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Executives

Ralph Castner - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chairman of World's Foremost Bank

Thomas Millner - Chief Executive Officer, President and Director

Chris Gay - Treasurer

Analysts

Mark Smith - Feltl and Company

David Magee - SunTrust Robinson Humphrey Capital Markets

Jim Duffy - Thomas Weisel Partners Equity Research

Kristine Koerber - JMP Securities LLC

Christopher Horvers - JP Morgan Chase & Co

Rick Nelson - Stephens Inc.

Derek Leckow - Barrington Research Associates, Inc.

Paul Lejuez - Crédit Suisse First Boston, Inc.

Cabela's (CAB) Q1 2010 Earnings Call May 4, 2010 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. First Quarter Fiscal 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Chris Gay, Director, Treasury and Investor Relations. Please go ahead.

Chris Gay

Good morning. I welcome everyone listening today, both from the conference call and by webcast. A replay of today's call will be archived on our website at www.cabelas.com. With me on today's call are Tommy Millner, Cabela's Chief Executive Officer; and Ralph Castner, Cabela's Executive Vice President and Chief Financial Officer.

This conference call will include forward-looking statements. These statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance. Actual events or results may differ materially from those statements.

For information about certain factors that could cause such differences, investors should consult our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission and available on our 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 financial measures. Please refer to our earnings release to find the reconciliations of these non-GAAP financial measures to GAAP.

Now on to the financial results. For the quarter, adjusting for divestitures, consolidated revenues increased 5.1% to $560 million. Retail revenue decreased 1.5% to $271 million, and direct revenue increased 2.1% to $223 million. For the quarter, financial services revenue increase 77% to $60 million compared to $34 million in the year-ago quarter. The increase in financial services revenue was due to higher interest of fee income, lower interest expense and lower provision for loan losses.

Operating income increased 29% to $15.9 million as compared to $12.3 million in the year-ago quarter, and diluted earnings per share increased 50% to $0.12 in the quarter compared to $0.08 in the year-ago quarter.

First quarter 2010 results include a $12 million after-tax special charge related to an FDIC compliance examination. First quarter 2009 results included impairment and other special charges of $3.9 million after tax. Excluding these items in each quarter, diluted earnings per share for the first quarter of 2010 was $0.29 compared to $0.13 in the first quarter of 2009.

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

Thomas Millner

Thank you, Chris. Good morning, everyone. We are encouraged by our first quarter results, which reflect the continued progress we are making in our areas of strategic focus, which are improving merchandise gross margins, increasing retail profitability, improving return on invested capital, growing the Direct business, retail expansion, tightly managing our balance sheet and maintaining profitability at Cabela's bank. And we are very pleased with the progress we made during the quarter on these initiatives.

Let's first start by discussing merchandising trends. As we anniversary the strong sales of firearms and ammunition, we have been pleased that sales declines in these categories have been less than expected. We have had great success finding alternative sources of supply for ammunition and continue to reduce back orders related to both firearms and ammunition. Firearm background checks, as reported by the FBI, continue to validate that we are taking market share from our competitors.

Additionally, we are beginning to see improvement in merchandise categories other than firearms and shooting. For the quarter, we saw sales increases in 10 of the 11 non-firearms and shooting categories. With regard to retail profitability for the quarter, we again improved our retail store labor efficiency. As an example, we have recently redesigned the footwear departments in more than half our stores, and installed self-service fixtures, which add convenience for customers and have increased footwear sales while reducing labor costs. We also elected to increase retail advertising during the quarter, our first increase in five quarters.

Increases in retail advertising focused on a new event targeting NRA customers and an additional clothing flyer. Even with the increased advertising spend and slightly lower gross margins, retail operating margins were 6.6% in the quarter, in line with the first quarter of 2009.

Now let's talk about our Direct segment. We are particularly encouraged with our Direct segment performance during the quarter. Adjusting for divestitures, revenue in our Direct segment increased 2.1% during the quarter, led by an increase in Internet sales. As the Internet continues to be the preferred shopping channel for our direct customers, we expect it to continue to become a bigger piece of our Direct business. To support this vitally important part of our company, we spent the last 18 months completely redesigning cabelas.com. Later this summer, we will launch the new cabelas.com website, which will provide improved navigation tools, enhanced product presentation and graphics, international commerce capabilities and the best-in-class e-commerce functionality in the outdoor space.

Our investment in this project of $10 million will ensure that our already-dominant e-commerce position in the outdoor space will continue long into the future. We are especially pleased with these results as this is the first time in six quarters we have grown revenue in our Direct business. It is particularly notable that we were able to grow Direct revenue while reducing our direct marketing costs.

We continue to focus on mailing smaller catalogs. During the quarter, we added three new catalogs, replacing three older titles. And I'm pleased to say, all three performed well. As a result of our continued focus on smaller, more relevant catalogs, we were able to reduce the number of catalog pages mailed, but increased total circulation, leading to continued improvements in direct marketing costs. Additionally, we continue to increase the number of multi-channel customers, the real measure of success for a multi-channel company. Improved efficiency of our direct marketing spend, combined with a higher marketing fee paid by our bank, more than offset gross margin compression. As a result, for the quarter, operating margins in our Direct business improved 50 basis points to 13.6%.

