Attached files

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EX-21.1 - CABELAS INCexhibit211q42010.htm
EX-24.1 - CABELAS INCexhibit241q42010.htm
EX-31.2 - CABELAS INCexhibit312q42010.htm
EX-23.1 - CABELAS INCexhibit231q42010.htm
EX-32.1 - CABELAS INCexhibit321q42010.htm
EX-31.1 - CABELAS INCexhibit311q42010.htm
EX-10.13 - CABELAS INCexhibit1013q42010.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
Form 10-K
_________________
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2011
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-32227
 
 
CABELA’S INCORPORATED
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-0486586
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 
 
 
One Cabela Drive, Sidney, Nebraska
 
69160
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (308) 254-5505
Securities registered pursuant to Section 12 (b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Class A Common Stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    o
Accelerated filer   x
Non-accelerated filer    o (Do not check if a smaller reporting company)         
Smaller reporting company   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $494,482,540 as of July 2, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) based upon the closing price of the registrant’s Class A Common Stock on that date as reported on the New York Stock Exchange. For the purposes of this disclosure only, the registrant has assumed that its directors and executive officers and the beneficial owners of 5% or more of its voting common stock as of July 2, 2010, are affiliates of the registrant.
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, $0.01 par value: 68,408,611 shares as of February 22, 2011.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K to the extent stated herein.

 

Special Note Regarding Forward-Looking Statements
 
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 level of discretionary consumer spending;
•    
the state of the economy, including increases in unemployment levels and bankruptcy filings;
•    
changes in the capital and credit markets or the availability of capital and credit;
•    
our ability to comply with the financial covenants in our credit agreements;
•    
changes in consumer preferences and demographic trends;
•    
our ability to successfully execute our multi-channel strategy;
•    
the ability to negotiate favorable purchase, lease, and/or economic development arrangements for new retail store locations;
•    
expansion into new markets and market saturation due to new retail store openings;
•    
the rate of growth of general and administrative expenses associated with building a strengthened corporate infrastructure to support our growth initiatives;
•    
increasing competition in the outdoor segment of the sporting goods industry;
•    
the cost of our products;
•    
political or financial instability in countries where the goods we sell are manufactured;
•    
increases in postage rates or paper and printing costs;
•    
supply and delivery shortages or interruptions, and other interruptions or disruptions to our systems, processes, or controls, caused by system changes or other factors, including technology system changes in support of our customer relationship management system;
•    
adverse or unseasonal weather conditions;
•    
fluctuations in operating results;
•    
increased government regulations, including regulations relating to firearms and ammunition;
•    
inadequate protection of our intellectual property;
•    
material security breaches of computer systems;
•    
our ability to protect our brand and reputation;
•    
our ability to manage credit, liquidity, interest rate, operational, legal, and compliance risks;
•    
increasing competition for credit card products and reward programs;
•    
our ability to increase credit card receivables while managing fraud, delinquencies, and charge-offs;
•    
our ability to securitize our credit card receivables at acceptable rates or access the deposits market at acceptable rates;
•    
decreased interchange fees received by our Financial Services business as a result of credit card industry regulation and/or litigation;
•    
impact of legislation, regulation, and supervisory regulatory actions, new and proposed regulations
affecting securitizations, and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection
Act (the "Reform Act");
•    
other factors that we may not have currently identified or quantified; and
•    
other risks, relevant factors, and uncertainties identified in the "Risk Factors" section of this report.
 
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.
 
 
 
 

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CABELA’S INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 1, 2011
TABLE OF CONTENTS

 
PART I
Page
 
 
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
(Removed and Reserved)
 
 
 
PART II
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
 
 
and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
PART III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
 
 
 
SIGNATURES

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PART I
 
ITEM 1. BUSINESS
 
 
Overview
 
We are a leading specialty retailer, and the world’s largest direct marketer, of hunting, fishing, camping, and related outdoor merchandise. Since our founding in 1961, Cabela’s® has grown to become one of the most well-known outdoor recreation brands in the world. We have long been recognized as the “World’s Foremost Outfitter®.” Through our growing number of retail stores, and our well-established direct business, we believe we offer the widest and most distinctive selection of high-quality outdoor products at competitive prices, while providing superior customer service. We also issue the Cabela’s CLUB® Visa credit card, which serves as our primary customer loyalty rewards program. Refer to Note 24 entitled “Segment Reporting” to our consolidated financial statements and our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional financial information regarding our Retail and Direct businesses, as well as our Financial Services business.
 
We were initially incorporated as a Nebraska corporation in 1965 and were reincorporated as a Delaware corporation in January 2004. In June 2004, we completed our initial public offering of common stock. Our common stock is listed on the New York Stock Exchange under the symbol “CAB”.
 
 
Retail Business
 
We currently operate 31 retail stores, 30 in 22 states and one in Canada. We opened a retail store in Grand Junction, Colorado, in May 2010, increasing our total retail square footage to 4.4 million square feet at the end of 2010. Our Retail store business operations generated revenue of $1.4 billion in 2010, representing 58.6% of our total revenue from our Retail and Direct businesses.
 
Customer Relations. In order to better serve our customers, we continue to advance our efforts to offer customers integrated opportunities to access and use our retail store, catalog, and Internet channels. Customer service venues include in-store pick-up for Internet website orders, Internet and store kiosks, and catalog order desks. Our in-store kiosks provide our customers access to our entire inventory assortment, allowing customers to place orders for items that may be out of stock in our retail stores or to purchase items only available on our Internet site. Our in-store pick-up program allows customers to order products through our catalogs and Internet site and have them delivered to the retail store of their choice without incurring shipping costs, increasing foot traffic in our stores. Conversely, our retail stores introduce customers to our Internet and catalog channels. Our multi-channel model employs the same merchandising team, distribution centers, customer database, and infrastructure, which we intend to further leverage by building on the strengths of each channel.
 
Store Format and Atmosphere. Our retail store concept is designed to appeal to customers from a broad geographic and demographic range. Our next generation store format, with more standardized store sizes, expedites store development time and allows us to pursue the best retail locations, is adaptable to more markets, improves time to market, and allows us to be more efficient in our operations by reducing our capital investment requirements and increasing sales per square foot. Our next generation store format improves our return on invested capital and better serves our customers by providing shopper-friendly layouts with regionalized product mixes, concept shops, and new product displays and fixtures with enhanced features.
 
Our retail stores range in size from 35,000 to 246,000 square feet and our large-format retail stores are 150,000 square feet or larger. Our large-format retail stores have been recognized in some states as one of the top tourist attractions, often attracting the construction and development of hotels, restaurants, and other retail establishments in areas adjacent to these stores.
 
Retail Store Expansion Strategy. Enhancing our retail store efficiencies and taking the necessary steps to improve our financial performance is a high priority in our strategic planning. We focus new-store growth where we are strongest with new stores strategically sized to match their markets. We continually review our previously announced stores to reconfirm our expectations based on what we have learned over the past year. We opened a 76,000 square foot retail store in Grand Junction, Colorado, in May 2010. This store features our next generation format while the exterior reflects our traditional store model. We plan on opening two next generation stores in the United States in 2011, one in Allen, Texas, and one in Springfield, Oregon. In addition, we plan to open one next generation store in Canada in 2011 in Edmonton, Alberta. We also announced plans to open a next generation store in 2012 in Wichita, Kansas, and another store in 2012 in Canada, though the location has not been named.

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Store Locations and Ownership. We currently own 25 of our 31 retail stores. However, in connection with some of the economic development packages received from state or local governments where our stores are located, we have entered into agreements granting ownership of the taxidermy, diorama, or other portions of our stores to these state and local governments. Refer to Item 2 – “Properties” for the locations of our stores.
 
 
Direct Business
 
Our Direct business uses catalogs and the Internet as marketing tools to generate sales orders via the Internet, telephone, and mail. Our Direct business generated revenue of $1.0 billion in 2010, representing 41.4% of our total revenue from our Retail and Direct businesses.
 
Catalog Distributions. We have been marketing our products through our print catalog distributions to our customers and potential customers for over 49 years. We believe that our catalog distributions have been one of the primary drivers of the growth of our brand and serve as an important marketing tool for our Retail business. In 2010, we mailed more than 136 million catalogs to all 50 states and to more than 175 countries and territories. Our master catalogs offer a broad range of products while our specialty and micro-season catalogs offer products focused on one outdoor activity, such as fly fishing, archery, or waterfowl, or one product category, such as women’s clothing.
 
Many of our customers read and browse our catalogs, but order products through our website. Based on our customer surveys, we believe that our customers want to receive catalogs even though they purchase merchandise and services through our website and retail stores. We use the catalogs to prompt customers to go to retail stores and the Internet or to our call centers to place orders directly. Accordingly, we remain committed to marketing our products through our catalogs, as we view our catalogs and the Internet as a unified selling and marketing tool. Our goal is to continue to fine tune our catalogs, as well as the number of pages and product mix in each, in order to improve the profitability of each title. We want to create steady, profitable growth in our direct channels, while reducing marketing expenses and significantly increasing the percentage of market share we capture through the Internet.
 
We recognize that the catalog business is mature and that mobile marketing and social networking are going to have an increasingly important focus for us in the next couple of years. With the growing presence of new technologies, we believe mobile marketing and social networking will build our brand, build our customer databases, and enhance the management of contacts with our customers.
 
Direct Business Marketing. We market our products through our website and catalog circulation. Our website is a cost-effective medium designed to offer a convenient, highly visual, user-friendly, and secure online shopping option for new and existing customers. We continue to expand electronic marketing strategies and customize Internet marketing campaigns to target and optimize specific markets. In October 2010, we launched our new website which featured significant enhancements, including guided navigation to improve customers' movement throughout the site, managed content to aid in customizing the individual shopping experience, better promotional capability, and international commerce capabilities. In addition to the ability to order the same products available in our catalogs, our website gives customers the ability to review product information, purchase gift certificates, research general information on the outdoor lifestyle and outdoor activities, purchase rare and highly specialized merchandise, and choose from other services we provide. The number of visitors to our website increased 5.8% in 2010 compared to 2009. Our website was the most visited sporting goods website in 2010 according to Hitwise, Incorporated, an online measurement company. On December 15, 2010, we launched our website in France, www.cabelas.fr, which offers more than 5,000 of Cabela’s branded products.
 
We use our customer database to ensure that customers receive catalogs matching their merchandise preferences, to identify new customers, and to cross-sell merchandise to existing customers. We focus on a disciplined approach in determining the number of pages and circulation of our catalogs in order to maximize productivity and profits as postage and printing costs continue to increase. We also utilize our marketing knowledge base to determine optimal circulation strategies to control our catalog costs while continuing to grow our merchandising business.
 
 

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Financial Services Business
 
Through our wholly-owned bank subsidiary, World’s Foremost Bank ("WFB"), we issue and manage the Cabela’s CLUB Visa credit card, a rewards based credit card program. We believe the Cabela’s CLUB Visa credit card loyalty rewards program is an effective vehicle for strengthening our relationships with our customers, enhancing our brand name, and increasing our merchandise revenue. Our rewards program is a simple loyalty program that allows customers to earn points whenever and wherever they use their Cabela’s CLUB Visa credit card and then redeem earned points for products and services at our retail stores or through our Direct business. Our rewards program is integrated into our store point-of-sale system. Our customers are informed of their number of accumulated points when making purchases at our stores or ordering through our Direct business. The percentage of our merchandise sold to customers using the Cabela’s CLUB card was 30.0% for 2010 compared to 27.9% for 2009. The primary purpose of our Financial Services business is to provide customers with a rewards program that will enhance revenue, profitability, and customer loyalty in our Retail and Direct businesses.
 
Our bank subsidiary is an FDIC insured, special purpose, Nebraska state-chartered bank. Our bank’s charter limits us to issuing consumer credit cards and certificates of deposit of $100,000 or more. Our bank does not accept demand deposits or make non-credit card loans. During 2010, we had an average of 1,317,890 active credit card accounts with an average balance of $1,875 compared to an average of 1,244,621 active credit card accounts with an average balance of $1,857 during 2009.
 
Financial Services Marketing. We have a low cost, efficient, and tailored credit card marketing program that leverages the Cabela’s brand name. We market the Cabela’s CLUB Visa credit card through a number of channels, including retail stores, inbound telemarketing, catalogs, and the Internet. Customer service representatives at our customer care centers offer the Cabela’s CLUB Visa credit card to qualifying customers. This card is marketed throughout our catalogs and our Internet site. Our customers can apply for the Cabela’s CLUB Visa credit card at our retail stores and website through our instant credit process and, if approved, receive reward points available for use on merchandise purchases the same day. When a customer’s application is approved through the retail store instant credit process, the customer’s new credit card is produced and given to the customer immediately thereafter. Maintaining the growth of our credit card program, while continuing to underwrite high-quality customers and actively manage our credit card delinquencies and charge-offs, is key to the successful performance of our Financial Services business. Our Financial Services growth is dependent, in part, on the success of our Retail and Direct businesses to generate additional sales and to attract additional Financial Services customers.
 
Underwriting and Credit Criteria. We underwrite high-quality credit customers and have historically maintained attractive credit statistics compared to industry averages. We adhere to strict credit policies and target high credit quality obligors. The scores of Fair Isaac Corporation (“FICO”) are a widely-used tool for assessing a person’s credit rating. Our cardholders had a median FICO score of 790 at the end of 2010 compared to 787 at the end of 2009. We believe the median FICO scores of our cardholders are well above the industry average. Our charge-offs as a percentage of total outstanding balances were 4.23% in 2010, which we believe is well below the 2010 industry average.
 
The table below presents data on the performance of our credit card portfolio comparing the last three years and illustrates the high credit quality of our managed credit card portfolio. The following chart shows delinquencies, including any delinquent non-accrual and restructured credit card loans, and charge-offs, including any accrued interest and fees, as a percentage of our average managed credit card loans:
 
As a Percentage of Average Managed Loans:
 
2010
 
2009
 
2008
Delinquencies greater than 30 days
 
1.13
%
 
1.79
%
 
1.68
%
Gross charge-offs
 
4.88
 
 
5.52
 
 
3.40
 
Charge-offs, net of recoveries
 
4.23
 
 
5.06
 
 
2.95
 
 
Products and Merchandising
 
We offer our customers a comprehensive selection of high-quality, competitively priced, national and regional brand products, including our own Cabela’s brand. Our product assortment includes merchandise and equipment for hunting, fishing, marine use, and camping, along with casual and outdoor apparel and footwear, optics, vehicle accessories, and gifts and home furnishings with an outdoor theme.
 

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The following chart sets forth the percentage of our merchandise revenue contributed by each of the five product categories for our Retail and Direct businesses and in total for the last three years.
 
 
Retail
 
Direct
 
Total
 
2010
 
2009
 
2008
 
2010
 
2009
 
2008
 
2010
 
2009
 
2008
Hunting Equipment
44.5
%
 
45.3
%
 
39.9
%
 
33.7
%
 
35.2
%
 
28.7
%
 
40.2
%
 
41.1
%
 
35.1
%
Clothing and Footwear
24.0
 
 
22.9
 
 
24.9
 
 
33.4
 
 
33.4
 
 
36.6
 
 
27.7
 
 
27.3
 
 
30.0
 
Fishing and Marine
14.2
 
 
14.5
 
 
15.9
 
 
11.5
 
 
12.1
 
 
12.9
 
 
13.2
 
 
13.5
 
 
14.6
 
Camping
8.5
 
 
8.5
 
 
9.3
 
 
11.8
 
 
10.2
 
 
12.5
 
 
9.8
 
 
9.2
 
 
10.6
 
Gifts and Furnishings
8.8
 
 
8.8
 
 
10.0
 
 
9.6
 
 
9.1
 
 
9.3
 
 
9.1
 
 
8.9
 
 
9.7
 
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Hunting equipment. We provide equipment, accessories, and consumable supplies for almost every type of hunting and sport shooting. Our hunting products are supported by in-house services such as gun bore sighting, scope mounting, and bow tuning to serve the complete needs of our customers.
 
