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Executives

Chris Gay - Treasurer and IR Manager

Dennis Highby - President and CEO

Ralph Castner - VP and CFO

Brian Linneman - SVP of Global Supply Chain and Operations

Analysts

Mitch Kaiser - Piper Jaffrey

Rick Nelson - Stephens Incorporated

Paul Lejuez - Credit Suisse

Derek Leckow - Barrington Research

Reed Anderson - D. A. Davidson

David Cumberland - Robert Baird

Jim Duffy - Thomas Weisel Partners

Bob Simonson - William Blair

Mitch Kaiser - Piper Jaffray

Paul Lejuez - Credit Suisse

Cabela's Inc. (CAB) Q4 2007 Earnings Call February 21, 2008 4:30 PM ET

Operator

Welcome to the Cabela's, Incorporated, fourth quarter and fiscal 2007 Earnings Call. (Operator Instructions)

I would like to turn the conference over to Chris Gay, Treasurer and Investor Relations Manager. Please, go ahead.

Chris Gay

Thank you. Good afternoon. I welcome everyone listening today both on the conference call and by webcast. This afternoon, we issued our fourth quarter and full year fiscal 2007 earnings press release. If you have not yet seen it, it is available on the Investor Relations section of our website at www.cabelas.com. In addition, a replay of today's call will be archived on our website.

With me, today, are Dennis Highby, our President and Chief Executive Officer, Ralph Castner, our Vice President and Chief Financial Officer, and Brian Linneman, our Senior Vice President of Global Supply Chain and Operations. Unfortunately, Pat Snyder, our senior vice president of Merchandising, Marketing and Retail Operations, couldn't be with us today.

This conference call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identified by words such as "expect," "anticipate," "project," "intend," "plan," "believe," and "confident." Forward-looking statements are based on our current assumptions and expectations and are subject to risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. We encourage you to review the risks identified in our filings with the SEC, including the information set forth in the risk factors section of the company's Form 10-K for the fiscal year ended December 30, 2006, and Form 10-Q for the fiscal quarter ended March 31, 2007.

Let me provide a summary of our fourth quarter's results. Consolidated revenues increased 13.9% to a record $889 million. Retail revenue increased 31.8%, as we opened six stores, with a total of 1 million square feet, in the quarter. We look forward to a full year contribution from these new stores in 2008.

Even with the opening of eight new retail stores, direct revenue increased 3.3% in the quarter, due to continued strength in internet sales. Active credit card accounts increased 16.4% for the quarter. We now have over 1 million active credit card account holders that earn rewards to use across our multi channel model. These card holders have grown to represent more than 27% of our sales.

Our earnings per share for the quarter were $0.84, which represents a 5% increase over the fourth quarter last year.

Now, I'll turn the call over to Dennis Highby, our President and Chief Executive Officer.

Dennis Highby

Thank you, Chris. We set aggressive goals to roll out eight new retail stores to significantly increase our market share in 2007. Though we are extremely pleased that we were able to open all these stores on schedule, including seven in just two months, macroeconomics weighed heavily on our fourth quarter results- prompting us to refocus our 2008 goals to adapt to the challenging economic climate.

We were clearly disappointed at the performance of the retail segment in the fourth quarter. Three new stores that opened in 2007 fell short of our expectations, while five stores either met or exceeded our expectations. We have initiated plans to improve performance across our store base, which I'll discuss in more details shortly.

We had many accomplishments during the year, which we believe will provide a strong foundation for our future growth. We opened eight new stores during the year. These stores added 1.3 million square feet of retail space, an increase of 49%, bringing total retail square footage at the end of 2007 to 4 million square feet.

Business through our internet site increased 30%, and our website received numerous awards and accolades including being the most visited e-commerce website in the sporting goods industry. We added five new catalog titles during the year for a total of 91 catalogs, while at the same time reducing the number of total pages, in order to further control cost. We began our implementation of customer service enhancements at our retail stores, designed to increase sales and customer service. These enhancements include availability of in-store pickup, new retail internet kiosks, and the installation of a catalog order desk in our retail stores.

We expect to have these enhancements available in all retail stores shortly and are very encouraged by the early results. We are excited about our expansion in Canada with the acquisition of SIR Warehouse Sports, and are encouraged by the financial results in Canada since the date of acquisition.

Our financial services/credit card business continues to grow, exceeding one million active accounts and over $2 billion in total credit loans outstanding.

Additionally, in 2007, we realigned our Management team to further integrate and built upon the strength of each of our channels. We strengthened our retail talent by bringing in highly qualified and experienced retail management from other large companies.

We expect to realize significant benefits from this realignment throughout 2008 and beyond. Given the challenging macro-economic environment that we experienced in the second half of '07, and it is expected to continue into 2008, we made the strategic decision to refocus our 2008 goals. As a result, several weeks ago we announced that we would slow our new store expansion and focus on improving the profitability of our existing operations.

We now expect to open two stores in 2008. We expect our Scarborough, Maine store to open in the second quarter and our Rapid City, South Dakota, store to open in the third quarter. We have spent a significant amount of time planning and designing our next generation store, which will be both smaller and more productive. The Rapid City, South Dakota store will be our first next generation store.

