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Cabela's Incorporated (NYSE:CAB)

Q4 2009 Earnings Call Transcript

February 18, 2010 11:00 am ET

Executives

Chris Gay – Treasurer & IR Manager

Tommy Milner – President and CEO

Ralph Castner – EVP and CFO

Pat Snyder – EVP and Chief Marketing Officer

Analysts

Reed Anderson – D.A. Davidson

Jim Duffy – Thomas Weisel Partners

Tom Shaw – Stifel Nicolaus

Derek Leckow – Barrington Research

Kristine Koerber – JMP Securities

Mark Smith – Feltl and Company

Paul Lejuez – Credit Suisse

Christopher Horvers – J.P. Morgan

Jim Chartier – Monness Crespi Hardt

Jonathon Grassi – Longbow Research

Operator

Good morning, ladies and gentlemen, welcome to the Cabela’s Incorporated fourth quarter and full fiscal year 2009 earnings conference call. At this time all participant 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 a question. (Operator instructions).

I would like to remind everyone this call is being recorded. I will turn the call over to Chris Gay, Treasurer and Investor Relations Manager. Please go ahead.

Chris Gay

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

With me on today’s call are Tommy Milner, 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 Web site including the information set forth under the captions “risk factors” and special note regarding forward-looking statements. Additionally this conference call will include certain non-GAAP measures. Please refer to our earnings release to find reconciliations of these non-GAAP measures to GAAP.

Now, on to the financial results. Let me first note that our fourth fiscal quarter and fiscal year ended January 2nd 2010 includes 14 weeks and 53 weeks respectively while our fourth fiscal quarter and fiscal year ended December 27, 2008 included 13 weeks and 52 weeks respectively.

For the quarter, adjusting for divestitures, consolidated revenues increased 5.5% to $918 million. Retail revenue increased 8% to $464 million and direct revenue increased 1.3% to $406 million.

During the quarter we reduced direct marketing cost of 4%. Direct marketing cost as a percent of direct revenue decreased to 14.2% as compared to 14.7% in the year ago quarter.

The impact of the extra week generated incremental $17 million of revenue in our Direct segment and incremental $34 million of revenue in our Retail segment, as it relates to the net income, the extra week accounted for $0.02 to $0.03 of earnings per share for the quarter.

For the quarter, financial services revenue increased 18.6% to $45 million as compared to $38 million in a year ago quarter. The increase of the financial services revenue was due to higher interest and other fee income.

As many of you already know our financial services subsidiary is on a true calendar year and therefore results are not impacted by the additional week. For the quarter we recognized impairment and other special charges of $52.8 million primarily related to the non-cash write-down to fair value of certain property and equipment. Excluding these items, for the quarter, diluted earnings per share were $0.77.

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

Tommy Milner

Thank you, Chris. Good morning, everyone. 2009 was extremely productive, as we met or exceeded nearly all of our objectives for the year. Accomplishments we’re particularly pleased with include for the year, we generated a record $294 million of cash flow from operations by tightly managing our balance sheet.

During the year, we divested two non-core businesses, improved working capital and significantly reduced inventory levels. Cash flows from operations significantly exceeded our expectations for the year.

In 2009, we reduced inventory levels $78 million compared with year-end 2008, ending the year with $440 million of inventory. This is the second consecutive year we reduced inventory levels as we focused more heavily on reducing aged and unproductive inventory. Inventory turns increased from 2.5 turns at the end of 2008 to 3 turns at the end of this year. We feel very good about our current inventory position and plan to focus on improving inventory turns through higher sales over the next several years.

The combination of strong cash flows and tightly managing our balance sheet allowed us to significantly improve return on invested capital for the year which is a key focus of ours. Return on invested capital at year end improved 150 basis points to 11.1% from 9.6% at the end of 2008. As we have previously mentioned, our long-term goal is to improve ROIC to achieve a 12% to 14% return on capital over the next several years and we’re confident we have sufficient opportunities to streamline operations and better manage our balance sheet to achieve this goal.

Another strategic initiative is improving retail profitability for the quarter and year, operating margins in our Retail segment increased 70 basis points as we improved labor utilization and advertising efficiency in our stores.

We realized the biggest improvement from improved labor productivity in our stores. Improvements in labor productivity are due to more streamlined flow of goods to our retail stores and better management of retail staffing levels. For the quarter, sales per labor hour increased 9.6%.

Improvements in retail advertising also contributed to operating margin improvements. For the year, retail advertising as a percent of retail revenue decreased 70 basis points. Improvements in advertising were due to increased localization of category-driven promotions, more effective broadcast placement and improvements in multi-channel promotions.

Another of our strategic initiatives is growing our retail business. For the quarter, comparable store sales on a like calendar basis decreased just 0.5%. We’re pleased with this result given the tough comparisons we faced related to the strength and firearms in ammunition in the previous year.

Over the past several quarters, we reported comparable sales adjusted for firearms and ammunition. Since we have now annualized the strong sales in these categories, there is not a material difference between the two metrics.

Currently, all signs point to a soft landing as it relates to firearm and ammunition sales. More importantly, a close analysis of the next data confirms that we’re significantly increasing our market share.

Our growth rate and firearm sales has exceeded the growth rate in firearm background checks in 23 months of the past 24 months. In fact, for 2008, and 2009, our growth rate in firearm sales were nearly double the growth rate of firearm background checks.

For the quarter, on a like calendar basis, handgun sales were down year-over-year, while long gun and ammunition sales increased. For the quarter, we also saw strength in archery, men’s apparel and footwear.

The improvements noted above give us sufficient confidence to move forward with accelerating a retail store expansion plans. As such we’re pleased to announce that we’re in the final stages of negotiations to open two new stores in the United States.

Both stores will be our smaller more efficient next generation store format and are expected to open in 2011. One in the spring, the other in the fall. Once negotiations are complete, we will announce the size and location of these stores.

Additionally, since our 2007 acquisition of S.I.R. Warehouse Sports in Winnipeg, Canada, we’ve been upgrading the infrastructure for further expansion into Canada. With these efforts well underway and the strong performance of our Winnipeg store, since its rebranding has revenue more than doubled in 2009, we’re excited to announce we’re in the final stages of negotiation to open up two next generation stores in western Canada also in 2011. Canada is a prime location for outdoor activities and we’re excited about our further expansion into this great market.