 Clothing and footwear. Our clothing and footwear merchandise includes fieldwear and sportswear apparel and technical gear for the active outdoor enthusiast, as well as apparel and footwear for the casual customer.
 
Fishing and marine equipment. We provide products for fresh water fishing, fly-fishing, salt water fishing, and ice-fishing. In addition, our fishing and marine equipment offering features a wide selection of electronics, boats and accessories, canoes, kayaks, and other flotation accessories.
 
Camping gear and equipment. We provide a diverse selection of camping gear and equipment for various experience levels of outdoor enthusiasts. This product category includes a full range of equipment and accessories supporting all outdoor activities, including food preparation, outdoor cooking, travel, and outdoor living. In this category we also include all-terrain vehicles, as well as accessories for automobiles and all-terrain vehicles.
 
Gifts and home furnishings. Our gifts merchandise includes games, food assortments, books, jewelry, and art with outdoor themes. Home furnishings merchandise includes furnishings and accents with outdoor themes for the home and cabin.
 
Cabela’s branded products. In addition to national brands, we offer our exclusive Cabela’s branded merchandise. We have a significant penetration of Cabela’s branded merchandise in casual apparel and footwear as well as in selected hard goods categories such as camping, fishing, and optics. Where possible, we seek to protect our Cabela’s branded products by applying for trademark or patent protection for these products. Our Cabela’s branded products typically generate higher gross profit margins compared to our other branded products. In 2010, our Cabela’s branded merchandise accounted for approximately one-third of our merchandise revenue. By having an appropriate mix of Cabela’s branded and other branded merchandise, we strive to meet the expectations and needs of our customers and expand the recognition of the Cabela’s brand.
 
 
Marketing
 
We seek to increase the amount each customer spends on our merchandise through enhanced customer targeting, expanded use of digital marketing channels in mobile marketing and social networking and other technology-based approaches, continued introduction of new catalog titles, and the development and marketing of new products. We have taken advantage of web-based technologies such as targeted promotional e-mails, on-line shopping engines, and Internet affiliate programs to renew efforts in local markets and to increase sales. We also are improving our customer relationship management system, which we expect will allow us to better manage our customer relationships and more effectively tailor our marketing programs. We will continue to use our expanding Retail business to capture additional customer purchase history and information.
 

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Our marketing strategy focuses on using our multi-channel model to build the strength and recognition of our brand by communicating our wide and distinctive offering of quality products to our customers, and potential customers, in a cost effective manner. Our largest marketing effort consists of distributing over 136 million catalogs annually in order to attract customers to our Retail and Direct businesses. We have also established our website to market our products to customers and potential customers who shop via the Internet. We use both our catalogs and our website to cross-market at our retail stores. Our marketing strategy is designed to convey our outdoor lifestyle image, enhance our brand, and emphasize our position in our target markets.
 
In addition to the use of our catalogs and our website, we use a combination of promotional events, traditional advertising, and media programs as marketing tools. We engage in certain promotional activities by sponsoring sportsmen and women advocacy groups and wildlife conservation organizations, including U.S. Sportsmen’s Alliance, National Rifle Association, National Wild Turkey Federation, Women in the Outdoors, Rocky Mountain Elk Foundation, Whitetails Unlimited, Pheasants Forever, Quail Forever, Ducks Unlimited, Delta Waterfowl, Trout Unlimited, and Safari Club International, as well as regional and local events and organizations. We also provide sponsorship of fishing tournaments and other related habitat and wildlife conservation activities.
 
We have historically received extensive local publicity from the unique Cabela’s shopping experience when we open a store. As we enter into metropolitan markets, where the opening of a Cabela’s store may not be major news, we will supplement any publicity with additional advertising to increase consumer awareness of new store openings.
 
 
Competition
 
We compete in a number of large and highly competitive markets, including the outdoor recreation, and casual apparel and footwear markets. The outdoor recreation market is comprised of several categories, including hunting, fishing, camping, and wildlife watching, and we believe it crosses over a wide range of geographic and demographic segments. We compete directly or indirectly with other broad-line merchants, large-format sporting goods stores and chains, mass merchandisers, warehouse clubs, discount and department stores, small specialty retailers, and catalog and Internet-based retailers.
 
We believe that we compete effectively with our competitors on the basis of our wide and distinctive merchandise selection, our strong credit card loyalty rewards program for our customers, and the superior customer service associated with the Cabela’s brand, as well as our commitment to understanding and providing merchandise that is relevant to our targeted customer base. We cater to the outdoor enthusiast and the casual customer, and believe we have an appealing store environment. We also believe that our multi-channel model enhances our ability to compete by allowing our customers to choose the most convenient sales channel. This model also allows us to reach a broader audience in existing and new markets and to continue to build on our nationally recognized Cabela’s brand.
 
 
Customer Service
 
Since our founding in 1961, we have been deeply committed to serving our customers by selling high-quality products through sales associates who deliver excellent customer service and in-depth product knowledge. We strive to provide superior customer service at the time of sale and after the sale with our Legendary Guarantee and Cabela’s Xtreme Protection plans. We continue to advance our efforts for offering customers a seamless, integrated experience whether they shop with us in our retail stores, on the telephone, or on the Internet. Our customers can always access well-trained, friendly, and knowledgeable associates and outfitters to answer product use and merchandise selection questions. We believe our ability to establish and maintain long-term relationships with our customers and encourage repeat visits and purchases is due, in part, to the strength of our customer support and service operations.
 
 
Distribution and Fulfillment
 
We operate distribution centers located in Sidney, Nebraska; Prairie du Chien, Wisconsin; Wheeling, West Virginia; and Winnipeg, Manitoba. These distribution centers comprise nearly 3 million square feet of warehouse space for our retail store replenishment and Direct business activities. We ship merchandise to our Direct business customers via United Parcel Service, Canada Post, and the United States Postal Service. We use common carriers and typically deliver inventory two to three times per week for replenishment of our retail stores.
 
 

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Management Information Systems
 
Our management information and operational systems manage our Retail, Direct, and Financial Services businesses. These systems are designed to process customer orders, track customer data and demographics, order, monitor, and maintain sufficient amounts of inventory, facilitate vendor transactions, and provide financial reporting. We continually evaluate, modify, and update our information technology systems supporting the supply chain, including our design, sourcing, merchandise planning, forecasting and purchase order, inventory, distribution, transportation, and price management systems. We continue to make modifications to our technology that will involve updating or replacing certain systems with successor systems, including improvements to our systems for multi-channel merchandise and financial planning, e-commerce, and customer relationship management.
 
In October 2010, we launched our new website featuring significant enhancements, including guided navigation to improve customers' movement throughout the site, managed content to aid in customizing the individual shopping experience, better promotional capability, and international commerce capabilities.
 
In October 2010, we also implemented substantial information technology system changes in support of our customer relationship management system in our Direct business. During implementation, we encountered issues with these system changes that affected our ability to take and process customer orders and to deliver products to our customers in an efficient manner. These implementation issues had an adverse impact on our business, including the loss of sales. At the end of 2010, we successfully resolved most customer related issues arising from these system changes.
 
 
Employees
 
At the end of 2010, we employed 13,700 employees - 6,100 of whom were employed full-time. We use part-time and temporary workers to supplement our labor force at peak times during our third and fourth quarters. None of our employees are represented by a labor union or are party to a collective bargaining agreement. We have not experienced any work stoppages and consider our relationship with our employees to be good.
 
 
Seasonality
 
We experience seasonal fluctuations in our revenue and operating results. 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. Refer to Note 26 to our consolidated financial statements for quarterly results of operations for 2010 and 2009.
 
 

9

 

Government Regulation
 
Regulation of World's Foremost Bank. WFB, our wholly-owned bank subsidiary, is a Nebraska state-chartered bank with deposits insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). WFB is subject to comprehensive regulation and periodic examination by the Nebraska Department of Banking and Finance (“NDBF”) and the FDIC. WFB does not qualify as a “bank” under the Bank Holding Company Act of 1956, as amended (“BHCA”), because it is in compliance with a credit card bank exception from the BHCA. On July 21, 2010, the Reform Act was signed into law. The Reform Act makes extensive changes to the laws regulating financial services firms and credit rating agencies and requires significant rule-making. In addition, the legislation mandates multiple studies which could result in additional legislative or regulatory action. The Reform Act does not eliminate the exception from the definition of “bank” under the BHCA for credit card banks, such as WFB. However, the Reform Act directs the Comptroller General of the United States to complete a study within 18 months of the Reform Act's enactment to determine whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system, to eliminate certain exceptions under the BHCA, including the exception for credit card banks. If the credit card bank exception were eliminated or modified, we may be required to divest our ownership of WFB unless we were willing and able to become a bank holding company under the BHCA. Any such forced divestiture would materially adversely affect our business and results of operations. In addition, the Reform Act establishes a new independent Consumer Financial Protection Bureau (the “Bureau”) which will have broad rulemaking, supervisory, and enforcement authority over consumer products, including credit cards. The Reform Act will also effect a number of significant changes relating to asset-backed securities, including additional oversight and regulation of credit rating agencies and additional reporting and disclosure requirements. See “Risk Factors - The Dodd-Frank Wall Street Reform and Consumer Protection Act may impact the practices of our Financial Services business and could have a material adverse effect on our results of operations” and “Management's Discussion and Analysis of Financial Condition and Results of Operations - Developments in Legislation and Regulation.”
 
There are various federal and Nebraska laws and regulations relating to minimum regulatory capital requirements and requirements concerning the payment of dividends from net profits or surplus, restrictions governing transactions between an insured depository institution and its affiliates, and general federal and Nebraska regulatory oversight to prevent unsafe or unsound practices. At the end of 2010, WFB met the requirements for a well-capitalized institution, the highest of the Federal Deposit Insurance Corporation Improvement Act's five capital ratio levels. A well-capitalized classification should not necessarily be viewed as describing the condition or future prospects of a depository institution, including WFB.
At the beginning of 2010, WFB's required capital was increased under regulatory capital requirements of the applicable federal agencies as a result of new accounting standards which required the consolidation of the assets and liabilities of the Cabela's Master Credit Card Trust and related entities (collectively referred to as the “Trust”) on WFB's balance sheet. As of December 31, 2010, the most recent notification from the FDIC categorized WFB as well-capitalized under the regulatory framework for prompt corrective action. In order for WFB to continue to meet the minimum requirements for the well-capitalized classification under the regulatory framework for prompt corrective action, we invested $150 million in 2010 in additional capital in WFB. See “Risk Factors - We may have to reallocate capital from our Retail and Direct businesses to meet the capital needs of our Financial Services business, which could alter our retail store expansion program” and “Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of New Accounting Pronouncements.”
The consumer lending activities of WFB are subject to regulation under various federal and state laws. We spend significant amounts of time ensuring we are in compliance with these laws and work with our service providers to ensure that actions they take in connection with services they perform for us are also in compliance with these laws. Depending on the underlying issue and applicable law, regulators are authorized to impose penalties for violations of these statutes and, in some cases, to order WFB to compensate borrowers. Borrowers may also have a private right of action for some violations. Federal bankruptcy and state debtor relief and collection laws also affect the ability of our bank subsidiary to collect outstanding balances owed by borrowers.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) and related regulations restrict our ability to increase interest rates on existing credit card balances, charge over-limit fees, and charge fees for making a late payment. The CARD Act provisions also further define acceptable due dates, payment allocations, disclosure requirements, and "reasonable" fees and limit our ability to increase the interest rates on variable-rate credit card accounts that are subject to a fixed-rate floor. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Developments in Legislation and Regulation.”
 

10

 

Several rules and regulations have recently been proposed or adopted by the Securities and Exchange Commission ("SEC") that may substantially affect issuers of asset-backed securities. It remains to be seen whether and to what extent any final rules adopted by the SEC will impact our bank subsidiary and its ability and willingness to continue to rely on the securitization market for funding. See “Risks Factors - We may experience limited availability of financing or variation in funding costs for our Financial Services business, which could limit growth of the business and decrease our profitability," “Risks Factors - The Dodd-Frank Wall Street Reform and Consumer Protection Act may impact the practices of our Financial Services business and could have a material adverse effect on our results of operations” and “Management's Discussion and Analysis of Financial Condition and Results of Operations - Developments in Legislation and Regulation.”
 
Taxation Applicable to Us. We pay applicable corporate income, franchise, and other taxes to states in which our retail stores are physically located. As we open more retail stores, we will be subject to tax in an increasing number of state and local taxing jurisdictions.
 
Other Regulations Applicable to Us. We must comply with federal, state, and local regulations, including the federal Brady Handgun Violence Prevention Act, which require us, as a federal firearms licensee, to perform a pre-sale background check of purchasers of hunting rifles and other firearms.
 
We also are subject to a variety of state laws and regulations relating to, among other things, advertising, pricing, and product safety/restrictions. Some of these laws prohibit or limit the sale, in certain states and locations, of certain items we offer, such as black powder firearms, ammunition, bows, knives, and similar products. State and local government regulation of hunting can also affect our business.
We are subject to certain federal, state, and local laws and regulations relating to the protection of the environment and human health and safety. We believe that we are in substantial compliance with the terms of environmental laws and that we have no liabilities under such laws that we expect to have a material adverse effect on our business, results of operations, or financial condition.
Our Direct business is subject to the Mail or Telephone Order Merchandise Rule and related regulations promulgated by the Federal Trade Commission (“FTC”) which affect our catalog mail order operations. FTC regulations, in general, govern the solicitation of orders, the information provided to prospective customers, and the timeliness of shipments and refunds. In addition, the FTC has established guidelines for advertising and labeling many of the products we sell.
 
 
Intellectual Property
 
Cabela’s®, Cabela’s CLUB®, Cabelas.com®, World’s Foremost Outfitter®, World’s Foremost Bank®, Bargain Cave®, and Herters® are among our registered service marks or trademarks with the United States Patent and Trademark Office. We have numerous pending applications for trademarks. In addition, we own several other registered and unregistered trademarks and service marks involving advertising slogans and other names and phrases used in our business. We own certain patents associated with various products. We also own trade secrets, domain names, and copyrights, which have been registered for each of our catalogs.
 
We believe that our trademarks are valid and valuable and intend to maintain our trademarks and any related registrations. We do not know of any material pending claims of infringement or other challenges to our right to use our marks in the United States or elsewhere. We have no franchises or other concessions which are material to our operations.
 
 
Available Information
 
Our website address is www.cabelas.com. We make available on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, free of charge, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. Our SEC reports can be accessed through the investor relations section of our website. The information on our website, whether currently posted or in the future, is not part of this or any other report we file with or furnish to the SEC.

11

 

ITEM 1A. RISK FACTORS
 
Risk Factors
 
Risks Related to Our Merchandising Business
 
A decline in discretionary consumer spending could reduce our revenue.
 
Our revenue depends on discretionary consumer spending, which may decrease due to a variety of factors beyond our control, including:
 
•    
unfavorable general business conditions;
•    
increases in interest rates;
•    
increases in inflation;
•    
wars, fears of war, and terrorist attacks and organizing activities;
•    
increases in consumer debt levels and decreases in the availability of consumer credit;
•    
adverse or unseasonal weather conditions or events;
•    
increases in gasoline prices reducing the willingness to travel to our retail stores;
•    
adverse changes in applicable laws and regulations;
•    
adverse legislation relating to sales of firearms and ammunition;
•    
increases in taxation;
•    
adverse fluctuations of foreign currencies;
•    
adverse unemployment trends;
•    
adverse conditions in the mortgage and housing markets; and
•    
other factors that adversely influence consumer confidence and spending.
 
Our customers' purchases of discretionary items, including our products, could decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions. If this occurs, our revenue would decline. 
Difficult conditions in the economy generally may materially adversely affect our business and results of operations.
 
