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Cabela's (NYSE:CAB)

Q4 2011 Earnings Call

February 16, 2012 11:00 am ET

Executives

Chris Gay - Director of Treasury & Investor Relations and Treasurer

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

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

Analysts

N. Richard Nelson - Stephens Inc., Research Division

Reed Alan Anderson - Northland Securities Inc., Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

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

Jonathon N. Grassi - Longbow Research LLC

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

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

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

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Inc. Fourth 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, 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, 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'll turn the call over to Tommy Millner, Cabela's Chief Executive Officer.

Thomas L. Millner

Thank you, Chris. And good morning, everyone. A record fourth quarter and full-year financial results validate that our strategies are working and provide us with the confidence required to accelerate retail store expansion. For the quarter, we realized strong growth in merchandise margin, retail and direct segment operating margin; improved performance in our Cabela's CLUB Visa program; and increases in market share.

This strong performance led to our highest level of return on capital in more than 6 years. We ended the year with return on capital of 14.3% compared to return on capital of 9.6% just 3 years ago.

Improvements in return on capital are due to our continuing efforts on balance sheet management and significant improvements in profitability.

With regard to profitability, we are particularly pleased with the improvements in retail profitability we have realized over the last 2 years, which has been a key focus of ours and a prerequisite to accelerating store growth. For the year, retail profitability increased 240 basis points to 17%. This compares to retail profitability of just 11.7% 2 years ago. As a result of the progress we have made, improving retail profitability and return on capital, we are accelerating our retail store expansion.

Additionally, as a part of our retail expansion strategy, we believe a unique competitive opportunity exists to penetrate markets with less than 250,000 people around the United States and Canada. In order to serve these markets, we have developed a new Cabela's Outpost store format. These stores will be 40,000 square feet and will bring the excitement of the Cabela's retail experience to customers in these underserved markets. The stores will be designed to have an innovative, flexible floor plan, a plan we internally call Core-Flex, which will provide our customers an ever-changing visual look at the center core of the store, complemented by a revolutionary digital signage concept.

Our Outpost stores will initially target the Western United States, the upper Midwest, and Canada and are designed to be additive to our growth plans for larger next-generation stores. As a result, we now expect to open a total of 6 stores in 2012: 4 next-generation stores in the United States; 1 next-generation store in Canada; and our first Outpost store in Union Gap, Washington slated to open in the fall of 2012. Looking forward to 2013, we expect to open 6 next-generation stores in the U.S., and as many as 3 Outpost stores.

Earlier this morning, we announced several of these locations, and we are very excited to enter these new markets. Additionally in 2013, we intend to relocate our existing Winnipeg store. Now, turning to merchandise gross margin, which is another key initiative of ours.

For the quarter, merchandise gross margin increased 40 basis points to 36.4%. During the quarter, we saw a significant strength in the Firearms and Shooting categories, which caused a significant mixed shift into these lower-margin categories. For the quarter, this adverse mix, resulted in a 50-basis point headwind to merchandise margin.

As you will recall, 2 years ago we introduced strategic initiatives focused on improving retail profitability. We set these initiatives in place because we needed to significantly improve retail profitability for our retail model to work. As we stated several times, we set a goal to exit 2012 with consolidated gross margin 200 to 300 basis points above 2009 levels. This initiative is a critical component of improving retail profitability to make our retail model work and to accelerate store expansion. Since 2009, we've raised consolidated merchandise gross margin by 100 basis points. However, what is more important, is that in our Retail segment, merchandise gross margin has increased 190 basis points from 2009 levels. The improvement in retail merchandise margin has been a significant contributor to the increases in retail profitability over the last 2 years, and is one of the reasons we are accelerating retail store expansion.

We still expect to meet our consolidated merchandise margin goal, however, since we based our goal on exit rate, we'll see the remainder of the benefit in 2013.

Now let's look at our Direct business. For the quarter, adjusted for divestitures Direct revenue declined just 1.9%. Despite the modest decline in revenue, Direct segment operating margin improved 150 basis points to 18%. For the quarter, multichannel customers increased 1.9%. In our Retail segment, for the quarter, comparable store sales increased 1.7%, recall that this is on top of the 7.3% comp store sales increase we realized in last year's fourth quarter. And I'm pleased to report that again this year, we had a very strong performance from Black Friday through Christmas. Sharp advertising, solid merchandising and inventory planning and great in-store customer service helped drive very strong results during the holiday season. For the quarter, average ticket increased roughly 8% and retail operating margins increased for the 11th consecutive quarter.

Now let's look at operating expenses, which again saw sequential improvement. Excluding impairment and other special charges, operating expense as a percent of revenue decreased 20 basis points to 29.6% of revenue compared to 29.8% of revenue in the year-ago quarter. Over the past couple of years, we've made investments in retail store labor, retail store infrastructure and IT systems, which have all contributed to growing our business.