Another area of strategic focus is expanding merchandise gross margin. For the quarter, merchandise gross margins declined 120 basis points. As we disclosed last year, the fourth quarter of 2008 included an $8.7 million benefit due to a change in our estimate for gift instrument breakage. This change accounted for roughly half of the margin deterioration.

Additionally, we took a number of steps in the fourth quarter to liquidate on productive inventory. Improving merchandise gross margins represents the biggest opportunity to further improve retail profitability and we’re confident in our ability to expand gross margins over the next several years.

Now, let’s look at World’s Foremost Bank. We’re encouraged with the improvement in profitability at World’s Foremost Bank. Pricing adjustments have helped mitigate the financial impact of increased bad debts, and as a result, excess spread has continued to improve, a trend we’ve seen all year. In 2010, World’s Foremost Bank will be faced with new regulatory changes. And we’re confident we made the appropriate changes to help offset the impact.

As we’ve previously discussed, the FASB has approved changes to securitization accounting, requiring consolidation of credit card trust in the first quarter of 2010. As a result of these changes, World’s Foremost Bank will be subject to additional capital requirements of roughly $200 million.

Due to our strong cash flows, we ended the year with $211 million of cash on our balance sheet at the parent company. We are extremely pleased we’ve been able to raise the entire $200 million from cash flow from operations. Recently, regulators have approved a transition period of four quarters to raise the required capital. As a result, we now expect to make the required capital contribution to World’s Foremost Bank throughout 2010 rather than entirely in the first quarter.

Now, let’s talk about our Direct segment. For the quarter, operating margins in our Direct segment decreased 60 basis points to 15.9% compared to 16.5% in the same quarter a year ago. Operating margin was impacted by lower gross margin due to our focus on reducing inventory levels.

We again realized improved efficiency of direct marketing expenditures as we continue to deliver a more focused offering to our customers based on their buying patterns and behaviors. For the quarter, direct marketing costs were 14.2% of direct revenue as compared to 14.7% of direct revenue in the year ago quarter.

As we look forward to 2010 and beyond, we do not expect to be as aggressive in reducing catalog pages as we were in 2009. We will, however, continue to see a shift in spending from traditional paper catalogs to more electronic means as the internet continues to become a bigger piece of our direct business.

During the quarter, traffic to cabelas.com increased 11% on a like calendar basis. And cabelas.com remains the most visited Web site in the sporting and recreation industry.

In addition to the improvements we’ve seen in both our Retail and Direct segment, we also continue to benefit from improved distribution efficiencies. Improvements in distribution are being led by improvements in vendor compliance, better utilization of freight carriers, SKU reduction and better use of existing systems and automation. For the quarter distribution cost as a percent of merchandise revenue improved 20 basis points.

Before turning the call over to Ralph, I want to thank all Cabela’s employees who’ve really taken to heart our strategic initiatives to improve operations and efficiencies. Our success in 2009 is directly attributable to their hard work and dedication. And I sincerely thank them for all they do everyday to cherish and please our customers.

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

Ralph Castner

Thanks, Tommy. We’re very pleased with our fourth quarter financial results and as Tommy mentioned, significant progress were made in the areas of strategic focus.

Earnings per share excluding impairment and special charges for the quarter were $0.77 which exceeded our expectations. The impairment charges which are mostly non-cash are result of a comprehensive review of all our assets and which were written down certain property and land fair value. Special charges include restructuring charges as well as the change in the value of our interest-only strip (inaudible) associated with our securitized loans.

In regard to the change in value of our interest-only strip, new accounting regulations require consolidation of off-balance sheet securitizations effect in the beginning of fiscal 2010 will eliminate the recognition of changes and value of our interest-only strips and as such, we believe adjusting for this item provides more relevant comparison.

As Tommy mentioned for the quarter, we again reduced inventory levels. Reduction in inventory levels has been a focus of ours for the past 18 months and the results have exceeded our expectations.

In addition to improved inventory levels, we had success managing other areas of our balance sheet. Accounts receivable decreased $40 million year-over-year. Other assets are down slightly. We standardized payment terms of domestic vendors and have recently implemented 30-day terms in our trade letters of credit, all of which have significantly improved working capital.

All this helped us generate a record $294 million of cash flow from operations for the year. On a consolidated basis, we ended the year with $582 million of cash and cash equivalents and a spread of $410 million in the end of 2008. Cash available to the parent company at year end was $211 million as compared to just $8 million at the end of 2008.

In addition to generate record cash flow and ending the year with significant cash, we also reduced total outstanding debt. Total debt at year-end was $348 million compared to $380 million in the year-ago period. This is the second consecutive year that we’ve reduced outstanding debt.

Now, let me just discuss the effective tax rate. Due to our international activities, higher portion of our income was generated by our foreign entities, which have a lower effective tax rate. We believe this rate is sustainable and we expect our effective tax rate for 2010 to be 34% to 34.5%.

Now, turning to World’s Foremost Bank. During the quarter, average managed credit card loans increased 9.5% and average active accounts increased 7.4%. Both compared to the same quarter year ago. For the quarter, the average accounts balance increased 1.9%. For the quarter, net charge-offs at World’s Foremost Bank were 5.26% compared to 3.53% the year ago quarter. For the year, average net charge-offs were 5.06% in line with our expectations.

For the quarter, managed financial services revenue as a percentage of average managed credit card loans was 7.5% as compared to 6.9% in the prior year quarter. This is the third consecutive quarter that we’ve increased managed financial services revenues as a percent of average managed credit card loans. The increase is due to the pricing adjustments implemented over the past 12 months, as well as the introduction of our new VISA signature product, which has helped increase interchange income.

At year-end, the greater than 38 delinquencies were 1.78%, which is the lowest level we saw all year. Greater than 60-day delinquencies were 1.09% and greater than 90-day delinquencies was 0.56%. Despite the recent improvement in delinquency trends, we remain cautious as it relates to charge-offs. For the year we expect average net charge-offs (inaudible) 5.75% and 6.25% as compared to average net charge-offs of 5.06% in 2009.

With respect to liquidity, last week we completed a $300 million securitization. We expect the securitization along with our current cash balance existing term securitizations in the roughly $200 million capital contribution from Cabela’s to provide sufficient liquidity from World’s Foremost Bank through November 2010.

