Cabela's (CAB) CEO Tommy Millner on Q2 2016 Results - Earnings Call Transcript

| About: Cabela's Incorporated (CAB)

Cabela's Incorporated (NYSE:CAB) Q2 2016 Earnings Conference Call July 28, 2016 11:00 AM ET

Executives

Andrew Weingardt - Investor Relations Manager

Tommy Millner - Chief Executive Officer

Ralph Castner - Executive Vice President and Chief Financial Officer

Scott Williams - President

Analysts

Seth Sigman - Credit Suisse

Stephen Tanal - Goldman Sachs

Mark Smith - Feltl & Company

Jim Duffy - Stifel

David Magee - SunTrust

Andrew Burns - D.A. Davidson

Patrick McKeever - MKM Partners

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Cabela’s Incorporated Second Quarter Fiscal 2016 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Andrew Weingardt, Investor Relations Manager. Please go ahead, sir.

Andrew Weingardt

Thank you. Good morning. I welcome everyone listening today both on the conference call and by webcast. A replay of today’s call will be archived on our website at www.cabelas.com.

With me on today’s call are Tommy Millner, Cabela’s Chief Executive Officer; Ralph Castner, Cabela’s Executive Vice President and Chief Financial Officer; and Scott Williams, Cabela’s President.

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

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

Tommy Millner

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

Our second quarter results reflect meaningful improvements in our business with positive comp store sales, growth in Internet and catalog revenue, further improvement in expense leverage and growth in our Financial Services business. This marks the first time since the third quarter of 2013 that we have reported positive comp store sales and growth of our Internet and catalog sales in the same period.

Our multiyear restructuring efforts aimed at lowering operating expenses have continued to exceed our expectations. As a result, in the second quarter, we made the decision to invest these savings into customer-facing price and promotion activities. We used this opportunity to: drive merchandise sales, both in stores and online, improve inventory turns; grow market share, and sell through some of our slower moving inventory. We will continue to evaluate opportunities to invest the savings of our expense management initiatives and remain comfortable with our previous guidance of SD&A leverage as a percent of total revenue over the next 3 years of up to 150 basis points versus our baseline of full year 2015.

Our Vision 2020 initiative focus on the core showed meaningful contribution during the quarter as we experienced positive comp store sales and positive Internet and catalog sales in our firearms, optics, fishing, shooting, camping, powersports and home and gift categories. As previously mentioned, our new Vision 2020 strategy is focused on creating intense loyalty for our outdoor brand through our four key merchandise categories: hunting, fishing, camping and recreational delivered by our highly engaged outfitters. We rolled out this new vision in the third quarter of 2015 and see the potential to continue expanding market share in the outdoor industry while growing organically through customer loyalty and by providing rich customer experiences in every channel.

For the quarter, consolidated comparable store sales increased 1.5% and U.S. comparable store sales increased 2% both on a shift adjusted calendar basis. This is the first quarter we have reported positive consolidated comparable store sales since the third quarter of 2013. We were particularly encouraged by positive comparable store sales in our firearms, optics, fishing, shooting, camping, powersports and home and gift categories. While our apparel and footwear categories have improved meaningfully from previous trends, we continued to face softness in these categories through the second quarter.

For the quarter, internet and catalog sales increased 3.3%. With the exception of the fourth quarter of 2015, this is the first quarter we reported growth in Internet and catalog sales since the third quarter of 2013. This growth is attributable to strong performance in our shooting, optics, camping, home and gifts, powersports, fishing and hunting apparel categories. We continue to face softness in our casual apparel and footwear categories, but have seen meaningful improvement in the performance of these categories in our Internet business as we have stepped up our promotional cadence over the past quarter.

For the quarter, as a result of our deepened focus on SD&A, we were able to leverage our SD&A expenses by 280 basis points on a GAAP basis and 330 basis points on a non-GAAP basis. On a GAAP basis, operating income increased by $4.3 million or 6.8% as compared to the second quarter of last year, while non-GAAP operating income increased by $9.9 million or 15.6% as compared to the second quarter of last year. Additionally, I would like to remind everyone that we reported meaningful SD&A leverage in both the fourth quarter of 2015 and the first quarter of 2016. While still in the relatively early stages of our expense management initiatives, we are confident that this reduction of cost and improvement of process throughout the organization will continue to provide benefit in the remainder of 2016 and beyond.

