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Executives

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

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

Chris Gay - Director of Treasury & Investor Relations and Treasurer

Analysts

N. Richard Nelson - Stephens Inc., Research Division

Aaron Goldstein - JP Morgan Chase & Co, Research Division

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

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

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

Reed Alan Anderson - D.A. Davidson & Co., Research Division

Jonathon N. Grassi - Longbow Research LLC

Cabela's (CAB) Q3 2011 Earnings Call October 27, 2011 11:00 AM ET

Operator

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

Chris Gay

Good morning. I welcome everyone listening today, both on the conference call and by webcast. A replay of today's call will be archived on our website at www.cabelas.com. With me on today's call are Tommy Millner, Cabela's Chief Executive Officer; and Ralph Castner, Cabela's Executive Vice President and Chief Financial Officer.

This conference call will include forward-looking statements. These statements are made on the basis of our views and assumptions as of this time, and are not guarantees of future performance. Actual events or results may differ materially from those statements. For information about certain factors that could cause such differences, investors should consult our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Special Note Regarding Forward-looking Statements.

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

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

Thomas L. Millner

Thank you, Chris, and good morning, everyone. Our record third quarter financial results validate that our strategies are working. We realized strong growth in merchandise margin, Retail and Direct segment operating margin, strong performance at our Cabela's CLUB Visa program, 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.

Merchandise gross margin increased 140 basis points in the quarter to 35.9%, our highest third quarter performance in the last 5 years. During the quarter, we deliberately reduced promotional discounts through the elimination of an unprofitable retail promotion. The lower promotional discounts in our Retail segment resulted in significant acceleration in merchandise margin improvements.

Our initiatives to improve merchandise margins are on track and as a result, we remain confident in our ability to increase merchandise margins, 200 to 300 basis points over 2009 levels by the end of 2012.

Over the past several years, we have spent significant time and resources improving all aspects of our Retail operation. This includes: Significantly reducing and improving inventory levels; restructuring our merchandising organization; developing our next-generation store format; instituting new technologies in our retail stores; improving vendor collaboration; and instituting rigorous discipline around preseason planning and in-season management.

With a solid foundation in place for improving both Retail operations and merchandise performance, we have begun to focus on improving our discipline around promotions and sales discounts as we continue to strive to become a best-in-class retailer. This quarter, we made the decision to eliminate an unprofitable retail promotion at the expense of comparable store sales. It is always difficult to consciously sacrifice revenue in a quarter. However, it was clearly the correct long-term decision for the company. Using each promotional dollar more effectively is crucial over the long-term to maximize our growth and retail profitability.

At the merchandise level, we saw a strength in firearms, power sports, footwear, fishing and men's apparel, while archery and tree stands were soft. In spite of a lift of margin as a result of fewer discounts, merchandise mix was a slight headwind in the quarter due to strength in firearms.

Now let's look at our Direct business, which showed improved results in the quarter. Direct revenues were unaffected by the retail promotion decisions, and improved from the prior several quarters. For the quarter, adjusted for divestitures, Direct revenue declined just 1.7%, our best performance in 4 quarters. Even more encouraging is that despite the modest decline in revenue, Direct segment operating margin improved 320 basis points to a third quarter record 17.6%. For the quarter, multichannel customers increased 1.9%.

In our Retail segment for the quarter, average ticket increased nearly 3%, offset by slight declines in transactions. Retail operating margins increased to a third quarter record 16.8%. This is the 10th consecutive quarter of increasing Retail segment profitability.

We also continue to be pleased with the performance of all of our recently opened next-generation stores. During the quarter, we opened a new store in Edmonton, Alberta, Canada, and the results are exceeding our expectations. Our next-generation stores, opened since 2009, are outperforming our legacy stores on a sales per square foot and profit per square foot basis by 30% to 40%, and have meaningfully higher return on capital. As a result, we expect to accelerate Retail store expansion in the United States and Canada in 2013, beyond the 2012 level of 5 stores.

Now let's look at our Cabela's CLUB Visa program, which had another exceptional quarter, as we continue to see strong growth in average active accounts, lower funding costs and significant improvements in delinquencies and net charge-offs.

For the quarter, average active accounts increased 7.9%. We also realized significant improvements in net charge-offs, which were at the lowest levels we've 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 perform very well.

