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Executives

Chris Gay – Treasurer and IR Manager

Tom Millner – President and CEO

Ralph Castner – VP and CFO

Pat Snyder – SVP Merchandising, Marketing, and Retail Operations

Analysts

Rick Nelson – Stephen's

Reed Anderson – D.A. Davidson

Jim Duffy – Thomas Weisel Partners

Kristine Koerber – JMP Securities

Mark Smith – Feltl and Company

Paul Lejuez – Credit Suisse

Cabela's Incorporated (CAB) Q2 2009 Earnings Call Transcript July 30, 2009 11:00 AM ET

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Cabela's Incorporated Second Quarter Fiscal 2009 Earnings Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. (Operator instructions). I will now like to remind everyone that this conference call is being recorded.

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

Chris Gay

Good morning. 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 Tommy Millner, Cabela's Chief Executive Officer, and Ralph Castner, Cabela's Vice President and Chief Financial Officer. Tommy and Ralph, each have prepared comments related to second quarter operating results. Additionally Pat Snyder, Senior Vice President of Merchandising and Marketing and Brian Linneman, Senior Vice President of Global Supply Chain and 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 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.

Now on to the financial results. Consolidated revenues increased 4.4% in the quarter to $549 million. Retail revenue increased 10.2% to $302 million as compared to $273 million in the year-ago period. The increase in retail revenue was primarily due to a comparable store sales increase of 6.1%. Direct revenue decreased 3.6% to $200 million as compared to $207 million in the year ago quarter. As you know, we measure the growth in direct sales relative to direct marketing costs.

During the quarter we reduced direct marketing costs 10.1%. Direct marketing costs as a percent of direct revenue decreased to 13.0% as compared to 14.0% in the year ago quarter. Revenue increases were driven by continued strength in our hunting category as we continue to see significant demand for hunting equipment. Financial services revenue increased 15.4% to $44 million as compared to $38 million in the year ago quarter. The increase in financial services revenue was due to higher interest and other fee income and by an increase in the evaluation of our residual interest in credit card receivables.

During the quarter, we recorded $11.7 million pretax non-cash charge related to the write-down of land. This was partially offset by an $8.5 million pre-tax benefit and an increase in the evaluation of our residual interest in credit card receivables. Diluted earnings per share for the quarter increased 27% to $0.14 as compared to $0.11 in the year ago quarter. I would like to point out that due to a restructuring of legal entities in the second quarter last year, the effective income tax in the second quarter of 2008 was 17.8% compared to the 37.3% tax rate expense in the second quarter of this year.

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

Tom Millner

Thank you, Chris, and good morning, everyone. Since joining Cabela's as CEO nearly four months ago, we have continued to re-emphasize our ongoing efforts to improve operating efficiencies, control costs, and strengthen our balance sheet, the results of which are evident over the last three quarters. We're pleased with the comparable store sales increase of 6.1%. This is our third consecutive quarter of positive comparable store sales, an encouraging trend after a very challenging 2008. For the quarter, in our comp stores, average ticket increased 3.3% and transactions increased 2.6%.

Operating margins in our retail segment increased 310 basis points to 11.3% as compared to 8.2% in the same quarter a year about as we reduced labor costs and improved advertising efficiency. For the quarter, labor as a percent of retail revenue decreased 140 basis points. Improvements in labor productivity have been driven by enhancements in several areas, including more streamlined flow of goods to our retail stores and better management of retail staffing levels. Our customer surveys scores, which we call voice of the customer, continue to improve with customer satisfaction consistently coming in and more than 90%.

Additionally, retail advertising as a percent of retail revenue improved 50 basis points as we significantly improved advertising sales lift. Improvements in advertising were due to better targeting of ad flyer distribution, more effective broadcast placement, and improvements in print advertising contracts. And there are many more opportunities to continue to improve operating efficiencies in our retail stores. Let me name just a few.

