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Cabela's (NYSE:CAB)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET

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

David Magee - SunTrust Robinson Humphrey, Inc.

Reed Anderson - D.A. Davidson & Co.

Jonathon Grassi - Longbow Research LLC

Aaron Goldstein - JP Morgan Chase & Co

Mark Smith - Feltl and Company, Inc.

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

N. Richard Nelson - Stephens Inc.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. Second Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this call is being recorded. I will now turn the conference over to Chris Gay, Director, Treasury, and Investor Relations. Please go ahead, sir.

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 at www.cabelas.com, 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 and website to find the 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.

Our record second quarter financial results validate that our strategies are working. We realized strong results in retail revenue growth, record second quarter profitability on a consolidated basis as well as in each of our direct and retail segments, strong performance at our Cabela's CLUB Visa program, a higher merchandise gross margin and increases in market share. These components combined to help achieve increases in one of our vitally important metrics: after-tax return on invested capital.

Our Merchandising segments realized strong growth and profitability. For the quarter, comparable store sales increased 4.4% as a result of increases in average ticket. Retail operating margins increased to a second quarter record of 16.2%. This is the ninth consecutive quarter of increasing Retail segment profitability. We realized gains in 10 of 13 product categories during the quarter with the strongest growth coming from firearms and power sports. Additionally, each of our clothing category and footwear realized strong growth.

Moving to our Direct business for the quarter. Adjusted for divestitures, Direct revenue declined 4.6%. Even more so than in the first quarter, the entire decline was a result of ammunition and shooting returning to more normalized levels. As you may recall, ammunition sales were at extraordinary levels last year. Despite difficult revenue comparisons, Direct segment operating margin improved to a second quarter record of 19.5%.

For the quarter, multichannel customers increased 3.5%, up from 2.5% in the first quarter, which is an important metric for the long-term health of our business. Merchandise gross margin increased 80 basis points in the quarter to 36.7%, our highest Q2 performance in the last 5 years. Improvements in Merchandise margin are a result of continued improvements in pre-season in planning, in-season management and vendor collaboration. We are continuing to see some increased cost from vendors and are successfully increasing prices to help mitigate these higher costs. Our initiatives to improve merchandise margin resumed their positive trends. And as a result, we expect to realize higher merchandise margins in both the third and fourth quarter of this year. Additionally, we remain confident in our ability to increase Merchandise margins 200 to 300 basis points over 2009 levels by the end of 2012.

On a consolidated basis, Merchandise mix did not have a significant impact on consolidated Merchandise gross margin. However, we did see a divergence between segments this quarter. Due to strength in firearms and power sports in our Retail segment, Merchandise margin was adversely impacted by mix. Despite the unfavorable mix shift, Merchandise margin did increase in our Retail segment.

In our Direct segment, however, where we don't sell firearms and boats and ammunition and shooting continued to return to more normal levels, mix helped quite a bit, and Merchandise margin was up more than 150 basis points in this segment. This higher Merchandise margin helped lead to higher operating margins in our Direct segment.

Now let me update you on our new stores and future store opening plans. We have been very pleased with the initial performance of all of our recently opened next-generation stores. From a productivity standpoint, each of our new stores is generating sales and profitability per square foot higher than the corporate average, which provides us with even greater confidence to invest in more retail stores. As you might have already seen, this morning, we announced plans to open 2 more next-generation stores in 2012: one in Rogers, Arkansas, and the other in Charleston, West Virginia. This brings the total new store count for 2012 to 5 new stores, 4 in the United States and one in Canada. These 5 stores will increase our retail square footage by nearly 10%. We're also excited that our second store in Canada will open in Edmonton next week, and we look forward to future expansion in this great market.

Finally, as I'm sure you're all aware, over the last several years, we have shifted to our next-generation store format with an accompanying shift in real estate strategy. And as I mentioned just a moment ago, we've been very pleased with the early results of our next-generation stores. This has changed our strategic approach to the Denver marketplace, and we're looking at Denver in a fresh way. And as a result, despite its great location, we no longer expect to open a store in Wheat Ridge, Colorado.

