Cabela's (CAB) Thomas L. Millner on Q4 2015 Results - Earnings Call Transcript

| About: Cabela's Incorporated (CAB)

Cabela's, Inc. (NYSE:CAB)

Q4 2015 Earnings Call

February 18, 2016 11:00 am ET

Executives

Andrew Weingardt - Investor Relations Manager

Thomas L. Millner - Chief Executive Officer & Director

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Scott K. Williams - President

Analysts

Seth I. Sigman - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Matt Nemer - Wells Fargo Securities LLC

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

N. Richard Nelson - Stephens, Inc.

Peter Jacob Keith - Piper Jaffray & Co (Broker)

David G. Magee - SunTrust Robinson Humphrey, Inc.

Stephen Vartan Tanal - Goldman Sachs & Co.

Patrick G. McKeever - MKM Partners LLC

Lee John Giordano - Sterne Agee CRT

Andrew S. Burns - D.A. Davidson & Co.

Matthew J. McClintock - Barclays Capital, Inc.

Mark E. Smith - Feltl & Co.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's, Incorporated Fourth Quarter and Full Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded.

I will now turn the conference over to Andrew Weingardt, Investor Relations Manager. Please go ahead, sir.

Andrew Weingardt - Investor Relations Manager

Thank you. 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; Ralph Castner, Cabela's Executive Vice President and Chief Financial Officer; and Scott Williams, Cabela's President.

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 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 - Chief Executive Officer & Director

Thank you, Andy, and good morning, everyone. I would like to begin by reminding everyone that we issued a press release in December announcing that our board had initiated a process to explore strategic alternatives. That process has continued and is ongoing. I hope you can appreciate that we will have no further comments related to the review unless further disclosure is appropriate or required. The purpose of today's call is to discuss our fourth quarter performance and we ask that you keep your questions focused on the results. I thank you all in advance for your understanding.

Ralph and I are pleased to have Scott Williams join us on the call today. As you know, Scott was promoted to President last week. This move brings alignment under one leader for all of our customer-facing strategies. Scott has made a tremendous contribution to Cabela's over the past five years and provides insight and expertise that will drive many future successes.

Moving on to results, we were pleased with our fourth quarter performance. Our omni-channel strategy combined with our aggressive expense reduction strategies allowed us to exceed external revenue and profit objectives. As previously mentioned, during the third quarter, we rolled out our new Vision 2020 strategy, focused on being the world's best omni-channel retailer by creating intense loyalty for our outdoor brand through legendary products and customer service delivered by our highly engaged outfitters. We see the potential to continue expanding market share in the outdoor market while growing organically through customer loyalty and by providing rich customer experiences in every channel.

As a part of our new vision, we deepened our focus in two strategic areas: focus on the core and our foremost advantage. Focus on the core will concentrate investment and resources on hunting, fishing, camping, and recreational shooting. These categories are areas where customers most identify with Cabela's and where customers demand the most from us in product selection, availability, and expertise.

Foremost advantage is based on our heritage as the world's foremost outfitter. Cabela's foremost advantage aligns business strategies to a framework developed with 50-plus years of deep customer insights. This framework will drive revenue and shareholder returns by focusing on our customers and is defined by four areas: experience, expertise, excellent value, and exceptional products.

For the quarter, this deepened focus helped to overcome a challenging environment and drove merchandise revenue growth. Throughout the quarter, we saw softness in our apparel categories, as our fall and winter assortments were met with unseasonably warm weather across most of our major markets. However, we were particularly pleased with the improvement we saw in the performance of these categories when winter weather impacted most of the nation early in the first quarter of 2016.

Our new format stores continue to outperform our legacy stores in both sales and profit per square foot and we're able to post better comparable store sales than our legacy stores in the fourth quarter. For the quarter, consolidated comparable store sales were down 4.9% and U.S. comparable store sales were down 3.5% both on a 14-week versus 14-week basis. Positive comparable store sales in our firearms, shooting, ammunition, and home and gifts categories were more than offset by softness in other categories including apparel, archery, and general outdoors.

For the quarter, direct revenue increased 0.5% including the 53rd week and was down 4.3% excluding the 53rd week. Fourth quarter direct revenue growth in our home and gifts, powersports, shooting, camping, and archery categories more than offset softness in apparel and hunting equipment categories.

In the fourth quarter, while still in the relatively early stages of our expense management initiatives, we drove SD&A expense leverage of 130 basis points. This leverage was attributable to the reduction of cost throughout the organization. As previously discussed, we have identified cost savings opportunities that include IT process improvement, indirect procurement, retail labor optimization, merchandise sourcing, retail support functions, supply chain enhancements, and new store building cost reductions, some of which we have already actioned.

The results of these initiatives are expected to drive meaningful improvement across the organization, and we continue to expect SD&A leverage as a percent of total revenue over the next three years by up to 150 basis points.

As we've previously expressed, we've been disappointed with the revenue and profit performance of the stores that we opened in 2015. As a result, earlier in 2015, we organized teams to evaluate new ways to reduce both our store operating cost and capital expenditures. During the fourth quarter, we began to see the results of our operating cost initiatives and have reviewed progress towards significant future cost savings in stores to be built later this year and in 2017.

Therefore, we believe that opening new stores will provide our shareholders with an attractive return on capital even with continued modest revenue performance. Just as we did when we rolled out our next generation stores, we will test our store rollout strategy and implement learnings in future stores as we proceed. As such, we expect to build eight stores in 2016 and six stores in 2017. We have identified and announced all of the 2016 openings, and we have identified three of the six stores to be opened in 2017. We will be working over the next two quarters to finalize the remaining locations for 2017.

Additionally, we remain committed to expanding our retail footprint in North America to 200 stores to 225 stores. With our continued expansion into new markets, it is important to note that during the quarter, we saw a little impact on our comp stores from either cannibalization or competitive incursion.