The performance of our Cabela's CLUB Visa program should come as no surprise, as we continue to have one of the highest quality portfolios in the credit card industry. This, together with the intense loyalty to our brand, has led the lower charge-off volatility than anyone else in the industry during any recent business cycle.

As we have previously discussed, return on capital is a critical measure of success. We are extremely pleased that our strong third quarter results led to a 210-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.

Additionally, we have continued to see strong performance into the fourth quarter. Retail comps are flat to date. Direct revenue growth continues to improve as currently positive. Merchandise margin continues to be up, 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 exceed current external expectations by the amount of the outperformance in the third quarter, compared to external expectations.

In closing, I want to personally thank Cabela's Outfitters for their contribution, and the support that they have shown to ensure Cabela's remains at the forefront of the outdoor industry. I 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 W. Castner

Thanks, Tommy. Following up on Tony's remarks, we feel very good at about our third 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 170 basis points to 10.3%, compared to 8.6% 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 162 basis points to 2.23%, compared to 3.85% in the third quarter last year. Additionally, we continue to see improvements in delinquencies. Greater than 30-day delinquencies were just 0.94%, as compared to 1.33% a year ago. Greater than 60-day delinquencies were 0.55%, as compared to 0.80% a year ago. And greater than 90-day delinquencies were 0.27%, as compared to 0.42% a year ago.

For the quarter, we reduced our allowance for loan losses by $2.5 million, as compared to $0.9 million in the third quarter last year. This reduction was a result of continued improvements in delinquencies, delinquency roll rates and net charge-offs.

Now let me highlight our future funding plans. As you may have already seen this morning, we announced the completion of a $300 million term securitization, of which $255 million was issued to third parties. The Class A notes consisted of $165 million of notes, which accrue interest at a fixed rate of 1.90% per year, and $90 million of notes, which accrue interest at a floating rate equal to LIBOR plus 55 basis points. These rates compare very favorably to the 2-term securitizations that matured in September and October, which accrued interest at fixed rates of 6.5% and 5.3%, respectively. The floating rates, as high as LIBOR plus 300 basis points. This is the 5-year deal, allowing us to lock in liquidity at favorable spreads and interest rates for an extended period of time.

We have 1 securitization totaling $500 million maturing in 2012. This matured securitization is entirely floating rate and accrues interest at a rate of LIBOR plus 200 basis points. We intend to fund this maturing securitization with a new term securitization, which we expect to close in the first quarter of 2012. We would expect that this new securitization to be a mix of fixed and floating rate obligations.

Additionally, we plan to fund future growth and maturing CDs, with a combination of future term securitizations, and by remaining active in the CD market throughout the year.

As we've mentioned last quarter, our parent company revolving credit facility expires in June of 2012. Negotiations are substantially complete, and we expect to enter a new revolving credit facility in the next week or 2. For the quarter, operating expenses, as a percent of revenues, increased 40 basis points. Much of this increase was a result of growth at World's Foremost Bank, additional IT costs, new store expenses, and higher retail advertising. Recall, that in the fourth quarter of 2010, we had a $10 million SG&A benefit from the settlement of an FDIC matter. Adjusting for this, we expect operating expenses to grow at the same rate of sales in the fourth quarter of 2011.

From an inventory standpoint, inventory increased just 6%, or $38 million year-over-year to $653 million. The higher inventory levels are mostly related to our clothing and footwear categories and our focus on our core product. We're very comfortable with current inventory levels, and we believe we're well-positioned for the remainder of 2011.

Also, you may have read in our earnings release, Cabela's Board of Directors approved the share repurchase program designed to offset shareholder dilution, resulting from the granting of equity-based compensation awards. Accordingly, we plan to repurchase up to 800,000 shares in the open market -- in open market transactions through February of 2012.

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

Thomas L. Millner

Thanks, Ralph. Again, we're very pleased our record financial results for the third 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] We'll take our first question from Rick Nelson with Stephens.

N. Richard Nelson - Stephens Inc., Research Division

Ralph, I've got a question about the credit business, the provision came in below our forecast about half of last year. I'm wondering how we should think about that as we look forward over the remainder of the year and into next year. And as that provision normalizes perhaps at a higher level next year to these lower costs securitizations today offset potentially in their provision.

