Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - CABELAS INCexhibit321q22016.htm
EX-31.2 - EXHIBIT 31.2 - CABELAS INCexhibit312q22016.htm
EX-31.1 - EXHIBIT 31.1 - CABELAS INCexhibit311q22016.htm

 

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended July 2, 2016
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
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
 
 
One Cabela Drive, Sidney, Nebraska
 
69160
 
 
(Address of principal executive offices)
 
(Zip Code)
 
(308) 254-5505
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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 x No o

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 x                                                                                                          Accelerated filer o
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

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: 68,465,292 shares as of July 25, 2016

1




CABELA’S INCORPORATED

FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 2, 2016

TABLE OF CONTENTS 

 
 
 
 
 
 
Page
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
Condensed Consolidated Statements of Income
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
Condensed Consolidated Statements of Stockholders’ Equity
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
SIGNATURES
 
 
 
 
 
INDEX TO EXHIBITS
 

2



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

CABELA’S INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except Earnings Per Share)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Revenue:
 
 
 
 
 
 
 
Merchandise sales
$
786,203

 
$
706,068

 
$
1,506,118


$
1,403,722

Financial Services revenue
135,081

 
124,943

 
275,904


247,856

Other revenue
8,613

 
5,265

 
12,537


11,774

Total revenue
929,897

 
836,276

 
1,794,559


1,663,352

Cost of revenue:
 
 
 
 
 
 
 
Merchandise costs (exclusive of depreciation and amortization)
527,409

 
452,994

 
1,015,401

 
919,213

Cost of other revenue
4,138

 

 
4,291

 
220

Total cost of revenue (exclusive of depreciation and amortization)
531,547

 
452,994

 
1,019,692

 
919,433

 
 
 
 
 
 
 
 
Selling, distribution, and administrative expenses
329,682

 
319,892

 
658,871

 
635,996

Impairment and restructuring charges
959

 

 
3,931

 

 
 
 
 
 
 
 
 
Operating income
67,709

 
63,390

 
112,065

 
107,923

 
 
 
 
 
 
 
 
Interest expense, net
(8,285
)
 
(4,588
)
 
(17,516
)
 
(8,362
)
Other non-operating income, net
2,780

 
2,025

 
3,681

 
3,765

 
 
 
 
 
 
 
 
Income before provision for income taxes
62,204

 
60,827

 
98,230

 
103,326

Provision for income taxes
24,445

 
20,770

 
37,582

 
36,495

Net income
$
37,759

 
$
40,057

 
$
60,648

 
$
66,831

 
 
 
 
 
 
 
 
Earnings per basic share
$
0.55

 
$
0.56

 
$
0.89

 
$
0.94

Earnings per diluted share
$
0.55

 
$
0.56

 
$
0.88

 
$
0.93

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
68,388,426

 
71,065,258

 
68,168,772

 
71,168,661

Diluted weighted average shares outstanding
68,909,403

 
71,372,975

 
68,799,980

 
71,705,134


Refer to notes to unaudited condensed consolidated financial statements.




3


CABELA’S INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Net income
$
37,759

 
$
40,057

 
$
60,648

 
$
66,831

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on economic development bonds, net of taxes of $697, $(1,790), $1,267, and $(881)
1,100

 
(2,859
)
 
1,664

 
(1,615
)
Foreign currency translation adjustments
1,782

 
1,788

 
16,462

 
(13,723
)
Total other comprehensive income (loss)
2,882

 
(1,071
)
 
18,126

 
(15,338
)
Comprehensive income
$
40,641

 
$
38,986

 
$
78,774

 
$
51,493


Refer to notes to unaudited condensed consolidated financial statements.






4


CABELA’S INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Par Values)
(Unaudited)
 
July 2,
2016
 
January 2,
2016
 
June 27,
2015
ASSETS
 
 
 
 
 
CURRENT
 
 
 
 
 
Cash and cash equivalents
$
542,067

 
$
315,066

 
$
144,234

Restricted cash of the Trust
40,978

 
40,983

 
34,104

Accounts receivable, net
39,278

 
79,330

 
29,469

Credit card loans (includes restricted credit card loans of the Trust of $5,114,711,$5,066,660, and $4,421,172), net of allowance for loan losses of $83,950,$75,911, and $54,742
5,062,226

 
5,035,267

 
4,392,769

Inventories
888,209

 
819,271

 
900,761

Prepaid expenses and other current assets
122,139

 
117,330

 
106,498

Income taxes receivable and deferred income taxes (at June 27, 2015, only)
60,180

