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Cabela’s Incorporated (NYSE:CAB)

F1Q08 Earnings Call

May 1, 2008 4:30 pm ET

Executives

Chris Gay – Treasurer & Manager, Investor Relations

Dennis Highby - President, Chief Executive Officer & Director

Ralph W. Castner - Chief Financial Officer, Vice President & Chairman of the Board of World’s Foremost Bank

Patrick A. Snyder - Senior Vice President, Merchandising, Marketing & Retail Operations

Brian J. Linneman - Senior Vice President, Global Supply Chain & Operations

Analysts

Ralph E. Jean – Wachovia Securities

Rick Nelson – Stephen’s Incorporated

Paul Lejuez – Credit Suisse First Boston

David Cumberland – Robert W. Baird & Co.

[Chris Vezia] – Susquehanna Financial Group

Reed Anderson – D.A. Davidson & Co.

Bob Simonson – William, Blair & Company, L.L.C.

Jim Duffy – Thomas Weisel Partners

Robert Samuels – J.P. Morgan

Operator

Welcome to the Cabela’s Incorporated first quarter of fiscal year 2008 earnings conference call. (Operator Instructions) I will now turn the conference over to Chris Gay, Treasurer and Investor Relations Manager.

Chris Gay

I welcome everyone listening today both on the conference call and by webcast. This afternoon we issued our first quarter fiscal 2008 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.

Leading our call today will be Dennis Highby, our President and Chief Executive Officer. Dennis will review our first quarter accomplishments and our new store opening plans. Also joining us this afternoon is Ralph Castner, our Vice President and Chief Financial Officer. Ralph will review our first quarter financial results in more detail. Additionally Pat Snyder, Senior Vice President of Merchandising, Marketing and Retail Operations and Brian Linneman, Senior Vice President of Global Supply Chain and Operations will be available during the question-and-answer portion of the call.

Before we get started let me read the Safe Harbor language. This conference call will contain forward-looking statements within the meaning of 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 29, 2007.

Now let me provide a summary of our first quarter results. For the quarter revenue increased 15.9%, operating income increased 70.2% and net income increased 39.4%. Operating income in our retail segment increased 55.2% as operating margins expanded 120 basis points. Retail revenue increased 37.7% despite an 8.4% decline in same store sales. In our direct business operating income increased 3% as margins expanded 50 basis points.

Direct revenue for the quarter declined 0.6%. Operating income in our financial services business increased 25.9% as revenue increased 13.9%. Average active credit card accounts increased 16.95 for the quarter and the average account balance increased 7.6%. Earnings per share for the quarter increased 36.4% to $0.15 compared to $0.11 in the year ago quarter.

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

Dennis Highby

We’re extremely pleased with our profit growth in the first quarter. Consolidated operating income increased 70%. During the quarter we made a conscious effort to focus on and generate more profitable sales. We were especially pleased with the results of our retail segment which grew operating income 55%. On our last conference call we shared with you our four initiatives to improve retail profits in 2008 and beyond. They include improving retail store productivity, enhancing our merchandise planning and retail merchandising, improving inventory levels and execute more effectively our retail advertising strategy.

The first quarter of 2008 was challenging from a revenue perspective. However we made

significant progress in our initiatives to improve our retail profitability. With regard to store operations for the quarter the four-wall contribution of the stores in the comp base exclusive of vendor coop increased 120 basis points. This improvement was primarily due to an increase in gross margin at our retail locations and improvements in labor efficiencies in these stores. For the quarter, sales per labor hour in our comp store base increased by 0.5%. We achieved this increase in operating performance at our retail divisions despite a decrease in comp store sales of 8.4% for the quarter.

One of the reasons we were able to increase operating margin was our focus on average tickets. For the quarter average ticket in our comp store base increased roughly 3%. We have also made progress in the area of merchandise planning and retail merchandising. We have done more flexing of stores, we have improved visual merchandising, we have added more seasonal assortments, and we have improved the transition from winter to spring sets and streamlined the floor merchandise to the store. This helped drive the improvements in store level four-wall contribution, as we’ve been able to reduce the labor cost to handle the floor merchandise to our stores.