Now let's take a look at Cabela's CLUB, which had another exceptional quarter and continue to build our base of extremely loyal customers. For the quarter, the average number of active accounts increased 6.6%, and the average balance of credit card loans increased by 14.4% to $4.8 billion.

In conjunction with the implementation of our new vision during the third quarter, we have identified six strategic areas to support our new initiatives and drive future growth. These six focus areas are: improving top-line sales, increasing profitability, retail store expansion and innovation, focus on putting the customers' needs ahead of all else, diversity within our organization, and the continued growth of our world-class loyalty program at Cabela's CLUB. The development and implementation of this vision is a commitment to the core of our business and to the culture established by our founders: Dick, Mary and Jim Cabela. We are committed to connecting our customers with the core of their outdoor pursuits while providing unforgettable customer experiences.

Now turning to earnings guidance. We've been highly encouraged by the results realized from both our revenue and expense initiatives implemented in 2015. As a result, for full year 2016, we expect a high single-digit growth rate in revenue and a high single-digit or low double-digit growth rate in earnings per diluted share as compared to full year 2015 adjusted earnings per diluted share of $2.88.

Now, I'll turn the call over to Ralph Castner to review in more detail, among other things, performance of our Cabela's CLUB.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Thanks, Tommy. For the quarter, we were pleased with our outperformance in revenue, expense leverage, and profit. Despite a decrease in merchandise gross margin, we're able to grow earnings per diluted share through merchandise sales growth, strong performance from Cabela's CLUB, and expense leverage.

During the quarter, to no surprise, we experienced headwinds from unseasonable weather, which affected our soft goods categories and strength in firearms and ammunition. As a result, we experienced pressure on our margin rate. With this pressure top of mind, we focused on gross profit dollar growth, improving our inventory position, and leveraging our expenses. Our continued focus on expense management led to operating expense leverage of 130 basis points for the quarter. We're confident that our continued focus on expense management will provide sustainable benefit to profit contributions over the next several years.

For the quarter, Financial Services revenue increased 15.7% to $131.1 million. The increase in Financial Services revenue was primarily due to a 21.3% increase in interest and fee income and a 7.8% increase in interchange income. Average active credit card accounts grew by 6.6% in the quarter to over 2 million.

For the quarter, average credit card loans increased by 14.4% to approximately $4.8 billion. And at the end of the year, total loans exceeded $5 billion for the first time in history. Net charge-offs as a percentage of average credit card loans increased 2 basis points from the year-ago quarter and were 1.76% for the quarter.

During the quarter, we saw a shift in the trends in delinquencies. Greater than 30-day delinquencies were 0.82% as compared to 0.68% a year ago, greater than 60-day delinquencies were 0.51% as compared to 0.41% a year ago, and greater than 90-day delinquencies were 0.26% as compared to 0.22% a year ago.

During the quarter, we increased our reserve for loan losses by almost $10 million as compared to an increase of $3.9 million in the same quarter a year ago as a result of growth in the portfolio and an increase in delinquencies. For the full year 2015, the reserve for loan loss grew almost $20 million as compared to $3.5 million for the full year of 2014. During the quarter, we begin the implementation of several balance sheet optimization initiatives aimed at reducing working capital and monetizing unproductive assets.

At year end 2015, days inventory on hand decreased by approximately four days as compared to the prior year. Inventory increased by 7.8% or $59 million year-over-year to $819.3 million. We see improvement in inventory levels as a meaningful driver to balance sheet optimization going forward.

Before turning the call back over to Tommy, let me remind you of a few details pertaining to our 2015 results and our 2016 expectations.

Due to the slowdown in store growth, we expect full year 2016 capital expenditures to be between $200 million and $250 million. As a reminder, we executed a private placement transaction in August of 2015. We drew $250 million in August and $300 million in December with maturities of $100 million in five years, $250 million in seven years, and $200 million in 10 years. Interest will be paid semiannually at rates of 3.23% for the five-year maturities, between 3.70% and 3.82% for the seven-year maturities, and between 4.01% and 4.11% for the 10-year maturities. In addition to use for general corporate purposes, we also expect to use these notes in the repayment of unsecured notes for $215 million at 5.99% interest due on February 27, 2016. We expect interest expense in the first quarter to be a headwind due to the overlap in the existing private placement.

Additionally, for the full year 2016, we expect to have incremental incentive compensation expense of $20 million to $25 million compared to full year 2015. During the quarter, due to a change in our calculation and increased sales volume, our reserve for returned merchandise negatively impacted merchandise revenue by $12 million and merchandise gross profit by $5 million, neither of which were included in our comparable store sales calculation. We received a settlement during the quarter in the amount of $4 million. This settlement offset related operating expenses incurred earlier in 2015.

During the quarter, we completed a transaction related to our travel business. We recognized a gain on this transaction of approximately $1.5 million.

For the full year 2015, we continued to report direct and retail as two different segments. As we move to an omni-channel model, the lines between these segments have blurred in both our eyes and our customers' eyes. As such, it is very difficult to differentiate between these two channels from a revenue perspective and almost impossible to differentiate the two channels from a profit perspective. In the future, we may no longer report these two segments – these two channels as separate segments.

Due to the 53rd week in 2015, we'll report first quarter 2016 comparable store sales on a reported basis as well as on a shifted basis to account for the extra week in the fourth quarter of 2015. The shift in the calculation will provide a better view of how our comp stores perform by aligning the weeks of operation in the current year to the most comparable weeks in the prior year.

Through the end of the fourth quarter, we repurchased approximately 2 million shares of our 74.2 million shares as part of our current share repurchase plan. As Tommy mentioned, we expect high single-digit growth rate from revenue and a high single-digit or low double-digit growth rate in earnings per diluted share for full year 2016 as compared to full year 2015 adjusted earnings per diluted share of $2.88.

