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Cabela's Incorporated (NYSE:CAB)

Q2 2014 Earnings Call

July 24, 2014 11:00 am ET

Executives

Chris Gay - Director of Treasury & Investor Relations and Treasurer

Thomas L. Millner - Chief Executive Officer, President and Director

Ralph W. Castner - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Seth Sigman - Crédit Suisse AG, Research Division

N. Richard Nelson - Stephens Inc., Research Division

Jim Duffy - Stifel, Nicolaus & Company, Incorporated, Research Division

Mark R. Miller - William Blair & Company L.L.C., Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Charles Edward Cerankosky - Northcoast Research

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Andrew Burns - D.A. Davidson & Co., Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Lee J. Giordano - CRT Capital Group LLC, Research Division

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Incorporated Second Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Chris Gay, Director, Treasury and Investor Relations. Please go ahead.

Chris Gay

Good morning. I welcome everyone listening today, both on the conference call and by webcast. A replay of today's call will be archived on our 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 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 website to find reconciliations of these non-GAAP financial measures to GAAP.

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

Thomas L. Millner

Thank you, Chris, and good morning, everyone. The second quarter marks the final full period related to the surge in firearm and ammunition sales from a year ago. Our focus on tightly managing expenses, begun in late 2013, combined with new store performance and accelerating performance from our Cabela's CLUB program, resulted in profit and profitability that exceeded our expectations. We will maintain our focus on operating expense management for the remainder of 2014 and full year 2015.

As results compared to the year ago period continue to normalize, we believe that the opportunities we took advantage of to improve our business over the past year will become increasingly evident. At the end of the second quarter, for the trailing 12-month period, the 16 new format stores that were opened for the full period had sales per square foot of approximately $474, outperforming our legacy store base by roughly 45%. Additionally, these same new-format stores outperformed our legacy store base by approximately 53% in profit per square foot over the same period. On a comparable store sales basis, new-format stores that have been in the comp base for 1 year or less outperformed the consolidated comp base by 360 basis points for the quarter. We continue to be pleased with the performance of our new stores, and are particularly pleased with the results in Anchorage, Alaska, and Christiana, Delaware. The exceptional performance of these new stores continues to give us great confidence in our future store openings.

For the quarter, consolidated comp store sales decreased 14.2%. The decrease in comp store sales was primarily due to the accelerated falloff in demand for ammunition and other shooting-related categories. Comp store sales, excluding firearms, ammunition, other shooting-related categories and optics, were down 7.3%. We were particularly pleased with the improvement we saw from our General Outdoors category, with powersports, fishing and many camping and outdoor categories showing meaningful improvement since our first quarter call.

During the quarter, Cabela's branded product continued to show meaningful improvement. As a percent of total sales within our Softgoods and General Outdoors categories, Cabela's branded product increased by 160 basis points in each category. This represents a 180-basis-point improvement in Cabela's brand penetration on a consolidated merchandise sales basis. The strength of our brand has never been greater, and we are very excited for the innovative new Cabela's branded products we will be offering to our customers throughout the year.

Now let's take a look at our Cabela's CLUB, which had another exceptional quarter and continued to build our base of extremely loyal customers. For the quarter, average active accounts increased 7.7%. Cabela's CLUB members are our most loyal customers, with higher average spend and greater purchase frequency. Cabela's CLUB revenue increased approximately 23.5% to $109.4 million. The increase was primarily attributable to interest and fee income, as well as interchange income. We continue to see favorable delinquency trends and charge-off trends. Charge-offs remained at extremely low levels, and were just 1.67% in the quarter.

For the quarter, direct revenue decreased 18.3% as a result of a greater-than-expected decline in ammunition and other shooting-related categories. As we look at the trends in direct ammunition sales over the past several years, second quarter direct ammunition sales are consistent with levels we saw prior to the year-ago surge.

Our omni-channel improvements continue to gain traction as increased traffic through our new mobile site via handheld and tablet devices, as well as benefits from our omni-channel fulfillment program during the quarter, have been very encouraging. During the quarter, our ability to tightly manage expenses resulted in operating expense growth of only 2%, while we grew retail square footage by 18.4% from the same quarter a year ago. Companywide focus on expense management has played a key role in generating profitability throughout the tough comparisons from the year ago period.

Expense savings encompassed all areas of our company, including incentive compensation, contract labor, corporate overhead and a wide range of other initiatives throughout the company. Furthermore, the expense initiatives already in place will continue to yield benefits for the remainder of 2014 as we expect mid-single-digit expense growth for each of the remaining quarters of the year.

Now turning to earnings guidance. Second quarter results provide us with confidence in attaining our full year 2014 growth targets. We are pleased with our performance in the second quarter, however, due to the unsettled retail environment, we are not raising our full year guidance. Accordingly, we reaffirm our previous full year guidance and continue to expect 2014 earnings per diluted share to increase at a high-single-digit to low-double-digit rate versus 2013 adjusted earnings per diluted share of $3.32. We are updating the balance between quarters and now expect third quarter revenue to increase at a high-single-digit to low-double-digit rate, and earnings per diluted share to be between $0.80 and $0.90.

Now I'll turn the call over to Ralph Castner to review in more detail, among other things, performance of our Cabela's CLUB.

Ralph W. Castner

Thanks, Tommy. For the quarter, we realized strong performance from our new stores, meaningful benefit from our expense management initiatives, strong growth in financial services revenue and outstanding performance of Cabela's branded products. We opened 7 new stores during the second quarter in Greenville, South Carolina; Anchorage, Alaska; Christiana, Delaware; Woodbury, Minnesota; Manning, Alberta; Missoula, Montana; and Lubbock, Texas.

Looking forward to the remainder of 2014, we plan to open 6 stores in the third quarter, including Barrie, Ontario, which opened 2 weeks ago; Acworth, Georgia; Cheektowaga, New York; Tualatin, Oregon; Nanaimo, British Colombia; and Bowling Green, Kentucky. As Tommy mentioned, we've been thrilled with the performance of our stores that we opened in 2013 and so far in 2014. As we look across North America, we continue to see an opportunity for more than 200 stores, and expect to build stores at the rate of at least 13 per year. We do expect these stores to be smaller in size as we continue to optimize return on capital to our shareholders and as we move into smaller markets. In the future, you'll hear us talk about our store growth objectives as being between 900,000 and 1 million square feet per year as we focus on growth in these smaller boxes.

