Cabela's reports revenue of $850 million in third quarter

Although direct sales and firearms sales were somewhat disappointing, Cabela’s still saw revenue increases in the third quarter of this year.

Cabela’s boasted a total revenue increase of almost 15 percent to around $850 million during 2013’s third quarter. Retail store revenue increased about 20 percent to around $550 million. But direct revenue climbed a little less than one percent to around $199 million, which fell short of expectations, according to a press statement from the company.

“While pleased with many aspects of our business in the quarter, we did experience a change in consumer sentiment,” said Cabela’s Chief Executive Officer Tommy Millner in a conference call with investors last week. “This change seemed to go beyond the expected slow-down in firearms and ammunition.”

This downturn in sales began in August and has persisted through October.

“Our reaction has been to slightly increase advertising and marketing,” Millner said.

Cabela’s increased marketing and advertising spending by several million dollars, according to a press statement. The company worked to tightly manage expenses in order to deal with the drop in consumer spending, as well.

“Direct revenue was impacted by a significant deceleration in ammunition sales and a more cautious consumer,” Millner said. “As we expect ammunition to continue to moderate, our direct business is expected to be down at a mid single digit rate for the fourth quarter.”

Although direct business is lower than expected, sales are not doing that poorly.

“It’s kind of interesting, two years ago if we had had the direct business up nine tenths of one percent, we would have been celebrating,” Millner said.

The increase is actually decent, the company just thought it would be better, he said.

“As we think about our business, it is largely behaving as we thought it would as we’re entering this time period, as we’re coming up against really big comps,” said Cabela’s Chief Financial Officer, Ralph Castner in the third quarter earnings conference call last week.

Comps are comparisons of how business is fairing this year compared to last year.

The slow down in direct business could have been caused by talk of the conflict in Syria and the government shutdown, Castner theorized.

“It did hurt the rest of our business, but we feel pretty good about where we are as we anniversary this time with really tough comps,” Castner said.

Lower ammunition sales were more than offset by the elimination of free shipping to club members, increased penetration of Cabela’s brand merchandise and fewer discounts and mark downs.

Into July, business was running as planned. August saw a slow down in business across the board.

“We believe we’ve made the necessary adjustments to manage costs down to levels consistent with how our business is performing,” Millner said. “And we’ll continue to manage these costs through the end of the year.”

In the third quarter of 2013, firearms were down 2.5 percent compared to the same time last year. In contrast, merchandise profit margins increased this quarter from the same quarter last year.

“Our retail stores are performing at very high levels,” Millner said. “And we’ve adjusted expenses to be more in line with current business trends.”

Margins of profit on merchandise have improved significantly over the past four years, Millner said. He expects modest merchandise margin improvement through 2014. Improvements in retail profitability this quarter were due entirely to improved merchandise margins.

Cabela’s Club credit cards saw increased growth in accounts. The average number of active accounts increased around 10 percent. Cabela’s still expects to see double digit growth in earnings per share in 2014.

Although direct revenue saw little increase in the third quarter this year, it was at $199 million compared to $197 million in the same quarter last year, Castner said.

“While we’re pleased with the fourth consecutive quarter of growth in our direct business, results fell shy of our expectations as ammunition growth slowed faster than we anticipated, leading to a deceleration in internet traffic and lower average ticket,” Castner said.

Castner expects gun sales to be down significantly in the fourth quarter of this year compared to last year. Gun sales increased a fair amount during this time last year, leading up to the election and after the Newtown tragedy in December, Castner said.

“We expect the quarter to be largely impacted by guns and we’re actually anticipating to get it worse than what we experienced through the first three and a half weeks (of the fourth quarter of 2013),” Castner said.

Cabela’s canceled a major shooting advertisement book during the first quarter of this year and pulled firearms from other marketing because the company couldn’t obtain enough product.

“As the year has progressed, product availability has gotten better, but it’s still not great,” Millner said.

Some standard hunting ammunition is still hard to come by.

Some products closely related to firearms have seen sales decreases as well. Sales of firearms and optics were down last quarter, but fishing and hunting apparel were up.

“It’s all about innovation in other categories of our business to attract the consumer,” Millner said.

Cabela’s decided to focus on more effective marketing, cut down on distribution costs and pull back work behind the gun counter to counteract lower than anticipated sales.

Earlier this year, 23 percent of in store labor was spent on firearms because of such a high demand for them.

“We were dealing with such a volume of customers in that part of our store that we had to invest significant amounts of money just to provide a reasonable level of service,” Millner said.

Some days people were lined up inside the stores waiting to purchase a firearm, he added.

The change in consumer sentiment seemed to be across the board in terms of category and across the country in terms of geography, Millner said.

“There was no one place that was meaningfully better or worse,” Millner said. “The slow down seemed to be agnostic to category or geography.”

After company officials opened the conference call for questions, one caller wondered if the government shutdown physically affected the locations in which sportsmen and women could hunt.

“It was probably more just the noise of the uncertainty and what was going on in Washington that may have distracted the consumer,” Millner said. “But I think that as we look at the balance of the fourth quarter, the likelihood of more of that noise is probably lessoned, thank goodness.”

Although direct sales were slightly lower than expected this quarter, those at Cabela’s are still looking forward to expansion in the coming months.

“We’re very excited about our future growth opportunities and making sure we cherish and delight every customer, every day,” Millner said.