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Executives

Chris Gay - Treasurer and IR Manager

Dennis Highby - Vice Chairman

Tommy Millner - President and CEO

Ralph Castner - VP and CFO

Pat Snyder - SVP of Merchandising, Marketing and Retail Operations

Brian Linneman - SVP of Global Supply Chain Operations

Analysts

Rick Nelson - Stephens Inc.

Mitchell Kaiser - Piper Jaffray

Paul Lejuez - Credit Suisse

Reed Anderson - DA Davidson

Mark Smith - Feltl and Company

Kristine Koerber - JMP Securities

Jim Duffy - Thomas Weisel

Cabela's Inc. (CAB) Q1 2009 Earnings Call April 30, 2009 4:30 PM ET

Operator

Welcome to the Cabela's Incorporated first quarter fiscal 2009 Earnings Call. (Operator instructions).

I will now like turn the conference over to Mr. Chris Gay, Treasurer and Investor Relations Manager. Please go ahead.

Chris Gay

Good afternoon. I welcome everyone listening today both on the conference call and by web cast. A replay of today's call will be archived on our website at www.cabelas.com. With me on today's call are Dennis Highby, Cabela's Vice Chairman; Tommy Millner, Cabela's President and Chief Executive Officer; and Ralph Castner, Cabela's Vice President and Chief Financial Officer. Dennis, Tommy and Ralph each have prepared comments related to first quarter operating results.

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.

This conference call will include forward-looking statements. These statements are made on a 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 at 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.

Now on to the financial results. Consolidated revenues increased modestly for the quarter to $540 million exceeding external estimates. Retail revenue increased 8.3% to $276 million as compared to $254 million in the year-ago period. The increase in retail revenue was driven comparable store sales increase of 8.2%, which also exceeded external estimates. Direct revenue decreased 4.7% to $225 million as compared to $237 million in the year ago quarter.

These are extremely strong results given the fact we reduced direct marketing costs 13%. Revenue increases were driven by continued strength in our hunting category as we continue to see significant demand for hunting equipment. Financial services revenue decreased 16.7% to $34 million as compared to $41 million in a year ago quarter and diluted earnings per share for the quarter were $0.08, exceeding external estimates.

Now I'll turn the call over to Dennis Highby, Cabela's Vice Chairman.

Dennis Highby

Thanks Chris. Good afternoon everyone. I'm glad you could join us today. This will be my last earnings call for Cabela's as a transition from President and Chief Executive Officer to a Vice Chairman of the Board. Imagine the changes I've seen in the past 33 years, growing Cabela's at a compounded annual rate of 21% from $5 million to $2.5 billion company, was possible only because of the devoted team of professionals that are focused on listening to our customers and providing them with a broad selection of high quality merchandise. Cabela's multi-channel model and its management team is still the envy of our industry.

I've truly enjoyed working for Cabela's all these year in an industry for which I have such a strong passion. I've been most fortunate to have worked side-by-side with so many legends of our industry, people like Jim and Dick Cabela and so many of our dedicated employees, many of them my closest friends. It has been a privilege working with them all these years. It has been a dream career, truly rewarding in every sense.

I'm excited as I step aside that Cabela's is in the strong confident hands of Tommy Millner. As CEO of Remington, Tommy had a long understand of Cabela's, our traditions, values, customers and culture. Tommy is not a newcomer in any sense of the word. He joins us with a solid understanding of the industry, our vendors and has a passion for the outdoors.

Under Tommy's leadership, Cabela's will continue to grow and prosper and continue to take market share from our competitors. With his in-depth knowledge of the competitive landscape he is without question, the right executive for the top job. I look forward to helping Cabela's in my new role as a Vice Chairman and I thank you for allowing me this time to reminisce.

Now I'd like to introduce Tommy Millner, Cabela's President and Chief Executive Officer.

Tommy Millner

Thank you, Dennis and good afternoon. First I'm honored and excited to have been chosen to service as Cabela's first CEO, chosen from outside of the company. Rest assured I understand the burden this places on my shoulders. I welcome this challenge, because of my deep knowledge of this company and its fine people during my 15 years as CEO of Remington Arms. The values Dick Cabela, Jim Cabela and Dennis Highby built Cabela's upon are consistent with my vision for the future both personally and professionally.

Over the past three and half weeks, my time has been spent doing a deep dive on every aspect of our business. I visited a number of our locations already and will visit all of our stores, call centers, distribution centers, as well as the world's foremost bank in the next few months, as well as meet in one hour individual sessions with each of our top 50 key managers.

My goals is to quickly formulate enhancements to our current growth strategy based on first hand input from our sites and our people. It's a great privilege to present such a solid quarter, for which total credit goes to Dennis, the management team and all Cabela's employees.