As we have previously expressed, we have organized teams to evaluate new ways to reduce both our store operating costs and capital expenditures. These efforts encompass all phases of the new store opening process from site selection to construction cost to operational efficiencies. In the second quarter, we continued to see the results of our operating cost initiatives and it made progress towards significant future cost savings in stores to be built later this year and in 2017. Therefore, we continue to believe that opening new stores will provide our shareholders with an attractive return on capital at the sales per square foot performance we saw from our 2015 class of stores.

We have opened 6 stores so far this year, including Lexington, Kentucky; League City, Texas; Short Pump, Virginia; Centerville, Ohio; Farmington, Utah; and Abbotsford, British Columbia. Our 2016 class of stores have mostly performed in line with our expectations. We will open our final 2 stores of the year in the third quarter in Avon, Ohio; and Ottawa, Ontario. We expect to build 6 stores in 2017, 4 of which we have announced Gainesville, Virginia; McDonough, Georgia; Chesterfield, Michigan; and Albuquerque, New Mexico. Additionally, we remain committed to expanding our retail footprint in North America to 200 to 225 stores. With our continued expansion into new markets, it is important to note that during the quarter, we saw little impact on our comp stores from either cannibalization or competitive incursion.

Merchandise gross margins decreased by 290 basis points as compared to the same quarter a year ago, which can be attributed to two primary factors. First, as I mentioned earlier, our decision to invest expense savings to drive merchandise sales, grow market share and turn inventory was the primary factor in the decrease in merchandise gross margin. This includes the aggressiveness and timing of our promotional cadence throughout the quarter. Secondly, with continued softness in our apparel categories and strength in our hard lines categories, merchandise mix was a driver of the decrease in merchandise margin.

Now, let’s take a look at Cabela’s CLUB, which had another exceptional quarter and continued to build our base of extremely loyal customers. For the quarter, the average number of active accounts increased 7.3% and the average balance of credit card loans increased by 15.5% to nearly $5 billion. Due to higher delinquency rates, we increased our reserve for loan losses by $9.2 million in the quarter versus a reduction of $1.2 million in the same quarter a year ago.

Now, turning to earnings guidance, we continue to be very pleased with the success of our expense initiatives and our ability to generate top line improvement through the reinvestment of expense savings. As a result, for full year 2016, we continue to expect a high single-digit growth rate in revenue and a high single or low double-digit growth rate in adjusted earnings per diluted share as compared to full year 2015 adjusted earnings per diluted share of $2.88.

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

Ralph Castner

Thanks, Tommy. For the quarter, we were pleased with the positive comp store sales, growth in internet and catalog revenue, further improvement of expense leverage and growth in our financial services business. Although this growth impacted merchandise gross margin, our cost reduction initiatives meaningfully mitigated the gross margin decline through significant improvement in expense leverage.

During the quarter, we experienced comp store sales or internet and catalog sales growth in 8 of our 14 merchandise subcategories, including strength in our firearms, shooting, optic, fishing, camping, powersports, home and gifts and hunting and apparel categories. While improved from previous trends, weakness in apparel categories continued to put pressure on our margin rate. Our continued focus on expense management led to reported operating expense leverage of 280 basis points and adjusted operating expense leverage of 330 basis points for the quarter.

We are confident that our continued focus on expense management will provide sustainable benefit to profit contributions over the next several years. For the quarter, Financial Services revenue increased 8.1% to $135.1 million. The increase in Financial Services revenue was primarily due to a 25% increase in interest and fee income and a 6.4% increase in interchange income, which were partially offset by an increase in the provision for loan losses of $16.6 million. The increase in provision was mostly attributable to a $9.2 million reserve increase as a result of higher delinquencies as compared to a $1.2 million reduction of the reserve from the second quarter a year ago. We expect the full year reserve to increase between $25 million and $30 million. Average active credit card accounts grew by 7.3% in the quarter.

For the quarter, average credit card loans increased by 15.5%, with loans exceeding $5 billion at the end of the period. Net charge-offs as a percentage of average credit card loans increased 33 basis points from the year-ago quarter and were 2.12% for the second quarter. During the quarter, we continue to see a shift in trends and delinquencies. Greater than 30-day delinquencies were 0.84% as compared to 0.68% a year ago and greater than 60-day delinquencies were 0.51% as compared to 0.39% a year ago. And greater than 90-day delinquencies were 0.26% as compared to 0.20% a year ago.