We are currently rolling out a new merchandise return program called Cabela's Legendary Guarantee, designed to provide 100% customer satisfaction, while identifying customers abusing our returns programs across all sales channels. We have recently implemented a new check authorization service to reduce the number of bad checks we receive. We have redesigned a number of our front ends to expedite the checkout process and enhance the customer experience. And we continue to improve our outfitter training program and cross train our outfitters to be better prepared to serve customers in multiple departments.

There are just a few of the efficiencies we are working on. We will continue to test and challenge ourselves in all areas to make sure we are more efficient, more productive, and more profitable. Now, let us talk about our direct segment. Operating margins in our direct segment increased 360 basis points to 16.3% compared to 12.7% in the same quarter a year ago due to improvements in direct marketing expenditures, higher gross margin, and improved advertising efficiency.

The biggest contributor of operating margin improvement in our direct segment is the improved efficiency of direct marketing expenditures, which include both catalog costs and Internet marketing costs. We continue to deliver a more focused offering to our customers based on their buying patterns and behaviors. For the quarter, we reduced page count 14% compared to the prior year quarter while maintaining circulation. The result was a 100 point decrease in direct marketing costs as a percent of direct revenue. We are extremely pleased with these results and expect these positive trends to continue throughout the remainder of the year.

And let me assure you we have not reduced direct marketing costs at the risk of future growth. We have been able to refine our catalog distribution while increasing customer acquisition, retention and reactivation counts. In the quarter, customer counts for all three of these metrics were higher than the year ago quarter. Additionally, during the quarter, traffic to cabelas.com increased 18.6% and our market share increased from 7.1% to 8.4% of total traffic.

Merchandise gross margins improved 62 basis points in the quarter despite the ongoing mix shifts to lower margin hard good categories. Improvements in gross margin were broad-based as gross margin increased in virtually all product categories. These improvements were a result of lower promotional cost, reduced transportation expenses, and reduced discounts and markdowns. Gross margins improved more in our direct segment than in our retail segment. This is because the next shift is not as dramatic as we don't sell firearms in our direct segment.

As mentioned in our earnings release, we have completed a review of all land owned for future store locations to determine the potential of these sites. As a result, we have made a decision not to build a store in Greenwood, Indiana. Accordingly, we recorded an $11.7 million pretax non-cash impairment charge related to this location. We now intend to sell the land we own in Greenwood.

We had two other locations where we have announced plans to open a store, East Rutherford, New Jersey, and Wheat Ridge , Colorado. In regard to our store in East Rutherford, we continue to work with the developer of that project. This project has been delayed a number of times and we now expect the store to open in late 2010. Since this is a leased facility, we do not have a material investment in the site, and we have significantly slowed our planning to match progress of the development.

With regard to our Wheat Ridge location, we are extremely excited about locating a store in Colorado, and we look forward to opening the store. Since we own a significant amount of land at this site, we are working to maximize its potential. While we cannot give you a specific timeframe, we are finalizing plans and moving forward with opening the store.

At World's Foremost Bank, we're very encouraged with recent delinquency trends. Our bank team is proactively working to adjust pricing to mitigate the financial impact of the increased bad debts. Additionally, World's Foremost Bank will contend with new regulatory changes. Ralph will talk about each of these in more detail shortly.

For the quarter, we continue to realize strong performance in our hunting equipment category. While this is clearly led by strength in ammunition and firearms, we are experiencing strength in other categories in our comp stores, including archery, tree stands, optics, camping, fishing and reloading. Recently we have seen and expect to continue to see the year-over-year growth rate in firearm sales decelerate. However, ammunition sales remain strong with year-over-year growth rates exceeding those of firearms.

Our power sports division, which includes both automotive and marine electronics, continues to be challenging in this economy. We continue to gain market share from competitors in hunting equipment as well as in our overall merchandise categories. Many of you are aware of and even track the number of firearms background checks reported by the FBI. We compare Cabela's firearms unit sales to the number of reported firearms background checks, and for every month of this year, our growth rate in firearm sales has exceeded the growth rate in firearms background checks.

Before turning the call over to Ralph, I want to take this opportunity to thank all Cabela's employees who have worked so hard controlling costs and improving our operating efficiencies. They have really taken to heart our initiatives to improve our operations and I sincerely thank them for all they do to cherish and delight our customers.

