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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

Reed Anderson with D.A. Davidson

David Magee with SunTrust Robinson and Humphrey

Andrew Burns – Stifel Nicolaus

Rick Nelson - Stephens Inc.

Mark Smith - Feltl and Company

Aaron Goldstein – JP Morgan

Jonathon Grassi – Longbow Research

Christine Korber with JMP Securities

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) Q2 2010 Earnings Call July 29, 2010 11:00 AM ET

Operator

Good morning, Ladies and Gentlemen, and thank you for standing by. Welcome to the Cabela's, Incorporated Second Quarter Fiscal 2010 Earnings Conference Call. At this time, all participants are on a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions)

I will now turn the conference over to Chris Gay – Director, Treasury and Invest Relations. Please go ahead, sir.

Chris Gay

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

With me on today’s call are Tommy Millner, Cabela's Chief Executive Officer; and Ralph Castner, Cabela's Executive Vice President and Chief Financial Officer.

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

For information about certain factors that could cause such differences, investors should consult our annual report on Form 10-K, and quarterly report on Form 10Q, filed with the Securities and Exchange Commission, and available on our website, including the information set forth, under the captions, risk factors and special note regarding forward-looking statements.

Additionally, this conference call will include certain non-GAAP financial measures. Please refer to our earnings release to find reconciliations of these non-GAAP financial measures to GAAP. Now, on to the financial results.

Through the quarter, adjusting for divestitures, consolidated revenues decreased 3.3% to $526 million. Retail revenue decrease 2 1/2 % to $294 million. And direct revenue decreased 11.7% to $172 million.

For the quarter, financial services revenue increased to 28% to $56 million as compared to $44 million in year ago quarter. Recall that second quarter 2009, financial service revenue included a $8 million gain related to the valuation of our interest only strips.

The increase in financial services revenue was due to lower provision for loan losses, higher interchange and interest and fee income, and lower interest expense.

Operating income, increased 62% to $30.7 million as compared to $18.9 million in the year ago quarter. And earnings per share increased 98% to $0.26 in the quarter compared to $0.14 in the year-ago quarter.

Second Quarter 2010 results include $1.4 million after-tax impairment charge, related to land held for sale.

Second Quarter 2009 results included impairment and other special items, netting to $2.1 million after tax. Excluding these items in each quarter, earnings per share for the second quarter of 2010 were $0.28 compared to $0.17 in the second quarter of 2009.

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

Tommy Millner

Thank you, Chris. And good morning, everyone. We are encouraged by our second quarter results, which reflect the continued progress we’re making in our areas of strategic focus, improved results at World’s Foremost Bank, and a keen focus on a balance sheet and return on invested capital.

Let me start with the progress we continue to make on our areas of strategic focus. We are particularly pleased with the improvement in merchandise gross margin we realized in the quarter.

For the quarter, merchandise gross margins increased 80 basis points; the first increase in the past year. The improvements were broad based as margins increased in 11 of 13 merchandise subcategories.

Improvements in merchandise gross margin are a result of lower markdowns and liquidation of problematic inventory due to better inventory management, and early progress related to vendor collaboration and price optimization.

We’re still in the early stages of our gross margin expansion initiatives, which provide us with greater confidence that we will continue to see margin expansion for the remainder of this year and into next year. And that we are on track to improve merchandise gross margins 200 to 300 basis points by the end of 2012.

Partly due to improvement and gross margins and despite lower revenue, retail segment operating margins increased 270 basis points in the quarter. This is the fifth consecutive quarter of increases in retail segment operating margin.

In addition to higher gross margins the retail segment received higher marketing fees from our bank in the second quarter this year compared to the year ago quarter.

Increasing retail profitability is a key component of our retail expansion strategy. And this margin expansion combined with early successes at our next generation stores, enhances our confidence in future retailing expansion opportunities. And we continue to be pleased with the early success of our Grand Junction Store, 90 days into its grand opening.

Now, let’s review revenue and merchandising trends during the quarter.

Firearm sales remain relatively strong and we continue to capture market share. Ammunition sales remain relatively strong in our retail stores, but we are seeing less demand for ammunition in our direct business. We attribute this to consumers not having to search the internet for ammunition as they are able to find ammunition at retail stores as supply continues to catch up to demand.

Exclusive of the shooting category, which includes ammunition and reloading supplies, merchandise demands remained relatively strong in the quarter. However, as a result of our aggressive inventory reductions, we cut inventory a little too much. Particularly in Cabela's branded soft goods. This resulted in significant lower fill rates in our direct business.

