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Cabela's Incorporated (NYSE:CAB)

Q1 2013 Earnings Call

April 25, 2013 11:00 am ET

Executives

Chris Gay - Director of Treasury & Investor Relations and Treasurer

Thomas L. Millner - Chief Executive Officer, President and Director

Ralph W. Castner - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Seth Sigman - Crédit Suisse AG, Research Division

Reed Alan Anderson - Northland Capital Markets, Research Division

N. Richard Nelson - Stephens Inc., Research Division

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

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

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

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

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

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. First Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Mr. Chris Gay, Director, Treasury and Investor Relations. Please go ahead, sir.

Chris Gay

Good morning. I welcome everyone listening today, both on the conference call and by webcast. A replay of today's call will be archived on our website at www.cabelas.com.

With me on today's call are Tommy Millner, Cabela's Chief Executive Officer; and Ralph Castner, Cabela's Executive Vice President and Chief Financial Officer. This conference call will include forward-looking statements. These statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance. Actual events or results may differ materially from those statements. For information about certain factors that could cause such differences, investors should consult our annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Special Note Regarding Forward-looking Statements.

Additionally, this conference call may include certain non-GAAP financial measures. Please refer to our website to find reconciliations of these non-GAAP financial measures to GAAP.

Now, I will turn the call over to Tommy Millner, Cabela's Chief Executive Officer.

Thomas L. Millner

Thank you, Chris, and good morning, everyone. Our record first quarter financial results validate that our 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, higher merchandise margin, operating expense leverage, solid account growth in our Cabela's CLUB and exceptional performance from our next-generation stores.

During the quarter, we realized very strong comp store sales in the month of January.

In February, we saw comp store sales moderate to being up mid-teens. When we issued our interim first quarter update in early March, we expected continued moderation of comps through the end of the quarter. However, comps did not moderate further in the month of March and continued to be running at a positive mid-teens rate through yesterday.

This strong performance led the record first quarter results, significant increases in market share and further increases in return on invested capital.

We continue to see exceptional performance from our next-generation stores. For the quarter, our next-generation stores continue to outperform our legacy stores in both sales and profit per square foot.

Additionally, our next-generation stores are performing better than our legacy stores as they enter the comp base. This is extremely encouraging as we continue to accelerate retail store expansion.

During the quarter, we opened next-generation stores in Columbus, Ohio and Grandville, Michigan. We also opened an Outpost store in Saginaw, Michigan.

Each of these openings exceeded our expectations, drawing thousands of customers at each event. The ability of our new stores to coexist in markets near legacy stores without cannibalizing sales from legacy stores, continues to be a positive development.

Earlier today, we announced the location of 2 more 2014 next-generation stores. To Alison, Oregon, a suburb of Portland; and Edmonton, Alberta. This brings the total to 6 announced United States next-generation stores for 2014 with plans for up to 2 more.

In addition to Edmonton, we are also planning on opening up to 2 additional next-generation stores in Canada in 2014. Our current Canadian locations have yielded outstanding results and we are very excited about further expansion of our Canadian footprint. And finally, we plan to open up to 3 Outpost stores in 2014 with sites yet to be determined.

These new stores represent 16% to 18% retail square footage growth in 2014.

In addition to strong new store performance, we also realized continued strength in comp store sales, which increased 24% in the quarter.

The increase in comp store sales was broad-based as sales increased in every one of our 33 comp stores. While much of the comp increase was a result of strength in firearms and ammunition, we realized double-digit comp growth in women's and children's apparel, hunting apparel, footwear, optics and archery.

As a result of the strong performance in these merchandise categories, comps, excluding firearms and ammunition, were up 9% in the quarter.

Given the strong demand and very tight supply of ammunition, for competitive reasons, in the future, we will not report comp store sales or direct revenue growth excluding ammunition until the extraordinary demand for ammunition normalizes.

For the first quarter, retail transactions increased 14% and average ticket was up 10%. Multichannel customers increased 10% during the quarter.

We continue to see strong new customer growth from the strength in firearms purchases. As we discussed last quarter, these new customers create a great opportunity for us to convert these individuals into long-term shoppers with our proven marketing and retention strategies.