While we continue to make some of these investments for 2012, we expect to grow operating expenses at a slower rate than revenue growth. Before discussing Cabela's CLUB Visa, I'd like to comment on our ability to lower inventories in 2011 in spite of warm weather and its negative impact on cold-weather apparel. It is a testament to our merchants that their efforts over the last 3 years in all aspects of vendor collaboration allowed for quick reaction with our partners to get ahead of and not behind the potential inventory risk of a warmer winter. These actions resulted in a 3% decrease in inventory levels in 2011. As a result, we see little to no margin risk in the first quarter of 2012 related to liquidation of cold-weather gear.

Now let's look at our Cabela's CLUB Visa program, which had another exceptional quarter as we continued to see strong growth in average active accounts, lower funding costs and improvements in delinquencies and net charge-offs. For the quarter, average active accounts increased 8%. We also realized significant improvements in net charge-offs, which are at the lowest levels we've seen in more than 4 years. There are several factors that make us very confident that our Cabela's CLUB Visa program will continue to perform very well. First, we expect to continue to benefit from lower funding expense as higher securitizations mature. Second, last month, the Fed indicated it would keep interest rates at current levels for at least the next several years indicating to us that even after 2012, we do not expect to face any pressures from higher funding cost. And finally, with the acceleration of new store openings, we expect account growth to remain strong for the next several years. With this backdrop, we are very confident that the Cabela's CLUB Visa program will continue to generate significant rewards for customers, increased customer loyalty for Cabela's and provide higher profitability for our shareholders.

Now looking at guidance. It is clear our strategies are working, and our next-generation stores are achieving superior results. As a result, we expect to achieve double-digit full-year earnings per share growth in 2012.

In closing, I want to personally thank Cabela's outfitters for a great 2011. We appreciate all of 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, among other things, performance at World's Foremost Bank. Ralph?

Ralph W. Castner

Thanks, Tommy. Following up on Tommy's remarks, we're very pleased with our fourth quarter results and results we achieved with regard to retail profitability, merchandised margin and operating expenses, which helped drive increases in Retail and Direct segment profitability.

For the quarter, Financial Services revenue as a percentage of average managed credit card loans increased to 160 basis points to 10.6% compared to 9% in the year-ago quarter. Increases in Financial Services revenue primarily due to higher interest and fee income, reduced interest expense and lower provision for loan losses.

For the quarter, net charge-offs as a percentage of average credit card loans improved 126 basis points to 2.12% compared to 3.38% in the fourth quarter last year. Additionally, we continue to see improvements in delinquencies. Greater than 30-day delinquencies were just 0.87% as compared to 1.13% a year ago. Greater than 60-day delinquencies, were 0.53% as compared to 0.72% a year ago, and greater than 90-day delinquencies were 0.27% as compared to 0.37% a year ago. As we do periodically, we recently hired an outside specialist to validate that the financial relationship between our Cabela's CLUB Visa program and our Merchandise business is at market rates. As part of that study, we learned that in this relationship, it's common for the retailer to receive their economics as a fixed percentage of some metric like charge volume and have the volatility in credit card earnings reflected in the bank.

Consequently, beginning in 2012, we'll be changing our arrangement by eliminating the existing marketing fee structure and after reimbursing the merchandise business for certain out-of-pocket expenses replacing the existing marketing fee with a fixed license fee equal to 70 basis points on total Cabela's CLUB charge volume. We don't expect this change to have a meaningful impact in the total amount of current or future economics transferred between are Cabela's CLUB Visa business and our Merchandising business.

Now let me highlight our future funding plans. We have one securitization totaling $425 million maturing in 2012. This 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 when we expect to close in the first quarter of 2012. We also expect this new securitization to be a mix of fixed and floating rate obligations. After March, our next term securitization doesn't mature until January of 2015. Additionally, we expect to renew one of our variable-rate conduit agreements early in our efforts to the lather the maturity of these facilities to have only one facility come due in any given year. Looking forward, we plan to fund future growth with a combination of future term securitizations and by remaining active in the certificate of deposit market throughout the year. As most of you are aware, we entered into a new revolving credit agreement during the quarter at the parent company. The new $450 million 5-year credit facility may be increased to $500 million subject to certain terms and conditions and provide sufficient liquidity as we accelerate retail store expansion.