During the quarter, merchandise gross margin decreased 70 basis points to 37.0% from 37.7% in the same quarter a year ago. The decrease is entirely due to an adjustment in the presentation of reimbursement between segments for certain operating and promotional costs, which totaled $4.8 million for the quarter.

The effect of this change increases financial services revenue and merchandise cost. This new presentation will be ongoing and has no impact on consolidated operating income or earnings per diluted share.

Now turning to operating expense. Operating expenses grew by only 2% during the second quarter. This expense growth of approximately $5.6 million was primarily attributable to new store expenses and preopening expenses, which increased by $5.1 million and $1.6 million, respectively. For the quarter, financial services revenue increased approximately 23.5% to $109.4 million, inclusive of the $4.8 million adjustment just mentioned. The increase in financial services revenue was primarily due to a 7.7% increase in average active accounts. The account growth helped drive higher interest and fee income, as well as interchange income.

For the quarter, average credit card loans increased by 12.4%. Net charge-offs, as a percentage of average credit card loans, decreased 20 basis points from the year-ago quarter and were just 1.67%. Additionally, we continue to see improvements in delinquencies. Greater-than-30-day delinquencies were just 0.65% as compared to 0.66% a year ago. Greater-than-60-day delinquencies were 0.36% as compared to 0.39% a year ago, and greater-than-90-day delinquencies were just 0.18% as compared to 0.20% a year ago. As a result of these lowered delinquencies in loan rates, during the quarter, we reduced our allowance for loan losses by $3.7 million, compared to approximately $2.2 million in the year ago quarter. Partially offsetting these reserve reduction was a $1.3 million increase in consolidated interest expense due to an income-tax-related issue at Cabela's CLUB. Due mostly to continued portfolio growth, we expect to realize reserve increases in the third and fourth quarter of 2014. We expect the increase in reserves for the second half of 2014 to be roughly equal to the $6 million of reserve releases we had in the first half of the year.

Additionally, last week, we completed a 5-year term securitization to fund growth. The transaction included $340 million in notes that accrue interest at a floating rate equal to 1 month LIBOR plus 45 basis points per year. This securitization will be used mostly to fund portfolio growth, the maturing securitization in 2015 and maturing certificates of deposit.

As we look forward, our next term securitization matures in January of 2015. For the quarter, financial services interest expense decreased to $15.8 million as compared to $15.9 million in the same quarter a year ago. During the quarter, in accordance with the existing intercompany agreement, Cabela's CLUB paid an additional license fee to the merchandising business. This additional license fee is due when Cabela's CLUB total risk-based capital exceeds 13% at any quarter end. The additional license fee due was $11 million. $7 million was recognized in the Retail segment and $4 million was recognized in the Direct segment.

For the quarter, the total license fee to be paid to the merchandising business, including additional license fees paid, increased $14 million. The total license fee increased from $13 million in the Retail segment and $1 million in the Direct segment.

During the quarter, we announced plans to outsource distribution in Canada. Accordingly, we recognized impairment and restructuring charges related to employee severance agreements of $641,000 in the quarter. We expect to incur approximately $4 million of additional expenses related to the transition to our third-party provider and closing of our current distribution center over the next 12 months.

Now let's turn to inventory. Inventory increased by 15.4% or $107 million year-over-year to $803 million. Over the same period, we've grown retail square footage by 18.4%, with 14 new stores opening since Q2 2013. Additionally, we're very comfortable with the quality of our inventory as we've entered the second half of the year and prepare for the upcoming new store openings.

For the quarter, cash flow from operations was $47 million, compared to $183 million in the same period a year ago. The majority of the change in cash flow from operations is due to a timing difference of -- at Cabela's CLUB related to the daily settlement of customer’s charges as the year ago quarter for the CLUB ended on a weekend. With our accelerating store growth plans, we expect full year 2014 capital expenditures to be between $400 million and $450 million. Cash flow from operations is expected to be between $300 million and $350 million for 2014.

Accordingly, we expect to complete a small financing transaction in early 2015 to fund future growth. Finally, as we indicated last quarter, we completed an amendment to our existing credit agreement to increase the capacity and to extend the maturity. The new $775 million facility replaces our $415 million facility. The new facility has a 5-year term maturing in June 2019. The larger facility provides significant flexibility as we continue to expand our retail footprint.

Now I'll turn the call over to Tommy for some closing comments.

Thomas L. Millner

Thanks, Ralph. With the most challenging comparisons from the firearms and ammunition surge behind us, we are confident in the strength of our company. We're very encouraged by our ability to manage expenses, the performance of our new stores, the improvements in our omni-channel model, the growth in our Cabela's CLUB loyalty program and the outstanding performance of our Cabela's branded products. Our growth strategy remains strong and intact as we continue to seek out new opportunities for our business.

Before turning it over for questions, I want to sincerely thank our outfitters who have embraced efforts to lower costs in every area of our company. Well done, team.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Seth Sigman from Crédit Suisse.

Seth Sigman - Crédit Suisse AG, Research Division

I just want to focus a little bit on the Q3 guidance. I think you took it down to high-single-digit to low-double-digit revenue growth now. Can you maybe just talk about what's implied for comps there? And any update on how you're tracking so far in Q3?

Thomas L. Millner

Seth, let me give you a little color on our thoughts and then Ralph can talk about the specific numbers. As we look at Q3, it's a mix of a couple of concerns and positives, and I want to go through them, if you don't mind. First, July has started a little softer than we had hoped. However, it's important to note that July is clearance month, and we really haven't rolled to fall merchandise yet. That doesn't happen until really the first week of August. We're also listening to what other retailers are saying, both inside our sector and in the broader retail marketplace in the United States, about their business. So we're listening, as you are, and it points to our comments a sense that it's a little unsettled out there. So a couple of specific concerns. We do feel encouraged by these positives. First, the acceleration of the CLUB is just a really good thing for our company. I hope you and others on the call are encouraged by our expense initiatives, which were significant and will continue into the third quarter. Most of you saw the great new products that we're launching for fall. They have not hit the stores yet and really don't have any big presence on cabelas.com right now. And I think our promotional plans for Q3, as we begin August and go through the rest of the quarter, I would characterize as aggressive and back to a more normal cadence. And then, last but not least, we're getting into hunting season. When the doves start flying in late August, our customer -- our core customer who really supports us, we're getting into their sweet spot. So as we kind of looked at the third quarter and balanced all of those things, Ralph can give you a little more color on the specific numbers.