Now let's look at our Cabela's CLUB Visa program, which had an exceptional quarter as we continued to see strong growth in average active accounts, lower funding cost and significant improvements in delinquencies and net charge-offs. For the quarter, average active accounts increased 7.4%. We also realized significant improvements in net charge-offs, which were at the lowest levels we have seen in more than 3 years. These favorable performance metrics, combined with improved funding costs, boost our confidence that our Cabela's CLUB Visa program will continue to have a great year.

As we had previously discussed, return on invested capital is a critical measure of success. We are extremely pleased that our strong second quarter results led to 180 basis-point increase in return on capital compared to the prior-year quarter. We expect to realize further increases in return on capital as we increase earnings and further strengthen our balance sheet. We're encouraged that the results we experienced in the second quarter have continued into the third quarter. That is, Retail comps are slightly positive, Merchandise margin continues to be up, the Direct business has improved slightly and the performance of the Cabela's CLUB Visa program remains strong. As a result, we expect earnings per share for the full year of 2011 to meet or exceed current external expectations.

In closing, I want to personally thank Cabela's outfitters for their contribution and support that they have shown daily in helping Cabela's flourish. We appreciate all your hard work and effort in cherishing and delighting 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 very good about our second quarter results and are particularly pleased with our increases in Merchandise margin, which helped drive increases in Retail and Direct segment profitability.

For the quarter, Financial Services revenue, as a percentage of average credit card loans, increased 120 basis points to 10.6% as compared to 9.4% in the year-ago quarter. Increases in Financial Services revenue were primarily due to lower provision for loan losses, higher interchange income and reduced interest expense.

For the quarter, net charge-offs as a percentage of average credit card loans improved 244 basis points to 2.34% compared to 4.78% in the second quarter last year. Additionally, we continued to see improvements in delinquencies. Greater than 30-day delinquencies were just 0.92% as compared to 1.45% a year ago; greater than 60-day delinquencies were 0.57% as compared to 0.91% a year ago; and greater than 90-day delinquencies were 0.28% as compared to 0.47% a year ago. For the quarter, we reduced our allowance for loan losses by $5 million. This reduction was a result of continued improvements in delinquencies, delinquency roll rates and net charge-offs.

Now let me highlight our funding plan for the rest of the year. Recently, we completed a $300 million term securitization. This is a 5-year deal, allowing us to lock in liquidity at favorable spreads and interest rates for an extended period of time. We have 2 securitizations totaling $700 million and $102 million in certificates to deposits maturing later this year. Funding for the maturing securitizations and certificate of deposit will come from nearly $565 million of cash and investments held at the end of June, as well as additional securitizations we expect to complete later this year. And we expect to benefit from lower funding costs as current market spreads are more favorable in the existing spreads on our maturing securitizations.

As we've mentioned last quarter, our parent company revolving credit facility expires in June of 2012 and, as you will notice, is now classified as a current liability. We're in preliminary discussions with our banking partners and intend to enter into a new revolving credit facility late in Q3 or early Q4.

For the quarter, operating expenses as a percent of revenues increased 140 basis points. Much of the increase was a result of increased preopening costs, the write-off of certain receivables and additional IT costs related to our CRMS project. We do not expect these expenses to reoccur in the second half of this year. And as a result, we expect operating expenses to grow at approximately the same rate as sales for the remainder of the year.

From the inventory standpoint, inventory increased $87 million year-over-year to $600 million. This was a planned increase as we brought in some product in early ahead of price increases, and we want to ensure we have enough inventory for the second half of 2011. The higher inventory levels are mostly related to our clothing and footwear categories and are focused on core product. We're very comfortable with current inventory levels, and we believe we're well-positioned for the remainder of 2011.

For the quarter, the effective tax rate was 34.6%. This is higher than the 32.7% effective tax rate we realized last year due to having less income allocable to foreign sources. The higher tax rate impacted earnings-per-share by $0.01. For the remainder of the year, we expect our tax rate to 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 record financial results for the second quarter 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'll go to Reed Anderson with D.A. Davidson.

Reed Anderson - D.A. Davidson & Co.