Also during the year, we generated a record $366 million of cash flow from operations and EBITDA was a record $322 million. We ended the year with $305 million of cash, of which $188 million was held at the parent company. During the quarter, we realized $7.8 million pretax of impairment and restructuring charges. These are mostly related to the write-down of economic development bonds where the development happens slower than we previously anticipated. We have now assumed minimal future development and do not anticipate future write-downs of economic development bonds. For the year, impairment and restructuring charges totaled $12.2 million pretax and were mostly related to the write-down of economic development bonds and land held for sale. This compares to an impairment and other special charge of $13.6 million pretax in fiscal 2010. Last year, we announced that the Cabela's board of directors approved a share repurchase program designed to offset shareholder dilution resulting from the granting of equity-based compensation awards. During the fourth quarter, we purchased 800,000 shares in the open market at open -- the open market transactions at an average price of $24.95. Additionally as a result of this program, the company intends to repurchase up to 800,000 shares of its common stock in open market transactions due February of next year. Now let me turn the call back over to Tommy for some closing comments.

Thomas L. Millner

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

N. Richard Nelson - Stephens Inc., Research Division

Tommy, can you talk about store economics if you're anticipating from the Outpost stores, sales or sales per square foot of the four-wall profitability, paying investments and inventory, and fixtures and equipment. I guess that Springfield, Oregon store is closed to that because as we have right now.

Thomas L. Millner

Rick, let me give you a little color first and then we'll go through the economics. The original idea for this Cabela's Outpost store came as a result of 2 data points. First, we have a store in Kearney, Nebraska that is in a very small market that does very, very well. As you know about a year ago, we opened Springfield, Oregon and that store as we've noted before has performed very well. And it peaked our interest that maybe there was a competitive opportunity in these markets with less than 250,000 people that clearly have high concentrations of hunters, fishers and campers. And for those of you who followed the industry a long time, if there even is a competitor in a market like that, they typically are not very sophisticated. There is no seasonal role of merchandise. You kind of see the same thing you see every time you go in. So we challenged our team to come up with really a revolutionary new idea for a smaller market. And at the center of this Outpost idea is the center part of the store, which I referenced we call Core-Flex, that area, the center part of the store will flex a full 4 times a year. So early spring, late spring, early fall, late fall, so the customer gets a constantly changing exciting new look. And setting that off is a really unique signage, digital signage program that for those of you coming to our analyst day, we'll let you see. But it's all designed to create that Cabela's retail experience in a smaller market. This is way more than just a 40,000-foot box in a small market. A lot more than that. The last thing I would say is we're going to have a much deeper focus on Cabela's branded merchandise in these smaller format stores. We also think that accessing the entire line through our in-store kiosk program, we're going to have high penetration there. So I hope that gives a little color to just how excited we are by this additional opportunity for growth in addition to the Next-gen stores, and I'll have Ralph walk you through the store economics.

Ralph W. Castner

I can share with you, Rick, some of the store economics. But I would tell you on a per square foot basis, they're probably not reasonably different than our next-generation store. We expect sales per square foot to be sort of in that $400 to $500 a square foot with contribution margins somewhere in the high teens and then after our -- then the layer on top of that, sort of a 9% corporate overhead charge. So we expect to get IRR's in a -- somewhere in those mid-teens. The capital investment for one of these new stores we expect to be about $10 million.

N. Richard Nelson - Stephens Inc., Research Division

What is the long-term potential you see for the Outpost and as well as the Next-gen stores?

Thomas L. Millner

Well, the near-term opportunity for the Outpost stores, we think as I said in the script was in the Western U.S., certainly the upper Midwest and in Western Canada. Beyond that, you can just imagine how many markets there are where there are deep concentrations of hunters, fishermen and campers across the entire country where we can roll out this format. In next-generation stores, gosh, we just have a very long runway left, and I hope you get the sense of the last 3 years we've worked really hard to make sure we had a sustainable model that we could roll out before we accelerated growth. And as we finished 2011, we just feel we're in a position to start growing because of our own control of our own business plus, there is competitive opportunity to take market share in a big way.

N. Richard Nelson - Stephens Inc., Research Division

Okay. Also I would like to ask you about the Direct business. I know you got new management now overseeing that operation. If you could discuss the revenues and the operating costs in that business, highly divide between catalog and Internet, and what sort of opportunity there might be for cost takeout as you migrate people from the catalog to the Internet?

Thomas L. Millner

Well, Scott is -- Scott Williams, our new CMO is beginning to lay his plan out. At its core is a shift from print first, which is how our process works here as a catalog legacy merchant, to digital first, because digital is the future. So we will work digital first, and then catalogs will flow from there. Certainly in that transition, there is an opportunity to lessen the amount of money that we spend on catalogs and as we go through the next couple of years, I think that will become self-evident. Concurrently, we're testing a lot of things on the web. We have torn down a couple of merchandise categories to their core, looked at enhanced presentation, better presentation of the merchandise, deeper content, enhanced focus on page search and in, thus far, in the first quarter, we've also tested some enhanced shipping offers that those of you who are cabelas.com shoppers would have seen, and we're pretty pleased with the results of those initiatives. So as we move through time, there will definitely be a shift to digital and a lessening of catalog. And we'll keep you posted as we move through time on how that's going.

