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Executives

Chris Gay - Director of Treasury & Investor Relations and Treasurer

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

Ralph W. Castner - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Reed Alan Anderson - Northland Capital Markets, Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

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

Joe Edelstein - Stephens Inc., Research Division

Jonathon N. Grassi - Longbow Research LLC

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

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

Cabela's (CAB) Q2 2012 Earnings Call July 26, 2012 11:00 AM ET

Operator

Good day, everyone, thank you for standing by. Welcome to the Cabela's Inc. Second Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions]. I would like to remind everyone that this call is being recorded. I will now turn the conference over to Chris Gay, Director, Treasury and Investor Relations. Please go ahead.

Chris Gay

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

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

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

Thomas L. Millner

Thanks, Chris, and good morning, everyone. Normally, great news like today takes my breath away. Today it seems like great news and the worst cough and cold I've had in 5 years is doing the trick. So if during the script or during the call I sound like I'm dying, I'm actually not, but bear with me. Well on with the script.

Our record second quarter financial results validate that our growth strategy is working well. For the quarter, we realized strong growth in comp store sales, improved revenue performance in our Direct business, higher merchandise and operating margins, strong revenue and profit growth in our Cabela's CLUB Visa program and increases in market share. This strong performance led to record second quarter earnings and further increases in return on invested capital.

We are particularly pleased with continued strength in comp store sales, which increased 4.7% in the quarter. The increase in comp store sales was broad-based as sales increased in 25 of our 30 comp stores, and in 12 of 13 merchandising subcategories. For the quarter, average ticket increased 4% and we are particularly pleased that transactions increased for the first time in 5 quarters.

In addition to strong comp store sales, we also realized very strong performance from our new stores. For the quarter, sales per foot in the 6 new stores not in the comp base was meaningfully higher than our legacy store base. This is extremely encouraging as we continue to accelerate retail store expansion.

For the quarter, merchandise gross margin increased 70 basis points to 37.4%. This is the highest second quarter merchandise margin in more than 6 years. Similar to last quarter, we continue to see significant strength in the firearms and shooting categories, which caused a material mix shift into these lower margin categories. For the quarter, these adverse mix resulted in roughly 24 basis point headwind to merchandise margin.

Now let me turn to retail profitability, which is a key initiative in our retail growth strategy. For the quarter, retail profitability increased 230 basis points to 18.5%, a new second quarter record. This is the 13th consecutive quarter of retail profit improvement. Improvements in retail profitability were due mostly to higher merchandise margin and continued improvements in labor productivity.

Since our last call, we opened one next-generation store in Saskatoon, Saskatchewan Canada in May. The opening was a huge success with literally thousands of people waiting to shop the store on grand opening day. All 3 of our Canadian stores continue to perform very well, and Canada is proving to be a great market for Cabela's. We have strong brand recognition, significant participation in outdoor activities and because of the climate, a very favorable merchandise mix. In short, we couldn't be more pleased with the success we are seeing in Canada, and we look forward to further accelerating our growth there.

For the remainder of 2012, we plan to open next-generation stores in Rogers, Arkansas and Charleston, West Virginia. And we will open our first, 40,000-square-foot outpost store in Union Gap, Washington in October.

Looking forward to 2013, we expect to open 6 domestic next-generation stores and 2 outpost stores. Additionally, we will be relocating our existing 45,000-square-foot Winnipeg store to a more desirable location and increasing its size to 70,000 square feet. We have announced all of our domestic next-generation store locations for 2013. And just this morning, announced the location of our first 2013 outpost store location in Saginaw, Michigan.

Furthermore, we're beginning to fill in on our store expansion plans for 2014. This morning, we announced the location of our first 2014 next-generation store in Anchorage, Alaska. We've wanted to build a store in Alaska for a very long time. Alaska has a very rich outdoor heritage and we have a lot of tremendous customers in Alaska. These great customers rely on us for their outdoor recreation needs, as well as their everyday living. We are very excited about the opportunity Alaska represents and further serving our great customers.

