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Cabela's Incorporated (NYSE:CAB)

Analyst/Investor Day

March 22, 2012 10:30 am ET

Executives

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

Brian J. Linneman - Chief Merchandising Officer and Executive Vice President

Douglas R. Means - Chief Supply Chain Officer and Executive Vice President

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

Scott K. Williams - Chief Marketing Officer, Executive Vice President and E-Commerce Officer

Unknown Executive -

Analysts

Unknown Analyst

Joseph Agnese - S&P Equity Research

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

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

Thomas L. Millner

Good morning. I'd like to welcome everybody here at Phoenix and joining us on the webcast, I think we have 11 or 12 folks on the webcast. For those of you on the webcast, we're very sorry you're not here to see the question I'm going to ask this group. So how many analysts meetings have you ever been to where there was a rhinoceros at the front door with a greeting? A show of hands. None. Well, thank you, all, for being here. A couple of housekeeping items before we get going. For those of you here in Phoenix, you will notice a red form at your chair. We are deeply committed at our company to continuous improvement. Last year, we began the process of continuous improvement for this meeting in seeking your feedback so that we can get better over time. So we would ask at the end of the meeting, you fill this, it kind of rates how we did and things you would like to see us do to get better. We can't read your minds, so we would really appreciate your support in completing those.

Is this working with the slide deck? Forward-looking statements, information you're all aware of that, so I won't belabor that. Before talking about the presentation, Michael Copeland, our Chief Operations Officer, runs all the retail stores, is not able to be here, his wife had some minor surgery and he's actually with her today. So you will get a very poor stand-in for him which is me giving the Retail operations presentation in a little bit. So with that, let's kick the meeting off.

I'd like to start with a really simple premise in my 15-minute introduction. Why consider investing in Cabela's? Well, I think 5 things stand out. First, the inherent strength of investing in the clear, unquestioned market leader in the hunt, fish, camp space, supported not just by market leadership but by an iconic brand on the front of the building and iconic products. Our key metrics are both strong and growing. And I think we now have a 3-year track record that demonstrates that to all of you.

Growth is accelerating. Investors like profitable growing companies. We treasure our balance sheet, it is part of the DNA of our company. I think it's part of conservative Western Nebraska values and in this particular market, in the competitive set that we have, having a powerful balance sheet serves so many advantages, which I'll talk about in a few minutes as not to be missed in this audience. It is a good time not to have leverage.

And then lastly, how many meetings where Ralph and I in 3 years ago when I joined the company where the first question was, "Why in the world do you guys own a bank? We don't get it. The financial crisis is in full bloom. What do you own a bank for?" Well, now, 3 years later, after coming through the crisis, we have the ability to reflect and by any measure, you want to come up with, our financial services, CLUB Visa business, is best in class by any measure you can come up with. So what I'd like to do is take just a few minutes and look at each one of these 5 components and go into a little more depth.

Market leadership, our now 37 retail stores in North America in the U.S. and Canada, soon to be 38 and 39 in the next 60 days as we open Tulalip, Washington and Saskatoon in Saskatchewan support our direct business, which, as we remind you, is 3 to 4x larger than our next competitor. So this wonderful Omni-Channel model we have drives the iconic brand. Lest we never forget, core foundational DNA that built our company is legendary customer service. We are, without customer, service and that one-on-one expert connection with our customer, we're just another retailer selling product. And that is not part of the magic of our company. So delivering great customer service is core to who we are. And then, in an environment where we have a number of branded vendors selling product directly to consumers and that trend seems to be growing, I would hope as investors or those covering our company should take great comfort in the fact that we have a legitimate, innovative, $650 million national brand in Cabela's product. And lest there be no doubt that the reason this room is surrounded by Cabela's-branded product and these are all new products that are in the market stream today, it is a reminder to you that it's great for us to have a terrific website and great call centers and terrific outfitters and wonderful retail stores and growing and all of those good things. If we don't have the right products, the right Cabela's branded products for our customers who demand authenticity and innovation, it doesn't matter how beautiful the building is, if the merchandise is not right. So you are surrounded today by real innovation, and Brian is going to talk a lot about that in a few minutes.

Key metrics. Any CEO of any publicly-traded company would love the privilege of showing you guys these 4 slides. When slides -- when trend charts go from low to high, from left to right, that's normally a pretty good sign of the health of the company. So first, return on invested capital. Huge growth, from 9.5% to 14.3% over the last 4 years, from an absolute laser focus on getting rid of unproductive assets on the balance sheet. And Ralph and his teams have done a phenomenal job of making our balance sheet even more pristine and in conjunction with improved profitability, we've got great lift in return on invested capital. Merchandise margins, again, we reversed a 5-year trend of declining margins from 2000 -- starting in 2009, we have seen continuous improvement in margin expansion and we expect that to continue.

Retail segment profitability, up 600 basis points in 4 years to 17%. Why is this so important? As we told you repeatedly, without an improved retail profit model, it simply made no sense to grow. Now we have significant experience in consistently improving Retail segment profitability, hence the decision to step on the gas pedal a little bit more and start growing. And then lastly, all that translates into consistent EPS growth. You can see that EPS went from $1.24 to $2.12 in 2011. And again, if you look at performance, accelerating, I think these 4 slides; any CEO would be thrilled to be able to present any one of them. So I think our core metrics couldn't be more solid as we come into 2012.

Store growth acceleration. That's where we are, 37. We're starting to lose track as we open so many stores, but 37 with these to come. And I'm going to try and use the laser pointer. No. Red one? No. Oh, There it is.

I would call your attention to a couple of areas. I have held back the organization for a couple of years at looking at specific areas of the country. Look at all that concentration and there is a -- sorry. Let's back up. There we go. Look at that big gaping hole in the Southeastern United States, my belief was until we reinforce our backyard, which is the Upper Midwest, the Pacific Northwest and begin our penetration in the Upper Midwest and in Canada, let's don't mess around in the Southeast. Let's shore up our backyard before we begin to expand too much. Well, those constraints are off the organization. Furthermore, going west, deeper into Western Canada, in British Columbia, you don't see any stores. That is a densely rich population area. So Calgary and the markets in Vancouver, rich with hunters, fishers and campers. Our success in Edmonton and Winnipeg and I know the success we're going to have in Saskatoon, will only support that expansion west. So let me just tick off some markets, and I'm not telling you where we have sites in these places, but if you think about the whole Interstate 85 corridor: Richmond, Raleigh, Charlotte, Atlanta, Greenville, Spartanburg, Birmingham, Macon, Georgia, Tallahassee, Florida, Orlando. We know from our direct business, we have customers there. We have lots of customers there. So what's -- the irony of our company is, we have this iconic brand, yet we are so under penetrated in significant parts of the United States that are absolutely rich in hunters, fishers and campers. So if you think about growth, certainly opportunity in the northeast, more in Canada and obviously, opportunity in the Southeastern United States.

The balance sheet. We rank as one of the best in the retail industry and lease adjusted debt to total cap. In times like these, I think everyone saw Ruger's announcement yesterday where they're not going to take any new orders for new guns. If you don't think in this environment, being able to pay, if we wished, net one day to take any credit risk off the table for a manufacturer, if you don't think that has real profound benefit, in a broader industry, in retail which has, I would say, at best, a spotty track record of credit quality in the retail space with the exception of a few companies, during the last run-up, our ability to use our balance sheet to pay for ammunition products sooner than anyone else could or would got us product availability so that we never ran out. And if we get into that environment later this year or even sooner this year, having this kind of financial strength has real on-the-ground leverage every day to get product.

My favorite topic, financial services. We believe, really deeply, that the glue that holds our customer to our brand is the Cabela's CLUB Visa program. Last year, we gave away $156 million. Is that right, Ralph? $156 million of free points to our customers, free merchandise. Our customers love free merchandise in their lifestyle passion, hunting, fishing and camping. So having this powerful tool, we think, is a clear competitive differentiator. What is quite interesting is, in spite of a very conservative approach in the last several years to Retail expansion, we have been able to, through the integration of our program in our retail stores, to actually accelerate average active account growth. Last year, it was a little more than 6% without a lot of new stores. So if you can only imagine or model as we accelerate growth, just the sheer magnitude of the lift and account growth from more stores is significant.

This is a fiscal year 2009 depiction for a reason. When I got here, all we heard was, "you guys are at 5%, 5.5% charge-offs, you're going to 15%. So you're telling me that you guys are smarter than American Express, than Target, than everybody else. I'm sorry, I don’t that believe you. You can't be that smart."

Well, I'm not sure we're smart, but what I know is, when you start with very high credit quality, you end up with a very good result at the end of the food chain when and if any of those customers default. And we have to charge-off. So we said to analysts and investors, "We're different." So it's interesting to look back and say, "I told you so." This is at the worst of times. Probably in our lifetimes, we all hope. And how did we do? Well, we were smarter than everybody else and the bar graph proves it. So I hope that the questions of, should you own the CLUB Visa program or not? I hope those are put to bed forever. Because in the worst of times, we were best in class by any definition that you can come up with. So a critical part of our success and an engine for growth and profitability and loyalty as we accelerate retail store growth.

So market leader, key metrics are strong and increasing, accelerating growth, great balance sheet and a financial services business that is just world-class. I'll close by telling you, as we finished 2011, after 3, 4 years of really hard work, as I reflected on the last 3 or 4 years, I felt like, as a company, we were really in a great place.

Our competitor sets, they're not in terrific shape. I think the market voids that we showed you in critical geographies in the United States are waiting for us, and now it's time, with good fundamentals, to grow.

And we'll talk a little bit in a few minutes about what those gating items are that we will use to make sure that as we grow, we don't derail the company which I can assure you, we will not do.

With that, thank you very much. Next presenter, Brian?

Brian J. Linneman

Well, good morning, everyone. Thanks for being here today. It was fun to sit and talk with some folks last night and get a little bit of precursor on what's on your mind. And so I hope from the message that I've got planned for you this morning, we're able to answer a lot of your questions and hopefully get you excited about what's going on in certainly this room. If you don't take time to walk around and look at some of what's going on in this room, you're going to miss some things. It goes down to little stories that are pretty big things that are going on at Cabela's. Not only do we got Cabela's branded products, but a new reloading shop and so on and so on. So there's details and there'll be people available for you to walk around and look at the stuff, so.

But anyway, I'm Brian Linneman, I've been the Chief Merchant here in the last 2 years, I've been with Cabela's for the last 13 years. And my key messages for you today on the -- going to be agenda, I want to start off and just give you a little picture of what life was like at Cabela's in 2011, a little macro view of our business. We're going to talk about the strategies that we put out, put forth, that we started down this journey in early 2010. I can tell you we're on the same journey and we're going to walk through, update you on how that's working and how it's validated in the results. We'll spend a little bit about what's going on, going forward, certainly, summarize and take some questions at the end of the conversation.

So I want to just step back for a second and give you a picture of what 2011 looked like. Certainly, it was a volatile year. We saw extreme volatility in commodity and raw material pricing. Cotton, rubber, up over 200%, manufacturing cost in Asia elevated. And all in all, we've managed through this environment pretty well. We've done that through more effective vendor management. We passed on a lot of retail, our cost increases through our retails in 2011 to our customers. And for the most part, that was accepted pretty well. And I can tell you, we also strategically carried over some products from fall 2010 into '11, particularly in soft goods that we were seeing enormous increases in costs and sort of built that into our process.

The second leg here is this product mix. I know on the call you guys have heard, I want to share with you that -- a clear understanding around firearms and ammunition, certainly are on a rabid pace. We all understand that. I can tell you that's the good news. The bad news is, this creates certainly margin pressures on our business. And this is a low -- our guns are in the lower end of the scale for margins and with that mix shift that's taken place, it certainly puts some pressure on margins. You combine that with the unseasonably warm weather we had in the fourth quarter and toughness in soft goods and you combine the increased appetite for guns, you kind of got the perfect storm going on, which ultimately in the fourth quarter led to about 50 basis points of margin erosion when you concentrate on the mix shift between guns and soft goods in Q4. I can tell you, we have and continue to raise prices on guns and ammunitions to counter some of that mix shift challenge, and we see no reservations from our consumer year-to-date on making those changes.

Last segment around the competitive environment. Fourth quarter was an interesting quarter for us. Customers were definitely looking and responding to deals. The consumer, no question, was under pressure. The environment, competitive environment, particularly in soft goods in the fourth quarter was highly competitive. Free shipping offers going on, in some cases, you saw 40% off plus free shipping, you could almost call that product dumping and it didn't help our product mix headwind in the fourth quarter. So just a little color on our business.

Now we're going to talk a little bit about, so what's the strategies going forward? Where are we getting traction here? I can tell you, we're going to walk through 4 key components. The first one is people. But these strategies are the strategies we deployed in early 2010 and we're going to continue down that same path because it's working. We're seeing the answers and the results. Just starting on the people side. We made significant and sweeping changes to both the organizational structure and roles and responsibilities. And I can tell you these changes have created a true multichannel merchandise organization and have set the stage for our scalability to grow and really get going with our growth and support that scalability, appropriately.

Product life cycle management, which we have implemented several retail best practices in this arena. We put rigor in the science of assortment planning, while preserving what the Cabela's brand stands for. We've reduced SKU count by almost 10% in 2011, while driving higher sales. We've made significant gains in improving inventory productivity through better preseason planning and end season management. And our commitment here is around and focuses on this process and retail best practices to capture consistency and predictability in what we're doing, how we flow goods and the results that we're seeing. I told the group yesterday, I wish this was a sexier subject, but I can tell you, being really good at product life cycle management is sort of the secret sauce of any great retailer; being able to flow goods, plan goods, plan your assortments. We put a lot of energy into this component or this leg of the stool.

Thirdly, is the vendor environment. Through a vendor relationship management process, we’ve definitely increased collaboration with key strategic vendors and realized gains on the buy side as it relates to margins. Our vendor tiering process, it's a process where we tier vendors into particular buckets, have allowed us to focus merchants time with the right strategic partners in an effort to develop exclusive offerings, plan the business, build promotional product, et cetera.

We, typically, I expect 3 things from key strategic partners: First and foremost, we want their best people working with Cabela's; secondly, we want access to their innovation stream and thirdly, we want a true, open collaborative partnership where information is exchanging on a very fluid environment. And the vendor approach at Cabela's, we have great strategic partners. Our suppliers are fantastic partners. And I can tell you, we've really elevated this and put some management behind how we measure the results and how we engage vendors and it's made a real difference.

The last leg on the stool is around Cabela's branded products. We're definitely committed to growing the penetration at Cabela's branded products. I can tell you, significant work has been done here, to not only operationalize how we develop products for Cabela's branded products, but more importantly, leveraging the key strengths. This is important. Leverage key strengths of our people, the knowledge they have in the outdoors and linking that knowledge to professional design services in a methodical approach towards product development with Doug's team to really create a machine here in which we can introduce new product faster and really position Cabela's branded products to be what it is, premium outdoor gear.

So evidence here, we -- these strategies, this is what's happening, folks. This is how we're driving the business. And the chart here -- to me, the results are clear. We're proud of the fact that we've grown sales and margins in a very tough economic environment. And we're proud of that fact that we've been able to do that. Just another piece of evidence around our strategy is working, just to take a quick look at inventory productivity. The blue bars up there, certainly are inventory, the line itself, is sales. I mean, all I'm going to tell you is, driving higher sales with lower inventory is a good thing. Just another indicator of how we're doing. So where do we go from here?

There's 4 focus points that I just would reaffirm with you. We don't have a change of strategy here, this is about optimizing and adjusting, tweaking what we're doing today. Our first focus is around processes. I mean, we've instituted a number of retail best practices, processes and merchandising, planning and inventory and in many cases, those processes still have -- can be simplified or they can be optimized. We were talking last night, we've introduced a lot of new things and we're certainly have learnings, and the organization itself to embrace those learnings and be good at how we approach markdowns, how we plan the business, assortments, et cetera, takes time. So this is an emphasis and an important component of what we're doing. We want to simplify the business and optimize what we're doing in an effort to create the ability to grow and the scalability around how we do work at Cabela's.

Focus 2. We are seeing return on investment from technology investments. We've instituted tools like JDA Allocation, demand forecasting, just to name a few. But we still have opportunities to integrate the merchandising systems for a more precise assortment planning and end season management. This increase in precision helps us generate visibility into both sales, in margin opportunities that perhaps today, we might not be able to see. In addition, we're implementing the price optimization tool that will be deployed in late 2012. This will give us leading industry tools for a better initial price setting, markdowns and promotional pricing of product. And lastly, we'll rollout a net SKU profitability, net SKU profitability project midyear that will give us a much better insight towards the assortment profitability leading the rationalization and improving gross margins.

Focus 3 is about innovation. We plan to create and compress the product development life cycle in our business for our own Cabela's branded products. We have also reinvigorated the merchandising team around product innovation and we're going to talk about this in a little bit later on in the presentation. The last focus is really about assortments. We've got work to do here, but we still have opportunities to refine assortments and then capitalize on regional relevancy. While solid gains have been made in how we plan assortments and in inventory productivity, we still see additional opportunities to tweak out and migrate additional opportunities out of the assortment. Again, I'll give you an example, using this net SKU profitability tool, we can take the next step in better understanding how a given product performs at the net level, with multiple variables of cost which provides a profit view at a SKU level by channel and by a vendor. Which then, you can also understand that's how we would rationalize that next level of assortments, as well as utilize the information [ph] to compare vendor performance from one vendor to another. So taken together, these local points, we believe will drive incremental sales and margin opportunities while controlling expense growth.

So what are the focus points for Cabela's branded products? Number one is speed to market. Our development cycle has been too slow. Our lead times are too long. We are focused on compressing the cycle to increase and maximize market opportunities. As we develop Cabela's branded products and move specifically to reenergize the product offering, we believe a more efficient development process will better position us against the competition. Doug Means who is -- will talk a little bit later around the sourcing process and what we're doing and a lot of good things happening there.

Branding and marketing. We're taking great efforts to drive more marketing support both in and across product categories. I can tell you, as Tommy talked about, the Cabela's brand is a $650 million-plus brand, it's the cornerstone of what we have to offer in our business. And we've had opportunities to elevate the marketing and branding support. We're building innovative products and launching those products with a focused effort around marketing, how do we go through the process and linking from the very beginning, from the innovation, design, all the way through and to a product launch, still is a significant opportunity for us. We have a ways to go to improve that entire process.