Ralph W. Castner

Yes. I mean, Tommy -- I mean, obviously, Tommy is right. July started a little bit softer than we thought. Although even with that, by the way, it has still improved over the third quarter. We're continuing to walk through a cadence that the decline we're seeing in comps is getting less every quarter and every month. So we're doing way better in July than what we're doing than -- what we did in the previous quarter. Now having said that, by the way, 4th of July was tough for us. And quite frankly, some of that may have been due to the calendar shift, with 4th of July moving from a Thursday to a Friday. I mean, last year, we basically had a 4-day weekend over 4th of July. This year, we just had a 3-day weekend. So that was one of the reasons we started off slow. But we're seeing comps improve as we move through the month of July, and they continue to get -- the decline continues to get better as we move through the month. So we're still pretty optimistic as we go through the third quarter. Having said that, at one time, I was hoping to see flat comps in the third quarter. That doesn't seem to be the case now. I think we'll probably see something in mid-single-digits decline in the third quarter. But every -- as Tommy pointed out, there's a lot of other things in our business that we continue to feel really good about. But the other thing that just continues to surprise me is how we try to think about working costs out of our organization. Our employees have done a great job of identifying opportunities. We continue to find more and more of those. And quite frankly, as we move through the quarter and the back half of the year, there could be continued upside relative to our expectations on expense management.

Seth Sigman - Crédit Suisse AG, Research Division

Okay. That's helpful. And just to clarify on one of the comments you made earlier, the negative 7% comp this quarter, that would be excluding guns, ammo and anything related to that. Is that comparable to the down 12% comp that you quoted in the first quarter? Like is that down 7% in improvement in trend?

Thomas L. Millner

Yes. Yes, a small improvement.

Seth Sigman - Crédit Suisse AG, Research Division

Okay. And so even though July is a little softer than expected, is that underlying trend a little bit better than the first quarter as well?

Ralph W. Castner

I'm not sure we got that number for the month of July only, but I would assume that the trend is continuing to get better because we're seeing continued improvement across all of our comp categories.

Operator

And we'll take our next question from Rick Nelson.

Thomas L. Millner

Rick?

Ralph W. Castner

Rick, are you there?

Thomas L. Millner

Apparently not. Could we go to the next caller, please?

N. Richard Nelson - Stephens Inc., Research Division

It's not on mute. Sorry for that. Provision came in below forecast, Ralph. You talked about reserve reversal this quarter, and I guess in the back end of the year, we're going to see some of that come back. And curious if you're still looking at that provision normalizing at around 2%. You were at 1.2% we're calculating this quarter.

Ralph W. Castner

Yes. There's no question, we -- well, first, let's -- I'll talk about them separately. First, let's talk about just the change in the reserve. We've seen -- we saw a $3.7-million reduction in the reserve in the second quarter. And that -- the charge-offs in that business just keep getting better. Now by the way, I also want to point out, we had a one point -- down in the interest expense line in the consolidated financials, we had a $1.3 million of additional interest expense related to an income tax issue at the bank. And I kind of look at those 2 items together, if you would. But in the back half of the year, we clearly see our allowance for loan losses going up by probably about $6 million as we get more portfolio growth. Now to your point, over time, charge-offs in the quarter were 1.67%. That's down from 1.87% in the same quarter a year ago. Over time, those have got to go up. But that could -- and you threw out 2% number, which is a number I've talked about a lot in the past. We clearly see those gravitating up to 2%, but that could take a number of years. But a more normalized range for charge-offs is somewhere in the 2% to 2.25% kind of a range. But I don't -- that won't happen quickly.

N. Richard Nelson - Stephens Inc., Research Division

Okay. Got you. And the merchandise margin down 70 basis points, you've pointed to some accounting changes. Had those not gone into effect, would we have in fact seen a lift in the merchandise margin?

Ralph W. Castner

It would have been up slightly.

N. Richard Nelson - Stephens Inc., Research Division

Okay. And if you could speak to the margin in the firearms, ammo category, is there a lot of pressure there today?

Ralph W. Castner

Actually, we talked about that. We've been -- there is still pressure year-over-year, but this is now the third -- let's see, in ammunition, it's the third quarter in a row that we've seen expansion in ammunition margins. And in guns, it's also the third quarter in a row that we've seen expansion in gun margins. So although we're seeing pressure -- although we've seen pressure mainly because the year-over-year numbers are so much tougher. But we're seeing sequential improvement, which makes us really pleased. Matter of fact, in both cases of guns and ammo, the actual margin we realized in Q2 is about -- Q2 of '14, is about the same margin that we've gotten in Q3 a year ago. So the year-over-year decline is going to go away next quarter. And hopefully, we'll continue to see sequential improvement as we move throughout the year. But we feel really good about the trajectory we've got in the ammunition markets.

Thomas L. Millner

Rick, if you remember on the first quarter call I commented that we're a pretty competitive organization, and it was very difficult in the early part of the first quarter to just watch red numbers every day, if you're sitting in the gun and ammunition categories, and we got probably too aggressive. We really took a more moderate approach in the second quarter just having lived through the first quarter, and we knew these trends were going to continue and the comps were going to be really impossible to lap. And we took just a way more prudent approach and just kind of returned to a normal promotional cadence. And as we look to the balance of the year, we feel really good about how we're going to promote guns and ammunition. It should be, I would call it sane yet aggressive to drive the traffic. So just a subtle change in the second quarter from Q1.

Operator

And we'll take our next question from Jim Duffy from Stifel.

Jim Duffy - Stifel, Nicolaus & Company, Incorporated, Research Division

You guys are doing a lot of hard work on the expenses. The elephant in the room, however, is that you are aggressively expanding the footage. Difficult gun and ammo compares will be behind you at some point in the third quarter, yet the comps for the third quarter are looking down mid-single digits. What -- I mean, what's it going to take to stabilize the comps here? What's the timeline for that? And then I have a follow-up question on the new stores.