Additionally, with less problematic inventory, we did not have as much clearance inventory to offer to our customers. Due to longer lead times associated with Cabela's branded product, we expect these low inventory levels to continue to modestly impact direct revenue in the early third quarter before returning to more normalized levels by the fall selling season.

Now let’s look at World’s Foremost Bank.

The operation of World’s Foremost Bank continues to drive significant customer loyalty. For the quarter, financial services revenue increased 28%. Average active accounts increased 5 1/2% and the average account balance increased 2%. Cabela's Club Members, continue to be our best, most credit worthy, and highest net worth customers.

Now turning to operating expenses.

During the quarter, we were able to make personnel additions in our merchandising, planning and inventory control areas and still hold operating expenses consistent with the prior year. And we’re pleased that these investments led to increases in gross margins.

The improved operating results I previously mentioned, combined with our balance sheet improvements, continue to lead to improvements in return on invested capital. Improving return on invested capital has been a key focus of ours and given our strong second quarter results, we again realized improvements in return on invested capital.

On a rolling four-quarter basis, return on invested capital improved 120 basis points year over year.

As we have previous disclosed, our long-term goal is to improve ROIC to achieve a 12 to 14% return on capital over the next several years, and we expect to achieve our goal.

Now let me update you on our retail expansion plans.

For 2011, we remain on track to open two stores in the U.S. and one store in Canada. We expect to open both Springfield, Oregon, and Allen, Texas in the second quarter of 2011. And as you may have seen this morning, we announced that our Canadian store will be in Edmonton, and is scheduled to open mid next year.

This store will be one of our next-generation store formats, and is expected to be 70,000 square feet in size. And given our strong results in Winnipeg, we are very excited about our further expansion in Canada.

We currently expect to open another store in Canada in 2012, and are actively seeking additional locations in the United States. We look forward to entering these new markets and will announce additional locations as negotiations are completed.

Now, turning to guidance.

We’re pleased with our continued progress, controlling cost and driving operational excellence. Given our strong results for the first half of 2010, we expect earnings per share for the full year, exclusive of impairment and other special charges, to meet or exceed current expectations.

Before turning the call over to Ralph, I would like to thank all Cabela's employees for their hard work and dedication. Their commitment to our customers 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 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 encouraged with our second quarter financial results. And as Tommy mentioned, the significant progress we made in areas of strategic focus, balance sheet management and return on invested capital.

Let me start with World’s Foremost Bank, which had another solid quarter. For the quarter, managed financial services revenue has a percentage of average managed credit card loans, increased to 160 basis points to 9.4% compared to 7.8% in the year ago quarter.

Increases in financial services revenue were primarily due to lower provision for loan losses, which were $10 million less in the same quarter year ago, and a $6 million increase interchange income, and $4 million increase in interest and fee income.

Additionally, as a result of the favorable interest rate environment, interest expense decreased $4 million or 90 basis points as a percent of average manage credit card loans. These results are all the more encouraging given that in the second quarter of 2009, we recognized a $8 million gain related to the valuation of our interest-only strips.

For the quarter, net charge offs as a percentage of managed credit card loans, were 4.78% as compared to 5.24% in the second quarter last year.

Additionally, we continue to see a decrease in delinquencies. Greater-than-30-day delinquencies were 1.45% as compared to 1.81% a year ago. Greater-than-60-day delinquencies were 0.91% as compared to 1.08% a year ago, and greater than 90-day delinquencies were 0.47% as compared to 0.56% a year ago.

As a result of these lower delinquency rates, we now expect average net charge offs for the year to between 5% and 5 ½%. The gain in the first quarter of 2010, WFB makes a quarterly provision for low losses.

The two primary factors in determining the amount of provision are the size of the portfolio and our expectation of future charge offs.

Due to our improved outlook for future charge offs, in the quarter are annualized provision for credit losses was 2.7% which is less than our charge off rate of 4.8%, and up from 2.5% in the first quarter.

For the remainder of 2010, we expect our provision for loan losses will be approximately the same as our charge-off rate for the same period of time.

As charge offs continue to stabilize, I’d like to highlight the high quality of our credit card portfolio. Since we formed World’s Foremost Bank in 2001, we’ve operated it with the goal of providing a superior customer reward program at a reasonable cost. And with more than 1 million active customers. And given the profitability of this business, we’ve certainly exceeded our goals.