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

Ralph Castner

Thanks Tommy.

We are extremely pleased with our second quarter financial results and as Tommy mentioned the significant efficiencies we continue to realize in both our retail and direct segment. I would like to spend the majority of my time focusing on our balance sheet, cash flows, and World's Foremost Bank.

Cash and cash equivalents at the end of the quarter were $481 million as compared to $88 million at the end of the year ago quarter. Virtually all of this cash is held at World's Foremost Bank as a result of our secured certificate of deposit program and can be used to fund credit card receivables. For the quarter, we again reduced inventory levels. Inventory levels decreased 7% to $587 million as compared to $631 million at the end of the second quarter of 2008. We will continue to focus on tightly managing inventory levels throughout the remainder of the year and now expect inventory levels at the end of the year to be at or slightly below last year's levels.

Accounts receivables decreased $50 million year over year as we increased our focus on strengthening our balance sheet. Retained interest in securitized loans including asset backed securities increased $83 million compared to the year ago quarter. This is mostly due to World's Foremost Bank retaining $75 million of subordinated notes related to our TALP securitization transaction in April. We have substantially reduced debt levels relative to the year ago period. We ended the second quarter with $144 million less debt as compared to the year ago quarter. Total debt at quarter end was $490 million compared to $634 million in the year ago period. Recall that in late 2008 we repaid $50 million of debt. This repayment along with the lower outstanding balance on our revolver has significantly reduced outstanding debt levels further strengthening our balance sheet.

Total outstandings on our revolving line of credit at quarter end were $133 million as compared to $221 million in the year ago period. For the year to date period, cash flow used in operations improved $97 million. Cash used in operations for the year-to-date period was $47 million compared to $143 million in the same period a year ago.

Now turning to World's Foremost Bank. During the quarter, average managed credit card loans increased 11.5% and average accounts grew 9.8% both compared to the same quarter a year ago. For the quarter, average account balance increased 1.5% compared to the prior year quarter. Net charge offs at World's Foremost Bank increased 5.24% compared to the impact – and continue to impact our financial results. Our bank management team is proactively managing these challenges with the following efforts.

First, we continue to review our pricing and make adjustments when appropriate. Earlier this year, we implemented risk based pricing and in August expect to further refine – expect to further refine pricing. Secondly, during the quarter, we expanded our Visa Signature Program to more club members. The benefit of the signature card is that our club members earn higher rewards on their Cabela's only spending and the World's Foremost Bank receives higher interchange revenues on all credit card charges. Finally, we have more aggressively increased our portfolio management efforts by managing credit limit on customers we believe are risk free charge-offs.

As most of you are aware, we released our master trust performance data monthly and we're very encouraged with the delinquency trends, which we have been stable for the last several months. Compared to the first quarter of 2009, total delinquencies decreased in each of our delinquency buckets. 30 day delinquencies declined to 1.81% compared to 1.89% in the first quarter. 60 day delinquencies declined to 1.08% compared to 1.15% at the end of the first quarter. And 90 day delinquencies declined to 0.56% compared to 0.59% at the end of the first quarter.

Additionally, charge-offs for June were at the lowest levels we have seen since February. As you have seen, the charge-offs is reported in our monthly 8K filings are very volatile. This is generally due to having such a short measurement period. For example, monthly charge offs can vary dramatically while the number of process engaged are cycle based in a given month. These anomalies average out over longer periods of time, which is one of the reasons the quarterly results are much less volatile.

Based upon current delinquency trends, we continue to expect net charge-offs for the year to be between 5.1 and 5.5%. During the quarter, World's Foremost Bank recorded an $8.5 million benefit due to an increase in the valuation of our residual interest and credit card receivables. The increase in evaluation is a result of updating key economic assumptions, factoring in a higher interest rate and fees to take effect in August, offset by the expected impact to the new credit card legislation. This gain is represented in the other income line on the non-GAAP disclosure located on the last page of our earnings release.

