Cabela's Incorporated (NYSE:CAB)
Imperial Capital’s 7th Annual Global Opportunities Conference Call
September 19, 2013, 10:00 AM ET
Ralph Castner - Executive Vice President and Chief Financial Officer
Scott Williams - Executive Vice President and Chief Marketing and E-Commerce Officer
Lee Giordano - Imperial Capital
Lee Giordano - Imperial Capital
Good morning. I'm Lee Giordano. I'm the consumer retail analyst here at Imperial Capital. And on behalf of Imperial Capital and myself, it's my pleasure to welcome those to our 7th Annual Global Opportunities Conference. And with us from the company today is Ralph Castner, EVP and CFO; and Scott Williams, EVP and Chief Marketing Officer.
And with that, I'll hand it over to Ralph.
Great. Thank you. As Lee said, I'm joined today by our Chief Marketing Officer, Scott Williams. Scott and I will both be able to answer questions at the end of the presentation. I want to spend about 15 to 20 minutes here just giving you guys an overview of Cabela's, and then we can spend some time with questions as we wrap up.
I will dispense with the reading of the forward-looking language, I'm sure all of you are familiar with that. I want to spend a little bit of time today talking about why Cabela's has outperformed the market so significantly for this last four years and why we think we can expect this performance to continue into the future.
Really, over the last four years, Cabela's stock has increased to the unbelievable 365% compared to the S&P retail index, which has increased to 141%; the S&P MidCap, which is up 97%; and the overall S&P 500, which is up 72%.
And how we've done this is really by a four-pronged approach. First is, really we spent some time, I'll go into this a little bit, back in 2008, 2009, focusing on the fundamentals of our business and working on every aspect of our business to try to improve it. Secondly, it's created a dominant channel -- a dominant omni-channel model.
For those of you who aren't familiar with Cabela's, Cabela's was started in 1961, primarily as a catalog business by Dick Cabela, out of his home in Chappell, Nebraska. That business over time has grown to be the dominant direct player in the businesses and has really morphed from a great catalog company to a great online business. We'll spend a little bit of time talking about this.
Then given our confidence in improving the fundamentals of our business, we really accelerated our retail footprint rollout into the future as we've designed, more productive stores, and we were pretty confident to get returns on capital for our shareholders that are attracted. And lastly, I want to spend some time talking about our unbelievably good loyalty program, which is a real leader in the industry.
So first, let's talk about focusing on fundamentals. And to give you a little bit of history on this, in 2003, we opened a store in Hamburg, Pennsylvania, that was 250,000 square feet just over $400 a foot. It was an unbelievable success. Huge store, it's about two hours here from New York City, if you've ever been there.
And it was either the greatest decision or the greatest mistake we ever made, because it was so unbelievably profitable. We naively thought, hey, this is easy, and just build a bunch of really big stores and everybody is going to show up. Well, that worked great, until we got -- built about three of them.
And we had a couple of stores that did half as much as our store in Hamburg, and we realized that we had a problem, and we really spent some time then in 2007, 2008, redesigning the store format that was either a 125,000 or 100,000 or 80,000 square feet, and at the same time embarked on a mission to really improve the profitability of our existing stores.
A lot of these stores we hadn't developed the retail expertise to really run them well, and before we just made and rolled out a new format, and want to rely entirely on the confidence of that new format to get us going, we wanted to make sure that we've seen some improvement in some of our base stores. So, we pulled apart every line item in the P&L, worked on improving sales per square foot and all the expense metrics as a percent of sales until we got comfortable that we can expand retail well.
As I'll show you in a little bit, we now feel comfortable that we have those metrics in place and really have for a couple of years, and made a decision to accelerate retail to the point that in 2014, we'll be opening 14 stores across the U.S. that compares to as approximately 10 stores in 2013.
All of this improvement in retail profitability along with our card business has really accelerated our earnings per share over the last four or five years, where they're now -- it's almost tripled over the last three or four years, and both cleaning up our balance sheet, opening new smaller stores and increasing profitability has led to really accelerated return on invested capital.
