W. Castner

Well, let -- I'll take that Reed, this is Ralph. I got to tell you, I'm going even back in time to the start of the fourth quarter, our merchandising team, particularly our gun and ammo team, took a big bet on building up inventory going into the fourth quarter. That, in hindsight, looks like a great decision. So we feel very comfortable with where we are on an inventory level, being able to service our customers. And then as I alluded to in my comments, with the colder winter we've had this year, any excess inventory we carried over the past with respect to outerwear and cold-weather gear is -- we're quickly working through. And although as a percentage increase, it may seem more than we've had in past years, we feel really good that we've got the inventory in the right places and took bets in the right places. And I think -- further on that, we're really seeing the benefit of that as we go into the first quarter.

Reed Alan Anderson - Northland Capital Markets, Research Division

That's excellent. Then the last question, I'll let somebody else jump in, probably, for Ralph. On the interchange piece, I mean, I guess, my thought coming in, seeing the call reports said it was that -- I suspected that was the reason why, but because the settlement is -- there's still a lot of people kind of not wanting to be part of it, you don't have complete finality. Was the idea behind booking that $12.5 million of that sort, it's going to be at least be that number but it could change? Or is it for sure no more than that number?

Ralph W. Castner

Well, if the settlement -- we were in a unique situation, just to give you some background on that. Because we are not a charter member of Visa, so we weren't a party to the suit, necessarily. And quite frankly, we're a little surprised when we learned that we had some financial consequences as a result of that through a reduction in interchange. So assuming the suit gets agreed to, there is no more -- it can't get any worse than $12.5 million. Now, if -- I think, the threshold is if 25% of the class of merchants agree not to take it, that basically puts Visa and MasterCard and the merchants back at the table to renegotiate a new deal. And since we're not a part of that deal, I'm not sure I can really comment on it. But assuming that less than 25% of the merchants opt out, the $12.5 million is the most it can be.

Operator

And we'll take our next question from Seth Sigman with Crédit Suisse.

Seth Sigman - Crédit Suisse AG, Research Division

Just going back to the Direct business. I mean, what do you think is driving that consistency that you mentioned? And then, I know you have identified a few areas to help improve the conversion online, improve the site functionality, your inventory integration. I mean, where are you with those efforts? And do you think that helps continue driving this positive growth as you look to 2013?

Thomas L. Millner

Well, Seth, as we've talked on previous calls, we focused our efforts in Direct in a number of areas, first, content improvement. If you visit the site frequently, you see much richer content. And yet we're still only in the third or fourth inning of that improvement. Our e-mail campaigns have been much more effective. User navigation, we've integrated some techniques to make our site simpler to navigate. We've called out Cabela's branded merchandise and key items much more effectively. During the holiday season, we've always had door busters at our Retail stores, but we had door busters online this year. So I can't tell you it's one thing. It's a whole lot of things that we're doing better. And yet, I think, were only in the, probably, the fourth inning of the baseball game, and we're just going to continue to improve. If you go on the site today, you'll see a major launch of our spring goods called Stitched In, has very rich content, calls out great items. You'll also see we allowed our customers to go to the SHOT Show and the Archery Trade Show to see great new products when they occurred. That drew a lot of traffic. So just a whole lot of things.

Ralph W. Castner

One other thing on this consistency in earnings that Tommy should elaborate on is, one of the things that this -- I'm sorry, consistency in revenue, both in comp store sales and the Direct business, it really allowed us to plan earlier in the year, earlier in the quarter, and make some investment in our customers, both by enhanced benefits of the bank and through additional advertising that we did that we think is going to really pay off as we go into the first quarter.

Thomas L. Millner

Absolutely.

Seth Sigman - Crédit Suisse AG, Research Division

Okay, that's helpful. Maybe just shifting gears to the merchandise margins. Excluding firearms, where do you think that can go into 2013? And I mean, maybe you can remind us of some of the initiatives such as price optimization and where you are with that.