With respect to liquidity, in early June, we renewed our $225 million commercial paper conduit with Wachovia Bank. We expect this renewal along with our current cash balance and existing term securitizations will provide sufficient liquidity for World's Foremost Bank through June of 2010.

As we look forward, we expect to complete another term securitization later this year and renew our other commercial paper conduit in the fourth quarter. We feel very comfortable with our liquidity position and have been encouraged with what we're seeing in the term securitization market. Recently TALP securitization deals are getting done with tighter spreads that we experienced in April and securitization deals are getting done outside of TALP. As a result, we would expect lower borrowing costs when we complete our next securitization.

As many of you are aware, the FASB has approved changes to securitization accounting requiring consolidation of credit card securitizations in the first quarter of 2010. Absent any regulatory change, this will require bank securitized credit card receivables to be subject to increased capital requirement. The additional capital requirement for World's Foremost Bank will be between $160 million and $200 million. Given 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 over time.

We have spent considerable time reviewing about debt covenants as it relates to consolidation and credit card securitization. In our revolving credit agreement, World's Foremost Bank's liabilities are already excluded from the financial debt covenants. Therefore, we do not believe that we have any covenant issues that are related to the consolidation of the receivables. This agreement does however limit Cabela's additional investment in the World's Foremost Bank to $75 million of which we have already invested $25 million.

To the extent the regulators do not provide a transition period related to capital requirements, we may ask our credit agreement banks to waive this limitation or World's Foremost Bank could issue preferred equity to a third-party to meet the capital requirements.

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

Tom Millner

Thanks Ralph.

Again, we are very pleased with our solid second quarter results and our improvements in controlling cost and improving operating efficiencies as well as strengthening our balance sheet. We remain confident our profitable multi-channel selling platform, strong brand and superior customer services are a competitive advantage, unmatched by anyone in our industry, and it will serve us very well for many years to come.

With that operator, let us open the call for questions.

Question-and-Answer Session

Operator

Thank you. Today's question-and-answer session will be conducted electronically. (Operator instructions). We will take our first question from Rick Nelson with Stephen's.

Rick Nelson – Stephen's

Thank you. Good morning. Congratulations.

Tom Millner

Hi, Rick.

Rick Nelson – Stephen's

Can you tell me where the $8.5 million gain landed in the segmented results for operating income?

Ralph Castner

Well, yes, initially it is in the financial services revenue, but as you know, we allocate profits to the other two segments to the extent that the profitability exceeds the 2% return on assets. So ultimately, those would – the profit aspect of that, a portion of that would have shown up in the other two segments, although I will tell you and I can get the numbers for you, Rick, but the profitability increases we saw in the other two segments were not driven by the impact of the bank. The marketing piece of the retail segment were up 1.7 million and the direct business were up 1. 3 million relative to the year ago period.

Rick Nelson – Stephen's

Okay. Thank you for the clarification. Also interested in taking a look at comps, you pulled out the gun and ammo business how the comps would have looked in the quarter?

Ralph Castner

Rick, as you know, several of our categories had been impacted by external macro economic factors, namely gun, ammo and power sports. I think what was encouraging during Q2 was that if you exclude all of those categories the comps for the quarter would have been up almost 1%.

Rick Nelson – Stephen's

And how of those categories produce the slowdown that you're indicating, what sort of comp do you think we should look for over the remainder of the year?

Ralph Castner

Well, I think what we said was guns are decelerating to no one's surprise. Ammo remains very strong and I think as we provided our outlook for the future we baked all that in knowing that we were going to have big comps in guns in Q4 and our outlook reflects at this point in time how we view the rest of the year.

Rick Nelson – Stephen's

Thanks. And I know that guns are low-margin category, how about the ammunition business?

Ralph Castner

It is also a low-margin category.

Rick Nelson – Stephen's

Okay. And so the margin improvement that we saw in the quarter, merchandise margins, I would suppose would be sustainable in your mind given the mix shifts there in particular?