Now let's look at Cabela's bank. The bank had a good first quarter, and we are encouraged with recent delinquency trends and improvement in profitability. As a result of higher interest and fee income and lower provision for loan losses, managed financial services revenue, as a percentage of average managed credit card loans, was the second highest level we had seen since 2007. Additionally, the loyalty programs associated with the Cabela's CLUB Visa program continues to increase new customer acquisition, generate higher average spend and increase customer shopping frequency. For the quarter, average active accounts increased 5.6% and we are thrilled that we continue to increase Cabela's brand loyalty by adding new members to the Cabela's CLUB Visa program.

Cabela's CLUB Visa members continue to be our best, most credit-worthy and highest network customers. We are continuing to maintain our high credit standards, and the medium FICO scores remains unchanged at 787. While this business has seen a lot of volatility over the past two years, the more than 1 million active customers that earned more than $100 million of free merchandise over the last year is a testament to the strength of the Cabela's CLUB Visa loyalty program and we remain strongly committed to this integral part of our business model.

In the first quarter of 2010, we recorded a $12 million after-tax special charge related to concerns the FDIC raised with regard to the way the bank assessed certain overlimit fees, penalty interest rates and late fees over the past six years. We are working with the FDIC to quickly resolve this matter, and we are unable to provide additional details regarding the nature of the examination report other than to say, all practices of concern in the examination report were changed or eliminated by late 2009, and therefore, have already been taken into account in any guidance that we'd given for 2010. Additionally, we estimate that our maximum financial liability is $12 million after tax, which we have reserved for by the special charge taken in the first quarter, and that we expect to meet or exceed current expectations even after absorbing this special charge.

Moving back to our first quarter business discussion. During the quarter, we continue to tightly manage working capital and improve inventory levels. This is the seventh consecutive quarter of year-over-year inventory reductions. Our SKU reduction efforts continue to meet or exceed our expectations, and we feel very good about our current inventory position. The improved operating results I previously mentioned, combined with our balance sheet improvements, continue to lead to improvements in return on invested capital.

As we have previously discussed, improving return on invested capital has been a key focus of ours, and given our strong first quarter results, we have again realized improvements in ROIC. On a rolling four-quarter basis, return on invested capital improved 140 basis points year-over-year to 10.1% from 8.7%. As we have previously disclosed, our long-term goal is to improve ROIC over the next several years, and we continue to make progress to that end.

Another key area of strategic focus is expanding merchandise gross margins. Merchandise margins were lower than a year-ago quarter as we continued efforts to reduce aged and unproductive inventory. Despite lower margins in the quarter, we saw sequential improvement in margins throughout the quarter. As we have previously discussed, improving margins is a top priority related to our strategic focus, and our goal is to improve the merchandise gross margins 200 to 300 basis points by the end of 2012. Key opportunities for gross margin improvement center around improved vendor collaboration, enhanced pre-season planning, veteran seasoned management and price optimization.

Now let me update you on our retail expansion plans. As you may have already seen this morning, we announced the locations of our two new stores slated to open in the United States in 2011, one in Springfield, Oregon, right next to Eugene, and the other in Allen, Texas, North of Dallas. Both Texas and the Pacific Northwest are prime locations for a variety of outdoor activities, and we look forward to opening new stores in each of these great markets.

With regard to our Canadian retail expansion, Canada is well known for its great outdoor activities, and we are excited about our expansion into this great market. And our store at Winnipeg continues its strong performance. However, in order to better ensure success, we have decided to slightly modify our Canadian store expansion plans from opening two stores in 2011 to opening one store in '11 and the other in 2012. We look forward to announcing the specific locations of these stores at the appropriate time.

As it relates to guidance, given our strong first quarter results, we expect earnings per share for 2010 to meet or exceed current expectations, even after absorbing the special charge taken in the first quarter. Additionally, given continued favorable trends related to charge-offs, we now expect average net charge-offs at our bank in 2010 to be between 5.25% and 5.75% as compared to our previous guidance of 5.75% to 6.25%.

Before turning the call over to Ralph, I would like to take a moment to say thank you to all Cabela's employees for their hard work and dedication. It's this passionate group and their commitment to our customers, which has placed Cabela's at the forefront of the outdoor industry, and I sincerely thank them for all they do to cherish and delight our customers each and every day.

Now I'll turn the call over to Ralph Castner to review in more detail our balance sheet and performance at our bank. Ralph?

Ralph Castner

Thanks, Tommy. We're encouraged by our first quarter financial results. As described at the end of 2009 in our 10-K, in our first quarter financial statements, we consolidated our credit card trust as required by changes in accounting principles. I want to take a minute and highlight the more significant changes.

First, we included the $2.4 billion of loans in the Cabela's master credit card trust in our balance sheet. This amount was reduced by the establishment of an allowance for loan losses of $150 million. Second, we include the $2.1 billion of secured obligations of the trust and separated of these amounts into their short-term component, which was $750 million and a long-term component, which was $1.4 billion. These amounts, along with the time deposits that we had previously at our balance sheet represented liabilities, which are solely the obligations of our bank and its trust. Any debt that is a responsibility of the parent company is included in long-term debt at the end of the quarter, and totaled only $351 million.

As it relates to the cash flow statement, in previous years, all the material cash flows of the bank, other than the change in time deposits, were included in cash from operations. Now we've broken out changes in the borrowings from the trust as a financing activity, and credit card loans originated at third parties as an investing activity.