Our results of operations are materially affected by conditions in the economy generally.  Volatile oil prices, depressed real estate values, the availability and cost of credit, risks of increased inflation and deflation, low business and consumer confidence, and high unemployment have created fears of continuing unfavorable economic conditions. Factors such as consumer spending and the volatility and strength of the capital markets all affect the business and macroeconomic environment and, ultimately, the revenue and profitability of our business.  In an economic environment characterized by higher unemployment, lower family income, and lower consumer spending, the demand for our products could be adversely affected.  This may materially affect our business and results of operations.
Competition in the outdoor recreation and casual apparel and footwear markets could reduce our revenue and profitability.
 
 The outdoor recreation and casual apparel and footwear markets are highly fragmented and competitive. We compete directly or indirectly with the following types of companies:
 
•    
other specialty retailers that compete with us across a significant portion of our merchandising categories through retail store or direct businesses, such as Bass Pro Shops, Gander Mountain, Orvis, The Sportsman's Guide, and Sportsman's Warehouse;
•    
large-format sporting goods stores and chains, such as The Sports Authority, Dick's Sporting Goods, and Big 5 Sporting Goods;
•    
retailers that currently compete with us through retail businesses that may enter the direct business;
•    
mass merchandisers, warehouse clubs, discount stores, and department stores, such as Wal-Mart and Target; and
•    
casual outdoor apparel and footwear retailers, such as L.L. Bean, Lands' End, and REI.
 

12

 

Many of our competitors have a larger number of stores, and some of them have substantially greater market presence, name recognition, and financial, distribution, marketing, and other resources than we have. In addition, if our competitors reduce their prices, we may have to reduce our prices in order to compete. Furthermore, some of our competitors have aggressively built new stores in locations with high concentrations of our Direct business customers. As a result of this competition, we may need to spend more on advertising and promotion. Some of our mass merchandising competitors, such as Wal-Mart, do not currently compete in many of the product lines we offer. If these competitors were to begin offering a broader array of competing products, or if any of the other factors listed above occurred, our revenue could be reduced or our costs could be increased, resulting in reduced profitability.
If we are unable to comply with the terms of our credit arrangements, especially the financial covenants, our unsecured revolving credit facility could be terminated and our unsecured senior notes could become due and payable.
 
Our $350 million unsecured revolving credit facility and unsecured senior notes contain certain financial covenants, including the maintenance of minimum debt coverage, a fixed-charge coverage ratio, a cash flow leverage ratio, and a minimum tangible net worth standard. We may not be able to satisfy these ratios, especially if our operating results deteriorate as a result of, but not limited to, adverse economic conditions or the impact of other risk factors that may have a negative impact on our business and results of operations. A breach of any financial covenant or our inability to comply with the required financial ratios could result in a default under our unsecured revolving credit facility and unsecured senior notes, and we can provide no assurance that we would be able to obtain the necessary waivers or amendments from our lenders to remedy a default. In the event of any default that is not waived, the lenders under our unsecured revolving credit facility are not required to lend any additional amounts or issue letters of credit and could require us to apply all of our available cash to collateralize any outstanding letters of credit and declare any outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. In addition, the holders of our unsecured senior notes could declare all outstanding amounts, together with accrued interest and other fees, to be immediately due and payable.
 
We may not be able to raise additional capital or obtain additional financing if needed.
 
Volatility in the equity and debt markets, tightening of the credit markets, and the worldwide economic environment could make it more difficult for us to raise additional capital or obtain additional financing, and jeopardize the counterparty obligations of one or more of the banks participating in our $350 million unsecured revolving credit facility. We cannot be certain that additional funds will be available if needed and to the extent required or, if available, on acceptable terms. If we cannot raise necessary additional funds on acceptable terms, there could be a material adverse impact on our business and results of operations. We also may not be able to fund expansion, take advantage of future opportunities, meet our existing debt obligations, or respond to competitive pressures or unanticipated requirements.
Our comparable store sales will fluctuate and may not be a meaningful indicator of future performance.
 
Changes in our comparable store sales results could affect the price of our common stock. A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:
•    
competition;
•    
new store openings;
•    
general regional and national economic conditions;
•    
actions taken by our competitors;
•    
consumer trends and preferences;
•    
new product introductions and changes in our product mix;
•    
timing and effectiveness of promotional events; and
•    
weather conditions.
 
Our comparable store sales may vary from quarter to quarter, and an unanticipated decline in revenues or comparable store sales may cause the price of our common stock to fluctuate significantly.

13

 

If we fail to maintain the strength and value of our brand, our revenue is likely to decline.
 
Our success depends on the value and strength of the Cabela's brand. The Cabela's name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting, and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide high quality merchandise and a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative publicity. Any of these events could result in decreases in revenue.
If we cannot successfully implement system changes in support of our customer relationship management system, our operating results could suffer.
We are implementing substantial information technology system changes in support of our customer relationship management system in our Direct business. There are inherent risks associated with these system changes that could affect our ability to take customer orders, to deliver products to our customers in an efficient manner, and to collect cash from our customers. For example, in October 2010, we implemented a significant number of information technology system changes and encountered issues with these system changes that affected our ability to take and process customer orders and to deliver products to our customers in an efficient manner. Our success in this implementation depends on our ability to process customer orders, including the collection of cash, track customer data and demographics, and provide accurate financial data and reporting. We may be unable to successfully implement these system changes, or the changes to this system could result in order fulfillment and cash collection issues, which could have an adverse effect on our financial condition and results of operations. Additionally, there is no assurance that successful implementation of these system changes will deliver value to us.
 
Failure to protect the personal information of our customers may harm our business and reputation.
 
The nature of our business requires that we collect and maintain personal information about our customers. We use third-party systems, software, and tools in order to protect the customer data we obtain through the course of our business. Although we maintain security measures to protect such customer information, security breaches, computer viruses, acts of vandalism, human error, or other similar events may result in the unauthorized disclosure of confidential customer information. Such a security breach could damage our reputation with our customers and expose us to the risk of litigation.
If we cannot successfully implement our retail store expansion strategy, our growth and profitability would be adversely impacted.
 
We continue to seek additional locations to open new retail stores. Our ability to open new retail stores in a timely manner and operate them profitably depends on a number of factors, many of which are beyond our control, including:
•    
our ability to manage the financial and operational aspects of our retail growth strategy;
•    
our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data to determine consumer demand for our products in the locations we select;
•    
our ability to negotiate and obtain economic development packages with local and state governments where our new retail stores would be located;
•    
our ability to negotiate favorable lease agreements;
•    
our ability to properly assess the profitability of potential new retail store locations;
•    
the availability of financing on favorable terms;
•    
our ability to secure required governmental permits and approvals;
•    
our ability to hire and train skilled store operating personnel, especially management personnel;
•    
the availability of construction materials and labor and the absence of significant construction delays or cost overruns;
•    
our ability to provide a satisfactory mix of merchandise that is responsive to the needs of our customers living in the areas where new retail stores are built;
•    
our ability to supply new retail stores with inventory in a timely manner;
•    
our ability to properly assess operational and regulatory challenges involved in opening and successfully operating retail stores in Canada;
•    
our competitors building or leasing stores near our retail stores or in locations we have identified as targets for a new retail store; and
•    
general economic and business conditions affecting consumer confidence and spending and the overall strength of our business.
 

14

 

We may not be able to sustain the growth in the number of our retail stores, the revenue growth historically achieved by our retail stores, or to maintain consistent levels of profitability in our Retail business, particularly as we expand into markets now served by other large-format sporting goods retailers and mass merchandisers. In particular, new retail stores typically generate lower operating margins because pre-opening costs are fully expensed in the year of opening and because fixed costs, as a percentage of revenue, are higher. In addition, the substantial management time and resources which our retail store expansion strategy requires may result in disruption to our existing business operations which may decrease our profitability.
The slower pace of our retail store expansion may negatively impact our revenue growth and profitability.
 
The opening of new retail stores has contributed significantly to the growth of our merchandising revenue. As part of our efforts to improve retail operations, and in light of the challenging macroeconomic environment facing retailers, we made the strategic decision to slow the pace of our retail store expansion. We opened eight new retail stores in 2007, two new retail stores in 2008, one new retail store in 2009, and one new retail store in 2010. In 2011, we expect to open two new retail stores in the United States and one new retail store in Canada. The slower pace of our retail store expansion may negatively impact our revenue growth and profitability.
Retail store expansion could adversely affect the operating results of our Retail business and reduce the revenue of our Direct business.
 
As the number of our retail stores increases, our stores will become more highly concentrated in the geographic regions we serve. As a result, the number of customers and related revenue at individual stores may decline and the average amount of sales per square foot at our stores may be reduced. In addition, as we open more retail stores and as our competitors open stores with similar formats, our retail store format may become less unique and may be less attractive to customers as tourist and entertainment shopping locations. If either of these events occurs, the operating results of our Retail business could be adversely affected. The growth in the number of our retail stores may also draw customers away from our Direct business, which could adversely affect our Direct business revenue.
Our failure to successfully manage our Direct business could have a material adverse effect on our operating results and cash flows.
 
During 2010, our Direct business accounted for 41.4% of the total revenue in our Retail and Direct businesses. Our Direct business is subject to a number of risks and uncertainties, some of which are beyond our control, including the following:
•    
our inability to properly adjust the fixed costs of a catalog mailing to reflect subsequent sales of the products marketed in the catalog;
•    
lower and less predictable response rates for catalogs sent to prospective customers;
•    
increases in United States Postal Service rates, paper costs, and printing costs resulting in higher catalog production costs and lower profits for our Direct business;
•    
failures to properly design, print, and mail our catalogs in a timely manner;
•    
failures to introduce new catalog titles;
•    
failures to timely fill customer orders;
•    
changes in consumer preferences, willingness to purchase goods through catalogs or the Internet, weak economic conditions and economic uncertainty, and unseasonal weather in key geographic markets;
•    
increases in software filters that may inhibit our ability to market our products through e-mail messages to our customers and increases in consumer privacy concerns relating to the Internet;
•    
supply and delivery shortages or interruptions, including reduced service levels from the United States Postal Service, and other interruptions or disruptions to our systems, processes, or controls, caused by system changes or other factors, including technology system changes in support of our customer relationship management system;
•    
changes in applicable federal and state regulation;
•    
breaches of Internet security; and
•    
failures in our Internet infrastructure or the failure of systems of third parties, such as telephone or electric power service, resulting in website downtime, customer care center closures, or other problems.
 
Any one or more of these factors could result in lower-than-expected revenue for our Direct business. These factors could also result in increased costs, increased merchandise returns, slower turning inventories, inventory write-downs, and working capital constraints. Because our Direct business accounts for a significant portion of our total revenue, any performance shortcomings experienced by our Direct business could have a material adverse effect on our operating results and cash flows.

15

 

Any disruption of the supply of products and services from our vendors could have an adverse impact on our revenue and profitability.
 
Our vendors and service providers include the following:
•    
vendors to supply our merchandise in sufficient quantities at competitive prices in a timely manner;
•    
outside printers and catalog production vendors to print and mail our catalogs and to convert our catalogs to digital format for website posting;
•    
shipping companies, such as United Parcel Service, the United States Postal Service, and common carriers, for timely delivery of our catalogs, shipment of merchandise to our customers, and delivery of merchandise from our vendors to us and from our distribution centers to our retail stores;
•    
telephone companies to provide telephone service to our in-house customer care centers;
•    
communications providers to provide our Internet users with access to our website and a website hosting service provider to host and manage our website;
•    
software providers to provide software and related services to run our operating systems for our Retail and Direct businesses; and
•    
third-party card processors, such as First Data Resources, that process Cabela's CLUB Visa transactions.
 
Any disruption in these services could have a negative impact on our ability to market and sell our products, and serve our customers. Our ten largest trade vendors collectively represented approximately 16% of our total merchandise purchases in 2010. If we are unable to acquire suitable merchandise or lose one or more key vendors, we may not be able to offer products that are important to our merchandise assortment. We also are subject to risks, such as the price and availability of raw materials and fabrics, labor disputes, union organizing activity, strikes, inclement weather, natural disasters, war and terrorism, and adverse general economic and political conditions that might limit our vendors' ability to provide us with quality merchandise on a timely basis. We have no contractual arrangements providing for continued supply from our key vendors and our vendors may discontinue selling to us at any time. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality and more expensive than those we currently purchase. Any delay or failure in offering products to our customers could have an adverse impact on our revenue and profitability. In addition, if the cost of fuel rises, the cost to deliver merchandise to the customers of our Direct business and from our distribution centers to our retail stores may rise which could have an adverse impact on our profitability.
Political and economic uncertainty and unrest in foreign countries where our merchandise vendors are located and trade restrictions upon imports from these foreign countries could adversely affect our ability to source merchandise and operating results.
 
In 2010, approximately 17% of our merchandise was imported directly from vendors located in foreign countries, with approximately 91% of our imported merchandise being obtained directly from vendors located in China, Vietnam, El Salvador, India, and Taiwan. In addition, we believe that a significant portion of our other vendors obtain their products from foreign countries that may also be subject to political and economic uncertainty. We are subject to risks and uncertainties associated with changing economic and political conditions in foreign countries where our vendors are located, such as:
•    
increased import duties, tariffs, trade restrictions, and quotas;
•    
work stoppages;
•    
economic uncertainties;
•    
adverse foreign government regulations;
•    
wars, fears of war, and terrorist attacks and organizing activities;
•    
adverse fluctuations of foreign currencies; and
•    
political unrest.
 
We cannot predict when, or the extent to which, the countries in which our products are manufactured will experience any of the above events. Any event causing a disruption or delay of imports from foreign locations would likely increase the cost or reduce the supply of merchandise available to us and would adversely affect our operating results, particularly if imports of our Cabela's branded merchandise were adversely affected as our margins are higher on our Cabela's branded merchandise.
In addition, trade restrictions, including increased tariffs or quotas, embargoes, safeguards, and customs restrictions against apparel items, as well as United States or foreign labor strikes, work stoppages, or boycotts could increase the cost or reduce the supply of merchandise available to us or may require us to modify our current business practices, any of which could hurt our profitability.

16

 

Due to the seasonality of our business, our annual operating results would be adversely affected if our revenue during the fourth quarter was substantially below expectations.
 
We experience seasonal fluctuations in our revenue and operating results. Historically, we have realized a significant portion of our revenue and earnings for the year in the fourth quarter. In 2010 and 2009, respectively, we generated 35.1% and 34.9% of our revenue, and 59.1% and 33.5% of our net income, in the fourth quarter. We incur significant additional expenses in the fourth quarter due to higher customer purchase volumes and increased staffing. If we miscalculate the demand for our products generally or for our product mix during the fourth quarter, our revenue could decline, which would harm our financial performance. In addition, abnormally warm weather conditions during the fourth quarter can reduce sales of many of the products normally sold during this time period and inclement weather can reduce store traffic or cause us to temporarily close stores causing a reduction in revenue. Because a substantial portion of our operating income is derived from our fourth quarter revenue, a shortfall in expected fourth quarter revenue would cause our annual operating results to suffer significantly.
If we lose key management or are unable to attract and retain the talent required for our business, our operating results could suffer.
 
Our future success depends to a significant degree on the skills, experience, and efforts of our senior executive management and merchandising teams. With the exception of our Chairman, Richard N. Cabela, our Vice Chairmen, James W. Cabela and Dennis Highby, and our President and Chief Executive Officer, Thomas L. Millner, none of our senior management has employment agreements other than our Management Change of Control Severance Agreements. We do not carry key-man life insurance on any of our executives or key management personnel. In addition, our corporate headquarters is located in a sparsely populated rural area which may make it difficult to attract and retain qualified individuals for key management positions. The loss of the services of any of these individuals or the inability to attract and retain qualified individuals for our key management positions could cause our operating results to suffer.
Our business depends on our ability to meet our labor needs, and if we are unable to do so, our retail store expansion strategy may be delayed and our revenue growth may suffer.
 