Ralph Castner

Well, let us talk of about margins a little bit. Margins were improved as a result of a host of a number of things, the most important of which in my mind is that we are running the company on less inventory and you're aware of the improvements that management has made over the last year. Having less inventory and having more inventory of the right stuff just leads you to make a lot less dumber decision quite frankly. So it results in more efficient backrooms, let's non selling labor, fewer markdowns, and all of those areas certainly helped us in the quarter. We also got some pickups from fuel cost and better promotional cost utilization from our supply chain. I would tell you that one of the areas – I am pleased with all the metrics performances we had during the quarter but I think one area where we still have a lot of work to do is in the area of growing margins consistently over time going forward. But I am pleased with the progress that we made in the quarter.

Rick Nelson – Stephen's

Great. Terrific quarter. Thanks and good luck.

Operator

We'll take our next question from Reed Anderson with D.A. Davidson.

Reed Anderson – D.A. Davidson

Good morning guys.

Ralph Castner

Hi, Reed.

Reed Anderson – D.A. Davidson

Good quarter also and add my congrats. A couple of questions, we will start with Pat. Pat, I was curious if you look at, if you just look at payroll for example, just kind of high-level, is your sense that, is your Cabela's branded product, is that performing would you say better or worse on a year over year basis versus the bigger brand or the more national brands or international brands like Columbia, North Face, Underarm and stuff like that, which of those buckets will be performing better?

Pat Snyder

You know it depends on what channel and really what retail stores, they will fluctuate by our direct business. We take our catalog customer is very well focused on Cabela's brands and buys a lot of Cabela's brand product out of catalog. In our retail stores, if we see the more urban markets, we tend to have a lot more competition in those markets. The customers aren't as familiar with Cabela's brands, so naturally they will buy more of the national brand products.

Reed Anderson – D.A. Davidson

Okay. That makes sense. But so really it depends – but in the stores, probably is it safe to say that just on a trend basis maybe the brands are going to do a little bit better than the Cabela's or is that – am I not…

Pat Snyder

I don't know if we can make that assumption, Reed.

Reed Anderson – D.A. Davidson

You can't, okay. How about then if you look at the footwear category, another curiosity I had was you know some people talking about a little bit of a rebound and some of the boot business related to some brands and who knows but if you look to your business in footwear, Pat, in terms of boots versus more casual or trail type of product, which of those buckets would you see performing better for you guys right now?

Pat Snyder

Well actually you know the hiking shoes and trail shoes would be performing better in the spring summer season. The boots will really come in the fall with the hunting categories really, increase in the hunting business in the fall.

Reed Anderson – D.A. Davidson

But relative to expectations would you say the same thing as well at this point? I mean just back out the seasonality, would you still say the same thing that even through it is seasonally weak of boots you've still seen better performance out of a casual?

Pat Snyder

You know I don't know if I can give you the answer to that, Reed. I don't think we see a lot of difference either way.

Reed Anderson – D.A. Davidson

Okay, that is fine. Just curious. And then on the real estate write down, Ralph, what does that look like that roughly $12 million, I mean what is that as a percent of what you might have paid? I mean how big of a differential is it to take the down versus what you might have paid, just curious?

Ralph Castner

Well I mean it was substantial but it was a substantial percentage, but part of that is we have begun to do a lot of construction on the site, which obviously did not enhance the value in the long-term and, that part of what we are writing off too. So I mean it was a meaningful percentage but I'm not sure – I don't remember if the numbers off the top of my head, but it was significant, but I'm not sure even if you have the numbers it would be that helpful to you.

Reed Anderson – D.A. Davidson

Okay, good. Tommy, I'm curious, we all saw a lot of the newer, smaller prototypes, that sort of thing, just curious kind of your earlier take on the results there, I mean obviously it is you probably made many changes between now and whatever but what is your thought on boosting the return on invested capital and making the store more productive based on that smaller format, what you see today?

Tom Millner

Reed, we really like what we see in Billings. Our only caution would be we are still in the opening of the store phase but our customers are enjoying shopping in Billings and we couldn't be more pleased at this point and I think it speaks to lower some cost to build the store and it just looks really good so far.