Now let's look at our Direct business. For the quarter, Direct revenue declined just 7/10 of 1%, which is a huge improvement from the first quarter. During the quarter, we realized improvements in Internet traffic, growth in multichannel customers and very early progress in our print-to-digital transformation. Late last year, we began to develop a multiyear approach to reverse the 4-year downtrend in our Direct segment and transform our 51-year-old legacy catalog business into an Omni-Channel enterprise supporting transformation for digital, e-commerce and mobile, while optimizing the customer experience with our growing retail footprint.

We're in the very early stages of this effort. Near-term efforts will focus on print-to-digital transformation and testing targeted shipping offers. Later this year, we'll test new mobile and digital efforts with a focus on the holiday season. We are also pleased with our initial results, but there is a lot of work still to be done. While we clearly expect ongoing annual improvements, this will be a multiyear effort and you can expect to hear more about these initiatives over the next 9 to 18 months.

Now let's look at operating expenses, which again saw sequential and year-over-year improvement. Operating expenses as a percent of revenue decreased 170 basis points to 36.5% compared to 38.2% in the year ago quarter. This is the third consecutive quarter of operating expense leverage. We continue to focus on getting the maximum benefit out of every operating expense dollar, while making important investments in our business. For 2012, we continue to expect operating expenses to increase at a slower rate than revenue growth.

Now let's look at our Cabela's CLUB Visa program, which had another exceptional quarter as we continue to see strong growth in average active accounts, lower funding costs and improvements in delinquencies and net charge-offs. For the quarter, average active accounts increased 7.9%. We also realized significant improvements in net charge-offs, which were just 1.86% and are at the lowest levels we've seen in 5 years. With the backdrop of lower funding costs, strong account growth and favorable delinquencies in charge-offs, we are very confident that the Cabela's CLUB Visa program will continue to have a very good year.

Now looking at guidance. It is clear our strategies are working and our next-generation stores are achieving superior results. Accordingly, we expect our full year 2012 earnings per share to exceed current estimates by 1% to 3%.

In closing, I want to personally thank all of our Cabela's Outfitters for a great first half of the year. We appreciate all your hard work and effort in cherishing and delighting our customers each and every day.

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

Ralph W. Castner

Thanks, Tommy. Following up on Tommy's remarks, we are very pleased with our second quarter performance and the results we achieved with regard to revenue growth, merchandise margin, operating expenses, net income and return on invested capital.

For the quarter, Financial Services revenue increased 12.8% to $79.3 million. The increases in Financial Services revenue were primarily due to higher interest and fee income and lower interest expense.

For the quarter, net charge-offs as a percentage of average credit card loans improved 48 basis points to 1.86%, compared to 2.34% in the second quarter last year. Additionally, we continue to see improvements in delinquencies. Greater than 30-day delinquencies, were just 0.73% as compared to 0.92% a year ago. Greater than 60-day delinquencies were 0.43% as compared to 0.57% a year ago. And greater than 90-day delinquencies were 0.23% as compared to 0.28% a year ago. Delinquencies and charge-off trends continue to be favorable. For the quarter, there was no change in allowance for loan losses. This compares to a $5 million reduction in the second quarter a year ago. We do not expect to have material reductions and allowance for loan losses for the remainder of 2012.

Now let me highlight the future funding plans of our Cabela's CLUB Visa program. In June, we completed a $425 million, 5-year securitization, most of which will be used upon future growth. The securitization transaction included the issuance of $300 million of notes, which accrue interest at a fixed rate of 1.45% and $125 million of notes, which accrue interest at a floating rate equal to 1 month LIBOR plus 48 basis points. Our next term securitization doesn't mature until January of 2015 and we do not expect to complete another securitization this year.

From an inventory standpoint, inventory decreased 4% or $23 million year-over-year to $577 million. For the quarter, inventory turns improved slightly to 2.9x on the trailing 4-quarter basis. As we move into 2013 we may need to make additional inventory investments in order to support retail growth and grow our Direct business. As a result, we only expect small inventory turn improvement from these levels.

Accounts payable increased $75 million year-over-year, roughly $55 million of this is a Cabela's CLUB Visa payable to our processer, FDR. This is merely a timing difference related to quarter end. Gift instruments and credit card reward points increased nearly 13% or $25 million year-over-year to $221 million. $20 million of the increase was due to additional credit card club rewards. This cash flow is an often overlook benefit as the Cabela's CLUB Visa program pays for the points when earned rather than when redeemed, and is a significant source of cash for our merchandising business.