Our success depends on hiring, training, managing, and retaining quality managers, sales associates, and employees in our retail stores and customer care centers. Our corporate headquarters, distribution centers, return center, and some of our retail stores are located in sparsely populated rural areas. It may be difficult to attract and retain qualified personnel, especially management and technical personnel, in these areas. Competition for qualified management and technical employees could require us to pay higher wages or grant above market levels of stock compensation to attract a sufficient number of employees. If we are unable to attract and retain qualified personnel as needed, the implementation of our retail store expansion strategy may be delayed and our revenue growth may suffer.
A natural disaster or other disruption at our distribution centers or return facility could cause us to lose merchandise and be unable to effectively deliver to our direct customers and retail stores.
 
We currently rely on distribution centers in Sidney, Nebraska; Prairie du Chien, Wisconsin; Wheeling, West Virginia; and Winnipeg, Manitoba, to handle our distribution needs. We operate a return center in Oshkosh, Nebraska; and our Wheeling, West Virginia, distribution center also processes returns. Any natural disaster or other serious disruption to these centers due to fire, tornado, or any other calamity could damage a significant portion of our inventory and materially impair our ability to adequately stock our retail stores, deliver merchandise to customers, and process returns to vendors and could result in lost revenue, increased costs, and reduced profits.
New state tax initiatives could subject us to liability for past sales and cause our future Direct business sales to decrease.
 
A number of states have adopted initiatives, or are considering adopting initiatives, that require Internet retailers operating “affiliate programs” in the state to collect sales tax on the retailer's sales to residents in these states. We believe that affiliate programs do not create nexus with a state and that these initiatives are inconsistent with the United States Supreme Court's holding that states, absent congressional legislation, may not impose tax collection obligations on out-of-state direct marketers unless the out-of-state direct marketer has nexus with the state. If these initiatives are successful, we could be required to collect sales taxes in additional states. The imposition by state governments of sales tax collection obligations on out-of-state direct marketers who participate in Internet commerce could create additional administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors, and decrease our future Direct sales.

17

 

We must successfully order and manage our inventory to reflect customer demand and anticipate changing consumer preferences and buying trends or our revenue and profitability will be adversely affected.
 
Our success depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner. We cannot predict consumer preferences with certainty and they may change over time. We usually must order merchandise well in advance of the applicable selling season. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends or changes in prices. If we misjudge either the market for our merchandise or our customers' purchasing habits, our revenue may decline significantly and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins. In addition, as we implement our retail store expansion strategy, we will need to construct additional distribution centers or expand the size of our existing distribution centers to support our growing number of retail stores. If we are unable to find suitable locations for new distribution centers or to timely integrate new or expanded distribution centers into our inventory control process, we may not be able to deliver inventory to our retail stores in a timely manner, which could have an adverse effect on the revenue and cash flows of our Retail business.
The failure of properties to generate sufficient taxes to amortize economic development bonds owned by us that relate to the development of such properties would have an adverse impact on our cash flows and profitability.
 
We own economic development bonds issued by state or local governmental entities in connection with the development of some of our retail stores. The proceeds of these bonds were used to fund the construction and equipping of new retail stores and related infrastructure development. The repayments of principal and interest on these bonds are typically tied to sales, property, or lodging taxes generated from the related retail store and, in some cases, from other businesses in the surrounding area, over periods which range between 20 and 30 years. However, the governmental entity from which we purchased 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. We make estimates of the discounted future cash flow streams these bonds are expected to generate in the form of interest and principal payments. Because these cash flows are based primarily on future property or sales tax collections at our retail stores and other facilities (which in many cases may not be operating at the time we make our estimates), these estimates are inherently subjective and the probability of ultimate realization is highly uncertain. If sufficient tax revenue is not generated by the subject properties, we will not receive the full amount of the expected payments due under the bonds, which would have an adverse impact on our cash flows and profitability.
Our failure to comply with the terms of current economic development agreements could result in our repayment of grant money or other adverse consequences that would affect our cash flows and profitability.
 
The economic development packages which we have received in connection with the construction of some of our current retail stores have, in some instances, contained forfeiture provisions and other remedies in the event we do not fully comply with the terms of the economic development agreements. Among the terms which could trigger these remedies are the failure to maintain certain employment and wage levels and failure to keep a retail store open. At January 1, 2011, the total amount of grant funding subject to repayment pursuant to a specific contractual remedy was approximately $13 million. Another remedy that has been included in some economic development agreements is loss of priority to tax payments supporting the repayment of bonds held by us. Where specific remedies are not set forth, the local governments would be entitled to pursue general contract remedies. A default by us under these economic development agreements could have an adverse effect on our cash flows and profitability.

18

 

We may incur costs from litigation or increased regulation relating to products that we sell, particularly tree stands and firearms, which could adversely affect our revenue and profitability.
 
We may incur damages due to lawsuits relating to products we sell. We are currently a defendant in certain product liability lawsuits, including lawsuits relating to tree stands. We may incur losses due to lawsuits, including potential class actions, relating to our performance of background checks on firearms purchases and compliance with other sales laws as mandated by state and federal law. We may also incur losses from lawsuits relating to the improper use of firearms or ammunition sold by us, including lawsuits by municipalities or other organizations attempting to recover costs from manufacturers and retailers of firearms and ammunition. Our insurance coverage and the insurance provided by our vendors for certain products they sell to us may be inadequate to cover claims and liabilities related to products that we sell. In addition, claims or lawsuits related to products that we sell, or the unavailability of insurance for product liability claims, could result in the elimination of these products from our product line, thereby reducing revenue. If one or more successful claims against us are not covered by or exceed our insurance coverage, or if insurance coverage is no longer available, our available working capital may be impaired and our operating results could be adversely affected. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our profitability and on future premiums we would be required to pay on our insurance policies.
Current and future government regulation may negatively impact demand for our products and our ability to conduct our business.
 
Federal, state, and local laws and regulations can affect our business and the demand for products. These laws and regulations include:
•    
FTC regulations governing the manner in which orders may be solicited and prescribing other obligations in fulfilling orders and consummating sales;
•    
laws and regulations that prohibit or limit the sale, in certain states and localities, of certain items we offer such as firearms, black powder firearms, ammunition, bows, knives, and similar products;
•    
the Bureau of Alcohol, Tobacco, Firearms and Explosives governing the manner in which we sell firearms and ammunition;
•    
laws and regulations governing hunting and fishing;
•    
laws and regulations relating to the collecting and sharing of non-public customer information; and
•    
United States customs laws and regulations pertaining to proper item classification, quotas, payment of duties and tariffs, and maintenance of documentation and internal control programs which relate to importing taxidermy which we display in our retail stores.
 
Changes in these laws and regulations or additional regulation could cause the demand for and sales of our products to decrease. Moreover, complying with increased or changed regulations could cause our operating expenses to increase. This could adversely affect our revenue and profitability.
Our inability or failure to protect our intellectual property could have a negative impact on our operating results.
 
Our trademarks, service marks, copyrights, patents, trade secrets, domain names, and other intellectual property are valuable assets that are critical to our success. Effective trademark and other intellectual property protection may not be available in every country in which our products are made available. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our revenue. Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays, or require us to enter into royalty or licensing agreements. As a result, any such claim could have an adverse effect on our operating results.
 

19

 

Risks Related to Our Financial Services Business
 
We may experience limited availability of financing or variation in funding costs for our Financial Services business, which could limit growth of the business and decrease our profitability.
 
Our Financial Services business requires a significant amount of cash to operate. These cash requirements will increase if our credit card originations increase or if our cardholders' balances or spending increase. Historically, we have relied upon external financing sources to fund these operations, and we intend to continue to access external sources to fund our growth. A number of factors such as our financial results, changes within our organization, disruptions in the capital markets, increased competition in the deposit markets, our corporate and regulatory structure, interest rate fluctuations, general economic conditions, possible negative credit ratings affecting our asset-backed securities, and accounting and regulatory changes and relations could make such financing more difficult or impossible to obtain or more expensive. In addition, several rules and regulations have recently been proposed by the SEC that may substantially affect issuers of asset-backed securities. We have been and will continue to be particularly reliant on funding from securitization transactions for our Financial Services business. Securitization funding sources include both variable funding facilities and fixed and floating rate term securitizations. A failure to renew these facilities, to resecuritize the term securitizations as they mature, or to add additional term securitizations and variable funding facilities on favorable terms as it becomes necessary could increase our financing costs and potentially limit our ability to grow our Financial Services business. In addition, the ability of our Financial Services business to engage in securitization transactions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events, which could materially affect our business and cause our Financial Services business to lose an important source of capital.
Furthermore, even if we are able to securitize our credit card loans consistent with past practice, poor performance of our securitized loans, including increased delinquencies and credit losses, lower payment rates, or a decrease in excess spreads below certain thresholds, could result in a downgrade or withdrawal of the ratings on the outstanding securities issued in our securitization transactions, cause “early amortization” or “early redemption” of these securities, or result in higher required credit enhancement levels. This could jeopardize our ability to complete other securitization transactions on acceptable terms, decrease our liquidity, and force us to rely on other potentially more expensive funding sources, to the extent available, which would decrease our profitability.
Our current funding strategy also includes a continued reliance on certificates of deposit to help fund growth and maturing securitizations. If there is an increase in other financial institutions relying on the deposits market for liquidity and funding, competition in the deposits market may increase resulting in less funds available or funds at unattractive rates. In addition to the non-brokered certificates of deposit market to fund growth and maturing securitizations, we have access to the brokered certificates of deposit market through multiple financial institutions for liquidity and funding purposes. Our ability to issue certificates of deposit is reliant on our current regulatory capital levels. If WFB were to be classified as an adequately-capitalized bank, we would be required to obtain a waiver from the FDIC in order to continue to issue certificates of deposits and would be limited to what interest rate we can pay on deposits. At the end of 2010, WFB met the requirements for a well-capitalized institution, the highest of the Federal Deposit Insurance Corporation Improvement Act's five capital ratio levels.
 
We may have to reallocate capital from our Retail and Direct businesses to meet the capital needs of our Financial Services business, which could alter our retail store expansion program.
 
WFB must satisfy the capital maintenance requirements of government regulators and its agreement with Visa U.S.A., Inc. ("Visa"). Although WFB satisfied the requirements for the well-capitalized classification under the regulatory framework for prompt corrective action at December 31, 2010, no assurances can be given that WFB will continue to satisfy such requirements. A variety of factors could cause the capital requirements of WFB to exceed our ability to generate capital internally or from third party sources. For example, government regulators or Visa could unilaterally increase their minimum capital requirements. Also, we have significant potential obligations in the form of the unused credit lines of our cardholders. At January 1, 2011, these unfunded amounts totaled approximately $16 billion. Draws on these lines of credit could materially exceed predicted line usage. If WFB ceases to qualify as well-capitalized, WFB would become subject to regulatory restrictions that could materially adversely affect its liquidity, cost of funds, and ability to conduct normal operations. If WFB's capital requirements were to increase, we may have to contribute capital to WFB, which may require us to raise additional debt or equity capital and/or divert capital from our Retail and Direct businesses, which in turn could significantly alter our retail store expansion strategy.

20

 

It may be difficult to sustain the historical growth and profitability of our Financial Services business, and we will be subject to various risks as we attempt to grow the business.
 
We may not be able to retain existing cardholders, grow account balances, or attract new cardholders and the profits from our Financial Services business could decline, for a variety of reasons, many of which are beyond our control, including:
•    
credit risk related to the loans we make to cardholders and the charge-off levels of our credit card accounts;
•    
inability of cardholders to make payments to us due to economic conditions and limited access to other credit sources;
•    
inability to manage credit risk and keep credit models up to date with current consumer credit trends;
•    
lack of growth of potential new customers generated by our Retail and Direct businesses;
•    
liquidity and funding risk relating to our ability to create the liquidity necessary to extend credit to our cardholders and provide the capital necessary to meet the requirements of government regulators and Visa;
•    
operational risk related to our ability to acquire the necessary operational and organizational infrastructure, manage expenses as we expand, and recruit management and operations personnel with the experience to run an increasingly complex and highly-regulated business; and
•    
the credit card industry is highly competitive with increased use of advertising, target marketing, reward programs, and pricing competition in interest rates and cardholder fees as both traditional and new credit card issuers seek to expand or to enter the market and compete for customers.
Economic downturns and social and other factors could cause our credit card charge-offs and delinquencies to increase, or credit card balances to decrease, which would decrease our profitability.
 
Recent economic conditions have adversely affected unemployment rates, consumer spending, consumer indebtedness, and the availability of consumer credit, which in turn adversely affected the ability and willingness of the cardholders to pay amounts owed to our Financial Services business. These factors led to increased delinquencies and charge-offs during the recent economic downturn. The general economic environment may worsen, unemployment may continue to remain high, the housing market may continue to be depressed, and consumer credit availability may decrease. The ability and willingness of cardholders to pay could be adversely affected, which would increase delinquencies and charge-offs. In addition, if economic conditions deteriorate, the number of transactions and average purchase amount of transactions on the credit card accounts may be reduced, which would reduce the revenue of our Financial Services business. A variety of social and other factors also may cause changes in credit card use, payment patterns, and the rate of defaults by cardholders. These social factors include changes in consumer confidence levels, the public's perception of the use of credit cards, changing attitudes about incurring debt, and the stigma of personal bankruptcy. Our underwriting criteria, portfolio management, product design, and collection operations may be insufficient to protect the growth and profitability of our Financial Services business during a sustained period of economic downturn or recession or a material shift in social attitudes.
 
The performance of our Financial Services business may be negatively affected by the performance of our merchandising businesses.
 
Negative developments in our Retail and Direct businesses could affect our ability to grow or maintain our Financial Services business. We believe our ability to maintain cardholders and attract new cardholders is highly correlated with customer loyalty to our merchandising businesses and to the strength of the Cabela's brand. In addition, transactions on cardholder accounts produce loyalty points which the cardholder may apply to future purchases from us. Adverse changes in the desirability of products we sell, negative trends in retail customer service and satisfaction, or the termination or modification of the loyalty program could have a negative impact on WFB's ability to grow its account base.

21

 

Our Financial Services business faces the risk of a complex and changing regulatory and legal environment.
Our Financial Services business operates in a heavily regulated industry and is therefore subject to a wide array of banking and consumer lending laws and regulations. Failure to comply with banking and consumer lending laws and regulations could result in financial, structural, and operational penalties being imposed.  For example, on March 5, 2010, WFB received a preliminary report related to a compliance examination conducted in the second quarter of 2009 from the FDIC. WFB received the final version of this report from the FDIC on May 19, 2010.  The FDIC's findings were that certain practices by WFB regarding the assessment of overlimit fees, late fees, and penalty interest charges and contacting delinquent cardholders at their place of employment were improper because such practices were unfair and/or deceptive under applicable law. The FDIC has indicated that it intends to require WFB to reimburse cardholders who paid improper fees and/or interest charges and has also indicated that it will seek to impose on WFB a monetary penalty as a result of the improper practices.  Subsequent to January 1, 2011, WFB and the FDIC agreed in principle to settle all matters related to the 2009 compliance examination. As of January 1, 2011, we had accrued a liability of $8 million in our consolidated financial statements for the matters cited by the FDIC in its examination report.
The CARD Act and related regulations restrict our ability to increase interest rates on existing credit card balances, charge over-limit fees, and charge fees for making a payment. The CARD Act provisions also further define acceptable due dates, payment allocations, disclosure requirements, and “reasonable” fees and prohibit increasing the interest rates on variable-rate credit card accounts that are subject to a fixed-rate floor. As a result of the CARD Act, our Financial Services Revenue was negatively impacted. Beginning in February 2011, the third phase of the CARD Act requires creditors that increased annual percentage rates due to credit criteria, market conditions, or other factors on or after January 1, 2009, to review accounts at least every six months to determine whether the annual percentage rate should be reduced, which could result in reduced interest income. The CARD Act also requires the Federal Reserve to conduct various studies regarding interchange fees, credit limit reductions, financial literacy, marketing, and credit card terms and conditions. Future legislation or regulations may be issued as a result of these studies.  Future changes as a result of these studies may result in future negative impacts to the revenue from our Financial Services business.
 