Reed Anderson – D.A. Davidson

Okay, all right. And then also curious given your background in the ammo business, I mean any sense there that we're going to start to get a little more supply coming in, I am sure you are having a lot of conversations, but still backward on a lot of the stuff, what is your sense of when that is going to improve on the supply side?

Tom Millner

I wish I had the answer. First of all, it is fuzzy there, just when we start making a little headway in one area of ammunition, we get backed up in another part of the business. So I frankly don't know. We have developed some alternate sources and that could help us going forward but the point that really loosens up is beyond me because the demand is still very, very strong.

Reed Anderson – D.A. Davidson

Okay, fair enough. And then just one more, and this is probably for you, Tommy, or maybe even Pat, but I just got here one of your latest books, I think it is a 100 page fall book, and what I really like I guess is the format has changed and you have kind of gotten rid of a lot of the text and the small descriptions and the stuff, and it is really more just pictures, prices and basic descriptions. And I guess is that an effort, is that what we have seen in the numbers, both in terms of reducing cost, but also a way to really drive people if they want more information to complete the transaction to the web, I mean can you talk a little bit about that, what you – how we should think about that?

Tom Millner

Sure. It is an effort to help reduce cost and as we look at mailing a master catalog out to these customers or a small version, we constantly test what is going to be more effective to driving customers to our Internet site, into the retail stores. And this is just one of those efforts that you are seeing. It is something we continue to refinance as we go through the course of the year and look at our catalogs and how we can increase sales and reduce costs by testing new ideas.

Reed Anderson – D.A. Davidson

It looks great. So good. Well, I'll let other people jump in, but good luck.

Tom Millner

Thanks.

Operator

We will take our next question from Jim Duffy with Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

Thanks everyone and nice quarter. Question for you Ralph, to what do you attribute the decline in delinquencies? You know with unemployment rates continuing to climb, one might be inclined to think it will be going in the other direction, have you purged the portfolio of high risk receivables, is that part of the dynamic?

Ralph Castner

Well, yes. First of all we have on the overall unemployment level it does seem like at least it is not accelerating as fast and we are seeing fewer new filers and those kinds of things. But I think the real issue and the bigger issue is it is just a testament to our bank management, their ability to manage credit lines on those people who we think are going to go bankrupt and trying to get the credit lines down and yet keep them high for our best customers. I think it is a tribute to the quality of our management team at the bank.

Jim Duffy – Thomas Weisel Partners

Okay. And then the difference between the master trust data and the quarterly data if I remember correctly on charge-offs is related to what you actually collect after the debt has been written down?

Ralph Castner

Well, that is one difference. There is a lot of them.

Jim Duffy – Thomas Weisel Partners

Can I ask you to remind us of those please?

Ralph Castner

Well – oh, yes, well, there are – there is – well, first of all, the way you are doing over the aggregate, there is two. There is the recoveries and then there is the way that we account for finance charges and fees. In the master trust data, I believe that data is not included in the – that is not included in the bad debt but when you write it off for the financial statements, we include it in the bad debt. My real comments in the script having to do with timing. We can charge off a credit card in the time it cycles and when you look at some of the monthly data, you can have more cycles in month or another, but as you go through quarters, a lot of that data sort of normalizes. So my point was you're going to see a lot more volatility in the monthly data than in the quarterly data.

Jim Duffy – Thomas Weisel Partners

Okay. And then there were comments in the press release about gaining on the competition, benefiting from competitive weakness, can you may be throw a little more detail specifically on where you are seeing benefits, both regionally and in merchandise categories?

Tom Millner

Yes. I will be glad to. I think as everybody is aware we have had two of our large competitors, one actually filed for bankruptcy and liquidated. The other filed for bankruptcy and has a reorganization plan. During this period of disruption, we were clearly, when we look at just the gun data that we mentioned in the script, there is no question in our minds that we are gaining share, not just share where those companies had stores that no longer exists that we were able to directly capture. But on a broader scale, there's just a lot of – with that many stores out of commission or closed outright, we certainly gain advantage. And it was – we feel pretty strong that except for those areas like power sports and marine categories that are just hurt by the macro economy, we feel pretty good that we gain share across the board.