Leveraging innovation streams. I'll give you -- you'll see a lot of examples which we'll walk through here today. But this is all about embedding certain technologies into our Cabela's branded products. It could be a fabric, it could be a high-end coating, it could be a compound, which I'll show you examples. And there's a lot of technology advances that are happening and how we embed those technologies into Cabela's branded products to solve a problem for the customer is pretty important. I'd just would stress to you, when you have intense product expertise like we have, and you have the ability to create innovative ideas from the field and also solicit technologies from the field along with professional designs, along with marketing and support of machine we have, that's not really, I don't think there is a competitor that can match that process. The future is bright for Cabela's branded products, and we think by creating uniqueness in our assortments through Cabela's branded products, higher margins and certainly, noncomparable on price are the key attributes on why this is a focal point.

So let's look at some products, we'll just point out here. This is a Cabela's Euro HD binocular. It's over here on the table, so when you get a second, you'll have to go look at it. And when you're in the store, I hope you can stop by and take a look at, we'll contrast a couple of products; a Swarovski binocular which is probably the finest binocular optics company on the planet, and a Cabela's Euro and take a look through them and see what you think. The Euro line of optics is not only binoculars, it's a scope series as well. This product is built in Europe. It comes with the highest quality lenses available in the world and I can tell you -- so building the lenses for this thing, it starts off with a 50-pound block of glass. In over a 2-month time period, it's cut, ground, polished and coated. It literally takes 2 months to meet the specifications for the lenses that go into that optic. It's a great optic. It's a fantastic process and we've got a great partner in Europe building these. I can tell you, we have the same specifications, features, performance of some of the most premium optics brands in the world and in many cases, you'll see that we're up to 2x cheaper on the retail price. They're higher. National brands are -- the premium brands are 2x higher than we are on Cabela's branded products. Part of that -- so why are we so low? Well, part of that is, we don't have the consumer recognition in optics to command premium price points yet. I can tell you that will come with time. Secondary, we're working directly with the manufacturers to -- obviously, we can land costs product at a much lower cost, then be able to afford ourselves the opportunity to sell that product at a relatively strong value for the consumer.

Our goal on this particular product will to -- we'll expand gross margins over time, increasing price points more in line with the competition. And it's a great product. If you've never looked at it, I challenge any of you to give us a chance on a Cabela's Euro HD line of optics. Again, to show a little digression here, as you walked in the door is the next product, it's called Cabela's OutfitHer series. This is a real quick story about expanding product selection to an emerging customer, where I can tell you, we already command significant market share with men. Men's camo is a cornerstone to what we do and extending and building a line of Cabela's OutfitHer series for women is very exciting. Women hunters want the same thing in women's clothing that any female around the world would want and that is, they want products designed for women. They want progressive styling, they want functional fit, they want technical features. And I can tell you, we've built that into this line. 100% waterproof, soft and quiet fabric, strong performance elements and I can also share with you that women's, the initiative of women's is a big idea in our company. There's a lot of other segments that we can capitalize and cater to an emerging customer in not only hunting but fishing, camping, trail. We're building products for end use for women in our business and I want to certainly make sure we welcome them into the community and enjoying the outdoors.

If you haven't seen this, this is a new product, this is a Cabela's BOA speed hunter, it's at the front door. Go stick your arm in the shoe and crank it down, you'll find an interesting, innovative approach towards building a product. This boot has a flex and feel of an athletic shoe with the support of a hunting boot, sleek design, outstanding field performance. But what's really makes it special and unique is the -- comes with an advanced BOA closing system. It's an easy, one-handed lace tension adjustment with a quick turn of a dial. And you simply pull the knob out to release but you can adjust that tension, just fine tune it to your comfort and desire and what you're doing. It's up on that front table. Please, take a look at it. It's a great product. The BOA closure system is made with some really high-end products and guaranteed for life. You're not going to destroy this. So great innovative product, great approach towards an environment of what we call, if you're going to do a lot of walking not in -- with great field performance, this is a great product for that particular customer.

Up here on my left is the Cabela's Bow and Rifle Pack. Certainly, as you look around, we've got numerous product categories where we dominate in product categories around innovation and I can tell you, hunting packs is no exception. So our merchants are users of this product and very simply put, they have a very unique perspective on what elements and features to add into a product. Frankly, they're building products in a lot of cases for themselves and their desires and how they would utilize them in the field. So the example here is a Bow and Rifle Pack, the problem is -- we always start innovation ideas around problem statements and the problem here is, in many cases, if you're going to go out for a daypack and hunting for an entire day, you’ve got to transport everything you got, for a day's supply. In many cases, you're certainly going to need food and other elements but in -- hunters carry a bow or a rifle, right? Well, we don't have -- we had an idea around how do we build a product that's in combination -- a world-class pack with the ability to carry a bow and/or a rifle and with all the features and benefits of what we would consider a best-in-class pack. This product is a great product. It won Best New Hunting Pack by Field & Stream. It's just one example of the many awards that we win in our business and recognition we get from the industry around the products that we build.

Here's another one. This is a Platinum -- Cabela's Platinum Zx Rod. We saw an opportunity to build a premium high-end rod that would compete very well against key national brands. Again, problem, avid fisherman who fish all day, believe it or not, are looking for lighter materials and more sensitivity. And fatigue does come into play if you're actually allowed to spend that much time fishing. The solution is, we built a rod that's 15% lighter, 30% stronger than any rod we have built today. And we partnered, again, using technology with 3M and used a matrix resin technology that developed from 3M and in partnership, built this rod. And similar to the optics example I shared with you earlier, our strategy is to build a high-end performance rod and offer it at compelling price point. This rod comes with the same quality and performance of high-end rods like G. Loomis and St. Croix at 40% to 50% savings. We will use this to gain market share and get product in the hands of the customer. And just as another example, this particular rod has received awards; Best of the Best Casting Rod in Field & Stream 2012, it's up front there. And it's also received editor's choice for a spinning rod out of Outdoor Life's 2012 March tackle test. These are fantastic products, highly innovative products.

I want to move over to heat technology. It's right over here on the right. I hope you can -- are able to stop by and try on some gloves or a vest. But this is an innovative program that allows our customers to endure the outdoor elements and stay comfortable. I mean, if you're in a tree stand on a cold day, the ability to offer heated technology, be it a vest, a jacket, gloves, socks, is a performance element we want to have in our arsenal. We utilize the patented electric heat technology developed by Gerbing's. The technology is exclusive to Cabela's in the outdoor market. Some of the key features, it's a nanowire, which means very, very small wires that actually heat and have a coating around them where it's almost instant heat. There's -- it's almost -- you turn that on and in very, very short order, you have heat. There's 4 heat settings, it's a 7 volt lithium battery that will last up to 10 hours. Again, product will be available at a significantly lower price point than some of the competition. We'll leverage this thing across multiple categories. It will be men's and women's casual. We'll build some camo products for hunters, both on the men's and women's side. And certainly, have gloves and socks and the accessory environment to support this technology. It comes with a lifetime warranty on the heating element. You can wash the product. It's a great product. So that gives you a picture of Cabela's branded work we're doing on the Cabela's brand, creating innovation.

I'm going to switch now, we're going to talk a bit about some of the uniqueness and exclusivity we're creating with our national brands.

So here's a North Face Hera jacket. Bottom line, all I'm going to say is, it's a -- through a great relationship with North Face, who's clearly a high-end premium outerwear brand, we -- this is an exclusive product, it's not just one, there's multiples. It's an example of a high-end brand where this jacket is exclusive not only in color but also, the jacket itself, styling, is an exclusive to Cabela's in the outerwear component. We have lots of examples, just trying to show you a spectrum here.

Cabela's by Meindl, certainly, a premium product line. It's located over here on the right. I hope you can spend a minute and talk with some folks over there at break. Bottom line is, it's -- the Meindl by Cabela's product line of premium hunting boots has been a true partnership that we've enjoyed for well over 20 years. This is German quality boots. These boots are some of the finest footwear pieces that you can put on your feet. And we continue to expand this line working with Meindl into trail shoes, hikers, as well as women's hunting boots. This is an exclusive offering to Cabela's in North America. Nobody else sells Meindl, and if you've never tried a pair of Meindl boots with the quality of German craftsmanship, you don't know what you're missing. That's how I'll leave that particular conversation.

In the back is a UTV. This is a product line that certainly resonates heavily with our customer. Hunters, fishermen, utilize ATVs, UTVs. And UTVs, for those that aren't totally familiar, it's a utility vehicle, they call those side-by-sides. What you see in the back is a UTV, an ATV would be used, set on top of it and ride it. Unfortunately, these product categories are at the low end of the margin range. And really to solve this challenge, we partnered to develop a unique line of ATV, UTV products and I can tell you, they're great products. But allow us to have a significantly more, almost twice the gross margin rate as of similar national branded products. This is an exclusive line of products to Cabela's that allows us to control our own destiny, and we've performed extensive field testing on this thing. I mean, through the mountains, on the plains, taking it fishing, dragging logs. We beat up these things over a long period of time to ensure quality and dependability and it's a great product at a compelling price point and certainly exclusive to Cabela's.

The last product I want to talk about happens to be over here, and I understand that we have someone in the audience that wants to buy that particular gun. Is that true? Anyway, this is -- I think guys, we all know that there's an unprecedented appetite for firearms. With the strength of firearms, we certainly continue to take market share from our competitors and we see an opportunity to create exclusivity in our assortments to not only increase business but increase margins. In 2011, we started with our 50th anniversary classic collection, which included various firearms that have not been in the marketplace for decades. And we took the best features of the old classic gun and modernized it for today's hunter. The result is a blend of old classic styling with new age features. The response to the product was very strong and we continued the strategy into 2012 with the classic line of firearms for 2012, there are 6 guns over there. The example I'm showing you is a Winchester Model 70 rifled in a 257 Roberts version. But this gun can't be bought anyplace else, we worked very closely with Winchester to refine that old classic styling and bring new age features to that gun in an exclusive offering to Cabela's.

Why clearly is that uniqueness and exclusivity we can create as the place to shop when looking for firearms? It creates that exclusivity, as I said, higher margins and frankly, cannot be price shopped. It's kind of a one-of-a-kind example. So that comes with great relationships with our suppliers to do things like this.

So summary. In spite of a lot of external factors, creating margin headwinds in our business, we're proud of the fact that we've driven higher sales, improved margins with less inventory in a very tough economic environment. Our strategies are working, we are improving predictability and consistency in our results. Our overall execution is improving our business on many fronts. We continue to uniquely -- be uniquely positioned in the industry with Cabela's branded products. I could tell you, we will exploit this competitive advantage to create exclusivity and non-comparability that yield higher margins. We will continue to increase sales penetration at Cabela's branded products and our ability to leverage vendor partnerships to create uniqueness and differentiation in our assortments are also working. We're fortunate to have great relationships with key suppliers. And all in all, folks, we feel like we're in a really good place with our business and proud of the achievements and accomplishments that we've made in the last couple of years, and really excited about the future as we look into spring '13, particularly in some of the clothing segments. We're doing a lot of work to improve design, functionality and performance of our company and around Cabela's branded products.

So with that, I'd open it up for any questions. Go ahead.

Question-and-Answer Session

Unknown Analyst

So can you talk about how much of your capital [indiscernible] comp [ph] [indiscernible] last year? And what are you expecting for this year? And maybe elaborate on [indiscernible] throughout the year?

Brian J. Linneman

Well, we have...

Thomas L. Millner

Maybe you would want to repeat the question before you answer it.

Brian J. Linneman

Okay. I don't -- I think the question was if -- are we seeing from -- our average ticket from last year to this year in the cost increases, how does that influence comp store sales in the business, correct?

Unknown Analyst

Yes.

Brian J. Linneman

So there is no question that our average unit retail on a product is up along with average ticket. And certainly, we've got a -- transactions were a little bit softer in 2011. As we look forward to this year, we -- there's certainly was a very wide spectrum of products on the commodity side that affected costing and we took up prices on a lot of products. We don't see a lot of that happen. There's some cost increases that we're still taking but it's minimal in nature as it was compared to a year ago. So we're not making a lot of adjustments on the general assortment. I can tell you we're continuing to raise prices on guns and ammunitions specifically those products that are becoming scarce and hard to get your hands on, we'll continue to do that.

Unknown Analyst

And maybe you can talk about the uptake on [ph] price optimization, maybe rationalization plus what's the opportunity and kind of what's the timing of that?

Brian J. Linneman

Well, the question was price optimization, what's the timing? What's the benefit? Well, we believe, I believe that if we can get price optimization in place by year end, certainly there is a portion of the front half of 2013 where you're going to be tweaking and getting familiar with how to embed that in your organization. But I think by the back half of 2013, we can start seeing pretty good benefits from not only the markdown piece but the promotional piece. The thing -- I'm not trying to educate you on price optimization, there's 3 legs to that, remember. It’s initial price, promotional and markdown. And by '12, end of '12, we will have put in place the promotional markdown piece, not the initial price. That will come at a later time. Other questions? Yes.

Unknown Analyst

Do you think that with this aggressive company branded product strategy, that you risk in some way alienating manufacturers? They'll become afraid to deal with you because you're not very supple.

Brian J. Linneman

I'm certain there's -- you could find someone that would have that thought process. I can tell you that, we look very -- we look to create voids, look for niches and voids in our assortment and exploit those voids with our capability and knowledge. We have national brands that frankly, compete with us on a daily basis on the web and by opening retail stores. And I think it's sort of something that maybe neither party really enjoys; we don't enjoy them competing against us and they probably don't like Cabela's branded products and we've tried to find a happy medium and how we can coexist and exploit each other to leverage, delivering products and higher sales. I think we're in an okay place. It's definitely something that is a common conversation though. Go ahead.

Unknown Analyst

Brian, related to that, do you -- when you guys introduce a Cabela's branded product and with the effort to control SKUs, do you eliminate a national brand product at the same time? How does that rationale works?

Brian J. Linneman

It depends. It depends on the category. I would tell you that a lot of the rationalization we've done in 2011 was more on the soft goods arena than it was on the hard goods side. And so what we're looking at is removing duplication, looking at price points and good, better, best and really rationalizing the assortment in the offering to make sure that we've removed duplication and we're investing where we're getting traction. And that's what most of that reduction has come from. Yes?

Unknown Analyst

Brian, you talked about vendor relations being one of the important strategies. Can you talk about how that benefited Cabela's during fourth quarter, where we have the abnormally warm weather? And can you talk to -- you touched on you had some carryover soft goods inventory coming into '11, how are we looking coming into 2012?

Brian J. Linneman

Okay. So our vendor relationships with key suppliers, strategic partners, we're pumping data to them on a weekly basis. They understand our on-hand inventory position. They understand where we're selling product, at what price. And we have, during the peak season time, we have a high degree of frequency of discussion with key vendors as it relates to the performance of the business. And because of: a, the relationship; b, of the information and the response acting early, I think those 3 components allowed us to fare a little bit better than trying to send products back in January, or concerned about a sell-through on outerwear in mid-January with key suppliers. We acted on this pretty early. We looked at -- we knew there was a challenge to the business regardless of what happened in mid-November. And as we progressed towards the end of November, it became pretty apparent that the likelihood in a big change was probably not in the cards. And if it did, we had Cabela's branded products that we could rely on to continue to sell through. As it relates to product we carried into 2012, it's pretty minimal. We're in a good place. National brand-wise, it's very, very small, key outerwear pieces that we haven't sold through. I can tell you, we took carryforward programs in Cabela's branded products, and we'll be storing those away and we'll reintroduce those. These are great programs that will carry forward into the fall programs that we'll pull out and reintroduce this fall. It wasn't -- it didn't make sense to take a bloodbath on the margin line to move through those products. And we're not talking about a challenge at all here. It's a high single-digit million dollar number.

Thomas L. Millner

Let me add one more thing about vendors and vendor collaboration. Our partner, Michael Copeland, has a great expression that winners like to keep score. So when Brian and his team's instituted the vendor scorecard to begin measuring performance of our supply base on a wide range of performance metrics, what we saw was a bifurcation between those that couldn't wait to be measured, who wanted to be measured against their peer group to show how great they were and earn more business. So I would call out a couple of vendors. Savage Arms, man, what an innovative -- measure me, I'm ready to just take it to everybody that we compete against. North Face and Columbia, great companies, love to be measured. So -- but yet there are others that I won't name that dreaded being measured because either they weren't sophisticated enough or didn't care, or just didn't want to step their game up. So it's been interesting to watch that parting of the Red Sea happen, and it clearly separates those that we want to really partner with from those that we just do business with.

Brian J. Linneman

Any other questions?

Unknown Analyst

One more. Just the last year, you guys had a couple of different changes in promotions throughout the course of the year which caused volatility in comps. Is there anything comparable that we should see in 2012 that would affect the cadence of sales or momentum, anything along those lines?

Brian J. Linneman

Not to the extent of 2011. I mean, that was a big deal for us to look at that promotional environment and that cadence and understand we needed to make a change, and we did it. And that change -- we won't be affecting anything like that in 2012 to that level.

All right. I'm going to turn it over to Doug Means.

Douglas R. Means

Good morning. I'm Doug Means, the Executive Vice President and Chief Supply Chain Officer for Cabela's. I'm really excited to be here this morning. We've got a lot of things happening in the supply chain, certainly, issues that globally, we're dealing with, and I'm anxious to tell you about some of the things that we're working on to make sure that we're continuing to support the

[Audio Gap]

and the innovation for Cabela's. So it's an exciting time for us.

For those of you that were here last year who got a chance -- who we got a chance to speak with last year, I tell you, our focus in the supply chain was around international. Things that were going on internationally, whether it was labor rates in China, factory capacities, those kinds of things. I want to give you a little bit of an update on some of the things that we put in place over the last couple of years and some of the results that we are seeing.

First of all, sourcing. As everybody is aware, the climate over the last couple of years, primarily in Asia and China specifically, was really focused on capacity, labor availability, wage rates. Some really unprecedented changes that were going on in that part of the world, and we needed to make sure that we were dealing with it. As you can see by this chart, we were very focused and very concerned on our exposure in China in particular. We had a lot of sourcing in China, a lot of volatility there, and we weren't really taking advantage of some of the trade programs -- trade preference programs offered throughout the world, especially in our soft goods environment where duty rates can be very high.