Thomas L. Millner

Well, Jim, I think we're trying to take a really cautious approach in our overall guidance for the third quarter. To my comments a few minutes ago, we would certainly hope we could outperform that. But just trying to take a conservative approach, which builds from comps all the way up to the top of the business in overall guidance, we would certainly hope to see better than mid-single-digit declines as we get into the fourth quarter, and that's what we're really -- we're aiming for. I think what's going to be really important is to see how the new products launch and balanced against what consumer sentiment is as we get into the real heart of the year. And I tell you, our visibility on that here on the 24th of July is we haven't got the new products in the stores yet, so we don't really have a read. So I'd just characterize it as cautious.

Ralph W. Castner

I guess, Jim, to your question, is I don't consider positive comps in the fourth quarter to be unachievable. We're going to have more stores in the comp base that are comping better. And that -- we understand we need to see positive comps here shortly. I'm disappointed we probably won't see them in the third quarter. But as we move into the fourth quarter and to early 2015, we should expect to see positive comp.

Jim Duffy - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then, Tommy, you mentioned promotions back to a more normal cadence. Can you elaborate on that? And then related to that, to what extent do you think that the tight SG&A management is impacting the sales?

Thomas L. Millner

Well, we consciously, Jim, last fall, just made a corporate decision that we were not going to get expense savings out of marketing dollars. That just made no sense whatsoever. So our expense initiatives are virtually all outside of discount dollars and merchandise and marketing dollars and all of those initiatives. These are areas where we're saving money, and things we don't need to do anymore, can do better or can do less expensively, not in the areas of marketing that drive the business. So I hope you should take comfort in that. If you go to cabelas.com today, you will see a teaser for what's been a really good promotion of modern sporting rifles. We've been able to partner with our vendors. They've been very supportive, and I think it's just a really good aggressive cadence that we've got for the balance of the year and let's -- we'll just have to see if the consumers are going to respond. But I think that's how we see the balance of the year. But we're not cutting marketing dollars, we got to drive sales.

Jim Duffy - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. Last question, the new store sales per square foot, $474. What's your level of confidence that, that's hitting a bottom?

Ralph W. Castner

Well, I think it largely depends upon the comp, but the level of decline is, as we exit the gun and ammo thing, is continuing to diminish. So I guess we feel reasonably good. Could it go lower than here? Maybe. But -- and I know you guys are all comparing that to the $450 number that we talked about as what we modeled the stores at. But I'll also tell you with all the work -- and we'll need to reevaluate that as we get into 2015. We will reevaluate this as we get to 2015. But the tremendous amount of work we're doing trying to drive down store costs and manage expenses will be able for us to achieve a profitable return on our stores in some number less than $450. Now what that is, we'll find out. Having said that, I know what it means that I'm sharing that with you because I think the $474 per square foot that we're enjoying today is going to get below $450. I just think the margin of safety is going to get greater.

Thomas L. Millner

And, Jim, it's just a good discipline in our company we're looking at everything. I mean literally, everything of how we can do things at a lower cost to include building stores.

Operator

And we'll take our next question from Mark Miller from William Blair.

Mark R. Miller - William Blair & Company L.L.C., Research Division

Tommy, can you spin up your crystal ball and tell us why do you think the firearms and ammo have dropped off more than you would expect? And I think that the rising short interest in your shares is based on a view that you've been in a super cycle and there's a perceived risk that we're just going to track -- slide down towards that 2008 level. And Ralph, I guess your prior comment that you're creating a bigger safety level on the sales per square foot, I mean, that might almost make us feed into suspicion that, that's where we're headed.

Thomas L. Millner

Well, I'll give some color and then Ralph can weigh in, Mark. As we look at Q2, our gun performance was only very, very slightly less than our expectations. So that's kind of a good thing. To our belief in normalization and then you look at the mixed data, it would certainly feel like, although clearly down, pretty damn close to our expectations. Ammo clearly fell off sharper, maybe even as much as much sharper than our expectations. However, when we look at the Direct business by example, in the second quarter, ammo demand was still above 2012 levels, albeit way lower than 2013. So I think as we come into Q3, the headwinds in ammo really dissipate and the same for Q4. And I think -- I certainly hope that we've seen a bottoming of ammo. I guess time will tell and the crystal ball will clarify itself over time. But guns feel like they're normalizing, and we're starting to promote guns more regularly.

Ralph W. Castner

Yes. Mark, let me give you a little bit more color on that because I think there's a perception that there's been sort of a direct upward trend in gun sales from 2008 and beyond. As I -- one of the things we've done, and I've got it here in front of me, so it's helpful, but is look at just for the stores that were open for the full year of 2008, how have those gun sales performed since then by quarter? And I would tell you, they were up -- in Q2, for example, they were up in '09 and then down in '10, and then up in '11, '12 and '13. But our numbers that we're seeing in '14 are somewhere between those 2009 and 2012 levels. I guess what I'm telling you is I think we're seeing sales consistent with those early parts of the Obama administration years of gun sales. So the big increase was between '12 and '13.

Mark R. Miller - William Blair & Company L.L.C., Research Division

Okay. That's helpful. And then, I guess, as we look ahead to 2015, can you give us just a general framework for growth? I mean, I know you're coming into the peak selling season and I know it's early, but I think it'd be helpful to get an updated perspective on what you view as a normal comp. And then, you did talk about the expense initiatives being largely sustainable. But, I mean, if you can frame it, I mean, is this still a better-than-mid-teens growth business next year? Or if that's ambitious, then I think it would be helpful to know that because the Street numbers kind of reflect that.

Ralph W. Castner

Well, I'll let you guys model that, but I guess my expectation, and this -- in your reference to a crystal ball, I mean, I've always talked about this business as being a 2% to a 3% or 2% to 4% kind of comp-ing business. And as we sit here in July of '14, that would be my expectation for '15. So then you got to add into that the growth in square footage, which we have largely communicated historically, probably a flat to declining slightly Direct business. And then growth, as we've outlined several times in our card business, commensurate with our square footage growth. So I think we're still very optimistic about 2015. Tommy?