Throughout the quarter Cabela's continued to make significant progress in our efforts to control cost, drive operational excellence, strengthen our balance sheet and improve liquidity at World's Foremost Bank.

One of our highest priorities is to systematically control costs throughout the organization. Let me provide several observations about our efforts to reduce cost, and drive operational excellence during the quarter. Our retail segment achieved a comparable store sales increase of 8.2%, which exceeded both internal and external estimates.

For the quarter, in our comp stores, average ticket increased 5.4%, and transactions increased 2.7%. Additionally, the progress we've made tightly controlling inventory levels, better managing in season markdowns, and improving exit strategies, provided us with one of our cleanest and most effective transitions to spring merchandise in recent history.

We continue to tightly manage labor cost. Labor, as a percent of retail revenue, decreased 50 basis points in the quarter. Improvements in labor productivity have been driven by enhancements in several areas, including more streamlined flow of goods to our retail stores, and better managing staffing levels at our stores.

It is important to note, that we have been able to reduce payroll expenses as a percent of revenue, while improving customer service levels. Our customer service scores, which we call Voice of the Customer, improved significantly, and now consistently stand at over 90% satisfaction.

In our direct business, we significantly improved the efficiency of our direct marketing expenditures, which include both catalog cost and internet marketing cost. For the quarter, we significantly reduced page count, with only a negligible impact on revenue. The result was a 130 basis point decrease in direct marketing cost, as a percent of direct revenue. We've spent considerable time over the past 18 months, testing and refining our customer contact strategies.

These efforts have allowed us to deliver a more concise offer, based upon our customers buying behaviors. The result is that we expect to reduce direct marketing cost as a percent of revenue, with only a nominal impact to revenue throughout the year.

Additionally, during the quarter, we experienced a 25% increase in traffic to cabelas.com, and our market share increased from 8.1% to 9.2% of total traffic, which is more than double our next closest competitor.

During the quarter we also reduced other segment expenses as a percent of total revenue. Other segment operating expenses, which consist of distribution, general corporate overhead, and merchandizing cost, decline 60 basis points as a percent of total revenue, as we continue to improve distribution efficiencies, and tightly manage IT cost.

Let me now turn to improvements we realized in our already very strong balance sheet. During the quarter, we again tightly managed inventory levels, and significantly lowered debt levels. We reduced total debt, $151 million, ending the quarter with $475 million of total debt, as compared to $626 million at the end of the first quarter of 2008. Inventory levels decreased nearly 8% to $574 million as compared to $621 million at the end of the first quarter of 2008. We will continue to focus on tightly managing inventory levels throughout the remainder of the year.

As it relates to the World's Foremost Bank, charge-offs continue to be a challenge. Despite higher charge-off levels, we don't expect increased charge-off s to impact our earnings guidance, because our bank team is acting proactively to adjust pricing, to mitigate the financial impact of increased bad debts.

For the quarter, we realized very strong performance in our hunting equipment category, which is being led by strength in firearms and ammunition. We believe this is a sustainable trend that we expect to continue into the second half of 2009, and we also believe we are taking market share from our competitors in these categories for two reasons.

First, we are a preferred customer to our vendors. This has helped us acquire inventory of these very high demand products. Vendors prefer Cabela's, because we have a longstanding history with them, are financially sound with a strong balance sheet, and we pay our bills on time. The bottom-line, is when a vendor ships to us; they know the y are going to get paid.

Second, our customer loyalty is legendary in the outdoor industry. Our multi-channel model, exceptional customer service, deep and broad product offering and Cabela's club loyalty cart program provide customers a great value proposition.

We are very pleased with these results and in my short time here it is clear to me that the direction the company is on, namely further strengthening our balance sheet, tightly managing cost and improving our operations, as well as managing liquidity and combating higher charge off levels at world's foremost bank are the right actions to take. It will be my focus to work with the senior management team to improve operational excellence and return this company to its growth trajectory.

While I look forward to sharing details of this plan with all of you in the future I would like to introduce several of the themes we will focus on. First, we will continue to focus on our customers. To steer them to our unique multichannel model in the most efficient way possible. Second, will be our focus on actively reducing cost and improving operating margins throughout the company. And finally will be our focus on improving return on invested capital.

In closing I'd like to reiterate how excited I am to be here at Cabela's and how fantastic this company is and how great the people are. I'd like to thank Dennis Highby for welcoming and orienting me to this dream of a lifetime opportunity. And I'd like to thank all Cabela's employees not only those who have personally helped me settle in to my new job, but also to each Cabela's employee who has worked and continuous to work with the focus and dedication that has made Cabela's the World's Foremost Outfitter. I'm humbled to join this great company as its leader.

Now, I will turn the call over to Ralph Castner to review our balance sheet and performance at World's Foremost Bank in more detail.