A couple of questions. First off on just kind of looking forward into fall, Tommy. I mean when we saw you in Allen, Texas, one of the new programs is the camo program you highlighted with some new products and better presentation, et cetera. Just give us a sense of where that's at in terms of rollouts, expectations of change, just the sense of your -- where that's at today.

Thomas Millner

Reed, we have just concluded the initial rollout of the new camo presentation, store package in Dundee, Michigan, just a couple of weeks ago. And if the results from one store are indicative, we did the right thing. Just really strong, positive reaction from our customers that has translated into a really nice rollover. And we plan to roll it out as we do our fall rolls throughout the chain, but initial reaction has just been terrific.

Reed Anderson - D.A. Davidson & Co.

And you would expect to have that in pretty much most of the stores in time for hunting season, yes?

Thomas Millner

Yes.

Reed Anderson - D.A. Davidson & Co.

Okay, that's very good. And then another question on margins. You did say in your prepared remarks that you expect them to be up, obviously, in the second half as well. I mean, 80 basis points is a very big, is a very good increase. I'm just curious, just order of magnitude, is that type of level sustainable in the second half too? Or I would think it'd be a little bit -- maybe not quite as robust in the second half.

Thomas Millner

Reed, I think we're pretty optimistic about our ability, which we demonstrated in the second quarter, to have a good balance between low-single digit comps and margin expansion in the range that we experienced in the second quarter. And that trend has continued into the second quarter. So yes, I think that's in the ballpark. We really like what's happening in margin expansion. And I would comment that we had some headwinds in the quarter, specifically in Retail, where gun sales were very, very strong early in the quarter, as were boat sales. So we overcame those headwinds and even posted up margins in the Retail business, which just goes back to the underlying strategies that we have to grow margins over time. So we feel pretty good about where we're positioned.

Ralph Castner

Reed, to add to that, our margin expansion accelerated fairly significantly during the second quarter. And the second quarter was actually, if you go – we’ve have got a chart here in front of us where you look at the Merchandise gross margin over the last 4 years, the second quarter had the toughest comp of any quarter of the year. So we were pretty pleased with getting that. And yes, I think we should expect something of those levels for the back half of the year.

Reed Anderson - D.A. Davidson & Co.

That's great. That's very helpful. Ralph, a couple of questions on the Financial Services piece. Just curious, do you know what is the average rate of interchange this year versus a year ago? I know it's a function of mix of the types of cards, et cetera, but I'm just curious what the differential is.

Ralph Castner

I don't believe it's changed materially since a year ago, on the credit side of the business. There's a lot of things going on with mix, which are interesting, which strangely enough, have to do with fuel prices that can cause some weird behavior there. Because generally, your interchange rate at a gas station is lower, so that can cause some interesting interchange mix. But the rate schedule itself, I don't think has changed meaningfully.

Reed Anderson - D.A. Davidson & Co.

Okay. And then lastly, again, kind of to the credit card piece is -- or the Financial Services is, you're seeing store growth accelerate now, and obviously, that's very good on many fronts. But also, I mean, it still makes sense that in the tail of that, you usually get a nice lift in growth in cards, et cetera, like you historically have. Any reason to think that'd be different this time around?

Ralph Castner

No. As a matter of fact, it's something we're really looking forward to, and of course, I don't think you're really going to start seeing it until 2012, 2013.

Reed Anderson - D.A. Davidson & Co.

Right. It's in the wake of that.

Ralph Castner

Yes, as you know, we don't have a Canadian card, so we basically only added 2 stores this year. But as you start thinking about 4 next year and at least that many the year after that, as you know, that's a huge tailwind in that business.

Thomas Millner

And card contribution in the next-generation stores we've opened has been really good.

Operator

And we'll go next to Rick Nelson with Stephens.

N. Richard Nelson - Stephens Inc.

I'd like to follow up on the credit side as well. You've got $700 million around securitization that looks like they're going to mature in September or October. You just did a $300 million financing. How do you anticipate replacing that $400 million? Are you thinking fixed or floating? And I know that with the most recent securitization, about 1/2 was fixed at a higher rate, and 1/2 was floating.