Ralph W. Castner

Rick, we spend call it $135 million in Direct Marketing cost, and I would tell you 80% of that is paper. Now what's unclear to me is whether or not, is how we -- as we begin to transform that business, I'm not certain that $136 million number goes down. You most likely will see a significant shift in the mix of it that we think would drive more sales. So it's unclear to me whether or not the opportunity is in a expense reduction or a sales increase, but that's something Scott and his team is working out.

N. Richard Nelson - Stephens Inc., Research Division

Okay. I'd like to also ask you also about the bank policy change. What prompted that and how that's going to affect the presentation now as we move forward?

Ralph W. Castner

Well first of all, we don't think in the absolute dollars transferred, it's going to make a significant difference. But quite frankly, what -- as we were visiting with you guys, over the years, there's a lot of confusion to explain how improvements in the bank actually ended up benefiting the Retail and the Direct business. So as we started looking at comparables, it became pretty clear to us that what most people do is transfer a fixed percentage of some metric, and ours was 70 basis points on total charge volume. So the only change you'll see in the future, as we move forward, to the extent there's volatility in the earnings of our Financial Services business, that will show a path to Financial Services business and not somewhere else.

Thomas L. Millner

Where it belongs.

N. Richard Nelson - Stephens Inc., Research Division

Got you. And finally if I could ask you, any comment on comp sales, trends in early 2012 and what your expectations might be there. And where do you think we fit in the firearms cycle?

Thomas L. Millner

Well, let's -- I'll -- that was 2 questions. I'll take the first one. Comps have accelerated nicely from our Q4 run rate and let me remind everyone, we're growing over 8.9% from last year in Q1. So nice acceleration in comps. The Direct business started off slower than I would have liked in January, but as a result of some changes to promotional cadence and some testing of some enhanced shipping offers and the site redesigns that I mentioned, the Direct business in February has come back very, very strong. And just a comment, if there's been a negative to the Direct business recovering as we test enhanced shipping offers, remember, that flows through the margin line, so there was some pressure on margins but as -- on rate but a pretty significant lift in dollars. And we're going to continue to test those kinds of offers and others as we go through the year, but good start through Q1. And secondly, guns. Rick, as I've said on numerous calls, the -- this extension of acceleration of gun demand has lasted 5 years longer than I thought it would be and I spent the bulk of my life and my career in this business. I mean it just continues to be really strong in guns and ammo. We have continued to test increasing margins in those hot categories, and have done so successfully with no impact thus far on demand velocity. And we will continue to do so.

Operator

Next, we'll hear from Reed Anderson with Northland Securities.

Reed Alan Anderson - Northland Securities Inc., Research Division

Let's see. Let's start. I want to go back to, kind of one of Rick's earlier questions. Just getting back to that prototype. In terms of -- you gave that -- kind of that -- the metrics and investments. So that I'm curious, Tommy, just as you think about that, does that change your thinking at all about how you're going to kind of grow the Direct business down to road? Is that going to have an impact what's going to make it harder to grow that, or have you seen what you've seen in Oregon, tell you that you can still grow direct with more smaller store penetration?

Thomas L. Millner

Reed, I think, we -- just as a matter of course in our company, we believe that with enhancements to our cabelas.com site, the rationalization of catalogs and all those opportunities, we can grow the Direct business and rollout new, smaller prototypes, bigger prototypes, our next-generation stores so we just don't acknowledge to ourselves that the Direct business can't grow. Will it be pressured from these stores? Certainly. But we still think we can grow that business because of the competitive environment.

Ralph W. Castner

We -- to give you some color, when we open a store in a market, and it does depend on the market, it probably hurts the Direct business $2 million to $4 million per store. So if you take the midpoint and call it $3 million, you open 5 stores in the year, let's say, that's $15 million of pressure you put on the Direct business, which is 150 basis points on the growth rate. So to Tommy's point, it's still downward pressure, but we think you have to be able to grow the business despite that.

Reed Alan Anderson - Northland Securities Inc., Research Division

That make sense. That's helpful. Then on the promotional -- kind of, promotional programs, et cetera, couple questions. One is given kind of the way things shaped up and across the industry whether, et cetera, I'm just curious. At one point did you have to -- did you alter, if you did alter, your promotional cadence in the fourth quarter because it seem like you were coming out of Black Friday and really -- and you kind of comment to this in your prepared remarks that even through Christmas and may be a little bit past, that you were pretty much -- it seemed like where you wanted to be, I'm just curious what the last week or so might have looked like. And then secondly, it looked like from what I saw, that you brought back that tiered promotion that you kind of eliminated in 3Q but with the stipulation that you couldn't use that for firearms. And I'm curious if that's the case, was the -- was it still a very successful promotion? You just didn't have the margin that you used to get when people use that to buy guns?

