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Executives

Chris Gay - Director of Treasury & Investor Relations and 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

Reed Anderson - D. A. Davidson

Rick Nelson - Stephens Inc.

Christian Buss - ThinkEquity LLC

Jonathon Grassi - Longbow Research LLC

Mark Smith - Feltl and Company, Inc.

Derek Leckow - Barrington Research Associates, Inc.

Aaron Goldstein - JP Morgan

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

Mitchell Kaiser - Piper Jaffray Companies

David Magee - SunTrust Robinson Humphrey Capital Markets

Cabela's (CAB) Q4 2010 Earnings Call February 17, 2011 11:00 AM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cabela's Incorporated Fourth Quarter Fiscal 2010 Earnings Conference Call. [Operator Instructions] And I will turn the conference over to Mr. Chris Gay, Director, Treasury and Investor Relations. Please go ahead, sir.

Chris Gay

Thanks. 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 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 really excited to report on our record fourth quarter financial results and the progress we've made on our strategic initiatives to expand merchandise gross margins, improve retail profitability, increase return on capital and grow our Cabela's CLUB Visa program. These strategic initiatives are not just working but are accelerating, as evidenced by our fourth quarter results.

Let's begin with merchandise margins, which I am very pleased to report increased for the third consecutive quarter, and the improvement was broad-based, as margins increased in 10 of 13 subcategories. Ongoing improvements in pre-season planning and in-season management led to our 70 basis point gain. We expect these initiatives plus better inventory quality to support future margin improvements.

We're also delighted by our retail operating performance. Operating profit in our Retail segment improved $24 million in the quarter. More than half of the improvement arose from the strong performance from Black Friday through Christmas. Our merchants, marketing and retail operations teams planned for success, with wider and deeper inventory on key items, increases in store outfitter labor, sharper advertising, which increased customer urgency and great execution in all aspects of in-store customer service. Additionally, improvements in our Cabela's CLUB Visa program provided the other half of our operating performance.

In total, Retail segment operating margins increased 460 basis points in the quarter. This is our seventh consecutive quarter of increases in Retail segment operating margins.

During 2010, we found that certain areas of the store such as the gun counter and footwear would realize significant sales increases, with additional investments in store labor. And during the fourth quarter, we made these very productive investments, which was a significant contributor to our increase in comp store sales. We expect to continue to make these investments in the first half of 2011.

This nearly two-year trend in retail profitability is increasing our confidence in accelerating new store deployment. We recently announced plans to open a new store in Wichita, Kansas in 2012 and are actively seeking additional sites for 2012 and beyond.

Our commitment in 2011 is also exciting, with stores opening in Springfield, Oregon; Allen, Texas; and Edmonton, Canada. The combination of accelerating performance and market share gains increases our confidence in this acceleration of retail square footage growth.

We feel return on invested capital is a critical measure of our success, so we are excited by our full year increase of 210 basis points to 13.1%, our highest level in five years. The improvements we're seeing in our business provides confidence in our ability to exceed the high end of our ROIC goal of 14%.

Moving to our Direct business. We saw double-digit gains in our Internet business and plan declines in our catalog revenues. These results were encouraging, in light of greater-than-expected challenges with two systems implementations, the new cabelas.com website and a new customer relationship management system at our call centers. While the customer issues are largely behind us now, at times in the fourth quarter, our customers experience longer-than-average wait times and slow response times while placing orders. Thus, to actually grow our Direct business was encouraging. Despite these issues for the quarter, multichannel customers increased 8.7%, which is an important metric for the long-term health of our business.

Now let's review revenue and merchandising trends during the quarter. We're very pleased in the breadth of improvement by category, as 10 of our 13 merchandise subcategories grew, with the apparel and footwear categories showing the strongest increases.

From an inventory standpoint, inventory increased $69 million year-over-year to $509 million. This was a planned increase, as we wanted to ensure we had enough inventory for the holiday season, as well as enough inventory through the first half of 2011.

Recall in the first half of last year, we suffered from lower fill rates and in-stock levels as a result of cutting inventory a little too tight. We believe having relevant core inventory this year relative to last year was a large contributor to our comp store sales increase. We are very comfortable with the current inventory levels and believe we are well positioned for the first half of 2011.