Ralph W. Castner

Well, as far as the provision goes for the quarter, the provision was slight -- there's a couple of things that cause the provision to be less than of the charge-offs. The first is, when we get a charge-off number, that also includes, to some extent, interest and fee income, which is somewhere between 50 and 100 basis points. And when that charges off, those -- that's recorded as a reduction of interest and fee income, so that's part of it. But in addition to that, as we've pointed out, we released from our allowance for loan loss, about $2.5 million, which we can do the math on it, we'll have some improvement on it. Now we don't know what direction charge-offs are going to go next year. Although, I think your point, they're probably -- they are near historical lows.

N. Richard Nelson - Stephens Inc., Research Division

If we assume that those normalize at current levels, is there a way to benchmark?

Ralph W. Castner

Well, if they normalize at current levels, we could -- I could -- we could do it off-line, but whatever $2.5 million is, divided by $3 million, divided by 4, I mean, that would be the impact of the provision, which probably over time, will go up slightly and approach the charge-off level.

N. Richard Nelson - Stephens Inc., Research Division

And then caps [ph] -- the second part of that, you've done some lower costs securitizations during the year, you're going to get full year benefit of those next year. Does that more than offset, I guess, the potential for a higher on a provision next year?

Ralph W. Castner

It certainly will help, but it depends upon what the charge-offs are. But just as we -- just the October securitization was $250 million, which were -- it's exceeded all of our expectations. But we're 335 basis points cheaper than that, which is somewhere between $8 million and $10 million. So that's clearly going to be very helpful to offset any increase we might see in the provision for loan losses.

Thomas L. Millner

Just on the October...

Ralph W. Castner

And that's just on the October piece.

N. Richard Nelson - Stephens Inc., Research Division

Right. And you've done some past securitizations also that were at lower rates prior?

Ralph W. Castner

Yes. So that will be a big help to offset any increase that we see in the provision for loan losses.

N. Richard Nelson - Stephens Inc., Research Division

So Tommy, I would like to ask you about the promotional strategies for the fourth quarter. Do you continue to prune those promos and has that sort of flat comp? We've seen to date in the fourth quarter is that a sustainable comp expectation?

Thomas L. Millner

Rick, let me digress just for 1 second. The promotion that we eliminated in the third quarter was a cash card promotion that gave a customer up to $150 discount on a $500 purchase. This was a long-running, multiyear promotion that the company ran. As we've systematically looked at our Retail business and made improvements, a remaining area of focus is the efficiency of where we spend our promotional dollars and how we discount. This promotion generated negative gross profit dollars. And we simply said that's not good for the company long term, because you can imagine the customer gets really smart, and they end up taking that discount to the lowest margin hard goods in the store. So having said all that, we do not have any promotions or sales discounts to prune in the fourth quarter. And we will be appropriately promotional to last year in the fourth quarter, with probably 1 change, the theme of our entire promotional initiative from Black Friday going forward, is to create more urgency to get to our store.

N. Richard Nelson - Stephens Inc., Research Division

And Tommy, just some general comments on the consumer. How you see your customer right now? I know that the average ticket was up. Is the high-end outperforming the opening price points or...

Thomas L. Millner

I wouldn't make that -- we wouldn't make that conclusion, Rick. I think the customers are very value conscious at almost any price point. That's the sense we get. Is the consumer probably a little bit softer now? Yes, probably. But we don't see it isolated to the high-end or the low-end.

Operator

And moving onto Reed Anderson with D.A. Davidson.

Reed Alan Anderson - D.A. Davidson & Co., Research Division

Tommy, I just want to follow up on that last, that good color you provided on the promotion. My guess would be that, the buyer -- the participation of that promotion, because it was very lucrative, as a customer, was pretty high. Would you -- is that safe to assume, and so because of that, disproportionately in a big quarter like this, that's part of the reason the impact is what it was?

Thomas L. Millner

Yes, absolutely, Reed. And if you'll remember, to our last call, we had just concluded, July, and we noted that comps were trending favorably in July. The impact of this promotion span the months of August, September and into the very early part of October. So this promotion had a long life to it. And was obviously very lucrative, but not sustainable like we think in the best interest of the shareholders of the business.