As we look forward we feel very comfortable with our liquidity position, and I have been encouraged with what we’re seeing in terms of securitization market. Given current attractive interest rates, as 2010 progresses, we may elect to lock an additional long-term liquidity at attractive rates, should net charge-offs turn favorable to our expectations.

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

Tommy Milner

Thanks, Ralph. Again, we’re very pleased with the significant improvements we realized in 2009 as a result of our strategic focus on improving profitability in our retail stores. Improving return on invested capital and improving profitability at World’s Foremost Bank while preserving the brand loyalty of our customers.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And first, we will hear from Reed Anderson with D.A. Davidson.

Reed Anderson – D.A. Davidson

Couple questions. I’ll start I think with Ralph on the bank side of things. The interest expense in the quarter was very, real favorable, very low versus what we were thinking. Is that a one-time stuff in there, is that favorable, is that what we should think about as we look out in the '010 those types of lower levels versus '09?

Tommy Milner

Hey, Reed, just a bit of color before Ralph answers the question. In our script, I hope it came through that I am very pleased with the progress that was made at the bank in 2009 given unprecedented changes in the regulatory environment. The team really did a great job responding, I think, appropriately to preserve profitability and at the same time balance the customer loyalty issues that we face. Ralph?

Ralph Castner

Reed, I’m not sure I give a lot of color, particularly, on where your expectations were for interest expense. I will comment that we’re, during 2009, have some relatively higher fixed rate term securitization that mature that at least this one we just completed was variable rate. So all of that in effect, obviously, last quarter. But there is an opportunity as you go forward to refinance those. I will tell you (inaudible) depending on how we do during the year and what an outlook on liquidity we may start later in the year replacing some of those with some longer-term maturities, just to lock in these low interest rates.

So, I guess, the answer is, there is nothing unusual in the quarter that caused an interest expense number to be lower and as far as 2010 goes, it easily can be there. The only thing that would push it up is if we lighten the maturities and some of our liabilities to try and lock in interest rates.

Reed Anderson – D.A. Davidson

Okay, that’s good. And then also looking again just through those line items in the financial services business, it looks like the piece you are recovering from a gross charge-off is lessening a little. The difference between the net and the gross seems to be a little bit smaller. Is that a trend as well?

Ralph Castner

I am not sure I can comment on that, Reed.

Reed Anderson – D.A. Davidson

Okay. And then, lastly, on the finance services piece, just to your guidance in terms of charge-offs, clearly, you’ve seen things level off here in '09 and the numbers you just put out, it’s a lot lower than what you’re guiding to. And are you just being little conservative or are you seeing things out there that make you think that’s going to jump 70 basis points or 100 basis points. Just some more color on that if you could, please.

Ralph Castner

I guess the answer is have they absolutely peeked? I am not sure they have, they could still get worse. Clearly, if they get worse as indicated by our guidance they’re not going to accelerate at the same levels we saw in '07 and '08. I think we feel pretty good about it. Could the guidance be a little high? As I have told you before and we’ve documented internally, it’s highly correlated unemployment.

If we see big drops in unemployment, you could find maybe there is some upside. I think unemployment is probably going to get little worse before it gets better. If we do see favorable trends on bad debts, it goes to my comments earlier that you may see us even more aggressively, lighten our liabilities and get more fixed rates liabilities which would be a big opportunity for the future.

Reed Anderson – D.A. Davidson

And then, Tommy, switching to you a little bit, you have had really good progress in terms of boosting efficiency and productivity, can we see similar productivity gains in the retail business this year or we’re just getting a lot of low hanging fruits from last year?

Tommy Milner

No, Reed, I think we still have lots of opportunity in our retail stores. We’ve done a lot recently. We had our first vendor summit in the history of the company actually, couple of weeks ago, in Denver, and our message to our top 50 suppliers was, we’re opening the Kimono with you from an information standpoint and I think that collaboration is going to lead to more truck to floor products, more efficient turn in the store, more help on fixtures and just being better merchants, regionalized assortments, so, I think we still have good opportunities ahead of us.

Reed Anderson – D.A. Davidson

And then last one, this would be probably Tommy, maybe for Pat, but in terms of promotion, you send out these cards, every three months or four months, and I get them and a lot of people get them, but if you buy $500 you get X-amount of dollars off. One, we just got, I think, the other day was a much lower discount. And I’m assuming that’s a reflection of tweaking the advertising, but also just where you’re at in terms of margins, etc., Can you just comment on you did give some color on promotions, your advertising, but just that specific type of thing as well, how that plays in?

Pat Snyder

Reed, one of the benefits of having a data warehouse as extensive as we do, is it offers us the opportunity to test a number of things, and I suspect you would probably end in a card test program. We’re constantly testing all kinds of ideas to stimulate focus to, to come to our multi-channel model in less costly or maybe even more costly ways from a discount standpoint. We’re always testing to see what stimulates you to buy from us and we measure that.

Reed Anderson – D.A. Davidson

Very good, that’s it for me. Thanks, guys, good luck.

Operator

Next, we will hear from Jim Duffy with Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

Ralph, can I ask you to speak in more detail about the liquidation of inventory impact on gross margin? And then Tommy, maybe you could talk about whether the inventory position is where you want it to be, given your merchandising direction whether there is further clearance activity that needs to occur.

Tommy Milner

Jim, in the quarter, as we noted, net of the impact of gift cards from the prior year, we were down 60 basis points. A good part of that was just aggressively clearing unproductive inventory in the quarter. And as we’ve said to the investment community repeatedly since I got here, it’s just a matter of good business to keep inventories clean. And when we have that opportunity as we did in the fourth quarter, we were pretty aggressive. I feel very good about the quality of our inventories, but I would be the first one to say that clearance of unproductive inventory is a never ending process.

So, given everything that happened in the quarter I was pretty pleased. Because it comes back to one of those guiding principles of ours, which is efficiently managing our balance sheet. Longer-term improving gross margins. It’s a marathon, not a sprint, primarily driven by relatively long lead times in soft goods and we’re all committed, it is our biggest strategic initiative to growing margins over time. And I am confident with everything we got going here we can do that.