Before turning the call over to Tommy, let me remind you of a few details pertaining to our 2016 expectations. Due to the slowdown in the store growth, we expect full year 2016 capital expenditures to be between $200 million and $250 million. Interest expense in the second quarter was $8.3 million compared to $4.6 million a year ago due to the private placement that was completed in the second half of 2015 as well as a meaningful reduction in capitalized interest due to fewer capital projects in progress as compared to the year ago period.

Additionally, for full year 2016, we expect to have incremental incentive compensation expense of a roughly $15 million compared for full year 2015. Due to the 53-week year in 2015, we will report 2016 quarterly comparable store sales on a shifted adjusted calendar basis to account for the extra week in the fourth quarter of 2015. The shift in the calculation provides a better view of how our comp stores have performed by aligning the weeks of operations in the current year to the most comparable weeks in the prior year. The second quarter effective tax rate was 39.3% compared to 34.1% in the second quarter of last year. The increase in the effective tax rate was primarily due to increases in nondeductible expenses, tax adjustments attributable to changes in the mix of taxable income between the United States and foreign tax jurisdictions, state income taxes and a decrease in research and development tax credits. As Tommy mentioned, we continue to expect the high single-digit growth rate in revenue and a high single-digit or low double-digit growth rate in adjusted earnings per share for full year 2016 as compared to full year 2015 adjusted earnings per diluted share of $2.88 per share.

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

Tommy Millner

Thanks, Ralph. We are pleased to see that our strategies to improve top line performance along with our cost savings initiatives continued to provide meaningful benefit to profit contributions. We are confident in our ability to continue the implementation of initiatives across the organization that will generate improved performance in both revenues and profitability.

Before turning it over for questions, I want to sincerely thank every one of our outfitters for their hard work, dedication and commitment to excellence in cherishing and delighting our customers every day. You guys are the heart and soul of our company, and your passion for the outdoors and for our customers is unrivaled. I thank each and every one of you for your efforts.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Seth Sigman with Credit Suisse.

Seth Sigman

Thanks. Good morning, guys.

Tommy Millner

Good morning.

Seth Sigman

So I wanted to talk a little bit about sales and the decision to get a little bit more promotional in the quarter. Beyond the cushion that you are getting from the cost-cutting initiatives, any more color you can provide on that? And was it in response to weaker trends or was it in response to competitors, is there any context there and maybe what categories were most impacted would be helpful?

Tommy Millner

Yes, we will be glad to. First, it wasn’t the result of any competitive activity in the marketplace. There would probably be the suspicion out there in the world that the liquidation of the TSA business had something to do with it. It didn’t whatsoever. We have kind of never thought of them as a competitor. Seth, it was really a purposeful decision. We knew we were accelerating our savings as a result of all the hard work folks have done in our company for the last year. And we just made a purposeful decision to get competitive across the board, both in promotion and in price, to drive top line. The result of all of that, I think we were very pleased that we got operating margin rate expansion in the quarter of about 40 basis points in the merchandise business. And we recognize that’s been a longstanding criticism that the merchandise business hadn’t been as profitable as perhaps some thought it should be. So, the decision to get competitive and to drive value to our customers, we felt like we had the ability because of cost savings to do that and we did and it was broad-based. So, as we look at the quarter, I think we were really pleased to see strength across the board from fishing and camping to recreational shooting, powersports, home and gifts. Our customers really reacted favorably in transaction trends and retention rates and multichannel customer visits. All of those things reacted really well to our decision to get very competitive.

Seth Sigman

Okay. And just the follow-up would be any categories in particular where you were even sharper with pricing? And then as you look at the improvement, would it be more weighted to stores or online just curious where that improvement happened? And when you think about transactions improving, is that traffic actually improving or is it conversion due to better deals? Thank you.

Tommy Millner

Well, as you know, we don’t count traffic in our stores. We only count transactions. We are on the verge of piloting a traffic counting system in the next several months, which we look really forward to. As we mentioned in the script, there was some component of the margin erosion that came from liquidation of slower-moving product. That would have been more online and would have affected Internet and catalog revenue slightly more and it would have been more biased to apparel categories. And aside from that, it was pretty broad-based of getting really competitive in most categories.