Thomas L. Millner

I absolutely agree.

Mark R. Miller - William Blair & Company L.L.C., Research Division

And I'm probably over here, but I'm going to sneak in one last one. Just to clarify on the license fees from the CLUB business to the merchandising business. Did that have like a 200-basis-point impact on the margins? Or how did that...

Ralph W. Castner

Well, let me give you exactly the numbers because it's a little bit -- it is, I admittedly, a little bit confusing. The total amount of the payments was an increase of $14 million, of which $13 million went to Retail and $1 million went to Direct. Now ever -- just -- this is the unusual part about it. Ever since we've had this intercompany agreement in place, we had a provision that if the capital of the bank ever got above a certain level, we would make additional payments equal to 1/2 -- the target was 13%, so equal to 1/2 of the amount, by which the capital of the bank exceeded the target. Those payments were $11 million of the $14 million, and $7 million of the $13 million that went to Retail. In the future, we intend to pay dividends, which don't go through the intercompany arrangement, so you won't see this sort of spike in payment between the 2 segments in the quarter. So the only quarter this will affect us is Q1 of this year and then Q1 of '15 -- or I'm sorry, Q2 of this year, and then Q2 of '15 when we are growing over the payment. But that was the nature of the payment, and it's something we don't expect to see in the future.

Mark R. Miller - William Blair & Company L.L.C., Research Division

So it helped merchandise margins by 200 basis points?

Ralph W. Castner

It's not -- no, no, no. It's not -- that particular payment is not in merchandise margins. It's reported as operating expenses at the bank and negative operating expenses at Retail. It has nothing to do with merchandise margins.

Operator

And we'll take our next question from Matt Nemer from Wells Fargo Securities.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

So I just wanted to touch on the expense reductions for a minute. Obviously, they're very impressive. I'm wondering if you can give us some color in terms of how much is incentive comp and maybe put some numbers around some of the other big buckets there.

Thomas L. Millner

Matt, let me -- if you don't mind, let me back up to last fall. We clearly saw the lapping of the surge coming. As we commented, we were seeing some consumer softness that started late August/September of last year. So trying to be proactive on the one thing that we could control, which was how much money we spend. We really organized a very formal process inside the company that started last fall. And in a corporation our size, once you start, it takes a little while for that snowball to start turning into an avalanche. And so we saw some benefit in the first quarter, but it just continued to accelerate as we got deeper buy-in down in the organization. If you'll remember, we sadly had to ask about 600 to 700 retail outfitters to leave the company. That was a big one. Certainly, incentive compensation is an important factor, but to hang it on incentive compensation, in your mind, would be a big mistake. This is every single corner of the company. Literally, every day, our folks are turning up opportunities in the distribution centers. Chris has done -- Chris is sitting in front of me. He's done a great job in credit card fees, and literally just all over the company. We are way less reliant on contract labor in IT right now, so we rationalized priorities in IT. Ralph and the Real Estate team are working hard to get costs down in the -- in new stores. We're challenging every single contract that is both existing and to be negotiated. So it's been literally across the enterprise, and we felt that it was the responsible thing for us to do coming into the surge and especially with the unsettled consumer environment. Ralph can give a little more detail.

Ralph W. Castner

Yes. What I'm going to share with you, Matt, is just -- and I know you guys didn't see our original budget, but to measure it in terms of budget seems like the best way to give you color. Because, I mean, obviously, the expenses were not down year-over-year, and they're up slightly because of new stores. But relative to our original budget, I would tell you that only 10% to 15% of the amounts we've saved relative to budget have been incentive comp. Let see, about 1/3 of the tax have been salary and wages largely because of some of the actions Tommy referred to earlier. Amazingly, almost 10% of it has been travel. That's just they've been asking our people to do a better job. About 5% of it has been credit card discounts. A surprising amount of it, and this has been an initiative across the whole company, more than 10% of it has been insurance and benefits. I think that we're spending a lot of time thinking about wellness. We're thinking about how we manage our -- in terms of benefit plans. So it's really, to Tommy's point, it's all across the organization, things we're -- and we're not done yet. We're going to continue to work on it as we move later in the year. And I would actually -- what encourages me about it is I think, recently, we've gotten more traction. As you guys probably see between the second and first quarter, I think we've got more traction to move throughout the year, and I expect we will continue to see traction as we move into the latter half of the year.

Thomas L. Millner

And Matt, to Jim's earlier question, believe me, we understand that driving revenue and getting the comp to flat and then to up is really important for us going forward. So not gutting the marketing budgets to meet expense targets is just kind of a given because we've got to drive sales, and we get that.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

And can we put the store experience and the merchandising organization in that same bucket, those 2 areas?

Thomas L. Millner

Absolutely. And specifically, as Ralph and our construction teams are looking at how to lower store costs, we're not talking about gutting customer experience. We're talking about construction techniques and that kind of stuff, not changing in-store experience, which is sacred ground here.

Ralph W. Castner

Yes. What we should do some time, Matt, is walk to a store and I can kind of give you our impression about how we think about it, where we see opportunity. And I can give you examples, it would be silly, but it's literally $50,000 and $100,000 at the time going with national contracts and some of our vendors. One of the things we looked at is, I know this sounds silly, but the hardware we use in all the parts of the store that the customer doesn't see, doorknobs, hinges, those kinds of things, we're just taking every aspect of the design and seeing what we can do better. And by the way, that philosophy is, what has happened all across the company, is how can we not impact the customer experience, but do things better.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And then just lastly, Ralph. Can you talk to this reclassification from Financial Services into the other businesses that if this is the $5-million number that impacted the merch margin? What was the kind of purpose to that? Is that ongoing?

Ralph W. Castner

Well it will be ongoing. Here's the history behind that. We, for years, have had the bank reimburse the merchandising business for all these promotions and things that we target to our Cabela's CLUB customers. And in an effort, just to provide more clarity, what we did was we -- only it doesn't affect the segments at all, but on a consolidated basis, we eliminate that in the consolidated financials. So there's entry made, if you will, at the end, if you get down to the debits and credits, that increases Financial Services revenue and increases cost of merchandise sales. So that when you go through that and divide merchandise gross profit by merchandise revenue, it goes down by an insignificant amount of money in the trend of things, but we just want to make sure we have that clear with everybody. So anyway, it's not a big deal. It doesn't affect the segment.