 
77,698

 
144,592

Total current assets
6,755,077

 
6,484,945

 
5,752,427

Property and equipment, net
1,839,451

 
1,811,302

 
1,763,483

Deferred income taxes
28,417

 
28,042

 

Other assets
142,314

 
138,715

 
118,044

Total assets
$
8,765,259

 
$
8,463,004

 
$
7,633,954

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
CURRENT
 
 
 
 
 
Accounts payable, including unpresented checks of $28,667, $23,580, and $20,149
$
253,488

 
$
281,985

 
$
325,548

Gift instruments, credit card rewards, and loyalty rewards programs
353,570

 
365,427

 
326,240

Accrued expenses and other liabilities
165,610

 
224,733

 
191,934

Time deposits
187,324

 
215,306

 
274,633

Current maturities of secured variable funding obligations of the Trust

 
655,000

 
65,000

Current maturities of secured long-term obligations of the Trust, net
1,359,032

 
509,673

 
467,205

Current maturities of long-term debt
68,461

 
223,452

 
223,443

Total current liabilities
2,387,485

 
2,475,576

 
1,874,003

Long-term time deposits
1,009,549

 
664,593

 
552,842

Secured long-term obligations of the Trust, less current maturities, net
2,466,054

 
2,721,259

 
2,636,209

Long-term debt, less current maturities, net
842,728

 
635,898

 
599,502

Deferred income taxes

 

 
10,947

Other long-term liabilities
134,349

 
137,035

 
135,679

 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES


 


 

 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
 
Preferred stock, $0.01 par value; Authorized – 10,000,000 shares; Issued – none

 

 

Common stock, $0.01 par value:
 
 
 
 
 
Class A Voting, Authorized – 245,000,000 shares
 
 


 
 
Issued – 71,595,020, 71,595,020, and 71,598,231 shares
716

 
716

 
716

Outstanding – 68,465,082, 67,818,715, and 70,675,975 shares
 
 
 
 
 
Additional paid-in capital
372,994

 
389,754

 
370,874

Retained earnings
1,712,510

 
1,651,862

 
1,529,363

Accumulated other comprehensive loss
(32,788
)

(50,914
)
 
(27,044
)
Treasury stock, at cost – 3,129,938, 3,776,305, and 922,256 shares
(128,338
)
 
(162,775
)
 
(49,137
)
Total stockholders’ equity
1,925,094

 
1,828,643

 
1,824,772

Total liabilities and stockholders’ equity
$
8,765,259

 
$
8,463,004

 
$
7,633,954

Refer to notes to unaudited condensed consolidated financial statements.

5


CABELA’S INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
60,648

 
$
66,831

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Depreciation and amortization
74,696

 
63,049

Impairment and restructuring charges
3,931

 

Stock-based compensation
12,555

 
10,408

Deferred income taxes
(1,643
)
 
7,514

Provision for loan losses
55,224

 
29,061

Other, net
(8,816
)
 
(1,196
)
Change in operating assets and liabilities, net:
 
 
 
Accounts receivable
39,714

 
32,970

Credit card loans originated from internal operations, net
79,398

 
79,883

Inventories
(63,674
)
 
(143,994
)
Prepaid expenses and other current assets
(1,935
)
 
(14,268
)
Accounts payable and accrued expenses and other liabilities
(75,798
)
 
(21,475
)
Gift instruments, credit card rewards, and loyalty rewards programs
(12,476
)
 
(12,982
)
Other long-term liabilities
(2,118
)
 
10,601

Income taxes receivable
17,517

 
(24,525
)
Net cash provided by operating activities
177,223

 
81,877

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property and equipment additions
(99,284
)
 
(221,046
)
Change in credit card loans originated externally, net
(161,581
)
 
(80,527
)
Change in restricted cash of the Trust, net
5

 
300,708

Other investing changes, net
1,900

 
954

Net cash (used in) provided by investing activities
(258,960
)
 
89

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Change in unpresented checks net of bank balances
5,087

 
(18,641
)
Change in time deposits, net
316,974

 
21,419

Borrowings on secured obligations of the Trust
2,740,000

 
978,750

Repayments on secured obligations of the Trust
(2,800,000
)
 
(1,330,000
)
Borrowings on revolving credit facilities and inventory financing
665,261

 
773,065

Repayments on revolving credit facilities and inventory financing
(401,990
)
 
(438,996
)
Payments on long-term debt
(223,295
)
 
(8,286
)
Tax withholdings on share-based payment awards, net of employee stock option exercises
1,673

 
(2,601
)
Excess tax benefit on share-based payment awards
3,753

 
1,540

Purchase of treasury stock

 
(53,279
)
Debt issuance costs paid
(2,421
)
 

Net cash provided by (used in) financing activities
305,042

 
(77,029
)
 
 
 
 
Effect of exchange rates on cash and cash equivalents
3,696

 
(3,461
)
 
 
 
 
Net change in cash and cash equivalents
227,001

 
1,476

Cash and cash equivalents, at beginning of period
315,066

 
142,758

Cash and cash equivalents, at end of period
$
542,067

 
$
144,234

Refer to notes to unaudited condensed consolidated financial statements.