Scott Williams

And I would just add we noted in the comments that 8 of the 14 categories were positive in the Q in either online or what we did in our retail stores. And while those went more to hunt, camp, fish, shoot along the lines of our Vision 2020, we saw sequential improvement in these from quarter-to-quarter in some of our soft goods areas, in footwear, in hunting apparel compared to the prior quarter.

Seth Sigman

Got it. Okay, thank you.

Operator

And we will take our next question from Stephen Tanal with Goldman Sachs.

Stephen Tanal

Thanks, guys. Good morning.

Tommy Millner

Good morning.

Stephen Tanal

So I wonder if you could give us a sense for how you think about what the promotions or the inventory liquidations in total may have done for the comp, have you guys thought about parsing that out?

Tommy Millner

Yes. The components of the merch margin decline in general terms, Stephen, mix and the timing of a promotion affected the 290 by about 90 basis points. And then the combination of price and clearance of product, and that’s more price than clearance on a weighted basis by a lot, was about 120 basis points. And then discounts were about 60 basis points.

Ralph Castner

Stephen, we were really pleased in the quarter with where our inventory levels ended up. As you know, one of our big initiatives this year has been to make better use of our working capital. And the fact that inventory was down year-over-year we view as important step. There was some drag on the margin as a result of that. It was not a huge deal, but there was some drag on margin results of inventory clearance.

Stephen Tanal

Yes, so that’s really helpful. I appreciate it. But I was also more asking kind of on the comp. If you have thought about to the extent it comped up 1.5, like what the impact might have been of the stuff that was on sale that drove the increase versus kind of the underlying tone of the business?

Tommy Millner

Yes, it was not a major driver of comp at all. It was the – your original comment that we were just more competitive across the board. It was not the liquidation that was a meaningful contributor.

Stephen Tanal

Got it. So, the ongoing price cut you think are resonating. And so we should think about similar maybe composition going forward, I guess is what I take away from that. Okay, that’s helpful. And obviously, the mix data has been showing some big numbers on the gun side are we able to talk about kind of comp in guns and ammo specifically or are you guys not splitting that out?

Tommy Millner

No, we are not going to split that out, but let me give you a little color. The – what bump occurred in the gun business occurred late in the quarter following the tragedy in Orlando. And as we look at the quarter, it was – guns weren’t the story in the quarter. In fact, to the contrary, it was the progress we made in comping, fishing and camping and recreational shooting and powersports. That’s and the sequential improvement, although still not at levels we are satisfied with in apparel, but it’s the comping of the other categories that’s really the story, it’s not a gun story.

Scott Williams

And to think about it as it portrayed throughout the quarter, we were pleased that while we don’t give month by month comps, we saw nice small positive comp trends in May before the Orlando incident. And for the quarter, while firearms moved up a little bit quarter-to-quarter, the big changes were in optics and some improvement back to close to flat in hunting apparel and what we did in fishing and camping. So it was more broad-based across our core categories, not just a firearm story.

Stephen Tanal

Good. That’s great to hear and it’s helpful. And I guess the last question for me the SG&A I mean it’s evaporating in a sense, could you point to specific areas where this kind of cost is coming at? I mean, it’s great to see, but I have a hard time putting – wrapping my head around it.

Tommy Millner

Well, it’s kind of – as we said in prior calls, the work that was begun last summer to benchmark virtually every functional area of the company to ensure that we had one, the right processes to be a best-in-class player in every functional area of the company and secondly to make sure we were operating the business with the right number of folks in the company has just led to extraordinary work that converted into really significant leverage. And I would tell you, we are still early innings. And maybe Scott can highlight the next big leg of the school – stool that’s coming before us. And at the entire supply chain initiative, we have a point of view that we can run the business with – without affecting the customer, with significantly fewer SKUs, with a supply chain that is much shorter in lead time, that will have the effect of dramatically lowering inventory and cost and actually drive sales because of the depth of inventory in the right products. And we are still in early stages there. Scott, you might want to add a bit there.