In addition, as a Visa member bank, WFB must comply with rules and regulations imposed by Visa. For example, WFB and Cabela's could be fined by Visa for failing to comply with Visa's data security standards.
The Dodd-Frank Wall Street Reform and Consumer Protection Act may impact the practices of our Financial Services business and could have a material adverse effect on our results of operations.
 On July 21, 2010, the Reform Act was signed into law.  The Reform Act, as well as other legislative and regulatory changes, could have a significant impact on us by, for example, requiring WFB to change its business practices, imposing additional costs on WFB, limiting fees WFB can charge for services, impacting the value of WFB and its assets, or otherwise adversely affecting WFB's business.  A description of the Reform Act and other legislative and regulatory developments is contained in “Management's Discussion and Analysis of Financial Condition and Results of Operations - Developments in Legislation and Regulation.”
 In addition, the Reform Act directs the Comptroller General of the United States to complete a study within 18 months of the Reform Act's enactment to determine whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system, to eliminate certain exceptions under the BHCA, including the exception for credit card banks.  If the credit card bank exception were eliminated or modified, we may be required to divest our ownership of WFB unless we were willing and able to become a bank holding company under the BHCA.  Any such forced divestiture would materially adversely affect our business and results of operations.
 The Reform Act will also effect a number of significant changes relating to asset-backed securities, including additional oversight and regulation of credit rating agencies and additional reporting and disclosure requirements.  In addition, the Reform Act will prohibit issuers and payment card networks from placing restrictions on vendors relating to credit card transactions, which could affect consumer behavior and the use of credit cards as a form of payment.
 The Reform Act will also likely result in increased scrutiny and oversight of consumer financial services and products, including credit cards, primarily through the establishment of the new independent Bureau within the Federal Reserve.  The Bureau will have broad rulemaking and enforcement authority over providers of credit, savings, and payment services and products.  The Bureau will have rulemaking and interpretive authority under existing and future consumer financial services laws and supervisory, examination, and enforcement authority over institutions subject to its jurisdiction.  State officials are authorized to enforce consumer protection rules issued by the Bureau.
 

22

 

Many provisions of the Reform Act require the adoption of rules to implement.  In addition, the Reform Act mandates multiple studies, which could result in additional legislative or regulatory action.  The effect of the Reform Act and its implementing regulations on WFB's business and operations could be significant.  In addition, we may be required to invest significant management time and resources to address the various provisions of the Reform Act and the numerous regulations that are required to be issued under it. The Reform Act, any related legislation, and any implementing regulations could have a material adverse effect on our business, results of operations, and financial condition.
Changes in interest rates could have a negative impact on our earnings.
 
In connection with our Financial Services business, we borrow money from institutions and accept funds by issuing brokered and non-brokered certificates of deposit and secured borrowings, which we then lend to cardholders. We earn interest on the cardholders' account balances, and pay interest on the certificates of deposit and borrowings we use to fund those loans. Changes in these two interest rates affect the value of the assets and liabilities of our Financial Services business. If the rate of interest we pay on borrowings increases more (or more rapidly) than the rate of interest we earn on loans, our net interest income, and therefore our earnings, could fall. Our earnings could also be adversely affected if the rates on our credit card account balances fall more quickly than those on our borrowings. In addition, at the end of 2010, approximately 34% of our cardholders did not maintain balances on their credit card accounts. We do not earn any interest from these accounts but do earn other fees from these accounts such as Visa interchange fees. In the event interest rates rise, the spread between the interest rate we pay on our borrowings and the fees we earn from these accounts may change and our profitability may be adversely affected.
Credit card industry litigation and regulation could adversely impact the amount of revenue our Financial Services business generates from interchange fees.
Our Financial Services business faces possible risk from the outcomes of certain credit card industry litigation and potential regulation of interchange fees. For example, a number of entities, each purporting to represent a class of retail merchants, have sued Visa and several member banks, and other credit card associations, alleging, among other things, that Visa and its member banks have violated United States antitrust laws by conspiring to fix the level of interchange fees. To date, we have not been named as a defendant in any credit card industry lawsuits. Moreover, the amount of interchange fees that are charged to merchants could be capped or limited by credit card industry regulation. If the interchange fees that are charged to merchants are reduced as a result of the interchange lawsuits or regulation, the financial condition and results of operations of our Financial Services business may be negatively impacted.
 
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 

23

 

ITEM 2. PROPERTIES
 
At the end of 2010, in addition to our retail stores listed below, we also operated our corporate headquarters, administrative offices, four distribution centers, a merchandise return center, and five customer care centers. The following table provides information regarding the general location, use, and approximate size of our principal non-retail properties:
 
 
 
 
 
Total
 
 
 
 
 
 
Square
 
Segment That
Property
 
Location (1)
 
Footage
 
Uses Property
 
 
 
 
 
 
 
Corporate Headquarters
 
Sidney, Nebraska
 
294,000
 
 
Retail, Direct and Other
Administrative Offices,
 
 
 
 
 
 
Retail Store Concept Center,
 
 
 
 
 
 
and Customer Care Center
 
Sidney, Nebraska
 
131,000
 
 
Retail, Direct and Other
Distribution Center
 
Sidney, Nebraska
 
752,000
 
 
Other
Distribution Center
 
Prairie du Chien, Wisconsin
 
1,071,000
 
 
Other
Distribution Center
 
Wheeling, West Virginia
 
1,165,000
 
 
Other
Distribution Center,
 
 
 
 
 
 
Customer Care Center,
 
 
 
 
 
 
and Administrative Offices
 
Winnipeg, Manitoba
 
130,000
 
 
Retail, Direct and Other
Retail Store, Warehouse,
 
 
 
 
 
 
 
and Administrative Offices
 
Winnipeg, Manitoba
 
85,000
 
 
Retail and Direct
Merchandise Return Center
 
Oshkosh, Nebraska
 
52,000
 
 
Other
Customer Care Center
 
North Platte, Nebraska
 
12,000
 
 
Direct
Customer Care Center
 
 
 
 
 
 
and Administrative Offices
 
Kearney, Nebraska
 
151,000
 
 
Retail and Direct
Customer Care Center
 
Grand Island, Nebraska
 
12,000
 
 
Direct
Customer Care Center, Bank Operations,
 
 
 
 
 
Direct, Financial Services
and Administrative Offices
 
Lincoln, Nebraska
 
76,000
 
 
and Other
Data Information Center
 
Papillion, Nebraska
 
16,000
 
 
Retail, Direct, Financial
 
 
 
 
 
 
Services and Other
 
 
 
 
 
 
 
(1)    
We own all of these properties with the exception of leases we have entered into for the customer care center in Grand Island, Nebraska, the distribution centers in Wheeling, West Virginia, and Winnipeg, Manitoba, and the retail store concept center in Sidney, Nebraska.
 
We own all of our retail stores except Boise, Idaho; Gonzales, Louisiana; Hazelwood, Missouri; Scarborough, Maine; Winnipeg, Manitoba; and Grand Junction, Colorado; and we have a ground lease for East Hartford, Connecticut. Also, in connection with some of the economic development packages received from state or local governments where our stores are located, we have entered into agreements granting ownership of the taxidermy, diorama, or other portions of our stores to these state and local governments.
 
 

24

 

The following table shows the location, opening date, and approximate total square footage of our United States retail stores used in our Retail segment:
 
 
 
Total Square
Location
Opening Date
Footage
 
 
 
Kearney, Nebraska
October 1987
35,000
 
Sidney, Nebraska
July 1991
104,000
 
Owatonna, Minnesota
March 1998
163,000
 
Prairie Du Chien, Wisconsin
September 1998
53,000
 
East Grand Forks, Minnesota
September 1999
60,000
 
Dundee, Michigan
March 2000
227,000
 
Mitchell, South Dakota
August 2000
84,000
 
Kansas City, Kansas
August 2002
192,000
 
Hamburg, Pennsylvania
September 2003
246,000
 
Wheeling, West Virginia
August 2004
175,000
 
Fort Worth, Texas
May 2005
234,000
 
Buda, Texas
June 2005
192,000
 
Lehi, Utah
August 2005
170,000
 
Rogers, Minnesota
October 2005
185,000
 
Glendale, Arizona
July 2006
166,000
 
Boise, Idaho
August 2006
132,000
 
Richfield, Wisconsin
September 2006
166,000
 
La Vista, Nebraska
October 2006
129,000
 
Hazelwood, Missouri
April 2007
132,000
 
Hoffman Estates, Illinois
September 2007
195,000
 
East Hartford, Connecticut
October 2007
195,000
 
Gonzales, Louisiana
October 2007
167,000
 
Hammond, Indiana
October 2007
189,000
 
Reno, Nevada
November 2007
129,000
 
Post Falls, Idaho
November 2007
129,000
 
Lacey, Washington
November 2007
195,000
 
Scarborough, Maine
May 2008
129,000
 
Rapid City, South Dakota
August 2008
80,000
 
Billings, Montana
May 2009
80,000
 
Grand Junction, Colorado
May 2010
76,000
 
At January 1, 2011, the total net book value of our property and equipment was $818 million. At the end of 2010, we believe that our properties and equipment were suitable for their intended use.
 
 

25

 

ITEM 3. LEGAL PROCEEDINGS
             
We are party to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of business. These actions include commercial, intellectual property, employment, and product liability claims. Some of these actions involve complex factual and legal issues and are subject to uncertainties. We cannot predict with assurance the outcome of the actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact earnings in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current action would have a material adverse effect on our results of operations, cash flows, or financial position taken as a whole.
 
 
ITEM 4. (REMOVED AND RESERVED)
 

26

 

 
PART II
 
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Price Range of Common Stock
 
We have common stock and non-voting common stock. Our common stock began trading on June 25, 2004, on the New York Stock Exchange (“NYSE”) under the symbol “CAB”. Prior to that date, there was no public market for our common stock. Our non-voting common stock is not listed on any exchange and not traded over the counter. As of February 22, 2011, there were 900 holders of record of our common stock and no holders of record of our non-voting common stock. This does not include persons who hold our common stock in nominee or “street name” accounts through brokers or banks.
 
The following table sets forth, for the fiscal quarters indicated, the high and low sales prices per share of our common stock as reported on the NYSE:
 
 
2010
 
2009
 
High
 
Low
 
High
 
Low
 
 
 
 
 
 
 
 
First Quarter
$
18.00
 
 
$
14.69
 
 
$
9.80
 
 
$
4.90
 
Second Quarter
21.24
 
 
13.42
 
 
14.48
 
 
8.71
 
Third Quarter
19.17
 
 
12.97
 
 
17.73
 
 
11.11
 
Fourth Quarter
23.11
 
 
18.28
 
 
16.00
 
 
11.65
 

27

 

 
Stock Performance Graph
 
The following stock performance graph and table show Cabela’s cumulative total shareholder return on a semi-annual basis for the five fiscal years ended January 1, 2011. The graph and table also show the cumulative total returns of the Standard and Poor’s (“S&P”) 500 Retailing Index and the S&P 500 Index. The graph and table assume that $100 was invested on December 30, 2005.
 
 
 
Dec 30,
 
June 30,
 
Dec 29,
 
June 30,
 
Dec 28,
 
June 28,
 
Dec 27,
 
June 27,
 
Jan 2,
 
July 3,
 
Jan 1,
 
 
2005
 
2006
 
2006
 
2007
 
2007
 
2008
 
2008
 
2009
 
2010
 
2010
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cabela’s Inc.
 
$
100
 
 
$
91
 
1
 
$
114
 
 
$
105
 
 
$
70
 
 
$
53
 
 
$
31
 
 
$
58
 
 
$
68
 
 
$
64
 
 
$
103
 
S&P Retailing Index
 
100
 
 
102
 
 
113
 
 
117
 
 
93
 
 
81
 
 
61
 
 
73
 
 
93
 
 
87
 
 
115
 
S&P 500
 
100
 
 
106
 
 
119
 
 
126
 
 
124
 
 
107
 
 
73
 
 
77
 
 
93
 
 
86
 
 
105
 
Dividend Policy
 
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, our revolving credit facility and our senior notes limit our ability to pay dividends to our stockholders.
 
Equity Compensation Plans
 
For information on securities authorized for issuance under our equity compensation plans, see “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
 

28

 

ITEM 6. SELECTED FINANCIAL DATA
 
 
Fiscal Year (1)
 
2010
 
2009
 
2008
 
2007
 
2006
 
(In Thousands Except Earnings per Share)
Operations Data:
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Merchandise revenue
$
2,412,486
 
 
$
2,447,635
 
 
$
2,380,655
 
 
$
2,173,995
 
 
$
1,908,801
 
Financial services revenue
227,675
 
 
171,414
 
 
158,971
 
 
159,335
 
 
137,423
 
Other revenue
23,081
 
 
13,191
 
 
13,095
 
 
16,269
 
 
17,300
 
Total revenue
2,663,242
 
 
2,632,240
 
 
2,552,721
 
 
2,349,599
 
 
2,063,524
 
Cost of revenue
1,575,449
 
 
1,602,621
 
 
1,540,214
 
 
1,378,386
 
 
1,204,399
 
Selling, distribution, and
 
 
 
 
 
 
 
 
 
administrative expenses
895,405
 
 
870,147
 
 
865,684
 
 
818,916
 
 
715,380
 
Impairment and restructuring charges
5,626
 
 
66,794
 
 
5,784
 
 
1,205
 
 
 
Operating income
186,762
 
 
92,678
 
 
141,039
 
 
151,092
 
 
143,745
 
Interest (expense) income, net
(27,442
)
 
(23,109
)
 
(29,658
)
 
(18,778
)
 
(16,126
)
Other income
7,360
 
 
6,955
 
 
6,854
 
 
6,913
 
 
9,637
 
Income before provision for income taxes
166,680
 
 
76,524
 
 
118,235
 
 
139,227
 
 
137,256
 
Provision for income taxes
54,521
 
 
26,907
 
 
41,831
 
 
51,348
 
 
51,471
 
Net income available to common stockholders
$
112,159
 
 
$
49,617
 
 
$
76,404
 
 
$
87,879
 
 
$
85,785
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
1.65
 
 
$
0.74
 
 
$
1.15
 
 
$
1.34
 
 
$
1.32
 
Diluted earnings per share
$
1.62
 
 
$
0.74
 
 
$
1.14
 
 
$
1.31
 
 
$
1.29
 
 
 
 
 
 
 
 
 
 
 
Selected Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (2)
$
136,419
 
 
$
582,185
 
 
$
410,104
 
 
$
131,182
 
 
$
172,903
 
Working capital (2) (3)
1,747,124
 
 
619,354
 
 
573,410
 
 
263,284
 
 
335,387
 
 Total assets (3)
4,531,179
 
 
2,491,885
 
 
2,396,066
 
 
2,212,830
 
 
1,751,230
 
Total debt excluding WFB
345,152
 
 
348,279
 
 
380,031
 
 
403,385
 
 
311,382
 
Total debt of WFB (3) (4)
2,496,651
 
 
476,664
 
 
486,199
 
 
260,591
 
 
108,687
 
Total stockholders’ equity
1,024,548
 
 
984,421
 
 
913,705
 
 
828,559
 
 
733,858
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
69,872
 
 
$
70,566
 
 
$
64,673
 
 
$
59,863
 
 
$
45,559
 
Property and equipment additions including
 
 
 
 
 
 
 
 
 
accrued amounts
79,720
 
 
49,817
 
 
54,934
 
 
364,326
 
 
190,592
 
 
 
 
 
 
 
 
 
 
 
(1)    
Fiscal years are based on the 52-53 week period ending on the Saturday closest to December 31. Fiscal 2010, 2008, 2007, and 2006 each consisted of 52 weeks and fiscal 2009 consisted of 53 weeks.
(2)    
Cash and cash equivalents include amounts for our financial services subsidiary totaling $82 million, $371 million, $402 million, $123 million, and $53 million at years ended 2010, 2009, 2008, 2007, and 2006. Our ability to use this cash for non-banking operations, including its use as working capital for our Retail or Direct businesses, or for retail store expansion, is limited by regulatory restrictions.
(3)    
Amounts as of and for the year ended January 1, 2011, include assets and liabilities resulting from the consolidation of the Trust related to a change in accounting principle. Accordingly, effective January 3, 2010, total assets and liabilities increased $2.15 billion and $2.25 billion, respectively, and retained earnings and other comprehensive income decreased $93 million, after tax.
(4)    
Amounts include time deposits and short-term borrowings of our financial services subsidiary, and for 2010, amounts also include the secured variable funding obligations and secured long-term obligations of the Trust.