6


CABELA’S INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in Thousands)
(Unaudited)
 
Common Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of 2015
71,093,216

 
$
711

 
$
365,973

 
$
1,462,532

 
$
(11,706
)
 
$

 
$
1,817,510

Net income

 

 

 
66,831

 

 

 
66,831

Other comprehensive loss

 

 

 

 
(15,338
)
 

 
(15,338
)
Common stock repurchased

 

 

 

 

 
(53,279
)
 
(53,279
)
Stock-based compensation

 

 
10,109

 

 

 

 
10,109

Exercise of employee stock options and tax withholdings on share-based payment awards, net
505,015

 
5

 
(6,748
)
 

 

 
4,142

 
(2,601
)
Excess tax benefit on share-based payment awards

 

 
1,540

 

 

 

 
1,540

Balance at June 27, 2015
71,598,231

 
$
716

 
$
370,874

 
$
1,529,363

 
$
(27,044
)
 
$
(49,137
)
 
$
1,824,772

 
 

 
 

 
 

 
 

 
 
 
 
 
 

Balance, beginning of 2016
71,595,020

 
$
716

 
$
389,754

 
$
1,651,862

 
$
(50,914
)
 
$
(162,775
)
 
$
1,828,643

Net income

 

 

 
60,648

 

 

 
60,648

Other comprehensive income

 

 

 

 
18,126

 

 
18,126

Stock-based compensation

 

 
12,251

 

 

 

 
12,251

Exercise of employee stock options and tax withholdings on share-based payment awards, net

 

 
(32,764
)
 

 

 
34,437

 
1,673

Excess tax benefit on share-based payment awards

 

 
3,753

 

 

 

 
3,753

Balance at July 2, 2016
71,595,020

 
$
716

 
$
372,994

 
$
1,712,510

 
$
(32,788
)
 
$
(128,338
)
 
$
1,925,094

Refer to notes to unaudited condensed consolidated financial statements.
 




7



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)



1.    MANAGEMENT REPRESENTATIONS
 
Principles of Consolidation – The condensed consolidated financial statements included herein are unaudited and have been prepared by management of Cabela’s Incorporated and its wholly-owned subsidiaries (“Cabela’s,” “Company,” “we,” or “our”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company’s condensed consolidated balance sheet as of January 2, 2016, was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly our financial position and results of operations, comprehensive income, and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. All intercompany accounts and transactions have been eliminated in consolidation.

World’s Foremost Bank (“WFB,” “Financial Services segment,” or “Cabela’s CLUB”), a wholly-owned bank subsidiary of Cabela’s, is the primary beneficiary of the Cabela’s Master Credit Card Trust and related entities (collectively referred to as the “Trust”). The Trust was consolidated for all reporting periods of Cabela’s in this report.
Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended January 2, 2016.
Cash and Cash EquivalentsCash and cash equivalents of the Financial Services segment were $455 million, $157 million, and $83 million at July 2, 2016, January 2, 2016, and June 27, 2015, respectively. Due to regulatory restrictions on WFB, the Company cannot use WFB’s cash for non-banking operations.

Segment Reporting – Effective the beginning of fiscal year 2016, the Company realigned its organizational structure and updated its reportable operating segments. The Company now accounts for its operations as two operating segments: Merchandising and Financial Services. For more information on this change in segments see Note 13 “Segment Reporting” of the Notes to Condensed Consolidated Financial Statements.
Reporting Periods – Unless otherwise stated, the fiscal periods referred to in the notes to these condensed consolidated financial statements are the 13 weeks ended July 2, 2016 (“three months ended July 2, 2016”), the 13 weeks ended June 27, 2015 (“three months ended June 27, 2015”), the 26 weeks ended July 2, 2016 (“six months ended July 2, 2016”), the 26 weeks ended June 27, 2015 (“six months ended June 27, 2015”), and the 53 weeks ended January 2, 2016 (“fiscal year ended 2015”). WFB follows a calendar fiscal period and, accordingly, the respective three and six month periods ended on June 30, 2016 and 2015, and the fiscal year ended on December 31, 2015.


