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Executives

Chris Gay - Treasurer

Thomas Millner - Chief Executive Officer, President and Director

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

Analysts

Rick Nelson - Stephens Inc.

Reed Anderson - D.A. Davidson & Co.

Jonathon Grassi - Longbow Research LLC

Mark Smith - Feltl and Company, Inc.

Derek Leckow - Barrington Research Associates, Inc.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Stephen Gregory - Mandalay Research

David Magee - SunTrust Robinson Humphrey Capital Markets

Cabela's (CAB) Q3 2010 Earnings Call November 2, 2010 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. Third Quarter Fiscal 2010 Earnings Conference Call. [Operator Instructions] 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 earnings release to find reconciliations of these non-GAAP financial measures to GAAP.

Now onto the financial results. For the quarter, adjusting for divestitures, consolidated revenues increased 3.9% to $643 million, retail revenue increased 6% to $369 million and direct revenue decreased 1.1% to $219 million.

For the quarter, financial services revenue increased 10.9% to $53 million as compared to $48 million in the year ago quarter. The increase in financial services revenue was due to lower provision for loan losses, higher interchange income and lower interest expense. Operating income increased 16.8% to $37 million in the quarter as compared to $32 million in the year ago quarter. And earnings per share increased 3.6% to $0.29 in the quarter compared to $0.28 in the year ago quarter.

Third quarter 2010 results include a $3 million pretax impairment charge related to our sale of Van Dyke's Restorers. Third quarter 2009 results included impairment and other special items netting to just $397,000 pretax. Excluding these items in each quarter, earnings per share for the third quarter of 2010 were $0.31 compared to $0.28 in the third quarter of 2009. Now I will turn the call over to Tommy Millner, Cabela's Chief Executive Officer.

Thomas Millner

Thank you, Chris, and good morning, everyone. We are pleased to report record third quarter financial 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 the 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 170 basis points, our second consecutive quarterly increase and the biggest increase we've seen in more than three years. The improvements were broad based as margins increased in 11 of 13 merchandise subcategories. Improvements in merchandise gross margin are a result of better preseason planning, greater vendor collaboration and improvements in in-season management.

We're still in the early stages of our gross margin expansion initiatives, which provides 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 compared to 2009.

Primarily due to improvements in gross margin and reducing expenses as a percent of sales, Retail segment operating profit increased $11.4 million. We are particularly pleased with these results as marketing fees paid from the bank to the Retail segment contributed just $1 million of the $11.4 million increase. Retail segment operating margins increased 250 basis points in the quarter to 14.1%. This is the sixth consecutive quarter of increases in Retail segment operating margin.

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 retail expansion opportunities. I'm also pleased to report that two weeks ago, we completed the sale of Van Dyke's Restorers business. As we previously discussed, part of our strategy is to sell assets which are not essential to our mission of providing outstanding outdoor products and services to our customers.

This is one of several non-strategic businesses we've sold over the past 14 months. These sales have allowed us to simplify operations, raise cash, increase return on invested capital and more sharply focus on our strategic initiatives.

Moving to direct revenue. Growth rebounded nicely from the prior quarter as fill rates in the Direct business improved significantly compared to the second quarter. We were especially pleased with direct merchandise performance as we move from spring-summer merchandise to fall-winter goods.

Additionally during the quarter, we launched the new cabelas.com website, which has enhanced navigation and site search, new comparison functionality and an improved look and feel.

Now let's review revenue and merchandising trends during the quarter. For the quarter, merchandising sales increased 2.3% and revenue increased in four of our five merchandise categories. We realized the greatest growth in hunting equipment and clothing and footwear while the fishing and marine area was soft. From these results, we were able to make additional investments in direct marketing cost and retail store labor that we had planned. After tightly managing cost for the past 18 months, we felt it's appropriate to reinvest some dollars to build upon our brand awareness and loyalty, further strengthen our market position and build on our industry-leading customer service levels.

Now let's look at World's Foremost Bank. The operation of the bank continued to drive significant customer loyalty. For the quarter, financial services revenue increased 10.9%, average active accounts increased 5.3% and the average account balance increased 0.4%. We're very pleased with the performance of the bank in the quarter and Cabela's CLUB members continued to be our best, most creditworthy and highest net worth customers.

