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CABELAS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This report contains "forward-looking statements" that are based on our beliefs, assumptions, and expectations of future events, taking into account the information currently available to us. All statements other than statements of current or historical fact contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "plan," and similar statements are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance, or financial condition to differ materially from the expectations of future results, performance, or financial condition we express or imply in any forward-looking statements. These risks and uncertainties include, but are not limited to: • the state of the economy and the level of discretionary consumer spending, including changes in consumer preferences, demand for firearms and ammunition, and demographic trends; • adverse changes in the capital and credit markets or the availability of capital and credit; • our ability to successfully execute our omni-channel strategy; • increasing competition in the outdoor sporting goods industry and for credit card products and reward programs; • the cost of our products, including increases in fuel prices; • the availability of our products due to political or financial instability in countries where the goods we sell are manufactured; • supply and delivery shortages or interruptions, and other interruptions or disruptions to our systems, processes, or controls, caused by system changes or other factors; • increased or adverse government regulations, including regulations relating to firearms and ammunition; • our ability to protect our brand, intellectual property, and reputation; • our ability to prevent cybersecurity breaches and mitigate cybersecurity risks; • the outcome of litigation, administrative, and/or regulatory matters (including a Commissioner's charge we received from the Chair of the U. S. Equal Employment Opportunity Commission ("EEOC") in January 2011), audits by tax authorities, and compliance examinations by the Federal Deposit Insurance Corporation ("FDIC")); • our ability to manage credit, liquidity, interest rate, operational, legal, regulatory capital, and compliance risks; • our ability to increase credit card receivables while managing credit quality; • our ability to securitize our credit card receivables at acceptable rates or access the deposits market at acceptable rates; • the impact of legislation, regulation, and supervisory regulatory actions in the financial services industry, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"); and • other risks, relevant factors, and uncertainties identified in our filings with the Securities and Exchange Commission ("SEC") (including the information set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, and in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the first quarter ended March 29, 2014), which filings are available at the SEC's website at www.sec.gov. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Our forward-looking statements speak only as of the date of this report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. The following discussion and analysis of financial condition, results of operations, liquidity, and capital resources should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, as filed with the SEC, and our unaudited interim condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Cabela's Incorporated and its wholly-owned subsidiaries are referred to herein as "Cabela's," "Company," "we," "our," or "us." Critical Accounting Policies and Use of Estimates Our critical accounting policies and use of estimates utilized in the preparation of the condensed consolidated financial statements as of September 27, 2014, remain unchanged from December 28, 2013. 31 -------------------------------------------------------------------------------- Cabela's® We are a leading specialty retailer, and the world's largest direct marketer, of hunting, fishing, camping, and related outdoor merchandise. We provide a quality service to our customers who enjoy an outdoor lifestyle by supplying outdoor products through our multi-channel retail business consisting of our Retail and Direct segments. Our Retail business segment currently consists of 64 stores, including the 14 stores that we opened in 2014, with their location and opening date as follows: • Augusta, Georgia, on March 20, 2014, • Greenville, South Carolina, on April 3, 2014, • Anchorage, Alaska, on April 10, 2014, • Christiana, Delaware, on May 1, 2014, • Woodbury, Minnesota, on May 15, 2014 • Edmonton, Alberta, Canada, on May 22, 2014, • Missoula, Montana, on June 12, 2014, • Lubbock, Texas, on June 26, 2014, • Barrie, Ontario, Canada, on July 10, 2014, • Cheektowaga, New York, on August 7, 2014, • Acworth, Georgia, on August 21, 2014, • Nanaimo, British Columbia, Canada, on September 11, 2014, • Tualatin, Oregon, on September 18, 2014, and • Bowling Green, Kentucky, on September 25, 2014. We now have 57 stores located in the United States and seven in Canada with total retail square footage of 6.9 million, an increase of 17% compared to the end of 2013. Our Direct business segment is comprised of our highly acclaimed website and supplemented by our catalog distributions as a selling and marketing tool. World's Foremost Bank ("WFB," "Financial Services segment," or "Cabela's CLUB") also plays an integral role in supporting our merchandising business. The Financial Services segment is comprised of our credit card services, which reinforce our strong brand and strengthen our customer loyalty through our credit card loyalty programs. Executive Overview Three Months Ended September 27, September 28, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands Except Earnings Per Diluted Share) Revenue: Retail $ 598,686 $ 550,878 $ 47,808 8.7 % Direct 175,335 198,596 (23,261 ) (11.7 ) Total 774,021 749,474 24,547 3.3 Financial Services 109,132 98,403 10,729 10.9 Other revenue 2,849 2,951 (102 ) (3.5 ) Total revenue $ 886,002 $ 850,828 $ 35,174 4.1 Operating income $ 93,915 $ 76,603 $ 17,312 22.6 Net income $ 53,839 $ 49,886 $ 3,953 7.9 Earnings per diluted share $ 0.75 $ 0.70 $ 0.05 7.1 32-------------------------------------------------------------------------------- Nine Months Ended September 27, September 28, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands Except Earnings Per Diluted Share) Revenue: Retail $ 1,540,071 $ 1,521,550 $ 18,521 1.2 % Direct 501,867 603,878 (102,011 ) (16.9 ) Total 2,041,938 2,125,428 (83,490 ) (3.9 ) Financial Services 317,074 272,753 44,321 16.2 Other revenue 14,014 11,949 2,065 17.3 Total revenue $ 2,373,026 $ 2,410,130 $ (37,104 ) (1.5 ) Operating income $ 206,759 $ 222,653 $ (15,894 ) (7.1 ) Net income $ 123,105 $ 144,278 $ (21,173 ) (14.7 ) Earnings per diluted share $ 1.71 $ 2.01 $ (0.30 ) (14.9 ) Revenues presented in the tables above are consistent with our presentation for total revenue as reported by segment. Revenues in the three months ended September 27, 2014, totaled $886 million, an increase of $35 million, or 4.1%, compared to the three months ended September 28, 2013. Total merchandise sales increased comparing the three month periods primarily due to an increase in Retail revenue from new stores of $108 million in the three months ended September 27, 2014. Our new retail store formats continue to generate an increase in sales per square foot compared to our legacy stores. The increase in Retail revenue from new stores was partially offset by a decrease in comparable store sales of $57 million, or 11.2%, as well as a decrease in Direct revenue of $23 million or 11.7%. Comparable store sales were down across all major product categories comparing the three months ended September 27, 2014, to the three months ended September 28, 2013, but primarily in the hunting equipment product category. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a substantial decrease in ammunition sales and shooting related products compared to the same period of 2013, and expected cannibalization from our new retail stores. Revenues in the nine months ended September 27, 2014, totaled $2.4 billion, a decrease of $37 million, or 1.5%, over the nine months ended September 28, 2013. Total merchandise sales decreased comparing the nine month periods primarily due to a decrease of $218 million, or 15.6%, in comparable store sales that extended across all product categories, led by a decrease in the hunting equipment product category. The sales of firearms and ammunition, which are in the hunting equipment product category, decreased significantly comparing the nine months ended September 27, 2014, to the nine months ended September 28, 2013. We believe the decreases in ammunition sales have begun to level out and are expected to return to more normalized levels in fiscal 2015. Direct revenue also decreased $102 million, or 16.9%, in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a substantial decrease in ammunition sales compared to the same period of 2013, and expected cannibalization from our new retail stores. Partially offsetting the decreases in comparable store sales and Direct revenue was an increase in Retail revenue from new stores of $237 million in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. In addition, our Cabela's branded products continue to be a core focus for us, as we saw growth in Cabela's branded softgoods and general outdoors categories in the three and nine months ended September 27, 2014, compared to the three and nine months ended September 28, 2013. Financial Services revenue increased $11 million, or 10.9%, in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, and increased $44 million, or 16.2%, in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. These increases in Financial Services revenue were primarily due to increases in interest and fee income and interchange income, partially offset by increases in the provision for loan losses. 33 -------------------------------------------------------------------------------- Operating income increased $17 million, or 22.6%, in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, and operating income as a percentage of revenue increased 160 basis points over the same periods. The increases in total operating income and operating income as a percentage of revenue were primarily due to increased contributions from our Financial Services segment and a decrease in selling, distribution, and administrative expenses. Operating expenses decreased in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, primarily due to a reduction in incentive compensation and our emphasis on operating expense management. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that have begun to show benefits in the three months ended September 27, 2014, and should continue to benefit operating income in upcoming periods. We plan to continue our retail expansion, our omni-channel initiatives, and our Cabela's branded product investments as we focus on expense management and emphasize corporate frugality. Operating income decreased $16 million, or 7.1%, in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013, and operating income as a percentage of revenue decreased 50 basis points over the same periods. The decreases in total operating income and total operating income as a percentage of total revenue were primarily due to decreases in revenue from our Direct business segment and in our merchandise gross profit. Selling, distribution, and administrative expenses increased overall primarily due to increases in new store costs and related support areas. These decreases to operating income were partially offset by increased operating income contributions from our Financial Services segment. Our strategic focus is to be the best omni-channel retail company in the world by creating intense customer loyalty for our outdoor brand. This loyalty will be created through two pillars of excellence: highly engaged outfitters and shareholders who support our short and long term goals. We continue to focus on these areas to achieve our vision: • Intensify Customer Loyalty. We will deepen our customer relationships, aggressively serve current and developing market segments, and increase our innovation in Cabela's products and services. • Grow Profitably and Sustainably. Through sustaining and adapting our culture, we will continuously seek ways to improve profitability and increase revenue in all business segments. • Enhance Technology Capability. We will implement a strategic technology road map, streamline our systems, and accelerate customer-facing technologies. • Simplify Our Business. As we focus on our priorities, we will align our goals to foster collaboration and streamline cross-functional processes. • Improve Marketing Effectiveness. We will optimize all marketing channels and expand our digital and e-commerce capabilities while continuing to strengthen the Cabela's brand. We offer our customers integrated opportunities to access and use our retail store, website, and catalog channels. Our in-store pick-up program allows customers to order products through our catalogs, website, and store kiosks and have them delivered to the retail store of their choice without incurring shipping costs, thereby helping to increase foot traffic in our stores. Conversely, our expanding retail stores introduce customers to our website and catalog channels. We are capitalizing on our omni-channel model by building on the strengths of each channel, primarily through improvements in our merchandise planning system. This system, along with our replenishment system, allows us to identify the correct product mix in each of our retail stores, maintain the proper inventory levels to satisfy customer demand in both our Retail and Direct business channels, and improve our distribution efficiencies. We continue to enhance our omni-channel efforts through greater use of digital marketing, the roll out of omni-channel fulfillment, and the improvements to our mobile platform. We continue to work with vendors to negotiate the best prices on products and to manage inventory levels, as well as to ensure vendors deliver all products and services as expected. Our efforts continue in detailed pre-season planning, in-season monitoring of sales, and management of inventory to focus product assortments on our core customer base. Our merchandise gross margin as a percentage of merchandise revenue decreased 100 basis points to 36.3% in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, and decreased 80 basis points to 36.0% in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. 34 -------------------------------------------------------------------------------- The decrease in merchandise gross profit as a percentage of merchandise sales comparing the three month periods was primarily due to an adjustment in the presentation of reimbursement between segments for certain promotional costs, which totaled $5 million for the three months ended September 27, 2014, and due to additional promotional activity. The effect of this adjustment in the presentation of reimbursement between segments for certain promotional costs increases Financial Services revenue and merchandise cost. The decrease in merchandise gross profit as a percentage of merchandise sales comparing the nine month periods was primarily due to lower margin in firearms, ammunition, optics, and the shooting product categories in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013, and to the adjustment in the presentation of reimbursement between segments for certain promotional costs, which totaled $10 million for the nine months ended September 27, 2014. We have improved our retail store merchandising processes, information technology systems, and distribution and logistics capabilities. We have also improved our visual merchandising within the stores and coordinated merchandise at our stores by adding more regional product assortments. Our outfitters also benefited through the launch of our new retail product information application which is available via hand held devices. This provides quick and convenient access to product information, allowing outfitters to be more efficient and engaging with customers. In addition, to enhance customer service at our retail stores, we have continued our management training and mentoring programs for our retail store managers. Comparing Retail segment results for the three and nine months ended September 27, 2014, to the three and nine months ended September 28, 2013: • revenue increased $48 million, or 8.7%, and $19 million, or 1.2%; • operating income increased $5 million, or 4.7% quarter over quarter, but decreased $19 million, or 6.7% comparing the respective nine month periods; • operating income as a percentage of Retail segment revenue decreased 70 basis points to 18.1%, and 150 basis points to 16.9%; and • comparable store sales decreased 11.2% and 15.6%, respectively. Our Retail business segment currently consists of 64 stores. Our new store formats generate higher sales per square foot and higher returns compared to our legacy stores which will help to increase our return on invested capital. It is expected that the planned openings of our new stores will continue to generate an increase in profit per square foot compared to the legacy store base. With this strong new store performance, retail store expansion remains on track with plans to increase retail square footage between 900,000 to 1,000,000 square feet annually over the next several years. For 2015 and thereafter, we currently have plans to open new retail stores located as follows: • Berlin, Massachusetts; Sun Prairie, Wisconsin; Garner, North Carolina; Fort Mill, South Carolina; Bristol, Virginia; Moncton, New Brunswick, Canada; Ammon, Idaho; Fort Oglethorpe, Georgia; Short Pump, Virginia; Noblesville, Indiana; Huntsville, Alabama; Oklahoma City, Oklahoma; Woodbury, New York; Calgary, Alberta, Canada; West Chester, Ohio; League City, Texas; and Lexington, Kentucky. For 2015, we have announced plans to open 14 stores with over one million square feet of retail space. This equates to approximately 15.7% annual square footage growth. Beyond 2015, as we continue our pace of new store openings, we expect to see more stores in smaller markets. We are focusing on improving our customers' digital shopping experiences on Cabelas.com and via mobile devices. Our marketing focus continues to be on developing a seamless omni-channel experience for our customers regardless of their transaction channel. Our digital transformation continues with efforts around enhancing our website to support the Direct business. The amount of traffic coming through mobile devices is growing significantly. As a result, we continue to utilize best-in-class technology to improve our customers' digital shopping experiences and build on the advances we have made to capitalize on the variety of ways customers are shopping at Cabela's today. We have seen successes in our social marketing initiatives and now have over 3.3 million fans on Facebook. Our omni-channel marketing efforts and retail expansion have resulted in an increase in the number of new customers, as well as in customer engagement with a consistent experience across all channels. Our goal is to create a digital presence that mirrors our customers' in-store shopping experience. Continuing into 2014, we realized improvements in our website traffic, growth in multi-channel customers, and progress in our print-to-digital transformation. We have developed a multi-year approach to reverse the downward trend in our Direct segment and transform our legacy catalog business into an omni-channel enterprise supporting transformation to digital, e-commerce, and mobile while optimizing the customer experience with our growing retail footprint. We are continuing our efforts in our print-to-digital transformation. 35 --------------------------------------------------------------------------------Comparing Direct segment results for the three and nine months ended September 27, 2014, to the three and nine months ended September 28, 2013: • revenue decreased $23 million, or 11.7%, and $102 million, or 16.9%; • operating income decreased $11 million, or 37.7%, and $29 million, or 28.1%; and • operating income as a percentage of Direct segment revenue decreased 430 basis points to 10.4%, and 240 basis points to 15.0%, respectively. The decreases in Direct revenue comparing the respective periods were primarily due to a decrease in the hunting equipment product category, primarily due to a substantial decrease in sales of ammunition and other shooting related products compared to the first nine months of 2013, and expected cannibalization from our new retail stores. We are building a 590,000 square foot distribution center in Tooele, Utah, to support our planned growth. We expect to have this distribution center operational by July 2015. At September 27, 2014, construction was in progress. As of August 2013, we have leased a 325,000 square foot distribution center in Tooele, Utah, which is expected to be in use through the third quarter of 2015. Cabela's CLUB continues to manage credit card delinquencies and charge-offs below industry average by adhering to our conservative underwriting criteria and active account management. Comparing Cabela's CLUB results for the three and nine months ended September 27, 2014, to the three and nine months ended September 28, 2013: • Financial Services revenue increased $11 million, or 10.9%, and $44 million, or 16.2%; • the average number of active accounts increased 7.5%, and 7.7%, respectively, to 1.8 million, and the average balance per active account increased $108 and $94, respectively; • the average balance of our credit card loans increased 13.0% and 12.6%, respectively, to $4.0 billion and $3.9 billion, respectively; and • net charge-offs as a percentage of average credit card loans decreased 16 basis points to 1.56%, and 15 basis points to 1.67%, respectively. During the nine months ended September 27, 2014, the Financial Services segment completed two term securitizations totaling $700 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. Current Business Environment Macroeconomic Environment - Beginning in August 2013, and continuing through the third quarter of fiscal 2014, we experienced a significant deceleration in sales of firearms and ammunition as well as a challenging consumer environment across all business channels. To address these trends, we adjusted our promotional spending and implemented operating expense controls to levels consistent with how our business is performing. We will continue to manage our operating costs accordingly through the remainder of fiscal 2014. The Financial Services segment continues to monitor developments in the securitization and certificates of deposit markets to ensure adequate access to liquidity. We expect our charge-off rates and delinquency levels to remain below industry averages. Visa Litigation Settlement - In June 2005, a number of entities sued Visa and several member banks, and other credit card associations, alleging, among other things, that Visa and its member banks violated United States antitrust laws by conspiring to fix the level of interchange fees. In July 2012, the parties to this litigation entered into a settlement agreement to resolve the claims brought by the class members. On December 13, 2013, the settlement received final court approval. Among other things, the settlement agreement required the distribution to class merchants of an amount equal to 10 basis points of default interchange across all credit rate categories for a period of eight consecutive months, which otherwise would have been paid to issuers like WFB. To date, WFB has not been named as a defendant in any credit card industry lawsuits. The remaining related liability of $1 million was settled in the second quarter of 2014. Therefore, at September 27, 2014, no liability was outstanding for this settlement compared to $4.7 million at December 28, 2013, and $8.3 million at September 28, 2013. 