8



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


Adoption of New Accounting Principles – In the three months ended April 2, 2016, we adopted the guidance of Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The following table summarizes the effects of this new guidance on amounts previously reported in our condensed consolidated balance sheets at the periods ended:
 
January 2, 2016
 
June 27, 2015
 
As Reported
 
Adjustment
 
As Adjusted
 
As Reported
 
Adjustment
 
As Adjusted
 
 
 
 
 
 
 
 
 
 
 
 
Other assets (including economic development bonds)
$
148,214

 
$
(9,499
)
 
$
138,715

 
$
125,745

 
$
(7,701
)
 
$
118,044

Total assets
8,472,503

 
(9,499
)
 
8,463,004

 
7,641,655

 
(7,701
)
 
7,633,954

Current maturities of secured long-term obligations of the Trust
510,000

 
(327
)
 
509,673

 
467,500

 
(295
)
 
467,205

Total current liabilities
2,475,903

 
(327
)
 
2,475,576

 
1,874,298

 
(295
)
 
1,874,003

Secured long-term obligations of the Trust, less current maturities
2,728,500

 
(7,241
)
 
2,721,259

 
2,643,500

 
(7,291
)
 
2,636,209

Long-term debt, less current maturities
637,829

 
(1,931
)
 
635,898

 
599,617

 
(115
)
 
599,502

Total liabilities and stockholders’ equity
8,472,503

 
(9,499
)
 
8,463,004

 
7,641,655

 
(7,701
)
 
7,633,954

 
 
 
 
 
 
 
 
 
 
 
 
In addition, effective in fiscal year ended 2015, we adopted on a prospective basis the provisions of ASU 2015-17 “Balance Sheet Classification of Deferred Taxes.” This standard simplified the presentation of deferred income taxes and required that deferred tax liabilities and assets be classified as non current in the Company’s consolidated balance sheets. Prior periods were not retrospectively adjusted; therefore, deferred income taxes of $12 million were presented as current assets in our condensed consolidated balance sheets at June 27, 2015.


9



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


2.    CABELA’S MASTER CREDIT CARD TRUST

The Financial Services segment utilizes the Trust for the purpose of routinely securitizing credit card loans and issuing beneficial interest to investors. The Trust issues variable funding facilities and long-term notes (collectively referred to herein as “secured obligations of the Trust”), each of which has an undivided interest in the assets of the Trust. The Financial Services segment owns notes issued by the Trust from some of the securitizations, which in some cases may be subordinated to other notes issued.
The following table presents the components of the consolidated assets and liabilities of the Trust at the periods ended:
 
July 2,
2016
 
January 2,
2016
 
June 27,
2015
Consolidated assets:
 
 
 
 
 
Restricted credit card loans, net of allowance of $83,670, $75,450, and $54,580
$
5,031,040

 
$
4,991,210

 
$
4,366,592

Restricted cash
40,978

 
40,983

 
34,104

Total
$
5,072,018

 
$
5,032,193

 
$
4,400,696

 
 
 
 
 
 

Consolidated liabilities:
 
 
 
 
 

Secured variable funding obligations
$

 
$
655,000

 
$
65,000

Secured obligations, net of unamortized debt issuance costs of $8,414, $7,568, and $7,586
3,825,086

 
3,230,932

 
3,103,414

Interest due to third party investors
2,703

 
2,682

 
2,171

Total
$
3,827,789

 
$
3,888,614

 
$
3,170,585


3.    CREDIT CARD LOANS AND ALLOWANCE FOR LOAN LOSSES
    
The following table reflects the composition of the credit card loans at the periods ended:
 
July 2,
2016
 
January 2,
2016
 
June 27,
2015
 
 
 
 
 
 
Restricted credit card loans of the Trust (restricted for repayment of secured obligations of the Trust)
$
5,114,711

 
$
5,066,660

 
$
4,421,172

Unrestricted credit card loans
26,385

 
38,278

 
21,683

Total credit card loans
5,141,096

 
5,104,938

 
4,442,855

Allowance for loan losses
(83,950
)
 
(75,911
)
 
(54,742
)
Deferred credit card origination costs
5,080

 
6,240

 
4,656

Credit card loans, net
$
5,062,226

 
$
5,035,267

 
$
4,392,769


10



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


Allowance for Loan Losses:
The following table reflects the activity in the allowance for loan losses by credit card segment for the periods presented:
 
Three Months Ended
 
July 2, 2016
 
June 27, 2015
 
Credit Card Loans
 
Restructured Credit Card Loans
 
Total Credit Card Loans
 
Credit Card Loans
 
Restructured Credit Card Loans
 
Total Credit Card Loans
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
66,431