Ralph Castner

Well, obviously, there's -- as we've talked a lot, Rick, there's big opportunity as we do these securitizations to lower interest costs as spreads tighten. One of the things we'll do, probably more so than we otherwise would've done, is lock in low rates because of the absolute level of interest rates. So I think looking forward, you should probably expect this to skew more towards fixed rate than you have might otherwise thought. I mean it's probably not all that scientific with respect to interest rate risk management, but you're not going to go broke borrowing money 5 years at 2%.

N. Richard Nelson - Stephens Inc.

Also the provision, Ralph, came in below our forecast, about 1/2 of where it was last year. If the charge-offs stabilize here, how should we think about the provision over the...

Ralph Castner

Well, I think the provision on an ongoing basis is going to be higher than what it was in the second quarter. I mean as I've said several times, over time, it ought to be about the level of charge-offs less 30 basis points. So our charge-offs, I believe, are about 2.3% or 2.4% in the quarter. So that would tell you, you ought to have a provision of about 2%, and I know it was 1-something in the quarter. So that's lower than it should be. It'll approach that -- it will most likely go up over time. Because, well, unless charge-offs drop, but I would tell you that charge-offs, as long as we've been running this business, are between 2% and 3%. So to think that charge-offs are going to drop much lower from these levels would seem like an anomaly in the event they would, so…

N. Richard Nelson - Stephens Inc.

Also noticed customer rewards were up 17%, 18%, both Retail and Direct sales. You combine the 2, up about 5%. Does it say anything about the rewards customer cashing in the rewards but not making the add-on purchases?

Ralph Castner

No. I think what it says more about is -- because we expense those rewards when earned, I think it just says more about the state of the overall economy and people are more comfortable using their cards now than they were a year or 2 ago. And there's just more rewards out there for our customers to redeem. If anything, it's probably a good-forward looking indicator.

N. Richard Nelson - Stephens Inc.

All right. And then question for Tommy on the store growth, stepping up for 2012 from 3 stores to 5 stores. Is that it for 2012? Or is there potential for more, not certain on the lead times?

Thomas Millner

Rick, I think that's about it for '12, just the real estate and construction lead times. We're getting pretty deep into 2011 to do much else in '12. So I wouldn't say we’ve totally put '12 to bed, but it's pretty darn close. We're now really looking into 2013. I would add one comment on store growth in '12 and '13. The success of our store in Springfield, Oregon, it's the smallest of the next-generation stores that we've opened. It's around 60,000 feet. The results there are really challenging our thinking to the point where we'd probably want to test another one of those size stores. And that's a good thing because the productivity on early returns on capital, they're pretty damn good. So that's framing some of our thinking also. Not a change in strategy, but the success there, we've got to validate whether that's replicatable to other places. The other thing that gives us some confidence as we look to lay loop [ph], this will be 2 stores in the Seattle market, one South and now one North. What's encouraged us in the Dallas-Fort Worth market, we assumed cannibalization of Fort Worth when we opened the Allen, Texas store. That has absolutely not happened. So it's causing us to think into '13 about, perhaps, more than one store in a given metropolitan market more frequently.

N. Richard Nelson - Stephens Inc.

Square footage up 10% in 2012. How are you thinking about the long-term growth rate, particularly at some of these newer stores?

Ralph Castner

Well, I think as we've said all along, Rick, this is Ralph, is as we get more and more confident about the productivity and the returns on capital of our retail stores, we'll start to accelerate growth. 10% feels like a good number for '12. To the extent we have as much or more confidence a year from now as we have today, maybe you can see some upward pressure on that number. But as we start thinking about -- I'm sorry, the 10% is in '11. So if you start thinking about '12, I would say something in the 5% to 10% range of square footage growth’s probably a good place to start, and it may go up from there.

Operator

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

Mark Smith - Feltl and Company, Inc.

First, can you walk through a little bit on sequential comp trend at all during the quarter and maybe any impact that fishing may have had?