Thomas L. Millner

It doesn't affect OP income or EPS.

Ralph W. Castner

Or EPS. It does have a small impact on the reported merchandise margins. It actually, though, interestingly enough, because the dollar amount stays flat throughout the year, it'll be even less meaningful as we get into the back half of the year when revenues go up so much.

Operator

And we'll take our next question from David Magee of SunTrust.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

A couple things. One is -- so the decline in the EBIT number for credit, that's entirely related to just the higher marketing fee that you described, the $14 million?

Ralph W. Castner

Yes, yes. I believe that's true.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Okay. But what does -- when you have the reversal of the loan loss, where does that flow through on the Financial Services P&L?

Ralph W. Castner

Through the provision for loan losses.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So it's offset there.

Ralph W. Castner

Yes.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

And then lastly, with regard to the second half sort of top line view and being a little more cautious, I certainly understand why. Is it a combination of the macro data points you hear out there? Or have you changed you're thinking about how the firearms and ammo sort of normalizes from here? Or both?

Thomas L. Millner

David, it's really not related to the firearms and ammo business. It's just -- look, we're hearing the same things you guys are hearing that it's a bit unsettled out there. And we just thought it would be prudent to take a cautious view of the back half as relates to our out-performance in Q2. But believe me, we're pushing like hell to do better in the second half of the year, as I commented earlier.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Is there a specific category that you would point to that would be the most affected by macro sluggishness?

Thomas L. Millner

No, I think it'd really be kind of across the board.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

It would be a traffic issue and...

Thomas L. Millner

Yes, yes.

Operator

We'll take our next question from Chuck Ceranskosky from Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

If -- Tommy, if you're looking at your comp base only, what's your feeling about competitive openings impacting the comp base away from the macroeconomic consumer unsettledness you mentioned?

Thomas L. Millner

It's not meaningful at all. We haven't seen any serious intrusion that we're concerned about competitively as relates to what we're talking about for the back half of the year.

Ralph W. Castner

Matter of fact, I would tell you, a way bigger factor, and this isn't even that big, but a way bigger factor is probably our owing incursions. I mean, there's no question, we just opened a store next to our -- we've opened our second store in Edmonton, which is impacting our first store in Edmonton. And I can't remember if you were there, Chuck, but our store in Christiana, Delaware, is clearly having some impact on Hamburg. That is -- those are -- and keep in mind, those are what? Two stores out of 45 or whatever, maybe, in our comp base. But that's probably a bigger issue than competitive openings.

Charles Edward Cerankosky - Northcoast Research

And Anchorage did well despite Sportsman's Warehouse and Bass Pro already being there?

Thomas L. Millner

We are extremely pleased with our performance in Anchorage.

Operator

We'll take our next question from Stephen Tanal from Goldman Sachs.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Just to quickly clarify the sort of excess payments -- or payments related to excess capital at the bank. That means, basically, credit segment EBIT would have been $8 million higher, Retail $7 million lower and Direct $1 million lower? Is that right?

Ralph W. Castner

Hang on. And we may be better off -- let's see, EBIT. So let me pulled the numbers out. Okay. So the total increase, and I'll just focus on this excess payment, so the total increase was $11 million. So Financial Services would have actually been $11 million higher, and financial -- Retail would have been $7 million lower and Direct would have been $4 million lower, absent that one-time deal. And, by the way, when you look at the numbers, particularly in Retail, you see it. Because EBIT goes from $91 million to $99 million, with a down $14 million comp. I mean that's clearly not what your expectation would have been with a down $14 million comp. And that was because of the $7 million payment I referred to a minute ago. Basically, EBIT would have been flat with a down $14 million comp, which is pretty impressive.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Right, which sort of gets me to the SG&A cuts which, obviously, were pretty good in the quarter. Definitely better than we'd modeled. How are you thinking about expense growth in 2015 off of these levels?

Ralph W. Castner

Well, I guess what I'm thinking about is that -- we talked about, about 20% of the reduction is related to incentive comp. We clearly will plan next year assuming that is back into the expense base. But on the other hand, what we're going to have help on this is this acceleration we've seen in expense growth -- or expense reduction initiatives throughout the year will be annualized as we move into next year, which will help us offset that. So we think that we'll have to continue to be really aggressive in managing expenses through 2015, mainly to put that incentive comp fee back into the expense structure, which I'm sure all of our employees will be glad to hear.

Thomas L. Millner

And we're already thinking about '15 from an internal budget standpoint, and we're going to -- we're setting really aggressive targets to keep costs in line, which is forcing prioritization, which we think is a good thing.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Sure. Okay, that makes sense. And in terms of the sort of the improving comps here, I mean it sounds like July is a little bit below plan. Clearly, 2Q is a little worse. What gives you guys confidence that sort of comps improving here for the rest of the quarter and then potentially turning to a positive in the fourth quarter?

Thomas L. Millner

Well, I think, as I mentioned earlier, you might not have been on the call, but we roll to fall merchandise, which is a big deal in 10 days to 2 weeks. And so we get -- we feel really good about the product offering that we have, combined with the fact that we come into hunting season. One of the things, Steven, in my career, July is always a difficult month, be it on the manufacturing side or the retail side of the outdoor industry because short of camping and boating, there's not a lot to hunt in the month of July. So to our core customer, there's not a heck of a reason to come into a Cabela's store. But once the new product comes and we start promoting those new products and encouraging them to come in, I think that gives us some encouragement and improvement as the quarter unfolds.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Understood. That makes sense. And just the last one here, quickly, for Ralph. I mean, sort of following up on Rick's question, in terms of loan loss reserves, the ratio, how are you thinking about like the right level of credit quality and charge-offs today at sort of today's obviously low levels?

Ralph W. Castner

Well, if you're looking at the absolute charge-off level, which was 1.67% in the quarter, I think over some period of time, that gets to a range of 2% to 2.25%. Now that could take -- that might take 5 years. I mean, I don't know. It's -- one of the things that's keeping it low is the growth of the portfolio because it does take new account some amount of time to charge off. So if the portfolio is growing at a 12% and 13% growth rate, it's going to stay low for a while. That's obviously in the -- that comment is framed in sort of a constant macro environment, but go ahead.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

No, understood. And that's certainly how we've modeled that credit, staying very good. But just in terms of the reserve ratio, obviously, if you're -- especially, if you're sort of running at low charge-offs because you're growing the book, wouldn't you be reserving for sort of future potential charge-offs going up? Or...