When we file our 10-Q, you will notice a difference in the way that delinquencies are reported in our financial statements. Now that the trust is consolidated, we have decided to break out all non-accrual and restructuring loans that are delinquent from our previously-disclosed delinquency table. The delinquency table, inclusive of delinquent and non-accrual and restructured loans, are greater than 30 days or 1.73%, greater than 60 days or 1.07%, and greater than 60 days or 0.56%.

We will continue to report delinquencies in our master trust data consistent with our historical practice. From an operational perspective, Cabela's bank had a good first quarter as a result of improvements in several areas. For the quarter, total managed revenue as a percent of average managed credit card loans increased 380 basis points to 9.9% from 6.1% in the same quarter a year ago. The increase was attributable to higher interest in fee income, lower provision for loan losses and lower interest expense.

For the quarter, interest and fee income increased $9 million to 11.8% of average managed credit card loans, compared to 11.2% in the year-ago quarter. As a result of lower delinquency trends, provision for loan losses was $8 million less than the same quarter a year ago. Additionally, as a result of favorable rates in our recent securitization completed in February, interest expense, as a percentage of managed credit card loans, decreased 80 basis points to 3.5% from 4.3% in the same quarter a year ago. Interest expense was favorable in the first quarter. As 2010 progresses, we may elect to lock in additional fixed-rate, long-term liquidity, which may increase our borrowing costs.

Now let me highlight the capital position of our bank. As we have previously discussed, the consolidation of the assets and the liabilities in the trust increased our bank's capital requirements by roughly $200 million. Regulators have provided a four-quarter grace period for companies to meet their capital requirement. During the first quarter, Cabela's invested $75 million of capital under our bank. Given our current capital expectations, we expect to invest an additional $125 million in the fourth quarter of this year.

As I hope you can tell, we're very pleased with the performance of our bank in the first quarter. You may have noticed that on Friday, we filed an 8-K, announcing the filing of our call report with the FDIC. Due to the consolidation of the trust, and the fact that a call report was required to be filed prior to our earnings release, we made the decision to file the 8-K at that same time as we filed the call report in order to provide the greatest transparency to our investors.

For the quarter, comparable store sales decreased 1.7%. As you know, this fiscal year began on January 3, 2010, while fiscal 2009 began on December 28. In order to make the comparable store sales calculation, in any discussion on this call with regard to merchandise trends more meaningful, we assume that both this quarter and the prior-year quarter began on the Sunday closest to January 3.

Now turning to the Direct segment. For the quarter, operating margins in our Direct segment increased 50 basis points to 13.6%. Improvements in operating margin were due to improved direct marketing costs, and a higher marketing fee paid to the Direct segment for the Financial Services segment. For the quarter, direct marketing costs were 12.6% of Direct revenue compared to 13.8% of Direct revenue in the year-ago quarter.

For the quarter, we reduced inventory levels $128 million compared to the year-ago quarter, ending the quarter with $446 million of inventory. Additionally, we continue to have success managing other areas of our balance sheet. Accounts receivable decreased $16.8 million or over 44% year-over-year. Other assets are down slightly, and accounts payable increased $28.4 million, and we standardized payment terms of our vendors.

On a consolidated basis, we ended the quarter with $291 million of cash and cash equivalents as compared to $541 million at the end of the first quarter of 2009. Because of our strong cash position, our bank has begun investing in U.S. government agency securities with longer-term maturities. As a result, you will notice a new line called held-to-maturity investment securities, which represent these investments, and total $225 million at the end of the quarter. All of these investments mature prior to year end, when we will need additional liquidity to meet our seasonal borrowing requirements.

Additionally, we continue to reduce outstanding debt at the parent company to further strengthen our balance sheet. At the end of the quarter, parent company debt totaled $351 million compared to $475 million at the end of the year-ago quarter, and we do not have any significant debt maturities until 2016.

Let me discuss our effective tax rate. Due to our international expansion activities, a portion of our income was generated by our foreign entities, which have a lower effective tax rate. Our effective tax rate for the first quarter of 2010 was 33.8% compared to 39.9% in the first quarter a year ago. We currently expect our effective tax rate for 2010 to be 34% to 34.5%.

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

Thomas Millner

Thanks, Ralph. Again, we're very pleased with our financial results for the first quarter of the year, and the improvements we continue to make in our areas of strategic focus. With that, operator, let's open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Jim Duffy with Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners Equity Research

On the merchandise side of the house, can you talk a bit about the mix dynamic in the margin and the factors that helped gross margin get better for you across -- or the merchandise margin get better across the course of the quarter?

Thomas Millner

I have to tell you, I was very pleased during the quarter across almost all of our merchandise categories that we did see some improvement. And as I've said to you, the group before, this is a marathon, not a sprint. So it was encouraging to see our efforts in vendor collaboration, veteran season management, price optimization, all the basics of retailing helped us during the course of the quarter. I will comment, Jim, that we were very aggressive in January in clearing fall goods. And I'm pleased to note that as the quarter unfolded sequentially, margins improved accordingly, very nicely, which was a nice thing to see.

Jim Duffy - Thomas Weisel Partners Equity Research

Ralph, I feel like I ask this every quarter, but can you quantify the impact to the liquidation efforts on gross margin?

Ralph Castner

I'm not sure we can, Jim. We've been really pleased with how we've continued to work down age and problematic inventory. But to try to quantify, it's difficult.