29

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 appearing elsewhere in this report.
 
Forward Looking Statements - Our discussion contains forward-looking statements with respect to our plans and strategies for our businesses and the business environment that are impacted by risks and uncertainties. Refer to “Special Note Regarding Forward-Looking Statements” preceding PART I, ITEM 1, and to ITEM 1A “Risk Factors” for information regarding certain of the risks and uncertainties that affect our business and the industries in which we operate. Please note that our actual results may differ materially from those we may estimate or project in any of these forward-looking statements.
 
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 business segments. Our Retail business segment is comprised of 31 stores, 30 located in the United States and one in Canada. Our Direct business segment is comprised of our highly acclaimed Internet website, which is supplemented by our catalog distributions as a selling and marketing tool.
 
     Our Financial Services business segment also plays an integral role in supporting our merchandising business. Our Financial Services business segment comprises our credit card services, reinforces our strong brand, and strengthens our customer loyalty through our credit card loyalty programs.
 
 
Fiscal 2010 Executive Overview
 
 
 
 
 
 
Increase
 
 
 
2010
 
2009
 
(Decrease)
 
% Change
 
(Dollars in Thousands)
Revenue:
 
 
 
 
 
 
 
Retail
$
1,412,715
 
 
$
1,388,991
 
 
$
23,724
 
 
1.7
 %
Direct
999,771
 
 
1,058,644
 
 
(58,873
)
 
(5.6
)
Total merchandise sales
2,412,486
 
 
2,447,635
 
 
(35,149
)
 
(1.4
)
Financial Services
227,675
 
 
171,414
 
 
56,261
 
 
32.8
 
Other revenue
23,081
 
 
13,191
 
 
9,890
 
 
75.0
 
Total revenue
$
2,663,242
 
 
$
2,632,240
 
 
$
31,002
 
 
1.2
 
 
 
 
 
 
 
 
 
Operating income
$
186,762
 
 
$
92,678
 
 
$
94,084
 
 
101.5
 
 
 
 
 
 
 
 
 
Earnings per diluted share
$
1.62
 
 
$
0.74
 
 
$
0.88
 
 
118.9
 
Revenues for 2010 totaled $2.7 billion, an increase of 1.2% over 2009. Revenue in our merchandising business decreased $35 million, or 1.4%, in 2010 compared to 2009. The net decrease in total merchandise sales comparing 2010 to 2009 was due to:
•    
$51 million in sales that was reflected in the extra week in 2009 compared to 2010 which consisted of 52 weeks; and
•    
a net decrease in Direct revenue of $25 million compared to 2009 from our non-core businesses that we divested of in October 2010 (home restoration products) and in the fall of 2009 (taxidermy and wildlife prints and collectibles).
 
These net decreases were partially offset by:
•    
sales from our new retail store that opened in Grand Junction, Colorado, in May 2010; and
•    
increases in comparable store sales of $21 million led by increases in sales in the clothing and footwear category.

30

 

Financial Services revenue increased $56 million, or 32.8%, in 2010 compared to 2009 primarily due to lower loan losses, increases in interchange income, a decrease in interest expense, and growth in the number of active accounts and average balance per account, partially offset by higher customer reward costs.
Operating income for 2010 increased $94 million, or 101.5%, compared to 2009, and total operating income as a percentage of total revenue increased 350 basis points to 7.0% compared to 3.5% in 2009.  The increases in total operating income and total operating income as a percentage of total revenue were primarily due to:
•    
a decrease of $61 million in impairment and restructuring charges compared to 2009 as we recorded $6 million in 2010 compared to $67 million in 2009;
•    
increases in revenue from our Retail business and Financial Services segments as well as improved efficiencies in labor productivity in our Retail business; and
•    
a decrease of $9 million in catalog and Internet-related costs in our Direct business segment comparing 2010 to 2009 resulting from our planned reduction in the number of catalog pages circulated.
  
Fiscal 2010 consisted of 52 weeks and fiscal 2009 consisted of 53 weeks. The table below presents revenue results for 2010 calculated in accordance with generally accepted accounting principles ("GAAP") compared to 2009 excluding the effect of revenue earned in the last week of 2009. Management believes these non-GAAP financial results for 2009 provide useful supplemental information to investors regarding revenues and trends and performance of our ongoing operations and are useful for year-over-year comparisons of such results. In addition, management evaluates results using non-GAAP adjusted total revenue. These non-GAAP results should not be considered in isolation or as a substitute for total revenue calculated in accordance with GAAP. Financial Services was not adjusted because its reporting periods end on a calendar year.
 
 
 
 
2009
 
 
 
 
 
 
 
Excluding
 
Increase
 
 
 
2010
 
Extra Week
 
(Decrease)
 
% Change
 
(Dollars in Thousands)
Revenue:
 
 
 
 
 
 
 
Retail
$
1,412,715
 
 
$
1,354,983
 
 
$
57,732
 
 
4.3
 %
Direct
999,771
 
 
1,041,389
 
 
(41,618
)
 
(4.0
)
Total merchandise sales
2,412,486
 
 
2,396,372
 
 
16,114
 
 
0.7
 
Financial Services
227,675
 
 
171,414
 
 
56,261
 
 
32.8
 
Other revenue
23,081
 
 
13,010
 
 
10,071
 
 
77.4
 
Total revenue (non-GAAP basis)
2,663,242
 
 
2,580,796
 
 
82,446
 
 
3.2
 
Total revenue - week 53
 
 
51,444
 
 
(51,444
)
 
 
Total revenue (GAAP basis)
$
2,663,242
 
 
$
2,632,240
 
 
$
31,002
 
 
1.2
 
The impact of the last week in 2009 was to increase total revenues and revenue from our merchandising businesses by $51 million. As noted above, after adjusting 2009 to be on a comparable 52-week year, revenues for 2010 increased $82 million, or 3.2%, over 2009 and revenue in our merchandising businesses for 2010 increased $16 million, or 0.7%, compared to 2009. The net increase in total merchandise sales comparing 2010 to 2009 was due to 1) the opening of our Grand Junction, Colorado, retail store in May 2010; 2) increases in comparable store sales led by increases in the clothing and footwear category for 2010 compared to 2009; and 3) increases in Internet sales in Direct business revenue.
 
 
Fiscal 2010 Achievements and Update to Our 2012 Vision
 
Cabela's 2012 Vision is to become the best multi-channel outdoor retail company in the world. While the business environment in which we operated in 2010 continued to be challenging, we believe our multi-channel model and our strong brand name provides us with opportunities for growth and profitability.  Over our history, we have established name recognition and a quality brand that is renowned and respected in the outdoor industry. Throughout our multi-channel business, our strategy is to continue our focus on our customers by providing legendary customer service, quality, and selection.
 

31

 

In 2010, management emphasized a greater focus on improving retail productivity, mitigating bad debt risk in our credit card business, and concentrating on a return on capital discipline.  We have six strategic initiatives we are focusing on to achieve our 2012 Vision and deliver value to our customers, giving us sustainable, competitive advantages:
 
•    
Focus on Core Customers: Combine our outdoor expertise, product knowledge, and understanding of core customers to drive customer loyalty. Improve customer experiences – every customer, every interaction, every day. Our goal is to use the product expertise we have developed over the years, along with a focused understanding of our core customers, to improve customer loyalty, enhance brand awareness, and offer the best possible assortment of products in every merchandise category.
  
As we focus on our core customers, we are targeting marketing efforts that are directed to different customer interests by improving our modeling methodologies.  We are also using historic sales information to select and size markets while focusing on areas with large concentrations of core customers.
 
We offer our customers integrated opportunities to access and use our retail store, Internet, and catalog channels. Our in-store pick-up program allows customers to order products through our catalogs, Internet site, 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 Internet and catalog channels. We are capitalizing on our multi-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, and also helps maintain the proper inventory levels to satisfy customer demand in both our Retail and Direct business channels, and to improve our distribution efficiencies.
 
•    
Improve Merchandise Performance: Improve margins and minimize unproductive inventory by focusing on vendors, assortment planning, and inventory management. Optimizing merchandise performance allows us to maximize margins, which will require detailed preseason planning, as well as in-season monitoring of sales and management of inventory. We must work with vendors to manage inventory levels, negotiate the best prices on everything we buy, and ensure each vendor is delivering all products and services as expected.
 
We are concentrating efforts in detailed pre-season planning, as well as in-season monitoring of sales and management of inventory.  We worked 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. We reduced unproductive inventory levels during the first half of fiscal 2010 and increased product assortment heading into the fourth quarter of fiscal 2010. Our merchandise gross margin as a percentage of merchandising revenue increased 50 basis points to 35.1% in 2010 compared to 34.6% in 2009. This increase was due to better inventory management, which reduced the need to mark down product, improvements in vendor collaboration, and advancements in price optimization to ensure we are pricing correctly in the marketplace.  
 
•    
Retail Profitability: Improve retail profitability and predictability by concentrating on sales, advertising, and costs while providing excellent customer experiences. Our goal is to identify the best practices that produce the best results and apply those findings to all stores. We have to execute on the balance that allows us to deliver the best possible selection of products and expected level of customer service in each store while managing labor, advertising, and other store costs.
 
We have improved our retail store merchandising processes, management information 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.  To enhance customer service at our retail stores, we have implemented management training and mentoring programs for our next generation managers. Operating income for our Retail business segment increased $43 million, or 26.2%, to $206 million in 2010 compared to 2009. In addition, operating income as a percentage of Retail business segment revenue increased to 14.6% in 2010, up 290 basis points compared to 2009.  
 
•    
Retail Expansion: Capitalize on our brand strength by developing a profitable retail expansion strategy focused on site locations and appropriate sized stores in our top markets. Our goal is to increase our retail presence across the United States and Canada by developing a profitable retail expansion strategy that takes into consideration not only site location, but also the strategic size for each store in its given market.
 

32

 

We incorporated our next generation store format into our new store that opened on May 20, 2010, in Grand Junction, Colorado.  The Grand Junction store is 76,000 square feet and anchors the largest destination mall on the Western Slope of Colorado.  This retail store brings our total retail store square footage to over 4.4 million square feet at the end of 2010. We expect to open two next generation stores in 2011 in the United States - one in Allen, Texas, and one in Springfield, Oregon.  In addition, we plan to open one next generation store in Canada in 2011 in Edmonton, Alberta. We also announced plans to open a next generation store in 2012 in Wichita, Kansas, and another store in 2012 in Canada, though the location has not been named.
 
•    
Direct Business Growth: Grow our Direct business by capitalizing on quick-to-market Internet and electronic marketing opportunities and expanding international business. Our goal is to continue to fine tune our catalogs, as well as the number of pages and product mix in each, in order to improve the profitability of each title. We want to create steady, profitable growth in our Direct channels, while reducing marketing expenses and significantly increasing the percentage of market share we capture through the Internet.
 
Our efforts on redesigning our Internet website to support this important channel of our Direct business continue. In October 2010, we launched our new website featuring significant enhancements including guided navigation to improve customers' movement throughout the site, managed content to aid in customizing the individual shopping experience, better promotional capability, and international commerce capabilities. Our Internet website continues to be the most visited sporting goods industry eCommerce website according to Hitwise, Incorporated, an online measurement company. On December 15, 2010, we launched our website in France, www.cabelas.fr, which offers more than 5,000 of Cabela’s branded products.
 
We divested our non-core home restoration products business in October 2010 and our non-core taxidermy and wildlife prints and collectibles businesses in the fall of 2009. The following table presents a reconciliation of Direct and total revenue for 2010 and 2009 excluding the revenue of these non-core businesses and week 53 for 2009. We believe presenting this non-GAAP comparable financial data provides useful supplemental information regarding Direct and total revenues, and trends and performance of our ongoing operations, and is useful for comparisons of results.
 
 
 
 
Increase
 
 
2010
2009
(Decrease)
% Change
 
(Dollars in Thousands)
 
 
 
 
 
Direct revenue (non-GAAP basis)
$
986,047
 
$
1,002,307
 
$
(16,260
)
(1.6
)%
Direct revenue from non-core businesses (1)
13,724
 
39,082
 
(25,358
)
(64.9
)
Direct revenue - week 53 (2)
 
17,255
 
(17,255
)
 
Direct revenue (GAAP basis)
$
999,771
 
$
1,058,644
 
$
(58,873
)
(5.6
)
 
 
 
 
 
(1)Represents Direct segment revenue on our non-core businesses that we divested of in October 2010 (home restoration products) and in the fall of 2009 (taxidermy and wildlife prints and collectibles).
(2)Represents revenue earned in the last week of 2009 (week 53).
 
Our Direct revenue decreased $59 million, or 5.6%, in 2010 compared to 2009. The impact of the extra week in 2009 was to increase Direct revenue by $17 million; therefore, adjusted for 52 weeks, Direct revenue decreased $42 million in 2010 compared to 2009. For comparative purposes, Direct revenue in 2010 compared to 2009 (adjusted for the effect of divestitures and week 53) resulted in a decrease of 1.6%. Direct revenue also decreased due to inventory reduction initiatives in the first half of 2010, which affected inventory levels resulting in fill rates being lower comparing the respective periods, and due to a decrease in the sales of ammunition and reloading supplies as supply has caught up to demand and consumers are now able to find ammunition at retail stores.  
 

33

 

Operating income for our Direct business segment was $156 million in 2010 compared to $161 million in 2009.  Operating income as a percentage of our Direct business segment revenue increased to 15.6% in 2010, up 40 basis points compared to 2009. During 2010, the managed reduction in catalog pages circulated resulted in a decrease in catalog-related costs compared to 2009. As a percentage of Direct revenue, total direct marketing costs (catalog and Internet related marketing costs) decreased 10 basis points to 13.7% compared to 13.8% in 2009. As a result of our focus on smaller, more specialized catalogs, we reduced the number of catalog pages mailed but increased total circulation. The number of active Direct customers increased by approximately 1% compared to 2009.
 
•    
Growth of World's Foremost Bank: Our goal is to continue to attract new cardholders through our Retail and Direct businesses and increase the amount of merchandise or services customers purchase with their CLUB Visa cards while maintaining WFB's profitability and preserving customer loyalty by creating marketing plans, promoting additional products, and expanding our partnership programs to best serve our customers' needs and give us brand exposure.
 
WFB continues to manage credit card delinquencies and charge-offs below industry average by adhering to our conservative underwriting criteria and active account management.  We added new credit cardholders as the number of average active accounts increased 5.9% to 1.3 million compared to 2009.  On a managed basis, Financial Services revenue increased $56 million, or 32.8%, in 2010 compared to 2009 primarily due to lower loan losses, increases in interchange income, a decrease in interest expense, and growth in the number of active accounts and average balance per account, partially offset by higher customer reward costs. In 2010, WFB completed two securitization transactions for a total of $550 million and renewed its $260 million and $412 million variable funding facilities.
 