So in the last couple of years, we implemented a strategy to get more in balance with our sourcing structure in China. We feel like China's still very important. It's always going to be important. Even if you're not doing finished goods production in China, chances are a lot of the raw materials are coming out of there anyway.

So we saw -- we effectively moved a number of sourcing programs out of China. We saw it go from about 65% of our sourcing down to just under 50%. We feel pretty good about that. The other thing that I would note here is that in that red circle, our strategy was all about getting the right kinds of production into duty-free sources. So we try to take advantage now of NASDA, CAFTA and quiz programs in Central America and also in the Middle East. We're starting to see some really good results, we're getting good pricing out of those. We're seeing landed prices for a lot of products coming down as we take advantage of those programs, and we're very happy with the results.

Another thing that we talked about a year ago is just that the importance of raw materials and what we're doing to leverage our buy strength on raw materials. I gave you a couple of examples of some of the things that we had done to consolidate where we had similar types of raw materials, that we weren't taking advantage of our leveraging strength. I can tell you, that program is working very well. In the last year, we saw a reduction in the number of raw materials we were using for Cabela's branded products by about 270 materials with a savings of just over $2 million to our landed costs again. So the whole idea is making sure that we're using our relative strength, being intelligent about how we're purchasing raw materials for production and are we being strategic about it. And what I'd tell you is that program is working, we're seeing results, and we continue to expect to get better and better at that. I also talked last year about some of the things that we were doing overseas in our office in Hong Kong. We weren't really taking advantage of the fact that we had eyes and ears in Asia, and we needed to change that. So we upgraded our strengths there. We put some additional people who had a lot of experience in both the hard goods and soft goods manufacturing arenas, and we really got folks out into the factories. The whole idea was that if you, again, if you've ever done business in Asia, you'll know that you usually don't find out about problems until it’s too late. And you've got to have folks there who are asking the questions every day, are we on time? Is everything going as expected? Or do I have any quality issues? Are there any things that we need to deal with? So we got folks out in the factories, we're paying a lot more attention, upgraded the communication and seeing really good results. As you can see by this chart, we continue to see our overseas vendor shipping -- shipping us the products on time and in the quantities that we expect. Again, we expect this metric to continue to rise simply because we're developing those relationships, developing the trust and the communication with the factories to make sure that they understand that we're just trying to help solve problems.

And as we get the product when we want and we can execute against our plans, it's profitable for everyone. So again, I think real good results on some of the things that we're doing internationally.

So as we focus now on today and in the future, we feel like we're doing well internationally, we're not going to take our eye off the ball there. But we need to focus now on the domestic supply chain. Some of us were talking at dinner last night about some of the things that are going on in the transportation industry here, domestically. No surprise at all what's happening with fuel.

We expect that fuel prices will continue to rise. This is something that everyone is dealing with, and it's just one of those headwinds that I think, over time, we're going to have to make sure that we're managing as well as possible.

The government and the insurance industries are putting pretty heavy regulations on the trucking industry. For any of you that follow this, there are a number of things going on in the trucking industry that we believe are going to add cost to just moving product down the road. The number of hours the drivers are allowed to drive over the course of a week is being lowered. It's harder and harder to attract new drivers into this industry, and the demand for drivers is driving up wages. Replacement costs for equipment are going up, primarily around regulations aimed at getting better fuel economy, safer equipment on the road and then things -- replacement costs for things like tires and the price of rubber and what's that doing this industry, all really driving prices up. Again, not something unique to Cabela's, but something that we've got to be prepared to deal with.

And then finally, as we build new stores and as we allocate more of that store space to retail selling space, backrooms are getting smaller. We still have the expectation that we're going to deliver product to our customers on time so that we're not experiencing stock-outs and things like that. So we've got to make sure that we're replenishing those stores on a regular basis and we still got to -- even though there's less room to hold products in the backroom, we still got to make sure that product's there. Obviously, that means more frequent deliveries, smaller deliveries, and we're -- we've got to make sure that we're managing that in the proper way. So what are we doing about that? Well, to us, it's all about efficiency. We believe that the answer to this is getting better at making sure that we're moving fewer miles to support our distribution network. It means getting better at predicting where a product needs to be, moving it only when it absolutely needs to be moved.

Here’s some of the stuff that we're working on. We're in the process of putting a new transportation measurement system in. It will go in this summer. It's going to help us get a lot more sophisticated at how we look at freight. We're not going to look at single lanes anymore. We don't look at freight just as -- to a store or to a particular customer or in from a particular vendor, it's a much more sophisticated network and we need the tools to make sure that we're managing it properly.

We're also doing a lot of work right now at looking at freight across multiple channels of distribution. So the lowest cost way of moving freight is a dedicated route, bringing -- taking freight to a particular area and bringing freight back, fully utilizing the equipment. So we're working now to co-mingle freight. It may be, in some cases, direct-to-consumer freight with retail freight. In other cases, it may be outbound retail freight with inbound vendor freight into distribution centers, and we're seeing some real wins in this and looking at our distribution network again in a much more sophisticated way.

Delivery priority is another big topic for us in the distribution logistics group. Scott's group has a wealth of knowledge that we're now taking advantage of around particular stores, what's going on in those stores, particular events, particular seasons that, that area may be preparing for, and then the buying habits of all the customers around those stores. The whole idea here is that we want to know, not in a reactionary way, what are the holes that we need to fill in with inventory. But what are people going to buy tomorrow, and next week, and next month, and how do we plan to get the freight there in a, again, in a more sophisticated way so that we provide the right priority to that freight. We have an incredible direct-to-consumer and overnight package network that we use, and we're looking at ways that we can utilize that to help supply retail stores as well when it's necessary. We don't believe that we have to move every piece of freight overnight, but when we do, we've got the leverage and the capability to do it. And the rest of the freight that needs to be moved on a more -- in a more economical fashion, we’ve got the ability to do that as well. So we're looking at things not in one standard way, but across multiple options in terms of getting freight to retail stores and to customers in the right priority.

A big initiative that we're working on now, we're piloting a program. And you heard Brian talk -- both Brian and Tommy talked about vendor relationships and how we're using those to make sure that it's advantageous to us in terms of how we do business.

We're piloting a program with 19 vendors right now to completely change the way we look at their performance as it relates to the supply chain. We've thrown chargebacks out the window, and it's all about communication and planning. So what we're doing with these 19 vendors now is measuring their performance, not on a monthly or quarterly basis, but literally on every shipment that they send to us. And then we -- in turn, we immediately give those vendors feedback as to how that shipment looked, what problems there were, what we needed to do to correct it and what we're going to do to correct it in the future so it doesn't happen again. Interestingly enough, what we found is that in a lot of cases, we created the problem ourselves. We didn't give the vendor enough time to get products to us. We didn't give them the right information. And all of this is coming to the surface through these pilot programs. We're able to fix the problems faster and put all of our energy not into negotiating a chargeback with the vendor, but put the energy into solving the problem. And the whole idea here is to really create a best-in-class program that we can work with our vendors on really getting to the roots of the problem and making sure that we understand what it takes to do business with Cabela's, and making sure that we're addressing the issues that we create and the vendors are addressing the issues that they create and we get those things fixed. And we have a much stronger and a much more efficient supply chain coming out of that.

So that's really what's going on in terms of moving stuff up and down the road. It's really important, and I think, again, as you all know, plenty of headwind there. But what I'd tell you is our plan is to do everything that we can to manage those headwinds better than anybody else in the industry. We got the right talent and the right folks focused on this, and we think we're going to do a really good job of making sure that we continue to support the Retail and Direct customers as well as possible. You heard Brian talk a lot about innovation, and if you look around the room, you see all the stuff that we're working on. All of that doesn't just happen by accident. There's a lot of work that goes into that. And what I'd tell you is we look at the -- look at innovation as a process. There are series of steps, not always easy to define, but there are series of steps that we go through to take an idea out of someone's head and get it into a commercial product that's in the customer's hands as quickly as possible. It's absolutely imperative that we do that faster than anyone in the industry, and we're doing a bunch of stuff right now to make sure that we're -- that, that's happening. I’m going to talk to you about some of the systems that we're putting in place to make sure that we're doing that well. You hear me talk a lot about raw materials.

Raw material accounts for about 2/3 of the cost of a product and about half of the development and production lead time. Raw material is a critical component of what we do, and we need to make sure we're managing it well.

And then again, we're going to talk more about what we're doing to collaborate with vendors to make sure that this process is as smooth as possible and then -- and as efficient as possible. So we're in the process now and we're going to go live in late April with a product life cycle management tool, a pretty valuable tool as it relates to innovation. As many of you may know, the development process and the creative process in itself and by its nature is very chaotic. There are a lot of people involved, vendors, designers, merchants, marketing people, sourcing people, costing people. And it's -- the product is constantly evolving. Everything changes on a daily basis. One of the biggest challenges in the development process is keeping everybody on the same page.

This PLM tool will do that. It's a single depository for all information about product so that everybody, including our vendors, knows exactly where we are. What raw materials are we using? What do they cost? How many do we need? At what stage in the process are we? Who is responsible for what's going on now? All held in one place that anyone can access to make sure that we're staying on the same page, will help considerably when it comes to talking about doing this faster. One of the most critical components of the development process is making sure that everyone stays disciplined to the process. It's very easy to get off track when things are changing so drastically and so quickly. The PLM system has both calendar and timeline management so that everyone knows, are we on time? Who is responsible for what's supposed to be happening right now? If we're not on time, what do we need to do to get it fixed? Discipline around this process is critical and this is going to help us maintain that. Raw material visibility. Again, I'm -- you're going to get sick of me talking about this. But this tool will allow us on any products to be able to consolidate all of our -- all of the information around and sort it by raw material. So that we can leverage our relative size and our relative strength around purchasing, making strategic purchases of raw materials when it's advantageous so that we're not buying in small lots or we're not making any minimums because of one particular item, but we're looking at things as a whole from a raw material perspective, and allows us to leverage and get best price as possible. And then finally, this tool will also -- it's going to allow us to collaborate with our vendors. So our vendors will actually have visibility to the development process as well. For those particular items that are assigned to that vendor, they'll know what stage we're in, when are -- when we expect them to get back to us with information. They can even, through the system, they can even make recommendations for changes to a product or make recommendations to changes for a production process that will help lower costs. So we're kind of opening up our information to the vendor so that we can get a more collaborative and more 2-way discussion around what that product looks like, what it takes to manufacture it and what it's ultimately going to cost. A pretty exciting tool for us.

Again, we continue to work on making sure that we're supporting the raw material innovation. A lot of the products that we make, it's all about the materials that it's made up, especially in the soft goods area where you have certain characteristics that the consumer is looking for. We're working with some technology suppliers right now to create a fiber that actually combines a number of different characteristics from a number of different fibers to help give us a whole new product that you couldn't get before. So for example, we can combine the characteristics of abrasion strength with stretch, so that you're not getting one thing and giving something else up. Another example is the hand feel, the soft hand feel of cotton with moisture wicking, so that again, you don't have that shiny polyester look. You don't have to give that up just to get moisture-wicking capabilities. Some really cool things, I think, that are going on that are going to help us be very innovative in Cabela's branded products.

Another thing that really helps us is being able to develop a raw material that we can use over a whole series of products. Again, it helps us reduce the amount of develop time it takes to get those raw materials ready, as well as helps us leverage our buy strength. Here is a good example of a down-proof nylon that we developed, that we're using not only for down jackets and sleeping bags, but also using for a lightweight packable rain-resistant jacket. So again, a material we already had, found another use for it. We don't have to go out and develop something new, we can leverage our buy strength, and really helps us take advantage to innovate new items. And finally, we're developing our resources, both here and overseas, to make sure that we can support the merchant and the design teams. We're beefing those areas up. We're making sure that they've got the right knowledge, the right technology, and they're bringing new technology and new products to the merchants and to the designers so that we're always staying on the cutting edge of what's going on with some of the raw materials.

We are starting -- we have started this spring, a new program with one of our overseas vendors. And as we get further into that, we'll start to roll it out to the rest of our vendors. But it's all around, how we're collaborating and how we're working on the development and production process with the vendor. Communication is at a whole new level. We're looking at these factories as strategic partners in a whole new way. The old way of communicating with a lot of vendors was price negotiation. You were never happy, you're going to walk away, you're going to do all these things, and it was -- it tended to be a very contentious relationship. Your sole communication was, what was the quality of the product, was it going to be on time, what's the price. We're completely changing that and looking at these vendors now in a very strategic way. We're now, through this pilot program, providing very detailed information not only about what we need to produce, but what events are going on with the products that they're making. When are those events going to occur? How does that help the vendor plan their production in their space and maybe even their raw material purchases around being able to predict what our business looks like, and how that impacts them in a really positive way. We need to -- we talk a lot about this. We need to think like a manufacturer when it comes to Cabela's branded products and how we can help them become more efficient. Communication, very different level of communication. In this pilot program and for most of our major vendors as we go forward, we'll actually have Cabela's employees in the factory. They're there to answer questions, they're there to make sure that things are happening. They're there to help plow the road in a lot of cases where the manufacturer needs to plan production lines, production schedules, staffing, and our employees will help do that to make sure that, that's happening and we're getting issues dealt with sooner rather than later. Again, the whole idea here is if we can provide a lot more information to the factory, they'll be able to produce our products better and faster. And then we're partnering, in a lot of cases, to help develop resources at the factory. We can't have every resource necessary in Sidney to develop product. We can always hire structural engineers or materials engineers, or production planners or costing people. And -- but often, the vendors in the factories have people like this already there. We're working with these guys now to make sure that they're developing their people to help support us better. Again, the ones that are really interested in becoming a long-term strategic partner are happy to do this. It makes them more valuable to us, and in turn, makes -- gives them the opportunity to expand their business with Cabela's. All this comes down to lead time and cost.

The whole idea here is, we need to be able to make products faster and we need to make them in the most efficient way possible. And we believe that with the right partners, this is going to make a significant difference in terms of speed-to-market.

And finally, we're really -- we continue -- you heard Tommy talk about continuous improvement. This is what this is all about. Our development process is in standards. Again, you heard me talk about a little bit earlier with the PLM conversation, but it's absolutely necessary that we've got our stuff together in-house in terms of how we develop product.

So we continue to engineer and reengineer the development process. We want to be as good as we can be at moving the ball down the field when it comes to developing new products. Are we doing things in a disciplined way? Is that product relevant? Are we measuring it in the right way? And it's also about -- it's not just about moving it as fast as you can, but moving it as efficiently as you can. So one of the things we're doing around that is developing production standards that we can share with our vendors so that we don't have to recreate the wheel every time we need to build the hood of a coat or anything like that. They already know what our standards are and what our expectations are. Reduce the number of questions, reduce the number of mistakes, get it right the first time is really what that's all about. Tommy said it and we hear this a lot, winners keep score. We measure everything in the development process now. We report on a weekly basis to every category manager about the products that they're developing, are they on time? If they're not on time, what do we need to do to catch up? Who's responsible for doing that? Make it very clear to everyone where we are in this process and what we need to do to stay on time.

So what does all this lead to? Our capacity to innovate. Not only are we expecting to decrease the amount of time that it takes to innovate and bring new products to the market, but we also expect to do a lot more. And we truly believe this gives us the ability to do that. Lead times. You heard Brian talking about it and you'll hear me talk about it all the time. We've got to get faster, both in how we develop new products and how we get those products produced and onto the floor or into our customers' hands. This doesn't mean giving up quality. As a matter of fact, I would tell you, the more disciplined we are and the more we can work on this, the better the quality of our products gets. Our customers rely on us to make sure that when they buy something from us, it's not going to fail. And this process helps ensure that. And then finally, how we manage cost; cost of the product, cost of the development cycle, whatever that may be. We don't always necessarily need to take cost out of a product. We just need to make sure that the cost is in the characteristics and in the functions of that product that the customer sees the most value in. And that's what this is all about, is making sure that we've got -- we're putting the cost in the right place and what matters to the customer.

So in summary, our sourcing strategies and our international presence is really improving. We feel like we've got a good handle on it and we're going to continue to work on making sure that things are happening overseas the way they're supposed to. We’ve got plenty of headwinds just like everyone else in the domestic transportation market, nothing new and nothing surprising. Our challenge over the next few years is to make sure that we manage that better than anyone else. And then finally, we continue to support innovation in the best way possible. It's all about providing more -- providing the support to make sure that we're getting more innovation and we're getting it as fast as we possibly can.

So with that, I'll take questions.

Unknown Analyst

So I have 2 questions. One, you talked about the supply chain focus for this year. One of them was Retail replenishment. Can you just give us a sense of how you're looking at that today as you move from a strategy of 150,000, 200,000 square foot stores to smaller stores, to the outpost. How does that play into changing that strategy?

Douglas R. Means

Sure. So the question is, with the format of -- as the format of the stores changes and the stores get smaller, how do we expect to -- what -- how does that impact our replenishment strategy, right?

Unknown Analyst

Yes.

Douglas R. Means

Well, interestingly enough, one of the advantages that we have is as we open more stores, we don't have -- that actually gets a little bit easier. We can start to regionalize distribution, and we're doing that now with smaller stores especially in the northwest part of the United States, where we'll -- instead of supporting a store with a single lane, we may support 2 or 3 stores with one lane. So that we're making more frequent shipments, just smaller. We may put 2 or 3 stores on one truck and deliver 3, 4, 5x a week. So we've got -- we've actually got plenty of room here to make sure that we're supporting those stores on a more regular basis even if it means smaller shipments. What I'd tell you is we even take advantage now of some of the package service, some of the package services that we have. So that in some cases, we're using a small package service, 100 weight service from UPS to actually ship and replenish stores. It really just depends on how -- what we do is we model what we need to do with that store, how often we will need to replenish it, and then just use the resources that we have. Like I said, it actually gets easier as we open more stores.

Unknown Analyst

The other question I had was on the product life cycle management. As you start dealing with that, I'm just curious, is that -- do you do that only on more new products for the future or are you going to start putting that in alternate places with a lot of stuff in order to develop [indiscernible] what kind of time [indiscernible]?

Douglas R. Means

Yes. So the question is, is the product life cycle management, the PLM system, only for new product, new development product, or is it for everything? It is for everything. Because we'll actually use that system to do costing and pricing and communicate forecasts to the vendors. So the timing is going to be -- we'll actually start -- we're going to use a team of folks and we're going to migrate information from the current system that we have into the new system starting in April. So we'll start using it actually for spring '13 production and fall '13 development.