We ended the quarter with total debt at the parent company of $340 million. With one of the lowest lease adjusted debt-to-total-capital ratios in the retail industry, we remain very comfortable with our debt levels. Our next required principal payment of approximately $8 million is due in January of 2013.

For the first 6 month of the year, cash flow from operations was $70 million and capital expenditures were $86 million. With our accelerating store growth plans, we expect full year 2012 capital expenditures to be between $175 million and $200 million. With cash flow from operations approaching $300 million this year, we expect to fund is growth with internally generated cash.

Last quarter, we announced the Cabela's Board of Directors approved a share repurchase program designed to offset shareholder dilution, resulting from the granting of equity-based compensation awards. During the quarter, we purchased 800,000 shares in open market transactions at an average price of $36.19.

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

Thomas L. Millner

Thanks, Ralph. We couldn't be more pleased with our record financial results in the second quarter and the significant improvements we continue to make in our areas of strategic focus. And with that, operator, let's open the call for questions

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Reed Anderson from Northland.

Reed Alan Anderson - Northland Capital Markets, Research Division

A couple of questions. Tommy, obviously in your core categories, you're clearly taking share. But I was curious to, as you've kind of broaden the -- or not broaden, but really focused the merchandise assortment, I'm thinking of some of the apparel initiatives, women's, et cetera, do you feel like you're getting a bigger share of the wallet that's even outside of your category? Have you done any work on it? I'm just curious of your thoughts.

Thomas L. Millner

Yes. I do, Reed. We've taken a lot of really great steps in categories like tactical clothing, soft tactical clothing. Our women's initiative, we call OutfitHer, which is a full line of camouflage clothing designed for women by women, not asking women to buy children's clothes, and try to make it look like women's clothing. We've made really good progress in outdoor living and in our home and gifts categories to just broaden our appeal a little bit without losing our core at all. And I think what was really encouraging to us in the quarter, we didn't disclose this in the script, but comps, excluding guns and ammunition, were up 4.2%. And you know the wrap against us in the past was, we are totally dependent on guns and ammunition. Well, comps were 4.2% in the second quarter without guns and ammunition, which speaks to your point, I think.

Reed Alan Anderson - Northland Capital Markets, Research Division

Yes. That's terrific. I noticed, too, in your comments or at least in the release, you even talked about power sports. You made a positive comment on that. I mean does that partly reflects some of the initiatives we saw at the most recent Analyst Day? Or there are some other things going on there that are driving that?

Thomas L. Millner

It was a really big quarter in the boat business. Apparently pent-up demand from several years of slow boat sales and flooding in the upper Midwest last year.

Reed Alan Anderson - Northland Capital Markets, Research Division

Makes sense. Tommy, I kind of always wanted to get your sense of the Firearms business. We all know it's strong, but there are still supply constraints, particularly on a lot of the key products. Do you still feel like you guys have a competitive advantage there? Are you seeing that or is that not the case anymore?

Thomas L. Millner

No. We definitely have a competitive advantage. And it all comes back to the balance sheet strength that we have. The issue of whether Cabela's can pay or not versus others is not even on the table as you can imagine. And plus, our merchandising and supply teams have just done a great job making sure that we were way ahead of the curve coming into fall. I think we're in really great shape.

Reed Alan Anderson - Northland Capital Markets, Research Division

And then last question for Ralph, on the bank side. It look good. Looks like we're finally starting to see, at least on the interest income side, a little bit impact of lower rates. And so kind of what we saw in there is that it make sense in what we saw in 2Q on a go forward at least that, that's kind of more what it looks like from an -- you're offsetting it by a lower interest to cost, but that's more reflective of kind of the current environment, does that make sense, Ralph?

Ralph W. Castner

Yes. That's probably fair. I'm not sure we've seen -- we haven't seen that much movement in interest rates on the way down, but we have seen some. And as you know, we have completed all of our refinancing on the interest expense side. As I quoted, who would have ever thought in our lifetimes you'd borrow 5-year money at a fixed rate of 1.45%? That's a great business.