Ralph W. Castner

Well, the way the reserve calculation basically -- I mean, you can't -- for maybe obvious reasons, you can't assume things are going to get worse in the future and reserve for anticipated change in trend. You kind of got to -- and this area gets looked at with a great deal of scrutiny, as you can -- might imagine because of the temptation there to manage earnings. So there's a very formulaic process. But, I guess at a high level, the way I would think about it is if -- whatever the percentage of the reserve is to the total, that will stay constant as -- that will be correlated with the charge-off rate. So if charge-offs stay at one point -- let's just say charge-offs stay at 1.67% for 3 years. Whatever the reserve is, as a percent of the total receivables, would then basically stay constant for that same period of time. But as the portfolio grows, obviously, the absolute amount of the reserve would go up over time.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Got it. Okay. So that -- I mean, that basically service you'll be provisioning just the amount of charge-offs, which I guess would still imply provisions going up. But I think I understand. I mean, the reserve ratio is not going up until your charge-offs get worse [indiscernible] to the bottom line.

Ralph W. Castner

Right. But it will go up -- so the point of the provision is it will go up if the portfolio grows. So you might actually have a provision slightly greater than charge-offs as we move forward.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Okay. But no idea on when that might happen?

Chris Gay

Well, I talked earlier. We would expect -- we expect the allowance to go up in the back half of the year.

Operator

We'll take our next call from Jim Chartier from Monness, Crespi, Hardt.

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Can you just give us a little more color on how ammunition trended in the back half of the year? Was third quarter growth in ammunition as strong as the first half of the year? And then how did ammunition trend over the course of fourth quarter? Was it up early and then start to decline later in the quarter?

Thomas L. Millner

Let's see. Ammo -- it's hard to get the seasonality out. I'm assuming you're talking about 2013?

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Yes.

Thomas L. Millner

In our Retail business, ammo was clearly good and trended up versus 2012 in the first quarter. Was up in the second quarter versus 2012. Trended up about the same amount in Q3. And then in Q4 of '13, trended down. I think the trends in our ammunition business are pretty consistent with that.

Ralph W. Castner

Yes, so let me just -- I'll try to add a little color to that. The percent improvement we saw at '13 over '12 declined from the first quarter to the second quarter to the third quarter. And then in the fourth quarter, mainly because the fourth quarter of '12 was so strong, in the fourth quarter, we -- it was down significantly in '13.

Thomas L. Millner

Yes, very significantly.

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Right. So the third quarter comparison in ammunition, from a growth perspective, is similar to what you saw in the first half?

Ralph W. Castner

I would tell you, it's easier than both the first and the second.

Thomas L. Millner

That's the surge-ins, obviously. So those headwinds lessen.

Ralph W. Castner

And actually, for what it's worth in guns, guns on a comp basis become much easier in the third versus the second.

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And then how do you guys -- there's been a lot of talk about the number of new shooters coming into the sport over last few years. How do you think about the level of ammunition demand kind of a couple years out, given that the number of people that were new to firearm?

Thomas L. Millner

Well, I would -- I still remain -- after seeing this business for 20 years, I'm still long-term bullish once we -- people dig through inventories and all of that cleans itself from the system. I think just the initiatives we see in youth shooting initiatives and females in the sport and minority outreach programs and youth programs that are occurring, I still think the long-term viability of the industry in recreational shooting and hunting is solid and growing.

Operator

And we'll take our next question from Mark Smith from Feltl and Company.

Mark E. Smith - Feltl and Company, Inc., Research Division

I'm not sure if you gave it or if you have it in front of you, but do you have the sequential comps during the quarter, those monthly comps?

Ralph W. Castner

Yes, but we don't -- we normally don't give comps by month. They did get better. They got better during the...

Thomas L. Millner

Sequentially better month-to-month.

Ralph W. Castner

Month-to-month, they got better, and they continue to get better.

Mark E. Smith - Feltl and Company, Inc., Research Division

And you might have hit on this, Tommy, that -- the negative 7.3% for the quarter, did you see the same trend in that business, excluding hunting optics, shooting, ammo and whatnot?

Ralph W. Castner

We don't have that by month. I would tell you, yes, only because seeing how all the categories behave.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. And then you guys, I think, have previously given some full year 2014 sales guidance of mid- to high-single-digit rate. Are you still sticking by that? Should we look at that as maybe closer to that mid-single-digit, just looking at your guide for Q3?

Ralph W. Castner

I think we gave really specific guidance in our earnings release. And I guess I'll refer you to that. And we gave it by quarter, so I don't recall where that ends up for the year. But...

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. And then lastly, any -- Tommy, any firearms or ammo other than 22 that you're still having trouble getting in stock?

Thomas L. Millner

No. In fact, fill rates have gotten better. Ammo fill rates were up almost 900 basis points, except for rimfire, which is still just very, very difficult to get. And I would say, if there's any one long-term concern I have is that rimfire is, Mark, as you know, it's kind of the gateway for a young person or someone else to start shooting because there's no recoil. It's fun to go out plinking. And the longer that stays tight, it could have a long-term subtle suppressive effect on new participation. But the pipeline of people that we've got that are new is still really rock solid. But we're hoping that the manufacturers are going to begin to increase capacities reasonably to get us back in stock on rimfire. But it's still a big problem.

Mark E. Smith - Feltl and Company, Inc., Research Division

Maybe one more. Anecdotally, looking at that -- those same trends, have you've seen any shift more to 20 rather than 12 gauge or even a 410 that you've seen over the last year or 2?

Thomas L. Millner

Actually, our shotgun business was actually very encouraging. And I wish I could tell you I knew whether that was the modern sporting rifle customer migrating to shotguns, but we see positive glimmers in the shotgun business.

Operator

We'll take our next question from Andrew Burns from D.A. Davidson.