After navigating through a difficult economic environment and new regulatory changes, it is becoming clear that we're starting to experience tailwinds with regard to charge-offs, delinquencies and interest rate spreads on funding cost. With a stabilizing economy and regulatory changes largely implemented, it is now very exciting that we can get back to the business of using our bank to help drive additional customer spending through all of our channels.

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 third quarter results, we again realized improvements on ROIC. On a rolling four quarter basis, return on invested capital improved 90 basis points year-over-year. As we previously 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 United States and one store in Canada. We expect to open both Springfield, Oregon and Allen, Texas in the second quarter of 2011. And we expect to open our store in Edmonton mid next year. We currently expect to open another store in Canada in 2012 and are also actively seeking additional locations in the United States. We look forward to entering these new markets, and we'll 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 nine months of 2010, we expect earnings per share for the full year, exclusive of impairment and other special charges, to meet or exceed current expectations.

Additionally for 2011, we expect earnings per share growth to return to a double-digit rate. Before turning the call over to Ralph, I'd like to thank all Cabela's' employees for their hard work and dedication. Our employees' commitment to our customers is legendary and has placed Cabela's at the forefront of the outdoor industry, and I sincerely thank them all for what they do to cherish and delight our customers each and every day. Now I'll turn the call over to Ralph Castner to review in more detail our balance sheet and performance at World's Foremost Bank. Ralph?

Ralph Castner

Thanks, Tommy. We're encouraged with our third quarter financial results and, as Tommy mentioned, the significant progress we've made in our areas of strategic focus 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 as a percentage of average managed credit card loans increased 40 basis points to 8.6% compared to 8.2% in the year ago quarter.

Increases in financial services revenue were primarily due to lower provision for loan losses and an increase in interchange income. Additionally, as a result of the favorable interest rate environment, interest expense decreased $1.6 million or 50 basis points as a percent of average managed credit card loans.

For the quarter, net charge-offs as a percentage of average managed credit card loans were 3.85% compared to 5.02% in the second quarter last year. Additionally, we continue to see a decrease in delinquencies. Greater than 30-day delinquencies were 1.33% as compared to 1.90% a year ago; greater than 60-day delinquencies were 0.80% as compared to 1.12% a year ago; and greater than 90-day delinquencies were 0.42% as compared to 0.56% a year ago. As a result of these lower delinquencies, we now expect average charge-offs for the year to be between 4.25% and 4.5%.

As we discussed last quarter, we do not expect our allowance for loan losses to change significantly in the last two quarters of 2010. Indeed, in the third quarter, we reduced our allowance for loan losses by less than $1 million. In the fourth quarter, we expect only a small change in the allowance for loan losses.

Now I'd like to remind everyone about the bank's capital position. As we've previously discussed, the consolidation of the assets and liabilities in the trust effective January 1, 2010, increased the bank's capital requirements. As a result of lower projected outstandings, we now expect the capital requirements to total only $150 million compared to our previous estimate of $200 million. Recall, Cabela's invested $75 million of capital into the bank in the first quarter of 2010. We expect to invest the remaining $75 million later this year.

Given our strong cash flows for the first nine months of the 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 increased 2.4%. 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 with regard to merchandise trend is more meaningful, we assume that both of this fiscal year and the prior fiscal year begin on the Sunday closest to January 3. Improvements in comparable sales were broad based as we saw increases in 11 of 13 merchandise subcategories.

Another area which we are proud of is our continued progress in strengthening our balance sheet. For the quarter, accounts payable increased $32 million as we standardize our payment terms and gifts instruments and credit card loyalty points increased $50 million. Inventory increased $43 million year-over-year as we want to ensure we have enough inventory for our upcoming holiday season. It's important to note the build up of inventories focused on core items, and we're very comfortable with these current levels.

On a consolidated basis, we ended the quarter with $395 million of cash and cash equivalents. Nearly all of which is held at World's Foremost Bank. Additionally, the bank have $335 million of restricted cash, of which $250 million was used to retire the term securitization that matured in October. The remaining $60 million is related to the securitization completed in September and has since been released to the bank.