Reed Alan Anderson - D.A. Davidson & Co., Research Division

That makes a lot of sense, okay. And then the other question I had, just on comps. I mean, I've got to believe weather's a factor in the quarter, most people, particularly in the upper Midwest, et cetera, I mean, it's been a lot warmer. You don't want to use as an excuse, but would you agree that, that probably didn't help your business in the quarter?

Thomas L. Millner

Well, it helped fishing a lot. Fishing stays strong much further, but one could make the argument, it did delay the onset of the hunting season. But we don't like to give the weather reports on earnings calls. So we have to manage around that.

Reed Alan Anderson - D.A. Davidson & Co., Research Division

Perfect. And then on the -- you've had a lot of categories you've touched, if not all of them, but some of the ones that I want to just get a little more color on, firearms, you've done some of the reset, you've shifted around the kind of the look of there. You've put in some new fixturing. Is that working? Is that why you're seeing some strength in that business? Or do you think it's too early to tell?

Thomas L. Millner

No, it's not too early to tell. The results in our Owatonna, Minnesota store have been fairly dramatic, and dramatic in a good way. Customers have reacted very favorably to the ease of shopping. And it's freed up our Outfitters to more effectively wait on customers. In addition, guns have continued to be strong, then in Retail, ammunition has continued to be strong. In spite of the withdrawal of this promotion, the weak areas were optics, archery and hunting, which are categories you would expect to be impacted by the elimination of this -- the cash card discount promotion in the third quarter.

Reed Alan Anderson - D.A. Davidson & Co., Research Division

And then what about -- I know it's a much smaller piece of the business, but the women's and kids, you've kind of dramatically sort of repositioned that, more like almost a department store in some locations. Has that had any discernible impact, positive or negative at this point?

Thomas L. Millner

It's about flat during the quarter.

Reed Alan Anderson - D.A. Davidson & Co., Research Division

Okay. A couple more. You talked about new store productivity, up 30% to 40%, just to kind of put some numbers around that. I mean, if I look back kind of before you were really opening these smaller stores, you're talking $300-ish a foot on average for the company. I mean, are we talking numbers closer to $400 a foot for these smaller stores?

Ralph W. Castner

Reed, this is Ralph. Yes. it's too early to tell, but I mean, they're doing -- I mean, we hit it at it on the call. With -- as you know, our old stores did somewhere around $325 a foot, and we're doing 30% to 40% better than that. So we're really pleased with how some of these new smaller stores are performing.

Thomas L. Millner

And it's giving us that confidence that we've talked about for 3 years, that once Ralph and I, and the organization saw the success that we expected, we would begin to accelerate a lot more rapidly new store growth.

Reed Alan Anderson - D.A. Davidson & Co., Research Division

And Tommy, is -- and just to be real specific, I mean, if you look at kind of the range of size you give for what you call a small store, do you think you're more successful towards the lower end of that range or the -- I mean, is it -- can it be truly more of an 80,000 square foot store?

Thomas L. Millner

Yes, absolutely. And Springfield is smaller than 80,000 feet. It's around 60,000 feet, all-in. That store's been really strong. So yes, the bias is to the 80,000 and below. Edmonton was -- is 76,000 feet, and it's just been phenomenal.

Ralph W. Castner

Which I think also goes, Reed, to talk about the opportunities in Canada. We feel really good about that.

Reed Alan Anderson - D.A. Davidson & Co., Research Division

Yes. The -- 2 more. On inventory, that's a very conservative number, that looks good. 2 questions. One is, how much of that increases is probably cost-related, just to input costs, et cetera? Secondly, just what would that look like on a per-foot basis in the stores?

Thomas L. Millner

Yes. Some part of the inventory is definitely cost-related. I'll let Ralph talk about the store level inventories. But 1 other color comment, we feel really good about where the quality of our inventories are positioned as we head into the fall selling season. We're not overbought, underbought. We're appropriately bought for the season.

Ralph W. Castner

With respect to Retail inventory, I would tell you, a large -- at least, in the dollar amount, a large piece of the dollar amount has to do with Canada. And that's just because those guys go through their growing pains up there. I would tell you, Retail -- of course, I don't spend a lot of time talking about Retail per square foot because so much of the inventory has actually held share in than the DCs. But I think Retail's inventory per square foot is basically consistent with the year ago. Of course -- that's of course is excluding any of the inventory in the DC.