Operator

We'll take our next question from Sean Naughton of Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Question on the Direct business. Can you talk about some of the categories that were strong within the Direct business and maybe elaborate on some of the strategies you used in the quarter to really help drive that improvement?

Thomas L. Millner

Sure. Shooting was very strong in the quarter. Fishing was also very strong. And to my earlier comments, home and gifts were very strong. I want to first characterize that we were really pleased to see progress in the Direct business in the second quarter. But caution, this is, as we've said, this is a long-term fix to get the business where we want it to be, but clearly, a good first step in the quarter. More than product making a difference, we tested up a bunch of different things in catalogs, size of catalogs, frequency, driving browser traffic, and a number of things that, frankly, for Sean, for competitive reasons, we're not going to go into detail on. We are pleased with how some of those things tested, they clearly worked. In the balance of the year, we're going to test some more things and see how they work. But good initial progress, nice first step, but it is a long path that we're on and we're going to keep at it.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Understood. That make sense. And then Ralph, maybe you can just give us an idea of how we should think about new account growth relative to new store growth and what you believe is kind of a reasonable expectation? And secondly, is there anything on the regulation front that we should be thinking about, on the card business?

Ralph W. Castner

You know, I think -- well, first of all, let me start with account growth. We had account growth of almost 8%. There's no question we'll see upward pressure on that. I think we can envision account growth as sort of in the low-double digits as we start to accelerate store growth. But we actually went back and did some work for this. We had growth rates in that business in the mid-teens in 2008, but that's when we were adding 8 stores on a base of 24. So we won't be growing square footage at the same percentage. But I would think that -- I would think we could get up to a sort of low-double-digit account growth over the next 3 or 4 years. Now as far as regulation goes, I would tell you from a congressional standpoint, most regulators, no new regulation that we see. I think some of you probably noticed 10 days ago this Visa settlement that came out. We -- we're just continuing to watch what can happen interchange rates. There's nothing in that settlement that we're too terribly concerned about. But obviously, if something happened in credit card interchange which, at least as we look at the world now, we don't see. But that could be a risk in the future.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Completely understood. And then just lastly, as we kind of look at the balance of the year, are there any changes in promotions between Q3 and Q4 that we should be cognizant of from a modeling standpoint? And then as a follow-up, given the difficult weather conditions last year in Q4, how are you thinking about the opportunity for upside in the fourth quarter and then growth in that business?

Thomas L. Millner

Well, we don't have any major media shift -- major promotional shift plans. We're going to test a number of things, but there'll be weighed against what we did in the prior year. So on balance, I would call it a push. We might have a little more media later in the year. I think, we feel really encouraged about hunting season and the products, especially Cabela's branded products, that we're going to have for sale in the fall hunting season. And so I think we're reasonably encouraged. We'll just see, I don't know what the weather's going to be. But it doesn't seem like the drought in the upper Midwest has had a meaningful effect on our business thus far, given comp strength in the quarter and the improvements in the Direct business. So we'll manage the weather best we can when it happens.

Operator

We'll take our next question from Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Can you provide an update on the rollout of the price optimization tool that you've been working on, both the timing and the expected benefits in that?

Thomas L. Millner

Yes. We continue to roll the price optimization model out. And I think the timing that we had quoted prior was later this year into the early part of next year, but moving ahead pretty much as planned. I would comment, one of the things that really helped us in the quarter was the managing of markdowns through the quarter. We're going to finish -- we finished the quarter and now we're transitioning to fall merchandise as clean as we've ever been. So carryovers of inventories from spring and summer to fall are going to be as low as we can remember. And obviously, the fact that we managed to get margin rate increase as we managed through getting out of categories is a testament that our merchants and our planners are doing a great job managing price optimization, even at this early stage.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Great. And then just a quick follow-up on firearm sales. There's been a lot of talk over the past week about a pickup in firearms across the country in the wake of the tragedy in Colorado. Can you give us a sense of any impact on your business that you're seeing and if is there's any potential long-term effects that might take place?

Thomas L. Millner

Well, I don't know about the long-term impact but obviously, our hearts go out to the victims and everybody touched by the tragedy in Aurora. And I would say that the trends that you read about in the press, we are experiencing, at least thus far, since the incident.