36--------------------------------------------------------------------------------Operations Review The three months ended September 27, 2014, and September 28, 2013, each consisted of 13 weeks and the nine months ended September 27, 2014, and September 28, 2013, each consisted of 39 weeks. Our operating results expressed as a percentage of revenue were as follows for the periods presented. Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 Revenue 100.00 % 100.00 % 100.00 % 100.00 % Cost of revenue 55.59 55.23 55.12 55.69 Gross profit (exclusive of depreciation and amortization) 44.41 44.77 44.88 44.31 Selling, distribution, and administrative expenses 33.81 35.76 36.14 35.04 Impairment and restructuring charges - - 0.03 0.03 Operating income 10.60 9.01 8.71 9.24 Other income (expense): Interest expense, net (0.58 ) (0.59 ) (0.61 ) (0.59 ) Other income, net 0.10 0.12 0.17 0.15 Total other income (expense), net (0.48 ) (0.47 ) (0.44 ) (0.44 ) Income before provision for income taxes 10.12 8.54 8.27 8.80 Provision for income taxes 4.04 2.68 3.08 2.81 Net income 6.08 % 5.86 % 5.19 % 5.99 % Results of Operations - Three Months Ended September 27, 2014, Compared to September 28, 2013 Revenues Retail revenue includes sales realized and customer services performed at our retail stores, sales from orders placed through our retail store Internet kiosks, and sales from customers utilizing our in-store pick-up program. Direct revenue includes Internet and call center (catalog) sales from orders placed through our website, over the phone, and by mail where the merchandise is shipped to non-retail store locations. Financial Services revenue is comprised of interest and fee income, interchange income, other non-interest income, interest expense, provision for loan losses, and customer rewards costs from our credit card operations. Other revenue sources include fees for our hunting and fishing outfitter services, fees for our full-service travel agency business, real estate rental income and land sales, and other complementary business services. Comparisons and analysis of our revenues are presented below for the three months ended: September 27, September 28, Increase 2014 % 2013 % (Decrease) % Change (Dollars in Thousands) Retail $ 598,686 67.6 % $ 550,878 64.8 % $ 47,808 8.7 % Direct 175,335 19.8 198,596 23.3 (23,261 ) (11.7 ) Financial Services 109,132 12.3 98,403 11.6 10,729 10.9 Other 2,849 0.3 2,951 0.3 (102 ) (3.5 ) Total $ 886,002 100.0 % $ 850,828 100.0 % $ 35,174 4.1 37-------------------------------------------------------------------------------- Product Sales Mix - The following table sets forth the percentage of our merchandise revenue contributed by major product categories for our Retail and Direct segments and in total for the three months ended September 27, 2014, and September 28, 2013. Retail Direct Total 2014 2013 2014 2013 2014 2013 Hunting Equipment 48.6 % 51.1 % 43.4 % 47.6 % 47.3 % 50.2 % General Outdoors 30.7 28.3 30.4 27.8 30.6 28.2 Clothing and Footwear 20.7 20.6 26.2 24.6 22.1 21.6 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % The hunting equipment merchandise category includes a wide variety of firearms, ammunition, optics, archery products, and related accessories and supplies. The general outdoors merchandise category includes a full range of equipment and accessories supporting all outdoor activities, including all types of fishing and tackle products, boats and marine equipment, camping gear and equipment, food preparation and outdoor cooking products, all-terrain vehicles and accessories for automobiles and all-terrain vehicles, wildlife and land management products and services, including compact tractors and tractor attachments, and gifts and home furnishings. The clothing and footwear merchandise category includes fieldwear apparel and footwear, sportswear, casual clothing and footwear, and workwear products. Retail Revenue - Retail revenue increased $48 million, or 8.7%, in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, primarily due to an increase of $108 million in revenue from the addition of new retail stores, as our new retail store formats continue to generate an increase in sales per square foot compared to our legacy stores. The increase in retail revenue from new retail stores was partially offset by a decrease in comparable store sales of $57 million. Comparable store sales were down across all major product categories comparing the three months ended September 27, 2014, to the three months ended September 28, 2013, but primarily in the hunting equipment product category. We believe that the decreases in sales of firearms and ammunition have begun to level out and are expected to return to more normalized levels in fiscal 2015. Comparable store sales and analysis are presented below for the three months ended: September 27, September 28, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Comparable stores sales $ 450,729 $ 507,490 $ (56,761 ) (11.2 )% Direct Revenue - Direct revenue decreased $23 million, or 11.7%, in the three months ended September 27, 2014, compared to the three months ended September 28, 2013. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a decrease in sales of ammunition and other shooting related products compared to the third quarter of 2013, and expected cannibalization from our new retail stores. 38 --------------------------------------------------------------------------------Financial Services Revenue - The following table sets forth the components of Financial Services revenue for the three months ended: September 27, September 28, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Interest and fee income $ 103,333 $ 87,945 $ 15,388 17.5 % Interest expense (16,155 ) (17,075 ) (920 ) (5.4 ) Provision for loan losses (19,088 ) (8,404 ) 10,684 127.1 Net interest income, net of provision for loan losses 68,090 62,466 5,624 9.0 Non-interest income: Interchange income 93,817 88,963 4,854 5.5 Other non-interest income 999 1,430 (431 ) (30.1 ) Total non-interest income 94,816 90,393 4,423 4.9 Less: Customer rewards costs (53,774 ) (54,456 ) 682 1.3 Financial Services revenue $ 109,132 $ 98,403 $ 10,729 10.9 Financial Services revenue increased $11 million, or 10.9%, for the three months ended September 27, 2014, compared to the three months ended September 28, 2013. The increase in interest and fee income of $15 million was due to an increase in credit card loans and an increase in the mix of credit card loans carrying interest, partially offset by lower London Interbank Offered Rate ("LIBOR") rates. The provision for loan losses increased $11 million primarily due to growth in the average balance of credit card loans compared to the three months ended September 28, 2013, and a reduction of $5 million in the allowance for loan losses on the restructured credit card loans segment in the three months ended September 28, 2013. The increase in interchange income of $5 million was primarily due to an increase in credit card purchases. The following table sets forth the components of Financial Services revenue as a percentage of average total credit card loans, including any accrued interest and fees, for the three months ended: September 27, September 28, 2014 2013 Interest and fee income 10.3 % 9.9 % Interest expense (1.6 ) (1.9 ) Provision for loan losses (1.9 ) (0.9 ) Interchange income 9.4 10.0 Other non-interest income 0.1 0.2 Customer rewards costs (5.4 ) (6.1 ) Financial Services revenue 10.9 % 11.2 % 39--------------------------------------------------------------------------------Key statistics reflecting the performance of Cabela's CLUB are shown in the following chart for the three months ended: September 27, September 28, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands Except Average Balance per Account ) Average balance of credit card loans (1) $ 4,013,989 $ 3,551,109 $ 462,880 13.0 % Average number of active credit card accounts 1,820,924 1,694,334 126,590 7.5 Average balance per active credit card account (1) $ 2,204 $ 2,096 $ 108 5.2 Net charge-offs on credit card loans (1) $ 15,621 $ 15,312 $ 309 2.0 Net charge-offs as a percentage of average credit card loans (1) 1.56 % 1.72 % (0.16 )% (1) Includes accrued interest and fees The average balance of credit card loans increased to $4.0 billion, or 13.0%, for the three months ended September 27, 2014, compared to the three months ended September 28, 2013, due to an increase in the number of active accounts and the average balance per account. The average number of active accounts increased to 1.8 million, or 7.5%, compared to the three months ended September 28, 2013, due to our successful marketing efforts in new account acquisitions. We define an active credit card account as any account with an outstanding debit or credit balance at the end of any respective month. Net charge-offs as a percentage of average credit card loans decreased to 1.56% for the three months ended September 27, 2014, down 16 basis points compared to the three months ended September 28, 2013, due to improvements in the quality of our credit card portfolio evidenced by continued low delinquencies, lower delinquency roll-rates, an increase in recovery rates, favorable charge-off trends, and declining loan balances in our restructured loan portfolio. See "Asset Quality of Cabela's CLUB" in this report for additional information on trends in delinquencies and non-accrual loans and analysis of our allowance for loan losses. Other Revenue Other revenue was $3 million in both the three months ended September 27, 2014, and the three months ended September 28, 2013. Merchandise Gross Profit Comparisons and analysis of our gross profit on merchandising revenue are presented below for the three months ended: September 27, September 28, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Merchandise sales $ 773,438 $ 749,141 $ 24,297 3.2 % Merchandise gross profit 280,946 279,527 1,419 0.5 Merchandise gross profit as a percentage of merchandise sales 36.3 % 37.3 % (1.0 )% Merchandise Gross Profit - Our merchandise gross profit increased $1 million, or 0.5%, to $281 million in the three months ended September 27, 2014, compared to the three months ended September 28, 2013. Our merchandise gross profit as a percentage of merchandise sales decreased 100 basis points to 36.3% in the three months ended September 27, 2014, compared to the three months ended September 28, 2013. The decrease in our merchandise gross profit as a percentage of merchandise sales comparing the respective periods was primarily due to an adjustment in the presentation of reimbursement between segments for certain promotional costs, which totaled $5 million for the three months ended September 27, 2014, and additional promotional activity. The impact of this reimbursement adjustment results in an increase in Financial Services revenue and an increase in merchandise cost of sales by the same amount. This presentation will be ongoing and had no impact on consolidated operating income or earnings per diluted share. 