Unknown Analyst

Just a follow-up. Just a follow-up to his first question on the distribution side. And as you regionalize those lanes, do you see a need for additional distribution centers? What's the timing of that? What potential costs could look like as you begin to roll out the store plan?

Douglas R. Means

Yes. So we're in the middle of a study that's going to help us answer that question. What I'd tell you is, my challenge to our team is we don't expect our distribution now -- tomorrow like it -- to look like it looks today. We think that, that distribution network of the future probably involves a number of third-party logistics providers or warehousing providers. It may -- it's going to mean shipping product from stores. It is going to be a very different network to our -- to support both the Retail and the Direct business than I would tell you today. Much less static than it is, a lot more dynamic in terms of looking at inventory, moving inventory a lot less. We'll actually use providers on the West Coast for a product that's coming into the country to help to just leave product there and only move it when it's absolutely necessary. I mean, we really believe that -- I was telling some folks at dinner last night, it's this simple. We look at product in a vendor's hands and we look at product in a store in a customer's hands, and everything else in the middle is time and money. And whatever we can do to reduce that, we feel like it's a win. The systems that are available today, the planning systems, the inventory systems, the network analysis systems, I think, will allow us to be a lot more sophisticated about how we look at this.

Unknown Analyst

For the potential expansion in Canada, do you think that you'd be able to service that through the West Coast or where that could potentially be? I mean, are you ready for that?

Douglas R. Means

Yes, yes. Again, we're -- we certainly are looking at Canada and how we expect to support Canada through this. A lot of questions are still on the table with Canada. As you can imagine, customs regulations allow us to -- it gets a little more complicated in terms of how we move product back and forth across the border. But again, we absolutely expect Canadian distribution to be a part of that network, whatever that ultimately looks like. One of the other challenges that we have today is that we've got -- because of the acquisition, we have different systems there that, over time, we're going to have to get over that hurdle as well.

Unknown Analyst

Doug, if we give you a couple of years with the new system tools that are coming in and the new processes around product development, cycle times, how much -- what kind of percentage reduction would you hope to see a couple of years out in the product design cycle?

Douglas R. Means

Yes. No, that's a -- it's a great question and something we talk about all the time. What I'd tell you is, what we've modeled on the production side is just through this pilot. And we're kind of bulling our way through it because we want to learn a lot about how this all needs to happen. But day one, once we go live, we expect about a 30% reduction in the time from when we place a purchase order to when -- to x factory. And that's day one. We think we can be on the good side of that as we get better with that. In the development cycle, what I'd tell you is I'm always a little cautious to talk about hard percentages because it's going to be very dependent on product and need. And my experience with this is that there will be a certain portion of the product that we need to be super-fast on. And we'll develop systems and resources to be super-fast. In other words, I need to get from an idea into making a product in a month. And we'll make sure that we've got the resources to do that. There's other products that you don't have to be so fast in. But what I would tell you is our expectation is that if 30% feels like a good number to us, that would put us, certainly, best-in-class. And what I'd tell you is I'm pretty confident that we can get there. Even in the things that we're doing now, just in measuring and reporting back to folks about how they're doing against our development timeline, for the development we're doing now, we're far ahead of where we were a year ago.

Unknown Analyst

Can you just talk about the opportunities to reduce the cost of DTC shipments? And then, where do you think you benchmark relative to some of your direct competitors in terms of cost of shipping DTC?

Douglas R. Means

So what I'd tell you -- I'll answer the second question first. Because of our relative size, we believe we're getting the best rates possible with -- in the Direct business. I think we've done a great job, we've got a great partner in UPS that helps us make sure that we're being cost effective. There are some things that we're doing to help mitigate those costs. We're changing packaging in some cases so that the cube -- to reduce the cube, to help drive down costs. We've seen the average cost of a package in the last 12 months for us, drop by about $0.65 a package, which is pretty significant, through a number of things that we're doing. It's some -- it's that co-mingling of freight and giving us the ability to utilize trailers better so that we're just getting more efficient distribution out of that. That the way that we've changed the packaging, which also helps, we also put in place the, a program called SurePost that uses the Postal Service to deliver packages the last mile. So the most expensive part for any of the small package carriers is not moving freight down the interstate, it's putting it in that truck and delivering it, walking up to the consumer's door and knocking on the door. That's the expensive piece of it. There are postal carriers going to every door every day, and they're utilizing that now for that last mile of delivery, which is also really helping. We're cautious about that because we need to make sure that we deliver on promise for service. And so we're very careful about where we apply that. But I'd tell you, we're getting very good rates today. We have locked in those rates for the foreseeable future so that we're not getting hit with fuel surcharges as that market gets more volatile.

Unknown Analyst

How often do you find, when you source your Cabela's branded merchandise, that you have a conflict with one of your existing vendors in terms of either raw materials or manufacturer?

Douglas R. Means

We're -- there's no question about it. We walk through factories and we see products from vendors. We see products from competitors. It's a relatively small world over there as crazy as that sounds. But what I would tell you is I don't know -- I've -- it isn't very often that we actually run into a conflict. I think what we do over time is build the relationship with the vendor in such a way that I think there's a lot of trust there. You always have to be careful and you can't be naïve about what's going on. Whatever we see, everyone else sees as well. And I think as we get more innovative and as we get faster, that's going to be important to make sure that we're managing that relationship well. I'd tell you, it's not very often that we run into a lot of conflicts. And where we have proprietary or intellectual property concerns, we're making sure that we're manufacturing those products with a vendor that we feel very confident about for that very reason. We don't want somebody else seeing stuff that we just don't want to get out there yet. So it's interesting and something you always have to be aware of. To me, in my experience, it's all about the relationship with that vendor. And where we've had problems, we walk away from the vendor. It's just not -- it's not worth trying to manage that.

Thomas L. Millner

Thanks, Doug. Two things before we break. We intentionally had Brian and Doug go deeper in the weeds than we would normally go in terms of processes that are being built or that are in place in the business with this group. And we did so because as we talk about where do we take the company from here, it is very important that this audience and those on the phone understand that there are real sophisticated processes behind the scenes that appear on the surface to be fairly mundane. But if we're going to have continuous improvement from here, it has to be based on best-in-class processes in innovation, in the way the merchants plan and execute products and season, all the way to what Doug's doing in distribution and supply chain and innovation. That's #1. So thank you for bearing with us as we went deeper.

The other thing is we wanted to clearly convey to your questions, our vision is not to have Cabela's branded merchandise as quote, "a knock-off brand" where we just look at what everybody else is doing and quickly knock it off. And I hope you got the sense, and especially looking around the room, that is the furthest place from where we want to be. We want to elevate the Cabela's brand to an even more viable national brand that is really innovative. There are only so many new ideas in the world so could you say our heated performance gear emulates what Columbia did? Well, sure. But it's still innovation. And that's a really important point. We have no intention of degredating the Cabela's brand by turning it into a knock-off brand. That is, in fact, the furthest thing we want to do, and I hope that rang through.

It is now 19 minutes past the hour. We're running a little behind, so if we could take an 11-minute break for you guys on the phone and reassemble at 30 past the hour, we'll get the presentations back on track. Thanks very much.

[Break]

Thomas L. Millner

If everyone could begin to move to their seats. I know that Michael Copeland would much prefer giving this presentation than having yours truly, the B team gives the presentation because, as we said earlier, Michael's favorite expression is winners keep score, and four-wall contribution, Retail up 600 basis points in the last 4 years is clearly an indication of winning.

Today, I'd like to walk you through -- let's get on sync. Clearly, we'll walk you through what has gotten us to such high levels of performance in Retail operations which, ironically, as we begin to accelerate growth, are the same things that will sustain profitable growth for us. And they are really 3 pillars. They are the investment in our Retail Outfitters. And I think you all know enough about our company to know that the vital link to our customer is that knowledgeable brown shirt Outfitter in each one of our retail stores, as well as our customer service folks in our call centers. Secondly is everything that we do to cherish and delight our customers each and every day. If we're ever relegated to just selling stuff every day without that relevant expertise and the personalization to the customer, I would submit to you, we're probably in a very bad place if that's where we're we get. And then lastly, a real keen focus on process. So let's take a look at each of these 3 components: Outfitters, customers and process, to give you some idea. It's -- this presentation is a mix of what got us here and what's going to take us forward. So first, let's look at Outfitters. Last year, we invested 0.5 million hours, or roughly 2 weeks per Outfitter, in training so that our Outfitters understand their job, understand the technologies of the products that we sell and can truly be the expert advocates when our customers walk into our retail stores or call our call centers.

The second component is communication. I had a board member years ago that had a very senior job at McDonald's and he told me something I will never forget. He said, if you're not telling your story to your employees, they're either hearing the story from someone else or they're making up their own story, neither of which is a very good outcome for you or the company. And that has stuck with me for decades. So we make a huge investment in our company in communicating with our frontline Outfitters so that they constantly are aware of what the vision is, how we're doing, where we're going and what's important from a value standpoint. There isn't a week that goes by that one or all of us aren't cutting videos that are broadcast in every break room in the entire company, from the distribution centers, call centers, corporate office, to the retail stores. And for those of you here in Phoenix, if you look in the back of the room, you'll see a big screen TV. Each of those big screen TVs is in all of our break rooms across the company. And it's a messaging technique that we use to constantly keep our store Outfitters with us like an orchestra. So

[Audio Gap]

exactly what we're thinking, how we're doing, what's important, what we want them to focus on. And one of the great -- this was a great tool the days ahead of Black Friday. We used video on our TV monitors to really rally the troops and remind them what we were focused on in Black Friday. And it was a major contributor to the success we had in Black Friday. The other component is what we call Falcon Task Management [ph]. One of the risks in a big retail store is that the department level or Outfitter level associate is so overburdened with task, most of which don't even relate to them, that they can't do their job interfacing with the customer, which is the most important part of their job. So a best-in-class process that best-in-class retailers use is task management. So the deeper you get within the store to task, tasks are filtered so we don't overburden. So tasks are more targeted to that individual's specific job. It is a filtering process that’s had a really big impact to free our associates up to do what we want them to do, which is, how can I help you? Welcome to Cabela's. What are you looking for? Instead of running all over the store doing relatively unimportant, or for their job, meaningless tasks. As we come in to 2012 and begin to grow, one of my early learnings about the Retail business, which is dramatically different from manufacturing, is the fact that a bad general manager in a store, bad store. Almost a universal truth in Retail. So as we begin to grow from a handful of stores a year to 8 to 10 stores a year, we've got to have talent ready to go to meet the needs of a growing company so that we don't hand the keys to the castle in a new store to somebody that looks good in the interview process that we haven't had a chance to look at. So how do we do that? We have a program called CLIMB [ph], Creating Leaders and Increasing Management Bench [ph] strength, that really has 3 pillars to it. The first is the Manager-In-Training program. This typically relates to outside hires. So we hire someone from Home Depot, Lowe's, Best Buy, you name the retailer. They come to work as a Manager-In-Training. We put them in the store and they shadow the store manager for 6 months to a year, so that we get a very clear look at them, their technical skills. Do their values match with ours? Are they team builders? Do they have an attention to detail? Are they merchant operators? So that we get a look at them before we say, okay, here's your new store, we hope it all works out. And we have been using that program for about 2 years with tremendous success. Secondly, we have a SUMMIT level development program for in-house folks. These are typically -- we have a fairly sophisticated succession planning process. We identify high potential candidates across the organization. But for this example in Retail, we'll identify a number of hypos, we put them in the SUMMIT leadership program and the goal is have them 6 to 12 months ready to take a store. So they will go through an intensive self-development program and a formal leadership development program with their store general managers and the regional managers so that we have both in-house talent ready to go and outside talent that we've had a chance to look at. And thus far, in the new stores that we've opened and the external hires that we brought in, it has really made a big difference because it serves us no benefit to start growing and have new stores that fail. So we're doing everything we can do to make sure that, that doesn't happen.

So let's talk about customers. Everything in our company, customers are the center of everything we do. Our vision 2012 has 3 concentric circles. The center circle, the focus of everything we do in our company revolves around customers. We use, in order to keep score, ACSI, which is widely regarded as the highest scoring system for customer satisfaction in the retail marketplace. And you can see that we scored last year at 87.1% against an industry average of 76%.

I would love to tell you who those companies are that the benchmarked against because most of them are leading names in customer satisfaction across the entire retail spectrum. Everything that we've done to cherish and delight our customers is paying off in our scoring. These results are part of store metrics and they are widely shared at the lowest levels in the organization to get by in, to be a truly great customer service company.

So what drove these results? Well, we believe really strongly that culture is the center of everything that built our company over 51 years. We have a great culture for the customer. Dick and Jim and Mary started the company that way and that lives today in every one of our Outfitters. In order to bind it together so that our retail Outfitters can understand it, we developed the Legendary Impression program. And if you're in our retail stores and you ask any of our Outfitters, "What are the 8 touch points of Legendary Impressions?" I would be absolutely shocked if any Outfitter couldn't reel them off right off the top of their tongue. It's something we talk about all the time. Because as I said earlier, we don't just sell stuff. There's a magic and a secret sauce to our company and it revolves around customers and delighting them.

We also empower our people. We don't have minutia-driven centralized control system of everything our Outfitters do. In fact, we call it, internally, our jargon is, "Our folks have freedom with fences." We want people to be creative in the Clothing department or the Reloading department or the Shoe department, in the Glendale store or in a Owatonna, Minnesota, or Lacey, Washington. We want an element of local creativity among our Outfitters. In exchange for that, we have high levels of accountability and ownership. We don't want people just running off into the wild, we want them to be creative but we expect accountability from their actions as well.

And then the last component is if you want to reinforce good behavior, the best way to do that in a company 14,000 people like ours is to recognize those people that best exemplify the behavior that you want. Just 3 weeks ago, we had a big meeting in Denver, our annual meeting. We had 600 people there, mostly store-level folks and it was an educational seminar and getting everybody on the 2012 page, but most of the time was spent recognizing that level of exceptional performance to serve as a beacon for everyone else.

We're also doing some other really cool stuff with customers. Last year, we began beta testing a personal shopper program. We identified our top-tier CLUB Visa cardholders. We sent them letters, e-mails and follow-up phone calls from the local store general manager. And the call went something like this, "Hi, Mr. Caser, I'm Bob. I'm the general manager at La Vista or in Sidney. We know you're a very important customer. Next time in, I'd like to be able to help you, show you around the store, show you some new products." And guess what happened? Average ticket with those transactions was over $1,500. Just by loving those very special customers a little bit more. And we are trying to figure out how to scale that across the enterprise.

We had 38,500 customer events and seminars last year to bring local relevance to our retail operations. As Brian said with our OutfitHer series of products, we are very focused on female hunters, fishers and campers in a much more accelerating basis. If we can just get every spouse or significant other of all of our male customers to get into the lifestyle, we can double the size of our company organically just from doing that. Now can that happen near-term? Probably, not. But this is such an untapped market, and the best way to do it is to have events that are tailored to female shoppers. So we had ladies' nights in a number of our stores in the fourth quarter of last year, and approximately 1,600 ladies showed up. And it was, "How can you get into the outdoors? Here are the products that we have," and we're going to expand that over time.

Mobility. Last year, we tested tablets. Actually, in the Glendale, Arizona store, which we'll go to this afternoon. And we put out tablets in the hands of a number of our Outfitters. So that when a customer there and may have a question as simple as, "Hey, we're in town from out of town, where can we go to dinner around here tonight?" Right there on the spot, our Outfitter can, through their iPad, service basically an on-the-floor concierge service to help them. Or let's say, they have a question about product or a place to go fishing, the data is right there in their hands and it's also linked to cabelas.com. And the results were really terrific.

We had some great anecdotal stories of meeting customers' needs, we actually helped a handicapped customer who was going to take his wheelchair across a 4-lane road to go visit the stadium, and our Outfitter said, "Hold on, that's pretty dangerous, let me call a car service that helps handicapped individuals and we'll take care of it." And we did. So that customer were safely transported. Now that may sound silly, but how many people do you think that customer will tell that we were able to do something really special without the Outfitter leaving, going to a phone, maybe not finding out how to do it, but right there in front of them. So we, right now, are further examining how we can scale that across the chain. Home Depot is doing a really great job in Outfitter Mobility in their stores and we've been in contact with a number of locations to figure out how to do it better.

Another thing we're trying to do is look big, act small. Because our customers here in Arizona or in Sidney or in Richfield, Wisconsin or wherever, they expect us to understand what's going on in the local market. And what we have to do is share timely, relevant local information with them. When you're in a store today, this afternoon, you will see a fishing report in the fishing department that is relevant to right now to what's being caught in all the lakes around this store. Same thing when the rut starts in deer season. Where are the deer being harvested and as well as local information about events and seminars that are happening in the store. Again, if we just look big and come into a market, that's not good enough. Our customers expect more of us.

If you look straight in the back of the room, you'll see a new kiosk that I would encourage you to look at later. We are replacing our existing kiosks in the retail stores with this new, more reliable, easier-to-use kiosk. This is particularly important because as we talk about outpost stores, we expect in the smaller format a much higher concentration of kiosk sales to access the entire assortment. So having a technology that's easy to use and more reliable is really important. When kiosks are down, our Outfitters lose the confidence to take the customer to the kiosk because they don't want to be embarrassed.

The 2012 enhancements in electronic 4473s, we learned from customer feedback that the process of buying a gun, literally the time it takes, was a friction point. And we sell a sufficient number of guns that we had to eliminate that friction point. So we have automated the 4473 process with a computer that make –- it’s kind of a dual benefit, easier to use for the customer and it reduces errors on the 4473 that a human being can make in a handwritten process. The ATF doesn't like errors on 4473s, I can assure you.

The other thing that was kind of amazing is until last year, our process was you go in, buy your gun, you get the gun and what do we do? We walk you out of the store. So here we just sold you one of the lowest margin products in the store and we escort you physically to your car. So we kind of thought, well, that's kind of a dumb idea because we just missed the chance to sell you a sling, a case, a butt pad, another choke tube, a cleaning kit, where we could grow ticket and margin. So we have launched across the chain of firearms concierge program which allows you to get your gun and continue to shop, and if you need someone to help you, do the add-on sale with the scope or rings or bases or whatever, that person is there to grab you by the hand and show you exactly what you need. And that's helping customer satisfaction and ticket and margin.