Scott Williams

Yes, I would just add to size it. When we talk about 330 bps of leverage, you can think of over half of that being in salary, wages and related bonus expense. So that is real costs that are taken out of the business going forward. And we found it to be really remarkable when we grow our total sales in the low double digits and have positive comps. Our ability to keep our SG&A expense levels flat really has led to a lot of improvement in what’s happened in the leverage as a bps basis. Additionally, I think it’s important that it’s not just about salary and wages or indirect procurement, it’s in the processes, it’s global sourcing, it’s SKU rationalization. And many of those are 3 to 4 months into what would be a year, 1.5 years type process and we expect that to not only help expense leverage, but some of that will come in cost of goods and improve the inventory turns, all of which will really help our profitability going forward.

Stephen Tanal

That sounds like a lot of opportunity for sure. I guess, the other one – one last one from me as you sort of talk about the revenue growth – and obviously the provisions have ticked up here. The delinquency has come up – came up a little bit. And I think a lot of the good growth in revenue is coming on the credit side and one thing we have noticed is the loans to FICO was 691 and below, maybe a bit growing kind of much faster actually than the total. Could you maybe flush it out a little bit? I mean clearly, you used to run the 794 FICO. So, you are really high. There is probably an opportunity to do that. But is that what’s behind the delinquencies? Are interest rates going up a little bit, because the loan quality, I don’t want to say, did not – went worse? I mean, you guys are starting from such a high place, right? So Ralph, I think you could maybe give us some color there that would be my last one? Thanks so much.

Ralph Castner

Well, no, there is no question, we have been – and it’s getting a little bit more meaningful, but we have tested for a number of quarters going deeper in the credit file. I would tell you we are proceeding very slowly, very carefully and measuring over long periods of time to make sure that’s value accretive. So, we have tested down lower FICO scores, which is part of the contributor. But I will also tell you we are just – we are seeing delinquencies and charge-offs sort of revert to the mean. I mean, I have been saying for years that charge-offs ought to be between 2% and 2.25% and that’s where we are seeing them gravitate to. So, I would tell you most of this is revision from the mean, although there is some testing going on in lower FICO scores. So, when you see the bottom FICO scores that the balance of their increasing is at least in part due to some of the testing we are doing in those levels.

Stephen Tanal

Thank you very much.

Operator

And we will go next to Mark Smith with Feltl & Company.

Mark Smith

Hi, guys. Just wanted to revisit maybe some of the shooting sports stuff again. Looking at the direct business, would that business have still been positive if we stripped out maybe ammo and any other kind of shooting-related products?

Tommy Millner

Mark, as we said we are not going to get into that what would have been without this or add that, it’s not productive. We will go back – and certainly the recreational shooting business was good in the quarter. But the story here is the broad-based nature of the improvement in our businesses and that’s really what we are focused on.

Scott Williams

Yes. I would just add that as you will recall our participation online in firearms and powersports is simply as an omni-channel research tool. We are not able to take advantage of the commerce in that channel. And so we were really pleased to see our internet and catalog total business up for the Q without those participating online.

Mark Smith

Okay. And then Tommy, you talked about Sports Authority rather kind of liquidating sales and you said you don’t look at them as a competitor. But do you think you saw any negative impact during the quarter maybe in your apparel or footwear business due to some of those liquidation sales?

Tommy Millner

As you know, we don’t Mark. And Ralph is always the first one to remind us that the heavy concentration of the old Sports Authority stores were in California and Florida, a place where we have no stores. So, that’s probably why we have never really felt that they were a direct competitor of ours, because their concentration is kind of not where we are. And I think they served a different customer.

Mark Smith

And then maybe for Ralph, can you give us any insight into kind of maybe tax rate expectations as we look at our models?

Ralph Castner

Yes. And I don’t know that I have got a specific number for guidance to give you. The tax rate in the second quarter a year ago was benefited due to some research and development tax credits we got. But I would – put it this way, I don’t think it will be any higher than where it is today and we have seen it creep up over time, but we have planned for that.

Mark Smith

And then last question, just kind of going back to the firearm business and looking at NICS data. Tommy, could you make an argument, are you guys staying competitive in the firearms business or do you feel like people are maybe going somewhere else for some of these firearm purchases?