Additionally we have made some improvements with regard to improving inventory levels. For the quarter inventory levels increased 23% to $621 million. This is a slower increase than we realized in the fourth quarter of 2007. On a comp store basis inventory per square foot was reduced by 5.6%. We expect to make further improvements in our inventory levels as we move through 2008. Finally we have begun to make improvements in retail advertising. We are continuing to analyze our media spend on a market-by-market basis to more efficiently spend advertising dollars where they will produce the highest returns. We have focused most of our time in the first quarter on improving retail profitability.

I would also like to update you on both our direct and financial services business. During the first quarter revenue of our direct business declined 0.6%. For the quarter we reduced catalog circulation and page counts. Opening eight new Cabela’s in 2007 created some cannibalization of our direct business. Additionally certain winter catalogs were particularly soft in the first quarter. I will note that our spring catalogs are doing very well and we expect a return to positive revenue growth in the second quarter.

Effective January 1 we were collecting sales tax on direct orders in the 16 states where we have a store. The impact on direct sales from the collection of sales tax has been minimal. In fact in states where we have not opened a store in the last 12 months direct revenue growth actually performed better than the direct business as a whole. On a consolidated basis hunting equipment, camping and boats all performed well during the quarter while marine, fishing, auto ATV remained challenging.

During the first quarter the performance of our financial services business exceeded our expectations. For the quarter average active accounts increased 16.9% while the average accounts balance increased 7.6%. Bad debts were in line with our expectations. For the quarter net charge offs were 2.53% compared to 2.38% in the fourth quarter of 2007. Based upon this experience in the first quarter and our predicted modeling for the year we continue to believe that our full year net charge offs will be at or below 2.6%. We continue to be very pleased with the performance of this business.

Despite lower than expected revenue consolidated operating margin for the quarter exceeded our expectations increasing 120 basis points compared to the year ago quarter. For the quarter operating margin was 3.9% compared to 2.7% in the year ago quarter. Operating margin was favorable mostly due to higher gross margin on merchandise sales.

Let me now update you on our future store opening plans. For 2008 we expect Scarborough, Maine to open May 15 and Rapid City, South Dakota to open in August. For 2009 we expect to open two stores, the first store to open will be East Rutherford, New Jersey and the other will be our store in Billings, Montana. We look forward to bringing the Cabela’s experience to these new important markets. With regard to our planned Montreal store we no longer plan to open a retail store in Montreal at this time.

In closing I’d like to express how proud I am of our employees and how they stepped up to meet the challenges of a tough consumer climate. The true character of Cabela’s employees came through loud and clear as they met the challenges with the willingness to adapt and refocus on changing priorities. I’d like to sincerely thank them for their continued dedication to this company.

Now I’d like to turn the call over to Ralph Castner to review our financials in more detail.

Ralph W. Castner

During the quarter consolidated revenue increased 15.9% to $535.5 million compared to $462.1 million in the first quarter of 2007. Retail revenue for the quarter increased 37.7% to $254.4 million in the quarter versus $184.8 million in the same period last year. The growth in retail revenue is due to the eight stores opened last year as same store sales declined 8.4%. Similar to recent quarters, average ticket continues to increase while traffic continues to be down. Direct revenue for the quarter decreased 0.6% to $236.5 million compared to $237.9 million in the same quarter a year ago. Direct marketing costs as a percent of direct revenue was 15.1% in the quarter compared to 14.9% in the year ago period.

Looking now at the financial services segment for the quarter revenue increased 13.9% to $40.7 million versus $35.7 million in the first quarter last year. We measure the performance of our financial services segment on a non-GAAP basis. The reconciliation of these measurements to GAAP was provided in our earnings release. Driving strong results in the quarter is average managed credit card loan growth of 26% and average active account growth of 17% compared to the same quarter a year ago. For the quarter the average account balance increased 7.6% compared to the prior year quarter. Total managed revenue as a percent of total managed receivables was 8.3% in the first quarter compared to 9.2% in the same quarter a year ago.

Now turning to consolidated gross profit, gross profit for the quarter increased 20.5% to $22.7 million versus $184.1 million in the year ago quarter. Gross margin was 41.4% in the quarter compared to 39.8% in the same quarter a year ago. We spent a lot of time this quarter focusing on more profitable sales. We did have a little tailwind this quarter with respect to gross margin. You will remember that in the first quarter of 2007 we changed our estimate for drop ship merchandise which negatively impacted the first quarter of 2007 by about 60 basis points.