Now let me discuss our effective tax rate. For the quarter, our effective tax rate was 37.9% compared to 35.1% in the third quarter a year ago. The higher tax rate was due to less income allocable to foreign sources and certain non-deductible payments. Through the first nine months of the year, our effective tax rate was 35.2%, and we expect our effective tax rate for fiscal 2010 to be 35% to 35.5% as compared to our prior guidance of 34% to 34.5%. Now let me turn the call back over to Tommy for some closing comments.

Thomas Millner

Thanks, Ralph. Again, we're very pleased with our financial results for the third 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

[Operator Instructions] We'll go first to Derek Leckow with Barrington Research.

Derek Leckow - Barrington Research Associates, Inc.

Tommy, I just wonder if you could give me an update on the growth of number of 12-month buyers across all channels?

Thomas Millner

Multichannel customers in the quarter, Derek, were actually down about 4.5%. Although I would note that reactivation, it was down 28 bps. Retention was down just a little bit as well.

Derek Leckow - Barrington Research Associates, Inc.

Does this have to do with the slowdown earlier in the year on the catalog, do you think? Will we see a rebound in this number as we get into the fourth quarter?

Thomas Millner

Well, we would certainly hope so. As you know, the growing and retaining multichannel customers is, that's an important metric and I think your hypothesis is correct.

Derek Leckow - Barrington Research Associates, Inc.

And then just given the improvements in profitability that we saw here and your comments earlier in the year at your Boston Analyst Day, where you just kind of said, "We're going to be looking at the reinvigoration of store growth." I wonder if you can comment on a little bit and talk about what should be the annual target for square footage growth if you have one at this time?

Thomas Millner

I don't think we have one specifically at this time. But I would comment that as we've consistently said, as we get more comfort as a company that we are getting sustainable improvements in retail profitability as we displayed in the third quarter, our appetite for new stores will grow accordingly, plus the results that we're seeing with our next-generation stores continue to be good. So I think we're more upbeat as we continue to see these favorable results, as you would expect.

Ralph Castner

Derek, as far as your modeling goes, I think the three stores we've talked about in '11 are pretty much locked and loaded. I wouldn't see any more stores than what we've announced. We're starting to go out to fill the pipeline for 2012, and we're pretty excited about what we're seeing. And as we told you on our analyst day, the more profitable we are in our Retail segment, the more sites we're going to be able to afford, and we're pretty excited about that.

Derek Leckow - Barrington Research Associates, Inc.

If I think about order of magnitude, I mean, I look at some of your competitors, Gander Mountain has about 120 stores. And just looking at the North American opportunity, would you characterize that as being two to 3x the size of your current chain?

Thomas Millner

I'd say it's significant.

Operator

Our next question comes from Jim Duffy with Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Ralph, is there any way to itemize or rank the factors that are contributing to the merchandise margin improvement?

Thomas Millner

Jim, I think I can handle that. I think as we've said to you guys at a number of Analyst Days that we've really been focused on better management of merchandise through the season so that we get in and out much more effectively, and we've implemented some price optimization tools, some allocation techniques. We've reached out to our vendors to get their help in this regard. And those initiatives have been major drivers in improving merchandise margin performance. It really wasn't a mix issue. It's just been the plan that we put in place, we've worked the plan and our teams have just done a spectacular job.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Is there, Tommy, any kind of quantitative examples about how you exited the summer season merchandise categories that you can point to or any anecdotes that might be helpful for us understanding that?

Ralph Castner

Jim, one item I will give you, and this is just one metric we look at. But the number of items that we sold below cost in the third quarter this year as compared to the third quarter a year ago was down significantly. And it just goes to all the points that Tommy made a few minutes ago about that's an outcome of better planning and better processes.

Thomas Millner

So Jim, our prior history had been full of waiting until the very end of the season to pull the plug on markdowns instead of managing markdowns through the season. And as Ralph pointed out that's just making a huge difference in our business, and it's basic retailing.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Ralph, the apparel comps, were they in excess of what you saw for the store chain as a whole? Are you getting good traction on your apparel merchandising efforts, that being obviously an important high margin category for you?