Thomas L. Millner

Fill rate is a way more important metric for us because our customers drive a long way to our stores. And they don't like to be disappointed by empty pegs.

Operator

We'll move on to Sean Naughton with Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Can you talk a little bit more about the Direct business? Obviously, Retail feels like you -- there was a little bit of a nonprofitable promotion that you pulled off, affected the impact of the sales. But in the Direct business, nice improvement there. Anything you can point to, specifically?

Thomas L. Millner

Yes. Really, 3 things: First, improved functionality and fill rate. Fill rates were up nicely. And we made some enhancements to functionality. For instance, now a customer can see a product stock before they add it to their cart, and that was a feedback point we had gotten from our customers, that they wanted to see improved. Secondly, we've made some significant advances in improving content on cabelas.com. If you go on the website, you will see Deer Nation. And the rut report, which is a program that we've launched in conjunction with Field & Stream and Outdoor Life, to make cabelas.com the headquarters for deer hunters in the critical deer fall selling season. And then we tested a number of promotional ideas, significantly more Web-only promotions, and we tested a couple of 4-day events with success. We saw our visitors rise about 8% to cabelas.com, which was a really good trend, And we've done a number of other things in social, mobile and digital. I wouldn't say they're needle movers, and I would close by Direct -- we were encouraged, but we still have a long way to go. Our new CMO, Scott Williams is on-board, and he's been here 3 weeks. So he's beginning to develop a near-term and long-term plan to get consistent growth. And it's not going to be an overnight miracle, but we really pleased with the progress we made in the quarter. There are signs of life in this business.

Sean P. Naughton - Piper Jaffray Companies, Research Division

That's good to hear. And then on the merchandising margin expansion, obviously, continued improvements. Can you talk about your, kind of the private brand where we sit today, kind of where we're going? Where was different that from Q3 last year?

Thomas L. Millner

There is a much higher level of intensity in all of our media and in our store presentations on Cabela's branded merchandise. If you receive our catalogs, and I hope you do, you will have seen in the third quarter of this year, versus the third quarter of last year significantly more content-focused on Cabela's branded merchandise in every single category. And we will continue to increase that focus in the coming quarters and years.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay, great. And then just lastly, a real state question for you. How do you think about moving forward repurposed real estate versus new buildings? And then also could you just kind of frame up the potential opportunity within Canada? And give us an idea of the competition that you're facing out there right now?

Thomas L. Millner

Let me -- I'll let Ralph talk about real estate, but I want to touch on Canada first. One of the reasons we're so excited about Canada is that the relative strength of Canadian outdoor retailers to those in the United States, it pales in comparison. So we sense a real competitive opportunity to bring the Cabela's concept to Canada, and really catch those folks in Canada very flat-footed, which is what's happened thus far. Ralph, you want to touch on real estate?

Ralph W. Castner

Yes, just talking about real state, we continue to do for repurposed real estate. But it seems like as we look at more -- there's clearly some operational issues with doing that. It seems like as we're looking at new opportunities, there's just -- they tend to gravitate towards new real estate. As a matter of fact, if we go through the stores for next year -- let's see, we'd open 5 stores next year, I believe they're all going to be new. We'll continue to look at repurposed real estate, but it seems like mostly opportunities are new, particularly when you're looking for prime locations.

Operator

[Operator Instructions] Our next question will come from Jonathon Grassi with Longbow Research.

Jonathon N. Grassi - Longbow Research LLC

When we look at the comp store sales trends by month in the quarter, does it correlate pretty strongly with the merchandise margin improvement? Yes, so are they pretty correlated month-by-month?

Thomas L. Millner

I didn't -- let me touch on the inter-quarter trend. We were slightly up in July, slightly down in

August, down a little further in September, when the real impact of the cash card promotion hit. And then we have trended back to flat in October. So that's pretty much the trend. And I haven't thought about the margins by month. I don't have that in front of me. We can get that for you from a high-level overview. But I suspect they probably trended close to that.