So, let's talk about the merchandise margin. Back in 2009, as we were tearing apart every line item of the P&L, we knew that for a retail store to be profitable, we needed to get 200 to 300 basis points of improvement in merchandise gross margin, and how we did that? Our merchandise processes are either for better or worse was designed by a great catalog company.
And what I mean by that is, basically what we do is we buy a whole bunch of merchandise and keep running and catalogs tell it was done, and quite frankly there was no cost there other than to print a new catalog. As we hit more and more retail stores, what we learned obviously in retailing, there's a significant cost being wrong in inventory, because then you'd have to mark it down or move it out.
So our merchandising teams went to develop our merchandise plans, based upon the selling curve they can expect in each of their products and did a much better job of managing markdowns, where we saw this roughly 200 basis points improvement between 2009 and 2012, and then so far in 2013, we've seen another 70 basis points improvement on top of that.
And then all of our efforts, including improvement in merchandise margins as well as the improvement in SG&A at the store level has led to significant increases in retail profitability. You can see -- and by the way, a four-wall contribution of 11.7% may seem like an impressive number to you until I share with you that in addition to that we've got overhead costs that primarily include distribution cost that run about 10% of sales.
So, if you go back in 2009, the four-wall profitability of our store was about 11.7% and we are running 10% over that -- 10% in addition to that in overhead. So we are basically barely breaking even in retail. And then really without -- there is not a whole lot of new store growth until you get to 2012. We were able to improve our retail profitability by almost 700 basis points between 2009 and 2012.
Then you'll see so far this year, year-to-date through June 2013 compared to 2012, we're up another 230 basis points, so increasing retail profitability is one of the reasons we feel confident in our store rollout strategy. So beginning really in 2000, I think we opened one store in each of 2009 and 2010, we slowly started to accelerate retail growth as we felt more comfortable about our own retail profitability and the fact that we could get an appropriate return on capital of these new stores.
So these next two slides are maybe two of the most important that I discussed in my presentation today, but if you look at our 28 legacy stores, they are open for the full year of 2012. Those stores were doing $345 of sales per square foot, and the four-wall profit per square was $56, where if you look at just the last five stores that we opened into our next generation store format, those five stores are doing sales of $498 a square foot and the four-wall profitability of $91 a square foot.
Now, I'm sure I'll get a lot of questions today, but what I am most interested in, as I look at this company is what -- as we enter more and more of these new stores into the base, how is the productivity of those stores behaving.
Now, what you will see as you go to the next slide, as I look just at Q2 of 2013, we now had a total of 12 of our new stores open, because we'd open them either in 2012 or early in 2013. We now have 12 of the new stores as compared to 28 of the legacy stores and sales per square foot just for the second quarter were $119 a foot compared to the 28 base stores of $79 per square foot or an amazing 51% better, and from a profit standpoint, those stores are doing 69% better.
So we feel really comfortable with these stores as we're continuing to roll them out and are on the pace to open about 1 million square feet of new retail a year, starting in 2014, which represents about 14 stores per year. All of this improved what we had in retail, in our card business, which we'll talk about in a little bit, led pretty significant increases in earnings per share.
If you see back in 2009, our earnings per share were just $1.36. Through the full year of 2012, we've increased those earnings per share to $2.72, and then even in 2013, we've seen pretty impressive improvement from $0.87 a year ago to $1.32 for the first six months of this year.
As I alluded to earlier, one of the things we did back in really 2011 and 2012 is clean up our balance sheet. We still had more real estate than we needed. We had a couple of subsidiaries that we disposed of, but mainly through the improvement and profitability that we saw in retail combined with the smaller stores, we have pretty significant increases in return of invested capital, increasing from 11% in 2009 to 15.8% in 2012, and we're continuing to see increases as we move into 2013.
As I said earlier, the real heritage of our business is in the catalog business, which then moved into the online business. And up until two or three years ago, we treated those items as unfortunately separate businesses. We haven't rolled out a lot of technology, for example in store pick up where you can order online and pick up in the store or have kiosks in the store.
We've really morphed over the last two or three years to a real omni-channel model, where we market to our customers through a variety of means, really put the customer in the centre of the decision and let them choose how they want to deal with this. One of the technologies we're rolling out right now, which is pretty interesting, is omni-channel fulfillment.