We expect the slowdown in new store openings to have several positive impacts for 2008. We expect pre-opening costs in 2008 to be $8 million to $10 million lower than 2007. We expect the capital expenditures for 2008 to be $100 million to $125 million, as compared to $372 million in 2007.

We do not expect any significant penalties from delayed 2008 store openings, nor do we anticipate any material changes to the economic development of packages. We expect to see strong growth in credit card accounts in 2008 and beyond.

From a new account per square foot perspective, there is not a material difference between our recent store openings, as compared to our more mature stores. Our existing retail stores, along with our direct business, will allow us to generate double digit growth in active accounts for the next several years.

From an operations perspective, we are taking immediate action to improve results across several areas of the company, especially in our retail division. We expect these initiatives will have a positive impact on our 2008 results. They include the following:

First, we were disappointed in the performance of the retail advertising campaign in 2007. As a result we hired a new Director of Retail Marketing. This individual comes to us with 30 years of experience in the outdoor industry. Our Marketing Department will be focused on improving our advertising strategy, by using more targeted campaigns throughout the multi-channel business.

Secondly, we recently added [Michael Copeland], and he is a new Vice President of Retail Operations. Michael brings over twenty years of retail experience, most recently with a major home improvement retailer. Under his leadership, we expect to improve retail profitability and same store sales, by focusing on increasing average tickets, improving overall productivity, enhancing outfitter training, and addressing underperforming stores.

Though the Management team is focused on improved planning and retail merchandising for retail stores, this will involve enhanced product assortments, increased flexing of stores, more seasonal assortments, and streamlining the flow of merchandise to stores.

And last, we'll focus on improving inventory management by better leveraging existing technologies, including our Evant replenishment system, reviewing and modifying minimum order quantities, and executing an open to buy process, to realizing improvement in inventory turns. Because of these initiatives, we look forward to improving our business and improving shareholder value in the near long term.

We enter 2008, encouraged and optimistic. For the year, we expect to realize a significant decrease in pre-opening cost. Additionally, given the early results of in-store pick up and internet kiosk, we look forward to rolling these enhancements out to the remainder of our stores, early in 2008.

With continued growth in our financial services business, and a full year impact of the new stores we opened late in 2007, we are confident that we can achieve our fiscal 2008 mid single-digit EPS growth target.

Looking forward to 2009, we currently expect to open two stores. The first will be East Rutherford, New Jersey. This is a lease store and is expected to open in the second quarter of the year. The other location is Billings, Montana. The Billings store will be, possibly, a next generation store and is expected to open in the third quarter of the year.

In closing, I'm very proud of the efforts of Cabela's outfitters and how they responded to the economic conditions that challenged us in the second half of 2007. I believe it is to their credit, how everyone worked together as a team to meet the challenges facing us, and their willingness to reexamine strategic goals and quickly refocus and adapt to the changing economic climate for 2008. I'm extreme proud of their efforts and handwork during this challenging time.

I'll turn the call over to Ralph Castner to review our financials in more detail.

Ralph Castner

Thanks, Dennis. For the quarter, consolidated revenue increased 13.9%. Direct revenue from the quarter increased 13.3%. Direct marketing costs as a percentage of direct revenue were 15.0% in the quarter compared to 15.7% in the same period a year ago. Direct marketing costs for the quarter decreased nearly 1%; while direct revenue increased 3.3% as we improved the efficiency of our marketing spend in both catalogs and internet.

Retail revenue for the quarter increased 31.8%. Results here were positively impacted by our eight new store openings in 2007, as the same stores sales declined 5.9% for the quarter. Looking now at the financial services segment, average managed credit card loans increased 25% in the fourth quarter and average active accounts increased 16.4% compared to the same quarter a year ago. For the quarter the average account balance increased 7.6% compared to the prior year quarter.

We measure the performance of our financial services segment on a non-GAAP basis, a reconciliation of these measurements to GAAP is provided in our earnings release.

Financial services revenue growth was adversely impacted by increased charge-offs and the impacts of changing assumptions related to securitization accounting. For the quarter, revenue decreased 1.7% to $37.8 million, versus $38.5 million in the fourth quarter last year.

Cabela's is required to follow FASB 140 with regard to securitization accounting. The statement requires that we record an asset equal to the present value of the profits over the life of the portfolio, which is approximately seven months. The value of this asset decreased during the quarter, due to changes in assumption with respect to bad debts, interest rate spreads, and an increase in the discount rate. As a result of these changes in assumptions, financial service's revenue was negatively impacted by $5.1 million compared to the year ago quarter. Half of this change was anticipated in our original planning for year.

Now turning to consolidated gross profit: gross profit for the quarter increased 9.8% to $371.8 million versus $338.6 million in the year ago quarter. Gross margin was 41.8% in the quarter compared to 43.4% for the same quarter a year ago.

Our merchandise gross margins were 39% in the fourth quarter versus 40.2% in the same quarter last year. Gross margins were negatively impacted by additional promotional activity and a shift in sales from higher margin soft goods to lower margin hard goods.