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

Thomas L. Millner - Chief Executive Officer & Director

Thanks, Ralph. We were pleased to see our new vision begin to drive meaningful improvement across the business and we will continue to implement initiatives across the organization that will generate improved performance in both revenues and profitability.

Before turning it over for questions, I want to sincerely thank our outfitters for their continued commitment and passion in cherishing and delighting our customers every day. Our successes throughout the implementation of our new vision and our strategies are evident of your hard work and dedication, and I thank each and every one of you for your efforts.

With that, operator, let's open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. We'll go first to Seth Sigman, Credit Suisse.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker)

Thanks. Good morning, guys.

Thomas L. Millner - Chief Executive Officer & Director

Good morning, Seth.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker)

I was wondering if you could elaborate on the cadence of the quarter and then also the comment about Q1 that suggested an improvement. Does that mean comps are positive, how should we be thinking about that?

Thomas L. Millner - Chief Executive Officer & Director

Well, the cadence during the quarter, the first two months of the quarter were tough, obviously weather driven, and we saw a real nice improvement in December. And those December trends have continued into the first quarter. We've seen acceleration in comp performance and gross profit dollar performance. Rate is better and we continue to see really favorable improvement in operating expenses.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker)

Okay. And clearly the organization has been hard at work. That improvement also coincides with what seems to be improvements across the broader industry, coincides with weather, and also the NICS improving. Is there a way to isolate how much of that improvement is self-driven, some of the assortment and other changes you've made versus broader industry improvements?

Thomas L. Millner - Chief Executive Officer & Director

Well, I think you're getting to the gun and ammo question. We didn't – we're not going to break out comps ex-gun and ammo as we did previously, because it really wasn't that impactful in the quarter. It's an improvement, but it's nowhere near the scale that we saw at the end of 2012. So, I hope that answers the question.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker)

Okay. Yeah. Let me just follow-up with a gross margin question, going back to one of your comments. Merchandise margin I think was down 190 basis points. Can you maybe talk about how much of that was mix versus discounting? And then the second piece of that, as you just look at merchandise margins for the year at roughly 34%, it's below 2009, it's down 250 basis points from prior peak levels. How do you think about the recovery opportunity and some of the structural and competitive changes that may limit that recovery? Thanks.

Scott K. Williams - President

Yeah. Seth, this is Scott Williams, so good to be on the call. We broke down the gross margin shortfall, roughly equally broke out between what was competitive promotional environment and what was merchandise mix. And so roughly broke down, equally between the two.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker)

Okay. And then just...

Thomas L. Millner - Chief Executive Officer & Director

And as we look forward, just a thought about the fourth quarter. Given the weather and given what we had to do to clear goods in apparel and footwear, we just got – we got really aggressive, and we were driving more to gross profit dollars in the quarter. And I would tell you, we came very, very close to our internal plan in gross profit dollars and had a lot of success in clearing inventory. Obviously, going forward, we are working on dozens of strategies in the whole supply chain of merchandising that works for Scott now to get margin rate performance better, but we're also focusing really heavily on driving gross profit dollars, and there is a balance there. But, clearly we get it and we're doing everything that we can in what is the challenging environment to get rate closer to flat or up, but we're not there yet.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker)

Okay. And then just what's embedded in the guidance, is there an assumption that merch margins will improve as you look to 2016 and what's reflected in that guidance you gave?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

We're not looking for meaningful improvement in gross margin in 2016.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker)

Okay. Got it. Thanks, guys.

Operator

We'll go next to Matt Nemer with Wells Fargo Securities.

Matt Nemer - Wells Fargo Securities LLC

Good morning and congrats to Scott on his recent promotion.

Scott K. Williams - President

Thanks, Matt.

Matt Nemer - Wells Fargo Securities LLC

I've got a couple of questions. The first one I wanted to start with on the new stores. Tommy, you mentioned that there's been a lot of analysis of the 2015 class and that you've identified some changes for the 2016 and 2017 classes. Just wondering if you can talk about what some of the cost savings or CapEx savings opportunities are?

Thomas L. Millner - Chief Executive Officer & Director

Yeah. Matt, since Scott drove these initiatives, I'm going to let him weigh in.

Scott K. Williams - President

Matt, we're really excited. When we look at the SG&A leverage and what we've driven in to kind of the DNA of the culture, we're excited about that. But we're also excited about what we found in both land cost, cost of construction to build new stores and it's really broad based. In some cases, we think that we can live with a little bit smaller parking lots and that gives us some savings in CapEx and land cost. We've been able to look at reengineering some materials that are non-customer facing and that goes to our commentary that we think that we can have positive, attractive returns on these new stores even at today's levels. We're also looking at how to align with our 2020 vision on the hunt, camp, fish, shoot to drive revenue in those key categories that Cabela's has ownership in.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

To that point, one of the studies that Scott's team did was to do an analysis of the utilization of the parking lots and we've actually found in some of the old stores we may have more parking than we need and we can go sell some of those out lots, which as an example, I know in the press release we've referred to unproductive assets, that'd be an example of some of the unproductive assets that we're thinking about converting to cash. Over the next 12 months to 24 months as we look to the optimal use of those – of that real estate and there's other real estate that we've got that we think that we can – as we consolidate corporate offices and some of these other things, we think there's some assets that are outside of working capital we can convert to cash.

Thomas L. Millner - Chief Executive Officer & Director

Matt, it's kind of interesting looking back over time. If you'll recall, the Outpost stores got off to a very rough start and we went back and talk to our customers, they told us focus on the core and give us a little better mix of branded merchandise in apparel. We did that and the Outpost stores are the best performing of our new class of stores in comp performance and they are doing really, really well in sales per square foot versus the legacy stores now, and a lot of those learnings from merchandising, Scott took into the future vision stores of the 50,000 and 70,000 footers. And we're pretty excited about the opportunity to thoughtfully restart growth again.