In the first quarter of 2008 merchandise gross margins increased 190 basis points to 36.1% from 34.2% in the same quarter last year. Additionally as we continue to see strength in certain hard good categories merchandise gross margins continue to be impacted by a mid-shift to these lower margin products. We’re very pleased with the extent the increase in gross margin improved our retail profitability in the quarter.

Now let’s look at operating income. Operating income for the quarter increased 70.2% to $21.1 million versus $12.4 million in the same quarter last year. Operating margins in our direct segment increased 50 basis points to 14.2% as compared to 13.7% in the same quarter a year ago. The increase is due to higher merchandise gross margins and a reduction in equipment and software expense to support our Internet site. Marketing fees paid to the direct business from the financial services business did not have a material impact on operating margin expansion.

Operating margins in our retail segment increased 120 basis points to 10.6% as compared to 9.4% in the same quarter a year ago. The increase in retail operating margin is attributable to higher gross margin and labor efficiencies. Marketing fees paid to the retail business from the financial services business did not have an impact on operating margin expansion.

On a consolidated basis operating margins increased 120 basis points to 3.9% from 2.7% in the same quarter a year ago. The increase is mostly related to improvements in gross margin and operating efficiencies in our comp store base. Interest expense increased $3.7 million relative to the year ago quarter. The increase is due to our $60 million senior note offering completed in June of 2007 and our $57 million senior note offering completed in January of this year and a higher balance on our revolving credit agreement during the quarter relative to the year ago quarter.

Moving on to earnings, for the quarter net income was $10 million compared to $7.1 million in the first quarter last year. Diluted earnings per share were $0.15 in the first quarter compared to $0.11 in the same period last year. As far as the balance sheet goes as of March 29 the company had cash and cash equivalents of $78 million versus $52 million at the end of the first quarter last year.

Total debt at quarter end was $626 million compared to $314 million in the year ago period. We had $106 million of economic development bonds compared with $117 million in the year ago period. Inventories rose 23% to $621 million up from $505 million at the end of March 2007 due mostly to stocking our seven new stores opened late last year.

Turning now to cash flow metrics, we incurred capital expenditures totaling $50 million in the first quarter of 2008, deprecation and amortization was $17.7 million in the quarter. We did not purchase any economic development bonds during the quarter. We have submitted our bond applications related to several 2007 stores to the appropriate agencies and we’re currently awaiting their review and approval in anticipation of funding.

Economic development bonds in our balance sheet increased roughly $8 million during the quarter as we wrote up the value of our bonds related to our Hamburg, Pennsylvania store. For 2008 we expect capital expenditures including purchases of economic development bonds to be in the $100 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.

As I’m sure you’ve already seen in early April we increased our revolving credit facility from $325 million to $430 million. You will remember in November of 2007 we borrowed $50 million from US Bank. We increased our facility to make sure that we have sufficient liquidity and flexibility as we proceed throughout 2008 and beyond.

Now with regard to annual guidance, we continue to gain traction with regard to our four initiatives to drive retail profitability and our first quarter results reflect this progress. We’re also pleased with the strong performance of our financial services business during the quarter.

Based upon the first quarter results we’re now even more confident in our ability to generate mid-teens revenue growth and mid-single digit earnings per share growth for 2008. We expect a challenging sales environment for the remainder of the year with most of our growth in profits coming in the third and fourth quarters as we benefit from our retail profit improvement initiatives.

Our guidance incorporates the following assumptions for the full year. We expect same store sales for the full year to be down slightly more than 2007 levels which were -1.2%. For 2008 we’ve budgeted bad debt levels of 2.6% for the full year.

Based upon our experience in the first quarter as well as our projections for the remainder of the year we continue to believe that this is a reasonable expectation. With respect to gross margin we expect to see pressure on gross margins throughout the remainder of the year. Finally we expect to see improvement in the performance of our retail stores.

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

Dennis Highby

We are obviously very aware of the tough consumer environment and our near term outlook reflects that. We’ve laid the groundwork and already made material improvements with regard to our initiatives to improve retail profitability. We believe that this will allow us to substantially improve our profitability as the economy recovers. We look forward to the remainder of the year and are focused on capitalizing in the significant opportunities to drive efficiencies and become even more profitable into the future.

Let’s open the call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first call comes from Ralph Jean – Wachovia.

Ralph E. Jean – Wachovia Securities

It’s really unusual to get retail operating margin expansion on a -8 comp especially 120 basis points and you leveraged your direct business on down sales and your own allocated overhead was down as a percent of sales, so was it all gross margin or can you identify and quantify any permanent expense reductions?