For the quarter, merchandise margin increased 110 basis points to 35.6%. Despite the headwind in consolidated merchandise gross margin related to the sale of firearms and ammunition, strength in high-margin soft goods and footwear, combined with fewer sales discounts and markdowns, more than offset the mixed headwind.

Improved performance of Cabela's brand products, combined with our recent implementation of net SKU profitability, as well as our planned implementation of a price optimization tool later this year, should drive future margin improvement.

Now let me turn to retail profitability, which is a key initiative in our retail growth strategy.

For the quarter, retail profitability increased 460 basis points to 17.4%, a new first quarter record. This is the 16th consecutive quarter of retail profit contribution improvement. Improvements in retail profitability were due to higher merchandise margin and leverage of store labor and advertising expenses.

Our Outfitters are our greatest asset and our ability to generate record comp store sales, while leveraging labor costs, is a testament to the quality of our Outfitters.

Our omni-channel marketing strategy continues to improve our marketing effectiveness. And we are realizing these improvements in both our retail and direct segments.

We're also pleased with the improved performance of our Direct business, which increased 18.4% in the quarter. Improvements in the Direct business were due to increased traffic to cabelas.com, which drove a 12% increase in orders.

We also realized a 6% increase in average order size. Our new advertising campaign, It's in Your Nature, has generated tremendous customer response across all aspects of our business and has created a strong emotional connection with our customers.

The recent success in our Direct business gives us confidence to make additional investments in this business in future quarters.

Additionally, we will continue to develop and improve our omni-channel strategy as a means of connecting with our customers through all channels of our business.

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

For the quarter, average active accounts increased 10.2%. We also realized improvements in net charge-offs, which were just 1.86% and are 14 basis points lower than charge-offs in the same quarter a year ago.

Now turning to guidance. We are extremely pleased with our strong first quarter results and our ability to increase sales and margin while controlling cost. Our retail stores are performing at very high levels and our Direct business is starting to show real improvement.

As a result, we expect our outperformance in the first quarter to flow through to our full year results and we are comfortable with the current quarterly breakdown of external earning estimates for 2013.

The success we've seen through the first quarter is attributable to the dedication and quality of our Cabela's Outfitters. I want to personally thank each and every one of our Outfitters for their hard work, effort and passion in cherishing and delighting our customers each and every day.

As I turn the call over to Ralph Castner, this is a big day for the big guy. Ralph, happy 50th birthday from all of us.

Ralph W. Castner

Thanks, Tommy. I had hoped you've forgotten that. Following up on Tommy's remarks, we're very pleased with our first quarter performance. Including the particularly strong performance from our next-generation stores, improvement of Direct business, operating expense leverage and solid performance of our Cabela's CLUB.

For the quarter, earnings per share increased 75% to $0.70 per share, compared to $0.40 per share in the prior year.

Strong comp store sales, along with excellent performance of our next-generation and Outpost stores, led to a record retail revenue of $486.7 million, an increase of 41% over the same quarter a year ago.

With our aggressive expansion of retail square footage and the excellent performance of our next-generation and Outpost stores, we're looking forward to the road ahead.

For the remainder of 2013, we'll open 6 more new stores. We opened a next-generation store in Louisville, Kentucky 2 weeks ago, and in May, we'll relocate our Winnipeg store.

In the third quarter, we plan to open 3 next-generation stores with locations in Ashwaubenon, Wisconsin, a suburb of Green Bay; Thornton, Colorado and Lone Tree Colorado, which are both suburbs of Denver; as well as a Canadian store in Regina, Saskatchewan.

In the fourth quarter, we plan on opening 2 more Outpost stores in Waco, Texas and Kalispell, Montana.

With regard to comp stores, we'll have 3 next-generation stores entering the comp base in the third quarter of this year.

For the quarter, Financial Services revenue increased 2.8% to $85.8 million. Average credit card accounts increased 10.2% and average balance of credit card loans increased by 12.8% during the quarter.

Additionally, we continue to see improvements in delinquencies. Greater than 30-day delinquencies were just 0.73% as compared to 0.80% a year ago; greater than 60-day delinquencies were 0.45% as compared to 0.49% a year ago; and greater than 90-day delinquencies were just 0.24% as compared to 0.26% a year ago.

Now let me highlight the future funding plans of our Cabela's CLUB. In the first quarter of 2013, we completed a 10-year securitization of $385 million to fund growth.