Scott K. Williams - President

And Matt, finally...

Matt Nemer - Wells Fargo Securities LLC

Okay.

Scott K. Williams - President

One final comment. We're looking at some internal measures that we don't publish. But the percentage of our sales per square foot, that is sellable square footage. So, the elimination of larger back rooms based on efficient use of inventory, what we're able to do to support with IT and other things to try to maximize the selling square footage in each of our new stores.

Matt Nemer - Wells Fargo Securities LLC

Great. That's super helpful. And then, Ralph, you partially answered my second question on the sale of unproductive assets. Is there – do you have a target range in mind for what those assets could be worth in sum?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Yeah. As we think about it, it's probably, it's something $50 million or maybe greater than that when you look at the excess real estate we've got and that will take some amount of time to liquidate. But, as I think about unproductive inventory, it's – or unproductive assets, it's really working capital, and that's by far the bigger opportunity, and then some of these unproductive assets that Scott and I talked about.

Matt Nemer - Wells Fargo Securities LLC

Okay. Great. And then just lastly, the January charge-offs up-ticked a little bit versus the normal trend from December to January. Just wondering if you think that's sort of a further escalation in what we saw in the fourth quarter and do you have any kind of early sense for what might need to happen in the loan loss reserve?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Well, I'll tell you this. When we think about our guidance for 2016, we've anticipated charge-offs increasing slightly over time. And when we're thinking – I mean, one of the things people kindly get lost on is, we increased our – in our results for 2015, we increased our allowance for loan losses by almost $20 million. And as we look forward to 2016, we're thinking of another increase, maybe close to that magnitude of an increase as we look forward to next year.

So, I think, we're certainly not alarmed by it, but we think we've reached the trough of charge-offs and we expect them to go up. I don't know, as I've told other people forever, the historic range of charge-offs at our bank has been somewhere between 2% and 2.25% and we think over a number of years we're going to return to that range.

Matt Nemer - Wells Fargo Securities LLC

Makes sense. Okay. Very helpful. Thanks so much.

Operator

And we'll go next to Jim Duffy with Stifel.

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

Thanks. Good morning, guys. Couple of questions for you. First, as you look to the analysis of stores in the class of 2015, were there any characteristics of the site locations of the stores that you were most disappointed with that shared commonality?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

As we look through it, I mean, there is no question there were some greater sense of stores in the Southeast and maybe it will take us a little longer to get our brand penetration there. And we've talked earlier, we look to drive times. Drive times have been a little less and I think what we're doing is just trying to adjust the organization, the cost of the box, and the expenses in the box for what maybe a lower revenue number than what we enjoyed on some of our earlier next generation stores.

Thomas L. Millner - Chief Executive Officer & Director

And, Jim, just to put an exclamation point on Ralph's comment, as relates to the 2015 class of stores, we're not just sitting back and saying, well, they weren't as good as we thought they were going to be. We have a number of initiatives tied to our deeper focus on the core, which is the hunter, the angler, the camper and the recreational shooter in those stores and we're anxious to see the results of those as we do our spring rolls and adjust the layouts in those stores. To my comment to Matt Nemer, those kind of adjustments had a meaningful impact in our Outpost stores and we'll see what happens in this class of stores.

Scott K. Williams - President

And what you can expect is from those Outpost stores, which are the class of stores that have gone from underperforming to marked improvement, we take those tests and roll them out not only to 2015 stores, but where possible integrate those into the building process for 2016, 2017. Also, as we look at the 2016 class of stores, we've announced these, but you'll see us going into some markets that we haven't been in before. It will be our first store in the Greater Houston area. We'll have a second store in North Salt Lake. We will have a store in Richmond, Virginia. We think there is some really core markets that we're going into and we're excited about this class of stores.

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

Okay. Great. And then, Scott, can you speak to some of the areas of the merchandising strategy that you should make – you think should make positive contributions to comp in 2016? What are some of the areas we should watch for?

Scott K. Williams - President

Well, as a part of our Vision 2020, we've announced to focus on hunt, fish, camp and shooting sports, that's recreational shooting. We were really pleased with our camp Cabela's initiative in this last year, which showed a signal for our organization to really rally around the category, and throughout the year, camping outperformed the overall complex and its comp performance and growth rates. We've identified some excitement around recreational shooting, which is a real growth area within the industry and we think it's an area that we have a right to own. Our customers have told us they expect us to have strong assortments there and strong growth there.

Additionally, we have a number of tests underway some of which we don't disclose for competitive reasons, but there is one I would talk about in apparel where we've been looking for greater performance in apparel. And we found that our customers have told us they want a nice balance between Cabela's branded product and national brand. So we've rolled out a project, a test that we internally called monster shops. It features some of our best soft goods national brands, think of Under Armour, The North Face, Columbia, Carhartt. It's shown some real nice improvements and as we reap the benefits of these tests, you can expect those to be layered into our future stores.

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

Great. Thanks for that. And maybe the last question for Ralph. Ralph, you guys have been tightening the belt for some time now. Can you may be shed some light on some of the key areas where you're looking for further expense savings?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Yeah. And Scott should weigh in on this too. But I would tell you, Scott's really led an initiative across the entire organization to reduce expenses and it's everything from – and then each member of senior team has got a particular aspect of that we're leading. For example, I'm leading indirect procurement where we're looking at all of the people that we buy stuff for, that's not for resale, trying to drive down the cost of that, but it includes store level labor, it includes IT. There's several avenues that we're reaching. I would tell you we're just starting. As we dig in more, we find more and more. Scott, do you want to add to that?