Dennis Highby

In regard to retail operating margins being up 120 basis points, the biggest contributor was higher gross margins and also just the improvement in labor as a percent of sales. The direct operating margins being up 50 basis points, again it was higher gross margins and improvement in equipment and software expense related to the Internet.

Ralph W. Castner

Ralph, we’re very focused on improving retail profitability. We’re pleased with the gross margin expansion that we saw this year. We have been working hard to reduce SG&A at the store level and we saw a nice improvement there from reduced SG&A at the store level. As you pointed out, we were also successful in lowering our corporate overhead by 43 basis points and that was primarily a result of leverage in salary and wages, incentive compensation depreciation. We believe we had improvement both on the gross margin line and the SG&A line and we’re pleased with that.

Ralph E. Jean – Wachovia Securities

Do you have the ability to look at credit card transactions and determine by zip code how far the average customer is driving and how much has that dropped over the last couple of quarters if you are able to measure that?

Dennis Highby

Ralph, if we have that information, I don’t think I look at it regularly.

Patrick A. Snyder

Actually on the retail side of the business we’re seeing some of our customers coming from as far as an hour away from the stores and we think that’s been increasing recently.

Operator

Your next question comes from Rick Nelson – Stephen’s.

Rick Nelson – Stephen’s Incorporated

Can you remind of why you thought the first quarter on a compare was going to be so difficult and you posted some pretty nice growth over and above what was supposed to be the toughest quarter of the year?

Dennis Highby

Just looking at toward the end of the fourth quarter it was tough out there. Again even in the spring our comp store sales were down 8.4%. We’ve been able to improve other parts of our business to significantly show improvements.

Ralph W. Castner

As we lap the year and we told you in the last call that we’ve seen challenging comps as we went through January and February and we took immediate action to right size the business, as I told Ralph Jean, both our shared overhead group and at the retail stores and I think you’re seeing the results of that.

Rick Nelson – Stephen’s Incorporated

The guidance for the year, mid-single digit growth, hasn’t changed. Is there something you’re seeing of late that is causing more concern?

Dennis Highby

Remember the first quarter is a very small quarter. It’s a tough environment out there for retail and I think we’re cautiously optimistic but we’re glad we have one under our belts successfully. But it’s a long ways until the end of the year.

Rick Nelson – Stephen’s Incorporated

The direct business, you’ve in the past guided to low to mid-single digit sales growth there and it wasn’t achieved this quarter. How do you feel about that target?

Dennis Highby

I think for the full year we still feel good that we’re going to have a strong direct business. We did reduce our page counts and circulation and we did see a little softness in our fall and Christmas books just coming around the corner into the first part of the first quarter. We look forward to a good direct business throughout the year yet.

Rick Nelson – Stephen’s Incorporated

Last quarter you had talked about three of the eight store openings being under performers. I’m wondering how those tracked in the first quarter. Are you seeing improvements there?

Dennis Highby

Retail sales for the quarter were up 37.7%. We’ve been spending time improving all of our stores, Rick, and I don’t think I’m going to comment on any particular stores at this time.

Operator

Your next question comes from Paul Lejuez – Credit Suisse.

Paul Lejuez – Credit Suisse First Boston

Couple questions on the gross margin, could you re-explain what happened last year that helped the comparison? If you could break down the gross margin improvement [inaudible] this point versus IMU versus mark down rate versus whatever that other thing you were talking about?

Ralph W. Castner

Paul, a year ago drop ships are an issue where we contracted third party vendors to send merchandise directly to our customers and at the end of the year we true up an estimate where we sold the drop ship merchandise but haven’t yet paid for it. A year ago we trued that up at what would be, let’s see, at the first quarter of ‘07 and we trued that up for the prior year of ‘06 and that hurt margins in 2007 by about 60 basis points.

In the first quarter of 07 so now we’re obviously anniversarying that, we didn’t have to deal with that anymore and that’s all be trued up and fixed. We did have a little bit of tailwind. I have to tell you, we’re very pleased with our gross margin expansion beyond that issue, particularly retail. We saw nice improvement, what you see in the retail operating margin improvement that we saw in the quarter.

Paul Lejuez – Credit Suisse First Boston

There’s typically a cost of other revenue line in your P&L that was taken away. Last year it actually looked like it was a slightly negative cost. In other words, a benefit. I’m just wondering what that line would like this year and would that help in your gross margin at all?