Lastly, in our boat and ATV, UTV business. We didn't run this like a boat dealership. So our database and sales tools to actually capture customer data and follow them before, during, after the process to make sure they were happy, it's just wasn't as good as it should be. And we have launched those initiatives in our retail stores, which are both helping Outfitters look like experts and reduce customer friction.

Now let's switch to process. For those of you that have followed us, you have seen that retail labor as a percent of sales has declined over the last 3 years. Ordinarily, this would be a warning sign that we're just cutting labor to get enhanced profitability. That couldn't be further from the truth. In fact, if you remember back to ACSI scores, we have increased customer satisfaction and lowered labor. How have we done that? If you've listened to our calls over the last couple of years, we've used technology in 2 fashions: our work brain, labor management system, which is best-in-class that ensures that we have the right labor in the stores at the right times in the right departments. Secondly, we work with a company called SCOPIX that installed camera systems in our stores to measure engagement. So we knew where the customer was flowing in the stores.

So what did it tell us? Well, it told us, duh, when a customer goes to the gun safe area and one of our Outfitters engages in less than 30 seconds, the likelihood of selling a safe goes through the roof because it's a high-touch category. It also taught us in footwear that we need to put Performance Products on the wall and self-service stuff like sandals and flip-flops or Merrells out on the gondo. You don't need an expert to sell you a pair of Teva sandals. You do need an expert to sell you a pair of Meindl boots or a pair of hunting boots. So it allowed us to direct labor where expert labor and advice was needed and not worry about it in other parts of the store. And those things have helped us reduce overall labor as a percent of sales.

I think this statistic may surprise some of you. Seven of the top 10 NICS locations in the United States, 7 of the top 10, were Cabela's retail stores. So having great compliance, from an ATF standpoint is an absolute necessity. It's not even a nicety, it's a necessity just because of the sheer volume of firearms that we sell in the overall NICS system nationwide. And I think we always strive to be better, but we're pretty darn good right now.

This is another, concerning statistic. Last year, we have a lot of customers that bring used guns into our stores to trade them. Because of our new safety procedures at the front door, which you'll see in Glendale today, we stopped 1,654 loaded firearms that were being brought into our stores. So imagine when you look at our competitors who are allowing people to just bring guns in. What happens if one gun discharges and one 8-year-old child is shot and dies. It's the Jack in the Box scenario from that -- you could never ever recover from that. So we are going to extraordinary lengths with the knowledge that some of our customers bring loaded firearms unknowingly, this is not knowingly, this is late [ph] into the store. And we stop every gun that comes in the front door. So tremendous effort to have the safest investment we can possibly have. So what did all that add up to? Well, it increased 4-wall contribution 600 basis points in 4 years.

Now I'd like to transition into the top of the house, if you’ll remember the opening slide, and talk about growth. The outpost stores are a really exciting concept for us. However, they require a different level of thinking in terms of staffing and training and expertise. We had to initiate a different staffing matrix and all of that means is with fewer people in the store, more people will have to wear more hats and be trained to do different things within the store. So we have spent -- we are spending a lot of effort to make sure that those people that will be in our outpost stores are much higher cross-trained than in any of our other either old store formats or next generation formats. And this gives us the ability to leverage labor across the entire store much more efficiently.

We mentioned the new kiosk, they're going to be really important, because we expect a much higher percentage of kiosk sales in the outpost stores just because of a little tighter assortment and customers who want to access the entire product line.

One of the benefits of both the next-generation stores, which are now fairly standardized, as well as the outpost stores, we spent a lot of time standardizing our standard operating procedures. And the benefit that this has given us, I'll use Wichita, which opened last week. The process to open Wichita was exponentially simpler than the first next-generation store of its size that we opened in Rapid City, South Dakota. So now, we've gotten SOP-standardized and we can, without as much effort, just start knocking the stores out. And that's really, really important. What is very important is sustaining the culture of the company in the outpost stores. So we don't want outpost stores viewed as just a little tiny Cabela's store. We want that same level of excitement and Ralph is going to talk about that in his presentation.

The other thing that's important in outpost stores is the clearance of inventory at the end of the season that the center core of the store is going to change 4 times a year. So merchandise that we clear at the end of the season, these outpost stores will be within a couple of 100 miles maybe as much as 300 miles from a big brother store, so that merchandise will quickly go, the end-of-season merchandise we couldn't clear, will go to the big daddy store, which has the ability and the traffic to blow through merchandise, which we think is going to be really beneficial.

This has also been a big break for the new store opening teams. So when we were in Wichita last week, we called them the Cabela's Pro Team, these are Outfitters from around the chain that are the best of our best, they come in

[Audio Gap]

and then guess what happens we opened Springfield, Oregon and the success there, I can't express to you how successful that store has been and it's 57,000 square feet and it still is rocking. So we kind of put those data points together and said, "You know what? Maybe there's an additional opportunity for growth given how poor the retailers are in these smaller markets, what an opportunity it is, how dense our customers are, and we think we can bring real excitement in addition to next-gen format and maybe become an even faster growing company."

And then lastly it's all about the customer. Looking big, acting small through events targeted marketing programs like OutfitHer and everything else we do makes all the difference in our business.

So with that, questions about retail.

Thomas L. Millner

Yes?

Unknown Analyst

Do you think in the outpost stores, the product mix is going to differ pretty significantly from the other stores?

Thomas L. Millner

It is. One of our initial thoughts was that there should be a much deeper focus on Cabela's branded merchandise in the Outpost stores. What we see in smaller towns as opposed to urban markets is more of a bias to the Cabela's brand. We certainly see that in the direct business and soft goods, and in a store like Harney, the penetration in soft goods, bias to the Cabela's brand is much deeper. I wouldn't even hypothesize why that's the case, but clearly, the rural customer likes the Cabela's brand more than they do in big urban markets. So in a market like Dallas/Fort Worth, the Under Armour brand is really big in our stores, whereas in a smaller market, there's more of a bias to Cabela's merchandise. So we're going to be really focused on the Cabela's brand in the smaller markets.

Unknown Analyst

How much does that result in the higher returns you've seen?

Thomas L. Millner

Well, we haven't opened the store yet. So...

Unknown Analyst

In your smaller stores in general.

Thomas L. Millner

It helps, it definitely helps. But I think what's been a more profound impact in the smaller stores is the higher sales per square foot, which Ralph will talk to you about in a few minutes. But I mean, the success in stores like Harney, which is a relatively old store and then in Springfield, Oregon, where we've got sales per foot that is just off the charts from the base. Having less sometimes results in more. What else is new? Yes, Faith [ph]?

Unknown Analyst

I was wondering if you could -- you talked a little bit about how gas prices impact you from a distribution standpoint, but I was curious if you could provide some historical perspective on how it impacts customer traffic. And maybe some insight on what you're seeing now, and then whether or not that might be potentially offset by the benefit of traffic driver from the strong demand for firearms and ammunitions.

Thomas L. Millner

The only thing I can go on was what happened, I guess, 2 years ago when gas prices spiked. We saw a clear trend that people stopped vacationing in the summer when gas prices were really high a couple of years ago and they tended to stay home which made for a better fishing and camping business. The whole staycation idea, we definitely saw. I'm sure there is some point at which is it $6 a gallon? $7 a gallon? Heaven forbid we ever get there, that there's some impact to our business. But I would submit to you, the beauty of being a multichannel retailer, our customers are still going fishing, they are still going to go deer hunting, because the misconception that's held in the world about our customer, especially our hunting customer, is that their trophy hunters. That's the 1%. The rest of the other 99% hunt to feed their families. And it's part of their lifestyle. But they feed their families with the game that they harvest. And I would submit if gas is $5 or $6 a gallon, they're still going hunting. Now, might they drive 2 hours to our store? Maybe not. But they're going to go online and buy from us. So I think we're fairly well insulated although, if gas goes to $7 a gallon, everyone is affected. But I don't see that happening, I'm not an oil prognosticator, but I'm glad we're in a passion business where everything in here is a deep part of the lifestyle of our customer. And I don't think whatever gas prices are, they're going to stop pursuing their avocation. The hunters that are in the room, albeit, probably affluent hunters, they're still going hunting no matter what. Yes?

Unknown Analyst

Tommy, not to put you on the spot, but I know you've got really great data on markets from the catalog side of the business.

Thomas L. Millner

We do.

Unknown Analyst

Without putting a time on it, as you're looking at next generation and outpost stores and cross mapping that with the data that you've got, I mean, how big is the potential unit opportunity in both of these?

Thomas L. Millner

We have resisted the temptation to say, "Well, it's 500 stores, 200 stores, 300 stores, 175 stores." All I can tell you, it's a lot. And if you'll remember the map I showed you in my opening comments, there is that whole void in the southeastern United States where our direct data tells us, we have lots of customers there. We have lots more customers in the northeast United States. We only have really 3 stores there Hamburg, Pennsylvania, Scarborough, Maine and East Hartford, Connecticut. I mean there is population density and hunting density there. Then you look at Canada, you have Vancouver, Calgary. We'll do a new store in Winnipeg, Regina, Grand Prairie, I mean I can just -- Toronto, I can go on and on. It's a lot of stores. The gating item which is important for you to know is we will grow at a pace greater than where we have been, but not at a pace where we risk losing our culture in those stores, because we just can't do that. Our customers expect us to be great one-on-one, and that's the gating item. I feel really good about our ability to grow pretty rapidly. It's a large number of stores. Okay, Ralph?

Ralph W. Castner

Well, Tommy, as usual did a great job of setting me up to talk about the growth. This is a pretty exciting time to talk about rolling out retail stores. I want to spend time with you today going through just a couple of topics as we start talking about retail expansion. The first for anyone who's curious is to really answer the question, "Why now? Why do we feel confident that we can start to roll out retail stores again?"

Just spend a little bit of time talking about our return expectations going forward, what our goals are, what we expect to see. Talk about some specific plans for some markets we expect to go into in 2012 and 2013. Touch, expand a little bit on opportunities we see in Canada, we feel really good about our performance we've seen in Canada with our first 2 stores and opportunities to move forward. Then lastly, talk a little bit about the outpost stores, which other speakers have touched on earlier today.

First, let's talk about why now? Why do we feel confident that we can open a bunch of retail stores again. First of all, you've seen these numbers on the slide earlier, but for 3 or 4 reasons, we've seen pretty meaningful improvement in our retail profitability. And sort of give you all a history of Cabela's roll out of retail strategy. If you go back to 2006 to 2008, we weren't executing well on our retail expansion strategy. You can see our contribution margins fell from 15% to 11%. And I would tell you, that's almost entirely due to introducing new stores into the base over that timeframe, where we introduced stores that were too big and you just couldn't get enough volume through some of these big stores to make them work.

So about 2007, 2008, largely under Brian's leadership, we developed our next generation store format which are the 80,000, 100,000, 125,000 square foot store formats. We felt a lot of confidence in that store -- in that format. But before we really felt comfortable rolling them out, we said to ourselves, "Look, we've got to see some improvement in our base stores before we can just rely on the new store format to get to the rest of the way there." So we really set some goals for ourselves on every line of the P&L where we expected to see improvement we can get. And we've got it really in 4 areas, it's no secret.

The first one is no secret that the bank has been a big contributor to our business going forward, and that has contributed increase to margin. We've talked earlier, and I'm doing this in order, we talked earlier about the gross margin improvement. We quoted on our last call that just between 2009 and 2011, we've seen 190 basis point improvement in gross margin. That was helpful. Tommy also alluded to improvements we've seen in labor productivity as a percent of sales have contributed, too. And finally, we've seen the productivity in advertising going forward.

So we feel pretty good about it. Now as you go through the individual -- as you go through the goals of what we need to see to the work, our stores need to do about -- and this is profit by the way, actually, I'll go through the rest of the slides so you can see the sales numbers too. But for one of our stores to work, they need to do about $325 per square foot. I'll have another slide later that shows the return expectations from a store. But our stores view the $325 per square foot to have sort of a store-level operating profit of $48 a square foot. As you look back to 2008, you can see we clearly had a problem. In 2008, our stores that we had opened for the full year of 2008 only did $33 -- $301 a square foot in sales and $33 a square foot in gross profit. Now in 2011, and it's basically the same stores, we've opened, I think, 2 or 3 new ones since then, but our entire store base has increased their sales per square foot to $328 and the operating profit per square foot to $56.

Now what's interesting is if you just look and then the slide at the right talks about the last 4 stores we opened, which would be Allen, Texas, Eugene, Oregon, Grand Junction, Colorado and Billings, Montana. And only 2 of those stores opened last year, so I just took the last half of the year, which is when the last 2 of those stores opened. But if you look at those 4 stores for that 6-month time period, those stores did $242 per square foot as compared to the entire base, which only did $193 a square foot and the operating profit of those stores was $42 as compared to the whole base which was $33. So those stores are running between -- at least on a profit standpoint, are running 25% to 30% better than the whole base.

So we feel pretty good as we start rolling out stores. We talked about, we opened in Wichita last week, a lot of excitement. We obviously look with great interest as we move forward as to how Wichita does sort of at least relative to the last 4 stores. But if you assume that same 30% increase in profit and apply it to the entire store base, that was say the 2011 numbers, I'm just adding 30% to the 56% we did, would be somewhere around $71 operating profit contribution on a store level relative to a required level of $48. So we feel pretty good about where we're going. If you look at -- this is just a -- if you look at our return expectations for a minute, this is just a summary and this is actually a recent store opening that we had announced. I just pulled out the store model that we'd looked at internally to give you guys some visibility into what we expect. But an 80,000-square-foot store, and this will seem like a big number relative to our historical and what we've seen in our most recent stores, we would expect the new store with a smaller store and better display to do about $450 a square foot in sales. So an 80,000 square foot store will do around $36 million annually in sales.

The 4 wall operating contribution, inclusive of depreciation and amortization runs about 16.6%, again, that compares to the 17% of operating profit number we showed you earlier. Then we do, when we do our store models, if anyone is trying to recreate this, we do load that for all corporate overhead, which is now running somewhere between 8% and 9% of sales. So if you look at that on a fully loaded basis with an initial investment, which is somewhere around $20 million, you'll see you'll get about 13% fully-loaded IRR.

I wanted some -- most of these stores have been announced, but I want to share a little bit with you about our specific plans going forward. We're really going to focus on some of the top 50 markets that we see in the U.S. for sales of our product categories and be in the places where retail happens in those marketplaces, look for co-tenancy, look for access. For those of you who've been to our store, both Allen and Eugene are great examples of it. Allen, Texas is in a great retail center with a lot of great co-tenancy right next to a Target. We're in a mall in Eugene, Oregon. Wichita, we're right next to a Target. Those are the kind of markets and locations we're looking for, look for some of the best locations in those markets, trying to capitalize in opportunities to open a market.

When you open an 80,000 square foot store at Wichita, Kansas, I mean, you're going to own the market. It's a great place to be. A lot of our customers are there who feel a lot of affinity towards of brand. I mean focus on some markets with minimal competitive pressure, which is what you've seen lately even in Allen, Grand Junction, Eugene, Wichita, not a whole lot of competitive pressure although, as Tommy talked about earlier, we are starting to open up those constraints as we feel better and better about our new store performance and utilize our next generation stores format. Primarily, what we'll roll out will supplement that with some of our outpost stores.

If you look specifically at what we expect from a square footage perspective. As I said earlier, we really -- opened about one store a year in 2009, 2010. Moving forward to 2011, we expect to open 228,000 square feet of retail; 2012, that will be around 470 square feet of retail; and somewhere between -- we're still -- as far as our specific plans go, I would tell you, we're in the final throes now of locking in all of our store sites for 2012. You should expect to see announcements probably sometime in the next 30 days, finalizing all of our -- I'm sorry, 2013 openings, I'm off a year. We're doing all of our 2013 openings. And we're starting to really think about spring of 2014 from an opening standpoint.

As far as percentage increases go, you'll see we really only had about a 2% percentage increase in retail square footage in both 2009, 2010. Last year in 2011, that increased to 5%. You'll see 10% in 2012. As we look forward to 2013, you should expect something between 11% and 13% growth in the retail square footage. Specifically for this year, 2012, we opened last week in Wichita, Kansas, we expect to open next month in a store, great location, North of Seattle. I was talking to Kate, she's a Seattle native and knows right where this is, it's next to an Indian casino North of Seattle. We expect to get great traffic both from Seattle and also some coming down from Vancouver and British Columbia, which would be helpful to at least provide some access to people in those markets.

In the fall -- well, I'll jump forward to Canada. Then in May, we're going to open a 50,000 square foot store in Saskatoon. So that will really complete our spring openings when we can open Saskatoon in May. Then as far as the fall goes, we'll open in Rogers, Arkansas, which I'm sure most of you are familiar with. That's in Northwest Arkansas near Bentonville where Walmart is headquartered, great opportunity for us there. And then Charleston, West Virginia. It was interesting. Charleston is probably not a market you'd think would jump to the forefront of your thinking, but as we continue to search for new markets, we had our marketing people run a stat of -- I think it was the community in U.S. where hunting and fishing sales were the greatest on a per capita basis, and Charleston, West Virginia popped the top of the list, so that there are -- even though that's probably not a market you guys are familiar with, there are a lot of our customers in Charleston, West Virginia. Go in and then look for that store site, which is a pretty exciting trip. So we're looking forward to opening there in the fall.

And then our first Outpost store will open in Yakima, Washington, 40,000 square feet in October this year. So we'll have the 3 openings in the fall. Now as we look forward to 2013, we've already announced stores for the 3 U.S. Next Generation stores that we expect to open in the spring, we've already announced, those are Columbus, Ohio, Grand Rapids, Michigan and Louisville, Kentucky. As I mentioned earlier, we're in the throes of negotiating up to 3 more stores in the fall where you should expect to see announcements probably sometime in the next 30 or 45 days.

In Canada, and this is probably all we're going to be in 2013, we're going to do a relocation of our Winnipeg store. And I was talking to somebody who's actually -- one of you actually, I think it was Mark, had actually visited that store, that we do great in Winnipeg but the access in and out of that store is tough. We're pretty excited about relo-ing that. We're going to be near an IKEA store in just a much better location from an access standpoint. So we think we'll be much better once we get that store relocated. Then we have not -- we're not as far along in identifying our outpost stores for 2013, I would tell you there's one, which is sort of in the final throes of negotiation, we would expect to open an additional 1 to 2 in the fall for a total of 1 to 3 for the year, and then probably do another one, early 2014. Specific -- and that's where we're looking at for our specific sites. We're pretty excited to start retail growth.