Thomas L. Millner

Yes. As we've signaled in prior calls, we see tens of bps of increase going forward, notwithstanding the -- whatever the impact is of mix. I think, we were very pleased in the 60 bps improvement in all other categories in the quarter which says -- I'm not certain I would expect 60 bps going forward every quarter, but just in the spirit of continuous improvement, we'd like to get tens of bps of improvement going forward. The things that are driving that continue to be demand forecasting, in-season management, preseason planning, this big time focus on Cabela's branded products, and the elevation of our brand, which I think you're really good see in spring softgoods and footwear, with performance really being a focus in those products. Price optimization will come later in the year. As we've said, we see what other retailers are counting as the benefit, we'll see. We haven't launched it yet, so we'll keep you posted as we dig through the year. But when we can increase margins even in firearms and ammunition in every other category in the biggest quarter of the year, that should be a signal of really good progress in our company.

Operator

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

N. Richard Nelson - Stephens Inc., Research Division

I'd like to follow-up on the VISA settlement, Ralph, and whether that has implications for the interchange rate on a go-forward basis.

Ralph W. Castner

Well, we're not planning on it. I mean, one of the things it can do is it can allow classes of merchants to negotiate directly with VISA. So I mean, there may be some pressure on it over time. But one of the big things that this settlement does is, assuming you're a part of that class, you agree that you won't later sue VISA for interchange infractions, for lack of a better word. So other than the fact if they negotiate -- if large groups of merchants get together and negotiate lower fees, we don't expect it to have much of an impact on interchange going forward.

N. Richard Nelson - Stephens Inc., Research Division

Okay. Also, curious if you're able to break out the comp in firearms and on firearms categories in the quarter?

Ralph W. Castner

Well, we talked about that a little bit, yes. Not -- if you pull up firearms alone, the comp was still around 7%. So we feel -- I mean, we feel pretty good about all of our other categories.

N. Richard Nelson - Stephens Inc., Research Division

Okay. And that definition of normalized firearm sales, I'm wondering what goes into that and how you're planning 2013, if that's a normalized year or above or below?

Thomas L. Millner

Well, when we noted a normalized rate, it was, probably, more a subjective measure with math applied to it. To just give you a sense of what the surge may have impacted the business late in the quarter, the comments that we would give you about the first quarter is that business is very strong and it has accelerated from fourth quarter levels in all channels. And Rick, 4 years ago, we said how long is this going to last? And we're still saying it.

N. Richard Nelson - Stephens Inc., Research Division

Got you. And I know you expressed comfort with the consensus estimates that are out there. Curious how you're thinking about comp and how you're thinking about the Direct channel as it relates to the EPS comfort.

Thomas L. Millner

Well, I think we built all of that into our expression that we were comfortable. And we'll report to you as we dig through the year. But I think the Direct business is still -- we're not declaring victory in Direct. It's still early in our journey. We've said it's going to be a couple of year process. But I've got to tell you, we were very pleased with the consistency in the business in the fourth quarter from month-to-month and pleased to see improvements as we gotten in into the first quarter, but we still have a lot of work to do.

Ralph W. Castner

I mean, Rick, we feel -- it's probably hard to underestimate how good we feel about our business going into 2013. We alluded to it in the press release, so we've actually seen the business accelerate from fourth quarter 2012 levels. Again, we made some investments through the SG&A line in the fourth quarter through additional advertising that we think are really paying off as we move into the first quarter. Obviously, there's been some increased demand, which you see in the mix data and some of those other things. I don't know how long that will continue. But we continue to feel really good about our business and we're continuing to get an inventory and satisfy our customers' needs.

Thomas L. Millner

And especially, Rick, the performance in non-gun and ammunition categories, we've just been very pleased that we're seeing improved performance across the enterprise.

N. Richard Nelson - Stephens Inc., Research Division

Yes, that's encouraging, even with -- whether it compares -- whether it being another challenge for a lot of retailers. Hopefully, those will get repeated again.

