Cabela's reports 6 percent decline in second-quarter profit

Cabela’s Incorporated (NYSE:CAB) Thursday reported financial results for it second 2016 fiscal quarter.

Cabela’s Inc. reported a 6 percent decline in its second-quarter profit Thursday, but didn’t offer any new clues about its long-term strategic plans.

The company reported total revenue increased 11.2 percent to $929.9 million. Retail store sales accounted for the largest percentage increase, up 13.3percent to $644.9 million. Internet and catalog sales increased 3.3percent to $141.3 million, and financial services increased 8.1 percent to $135.1 million

The Sidney-based company reported net income of $37.8 million, or 55 cents per share. That’s down from last year’s $40.1 million, or 56 cents per share.

But this year’s results were weighed down by restructuring charges of $959 million as Cabela’s works to reduce expenses. Excluding those, the outdoor gear seller would have reported earnings per share of 59 cents.

The 10 analysts surveyed by Zacks Investment Research expected earnings of 61 cents per share, on average.

Cabela’s is in the midst of a strategic review that began in December after an activist investor began urging it to consider selling all or part of the company. The retailer said Thursday that review is ongoing, so officials won’t comment on it.

Activist investment firm Elliott Management began pushing for significant changes at Cabela’s last October. Elliott owns 7.4 percent of Cabela’s shares and holds options to buy another 3.8 percent.

Cabela’s decisions are being watched closely in its hometown of Sidney. The company employs about 2,000 people in the western Nebraska town of about 7,000.

Cabela’s CEO Tommy Millner said the company is successfully limiting expenses. So he reiterated Cabela’s outlook for high-single-digit or low-double-digit growth in the company’s full year earnings per share.

“Success in our expense management efforts allowed us to take a more aggressive price and promotion approach in the second quarter,” Milner said. “This approach led to improvements in transaction trends, positive comparable store sales, growth in Internet and catalog sales, and market share improvements. As we look to the balance of the year, we will continue to weigh opportunities to drive revenue through the utilization of our expense initiative savings.”

Cabela’s reported that for the quarter, consolidated comparable store sales increased 1.5 percent and U.S. comparable store sales increased 2.0 percent as compared to the same quarter a year ago. This marks the first quarter of positive comparable store sales since the third quarter of 2013. Cabela’s attributed the increase to strength in firearms and shooting related categories as well as the camping, powersports, and fishing categories.

Cabela’s said merchandise gross margins decreased in the quarter to 32.9 percent compared to 35.8 percent in the same quarter a year ago. This decrease was the result of a purposeful plan to right size inventory levels, improve transaction trends, drive positive comparable store sales, and generate positive Internet and catalog sales, all of which occurred in the quarter. The decline was attributable to more aggressive pricing, increased discounts, merchandise mix, and timing of promotions.

“Our expense and process improvement activities have exceeded our expectations,” Millner said. “It is important to note that the second quarter marks the third consecutive quarter of expense leverage at Cabela’s and the rate is accelerating. We have not only lowered our expense levels, but have also implemented process improvement activities to ensure that these savings are permanent. We are in the early stage of many of these initiatives and expect ongoing benefit in the balance of 2016 and beyond.”

The company reported its credit card business, Cabela’s CLUB, had an excellent quarter despite an increase in the loan loss reserve.

Due to higher delinquency rates, the reserve for loan losses increased by $9.2 million in the quarter. During the quarter, growth in the average number of active credit card accounts was 7.3 percent and growth in average balance per active credit card account was 7.7 percent. The average balance of credit card loans grew 15.5 percent to almost $5.0 billion. For the quarter, net charge-offs were 2.13 percent. Second quarter the company’s financial services revenue increased 8.1 percent, driven by increases in interest and fee income as well as interchange income, both of which were partially offset by the increase in the provision for loan losses.

Stifel analyst Jim Duffy said Cabela’s reported shrinking profit margins in the quarter as it offered more discounts to boost sales. That’s not sustainable, but Duffy said Cabela’s cost--cutting in this quarter helped offset the smaller profit margin.

Cabela’s posted revenue of $929.9 million in the period was up 11.2 percent over last year, and topped Street forecasts. Seven analysts surveyed by Zacks expected $911.5 million.