This next slide is not in your book, but it helps to answer the question that Todd said -- asked a little bit ago about our retail square footage. This is a map of the United States where 1 dot represents 250 customers. And interestingly enough, it is both retail and direct customers. So you would expect the dots to be much more centered around places where we have stores. But as you can see, there is a fair amount of the country where we have no stores yet with a real opportunity to go get the rest of our -- get more of our customer base. Denver is a great market. You can see there's markets in Texas that we're just beginning to touch with our 3 stores there. We have no stores in California other than -- Reno does serve a lot of the Northern California market. Big opportunities in California. All through the Southeast; Atlanta, Florida, North Carolina, Tennessee, lot of customers. And then you get up really into the heart of Cabela's country which is Ohio, Pennsylvania, upstate New York, we're way underpenetrated on a store base, looking forward to go into those markets, and we've had people in those markets looking for store sites. And as we move forward to 2014, 2015, you can sort of imagine where we'll be putting some of our retail locations.

Just some specific sites we're considering, one, which we didn't look out on the map, Anchorage, Alaska is a great market for Cabela's with great customers. We would love to be in Anchorage, Missoula, Montana, Kalispell, Montana, Helena, those 3 would probably -- and I don't know that we'd do them all, but those are some markets we're looking at for outpost stores. Calgary and Alberta, Canada would be great. Regina and Saskatchewan, Portland, Oregon and Northern Delaware, awesome sites, we're more serious about looking at the stores and some opportunities as we move forward.

Talk a little bit about Canada, our history in Canada, for those of you who don't know, in 2007, we bought a company called S.I.R. Wholesale Sports, which did somewhere between $10 million and $20 million in business at the time we bought it, half of it was in retail, half of it was indirect. But it really gave us a way to launch into Canada from where we really bought some people who were able to help us execute a Canadian strategy. And it's really worked out well. We started off, and this I'll take full responsibility for, we really started off slow in Canada because we were worried, for those of you who don't know, we run Canada on a totally separate SAP platform and somebody asked a question earlier about a distribution center in Canada. I mean, we would have to rely on a Canadian-specific distribution. Trying to move product across borders is just difficult. So it is a separate operation. So when we opened a store at Edmonton, I kept reminding Tommy, I mean, you got to remember, we're growing at a 100% in Canada. We're going from 1 store to 2 and we need to think about that as an organization that's growing that fast. And we'll grow 50% this year when we go from 2 stores to 3. So we had a lot of real estate opportunities in Canada, but I sort of intentionally suggested that we slow that down until we have the confidence that management team can execute that. Well, based upon what happened at Edmonton last year where we expect to happen in Saskatchewan, we feel really good about our management team's execution up there and are ready to start looking at some more sites and expand more rapidly into Canada.

Now I will confess, this is the same map we discussed earlier, although I will confess, the scale is different. The U.S. map, one dot represented 250 customers, here, one dot represents 15 customers. But you can see, there's areas of Canada where we have a lot of customers and have not yet penetrated with store base yet. If you look in Southern Quebec and Southern Toronto, there are a ton of customers there with big opportunities for us. So not surprisingly, what you'll probably see us do, there are -- in Alberta, Saskatchewan, Manitoba, there's probably a handful of sites for us. We need to move into British Columbia, there's some great opportunities there. Then you'll slowly see us start moving in east into Ontario, Quebec and the maritime provinces.

We talked earlier about outpost store and then we're pretty -- we've covered this in a fair amount of detail, but really the challenge we had is, how, as you look across the U.S. there's great markets that are not particularly big but have a very high penetration of Cabela's customers. And I'm sure a lot of you have been or can think of something, I mean, Idaho Falls, Casper, Wyoming, Missoula, Montana that may not have a lot of people but all of them there hunt, fish, camp and participate in our products. So what we looked at is trying to open a 20,000 to 40,000 square foot store and I'll tell you as we've spent more time in this, this is getting way pressed more towards 40,000 than the 20,000. Most of these we're looking at a 40,000 square feet, do somewhere between $15 million and $20 million a year in sales, looking at the markets where there's less than 250,000 people. An important metric here is this will be within 300 miles of an existing Cabela's store. And there's really 2 reasons for that: one of them is to give them -- give that store some management resources upon which they can fall back on; and secondly, to give them away to clear merchandise.

So for an example, Yakima, Washington, each of this will be assigned a big brother store. I presume Yakima's will be our Lacey store, which is the most mature store we have within 300 miles. So they'll be able to rely on the people on our Lacey store for management talent and also to clear merchandise. When it comes time to markdown merchandise at the end of the season, we'll just move that merchandise into Lacey, clear it through there, not clear to the outpost store, and quite frankly, the amount of inventory that you'll have to move will get lost in a store the size of Lacey and we'll be able to liquidate it in an orderly fashion.

And as both Brian and Tommy discussed, we'll be very seasonal. As we go through this, I'll show you just a couple of floor plans for the store and how we expect to see that roll over during the year. Clearly, the scaled back version of a customer experience and amenities, but I sort of used this room as an example today. If our construction and visual merchandising people can make a conference room in Phoenix look as nice as this one, I have a great deal of confidence that we're going to be able to bring that outdoor experience to these stores and really represent the Cabela's brand well. The only thing that will be permanent in the store is the firearms counters. So we will sell firearms in here. When you see the format, it's generally out at the left, but the entirety of the remainder of the store will be able to flex with the season and put in different product categories.

Here, I just gave a couple of visuals of what we expect the store to look like. The exterior will clearly be a more rustic look, weathered wood but really represent everything that is the Cabela's brand. The interior of the store, you'll be able to see, there'd be a lot of pictures like you see around our room here to identify what department you're in and give a sense of that Cabela's outdoor experience. Here you'll see a couple of important things for the store. Starting on the left, you'll see our firearms counter. Then moving over, you'll see the sign that displays archery. And then finally, the in-store pickup area, which we expect to be a major part of the store. Just given the more limited inventory, we expect a lot of people to order online, have the product shipped to the store and pick it up there.

Looking specifically at how we might see the store layout, this is actually the fall set, I believe, with the blue-gray areas upfront being hunting, archery being over at the left, camo being in the back, very small presence of fishing and products you expect to buy in the fall. Then you can see how that'll flip over in the spring where the green is bringing all the fishing stuff forward, very little camouflage, a lot more fishing, camping, spring sets that you'd expect to see in the spring time of the year.

So with that, I'll be happy to take any questions.

Ralph W. Castner

Yes, Maggie [ph]? I'm sorry, you might -- use the microphone, oh.

Unknown Analyst

Yes, I'm just wondering, Ralph, if you're using the mother stores, so to speak, for clearance purposes, don't you risk getting them a little overloaded?

Ralph W. Castner

Yes, well, you do. Although our expectation is that the amount of inventory we'll clear in the store will not be meaningful relative to the amount of tourists, inventory basically...

Unknown Analyst

Is the outlet store strategy going to be something that you're considering?

Ralph W. Castner

I'm sorry. Is what...

Unknown Analyst

An outlet store is something...

Ralph W. Castner

I'll probably defer -- Brian, I don't know if you have anything to add to that, but so far we haven't seen the need.

Brian J. Linneman

Maggie [ph] , our Bargain Caves really serve as our outlet strategy. And when we opened Rapid City, that store did not have a Bargain Cave in it and our customers told us very loudly and very clearly that, that was a really bad idea on our part. So Rapid has a Bargain Cave now. And it was -- I mean our, customers were irate. So that's really our clearance strategy.

Unknown Analyst

Maybe just a comment on the [indiscernible]

Ralph W. Castner

Is that Michael [ph]? I don't know.

Brian J. Linneman

Yes it is. The outpost strategy isn't to take all the merchandise. We will clear as much goods in an outpost environment that we can on a seasonal basis. Any residual, we'll look to make that transfer to a sister store. Okay. Other questions?

Ralph W. Castner

Yes, one at the back. I'm sorry, right there. Yes?

Unknown Analyst

Can you tell me -- in your model, when you're doing these outpost stores, do you have anything in there for cannibalization whether it's for the Direct business or whether some of the larger-format stores you have in place today?

Ralph W. Castner

That's a good -- that's a great question, actually. I would tell you, when we actually do the model, we don't include cannibalization but -- and Scott'll come across the table at me on this, we seem to care less about in the direct business than we do in retail. If you we're going to -- and I won't name them, but there have been a lot of markets that we've gone through to look at putting a second store, but if you really look at sort of the incremental revenue after you cannibalize the existing one, we've made the decision not to. As it relates to retail, we know that you're going to lose in a given market $2 million to $3 million of sales out of the direct business, but when you look at the incremental, in this case, $36 million, and by the way the $2 million to $3 million is only at bigger stores, I'd have to get data and update on the smaller stores, but when you look at the opportunity to do $30 million or $40 million for retail, that seems to be a trade worth making. It does, however, put challenge -- it's one of the many things that is challenging the growth rate in our direct business. I'm sorry, another question right there.

Unknown Analyst

Ralph, the Winnipeg store when you replace that, what size of store are you replacing? Big to small or vice versa?

Ralph W. Castner

It's 70,000 square feet. And the existing one, I think, is 50,000.

Unknown Analyst

50,000. That's going up, right?

Ralph W. Castner

Yes, going up. And the square footage will help, but I’ve got to tell you, location and parking are huge issues in Winnipeg. Other questions? Yes, sir?

Unknown Analyst

Just on the model that you have laid out in the presentation. The implication was the new stores opened like 140%, 150% productivity and then they don't comp, they're after...

Ralph W. Castner

Well actually, let's see if I can go back there. Will this let me? We have a positive 2 comp in the store model.

Unknown Analyst

Is it just something more like if opens so productive, it takes 1 year or 2 to digest? And then thereafter you can have [indiscernible]

Ralph W. Castner

I'll tell you. Our recent experience is, we -- those new stores enter the comp basis at 15 months and I'm always interested in this but as, like Grand Junction and some of those newer stores that started into the comp base, they've been comping positive at 15 months.

Unknown Analyst

Like at that 2.5% rate? Or at a greater...

Ralph W. Castner

Like, something near, something -- I think, actually, Grand Junction was 1 in 7 or something. Something's [indiscernible].

Unknown Analyst

I guess, well, I was just been watching this, they only comp 2.5%. Can you actually expand operating profit or no?

Ralph W. Castner

Yes, you can, although you have to -- if you look at it on a profit perspective between year 1 and year 2, there are some other anomalies that play into it. For example, margin is generally less in year 2 than year 1, but clearly over long periods of time, we believe at 2% to 3% comp that you can expand operating margins.

Other questions? Great. I think now we're scheduled for a break. Let's take 10 minutes?

Thomas L. Millner

Yes.

Ralph W. Castner

10-minute break and we'll reconvene at 10 till.

[Break]

Scott K. Williams

Good morning. By way of introduction, my name is Scott Williams, and I'm responsible for the marketing in the direct business. Joined Cabela's in October of last year. And so I'm going to focus a little bit of wearing 2 hats today to talk not only about what I think about marketing, our brand and the opportunities there, and where we can go forward with our direct business.

So as I think about 5 months on the job and what I've observed, let me give you a few headlines that I think are really notable, first of all, as it might be of no surprise to you, I think we have a really exciting brand. It's not uncommon to see folks be wearing a Cabela's shirt and have them stop and say, "God, I love your company" or "When are you going to bring a store to our area," or "I've been getting your catalog for years," or "I loved the Cabela's product, private-branded product," or "You know what? I carry a Visa card in my wallet." And they say it with pride and something that this really fits our business with their hobbies and their passion.

Second, we have an extremely strong culture. Never worked in a place where we have such a passion for the customer. I was thinking about of our Wichita grand opening last week and we were waiting to go outside and greet 3,500 customers waiting in line to come into our retail stores and we were given out awards and we had our Outfitters together. And literally, the Governor of Kansas leaned over and said, "Man, this is like a pre-game pep rally. It's like you're in the locker room ready to take the field. I mean, I've never seen this in a retail environment. This is really fun." And we've got a lot of experience. A lot of folks that have driven -- they're field-tested and field-proven and that's what's really driven the quality of our products.

Additionally, you've seen a lot today, we have momentum at retail. I don't think there is a lot of folks who are looking at 10-plus-percent square footage growth, that have really been able to drive various formats and profitability within retail, and a lot of that's driven by what we can with the brand, with marketing support, and with flawless execution at retail.

And then finally, I'll talk to you today about a need to transform our marketing mix. Tommy talked today about how much fun it is to put up a slide where every chart goes up and to the right and, obviously, our performance is something we're very proud of. If there's one area of the company that hasn't gone up and to the right, that's been the growth of our direct business over the last 4 years, and we've been declining at 3% or 4% for about the last 3.5 years. There's some important numbers inside of that in that there is a decline in calling on the phone business, that's from the heritage catalog business that needs to be counteracted by our growth within the internet. But we'll talk a little bit about that and specifically, what we need to do in looking at our marketing mix as we move forward to embrace how folks who are consuming media advertising and marketing going forward.

So let's talk about the excitement and the brand, and what can happen when an omni-channel approach in marketing really comes together. Take Black Friday 2011. As you know, almost all retailers are really trying to take advantage and see who wins this day. It's almost a scorecard of who really launches into the holiday season. And as we looked at it, coming into last year, we thought, "Do we have a right to play in Black Friday?" We've had some success the year before, but continually, everyone's looking for that extra edge. And as we look at a lot of retailers were saying, "You know what? I opened at 5:00 a.m. last year, let's go to 4:00 a.m." or "Let's go to midnight" or "Let's open on Thanksgiving" or "Let's do door busters that are below costs."

And as we looked at it, we thought, "You know what, we think we have the combinations of passion, Brian's team coming up with unbelievable products and door busters at nice values, but not at ridiculous margins, but to really drive the traffic and the passion." And what ended up resulting was we had over 56,000 people outside our chain that morning. Think about that, from a minimum of 300 at a smaller store to over 4,000 people waiting in line.

And in many times, they had been waiting 12 to 24 months. They had done it with excitement and passion, and to be able to go forward with that. Additionally, it's really important that we were able to get the word out, and we resparked [ph] by some social and digital efforts. Additionally, we were able to use inserts within newspapers, have our outfitters there, refreshed, having been home on Thanksgiving and there at 3:00 a.m. preparing to handle those lines flawlessly and to really provide superior customer service to our customers coming in that Friday morning.

You've heard us mention Wichita, Kansas several times today. So we opened there last week, 80,000 square foot. We would have seeded this market with billboards announcing that. I can trust you that the competitors in the market knew very well that we were coming and know very well today that we're there. We had retail flyers, the arm stretcher flyers that will talk about our great door busters, our events. Additionally, tease [ph] with digital and social, virtual tours of the store, et cetera. So on last Wednesday, but I guess, it would be a week ago Wednesday now, we had 3,500 people outside the store. Great grand opening, folks coming in, but it ended up turning into literally a 5-day event. Four days later on that Saturday, we had the Swamp People celebrities that were there. And that Saturday morning, we had over 3,000 people in line waiting for that. So it's really an excitement combining our retail-tainment with our great products here and bring excitement to that market, and we think that would be a really successful market for us. The point here is that we get all aspects of the company working together, this isn't a marketing story. This isn't just a retail story. This isn't just a merchandising story. It's really when everything comes together.

So let's talk about marketing mix. These are designed to be illustrative, but this marketing mix pie, you can kind of eyeball that our catalog spend as a piece of our overall spend is still well over 50% of our mix. We have said that the amount we would spend to support direct, which in this case would be the light blue and the dark blue, it would be the catalog cost plus the online advertising, we've estimated that that's somewhere around $135 million. And what we've said is that we don't anticipate that total spend to necessarily go down, but we do anticipate that the mix of those 2 between print to digital will significantly change. And we think there's opportunity for greater ROI and the move from our heritage business to embrace the growth that we're seeing from other multichannel retailers. Having said that, we will do it very wisely over time. We're fortunate to have a lot of data from the heritage of our catalog business, and the combination with our CLUB Visa program that gives us a lot of data to be able to migrate that.

We also see that in the green pie, we would have our retail advertising piece, which is primarily print as well, that will go into newspaper inserts, not only supporting grand openings but events like our Spring Great Outdoor Days. You can add the light blue and the green together and see that we are still north of 80% of our marketing spend in print type of marketing. I think there's tremendous opportunity here to go forward, and that is something that will not only help our overall business, but was something that we called printed digital internally. We'll talk about further and something you'll see some significant change over the next several years.

So for headlines, on marketing strategies that I'll talk about today. Digital and E-Commerce, brand marketing, omni-channel marketing and print-to-digital transformation.

So let's start with Digital and E-Commerce. Let's talk about Cabelas.com. As you've -- as we've said, if you look at our Direct business, the majority of our business within Direct is Cabelas.com. It is -- it's well past 50%, and growing to a large majority compared to what would have been those that pick up the phone and call in. As we look at this, we think there's tremendous opportunity here. And while our growth rates have not been what we've wanted, we do feel like there's some nice signs of progress. And let me talk a little bit about some of the efforts that we're undertaking.

First of all, through the 5-day period that would be Black Friday to Cyber Monday last year, we had record traffic on the site. We also had record sales. And know that when we have terrific product, so that we can drive some significant sales through our Cabelas.com. It has not been sustainable quarter in and quarter out, as you well know, for the last 14 quarters, and we continue to work hard against it. But additionally, what we have done over the course of time, and this predates me, but there's been a lot of hard work in what we call site planogramming. And that's literally taking the site and breaking it down, category by category, usability, site navigation, literally the tabs and navigation at the top, et cetera. And a lot of hard work has been done, we think is foundational work that will help us going forward.

Finally, you'll notice that we are those that are watching closely have been testing shipping offers. We're very well aware that free shipping or close relatives of free shipping have become very, very prevalent in the marketplace and accelerated over the last couple of years. We also realized that it's very important that we think about this smartly that, rather than just think about free shipping 24/7, 365, that it's very important that we look at free shipping and how it relates to other business objectives. So you will have seen us do some one-set shipping when you add a soft goods item, or when you add a Cabela's branded product to your car. We currently have had a $2 flat rate shipping on $49 that has been running recently. I will tell you that when we're on offer, meaning when we have shipping offers running, the trajectory of our business moves significantly. They are needle movers. And as we move forward, you've seen our Direct business. It's continued to be a profitable business, and it still is slightly more profitable than our Retail business. As we move forward, we continue to balance between 3 objectives, right? Direct sales growth, margin percentage expansion and the profitability of our Direct business. But trust us that we're looking at that, and feel strong that our data and analytics will help us drive forward and you'll see more to come on that.