Now let's look at operating income: operating income for the quarter increased 6.8% to $94.1 million versus $88.1 million in the same quarter last year. Operating margins in our direct segment decreased 40 basis points to 18.5% as compared to 18.9% in the same quarter a year ago. The decrease is due to reduced marketing fees paid to direct segment from the financial services segment and lower gross merchandize margins.

Direct operating margins benefited from improvements in direct marketing cost. Operating margins in our retail segment were 15.3%, as compared to 21.4% in the same quarter a year ago.

The retail operating margin was adversely impacted by the following: lower merchandise gross margin, which negatively impacted operating margin by 180 basis points; increased advertising and promotional expense, which accounted for 150 basis points of the deterioration; lower marketing fees paid to the retail segment from the financial service's segment, which impacted the segment by roughly 80 basis points; increased depreciation, which had a 50 basis point impact; an increased pre-opening costs, which accounted for roughly 20 basis points for the quarter.

On a consolidated basis, operating margins decreased 70 basis points to 10.6% from 11.3% in the same quarter a year ago. The decrease is related to lower merchandised gross margins, increased advertising and promotional expense, and higher pre-opening cost, which were only partially offset by reduction in incentive compensation and direct marking cost.

Moving on to earnings: net income increased 5.4%. Diluted earnings per share were $0.84 in the fourth quarter compared to the $0.80 in the same period last year. As far as the balance sheet goes, as of December 29th the company had cash and cash equivalents of $131 million versus the $173 million at the end of 2006, and total debt up $403 million versus $311 million at the close of last year. We had $98 million of economic development bonds compared with $117 million at the close of last year. Recall that during the year, we monetized $43 million in bonds associated with our Wheeling, West Virginia facilities.

Inventory rose 26% to $608 million, up from $484 million at the end of last year, due mostly to stock in our eight new stores opened during the year, and some inventory over stock, due to lower than expected sales.

Turning now to cash flow metrics: we incurred capital expenditures totaling $336 million in 2007. In addition, we purchased $36 million of economic development bonds during the year, and monetized an additional $45 million from retirement and maturity of economic development bonds.

With regard to the economic development bonds related to stores opened in 2007, we purchased $36 million worth of bonds during the year. As of the end of the year, there are an additional $41 million of bond transactions yet to be closed. With respect to these transactions Cabela's has spent all of the funds related to these bonds in 2007, and now is in the process of submitting a formal request to close the bond documents and have the moneys reclassified from fixed assets to bonds. In addition to the bonds purchased by Cabela's, economic development bonds totaling $15 million were purchased by other investors.

Additionally, incentives other than economic development bonds related to these stores were approximately $30 million, most of which Cabela's will receive over time. During the quarter, we performed our quarterly analysis of the market value of our entire economic development bond portfolio. As of that, as part of that review, we determined that there were certain bonds where the market value of bonds had fallen below their book value. As a result, we had a $6.7 million valuation adjustment to our economic development bond portfolio that resulted in a reduction in net income for the fourth quarter of $750,000.

Let me now update you on our capital plans for 2008. For 2008, we expect capital expenditures, including purchases of economic development bonds, to be in the $100 million to $125 million range. We expect to fund this through our $57 million senior note offering completed in January of this year, and cash generated from operations. We do not intend to complete another debt transaction to fund our 2008 growth.

Now with regard to annual guidance, for 2008 we expect to generate mid-teens revenue growth. Revenue growth will be driven mostly by the full year contribution from the eight stores we opened in 2007. Given the current economic environment, we expect earnings per share to grow at a mid single-digit rate for 2008. In our planning for 2008, we've made some very conservative assumptions, which I'll like to highlight.

We expect same store sales for the full year to be down slightly more than 2007 levels, and we expect more difficult comparisons for the first three quarters of the year, especially in the first quarter. For 2008, we've budgeted for a 60 basis point increase in bad debt levels relative to full year 2007. We expect to continue to see a mix-shift to lower margin hard goods. We expect continued pressure in merchandised gross margins throughout the year.

Despite what we are expecting to be a tough retail environment, there are several opportunities to increase earnings for 2008. First is reduction of pre-opening expenses: we expect pre-opening cost to be $8 million to $10 million less in 2008 than they were in 2007. Secondly, we'll continue to leverage our fixed overhead cost. In 2007, we saw shared services as a percentage of total sales decrease to 9.3% from 9.8% in 2006. We expect to continue to see overhead as a percentage of total sales fall to 9.2% of total sales in 2008.

Finally we expect to see improvement in the performance for our retail stores. I will now turn the call back over to Dennis who will review each of these initiatives with you again.

Dennis Highby

Thanks, Ralph. We are committed to improving the performance of our retail division. We are taking immediate steps to improve retail results. We have spent a significant amount of time evaluating our performance and are rolling out several initiatives focused on improving our store operations. As I mentioned earlier, these include: improving our retail advertising strategy, improving retail store productivity, improved merchandize planning and retail merchandising, and improved inventory management. We are very excited about these initiatives and believe we can drive material improvements in our business throughout 2008 and beyond. I look forward to updating you on the progress of these initiatives throughout the year. With that, operator, let's open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Mitch Kaiser with Piper Jaffrey, please go ahead.