Operator

We'll take our next question from Matt Nemer with Wells Fargo.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

First question is I wanted to touch on the new free shipping program for CLUB Visa members. I'm wondering if that's helping to drive direct traffic or conversion or maybe card member account growth? And then can you talk about how the economics of that are playing out? Does the extra volume from free shipping pay for the markdown? Does it drive a gross margin dollar improvement?

Thomas L. Millner

Matt, that's a really good question. If you followed cabelas.com, you would note that we just launched it a little more than 3 weeks ago, late in the month of June. So one, it didn't have a meaningful impact on the quarter. And two, is limited to the subset of our cardholders. And it is a promotion at this point, not a permanent benefit. So there are opt-ins and all that kind of stuff. I would say, at this point, it's way too early to tell because it's, again, a test and validate and let's see what effect this does. It has had a nice impact on new card activation, which is a really good thing. Mechanisms for future funding, we're going to have to balance against, if we want to continue to do this longer term against other promotions and other places that we spend money. So early signs are encouraging, but we've got some work to do before we decide what to do longer term. Ralph, you want to add anything?

Ralph W. Castner

No. I just -- and Tommy touched on it. But you asked as part of your question what the impact is our new card growth. We always view that as an ancillary benefit, I'm not sure it's that significant. But we've seen lift in cards, both in our call centers and in our Internet as a result of the promotion.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

That's interesting. And then secondly, I'm wondering -- I enjoyed hearing your comment about the new stores and their performance out of the gate. At the Analyst Day, you mentioned that the newer stores are about 30% more productive per foot. Is it fair to say, based on your enthusiasm, that maybe they're even doing a little bit better than that?

Thomas L. Millner

They are doing really, really well. And it really encourages us to see that our customers are voting in the strongest of possible ways that this new format does not compromise customer experience. In fact, I would note that our voice of the customers scoring system that we talked about at Analyst Day, some of our best-performing stores are the new stores. And so we're getting great customer experience and then the financial implications, I mean, I just can't understate how meaningful they are. It's significant, and as we look at the buzz that's occurring in Rogers, Arkansas today ahead of our opening and in Charleston, West Virginia, just weeks apart from Rogers, the buzz is just tremendous. And this morning, we announced what we know is a hugely lucrative market for us in the Direct business, which is Alaska, to have a big presence in Anchorage is just really, really important. And we have coveted a site in Alaska for a long, long time in our company.

Ralph W. Castner

Just to add on a little bit on to the new store discussion, I did some work in this and looked at earnings release before we sent it out. But if you look at the incremental retail sales growth beyond the comp and compare it to incremental square footage growth, you'll get a sense for how well those new stores are doing. We didn't to quantify it on the call, primarily because Wichita opened in March and Tulalip opened in May. So a lot of the big grand opening hype of those stores was within the quarter. If we try to quantify it, it might distort whatever numbers we had. And then Saskatoon opened in May. So we wanted to get the grand openings sort of out of the quarter before we started giving you guys numbers on that. But I think it's safe to say, based from what we've seen, is we're really pleased with kind of the 2012 class of stores that we've seen so far, which are the 3 we've opened. We've got 2 more in August that we look forward to report to you on the next call. But 2 of the underlying messages you guys should take away from this call is how pleased we are with new store performance and also how well our business is doing in Canada. We continue to feel really, really good about that market.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

That's great. If I could just sneak in one more which is, can you comment on your comps in the guns and ammo categories versus how the market is doing? Do you think you're holding share, gaining share, maybe giving up a little share?

Thomas L. Millner

No. I think we're gaining share. Just the fact that we have -- are inside positions are pretty good in guns and our balance sheet gives us access to our best partners under the biggest sellers. Supply constraints have -- they're crop up here and there but on balance, I think we're in really good shape and probably taking share in guns and ammo.

Operator

And we'll go next to Dave Magee from SunTrust Robinson Humphrey.