Jim Duffy – Thomas Weisel Partners

Tommy, just to help us understand, was a lot of the liquidation on a legacy inventory position, legacy buys, in an effort to clean up the inventory balances or was it just aggressive efforts to exit the season clean?

Tommy Milner

It was legacy.

Jim Duffy – Thomas Weisel Partners

Okay.

Tommy Milner

Primarily.

Jim Duffy – Thomas Weisel Partners

And then, Tommy, can you talk about the expected direction of the Direct business in 2010? You mentioned you are not going to be as aggressive cutting catalog distribution. Do you expect improvement in sales in operating margins in the Direct segment in 2010?

Tommy Milner

Well, Jim, long-term we’re committed. It’s one of our strategic initiatives to profitably grow our Direct business. And, like in any year where you have a long-term objective, would also be a little disappointed if we didn’t see improvements and we got a lot of initiatives underway to see those improvements.

Jim Duffy – Thomas Weisel Partners

Okay. And then final question with regards to the four new store openings in 2011. Can you explain in more detail the factors that give you the confidence to make those commitments? Are they in fact commitments or is that something you can get out of and what are you seeing from new format stores that necessarily gives you the confidence that, that’s good use of shareholder capital to open more stores?

Tommy Milner

We have been very consistent throughout 2009 in every public environment that we’ve been in with you guys that as our confidence level grows, that the initiatives that are underway throughout the enterprise to improve overall profitability as well as retail profitability, the measure of our confidence to you, we consistently said should be our willingness to begin prudently to grow new stores. And I will repeat that again as we have before.

We are ever more confident that we’re beginning to see nice improvements, both in our existing next-gen formats as well as throughout the rest of the chain and that gave us the confidence to prudently move forward with four new stores in 2011. I really wish I could tell you guys where they were. But we’re just in the final stages of negotiations. Every confidence we’re going to bring those to a close and as soon as we can tell you I can’t wait because they’re great markets.

Ralph

Jim, if I can add to that, and I’ve talked a lot about this improvement we need to see in retail vis-à-vis our real estate opportunities. We did get 70 basis points a lift in our existing retail stores, which, and I talked to you about our targets in the past that on a go forward basis that needs to be 15 or north (inaudible). But we did see a lot of improvement we saw, nice improvement in our next generation stores particularly in billing.

As I told you earlier, the more we improve that opportunity, the more real estate opportunities that we’re going to be able to afford. I’ll tell you particularly the two opportunities in the U.S. are interesting real estate opportunities, maybe similar to Grand Junction, where we got an opportunity to go and get an attractive lease or get some interesting incentives and great retail locations.

So these are very interesting opportunities from a real estate standpoint. The two stores in Canada, quite frankly are largely driven by the huge success we’ve seen in our S.I.R acquisition in Winnipeg. As I think Tommy or Chris said in his remarks, we have seen revenue about double up there. So, we feel really good about our opportunities in Canada.

Tommy Milner

Jim, lastly, to close the Canadian thing, I am not sure how widely known it is on the Street. Our brand in western Canada is at least and perhaps more powerful up there with hunters, fishermen and campers than it is in the United States. So it’s really a sweet spot for us.

Jim Duffy – Thomas Weisel Partners

Great, thank you.

Tommy Milner

Sure.

Operator

Next, we will hear from Tom Shaw with Stifel Nicolaus.

Tom Shaw – Stifel Nicolaus

Hey, thanks, guys. Tommy, I guess the clarification when you were listing some of the details on the product side did you say long guns and ammo were comping positive in the quarter?

Tommy Milner

Yes.

Tom Shaw – Stifel Nicolaus

And handguns were down, right?

Tommy Milner

That’s correct. As you would expect, black guns and handguns had the biggest run up and so they’re going to have the softer landing.

Tom Shaw – Stifel Nicolaus

Got you. And a month and a half into 2010 can you guys give any clarity on what you are seeing with any kind of trends at this point? Obviously, this is the biggest quarter of impact from fire arms and ammo and the weather has been a little dicey around most of the country as well.

Tommy Milner

Yes, Tom, we’re very pleased thus far with Q1. It looks a lot like Q4 did.

And so, starting the new year, we’re pretty encouraged.

Tom Shaw – Stifel Nicolaus

All right. And maybe last one. And again, for Tommy, you touched on to some degree. What are the major, if you could rank the priorities for improving retail profitability this year after some of the improvements in labor on the advertising side in 2009?

Tommy Milner

Continued improvements in labor performance, the lessening of non-selling labor, and making sure that we get our folks out on the floor, interacting with our customers and we’ve implemented the most significant change in training that those of you who come to analyst day, will hear about that in recent memory. We continue to see big opportunities in really working much closer with the vendor community, to collaborate on every element of moving goods and selling goods, tightening assortments, making sure we have proper regionalization. Those are the biggies. Obviously, we continue to tweak ad placement. And I’d be remiss in saying that gross margins that’s the biggest lever in retail profitability, obviously goes without saying.

Tom Shaw – Stifel Nicolaus

All right, thanks, guys, good luck.

Tommy Milner

Sure.

Operator

Next we will go to Derek Leckow with Barrington Research.

Derek Leckow – Barrington Research

Thank you, congratulations, guys, nice job on last year. I wanted to touch on the comments about the guidance. Tommy, if you could help, maybe sharpen that a little bit. The external estimates I’m looking at are $0.81 to $1.45 for next year. When you guys say you’re comfortable with those, can you help me understand what do you really mean by that?

Tommy Milner

I will try. First of all, it’s very early in 2010 and to my earlier comments; we’re pretty pleased with how Q1 has started. As such, when we looked at our 2010 expectations, we thought they were in line with the range of external estimates that we saw from first call. There are a couple of outliers, which we excluded on the low side. And I hope that gives you the sense of some clarity. Really, early in the year, we looked at the estimates that we saw knocked out a couple of the low-end outliers and got pretty comfortable at this point in the year with that guidance.

Derek Leckow – Barrington Research

So, if I knock those out, I guess, you come out with a growth rate that’s a little bit, single digit growth rate for next year in EPS, and is that about right?

Ralph Castner

Yes, I don’t know if we’re going to be a lot more specific than that, Derek. You guys –

Derek Leckow – Barrington Research

Fair enough, that you’re not going to comment specifically. But I just wanted to get that out there, because, it was a huge range out there. So anyway, I think, Tommy –

Tommy Milner

If we wanted to be really specific, we would have been.