Jim Duffy - Thomas Weisel Partners Equity Research

And so, Tommy, circling back to what you said about being aggressive about clearing fall inventory in January, do you think you were -- is it possible you were too aggressive with that and you could have made better margin on it if you weren't as aggressive and sold it in maybe February and March?

Thomas Millner

Jim, I think the simple answer is no. Just as a matter of good business discipline, keeping inventories as clean as possible is simply good business. And if that meant in January, we sacrificed a little margin, I stand by that decision. I think it was the right thing for us to do. What's encouraging is, and once we got through that, we are seeing nice improvement. And I would add, I'd be disappointed if, as the course of this year unfolded, we didn't see lift in margin.

Jim Duffy - Thomas Weisel Partners Equity Research

So by the second half of the year, you would expect to see merchandise margins improve on a year-to-year basis?

Thomas Millner

I'd be disappointed if we didn't.

Jim Duffy - Thomas Weisel Partners Equity Research

Tommy, when would you expect to be able to see positive same-store sales result?

Thomas Millner

Jim, as you know, we don't give comp store sales guidance, and I'm not going to start today. Suffice to say, when you look at our updated guidance, that should tell you that across the enterprise, we feel pretty good about our business, and I'll let it go with that.

Operator

And now, we'll open the floor up to Derek Leckow with Barrington Research.

Derek Leckow - Barrington Research Associates, Inc.

Tommy, just if I could start with the guidance, just to put a finer point on things here. I'm looking at the consensus estimates, they're $1.33. And then, if I just adjust this quarter for that one-time charge, $0.29 in earnings in the first quarter, I'm coming out with about $1.52. Is that what you mean by the guidance?

Ralph Castner

No, Derek. This is Ralph Castner. When we talked about our full year guidance, it was on a reported basis. So it would've been the reported numbers, not the non-GAAP numbers. So I guess the point was we were looking at the same current expectations you were, but not looking at the non-GAAP number, we're looking at the reported number of $0.12.

Derek Leckow - Barrington Research Associates, Inc.

Yes, right, but that gives me to about $1.34. So if I take that adjustment for the first quarter -- but if I make that adjustment for the $18 million, I'm coming out with something closer to $1.50 if I just call that the true first quarter operating earnings number.

Ralph Castner

Well, I understand that. Yes, I understand that. But when we talked about hitting the number, it was the $1.34 number you quoted. And obviously, to your point, we don't expect to have the one-time charge we talked about this year or a year from now. And If you want to add back that, that's your choice.

Derek Leckow - Barrington Research Associates, Inc.

Yes, that's my thinking as reasonable here. Tommy, last quarter, you gave us a pretty good sense for the growth in multi-channel customers, and I think I'm most encouraged to see the growth in your Direct business despite the pullback in pages mailed and so forth. So growth in multi-channel, more customers, how did that do this quarter?

Thomas Millner

Up 3% with acquisition up 16%. Retention and reactivation were essentially flat.

Derek Leckow - Barrington Research Associates, Inc.

Then, just as I can look at, there are other categories beside firearms, you mentioned 10 of the 11 growing. Now these were up against fairly, I guess, easier comparisons last year. How would you characterize the comparison during the recession last year?

Thomas Millner

Well, obviously, guns and ammo were big last year. As we've said we saw a shift in market basket. Comps are never easy, so growing our business in the environment that the world lives in today is always challenging. But at the end of the day, seeing improvements in men's apparel, power sports, footwear has just done a terrific job. We're encouraged by those.

Derek Leckow - Barrington Research Associates, Inc.

I guess those are comping positive in each of those categories now, right?

Ralph Castner

Yes, Derek. I mean, what I guess please me the most -- this is Rob Castner, the two of the best categories were footwear, which we've discussed a lot had to do with how we rearrange the stores, making them more self-service friendly. And the other one that's encouraging is optics, is a very strong category. And the reason I guess I'm encouraged by that is, that was a good category a year ago because of the guns and ammo phenomenon and the to be able to grow on top of that is a big plus. We've started to see some improvement in clothing. We started seeing some improvement in the clothing area, which is encouraging.

Operator

And now we'll hear from Rick Nelson with Stephens Investment Banking.

Rick Nelson - Stephens Inc.

I wanted to ask you what triggered the FDIC review and why it's announced today rather than last year in the 10-K.

Thomas Millner

Rick, I hope you'll appreciate that there really only four things I can comment on as it relates to the FDIC. First, all matters of concern were changed or eliminated in 2009 and therefore, are part of our 2010 guidance. Secondly, we've estimated our maximum liability and reserved accordingly. Third, after taking the charge, we expect to meet or exceed current expectations, and we're still working with the regulators to resolve the matter. And I really can't go a lot further, and I would appreciate your indulgence.

Rick Nelson - Stephens Inc.

Would you be able to tell us if the charge, is it a fine or is it a return of capital to the customers or...

Ralph Castner

I'll add. The vast majority of it is restitution. And the reason there was no discussion of it in the K was we didn't receive written notification of the FDIC until after the K was filed.

Rick Nelson - Stephens Inc.

Can you also talk about sales momentum during the quarter. I know you mentioned that you got a merchandise margin lift as a quarter progressed. I'm curious about how the comp tracked during the quarter. Any commentary on April would be helpful.

Thomas Millner

Rick, I think that if I recall correctly month-to-month, the quarter was pretty consistent across all channels. April, we don't have a lot to say about April because it just closed on Saturday night and we've been pretty busy the last couple of days getting ready for you guys. I just had a very high level. As expected, revenues were a little down. This is kind of the high watermark of the gun and ammo surge last year. And margins were better than expected. But that's very preliminary as Ralph and I really haven't even looked at numbers.