Ralph Castner

Thanks Tommy. I think Tommy has done a good job of taking you through the highlights of the income statement. Consistent with our theme of improving return on invested capital, I'd like to spend the majority of my time focusing on our efforts to generate cash from our balance sheet and improving our consolidated liquidity position.

Cash and cash equivalents at the end of the quarter were $541 million as compared to $78 million at the end of the year-ago quarter. Virtually all this cash is held at World's Foremost Bank. As a result of our certificate and deposit program and it can be used to fund credit card receivables.

Inventories decreased 7.6% to $574 million at the end of quarter as compared to $621 million in the year ago quarter, as we continue to tightly manage inventory levels. We expect inventory levels at the end of the year to be at or slightly above last year levels. Improvements will be driven by are opened by process, reducing aged inventory and skew rationalization.

Accounts receivable decreased nearly $19 million as we've increased our focus on strengthening our balance sheet. Improvements were driven by our efforts to collect more of the receivables due from our vendors.

Total debt at quarter end was $475 million compared to $626 million in the year-ago period. Recall that in 2008 we repaid $50 million of debt. This repayment along with a lower outstanding balance in a revolver has significantly reduced outstanding debt levels further strengthening our balance sheet.

Turning now to World's Foremost Bank. For the quarter revenue decreased 16.7% to $33.9 million compared to $40.7 million in the first quarter last year. We measure the performance of our financial services segment on a non-GAAP basis, a reconciliation of these measurements to GAAP is provided in our earnings release.

During the quarter, average managed credit card loans increased 14.1%, and average active accounts grew 10.7% both compared to the same quarter a year ago. This validates our experience in the absence of store growth we can continue to generate new accounts. For the quarter, the average account balance increased 3% compared to the prior year quarter. Total managed revenue as a percent of total managed receivables was 6.1% in the first quarter of 2009 compared to 8.3% in the year ago quarter.

Charge-offs at World's Foremost Bank, are significantly impacting our financial results. Our bank management team is proactively managing these challenges with the following efforts. First, we continue to adjust our credit card pricing to market levels. Earlier this year, we implemented risk-based pricing and as a result, we've been able to maintain our interest yield of over 10% on our credit card portfolio. We're continuing to review pricing and expect to implement additional pricing changes where appropriate.

Secondly, we are in the process of introducing our new Cabela's CLUB Signature Visa Card to select customers. The program has been well received and we are expanding the program to more club members. The benefit of the Signature card is that our club members earn high rewards on the Cabela's only spending and World's Foremost Bank receives higher interchange on all card charges.

Finally, we've aggressively increased our portfolio management efforts by managing credit limits on customers that we believe are a risk for future charge-offs. With respect to liquidity, two weeks ago, we increased our liquidity at World's Foremost Bank $425 million by issuing a term securitization transaction under the governments TALF program.

This transaction was important to the company for two reasons. First, it provided us with a permanent source of liquidity for the next three years, and as a result we will virtually suspend our certificate of deposit insurance program.

Secondly, the securitization transaction will require significantly less capital for World's Foremost Bank. As many of you are aware, the FASB has proposed changes to securitization accounting that will require the consolidation of credit card securitizations in the first quarter of 2010. We expect the FASB will approve this change.

Absent regulatory change, this will require banks and securitized credit card receivables to be subject to increased capital requirements. We believe that minimum additional capital required for World's Foremost Bank will be between $150 million and $175 million.

Given in the current macroeconomic environment and the focus on encouraging banks to make additional loans, we believe that the regulators will transition the additional capital requirements overtime.

Now, turning to cash flow metrics. Our focus on operational excellence continues to drive significant improvements in cash generated from operations. Cash flow used in operations for the quarter was $67 million. This is an improvement of a $104 million compared to the year ago quarter when cash flow used in operations was $171 million. For the quarter we incurred capital expenditures totaling $20 million as compared to $50 million in the first quarter last year. For 2009, we expect capital expenditures to be in the $40 million to $50 million range.

Now with regard to annual guidance. Previously, we expected same stores and total revenue for the full year to decline slightly, as compared to the prior year. Given the strength that we're seeing in the first quarter, we are increasing our guidance for same stores sales and total revenue. We now expect same stores sales and total revenue to be at least flat for the year.

At our financial services segment, we'd previously expected charge offs to be between 4.5% and 4.6% for the full year of 2009. Based upon recent trends that we've seen on our credit card portfolio, we now expect charge-offs for the full year to be between 5.1% and 5.5%.

We expect to continue to manage these higher costs, with pricing changes and additional products that will help to mitigate their financial impact. The additional revenue we are expecting from increased comparable store sales will help offset deterioration to profitability of World's Foremost Bank. Therefore, we're maintaining our earnings per share guidance for 2009, which we expect to be roughly equal to 2008 levels.

