One of the classic question analysts ask businesses is whether they are primarily focused on building revenue or increasing margin. Too often, the answer is “both”, which reveals absolutely nothing about a business’s priorities.
Comes now Cabela’s, which explicitly sought to control its inventory levels during the recent lean times. The sporting goods marketer achieved its goal so well that its margins rose nicely: The company’s second-quarter operating income jumped from $18.9 million, or 3.4% of its total revenue, to $30.7 million, or 5.8% of its revenue.
That said, the growth in direct activity margin lagged that of retail. Granted, direct channels had and have been more profitable: Cabela’s direct business realized operating margin of 17.8%, or $30.6 million of the $171.5 million it pulled in during the most recent second quarter, up from 16.3% during second-quarter 2009, or $32.6 million of the $199.5 million it generated a year ago.
In comparison, retail operating income during the most recent quarter was $41.1 million, or 14% of the $294 million in retail sales Cabela’s racked up, compared with $34 million, or 11.3% of the $301.6 million it generated a year ago. (The company also generates revenue and margin from its financial services operations.)
During an earnings call, Cabela’s CEO Thomas Milner said better inventory control led to a reduction in markdowns and liquidation activity, improving margins. But did the company go too far in controlling its stock?
“As a result of our aggressive inventory reductions, we cut inventory a little too much,” Milner said during the call. “Particularly in Cabela’s branded soft goods. This resulted in significantly lower fill rates in our direct business.” The company’s self-branded merchandise tends to rely more heavily on catalog and Internet sales, especially when compared with the availability of outside national brands in its retail outlets.
CFO Ralph Castner was even blunter about the challenges the direct channel had faced. “Fill rates just got clobbered because we didn’t have enough inventory to support the demand in Cabela’s men’s and women’s private label product,” he said, adding that as a result of the merchandise shortage the company didn’t mail a few catalogs it had planned to send out.
Which is not to say Cabela’s cut total circulation. While the company didn’t release its total magazine count, it did mail more, albeit smaller, catalogs, and realized a net savings of $3 million during the second quarter in catalog expenses – all of which went to boosting the profitability of Cabela’s direct activities.
Milner added that the cutback in branded merchandise would likely last until early in its third quarter before the pipeline was refilled, and that the lack of merchandise would continue to have a modest impact on direct revenue during the quarter.