Ralph W. Castner

No, I can’t speak to that, Paul. I don’t believe there was anything significant in there.

Paul Lejuez – Credit Suisse First Boston

But there’s no more cost of other revenue line. How do we think of that?

Ralph W. Castner

Sometimes what’s in there is when we have a land sale, the basis of the land sale goes through there but we did not have any land sales in either this quarter or the same quarter a year ago.

Paul Lejuez – Credit Suisse First Boston

Did you say what the long-term debt piece was out of the long-term liabilities? And mark down levels coming out of the first quarter this year versus last year?

Patrick A. Snyder

In the promotional environment for Q1 I think we were probably less promotional this year than what we were a year ago. Our sales discounts at retail were actually down from a year ago. I think it will play out, how competitive the market is going forward. So far we haven’t seen a tremendous amount of promotional activity.

Ralph W. Castner

Paul, the long-term debt piece at quarter end was $599,802,000.

Paul Lejuez – Credit Suisse First Boston

What was the comment about gross margin being pressured for the rest of the year?

Dennis Highby

I think as we move forward through the year, depending how competitive this retail environment, we think we’ll have pressure on it. I don’t think anyone feels it’s a real easy retail environment today. As we move forward if we have to get promotional we certainly are prepared to.

Paul Lejuez – Credit Suisse First Boston

The improvement that you saw in the first quarter outside of that 60 basis points, would you still expect that 100 basis points plus to be much lower? But would you actually look for gross margins to be down year-over-year or just less of a benefit?

Ralph W. Castner

No, I think I told you in our comments that we would expect them to be down in a tough consumer environment for the remaining nine months.

Operator

Your next question comes from David Cumberland – Robert Baird.

David Cumberland – Robert W. Baird & Co.

On the gross margin, part of the way at understanding other than the drop ship comparison benefit, what were the reasons for the improvement in retail? Pat just mentioned fewer sales discounts and maybe that’s part of it. Is that the case and what else drove that?

Patrick A. Snyder

As Dennis mentioned in his script the two biggest pieces in there is that retail was a percent of labor which we manage very well. As a percent of sales, labor came in; we saved quite a bit of dollars there, quite a bit of expense there. The other thing is we continue to improve on our efficiencies at retail. We have a back room project that we’ve been working on since the first of the year. It improves the flow of our product from the DC to the floor of the retail stores and we’re just starting to see some efficiencies from some of these profit improvement plans or initiatives that we put together.

Ralph W. Castner

I think your question is with respect to the gross margin line?

David Cumberland – Robert W. Baird & Co.

Yes.

Ralph W. Castner

There we really focused our marketing efforts this quarter on going to a more profitable customer. So we’re reducing the amount of sales discounts, improving our advertising spend and I think you saw the improvement of that in the gross margin line.

David Cumberland – Robert W. Baird & Co.

Ralph, what were the delinquency numbers at the end of the quarter?

Ralph W. Castner

Our experience with respect to bad debts is right in line with our expectations. 90 days delinquencies went from 0.28% and that was at the end of the year. It was at 0.28%, it went to 0.31% at the end of the first quarter. 60-day delinquencies were 0.57%. Those increased to 0.64%. And 30 days went from 0.97% to 1.11%. Charge offs for the quarter went from 2.38%, and again that’s fourth quarter ‘07, to 2.53%. We feel real good about what our credit exposure is for the rest of the year.

David Cumberland – Robert W. Baird & Co.

The private label opportunity, how are you looking at that this year in longer term? The 10-K indicated that percent of sales from the Cabela’s brand was down a bit in 07. Could that start to rise again and what categories might be opportunities?

Patrick A. Snyder

The opportunities would be in the hard goods categories. In the soft goods areas we’re already a pretty high percentage of Cabela’s brand product. Also when we look at our retail stores, the customers that are coming in to shop they prefer to buy national brand merchandise also. As we expand our soft goods categories in the stores, we do include probably a higher percentage of national brand merchandise.

Operator

Your next question comes from Chris Vezia – Susquehanna Financial.

Chris Vezia – Susquehanna Financial Group

The inventory being up 23%, can you add some color about the components to that inventory? I know you’ve talked about how a component of hard goods in that inventory as a function of the pressure on the gross margin for the balance of the year, but can you add a little more color on what areas are maybe soft and obviously causing some pressure on that inventory level?