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

Tommy Millner

Again we are very pleased with our solid first quarter results, as we continue to reduce cost, drive operational excellence and strengthen our balance sheet. We will continue to focus on the merchandise categories that are resonating with our customers, and we will continue to take market share from our competitors.

We are confident that our profitable multi-channel selling platform, strong brand, and superior customer service, our competitive advantage, unmatched by anyone in our industry, and we will service very well for many years to come.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Rick Nelson with Stephens.

Rick Nelson - Stephens Inc.

First question, I am curious how big the hunting equipment category is, as perhaps as a percent of total revenues.

Ralph Castner

I'll refer you back to the 10-K, where we disclose that by product categories in that document, Rick.

Rick Nelson - Stephens Inc.

How important was that to driving the comp in the quarter, can we look at comp, ex hunting equipment, to get a feel for the growth in the other categories?

Tommy Millner

I'm not sure that's a meaningful measure, and not one I have really looked at. We are participating in 53 different merchandizing categories, some are always up, some are down.

I think what's important, is that we had long dominance in these two categories of hunting equipment and ammunition, from the very first store that we opened in 1991. I think what's important is we are using this expanding market to capture new first time customers, grab market share, which will support our multi-channel model going forward.

Rick Nelson - Stephens Inc.

How sustainable do you think the growth is in hunting equipment? I see your comp forecast for the year is more moderate. Are you indeed seeing a slowdown now or is it just a desire to be conservative with the guidance?

Tommy Millner

Actually, the trends have continued into April. In fact, some SKUs have actually increased their velocity. So we are being a bit cautious. We do believe that the supply shortages that exist in the marketplace are lengthening the demand curve. So a little bit of caution is in order. We are watching these trends on a daily basis with our suppliers.

Rick Nelson - Stephens Inc.

Question also in the release you called out the $14.7 million increase in bad debt expense. I wondering how much of that is incremental related to the rise in the charge-offs if there is any way to quantify that?

Ralph Castner

I am not sure I understand your question Rick. I mean, $14.7 million was the absolute increase in charge-offs we experienced quarter-over-quarter.

Rick Nelson - Stephens Inc.

But you are going to have to see natural growth related to the growth in the portfolio?

Ralph Castner

Well, and that's true. I mean the portfolio in total well I guess I can help you with that. The portfolio in total is up 14%, charge-offs for a year ago were $12.4 million. So that would have increased the same rate as the portfolio would have gone to $14 million or $15 million, charge-offs moved to $27 million. So the vast majority was increase in rate as supposed to volume.

Rick Nelson - Stephens Inc.

Got you. And what can you do on the credit extensions or collections side to improve that charge-off experience. I know you talked some about pricing.

Ralph Castner

Well, our team at our bank and I've been visiting with those guys with some regularity, are doing a great job of looking forward and trying to manage our credit risk. And most of it's done through credit obviously underwriting is a big part of it. You need to make sure you underwrite the accounts on the front end. But the second big lever to [poll] is in credit line management. We were running a lot of predictive models to look forward to try to determine what accounts are probable to charge-off in the future and reducing credit limits as much as possible.

Operator

We'll take question from Mitchell Kaiser with Piper Jaffray.

Mitchell Kaiser - Piper Jaffray

Good afternoon. I was hoping could you talk about the sustainability you think that the firearms area might play out kind of over the year and maybe, how much the stock outs may be hurt you on the comp if you possibly could.

Tommy Millner

Well, certainly, we are not getting all the products that we would like to get. So, there is some throttling from that standpoint. Although I have to say our suppliers given the strength of our balance sheet and their confidence in getting paid. We've worked very closely with them and it's certainly helped a lot.

I think as we look at trends going into April, we have the confidence that there is sustainability into the second half of the year, because of the stretching out of the demand curve, because people just aren't getting all the products that they would like.

Mitchell Kaiser - Piper Jaffray

Okay. So, do you have back orders than or people actually have orders that aren't fulfilled at this point?

Tommy Millner

Yes and yes.

Operator

We may now take a question from Paul Lejuez from Credit Suisse.

Paul Lejuez - Credit Suisse

Can you maybe talk about the comp performance of guns and ammo over the past year just trying to get an understanding of when that really starts to kick in, when it really starts to add to the comp base. I think you said in the fourth quarter it maybe added 400 basis points, but can you may be just talk about, how that trended during last year. So, we know kind of what we are up against this year?

Tommy Millner

Paul, I am going to let Pat Snyder handle that when since I wasn't here then.

Pat Snyder

As we saw guns and ammunition sales start to take off last year it was really in the early part of October. Since October we've seen the demand increase every month up and through April this year so we continue to see this demand building.