Jonathon N. Grassi - Longbow Research LLC

So the comp -- it's flat, thus, so far in October, and you said the merchandise margins still has improved as well, I mean -- but is the level of improvement decelerated? Or is it kind of running close to where it was for the third quarter?

Thomas L. Millner

Ralph, have you got that?

Ralph W. Castner

No. It's decelerated some. I mean the margin improvement we're seeing so far in the fourth quarter, where there's still lot, and we're still making meaningful progress, but they're not as much as they were in the third quarter just because of the absence of the promotion.

Jonathon N. Grassi - Longbow Research LLC

Right, okay. And then...

Thomas L. Millner

You get back to normal improvements in Q4.

Jonathon N. Grassi - Longbow Research LLC

Okay, got you. And then you had noted that the promotional pruning is somewhat limited going forward. I guess where you guys see most opportunity to get the remaining merchandise margin improvement of the 200 to 300 basis points? Where's the biggest upside opportunity there?

Thomas L. Millner

Well, it continues to be in those areas that we've talked about all along, which is fully implementing our preseason planning and in-season management initiatives, even further collaboration with our vendors. We've made good strides, but we're not in the ninth inning there, and maximizing the intense focus on Cabela's-branded merchandise, which have between 600 and 1,000 or more basis points of advantage to branded goods.

Jonathon N. Grassi - Longbow Research LLC

Okay. And then just, you have mentioned, Scott Williams is just coming on about 3 weeks ago. And is he -- can you give us any insight into kind of the early read he's given you on where you can step up or improve the current marketing platform, especially for the Direct business? Is there any I guess, low-hanging fruit you can kind of just guide us through right now?

Thomas L. Millner

Yes. During the interview process, Scott obviously did a lot of work on the company, and clearly, saw that we were a little too transactional on cabelas.com that we lack some functionalities that our platform actually had. And that there was an opportunity to link better, marketing launches and messaging across the enterprise. But I think Scott's wealth of experience in digital commerce, he just saw all kinds of opportunities for us to improve and use technologies and techniques that are pretty widely used across the digital space. And I think being here 3 weeks has only validated that to him.

Jonathon N. Grassi - Longbow Research LLC

okay, got you. And then guys, finally, can you give us the marketing fees paid to the merchandise business?

Ralph W. Castner

Yes. To Direct, the change was, the Direct business was up $8.5 million and Direct business -- I'm sorry, Retail was up $8.5 million, Direct was up $5.2 million.

Operator

Moving on to Mark Smith with Feltl and Company.

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

Guys, can you give us what the comps were in October of last year, just for year-over-year kind of look at it?

Thomas L. Millner

We don't give them by month, Mark.

Ralph W. Castner

The quarterly comp a year ago, that was up 7.3%.

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

And I guess maybe I'm digging too much for it, but just trying to see if you're flat, kind of what the quarter last year look like sequentially through the quarter.

Ralph W. Castner

Yes. I mean, I understand what you're asking, we just -- I mean, that's going down to a rat hole to disclose them by month. But I mean look, we clearly understand that the fourth quarter was the toughest quarter, which we're up against, from a comp perspective. Tommy already alluded to that we're flat to the first, whatever it is, 3.5 weeks, which feels pretty good, given the fact that it is such a tough comp -- it's such a s tough comparable.

Thomas L. Millner

And we think, Mark, that our promotional plans for the balance of the quarter, especially from Black Friday through Cyber Monday and then into the year, we're going to be pretty aggressive.

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

Okay, good. And then second, it seems like a big product that you've definitely pushed on the branded side, is the New Way to Hunt. Can you give us any update on how that product's being received and anything that you've learned from the process?

Thomas L. Millner

It's been received very well. And I think what's important is we combined a really good product with enhanced presentation in our Retail stores. So it's much easier to shop camo clothing from base layer, all the way to outer wear in our stores than ever before. And that, we think, is just a great combination of good product and good in-store merchandising, and the product is terrific.

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

Okay. And then lastly, back to the Canadian opportunity. It seems like there's a lot of opportunity for you there. Can you just -- do you have enough kind of capacity out of your current distribution center?