Now let's take a look at our Cabela's CLUB Visa program. This program continued to drive significant customer loyalty. For the quarter, revenue increased 27.8% and average active accounts increased 6%. We are encouraged that the trends we experienced in the quarter have continued into 2011, and our business has started off particularly strongly with retail comps. As a result, we expect earnings per share for the full year of 2011 to meet or exceed current analyst expectations.

Recall that in the first two quarters of 2010, we had significant bad debt reserve releases, which we do not expect to reoccur. Ralph will comment on the expected quarterly breakdown without these reserve releases in a moment.

Before turning the call over to Ralph, I'd like to thank all of our 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 all of them 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. Following up on Tommy's remarks, we feel great about how our business accelerated in the fourth quarter and has continued to perform into the new year. With regard to the quarterly profits split, in 2010, we had bad debt reserve releases totaling $11 million and $9 million pretax in the first and second quarter of the year. We do not expect releases of this magnitude in the first half of 2011. In both these quarters, we expect earnings per share to be somewhat higher than the prior year after adjusting for the previous year’s reserve release, and we remain very comfortable we will meet or exceed full year analyst estimates.

Our Cabela's CLUB Visa program had another solid quarter. For the quarter, managed financial services revenue as a percentage of average managed credit card loans increased 150 basis points to 9% as compared to 7.5% 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 $2.3 million or 60 basis points as a percentage of average managed credit card loans.

For the quarter, net charge-offs as a percentage of average managed credit card loans were 3.38% as compared to 5.26% in the quarter last year. Additionally, we continued to see decreases in delinquencies.

Greater than 30-day delinquencies were just 1.13% as compared to 1.79% a year ago. Greater than 60-day delinquencies were 0.72% as compared to 1.09% a year ago. And greater than 90-day delinquencies were 0.37% as compared to 0.56% a year ago. As a result of these lower delinquency rates, we expect average net charge-offs for the year to be between 3.5% and 4%.

As expected, during the quarter, we fulfilled the capital requirements for WFB by contributing $75 million to the bank at the end of the fourth quarter. We funded the contribution with cash on hand and do not expect to have to make further capital contributions to WFB in the foreseeable future.

With regard to other revenue. Consistent with our strategy of turning non-performing assets into cash, we sold $9.4 million of land, mostly related to our Greenwood, Indiana location, which was included in other revenue. These sales generated only a $1.3 million of profit as compared to about $300,000 of profit in the same quarter a year ago. On a consolidated basis, we ended the quarter with $136 million of cash and cash equivalents, of which $82 million was held at World's Foremost Bank and $54 million was held at the parent company. Additionally, the bank had $19 million of restricted cash.

Now let me discuss our effective tax rate. Our tax rate was 30.8% for the quarter and 32.7% for the year. These lower-than-historical rates are due to tax benefits brought about by our international activities, which should largely continue into the future. This benefit was offset by an increase in interest expense due to a change in the timing of prior tax deductions. For 2011, we believe that our effective tax rate will be approximately 34%.

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 fourth quarter and full 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] And we will take the first question from Rick Nelson with Stephens.

Rick Nelson - Stephens Inc.

I wanted to ask you about the provision for loan losses coming in at 2.4% versus 4.6% a year ago. Is there anything unusual this quarter and any reason we can expect that loan loss provision to remain in the mid-2% area?

Ralph Castner

Yes. We did have in the quarter about a $4 million reduction in our allowance for our loan losses, which is why the provision is so much less than the charge-offs. We gave some guidance with respect to charge-offs as it relates to 2011 in that 3.5 to 4 range. And as it relates to any changes in our allowance for loan losses, in a constant credit environment, we would expect our allowance for loan losses to actually increase, which would drive the provision up slightly just as the portfolio grows. Now we've obviously been very excited about how we’re seeing continued improvement in the credit quality going forward. So hopefully a continued credit quality would offset any change in the provision going forward. So I guess that's a long way of saying that as we look into 2011, we'd expect it to be higher than that two number that we've seen recently and something closer to our charge-off guidance, which is in the 3.5 to 4 range.

Rick Nelson - Stephens Inc.

And, Ralph, the EPS guidance that you provided for the first half an increase, that incorporates a higher provision. It's not x...

Ralph Castner

Yes, that’d be fair, yes. And by the way, the 2 7 provision I think that you quoted, Rick, was the full year provision. The provision...

Rick Nelson - Stephens Inc.

2 4 in the quarter?