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

Just a couple of questions. One is, as I look to the next quarter in terms of comparisons, it looks like you have an opportunity in terms of somewhat a user comparison. I think, as our call is related to last year to the warm weather in the Fall, if things are normal this Fall in terms of getting cooler on time, which I know may be a stretch from how it seems today. But if that happens, is that a real opportunity in terms of perhaps some acceleration in comps year-to-year?

Thomas L. Millner

Well, one would think so. And we tried to bake that into our guidance that we expressed today. But it would appear to be an opportunity and -- but you know, the Fall -- the dove haven't started flying yet. Until the dove start flying, I, for one, don't start to get excited until the hunters start to hit the field. But it would look like an opportunity.

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

Two questions on the next-generation stores open this year. One is, is the mix in merchandise being sold significantly different than the legacy stores? And then any thoughts on how the stores might comp next year, given that they've started off so strongly this year?

Thomas L. Millner

The merchandise mix being sold really is market dependent. As you would expect in the Pacific Northwest, in Tulalip, we're selling a lot more outerwear. And in the new store in Allen, Texas, we're selling more firearms because it's Texas and that's a good gun market for us. But I don't think the dispersion of what we're selling is any different in the new stores than it is in the legacy stores. But I think what's happening in the new stores is this lack of necessity to triplicate assortments and then have to deal with the markdown of those product categories because we had to duplicate, and worse even more than duplicate, offering to fill space. Just the raw productivity of the stores is so much better.

Ralph W. Castner

I want to talk a little bit, you asked about how these stores are going to comp as they come into the comp base. First of all, we really can't comment on the ones we just opened this year, because we don't know. But the best data point we have is to go back and look at the stores we opened a year ago in Springfield, Oregon and in Allen, Texas. And they're performing, as the end of the comp base, sort of right in line with the comp. They're not a huge lift and they're certainly not a distraction. How well -- and by the way, Edmonton will enter the comp base this Fall. But there's nothing to believe that what we've seen in Saskatoon or the other 2 stores we opened this year that -- or I guess, which would be Tulalip and Wichita, that those won't have the same performance moving into the comp base. I think it's more common on these next-generation stores and how they're more consistent performers.

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

My last question has to do with the Direct business. And hopefully, what we're seeing here is an inflection point with regard to improving top line trends there. Do you feel any differently about that process as it happens, what the impact might be on your store base? Do you think that it can be done with the sort of a minimal impact as far as cannibalization?

Thomas L. Millner

I think what's going to be really interesting to see is, as we go to places where we don't have stores like Anchorage, Alaska, it's going to be interesting to see if there's actually a lift in the Direct business in Alaska because our visual footprint is elevated. We're in the market and we're more top of mind because customers will drive by our store and frankly, we'll just have to wait and see what happens. But it's going to be very interesting to watch.

Operator

We'll go next to Rick Nelson with Stephens Incorporated.

Joe Edelstein - Stephens Inc., Research Division

This is Joe Edelstein in for Rick. You started the conversation and indicated that you saw a lift in the average ticket. As you look out to the rest of the year, and I know, Tommy, you mentioned that hunters will come into the store once we've really move into the hunting season. But how do you think the split will look between average price and general traffic into the stores?

Thomas L. Millner

I think that we feel really good about our media plan for the Fall. So I guess, I'm cautiously optimistic that we've got a media plan and product offering and product value to continue the traffic trends, but time will tell, obviously. We have spent a lot of effort in retail in driving average ticket up and we've done it through a lot more clip strips. And I'll give you an example, in the Northeastern United States, there is, today, an explosion in bug population: flea, tick, mosquitoes. So in our Northeastern stores, you're going to see a lot more opportunities in the store, all throughout the store, to buy those kinds of products, to encourage that purchase. And we've done it in a bunch of other categories. We put -- as I mentioned earlier, tactical clothing over near the firearms and ammunition pads. That's lifted that category, which drives higher tickets. So ticket being up, believe me is not an accident, but our teams in merchandising and in retail operations have focused there and it was really great to see results from it. And we're going to continue.

Joe Edelstein - Stephens Inc., Research Division

If I can, then maybe just come back to the stores. A lot of excitement around the next-gen stores and the potential for outpost stores. I'm just curious, what things are you learning from those that you can then come back and apply into the larger legacy stores? How much focus in the past, for instance, has there been on flexing merchandise pads within the larger stores or even incorporating the new digital signage and other initiatives that you have?