The securitization transaction included the issuance of $327 million of notes, which accrue interest at a fixed rate of 2.7%.

As we look forward, with interest rates at record low levels, we will continue to focus on linking the maturities in both the securitization and the certificate of deposit markets. This could put some upward pressure on interest expense over time as 10-year rates are about 200 basis points higher than current variable interest rates.

With our expected strong portfolio growth, we believe locking in long-term liquidity and laddering maturities appropriately will create long-term value. We do not expect to complete another term securitization during 2013 but will remain active in the CD market with a focus on 10-year maturities.

Our next term securitization doesn't mature until January of 2015.

Additionally, at the end of March, we early renewed our variable funding conduit facility with Bank of America. These conduit facilities, of which we have 3, all have 3-year terms. The early renewal of this facility has allowed us to stagger the maturities of these conduits to only have 1 mature in any given year.

Now, let's turn to inventory. Inventory increased 13.7% or $74 million year-over-year to $613 million. Most of this increase is attributable to new stores.

The strength in cold weather soft goods and footwear we realized towards the end of the first quarter, allowed us to transition to our spring assortment with very little excess inventory from our fall and winter assortments.

We feel very good about our inventory position as we look forward to the spring and summer season.

Gift instruments and credit card reward points increased nearly 16.1% or $34.6 million over the same period last year to $249 million.

Accounts payable increased $131 million year-over-year. Roughly $50 million of this as a Cabela's CLUB Visa payable to its processor, FDR. This is really a timing difference related to quarter end.

The remaining increase is due mostly to an increase in trade payables from the strong sales in construction payables due to store growth.

For the quarter, cash flow from operations was $123 million and capital expenditures were $65 million.

With our accelerating store growth plans, we expect full year 2013 capital expenditures to be between $300 million $325 million.

We ended the quarter with about $82 million of cash in our Merchandising business. This cash, combined with cash flow from operations, which is expected to be $250 million to $300 million in 2013, should allow us to internally fund store growth through 2014.

During the quarter, we repurchased 72.2 -- 72,200 shares of common stock related to our Board-approved 750,000 share repurchase program, designed primarily to offset shareholder dilution resulting from the granting of equity-based compensation awards.

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

Thomas L. Millner

Thanks, Ralph. As I hope you can tell, we're very pleased with our record financial results for the first quarter and in particular, the strong performance of our next-generation stores and improvements in our Direct business. We're very excited about our future growth opportunities and making sure we cherish and delight every customer every day.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go right to our first question from Seth Sigman with Crédit Suisse.

Seth Sigman - Crédit Suisse AG, Research Division

I guess, the first question, I'm just curious if you can maybe discus what happened in February versus January and what kind of surprised you in March? Was it the result of any sort of internal or marketing changes? How are you thinking about the strength that you saw in March and then so far in April, which categories maybe are outperforming?

Thomas L. Millner

Certainly. Probably to no one's surprise on the call, January was just exceptionally strong, both in Direct and in our Retail business. We did see moderation in the month of February as supply tightened a little bit. And we expected even more moderation in the month of March, which ultimately didn't really happen. So March just finished stronger than we thought when we talked to you guys on March 12. It finished quite strong, consistent with February. And as I said in the prepared remarks, we continue to see mid-teens comp performance, April to date.

Ralph W. Castner

Just to add on to that, as far as categories go, I mean not surprising, shooting and firearm have been strong. But also, we've been really pleased with women's and kids apparel and hunting apparel has been strong, too. What's interesting and the way we see as an opportunity going forward is the spring related merchandise categories: fishing, marine, camping and outdoors, were pretty slow in the first quarter because of the weather and how cold it is. But we think that represents pent up demand that we can experience in the second and third quarters.

Thomas L. Millner

Seth, as we've said in our prior calls, we have been working very hard for a number of years on the quality of our apparel and footwear assortments, both in branded goods and even more, in Cabela's branded products. So as we look back on the quarter, it's no surprise guns and ammunition were going to be strong in the first quarter. I think the real story for our first quarter was just the really powerful response from our customers to our spring offering. In the face of absolutely no warm weather almost anywhere. So that was very encouraging.