Ralph Castner

Well, I'm looking at the press release, and I have it at 3 2 in the quarter. So I have a 3 2 in the quarter, which obviously is closer to the charge-off rate, which is what you'd expect.

Rick Nelson - Stephens Inc.

Also on the ROI, 13.1%, Tommy, what is the threshold there for stepped up historic growth? And should we be thinking about a meaningful ramp in 2012 given where the ROI is at this point?

Thomas Millner

Rick, I think it's an understatement that our confidence is increasing significantly, as the fruits of all of our work here are starting to come to bear. I think we would be disappointed if we weren't able to open more stores in '12 than we're going to open in '11. And we’d certainly like to pick up the pace, given this increase in our confidence in '12, '13 and '14. I'm not going to give you a specific number, but these results clearly indicate that we're making progress. We feel it and are more encouraged about the growth than we've been in a long time.

Ralph Castner

Rick, following up on your provision question just a minute ago, it was 2 4 for the quarter. I was looking at the interest expense line. So you're right, it was 2 4, but we should expect that to increase as we go into next year.

Rick Nelson - Stephens Inc.

Also I’d like to ask you about the gross margin. Up 70 basis points, the merchandise margin in the quarter, and we've seen a few quarters now of improvement. I know in the past, you've talked about 200 to 300 basis points of future opportunity. Wondering what you see ahead, given what you've already accrued.

Thomas Millner

We still remain committed to growing margins 200 to 300 basis points by the end of 2012. And we've consistently said this is a marathon, not a sprint. And I couldn't be more pleased that we were able to grow comps 7.3% and have margin expansion. So good progress but more to come.

Rick Nelson - Stephens Inc.

And you seem to suggest that comps were attracting quite strong at present. Are we impacting an acceleration?

Thomas Millner

They are slightly above the fourth quarter rate.

Operator

And now we'll move to the next question, will come from Derek Leckow with Barrington Research.

Derek Leckow - Barrington Research Associates, Inc.

Congratulations, first of all, on that improvement in return on invested capital, Tommy, and can you give us some more color on that? What's the store-level return look like right now?

Thomas Millner

Go ahead, Ralph.

Ralph Castner

The store levels clearly improved, and we’re seeing a big improvement on our retail profitability, and it gives us confidence as Tommy about to roll out more stores. I'm not sure I can help you quantify it, but we think there's still opportunity to get that out A, as we increase earnings and like we did in the quarter, there continues to be assets that we can convert to cash.

Thomas Millner

I think, Derek, the color I would add is we remain focused on two fronts to drive return on capital. First is maximization of the balance sheet. And then secondly, just operational excellence across the enterprise on hundreds of initiatives to improve the way our company operates every day. And that ultimately turns into that really important, probably our most critical measure, which is return on capital, so we were just thrilled by the progress in 2010.

Derek Leckow - Barrington Research Associates, Inc.

And what's the performance of the sort of smaller prototypes versus the larger ones? Was that where you saw more of a surprising return or what can you tell us about that?

Thomas Millner

No, it was broad-based, although I would tell you we continue to be very pleased with the performance of our next generation stores, and we'll open three more of those next gen stores this year.

Ralph Castner

Where we saw the most improvement, Derek, if you go by a store-by-store basis, is some of those stores we opened in, I lose track of the years, but '07, '08, some of those latter big stores that we opened that underperformed rather significantly at the time, those stores have made a remarkable improvement, in some cases due to right-sizing them and in some cases just due to our team at the store executing better. But we saw some -- in some of our stores that had previously underperformed, we saw some big improvement.

Derek Leckow - Barrington Research Associates, Inc.

So just to kind of frame this for the future, then, for 2012 and '13 and so forth, are we starting to see a 5% square footage growth, kind of, expectation? Or is there a number that you might be comfortable talking about at this point in time, Tommy, about how much square footage growth you might be targeting on a long-term basis?

Thomas Millner

There's not a specific number either in percentage or in numbers. Suffice to say as I said earlier, given this level of performance, if we can find the right locations that fit our profiles, we're going to accelerate retail growth.

Operator

And now we'll move to a question from Mitch Kaiser with Piper Jaffray.

Mitchell Kaiser - Piper Jaffray Companies

First of all, on the merchandise margins, I just want to make sure that we're framing this correctly. The 200 to 300 basis points, guys, is that off of the 2009 level? And if my math is right, it looks like you expanded that about 20 basis points in 2010 given the particular weakness in the first quarter. So is it another incremental 180 to 280 over the next couple of years?