Paul Lejuez - Credit Suisse

Got you, and I think you mentioned, you said something about April was kind of running at the same level. Were you talking specifically about the gun category or were you talking about total comps?

Pat Snyder

Both.

Paul Lejuez - Credit Suisse

So comps are continuing at the same level as we saw in the first quarter?

Pat Snyder

Trends are very good.

Paul Lejuez - Credit Suisse

Got you. Ralph, can you explain why there is no spread between the comps and the total retail sales line, as one was up 8.2%, one was up 8.3%?

Ralph Castner

Yes. Just because the impact of the new stores is getting to be much less, I think we've comped almost every store in the comp base. So maybe just a handful, there would be Rapid City and Scarborough that we opened last year that aren't and there may be one of the stores opened in 2008 that I think came into the comp base in the first quarter.

Paul Lejuez - Credit Suisse

So all those stores that opened in the fourth quarter of '07 they are all in the comp base as of today, correct.

Ralph Castner

I believe as of today, that's true, yes. They worked for those…

Paul Lejuez - Credit Suisse

How's that…

Ralph Castner

What's that?

Paul Lejuez - Credit Suisse

I was going to ask, how is that class of stores performing?

Ralph Castner

I think it's pretty obvious when you look at that represented 18 of our 27 stores or whatever in the comp base, well obviously they did pretty well. You couldn't have posted a comp like that.

Paul Lejuez - Credit Suisse

I thought they weren't in the comp base in the first quarter?

Ralph Castner

A lot of them enter the comp base in the first quarter.

Paul Lejuez - Credit Suisse

In the last month, correct?

Ralph Castner

It depends on the store, Paul.

Paul Lejuez - Credit Suisse

Okay. Then I guess just trying to understand, you guys beat on the comp revenue line by a bunch, operating margins were down a 130 basis points, is that correct? Just trying to understand how you guys are thinking about that going forward? The trade off there between sales and margin as you kind of put together your guidance for the year?

Ralph Castner

A lot of it depends on how long this gun and ammo thing plays out. I think we expect to have very strong sales. There may be some pressure on margin, but I will tell you, the first quarter was our toughest comparison if you will from a gross margin standpoint. That comparison gets much easier to remove throughout the year. So we should see margins approach a year ago level and maybe even exceed later in the year.

Paul Lejuez - Credit Suisse

A question on the credit card. What are your expectations for that average balance? The increase there was much below where we have seen it in the past couple of quarters. Is that a function of some of the actions that you're taking and managing credit card, and what do you expect that to end up as we move throughout the year?

Ralph Castner

I think we expect to see it above the percentage increase we saw in the first quarter. What's pretty interesting about that metric is, that we're seeing big decreases in both spending per account and payments per account, but they are going down by about the same level. So, people aren't lowering their overall balance, they are just spending less and paying less. Does that make sense? I think we'll see a low single digit percentage increase in that balance, as we move throughout the year.

Paul Lejuez - Credit Suisse

Just last one, sorry to hog your time. If there is no transition period in terms of the capital required when the credit cards have to come on, what's the alternative?

Ralph Castner

There are several things we could do. The first is, as you know Paul, and that's where I wanted to call up a number, we think the number between $150 million and $175 million. We believe at the end of the year or early in the next year, we'll have sufficient cash to make that contribution. So the first choice is, we just make the contribution from the parent level, have the money.

As you probably know, that will require waiver into our credit agreement, which we believe we can get however. If we can't, other choices are to [walk] to the third party sources to provide preferred stock or some other equity to our bank. Another choice is to shrink the size of the bank. Clearly the last choice is the least preferable.

Operator

And we will now take a question from Reed Anderson with DA Davidson.

Reed Anderson - DA Davidson

Actually the comps question from earlier. I guess, Pat, you stripped out just firearms and ammo. Was the hunting equipment piece still reasonably good number, or was it very much dominated, by what still as a small portion of your overall revenue?

Pat Snyder

In the total picture, as we look in all the product categories, Reed, we could strip out the guns and ammunition, but on the other side, you strip out the categories that we're down to kind of offset that. I think we are very pleased with their comps, we were happy with the performance of our product categories, and it's certainly led by one of our stronger categories, and let's say, hunting equipment. So, we are quite pleased with where we ended up.

Reed Anderson - DA Davidson

And then in terms of just overall Pat. Again, probably not looking at the guns piece, because that would be a little skewed just by the demand and supply issues, but are you seeing any trade down to either, either a little bit more of a value price point or anything, anything in the majority of your categories, particularly (inaudible) from what I am thinking.

Pat Snyder

As we look at our customer, we feel it is very value oriented anyway, its part of our merchandise strategy going forward and certainly they are looking for bargains today. That's kind of where the market has been for the last six months.