And it's interesting, because I've heard Macy's talk about what they're doing about filling direct orders from the stores. They think about it, at least what I am told is a way to really save freight costs. We see it a little different from that. We see it as a way to really enhance the value to our customer and increase sales. What happens today is if you order a product from Cabala's and we don't have it available in the distribution center, we pull it off the site, even though the product might be available at the store to them.
So what we're doing here is giving visibility to all the inventory we have, not just in the distribution center, making it available to our internet customer and then to the extent that product is not available in the distribution centre, but is available on the store, we will actually box the product up in the store and mail it to you directly from the store. So, we see it as a sales enhanced initiative, not necessarily as a freight saver.
Touching a little bit on ruling out retail square footage as we talked about back in 2009 and 2010, we're still in the process of really improving our base retail profitability. We had this new exciting next-generation store format, but we wanted to be careful as we rolled it out, so we really rolled out just one store in each of 2009 and 2010, but you see beginning of 2011 and 2012 and into 2013 and 2014, we really accelerated the number of square feet. We're at the point today that we think about 1 million square feet per year is the appropriate number to rollout.
And what's the real gatekeeper on that if you will is Cabela's has got a great brand in the outdoor space. So, we want to make sure we preserve that relationship with our customer. To make sure that we can assure our customers that when they visit us in the store that the people inside the store are going to give them the customer experience that they expect.
But we think at 1 million square feet per year, we can still deliver on that expectation of the store. If we build any faster than that we're afraid we might comprise that experience in the store. So 1 million square feet feels like the right number, probably from 2014 through 2017.
This is our store opening schedule for both '13 and '14. The first six stores are our next-generation stores, either 80,000 or 100,000 square foot stores that were open in 2013. All of those are now open. We would be opening our two stores in Denver in August of 2013.
The next two stores and we are expanding also in Canada where we think we've got unbelievable opportunities. We're actually opening our second Canadian store this week in Regina, Saskatchewan. As part of our store rollout, we've designed a smaller 40,000 square foot format for smaller markets across the U.S. where the population might not be as high, but the percentage of people who participate in hunting, fishing and camping is really high. We've opened one of those stores earlier this year in Saginaw, Michigan. We have two more yet to come in October in Waco, Texas and Kalispell, Montana.
So as we look forward to 2014. We're going to open eight of our next-generation stores in Greenville, South Carolina; Anchorage, Alaska; Christiana, Denver; Woodbury, which is a suburb of Minnesota; Cheektowaga is just outside the Buffalo; Tualatin is near Portland, Oregon; Bristol, Virginia; Acworth, Georgia, which is in the Greater Atlanta area.
We're going to try to open three stores in Canada. We're still finalizing one more site in Canada. We'll open it in at Edmonton, Alberta and Barrie, Ontario. And next year, we'll open three outpost stores in Augusta, Georgia; Lubbock, Texas and Missoula, Montana.
Mike alluded to this earlier, but I want to spend just a little bit of time talking about our Cabela's loyalty card. Think about this card as an airline card, where you are in 1% back -- it's a Visa, MasterCard that will be used anywhere, where you're 1% back on your non-Cabela's purchases and up to 5% back on your Cabela's purchases.
Our former CEO had a saying about why this worked so well. It's rough, it's really easy, because guys want the credit card and earn the free points, so they don't have to tell their wives how much money they spend on Cabela's. And this has turned out to be a very, very strong program. It's about $17 billion annually charged on Cabela's CLUB Visa Card, at any point in time, outstandings in the card run about $3.5 billion. This is a program that we manage in-house out of our credit card operation late in Nebraska.
One of things that really makes this work is our average FICO score is 793, which I don't how much is used to study FICO scores. That's a phenomenally high FICO score and it really goes to the power of the brand and our ability to track that high-end customer to our brand.
29% of our sales are on our card. And probably the greatest gee-whiz fact of all this is that 1% back on the non-Cabela's spend and up to 5% back in the store, that results in our customers in 2012 earning $190 million of free merchandise or almost 5% of our total sales, our free rewards within our customers earning on our card by using it, by using it elsewhere.