Brian J. Linneman

We’re certainly up 23%. Primarily that’s derivative of filling the new stores. We had seven stores open late in the year in 07. We have some overstocks from the soft sales coming out of the fourth quarter where we moved goods into the first quarter of this year. That was primarily in the soft goods area. We expect the growth to slow as we anniversary the new stores as we progress through the year. The last thing I’d just mention is we do believe it’s good inventory and I can assure you one of our initiatives is to be very focused on driving down inventory throughout the year and I think we can expect it to grow at a slower rate than sales through some of the disciplines we’ve implemented.

Chris Vezia – Susquehanna Financial Group

Is it maybe fair to say during the first quarter, you talked about reducing your promotional activity and maybe doing a better job flowing the merchandise, but to some extent did you maybe sacrifice the opportunity for sales at retail to improve the margin?

Dennis Highby

I think that was part of it. We did spend less advertising dollars for our comp store sales. Pat, I don’t know if you want to add anything else to that?

Patrick A. Snyder

I would just say going forward we’re much more aggressive in season as we look at our spring products today, especially in the very seasonal areas for clothing and gifts. If we have products that aren’t moving in the stores today, we’re marking them down and liquidating right away. So we’re in that process even right now as we identify programs that don’t move. We’re not waiting until the end of the season to try and liquidate and take a lower margin on the product. We’re probably doing a better job of liquidating merchandise today.

Chris Vezia – Susquehanna Financial Group

Inferring from what you’re saying, it seems like you’ve gotten a little bit more promotional going into the second quarter on some of those key areas that are a little bit softer and a little bit sluggish in terms of the movement relative to the first quarter?

Dennis Highby

In the case where we do have some obsolete inventory it’s a good time to keep our inventory in line.

Chris Vezia – Susquehanna Financial Group

Ralph, just real quick on the 30-day delinquency, could you just do that one more time?

Ralph W. Castner

The first quarter it was 1.11%. This is fourth quarter ‘07 to first quarter ‘08. Fourth quarter ‘07, 30 day delinquencies were 0.97%. Those increased to 1.11%.

Chris Vezia – Susquehanna Financial Group

Lastly, looking at your guidance for the balance of the year in terms of low single digit earnings growth, I’m just trying to get a sense after very strong execution in Q1 it looks like Q2, it seems like it’s always difficult to leverage during that quarter given the volumes and the given the fact it looks like you’ve become incrementally more promotional.

Does it look like you still anticipate earnings growth for the, not being too specific here, but for the balance of the quarter or is there a possibility where earnings can actually be down maybe during the second quarter to get to your guidance?

Ralph W. Castner

I tried to address that in our scripts. We expect most of the earnings growth to be in Q3 and Q4 so I think you can read into that that we expect there be some earnings pressure in Q2.

Operator

Your next question comes from Reed Anderson – D.A. Davidson

Reed Anderson – D.A. Davidson & Co.

Pat, and you may have said this, I got cut off just briefly, but in terms of the gross margin going back to that, was mix a positive or a negative for margins in the quarter versus last year?

Patrick A. Snyder

It was a negative.

Reed Anderson – D.A. Davidson & Co.

Order of magnitude, just a modest negative or was it meaningful?

Patrick A. Snyder

I’d say a modest negative. As we see the strength in some of our categories was in the hunting equipment and surprisingly first quarter boats was a very strong for Cabela’s which is probably bucking the national trend. I think boats in the first quarter nationally are down in the 15% to 20% range. Both of those are lower margin categories for us and our soft goods sales were okay but we probably would have expected more out them and those are really where some of our higher margin categories are at.

Reed Anderson – D.A. Davidson & Co.

To the labor savings or benefits you saw which is more at the SG&A line, Pat, was there some labor scheduling, software or something you implemented? What was the source of all of a sudden getting a lot of labor efficiency this quarter?

Patrick A. Snyder

We were looking really back in the fourth quarter at the tough environment we’re in for retail and understood very clearly we had to cut expenses and manage our business more profitably. Certainly that was one of the initiatives. We’re using a labor scheduling software that helps us at retail, but I think we took a good hard look at how much labor we had in our stores and what we were projecting sales to be and tried to match it better this year.

Reed Anderson – D.A. Davidson & Co.

Ralph, two questions, I think you said average ticket, or Dennis might have said average ticket was up 3% in the stores, given what circulation was and what we saw for revenues in the direct business, was average ticket then down in the direct business or would that have also been up a little?