Mitch Kaiser - Piper Jaffrey

Thanks guys, good afternoon.

Dennis Highby

Good afternoon.

Mitch Kaiser - Piper Jaffrey

Could you talk about the extra advertising that you saw in the fourth quarter, and maybe obviously, it didn't show through on the comps. Could you talk about what products that was focused on, what regions, and then may be where it was disappointing relative to what your expectations were?

Dennis Highby

I think, Mitch, you remember in the third quarter, we felt good about our advertising, it was working. We had better product selection, more density on the pages. We shifted lot of the advertising from regular newspaper insertions into direct mailings. But it seem like in the fourth quarter, things were just tough all over, I think, that's typical of lot of people that experience a tough fourth quarter in the retail environment.

Mitch Kaiser - Piper Jaffrey

Okay. So, did it get worse throughout the quarter then, or is it bad November, or how did the quarter really play out, could you just shed some light on that?

Dennis Highby

Yeah, it just seem like, in general, anything we did for advertising, for retail, it didn't work, no catalog seem to hang in there pretty good. We weren’t really more promotional in advertising for our catalog business, but retail really took a dive in the fourth quarter.

Mitch Kaiser - Piper Jaffrey

Okay. And then, you mentioned three of the stores, three of the eight did not meet expectations, and I know, you brought Michael Copeland, and maybe could you just talk a little bit about what you are going to do specifically to address those three stores?

Dennis Highby

His goal is to do a lot of different things, but some of the highlights would be to continue to increase average ticket, some of the other people that we brought on Board, Chuck, Danny, in our merchandising area and they're committed to adding additional new products, every 12 weeks in the stores, especially in the clothing part of the company.

Another thing they are going to really focus on, we have not done as good a job as we are going to in the future, and what we call, like seasonal flex for the store. When archery is done, get rid of as much of it as you need to, move into more casual clothing for instance, when the fishing season is nearing its end this year, that’s going to shrink more significantly than it ever has.

Another thing micro-seasons, there are lot of little seasons that pop up throughout the year. We have one in Sidney here, the Elk Season for instance. We are going to do a much better job really focusing on those little seasons. Planogramming for the stores. We finally have a full rollout of our planograms, that’s been kicked off this spring. We think that’s going to have an impact on retail store productivity. Again we are going to do a better job training our outfitters. So that’s really how we are going to address the underperforming stores.

Mitch Kaiser - Piper Jaffrey

Okay. And then just lastly, I know there's going to be a bunch of other questions. When you talk about two stores for 2009, and you've positioned, I guess up and until at this point, the company has a mid teens revenue and EPS grower, is it possible that you could continue to grow, both the top and bottom line at a mid-teens level with only two stores opened for '09?

Dennis Highby

No, I think that’s going to be tough. Lot of it, Mitch depends on what happens in 2008. We see that we have opportunities to improve our retail store productivity, that count of two in 2009, and I think we'll have some flexibility on that. We have other stores that are in the pipeline that we could tee-up. I think just based on how retail is at the moment, I think it is very prudent for us to slow down, clean-up what we have and get things back on track and then move forward, back in to mid-teens rate at some point.

Mitch Kaiser - Piper Jaffrey

Okay. I would agree with that, so good luck guys, thanks.

Operator

Thank you, our next question comes from the line of Rick Nelson with Stephens Incorporated. Please go ahead.

Rick Nelson - Stephens Incorporated

Thank you, and good afternoon.

Dennis Highby

Good afternoon.

Rick Nelson - Stephens Incorporated

Can you shed some color on the inventory rise, up on 25%, is that heavy relative to where you thought you'd be at this point and if so, what categories?

Dennis Highby

One thing you should remember, in the fourth quarter especially sales are soft. Brian Linneman is here today, that's something that's under his direction. Brian, you might want to add something or give some color on that?

Brian Linneman

Rick, remember we opened seven stores late in the year? So certainly, we've got inventory for those seven stores. There is no question the softness in sale caused some overstock. I would say they are primarily weighted to the hard goods versus soft goods. It's good inventory that we believe we can work through and we expect between now and mid-year that we'll be able to reduce that inventory and get back closer to back on plan.

Rick Nelson - Stephens Incorporated

May be, just as an follow-on if you could talk some about sales in the fourth quarter from a merchandize standpoint where it sounds like things of were wiped on the hard lines inside of the house. How did soft lines performed?

Dennis Highby

Some of the categories that did well in the fourth quarter, again, hunting equipment, it was strong, camping, automotive and footwear. Some of the categories that were especially hurt in the fourth quarter were hunting, clothing and marine, just to name a couple.

Rick Nelson - Stephens Incorporated

Got you, and in terms of the underperformers, three stores are there any conclusions you can draw about those. Is it a location issue, a store sizing issue, or some other factors or that?

Dennis Highby

Yeah, Brian and Ralph might want to add something. I think, one thing that we're learning even though we have a very good idea, exactly what our customers buy, exactly where they live, some other things that we're learning and we have brought in outside sources to help us with it, is that drive times make a tremendous difference in some of these areas, where maybe the traffic is more congested. I don't know -- Brian or Ralph, do you want to add on anything to that?