So thinking about where we're going, what we're going to do in the future, why do we think this performance is going to continue. Well, as we discussed we've got substantial unit growth opportunity. We will open -- we will have open at the end of this year 50 stores. Open in a pace of roughly 14 a year.
We believe that through the U.S. and Canada, there is room for a total of 225 stores or basically we've got 10 years of runway at a pace of opening 14 stores per year. We're going to continue to make investments in our omni-channel model. One example we just gave -- we gave of this omni-channel fulfillment that we're in the process of doing now. As we look forward to the future, we're going to spend more time investing in new technologies like mobile.
Our Cabela's CLUB Visa Card is going to continue to grow as we rollout retail square footage. We're rolling out business at about 12% to 14% annually. And as you model out with increasing square footage growth, we think that's a sustainable rate for a number of years into the future.
When Scott first came on Board of Cabela's, one of the things he shared with me that amazed me, was how strong the Cabela's brand in merchandise is. Almost 30% of our sales internally are done on our own branded merchandise, which represents about $1 billion in sales of our own merchandised that we do in-house.
And then lastly, we've got a really strong and powerful balance sheet that will allow us to fuel growth in the future. I talked a little bit early about, we've got a potential for 225 stores, had 40 stores open at the end of 2012. We're going to continue to open these stores. And our stores in Canada are doing unbelievably well. So we think it's a real opportunity to continue to fuel growth for us.
Our omni-channel model continues to work very, very well. We've got some investments we need to continue to make there. We do believe that business is about $1 billion. We think our next biggest competitor in sort of the online space does about $200 million. So as I'd think about growth in that business, it will be somewhere between flat to a small amount of growth in that business. But that's clearly a mature business that most of our growth in the future coming from retail expansion.
This Chart just goes to demonstrate the relationship between square footage growth and growth in our Cabela's CLUB Visa accounts. Even in years that we didn't have great square footage growth, we are able to grow our Cabela's CLUB Visa program by about 6%.
That is correlated to square footage growth, but there is really a lag, as it takes those stores a little bit of time to really be contributors to new account growth. But you can see, we've been able to increase account growth in 5.9% in 2010 to 11% in 2013. And we think that 11% number is sustainable for a fair amount of time.
To touch a little bit on our Cabela's brand and products, it's about 30% of our assortment. The margin there is 800 basis points to 1,200 basis points stronger than the rest of our product category. And it really provides us with the strategic advantage against other online internet players that are selling the similar kind of products, but they can't match our Cabela's brand.
And the Cabela's brand is really an icon in the outdoor space. If you talk to anybody who hunts or fishes and participates in the outdoors, they are very familiar with our brand and it's recognized as a world leader.
Finally, I want to end up with our great balance sheet. We have been generating roughly $300 million a year from cash flow from operations. The parent company's debt -- the parent company capital structure looks like only about $300 million of equity -- $300 million debt and about $1 billion of equity, so if we need to, there is quite ability to continue to leverage our balance sheet.
But even as we look forward with opening 1 million square feet a year, we think our CapEx requirements are going to be about $450 million relative to cash flow from operations and about $350 million. So we'll need to borrow or financial externally about $100 million a year of external financial for each of the next two years. And we think that's very manageable, given our current capital structure.
So with that and we've got about four minutes left. Scott and I will be available for some questions, if you guys have got any questions, we would be happy to entertain.
Ralph, you talked a little bit about the competitive environment today and particularly with Dick's, when you coming out yesterday and talking about the expansion of the industry concept, how that might impact your growth plans if at all?
Well, I don't know if it is going to impact our growth plans a lot. I mean Dick's is obviously a great competitor and they've got ability to rollout a lot of stores in the future. We think we can continue to differentiate ourselves by being sort of the athletic leader in that space, providing great customer service on the floor and having a great assortment. So we'll see how we go. Scott, I don't know if you anything to add to that.
I would just add that a bit of one of exciting things about our retail growth is that a lot of this stores you saw opening Acworth, Georgia, Greenville, South Carolina, Anchorage, Alaska, those are not even close to where our current footprint is. So we're opening in areas that are not on top of our own source. And so we really haven't build out our domestic footprint. So we think there's a lot of runway.
Other questions? Great. Thank you very much guys.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!