Dennis Highby

I don’t have that one in front of me but I think it was maybe similar to last year, maybe down slightly.

Reed Anderson – D.A. Davidson & Co.

Ralph, inside the financial services piece in the securitization income, how much was the gain on sale for this quarter versus last quarter?

Ralph W. Castner

I can answer that question a little bit differently. The accounting impact of securitization which is the gain net of the amortization of previous gains, that’s isolated in that other line in the financial services segment. The primary thing in that line, and that line increased from $1.4 million to $2.3 million. It was not significant.

Operator

Your next question comes from Bob Simonson – William, Blair.

Bob Simonson – William, Blair & Company, L.L.C.

On the gross margin again, I hate to keep it in the same subject, but I think you just mentioned that the mix was a modest negative because of the hunting, lower margin hunting and the boats. But it was up in overall. Is that lower shrink, is it higher initial mark on, and was it less markdowns? Which ones helped you get there at the store level?

Patrick A. Snyder

The biggest piece of it was we had less promotions in retail than the year before and I talked about the sales discounts that were reduced. That helped quite a bit actually. We saved quite a few dollars on sales discounts.

Ralph W. Castner

Pat talked about mix and I did some estimates to try to calculate that and it was a modest negative, but it was less than, at least my calculations were less than 50 basis points of a negative. I wouldn’t try to discount it too much by that although it was a factor. Just in all aspects of our marketing to focus on a more profitable sale including sales discounts, promotions and everything is what helped drive that gross margin line?

Bob Simonson – William, Blair & Company, L.L.C.

I ran some quick math looking at some of the first call numbers for the year and current consensus is about $1.38, you made $1.31 last year if I take out the two first quarters, if you’re up 5% that would be $1.38. That’s mid-single digits; essentially the next nine months are up $0.03 from $1.20 to $1.23. Is that what you want us to take away from mid-single or could it be 6% or 7% or something that it’s not that tight a comparison?

Ralph W. Castner

You’re in the right ballpark, Bob.

Bob Simonson – William, Blair & Company, L.L.C.

So there’s a down second quarter and then it’ll be up a little bit more than that in the second half?

Ralph W. Castner

I think you got that right, Bob.

Operator

Your next question comes from Jim Duffy – Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

On the merchandise margin, was vendor support a component that provided a beneficial impact to you there? Were you able to go back to your vendors and lean on them in what’s tough times?

Ralph W. Castner

That was clearly a component of it, yes.

Jim Duffy – Thomas Weisel Partners

As you look to your forward buys, particularly in the soft goods side of things where it seems volumes have been lower than in previous years, are you planning to run the inventory per store more lean than you have historically? Are you cutting back on those buys in an effort to keep the inventories in check?

Dennis Highby

Jim, I think we’ve been doing a good job getting the right inventories in these stores. Maybe we have too much inventory in the back rooms, getting that straightened out. Brian, do you want to comment?

Brian J. Linneman

Comp store inventory in the stores are down 5.6% for the quarter and part of that is we wanted to make sure we entered the transition from fall to spring and flow goods more efficiently and allow these stores be prepared to be in business for the spring season. I think we did a better job executing this year.

Jim Duffy – Thomas Weisel Partners

Final question, within your direct business are you seeing big regional disparities in performance on the year-to-year basis? Maybe pockets where the economy may be weaker?

Dennis Highby

Jim, I think there’s two things going on there, wherever there’s housing crisis, those markets are softer than what we’ve seen before. But where they raise corn it seems like they’re in pretty good shape.

Operator

Your last question comes from Nicholas Smith – J.P. Morgan.

Robert Samuels – J.P. Morgan

One quick question on the tax rebates, any thoughts around that? It doesn’t sound like you are expecting [inaudible]. Can you comment on it?

Dennis Highby

It’s hard to measure right now. In looking at some of the statistics, a lot of people are going to take that and pay off their credit cards or pay them down and pay other things and maybe retail will be the last thing they use the money for. I think it could have an impact starting in May. We have some promotions that are going to encourage our customers to use their rebate with Cabela’s. We’ll see how it turns out.

Operator

We have no further questions.

Dennis Highby

I’d just like to say thank you for joining us today and look forward to talking to you soon.

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Source: Cabela’s Incorporated F1Q08 (Quarter End 03/29/2008) Earnings Call Transcript
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