40 --------------------------------------------------------------------------------Selling, Distribution, and Administrative Expenses Selling, distribution, and administrative expenses include all operating expenses related to our retail stores, Internet website, distribution centers, product procurement, Cabela's CLUB credit card operations, and overhead costs, including: advertising and marketing, catalog costs, employee compensation and benefits, occupancy costs, information systems processing, and depreciation and amortization. Comparisons and analysis of our selling, distribution, and administrative expenses are presented below for the three months ended: September 27, September 28, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Selling, distribution, and administrative expenses $ 299,587 $ 304,293 $ (4,706 ) (1.5 )% SD&A expenses as a percentage of total revenue 33.8 % 35.8 % (2.1 )% Retail store pre-opening costs $ 7,821 $ 7,808 $ 13 0.2 We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that have begun to show benefits in the three months ended September 27, 2014, and should continue to benefit operating income in upcoming periods. Selling, distribution, and administrative expenses decreased $5 million, or 1.5%, in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, and decreased 200 basis points to 33.8% as a percentage of total revenue. Operating expenses decreased in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, primarily due to a reduction in incentive compensation and our emphasis on operating expense management. The most significant factors contributing to the changes in selling, distribution, and administrative expenses in these respective periods included: • a decrease of $24 million in employee compensation, benefits, and contract labor primarily due to a reduction in incentive compensation and our emphasis on operating expense management; • an increase of $11 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores as well as corporate offices; and • an increase of $4 million in fraudulent transactions on the Cabela's CLUB credit card. Significant changes in our consolidated selling, distribution, and administrative expenses related to specific business segments included the following: Retail Segment: • An increase of $8 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores. • An increase of $2 million in employee compensation, benefits, and contract labor primarily due to the opening of new retail stores. Direct Segment: • A decrease of $5 million in employee compensation, benefits, and contract labor in part related to our emphasis on operating expense management. Financial Services Segment: • An increase of $4 million in fraudulent transactions on the Cabela's CLUB credit card. 41--------------------------------------------------------------------------------Corporate Overhead, Distribution Centers, and Other: • A decrease of $21 million in employee compensation, benefits, and contract labor primarily due to a reduction in incentive compensation and our emphasis on operating expense management. • An increase of $3 million in building costs primarily related to the operations and maintenance of our corporate office to support operational growth. Operating Income Operating income is revenue less cost of revenue and selling, distribution, and administrative expenses, and impairment and restructuring charges. Operating income for our merchandise business segments excludes costs associated with operating expenses of distribution centers, procurement activities, and other corporate overhead costs. Comparisons and analysis of operating income are presented below for the three months ended: September 27, September 28, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Total operating income $ 93,915 $ 76,603 $ 17,312 22.6 % Total operating income as a percentage of total revenue 10.6 % 9.0 % 1.6 % Operating income by business segment: Retail $ 108,552 $ 103,658 $ 4,894 4.7 Direct 18,236 29,284 (11,048 ) (37.7 ) Financial Services 28,158 29,182 (1,024 ) (3.5 ) Operating income as a percentage of segment revenue: Retail 18.1 % 18.8 % (0.7 )% Direct 10.4 14.7 (4.3 ) Financial Services 27.0 29.7 (2.7 ) 42-------------------------------------------------------------------------------- Operating income increased $17 million, or 22.6%, in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, and operating income as a percentage of revenue increased 160 basis points to 10.6% in the three months ended September 27, 2014. The increase in total operating income and operating income as a percentage of revenue was primarily due to increased contributions from our Financial Services segment and a decrease in our consolidated operating expenses. Operating expenses decreased in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, primarily due to a reduction in incentive compensation and our emphasis on operating expense management. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that have begun to show benefits in the three months ended September 27, 2014, and should continue to benefit operating income in upcoming periods. We plan to continue our retail expansion, our omni-channel initiatives, and our Cabela's branded product investments as we focus on expense management and emphasize corporate frugality. Under an Intercompany Agreement, the Financial Services segment pays to the Retail and Direct business segments a fixed license fee that includes 70 basis points on all originated charge volume of the Cabela's CLUB Visa credit card portfolio. In addition, among other items, the agreement requires the Financial Services segment to reimburse the Retail and Direct segments for certain promotional costs, which are recorded as a reduction to Financial Services segment revenue and as a reduction to merchandise costs associated with the Retail and Direct segments. Also, if the total risk-based capital ratio of WFB is greater than 13% at any quarter end, the Financial Services segment must pay an additional license fee to the Retail and Direct business segments equal to 50% of the amount that the total risk-based capital ratio exceeds 13%. Total fees paid under the Intercompany Agreement by the Financial Services segment to these two segments increased $3 million in the three months ended September 27, 2014, compared to the three months ended September 28, 2013; a $6 million increase to the Retail segment and a $3 million decrease to the Direct segment. Interest (Expense) Income, Net Interest expense, net of interest income, was $5 million in both the three months ended September 27, 2014, and the three months ended September 28, 2013. The amount of interest capitalized in the three months ended September 27, 2014, compared to the three months ended September 28, 2013, increased due to more stores opened comparing the respective periods. However, the increase in the amount of interest capitalized comparing the respective periods was offset due to additional interest expense recognized in the three months ended September 27, 2014, associated with our uncertain tax positions and increases in interest expense due to increases in the outstanding balances on our revolving credit facility during the three months ended September 27, 2014, compared to the three months ended September 28, 2013. Other Non-Operating Income, Net Other non-operating income was $1 million in both the three months ended September 27, 2014, and the three months ended September 28, 2013. This income is primarily from interest earned on our economic development bonds. Provision for Income Taxes Our effective tax rate was 40.0% for the three months ended September 27, 2014, compared to 31.3% for the three months ended September 28, 2013. The increase in our effective tax rate comparing the respective periods is due to an increase of $4 million in accrued income tax related to tax adjustments attributable to changes in the mix of prior year taxable income between the United States and foreign tax jurisdictions and an increase in our state effective tax rate. 43-------------------------------------------------------------------------------- Results of Operations - Nine Months Ended September 27, 2014, Compared to September 28, 2013 Revenues Comparisons and analysis of our revenues are presented below for the nine months ended: September 27, September 28, Increase 2014 % 2013 % (Decrease) % Change (Dollars in Thousands) Retail $ 1,540,071 64.9 % $ 1,521,550 63.1 % $ 18,521 1.2 % Direct 501,867 21.1 603,878 25.1 (102,011 ) (16.9 ) Financial Services 317,074 13.4 272,753 11.3 44,321 16.2 Other 14,014 0.6 11,949 0.5 2,065 17.3 Total $ 2,373,026 100.0 % $ 2,410,130 100.0 % $ (37,104 ) (1.5 ) Product Sales Mix - The following table sets forth the percentage of our merchandise revenue contributed by major product categories for our Retail and Direct segments and in total for the nine months ended September 27, 2014, and September 28, 2013. Retail Direct Total 2014 2013 2014 2013 2014 2013 Hunting Equipment 46.9 % 52.1 % 38.7 % 45.2 % 44.8 % 50.2 % General Outdoors 33.1 29.3 35.6 30.9 33.8 29.7 Clothing and Footwear 20.0 18.6 25.7 23.9 21.4 20.1 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Retail Revenue - Retail revenue increased $19 million, or 1.2%, in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013, primarily due to an increase of $237 million in revenue from the addition of new retail stores, as our new retail store formats continue to generate an increase in sales per square foot compared to our legacy stores. The increase in retail revenue from new retail stores was partially offset by a decrease in comparable store sales of $218 million. Comparable store sales were down across all major product categories comparing the nine months ended September 27, 2014, to the nine months ended September 28, 2013, but primarily in the hunting equipment product category. We believe that the decreases in sales of firearms and ammunition have begun to level out and are expected to return to more normalized levels in fiscal 2015. Comparable store sales and analysis are presented below for the nine months ended: September 27, September 28, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Comparable stores sales $ 1,182,616 $ 1,400,586 $ (217,970 ) (15.6 )% Direct Revenue - Direct revenue decreased $102 million, or 16.9%, in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a substantial decrease in sales of ammunition and other shooting related products compared to the nine months ended September 28, 2013, and expected cannibalization from our new retail stores. 