Operator

And we will take our next question from Matt Nemer with Wells Fargo Securities.

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

I had a question about the incremental advertising in the fourth quarter. Was that targeted at the Retail or the Direct channel? And could you just talk about any changes in advertising in Direct and what impact it might be having on the sales growth?

Thomas L. Millner

Matt, the expenditure of several million dollars was done on an Omni-basis. So Direct benefited and Retail benefited.

Ralph W. Castner

When you look at the segments, and the point of all that, Matt, is the lines on advertising between Retail and Direct are getting much fuzzier. Now having -- we made big investments, particularly in digital advertising, which does get charged to the Direct business. But we made -- and so you see that in the press release, the expenses were up in that segment. But to Tommy's points, the benefit of that spend goes across all channels.

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

Okay, that's helpful. And then staying on Direct, could you just talk about, to the extent that you're okay talking about this from a competitive standpoint, are there any major initiatives that are planned in the next few quarters in terms of site changes, user experience, et cetera?

Thomas L. Millner

For competitive reasons, I would ask you to give me a pass on the specifics. But we're continuing to, at a high level, enhance targeted e-mail campaigns, the use of self-mailers, just ongoing improvements in our use of social media. Our Denver office now has 8 or 10 folks there and they're already making a difference in both digital, where to spend, how to maximize SEO and also in trying to maximize social. You're going to see a lot more content expansion online in the coming months. Matt, as we look at the balance of the year, we're going to be strategic about the kind of investments that we opted to make in the fourth quarter. And we'll measure how strong the business is and whether we need to make additional incremental investments in advertising and marketing. But it's just continuing to get better at those thousand little things that you well know that best-in-class e-tailers do, and we're making progress.

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

So on a full-year basis, should that business -- you talked about the acceleration in Q1 from Q4. Should we expect the business to be up low-single digits for the full year? Is that a reasonable expectation?

Ralph W. Castner

Well, I'm not sure we can give you specifics. We feel really good about, of course -- and the only reason I'm hesitant to response is, I mean, our historical performance, we've not had an up Direct business since the first quarter of 2010. So having said that, to get optimistic and start talking about specific numbers, it just doesn't seem like the right time to do it. But we feel really good about where we are and the fact we're up in the fourth quarter is encouraging.

Thomas L. Millner

Matt, you may have missed an earlier question that I answered. I'm not prepared to declare victory on one quarter. But what we are prepared to say is that we're really pleased with the consistency of the 3 months in the quarter and the trends coming into the first part of 2013. And we're just going to keep working on that consistency.

Ralph W. Castner

We did say, Matt, I think, you might have alluded to this in your question, that in the first quarter, we've seen the business accelerate from fourth quarter levels. So yes, we are encouraged. But I'm not -- nowhere near ready to declare victory.

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

Okay, great. And then just lastly, on the Outpost stores. Now that you have, I guess, 2 open, can you remind us what the typical investment and the targeted sort of payback period is on those stores?

Thomas L. Millner

Yes. We got...

Ralph W. Castner

When modeled them, we model them like our next-generation stores. But we roughly got $10 million dollars in an Outpost store. And we expected to get a return similar as a percentage to what we saw in our next-generation stores. Early returns are really good, and I think we'll have more to -- we really can't -- won't be able to get into a lot more depth until the end of the year when we've got more open. But I think our early returns are encouraging. And I know, as you've know, Matt, because you been to our store openings, it's pretty easy to get excited. But Man, when you saw the pictures today from Saginaw, Michigan, it would give you reason to be excited.

Thomas L. Millner

It is snowing and cold in Saginaw. And the crowd was estimated at over 3,000 people, which is crowd size we would expect at a next-generation larger format store. And we had CLUB day yesterday and it was pretty impressive.

Operator

And we will take our next question from Sean Naughton with Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

In terms of the ticket, the transaction's basically flat in the quarter, it has been flat for some time. And I just would've thought, given the comp and demand for firearms that the transactions would've been positive. Did you feel like maybe you were missing some sales, not the right inventory or not enough inventory, potentially, in some areas? Just any comments on traffic or transaction would be helpful.