Andrew Burns - D.A. Davidson & Co., Research Division

Two quick ones for you. Just hoping you could elaborate on the strength you're seeing in camping. It sounds like meaningful improvement. What the drivers are there? And then just trying to reconcile on the ammunition commentary. That was the one category that really underperformed to your expectations in the second quarter, yet when we temper the go-forward sales trajectory, it sounds like it's more of a high-level caution versus sort of resetting expectations for ammunition for the balance of the year. Any clarification there?

Thomas L. Millner

Yes. That's exactly right on the second part. That is exactly right. It's more high-level of concern at a macro basis. Because the interesting thing, if I just look at our Direct business, dollar performance in Q2 was above 2012, albeit far below 2013 and a little worse than our -- and worse than our expectations. So that's more the concern. Now to your camping question. I think we're really excited about the future of our camping business. Several years ago, we perhaps got a little too out of balance between Cabela's-branded products and national brands and with a lessening focus on Cabela's-branded product. And in the last year or 18 months, a renewed focus on Cab-branded product, performance and quality and real attributes in everything from tents and sleeping bags to hiking footwear, our XPG line is met with at least very early encouraging signs. So I think we're encouraged by camping.

Operator

We'll take our next question from Sean Naughton from Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Can we talk a little bit about the Direct business for a minute? Down 18% in the quarter. You kind of adjust for the shift in the $1-million impact on the transfer from the Financial Services business. Looks like it was down about 25% from a profitability standpoint. Just wondering how to think about that business moving forward and what are the trends that we're seeing there?

Thomas L. Millner

Well, I think we commented that the ammunition business has been such a big part of Direct. Especially when supply was really tight at retail stores, customers just defaulted to everybody online, including us of that sold ammunition, to try to find it. So the boom was really positive at the peak of the surge, and probably I would hope to no surprise when it's -- the surge kind of ended, it really overly affected our Direct business. Now having said that, we come out of the surge period the headwinds and ammo clearly calm in the back half of the year. We do have cannibalization. And remember, Sean, it's nearly $3 million a store and we're open in -- we're going to open 6 or 7 stores here in just the next several months. So while that $3 million doesn't happen at one-time, it happens over a period of time. We've got some headwinds there. I think we're going to have a lot more clarity as we get into the third and fourth quarters about how our efforts in our Foothills office that we've talked to you about, how our omni-channel efforts really affect the Direct business as we get away from all the muddiness that the ammo surge created in Direct. I think we'll have a clear idea, but we're committed to get that business, on a long-term basis, to flat to up low-single digits. And we'll see, as we get there through the third quarter and the fourth, how we're doing.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay, that's fair. And then maybe a couple questions on the credit business. When you look at interchange, I know they're soft -- softer than I would've expected quarter on interchange, up about 6% average account growth, close to 8%. How should we think about why that interchange number is slowing down at the rate? Is that spending outside of Cabela's stores? Or how do I think about that?

Ralph W. Castner

Well, it's entirely -- and I have to think about this a second. It's entirely spend outside of the store. I was trying to quickly here calculate the percentage increase in interchange income. But what we're seeing in that business is more and more people revolving, which is actually really good for the business. Average balance sheet going up, and the percentage of people that pay us interest every month keeps going up. I'm not sure I can necessarily, at least off the top of my head, answer your question with respect to interchange income. I guess what we look at is what the percentage interchange income is, it's up. Is that right? It's up 9.6%? I'm sorry? It's up 7%, which is about the same as the increase in average account. So I guess I'm not that worried about it. Average accounts were up 7.7%, interchange is up 7%.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. And then I guess just on the change in the merchandise reporting. Is that something to do with how you look at the segment? Is that specifically the customer reward fees? Is that where that's coming out of? Or is that another way...

Ralph W. Castner

It is absolutely coming out of the customer rewards fees, which is one of the reasons that's down.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. Got it. And then I guess last question for me. Just on the expenses. I know you spent a lot of time on this, but just quickly, you guys have been talking about mid-single to high-single-digit growth each quarter coming out of Q1. I think the number was only up about 2%, and so kind of at the low end of that mid-single, would be close to $5.5 million.

Ralph W. Castner

I would tell you that's below single in my commentary.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Yes. Right. Right. Yes, so I guess the question really is, where does that -- I mean, is the $5.5 million kind of below that plus 4% growth for Q2? Is it all the things that you guys have kind of already been alluding to that just -- you're getting that proliferation of buy-ins much better across the organization?

Ralph W. Castner

It is. And I would tell you, the only reason we're guiding for more than that as you go to the third and fourth quarter, is obviously you're going to have the impact of more store openings, which will put upward pressure on that. But I've got to tell you, I've been surprised every month about how our employees are continuing to react positively to what we've asked them to do around expenses. And if that came in less than that mid-single number we have guided to, I wouldn't be surprised. It's really been remarkable.

Thomas L. Millner

And, Sean, one of the key messages that we've communicated throughout the organization is to drive savings so that we can make investments back in the business to grow the business. And that message has really resonated across the organization, which is a far different message than just cut, which is not a great message. But finding savings so we can be more efficient and make prudent investments to grow the company, it's really an important message, and our employees have just embraced it.

Ralph W. Castner

I think all of our employees, Sean, understand that -- have this shared vision of a country someday with 200 Cabela's stores in it. And we all understand that we've got to get an appropriate return to our shareholders in order to make that happen, and that's what we're really driving to.

Operator

And we'll take our last question from Lee Giordano from CRT Capital.

Lee J. Giordano - CRT Capital Group LLC, Research Division

Just a quick one. Can you update us on the omni-channel fulfillment program that you began, I think it was late in 2013, and how that's working out?

Thomas L. Millner

Yes. Lee, it's been really just flawless. We told you it implemented on time, I think last October -- early October. And it's just worked like a charm. And I think it's going to -- it'll help us as we get into peak in second quarter. And I'm not prepared to share exactly what we're doing, but we're trying to enhance it even more because speed to customer is getting more -- is getting increasingly more important, so we're looking at some enhancements to be even quicker. But so far, just fantastic.

Operator

I'd like to turn the call back over to Mr. Gay.

Thomas L. Millner

If that's the last question, thank you, all, for joining us today, and we look forward to talking to you again soon.

Operator

This does conclude today's conference. Thank you for your participation.

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