Thomas Millner

Yes. Well, particularly I will talk about retail because that's where we saw most of the improvement. But, Jim, the increase in apparel and retail was greater than the overall comp or the overall business, so we make a subtraction there. But the real call out has been footwear. Footwear is up more than both men's, women's, well both casual apparel and as you know, that's also a very high margin category. Another high margin category that's performed well is camping and outdoors. It's up about or slightly higher than retail as a whole.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

And to what do you attribute the success in those categories? Is there something you're doing differently or has set your demand trend?

Thomas Millner

Jim, if you remember in the last quarter call, we pointed out in footwear for instance, we have had great success in going to self-service gondolas in a fair number of our stores and that we were expanding that. So we got better customer service, more merchandise out on the floor. And I would say to our merchants credits, if you look at our footwear assortment, it's just a great look in assortment, and customers are responding.

Ralph Castner

Jim, I think the improvement we've seen both in footwear and the soft goods categories go to everything Tommy said earlier about better planning for the product, better in-season management and having the product that's most relevant to our customers.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

So just running some projections forward, you're ROIC objectives look to me to be well within reach. I'm wondering if maybe there isn't even room for those objectives to go higher? Any comments on that?

Thomas Millner

Well, I think we'd like to achieve the first and then we'll look at increasing them. But I think from a velocity standpoint, retail profitability, merchandise margin performance and return on capital, we're making good progress, and we see that being sustainable.

Operator

We'll go next to David Magee with SunTrust Robinson Humphrey.

David Magee - SunTrust Robinson Humphrey Capital Markets

Can you, I guess, talk a little bit about the more recent trends. I guess I've been a little bit concerned about the warm weather this fall. You claimed hunting as being strong. Is that despite the warm weather we're seeing right now?

Thomas Millner

David, let me give you a little bit of color on October. Certainly, early in the month, the warm weather across the country was negative in both our Direct and Retail businesses. However, mid to late in the month, we had a really good cold snap from coast to coast if you'll remember. And our business particularly in outerwear and warmer weather soft goods improved really nicely. I would note that the Direct business was softer than Retail. Early in the month, we had two systems integrations, the new cabelas.com website and the new customer order management system. There were customer challenges early in the month, and we believe all are virtually behind us. And I think we're pretty optimistic about the November, December time period because the planning that we've done earlier in the year from a promotional standpoint and our inventory positions give us some optimism for the critical November, December selling period.

David Magee - SunTrust Robinson Humphrey Capital Markets

On the fishing side, do you think that the slowdown you've seen there is temporary? Any color on that?

Thomas Millner

Actually, fishing in the Direct business in Q3 was actually pretty good. The paradox is that while warmer weather hurt Outerwear business, the Fishing business stayed a little stronger deeper into the third quarter. But I think we feel good about our Fishing business.

David Magee - SunTrust Robinson Humphrey Capital Markets

And lastly, with regard to the sort of I guess the Internet business. Are you shipping much right now overseas? Is your brand had traction overseas? And is that something that's potentially a big source going forward?

Thomas Millner

The brand does have traction overseas, and we do business around the world in a large number of countries. It's more than 50 or 60 countries. Don't hold me to that number specifically. But we sell all over the world through our website. There are clearly opportunities internationally, and we continue to look and think about what we're going to do. But our more immediate focus is on the things that we talk about, which is improving merchandise margins, return on capital, growing our footprint in North America, while at the same time an eye on the international markets.

Operator

We'll go next to Mark Smith with Feltl and Company.

Mark Smith - Feltl and Company, Inc.

First, can you give us any more insight into firearm trends during the quarter namely black guns and also shotgun plates in this season, and how those trends look?

Thomas Millner

I don't have that by subcategory of merchandise, other than to tell you that the Gun business continues to be good, and we believe we continue to grow share.

Mark Smith - Feltl and Company, Inc.

Has the mix data tended to be conservative perhaps from trends that you've seen or roughly in line because that looked very strong during the quarter?

Thomas Millner

When we look at the mix data as we've said in prior calls, we believe when we look at our business compared to the mix data that we continue to take share in the marketplace in the Firearms business.

Mark Smith - Feltl and Company, Inc.

Then turning to ammo, we're seeing much better I guess ammo inventory for you as well as many of your competitors. Do you feel that can hurt you at all as people can go just about anywhere to get the ammo that they're looking for now?