Scott K. Williams - President

Well, I think it's encouraging is that it is so broad based, and so as we talked about in the script, it goes from retail labor optimization, IT processes, global sourcing, end-to-end product flow, supply chain enhancements. So, as we go forward, we're not just finding that in one place and we're finding a lot in the leverage and then taking those practices to our new store models as well. So, we're really encouraged that the organization has embraced this and has found some significant results.

Thomas L. Millner - Chief Executive Officer & Director

Jim, what I am particularly encouraged about is the cost savings that we've gotten in its early stages. These are permanent cost take outs in the organization that once out we're just not going to let them come back in and we're finding that as we focus tighter, we distract the organization less and I think everyone in the company is responding favorably to that.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Yeah. And then similarly, we're also leading an initiative on the balance sheet to reduce working capital, using a lot of the same processes and I think you saw some of the early signs of that in the quarter also.

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

Indeed. Thank you, guys.

Thomas L. Millner - Chief Executive Officer & Director

Thanks.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Thanks.

Operator

We'll go next to Rick Nelson with Stephens.

N. Richard Nelson - Stephens, Inc.

Thanks and good morning. I'd add my congrats to Scott as well. I'd like to ask about the inventory opportunity. It looks like you made some progress for sure in the quarter and is there a goal that you have in mind in terms of inventory turn or some other metric that we can think about the continued opportunity?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Well, we do have a goal as it relates to inventory turns. I'm not sure we're ready to share that publicly, but we would expect turn improvement over the next two years.

N. Richard Nelson - Stephens, Inc.

Got you. Thanks for that. Also, I'd like to – it sounds like these national brand shops are showing some success here. I think you had talked about a 25-store test. And this morning, I think you indicated that was going to be expanded. Is that going to the entire chain?

Scott K. Williams - President

We are in the low 20s on that test. So you're correct in the number of stores. And then we will sequentially roll that out. We're going to be adding like 8 to 10 stores as we go forward, and we're doing in as a part of several combined initiatives. So, when we go in and do what I'll call a mini remodel, we will reset several different departments and that will be consistent with that.

N. Richard Nelson - Stephens, Inc.

Got you. And what sort of lift out of it do you get with these shops versus the store base that doesn't have them?

Scott K. Williams - President

Well, we haven't disclosed the results of that. What I would tell you is that we're seeing nice lifts in subcategories. And so what I mean by that, if you go into men's apparel or women's apparel and get a nice lift, it will balance across that overall store as a small amount. But these categories will outperform.

N. Richard Nelson - Stephens, Inc.

Okay. Got you. Finally, the NICS checks have really accelerated here in December, in January again. How you are thinking about that type of gun/ammo business for the year? And it's an election year, how you plan the business around that?

Thomas L. Millner - Chief Executive Officer & Director

Rick, we were just at the SHOT Show in Las Vegas about three weeks ago and I think the acceleration of gun and ammo sales started in early December, and the tone at the SHOT Show is, it was kind of to our approach, things are better, but I think the memory of the falloff once the boom ended in 2013 is still very fresh in both big box retailers, independent dealers, and wholesale distributors' minds. And our manufacturing partners told us that people were being constrained in their enthusiasm over placing huge orders on a bet that things were going to get really busy later this year. And I think we've taken the same position. Our vendors have been really supportive. I think it's clearly a tailwind to some degree this year, but not distorted like it was in the last run-up three years ago. We'll monitor this as we get through the year. If I think back to 2012, we didn't really start making inventory bets until the July-August timeframe. And I think we're on the same kind of a trajectory as we lead up to the election. We're not getting overly exuberant right now, because those memories from 2013 and 2014 are still clear in our heads.

N. Richard Nelson - Stephens, Inc.

Fair enough. Thanks, Tommy and good luck. Thanks.

Operator

We'll go next to Peter Keith with Piper Jaffray.

Peter Jacob Keith - Piper Jaffray & Co (Broker)

Hi. Thanks. Good morning, everyone. Just a commentary on your new store growth and the 200 to 225 store target, you made some interesting comments today on the Outpost stores. Is that a concept now that we should expect to be reinvigorated and perhaps utilized more in the new store growth figures?

Thomas L. Millner - Chief Executive Officer & Director

No, we're going to – for the success of the Outpost stores, one of the challenges is in only 40,000 square feet, you don't have a lot of room for the operators to manage seasonal changes. So, Scott and his team have developed a 50,000 foot box that gives us a little more flexibility given the seasonal nature of the business and that's what you should expect to see. Scott, you want to add anything?

Scott K. Williams - President

Yeah. I would just clarify that for our 2016 class of stores, they are largely 70,000 square feet. You will see us optimize to two main models, 50,000 square feet and 70,000 square feet. They will take the learnings from Outpost and with the changes we've implemented in the redesign, we not only have the Outpost benefit of what we've been able to do with focus on hunt, camp, fish, shoot, we also are trying to optimize the percentage of selling square feet and that would allow the 50,000 square feet and 70,000 square feet to allow us to get our core inventory in there. So we're excited about keeping the learnings and bringing them together from our next-gen success and Outpost success around 50,000 square feet and 70,000 square feet.

Peter Jacob Keith - Piper Jaffray & Co (Broker)

Okay. That's helpful and thank you. And then maybe just a quick balance sheet question for Ralph. Certainly, the improvement in inventory is apparent, but also payable stepped down quite a bit such that your total cash conversion cycle moved down year-on-year. Was there some anomaly with payables in the fourth quarter, or anything that we could think about for the coming year to improve that working capital more?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Well, we're absolutely also focused on extending payables and have some initiatives underway. I will tell you quarter-to-quarter, when you look at the consolidated results, the bank creates a noise in there with respect to when their month end is and when some of their payments are due to their big contractors. We are equally as focused on really three areas, payables, gift instruments, and points. We think that's an opportunity for a source of cash and inventory and we're focused on all three of them.