Rick Nelson - Stephens Inc.

Also the provision for bad debt was dramatically lower than a year ago in the quarter, 2 1/2% of managed receivables compared to 4.1%. What drove that change?

Ralph Castner

Well, the biggest thing is just as we -- I mean, as I'm sure you know, Rick, given the new accounting, we make the provision for bad debt expense based upon our expectations in the future. And given what we've seen in sort of flattening to declining delinquencies relative to a year ago, we continue to be encouraged by what we're seeing on a bad debts standpoint.

Rick Nelson - Stephens Inc.

Why do you think the charge-offs of WFB are showing this as positive turnaround?

Thomas Millner

Well, Rick, I think if you go back to the last two years, I think it's our sense that the economy certainly is modestly improving from what we've been through in the last two years. So I don't think it should be a big surprise. It's occurring across the credit card sector. And I think it's just a function of a modestly improving macroenvironment.

Rick Nelson - Stephens Inc.

Also, I wanted to follow up on the Direct channel. We saw growth this quarter driven by Internet. Can you break out the performance of the Internet versus the catalog? And do you think the overall growth rate is sustainable?

Thomas Millner

Well, Rick, we don't, I think as you know, breakout Internet and catalog. We can tell you that we did see really nice growth in the Internet. This is a longer-term trend. We're the dominant player in the Internet, in the industry. Our traffic is twice the next largest competitor. And it's been an area of great focus for us. I think one of the bigger headlines is that we've spent a lot of time over the last several years refining our contact strategy with catalogs, to go to smaller catalogs, more event-driven catalogs that are designed to stimulate consumers to come to our website. And it would appear that, that strategy was successful in the first quarter. Definitely, one of our longer-term goals is to grow the Direct business over time, and it was nice to see that we had a good win in the first quarter.

Operator

And now we'll hear from David Magee with SunTrust Robinson and Humphrey. [SunTrust Robinson Humphrey]

David Magee - SunTrust Robinson Humphrey Capital Markets

On the expense side, you mentioned that advertising was a little higher, the page count was a little lower. What else got reduced, I guess, on a year-to-year basis on the expense line? And how much more do you have there in terms of your ability to reduce that number?

Thomas Millner

Distribution expense was also favorable in the quarter and retail labor was favorable. As I mentioned, we had a real win in our retail stores with the self-service fixtures for footwear, which offered that perfect opportunity of growing sales, improving customer satisfaction with less labor, so those kind of wins. I've said a number of times on calls that to accept the proposition that a company can never improve on efficiency is something I just don't accept, that our team doesn't accept. So there are always technologies available to help us do more with less. So I don't ever see opportunities ending for cost improvements.

David Magee - SunTrust Robinson Humphrey Capital Markets

Also on the loss provision number and excuse my ignorance here, but was the first quarter -- was this sort of a one-time catch-up or adjustment into or is loss provision for the entire year going to be less than you had originally expected?

Ralph Castner

No, I think -- look, obviously over time, the loss provision got to approach with the bad debt are. And I do think you can expect for the full year losses to be in that 2 1/2% range. Now because we'd reserved for them all for the start of the year, it's probably -- it's possible for them to be lower than the charge-off rate but not at the 2 1/2% level.

David Magee - SunTrust Robinson Humphrey Capital Markets

And then lastly, are you seeing any impact, as you can tell, with the higher gas prices on a year-to-year basis?

Thomas Millner

No, we can't tie anything in our business to that.

Operator

And now we'll hear from Chris Horvers with JPMorgan.

Christopher Horvers - JP Morgan Chase & Co

I just want to make sure I understand the accounting for losses. So Ralph, isn't that you say -- our provision we think needs to be x at year end. We're going to adjust to that at the end of the first quarter. So that $15 million provision this quarter, if you ended the year like you did last year, $120 million, that means that incrementally, the loan-loss provision in 2Q to 4Q is going to add up to that $120 million, if we just use that as an example?

Ralph Castner

I think I got lost in your numeric example. Do you want to run -- let me explain what we do and then you can repeat your numeric example. And obviously, what we determined in any quarter end is that our allowance for future loan losses is adequate. We set that number at $105 million at the end of the first quarter and we believe that reflects all the losses in our portfolio. Overtime, clearly, that number has got to approach what's the actual charge-off number is.

Christopher Horvers - JP Morgan Chase & Co

So if you set it $105 million and we stay at that, if you're going to annualized that, that would be roughly $26 million a quarter. So you took a charge of $15 million. So that $15 million is basically to get that provision up to $105 million?

Ralph Castner

In your example, the $105 million is the allowance, which is the balance sheet number for what we believe is basically one year's losses in the portfolio. So I'm trying to -- does that mean that our actual expense for the full year is going to be $105 million? It could be. Although, like we've seen improving environment particularly as we look out there. But it will clearly be higher than the annualized trying to get to the charge-off number -- it will clearly be higher than the annualized expense that we recognized in the first quarter. In the first quarter, our provision for loan losses was $15,000,147. So if you, obviously, if you take that times four, you're at $60 million. I think the full year provision will be a higher number than that. I don't know if it will approach $105 million or not.