44 --------------------------------------------------------------------------------Financial Services Revenue - The following table sets forth the components of Financial Services revenue for the nine months ended: September 27, September 28, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Interest and fee income $ 292,204 $ 250,383 $ 41,821 16.7 % Interest expense (47,845 ) (46,863 ) 982 2.1 Provision for loan losses (42,116 ) (33,030 ) 9,086 27.5 Net interest income, net of provision for loan losses 202,243 170,490 31,753 18.6 Non-interest income: Interchange income 267,756 252,290 15,466 6.1 Other non-interest income 2,621 4,113 (1,492 ) (36.3 ) Total non-interest income 270,377 256,403 13,974 5.5 Less: Customer rewards costs (155,546 ) (154,140 ) 1,406 0.9 Financial Services revenue $ 317,074 $ 272,753 $ 44,321 16.2 Financial Services revenue increased $44 million, or 16.2%, for the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. The increase in interest and fee income of $42 million was due to increases in credit card loans and the mix of credit card loans carrying interest, partially offset by lower LIBOR rates. The provision for loan losses increased $9 million primarily due to growth in the average balance of credit card loans compared to the nine months ended September 28, 2013, and a reduction of $8 million in the allowance for loan losses on the restructured credit card loans segment in the nine months ended September 28, 2013. The increase in interchange income of $15 million was primarily due to an increase in credit card purchases. The following table sets forth the components of Financial Services revenue as a percentage of average total credit card loans, including any accrued interest and fees, for the nine months ended: September 27, September 28, 2014 2013 Interest and fee income 10.1 % 9.7 % Interest expense (1.7 ) (1.8 ) Provision for loan losses (1.5 ) (1.3 ) Interchange income 9.3 9.8 Other non-interest income 0.1 0.2 Customer rewards costs (5.4 ) (6.0 ) Financial Services revenue 10.9 % 10.6 % 45--------------------------------------------------------------------------------Key statistics reflecting the performance of Cabela's CLUB are shown in the following chart for the nine months ended: September 27, September 28, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands Except Average Balance per Account ) Average balance of credit card loans (1) $ 3,860,956 $ 3,429,045 $ 431,911 12.6 % Average number of active credit card accounts 1,787,421 1,659,724 127,697 7.7 Average balance per active credit card account (1) $ 2,160 $ 2,066 $ 94 4.5 Net charge-offs on credit card loans (1) $ 48,404 $ 46,776 $ 1,628 3.5 Net charge-offs as a percentage of average credit card loans (1) 1.67 % 1.82 % (0.15 )% (1) Includes accrued interest and fees The average balance of credit card loans increased to $3.9 billion, or 12.6%, for the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013, due to an increase in the number of active accounts and the average balance per account. The average number of active accounts increased to 1.8 million, or 7.7%, compared to the nine months ended September 28, 2013, due to our successful marketing efforts in new account acquisitions. We define an active credit card account as any account with an outstanding debit or credit balance at the end of any respective month. Net charge-offs as a percentage of average credit card loans decreased to 1.67% for the nine months ended September 27, 2014, down 15 basis points compared to the nine months ended September 28, 2013, due to improvements in the quality of our credit card portfolio evidenced by continued low delinquencies, lower delinquency roll-rates, an increase in recovery rates, favorable charge-off trends, and declining loan balances in our restructured loan portfolio. See "Asset Quality of Cabela's CLUB" in this report for additional information on trends in delinquencies and non-accrual loans and analysis of our allowance for loan losses. Other Revenue Other revenue increased to $15 million in the nine months ended September 27, 2014, compared to $13 million in the nine months ended September 28, 2013, primarily due to an increase in real estate sales revenue comparing the respective periods. Merchandise Gross Profit Comparisons and analysis of our gross profit on merchandising revenue are presented below for the nine months ended: September 27, September 28, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Merchandise sales $ 2,040,501 $ 2,124,538 $ (84,037 ) (4.0 )% Merchandise gross profit 733,916 782,832 (48,916 ) (6.2 ) Merchandise gross profit as a percentage of merchandise sales 36.0 % 36.8 % (0.8 )% Merchandise Gross Profit - Our merchandise gross profit decreased $49 million, or 6.2%, to $734 million in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. The decrease in our merchandise gross profit was primarily due to a decrease in sales of firearms and ammunition as well as a decrease in comparable store sales. Additionally, unfavorable weather caused us to experience a late start in sales in our spring products. 46 -------------------------------------------------------------------------------- Our merchandise gross profit as a percentage of merchandise sales decreased 80 basis points to 36.0% in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. This decrease comparing the respective periods was primarily due to lower margins in firearms, ammunition, optics, and the shooting product categories in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013, and to the adjustment in the presentation of reimbursement between segments for certain promotional costs, which totaled $10 million for the nine months ended September 27, 2014. The impact of this reimbursement adjustment results in an increase in Financial Services revenue and an increase in merchandise cost of sales by the same amount. This presentation will be ongoing and had no impact on consolidated operating income or earnings per diluted share. Selling, Distribution, and Administrative Expenses Comparisons and analysis of our selling, distribution, and administrative expenses are presented below for the nine months ended: September 27, September 28, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Selling, distribution, and administrative expenses $ 857,643 $ 844,448 $ 13,195 1.6 % SD&A expenses as a percentage of total revenue 36.1 % 35.0 % 1.1 % Retail store pre-opening costs $ 20,896 $ 18,083 $ 2,813 15.6 Selling, distribution, and administrative expenses increased $13 million, or 1.6%, in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that have begun to show benefits in the three months ended September 27, 2014, and should continue to benefit operating income in upcoming periods. The most significant factors contributing to the changes in selling, distribution, and administrative expenses in these respective periods included: • an increase of $28 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores as well as corporate offices; • a decrease of $28 million in employee compensation, benefits, and contract labor primarily due to a reduction in incentive compensation and our emphasis on operating expense management; and • an increase of $8 million in fraudulent transactions on the Cabela's CLUB credit card. Significant changes in our consolidated selling, distribution, and administrative expenses related to specific business segments included the following: Retail Segment: • An increase of $19 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores. • An increase of $4 million in employee compensation, benefits, and contract labor primarily due to the opening of new retail stores. Direct Segment: • A decrease of $14 million in employee compensation, benefits, and contract labor in part related to our emphasis on operating expense management. 47--------------------------------------------------------------------------------Financial Services Segment: • An increase of $8 million in fraudulent transactions on the Cabela's CLUB credit card. • An increase of $3 million in employee compensation, benefits, and contract labor to support the growth of credit card operations. Corporate Overhead, Distribution Centers, and Other: • A decrease of $21 million in employee compensation, benefits, and contract labor primarily due to a reduction in incentive compensation and our emphasis on operating expense management. • An increase of $9 million in building costs primarily related to the operations and maintenance of our corporate office to support operational growth. Impairment and Restructuring Charges On June 11, 2014, we announced the transition to a third-party logistics provider for our distribution needs in Canada and the closing of our distribution center in Winnipeg, Manitoba, in March 2015. The third-party logistics provider began processing a portion of our Canada merchandise in a Calgary, Alberta, distribution center in October 2014. Accordingly, in the three months ended June 28, 2014, the Company recognized a restructuring charge related to employee severance agreements and termination benefits totaling $1 million. This restructuring charge was recorded to the Corporate Overhead and Other segment. We expect to incur approximately $4 million in additional incremental expenses related to the transition to a third-party logistics provider and the closing of our current distribution center - approximately $1 million in the fourth quarter of fiscal 2014 and approximately $3 million in the first half of fiscal 2015. On February 4, 2014, a U. S. district court (the "Court") entered a judgment against the Company in the amount of $14 million relating to litigation regarding a breach of a retail store radius restriction. At December 28, 2013, pursuant to this judgment, we recognized a liability of $14 million, including an estimated amount for legal fees and costs, in our consolidated balance sheet. We are currently in the process of appealing the Court's ruling. On March 21, 2014, through a supplemental judgment, the Court ordered that we pay interest in the amount of $1 million to the plaintiff. Therefore, at March 29, 2014, our liability relating to this judgment totaled $16 million, which included an additional amount for estimated legal fees and costs. At September 27, 2014, this liability remained at $16 million. The increase to this liability in the first quarter of fiscal 2014 resulted in the Company recording an increase to the carrying amount of the related retail store property through a reduction in deferred grant income by the additional amounts accrued, plus legal and other costs. The additional depreciation adjustment that reduced the deferred grant income of this retail store property resulted in an increase in depreciation expense of $1 million that was recognized in the three months ended March 29, 2014. This increase in depreciation expense was included in selling, distribution, and administrative expenses in the condensed consolidated statements of income and was recorded to the Retail segment. There was no additional depreciation expense adjustment recognized after March 29, 2014. We recognized an impairment loss totaling $1 million in the nine months ended September 28, 2013, related to the closure of our former Winnipeg retail store and the opening of a new next-generation store in Winnipeg in May 2013. The impairment loss of $1 million included leasehold improvements write-offs as well as lease cancellation and restoration costs. This impairment loss was recorded to the Retail segment ($820) and the Corporate Overhead and Other segment ($117). Local economic trends, government regulations, and other restrictions where we own properties may impact management projections that could change undiscounted cash flows in future periods which could trigger possible future write downs. 