Peter Jacob Keith - Piper Jaffray & Co (Broker)

Okay. Thanks a lot, guys. Good luck.

Operator

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

David G. Magee - SunTrust Robinson Humphrey, Inc.

Yeah. Hi. Good morning, everybody. Couple of questions. One is, Tommy, when you mentioned earlier about the competition, you weren't feeling any effects of competition. Could you talk a little bit about what you're seeing more at the store level when you do have head-to-head competition coming in, are your stores performing the way you would hope them to?

Thomas L. Millner - Chief Executive Officer & Director

Yes. And, David, during the quarter we commented on the call that we saw virtually little to no impact from either our own cannibalization or competitive incursion. And I suspect the competitive incursion is a function of other people slowing down store growth in 2015, following the difficult industry challenges in 2013 and 2014. So that we would have expected. But the impact of our own cannibalization was virtually non-existent, which is a positive.

David G. Magee - SunTrust Robinson Humphrey, Inc.

And so, I guess, I can infer that the stores are performing okay against new competition when they do have new competition. So, maybe they're slowing down in terms of the rate but...?

Thomas L. Millner - Chief Executive Officer & Director

Yes, very much. So, in fact, one of our competitors references that in their earnings calls.

David G. Magee - SunTrust Robinson Humphrey, Inc.

Thank you for that. And secondly, last quarter you talked about drive times being contracting a bit and today you mentioned that was a dynamic in the Southeast. Are you still seeing that, do you think on a broader basis and is that something that maybe at least a slight headwind for 2016?

Scott K. Williams - President

Yeah. This is Scott. We study the drive times pretty closely and we use that very heavily and when we approve new stores. I would describe the drive times as a slight contraction, thinking in the 5-minute to 10-minute type of range, not a drastic contraction. I would tell you we look at it by regionality and we watched that closely in the Southeast looking at how those stores performed and it maybe a little bit of a characteristic of the Southeast but it also can be a characteristic of the density of an urban area as well for where we would draw from because of the drive times and the traffic in those areas.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Yeah. To add on to that I mean, for example, one of our – and geography has a lot to do with this. One of our narrowest drive time stores in the Denver market, which interestingly enough is one of our best stores. So, and that's just because everybody in Denver lives in the greater – or everybody in Colorado lives in the Greater Denver Area and it's just very urban but the store is doing very well.

David G. Magee - SunTrust Robinson Humphrey, Inc.

Right. Scott and Ralph, thank you. Good luck.

Operator

We'll go next to Stephen Tanal with Goldman Sachs.

Stephen Vartan Tanal - Goldman Sachs & Co.

Guys, thanks for taking the question, and congrats to you, Scott.

Scott K. Williams - President

Thank you.

Stephen Vartan Tanal - Goldman Sachs & Co.

Just a start. Could you talk about ticket versus transactions in the quarter. How each one of those did?

Thomas L. Millner - Chief Executive Officer & Director

Yeah, similar to prior trends, transactions were down and ticket was up.

Stephen Vartan Tanal - Goldman Sachs & Co.

Okay. So, SG&A I guess is the biggest surprise to me, obviously, really good result there. Can you talk anything specific, I mean, the way I'm looking at this you levered 130 bps despite comping down 5 bps and you just last quarter set a target of 75 bps to 150 bps over three years. So, you're kind of already there despite what I guess you'd even describe as maybe a choppy top line. So should we – should we think that there is upside to that or are you guys at a rate that we should be modeling going forward? Is there anything one-time-ish in nature in there, just some color would be helpful?

Thomas L. Millner - Chief Executive Officer & Director

Well, I'll let – Scott is going to add on to this. But first of all, I wouldn't declare because we got down a 130 bps in one quarter overall. I mean, we need to do for more than one quarter in a row. There probably was some help in the first quarter. I mean, we had the extra week, which was a very good week. It was obviously in a big time of the year. There was (47:56) big expense base to get some out. So I don't know that I would be thinking about. I would still stick to our kind of 150 bps three-year guidance. But, we're obviously very pleased with what we saw in the first quarter.

Scott K. Williams - President

And as we talked about our broad-based cost initiatives and we outlined a bunch of those like the indirect procurement and IT process improvement, we have a very extensive process to map those costs, make sure they actually get out of the business and we have dedicated teams working on this project. And I would say, as you think about the 150 bps over three years, think of that evenly spread 50 bps a year. We feel like we have pretty good line of sight to that based off our early efforts and we will, of course, keep chugging to improve upon that but we feel like we have very specific buckets identified in a matter of executing to get that out of the business.

Thomas L. Millner - Chief Executive Officer & Director

Steven, I would add that just from my chair what I'm most pleased about is to see the organizational buy-in on helping us eliminate unnecessary processes, stop doing things that we just do because we've always done them. And it gives me real hope that we are very early innings. And if we see visibility to the 150 basis points going up, we're obviously going to share it. And believe me, we are doing everything in our power to drive that number north of what we've guided to. And I think your takeaway should be, we are really encouraged by the velocity we've developed and we intend on doing everything we can do accelerate that velocity.

Stephen Vartan Tanal - Goldman Sachs & Co.

That's all, very helpful. And could you tell us how much SG&A was in the extra week, as we think about what's normalized here?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

No. Well, you get back into it but I don't have the SG&A broken out by week. We thought of the – and I actually saw in the note earlier today, a bigger number than this. We thought about the extra week as being about $0.08 of earnings per share. Obviously, there wouldn't be a difference in margin in the extra week, or not meaningfully. So you could probably back into some SG&A number for the extra week.

Stephen Vartan Tanal - Goldman Sachs & Co.

Got it. That's helpful.