Thomas Millner

Well, I think what it did was put some pressure on ammunition sales through our direct channels. I think the direct channels at the top of the ammunition boom were the channel of last resort that people went to when they couldn't find it in their local store. And as the Ammunition business has modestly settled, and we're back in stock at retail, the retail part of the business is still good. But the follow-up is more in the direct channel. And I think that's make pretty common sense.

Mark Smith - Feltl and Company, Inc.

It looks like you put each more investment back into that Direct business and catalog. Did you see positive impact from that in Q3? Or is that all expected positives going forward?

Thomas Millner

Well, as we noted in our script, we made investments in SIRC in the Direct business. SIRC was up in Q3 12.3%, and we continue to focus a lot of effort on smaller and more concise catalogs that are designed to stimulate so they either buy or go to the Internet. And our recent multiyear investment in cabelas.com should indicate the depth of our commitment to the Direct business.

Ralph Castner

And Mark, I'll remind you that on our accounting for catalog cost, we amortize those over the expected life of the catalog. So at least in theory, the expense should always match the revenue unless the catalog either outperforms or underperforms expectations.

Operator

We'll go next to Reed Anderson with D.A. Davidson.

Reed Anderson - D.A. Davidson & Co.

First of all, in terms of, Ralph, you commented both -- can you tell me about the performance, the strength of footwear apparel. And I'm just curious if that holds consistent across both the Cabela's brand as well as the national brands? Or is it more concentrated on one or the other?

Thomas Millner

I think it's strength across the board.

Reed Anderson - D.A. Davidson & Co.

And in visiting stores, it looks like you have done more to push out some of the non-cabela's brand I think of Under Armor and North Face, Columbia. But even doing that, you saw strength in the Cabela's brand as well equivalent to that? But you have been like when I visited the stores recently, you have definitely beefed up the selection of brand merchandise. But despite that, you're still seeing the Cabela's brand is still keeping pace with the sales and your theme.

Thomas Millner

Yes. That's basically a market-by-market issue. If you went to more of our rural markets, you would see more Cabela's merchandise.

Operator

We'll go next to Rick Nelson with Stephens.

Rick Nelson - Stephens Inc.

I want to ask you about the bank. Is that down in interest and fee income this quarter, what you have been tracking up? Is that the new legislation that's affecting or what is the driver there?

Ralph Castner

Well, that's clearly part of it. And we now have combined those things in our income statement. But you've got the absence of over limit fees, the new restrictions on late fees and then the interest income is just declining the overall level of interest rates. So the three drivers behind that line item. But the absence of over limit fees is a big deal.

Rick Nelson - Stephens Inc.

Interest rates kind of have stayed the same, Ralph, because it had 11% as a percent of receivables, has had a good level, we should expect going forward?

Ralph Castner

Yes, I believe it's 10.9%. But yes. I think that feels like a fair number. And to keep in mind, Rick, all of those changes I referred to were contemplated in our planning for both this year and next year and as you can see, we've made some of that up in some other areas.

Thomas Millner

And Rick, one add to Ralph's comments that I pointed out in the script. It is encouraging that after going through the last couple of years that we are back to using these really unique assets that we have to drive revenue across our channels. And that's quite frankly fun.

Rick Nelson - Stephens Inc.

Also I know that the provision came in lower than we expected and the charge-off guidance was reduced. How should we think about the fourth quarter provision in light of the new charge-off kind of guidance?

Ralph Castner

Well, one thing about that, and we look at that a little bit. The provision number, that 3.2%, that's just a piece of the provision that's attributable to principal. Our bigger charge-off number includes both accrued fees and any accrued fees or interest that had been reversed to that line item. So the provision as disclosed, which is in last quarter was 3.2%, is always going to be, I don't know, 40 or 50 basis points less than the reported charge-off number. The other thing that impacts is also any releases in the reserve. But as we talked about it in the call, the change in the reserve in the third quarter just wasn't meaningful.

Rick Nelson - Stephens Inc.

Finally, on the comps. We saw nice improvement. How do you think about that as we look to the fourth quarter and in fact can comps accelerate from the areas to go on top of this year, gun and ammo compares?