48 --------------------------------------------------------------------------------Operating Income Comparisons and analysis of operating income are presented below for the nine months ended: September 27, September 28, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Total operating income $ 206,759 $ 222,653 $ (15,894 ) (7.1 )% Total operating income as a percentage of total revenue 8.7 % 9.2 % (0.5 )% Operating income by business segment: Retail $ 260,656 $ 279,409 $ (18,753 ) (6.7 ) Direct 75,429 104,912 (29,483 ) (28.1 ) Financial Services 84,847 79,198 5,649 7.1 Operating income as a percentage of segment revenue: Retail 16.9 % 18.4 % (1.5 )% Direct 15.0 17.4 (2.4 ) Financial Services 27.6 29.0 (1.4 ) Operating income decreased $16 million, or 7.1%, in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013, and operating income as a percentage of revenue decreased 50 basis points over the same periods. The decreases in total operating income and total operating income as a percentage of total revenue were primarily due to decreases in revenue from our Direct business segment and in our merchandise gross profit. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. These decreases to operating income were partially offset by increased operating income contributions from our Financial Services segment. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. We plan to continue our retail expansion, our omni-channel initiatives, and our Cabela's branded product investments as we focus on expense management and emphasize corporate frugality. Under an Intercompany Agreement, the Financial Services segment pays to the Retail and Direct business segments a fixed license fee that includes 70 basis points on all originated charge volume of the Cabela's CLUB Visa credit card portfolio. In addition, among other items, the agreement requires the Financial Services segment to reimburse the Retail and Direct segments for certain promotional costs, which are recorded as a reduction to Financial Services segment revenue and as a reduction to merchandise costs associated with the Retail and Direct segments. Also, if the total risk-based capital ratio of WFB is greater than 13% at any quarter end, the Financial Services segment must pay an additional license fee to the Retail and Direct business segments equal to 50% of the amount that the total risk-based capital ratio exceeds 13%. At March 31, 2014, the total risk-based capital ratio of WFB exceeded this 13% threshold; therefore, an additional license fee of $11 million was paid in April 2014 by the Financial Services segment to the Retail segment ($7 million) and the Direct segment ($4 million). Total fees paid under the Intercompany Agreement by the Financial Services segment to these two segments, including the $11 million payment triggered by the excess total risk-based capital ratio provision, increased $18 million in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013; a $21 million increase to the Retail segment and a $3 million decrease to the Direct segment. Interest (Expense) Income, Net Interest expense, net of interest income, was $14 million in both the nine months ended September 27, 2014, and the nine months ended September 28, 2013. The amount of interest capitalized in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013, increased due to more stores opened comparing the respective periods. However, the increase in the amount of interest capitalized comparing the respective periods was offset due to additional interest expense recognized in the nine months ended September 27, 2014, associated with our uncertain tax positions and increases in interest expense due to increases in the outstanding balances on our revolving credit facility during the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. 49 --------------------------------------------------------------------------------Other Non-Operating Income, Net Other non-operating income was $4 million in both the nine months ended September 27, 2014, and the nine months ended September 28, 2013. Provision for Income Taxes Our effective tax rate was 37.3% for the nine months ended September 27, 2014, compared to 32.0% for the nine months ended September 28, 2013. The increase in our effective tax rate comparing the respective periods is due to an increase of $4 million in accrued income tax related to tax adjustments attributable to changes in the mix of prior year taxable income between the United States and foreign tax jurisdictions and an increase in our state effective tax rate. Asset Quality of Cabela's CLUBDelinquencies and Non-Accrual We use the scores of Fair Isaac Corporation ("FICO"), a widely-used tool for assessing an individual's credit rating, as the primary credit quality indicator. The median FICO score of our credit cardholders was 795 at September 27, 2014, compared to 793 at December 28, 2013, and September 28, 2013. The following table reports delinquencies, including any delinquent non-accrual and restructured credit card loans, as a percentage of our credit card loans, including any accrued interest and fees, in a manner consistent with our monthly external reporting at the periods ended: September 27, December 28, September 28, 2014 2013 2013 Number of days delinquent: Greater than 30 days 0.70 % 0.69 % 0.71 % Greater than 60 days 0.42 0.42 0.42 Greater than 90 days 0.22 0.22 0.21 The table below shows delinquent, non-accrual, and restructured loans as a percentage of our credit card loans, including any accrued interest and fees, at the periods ended: September 27, December 28, September 28, 2014 2013 2013 Number of days delinquent and still accruing (1): Greater than 30 days 0.60 % 0.57 % 0.58 % Greater than 60 days 0.36 0.35 0.34 Greater than 90 days 0.19 0.19 0.17(1) Excludes non-accrual and restructured loans which are presented below. Non-accrual 0.13 0.13 0.16 Restructured 0.79 0.95 1.09 50--------------------------------------------------------------------------------Allowance for Loan Losses and Charge-offs The following table shows the activity in our allowance for loan losses and charge off activity for the periods presented: Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (Dollars in Thousands) Balance, beginning of period $ 47,350 $ 62,500 $ 53,110 $ 65,600 Provision for loan losses 19,088 8,404 42,116 33,030 Charge-offs (18,010 ) (17,477 ) (56,630 ) (54,426 ) Recoveries 4,272 3,943 14,104 13,166 Net charge-offs (13,738 ) (13,534 ) (42,526 ) (41,260 ) Balance, end of period $ 52,700 $ 57,370 $ 52,700 $ 57,370 Net charge-offs on credit card loans $ (13,738 ) $ (13,534 ) $ (42,526 ) $ (41,260 ) Charge-offs of accrued interest and fees (recorded as a reduction in interest and fee income) (1,883 ) (1,778 ) (5,878 ) (5,516 ) Total net charge-offs including accrued interest and fees $ (15,621 ) $ (15,312 ) $ (48,404 ) $ (46,776 ) Net charge-offs including accrued interest and fees as a percentage of average credit card loans 1.56 % 1.72 % 1.67 % 1.82 % For the nine months ended September 27, 2014, net charge-offs as a percentage of average credit card loans decreased to 1.67%, down 15 basis points compared to 1.82% for the nine months ended September 28, 2013. We believe our charge-off levels remain well below industry averages. Our net charge-off rates and the percentage of allowance for loan losses to our credit card portfolio have decreased due to improvements in the quality of our credit card portfolio evidenced by continued low delinquencies, lower delinquency roll-rates, an increase in recovery rates, favorable charge-off trends, and declining loan balances in our restructured loan portfolio. Liquidity and Capital Resources Overview Our Retail and Direct segments and our Financial Services segment have significantly differing liquidity and capital needs. We believe that we will have sufficient capital available from cash on hand, our revolving credit facility, and other borrowing sources to fund our cash requirements and near-term growth plans for at least the next 12 months. At September 27, 2014, December 28, 2013, and September 28, 2013, cash on a consolidated basis totaled $365 million, $199 million, and $410 million, respectively, of which $304 million, $94 million, and $335 million, respectively, was cash at the Financial Services segment which is utilized to meet this segment's liquidity requirements. During the nine months ended September 27, 2014, the Financial Services segment completed two term securitizations totaling $700 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. We evaluate the credit markets for securitizations and certificates of deposit to determine the most cost effective source of funds for the Financial Services segment. 