Christopher Horvers - JP Morgan Chase & Co

And the only way -- and it doesn't approach $105 million, if you see continued improvement in credit behavior, if we froze it today, it would be $105 million? If credit behavior didn't change as you saw it at the end of the first quarter, it would be $105 million?

Thomas Millner

Yes, I think that's probably fair.

Christopher Horvers - JP Morgan Chase & Co

And then on the -- within the Financial Services side as well, can you talk about what the allocation was to the Retail and Direct business?

Ralph Castner

Yes, the allocation of Retail and the Direct business, in Retail it was up $3.7 million. In Direct, it was up $3.5 million.

Christopher Horvers - JP Morgan Chase & Co

Jumping back to that loan loss, if I use that $105 million and I basically zero that against your guidance for $5.25 to $5.75, that's kind of your, I guess, balance that you're expecting on receivables, average balance? Is that right?

Ralph Castner

I'm not sure I understand your question.

Christopher Horvers - JP Morgan Chase & Co

So if I took the $105 million and I divide it by 0.055, isn't that you're...

Ralph Castner

No, because the problem with the $105 million is it also assumes some paydown in receivables. When we estimate our losses in the portfolio at any given point in time, it assumes some paydown in receivables during the year. So I don't think you can do half [ph](49:51) that easily.

Christopher Horvers - JP Morgan Chase & Co

And then moving on, in terms of the gross margins, the merchandise margins sound great. So you've really worked hard to cleanup the inventory throughout the past 12 months or so. Do you think that -- were merchandise margins as they progress through the quarter -- were merchandise margins actually up as you got to the March timeframe?

Thomas Millner

No, they never got to up. Although they made really significant sequential progress as I'd said.

Christopher Horvers - JP Morgan Chase & Co

As we look at the balance sheet, Ralph, what is the Retail and Direct -- take the bank off, what's the cash and debt? Could you review again what cash and debt is attributable to just the Retail and Direct business and not the bank?

Ralph Castner

Let's start with debt because it's by far the easiest. If you go look at the balance sheet, what we try to break out is that long-term debt number of $35,099,000. That is the Parent Company/Merchandising business only debt. The secured long-term obligations of the trust, the $1,378,000,000 and the $749.5 million, those are obligations of our trust which is now consolidated. And then the time deposits, the short-term piece, which is 124 and the long term piece, which is 337, those are obligations of the bank. The cash we had at year end, at the end of the quarter was only $39 million. As we kind of go into our seasonally high borrowing trends, which left then $252 million of cash at the bank. And then all of those held to maturity investment, the maturities of $225 million were also bank-only investments. So with just to that long explanation is, at the Parent Company there's a very little cash at the end of March and relatively little debt.

Operator

And now will open the floor into Jim Chartier [ph] with Emones Crestine Park [ph](52:24)

Unidentified Analyst

I want to circle back and then follow up on Chris' question. One, the change in the disclosure for the Financial Services revenues, is that just related to the accounting changes for doing the bank assets on the balance sheet?

Ralph Castner

From what we disclosed in the past, I'm not sure to what change you're referring to, before we disclosed in the past in the press release about the managed revenue of the bank, there's very few differences on how that's calculated, other than in the past that we had this change we had in the residual value of a subordinated interest, which now becomes provision for loan loss. Other than that, there is no difference in how managed revenues is calculated.

Unidentified Analyst

I believe that the net charge-offs used to be very close to the provision for loan losses. Is that right?

Ralph Castner

No, that's correct. So now we develop a provision based upon what we believe the adequacy for allowance for loan losses was. And in this quarter, that was 2 1/2% relative to losses, which were approaching charge-offs, which were approaching or were actually 4.96%.

Unidentified Analyst

And the reason that's done this year versus last year is because you now have the assets of the bank on the balance sheet?

Ralph Castner

That's correct, and an appropriate allowance.

Unidentified Analyst

So at the end of the press release you disclosed net charge-offs were $30 million. So if you're following the same convention last year, the provision for loan losses would have been $30 million rather than the $15 million reported this year?

Ralph Castner

I'm not sure I know where you -- yes, net charge-offs were $30 million. I think the only difference in a -- you're actually close. I think the only difference -- when I look at --- and I'm comparing that to a year ago where charge-offs were $26 million versus the P&L of $23 million, I think that numbers does not include recoveries, which generally wrote about 10% of charge-offs. So I mean yes, you're directionally correct.

Unidentified Analyst

So this year, you're getting a benefit because you now are taking down your expectation for future loan losses whereas last year you weren't able to do that?

Ralph Castner

Yes, if you want to try to isolate it, it's real simple. I mean the allowance for loan losses is disclosed on the balance sheet and it was reduced in the quarter by $11 million. So I guess, if you want to go back to the old methodology, you had assumed the provision was $11 million higher. But when you do that, also remember, we have unusual item for the FDIC issue of $18 million.

Unidentified Analyst

But that was broken out in the press release?

Ralph Castner

Right.

Unidentified Analyst

And then kind of going forward, if your loan loss provisions decreased back to historical levels, how do you view the sustainability of kind of the interest rate increases you've taken over the last 12 months to kind of offset the increased loan losses?

Ralph Castner

I mean, look, the pricing of our credit product will ultimately be determined by the market and there's a lot of upward shift in pricing in some parts due to regulatory changes. So we'll continue to adjust our product pricing to whatever it is in the market. And at least for the intermediate term, I believe those are sustainable that we have a sustainably priced product. Actually, we did.