Ralph Castner

The only thing we’ve learned is to just reinforce our commitment to our next-generation stores. We are going to look at stores and sort about 80 and 25,000 square foot range and use that store format that I know we talked about earlier, use that store format more going forward.

Dennis Highby

Brian, you want to talk about the next generation stores?

Brian Linneman

Yes, sure, the biggest factor, we're very close as Dennis talked about, we'll be pushing out a next-generation store in Rapid City this year. Going forward, we believe that thing will help us due to scaling prototypes from 80 to 125,000 square foot. We think we can reduce the capital investment. With the smaller stores, it gives you more flexibility to place multiple stores in a market, but inside the store, we've made a lot of adjustments to improve, how the way finding and the merchandised density in the stores, we've got areas where we can cross merchandize, as well as just this whole process of going to more prototypes, while as to expedite the store development time. We're pretty excited about getting this thing out in the market.

Rick Nelson - Stephens Incorporated

Okay. Thank you.

Dennis Highby

Thank you.

Operator

Thank you. Our next question comes from the line of Paul Lejuez with Credit Suisse. Please go ahead.

Paul Lejuez - Credit Suisse

Hey, guys, Paul Lejuez.

Dennis Highby

How are you doing, Paul?

Paul Lejuez - Credit Suisse

Good, thanks. Just wanted to touch on, bank SG&A down 10%. Just wanted to understand how to think about that going forward, was it the one time that drove that, and along the same lines, the non-allocable corporate expenses was also down 10% year-over-year after being up in the mid- to high-teens in the first three quarters. So, I'm just trying to understand what drove that and what to expect going forward?

Ralph Castner

Well, let's start with the shared, I don’t remember what you referred to it as, but corporate overhead shared expenses, a big part of that drop was incentive compensation decreases year-over-year. It was helpful, that was part of the others, was just being able to reduce those costs as a percentage of sales. We are looking for more reduction in that, probably another 10 basis points next year, and that’s even assuming that the incentive compensation returns to its historical levels. So, one part of our retail productivity is to continue to drive those expenses down and we did that in '07 and expect to do it again in '08. As far as the SG&A at the bank, I don’t know but I've got a lot of additional commentary on that, Paul.

Paul Lejuez - Credit Suisse

Just, how wouldn't did that happen, how did it go down 10% as the portfolio grew as much as it did?

Ralph Castner

How the expenses go down if the portfolio goes up? Well, as you know there are several components to that, one of which is just the operating expenses of the bank, we continue to get leverage there as it grows, also that would include the marketing fees that are paid to the retailer direct business and to the extent charges-offs were up those fees would be down also.

Paul Lejuez - Credit Suisse

Got you, and have you said what three stores that were under performing?

Dennis Highby

No.

Paul Lejuez - Credit Suisse

Or the ones that exceeded expectations?

Dennis Highby

No, we have not.

Paul Lejuez - Credit Suisse

And just wondering what you expect from the direct business. You touched on comps. I am just wondering what the assumption is for direct in '08?

Dennis Highby

No, we feel optimistic in '08. We have some additional catalog titles that were are going to introduce. We did introduce five new titles in '07. We came out with the successful optics book. We had a woman's holiday casual; we had a back-to-school book. We had another last minute gift catalog, holiday style type of book. But with the strength of the internet and some of the things that we are doing there -- Brian, and if you want to add on anything on the internet -- but we still feel good about our direct business.

Paul Lejuez - Credit Suisse

So, what's factored into your plans, is it still an increase of lower to mid single-digits in that business from the top line.

Dennis Highby

Yes, that's correct.

Paul Lejuez - Credit Suisse

Is that fair, okay. And then just last, can you just remind us the most recent FICO score the credit card portfolio on what date is that data?

Dennis Highby

As of the end of year the average FICO score was 787 -- that compares to 785 in '06, and just to more color I'll give you on that, but I think it is helpful. We are now to the point that 23% of our balances are over 85 months old. So, we will really start the deal with really seasoned portfolio there, which I think is helping to insulate us from some of these bad debt problems.

Paul Lejuez - Credit Suisse

Over how many months old?

Dennis Highby

23% of the receivables are over 85 months old.

Paul Lejuez - Credit Suisse

Got you, great, thank you, good luck.

Dennis Highby

Thank you.

Operator

Thank you, our next question comes from the line of Derek Leckow with Barrington Research, Please go ahead.

Derek Leckow - Barrington Research

Thank you, Good afternoon.

Dennis Highby

Good afternoon.

Derek Leckow - Barrington Research

Question on the productivity of pages versus productivity of your square footage, I mean, you saw much better performance out of the catalogue, how much of that was related to merchandising problems in the stores, relative to traffic, could you guys analyze that?

Dennis Highby

I think, without question, traffic is a single big driver of productivity in the stores and traffic continues to be soft in these stores, especially in the fourth quarter.

Derek Leckow - Barrington Research

And so, that was the major factor that wasn't, in your opinion, any issue with regard to merchandising the stores, or was that also an area that you thought was off a bit?