51 -------------------------------------------------------------------------------- As of September 27, 2014, cash and cash equivalents held by our foreign subsidiaries totaled $20 million. Our intent is to permanently reinvest these funds outside the United States for capital expansion. The Company has not provided United States income taxes and foreign withholding taxes on the portion of undistributed earnings of foreign subsidiaries that the Company considers to be indefinitely reinvested outside of the United States as of December 28, 2013. If these foreign earnings were to be repatriated in the future, the related United States tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of the year ended 2013, the cumulative amount of earnings upon which United States income taxes have not been provided is approximately $152 million. If those earnings were not considered indefinitely invested, the Company estimates that an additional income tax expense of approximately $30 million would be recorded. Based on the Company's current projected capital needs and the current amount of cash and cash equivalents held by our foreign subsidiaries, we do not anticipate incurring any material tax costs beyond our accrued tax position in connection with any repatriation, but we may be required to accrue for unanticipated additional tax costs in the future if our expectations or the amount of cash held by our foreign subsidiaries change. Retail and Direct Segments - The primary cash requirements of our merchandising business relate to capital for new retail stores, purchases of inventory, investments in our management information systems and infrastructure, and general working capital needs. We historically have met these requirements with cash generated from our merchandising business operations, borrowing under revolving credit facilities, and issuing debt and equity securities. The cash flow we generate from our merchandising business is seasonal, with our peak cash requirements for inventory occurring from April through November. While we have consistently generated overall positive annual cash flow from our operating activities, other sources of liquidity are required by our merchandising business during these peak cash use periods. These sources historically have included short-term borrowings under our revolving credit facility and access to debt markets. While we generally have been able to manage our cash needs during peak periods, if any disruption occurred to our funding sources, or if we underestimated our cash needs, we would be unable to purchase inventory and otherwise conduct our merchandising business to its maximum effectiveness, which could result in reduced revenue and profits. On June 18, 2014, we amended our credit agreement which now provides for an unsecured $775 million revolving credit facility and permits the issuance of letters of credit up to $75 million and swing line loans up to $30 million. The credit agreement formerly provided for a $415 million revolving credit facility with the issuance of letters of credit up to $100 million and a $20 million limit on swing line loans. The credit facility may be increased to $800 million subject to certain terms and conditions. The term of the credit facility, which formerly expired on November 2, 2016, now expires on June 18, 2019. Advances under the credit facility will be used for the Company's general business purposes, including working capital support. Our unsecured $775 million revolving credit facility and unsecured senior notes contain certain financial covenants, including the maintenance of minimum debt coverage, a fixed charge coverage ratio, a leverage ratio, and a minimum consolidated net worth standard. In the event that we failed to comply with these covenants, a default would trigger and all principal and outstanding interest would immediately be due and payable. At September 27, 2014, and September 28, 2013, we were in compliance with all financial covenants under our credit agreements and unsecured notes. We anticipate that we will continue to be in compliance with all financial covenants under our credit agreements and unsecured notes through at least the next 12 months. We have an unsecured $20 million Canadian ("CAD") revolving credit facility for our operations in Canada. Borrowings are payable on demand with interest payable monthly. The credit facility permits the issuance of letters of credit up to $10 million CAD in the aggregate, which reduce the overall credit limit available under the credit facility. On February 13, 2014, we announced our intent to repurchase up to 650,000 shares of our common stock in open market transactions through February 2015. We have not engaged in any stock repurchase activity from the date of this announcement through September 27, 2014. This share repurchase program does not obligate us to repurchase any outstanding shares of our common stock, and the program may be limited or terminated at any time. There is no guarantee as to the exact number of shares that we will repurchase. 52 -------------------------------------------------------------------------------- Financial Services Segment - The primary cash requirements of the Financial Services segment relate to the financing of credit card loans. These cash requirements will increase if our credit card originations increase or if our cardholders' balances or spending increase. The Financial Services segment sources operating funds in the ordinary course of business through various financing activities, which include funding obtained from securitization transactions, obtaining brokered and non-brokered certificates of deposit, borrowing under its federal funds purchase agreements, and generating cash from operations. During the nine months ended September 27, 2014, the Financial Services segment completed two term securitizations totaling $700 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. We believe that these liquidity sources are sufficient to fund the Financial Services segment's foreseeable cash requirements including maturities and near-term growth plans. Operating, Investing, and Financing Activities The following table presents changes in our cash and cash equivalents for the nine months ended: September 27, September 28, 2014 2013 (In Thousands) Net cash (used in) provided by operating activities $ (39,041 ) $ 94,193 Net cash used in investing activities (478,740 ) (559,658 ) Net cash provided by financing activities 685,201 586,448 2014 versus 2013 Operating Activities - Cash from operating activities decreased $133 million in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. In the three months ended September 27, 2014, we paid a deposit of $50 million for federal taxes related to prior uncertain tax positions, resulting in a net change of $53 million comparing the respective periods. In addition, we had net decreases of $43 million in accounts payable and accrued expenses, $47 million in prepaid expenses and other assets, and $29 million in inventories. Partially offsetting these decreases in cash from operating activities was an increase of $17 million relating to credit card loans originated from internal operations and $17 million in other long-term liabilities. Inventories increased $290 million at September 27, 2014, to $935 million, compared to December 28, 2013, while inventories increased $263 million at September 28, 2013, to $816 million, compared to fiscal year end 2012. The increase in inventories in 2014 is primarily due to the addition of new retail stores. Investing Activities - Cash used in investing activities decreased $81 million in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. Cash paid for property and equipment totaled $303 million in the nine months ended September 27, 2014, compared to $278 million in the nine months ended September 28, 2013. At September 27, 2014, the Company estimated it had total cash commitments of approximately $610 million outstanding for projected expenditures related to the development, construction, and completion of new retail stores and a new distribution center. This amount excludes any estimated costs associated with new stores where the Company does not have a commitment as of September 27, 2014. We expect to fund these estimated capital expenditures over the next 12 months with cash generated from operations and borrowings. In addition, net cash flows from credit card loans originated externally decreased $29 million. The Financial Services segment also purchased $135 million of U.S. government agency held-to-maturity securities during the nine months ended September 28, 2013. Financing Activities - Cash provided by financing activities increased $99 million in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. Comparing the respective periods, this net change was primarily due to an increase in net borrowings on secured obligations of the Trust of the Financial Services segment of $245 million in the nine months ended September 27, 2014, compared to the nine months ended September 28, 2013. We also had increases of $140 million in net borrowings on our revolving credit facilities and inventory financing and $49 million relating to the change in unpresented checks. Partially offsetting these increases was a decrease of $339 million relating to changes in time deposits. 53--------------------------------------------------------------------------------The following table presents the borrowing activities of our merchandising business and the Financial Services segment for the nine months ended: September 27, September 28, 2014 2013 (In Thousands) Borrowings on revolving credit facilities and inventory financing, net of repayments $ 344,707 $ 204,533 Secured obligations of the Trust, net 545,000 299,750 Repayments of long-term debt (8,347 ) (8,336 ) Borrowings, net of repayments $ 881,360 $ 495,947 The following table summarizes our availability under the Company's debt and credit facilities, excluding the facilities of the Financial Services segment, at the periods ended: September 27, September 28, 2014 2013 (In Thousands) Amounts available for borrowing under credit facilities (1) $ 795,000 $ 435,000 Principal amounts outstanding (346,292 ) (204,364 ) Outstanding letters of credit and standby letters of credit (32,290 ) (27,753 ) Remaining borrowing capacity, excluding the Financial Services segment facilities $ 416,418 $ 202,883 (1) Consists of our revolving credit facilities of $775 million and $415 million at September 27, 2014, and September 28, 2013, respectively, and our $20 million CAD credit facility at September 27, 2014, and September 28, 2013, for our operations in Canada. The Financial Services segment also has total borrowing availability of $85 million under its agreements to borrow federal funds. At September 27, 2014, the entire $85 million of borrowing capacity was available. Our $775 million unsecured credit agreement requires us to comply with certain financial and other customary covenants, including: • a fixed charge coverage ratio (as defined) of no less than 2.00 to 1 as of the last day of any fiscal quarter for the most recently ended four fiscal quarters (as defined); • a leverage ratio (as defined) of no more than 3.00 to 1 as of the last day of any fiscal quarter; and • a minimum consolidated net worth standard (as defined) as of the last day of each fiscal quarter. In addition, our unsecured senior notes contain various covenants and restrictions that are usual and customary for transactions of this type. Also, the debt agreements contain cross default provisions to other outstanding credit facilities. In the event that we failed to comply with these covenants, a default would trigger and all principal and outstanding interest would immediately be due and payable. At September 27, 2014, we were in compliance with all financial covenants under our credit agreements and unsecured notes. We anticipate that we will continue to be in compliance with all financial covenants under our credit agreements and unsecured notes through the next 12 months. Our unsecured $20 million CAD revolving credit facility also permits the issuance of letters of credit up to $10 million CAD in the aggregate, which reduce the overall credit limit available under the credit facility. 