Thomas L. Millner

Yes. That's exactly. We did not pull that promotion. But what we did was we modified it to make the exclusion that you referenced. Let me comment to your earlier question. It was clear into September and early October that the weather was warm and the weather forecast that we were looking at, said that probably wasn't going to change through the fourth quarter. And I think we felt so good about our Black Friday through Christmas promotional plan that we really didn't change very much. We started planning for Black Friday, almost days after Black Friday in 2010. And we were having a comp over big numbers because in '10 it was a record Black Friday through Christmas. And what we focused on was urgency. We wanted to make sure that instead of coming to Cabela's for the third or fourth or fifth store you've visited, we wanted you to be at our store first. So we opened at 5:00 in the morning, and we had more than 50,000 people in line at our stores. And we also made another subtle change, which was this acknowledgment that people shop on Black Friday for themselves as much as they shop for other people. So our merchandising efforts played to that and it really, it worked in a big way for us. So while the lack of Pac Boots sales and heavy outerwear were a headwind, we just felt really good about our plans and plowed ahead. And I would tell you, not just where we comped over big comp numbers from Q4 last year, the 36 point merchandise margin performance in 2010, that was our highest quarterly margin rate performance in all of 2010 and we comped over that by 40 basis points. So our teams did a great job.

Reed Alan Anderson - Northland Securities Inc., Research Division

One last question for Ralph, probably. Ralph, I was just kind of looking at the trend. If you look at account growth, if you will, in your business or in the Credit Card business over the last several years, and you look at that kind of relative to square footage and things like that, I mean it really looks like, I mean there is obviously a correlation there. But if I think of where your square footage is headed, I mean it seems like almost a given that your account growth should be a double-digit type of number this year and next. Does that logic makes sense to you?

Ralph W. Castner

No, I think that's right. First of all just commenting on account growth, it has been -- I've been very pleasantly surprised at the amount of account we've been able to generate with relatively few additional stores into the base. And to your point Reed, as you start adding in more and more stores, will put upward pressure on that growth rate to where it's low- to mid-double digit numbers as we continue to move forward. So yes, we're pretty excited about that business and what more retail stores will mean to it.

Operator

We'll now move to a question from Sean Naughton with Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Quick question for you on the mix of the business for the fourth quarter. Obviously, the soft goods was probably a little bit challenged as you've mentioned. But moving forward, that's been a nice kind of tailwind over the last couple of years here. Should we expect that in terms of the mix of sales in the store to continue to improve in 2012?

Thomas L. Millner

The mix of soft goods?

Sean P. Naughton - Piper Jaffray Companies, Research Division

Yes.

Thomas L. Millner

Yes, I would expect so. And one of the things we're doing because we have all kinds of merchandise in our stores, as we've seen this lack of winter, there's a blessing to that because it means spring is going to be here more than likely earlier. And we took advantage of the opportunity to do our spring rolls in our southern stores, much earlier than we have planned. And all the work that we've done the last 3 years to be good at that. We're going to get after the Fishing and Camping business much earlier than we did last year. And the absence of flooding in the Midwest unless we just get creamed with snow in the next 30 days. The fishing season ought to be good. And we sell a lot of fishing apparel, so we're optimistic about the spring.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay, good. And then, I guess on the corporate overhead side. Just saw some pretty good growth in that particular number year-over-year. Just wondering how I should think about that number kind of moving forward in 2012. Should that be at a run rate below the sales trends that you're planning for 2012 and what kind of drove the big increase in the fourth quarter?

Thomas L. Millner

For those of you on the call, if you'll remember in Q2, while we were spending at a rate north of our rate of sale in the first 2 quarters of last year, we told you that we expected that to change in Q3 and Q4 and it, in fact, did. And I'll let Ralph comment on '12.

Ralph W. Castner

No, just I think as we go forward we're going to be able to control that growth to be slightly less than the growth in the sales, so...

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. And then just lastly, I wanted to clarify, Tommy, I think a comment you made earlier on the merchandise margin. So should we expect merchandise margin improvement in 2012 or did we expect to get all the way to that lower end of that 200 to 300 basis point improvement or are we thinking that there could be, because of the mix shift and the strong demand you're seeing in the firearms cycle, that we may be 50 basis points below that?

Thomas L. Millner

No. I think as we get into 2013, we'll capture our goal and just from a continuous improvement process standpoint, we think we get -- we can get -- we've got enough opportunities to get margin improvement year after year after year across the business. In any given year, there'll be headwinds and tailwinds, but that's our job to manage around that.

Operator

And we'll now hear from David Magee with SunTrust Robinson Humphrey.