Dennis Highby

No, I think, it's all about traffic.

Derek Leckow - Barrington Research

Okay, alright, as I look at the difference in revenue versus earnings on the financial services side of business, Ralph, could you help me with the modeling here? What's the assumption for revenue growth? I mean, how do I think about revenue growth in the financial services area next year and going forward?

Ralph Castner

Well, we probably need to do that offline to get the best deal for, but I'll just help you a little bit, I mean, interest there are several components to that. Interest income and interchange income, auto increase and interest expense should all increase generally at the same rate that the portfolio grows. We record bad debts as negative to revenue so to the extent, those are up as a percent, that's going to be a drag on revenue.

Derek Leckow - Barrington Research

Then when do you make that adjustments, that's usually done in the fourth quarter, or when?

Ralph Castner

No, it's done quarterly.

Derek Leckow - Barrington Research

Done quarterly, okay.

Ralph Castner

It's actually done monthly, but you guys would see it quarterly.

Derek Leckow - Barrington Research

Okay.

Ralph Castner

And then lastly, which was a little bit of an anomaly in this fourth quarter, as you guys remember, we record an asset equal to the present value of the future cash flows of the portfolio, and a year ago, that had a almost between $4.5 million and a $5 million gain was, we tweak the assumptions for higher bad debts and little bit deteriorating interest spreads, there is actually a very, very small loss. A few hundred thousand dollars in the fourth quarter of this year, so that $5 million delta also ran through as a negative revenue adjustment, so I guess my point is, I would consider that the disconnect we saw between revenue growth and portfolio accrual in the fourth quarter is an anomaly of the fourth quarter

Derek Leckow - Barrington Research

So really looking ahead and we should kind of see those numbers line up, or look better next year?

Ralph Castner

Yeah, assuming the constant charge off environment, yes.

Derek Leckow - Barrington Research

Okay. And then just getting to working capital; you motioned that you are a little bit rich on some of the inventory. Is the plan here to liquidate that pretty quickly in the overstocks, and then what sort of working capital assumption should I make a far as how much cash could come out of there?

Brian Linneman

I'll quickly address the inventory and let Ralph address the working capital. We will work through this inventory. Our plan is to wok trough it in the first half of the year.

Derek Leckow - Barrington Research

Okay.

Dennis Highby

As we roll into fall, we think we are going to be back inline.

Derek Leckow - Barrington Research

Okay.

Ralph Castner

Yeah, I think there is some real opportunity in working capital for the year. The real test and that's going to be how we manage it particularly in the back half of the year. I mean, if we are able to grow that significantly slower than sales in the back half of the year, we should have a real opportunity from working capital perspective.

Derek Leckow - Barrington Research

So with the cash generation and lower CapEx next year, do you anticipate any kind of share repurchase or anything like that in the near term?

Ralph Castner

No, we are always looking at our balance sheet to making adjustments to that. That’s clearly one alternative that’s available to us.

Derek Leckow - Barrington Research

But you haven’t decided yet, or it hasn’t really come up yet?

Ralph Castner

If we decide to do that, we'll make an announcent.

Derek Leckow - Barrington Research

Got it. Okay. Thanks very much. Good luck.

Ralph Castner

Thank you.

Operator

Thank you. Our next question comes from the line of Reed Anderson with D. A. Davidson. Please go ahead.

Reed Anderson - D. A. Davidson

Good afternoon. I wonder if you might just expand a little bit on, Dennis, on your prepared comments about enhanced assortments, that sort of thing. I guess specifically, I am wondering if one of the initiatives might be to expand a little bit more on the branded side with some of the leading brands if you will, may be move a little bit away from the Cabela's brand. Is that one of the things you are contemplating?

Dennis Highby

No, I think the direction given to the merchandising people by myself is we need to make sure that these stores are fully merchandised that the consumer wants to buy. It's not trying to necessarily have everything in the stores, Cabela is on it. So, they are paying special attention to offering name brands, especially soft goods throughout this year. I think you'll see an uptake in the amount of brand name merchandise you see in our retail stores.

Reed Anderson - D. A. Davidson

And would it be as soon as say, even in spring we would see that or it will take a bit longer?

Dennis Highby

It's my understanding that we'll see it this spring.

Reed Anderson - D. A. Davidson

Okay. And then, can I on the similar vein here, to the comment about mix-shifting in favor of hard goods this year; is that just simply as you work through a lot of that, whether its inventory or it's a push on that end or is it a conscious effort to tweak some of the hard goods categories to draw some more people in?

Dennis Highby

I think part of the shift happened in the fourth quarter, when it was very very warm out, our insulated goods did not move and I think that's one of the reasons. And I think another reason is, I mean there is just continuous to be strong demand for lot of the hunting items that sell in hard goods. We have a huge selection and people come to us for that selection.

Reed Anderson - D. A. Davidson

Make sense. And then for full year, was ticket up or down for full year?

Dennis Highby

Ticket in both catalogue and retail was up.

Dennis Highby

Approximately percent, order, magnitude?

Reed Anderson - D. A. Davidson

Please don't disclose that.