Thomas L. Millner

Well, as you know, we don't measure traffic, we just measure transactions. So I don't think we felt like we missed anything. In fact, Sean, in 2011, we had nearly 60,000 people on Black Friday in front of our stores. And that is an unwieldy number of people that we were a little more cautious this year in terms of trying to get that many people to the store. And that may have had some modest impact on transactions just in that very big week. But, I mean, as we finished the quarter and come into this year, we're pretty pleased with where we are from a transaction standpoint. The quality and passion of our customers is really showing through.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. And then, I guess, maybe, Ralph, on the SG&A side of things, growth seems to be ramping up a little bit with square footage which, I think, makes sense. But should we think about that line item moving forward? You've talked about some of the investments that you've made in digital and marketing. Do you think that the run rate for that particular item should be roughly the kind of sales growth rate of whatever we're thinking about for the full year?

Ralph W. Castner

Oh, it's -- we're still -- we think we can still get leverage out of that. I would view the fourth quarter as an anomaly. You might remember, early in the year, we'd underspent on some advertising. We wanted to make sure a big piece of this increase in the fourth quarter of the SG&A line has to do with the additional advertising. And we just wanted to make a real statement in fourth quarter and to our customers that we're around and available for business. And we think some of that is going to have carryover benefit into 2013. But I'm not sure I would expect to see the same increase that we saw in the fourth quarter as we move into next year.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay, that make sense. And then just lastly, anything -- how do we think about the potential impact on the P&L, specifically, in the Financial Services component in a potentially rising interest rate environment here moving forward?

Ralph W. Castner

Well, there's no question, one of the things we're trying to do is really lengthen the maturities of our debt in anticipation of a rising interest rate environment at some point in the future. In a textbook case, and we give you enough information to model this out, about -- let me see, about 30% to 35% of our cardholders pay us off in full every month. We sort of view those as fixed rate assets. The -- so the 65% of the people that pay interest, pay us a floating rate based upon LIBOR. Now the one thing we don't know, particularly if rates would move up dramatically, is -- does somebody's interest rate going from -- let's say, they move up 400 basis points in a month, that sort of shock it, if somebody is paying 16% today and they go to 20%, does that change their behavior? But from a contractual standpoint, we're absolutely finding an upward movement in interest rate. And actually, because we've lengthened our reliabilities or in the process of lengthening our reliabilities, assuming no change in customer behavior, a short-term shock up in interest rates would actually be a benefit to P&L.

Operator

And we will now go to Jim Duffy with Stifel, Nicolaus.

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

Can you speak to the directional performance of -- in the fourth quarter of some of the categories outside of guns and ammunition? You guys typically give some color on the other categories.

Thomas L. Millner

Yes, Jim. We saw, obviously, strength in shooting and firearms; the hunting categories were also very strong; camping and outdoor, very strong; optics, very strong. As weather got colder, we saw nice improvement in men's and women's softgoods, which has carried into this year, hence, Ralph's comments about the cleanliness of our inventories. And we had a really good ice fishing performance. It came late, but it came really hard once it got cold up in the upper Midwest. There was a lot of ice and good performance there. So we were -- the talk is always about guns and ammo, but we were really pleased in both channels that the majority of our categories performed really well and continue to.

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

Good to hear. And then, Ralph, can you speak to the margins in the Direct business? Was the margin change on a year-to-year basis a function of merchandise margin or the SG&A?

Ralph W. Castner

I'm sorry, I'm not sure I understand you. The improvement in profitability of Retail, how much was margin, how much was [indiscernible] ?

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

No, no, Direct. On the Direct side, Ralph.

Ralph W. Castner

Yes, I'm sorry. Ask the question again, Jim. I'm sorry.

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

So the margins in the Direct business, change on a year-over-year basis, down a little bit, was that a function of merchandise margin or SG&A?