Seth Sigman - Crédit Suisse AG, Research Division

Just on that point. I think one of the concerns has been that firearms is just taking a lot of share of wallet at the expense of other categories, but you had a 9% comp excluding firearms and ammo, a very strong trend. And maybe that's just it's not happening. Either the whole category is rising or it's some of the internal changes that you said you're making or you're just taking a lot of share. I mean, was the right way to think about that? I mean, clearly, you're acquiring a lot of new customers. I mean, how do you think you can support the comps in the coming quarters even if the firearms do start to slow?

Thomas L. Millner

Well, I think the real key is to continue to have great merchandise priced fairly, which is sort of a cornerstone foundational element of our company. And if we can continue to attract and convert new customers, it feels pretty good. But our customers -- we didn't see a meaningful change in attachment rate on other products when a person came in and bought a gun or ammunition. But we saw lots of new customers that obviously liked our merchandise.

Ralph W. Castner

I mean, Seth, in your question, there's sort of a presumption that the firearms thing is going to slow down as we move through 2013. But really, since February, after we got into some of the supply constraints, we've not seen a meaningful change. And then to your point, on top of it, there's some categories like archery and tree stands that really have nothing to do with firearms or shooting, that are up really nicely. And women's and children's clothing, which is not a huge category, but because the margin is so high, that's another category that's done really well. They don't have anything to do with firearms. So our merchants have done a really nice job of getting relevant products for our customers and we're excited about that.

Operator

And next, we have a question from Reed Anderson with Northland securities.

Reed Alan Anderson - Northland Capital Markets, Research Division

Tommy, I think one -- just one follow-up to that last question, then I've got some other ones, you talked about kind of sales growth being very balanced in terms of not just firearms. How about the margin gains? Were those also pretty balanced across category or did you have some opportunity on the firearms side just because there was no -- you probably had some pricing opportunity there too? Just curious.

Thomas L. Millner

No, margins were consistently better across the board. We take -- as you know, Reed, we take a long-term view of our relationship with our customer and didn't use the acceleration in firearms and ammunition demand to dramatically change pricing. It was more the long-term increases that we had been able to get in those categories, but not what I would call a gouging of price, given the environment.

Ralph W. Castner

A commentary on margins, Reed. In preparing for the call, we went back and looked at margins by quarter over the last several years and we always said that a big part of margin improvement was going to come through better planning, better markdown management. And in the first quarter was really where we had our biggest opportunity. If you go back to 2010, the first quarter was more than 100 basis points lower than any other quarter and was 200 -- 260 basis points lower than the second quarter. So it's probably not a surprise that over time, we've got a disproportion in the amount of the increase in the first quarter. And although we expect improvement for the latter part of the year, I don't think we expect it nearly to the magnitude that we enjoyed in the first quarter.

Thomas L. Millner

But Reed, that first quarter gain, this 110 basis point, as Ralph said, the quality of our inventories, because of preseason planning, vendor collaboration, in-season management and -- we haven't even -- we wont see the benefit of price optimization probably until some stub of the fourth quarter, but then into 2014. This is where it's making a difference and that's in the first quarter.

Reed Alan Anderson - Northland Capital Markets, Research Division

That's great. Then shifting gears a little bit I mean, we have -- there's been obviously, supply constraints in the firearms piece for a while, but really prominent on the ammo piece right now. I mean, even your stores and you've always done a great job, Tommy, of kind of being able to supplement a lot of it, the nationally ran and stuff with some of your own private label to really get through that. But even now, that's challenging. I'm just -- I mean, you've been with this industry a long time, I'd love to get your perspective on where are we, when are we going to get some supply in there? And also, is that, in your mind, having any impact on just driving demand in the core firearms piece? Because to literally, it's to the point with people outside of you, where they don't even have ammo if you buy a gun in some locations. I'd love to get your perspective on that.

Thomas L. Millner

Sure, absolutely. First, I appreciate your indulgence and others on the call in understanding, as long as supplies are tight, we would prefer not to disclose sales, excluding ammunition in Direct or in comps until this sort of settles down and gets back to normal. It simply competitively disadvantages us. And so, I appreciate the understanding on that. We are -- I think, we're in a better place than most because we started diversifying our supply base about 4 years ago, not knowing any of this would ever happen. Having said that, supply is still tight. It is still constraining ultimate demand because we simply -- in some categories like 22 caliber ammunition, it's very, very tight. And I think the honest answer is, I don't know when it's going to loosen up. If the ammunition suppliers wanted to increase capacity, it would take a pretty long time to do that to meaningfully change capacity because of machine lead times and training people. And we'll just see, but I'm really glad for Cabela's, that we've diversified our supply base and we have a great balance sheet to do what we've got to do to get product. And there are only a hand -- half a handful of companies in our -- in retail or wholesale that can do that.