Since the inception of WFB, we’ve maintained our strict credit standards, and as a result, experienced charge off rates well below industry averages. This is extremely important to us, and we continue to maintain our high credit standards.

At quarter end, the median FICO remained relatively unchanged at 787.

Now, I’d like to remind everybody about WFBs capital position.

As we’ve previously disclosed, the consolidation of the assets and liabilities of the trust, effective January 1, 2010, increased World’s Foremost Bank capital requirements by roughly $200 million. Regulators have provided a four-quarter grace period for companies to meet their capital requirement.

Recall that Cabela's invested $75 million of capital into WFB in the first quarter of 2010. And we expect to invest to remain $125 million later this year. Given our strong cash flow through the first half of year and our expectations for the remainder of the year, we expect to fund this investment with cash on hand in the later part of this year.

Now, turning to comparable store sales.

For the quarter, comparable store sales decreased 4.6%. As you know, this fiscal year began on January 3, 2010. The prior year began on December 28. In order to make the same store sales calculation, and any discussion on this call which regards to merchandise trends more meaningful, we assume that both this fiscal year and the prior fiscal year began on the Sunday closest to January 3rd.

Another area, which we’re proud of is our continued progress in strengthening our balance sheet. For the quarter, inventory decreased $74 million. Accounts payable increased $33 million as we standardized our payment terms. Accounts receivable decreased $60 million year over year. Gift instruments and credit card loyalty points increased $12 million. And other assets are down slightly.

Additionally during the quarter, we sold $5 million of economic development bonds related to our Reno store.

All of our balance sheet improvements helped to significantly improve cash flow of operations, which you’ll see in our 10Q when it’s filed.

Due the first six months of the year, cash flow of operations improved $73 million. On a consolidated basis, we ended the quarter with $274 million of cash and cash equivalents; nearly all of which is held at World's Foremost Bank.

Additionally, World's Foremost Bank holds $225 million worth of investment, which mature prior to year end, and we will need additional liquidity to meet our seasonal borrowing needs.

Additionally, we continue to reduce outstanding debt at the parent company, further strengthening our balance sheet. At quarter end, the parent company debt totaled just $383 million compared to $490 million at the end of the year ago quarter.

Now, 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 second quarter of 2010 was 32.7% as compared to 37.3% in the second quarter a year ago.

We currently expect our effective tax rate for 2010 to be between 34 and 34 ½%.

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

Tommy Millner

Thanks, Ralph. Again, we’re very pleased with our financial results for the Second Quarter of the year, and the significant improvements we continue to make in our areas of strategic focus.

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

Question-and-Answer Session

Operator

Thank you, sir. The question and answer session will be conducted electronically. (Operator Instructions)

Our first question comes from Reed Anderson with D.A. Davidson. Please go ahead.

Reed Anderson – D.A. Davidson

Good morning, guys.

Thomas Millner

Good morning.

Reed Anderson – D.A. Davidson

Hey, a couple of questions. Let me start and kind of focused on comps a little bit first. The language in the release, and kind of your comments more or less replied that the absent of closeouts is more of a factor for direct. And I guess, I would think though that that would also have maybe a pressure on just comps. And I would be curious on your thoughts as well on that.

Thomas Millner

Reed, let me talk about same store sales a little bit. It was really a tale of two stories in the quarter. Virtually all of our comp decline was the result of April. We got the feeling in April that the consumer was just catching their breath in a big way after a fairly healthy first quarter for most retailers.

And what encouraged us was that as we came back into May and June, comps were nearly flat in May and June. And I would add that that trend is continued into July.

And most importantly, we saw this accelerations in margin during the quarter, which is – I think everyone on the calls knows, has been just a key, strategic focus for us because our ability to grow margins over time, it sort of sets the platform for the success of our entire company.

So it was very much a – at retail, not an inventory issue. And if you think about retail, we have a lot more national brands and soft goods in our stores where the catalog and internet business are really dominated by Cabela's branded soft goods, which is really where we got caught from an inventory standpoint.

Reed Anderson – D.A. Davidson

That’s very helpful. And then, as you saw that weakness in April, I’m just curious, did you adjust the promotional cadence at all, whether it’s with direct mail, or mailings. Anything that you would have taken to change that, to help the pick-up or was that constant as you planned it.