Within our e-mail and remarketing, we are fortunate to have a strong e-mail database. You'll see us not only drive that for traffic for Cabela's.com, but you'll also see it for multichannel traffic to include support of events like the Wichita, Kansas grand opening. We've also increased our spending in remarketing. In this case, you'll see a circled banner here where this is a customer who's gone to Cabelas.com. For some reason, has not purchased. They could have ran out of time. It could be something that they wanted to do, some comparison shopping. And at a subsequent site, we're able to offer them a relevant banner ad. And this is not just a banner ad that says, "Hey, come to Cabela's." But it's very relevant to the product category which they were clicking, and had maybe added to cart when they're on Cabela's.com. We're seeing the conversion of this much stronger than our other efforts that include what would have been catalogs, what would have been just standard e-mails and that ROI is stronger, and we continue to reinvest in this area.

We also think it's very important to embrace new technologies in and around forums and communities and blogs, et cetera. It's pretty well-documented that we have a very passionate customer base that also has a number of our categories that are considered purchases, meaning that they want to seek advice from others. We have had ratings and reviews for some time. They also will want to ask questions about product specifications. There's an example where we use a technology from Bazaarvoice called Ask & Answer. You can post a question that will specifically talk about the characteristics of a product. In this case, we've had over 27,000 questions submitted. Of those, 15,000 get an answer from a Cabela's online outfitter. So if you think of our outfitters in the store, that's one of our competitive advantage is that service. In this case, how to translate that online? We will then post an answer from -- and that will have a Cabela's expert badge, so that the customer knows this is coming from a Cabela's expert. Interesting piece here is that 12,000 of the answers come from other customers, right? And so you might think, wow, that's pretty interesting. But it shows how engaged our customers are. I'll also tell you that our customers are very knowledgeable. The answers tend to be very accurate, and the communities tend to be very, very self-policing. So as we go forward, we also utilize this information in an important way, and that question would be, do we have best-in-class content on the web? I mean is there any reason why we would have not had enough information in the photos, in the video, in the product description, in the spec to cause them to have to ask a question, right? And what does that mean for us and the implications of getting our conversion rates up. So it's a very fruitful area of information for us as we move forward.

In mobile, while we feel like we're off to a great start in mobile and probably the leader in our space, I would tell you we're not satisfied with where we are. But if you look out there today, you would see 3 mobile apps. You would see an app that translates Cabelas.com to the correct specifications for a smartphone, specifically with both iPhone and Android applications. You'll have one in the middle that's a shopping app. And then on the right, we think we have some great opportunities for value-added apps. In this case, it's a recon app that includes GPS technology that will help you as you go out on a hunt to track where you've been. You could drop pins based on where you sighted a deer, where you tracked it to, et cetera. And as we look forward with these, we think it's an exciting opportunity that not any multichannel retailer would have, something that has that fun experiential piece along with a shopping app.

You might have seen, in the last week or 2, we announced a sister app to the Recon Hut, which is a recon fishing app. We've launched that as a free app. It also has a subscription piece that will come in behind where you can download topography, lake depths, those type of things to be able to go forward to added-value services on that. So we think there's a lot of opportunity here. We see like everyone else the growth of those accessing our site via mobile devices. While it's still a small percentage as a base, the percentage growth is fairly significant.

Facebook and YouTube are great opportunities for us. We have about 1.5 million Facebook friends and likes that are out there. These are folks that are very engaged, receiving conversations out there. Folks are, as you might imagine within this category, they're posting their trophy catches and they're sharing their successes within the field, talking about opportunities of what they can do then to also do product recommendations and items that they love. There's photos and opportunities for those sharing and those to be able to upload back to Facebook and other social media sites. And then finally, we think that the opportunity for YouTube and videos is probably more relevant in this space than it is in most multichannel retailers. If you think about the expertise that's required within our business, where you really are looking for learning a new trade like fly fishing where you're really looking and needing to have some expertise that being able to go in and have how-to videos, specifically explaining some of the terrific technology we have, and the competitive advantage will be a great opportunity for us to translate that online.

So let's talk about brand marketing. If you think about the Cabela's brand, and right now, I'm not talking about Cabela's branded product but just the Cabela's brand. We're very fortunate to have celebrated our 50-year anniversary last year. And the yellow cursive Cabela's brand is pervasive throughout our company, and we're fortunate in that oftentimes you'll see our customers very proud to wear it. It means a lot of quality to them. It's a pride they have. They'll wear it in a hat, in a shirt. And we've got a lot of equity around World's Foremost Outfitter. Having said that, we're very cognizant of the fact that as we move forward, and we look at 10-plus percent retail expansion, as we look at where we want to be as a multichannel retailer, where are we on the refreshing of the brand? Is it where we need to be going forward?

We have undertaken an assignment with Ogilvy out of New York. Ogilvy works with a lot of best-in-class retail clients. They're about 2 to 3 months underway of a 4-month assignment in really looking at what we want to do. Do we need a refresh of the brand? And stay tuned on that because we think it's very important as we go forward. But it's clearly not a makeover. It's clearly not anything is broken, but it's something that we're making sure that we leverage as we're going forward.

Additionally, Brian talked about the terrific innovations that we've had in Cabela's branded product. In one of the areas that we don't think we've maximized on, and I would fully agree with Brian on this is, how do we bring those to life with marketing support? So if you take a look at these Cabela's branded products, and it's over 30% of our products within the store, and you may walk in and see some branded shops where you would see some of our best suppliers have very clear sections within the store that you know that they have a presence there. One of the questions we've always asked is do you know that Cabela's branded product has a strong presence throughout the store? And not only -- it's not just about signage, but how is it with packaging? How is it with consistency? And you'll see that we've made some strides with the consistency. You'll see some consistent colors and themes as we go forward.

Having said that, we not only need to have a consistent theme, we also at many times, need to tell a good, better, best story. That when we talk about the Euro HD Binoculars and other products, if you're getting up to a product, $700, $800, $900 price point, and it's competing with the best-in-class, we need to be able to display that within the packaging and get the signal to the consumers of the good, better, best story. So we have a lot of efforts underway with that regard and to give you an example, we've talked a couple of times about the flyer out here, which is just a fantastic product in how we signify the good, better, best story as we go forward. So we think this is not only a strategy point of view, from a portfolio management within our merchandising categories, but also a packaging story.

Omni-channel. Now this may seem like kind of a cliché, but when we think about omni-channel, we think in the very basic, that means putting the customer at the center. And I've yet to talk to a customer who says, "Hey, I'm a direct customer." Or, "Hey, I'm a retail customer." Right? They say I'm a Cabela's customer, and they navigate very fluidly between our different channels. So if you think about they may see us in digital and E-Commerce, they may see us within brand marketing that we may do and general branding. What we do in retail marketing. And then overlaid with all that is a strong analytics capability that we have with statisticians and SAS modelers combined with our CLUB Visa database. As we go forward, we think it's very important because as you look at it, it's not just -- although we report publicly by 2 different channels, oftentimes those channel lines are being blurred. So we have in-store pickup and kiosks that we do count within our retail channel, but they're really multichannel efforts. As we go forward, we'll continue to look at what it means from research online, right? And then go to the shore [ph] -- and store and shop. We also look at the other opportunities where we may open into a market like Wichita and they may start as a retail customer, and what they do to become a multichannel customer. We've been able to grow our multichannel customer percentage. And as you might expect, those who participate in 2 channels are -- purchase better than those who participate in 1 and 3, better than 2, as you might expect.

Finally, I'll talk about print to digital. I showed you the marketing mix at the beginning, right? That has 60% catalogs and then another 20% retail advertising. And what I would tell you is here's how we're looking at things going forward. We think the marketing mix attribution will be significantly different going forward. And I'll give you a couple of highlights here. These sizes of these pies are more illustration than it is the fact that there are so many pies. But in the past, you would talk about how much you would spend on print, retail, digital. As we go forward, there's many, many components. Some of them are more established than others. But you'll see paid search, SEO, e-mail, banner ads, retail flyers.

As we go forward, we're seeing at times even in the holiday time frame, it's not impossible for one of our customers to have been touched 4, 5 or 6 times by us before they make a purchase. It's probably not that big of a surprise. They've got an e-mail, they may still get a catalog from us. They open up the newspaper and they had something in there. They may just know Cabela's because we've -- they got word of mouth from a friend. And when you get down to it, you think about how are you going to get credit for that sale? How are you going to do the ROI on your marketing spend? Well, we're fortunate in that we've developed some proprietary models internally that we think give us a way to really migrate through that in looking at the attribution of the marketing spend. And as we go forward, we'll spend against that based on the ROI that we have, and also keeping in mind the heritage of our business. So we're very excited about this. I would tell you that, when you think about this, I would think about the movement from the pie I showed at the very beginning to the movement here as a several year process. But we think it's something that's very important. And we're also very cognizant of the fact that there's some major trends in the way information is consumed specifically with our younger customers. And as we introduce the new generations, and they get introduced to hunting and fishing and knowing the frequency of which they consume information, mobile, tablets, how they search for information, we need to be ready to embrace that.

The last piece I would tell you is that when you think about where we are in our direct growth rates and, obviously, not where we want to be, there's some maximizing of channels that the best internet retailers are doing today, right? It's not only taking catalogs, but there's a lot of effort from folks in -- how you're doing in SEO, remarketing, e-mail, paid search, what's your shipping offer, I talked a little bit about that earlier. And you can trust that we're working on maximizing all of those avenues. Having said that, you've heard the famous Wayne Gretzky quote which says, "Let's don't skate to where the puck is, but let's skate to where the puck is going to be." And I would give you a couple of headlines of things that we think over the next 2 to 3 years, and you can imagine the detail and plans underneath this. But mobile usability of the website and the usability includes all the science from number of clicks on the purchase path to the cart experience to the guided navigation, to search landing on to product pages with user-generated content, personalization where in those that come on to Cabelas.com, you see a different homepage and a different landing page based on your previous click stream and your previous activity and purchases with us. The growth of social and where social not only is a fun to have, but where it helps drive commerce.

I guess, the last piece I would tell you, and this is an important one to think about is, we have a heritage that's something that we're proud of and we're not running away from, but our heritage has been in driving print first. We've been very good at driving circulation. We would know when a spring book would drop, and we know when a camping book would drop. And as a piece of that, we built a lot of processes that said, in order you needed to have your products in by this date, you need to have your pricing in by this date, you need to proof your pages by this date.

As we go forward, that would tend to drive the process. And then you would allow some of the internet, digital and other pieces to fall out of a catalog process. But we're in the process of reengineering to where we really drive the digital experience first, and that means things like master assortment online. That means things like testing in the digital catalogs. That means things like best-in-class content throughout our site. And I would tell you that, that is going to be a roll up your sleeves that's already started, taking it category by category, item by item, conversion by conversion of product categories. And that's where we're headed, and we think it matches very much up with the demographics and the changing trends.

So with that, I'd be happy to open up for questions.

Scott K. Williams

Kate [ph] or Matt, whoever want to lead.

Unknown Analyst

So I've got 2 questions. I guess, the first is on you've had a great response to free shipping offers. How do you think about the balance between you mentioned gross margin percentage rates are one of your goals in DTC. Does it make sense to potentially lower those targets and optimize a much higher dollars with more free shipping?

Scott K. Williams

Well, I'll start with that. And Brian, feel free to jump in. We see the balance very carefully. We are measuring when we go more aggressive on price in certain categories, and isolate those variables from when we go with a shipping offer that tends to go across different categories. And what we're finding is that there's a delicate balance between the 2. But obviously, we know when we have some shipping offers, it also fuels some juice with SEO and some other areas as well. And so as we work through, we're taking this and isolating the variables test by test. And we've actually seen the combination of strong, hot new buys with the shipping offer to have some strength not necessarily just one petal or the other.

Brian J. Linneman

The only thing else I would add is that this business is built on being competitive, great service, quality products and there's certainly a change in the marketplace on with the web customers. Free shipping is becoming a more expected response from retailers, and we're looking hard at all of those components. But your question's a valid one, and it's a good one. And we're just trying to figure out how do we balance the 2 to achieve the ultimate outcome we need, which is driving the business profitably.

Thomas L. Millner

I'm sorry, I'll handle that, too. Your question really gets to the heart. We talk about growing gross margin percentages, which we're still committed to, it's just that much tougher in direct than in retail. We talked about it on our last call we've got 100 basis points on a consolidated basis, but 190 in retail. And for all the reasons these guys have said and embedded in your question, we've just found it much tougher to grow direct than retail. I think well at least speaking for myself, we set those goals, I think we've presumed they would both move evenly. That's not been the case.

Unknown Analyst

And then secondly, as you look at the website, Cabela's.com, can you talk to the conversion on the site? And as customers come down the funnel, is there other -- some low-hanging fruit opportunities to improve conversion? And what is the 10 basis point improvement conversion would mean in terms of dollars?

Scott K. Williams

Well, rather than talk percentages, let me just give you a couple of headlines. We've been relatively pleased with our traffic. So to that point of view, it speaks to the robustness of our brand, and it's not been a drop off in what has been the traffic to our site. As we go forward, we continue to measure conversion, and I would tell you conversion is not as high as we would like for it to be. I won't compare it to others because ours is a little different. We look at it at the browser level and within the purchase path. But we're also seeing that, Cabelas.com, part of that traffic is it's a terrific information site for our omni-channel business. You might expect we've had a significant growth in traffic and researching of firearms and ammunitions, some of which we can't participate fully online, but we're having a terrific service for our customers who end up buying in retail. So we do go through and break down those site metrics. But I think you're correct in saying it's more of a conversion issue than it is a traffic issue. Do you have one, Kate [ph]?

Unknown Analyst

I do. A couple of parts, couple of questions. One is on the pie chart that you laid out for where you'd like the marketing mix to go, the largest category is Other. And I was wondering if you could kind of elaborate on what that might be? And second, I was wondering if you could give us some insight on how large your customer database is in terms of e-mail and catalogs?

Unknown Executive

Did we disclose the e-mail database before?

Unknown Executive

No, we have not disclose the site.

Scott K. Williams

So I would tell you it's significant. Obviously, in the millions of e-mail databases, without disclosing the exact number. And so, and those that have opted in and continue we watch as those open and click-through, that's been a robust business for us, and we haven't been declining in our e-mail database. The marketing mix pie that you're talking about, that was illustrative. But I will answer your question directionally. When you look at a lot of those pies, there's some very specific slices in there that are current areas that you can spend against. Those are things like SEO, things like e-mail, things like paid search. There's also areas that you would've seen in our last slide that are more directionally competitive areas we want to spend against. And you would have seen things like personalization, things like mobile, things like usability, things like technological advantages that we think are an important piece as we look for leadership in this area.

Unknown Analyst

And this is a quick follow-up. We see a lot of great Cabela's branded products here today, and I think it's pretty prevalent in your stores at least [ph] that you can kind of further emphasize the Cabela's brand online?

Scott K. Williams

Well, when we talk about personalization, and we talk about relevant offers, obviously, there's some terrific ways we can promote product online that's a little different than you would do it in stores, right? So we run AB testing, that when you have the very basic things like customers who viewed this also bought this. We have some key feature places within our homepage and products where we're fully expecting and you'll already see it today where Cabela's branded product will be in key feature categories and headline categories. As we go through category by category, and best-in-class content, you should expect the best photos, specifications, product stories, to be supporting those in and around Cabela's branded products as well. So they're really the prioritization for how we feature our product. Yes, Joe?

Joseph Agnese - S&P Equity Research

Just to clarify, do you think with the new marketing mix, I mean, one, how long do you think it would take you to get there? And two, does it also give you an opportunity over time to potentially pull some of those costs out? You mentioned the $135 million current spend today. But could that come down, or is it really just reallocating?

Scott K. Williams

So we talk about a marketing mix move over -- we've talked about several years. So let's call it in a 3-year range, where for us to change from the -- and those are fairly significant pie-sized changes, from the first pie to the second one. You also might imagine that the circulation plan that you would have in this direct marketing catalog-type business oftentimes is forward plans, 6 to 9 months. So we're cognizant of migrating with those that we already have planned, and migrating successfully. I think it could fair to say that you'll see a greater change -- more significant change in '13, but you'll clearly see change within 2012. Your question regarding the total spend is that our plan today is to reallocate the spend and not reduce the marketing spend. And we think it's very important that as we move the top line sales trend for our Direct business, first of all, that's a priority for us, and second of all, that ought to lead to us having some efficiencies in the future. Yes?

Unknown Analyst

Just a quick follow-up on your -- the Cabela's branded product. What -- is there a difference between in-store penetration rate versus the direct channel penetration rate for the Cabela's brand? And then I guess, just number two, you've been seeing your active account purchases over the last 12 months increase about 1% a year over the last couple of years, but we're still seeing direct revenue declines. How do you explain that? Is it a unit issue or price? Just what is the delta there?

Scott K. Williams

On the active account issues, are you speaking of online active accounts?

Unknown Analyst

Just in the direct channel. Overall active accounts.

Scott K. Williams

Okay, let me start with the first one. You want to take to the branded -- sure.

Brian J. Linneman

So you look at the Cabela's branded product penetration, and you -- first misnomer, you got guns and ammunition and boats and so on. So you got a piece there. Cabela's branded product penetration is clearly, it's higher in the Direct business than in the retail. I have not factored out to take some big categories like boats out and guns, but the penetration is very strong, particularly in soft goods.

Thomas L. Millner

And then regarding active accounts, let me just kind of factor in 3 or 4 elements that we look at, right? Obviously, we've talked a little bit about traffic versus conversion. But as we look at active accounts, we look at ticket, and ticket has remained fairly strong. We also look at frequency and repeat purchases, which has continued to be strong. So as we look at it, it's not only just number of active accounts, but it's the quality of active accounts and the frequency of which we see them coming back to be able to go forward. We'll measure retention rate and reactivation as well. But we think that the number of active accounts, there's a quantity and a quality issue as we go forward and we feel like we're getting some good frequency.