 
Current Business Environment
 
Worldwide Credit Markets and Macroeconomic Environment – During 2010, the economic environment has shown signs of improvement, which we believe has led to a lower level of delinquencies and to a decrease in charge-offs in 2010 compared to 2009.  We expect our charge-off and delinquency levels to remain below industry standards. Our Financial Services business continues to monitor developments in the securitization and certificates of deposit markets to ensure adequate access to liquidity. 
 
Developments in Legislation and Regulation – On March 5, 2010, WFB received a preliminary report related to a compliance examination conducted in the second quarter of 2009 from the FDIC.  WFB received the final version of this report from the FDIC on May 19, 2010.  The FDIC's findings were that certain WFB practices regarding the assessment of overlimit fees, late fees, and penalty interest charges and contacting delinquent cardholders at their place of employment were improper because such practices were unfair and/or deceptive under applicable law. The FDIC has indicated that it intends to require WFB to reimburse cardholders who paid improper fees and/or interest charges and has also indicated that it will seek to impose on WFB a monetary penalty as a result of the improper practices.  Subsequent to January 1, 2011, WFB and the FDIC agreed in principle to settle all matters related to the 2009 compliance examination. As of January 1, 2011, we had accrued a liability of $8 million recorded as a charge to selling, distribution, and administrative expense in our consolidated financial statements for the matters cited by the FDIC in its examination report. The practices cited by the FDIC in its examination report as improper were eliminated in 2009 and will not be reimposed. WFB remained well-capitalized following the accrual of costs to resolve these matters with the FDIC. The costs incurred by WFB in resolving the matters cited by the FDIC were reflected in a reduced marketing fee paid by the Financial Services segment to the Direct and Retail segments according to contractual arrangement.
 
In May 2009, the CARD Act was signed into law.  Some provisions were effective in August 2009, but many of the provisions became effective in February 2010 and August 2010. The CARD Act has and will continue to affect various credit card practices of card issuers, including our Financial Services business, such as marketing, underwriting, pricing, billing, and disclosure.  For example, the CARD Act and related regulations restrict our ability to increase interest rates on existing credit card balances, charge over-limit fees, and charge fees for making a payment. The CARD Act provisions also further define acceptable due dates, payment allocations, disclosure requirements, and “reasonable” fees, and prohibit increasing the interest rates on variable-rate credit card accounts that are subject to a fixed-rate floor. As a result of the CARD Act, revenue from our Financial Services business was negatively impacted. Beginning in February 2011, the third phase of the CARD Act requires creditors that increased annual percentage rates due to credit criteria, market conditions, or other factors on or after January 1, 2009, to review accounts at least every six months to determine whether the annual percentage rate should be reduced, which could result in reduced interest income. The CARD Act also requires the Federal Reserve to conduct various studies regarding interchange fees, credit limit reductions, financial literacy, marketing, and credit card terms and conditions. Future legislation or regulations may be issued as a result of these studies.  The full impact of the remaining CARD Act requirements on WFB is unknown at this time due to the uncertainty of the results of these studies.  

34

 

 
On July 21, 2010, the Reform Act was signed into law. The Reform Act makes extensive changes to the laws regulating financial services firms and credit rating agencies and requires significant rule-making. In addition, the legislation mandates multiple studies which could result in additional legislative or regulatory action. WFB is currently reviewing the impact the Reform Act will have on its business.
 
The Reform Act imposes a moratorium on the approval of applications for FDIC insurance for an industrial bank, credit card bank, or trust bank that is owned by a commercial firm. Furthermore, the FDIC must, under most circumstances, disapprove any change in control that would result in direct or indirect control by a commercial firm of a credit card bank, such as WFB. For purposes of this provision, a company is a “commercial firm” if its consolidated annual gross revenues from activities that are financial in nature and, if applicable, from the ownership or control of one or more insured depository institutions, in the aggregate, represent less than 15% of its consolidated annual gross revenues. The Reform Act does not, however, eliminate the exception from the definition of “bank” under the BHCA for credit card banks, such as WFB. In addition, the Reform Act directs the Comptroller General of the United States to complete a study within 18 months of the Reform Act's enactment to determine whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system, to eliminate certain exceptions under the BHCA, including the exception for credit card banks. If the credit card bank exception were eliminated or modified, we may be required to divest our ownership of WFB unless we were willing and able to become a bank holding company under the BHCA. Any such forced divestiture would materially adversely affect our business and results of operations.
 
The Reform Act established the new independent Bureau which will have broad rulemaking, supervisory, and enforcement authority over consumer products, including credit cards. The Bureau will be directed to prevent “unfair, deceptive, or abusive practices” and ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent, and competitive. States are permitted to adopt stricter consumer protection laws and state officials can enforce consumer protection rules issued by the Bureau.
 
The Reform Act will also affect a number of significant changes relating to asset-backed securities, including additional oversight and regulation of credit rating agencies and additional reporting and disclosure requirements. Among other things, the Reform Act requires the federal banking agencies and the SEC to prescribe regulations to require securitizers to retain an economic interest in securitized assets, generally at a level of not less than five percent. The Reform Act also requires the SEC to adopt regulations regarding the use of representations and warranties in the market for asset-backed securities. In addition, the Reform Act will prohibit issuers and payment card networks from placing restrictions on vendors relating to credit card transactions, which could affect consumer behavior and the use of credit cards as a form of payment. The changes resulting from the Reform Act may impact our profitability, require changes to certain of WFB's business practices, impose upon WFB more stringent capital, liquidity, and leverage ratio requirements, increase FDIC deposit insurance premiums, or otherwise adversely affect WFB's business. These changes may also require WFB to invest significant management attention and resources to evaluate and make necessary changes.
 
As a result of the recent accounting guidance on consolidations and the accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity, there was uncertainty over FDIC guidance regarding the safe-harbor for legal isolation of transferred assets provided by FDIC Rule 12 C.F.R. 360.6 “Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection With a Securitization or Participation.” In March 2010, the FDIC announced an interim amendment of this regulation. Under the interim amendment, the legal isolation of property transferred in a securitization transaction prior to September 30, 2010, was preserved, regardless of whether the transfer qualified for sale accounting treatment under new accounting standards if the transfer otherwise complied with the FDIC's regulation. On September 27, 2010, the FDIC approved a final rule that, subject to certain conditions, preserves the safe-harbor treatment applicable to certain grandfathered revolving trusts and master trusts that had issued at least one series of asset-backed securities as of such date, which we believe includes the Trust. The final rule imposes significant new conditions on the availability of the safe-harbor with respect to securitizations that are not grandfathered.
 

35

 

Several rules and regulations have recently been proposed or adopted that may substantially affect issuers of asset-backed securities. On April 7, 2010, the SEC issued proposed rules that will significantly change the offering process, disclosure, and reporting for asset-backed securities. Pursuant to the provisions of the Reform Act, on January 20, 2011, the SEC adopted rules that require issuers of asset-backed securities to disclose demand, repurchase, and replacement information through the periodic filing of a new form with the SEC. These rules also require rating agencies to disclose in any report accompanying a credit rating for an asset-backed security the representations, warranties, and enforcement mechanisms available to investors and how they differ from those in similar securities. Also pursuant to the provisions of the Reform Act, on January 20, 2011, the SEC issued rules that require issuers of registered asset-backed securities to perform a review of the assets underlying the securities and to publicly disclose information relating to the review. These rules also require issuers of asset-backed securities to make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer. It remains to be seen whether and to what extent the January 20, 2011, rules or any other final rules adopted by the SEC will impact WFB and its ability and willingness to continue to rely on the securitization market for funding.
 
 Impact of New Accounting Pronouncements - The accounting guidance on consolidations and accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity resulted in the consolidation of the Trust effective January 3, 2010.  Consequently, there was a material impact on our total assets, total liabilities, retained earnings and other comprehensive income, statement of cash flows, and the components of our Financial Services revenue. The consolidation of the Trust eliminated retained interests in securitized loans and required the establishment of an allowance for loan losses on the securitized credit card loans.  The credit card loans of the Trust are recorded as restricted credit card loans and the liabilities of the Trust are recorded as secured borrowings.  The secured borrowings still contain the legal isolation requirements which would protect the assets pledged as collateral for the securitization investors as well as protecting Cabela's and WFB from any liability from default on the notes. The Trust was consolidated on January 3, 2010, resulting in an increase in total assets and liabilities of $2.15 billion and $2.25 billion, respectively, and retained earnings and other comprehensive income decreasing $93 million, after tax.
 
In 2010, we began reporting the results of operations of our Financial Services business in a manner similar to our historical managed presentation for financial performance of the total managed portfolio of credit card loans, excluding income derived from the changes in the valuation of our interest-only strip, cash reserve accounts, and cash accounts associated with the securitized loans. 
 
At the beginning of 2010, WFB's required capital was increased under regulatory capital requirements of the applicable federal agencies as a result of new accounting standards which required the consolidation of the assets and liabilities of the Trust on WFB's balance sheet. As of December 31, 2010, the most recent notification from the FDIC categorized WFB as well-capitalized under the regulatory framework for prompt corrective action. In order for WFB to continue to meet the minimum requirements for the well-capitalized classification under the regulatory framework for prompt corrective action, we invested $150 million in 2010 in additional capital in WFB. Effective December 11, 2009, we amended the terms of our credit agreement to allow us to invest up to $225 million into WFB in 2010 plus up to $25 million per year through June 30, 2012, when this credit agreement expires.
 
 

36

 

Operations Review
 
Our operating results expressed as a percentage of revenue were as follows for the years ended:
 
2010
 
2009
 
2008
Revenue
100.00
 %
 
100.00
 %
 
100.00
 %
Cost of revenue
59.16
 
 
60.88
 
 
60.34
 
    Gross profit (exclusive of depreciation and amortization)
40.84
 
 
39.12
 
 
39.66
 
Selling, distribution, and administrative expenses
33.62
 
 
33.06
 
 
33.91
 
Impairment and restructuring charges
0.21
 
 
2.54
 
 
0.23
 
Operating income
7.01
 
 
3.52
 
 
5.52
 
Other income (expense):
 
 
 
 
 
    Interest expense, net
(1.03
)
 
(0.88
)
 
(1.16
)
    Other income, net
0.28
 
 
0.26
 
 
0.27
 
Total other income (expense), net
(0.75
)
 
(0.62
)
 
(0.89
)
Income before provision for income taxes
6.26
 
 
2.90
 
 
4.63
 
Provision for income taxes
2.05
 
 
1.02
 
 
1.64
 
Net income
4.21
 %
 
1.88
 %
 
2.99
 %
 
 
Results of Operations - 2010 Compared to 2009
 
 
Revenues
 
 
 
 
 
 
 
 
 
Increase
 
 
 
2010
 
%
 
2009
 
%
 
(Decrease)
 
% Change
 
(Dollars in Thousands)
Retail
$
1,412,715
 
 
53.0
%
 
$
1,388,991
 
 
52.8
%
 
$
23,724
 
 
1.7
 %
Direct
999,771
 
 
37.5
 
 
1,058,644
 
 
40.2
 
 
(58,873
)
 
(5.6
)
Financial Services
227,675
 
 
8.6
 
 
171,414
 
 
6.5
 
 
56,261
 
 
32.8
 
Other
23,081
 
 
0.9
 
 
13,191
 
 
0.5
 
 
9,890
 
 
75.0
 
 
$
2,663,242
 
 
100.0
%
 
$
2,632,240
 
 
100.0
%
 
$
31,002
 
 
1.2
 
 
Product Sales Mix – The following chart sets forth the percentage of revenue contributed by each of the five product categories for our Retail and Direct businesses and in total for the years ended:
 
 
Retail
 
Direct
 
Total
 
2010
 
2009
 
2010
 
2009
 
2010
 
2009
Hunting Equipment
44.5
%
 
45.3
%
 
33.7
%
 
35.2
%
 
40.2
%
 
41.1
%
Clothing and Footwear
24.0
 
 
22.9
 
 
33.4
 
 
33.4
 
 
27.7
 
 
27.3
 
Fishing and Marine
14.2
 
 
14.5
 
 
11.5
 
 
12.1
 
 
13.2
 
 
13.5
 
Camping
8.5
 
 
8.5
 
 
11.8
 
 
10.2
 
 
9.8
 
 
9.2
 
Gifts and Furnishings
8.8
 
 
8.8
 
 
9.6
 
 
9.1
 
 
9.1
 
 
8.9
 
    Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

37

 

Retail Revenue – 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. Retail revenue increased $24 million in 2010 primarily due to to sales from our new retail store that opened in Grand Junction, Colorado, on May 20, 2010, and to increases in comparable store sales of $21 million led by increases in sales in the clothing and footwear category. After adjusting Retail revenue for the impact of the extra week in 2009, which totaled $34 million, Retail revenue in 2010 increased $58 million compared to 2009.
 
When gift certificates, gift cards, and e-certificates (“gift instruments”) are redeemed for merchandise or services, revenue is recognized. We record gift instrument breakage as revenue when the probability of redemption is remote. Gift instrument breakage recognized was $5 million, $5 million, and $10 million for 2010, 2009, and 2008, respectively. In the fourth quarter of 2008, we began recognizing breakage on gift instruments four years after issuance as a result of changes in historical trends in the types of gift instruments issued and related redemption rates. This change in estimate from seven to four years resulted in an increase in revenue and operating income of $9 million that we recorded in the fourth quarter of 2008. Our gift instrument liability at the end of 2010 and 2009 was $111 million and $103 million, respectively.
 
 
 
 
 
Increase
 
 
 
2010
 
2009 (1)
 
(Decrease)
 
% Change
 
(Dollars in Thousands)
Comparable stores sales
$
1,347,984
 
 
$
1,326,513
 
 
21,471
 
 
1.6
%
Comparable stores sales growth percentage
1.6
%
 
3.5
%
 
 
 
 
 
 
 
 
 
 
 
 
(1) Excludes the extra week in 2009 to present on a comparable 52-week basis.
Comparable store sales increased $21 million, or 1.6%, in 2010 principally because of the strength in our hunting equipment and clothing and footwear categories and the success of our Retail operations focus. A store is included in our comparable store sales base on the first day of the month following the fifteen month anniversary of 1) its opening or acquisition, or 2) any changes to retail store space greater than 25% of total square footage of the store.
 
Average sales per square foot for stores that were open during the entire year were $314 for 2010 compared to $316 for 2009 ($308 per square foot adjusted on a 52-week basis). The increase in average sales per square foot adjusted on a 52-week basis resulted from the increase in comparable store sales.
 
Direct Revenue – Direct revenue includes catalog and Internet sales from orders placed over the phone, by mail, and through our website where the merchandise is shipped to non-retail store locations. Our Direct revenue decreased $59 million, or 5.6%, in 2010 compared to 2009. The impact of the extra week in 2009 was to increase Direct revenue by $17 million; therefore, adjusted for 52 weeks, Direct revenue decreased $42 million in 2010 compared to 2009.
 
We divested our non-core home restoration products business in October 2010 and our non-core taxidermy and wildlife prints and collectibles businesses in the fall of 2009. For comparative purposes, Direct revenue in 2010 compared to 2009 (adjusted for the effect of these divestitures and the impact of week 53 in 2009) would have resulted in a decrease of $16 million, or 1.6%. Direct revenue also decreased due to our inventory reduction initiatives in the first half of 2010, which affected inventory levels resulting in fill rates being lower in 2010 compared to 2009. Fiscal 2010 was also affected by a decrease in the sales of ammunition and reloading supplies as supply caught up to demand and consumers are now able to find ammunition at retail stores.
 
Decreases in Direct revenue were partially mitigated by managed reductions in catalog-related costs comparing 2010 to 2009. As a percentage of Direct revenue, direct marketing costs decreased 10 basis points to 13.7% for 2010 compared to 13.8% for 2009. As a result of our focus on smaller, more specialized catalogs, we reduced the number of catalog pages mailed but increased total circulation, leading to continued improvements in marketing costs compared to 2009.
 