Ralph Castner

Derek, I just leave you with the impression, clearly that the number about the $0.81, I think there is another one down at a bock, those were clearly, we didn’t consider those when we were thinking about the range.

Tommy Milner

Derek, on a bigger sense, you get the sense from our tone that we made a lot of improvements in our company last year that are sustainable over the long-term. We’re pretty optimistic about our business.

Derek Leckow – Barrington Research

Those improvements are not lost on me. So congratulations on that. Now, just to focus on the Direct business again, because this one here is very interesting, that the fact that you took your cost down by 4%, yet you show some growth there. Now, you’re talking about, maybe next year, growing your direct marketing efforts again. What does that translate in your mind in terms of growth rate for Direct, even without store development in 2010?

Tommy Milner

I am probably not going to comment specifically on 2010, but longer-term, we, as you know, a couple of years ago, we dramatically cut circ I think Ralph can comment, he was here. We were pretty aggressive in page count reductions and modest changes in circ, but big changes in page count. And I think we learned a lot in that process and going forward, the significant changes are the way we manage our contact strategy with you as a customer.

And we’re learning a lot about what stimulates you to come and buy from us. I’m not going to give you a lot more details than that. Because I suspect competitors will listen to this call, and that’s pretty competitively sensitive information. But we’re working really hard on contact strategy. And that doesn’t mean we have to spend a lot more money to do it. We can do it more efficiently and in a lot of different ways. But I am not ready to tell our competitors what we’re doing.

Derek Leckow – Barrington Research

You haven’t comment on this in the past, but maybe it might be helpful if you can help us look at the customer base itself, for instance, your 12 months buyer file, how has that grown or how has that changed during the time that you pulled circulation down?

Tommy Milner

Full year multi channel customers increased about 10.5%, which we view is just the ultimate measure of the health of our company. We grew our file, 10.5%. And acquisition was up 8.7%. Retention was up about 1.5. So those core heart beat metrics of the company are really pretty good.

Ralph Castner

I want to correct just one thing you said. You said that we cut circ, we really did not make a meaningful change in circ. What we did mostly was cut page count. So to Tommy’s point, we’ve continued to see those core metrics, number of customers, activation retention, are all trending in the right direction. The only thing happened is we lost some unprofitable sales because our catalogs were too big.

Derek Leckow – Barrington Research

Right, okay, great. Thanks for clarifying that and good luck, guys.

Tommy Milner

Thanks.

Operator

We will next hear from Kristine Koerber with JMP Securities.

Kristine Koerber – JMP Securities

Hi, few questions, here. First of all, do you have CapEx guidance for 2010?

Ralph Castner

We expect it to be somewhere around $70 million.

Kristine Koerber – JMP Securities

Okay. And if we look at the comp trends throughout the quarter, if I recall correctly, you saw some comp acceleration from the third quarter into fourth quarter. I guess with the comps down slightly for the fourth quarter, can you just give us a little more color on what the trends were throughout the quarter?

Tommy Milner

Sure. As we told you in the third quarter call, October was very strong. I don’t remember what the exact comp number was. But it was a very strong month.

November, went the other direction. And then December came back nicely. And those trends have continued into this year.

Kristine Koerber – JMP Securities

Okay. And then if we look at inventory, you made great strides in reducing inventory. What should we expect for 2010? Should we see inventory levels to be down at similar rates?.

Tommy Milner

They are definitely not going to be down, another $77 million. They’re going to be flat, we would expect.

Kristine Koerber – JMP Securities

Okay, thank you.

Ralph Castner

I’ll just add to that a second. We still think there is opportunities on terms. But the opportunity is, growing sales without growing inventory. It’s going to be tough to get the absolute amount of inventory a lot lower than it is today.

Kristine Koerber – JMP Securities

Okay, that’s helpful, thanks a lot.

Ralph Castner

Thank you.

Operator

Next, we will go to Mark Smith with Feltl and Company.

Mark Smith – Feltl and Company

Hi, guys, just following up on the comp trends, can you talk a little about the product mix during the quarter and I guess if you saw much of a bump in apparel and footwear late as we saw the weather shift in December?

Pat Snyder

Mark, I’ll flip it over to Ralph in a second, but just a comment. In my new career in retail, I have learned that weather is both a blessing and a curse. And I will go back to the weekend before Christmas. We had really cold weather, if you guys remember, which theoretically should help soft good sales. The problem was that weekend before Christmas, which is a great shopping period, most of our stores from about billings in the upper Midwest all the way to Minneapolis were functionally closed because of blizzard conditions. So there was a little bit of offset there. Taken some good with the bad as we’ve recently seen in the northeast, in the recent weeks, cold weather is good, but blizzards aren’t so good. Ralph, do you want to add any…

Ralph Castner

No, just we did see some lift that the holding category to look good was big

game apparel. To comment ammunition was strong in the quarter, which was a little bit maybe surprising to some people. But I think what we have seen is all these guns were bought last year, people are shooting them and buying ammunition for that. Power sports continues to be somewhat challenging. Other than that I don’t think there was a big influence by mix in the quarter.

Mark Smith – Feltl and Company

Okay, good. How about private label? Can you give us any more color on how successful you’re on with your private label in Q4?

Tommy Milner

Yes, no real changes from prior period, it’s still a third of our business, and a great part of our company.

Mark Smith – Feltl and Company

Okay And then lastly, just any comments on gift cards through Q4 and any real impact that you saw on the extra week from redemption on gift cards?

Tommy Milner

I don’t have that in front of me. Ralph, do you?

Ralph Castner

No, I don’t think there was anything meaningful with respect to gift cards. We did see a slight increase in breakage in the fourth quarter relative to the normalized fourth quarter a year ago. Other than there was nothing material.

Mark Smith – Feltl and Company

Great, thank you.

Operator

Next, we go to Paul Lejuez with Credit Suisse.

Paul Lejuez – Credit Suisse

Could you maybe share with us where guns and ammo ended up as a percentage of sales for the year and specifically for the fourth quarter?

Pat Snyder

I have for the year, I’m not sure I’ve got it for the quarter. It’s about 15% for the year.