Thomas Millner

Well, obviously, April was down, I think for us, and most retailers, much deeper than anybody expected. But we believe in our strategy and believe in our plan, and there was no panic here. We felt really good about what we had coming in the balance of the year and just kept playing our game.

Reed Anderson – D.A. Davidson

That’s very helpful. Thanks for that detail. Then on the financial service piece, Ralph, that’s good commentary in terms of kind of how to think about the provision versus charge offs for the second half. But remind me, why is it also when you look at it on a non-GAAP basis that the other non-interest piece, that’s also kind of a lot, you know, it’s been real low the last couple of quarters. Why is that? What does that maybe look like the next couple of quarters?

Ralph Castner

I’m sorry Reed. What are you referring to, you looking at –

Reed Anderson

It’s that few million-dollar number, it’s that other non-interest piece. Would you subtract kind of the $13-$14 million, now it’s more like $2 or $3.

Ralph Castner

I’m sorry, other non-interest income of financial services business. That’s primarily fee income. Given the absence, the virtual absence of over limit fees, which have essentially gone away with the new regulation, and the limiting the late fees, that’s just driven that number down, Reed. We’ve obviously, compensated for in interest income.

Reed Anderson – D.A. Davidson

Okay, good. Then lastly, just some additional comments on the direct piece. I mean, what was amazing to me is when you look at the direct being down a lot in revenue versus what we thought, and probably what you had planned, for whatever reason, you still actually grew that, you improved the profitability there. I know it’s more of a more linear business sometimes than retail, but I was surprised that you could actually grow the margin there. Was there any one-time oddball items that accounted for that, or is that something just reflecting where you are today?

Ralph Castner

No, if you go back to what we said in the formal script, the decline in our direct business from a revenue standpoint was isolated in a handful of things.

First, fill rates just got clobbered because we didn’t have enough inventory to support the demand in Cabela's mens and women’s private-label product. And then, I guess this is a bad thing from a revenue standpoint but a good thing from profitability. Our teams have done a really great job on increasing the quality of our inventories, which resulted in – we just didn’t have very much problematic or slow moving inventory to move, so we had to pull a couple of titles that we just didn’t need to run this year.

And then as I mentioned, ammunition was – as retail has come back more in stock, I think that the web is less of a place now that people are chasing availability – that consumers are chasing availability.

Reed Anderson – D.A. Davidson

That makes sense. Well good, that’s all from me. Good luck, guys.

Ralph Castner

Hey, Reed, just to follow up on that direct question with respect for profitability. I mean, there was – if you look at the direct businesses as a percent of sales, everything was basically the same. The profit driver in the direct business was largely driven by the contributions of WFB which were, in the direct business, $5 million higher than they were a year ago. So that helped to drive the profitability as a percent up because the P&L does a lot of things Tommy commented on, all the margins and expenses we managed well as percent of sales.

Reed Anderson – D.A. Davidson

Got it, great. Thanks, Ralph.

Operator

Our next question comes from David Magee with SunTrust Robinson and Humphrey. Please go ahead.

David Magee – SunTrust Robinson and Humphrey

Thank you. Good morning. I guess just to follow on to that, is it possible to sort of isolate the EPS impact of the catalog or the direct mess in the quarter?

Ralph Castner

Well, I guess – I think I probably already gave you some color on that. I mean, I think as a percent of sales, ex the bank, both the gross profit as a percent of sales and the expenses as a percent of sales were consistent with a year ago. So I guess from my comments on that, if you take 15% which is basically the contribution, roughly of the direct business times the delta in sales, you isolate that number.

David Magee – SunTrust Robinson and Humphrey

Okay, thank you. And then, if I heard you correctly, the loss provision that you’ll take over the next couple of quarters, is that going to be roughly double what you took in the second quarter?

Ralph Castner

Well, first as a percent, yeah. Yeah, as a percent you’d expect a provision to be somewhere up around 5%, which is where our indications per charge-offs, up from the 2.7% that it was in the second quarter.

David Magee – SunTrust Robinson and Humphrey

Okay, and then lastly, any further color on the new store performance? You sound like your happy with what you’re seeing so far. Are you expecting, you know, to hit your sales per foot, and contribution margin objectives with that?

Thomas Millner

Well, while it’s, you know, were just 90 days into Grand Junction. We couldn’t be more pleased with both the revenue performance, store traffic, the feedback we’re getting from our customers and the financial performance of the store. And when you lay that on top of our ability to increase merchandise gross margins for the first time in a year across 11 of our 13 merchandise categories, it just gives us a lot of confidence that the strategic initiatives we have give us that ability to start growing the company again with new stores.