 
$
8,322

 
$
74,753

 
$
48,272

 
$
7,670

 
$
55,942

Provision for loan losses
30,692

 
1,712

 
32,404

 
13,835

 
1,996

 
15,831

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(27,132
)
 
(2,446
)
 
(29,578
)
 
(18,459
)
 
(3,666
)
 
(22,125
)
Recoveries
5,541

 
830

 
6,371

 
3,924

 
1,170

 
5,094

Net charge-offs
(21,591
)
 
(1,616
)
 
(23,207
)
 
(14,535
)
 
(2,496
)
 
(17,031
)
Balance, end of period
$
75,532

 
$
8,418

 
$
83,950

 
$
47,572

 
$
7,170

 
$
54,742

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
July 2, 2016
 
June 27, 2015
 
Credit Card Loans
 
Restructured Credit Card Loans
 
Total Credit Card Loans
 
Credit Card Loans
 
Restructured Credit Card Loans
 
Total Credit Card Loans
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
67,654

 
$
8,257

 
$
75,911

 
$
48,832

 
$
7,740

 
$
56,572

Provision for loan losses
51,518

 
3,706

 
55,224

 
24,603

 
4,458

 
29,061

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(54,101
)
 
(5,155
)
 
(59,256
)
 
(35,668
)
 
(7,447
)
 
(43,115
)
Recoveries
10,461

 
1,610

 
12,071

 
9,805

 
2,419

 
12,224

Net charge-offs
(43,640
)
 
(3,545
)
 
(47,185
)
 
(25,863
)
 
(5,028
)
 
(30,891
)
Balance, end of period
$
75,532

 
$
8,418

 
$
83,950

 
$
47,572

 
$
7,170

 
$
54,742


11



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


Credit Quality Indicators, Delinquent, and Non-Accrual Loans:

The following table provides information on current, non-accrual, past due, and restructured credit card loans by class using the respective quarter Fair Isaac Corporation (“FICO”) score at the periods ended:
 
FICO Score of Credit Card Loans Segment
 
Restructured Credit Card Loans Segment (1)
 
 
July 2, 2016:
691 and Below
 
692 - 758
 
759 and Above
 
 
Total
Credit card loan status:
 
Current
$
823,146

 
$
1,718,604

 
$
2,455,453

 
$
30,669

 
$
5,027,872

1 to 29 days past due
34,035

 
19,596

 
16,515

 
2,913

 
73,059

30 to 59 days past due
12,284

 
1,828

 
442

 
1,664

 
16,218

60 or more days past due
21,171

 
368

 
95

 
2,313

 
23,947

Total past due
67,490

 
21,792

 
17,052

 
6,890

 
113,224

Total credit card loans
$
890,636

 
$
1,740,396

 
$
2,472,505

 
$
37,559

 
$
5,141,096

 
 
 
 
 
 
 
 
 
 
90 days or more past due and still accruing
$
10,844

 
$
60

 
$
14

 
$
1,018

 
$
11,936

Non-accrual

 

 

 
7,179

 
7,179

January 2, 2016:
 
 
 
 
 
 
 
 
 
Credit card loan status:
 
 
 
 
 
 
 
 
 
Current
$
782,885

 
$
1,676,541

 
$
2,516,420

 
$
28,322

 
$
5,004,168

1 to 29 days past due
28,472

 
16,245

 
14,229

 
2,820

 
61,766

30 to 59 days past due
10,931

 
1,713

 
506

 
1,716

 
14,866

60 or more days past due
20,307

 
536

 
111

 
3,184

 
24,138

Total past due
59,710

 
18,494

 
14,846

 
7,720

 
100,770

Total credit card loans
$
842,595

 
$
1,695,035

 
$
2,531,266

 
$
36,042

 
$
5,104,938

 
 
 
 
 
 
 
 
 
 
90 days or more past due and still accruing
$
10,292

 
$
111

 
$
34

 
$
1,217

 
$
11,654

Non-accrual

 

 

 
7,059

 
7,059

 
 
 
 
 
 
 
 
 
 
June 27, 2015:
 
 
 
 
 
 
 
 
 
Credit card loan status:
 
 
 
 
 
 
 
 
 
Current
$
635,457

 
$
1,485,797

 
$
2,201,591

 
$
28,418

 
$
4,351,263

1 to 29 days past due
26,434

 
18,453

 
15,484

 
3,253

 
63,624

30 to 59 days past due
8,827

 
1,423

 
409

 
1,211

 
11,870

60 or more days past due
13,654

 
377

 
32

 
2,035

 
16,098

Total past due
48,915

 
20,253

 
15,925

 
6,499

 
91,592

Total credit card loans
$
684,372

 
$
1,506,050

 
$
2,217,516

 
$
34,917

 
$
4,442,855

 
 
 
 
 
 
 
 
 
 
90 days or more past due and still accruing
$
7,188

 
$
62

 
$
3

 
$
862

 
$
8,115

Non-accrual

 

 

 
5,618

 
5,618

 
 
 
 
 
 
 
 
 
 
(1)
Included in the allowance for loan losses were specific allowances for loan losses of $8 million at July 2, 2016, and January 2, 2016, and $7 million at June 27, 2015.