Ralph W. Castner

No, I'm sorry. It was primarily related to SG&A, and it goes with the comment I had with Matt, that we made big investments in certain marketing channels like digital that -- and historically, get charged to the Direct business, but we believe have an Omni-Channel impact across the whole company. So it was primarily related to SG&A.

Thomas L. Millner

Jim, if you were watching our advertising in the quarter, especially as we got into Black Friday through the end of the year, the look and feel across all of our media, it all said shop in store or online or call our call center. So we took an agnostic approach to where the customer ultimately shopped. But as Ralph said, the historic allocations, based on where we spent money, dinged the Direct business a little bit more.

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

Got you. Okay, good segue to my next question. I'm trying to think about the SG&A line and modeling that on a go-forward basis. Higher than I expected in the fourth quarter, it seems there was some -- maybe some pull forward of investments. Is that something that if you see your comp slow or your Direct business slow, that you're prepared to dial back to provide cushion to the earnings?

Thomas L. Millner

Well, yes, absolutely. We will make the right decisions for the totality of the company going forward.

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

Okay. And then...

Ralph W. Castner

I'm sorry, Jim, to give you some more color on that. Look, we expect to leverage SG&A over time. I will tell you, as it relates to advertising, we probably underspent a little bit in the first half of the year. It's hard to say you overspent, but we spent a lot in the fourth quarter to try to make sure we are leaving a message with our customers that would resonate in 2013. It may get -- I guess, what I'm telling you, is it may get lumpy on a quarter-to-quarter basis, but as we move into '13, we expect to leverage it, and we did leverage it in the fourth quarter.

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

Got you. Okay. I think I'm on board there. And then also, thinking from a modeling standpoint, guns and ammunition by quarter, is the percentage of volume higher in lower volume -- percentage of sales higher in lower volume quarters? Or maybe, what are some of the relevant comparisons we should be thinking about with respect to '12? This has become a huge driver of the top line. I want to try to make sure I'm getting it as correct as possible.

Ralph W. Castner

Well, it is, probably, a bigger -- to your question, it is probably a bigger percentage of sales, I mean, no question in the first and second quarter of the year, which is historically lower. But I'll also tell you this. We're probably entering unchartered waters as it relates to gun and ammo sales. So I'm not sure I can give you a lot of direction going forward. But given the 4-year trend we've had where it's been up, and then given the -- in the fourth quarter, where you got very centric -- or is very centric towards outerwear and gifts, there's no question it's bigger in the first half of the year.

Thomas L. Millner

Jim, I want add one other thing. What is very interesting that we've seen in the last 8 weeks is that firearms are driving record numbers of new customers to our company. And if I can state with absolute confidence one thing, we are very good at converting new customers into long-term customers that buy everything we sell. It's interesting that as we look at attachment rates in the last 8 weeks or so, there hasn't been a material change in attachment rates when someone buys a gun or buys ammunition. That's been pretty consistent. And remember that 80% of our baskets do not have guns or ammunition. But what we're seeing is record numbers of new customers coming to us for those products.

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

What do you mean by attachments, Tommy?

Thomas L. Millner

That would mean they bought a firearm and then added other things to their cart.

Ralph W. Castner

A T-shirt.

Thomas L. Millner

A T-shirt. We haven't seen a meaningful change in attachment rates recently. But we're getting lots of new customers.

Operator

And we will take our next question from Lee Giordano with Imperial Capital.

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

Can you just provide an update on the efforts to grow the women's and children's business? Is there anything new in the stores for this spring versus last year?

Thomas L. Millner

Yes, absolutely. You'll see, if you shop our stores or go online, a record number of new product sets in women's and children and it goes from guidewear to outerwear to casual. It's the most exciting launch of women's and children's clothes, probably, in the history of the company. We're very, very excited about it. And women's and children continues to perform really well even before the launch of a really great and exciting spring lineup.