Reed Anderson - DA Davidson

Ralph, what does inventory per foot look like year-over-year in the stores?

Ralph Castner

I think it will differ (inaudible). Reed.

Tommy Milner

Reed, they were down about 6, 6.5%.

Reed Anderson - DA Davidson

6.5%, Okay. So you said, based on your plan today at the end of this year, inventories are flat maybe up a little, what it would look like at the store level?

Tommy Milner

I would say a similar trend.

Reed Anderson - DA Davidson

Flat or down about 6?

Tommy Milner

No, flat.

Reed Anderson - DA Davidson

Flat. Similar with the overall company, okay.

Tommy Milner

Yeah.

Reed Anderson - DA Davidson

Then Ralph, on the financial services piece, couple of follow-ups there. On the fee income side that's come up a lot and what does that reflect on the higher levels of fee income you're seeing there?

Ralph Castner

Well, I think its two issues. One is higher levels, I mean, basically there is three things in there. There is lay, or two primary ones. Lay, over limit and cash advance that are three fees. It's not only the absolute amount of the fees, it's the timing to when we charge them, and those things are what's contributing to the increase.

Reed Anderson - DA Davidson

Are those the dynamics going on in that category? Is that a function of kind of some of the repricing sort of things you did back few months ago?

Ralph Castner

Well, it's an example of it.

Reed Anderson - DA Davidson

Okay.

Ralph Castner

I mean, it's not a good reason, but when delinquencies are up, so are late fees.

Reed Anderson - DA Davidson

Then the other line, remind me what's the other line in the way you report that on a non-GAAP basis, the negative 4.2 million?

Ralph Castner

You mean in the financial services business?

Reed Anderson - DA Davidson

Exactly.

Ralph Castner

That's primarily the impact of the FAS 140 accounting and the securitization accounting. As you could see that was almost $0.02 of a drag on the quarter, which someone asked me about the trends we see later in the year. One of the reasons we continue to expect or look, we're optimistic about the back half of the year is that drag will not occur every quarter.

Reed Anderson - DA Davidson

Then just a couple more, staying on the financial services piece, what was the net charge-offs as a percent for the quarter, Ralph?

Ralph Castner

Four, rather the nearest is 10 but it was 4.8%.

Reed Anderson - DA Davidson

4.8%. Okay, good. Then back to the firearms, just curious to because I mean, Tommy that's your background and clearly when you look at what's going on there, probably it's been more the assault rifle category or certainly the security defense sort of thing related to hand guns, its been the stronger areas. I am just wondering are you seeing yet any migration of the strength in those categories into more the core hunting long gun business which has still been somewhat challenging?

Tommy Millner

The simple answer is, yes.

Reed Anderson - DA Davidson

Did that sort of start in the first quarter or is it very recent or what would be the timing?

Tommy Millner

I think it started probably late last year and has just accelerated through the quarter.

Reed Anderson - DA Davidson

And do you think that, can you tell me does your gut tell you that's a function of people just maybe looking for different alternative or been broaden and seeing what's available there and so obviously that becomes appealing.

Tommy Millner

I think its probably two things; first, we are attracting some new customers that have never bought guns before. Our research indicates that to us. The second thing is I think a person comes in and perhaps sees a hand gun then want to buy and the next thing you know they might want to buy another hunting shot gun. So, because of our assortments and the power of our presence in these categories we're getting those add-on sales.

Operator

(Operator Instructions) And we will move to Mark Smith with Feltl.

Mark Smith - Feltl and Company

First of can you guys guess, talk a little bit about the competitive environment as we've seen some of your peers shut the doors?

Tommy Millner

That is a matter of public information. I think we believe that the impact in the short-term has been fairly neutral. Those two companies had very little inventory when they finally filed bankruptcy. So, in the short-term it's really not had a material impact, but we think overtime as we are really pressing our efforts to capture their customers both through our internet channel, our direct channel and our retail channel. It certainly got opportunity for us to grow in the future.

Mark Smith - Feltl and Company

Okay and then can you comment on the new smaller footprint store and kind of the early results on that and opportunities to move into some newer maybe smaller markets that weren't available before?

Tommy Millner

Brian.

Brian Linneman

Sure, we just opened obviously last summer our store in Rapid City and we will be opening the store in middle of May in Billings. Those are both versions of our next gen store, clearly lower capital cost. A lot of the things features within that store improved merchandise density, the shop ability of the store, signage adjacencies, all of those things are meeting our expectations and we are very happy with the results to-date and look forward to get the Billings store opened and servicing the sports men and women of Montana.

Mark Smith - Feltl and Company

Okay. Great. How about the Easter shift in the calendar this year and in quantify the impact that May have had?

Tommy Millner

It was a very small positive.

Mark Smith - Feltl and Company

Okay very small positive here?