Thomas Millner

Sure, I'll be glad to, Mark. As we noted in our last call, the strong trends in comp from the first quarter continued into April, primarily driven to a large measure, we had broad-based comp growth, but firearm sales were very, very strong in April, and in retrospect, we were probably more promotional in guns than we actually needed to be to the detriment of margin. Also, there was a logjam in boat deliveries that occurred in the first quarter because all the lakes were frozen, and guys didn't want to pick up their new boats, and that kind of broke loose in April. And then after looking at April, we changed our promotional cadence in May and June to be a little less promotional, to get this better balance of positive low-single digit comps with good margin expansion. To your question about fishing, fishing definitely came late because in the northern markets, the lakes were frozen all the way into April. Flyfishing, while not a needle-mover for the company, you can imagine with the amount of snow in the Rockies, it really impaired flyfishing. Those did come on later in the quarter, but they got a very late start.

Mark Smith - Feltl and Company, Inc.

Then looking at the 2 stores that you announced today, should we read anything into you guys going maybe more so into the Southeast and more vascro [ph] in other competitors on the fishing side. Should we read anything into that and kind of your, I guess, confidence in going into those markets?

Thomas Millner

No. You shouldn't read anything to that at all. We look at market opportunity and where we think we can have high return on capital stores. That's it.

Mark Smith - Feltl and Company, Inc.

Okay. And then lastly, just any update on remodels and what you saw -- that you talked about last quarter from Owatonna. Have there been any other changes in any other stores and then how those changes continued to work out?

Thomas Millner

We are in the process of doing gun remodels at a number of other stores. They’re not complete yet. Results at Owatonna continued to be good. We are testing a number of other things. And again, this is more to convey a sense that we try to continuously improve here. We had DVDs, magazines and books scattered all over our stores. And we recently concluded an 11-store test where we put them all in one place, call it a library for lack of a better term, and by aggregating those things in one place, we saw double-digit growth in those categories. So the test was so successful, we're going to roll it out in the rest of the chain, and that just is in line with the changes we made in footwear last year, to pull self-service out, the changes in guns, focus on end caps, movement of sunglass fixtures, staff to action alleys. So we continue to test and refine in Retail to drive more sales productivity through the stores.

Operator

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

David Magee - SunTrust Robinson Humphrey, Inc.

Just a couple of questions. One is, first on the inflation front. It just sort of seems to me that you all are maybe a little less concerned than you were a few months ago about that risk factor. Am I reading that correctly? And I'm just sort of curious where you're seeing inflation, and just any more color about that would be interesting to me.

Thomas Millner

We have definitely seen a lessening of the velocity of request for price increases. We are still getting some, but they are not at the rate that they were occurring months ago or even last fall. So that's a good thing. There has also been some moderation, as you know, in a number of commodity prices that we play in. Further, the stabilization of fuel cost that negatively impacted us last quarter has helped, plus we reacted a lot better with much better management of freight flow to our stores into our DCs to help mitigate these higher costs. So the combination of a change, a positive change in velocity and some better work on our part makes us somewhat less concerned, not unconcerned, but less concerned.

David Magee - SunTrust Robinson Humphrey, Inc.

And then my second question has to do with the Direct business. It sounds like it's stabilized when you x-out the impact of ammunition year-over-year. I'm curious at the interplay right now between the catalog versus the e-commerce. What’s sort of happening with those 2 components right now?

Thomas Millner

Well, let me be really clear. It's nice that it's stabilized, but we're not satisfied at all. We have not grown the Direct business over the last 2 years the way we wanted to. And believe me, it has our full attention inside the company. And the fundamental issue, you just hit on. We have got to grow the Internet and social channels at a far faster rate than we're growing them today to offset the significant decline we've seen over the last 2 years that continues in customers calling our call center. And look, we're really pleased with the profitability of the Direct business. Margins were up 150 basis points in the quarter, but we have to get that business growing.

David Magee - SunTrust Robinson Humphrey, Inc.

So at this point, what is the way to do that, do you think?

Thomas Millner

If I had the answer for that, you would've seen the results already. We're working on a number of issues on a broad array of fronts, from social to Twitter to text campaigns to QR codes. And I think our teams are on the right path. I just want to convey that there's nothing that's getting more of our focus in the company than getting the Internet channel growing at a much faster rate than it is today. That's really the key.