Dennis Highby

Okay. And then, Ralph, just to clarify your comment on essentially the bad debt expense, I think you said 50 basis points over this year for '08. Does that mean then for the full year that should be up like 26 or 27 as a percent?

Ralph Castner

Yeah, I think we budget actually 26 as a percent of the full year now. I will tell you January, we will decrease. The increase has been less than what we budgeted so, I guess, with one month under our belt, we feel pretty good about that, but its more in that 26 kind of range.

Reed Anderson - D. A. Davidson

Okay, and then finally again for Ralph. Just as we think about gross margins for the year, relative to shift in merchandise or whatever, I mean, what order of magnitude versus just a full year of '07 makes sense, is this just a year where you were down a 100 basis points in '08 or is that too much?

Ralph Castner

No, I don't know, but I'll give you a lot specific guidance, I was going to tell you, a 100 would be a lot.

Reed Anderson - D. A. Davidson

Okay, that's good to hear. Okay, that's it. Thanks.

Ralph Castner

Thank you.

Operator

Thank you. Our next question comes from the line of David Cumberland with Robert Baird, Please go ahead.

David Cumberland - Robert Baird

Thank you. Ralph, can you provide some information on delinquencies on a 30 day basis and also 60 and 90, if you have that?

Ralph Castner

I actually have all of it. The 30-day delinquencies in '06 were 0.75%, those have increased to 0.97%, 50-day delinquencies went to 0.44% to 0.57% 90-days delinquencies went from 0.18% to 0.28%. So again, although, we have seen an uptake in there, it's nothing that's not manageable.

David Cumberland - Robert Baird

And then, my other question is on the new Director of Retail Marketing. Can you provide more information on this person's background, when the person joining Cabela's and how quickly this person can have an impact?

Dennis Highby

It is kind of hard to have much of an impact, just started Monday. But, he has a background from West Marine. Before that he was with a company called Gart's, I believe and Denver, is that correct? Yeah. I think that's correct.

David Cumberland - Robert Baird

How quickly he might he be able to have impact?

Dennis Highby

I think he is going to have an impact immediately. I think he has a lot of great ideas; we've been lacking in that position; retail advertising expertise. We look forward to his contribution very, very soon in the first and second quarter for sure, mostly in the second quarter.

David Cumberland - Robert Baird

Sounds good. Thanks.

Operator

Thank you. Our next question comes from the line of Jim Duffy with Thomas Weisel. Please go ahead.

Jim Duffy - Thomas Weisel Partners

I was wondering if you could give me an update on the revised fixturing programs that you guys are rolling out.

Dennis Highby

The revised fixturing program?

Jim Duffy - Thomas Weisel Partners

Yeah, on the apparel side of the business and sort of the remerchandising?

Dennis Highby

One of the things we are doing, I don't know if you've been in some of the stores, one thing you'll see is that they are taller for instance. One side of the fixture -- and they are quite wide -- will have a lifestyle picture. In the right hand side, they are going to have the bullet points that tell the consumer exactly the benefits of buying that product. Brian, and if you want to add anything to that?

Brian Linneman

No, I just know that visual merchandizing is a key focus. Especially around the Cabela's brand of products this year, the graphics, the value proposition that that product provides in creating much more information around the product and its capabilities.

Dennis Highby

Their goal there, Jim, would be to have a lot of the merchandized to be more self-service I guess. It's easy to sell for the customers, if you can understand what he is getting.

Jim Duffy - Thomas Weisel Partners

Alright, thanks a lot.

Dennis Highby

Thank you.

Operator

Thank you. Our next question comes from the line of Bob Simonson with William Blair. Please go ahead.

Bob Simonson - William Blair

Good afternoon, Ralph a couple of number questions; on the CapEx for next year, if it's the same number of stores, is the dollar amount CapEx next year about the same or are there other capital programs that are either greater or smaller?

Ralph Castner

Well, I think in my comments we give a range of 100 to 125.

Bob Simonson - William Blair

For this year, how about next year if you have two more stores?

Ralph Castner

I am sorry, for '08. It should probably be a similar number for '09.

Bob Simonson - William Blair

Okay.

Ralph Castner

Yeah, that's probably fair. One of the stores for next year is a lease store.

Bob Simonson - William Blair

East Rutherford.

Ralph Castner

Yeah, but the tent reimbursement actually comes from cash flow from operations. So from a CapEx perspectives, looks like two owned stores. So, I think that's a pretty good number.

Bob Simonson - William Blair

And there is no another important CapEx programs that are either in '08, that are in '09 or vice versa?

Ralph Castner

No.

Bob Simonson - William Blair

Okay, do you have a break down on the interest expense versus income; it was from one line in the press release?

Dennis Highby

I do. You will have to give me one second. My recollection of interest expense was about $18 million.

Bob Simonson - William Blair

Okay.

Dennis Highby

So, whatever, let me just get that you --

Bob Simonson - William Blair

Just subtracted from the total.

Dennis Highby

You can say, subtracted from the total. Actually it was $18 million, $778 was the interest expense, plus the other income of $6 million 913.

Bob Simonson - William Blair

Okay, and do you a depreciation number for '07?