38

 

 
 
 
 
 
Increase
 
 
 
2010
 
2009
 
(Decrease)
 
% Change
Percentage increase year over year in Internet website visitors
5.8
%
 
17.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Catalog circulation in pages (in millions)
24,621
 
 
25,927
 
 
(1,306
)
 
(5.0
)%
Number of separate catalog titles circulated
107
 
 
97
 
 
10
 
 
 
 
 
 
 
 
 
 
 
 
Internet sales increased in 2010 compared to 2009. Visitors to our Internet site increased as we continued to focus our efforts on utilizing Direct marketing programs to increase traffic to our website. Visitors to our Internet site increased 5.8% during 2010. Our hunting equipment and clothing and footwear categories were the largest dollar volume contributor to our Direct revenue for 2010. The number of active Direct customers, which we define as those customers who have purchased merchandise from us in the last twelve months, increased by approximately 1% compared to 2009.
 
In October 2010, we launched our new website featuring significant enhancements, including guided navigation to improve customers' movement throughout the site, managed content to aid in customizing the individual shopping experience, better promotional capability, and international commerce capabilities.
 
In October 2010, we implemented substantial information technology system changes in support of our customer relationship management system in our Direct business and redesigned our Internet website. During implementation, we encountered issues with these system changes that affected our ability to take and process customer orders and to deliver products to our customers in an efficient manner. These implementation issues had an adverse impact on our business, including the loss of sales. At the end of 2010, we successfully resolved most customer related issues arising from these system changes.
 
Financial Services Revenue -  We did not retrospectively adopt the accounting provisions relating to the guidance on consolidations and the accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity; therefore, the components of the Financial Services revenue are not comparable to the 2009 and 2008 amounts as a result of the consolidation of the Trust. Beginning in 2010, 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.  In 2010, the securitization income component was no longer recorded and separately reported; rather the remaining components will now reflect the financial performance of the entire managed portfolio including the Trust.  The results of operations of our Financial Services business now look similar to our historical managed presentation for financial performance of the total managed portfolio of credit card loans, excluding income derived from the changes in the valuation of our interest-only strip, cash reserve accounts, and cash accounts associated with the securitized loans.

39

 

 
The components of Financial Services revenue on a GAAP basis were as follows for the years ended:
 
 
2010
 
2009
 
2008
 
(In Thousands)
 
 
 
 
 
 
Interest and fee income
$
271,651
 
 
$
51,505
 
 
$
38,722
 
Interest expense
(86,494
)
 
(24,242
)
 
(13,417
)
Provision for loan losses
(66,814
)
 
(1,107
)
 
(1,260
)
    Net interest income, net of provision for loan losses
118,343
 
 
26,156
 
 
24,045
 
Non-interest income:
 
 
 
 
 
    Securitization income
 
 
197,335
 
 
185,820
 
    Interchange income
231,347
 
 
31,701
 
 
28,072
 
    Other non-interest income
12,247
 
 
35,888
 
 
39,303
 
       Total non-interest income
243,594
 
 
264,924
 
 
253,195
 
Less: Customer rewards costs
(134,262
)
 
(119,666
)
 
(118,269
)
Financial Services revenue
$
227,675
 
 
$
171,414
 
 
$
158,971
 
Managed Presentation - As a result of the adoption of the accounting provisions relating to the guidance on consolidations and the accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity, a managed presentation, which is comparable between 2010, 2009, and 2008, has been presented to evaluate the changes in the Financial Services revenue. The managed presentation shown below presents the financial performance of the total managed portfolio of credit card loans for the periods presented.  The managed presentation for 2010 is the same as our GAAP presentation; however, the 2009 and 2008 presentation is non-GAAP. We conformed the following line items for 2009 and 2008 to the 2010 presentation:  overlimit and late fee income  to "interest and fee income" from "other non-interest income," interest and fees that were charged off from "provision for loan losses" to "interest and fee income," and customer rewards costs as its own line from "interchange income."
 
For 2009 and 2008, interest and fee income, interchange income, other non-interest income, and customer rewards costs on both the owned and securitized portfolio are reflected in the respective line items.  Interest paid to outside investors on the securitized credit card loans is included in interest expense.  Credit losses on the entire managed portfolio are reflected in the provision for loan losses.  This managed presentation includes income or expense derived from the valuation of our interest-only strip associated with our securitized loans that would generally be reversed or not reported in a managed presentation in the "other" component.
 

40

 

The following table sets forth the revenue components of our Financial Services segment managed portfolio for the years ended:
 
2010
 
2009
 
2008
 
(Dollars in Thousands)
 
 
 
 
 
 
Interest and fee income
$
271,651
 
 
$
270,724
 
 
$
221,690
 
Interchange income
231,347
 
 
206,462
 
 
194,096
 
Other non-interest income
12,247
 
 
11,712
 
 
10,816
 
Interest expense
(86,494
)
 
(96,253
)
 
(89,862
)
Provision for loan losses
(66,814
)
 
(102,438
)
 
(53,769
)
Customer rewards costs
(134,262
)
 
(119,666
)
 
(118,269
)
Other
 
 
873
 
 
(5,731
)
Managed Financial Services revenue
$
227,675
 
 
$
171,414
 
 
$
158,971
 
Managed Financial Services Revenue as a Percentage of Average Managed Credit Card Loans:
Interest and fee income
11.0
 %
 
11.7
 %
 
10.6
 %
Interchange income
9.4
 
 
8.9
 
 
9.3
 
Other non-interest income
0.5
 
 
0.5
 
 
0.5
 
Interest expense
(3.5
)
 
(4.2
)
 
(4.3
)
Provision for loan losses
(2.7
)
 
(4.4
)
 
(2.6
)
Customer rewards costs
(5.5
)
 
(5.2
)
 
(5.7
)
Other
 
 
0.1
 
 
(0.2
)
Managed Financial Services revenue
9.2
 %
 
7.4
 %
 
7.6
 %
Financial Services revenue increased $56 million, or 32.8% in 2010 compared to 2009, primarily due to decreases in the provision for loan losses and interest expense and increases in interchange income. During 2009, WFB executed a change of terms to lessen the effects of the provisions of the CARD Act. The increase in interest and fee income of $1 million was due to an increase in managed credit card loans, the change of terms, and reduction in charge-offs of cardholder fees and interest, partially offset by a decrease in fees and interest charged as a result of the CARD Act. The increase in interchange income of $25 million was due to an increase in credit card purchases and to an upgrade of customer accounts to our Cabela's CLUB Visa Signature program based on customers' card spend, which allows us to earn a higher interchange rate.  Interest expense decreased $10 million due to decreases in interest rates and changes in the fair value of our interest rate swap. The provision for loan losses decreased $36 million due to favorable charge-off trends and improved outlooks in the quality of our credit card portfolio as of the end of 2010 compared to 2009, evidenced by lower delinquencies and delinquency roll-rates comparing the respective periods.  Customer rewards costs increased $15 million due to the increase in purchases.  The "other" component of Financial Services revenue was eliminated effective January 3, 2010, upon adoption of the accounting provisions relating to the guidance on consolidations and the accounting for transfers of financial assets due to the derecognition of the interest-only strip, cash reserve accounts, and cash accounts.
 
Our Cabela’s CLUB Visa credit card loyalty program allows customers to earn points whenever and wherever they use their credit card, and then redeem earned points for products and services at our retail stores or through our Direct business. The percentage of our merchandise sold to customers using the Cabela’s CLUB card was 30.0% for 2010 compared to 27.9% for 2009. The dollar amounts related to points are accrued as earned by the cardholder and recorded as a reduction in Financial Services revenue. The dollar amount of unredeemed credit card points and loyalty points was $92 million at the end of 2010 compared to $81 million at the end of 2009.
 

41

 

Key statistics reflecting the performance of our Financial Services business are shown in the following chart for the years ended:
 
 
 
 
 
Increase
 
 
 
2010
 
2009
 
(Decrease)
 
% Change
 
(Dollars in Thousands Except Average Balance per Account)
 
 
 
 
 
 
 
 
Average balance of managed credit card loans
$
2,470,493
 
 
$
2,311,820
 
 
$
158,673
 
 
6.9
 %
Average number of active credit card accounts
1,317,890
 
 
1,244,621
 
 
73,269
 
 
5.9
 
 
 
 
 
 
 
 
 
Average balance per active credit card account
$
1,875
 
 
$
1,857
 
 
$
18
 
 
1.0
 
 
 
 
 
 
 
 
 
Net charge-offs on managed loans, including
 
 
 
 
 
 
 
accrued interest and fees
$
104,416
 
 
$
117,072
 
 
$
(12,656
)
 
(10.8
)
Net charge-offs, including accrued interest and fees,
 
 
 
 
 
 
 
as a percentage of average managed credit card loans
4.23
%
 
5.06
%
 
(0.83
)%
 
 
The average balance of managed credit card loans, including accrued interest and fees, increased to $2.5 billion, or 6.9%, for 2010 compared to 2009, due to the increase in the number of active accounts and the average balance per account.  The average number of active accounts increased to 1.3 million, or 5.9%, compared to the average number of active accounts for 2009, due to our marketing efforts.  Net charge-offs as a percentage of average managed credit card loans decreased to 4.23% for 2010, down 83 basis points compared to 2009, principally due to improvements in delinquencies and delinquency roll-rates. See “Bank Asset Quality” 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 sources include gains or losses on sales of land held for sale, amounts received from our outfitter services, real estate rental income, fees earned through our travel business, and other complementary business services.
 
 
 
 
 
 
Increase
 
 
 
2010
 
2009
 
(Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Other revenue
$
23,081
 
 
$
13,191
 
 
$
9,890
 
 
75.0
%
Real estate related revenue included above
11,487
 
 
2,133
 
 
9,354
 
 
438.5
 
Other revenue increased $10 million for 2010 compared to 2009. Real estate revenue totaled $11 million in 2010 compared to $2 million in 2009. Pre-tax gains on the sale of real estate totaled $2 million in both 2010 and 2009. These pre-tax gains on the sale of real estate were reflected in operating income for the respective years.
 
 

42

 

Gross Profit
 
Gross profit, or gross margin, is defined as total revenue less the costs of related merchandise sold and shipping costs. Comparisons of gross profit and gross profit as a percentage of revenue for our operations, year over year, and to the retail industry in general, are impacted by:
•    
shifts in customer preferences;
•    
retail store, distribution, and warehousing costs which we exclude from our cost of revenue;
•    
royalty fees we include in merchandise sales for which there are no costs of revenue;
•    
Financial Services revenue we include in revenue for which there are no costs of revenue;
•    
real estate land sales we include in revenue for which costs vary by transaction;
•    
customer service related revenue we include in revenue for which there are no costs of revenue; and
•    
customer shipping charges in revenue, which are slightly higher than shipping costs in costs of revenue, because of our practice of pricing shipping charges to match costs.
Accordingly, comparisons of gross margins on merchandising revenue presented below are the best metrics for analysis of our gross profit for the years ended:        
 
 
 
 
 
Increase
 
 
 
2010
 
2009
 
(Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Merchandising revenue
$
2,412,486
 
 
$
2,447,635
 
 
$
(35,149
)
 
(1.4
)%
Merchandise gross profit
846,321
 
 
846,499
 
 
(178
)
 
 
Merchandise gross margin as a percentage of
 
 
 
 
 
 
 
merchandising revenue
35.1
%
 
34.6
%
 
0.5
 
 
 
Merchandise Gross Margin – Our merchandise gross profit was flat in 2010 (52 weeks) compared to 2009 (53 weeks). On a comparable 52-week basis, merchandise gross profit improved in 2010 primarily due to better inventory management, which reduced the need to mark down product, continued improvements in vendor collaboration, and advancements in price optimization. These improvements, which started in the second quarter of 2010, were partially mitigated due to management's efforts to reduce aged and unproductive inventory in the first half of 2010.
 
Our merchandise gross margin as a percentage of revenue of our merchandising business increased to 35.1% in 2010 from 34.6% in 2009.   The increase in the merchandise gross margin for 2010 compared to 2009 is primarily due to ongoing improvements during 2010 in inventory management, vendor collaboration, and advancements in price optimization. The increase is also attributable to a shift in 2009 in customer preference toward lower margin ammunition, firearms, and related products, and the impact from higher 2009 merchandising revenue compared to 2010.     
 
 
Selling, Distribution, and Administrative Expenses
 
 
 
 
 
Increase
 
 
 
2010
 
2009
 
(Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Selling, distribution, and administrative expenses
$
895,405
 
 
$
870,147
 
 
$
25,258
 
 
2.9
%
SD&A expenses as a percentage of total revenue
33.6
%
 
33.1
%
 
0.5
%
 
 
Retail store pre-opening costs
$
4,760
 
 
$
3,694
 
 
$
1,066
 
 
28.9
 
Selling, distribution, and administrative expenses include all operating expenses related to our retail stores, Internet website, distribution centers, product procurement, and overhead costs, including: advertising and marketing, catalog costs, employee compensation and benefits, occupancy costs, information systems processing, and depreciation and amortization.
 

43

 

Selling, distribution, and administrative expenses increased $25 million, or 2.9%, in 2010 (52 weeks) compared to 2009 (53 weeks). Expressed as a percentage of total revenue, selling, distribution, and administrative expenses increased 50 basis points to 33.6% in 2010 compared to 33.1% in 2009. The most significant factors contributing to the changes in selling, distribution, and administrative expenses in 2010 compared to 2009 included:
•    
an increase of $11 million in contract labor due to costs relating to gift instruments sold through third parties, collection agency costs of our Financial Services business, and implementation issues relating to the information technology system changes in support of our customer relationship management system;
•    
an increase of $11 million in employee compensation and benefits partially due to the opening of our Grand Junction, Colorado, retail store and increases in staff of our merchandising and inventory logistics teams;
•    
a decrease of $9 million in catalog and Internet marketing costs;
•    
an increase of $8 million in operating expenses relating to matters arising out of the FDIC compliance examination;
•    
a decrease of $3 million in property taxes due to management's success in reducing property valuations;
•    
an increase of $4 million in bad debt expense; and
•    
increases in advertising and promotions of $1 million and in equipment and software expenses of $1 million.
Significant selling, distribution, and administrative expense increases and decreases related to specific business segments included the following:
 
Retail Business Segment:
•    
An increase in marketing fees of $21 million received from the Financial Services segment.
•    
A net increase in employee compensation and benefits of $4 million primarily due to the opening of our Grand Junction, Colorado, retail store.
•    
A decrease of $2 million in property taxes due to management's success in reducing property valuations.
•    
A decrease in professional fees of $1 million.
•    
An increase of $1 million in new store pre-opening costs.
Direct Business Segment:
•    
An increase in marketing fees of $17 million received from the Financial Services segment.
•    
A decrease in catalog and Internet related marketing costs of $9 million compared to 2009 primarily due to a managed reduction in catalog page count.
•    
An increase in bad debt expense of $5 million from estimated losses of customer receivables.
•    
An increase in advertising and promotional expense of $1 million to build on our market position and further increase our brand awareness and loyalty.
Financial Services:
•    
An increase of $38 million in the marketing fee paid by the Financial Services segment to the Retail segment ($21 million) and the Direct business segment ($17 million).
•    
An increase of $8 million relating to the matters arising out of the FDIC compliance examination.
•    
An increase in contract labor of $5 million primarily as a result of an increase in collection agency costs and an increase in the number of active credit card accounts and credit card transactions.
•    
An increase of $2 million in employee compensation and benefits.    
•    
Changes in marketing programs and a reduction in new accounts resulting in a decrease of $1 million in advertising and promotional costs.
Corporate Overhead, Distribution Centers, and Other:
•    
An increase of $6 million in employee compensation and benefits.
•    
An increase of $5 million in contract labor due to costs relating to gift instruments sold through third parties and implementation issues relating to the information technology system changes in support of our customer relationship management system.
•    
Increases of $1 million in depreciation and amortization expense and $1 million in costs for professional services.
•    
Decreases of $1 million in equipment and software expenses and $1 million in property taxes.
 
 

44

 

Impairment and Restructur