                                        

12



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


4.    BORROWINGS OF FINANCIAL SERVICES SEGMENT            
     
The Trust issues fixed and floating (variable) rate term securitizations, which are considered secured obligations backed by restricted credit card loans. A summary of the secured fixed and variable rate obligations of the Trust by series, the expected maturity dates, and the respective weighted average interest rates are presented in the following tables at the periods ended:
July 2, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
Series
 
Expected
Maturity Date
 
Fixed Rate Obligations
 
Interest Rate
 
Variable Rate Obligations
 
Interest Rate
 
Total Obligations
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
Series 2011-IV
 
October 2016
 
$
165,000

 
1.90
%
 
$
90,000

 
0.99
%
 
$
255,000

 
1.58
%
Series 2012-I
 
February 2017
 
275,000

 
1.63

 
150,000

 
0.97

 
425,000

 
1.40

Series 2012-II
 
June 2017
 
300,000

 
1.45

 
125,000

 
0.92

 
425,000

 
1.29

Series 2013-I
 
February 2023
 
327,250

 
2.71

 

 

 
327,250

 
2.71

Series 2013-II
 
August 2018
 
100,000

 
2.17

 
197,500

 
1.09

 
297,500

 
1.45

Series 2014-I
 
March 2017
 

 

 
255,000

 
0.79

 
255,000

 
0.79

Series 2014-II
 
July 2019
 

 

 
340,000

 
0.89

 
340,000

 
0.89

Series 2015-I
 
March 2020
 
218,750

 
2.26

 
100,000

 
0.98

 
318,750

 
1.86

Series 2015-II
 
July 2020
 
240,000

 
2.25

 
100,000

 
1.11

 
340,000

 
1.92

Series 2016-I
 
June 2019
 
570,000

 
1.78

 
280,000

 
1.35

 
850,000

 
1.64

 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Secured obligations of the Trust
 
2,196,000

 
 

 
1,637,500

 
 

 
3,833,500

 
 

Less unamortized debt issuance costs
 
(5,137
)
 
 
 
(3,277
)
 
 
 
(8,414
)
 
 
Secured obligations of the Trust, net
 
2,190,863

 
 
 
1,634,223

 
 
 
3,825,086

 
 
Less current maturities of secured long-term obligations of the Trust, net
 
(739,525
)
 
 
 
(619,507
)
 
 
 
(1,359,032
)
 
 
Secured long-term obligations of the Trust, less current maturities, net
 
$
1,451,338





$
1,014,716





$
2,466,054

 
 




13



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


January 2, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
Series
 
Expected
Maturity Date
 
Fixed Rate Obligations
 
Interest Rate
 
Variable Rate Obligations
 
Interest Rate
 
Total Obligations
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
Series 2011-II
 
June 2016
 
$
155,000

 
2.39
%
 
$
100,000

 
0.93
%
 
$
255,000

 
1.82
%
Series 2011-IV
 
October 2016
 
165,000

 
1.90

 
90,000

 
0.88

 
255,000

 
1.54

Series 2012-I
 
February 2017
 
275,000

 
1.63

 
150,000

 
0.86

 
425,000

 
1.36

Series 2012-II
 
June 2017
 
300,000

 
1.45

 
125,000

 
0.81

 
425,000

 
1.26

Series 2013-I
 
February 2023
 
327,250

 
2.71

 

 

 
327,250

 
2.71

Series 2013-II
 
August 2018
 
100,000

 
2.17

 
197,500

 
0.98

 
297,500

 
1.38

Series 2014-I
 
March 2017
 

 

 
255,000

 
0.68

 
255,000

 
0.68

Series 2014-II
 
July 2019
 

 

 
340,000

 
0.78

 
340,000

 
0.78

Series 2015-I
 
March 2020
 
218,750

 
2.26

 
100,000

 
0.87

 
318,750

 
1.82

Series 2015-II
 
July 2020
 
240,000

 
2.25

 
100,000

 
1.00

 
340,000

 
1.88

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured obligations of the Trust
 