Scott Williams

Well, I would just point you to the fact, we have not always used the NICS as a leading indicator for the firearms business, but we do watch it closely, of course, to make sure that we feel like we’re getting our share. One of the things that’s interesting in the NICS data, just to be helpful to you as you look at it, it includes both those that are background checks for a purchase and those that would want to be able to look at the checks for any sort of permits. So we try to break it out internally. We don’t share that as to what is our share of the eligible firearms purchases and how we’re tracking that. And we feel solid about how we continue to track against that metric.

Tommy Millner

But Mark, we have no either direct or anecdotal information that would suggest we are losing our competitive position in either the firearm or ammunition business. That is not something that we would even tolerate for one second.

Ralph Castner

And by the way, to Tommy’s comments earlier on firearms and not breaking out the numbers, they were strong. Firearm sales were strong, but part of it is they have been strong. They have been strong for the last three quarters. And so is it was not a big contributor to the sales trend, but we are comping well in firearms and it’s been – well, it’s been great for a while. It was not – I am not speaking for Tommy, but it was not specifically driven by what happened in Orlando in the second quarter.

Tommy Millner

That’s right.

Scott Williams

And to kind of size that, while it was strong in the last three quarters, we would have had two or three categories positive for the quarter in the fourth and the first quarter, where this we went to seven or eight. So, it carried to other categories or they carried on their own to positive comps.

Mark Smith

That’s helpful. Thank you.

Operator

We will take our next question from Jim Duffy with Stifel.

Jim Duffy

Thanks. Good morning, guys.

Tommy Millner

Good morning, Jim.

Jim Duffy

From your perspective, what’s behind the challenges in the apparel category and do you foresee any change to trends looking forward?

Tommy Millner

Well, we had – we mentioned in the prepared remarks that we had seen an improvement in trend in apparel and footwear from where we had been in the last year or so, which was encouraging. I think there are a couple of dynamics going on. We are – as we said, our strategic vision for the company involves a very strong merchandise pivot to our core categories, which are hunting, fishing, camping and recreational shooting. And we feel like we have got to focus our apparel and footwear efforts in categories that we have a right to own, things like rainwear, like camo clothing, like our guidewear programs. And as we give more floor space to those core categories, probably some areas in casual apparel, we could have slightly less assortments in over time, not dramatic, just a real deep thought process about what do we really have a right to own and what does our customer really want. We may have gotten a bit too wide in some of those non-right-to-own categories. And I think we are seeing as we carefully and thoughtfully pivot to a more deeper penetration of apparel categories that we can own we are going to see better results.

Scott Williams

And as we look at the results throughout 2015 and over the last four quarters, we would have seen some low double-digit declines in the four apparel categories. You can think of those being roughly cut in half to mid-upper-single digits for – across the apparel categories. But then to Tommy’s point, if you look at the four, the two that are most technical in hunting, apparel and footwear outperformed the other two. So, we are starting to see a little divergence in the performance and that gives us some confidence in moving the needle as part of Vision 2020.

Jim Duffy

Thanks a lot. Thanks for that. And then a question on the inventory, you made great progress across the quarter. It sounds like a lot of that was cleared through the e-commerce platform. Can you speak to store level inventories? And where I am going with this is if they are down as much as it appears speak to the capacity and your comfort with driving comps with less inventory?

Tommy Millner

I think it’s more the quality of the inventory, Jim. We have been and will continue to drive down the total amount of inventory, but the concentration of the inventory over time with fewer SKUs and a shorter supply chain lead time that will allow us to have significantly lower inventories, turn them faster and delight customers by having more key products in stock. And that’s kind of the effort that we are going through. And it’s – we may use some of the expense savings, probably will to help us clear some of those SKUs that are kind of long-tail SKUs that we have in the assortment for probably no reason.

Ralph Castner

And Jim, I don’t have the inventory broken out between store and distribution center here in front of me, but it may or it probably is down on a per-store basis. But the goal is to try to get it out of the backroom through a lot of these changes we are making in supply chain and improving the product flow. So the goal is not to cut the inventory on the floor, but it’s to get it out of the backroom in either get it – either put it in the DC and have the lead time shortened or get it out on the floor. So that’s really what we are thinking about from an inventory perspective.

Scott Williams

And we get really excited when we think about that from a customer service model impact of that. The ability to open eight stores a year in the last couple of years of 13 and 14 stores in a year and to be able to have retail labor take care of our customers like we want them to, yet be able to leverage retail labor compared to top line, we are excited about those possibilities as we have the inventory improvement.