Tommy Millner

Yes.

Mark Smith - Feltl and Company

Okay. And then lastly guns have kind of been beaten to death here, but just talk a little bit about the impact on margins and if the trend does start to taper off in the second half of the year, any potential increase in margins compared to what we saw here in Q1?

Tommy Millner

Well certainly margins were negatively impacted by our customers shift to firearms and ammunition. Obviously if those businesses softened in the second half of the year would have a beneficial impact on margin percentages. But I think we believe that we've got some lift opportunities as Ralph mentioned earlier in the back half of the year, just because of the liquidation of some inventory and some sales last year that we won't repeat this year.

Mark Smith - Feltl and Company

I'm sorry, I will ask one more on guns. Just on the average ticket price, can you just talk about how fire arm sales may be skewed that a little bit?

Ralph Castner

I actually don't have that, we will get back to you on that Chris and Ralph will.

Mark Smith - Feltl and Company

Okay. Perfect. And just one housekeeping question to end for Ralph cash from ops $67 million and CapEx 20 million, is that correct?

Ralph Castner

The 20 million is right. I believe let me look about -- you are correct. I believe $67 is close. Yes, cash used in operations was $67 million, actually 67, 157, CapEx was 20 million, 131.

Operator

Now we'll take question from Kristine Koerber with JMP Securities.

Kristine Koerber - JMP Securities

Yes, hi. Couple of questions, first back to the hunting category, could you quantify the new customers that you are attracting because of stronger sales of the guns and ammunition?

Tommy Millner

It's in the low double-digits we believe.

Kristine Koerber - JMP Securities

Are those customers shopping in other areas of the store?

Tommy Millner

They have to walk by a whole lot of products to get back to the gun counter.

Kristine Koerber - JMP Securities

So there is add on purchases, it just not single, it's in single basket hunting.

Tommy Millner

Absolutely.

Kristine Koerber - JMP Securities

Okay, great. And then second, can you, I don't know if you can comment on this credit card bill that they are moving forward with and Washington if that would have any impact at all on your business?

Dennis Highby

I can comment on that. I think the impact that will have on our businesses is and by the way, I did not read the final bill to-date we expect the transition of date to be summer of 2010. That will clearly reduce our flexibility to make pricing changes. I mean, it's generally more notice period. You aren't able to do things retroactively. And I think that it just goes to the point that we need to make sure that all of our products, you know, are market priced and deliver value to the customers and make sure that we get that pricing into effect yet this year.

Operator

We'll now take a question from Jim Duffy with Thomas Weisel.

Jim Duffy - Thomas Weisel

I'll kick off with a question for you Tommy. What are some of the things that you see is the greatest opportunities and what's priority number one from your standpoint in terms of creating shareholder value?

Tommy Millner

Let me give you some quick observations first --

Jim Duffy - Thomas Weisel

Sure.

Tommy Millner

And these are three and a half week observations, but I've know the company a long time. The death of the colt following of our customers strikes me as very Harley Davidsonish. I've spent a lot of time in stores and the number of customers that come in with their Cabela's hats, shirts, sweatshirts is just amazing.

I would say that has been matched by the passion of all of our associates that I've met and frankly it's unmatched in my career. I clearly saw that at call centers, distribution centers and in the stores and after I met a lot of people in the stores it was no surprise that our retail operations, while still has a whole lot of progress ahead of us, have made a whole lot of progress and it was that desire that I saw in the eyes of our associates that's the willingness to change and to improve was clearly evident.

The focus points as I mentioned in my prepared remarks, I think are pretty simple. It starts with the customer, that's how Dick and Jim and Dennis built the company. So how we continue to delight and cherish our customers and drive them to this very unique business model that we have is a key priority. And then the business disciplines of reducing cost on an ongoing basis and improving our operating margins with a heavy focus on returns on invested capital are to me just commonsense approaches to this or any other business.

Jim Duffy - Thomas Weisel

Okay. So it's great.

Tommy Millner

So that's where I'm focused.

Jim Duffy - Thomas Weisel

Very helpful. And then you bring a unique perspective coming from the vendor side. Is there anything you saw from the vendor side about Cabela's, which you think gives reason to bring change?

Tommy Millner

Needless to say I left a really great company and a market leader, and I did that because the values that I saw at Cabela's that were the corner stones of this company were values that I was personally comfortable with and professionally comfortable with and after being here three weeks. It has only validated itself that I made a great because the way this company does its business everyday endears itself to our vendors. And I clearly saw that from the other side of the fence.

Jim Duffy - Thomas Weisel

Great, we look forward to seeing your influence. Couple more questions if I may. Can you speak to some of the things you are doing on the direct side of the business to bring costs down, is it a safe assumption that we are seeing more volume go online unless through the call center maybe the catalog at this juncture?