David Magee – SunTrust Robinson and Humphrey

Great. Thank you.

Operator

Our next question comes from Andrew Burns with Stifel Nicolaus. Please go ahead.

Andrew Burns – Stifel Nicolaus

Thank you. Just a follow up question on inventory. You mentioned private label soft goods as part of the issues. Was that a piece of your inventory reduction efforts, was private label soft goods? Or was it more of an issue of being caught a bit flat footed with the longer lead times that we’re seeing now in the soft goods space.

Ralph Castner

Yeah, it was just a lead time issue. Obviously, our national brands, which are a big part of our retail model. They we’re able to replenish us quicker, but on Cabela's soft goods, when, when you play it to conservatively and the business is actually better, the lead times make it very difficult to go back for more product.

Thomas Millner

I would add that we feel very good about our buys for the fall selling season. And let me just give you a little bit of color.

As we sit here today, the number of containers that we have in transit is more than double what we had this time last year. And it’s more than just an aggregate inventory story.

We’ve made a conscious decision as a company, as we go into fall, to focus heavily on core items; those parts of all of our merchandise categories that really drive our business. So we’ve gotten behind core items. So I think our feeling, which kind of underlies our guidance, is that we feel really good about our promotional plans for the fall. And we feel really good about getting back in inventory. It just – the middle of August can’t get here soon enough when the fall selling season starts because, that’s really the heart of our business.

Andrew Burns – Stifel Nicolaus

Great. And can you give us some detail on the lower transaction volume in the quarter? Was that a traffic issue or a conversion issue? Any color there would be helpful, thanks.

Ralph Castner

I think it was really April. April was such a negative on the comp that I think that it really goes back to April being just a really tough month. But the encouraging thing was to see business returned to nearly flat comp levels in May, June and then the trend into July.

Andrew Burns – Stifel Nicolaus

And then turning into World's Foremost Bank, on the other fee income, given the new maximum relate rules that are implemented in August, should we expect that number to be further impacted or have all those changes all ready been incorporated?

Ralph Castner

No, you should expect it to be further impacted, but that’s all ready be contemplated in our guidance. Our existing fee now is $39 and the cap is effectively $25, although there’s some opportunities in some cases to go above that. So that will be impacted as we move later in the year, but we’ve obviously all ready fully considered that in our full year guidance.

Thomas Millner

And I think, as you’ve seen, as you’ve cracked our public filings on the bank, obviously the trends are certainly improving as we felt they would. And it really goes back to Ralph’s comment in the script about, it’s not an accident. We founded the bank with the premise of it being loyalty based and with a very high credit quality portfolio. And it’s served us very well, and it’s serving us very well now.

Andrew Burns – Stifel Nicolaus

Thank you.

Operator

Our next question comes from Rick Nelson with Stephen’s Incorporated. Please go ahead.

Rick Nelson – Stephen’s Incorporated

Hi. Good morning guys. this is Nathan Mendez in for Rick. I appreciate the color you guys gave on the monthly retail sales. Can you do the same for the overall business; kind of the cadence throughout the quarter, for the merchandise segment?

Ralph Castner

Well, we talked about same store sales and the direct business, the trends really didn’t change very much through the quarter. When we didn’t have inventory, it impacted us on a fairly level basis across the quarter.

Rick Nelson – Stephen’s Incorporated

Okay. And what for April, the week or month, what comp was that facing up against? Can you remind us of that, please:

Ralph Castner

I don’t have that right in front of me, we can get that for you.

Rick Nelson – Stephen’s Incorporated

Great. I appreciate that, thank you. And then, I apologize if I’ve missed this, but on the bank metrics, interchange income was a lot higher than it was a year ago. Can you give us a little more color on that? And is that sort of a permanent – something you expect to be a permanent sort of rate?

Ralph Castner

Yeah. I mean, it’s mainly driven, as we’re starting to see an increase in spending relative to a year ago. Spending per count continues to look real positive and a year ago it was not. That’s driving interchange income up

Rick Nelson – Stephen’s Incorporated

Okay, great. Thank you guys so much for that. And good luck on the quarter.

Ralph Castner

Thanks.

Operator

Our next question comes from Mark Smith with Feltl and Company. Please go ahead.