Thomas Millner

Well, it does go back from 2009, which was our starting point. And we think we'll get the 200 to 300 basis points from those 2009 baselines. I think, Mitch, what's most important is the traction we've had the last several quarters when all the inventory issues were behind us, and we're starting to see this nice acceleration. And I think we're actually up 50 to your math.

Ralph Castner

For the year.

Thomas Millner

For the year.

Mitchell Kaiser - Piper Jaffray Companies

And then just the initiative staffing in the gun and shoe categories, could you just go into a little more detail in what you did there? It certainly sounds like you drove some nice improvement.

Thomas Millner

We did. We've used some rather advanced analytics tools to measure how quickly we are engaging customers in critical areas of the store where they actually need assistance, which technical footwear and the gun counter are obvious areas. Those products have to be sold. And we made a conscious decision coming into the fall selling season to make pretty significant investments in additional store outfitters to drive those categories. And it just made a huge difference in our business. And we will continue that going forward.

Mitchell Kaiser - Piper Jaffray Companies

And then just lastly, obviously, we look at the Nicks [ph] data, and it looks like background checks are ticking up. I didn't hear any commentary about just firearm sales particularly in the fourth quarter and then on to the first quarter, if you don't mind.

Thomas Millner

We continue to believe when we look at the analysis of the Nicks [ph] data, there's no question we're gaining share and have gained share for more than a year and a half. And there are certainly some categories of the gun business like the black gun business, which has settled down, but the core gun business continues to be good. You see it in the Nicks [ph] data, and we think we're getting more than our share, which we intend to continue.

Operator

And now moving onto the next question. That will come from Jim Duffy with Stifel, Nicolaus.

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

I'm hoping for some more commentary around the factors which are contributing to improved comps. Tommy, is there any way to kind of look at your key initiatives and rank order those which are driving the most improvement?

Thomas Millner

Jim, I'll give you a bit of a long-winded answer, which I'll apologize for on the front side. It's obvious to all of us that while the first nine or 10 months of the year mean something, it's really the fourth quarter that makes all the difference in our business. So starting 13 or 14 months before this year's Black Friday, we put a plan together that planned for success. And it encompassed operations, marketing, the merchants and retail operations. And it began with collaboration with all of our supply partners to have the best products we could get to drive from Black Friday through Christmas. We were fairly narrow in our assortments but bought inventory in those items deep. We then added a change in our advertising mix to create more urgency so that we got that customer early on Black Friday, not later in the day. So we gave them reasons to come to us first, not at the end of the day. And then our staffing levels in the store, we bet on success. We had the folks there. And we were ready for all those thousands of customers that showed up at our doorsteps on Black Friday. And we continued that really intense focus all the way through the end of the year, and it just made a huge difference in our business. And being in a good inventory position has certainly helped us as we turned the calendar year into Q1.

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

And then can you provide any commentary around those 13 of the 15 categories? Have you been seeing outside strength in some of the higher margin merchandise categories?

Thomas Millner

Yes. We noted that we saw nice increases in the women's and children's area, which is another interesting anecdote. We did a complete rethink about 18 months ago on this category, used our customer personas to try and reposition that entire category and their success has been really wonderful to watch. We also saw strength in footwear. We saw strength in apparel. And the only area of the business that was really soft was ammunition sales in the Direct business, which you would expect as ammunition has come down from its peak levels to more of a new normal level. But it was strength across the board.

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

Couple questions for you Ralph. As you look to '11, what type of comps you think you'd need to lever on the SG&A line in '11?

Ralph Castner

Well, I think that the answer sort of remains the same to the question because about 10% of sales is SG&A. So if that's going up at 2% or 3%, you roughly need comps at half of that to sort of leverage SG&A. The rest of it’s going to be fairly fixed. So you need a one to two comp to leverage SG&A.

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

And that's inclusive of pre-opening?

Ralph Castner

I'm not including pre-opening to my thinking there. The pre-opening won't be that significant. Well, I guess we’ll have one store in Canada too. I was not thinking about pre-opening. They'll have to be greater than that to absorb pre-opening.

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

Given the difficult comparisons within this business with the adjustments for loan loss reserve in '10, should we expect growth in the financial services segment in '11?