Reed Alan Anderson - Northland Capital Markets, Research Division

One last question and I'll let somebody else jump in. Ralph, on the financial services piece, it's a small line item, but when you look at the customer reward cost going and it's kind of inched up, it's 10 basis points up versus last year and last year was up like 40 basis points. But I just want to make sure that you're still kind of managing that in relation to interchange income, which has also been going up in proportion. Just thoughts on that.

Ralph W. Castner

Yes, and I'll probably jump in with another theme on financial services. But there's not a lot going on with that line other than we continue to use our card program to build loyalty with our customers and come up with things like double and triple points and other programs like that, which might continue to have rewards cost grow slightly faster than interchange revenue. I think the big change you should look forward to at the CLUB, and I mentioned this in my notes, with rates being as low as they are, we're going to aggressively go out on the long-term end of the liability scale and try to lock in both liquidity and long-term rates. And to help you guys model that, if we were to do $100 million, that on a full year basis, would cost current year earnings about $2 million for this year. And we quite frankly expect to do hundreds of millions of dollars yet for the remainder of this year. So as you're modeling or thinking about financial services revenue, I think you should continue to see financial services revenue like you did in this last quarter but for a different reason, grow slower than account growth just as that interest expense creeps up which as you know, we record as negative revenue. So the big transformation you're going to see over the next 12 to 24 months is as long as rates are low, is an increased interest cost if we lock in those long term liabilities.

Thomas L. Millner

And Reed, we view that as a long-term investment in our business as profitability. And we may make some additional investments in the business. The launch of It's in Your Nature has been nothing short of terrific. So that's an opportunity to broaden that launch in the balance of the year. And as we see more traffic moving from desktop to tablet devices, we may accelerate some of that. Hence, our guidance being comfortable with current estimates in each of the remaining quarters.

Operator

Next, we'll take a question from Rick Nelson with Stephens.

N. Richard Nelson - Stephens Inc., Research Division

I would like to ask about the non-gun and ammo comps. The two just closed, plus 9%, that's an acceleration from what we heard last quarter. How much of that, Tommy, do you think was stimulated by the gun and ammo traffic? And maybe a better way of asking that is if we look at that 9% comp, how much of that had a gun and ammo purchase test to it?

Thomas L. Millner

Well, Rick, we didn't see a meaningful change in attachment rates. I think when you look at the categories in the quarter, non-gun and ammo they did so well. Women's and children, I mean, that doesn't have anything to do with the firearm and ammunition purchase. Archery was a double-digit contributor in comp performance in the quarter. That has nothing to do with guns and ammunition. I think a number of things are at play here. The first is our omni-channel muscle. We are building and getting much better at driving traffic, not only to dot.com, but also to our retail stores. I think that's making a difference. I think having, especially in apparel and footwear, really great looking new products, customers are coming in and buying those products. So look, do I expect a 9% comp in every other category in the rest of my career here? No, probably not, but it does speak to our marketing efforts are working together with great new products that don't have anything to do with guns and ammo. And it's just working.

N. Richard Nelson - Stephens Inc., Research Division

Also, I'm curious, subsequent to the Senate vote on background checks, have you seen any impact on it since April, it seems like it's off to a great start.

Thomas L. Millner

Yes, we haven't seen a meaningful change post the Senate not taking action.

N. Richard Nelson - Stephens Inc., Research Division

And finally, if I could ask you about the lift that you're getting as the next-gen stores come into the comp base, what sort of sales growth rate they are achieving?

Ralph W. Castner

Well, we mentioned in the call, Rick, that -- which is pretty interesting as -- that those stores at the end of comp base are actually comping above the chain as a whole. So we feel really good, not only about how our new stores are opening, but actually, as some of those begin to enter the comp base, they continue to perform really well.

Operator

And next, we'll take a question from Matt Nemer with Wells Fargo Securities.