David Magee - SunTrust Robinson Humphrey, Inc.

You don't think there's any market share issues with that channel, do you?

Thomas Millner

I don't.

Operator

And from Longbow Research, we'll go next to Jonathon Grassi.

Jonathon Grassi - Longbow Research LLC

I guess first, can you just start us off by what were the recoveries in the WFB business?

Ralph Castner

I'm sorry, I'm not sure I have those. We'll give you -- Chris has got them. Go on to your next question, we'll circle back.

Jonathon Grassi - Longbow Research LLC

The other one is an update one, too, was the marketing fee paid back to the merchandising operations, what was the change in that?

Ralph Castner

It was up about almost $11 million, $7 million of it was in Retail, $4 million of it was in Direct.

Jonathon Grassi - Longbow Research LLC

Okay. And then you guys mentioned on the Merchandise margin that it was, for the Retail business, it was pulled down by the gun and ammo business but offset by less promotional cadence. Was there any benefit from stronger soft good sales becoming a greater percentage of sales? I know we saw that last quarter. Do we see that again this quarter?

Ralph Castner

Well, soft good sales were better, but on a consolidated basis, mix had almost no impact on gross margin. Now when you look by channel, it did -- mix was helping.

Thomas Millner

It was significant by channel.

Ralph Castner

It was helpful in Direct and not helpful in Retail. But mix really didn't have -- was not really a factor. There were other categories. But here, clothing and footwear in the quarter, on a consolidated basis, went from 21.7% of sales -- oh, I'm sorry, that's for 6 months. It went from -- in the 3-month period, it went from 20.1% of sales to 21% of sales. Now there were some other categories that -- camping, for example, was down a little bit, which is a higher-margin category, but it did not -- clothing and footwear has been strong, but there were other things that offset it, so the mix wasn't a plus.

Jonathon Grassi - Longbow Research LLC

Okay. And then I guess going back to the Direct business. I know last quarter, you guys had the -- I believe it was the second quarter, you had the issue with the Cabela's branded inventory levels that led to a significant decline. I mean, kind of looking at the way it is now, even when you back out the ammo, was that business flat in the quarter then? Or did we see any improvement in that?

Thomas Millner

Yes, it was about flat.

Jonathon Grassi - Longbow Research LLC

It was about flat. Is there still challenges on some of the inventory levels or just wasn't selling through at quite the rate that you guys had hoped it would?

Thomas Millner

Well, no. I think our inventory positions are pretty good, and fill rates were up significantly. It just goes back to the challenge that I mentioned. We've got to grow the Internet channel at a much faster rate to offset the decline in people calling our call centers to order merchandise, which is a trend for every direct merchant in the world now.

Ralph Castner

You asked earlier about recoveries. Gross charge-offs were $18.3 million, and recoveries were $4.4 million.

Jonathon Grassi - Longbow Research LLC

Okay. And then just finally, can you remind us like among your time deposits and securitizations and conduits and other debt for WFB, what percentage of those are fixed versus floating? Do you have a rough estimate?

Ralph Castner

Yes. We try to keep -- let's see, we try to keep them about 40% fixed and 60% variable, but I'll tell you where -- to my comments earlier, that may be as much as flipped, with the 60% being fixed as we're trying to get more and more fixed rate over time. When you get the Q, there's a detailed break-out that you can calculate, including rate, which is interesting to those other comments. You could see what the rates is of the securitizations that are coming due now and how we'll be able to replace those at a much lower rate.

Jonathon Grassi - Longbow Research LLC

Right. It looks like the newest one does come in at lower rate than the one it's, I guess, essentially replacing. So that should be a positive going forward, correct?

Ralph Castner

Yes. The old rate was like 5.25 and the new one's like 2.25.

Operator

[Operator Instructions] And we'll go next to Aaron Goldstein with JPMorgan.

Aaron Goldstein - JP Morgan Chase & Co

So just to go into the comp a little more. Do you think the slowdown from 1Q and then maybe into 3Q is more compare-driven? Or is there any evidence that maybe the consumers have started to pull back now that the recovery looks to have stalled a little bit on the payroll side?