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

Great. And can you just remind me, what is the percentage of Cabela's branded product in the next-gen stores versus the Outpost stores? How much bigger is it in the Outpost stores?

Thomas L. Millner

I don't have -- maybe Ralph has the number exactly, off the top of his head. But it's significant. There are, in the Outpost stores, there is very little, if any, by category, branded merchandise in the Outpost stores in softgoods.

Operator

And we will take our next question from Mark Smith with Feltl and Company.

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

Tommy, I want a follow-up on your comments on new customers and primarily new gun customers. I don't know if you have any read through on if these are people who are buying a firearm for the first time or if they're gun people who are coming in because you're the only people who have what they want.

Thomas L. Millner

We don't know if -- we don't know the answer to that question, basically. If this is their first gun or their second gun, we just know they're new to us. And we were going to get our hooks in them pretty quickly.

Ralph W. Castner

And quite frankly, I'm not sure it matters to us. I mean, it's an opportunity for us to get a new customer that we continue to service into the future, and it's one of the reasons we're optimistic about '13.

Thomas L. Millner

And Mark, what's really great is that we've worked really hard for a year to make our firearms purchasing process the simplest and fastest in the marketplace. When a customer comes in that's new to us and has what I would argue is a materially different experience at the gun counter all the way through the processing of his paperwork, we think that has a really positive long-term benefit. And oh, by the way, might see other really neat stuff that he'll come back and buy.

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

Okay. I mean, I guess I was trying to get a read-through on how much you'll be able to have the supply of stuff that people want as we look at the next, perhaps, 6 months of increased demand, compared to a mom-and-pop shop down the road.

Ralph W. Castner

Well, this is Ralph, and I'll address that, only because our team has been working very closely with the merchandising team to make sure that we manage payment terms to clearly send the message to the vendor community that we can pay your bills with do your business with us. We've actually seen a nice flow of inventory continue to come in that we feel really good about. Our merchants have done an unbelievable job of continuing to get merchandise, and that's been a primary objective across the whole organization, something that we're really focused on.

Thomas L. Millner

And we have the most of diversified supply chain for ammunition that we built in the last 4 years of anybody in the marketplace. So not only do we have diversification of supply, we also have the power of our balance sheet, which is a -- it's a really powerful advantage in the world we live in today.

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

Okay, perfect. Then can you guys comment on just internet sales within Direct, internet sales and maybe a year-over-year delta?

Ralph W. Castner

I mean, I don't have the specific numbers, I'll just tell you. If you're defining an internet sale as how the order came through, it is such a huge piece now of the Direct business, it's hardly worth distinguishing the 2. And it is continuing to grow. What there is, is continuing to grow, and people that call our phone centers are continuing to decline at a rapid rate. But it is -- the vast preponderance of that business is now internet.

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

Okay. Then on the cost in Direct and kind of looking at margins, did you change anything in kind of catalog cost in the number that you're sending out?

Ralph W. Castner

Well, we continued -- our circulation was actually up in the quarter, pages were down which is a trend we've had for some time. But as I said earlier, we made significant investments in digital, searches [indiscernible] paid search, some of those kinds of things, that was up in the quarter and caused our advertising expense to be up in the fourth quarter. But we think those investments are really important in the fourth quarter and also important as we move into 2013.

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

And then one last question, just kind minutiae here, on the other fee income in the credit card business was down a little bit here. Is there anything to read into that? Or should we expect that to run at that $3 million to $4 million kind of per quarter?

Ralph W. Castner

No. I don't -- I'd have to go -- let me pull it up here real quick. No, I'm not familiar of anything in there that causes us concern one way or the other

Operator

And we will take our next question from Chuck Cerankosky with Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

If we're looking at the -- you gave a couple of numbers on the quarter without the guns in there or trying to provide a normalized look for -- look at the business, what would you say the extra kick in guns and ammo sales in the quarter contribute to operating profit dollars?