1,781,000

 
 
 
1,457,500

 
 
 
3,238,500

 
 
Less unamortized debt issuance costs
 
(4,317
)
 
 
 
(3,251
)
 
 
 
(7,568
)
 
 
Secured obligations of the Trust, net
 
1,776,683

 
 

 
1,454,249

 
 

 
3,230,932

 
 

Less current maturities of secured long-term obligations of the Trust, net
 
(319,793
)
 
 
 
(189,880
)
 
 
 
(509,673
)
 
 
Secured long-term obligations of the Trust, less current maturities, net
 
$
1,456,890





$
1,264,369





$
2,721,259

 
 
June 27, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
Series
 
Expected
Maturity Date
 
Fixed Rate Obligations
 
Interest Rate
 
Variable Rate Obligations
 
Interest Rate
 
Total Obligations
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
Series 2010-II
 
September 2015
 
$
127,500

 
2.29
%
 
$
85,000

 
0.89
%
 
$
212,500

 
1.73
%
Series 2011-II
 
June 2016
 
155,000

 
2.39

 
100,000

 
0.79

 
255,000

 
1.76

Series 2011-IV
 
October 2016
 
165,000

 
1.90

 
90,000

 
0.74

 
255,000

 
1.49

Series 2012-I
 
February 2017
 
275,000

 
1.63

 
150,000

 
0.72

 
425,000

 
1.31

Series 2012-II
 
June 2017
 
300,000

 
1.45

 
125,000

 
0.67

 
425,000

 
1.22

Series 2013-I
 
February 2023
 
327,250

 
2.71

 

 

 
327,250

 
2.71

Series 2013-II
 
August 2018
 
100,000

 
2.17

 
197,500

 
0.84

 
297,500

 
1.28

Series 2014-I
 
March 2017
 

 

 
255,000

 
0.54

 
255,000

 
0.54

Series 2014-II
 
July 2019
 

 

 
340,000

 
0.64

 
340,000

 
0.64

Series 2015-I
 
March 2020
 
218,750

 
2.26

 
100,000

 
0.73

 
318,750

 
1.78

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured obligations of the Trust
 
1,668,500

 
 
 
1,442,500

 
 
 
3,111,000

 
 
Less unamortized debt issuance costs
 
(4,018
)
 
 
 
(3,568
)
 
 
 
(7,586
)
 
 
Secured obligations of the Trust, net
 
1,664,482

 
 

 
1,438,932

 
 

 
3,103,414

 
 

Less current maturities of secured long-term obligations of the Trust, net
 
(282,321
)
 
 
 
(184,884
)
 
 
 
(467,205
)
 
 
Secured long-term obligations of the Trust, less current maturities, net
 
$
1,382,161

 
 
 
$
1,254,048

 
 
 
$
2,636,209

 
 


14



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


The Trust sold asset-backed notes of $1.0 billion (“Series 2016-I”) on June 29, 2016. The Series 2016-I securitization transaction included the issuance of $570 million Class A-1 notes, which accrue interest at a fixed rate of 1.78% per year, $280 million of Class A-2 notes, which accrue interest at a floating rate equal to the one-month London Interbank Offered Rate ("LIBOR") plus 0.85% per year, and three subordinated classes of notes in the aggregate principal amount of $150 million.
The Financial Services segment retained each of the subordinated classes of notes which were eliminated in the preparation of our condensed consolidated financial statements. Each class of notes issued in the Series 2016-I securitization transaction have an expected life of approximately three years and a contractual maturity of approximately six years. The securitization transaction was and will continue to be used to fund the growth in restricted credit card loans, maturities of time deposits, and future obligations of the Trust. In addition, the Series 2011-II ($255 million) notes matured and were repaid in full using restricted cash of the Trust on June 15, 2016.
The Trust also issues variable funding facilities which are considered secured obligations backed by restricted credit card loans. At July 2, 2016, the Trust had three variable funding facilities with $1.3 billion in total capacity and no amounts outstanding. On March 24, 2016, the Trust increased one of its $300 million variable funding facilities to $500 million and extended the maturity date from March 2016 to March 2019. Maturities for the variable funding facilities are now scheduled for March 2017 ($500 million), March 2018 ($300 million), and March 2019 ($500 million). Each of these variable funding facilities includes an option to renew subject to certain terms and conditions. Variable rate note interest is priced at a benchmark rate, LIBOR, or commercial paper rate, plus a spread, which ranges from 0.50% to 0.85%. The variable rate notes provide for a fee ranging from 0.25% to 0.50% on the unused portion of the facilities. During the six months ended July 2, 2016, and June 27, 2015, the daily average balance outstanding on these notes was $344 million and $94 million, with a weighted average interest rate of 1.23% and 0.78%, respectively.
The Financial Services segment has unsecured federal funds purchase agreements with two financial institutions. The maximum amount that can be borrowed is $100 million. There were no amounts outstanding at July 2, 2016, January 2, 2016, or June 27, 2015.