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

Just a couple of questions. One, the traffic in the fourth quarter, I guess, was down just sort of doing the math of the transactions in the comp. Is -- does that number turn positive now in the first quarter with the better top line trends?

Thomas L. Millner

Nothing I'm aware of.

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

Okay. So the acceleration in comps you may have seen so far this year, you think is because of this further expansion and the transaction size?

Thomas L. Millner

Yes.

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

Okay. Secondly, thinking about the [indiscernible] and the Direct business over the next couple of years, how important is the international opportunity in that framework?

Thomas L. Millner

It's an opportunity. But I wouldn't say that, that's a needle mover for us. It's just not a big enough business. It grew really nicely last year but not enough to impact consolidated results. And I don't expect that to happen this year or next year.

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

Is that because of the brand name not being cost?

Thomas L. Millner

Shipping cost.

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

Shipping. Okay. And then lastly, do you anticipate on the bank side that consumers will take on more leverages as the year progresses and I'm thinking that will be a good thing for you all if that's the case?

Ralph W. Castner

Well, it is if you look on an individual account, it will be interesting as we move forward in that business because the key metrics, as you guys and I think about it in that business which are average accounts, average balance and charge-offs, and we've had some benefit as we've slowed growth in that business that average balances has risen significantly as those accounts have matured. Just as we started adding more accounts, that's going to put downward pressure on average balance and probably some downward pressure on charge-offs. Now having said that, if people -- and we've seen that, if people are willing to take on more leverage, that may help offset some of that.

Operator

We'll now take a question from Jonathon Grassi with Longbow Research.

Jonathon N. Grassi - Longbow Research LLC

Can you just -- why was traffic down so significantly in the quarter, do you have any thoughts behind that?

Thomas L. Millner

We really don't. It was down I think 4%. And yes, we saw a good ticket lift. We weren't overly concerned about it especially as we've seen comp acceleration come in to the end of the first quarter. It was something we were watching, but we had such a good fourth quarter that it wasn't something we were overly concerned about.

Jonathon N. Grassi - Longbow Research LLC

Okay. And then, could you talk about the performance of the various product categories in the fourth quarter? How much of that comp was driven by the gun and ammo business versus some of the other product categories?

Thomas L. Millner

Well, in retail, what was really strong, and this is in descending order, was firearms then shooting, which is encompassing -- encompasses ammunition and some other categories, and then optics. And in the Direct side of the business, it was optics, shooting and power sports. The challenging categories in retail were archery, obviously, footwear because of Pac Boots, because of warmer weather. And men's apparel, led by cold weather clothing. In the Direct business, men's apparel, same story, was challenging, footwear and tree stands.

Jonathon N. Grassi - Longbow Research LLC

Okay. Can you give us an idea of your typical revenue distribution by month in the first quarter?

Thomas L. Millner

No. We don't provide that.

Jonathon N. Grassi - Longbow Research LLC

Okay. And then just one final question. I guess assuming a stable interest rate environment, is that $14 million in a financial service expense, or financial services interest expense, a reasonable run rate for 2012? Or should we look at the growing credit card portfolio requiring incremental financing that's going to drive that interest expense closer to $16 million to $17 million over the next few quarters?

Ralph W. Castner

With all -- obviously, all things being equal, that should grow at the same rate as average managed receivables, which will grow probably someplace through 10% and 15%. Now, there is still a limited opportunity to -- as we refinance some of these securitizations to lower the rate we're paying, at which will offset that to some extent. And by the way, I would -- when you're trying to come up with the run rate, I would look at it more by quarter because, while this is not a huge factor, there's a decrease in receivables seasonally between Q4 and Q1 just as people pay off their Christmas spending.

Thomas L. Millner

We did read in Chairman Bernanke's comment several weeks ago. I mean, he was very clear that the Fed intends to keep rates low. I think he specifically said for at least 3 years, and that just bodes well for funding costs in our portfolio.

Operator

We have a question from Mark Smith with Feltl and Company.

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

Most of my questions have been answered, but just one quick housekeeping. I know it's changing but what was the marketing fee here for this quarter?

Ralph W. Castner

It actually wasn't up significantly year-over-year. You'll remember a year ago in the fourth quarter, we had a $10 million reversal of the FDIC charge. And then -- so, that was sort of a growth issue. But on top of that, it was only up less than $2 million in Retail and less than $1 million in Direct.

Operator

And we have a question now from Jim Duffy with Stifel, Nicolaus.

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

Follow up to Sean's question, Tommy, can I ask you to repeat that you said in the prepared remarks about the merchandise margins, I didn't quite catch that about the benefit delayed until 2013. I have a few more bars after that if you don't mind.