Thomas Millner

Well, I think the simple answer is we'll see. I can tell you that, Rick, that I really feel good about our promotional plans for the next two months. We've got a plan that was essentially put in place earlier this year than probably a very long time in our company. Black Friday was really put to bed in June, and that gave us time to work with our vendors. And so I think we've got the elements in place to continue to drive good business from a comp standpoint. And we'll see where the customer is. But I feel very good about the things we control, and we'll see.

Rick Nelson - Stephens Inc.

How do you plan on kind of the business coming from the fourth quarter from an inventory standpoint, what sort of comp left there?

Thomas Millner

Well, inventories were up at the end of the third quarter about 7.5%, which reflected our need to get better back in stock on core items. So from a quality of inventory and a volume of inventory, Rick, I think we're in really good shape and I think we've got the plans to drive the business from something a lot better than an empty card. And I think it will help us going into next year also to have good inventory productivity.

Operator

[Operator Instructions] We'll go next to Christian Buss with ThinkEquity.

Stephen Gregory - Mandalay Research

This is Stephen Gregory of Mandalay Research. You have mentioned that you relaunched your sites this past quarter. Can you provide some color as -- what is your e-commerce position going forward and how do you plan to sell more goods and services off your site?

Thomas Millner

That's a good question. We invested a lot of money to get the new cabelas.com website to a point of world-class functionality, ease of navigation and portraying our products in the best possible way. Our goal is really simple. We have the most dominant website in the outdoor space. We do not intend on seating that position to anyone, and our investment in the new cabelas.com website is a reflection of that commitment. We think the Web and other social marketing mediums and mobile commerce techniques will continue to be a big part of our multichannel strategy. And we've made the investments to support that.

Operator

We'll go next to Jonathon Grassi with Longbow Research.

Jonathon Grassi - Longbow Research LLC

I guess, could you talk about the inventory shortages that you guys had in the second quarter? And I guess if you saw any benefit from possible revenue shifting in the third quarter as the soft good products came back into the store?

Thomas Millner

I'll comment on the second quarter, which I guess is a repeat on what we said in the last call. But we just ran inventories down too low, and we suffered accordingly from a fill rate standpoint. And as we plan for the third and fourth quarter from an inventory standpoint, we wanted to make sure that we had appropriate levels of inventory to drive our business. And that transitioned in the third quarter from spring and summer goods to fall and winter goods, we had the inventory to get our stores and stock and it made a big difference in our business as you could see from a revenue standpoint.

Ralph Castner

The catalyst for the improvement, primarily -- well, in both the Direct business and the Retail was, as Tommy said, the shift from spring goods to fall. And no one should assume that our business, particularly the Direct business, got remarkably better in July. I mean, it really, too, can tell sort of the first and middle of August when we rolled into our fall goods that we saw meaningful improvement primarily in the Direct business.

Stephen Gregory - Mandalay Research

I mean is that the same trend line you saw for the Retail business as well?

Ralph Castner

Yes. Well, the Retail business was never as volatile on the first place. But yes, the Retail business has got better as we move through the quarter.

Stephen Gregory - Mandalay Research

And then, I guess going back to Rick's questions on loan loss provisions. I guess I'm looking at it a little bit differently. I was surprised to see that the actual absolute loan loss provisions increased sequentially given the fact that we do continue to see some improvements in the overall performance of the portfolio. I guess how should we be looking at the absolute loan loss provision in the fourth quarter, because you guys said it's going to change a little bit?

Ralph Castner

Well, yes, and what I said early, we have an allowance for loan loss, and the changes in that allowance for loan loss go through the provision. And we don't expect that allowance to change much in the fourth quarter either. So you should expect the provision. All things being equal in the fourth will be something similar to the third. As it relates to the allowance for loan losses, which is one of the things that create the volatility quarter-to-quarter, there's two things that affect it. There's improvements in delinquency trends and increase in the size of the portfolio. One of the reasons you don't see the change in allowance in the back half of the year like you did in the first half despite an improving credit trends is that we've got to build some allowance as we increase the size of our portfolio in the third and fourth quarter, which is the seasonality high time to do that.

Operator

[Operator Instructions] It appears we have no further questions in the queue at this time. I would like to turn the call back to our speakers for any additional or closing remarks.

Chris Gay

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

Operator

This does concludes today's conference. We thank you for your participation.

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