Ralph Castner

Yes. I mean, the comment on the reserve releases, on a full year basis, that's something that we can clearly overcome because of the significant improvements we've seen in credit quality and delinquencies and those sorts of things. So they're not an impact at all as you start thinking about the full year. I just wanted to make sure everybody remembered and highlighted them in the first half of the year. But we do not believe that any change in the allowance that we had in 2010 will cause us a Grover [ph] issue for the full year of 2011.

Operator

And now we'll hear from Aaron Goldstein with JPMorgan.

Aaron Goldstein - JP Morgan

So just going back to the gross margin a little bit, could you maybe talk about what was the delta from 3Q, why it slowed down so much, given that apparel and footwear to your high margin categories seem to be some of your better categories?

Thomas Millner

Well, the comps were clearly easier in Q3. And I mean even to begin to suggest that we're disappointed with a 70 basis point improvement in margins, at the peak of the selling season when we grew comps 7.3% and actually grew our Direct business, we're just very, very pleased. It's an impossible question to answer why weren't they higher. We're pleased that they were higher. It seems only maybe a year ago that the skepticism was that we couldn't grow margins in sales at the same time, and I think we've dispelled that.

Ralph Castner

Another thing to think about with respect to the margin is it's probably not a big surprise that we did so much better in the third quarter when you're cleaning out all your spring merchandise. We've talked about for a long time that one of the big improvements is going to be through better planning and, therefore, having less stuff to clear out at end of season. So in the third quarter, as we exited spring, we just had way less merchandise to clean out, which is why you saw the big improvement. Then as you moved into the fourth quarter where both this quarter and the year ago, you're primarily selling more full margin products to not see as much improvement. But clearly when your goals -- to Tommy's point, when your goal is 200 to 300 over a several year period, getting 70 in a quarter is still pretty good.

Aaron Goldstein - JP Morgan

And maybe that 200 to 300 basis point improvement, are you seeing any pressure, anything that would change that number from sourcing costs on cotton or any other commodities?

Thomas Millner

No, we're not. We remain committed to the 200 to 300 basis point improvement. And let me comment on the cotton issue. Number one, we have relatively limited exposure, which would be very different from a specialty clothing retailer. We have a broad assortment of products. Soft goods is just part of our mix. And then within that mix where we do have cotton exposure, we think the combination of supply-chain efficiencies, which we're working as hard on as we are on retail profitability initiatives, and pricing power in our private label categories where we do have some relatively minor cotton risk, we think we can mitigate those pressures. It's also interesting to us that's worth a call out, in agricultural inflation, which we're all seeing being reported, if you think about where the concentration of a lot of our stores are, they are in agricultural areas. So while there's certainly some cost pressure, there are also a lot of farmers that are doing really well now that live pretty close to a fair number of our stores.

Aaron Goldstein - JP Morgan

It sounded like a lot of it was traffic-driven, but could you maybe tell us quantitatively or qualitatively ticket versus traffic on the comp and then on the marketing fees from the bank to retail and direct?

Thomas Millner

Transactions were up 2.5%. Ticket was up 4.8%. And, Ralph, you want to touch on the marketing fees?

Ralph Castner

One thing to think about before I give you the numbers with respect to the marketing fees is that these would include that big reversal of the release we had for the FDIC. So the marketing fees are up $10 million as they relate to retail in the quarter and $8 million as related to Direct for a total of $18 million. But $10 million of that was the FDIC reserve release. So we were, particularly in our Retail business, still really pleased with the improvement we saw in the profitability of that even without respect to the bank.

Operator

And now we'll take the next question from Reed Anderson with D.A. Davidson.

Reed Anderson - D. A. Davidson

One, Tommy, I had was obviously a lot of the major branded vendors have all had very strong fourth quarters and so I suspect they did well inside of your stores, too. But could you comment on that relative to how the Cabela's brand has performed because it still ends up being really your largest brand? I'm just curious how that's performing on a relative basis.

Thomas Millner

Our brand did very well, Reed, across the board. We think our product assortments were strong, and we look to thoughtfully increase focus on where appropriate by category on our branded merchandise. We're pretty pleased with the mix of product that we have today, and we had the right stuff at the right prices and drove our customers to our stores and they bought.