Operator

And then that will open the line up to Paul Lejuez with Crédit Suisse.

Paul Lejuez - Crédit Suisse First Boston, Inc.

Sorry to continue on with the charge-off questions. But you guys saw charge-off somewhere around 5%. You're guiding to 5 1/4% to 5 3/4% for the year. But the provision you took was well below that. Isn't this the first time you had a provision for the entire balance? Isn't this the first time you took it? I guess I don't understand what you're adjusting from?

Ralph Castner

What do you mean what I'm adjusting from?

Paul Lejuez - Crédit Suisse First Boston, Inc.

Well, your actual charge-offs around 5%. You expect them to be higher than that. So how is the provision lower?

Ralph Castner

Well, it's based upon what our -- here's what we did. At the end of the year, we set up a provision for loan loss of -- or an allowance for loan loss of roughly $115 million based upon our outlook for credit losses at that point in time.

Paul Lejuez - Crédit Suisse First Boston, Inc.

Could we see that provision anywhere?

Ralph Castner

It was disclosed in the 10-K. A matter of fact, I think I specifically shared the number with you, Paul. You remember that? old conversation?

Paul Lejuez - Crédit Suisse First Boston, Inc.

Yes.

Ralph Castner

Okay, so we disclosed in the 10-K that our start of the year allowance for loan loss was going to be $115 million. That was based upon -- and obviously it was down slightly for those [ph](57:51) Oh no, it was down about at year end.

Company Speaker

We announced the go-forward number?

Ralph Castner

Right, a go-forward number for loan losses. When we got to the end of March, we actually used the exact same model, put in the new inputs with our new expectations for we thought loan losses were going to be for the ensuing year and it was $105 million. So therefore the provision we needed to get our allowance to that $105 million number was less. And now the questions we got earlier, which were along the right lines -- look, I mean, I supposed, theoretically, you could look at that and say, "That's our expectation for losses a year out." Because our goal is to have one year's losses, one year's losses builds us an allowance. Now obviously, when you start looking at short periods of time like quarters, that gets a little out of sync.

Paul Lejuez - Crédit Suisse First Boston, Inc.

Can you give us what the operating cash flow was and the CapEx for the quarter?

Ralph Castner

Yes, first of all, I will give you the cash flow for the quarter. I'll start there. CapEx for the quarter was $14,291,000. Cash from operations, that you'll see when the Q's filed is $10,000,094. But see my comments earlier on my script about how that number is not comparable to year ago because of the changes due to FAS 166 and 167. And if you like it, I can take -- it's pretty easy to see. If you look at my comments and then look at the Q when it's filed to reconcile the differences.

Thomas Millner

But Paul, I would add that at a higher level, we remain very pleased with the progress that we're making in properly managing our balance sheet.

Paul Lejuez - Crédit Suisse First Boston, Inc.

On the gross margin line, what would the gross margin look like from the Van Dyke's and Wild Wings businesses? Was that above or below the normal core business?

Thomas Millner

Well, it was about $7 million of revenue in the quarter. Ralph, can...

Ralph Castner

I mean it was slightly higher in the core business but it so immaterial, Paul.

Thomas Millner

It's not material.

Paul Lejuez - Crédit Suisse First Boston, Inc.

I was thinking that it was probably a little bit lower. So I guess that's not right. But shouldn't there also be a natural lift on gross margin from weaker guns and ammo sales versus the rest of the product categories? And I guess, what would that imply is happening on those other categories?

Thomas Millner

Well, as you may not have been on the call, but on the call when I answered that question, it's not -- well, certainly, guns and ammo helped a little bit. That really isn't the story. We saw improvement almost across the board in our other categories as a result of all the work that we've been doing for the last two years to begin to improve margins over time.

Ralph Castner

The improvement you saw was sales improvement, not necessarily margin improvement. We have seen improvement in certain categories. The improvement Tommy was talking about was sales improvement.

Paul Lejuez - Crédit Suisse First Boston, Inc.

Does this FDIC examination impact your ability to sell CDs at all?

Ralph Castner

No.

Operator

And now we'll hear from Mark Smith with Feltl and Company.

Mark Smith - Feltl and Company

Can we talk at all about kind of average ticket compared to traffic, both in the Retail and the Direct business?

Thomas Millner

Yes. Average ticket, Mark, was up in Retail 4.9%. Sales per labor hour was up 9 1/2% and transactions were down 6.4%. That's in Retail. And in Direct, order size was -- ticket was down 1.3%, and orders were up 3%. And you would expect transactions to be slightly down, given the gun and ammo settling.

Mark Smith - Feltl and Company

And then can you give us an update where we stand on Xanadu and also insight into Grand Junction?

Thomas Millner

Well, first, the great news. Grand Junction is going to open on May 20. Our teams have been out there. They're very excited about the market. The store is at that point where merchandise is flowing, we're right on time. As you know, Ralph is now responsible for real estate among his other responsibilities, and I'll let him go into some detail on Xanadu.

Ralph Castner

I'm not sure we got a lot to add on Xanadu. But the sort of the status of that is that there is an out lease. If that mall is not open by -- I believe it's October of this year. And I'll just let you guys opine on what you think the status of that mall is with respect to an October opening.

Mark Smith - Feltl and Company

And then on the timing of some of these new openings, I think your press releases said early spring for Oregon and Texas. So I guess we can assume late Q1 or Q2 of next year. And then when could we look for the one in Canada?