Tommy Millner

Pat I'm going let you touch on that.

Pat Snyder

Okay. So we've been working very hard on refining our contact strategy determining which catalogs we mailed our customers, how many, what size and at the same really analyzing our page counts and circulation and continue to reduce those and so with this strategy we're able to reduce costs in Q1 roughly 13%. We still are experiencing about 4.7% increase in revenue and so we think our strategies are really working well, our contact strategies with our customers are paying off and we are seeing that in our response rates.

Tommy Millner

I think this ties into the core themes that I mentioned just a minute ago, which in the simplest of terms, we have to constantly challenge ourselves, how do we get more out of less?

Ralph Castner

Tommy if I can just add to that, I'm sure I'm going to read some more after this call, how weak the direct business was, but I just want to make it really, really clear. I have told people ever since we went public. The best way to measure the performance of our direct business is to look at the relationship of catalog cost of revenue and where everyone is pleased with whatever was down 4.7% in the direct business as we are an up 8 in the retail business when the down 4.7 is measured against the down 13 in catalog costs. Where everyone is pleased with the direct business, as well as the retail business.

Jim Duffy - Thomas Weisel

Ralph, on the financial services business, how you see the charge-offs flowing across the year. Did your team kind of think about it in those terms or--

Ralph Castner

Well, at the end of the day, as you know, Jim its going to be highly correlated unemployment and we want to see where employment goes to see ultimately where charge-offs are. I mean, obviously they spike up a lot last year. I guess we are expecting the year-over-year amount to decrease slightly as we move throughout the year, but over the long run they are going to be correlated with bad debts.

Jim Duffy - Thomas Weisel

Okay. And then final question, if you mention the timing of the Billings store I missed it?

Tommy Millner

May 12.

Jim Duffy - Thomas Weisel

May 12th. Great, thanks so much.

Operator

We do have a follow-up from Paul Lejuez with Credit Suisse.

Paul Lejuez - Credit Suisse

Two questions, one on the expense side. We saw pretty good expense control in the fourth quarter, in terms of year-over-year declines in dollars not the case in the first quarter just wondering how we should think about that over the balance of the year.

Ralph Castner

Well let me, part of the reason and you and I have been through this. Part of the reason, we saw the big reductions in the fourth quarter was some of these changes we made in the productivity of the catalog cost. The only reason you didn't see it in the first quarter like you saw in the fourth quarter is the absolute amount of catalog expenses were down so much year-over-year, and we just don't spend this much in catalog cost in the first quarter as we did in the fourth quarter. Therefore the cut in that is not as meaningful.

Paul Lejuez - Credit Suisse

So does that imply for 2Q, 3Q we're looking at a similar kind of expense dollar as the prior year?

Ralph Castner

Look we are continuing to manage the expenses, I don't think you'll see the reduction that we saw in the fourth quarter of last year, but I don't think you'll see big increases either.

Paul Lejuez - Credit Suisse

Got you and sorry to beat this to death, but I am getting emails from clients who are investors and potential investors, just trying to figure out if comps would have still been positive or specifically, what the comps would have been, ex the guns and ammo category? Just to help us analyze this business?

Tommy Millner

It would have been positive slightly. I'm sorry I misspoke, they would not have been positive.

Ralph Castner

I just want to reinforce with that though. What we said earlier, [week-adjusted] boats have been terrible too. We could pull boats out and that'd be up. So I think it's a little unfair to pull out the best category and say they would have been down. We could have just as easily pulled out the two worse categories, may be should have been up higher.

Paul Lejuez - Credit Suisse

I agree, but it's helpful for us to know what the best and worst were doing, so we can better analyze. So I appreciate it.

Ralph Castner

I know everyone is gun centric here, but there are some other categories that get clobbered because of the economy, that we think in a more normalized economy would be way up.

Paul Lejuez - Credit Suisse

Can you share some of those with us as well?

Ralph Castner

Boat or marine has been tough.

Paul Lejuez - Credit Suisse

How is that?

Ralph Castner

(inaudible) has been tough.

Pat Snyder

On the [core] is tough.

Paul Lejuez - Credit Suisse

How much?

Tommy Millner

ATB is clearly tough.

Paul Lejuez - Credit Suisse

Got you.

Ralph Castner

That's why Paul I didn't want to get into that take this out add that guns and ammo were a big part of our company.

Paul Lejuez - Credit Suisse

Yes. Agreed, and I appreciate it. Thank you.

Operator

Thank you. We have no further questions at this time.

Chris Gay

Thanks everybody for joining us and we look forward to taking to you again soon.

Operator

Thank you, again ladies and gentlemen. That does conclude our call for today.

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Source: Cabela's Inc. Q1 2009 Earnings Call Transcript
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