Thomas L. Millner - Chief Executive Officer & Director

Stephen, one other thing. I think you've been very aware of our new store growth models. One of the reasons our organization is really getting behind this attacking of corporate overhead is that if we want to restart growth and build out to 225 stores, which our organization really wants to do, a key component of that is lowering corporate overhead so that that component of the model works. And in conjunction with that, you may not have been on the call earlier, there has been a Herculean effort to get the cost of the building, the size of the parking lots, the amount of selling footage in our new 50,000-foot and 70,000-foot stores correct. So these two-pronged approaches, the organization has rallied behind because we want to take the Cabela's experience across North America and this is the way to do it and make it work for the shareholders.

Stephen Vartan Tanal - Goldman Sachs & Co.

That all make sense. Thank you, guys. Appreciate it.

Operator

We'll go next to Patrick McKeever with MKM Partners.

Patrick G. McKeever - MKM Partners LLC

Thanks. I know you don't want to break out the firearm and ammunition comp, like you did in the past. But I think there's some concern that you might not be getting your share of what appears to be a pretty strong acceleration in gun demand based on the NICS numbers. So how would you answer that question in terms of – I mean, do you feel like you are getting your share? Or do you feel, Tommy, like you might be leaving some sales on the table by not bulking up enough on inventory, just playing it more conservatively?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Well, let me – Tommy will add on to this, but let me just talk a little bit about it. I'm not sure I know how you can conclude that we did or didn't get our share. I mean, this was largely – the gun and ammo boom that was seen in the NICS data was largely an event of what the tragedy we saw in San Bernardino, which I think happened in the middle of December. So there're only a handful of weeks in the quarter we just reported that were post that event. So I don't know how you conclude that. Tommy, you may want to comment on that.

Thomas L. Millner - Chief Executive Officer & Director

And adding on to what Ralph said, we have not been supply constrained up until this point. So I see no evidence whatsoever in our daily sales of guns and ammo that we are doing anything other than taking share and competing in the marketplace. So you shouldn't take – you shouldn't read into that at all.

Patrick G. McKeever - MKM Partners LLC

Okay. Okay, fair enough. And it's not necessarily my read, but I think there is that concern.

Thomas L. Millner - Chief Executive Officer & Director

There shouldn't be.

Patrick G. McKeever - MKM Partners LLC

Okay. Good stuff. And then on direct, you saw – down 4% – a little more than 4%, excluding the extra week, which is a bit of an improvement from the second and third quarters. I know you're not going to break that out, or it sounds like you're not going to break that out going forward. But my question is – I mean, I think you've been saying direct will probably continue to decrease – or continue to show year-over-year declines in sales. But are you feeling better about that business? And do you think you can start to grow it on a year-over-year basis and effectively compete with Amazon and some of the others out there?

Scott K. Williams - President

Yeah. Well, first of all, as we look at the direct business, we continue to put investments into that business and we're really proud of the investments we've put into it. Our simplified checkout on our website, our mobile experience, et cetera, we think are all reaping underlying benefits. However, we really forecasted just moderate improvements in that business and part of that's because we continue to have cannibalization from our retail growth. So largely the reason – Ralph, you can weigh in on this, that we will probably not break that out going forward because we've seen continued increase in our omni-channel orders where folks are consuming the marketing on one side and consummating the sale in another channel.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Yeah. The bigger issue in looking at the direct as a segment is really from a profitability perspective because almost – something like 70% or 80% of the expenses that are currently allocated to the direct segment are advertising. And as our advertising messages take so many different forms and so many different channels, it's really difficult to determine, is that advertising just for direct or does it go across the whole organization as our customers choosing to deal with us in so many different fashions than they did four or five years ago. Quite frankly, the reporting probably hasn't caught up with where our business is.

Patrick G. McKeever - MKM Partners LLC

Got it. Okay. Thank you. Very helpful.

Operator

We'll go next to Lee Giordano with Sterne Agee CRT.

Lee John Giordano - Sterne Agee CRT

Thanks. Good morning, everyone. Can you talk some more about the performance of the Cabela's branded products in the quarter? And then as you think about branded versus private label longer term, how do you see the penetration of private label versus where it is today? Thanks.

Scott K. Williams - President

Yeah. When you take a look at our overall Cab-branded penetration, it's really difficult to look at it during the Q4 of last year. As you can expect, our penetration of Cab brand in soft goods is a very high percentage. And our penetration of Cab brand in the hunting complex is a lot lower percentage based on the preponderance of firearms, et cetera. So just a shift from soft goods due to the weather to the hunting complex will bring down the Cab branded percentage.

Important to note, though, in our hunting complex and in our general outdoors areas, the percentage of Cab brand both went up in 2015 versus 2014. We did decline slightly in soft goods and some of that is what I described earlier of our balance letting the customer vote between Cab branded and our monster shops initiatives, and so we will continue to watch that and let the sales results drive that percentage. But we in no way have moved away from Cab brand. It continues to be a key differentiator for us.

Lee John Giordano - Sterne Agee CRT

Okay. Thank you.

Operator

We'll go next to Andrew Burns with D. A. Davidson.

Andrew S. Burns - D.A. Davidson & Co.

Thanks. Two follow-ups from earlier topics. First, with the focus on hunt, camp, fish, shoot, will that actually translate into some floor space shifting out of soft goods? And will consumers perceive a much larger hard goods assortment as they come into stores in 2016?

Scott K. Williams - President

We have tests underway that we're not ready to disclose for competitive reasons. But one of the things that's really encouraged about within our organization is that we have a robust analytics organization that we believe in test and learn. And so as we go in and test different models and different floor space allocations, we will implement those that are reaping benefits.

Thomas L. Millner - Chief Executive Officer & Director

But I wouldn't want you to read this as some kind of massive shift away from soft goods categories. It's more at the subcategory level and focusing more on what our customers want from us and less on what they are telling us they don't want from us.