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

So I just wanted to follow-up on that last topic in terms of marketing efforts that drove traffic in non-guns and ammo categories. Is that primarily, do you think, the in Your Nature campaign or is it also e-mail campaigns or search engine marketing? Can you give us a little more color on sort of what's changed in marketing and then what we can expect on the website later this year?

Thomas L. Millner

Well, Matt, I hope you and everyone else on the call are watching our progress on cabelas.com. The changes in the user experience and navigation and content and just the impact of the splash page, and then landing pages when you click through to a product, they're pretty significant improvements with more to come. I couldn't be prouder of what our web teams and marketing, both here in Sidney and also in our new Denver office, the impact that they're having. And it's clearly making a difference. The back office enhancements, as I said last quarter, in search engine optimization and e-mail campaigns, for competitive reasons, we're not going to go into very much depth on that but we're learning a whole lot and it's making a big difference in our business to include specifically, how we are getting new to file customers really engaged with our brand and having It's in Your Nature, which is good work, I think everyone would agree, to create that brand essence and that emotional connection with our company, that's just frosting on the cake.

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

That's great to hear. And then secondly, given the slower start to spring, I think you sort of alluded to this but where you've seen a burst of warm weather, do you see an immediate response in your fishing and camping categories where it's warmed up? And given the slower or the shorter season that we may have this year, do you need to do anything in terms of inbound receipts or do you feel like you could still get full sell-through on what you've ordered?

Thomas L. Millner

No, I think we can get full sell-through. We had 6, 8 inches of snow here in Nebraska just last week and it looks like it's going to be a 70-plus degree weekend across most of the Midwest and Pacific Northwest, and the Northeast, which is really important for us. I would expect we see a pretty good acceleration of spring goods soon, but it's been cold everywhere.

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

Yes, crazy weather. And then just 2 -- a couple of modeling questions and then I'll turn it over to somebody else. Given the strong sell-through that you mentioned of winter merchandise, I would assume there's very little mark down in those categories required for 2Q. How much upward pressure could we expect on gross margins related to that? And then secondly, as the next-gen stores enter the comp base in Q3, for modeling purposes, is it fair to assume that they're kind of in the mid single-digit range when they enter the comp base?

Ralph W. Castner

Well, let me address your first question first. I'll just remind you that a year ago, margins in the first quarter were 34.5%. In the second quarter, they were 37.4%. So they were almost 300 basis points better. So we're actually looking at Q2 as a really tough quarter to try to get gross margin expansion by. And for what that's worth, Q3 is 37.2% and Q4 a year ago, was 36.2%. So I wouldn't look for a lot of gross margin expansion, maybe not in any of the 3 quarters for the remainder of the year. The second question was how the comps are entering the comp base. I mean, we commented they've consistently been better than the chain as a whole. So they continue to comp nicely as we go in. I'm not sure I can give you any more color on that. But as more stores enter the comp base -- actually, there's 2 things you're going to see. First of all, it should help comps, which is obviously a plus and we all need to remember, as we're looking at new store productivity, that we're going to get more and more stores into the comp base. So sort of as we define new store productivity, that will come under some pressure only because we're going to have more and more of the next-generation stores in the base.

Operator

And next, we'll take a question from David Magee with SunTrust Robinson Humphrey.

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

I just had a question regarding the exclusive merchandise, the Cabela's exclusive stuff, how it's growing versus the other non-guns and ammo merchandise and what does the pipeline look like for the balance of the year?

Thomas L. Millner

Well, I would say, a nice component of the 9% comp was in Cabela's branded women's, children's, hunting apparel, footwear and other related categories. So David, we couldn't be more pleased that all the hard work our merchants and our supply chain, our supply team and our partners, our manufacturing partners, are really delivering great merchandise. We have some really great launches coming this fall in even more innovative products in core apparel and camo and outerwear and footwear. And it's the stream of innovation that we started working on 3 years ago that has really started to bear fruit and I think elevated us in the marketplace nicely.

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

So that merchandise is growing faster than the balance of the products?

Thomas L. Millner

No, I wouldn't say that, but they're both growing at really great rates as witnessed by the comp.

Operator

Our next question comes from Jim Chartier with Monness, Crespi, Hardt.

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

My first question, did Direct see any gross margin improvement in the quarter? And I know that's been -- that has kind of lagged improvement in retail. As you get more traffic to the site, how do you think about trying to expand the gross margin there?