Dennis Highby

I do, I forget that you always want to know that number Bob. Depreciation full-year '07 was $59.863 million -- that includes amortization.

Bob Simonson - William Blair

Okay, and in your prepared comments, I think you said that from a pattern standpoint, on your earnings this year and that first three would be tougher than the fourth and especially, the first quarter. Is that to mean, that all of the growth, whatever you achieved this year would have to come in the fourth quarter?

Dennis Highby

No, the comments you're remembering was specifically related to comp store sales.

Bob Simonson - William Blair

Okay.

Dennis Highby

And if you remember, and kind of our thinking there is, look, first two quarters are going to be tough. Third quarter, was an anniversary and a really strong third quarter a year ago, which will make that one tough even though. We'd expect the overall economy to improve. So from a comp perspective, first half of the year is going to be tougher than the last half. I don't know, that I necessarily say that with respect to earnings.

Bob Simonson - William Blair

Okay, it may not be as volatile or as different in the earnings per share comparisons, is that correct, that the earnings comparison could be better than the comp comparison?

Dennis Highby

The only thing I'll point out on EPS is, in the third quarter we will be anversering a lot of pre-opening cost, from each stores we opened this year, that's some commentary. So, I don't think that you'll sitting there, waiting until the fourth quarter for all the earnings growth for the company for this year.

Bob Simonson - William Blair

Okay, and the last question on the stores, like Wheat Ridge and Greenwood, is there plans for that? Is that just multiplied and they will come back or is there any expense associated with just holding it or?

Chris Gay

Both of those markets were excited to open the Greenwood and Wheat Ridge, its just unfortunate, we're not going to open them sooner but they are definitely stores that are still under consideration, and again they are in great markets and we expect to open them.

Bob Simonson - William Blair

Okay, very good, thanks.

Chris Gary

Thank you.

Operator

Thank you (Operator Instructions) Our next question comes from the line of Mitch Kaiser with Piper Jaffray. Please go ahead.

Mitch Kaiser - Piper Jaffray

Thanks, guys. I had a follow-up question. On the smaller format store, if you are talking 80 to 125, are they still going to the same type of attraction that some of your bigger stores are? And does that limit your ability to get government financing behind those, if it were?

Dennis Highby

It's unfortunate, we're not able to show you one over the phone, but these stores are going to be very exciting, very dynamic. They are just, may be the outside shell is a little bit different shape but the interior of the store is going to be very efficient, it's going to be very appealing. We are really excited about it. They are less expensive to built, a little faster to get on the market, but I don't think it will have any affect on any incentives that we get.

Mitch Kaiser - Piper Jaffray

Okay. That sounds good. And then, just lastly, like Wheat Ridge for example, the stores that were going to be owned that have been mothballed so to speak, have you purchased the land at this point on those? I think there is four that are kind of have been mothballed so to speak. Can you just take us through those, where we stand with those?

Dennis Highby

I'm not sure where you get to four, but in Greenwood and Wheat Ridge the land has been purchased.

Mitch Kaiser - Piper Jaffray

Okay, Adairsville, Georgia and then Montreal?

Dennis Highby

Well Montréal was a lease deal so --

Mitch Kaiser - Piper Jaffray

Oh, it was. Okay.

Dennis Highby

And I think at Adairsville, we've said on a previous call that we are not intended to go forward there, there is no activity.

Mitch Kaiser - Piper Jaffray

Got it. Okay. Thanks, guys.

Dennis Highby

Thank you.

Operator

Thank you. Our final question comes from the line of Paul Lejuez with Credit Suisse. Please go ahead.

Paul Lejuez - Credit Suisse

Hey, thanks, a couple of follow-ups. Depreciation in '08, what should we expect there Ralph?

Ralph Castner

I am not sure; I've got a specific guidance number with respect to that. I mean it should grow at roughly the same rate it did between '07 and '06.

Paul Lejuez - Credit Suisse

And can you tell us what you've paid for the SIR warehouse?

Dennis Highby

No, we have not disclosed that.

Paul Lejuez - Credit Suisse

And then just last, the comp, it sounds like first quarter you are seeing comps that are down similar to what you saw in the fourth quarter or have things gotten a bit worse? Any color?

Ralph Castner

No, they are very similar.

Paul Lejuez - Credit Suisse

Got you, thank you.

Ralph Castner

Thank you.

Operator

Thank you. I will like to turn it back over to management for closing remarks.

Dennis Highby

Thank you. Again we are encouraged about our prospects and opportunities as we begin 2008. We believe the strength of the Cabela's brand and our superior product selection, our devotional to customer service, will continue to separate us from the competition and serve us while as we go forward. Thank you listening today and look forward to talking to you soon.

Operator

Thank you. Ladies and gentlemen that does conclude our conference for today. If you'll like to listen to a replay of this conference, you may do so by dialing 1-303-590-3030, and entering in the pass code number of 3836711 or you may dial 1800-406-7325. Those numbers are once again are 303-590-3030 or 1800-406-7325, and entering the pass code number of 3836711. Ladies and gentlemen, thank you for your participation. You may now disconnect.

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Source: Cabela's Inc. Q4 2007 Earnings Call Transcript
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