Andrew S. Burns - D.A. Davidson & Co.

Thanks. That's helpful. And then just in terms of inventory positions in what looks to be an uptrend in firearms and ammunition, we've heard from Winchester and Federal Premium about ammunition coming on strong here in recent months. In past cycles, you've had some pretty opportunistic inventory buys there that really differentiated you, and benefited the top line. Thoughts about buying deeper potentially in an uptrend in that category, ammunition. Thanks.

Thomas L. Millner - Chief Executive Officer & Director

We'll monitor that as we go through the year and we think our balance sheet and our ability to pay our bills will be a powerful differentiator with our vendor base who we have great relationships with globally.

Andrew S. Burns - D.A. Davidson & Co.

Thank you, and good luck.

Thomas L. Millner - Chief Executive Officer & Director

Okay. Thank you.

Operator

We'll go next to Matt McClintock with Barclays.

Matthew J. McClintock - Barclays Capital, Inc.

Yeah. Hi. Good morning, everyone. And congrats, Scott.

Scott K. Williams - President

Thanks.

Matthew J. McClintock - Barclays Capital, Inc.

I only have one question. Just focusing on the credit business, the average balance per credit account increased, I think, the highest rate that we've seen since, I guess, the mid-2000s. And I was just wondering how to think about that metric in an environment of slight increases – clearly, slight increases – in early-stage delinquencies and charge-offs as well as declining comp store sales. Thanks.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

Yeah, let me take each of those in no particular order. But, remember, on our card, only about 3% of the spend is in our stores. So there's almost no correlation (59:55) comp store sales and average balance on the card. What I've talked about for a long period of time is that the more – there's a maturity factor with respect to average balance. A 10-year-old account has a significantly higher average balance than it does in the first year that it opens. So when you see store growth decline – and particularly assuming we stay below the 14 we opened, the 13 we opened last year for a while – as you slow down stores, you will slowly see account growth decelerate, but you'll see average balance accelerate just as you get more and more of those mature accounts in the mix.

Now another phenomenon that we're seeing and watching very closely is revolving rate keeps going up. Now that also increases as an account matures, but we've been surprised, I guess, as to how that continues to go up and up and up. We're watching it closely to make sure that it's not an early indicator of bad debts or delinquencies or some other problems we're seeing in the portfolio. But the trends in that business from a receivable standpoint are extraordinarily strong and we expect them to continue for the foreseeable future.

Matthew J. McClintock - Barclays Capital, Inc.

Thanks a lot. That's exactly what I was looking for. Best of luck.

Operator

And our next question will come from Mark Smith, Feltl & Company.

Mark E. Smith - Feltl & Co.

Hey, guys. First off, can you just talk a little bit – you've talked about the inventory – just how you feel like you came out of the quarter in apparel and footwear? And maybe, so far in Q1, how much you've been able to move, or if there are any issues?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

We were really proud of the way the team reacted to the environment. As we talked about October and November, it became pretty clear, weather was not going to be our friend. And out in the external market, we had other retailers noting that they were struggling and were going to take more aggressive discounting postures. The team actually took about a three-pronged approach. One is we did have to do some additional discounting and movement, so that we wouldn't end the year with any aged or problematic go-forward goods. We also took a look at what we could do from return to vendors and/or any sort of adjustment of future receipts in a very modest way. But the team was able to navigate through this where we were just slightly over our inventory targets in soft goods as we finished the year and the year did finish strong in December for the 52nd week and 53rd week, which end up being very busy weeks as they go forward as folks go post Christmas.

Mark E. Smith - Feltl & Co.

Okay.

Thomas L. Millner - Chief Executive Officer & Director

And Mark, I think we feel really good about how we've been able to liquidate and thus far, in this quarter, and we feel great about where inventories are.

Mark E. Smith - Feltl & Co.

Perfect. And then can you guys just go through quickly maybe the cadence of openings in 2016?

Thomas L. Millner - Chief Executive Officer & Director

Yeah. I sure can. We have eight stores for this year, actually next month, we'll open in Lexington, Kentucky and Lake City, which is South Houston, those are March 16. In April, we have three stores: Short Pump, Virginia, which is Richmond; Centerville, Ohio, which is between Cincinnati and Columbus in the Dayton area, Farmington, Utah, North Salt Lake, and then in August, we'll be in Avon, Ohio – think Cleveland area, and then Ottawa, Ontario, Canada.

Ralph W. Castner - Executive Vice President & Chief Financial Officer

It's interesting. By the time when we visit with you guys next time in late April, five of the eight stores that we have slated for 2018 will be open.

Mark E. Smith - Feltl & Co.

Did I miss one there? I think we went through seven. Is that last one later than August?

Ralph W. Castner - Executive Vice President & Chief Financial Officer

I mean, I didn't say Abbotsford, that's Greater Vancouver. I apologize, that was June.

Mark E. Smith - Feltl & Co.

That's June, okay. Okay, perfect. And then last question, it may be a minor thing, but I'm just curious if we're seeing consumers change the way they're shopping, maybe. It sounds like archery was soft in retail but was up in the direct business. Is that a category where we're seeing people shift more to online?

Thomas L. Millner - Chief Executive Officer & Director

No. I think it was more liquidation of slow-moving and obsolete archery products that we liquidated in the direct channel. I think archery is a pretty technical sport and we're just in an innovation cycle in the industry right now that I'm very confident will recover as it always does. And that's the only – that's the explanation for archery.

Mark E. Smith - Feltl & Co.

Okay. Perfect. Thanks, guys.

Operator

We have no additional questions. I'd like to turn the call back to management for any additional or closing comments.

Thomas L. Millner - Chief Executive Officer & Director

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

Operator

And that does conclude today's conference call. Thank you for your participation.

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