Okay. With that, I'll pass along to Ralph, thanks.

Ralph W. Castner

I'd like to finish up today talking about the bank. As most of you know, our bank's run by a guy named Joe Friebe in Lincoln, Nebraska reports directly to Tommy. I've spent a fair amount of my career in the credit card business, so it's a topic I'm fairly passionate about. And I’ve spent a lot of time thinking about it because of its importance to our overall business.

Just really 2 things we're going to talk about this, touching a little bit on the growth of that business, which quite frankly, recently, has probably been stronger than a lot of people expected, and we expect it to accelerate over time as we open up new stores. So we'll spend a little time talking about historic growth of that business, growth we expect to see from existing stores, and also growth we expect to see as we roll out new stores.

And then lastly, and most of you are pretty familiar with our credit card business. I've got a slide in here that just talks about some of the financial metrics that I'll spend a little bit of time on.

So this slide represents really over the last 12 years, the growth in our credit card business. And there are a couple of dates on here that are pretty meaningful to me. First of all is marked, not that I forgot it or anything, but it's March 23, 2001. That's the day we chartered the World's Foremost Bank, and we had $323 million of credit card receivables and, yes, we thought we were a big deal. Back then, most of our accounts were really driven by the Direct business. We had -- and it's on here as listed as a prescreen of one. We instituted a process which was hugely successful, and if you -- back then, most of the orders were taken by the phones. But if Reed Anderson would call in on the phone, while he was placing his order, it would prescreen Reed, and see if he is qualified for a credit card. And then at the end of the call, you got pitched, "So, gee, Mr. Anderson, you've been approved for Cabela's CLUB Visa card. Can we just put your order on that card today?" And not surprisingly, the response was great. You can see the growth. Well, then as we get into the '05, '06 time frame, when retail came -- became much more important, we really started to staff those up and used those as a way to generate -- use retail stores to generate new accounts. So today, it's almost -- it's entirely flipped around, and like 77% of our new accounts comes from retail. We've grown the business in September. Well, really we ended the year at about $3 billion of credit card receivables. So we're roughly 10x as big as we were in March of 2001.

This is -- I put this in here for context, and if you're actually trying to compare it, this is where we rank, where the Cabela's CLUB Visa program ranks in the world of credit card issuers. Now if you go open this up and compare it to last year's list, it's a little bit different list. This is all general purpose credit cards. So it will include American Express and Discover. The list we shared with last year just included MasterCard, Visa. But it's pretty interesting, and particularly for a guy like me, that spent -- whatever it's been 22 years in the credit card industry, to see our 14 -- there are 2 metrics that are important is there's $14 billion placed on the Cabela's CLUB Visa card throughout the entirety of the year. At any given time, the average balance, if you add up everybody's statement, is about $3 billion. But if you compare that $14 billion and how that compares to some other guys that I think do a pretty good job in this industry, like PMZ, GE Capital, Barclays, USAA, HSBC, you can imagine a day 5 or 6 years in the future as we continue to grow in this business, that we get our charge volume somewhere between $25 billion and $30 billion, and really are sort of in the same space as a lot of those really big issuers. When we started doing this, I think we were 50th on the list. So it's just been interesting in the last 10 years to watch this continue to creep up to the 14th spot we are today with all issuers.

I shared this chart with you last year, and this really just goes to the incredible opportunity we still have to grow our credit card base among our existing customers. Last year, I believe we grew new accounts at a rate of about 7% or 8%. What this measures is CLUB penetration by store. So what that means is, if a -- if you have a store that does $10 million at a 35% penetration rate, then 35% of the sales in that store are either on our card or are paid for with free points that were earned by our card. Each of those lines at the bottom represents a different store in the order that the store opened. So you can see as you get to some of our newer stores, we've got penetration rates somewhere between 15% and 25%, and there's no reason other than just through the passage of time, that those stores at the newer end of the spectrum can't get their penetration up to some of the higher stores. And another take away from the slide which is really interesting is if you start looking at the outliers, and I should label them, they're almost entirely driven by geography. And what I mean, by that is, if you open a store here in Glendale, Arizona, which I don't know how far it is to the next closest Cabela's store but it’s a long ways. You probably have to go to Reno or Fort Worth, Texas. It doesn't have the ability to draft off those other stores. Like when we open in North Seattle next month, North Seattle will have a penetration rate -- without looking at the numbers I can tell you it will be at least 30% because they'll have the benefit of all the store -- all the accounts that have been issued in Lacey, Washington over the last several years. So that's why you have outliers. But there's clearly a trend to push those numbers upwards so we generate more and more new accounts.

Just a little bit to go to the opportunity in our existing store base. This shows our distribution of new accounts by channel. And you can see, retail is clearly the green channel, with each store representing a different stripe. And I came up with this chart -- and it was interesting because over my -- since we went public in 2004, so it's been almost 8 years now, there's been a series of chapters of other reasons -- of reasons why we will fail. And in 2005, 2006, as we were slowing store growth and not -- well, you guys will never be able to grow your credit card accounts, because all the accounts come from the stores. Well, the point of this is to show that we've got really a great distribution across all stores that generate new accounts. The first store, Sidney, is the one right next to the red stripe there. It's still amazing that we get -- whatever that is, 2% or 3% of our total accounts come out of the store that's been open since 1991. No big surprise, our biggest store, Hamburg, Pennsylvania's the biggest stripe there. You can see as you go over to the left, our other stores have diminished over time as they become more mature and as retail becomes a bigger part of our total business.

Just a little bit to highlight the financials of our credit card business, which are -- it just been an unbelievable business. Interest and fee income in 2011 was $277 million. That -- by the way, total outstandings were $2.7 billion. That's the average for the year. That was up 11.1% from a year ago. Interest income was $277 million, which was 10.1% of outstandings. And if that number is less than you might intuitively think, because you look at the rate on your credit card at 16% to 18%, the reason it's different is because the denominator is all balances including those people that don't pay any interest. So the weighted average rate is about 10.1%. That's actually down from a year ago, about 90 basis points, just as interest rates decline. And fee income is part of that, too. Interest expense on a consolidated basis is 2.6% and I've been quoted as saying that's about as good as it's ever going to get. And then last week, we did a 5-year fixed-rate securitization of 1.6%. So it may get better, but it's hard to believe that you're going to be able to fund the $3 billion credit card portfolio at 2.6% for long periods of time. Our provision for loan losses was $39 million or 1.4%. That was benefited last year, as I think most of you know, we had some reserve releases off the balance sheet. Our actual charge-off rate runs about 100 basis points higher than that. We do expect those to converge. There were obviously the reserve release is not something that's sustainable. But I will tell you the other metrics in that business, when you look at lower charge-offs and lower interest income, will certainly be enough to offset that. Interchange income, which is the piece of the transaction, if you guys -- checked out of your hotel rooms. And I know some of you are Cabela's CLUB Visa cardholders because you shared that with me, if you put it on your card today and charged $100, we would get $1.80 or 1.8% of that transaction. That totaled $267 million. We would turn around and pay you, the cardholder, 1% of that transaction, or $1 in my example. That number which is a gee-whiz number was $156 million last year. So if you think about that on our -- whatever it is, $2.8 billion of merchandise sales, 5% or 6% of our total consolidated sales were funded through free points earned from our Cabela's CLUB Visa program. And you need to wrap your head around that for a second, just to think about how important that is to the consolidated group.

So we have other interest and fee income, which is a relatively small number of $13 million. So the number we think about when we talk about this business is risk-adjusted revenue, which is the same revenue number we disclosed in the financials, which was $291 million, 10.6% of outstandings, and you can see the trend up from a year ago.

Just to highlight a couple of key metrics, because it really goes to the growth in this. We grew average active accounts, we added 98,000 accounts last year, grew them at 7.5%, grew average balance 3.3%. It's now $1,937. As we move forward -- there's a couple -- and this will be interesting as we move forward, the growth rate on accounts of 7.5% will go up and may go up meaningfully over time, as we roll our retail stores. There will clearly be downward -- and I don't want anybody to get freaked out when they see this, but there clearly will be downward pressure on average balance as we accelerate accounts. The reason for that is, and it's a curve I should put in here for next year. In its first year, a new account has an average balance of about $1,200. So you start adding in more and more accounts with $1,200 balances, it will push down growth on average account. But I'll tell you, part of what was enjoyed these last 3 years is we've slowed growth a little bit, is just have these accounts mature, get more and more higher balance accounts, which has been extremely helpful. So in total, we grew outstandings by 11.1% last year, and you should consider to see that grow.

We are in an inflection point of this. And I get that question a lot. Is our bank business as good as it’s ever going to get? And the answer to that, before I saw that we borrowed money at 1.6%, my answer to that is on a per-card basis, it's probably pretty close to as good as it's ever going to get. Now in total, we would expect that business to continue to get much better as we're able to grow accounts and get more volume to it. But on a per unit basis, it's pretty good.

This is a chart we share a lot as we go out in the road. It's just our delinquency and charge-off rates. It is funny. Tommy alluded to this. You go back to probably April of 2009, if I was at a meeting with a group of investors and they saw that upward slope in the charge-off rate, the only thing we heard is targets of 15, you're at 2 going to 5. No matter what you tell me, you're going to 15. A lot of guys believed us and saw some of the differences and educated themselves through this, but we've clearly seen that fall to sort of historical levels, and I'll tell you, before the runoff we saw in '08, '09 with the Great Recession, this business pretty much like clockwork had charge-offs between 2% and 2.5% and we're well within that range to really expect anything is sustainable below 2% is just unlikely. I fully expect charge-offs will be maybe even tick a little above 2.5%, but somewhere in that 2.5% range is a sustainable ongoing level for charge-offs.

Another chart that gets a lot of interest. The reason -- there's several of them, but the big reason why we didn't see that run-up in charge-offs is the best way to control credit is only let the right people in the door. And we have 2 benefits, one of which is highly linked to the Cabela's brand, which is you attract the high-end customer. But this chart represents -- the red line is the distribution by FICO score of the applications we take. The blue line is the distribution by FICO score of the applications that are approved. Clearly, there's 2 big takeaways from this slide. One of which is how we just don't play after about a 670, 680 FICO score. The other one is the huge bell curve on the right where 31% of our approved apps are from the FICO score greater than 800. And I don't know how many of you know your own FICO score, but if I went and looked mine up, and I wouldn't fit in the band at the far right. So I mean, we clearly are attracting a very creditworthy customer who responsibly handles their credit, which is just a great deal for this business.

I'm going to skip ahead one slide on this, because it's almost easier to explain starting on 112 and then going backwards. When we got into the Great Recession in '08 and '09, I learned a very important life lesson about liquidity and how important it is. We developed this tool to manage our liquidity going forward, and the way to think about it -- by the way this is the slide as existed in the heat of the Great Recession in September of 2008. The line that you see moving up into the right was our forecast for what we thought outstandings would be over the next 12 months. If you look at the bar charts at the far left, those were all of our sources of liquidity that existed at that date. So we had -- 60% came from term securitizations, another 10% or 20% came from CDs, and the last section basically came from conduits. Then we assumed, we looked forward and assumed and said, "Gee, if we cannot renew any of those facilities, when do we run out of money?" And we always try to keep that day 9 months out of the future. Well, you can see we often hear we're only, I don't know, 6, 7, 8 months out in the future from running out of money. Well, if you go forward today to what that chart looks like as of April of 2012, there's a couple of things you can know. One of which is we've done a much better job of planning for our liquidity and not having a bunch of liquidity renewals coming due any time in the next 12 months. We've done that several ways, the largest of which is switching all of our commercial paper conduits to 3-year deals. So we have 3 commercial paper conduits, one coming due each year. The other thing you'll notice by looking that is the 3 major bars, which are term securitizations, certificate of deposits and conduits are about evenly split. So what, the strategy from a liquidity standpoint is just get 3 different sources of liquidity and try to get the maturities out as long as possible, so it's nothing you have to worry about.

So really our funding plan which is I'm sure I'll put all these up. It's probably less exciting to you guys as we've largely gotten through a lot of the refinances in some of our high-cost securitizations. But we expect to complete 2 term securitizations in the first half of this year, one of which replaces a maturing CD. Again, trying to get our commercial conduits to where they have about equal size 3-year terms, with 1 coming due each year, and we will continue to be very active in the certificate of deposit market.

So with that, I'll be happy to take any question from the bank or any other topics.

Ralph W. Castner

Yes, Mark?

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

Ralph, you said that talking about penetration, it did look like -- did that go down on merchandise sales this year as a percent of total sales around the CLUB cards? Just a slight...

Ralph W. Castner

I don't believe that it did this year, no. I think Chris prepared the data for it. I think it was about flat year-over-year as a percent.

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

About flat, okay.

Ralph W. Castner

Other questions? Yes, Jim?

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

What are the interest rates on the CP conduit and the CDs?

Ralph W. Castner

The CP -- really for the most part, it doesn't matter on the source of liquidity. It has more to do with whether or not they’re variable fixed. All these commercial paper conduits are variable rate, which now has a rate of about 0.8%. The certificates of deposit can -- it's interesting, they tend to be at about the same rate as term securitizations, which for a 5-year deal is 1.6%. There's several reasons to use CDs. One of which is it's a lot easier -- because they're smaller amounts, it's easier to stagger the maturities and go get liquidity time frames of when you want them.

Other question -- yes, sir?

Unknown Analyst

What's the net impact of maybe higher interest rates over the next couple of years on the profitability of the credit card?

Ralph W. Castner

That's a great question. And I'll tell you if you look at the textbook, our textbook interest rate management, I would tell you we're perfectly hedged. If anything else, maybe a little over-hedged, in that we have more, I mean, on the one hand, we said, "Hey, if you can't make money borrowing at 1.6%, you shouldn't be in business." So we actually have probably more long-term liabilities than what we have long-term assets. So in that context, as rates moved up, at least in the short term, you've got to make even more money because you're able to chart. The rates on the card move automatically with the overall level of interest. Now the more macro issue to get you a little bit out of the textbook is there's going to be a pricing sensitivity? I mean, say your interest rate now is 17%. Well, you're a little bit insulated from it because it just didn't go down as rates went down. But if you have a 500 basis point move in the overall level of interest rates, and all of a sudden, your credit card rate goes from 17% to 22%, it's like gas prices, at some point there's a shock that it creates some price sensitivity that you don't think having sort of a context of overall interest rate risk management. And that's something we're continuing to deal with in and with how we price our products and get our resources. Other questions, yes, sir, Mark [ph] ?

Unknown Analyst

Ralph, just talking about the interchange income, can you remind us the difference between the signature and black cards, compared to standard cards?

Ralph W. Castner

Yes. It's -- well, it's roughly, I don't know, 40 or 50 basis points higher, and I'm doing that from memory. But I think the most -- the highest product we get in any card is somewhere around 2.5%.

Other questions? Great. Thank you for your time, I'll turn it over to Tommy.

Thomas L. Millner

Before we wrap up, I'd like to take a moment to have the folks in the room from our regional teams and from our corporate office to just stand up. They did an enormous amount of work to get this room ready, to get outside ready, to have the store tours ready. So thank you, guys, very, very much.

Now they asked me to demand a view, a show of hands of

[Audio Gap]

for the store after lunch. So could we have a show of hands?

Mel [ph], is that good? I think we would define that as a lot.

I would be remiss in closing what I hope you sensed as an energized management team excited about our business, excited about the prospects for the future without sharing what keeps me up at night as the CEO of the company. I think that's only fair to balance the good with what worries me. And there's really only one thing. And it's this scope of federal, state and local regulation that is to call it challenging, would be the understatement of the century. And it's not just in the bank with the FDIC. It's EEOC, IRS, ATF, I mean, OSHA, National Highway Transportation. Well, I mean it's just -- it's like never-ending. And what's challenging is the sheer nature of regulations allow for subjective view of that particular reg at any point in time, and it's ever-changing. So it's not like it's -- you were holding on the offensive line. It's like, well, you weren't holding last down, but this down, I'm going to tell you that you are holding the opposing player. The result of this has been a significant cost increase internally to build compliance functions that if you don't have the scale of a company our size, I don't know how you afford to do that. We've been able to do it and digest it, but 20% of Dodd-Frank's regs are written, 80% are not yet written. So just keeping up with the sheer magnitude of the regs that are coming, let alone trying to figure out how to adjust to the regulatory approach of the ones that are on the books, is what keeps me up at night. But we are doing everything in our power to have the most rigorous compliance function across the whole enterprise that we could possibly have. Other than that, the worries that I have, I think we're in control of our destiny. And that's a good thing.

A couple of closing thoughts, in my business experience, the most powerful motivating tool in your organization -- or our organization is that winning is the most contagious thing in the universe. And when organizations start winning, the movement of Mt. Everest is possible. And for 3 years in a row, we as a company have exceeded almost all of our own internal metrics. And I'm not talking about stock price. I'm talking about the blocking and tackling goals that we established in the company, to grow margins, return on capital and everything else down to a very granular level in the business. And I'm sure when our management team took over the company several years ago, deep in the organization, there was probably a, well, we'll the see if these guys are if they really know the direction and we're really doing the right stuff. Well, I can tell you, 3 years in, as deep as you want to go in the organization, everyone knows we're winning. And when everybody knows we're winning, it creates a whole ambience inside the company that all of a sudden, everything is possible. We can tackle very difficult problems and bust through because we have already taken against our own internal metrics 14,000 people to a place 4 years ago, trust me, they never imagined that we can get to. And when you balance that against the competitive environment that we are in, which I would characterize as relatively weak competitors, overlaid by big parts of the United States where we have no retail penetration. Admittedly, as Scott said, fixing the Direct business is not going to be a 2-month fix. It's going to take a couple of years. That notwithstanding, our position in the marketplace after 3 years of winning with what we view as a ripe environment to grow our company, even in a relatively unstable macroeconomic environment, I tell you, I couldn't feel better about where our company is. But believe me, this team of people and everyone that works for all of us, our core belief is that we are never satisfied with where we are. So we take time to celebrate but then the next morning, we get up and say, okay, we're only halfway to the goal, 1/3 of the way to the goal. We've got more to get, and that spirit of continuous improvement and winning is a really powerful thing that's happening in our company today.

So with that, I can't thank you enough for either owning our stock or covering our stock. We appreciate all of you and everybody on the webcast. Thank you, so much for being here work. I hope you learned a lot today. Don't forget…

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