Thomas L. Millner

Well, the first outpost store will not open until October. But we had a -- our last full briefing on the Union Gap outpost store just 2 days ago for the whole management team. And it was really interesting to watch the teams talk about, wow, let's see if this works in outpost because if it does, it is -- we could use that learning in the big store. And I'm not going to go into all the details for competitive reasons, but things like digital signage and flexing pads, we're going to learn at Union Gap and then when we open Saginaw, we're going to learn some more. And then in the remaining 3 as part of the test, we're going to learn even more. But our teams are really keyed in on what can we learn here that can help the bigger stores get even more profitable.

Ralph W. Castner

And I'll add to that. I would tell you that more than the store design, the learnings we're getting is just from having more and more retail talent expertise in our organization and bringing in that talent and applying sort of a talent knowledge as opposed to just the store design. There clearly are things that we learn from store design and having new of them, but the talent acquisition is, by far, a bigger contributor to it.

Joe Edelstein - Stephens Inc., Research Division

That's great. And maybe one last question on the outpost store. I know the concept is really intended to be put into the smaller markets, I think you said 200,000-type population markets. But is there a reason why this format couldn't work in say, a larger city?

Ralph W. Castner

Well, maybe, but I think the short answer is, I'm not sure we feel we need to at this point, given how well the next-generation stores are doing in larger cities. Now I would tell you there are some markets that we've looked at, where maybe you could supplement them with an outpost store. But I think, or at least our thinking today is, big markets, next-generation stores; smaller markets, output stores.

Operator

And we'll go next to Jonathon Grassi with Longbow Research.

Jonathon N. Grassi - Longbow Research LLC

I guess, obviously, it was really encouraging to hear that the comp was up excluding the gun and ammo, but you did mention the 12 and 13 product categories saw an increase. Which category was down?

Thomas L. Millner

I actually don't remember it, but it was down in a miniscule amount.

Jonathon N. Grassi - Longbow Research LLC

Okay. And then, you had mentioned the 24 basis point product margin headwind from the gun and ammo in the quarter. If I recall, you guys begin to increase prices on firearms about a quarter or 2 ago. Can you remind us when you started to increase the prices in? And if those price increases hadn't gone through, what would've been the -- if you could quantify the headwind would have been on the product margin improvement, that would be helpful.

Thomas L. Millner

We actually began to be a little more aggressive in pricing more than a year ago. And we'll have to look -- I don't have the number off the top of my head of what it would've been had we not. But I got to believe it would've been double or more. But we'll look at that.

Jonathon N. Grassi - Longbow Research LLC

Okay. And then I guess, finally, I know you guys have been hesitant to declare your total retail store potential. But now that you guys have had more time to study potential locations for the outpost stores, do you have any guidance that you could provide on how many total Cabela's doors you think there could be in U.S. and Canada?

Ralph W. Castner

Yes. Well, we've done some work in Canada. On the store format we're opening in Canada, which is a 50,000- or 70,000-square-foot store, the answer is probably somewhere around 20. Now at some point, we'll need to come up with the smaller format in Canada, because all the smaller markets are in the city and we haven't considered that yet. In the U.S., between outpost and our next-generation stores, it's probably somewhere between 150 and 200 stores. But one of the reasons that we don't want to nail it down is just like we're on retail expansion, as we rollout more and more next-generation stores, we're learning more about each of those markets. A perfect example is in Seattle with our opening in Tulalip. We're doing unbelievably well north of Seattle and it's caused us to believe there's probably room for yet another Cabela's store in the Seattle market. And I'm not sure 5 years ago, we saw that as a 3-store market. So we're continuing to learn a lot as we rollout stores, and we think there's a lot of opportunity.

Operator

We'll go next to Jim Duffy with Stifel, Nicolaus.

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

A couple questions for you. I know you had the firearms promotion in April 2011. Where we sit right now, have we fulling anniversary-ed the more promotional agenda that you had in the quarters past?

Thomas L. Millner

Yes. I believe so, Jim.