Reed Anderson - D. A. Davidson

Would it be fair to think, just given how strong some of the national brands, if you will, were, the non-Cabela's brands, maybe at least in the apparel category, for example, they might have done better than the Cabela's brand had done in the quarter?

Thomas Millner

I don't think I'd be able to say that. If you think about where the highest concentration of our private label product is, it's in camouflage clothing, which is almost all of our product, less so in men's casual where the branded vendors represent a bigger share of that business. So I'm not really sure -- it's an apples-and-oranges comparison.

Reed Anderson - D. A. Davidson

And then on the Direct business, obviously, it seems like you're kind of hitting an inflection there overall. I would suspect you’d continue to see e-commerce grow and moderation on the traditional catalog side. But, Tommy, as you just think about this current year, do you think that business will start to grow again – I mean, continue to grow? Or is it still sort of a flattish as that dynamic plays out between the channels?

Thomas Millner

Well, internally, Reed, we're planning for growth. You picked up on the clear issue. We've got to grow the e-commerce, which is not just the Web now, but we've launched a new mobile commerce capability. We've got to grow those businesses much faster to offset this inevitable decline of people calling our call centers to order merchandise. But I think what we're excited about is now that we have the new website up, our new cabelas.com website, we have now the world-class functionality to compete on a global level with anybody that's conducting e-commerce.

Reed Anderson - D. A. Davidson

Then switching gears a little bit, Ralph, I got cut off, I apologize, when you were going into your detailed comments. You may have covered this. But one thing I was curious about, there’s always a lot of puts and takes in the various line items, the way you report non-GAAP for the financial services. But if you just look down to just the bottom line there on the percent, managed financial services revenues as a percent of those total, it was 9% this quarter, which was 150 basis points up from last year. I mean, regardless of what the puts and takes are, if you just look at the bottom number, is that a number the sort of makes sense going forward? Or was that artificially high? I'm just trying to get a more simplified way of looking at it.

Ralph Castner

No, it really wasn't artificially high. The only thing that influenced it all as we talk about, we had about a $4 billion reserve release from our allowance for bad debts. Other than that, there was really nothing unusual. And the only remaining CARD Act issue related is when the late fee legislation went in August of last year, and by the way, these numbers I'm about to give you are all based on delinquency levels at that time. It will be less impactful as delinquencies go down. But the cap on the late fee impact us by about $16 million. $8 million of that cost, if you will, was realized in 2010 with the remaining $8 million coming next year. The macro issue in that business, as we've talked about publicly, is it seems to me -- and because we're price takers in that business from the big issuers. It seems to me that the big issuers are going to be very, very reluctant to start lowering interest rates because of the inflexibility that CARD Act provides. So as long as we don't get a lot of pricing pressure from the big issuers, that 9% number feels like a pretty good number.

Reed Anderson - D. A. Davidson

Tommy, you addressed the cost issues, but all-in, though, you feel like as everybody's all concerned about sourcing costs, et cetera, sounds like you're able to offset most of that with pricing in the Cabela's brand. Is that a fair way of looking at it?

Thomas Millner

Yes. The combination of managing it within our own brand plus supply-chain efficiencies on the other side of the water.

Operator

And now moving to a question from David Magee with SunTrust Robinson Humphrey.

David Magee - SunTrust Robinson Humphrey Capital Markets

You may have touched on this, but the $11 million sort of other revenue number, it sounds like the net benefit year-to-year is about $0.01 on that category.

Ralph Castner

That's precisely right. The reason the number grew so much is we sold a bunch of land. It was actually some land we’d written off a year ago and ended up selling it for about what we wrote it down to, which grossed up the revenue and the cost of sales but to your point, David, had a very small impact from an earnings perspective.

David Magee - SunTrust Robinson Humphrey Capital Markets

And then secondly, are you concerned at all about the impact of fuel prices and people’s inclination to drive to the store? In the past, that’s been maybe a little bit of headwind. It seems like right now, momentum’s pretty strong. You're not seeing it. But is that a risk factor going forward?

Thomas Millner

Well, if gas prices went up dramatically, it’d be naïve to think it wouldn't have somewhat of a negative effect on our business; it would. I think one of the things that we're grateful for is that we have a passionate customer. They're going to go duck hunting and deer hunting. They may not drive to our store, but that capability to have one of the world's best e-commerce capabilities to include now mobile capabilities. We have another legitimate way for our customers to shop with us if they feel it's too expensive to drive to our stores. We're not at that point yet. So that's our perspective.