Ralph W. Castner

Well, we have -- since we bought S.I.R., we've built a new distribution center in Canada, so that has clearly given us some expanded capability. But here on -- the right issue is, how fast can we grow that, given a relatively small management team in Canada. But given how well the execution within Edmonton, it's really increased our confidence that we can ramp that up. I mean, it's clearly not a capital constraint. It's a people constraint. And given what we've seen in the last year from our management team in Canada, we feel pretty good about accelerating growth up there.

Operator

And our next question will come from David Magee with SunTrust Robinson Humphrey.

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

I just had a couple of questions on the new stores. First, are you seeing a similar penetration with regard to the credit card sign-up in those new stores as you've seen in the past?

Ralph W. Castner

Yes, we are, which is pretty encouraging. I mean -- and you see that we had a slight acceleration of the growth rate of our Cabela's CLUB Visa, any where from 7% to almost 8% growth rate between Q2 and Q3. Some of that obviously, is an impact of the new stores. And yes, we feel good about it.

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

Okay. Then secondly, on the new stores, is the holiday assortment similar at the new store as the legacy stores?

Thomas L. Millner

Yes.

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

So you think that -- perform about the same way, I guess, like at legacy stores in the fourth quarter?

Thomas L. Millner

Well, what's -- what we noted was that our next-generation stores are performing because of ease of shopping and more concise merchandise assortments to the local market. They're performing significantly better. So we have great expectations for our new stores in the holiday season, plus they tend to be in under-penetrated markets. And our customers, they like that. They like being able to shop our stores, where in the past, they weren't able to. Springfield, Oregon is a great example of that.

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

Tommy, and then lastly, what is your current thinking regarding gun sales, and eventually, that's got to sort of moderately slow down. What is your current thinking regarding the possible impact on Cabela's when that eventually happens?

Thomas L. Millner

Well, I thought it was going to slow down about 5 years ago. So I'm probably not a good soothsayer of the gun business. But look, all indications are, that gun ammunition sales because of lots of factors, not the least of which is increased participation, will be strong through next year -- have no reason to believe they will not be, and we don't see any trends that indicate that.

Ralph W. Castner

Well, particularly with next year being an election year, we're -- we do not believe that guns will -- would be down in 2012. Now to your question about what happens what they do -- when they do go down, I mean, we think that there's a wallet share gain being made by the gun piece of our business, and we think the other piece of our business will increase to offset it.

Operator

Our next question will come from Jim Duffy with Stifel, Nicolaus.

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

By my math, the merchandise margin in the quarter grew faster than SG&A. Again by my math, that's the first time you've done that since 3Q last year. Is there any coincidence that the last time that happened was the third quarter as well? Or do you believe you have this formula wired, and you have sidelines to that continuing to be the case?

Ralph W. Castner

Well, look, we clearly expected to continue to be the case, and the first half -- the only reason to think it's more likely to happen in the third quarter, as we've started on this margin expansion initiative, we've always believed the third quarter is an opportunity to grow it. A year ago, it's because we got rid of a lot of clearance activity, and this year, it was because of the promotions. So I suppose there's some reason to believe, it's most likely to happen in the third quarter. Having said that, in the first half of this year, we clearly have higher expenses than we wanted to, or should have, or whatever. So by managing the expenses going forward in 2012, I guess we're anticipating that happens more times than it doesn't.

Thomas L. Millner

That's certainly our goal, Jim.

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

That makes sense, and that's certainly an appropriate goal. Ralph, if you look at the SG&A x pre-opening expense, what do you think your growth rate of that will look like, as you look out to '12?

Ralph W. Castner

Well, it's -- obviously, based on what I should -- we've just said, it should be something less than total revenue growth, which will be somewhere in the high single-digit area. And although that's largely determined based upon what happens to the comp and the change in the Direct business, the challenge we're having with managing SG&A. And I know the comp was enough this quarter, but for the past 3 or 4 quarters, when the comp's been up, it's been up by approximately the amount by which the Direct business is down. So it makes it tough to leverage the overhead in the business. If we got in a scenario where you had up comps and up Direct business, it just be a lot easier to manage the SG&A.

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

Okay. Have you guys reached the baseline for catalogs SIRC at this point? Or you continue to trim that?

Ralph W. Castner

I think, Jim, that's 1 of the challenges that our new CMO is really looking hard at. How do we migrate thoughtfully and prudently without wrecking the business? Catalogs spend to more digital medium and social mediums and mobile mediums. And sitting here today, I wouldn't say that we have that answer, but over time, managing SIRC and the cost of catalogs down is a given.