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

Okay. And then a follow-up to Nemer's question on the interplay between Direct business growth rates and the direct margin rates, can you speak to the strategy for balancing that on a go-forward basis. I know that's something that you guys spend a lot of time thinking about.

Ralph W. Castner

It is something we spend a lot of time thinking about. And I'm not sure I can give you a whole lot of direction, in other words, we're going to continue try a variety of promotions and trim out those that don't work and focus on those that work. And there will be, obviously, some will work more effectively than other over time. We think, margin will be at -- there's no question, I think margin will be under some pressure as we do this. But we think it's important to grow that business and make the necessary investments.

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

Okay. And then, also a follow-up about the new store productivity curve. Sounds like you're having big grand openings, but then they just fall right in line with the comp base. Is that what you saw in Grand Junction and what you saw in, just the one in...

Ralph W. Castner

No. No. What I -- my comments were those stores -- really, every store since we opened in Billings, Montana, we're seeing significantly higher productivity on a per square foot basis. My comment with respect to the comp is, when those stores anniversary, we continue to see growth in that business. And it does grow at about the same rate as the entire base. But just to be clear, on a per square foot basis, those stores start off and continue to do much, much better than the base stores. To the extent, I would tell you, Jim, there are some of those stores that are doing 50% to 100% better than the base. I mean there's some big -- there's some very high performers in the 2011, 2012 class.

Thomas L. Millner

Jim, they've opened big and stayed big.

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

Okay. And then historically, you had the big grand opening splurge. And then, in the past, it was difficult to anniversary that. It seems like you're doing it more gracefully now. As you get into quarters beyond the initial grand opening, are you seeing even greater productivity in the comps?

Ralph W. Castner

As it relates to the combination of, well, new stores in the comp, they still do have a big grand opening in the first 3 months. We comp the stores after 15 months. So as they enter the comp base, we're seeing the stores in and the comp base comping positive.

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

I got you. Okay. And then just a housekeeping question. What was the preopening expense during the quarter, Ralph? And what are you spending there per store with the newer format?

Ralph W. Castner

Well, there's $2.2 million in Q2 of '12, and that was down a little bit from a year ago. Now the thing that's a little bit misleading about that is, most of our -- we've spent most of the preopening costs in the quarter because, let's say, if you go back to Wichita opened in March, so that one was fully pre-opened. And then we opened Tulalip in April, so that was mostly had the preopening costs. So really, what you're seeing in the preopening cost in the second quarter is whatever residual amount we've spent in Saskatoon in the 6 weeks prior to opening.

Operator

[Operator Instructions] We'll go next to Mark Smith with Feltl and Company.

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

Can you talk at all about the delta in Internet sales kind of as a percent of Direct?

Thomas L. Millner

Well, it continues to be a bigger part of the Direct business, as you would expect. We don't really talk about the splits between those 2, but Internet continues to be growing at a much more rapid rate. And obviously, call center orders continue to decline.

Ralph W. Castner

Mark, it's -- the Internet is a very sizable piece of the Direct business, way north of half.

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

All right. And then second, can you comment on current trends or if not, maybe the cadence of sales during the quarter?

Ralph W. Castner

During the third quarter thus far?

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

Yes. Third quarter thus far and kind of cadence during Q2.

Thomas L. Millner

Trends are very consistent with what we saw in the second quarter by channel.

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

Any insight on thinking of how sales trended during Q2?

Thomas L. Millner

No. We don't really go into intra-quarter trends, but it was a good revenue quarter.

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

Then lastly, you guys had talked quite a bit about some excitement around fishing. Any other insight on strengths or weaknesses within the fishing category during the quarter?

Thomas L. Millner

Gosh, it's just -- Mark, it's just been a great fishing season. And I think it's a combination of terrific merchandise assortment, good in-stocks, appropriate levels of promotion in all channels. And it was really helpful this year that those areas in the country that were flooded out last year from the Rockies all the way through the upper Midwest, they actually had water and fishable lakes and rivers this year.

Operator

And there's no further questions in the queue. I would like to turn the call back over to Tommy Millner for any additional or closing remarks.

Thomas L. Millner

Well, thanks, everybody, for joining us today and we look forward to talking to you again very soon.

Operator

And this does conclude today's conference. We thank you for your participation.

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