Paul Lejuez – Credit Suisse

The two combined?

Pat Snyder

Yes.

Paul Lejuez – Credit Suisse

What was that last year?

Pat Snyder

I think about half of it, Paul. But I would have to go back and check the number.

Paul Lejuez – Credit Suisse

So those categories doubled in '09?

Pat Snyder

Yes.

Ralph Castner

Yes.

Paul Lejuez – Credit Suisse

Got you. And, Ralph, the marketing fees from the bank to Retail and Direct, how big of an impact was that, up or down this year versus last year fourth quarter?

Ralph Castner

You want the fourth quarter or the full year?

Paul Lejuez – Credit Suisse

Fourth quarter, but full year would be great also.

Ralph Castner

What it's worth really wasn’t a material change. I am sorry, for the full year, let me make sure I got the right numbers here. For the full year, they were really roughly, give them to you my channel, Direct was basically flat, was up by about a $1 million, and retail was up about $3 million.

Paul Lejuez – Credit Suisse

And for the quarter?

Ralph Castner

For the quarter, it was a little bit more impactful. Roughly, each channel was $3 million.

Paul Lejuez – Credit Suisse

Up 3 million from last year?

Ralph Castner

Per channel, yes.

Paul Lejuez – Credit Suisse

Per channel, got you. And can you just talk about the impairment charges? What stores, what was included in the impairment charges?

Pat Snyder

Just to comment, before Ralph goes into some detail on it, our decision was purely normal course and making sure our assets are properly valued on our balance sheet as a core principle of our company and accordingly that led us to the decisions. Ralph, do you want to add any color?

Ralph Castner

Well, the vast majority you will see it broken out. I think it is broken out in the back of the press release. The vast majority of this was writing down the fair market value, a handful of locations that we had, where the fair market value was below book value. It is both. And open store and unimproved real estate. But this write-down doesn’t change any of our plans with respect to existing stores or real estate that we own.

Paul Lejuez – Credit Suisse

Got you. And can you just maybe share with us how big that Canadian business is? It seems like, it’s only one store, right and but it’s moving the tax rate pretty significantly.

Ralph Castner

Yes. The Canadian business by the way is doing very, very well. It’s tens of millions of dollars of revenue. I would tell you that tax rate is down and its way more complicated in just Canada. We have other operations in our Direct business, where we have a facility in Hong Kong that allows some of our taxable income to be generated, four jurisdictions which drives the lower tax rate. The tax rate is not just Canada.

Tommy Milner

And Paul, one another comment Canada is we talk about retail expansion. I don’t want anybody to miss the point. That there is a significant opportunity for us to grow our direct Canadian business, which is today a relatively small business. But with our competencies over time it’s going to become a significant business up there.

Paul Lejuez – Credit Suisse

Got you. And then just last wild wings, is there any gain or loss in the quarter on the sale of Wild Wings?

Ralph Castner

No.

Paul Lejuez – Credit Suisse

Thanks, guys. Good luck.

Operator

Next, we will hear from Christopher Horvers with J.P. Morgan.

Christopher Horvers – J.P. Morgan

Thanks and good morning. A follow-up question on the guidance side, focused on the revenue, interested, if you could provide any commentary there as what range and expectations you are scribing to. I’ve seen here in Bloomberg, it’s about 2.74 billion is a point estimate. Is that in the zip code?

Ralph Castner

No. I tell you, (inaudible. I’m working at that number strikes me as high, somewhat of my comment on EPS, there’s a couple of outliers down around $2.4 billion, the consensus is that I’m referring to consensus on revenue of 2,617 billion was the consensus. So I think similar to what we said on EPS. There’re a couple of outliers we didn’t consider we made the comment. The other remaining range of estimates are lower than the number that you said.

Christopher Horvers – J.P. Morgan

Okay, I got you. Does that basically imply flattish comp for the year?

Ralph Castner

We don’t at this point talk about comps for the year. We didn’t do a lot. I think the most important factor in this is how we grow our customers and the amount they spend with us. And for that reason we didn’t offer a lot of guidance by channel.

Christopher Horvers – J.P. Morgan

Okay, right. You are looking at the productivity of the entire company, and if I get it from one segment, all the other as long as it got going up overall you are pleased?

Ralph Castner

Yes.

Christopher Horvers – J.P. Morgan

Okay, I understand. And then maybe with the cadence for the year. A little help on the cadence. You don’t provide quarterly guidance, but you are basically implying roughly flat to slightly positive EPS growth. You don’t have to confirm that. Is there a cadence where you’re expecting some pressure on the first top giving compares on the top line and then more growth in the back half?

Pat Snyder

No, we are not implying that.

Ralph Castner

No.

Pat Snyder

What we’ll do in '10 as we have done in '09 is consistently report to you guys how our retail profitability initiatives are, how we are doing in return on invested capital, how our Direct business did and our margin progress. And we’ve been I think very candid about that. And we’ll continue to.

Christopher Horvers – J.P. Morgan

All right, so, clearly, maybe at the category level any color at the category level in terms of how you mentioned the soft landing on guns and ammo, ammo holding at really well in the fourth quarter. When you think soft landing, is there any kind of cadence to that for the year or any quantification around your expectations?

Pat Snyder

No. Nothing more than what we’ve said.

Christopher Horvers – J.P. Morgan

Okay. And then on the Direct business, and this is a follow-up question to a previous question. I think you said Direct marketing expenses down about 4% year-over-year, your extra 53rd week, it looks like the revenues and direct were, if my math is right here, down roughly 5%. So, is there a one-to-one correlation between the dollars that you’ve got. And then on a percentage basis at least versus the revenue decline year-over-year, and is there any concern that you have over there?

Ralph Castner

When we talk about this all here we clearly as a percentage cut direct marketing costs more than we saw a decrease in sales. Now that we’ve been few cutting through all those circs. You’re going to see that trend stop. And as Tommy said, long-term we expect to be able to grow that business. You won’t see the severity in the decrease in marketing costs nor will you see the severity of decrease in revenue.

Christopher Horvers – J.P. Morgan

Okay, I understand. And then just a couple more, as you look through the first three quarters of the year, your sales growth in the hunting category ran down about 10%, I don’t have the detail for the year quite yet. And then hunting versus a total increase of about three or so percent. So, as you think about that guns and ammo soft landing and given the weighting of the hunting business, are you expecting the other categories to comp up or grow in a low to mid-single digit pace in 2010?