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

Okay. I guess Scott's got a long Sydney winter ahead of him, in which he can think about that, right?

Thomas L. Millner

It started yesterday with about 4 inches of snow.

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

I expect he's [indiscernible].

Thomas L. Millner

Luckily he's a Kansas City boy, so he's used to cold weather.

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

Okay. Well, Joe and his team have done a phenomenal job at the bank, metrics are looking really solid there. Ralph, I want to circle something back, or back to something you used to say. You used to talk about provisions running roughly 40 to 50 bps below average charge-offs. That hasn't really been the case since 4Q '09. I understand the variance from that is just a matter of searching for a bottom in the charge-offs. And looking at the trend in delinquencies, they seem to be at an all-time low. Is that 40 to 50 bps spread still a good number to work with going forward? Or is there something else we should be thinking about?

Ralph W. Castner

Well, I think 40 to 50, I talked about this a little bit earlier, around 50 basis points is the difference attributable to the fact that part -- when we give you a charge-off number of 2.25%, or whatever it was for this, about 50 basis points of that is accrued interest and fee income, and that when we reverse it through the provision is recorded as negative interest in fee income. So in almost any environment, there should always be a 50-basis-point difference. Now in this quarter, there's a little bit more than that, which was attributable to the reduction we had in our allowance for loan loss of $2.5 million.

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

To put it another way, yes, once you get to a baseline in...

Ralph W. Castner

Well, once you get to a baseline, it should still always be 50 basis points less is I guess, the short answer to your question. But I mean -- by the way, I mean, we have been thrilled with how that business has performed. Joe and his team did a good job, and to your point, this is almost as low as we've ever seen charge-offs.

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

Okay, great. The small sample size, but it -- can you comment on the productivity spread between your next-gen Canada stores and your U.S. stores?

Thomas L. Millner

Well, what I can comment on, Jim, is that margins -- aggregate margins in our Canadian stores are trending much higher than our U.S. stores just because of a different competitor set and a different approach to promotions, which gives us more reason to be attracted to growing in Canada. And it's a meaningful difference in margins.

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

Well I was going to say, what's the tax rate impact on out growth in Canada? Should that continue to bring the tax rate down? Or is it so small that, that's is not --doesn't have impact.

Ralph W. Castner

As you accelerate business in Canada, it should have some positive, about a slight positive benefit to the tax rate. I would -- it's not a huge factor, but I won't put upward pressure on it. Just adding onto Canada, I would -- I'm sorry if I'm adding to Tommy's answer here. I would tell you for the most part, all of the metrics in Canada are improved pretty significantly over the U.S. The only challenge we're having in Canada is sort of managing the expense base as we ramp that business up for future growth. So -- and by that I mean, sort of corporate overhead and merchandise. I mean, we started that business with a $15 million to $20 million business, and have grown it significantly. And there's expense issue as you ramp that up.

Operator

And moving on to Aaron Goldstein with JPMorgan.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

I was wondering if you maybe could help clarify on guidance a little bit, it looks like you said the beat in this quarter is about $0.06 it looks like first consensus, and then prior consensus, it was $2. So is that implying $2.06 for the year and implying about $0.99 for 4Q?

Ralph W. Castner

Yes.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay. And then just in terms of the marketing fee dollars, is there any change in the way you're allocating those? Or is that continue to be upon just performance of your credit card business from stores that you're [indiscernible]?

Ralph W. Castner

There's no change.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay. And then just diving deeply in the comp trends. I know you're not going to give by month, but at least is it fair to say that comparisons build throughout the rest of this quarter? And that the back half of this month, November, December are bigger quarters than October?

Ralph W. Castner

Well, they're bigger absolutely, there's no question. I don't know if the comps get any tougher as you move throughout the quarter. But in absolute dollars, obviously, they're bigger.

Thomas L. Millner

November and December, important this year just like in every other year.

Operator

And that is all the questions we have in the queue. At this time, I'd like to turn it back over to management for any closing remarks.

Thomas L. Millner

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

Operator

And this does conclude our conference call for today. We'd like to thank you for your participation.

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