Thomas L. Millner

Well, I can actually give you the color, Jim. Our initial focus on margins, let me remind everybody that the reasons we had to get merchandise margins up was 200 to 300 basis points was really simple. Our new store model did not work on the old pre-200 to 300 basis point margin rates. We could not accelerate growth in the company. So the genesis of 200 to 300 basis points was so that we could grow our company again. I called out that we are now up 190 basis points in retail merchandise margins, and expect more improvement this year and the year after, and the year after. So now I'm going to go back to consolidated merchandised margins. We are up 100 through '11, we expect to be up this year. And as we move into 2013, we expect to be fully into that 200 to 300 basis points of improvement and continue to improve year after year.

Ralph W. Castner

Just a message, Jim. This is Ralph. I mean, the goal on 200 to 300, the message is that in retail, we will get that easy -- we were somewhere in the middle of that range pretty easily by the -- by full year 2012. Our consolidated basis, we always said the goal was going to be as of the end of 2012. Therefore, we still expect to get 200 to 300 on a consolidated basis but you probably won't see all of it until you get to the full-year run rate for 2013.

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

Okay. That's very helpful, I'm glad I asked for a clarification there. And then the -- can I ask you to comment on where you are with overhaul of the promotional strategy. Have you fully anniversaried promotional events like you saw in the third quarter, which had impact on the margin.

Thomas L. Millner

Well, Jim, we will continuously look at -- as we move the shift from a lot of tiered offers, catalog driven to more digital mediums, the promotional cadence will change, more of a shift than huge swings as we impacted in the third quarter of next year. We don't have a lot of those bad guys looming ahead of us.

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

Okay, that's helpful too. And then cardholder growth, as mentioned in earlier question, accelerated in recent quarters, these smaller stores, are they generating new cardholder application to the similar rate to those of the larger stores?

Ralph W. Castner

I would tell you on a per square foot basis, yes. Obviously in aggregate, the stores do less. It is not as much in total, but we're very pleased with what those stores are generating.

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

It commensurate with the traffic then I guess.

Ralph W. Castner

Yes, sure. The metric we use internally, Jim. We call it the apps-to-trans ratio, which means that if you check out a 1,000 -- if you check out 1,000 people at the cash register that buy the merchandise, you have to get somewhere between 10 and 20 new credit card accounts.

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

That makes sense and then...

Ralph W. Castner

So those stores, those smaller stores would have a similar apps-to-trans ratio as a bigger store.

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

Makes sense. Okay. And then, you mentioned, your Men's business, how is your Women's and Children's business tracking given some of your new merchandising efforts? Has that been growing or falling as a percent of the mix in your...

Thomas L. Millner

When we look back over the full year '11, women's and children's was a bright spot in the business. And we have high hopes for that business. We've really revamped the entire category and have high hopes for that business. Jim, I want to make one other comment about merchandise margins. I think it was particularly encouraging to us that in the fourth quarter to hit 36.4, even with no winter weather and the great margins that we derived from Pac Boots and outerwear and men's heavy camo together with this ongoing acceleration of gun demand, I just think it's a real testament to all of those dozens of blocking and tackling initiatives in the business. And it just gives me confidence that if we get any break in the weather, it's -- we can see significantly higher margins. But we did it without any breaks.

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

The fourth quarter, I think, was a terrific quarter, certainly everyone on the Cabela's team deserves congratulations for that.

Thomas L. Millner

Yes, we were very pleased.

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

Pretty impressive, Tommy. Big picture question. In general I know the answer to this, directionally but I'm hoping for more commentary from you. From a competitive standpoint, what are you seeing -- is there anyone out there who's matching you with respect to the expansion that you're doing?

Thomas L. Millner

No. No one. And in fact, Jim, in the fourth quarter, we watched between Black Friday and the end of the year and even into early January, a number of retailers in our space who clearly had inventory problems in outerwear and Pac Boots that were just giving merchandise away. And because of the efforts of our merchants to really stay on top of inventories, we didn't have to do that and I think those kinds of panic at the last second moves that we saw our brand damaging. And I'm really glad we didn't have to do that. We stayed the course and the business came in, and we didn't send confusing messages to our consumers.

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

I'll leave you with this last question. How is it that you did that in terms of managing the inventory flows. Is it staged deliveries. How did you get the vendors to cooperate to that extent and -- any color on that will be helpful.

Thomas L. Millner

Well, over the last 3 years, we've worked diligently as we've said on every call and every analyst meeting we've been at on vendor collaboration. And our belief is you start building those relationships and sharing data, daily sales data with your vendors for their category over a long period of time, so that you get pretty good at it and you watch trends in real-time together with having relationships with our vendors from the top of the house with me to their CEO, and then Brian to their head of merchandising and all the way down through our buyers to their salespeople. So that when we need to make adjustments in the business, we're not talking to total strangers that we don't know that we're asking them to help us with inventory issues. And it's really been the culmination of 3 years of work in vendor collaboration that put us in a position to have those kinds of discussions and our vendors helped us because I -- they were on top of the data. They know we're growing. And so it -- we just teed it up really nicely.