David Magee - SunTrust Robinson Humphrey Capital Markets

That actually leads to my last question which has to do with given the potential in the e-commerce side and you guys, I think, did a great job with the site and everything, how are you thinking about the relative profitability of that business over time relative to your retail channel?

Thomas Millner

Well, I think we have a mindset of continuous improvement in our company. So we expect our businesses to grow, both top and bottom line, going forward, whether it's Retail or the Internet business or our Financial Services business.

David Magee - SunTrust Robinson Humphrey Capital Markets

But do you think that, that could be more profitable, the e-commerce channel, relative to selling product through the stores eventually?

Thomas Millner

I'm not sure I would go that far. Obviously, the transactional cost are less on the Internet, so it's inherently more profitable so that from an upside standpoint, there's probably a little less of an opportunity on the cost side than there is in the Retail business. But I think we think there's opportunity to improve in all of our businesses.

Ralph Castner

The Direct business is already more profitable than retail today as we sort of talked about earlier, although we’re getting much closer because the improvements that we've made in Retail. The real opportunity in the Direct business and e-commerce, I mean, remember today that about 15% of our sales are catalog costs and that by the way includes in the denominator both e-commerce and catalog sales. To the extent we're able to optimize that going forward and which may be possible in e-commerce, but that's the magic bullet.

David Magee - SunTrust Robinson Humphrey Capital Markets

It’s eventually sort of scaling down more mailing.

Thomas Millner

Well, it's getting people to go to the Web or our mobile commerce through alternate contact strategies like Facebook and Twitter that cost a heck of a lot of less than mailing them a 50-page catalog.

Operator

Next question will come from Jonathon Grassi with Longbow Research.

Jonathon Grassi - Longbow Research LLC

It does sound like most of the product categories performed really strongly. Can you talk about which product categories stood out amongst or being the top performers versus some of the weaker product categories?

Thomas Millner

We did speak about it earlier. We didn't have any -- I'll begin by telling you the only category I would really characterize as weaker year-over-year was in ammunition, which shouldn't be a surprise. The rest of our category strength was -- it was really across the board led by apparel and footwear, which just did a great job, and within apparel, we saw a nice strength in our women's and children's area, but just good performance in apparel and footwear.

Jonathon Grassi - Longbow Research LLC

And then regarding the comp performance so far in the first quarter, has it been up steadily through the first six to seven weeks so far? Or has it been kind of lumpy?

Thomas Millner

No. We noted that it is presently slightly above our Q4 rate and that's with some pretty significant weather events that took a number of our stores off-line thus far this year for a number of days.

Ralph Castner

If there's been lumpiness in the quarter, it's really been weather derivatives. Particularly in early February, we had to close some stores for a period of days, mostly in the Northeast. I mean, you guys are familiar with the weather issues.

Jonathon Grassi - Longbow Research LLC

And then just looking at overall operating expense growth in 2011, how should we be looking at that? Or I guess, do you guys expect top line growth to outpace operating expense growth?

Ralph Castner

I mean, the answer is yes. But as we sort of alluded to in the call, I mean, we should expect to see some operating expense growth next year, primarily, as we make some investments in retail store labor and although we're starting to anniversary these, but some of the additional expenses that we had in our merchandising department to deliver the results that we did particularly in the back half of the year. But you should expect some expense increase. Now we do expect revenue to grow faster so that we’ll still get margin expansion, but there will be SG&A increases.

Thomas Millner

And that's part of our guidance.

Operator

And now, the next question will come from Christian Buss with ThinkEquity.

Christian Buss - ThinkEquity LLC

Wondering if you could provide some perspective into what supply chain efficiencies you think you have the most leverage to pull on in 2011.

Thomas Millner

Well, I'll split my answer into two parts. First is with domestic-branded vendors. We have been working really hard for over a year to create a collaborative relationship with our domestic vendors. And what does that mean? That means an open sharing of data on what's actually happening in our business for them every day, together with bringing them into our planning process for advertisements nearly a year out into the future in some cases and then getting plugged into their innovation change so if they have a great product coming a year from now, we don't go deep in the product that's going to be phased out. So that is reaping just significant benefits because it's just not something we did here. The other side of the equation is with our private label Cabela's branded suppliers overseas, again, lengthening, planning horizons, which allows for more efficient acquisition of raw materials and better bulk run rates on products rather than being the last supplier to come in at the last minute and need something urgently. You pay for that. So those are the really balanced points between our offshore private label partners and our branded vendors, and it's making a big difference in our company.