Thomas Millner

No. We don't get the sense from a consumer standpoint that there is a significant slowdown.

Aaron Goldstein - JP Morgan Chase & Co

Okay. And then as you look into August and September, are those compares more difficult than July?

Thomas Millner

No, about the same.

Ralph Castner

As you think about the comp though, and some of this is us -- as we continue to refine our marketing strategies and how we execute Retail to find the right mix between comp growth and margin expansion. In the first quarter, we put a lot more labor on the floor, which helped to drive a significant increase in comp. And what we've learned is and maybe we cannot be quite so promotional going forward to continue to maximize the profitability of Retail. So I would tell you the volatility of the comp's driven a lot more by things we're doing than the macro level.

Thomas Millner

Absolutely.

Aaron Goldstein - JP Morgan Chase & Co

Okay. And then just maybe bigger picture. As you're opening more and more stores, I know this has been asked before, but do you think there's any maybe cannibalization on the Direct side that you're seeing, just maybe where you're getting orders from that as you open more stores that the Direct side continued to decline?

Thomas Millner

Yes. That certainly is a bit of a headwind, but we don't accept that as a reason for not continuing to grow our Direct business.

Aaron Goldstein - JP Morgan Chase & Co

Okay. And then maybe just a housekeeping question. On the charge-off provision reductions, what were those in 3Q and 4Q last year?

Ralph Castner

Well, I'm not sure we had any release of reserves in the back half of last year. If we did, it was very small. Most of it was in the front half, which is one of the reasons why when we gave guidance by quarter, we expected to have more -- we expected most of the growth in earnings to come at the back half of the year, which is what we've seen.

Operator

And our final question comes from Jim Duffy with Stifel, Nicolaus.

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

So it seems like from your commentary that you guys can somewhat turn the dial between comps and merchandise margin improvement. Where are you guys trying to strike the balance on that going forward? And then how are you managing SG&A accordingly as you try to leverage on the retail side of the operations?

Thomas Millner

Well, Jim, I think we've said for a long time that we felt with a 2% to 3% comp range that we could successfully leverage expenses. As we look at the balance of the year, I think to my earlier comments, in April, we were just very promotional in guns. And in retrospect, it decremented margin, and we probably would've sold a significant amount of guns without the margin decrement and been more profitable. So as we got into the latter part of the quarter, we were a little less promotional. And I think the balance we're trying to strike is to get good margin growth. And if we can strike that balance in low single-digit comps, we think that's going to be pretty good for us going forward.

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

Okay. And then in the first quarter and some of the commentary coming out of the Analyst Day, it seems like there was going to be some incremental SG&A spend in the stores. If you're striving more for that low single-digit comp, is some of that SG&A that may have been mentioned unnecessary?

Ralph Castner

No. I don't know that it was unnecessary, but we'll largely be comping that as we get into the third quarter. So we shouldn't expect to see that same level of growth.

Thomas Millner

Yes. We would expect SG&A to grow at the rate of revenue increase in the back half for the year.

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

All right. And then, Tommy, I think I ask you this every quarter, but looking forward, with respect to the Merchandise margins, it seems like you have an optimistic view. What are the near-term areas where you see the greatest opportunity for further improvement?

Thomas Millner

Jim, I think it's just continuing the basic blocking and tackling things that we've been doing. The collaboration with our vendors is maturing really nicely. We've got just lots of success stories of better flow, higher margins and better support on promotions and innovation, huge increase in vendor collaboration on future innovation, which is going to drive our company. Our teams are getting much better at in-season management and pre-season planning, which takes a lot of pressure off of dumping merchandise at the end of the season. And then, in our Retail segment, as witnessed by the anecdote about driving higher sales in just the little category of books and DVDs and magazines, higher sales and margins, we just continue to look at our retail stores not as static but as a dynamic vehicle to grow margins through better merchandising. So we are optimistic. I think we feel really good about our prospects.

Operator

And there are no...

Thomas Millner

We thank you for joining us today, and we look forward to talking to you again soon.

Operator

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

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