Jim Duffy

Thank you. Last one from me, any notable change in trend in oil patch markets in Canada?

Tommy Millner

No, not really. It’s still pretty – Canada is interesting, Jim. It’s kind of a tale of two countries. If you look on both coasts, pretty good, but in the prairie provinces that are really impacted by the oil patch it’s still pretty tough.

Scott Williams

And it’s pretty evident. We opened the store in Abbotsford, British Columbia this quarter, and you would have felt like you were at one of our U.S. openings. I mean it was 3,000 to 5,000 people out front, the massive excitement well – opened well above our expectations and is a leading store for us in Canada. So our brand is strong up there. And if we can release from the oil patch, I think we have got a really solid business in Canada.

Jim Duffy

Thanks guys. Good luck.

Operator

And we will take our next question from David Magee with SunTrust.

David Magee

Yes. Hi everybody. Good morning.

Tommy Millner

Good morning David.

David Magee

Just circling back to the delinquency question Ralph, should we expect a sort of similar trend for next year in 2017, all else being equal, with regard to that number?

Ralph Castner

Well, I think we will continue to get an up-tick in delinquencies, no question. I don’t know that it will be as much as what we have seen in 2016. I mean I said earlier that our estimated range is between 2% and 2.25%. I would probably give you 2% to 2.5% is where we expect the long-term range to be. Now, one thing though I am optimistic, very optimistic for this year and I talked about this as being a challenge for a while is, I mean the problem is when you are increasing the provision, you get the P&L impact – or increasing the allowance, you get the P&L impact of both the increased charge-offs and the increase in the reserve. At some point very soon, the rate at which we are increasing the reserve is going to decrease, so we won’t have as big a year-over-year grow-over problem. I mean last year, in total we increased the reserve by $19.3 million. So far this year, we have increased it by $8 million in the first half of the year, I am sorry – no, increased it by $8 million so far this year. So I would expect the increase this year to be – the increase in the allowance, we have already said, to be between $20 million and $30 million. As we look forward, I would not expect the increase to be that great. So it won’t have the grow-over issue to deal with in our year-over-year results.

David Magee

Thank you, Ralph. And then secondly, with regard to the second half, it seems like you guys have a decent opportunity on the weather side, given last year being very warm, is that something that you think you have got factored into the guidance or is that a potential upside?

Tommy Millner

I wish I could tell you we were good enough to forecast the weather. But in all seriousness David, it’s hard to imagine it could be a warmer fall than we had last year. So we haven’t really – we have just kind of focused on – it’s not going to get meaningfully better from a macro standpoint and we just have to control our own destiny and find the savings to reinvest in everything we are doing to include competitiveness. So if we get a little bit of cold weather early, that certainly helps everything a lot.

David Magee

Thank you, Tommy.

Operator

And we will go next to Andrew Burns with D.A. Davidson. And Mr. Burn if you check your mute button, at this time we cannot hear you.

Andrew Burns

Sorry about that. Good morning. Could you comment on outpost store performance, you had noticed an improvement in recent quarters, any update there or thoughts on potentially folding that back into the mix of new stores going forward? Thanks.

Scott Williams

We have indicated that when we open these outpost stores, they initially came out of the gates slower than our expectations. But over the course of time as we have improved our localization, as we have improved the management of those stores, put together some of the principles around focus on the core in those stores, they have continued to out-comp the chain as a class of stores. And additionally, they are starting to approach closer to the high-300s to close to $400 a square foot. And so we think as we get forward on that, we also are looking at our next-gen stores that continue to be well above $400 a square foot. And think about many of those being in the 80,000 square foot range and we have talked about our store model going forward being in the 70,000 range with a similar amount of selling square footage. So we really feel like the sweet spot in that model has proven very strong. And as we have leveraged expenses, not only in our operating expenses, but our ability to construct new stores, keeping the magic alive with lower opening cost to buy, build and develop those stores, our new store model looks very strong going up to 200 stores.

Tommy Millner

Andrew those outpost stores are double-digit comping.

Andrew Burns

Great news. Good luck. Thank you.

Tommy Millner

Thanks.