Operator

And we'll now take a question from Jim Chartier with Monness, Crespi, Hardt.

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

First question for Ralph. Where in the segment profitability did the integration charges fall?

Ralph W. Castner

They are in the other segment, which to an earlier question is one of the reasons they're up.

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

In the corporate overhead line?

Ralph W. Castner

Yes.

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

Okay. And then Ralph, on the last call I think you talked about high single-digit revenue growth for 2012. Is that still what we should be thinking about?

Ralph W. Castner

Yes.

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

And finally, sourcing costs, what do see for 2012 in the first half and second half of the year?

Ralph W. Castner

Stable.

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

Then would you expect any benefit at any point in the future from sourcing?

Thomas L. Millner

You know, maybe a little, but I don't think that's going to be a significant driver for us. Only because of the lead times that we work with especially on Cabela's branded merchandise. We could see some relief but not meaningful.

Operator

And we will take our last question from Aaron Goldstein with JPMorgan.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

First is a housekeeping. What was the provision adjustment for the quarter?

Ralph W. Castner

It was about $2 million.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay.

Thomas L. Millner

And that compares to $4.2 million in the prior quarter -- prior-year quarter.

Ralph W. Castner

And sort of as we've communicated, we expect that as we move forward to be a less meaningful contributor to income as we move forward, as it was in the fourth quarter.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

And then just looking at the accounting change, are you going to restate -- is it going to be similar to what you did in 2005, 2006 or how is it going to be any different? And then I guess, can you maybe talk about why you changed in the first place and why are changing it back?

Ralph W. Castner

Well first of all, the change you're -- I assume you're talking about the bank and the company relationship?

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Yes, correct.

Ralph W. Castner

The -- first of all, no. There will not be a restatement because the total economics under either methodology would have arrived to the same number. We're basically just converting it to a fixed -- converting the economics to a fixed percentage of charge volume so that going forward, if the -- there's volatility in earnings, they're going to be in the bank where they belong. But the total amount of economics transferred in 2011 were the same under either methodology.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay. And then just looking at the Direct business, I mean, I -- what -- I guess it looks like it's been down for a couple of years now and you've been talking about how you're trying to fix it, but continues to decline and part left to the store growth, but I guess what gives you confidence that you can turn that around, if you have not been successful so far?

Thomas L. Millner

Well I think the one thing that gives us the most confidence is that we are still the dominant Internet merchant in the outdoor space. So we are working from a very solid base, and that gives us comfort that we've got scale and with the right presentation and the right promotions to our customers, we think we can grow the business even with the headwinds of new stores.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay. And then just clarify on the mostly comment in your press release on that $7.8 million. What is the other part of that?

Ralph W. Castner

Well, first of all, let's -- first of all I assume you're talking about the impairment [indiscernible] charge.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

The impairment, yes.

Ralph W. Castner

First of all, let's -- there -- $6.5 million of it was related to the write-off of economic development bonds. So let me just talk a second about how that works because the accounting is a little bit unusual. When we originally built a store for example, let's say, the store cost $50 million, and we recorded $30 million of fixed assets and $20 million of economic development bonds. When we went in and -- and by the way, the economic development bonds are the future -- the present value of future sales taxes from our store and development around our store. We went in at the end of this year and looked at the amount of development that we assumed would happen around our stores. And in a few cases, it was just significantly less than we've modeled. So we wrote down in total, $24.3 million of the value of the bonds. So what you'd -- the accounting then is, as you go back to when the store was opened and assume that you'd increase fixed assets by $24 million and decrease the bond value by $24 million, and then ran through earnings what the depreciation would have been from the date the store opened to the end of that fiscal year, and that number was $6.5 million. In addition to that, there was about $900,000 of just write-downs we have of the land held for sale and then a handful of severance and some other miscellaneous things.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay. Great. And then maybe, are you seeing anything from Amazon as under -- in this part of your category that -- on the competition front that you're worried about?

Thomas L. Millner

I saw all the press reports that came out that they were going to get in the sporting goods space. They've been in our categories for years. So you can buy fishing rods and reels and cleaning kits for your guns and all kinds of stuff. So it seemed to me more of a team sports play than an outdoor play and so, no, we don't -- we haven't seen anything different. They've been playing in our space for a while.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay, then just housekeeping what percent of Direct is kind of Internet versus catalog still?

Ralph W. Castner

We haven't broken it out separately but well more than half of it is Internet. I mean...

Operator

And at this time, I would like to turn the call back over to Mr. Gay for any additional or closing remarks.

Chris Gay

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

Operator

Thank you, sir. That does conclude today's teleconference. We do thank you all for your participation.

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