Thomas L. Millner

It was flat. And that would be mix driven, I think, Jim.

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And then you've talked about acquiring a lot of new customers with the firearm purchases. Are you -- is it too early to tell if those customers are returning to the stores as repeat customers?

Thomas L. Millner

Yes. I think it's too new to state it with absolute certainty, but history would indicate that we're pretty good at retention and reactivation. In fact, in the quarter, reactivation was up 16.9%, activation of new accounts was 9.1%. So we're pretty pleased.

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Great. And then thinking about marketing expense for the rest of the year, similar to fourth quarter last year, do you think you'll reinvest into more marketing if business continues to be good?

Ralph W. Castner

I think as we go throughout the year, we'll continue to make significant investments in marketing, particularly in the second and the third quarter. Tommy touched on what a lot of those are, It's in Your Nature, mobility, continued support of e-mail campaigns and our Direct business. But yes, I would expect there to be continued investment, particularly in Q2 and 3 in the marketing effort.

Operator

Our next question comes from Lee Giordano with Imperial Capital.

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

I know it's still fairly early, but can you provide an update on the Outpost store out in Washington and how that's performing relative to your expectations?

Thomas L. Millner

Yes, Lee, we're really pleased with how both of our Outpost stores are performing. Saginaw was just terrific and Union Gap, we're just very pleased and we're learning a lot that we will apply to the ensuing 3, 4 stores that we open.

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

And then secondly, can you talk about what's really driving that improvement in the soft goods business? Is it just better merchandise, better merchandising, is it a combination? I guess, give us a sense of the sustainability of those improvements?

Thomas L. Millner

Well, some things I'm really comfortable about, the sustainability of being able to innovate, not just in the product but how those products are merchandised on our website and even more in our retail stores. We were just in Grandville, Michigan last week and then we were in Saginaw. And just the visual presentation of great-looking, new merchandise, it didn't surprise me why we were doing so well in those categories. We've just come a long way in our ability to present great product at retail.

Operator

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

On the Direct business, can you talk about how that growth was able to ramp so aggressively in Q1? And I guess, just thinking down the line here, are we declaring victory here now and we're going to start seeing growth or is it still potential couple of million dollars hit to that business as you open up a new store?

Thomas L. Millner

I don't think we're prepared to declare victory but it's certainly feeling better. And I think we'd keep working on store to door, which will come later this fall, and we'll see. But we're not declaring victory. We said this is a long path of improvement but we're very encouraged with where we are today.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Any particular categories on Direct that are driving the improvement there? And then, I guess, as a follow up there again, do you still think there's a few million dollar hit every time you open up a new store or is that not seem to be happening as much...

Ralph W. Castner

No, there's no question, there continues to be a hit every time we open a store. The Direct business probably -- well, certainly more than retail, was affected positively by ammunition. Ammunition was a big contributor to the growth rate. However, women's and kid's did very well in the Direct business also. So we are -- I would tell you, we're seeing similar to what we're seeing in retail, we're seeing those other product categories do better in the Direct business than they have, but ammo has been more impactful to the Direct business than firearms and ammo have been to Retail.

Thomas L. Millner

And it's not a change due to attachment rate.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Got it. And then just on the sourcing front, you talked about some of the things you're doing up front with giving vendors better visibility and better mark down rates, but are you seeing anything -- did you see any benefits in cost in Q1 compared to last year? I guess, how are the orders looking for the back half of 2013 in terms of the costing fund on the merchandise?

Thomas L. Millner

We're not seeing anything that's of concern on the costing front at this particular point in time.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. So it feels relatively manageable. Then I guess just lastly, is there anything on -- can lower diesel costs actually be a little bit of a benefit for you as well? Can that move the needle at all as we move through the rest of this year?

Ralph W. Castner

Well, I think it's clearly a positive from a supply chain standpoint, but I wouldn't call it material or a needle mover. It's just a nice to have.

Operator

And we'll take our next question from Jim Duffy with Stifel, Nicolaus.

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

I was going to ask if you could highlight some of the things the merchants have done differently in the categories other than firearms and ammunition, but it seems your emphasis on improved quality really seems to be driving sales there. Is there any way to quantify if ASP has been a driver of comps in those categories other than firearms and ammunition? And if so, how much?