Mark Smith – Feltl and Company

Hi guys. Can you talk at all about the product mix shift and any impact that may have had on your margins?

Ralph Castner

Mix was, as we look at margin, Mark, was – it virtually had no effect. Our margin increases, as I mentioned, were just really the function of all the hard work our teams have gone on inventory productivity, which just greatly improved as we worked through our strategy.

Our price optimization tools are working. And simply put, that means we’re doing a better job managing markdowns during the selling season. And I think what’s really encouraging is the acceleration of margin expansion that we saw both in the second quarter and that we are feeling as we get into the third quarter, which led to the comments that we made about our confidence as we look into Q3, Q4, and into next year. The initiatives that we put in place, they’re working. And that’s very encouraging.

Mark Smith – Feltl and Company

Okay. And then looking at the Grand Junction opening, did that have any significant impact on cannibalizing sales out of direct?

Ralph Castner

No, nothing meaningful.

Mark Smith – Feltl and Company

Nothing meaningful, okay. And then the last question, just looking at your guidance for net charge offs. Is it fair for us to look at that and you’d say that may be conservative giving where charge offs were in the first half in the delinquency trend over the last five, six months?

Thomas Millner

You know, we continue to be cautious about business given the macro environment. We want to be conservative of our estimation of that, and have been all year. If we continue to see trends in unemployment, yeah, I think there could be some upside to that number if unemployment continues to drop. If it starts to go the other direction, I think that feels like a reasonable range.

Mark Smith – Feltl and Company

Okay. So it’s really a factor of not knowing what’s going to happen in the macro environment more than any one thing that you see out there on the horizon currently.

Ralph Castner

Well, our estimate for charge off is largely driven by what we’re seeing in delinquencies and roll rates. And right now, we see that somewhere in the low range of 5% to 5 1/2 %, which as you know, our full year number was – our full year charge-off so far has been –

Mark Smith – Feltl and Company

Okay. Great. Thank you.

Operator

Our next question comes from Aaron Goldstein from JP Morgan, please go ahead.

Aaron Goldstein – JP Morgan

Hi. How are you guys doing? Can you just really quickly talk to us about the marketing fees that you paid to retail and direct?

Ralph Castner

Yeah, I think we all ready talked about the fact that the direct fee was up $5.1 million and the retail fee was up $6 million.

Aaron Goldstein – JP Morgan

Okay, great. And then since you’re seeing provision as kind of in the back half, with delinquencies going up, do you have to provision the other way? So could your provisions reverse and go higher?

Ralph Castner

Absolutely. They could be higher than charge offs in an environment where you see – your provision is basically, to make it easier, it’s your expectation for charge offs a year out. At a very high-level view of it. So yes, where you’re seeing charge offs increase, you’re provision will be higher than your charge-offs and the flip will be – and the reverse will be true.

So there are environments where you can see your provision being higher than your charge off rate. I am hopeful that we’re a long-term trend where we’re going to see decline in charge-offs, in which case they will continue to below the charge-off rate. And we certainly feel we’re in that trend phase.

Aaron Goldstein – JP Morgan

Okay. And just on the inventory, so did the lower ammo in the direct did not give you favorable mix given that ammo’s lower margin?

Ralph Castner

No.

Aaron Goldstein – JP Morgan

And then just finally, just a kind of bigger picture question. What gives you confidence that you can continue to get strong gross margins improvements and gross sales simultaneously.

Thomas Millner

Well, I don’t think they’re related necessarily. I think the initiatives that we’ve put in place, that we’ve talked with the investment community about to drive margins, improvements are fundamental retail, enterprise, goals. It’s better management of inventory. It’s collaborating with our suppliers to help them manage our business better, to flow product better, better rack-ready merchandise and price optimizing through the season.

Those investments we’ve been making in our business and they’re working. That doesn’t come at the expense of revenue. In fact, better collaboration with our suppliers can actually drive revenues higher if the macro environment is better. You get better turns, you get their best items, plug into their innovation streams. So I think we were encouraged as we saw May and June, and then July from a comp standpoint comeback to nearly flat. It said to us that we can get margins improvement without sacrificing top line. But, making sure those two throttles are correctly harmonized, that’s what we have to do. It’s what every retailer has to do.

Aaron Goldstein – JP Morgan

Great. So you don’t think that a lack of discounting stifled any sales? It was just inventory?