Jim Duffy – Thomas Weisel Partners

Okay. And then I just returned from the outdoor retail store, there was a lot of enthusiasm about the kind of staycations type merchandise, as you look towards the second half of the year and some of the categories that become more important in the second half of the year, what are some of the areas in your merchandise mix that you are enthused about?

Tom Millner

Well, as we mentioned, we definitely saw improvements in camping. There is certainly some trends that many of you follow in fishing license sales and some of the areas of the country where we have stores and high penetration in our direct business that are clearly benefiting from people staying closer to home and we are clearly aware of that. We certainly hope we are going to have a good hunting season although w are weeks away from knowing exactly where the consumer is there. But staying closer to home will be beneficial just from a good hunting season standpoint.

Jim Duffy – Thomas Weisel Partners

Great. Thank you very much. Good luck.

Tom Millner

Thanks.

Operator

We will take our next question from Kristine Koerber with JMP Securities.

Kristine Koerber – JMP Securities

Yes. Hi. A couple of questions. First of all can you just remind me when you started to see the bump in gun sales last year, was it end of third quarter, fourth quarter?

Ralph Castner

It was the day after the election, at eight o'clock in the morning.

Kristine Koerber – JMP Securities

Okay. CapEx, are you still planning on CapEx to be 40 million to 50 million for the year?

Ralph Castner

Yes.

Kristine Koerber – JMP Securities

And how should we think about CapEx going forward?

Ralph Castner

You mean for 2010?

Kristine Koerber – JMP Securities

Yes.

Ralph Castner

You know I'm not sure we have finalized all our thinking around 2010. We're just beginning that process. I mean I guess as I think about it at a high level, a similar number seems reasonable, but we have got to go through that process and decide exactly what we are going to do.

Kristine Koerber – JMP Securities

Okay. And then just lastly as we look at the hunting category, if we exclude both pieces of it, can you give us some idea on the breakdown of the mix, the guns, ammunition, camping, fishing et cetera?

Tom Millner

I'm not sure I understand your question.

Kristine Koerber – JMP Securities

I'm just trying to get an idea how if we exclude the boats, how the hunting category in general, how much of it, guns, just basically guns, ammunition, camping, what the biggest pieces of the category are?

Tom Millner

Let me say it this way. If we look at total comps and just take guns out, comps were up slightly. If you take guns and ammo out, leave boats in , we are down slightly. And then going beyond that, it is just – we're not going to go category by category and hope you understand.

Kristine Koerber – JMP Securities

Okay. Thank you.

Operator

(Operator instructions). We will take our next question from Mark Smith with Feltl and Company.

Mark Smith – Feltl and Company

Hi guys. Sorry if I repeat a question here, I'm bouncing between calls. Can you just give us an update on the performance of the next generation stores?

Tom Millner

Yes, actually you did miss that. The Billing Store, we continue to be very pleased. We are now almost 90 days in, we opened in April or May, and we continue to be very pleased with the productivity of that store. All of us in the company like the format a lot and we're very pleased that our customers in the Montana Wyoming markets they are telling us that as well with their purchases.

Mark Smith – Feltl and Company

Okay. And looking at positive results from next gen stores, what would the turnaround time be if you found a decent location today for next gen stores, what is the timing like before you could get one open?

Tom Millner

It really depends. If we were to go to a piece of what I will call recycled real estate, it could be an existing building where a company had gone out of business. It could be relatively quick if we built a Greenfield site, it is a much longer time horizon, say 18 months. But if there was a recycled piece of property, six months.

Mark Smith – Feltl and Company

Okay, perfect. And then I believe my last question can you just talk about any opportunities for continued SG&A saving outside of what we have seen thus far?

Tom Millner

Just the mindset that I have, there are always ways to do things better, more efficiently, at lower cost.

Ralph Castner

And I don't know – Tom, I'm sorry to jump in, but Pat and I know you were and I know you were not on part of the call, but Pat got a question earlier about catalog productivity and how we're driving revenue per page. That is a huge opportunity, along with continuing to better manage labor in the stores. Those are big drivers.