Tommy Milner

We said all along that as our customers buy guns and then they buy fewer guns, they are going to continue to spend money with us. And that will shift to other categories. That’s a reasonable expect station.

Christopher Horvers – J.P. Morgan

And then one final one on –

Tommy Milner

Let me add one other thing, just for a second. In the script, we talked about something that I just want to make sure everyone understand. It is very, very clear to us that with the competitive disarray that’s occurred in the markets we serve, especially with some big boxes that aren’t such big boxes any more, we’re capturing a growing share of the hunting and gun market. And that is great for our company long-term and short-term.

Christopher Horvers – J.P. Morgan

Right. And then one final one and then I will take the financial service question offline. The number out there, that you referred to with total sales expectation for 2010, it’s roughly flattish to where you ended this year. You do have billings in there until May. But does that imply a negative comp particularly in the first half of the year?

Ralph Castner

Your math’s right on the new stores. Billings does have anniversary in May and we will have a new store in Grand Junction, Colorado, (inaudible) base in May, which most likely will be only new store this year. So I guess from that you can conclude whatever you want about the comps, but we intentionally didn’t give specific guidance about comp store sales of the Direct business. I am sorry, the one other thing to consider, particularly, in effect to direct business, we will have the absence of the two businesses we sold in the last half of 2009 and if you look in the press release, we broke out how much those were in the quarter and you can estimate the impact of those for next year. We will continue to report the Direct business without the impact of the divestitures but that will affect the total amount of sales.

Christopher Horvers – J.P. Morgan

Right, I got you. Okay, thank you very much.

Operator

We will next hear from Jim Chartier with Monness Crespi Hardt.

Jim Chartier – Monness Crespi Hardt

Can you give us a breakdown for comp sales transactions versus the average transaction size?

Tommy Milner

I am not sure I have got that number right in front of me. Average ticket was, if that’s what you are referring to was flat in our retail business.

Ralph Castner

And therefore, transactions were flat too.

Jim Chartier – Monness Crespi Hardt

And then I don’t know if you gave this. I missed it. But can you give us the impact of the extra week of sales on earnings and margins?.

Ralph Castner

We did comment in the call that we think the extra week was $0.02 to $0.03. And I don’t know if you’re talking about gross margins or operating margins. But I think the message is that extra week looked a lot like first quarter week, not a fourth quarter week and it was obviously with interesting from a sales standpoint, and it wasn’t material from a profit standpoint.

Jim Chartier – Monness Crespi Hardt

Okay. And then the portfolio yield in the master trust data declined in January. Was that a seasonal factor or is that something we should expect going forward?

Ralph Castner

That was a seasonal factor and if you go back and look at all the previous Januaries, we saw a similar decline. We were not in the least bit concerned by what we saw in January. And actually, year-over-year, it was up.

Jim Chartier – Monness Crespi Hardt

Okay. And then, at some point, you will start to anniversary the interest rate increases you took as I guess you adjusted your portfolio for risk in 2009. When should we start to see the anniversary of those changes in 2010?

Ralph Castner

I am trying to go back. Our last one I believe was in August. So, we did it, we did several of them over the course of 12 months or 15 months. So really, between now and August, you will be gradually anniversarying more and more of those.

Jim Chartier – Monness Crespi Hardt

So with the portfolio, the interest income flattening out and charge-offs starting to continue to increase, you expect the financial services revenue will be down next year?

Ralph Castner

I think we continue to be very optimistic about that business with some of the things we did like VISA signature card, so I’d be disappointed if that were the case.

Jim Chartier – Monness Crespi Hardt

Okay. And then I know Target had made a comment a few months ago saying that they thought credit card legislation would basically force them to decrease their portfolio of receivables by about 10%. Can you talk about the impact of that on your portfolio of receivables?

Ralph Castner

Yes, our credit quality is so much different than Target portfolio. We don’t expect it to have a meaningful impact on outstanding receivables.

Jim Chartier – Monness Crespi Hardt

Okay, great, thanks a lot.

Operator

Next, we will go to Jonathon Grassi with Longbow Research.

Jonathon Grassi – Longbow Research

Good morning, guys. I know, you mentioned that billings is the only store you expected to open this year, but I guess there’s been a discussion of a new investors stuffing in on the Xanadu project, hoping to (inaudible) vitalize it. Does that change your outlook on what you expect that to go?.

Pat Snyder

Well, we’re going to open a store this spring in Grand Junction. Maybe that’s what you meant when you said billings.

Jonathon Grassi – Longbow Research

Right, I am sorry, about that.

Pat Snyder

And I think with regard to Xanadu we probably said as much about Xanadu as we probably should. Time will tell. I think that’s the best message I can give you.

Jonathon Grassi – Longbow Research

And then you said that 1Q was trending a lot like 4Q. I guess on the promotional level, are we expecting it’s going to be similar to 4Q should we expect some merchandize margin compression because of that?

Pat Snyder

We probably not going to get into in our quarter guidance on margins. I think the sense we wanted to give you was we’re off to what feels to be a pretty good start. But it’s obviously, early and this is a seasonal business. And November and December, I learned last year are really, really important.

Jonathon Grassi – Longbow Research

Okay. And then just finally on the 10% growth in the multi-channel customers is that growth coming from customers switching from retail to the direct business and using both now or are we seeing extra store too that we’re seeing direct customers going over to the retail stores?

Tommy Milner

No, I think it’s everything. I think the totality of what our enterprise is delivering in value to our customers, both in the products we offer and the multiple ways we let people shop and the experience they have when they get here. It’s growing our customer file and that’s the most important thing any company can have happen.

Jonathon Grassi – Longbow Research

So, it’s not SKU-ed one way or another?

Tommy Milner

No.

Jonathon Grassi – Longbow Research

Okay, thank you.

Operator

Now, we will take a follow-up question from Derek Leckow with Barrington Research.

Derek Leckow – Barrington Research

Yes, thanks for the follow-up. Just one quick one here, on the private label business, do you guys seeing any opportunities to vertically integrate anything as it relates to your private label either at the Cabela’s brand or other brands?.