Thomas Millner

Well, in the direct business we didn’t have as much problematic inventory to get rid of, so that clearly had an impact on revenue because we didn’t have to mail out those catalogs which didn’t result in a hemorrhage of margin. So while its slightly negative, it’s something we can manage through going forward, I believe.

Aaron Goldstein – JP Morgan

Thanks, very much.

Operator

(Operator Instructions) Our next question comes from Jonathon Grassi with Longbow Research. Please go ahead.

Jonathon Grassi – Longbow Research

Hey. Good morning, guys. On the SG&A side, I guess last quarter we saw [inaudible] year-over-year and an absolute basis. This quarter it looks like increased despite, I guess. But I guess it would be less selling cost and less catalog cost from what’s shipped out. I guess, was this a matter of the hires that we made during the quarter? If you could provide us a little color on that, and kind of how you look at SG&A going forward.

Ralph Castner

Yeah. We had some remaining spots to fill from the reorganization of our merchandise; inventory and inventory planning areas. And those investments that we’ve made, those are the people that are driving the margins improvements together with everything we’re doing in retail. And so they really paid off. Plus remember, we had new-store opening expense in the quarter from Grand Junction, which would have slightly elevated SG&A expense.

Going forward, just as a matter of discipline in our business, we’re trying to hold those levels of cooperate overhead as flat as we possibly can so that we can get the improved leverage from higher sales to the bottom line. We hold ourselves to that discipline.

Jonathon Grassi – Longbow Research

Then on footwear, how was that comp during the quarter. And I guess what impact have you seen from the stores and where the inventory was moved out onto the floor?

Thomas Millner

Footwear, thanks for asking that. Footwear was one of our top categories in the quarter at retail, right behind mens apparel. I would also add archery and tree stands were really strong in the quarter in retail. And our footwear initiative, like the initiative in sunglasses, really made a big difference for us.

Jonathon Grassi – Longbow Research

Okay. Then just finally, regarding trends in that credit card portfolio, of the accounts that you’re seeing charge offs and delinquencies, I guess, what is the average age of those accounts and how’s that been trending over the past few quarters.

Ralph Castner

You know, I’m sorry. I don’t have that detail of the average age of those accounts. I know one thing we’re very encouraged about though, just as we – as growth of our portfolio slowed, more and more of our accounts are becoming older where they’re, just as a general rule, less likely to charge-off.

Jonathon Grassi – Longbow Research

Okay, thank you.

Operator

Our next question comes from Christine Korber with JMP Securities. Please go ahead.

Christine Korber – JMP Securities

Yeah, just another follow-up question on the inventory. I believe total inventory was down about 13% for the quarter. Do you have it per store, inventory on the per store basis.

Ralph Castner.

I don’t, not in front of me, Christine.

Christine Korber – JMP Securities

Any idea? I mean, it sounds like most of the inventory decline is due to the direct business.

Ralph Castner

Yeah, it was done slightly in retail, only because we didn’t have as much closeout inventory to move. But the bulk of the shortfall was in the direct business.

Christine Korber – JMP Securities

Okay, great. And then, you mentioned the containers, goods, and trends up significantly year over year, are you seeing any issues as far as bringing goods in because I know – because of the container shortages, prices, etcetera, there’s been a lot of talk out there.

Ralph Castner

As it relates to offshore sourcing, at this point we don’t see anything that would meaningfully affect our business for the fall selling season. Our teams in the company together with our suppliers overseas have done a really good job in communicating and planning. And we don’t expect any impact at this point in time, either on cost or delivery. Some things are up and some things are down, and the balance of it we don’t expect any material impact.

Christine Korber – JMP Securities

Okay, so as far as timing, everything seems to be okay then?

Ralph Castner

Yes.

Christine Korber – JMP Securities

Okay. And then just lastly, I know your opening three stores next year and you mentioned you expect to grow new stores again. Are we looking out to 2012 before we see some acceleration in store growth beyond the three?

Thomas Millner

Yes, I don’t see just because of construction timelines and availability of retail space, I don’t see anything else in 2011.

Ralph Castner

And even in ’12, Christine, this is Ralph, when Tommy talks about acceleration of store growth, that’s going from 3 to 4 to 5, not 3 to 8.

Christine Korber – JMP Securities

Okay, great. Thank you.

Operator

(Operator Instructions) And there are no further questions. I’d like to turn the conference back over to the speakers for any additional closing remarks.

Thomas Millner

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

Operator

This concludes today’s conference call. You may now disconnect.

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