Mark Smith – Feltl and Company

Okay. I think that does it for me. Thanks.

Tom Millner

Great, thanks.

Operator

We will take our next question from Paul Lejuez with Credit Suisse.

Paul Lejuez – Credit Suisse

Hi, guys. Paul Lejuez.

Tom Millner

Hi.

Paul Lejuez – Credit Suisse

Hi. Can you maybe give a little bit more color on the trends throughout the quarter from a comp perspective maybe by month?

Tom Millner

Yes. I think they were pretty consistent through the quarter.

Paul Lejuez – Credit Suisse

And is the – are you seeing similar trends in the start of the third?

Tom Millner

Yes. The trends that we saw Paul in Q2 definitely extended into July but I don't take a lot of comfort from that because the fall selling season doesn't kick off for two or three more weeks when the dove start flying. So the it is kind of a stay tuned message.

Paul Lejuez – Credit Suisse

Right. Tommy, do you think that there may be some aspect of having pulled some sales forward from what would normally happen during the hunting season whether that would be on the firearms or ammo side, could we be up against that eventually?

Tom Millner

No. there is not enough supply in ammunition and I certainly don't sense it in any other categories.

Paul Lejuez – Credit Suisse

Got you. And Ralph, when do you expect the charge off, I guess it is called on a quarterly basis to stabilize? I was trying to figure out what you guys are thinking for the back half of the year, do you expect that line item to continue to edge higher?

Ralph Castner

Yes. I think that is pretty clear from our guidance. You know, we say we're going to be 5.1 to 5.5, which is slightly higher than that we are today. So yes, I think it is going to continue to go up but at much slower pace than what we have seen historically. The charge-offs, actual charge offs year to date are 4.98%, so yes, we said we're going to be 5.1 to 5.5, so that would be up slightly.

Paul Lejuez – Credit Suisse

Got you. And can you maybe provide – I don't if you have this data handy – the percent of total sales in the second quarter that were non cash reward points sales versus last year, just wondering whether or not people are using reward points to a greater degree?

Ralph Castner

You know I don't have that data. I do know from looking at the balance sheet that the outstanding rewards points in credit cards are down year over year and that is due to two phenomena. And in no particular order one of which is people are just spending less on their credit card which means there are earning fewer points but also we have seen a shift away from people buying gift certificates and actually just outright buying gifts and that has caused that outstanding liability to be down.

Paul Lejuez – Credit Suisse

Got you. And from an inventory perspective, where are you guys cutting back the most in the second half?

Tom Millner

I don't think Paul there is any one area that we are focused on. I think it is a holistic approach to just get more efficient, drive our assortments much closer to the market. I can tell you that our SKU rationalization program is ongoing and it is also serving to help us pull inventories down, but it is a holistic approach to the business.

Paul Lejuez – Credit Suisse

Got you. And then just finally it sounds with the comp results seemingly being driven by guns, ammo, which are lower margin items for you guys and categories, the fact that gross margin is up year-over-year, I'm just wondering if that is a function of prices on like items being higher, maybe less discounting or is most of that coming from the cost side?

Tom Millner

I don't know. You might not have been on the call when I answered this question earlier but margins were up due to a host of things that just range from fewer markdowns less discounts. I think we told you guys that we had a very clean spring roll. Pulling inventories down over the last year has certainly helped in all of those areas and we had a few little guys like fuel was favorable and we got improved promotional support in co-op from our supply chain. And it is – the margin improvement across the merchandise categories spread in 11 of 13 of our categories, so it was broad based.

Paul Lejuez – Credit Suisse

How much of the improved co-op contributed?

Tom Millner

A very small amount.

Paul Lejuez – Credit Suisse

Got you. Okay, thanks guys. Good luck.

Tom Millner

Thanks.

Operator

We have no further questions at this time. I'll turn the conference back over to Mr. Chris Gay.

Chris Gay

Thank you for joining us today, and look forward to talking to you again soon. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.

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Source: Cabela's Incorporated Q2 2009 Earnings Call Transcript
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