54 -------------------------------------------------------------------------------- Economic Development Bonds and Grants Economic Development Bonds - Economic development bonds are related to our government economic assistance arrangements associated with prior years' construction of certain retail stores or retail development. The governmental entity from which we purchase the bonds is not otherwise liable for repayment of principal and interest on the bonds to the extent that the associated taxes are insufficient to pay the bonds. If sufficient tax revenue is not generated by the subject properties, we will not receive scheduled payments and will be unable to realize the full value of the bonds carried on our condensed consolidated balance sheet. At September 27, 2014, December 28, 2013, and September 28, 2013, economic development bonds totaled $82 million, $79 million, and $79 million, respectively. On a quarterly basis, we perform various procedures to analyze the amounts and timing of projected cash flows to be received from our economic development bonds. We revalue each economic development bond using discounted cash flow models based on available market interest rates (Level 2 inputs) and management estimates, including the estimated amounts and timing of expected future tax payments (Level 3 inputs) to be received by the municipalities under tax increment financing districts. Projected cash flows are derived from sales and property taxes. Due to the seasonal nature of the Company's business, fourth quarter sales are significant to projecting future cash flows under the economic development bonds. We evaluate the impact of bond payments that have been received since the most recent quarterly evaluation, including those subsequent to the end of the quarter. Typically, bond payments are received twice annually. The payments received around the end of the fourth quarter provide us with additional facts for our fourth quarter projections. We make inquiries of local governments and/or economic development authorities for information on any anticipated third-party development, specifically on land owned by the Company, but also on land not owned by the Company in the tax increment financing development district, and to assess any current and potential development where cash flows under the bonds may be impacted by additional development and the anticipated development is material to the estimated and recorded carrying value based on projected cash flows. We make revisions to the cash flow estimates of each bond based on the information obtained. In those instances where the expected cash flows are insufficient to recover the current carrying value of the bond, we adjust the carrying value of the individual bonds to their revised estimated fair value. The governmental entity from which the Company purchases the bonds is not liable for repayment of principal and interest on the bonds to the extent that the associated taxes are insufficient to fund principal and interest amounts under the bonds. Should sufficient tax revenue not be generated by the subject properties, the Company may not receive all anticipated payments and thus will be unable to realize the full carrying values of the economic development bonds, which result in a corresponding decrease to deferred grant income. For the nine months ended September 27, 2014, and September 28, 2013, there were no other than temporary fair value adjustments of economic development bonds and no adjustments of deferred grant income related to economic development bonds. However, at September 27, 2014, we identified economic development bonds with carrying values of $18 million where the actual tax revenues associated with these properties were lower than previously projected. We will continue to closely monitor the amounts and timing of projected cash flows from the properties related to these economic development bonds. However, if the subject properties do not generate sufficient tax revenue, the Company may not receive all anticipated payments which may result in the Company being unable to realize the full carrying value of these bonds, which would result in a corresponding decrease to deferred grant income. Grants - We generally have received grant funding in exchange for commitments made by us to the state or local government providing the funding. The commitments, such as assurance of agreed employment and wage levels at our retail stores or that the retail store will remain open, typically phase out over approximately five to ten years. If we fail to maintain the commitments during the applicable period, the funds we received may have to be repaid or other adverse consequences may arise, which could affect our cash flows and profitability. At September 27, 2014, the total amount of grant funding subject to a specific contractual remedy was $44 million. At September 27, 2014, December 28, 2013, and September 28, 2013, the amount the Company had recorded in liabilities in its condensed consolidated balance sheets relating to these grants was $23 million, $23 million, and $7 million, respectively. 55 --------------------------------------------------------------------------------Securitization of Credit Card Loans The total amounts and maturities for our credit card securitizations as of September 27, 2014, were as follows: Third Party Total Investor Third Party Available Available Investor Interest Expected Series Type Capacity Capacity Outstanding Rate Maturity (Dollars in Thousands) 2010-I Term $ 45,000 $ - $ - Fixed January 2015 2010-I Term 255,000 255,000 255,000 Floating January 2015 2010-II Term 165,000 127,500 127,500 Fixed September 2015 2010-II Term 85,000 85,000 85,000 Floating September 2015 2011-II Term 200,000 155,000 155,000 Fixed June 2016 2011-II Term 100,000 100,000 100,000 Floating June 2016 2011-IV Term 210,000 165,000 165,000 Fixed October 2016 2011-IV Term 90,000 90,000 90,000 Floating October 2016 2012-I Term 350,000 275,000 275,000 Fixed February 2017 2012-I Term 150,000 150,000 150,000 Floating February 2017 2012-II Term 375,000 300,000 300,000 Fixed June 2017 2012-II Term 125,000 125,000 125,000 Floating June 2017 2013-I Term 385,000 327,250 327,250 Fixed February 2023 2013-II Term 152,500 100,000 100,000 Fixed August 2018 2013-II Term 197,500 197,500 197,500 Floating August 2018 2014-I Term 45,000 - - Fixed March 2017 2014-I Term 255,000 255,000 255,000 Floating March 2017 2014-II Term 60,000 - - Fixed July 2019 2014-II Term 340,000 340,000 340,000 Floating July 2019 Total term 3,585,000 3,047,250 3,047,250 2008-III Variable Funding 260,115 225,000 - Floating March 2015 2011-I Variable Funding 352,941 300,000 - Floating March 2016 2011-III Variable Funding 588,235 500,000 - Floating March 2017Total variable 1,201,291 1,025,000 - Total available $ 4,786,291 $ 4,072,250 $ 3,047,250 We have been, and will continue to be, particularly reliant on funding from securitization transactions for the Financial Services segment. A failure to renew existing facilities or to add additional capacity on favorable terms as it becomes necessary could increase our financing costs and potentially limit our ability to grow the business of the Financial Services segment. Unfavorable conditions in the asset-backed securities markets generally, including the unavailability of commercial bank liquidity support or credit enhancements, could have a similar effect. During the nine months ended September 27, 2014, the Financial Services segment completed two term securitizations totaling $700 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. We believe that these liquidity sources are sufficient to fund the Financial Services segment's foreseeable cash requirements, including maturities, and near-term growth plans. 56 -------------------------------------------------------------------------------- Furthermore, the securitized credit card loans of the Financial Services segment could experience poor performance, including increased delinquencies and credit losses, lower payment rates, or a decrease in excess spreads below certain thresholds. This could result in a downgrade or withdrawal of the ratings on the outstanding securities issued in the Financial Services segment's securitization transactions, cause early amortization of these securities, or result in higher required credit enhancement levels. Credit card loans performed within established guidelines and no events which could trigger an early amortization occurred during the nine months ended September 27, 2014, the year ended December 28, 2013, and the nine months ended September 28, 2013. Certificates of Deposit The Financial Services segment utilizes brokered and non-brokered certificates of deposit to partially finance its operating activities that are issued in minimum amounts of one hundred thousand dollars in various maturities. At September 27, 2014, the Financial Services segment had $830 million of certificates of deposit outstanding with maturities ranging from October 2014 to July 2023 and with a weighted average effective annual fixed rate of 2.24%. This outstanding balance compares to $1.1 billion at December 28, 2013, and September 28, 2013, with weighted average effective annual fixed rates of 2.14% and 2.30%, respectively. Impact of Inflation We do not believe that our operating results have been materially affected by inflation during the preceding three years. We cannot assure, however, that our operating results will not be adversely affected by inflation in the future. Contractual Obligations and Other Commercial Commitments In the normal course of business, we enter into various contractual obligations that may require future cash payments. For a description of our contractual obligations and other commercial commitments as of December 28, 2013, see our annual report on Form 10-K for the fiscal year ending December 28, 2013, under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations and Other Commercial Commitments." Off-Balance Sheet Arrangements Operating Leases - We lease various items of office equipment and buildings. Rent expense for these operating leases is recorded in selling, distribution, and administrative expenses in the condensed consolidated statements of income. Credit Card Limits - The Financial Services segment bears off-balance sheet risk in the normal course of its business. One form of this risk is through the Financial Services segment's commitment to extend credit to cardholders up to the maximum amount of their credit limits. The aggregate of such potential funding requirements totaled $29 billion above existing balances at the end of September 27, 2014. These funding obligations are not included on our condensed consolidated balance sheet. While the Financial Services segment has not experienced, and does not anticipate that it will experience, a significant draw down of unfunded credit lines by its cardholders, such an event would create a cash need at the Financial Services segment which likely could not be met by our available cash and funding sources. The Financial Services segment has the right to reduce or cancel these available lines of credit at any time. Seasonality Our business is seasonal in nature and interim results may not be indicative of results for the full year. Due to buying patterns around the holidays and the opening of hunting seasons, our merchandise revenue is traditionally higher in the third and fourth quarters than in the first and second quarters, and we typically earn a disproportionate share of our operating income in the fourth quarter. Because of our retail store expansion, and fixed costs associated with retail stores, our quarterly operating income may be further impacted by these seasonal fluctuations. We anticipate our sales will continue to be seasonal in nature. 57-------------------------------------------------------------------------------- |