Ralph W. Castner

I'm not sure I can quantify that. I'm not sure I can quantify what that is from an operating dollar perspective. As we have talked a long time, one of the things we're -- one of the things we don't know yet is to what extent people are taking purchases out of other areas of our store and moving them into guns and ammo. One of the downsides with, particularly with gun sales is, the labor costs associated with a gun sale is pretty significant. So it is much smaller contributor to operating income than a lot of other -- than a lot of the other categories of our store.

Charles Edward Cerankosky - Northcoast Research

Ralph, you mentioned that because the time that the Outfitter in the store is working with the gun buyer, he's away from helping other customers?

Ralph W. Castner

Absolutely. And we've had this -- we've had to staff up to gun counters meaningfully just because of the increased demand.

Charles Edward Cerankosky - Northcoast Research

Okay, so it's incremental cost, not just opportunity cost?

Ralph W. Castner

Absolutely.

Thomas L. Millner

Yes, it's incremental cost on lower margin categories.

Charles Edward Cerankosky - Northcoast Research

All right, all right. So an interesting category. And can you gentlemen comment on the Gander Mountain firearms store remodel that's about to open ahead of your Outpost store in Columbus, or maybe at about the same time, I don't quite member?

Thomas L. Millner

Look, they do what they do, and we do what we do. And we couldn't feel better about just how fantastic our location is in Columbus, Ohio. It is -- that is one of the best pieces of real estate we've ever been able to acquire. And I've got great expectations, given the visibility of that store and where it's located in prime shopping area. And Gander can do and what Gander does, and we love competing with them.

Ralph W. Castner

We've seen a trend of some of our competitors to try to fix up their stores in advance of us moving in so. The one I can think of most recently was in Charleston, West Virginia. And I'll tell you, if you were at that store opening, nobody -- it didn't matter that our competitors remodeled their stores. That store has been a huge success for us.

Operator

And we will take our final question from Anthony Lebiedzinski with Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

I just wanted to first, quickly, clarify the earlier comment in regards to same-store sales. I think, Ralph, you said that excluding firearms, they were up 7%. Now, if you were to exclude firearms and ammunition, what will be the same-store sales number for the quarter?

Ralph W. Castner

Well, if you totally excluded it, which I'm not sure is fair, but if you totally -- because of this issue with shift and the people want to pull firearms up. but if you totally excluded just firearms, it's about 7%, and if you included just firearms and ammunition, they'd be up around 2%.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay, that's helpful. And also, you had a shipping promotion for your Cabela's CLUB Visa customers, free shipping until December 31. Now you switched over to $5 flat rate shipping, can you comment on the order trends that you've seen since you've made that switch?

Thomas L. Millner

Yes, I think, I can give you some color on that. Let's go back to earlier in 2012. We made it very clear on a call that we were going to test a number of different kinds of offers as it relates to shipping offers. And we tested free shipping in the second half of last year. It did about what we thought it would do, although, there was a little more degradation to margin dollars, and ultimately, rate than we liked. And just in the spirit of ,"Hey, let's try something different and see what happens," we elected to move to $5 flat rate at least for the first half of this year. We'll decide what we'll do in the second half a little later in 2013. But we haven't seen a material degradation. In fact, what's been really interesting is, free shipping to CLUB Visa customers attracted a lot of new customers to want to sign up for CLUB Visa cards. And a concern we had when we went to $5 flat rate, was that, that trend would deteriorate. It absolutely has not. So we'll continue to test things. The benefit that $5 flat rate gives us is that we can pulse other offers around it as needed. So we have a little bit more flexibility with $5 flat rate, but so far so good. We said pretty clearly that the Direct business is -- has improved from Q4 rates. So we're continuing to test and pretty pleased with $5 flat rate.

Operator

That concludes today's question-and-answer session. Mr. Millner, at this time, I will turn the conference back over to you for any additional or closing remarks.

Thomas L. Millner

Hey, thanks, everybody, for joining us today, and we look forward to talking to you again soon.

Operator

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.

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