A cursory glance at first-quarter financials for Cabela’s Inc. might lead one to think that, in management’s eyes, direct marketing is the red-headed stepchild among channels.
Right off the bat, the company touts its retail results. Comparable store sales rose 8.2% between first-quarter 2008 and first-quarter 2009. And total retail sales jumped 8.3%, from $254.4 million a year ago to $275.5 million. In comparison, direct marketing sales fell, from $236.5 million a year ago to $225.4 million.
Thomas Millner, Cabela’s CEO, praised the company’s retail results, calling the increase “a strong validation of the strength of our brand and the loyalty of our customers,” in a statement accompanying the firm’s first-quarter financials. What did DM get from Millner? “We were able to lower direct channel marketing costs while holding revenues to only a 4.7% decline, which performed better than our expectations.”
But Cabela’s DM operations did more than outperform the company’s expectations: On a profitability basis, they outperformed retail. The $29.4 million in operating income DM generated during the most recent quarter amounted to 13.1% of the channel’s revenue. In contrast, the retail channel’s operating income was $18.1 million, or 6.6% of its revenue.
Millner was only slightly more laudatory of DM during an earnings teleconference, when he talked about containing catalog online marketing costs and delivering “a more concise offer, based on our customers’ buying behaviors,” according to a transcript from Seeking Alpha.
Granted, DM’s profitability rate was down from first-quarter 2008, when the $33.5 million in operating income it pulled in amounted to 14.2% of the channel’s revenue. But retail’s profitability fell even further from a year ago, when the $26.9 million in income it generated made up 10.6% of its revenue.
Overall, Cabela’s pulled in $529.5 million during its most recent quarter, more or less in line with $535.5 million it generated a year ago (in addition to retail and DM, financial services and “other” revenue contribute to the firm’s top line).
To be sure, DM’s importance in the overall revenue mix has shrunk: A year ago, it made up 44.2% of the firm’s first quarter sales, a figure that shrunk to 41.8% during the quarter just ended. And retail’s contribution rose from 47.5% to 51% during the same period.
But given the company’s narrowing margins – total first-quarter 2009 net income was $12.3 million, down from $21.1 million, owing to substantial increases in unspecified losses from its “other” operations – it’s a wonder it isn’t touting its more-profitable DM operations.
CFO Ralph Castner did, toward the end of the teleconference, reiterate the direct unit’s numbers and characterized the company’s attitude toward it as “pleased”, especially in regards to DM’s profitability as a percentage of catalog pages mailed.
The Analyst’s Take: There is a very good reason why Cabela’s may be touting its retail gains: The store may be focused on overall revenue growth right now, instead of profitability. If the company is focused on growing share of wallet, this makes sense. But it is a little galling to see the more-profitable DM channel get perfunctory treatment…