Christian Buss - ThinkEquity LLC

And then can we talk a little bit about the reserve account and how you calculate that because that's down about $15 million since when it was implemented? And I'm trying to understand what the puts and takes are there.

Ralph Castner

What we do -- actually, I think, since it was implemented, it's actually down a little more than that. The answer to your question about what we do is we segregate our portfolio by FICO score and look at the payment rates and what we call the rural rates, which is the percentage of people who move from 30-day delinquent to 60-day delinquent to 90-day delinquent to charge-off. Use that model going forward to predict what we think charge-offs are going to be for the upcoming year. So the way to think about it is what you're really doing is, at least in the P&L, you’re sort of pulling forward what you expect to happen over the next 12-month period. So not surprisingly in 2010, our expense was way less than our charge-offs because we were looking forward to 2011 when we expected to have lower delinquencies and lower charge-offs. So to my point earlier, although we did have some reserve leases in 2010, we think those will be largely offset in 2011 by lower charge-offs going forward. Although the benefit will be spread out over the entirety of the year, not just in the first half of the year, which is when we had the preponderance of the reserve releases.

Christian Buss - ThinkEquity LLC

On the marketing transfer payments, just a housekeeping question, does that get booked in SG&A for you guys?

Ralph Castner

It does, yes.

Operator

[Operator Instructions] And now we'll move to Mark Smith with Feltl.

Mark Smith - Feltl and Company, Inc.

First, Ralph, can you talk a little bit -- on the interest income in financial services came down a bit as a percent of the average balance in managed loans. Can you walk through that a little bit looking at your prior comments on not seeing any real pressure on pricing?

Ralph Castner

Well, yes. And, by the way, pricing pressure’s not what drove that down. The two things that drove it down are -- notice it says both interest and fee income. And in 2010, we had basically, the elimination of over limit fee and a cap on late fees. That combined was just a decrease in the overall level of interest rates is what drove that down, which, by the way, you can sort of help quantify that if you look at the quarter. Interest expense was down 60 basis points year-over-year and interest income was down 180, it looks like. That decrease in interest income is sort of a proxy for the decrease in overall level of interest rates to help sort of quantify how much is which.

Mark Smith - Feltl and Company, Inc.

And then just looking at your stores that you have set to open here in 2011, can you just talk about if those are on schedule and kind of the timing for those?

Thomas Millner

They are on schedule. Allen, Texas and Springfield opened in the spring and Edmonton in the early fall.

Ralph Castner

As you can imagine, those dates in both Eugene and in Allen are locked and loaded. Allen’s going to be like April 15, and Eugene is three or four weeks later.

Mark Smith - Feltl and Company, Inc.

Lastly, Tommy, can you talk a little bit about any potential impact on gun legislation as we start to hear that a little bit more? Is this a big risk? Or is this something that could give some potential upside if drives demand for firearms in the near term or if it drives more people into kind of a regulated dealer and outside of gun shows and personal transactions?

Thomas Millner

This is probably more of a political than a business comment, but we don't see the likelihood of any legislation making its way through the Congress, as it's currently constituted with Republican leadership. So we don't really see anything coming. If there begins to be a lot of chatter about the potential for additional regulation, you know what that does; it stimulates demand.

Ralph Castner

To that point, it was interesting this quarter. We had an interesting -- I don't know how closely you followed it, but we had an interesting situation in California. They had passed a law in California to outlaw the ability to ship handgun ammunition into the states. So basically, it made our Direct business not be able to ship handgun ammunition into California. By the way, I'm talking about the first quarter of '11 when I refer to the quarter. And what happened is in January -- that was supposed to go into effect January 31. And as you can imagine, in January, we saw pretty significant sales of handgun ammunition into California and then the law was overturned. So we got the benefit of it in January and didn't have to deal with issues impacted by the law. So to Tommy's point, it seems that politically, it's going to be tough to get any legislation passed, but any time the topic comes up, it drives demand.

Operator

And with no additional questions, I'll turn the call back over to the host for closing remarks.

Chris Gay

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

Operator

And with that, ladies and gentlemen, thank you for your participation. The conference has concluded.

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