Tommy Milner

By vertical integration do you mean going out and actually buying a supplier?

Derek Leckow – Barrington Research

Yes.

Tommy Milner

No. Actually, last year we went the other way, through the divestitures of those two businesses. Having been a manufacturer and now a retailer, it’s hard enough to be either one without trying to be both. And I know a lot of people do it successfully, but –

Ralph Castner

The other thing about that because we’ve looked at some of the past, Derek, what you normally find is when you go and try to model those us acquiring and usually the storage value because all of our competitors they do business with today, don’t think it’s such a good idea to buy from a Cabela’s owned manufacturer.

Derek Leckow – Barrington Research

Okay, understood. I was just thinking about some of the comments I heard relative to the ammunition category.

Tommy Milner

Yes, I think there’s sufficient opportunities in the supply chain across the enterprise that we don’t have to worry about buying anybody.

Derek Leckow – Barrington Research

Okay, thanks a lot.

Operator

And next, we will go to Mark Smith with Feltl and Company.

Mark Smith – Feltl and Company

Hi, guys, two quick follow-up questions. Pat, you said that ammo was pretty strong in Q4. Can you just talk a little bit about if you are able to get shipments and get more inventory or channels showed that shelf seemed to be a little more stocked in Q4?

Tommy Milner

They definitely were more stocked. And we had a couple of initiatives under our herders brand name that helped. And I wouldn’t say supply is completely loosened up. There are still some pockets of 380 handgun ammunition that remains pretty tight, but I think you saw our shelves in much better condition because of the strength of our balance sheet takes that issue off the table for our manufacturing partners in ammunition, which is not the case industry wide.

Mark Smith – Feltl and Company

Okay, and then lastly, I have the pleasure of being in Winnipeg more than I would like. Being up there, it sounds like you may have made some more investments in distribution center. I think that’s running everything out of the back of that store previously. Can you comment at all about that and that of the 70 million in CapEx in 2010? How much might be coming from investment into Canadian operations?

Tommy Milner

I’ll let Ralph touch on the CapEx question, but yes, we did secure a new warehouse in Winnipeg. And it really goes back to our strategy when we bought S.I.R., our game plan was, we bought a lot of local knowledge with all the great folks that work for us in Winnipeg. And our goal was to hang a lot of confidence on that great business. We went through an SAP installation last fall. That is ongoing. Added a warehouse, hired a president, have increased talent to prepare ourselves to manage what we believe is a significant opportunity for retail and direct channel growth in Canada. Ralph, do you want to add…

Ralph Castner

The real news here was the comments Tommy just made. But we did have a D.C. in Winnipeg. That’s a lease facility, so it’s not going to make a meaningful difference to CapEx. The way bigger story on CapEx is these two new stores that we’re looking at.

Mark Smith – Feltl and Company

But that should until 2011?

Ralph Castner

Right, yes, but you may see some CapEx yet this year in that number. I think the real news there is our confidence and our excitement about that business.

Mark Smith – Feltl and Company

Okay, great, thank you.

Operator

And our final question will be a follow up from Christopher Horvers from J.P. Morgan.

Christopher Horvers – J.P. Morgan

Thank you. On the mix data, you clearly gained a ton of market share in the biggest gun and ammo vendor in the country. On the mix side, what gives you the confidence that when it does start to go into the soft landing or starts to go down and really lap, particularly in the first quarter, that there isn’t, that you could perhaps see the double to down the side on that on the way down?

Tommy Milner

There is no future assurance. But I think what gives me comfort is, we have established ourselves as a place to buy guns and when you grow share that obviously offsets any future deterioration. So I feel really good about our position and having been in the gun business for a long time, I think we’re really poised very well. And the landing has been soft. And it’s been focused in those Voom categories of handguns and black guns, which, they are a part of our business, but I would say more a hunting company, which mitigates that future risk.

Ralph Castner

If I can just add to that the best way to answer the question is what we have seen now we anniversary the gun and ammo thing on 1st November, maybe some in October. The only month where we saw meaningful change is a result of the gun and ammo thing was in November. December had flattish comps. January, February has been more of same and I think what you have seen is what Tommy alluded to, that we have seen customers continued to come back for ammunition and the rest of their hunting and shooting supplies, which is driving a lot of business for us. We just don’t see this as a near-term problem.

Christopher Horvers – J.P. Morgan

That’s very helpful. Couple of quick ones. On the interest-only strip the write-off in the fourth quarter, is there something to think about plus or minus as you look at the first three quarters of this year. Did it help you or hurt you last year in the last three quarters?

Ralph Castner

First of all, I think it was actually a gain in the fourth quarter and a small loss for the full year. We did have a loss in the first quarter. Well, we had a loss in the first quarter a year ago, that would be helpful in the first quarter, in the second quarter, we disclosed this, the second quarter a year ago, we had a big game, but it was substantially offset by a write-down we took in our store at Greenwood. And quite frankly, I don’t remember the third quarter and the fourth quarter wasn’t material.

Christopher Horvers – J.P. Morgan

Okay. And then on the other fee income in the financial services business. Just curious, that’s doubled in the past two years. Does the new legislation change that level, are you able to hold that level, is that have to do with fees that you added in or how should we think about that in 2010?

Ralph Castner

The biggest driver, the fee income of the bank upward has been, as you have more late fees as people go bad on the credit cards. So that’s been the biggest single driver. As far as what to look for going forward is and I don’t recall, this did go in 2009, is the inability to charge on the limit fees. That happened prior to the fourth quarter. So it’s normalized for the fourth quarter. You have to opt in to be charged over limit fee, so that fee substantially goes away.

Christopher Horvers – J.P. Morgan

Right, so is 13 the right run rate? Is that was the fourth quarter?

Ralph Castner

Yes, I would have to go back and look at it by individual quarter and see, I’m not sure I can give you a whole lot more color other than it will be attracted, since the only thing is there substantial is late fee, so will be largely correlated with bad debts.

Christopher Horvers – J.P. Morgan

Okay.

Operator

There are no further questions.

Chris Gay

Thank you all for joining us today. And we look forward to talking to you again soon.

Operator

That does conclude today’s presentation. Thank you for your participation.

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Source: Cabela's Incorporated Q4 2009 Earnings Call Transcript
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