Operator

And we will go next to Patrick McKeever with MKM Partners.

Patrick McKeever

Great. Thanks. I guess, a similar question and that’s, did you see any significant performance variances between the next-gen stores and the legacy stores during the quarter, I mean, did you see that meaningful sequential improvement at the legacy stores as well or was that more driven by the smaller stores?

Ralph Castner

I am not sure we saw a meaningfully different – meaningful difference in the comp between those two stores. What we have seen in sales per square foot performance is that our next-generation stores continue to do really well. I mean of all the next-generation stores that we have opened they are actually doing better than $425 a foot. And what’s impressive about that is – I know last year, we talked about some of our new stores being disappointing. Well and those – the problem was we had set the expectations pretty high for those stores. But that – so that $425 a foot-plus numbers would have the spring openings from last year already in those numbers and we are still seeing a really solid on average, even including the 2015 stores. So what we are really focused in the company on is we feel we can get reasonably consistent performance somewhere just north of $400 a foot and we are getting the cost of the building and the cost to operate a box in line, so we can get attractive return to our shareholders at those sales productivity levels.

Patrick McKeever

Okay, great. Thanks. And then on the 3% increase in Internet and catalog sales, I mean that was a big departure from trend, do you think you can continue to grow that business on a year-over-year basis through the back half of the year, is there anything we should be thinking about beyond the usual that would limit – or would keep you from generating growth and perhaps going back to the negative trend?

Tommy Millner

Well, the – as I said earlier, the great tool we have in our arsenal now is the cost savings that we are generating, which we think are permanent cost savings. And that allows us to invest in revenue driving activities and the Internet and catalog revenue should benefit from that on an ongoing basis and that’s certainly our goal.

Patrick McKeever

Okay. And I am…

Scott Williams

I am pretty excited about it, because as we have said, the Internet and catalog business has needed to grow despite opening the number of new stores and in looking across the categories again. It was fairly broad-based, 7 or 8 categories out of the 14 positive. And so it didn’t feel like it was just concentrated in one area, but it was fairly broad-based.

Patrick McKeever

Okay, got it. And just one last one, on fishing, you called that out, what do you think drove that category? Was any of it related to the easing of drought conditions in some of your western states or is there something beyond that?

Tommy Millner

Well, yes. Certainly, the conditions in Texas are dramatically better year-over-year, because we now have lakes that are full in Texas. In fact, a lot of them are too full versus last year and the year before where they were unfishable. So, yes certainly a help from weather, but I think we were just again very competitive in fishing, like in other categories. The assortments resonated and the customer reacted by giving us their money.

Scott Williams

We were really pleased with the performance of our merchants in that category as well. We had some really strong product offerings. A couple of our new items that are Cabela’s brand promise items that were an everyday value with some strong marketing behind it, these are backed by our lifetime guarantee, items that don’t go on sale at a tremendous value of rod and reel combos performed really well as well. So fishing was really strong across the board.

Patrick McKeever

Got it. Thank you very much.

Operator

And we will go next to Mark Smith with Feltl & Company.

Mark Smith

Hi, guys. Just one quick follow-up. Have we seen any shift in Cabela’s branded items? And especially as we look at apparel, are there other opportunities that kind of had some Cabela’s branded items?

Tommy Millner

Scott, you want to...

Scott Williams

Well, I would just start with if you measure the Cab brand penetration across the entire business, it’s down a little bit and you could probably expect that with our strength into firearms and powersports, etcetera. So, some of our growth has been in those categories that lean heavier into national brands, etcetera. What we are doing within soft goods is we are just finding a little bit of a balanced, customer-driven approach to that. We early on had a heavy Cab branded penetration in our outpost stores in apparel. And in some cases, we balanced that with national brands and store within a store concept shops that we call Monster shops. And we think the magic will be in kind of the balance between Cab brand and the national brand without a specific percentage target, but driven by the run-rate and the demand velocity of the SKUs.

Mark Smith

Okay, thank you.

Operator

And that does conclude our question-and-answer session today. I would now like to turn the call back to you, Mr. Millner for any additional or closing remarks.

Tommy Millner

I would like to thank everybody very much for being on the call and we will talk to you soon. Thanks.

Operator

And that does conclude today’s conference. We do thank you for your participation. Please have a great day.

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