Ralph W. Castner

Well, I don't have the data in my fingertips, Jim. I don't think ASP was a big driver in the comps.

Thomas L. Millner

Nor do I, Jim. It was just really great reaction to our new spring assortment.

Ralph W. Castner

I mean, you get it and I think Tommy disclosed these, but you do get some sense of that on transaction versus tickets, where transactions were up 14% and tickets were up 8% in retail. So clearly, it was clearly mostly transaction-driven and a lot of that average ticket is just as people shift into firearms, that has such a high average ticket, that causes a fair amount of the average ticket increase.

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

Got you. Okay. And historically, you guys haven't had traffic counters. Have you done anything to measure traffic more recently?

Thomas L. Millner

No.

Ralph W. Castner

No.

Operator

And we'll go next to Mark Smith with Feltl and Company.

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

I just want to circle back on just a couple of quick things. First, just looking at the Direct. Can you guys quantify -- not direct, ammunition?

Thomas L. Millner

It was up 2.

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

And secondly, I don't know if you can quantify any pricing on -- pricing increase taken on firearms and ammo?

Thomas L. Millner

A little, little bit, but that was not a big driver.

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

Perfect. And then another here. Just as we look at kind of regulatory issues, as we look at any states that may have passed some laws. It looks like at the federal level, there won't be any changes here, just how we can view any changes and anything else out there on the horizon that we should be keeping our eye on?

Thomas L. Millner

Well, perhaps it would be helpful for you to know what happened in Connecticut. In the days ahead of the signing of Senate bill 1160 on April 4, you would imagine there was some pull forward of demand in ammunition and firearms. And then it sort of softened and kind of moderated. After that, until yesterday, it's still a pretty good level. Obviously in Connecticut, there are a lot of fishermen, a lot of hunters. There's are 50,000 hunters, they're campers and the store is still performing at a mid- teens rate through April after the legislation was signed. And I don't mean to minimize the impact of the legislation because it certainly did have some effect, but we'll see going forward, but that was the big example we have. And in Colorado, not a big, meaningful change, not much different from what I just told you.

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

And then looking North of the border. It's a little harder for some of us to track any regulatory issues there. But 2 things, on firearms and ammunition, have you seen any changes there either in demand or in regulatory issues? And secondly, any update on where we are on your credit card on the CLUB Visa in Canada?

Thomas L. Millner

No. No changes up North. In fact, up North, there has been the dismantling of the National Registry because it didn't work. In fact, in Canada, Mark, we can actually shift firearms in our Direct business in Canada. A customer has to have proof of an authorization card that they get from the government. So we don't see any change in the regulatory climate in Canada.

Thomas L. Millner

Just to add onto that, interestingly, we have seen a slight increase in firearm sales in Canada, but not nearly to the extent that we've seen in the U.S. And yes, you also ended your question with CLUB Visa, That's still a priority for us, it will be a while. Nothing in -- we would be lucky to have something in '14.

Operator

And our final question today comes from Anthony Lebiedzinski with Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

First, as far as the breakdown of same store sales excluding firearms and ammunition, that was helpful with the 9% increase. To put things in perspective, could you just tell us what the comp sales increase was for those categories in first quarter of last year?

Thomas L. Millner

I don't have that in front of me. We can get that number.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay, all right. And also, kind of the '13 merchandise sub categories were up. Could you just tell us what you were disappointed with?

Thomas L. Millner

Yes, it was all, it was the -- any spring merchandise like fishing, camping and boats. With the cold -- most of the lakes in Minnesota were frozen even into last week and the week before. So the only categories that were challenging, that we would have normally seen a lift in, in the month of March were fishing, camping and power sports and marine.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

So anything related to the warm weather?

Thomas L. Millner

Yes, absolutely.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. So in markets where you've had more seasonably good weather, what's the performance of those categories?

Thomas L. Millner

They're doing fine. But remember, most of our markets are Northern markets, so we're talking about Arizona, even Texas has been cold, and Louisiana. And most everything that's north of that has been cold.

Operator

And that concludes our question-and-answer session today. I would now like to turn the conference back over to management for any further or closing remarks.

Thomas L. Millner

Thanks, again, for joining us today and we look forward to talking to all again very soon. Thanks.

Operator

And that does conclude our conference call for today. We'd like to thank you again for your participation, and wish you a wonderful afternoon.

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