Thomas Millner

If I may, let me just touch on the two new stores. As we've said, we're going to use an appropriate blend of repurposed real estate in Greenfield, and these two stores are the perfect example of that. The store in Oregon is a repurposed piece of real estate in a very busy mall that our store actually fronts on I-5 with the tens of thousands of cars passing it on a daily basis. And we think it's a great place for a store. Good traffic, good retail adjacencies. In contrast to that, the store north of Dallas is in one of the fastest-growing parts of Dallas and Allen. And that's going to be a greenfield site, a 100,000 square-foot store sitting right on a major thoroughfare leading out of Dallas, north to the fishing areas and hunting areas. So we feel great about that store. So you get kind of the balance of the greenfield and repurposed. In Canada, we just slightly modified our opening plans for one store in '11. The other in '12. As we ramp up Canada, we just want to make sure we're doing everything we can to ensure success. And just modifying these launches, it's not material in our numbers, but we think it's the prudent thing to do.

Ralph Castner

I think we're really -- Tommy, touched on, I think we're really excited about the Grand Junction opening. That will be the new news. I believe that opens two weeks from Friday. So that will be an exciting opening.

Mark Smith - Feltl and Company

And then Tommy, just a follow-up on that. Looking at where you're doing some conversion, as well as some new builds, can you talk or give any insight into CapEx for 2010?

Thomas Millner

Yes, I think we're still -- at what Ralph? About $60 million?

Ralph Castner

Yes, we'll be somewhere around that $60 million to $70 million. The refurb store, and you can probably assume to this, but the store in Eugene is a lease situation. So that obviously have less CapEx than what we'll have in Allen. So yes, we'll be somewhere around $60 million or $70 million next year, stores will be a huge piece of it.

Operator

And now we'll open the floor up to Kristine Gerber with JMP Securities.

Kristine Koerber - JMP Securities LLC

First, as far as the financial liability, the $12 million after-tax, that is flowing through SG&A, correct? And if so, why is that?

Ralph Castner

Well, you're right. It is flowing through SG&A. And we believe that's the appropriate accounting for that, since it's primarily restitution and it's related to periods so long ago.

Kristine Koerber - JMP Securities LLC

And then you talk about the Footwear business and you're seeing much stronger sales in Footwear after you redesigned, went to more self-service. How much stronger are the sales and when do you expect to have the balance of the stores converted?

Thomas Millner

Well, they were up 9% to frame it. So a nice increase. And we'll roll out the rest of the stores in the balance of the next few quarters.

Kristine Koerber - JMP Securities LLC

And then, can you talk about the -- what you're seeing as far as conversion rates online?

Thomas Millner

No, I don't have those numbers in front of me.

Operator

And now will take a follow-up question from Jim Duffy with Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners Equity Research

Just a question on the Finance business, the variance between your gross charge-offs and the provision for loan loss, had been running about 30 to 40 bps conservative on a quarterly basis. Ralph, would you expect we'd see the provision of gross variance kind of revert towards that trend?

Ralph Castner

It just all depends on our expectation for future losses. There's no question they're going to start to approach each other. I don't know if they'll get that close. What we really driving is as we get to the back half of the year, what our outlook is going to be for 2011. That's really what you're kind of starting to predict.

Jim Duffy - Thomas Weisel Partners Equity Research

So if you take the annual guidance of 5 1/4% to 5.75%, and you take the -- what you're provision was in the first quarter. You're either expecting a meaningful increase in charge-offs or you're -- it sounds like you're building in some increase in the spread versus the current run rate in the gross...

Ralph Castner

Well, I guess I'll go to my comments earlier, Jim. And this is very, very theoretical. But what you're really trying to predict for this year's provision is what your losses is going to be for the full year of 2011. And as I said earlier, we clearly think they're going to be higher than 2 1/2%. So I think you're going to expect upward pressure. Now it's just way too early to predict what that number's going to be for 2011. We're very encouraged of what we're seeing from a bad debt perspective. But I'm not ready to throw a number out there. But clearly, 2 1/2% is lower than what we'll expect for a full year provision basis in '10 or a full year charge-off basis in 2011.

Thomas Millner

And Jim, I would add, this shouldn't be a surprise to anybody given the improvements that we're seeing in the broader economy.

Jim Duffy - Thomas Weisel Partners Equity Research

Not surprising at all. I guess what I'm trying to get my arms around is if there's something within your portfolio that leads you to believe that charge-offs should continue to go up or would go up into '11, given the backdrop of an improving economic environment and hopefully...

Ralph Castner

I think all the good direction we can give you about that we're really encourage with what we're seeing. I mean, just to compare delinquencies, for example, Jim, we're at 1 73, that's compared to 1 89 a year ago. So I think we're pleased with what we're overseeing, but there's a lot to your left and there's a lot of weird things that can still go on in the economy.

Jim Duffy - Thomas Weisel Partners Equity Research

I mean, my conclusion based on what I'm hearing from you is that it seems like that 5 1/4% to 5.75% could even proved conservative.

Ralph Castner

We'll see.

Operator

And ladies and gentlemen, that is all the time we have for question today. At this point, I would like to turn the call back to Mr. Tommy Millner, Chief Executive Officer for any closing or additional remarks.

Thomas Millner

Thank you guys for joining us today, and we look forward to taking to you again soon. Goodbye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Again, thank you for your participation. You may now disconnect.

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