5.     LONG-TERM DEBT AND CAPITAL LEASES
  
Long-term debt, including revolving credit facilities and capital leases, consisted of the following at the periods ended:
 
July 2,
2016
 
January 2,
2016
 
June 27,
2015
 
 
 
 
 
 
Unsecured $775 million revolving credit facility
$
275,000

 
$

 
$
511,632

Unsecured senior notes due 2017 with interest at 6.08%
60,000

 
60,000

 
60,000

Unsecured senior notes due 2016-2018 with interest at 7.20%
16,286

 
24,428

 
24,428

Unsecured senior notes due 2020, 2022, and 2025; with interest rates ranging from 3.23% to 4.11%
550,000

 
550,000

 

Capital lease obligations contractually payable through 2036
11,700

 
11,853

 
12,000

Unsecured notes due 2016 with interest at 5.99%

 
215,000

 
215,000

Total debt
912,986

 
861,281

 
823,060

Less current portion of debt
(68,461
)
 
(223,452
)
 
(223,443
)
Less unamortized debt issuance costs
(1,797
)
 
(1,931
)
 
(115
)
Long-term debt, less current maturities, net
$
842,728

 
$
635,898

 
$
599,502

 
The Company’s credit agreement provides for an unsecured $775 million revolving credit facility and permits the issuance of letters of credit up to $75 million and swing line loans up to $30 million. The credit facility may be increased to $800 million subject to certain terms and conditions. The term of the credit facility expires on June 18, 2019.

15



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


During the six months ended July 2, 2016, and June 27, 2015, the daily average principal balance outstanding on the line of credit was $250 million and $369 million, respectively, and the weighted average interest rate was 1.81% and 1.33%, respectively. Letters of credit and standby letters of credit totaling $34 million and $30 million were outstanding at July 2, 2016, and June 27, 2015, respectively. The daily average outstanding amount of total letters of credit during the six months ended July 2, 2016, and June 27, 2015, was $13 million and $20 million, respectively.
On February 27, 2016, we repaid our unsecured notes for $215 million from the proceeds of the private placement sale of unsecured senior notes in August 2015 for $550 million.
The Company also has an unsecured $20 million Canadian (“CAD”) revolving credit facility for its operations in Canada. Borrowings are payable on demand with interest payable monthly. This credit facility permits the issuance of letters of credit up to $10 million CAD in the aggregate, which reduces the overall available credit limit. There were no amounts outstanding at July 2, 2016, January 2, 2016, or June 27, 2015.
At July 2, 2016, the Company was in compliance with the financial covenant requirements of its $775 million credit agreement with a fixed charge coverage ratio of 7.77 to 1 (minimum requirement is 2.00 to 1), a leverage ratio of 1.82 to 1 (requirement is no more than 3.00 to 1), and a consolidated net worth that was $616 million in excess of the minimum, as defined in the agreement. At July 2, 2016, the Company was in compliance with all financial covenants under its credit agreements and unsecured notes. We anticipate that we will continue to be in compliance with all financial covenants under our credit agreements and unsecured senior notes through at least the next 12 months.


6.     IMPAIRMENT AND RESTRUCTURING CHARGES

Impairment and restructuring charges consisted of the following for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
July 2, 2016
 
 
 
 
Impairment losses relating to:
 
 
 
Property, equipment, and other assets
$
454

 
$
454

Other property

 
141

 
454

 
595

Restructuring charges for severance and related benefits
505

 
3,336

Total
$
959

 
$
3,931

Impairment – We evaluate the recoverability of economic development bonds, property (including existing store locations and future retail store sites), equipment, goodwill, other property, and other intangibles whenever indicators of impairment exist. In the three months ended July 2, 2016, we recognized an impairment loss of $0.5 million on a property based on a sales contract. The value of this property adjusted for selling costs was $0.3 million and its carrying value was $0.8 million. In addition, in the six months ended July 2, 2016, we recognized an impairment loss of $0.1 million on a parcel of unimproved land based on a sales contract. The value of this property adjusted for selling costs was $1.3 million and its carrying value was $1.4 million. Both of these impairment losses were recognized in the Merchandising segment. We did not recognize any impairment during the six months ended June 27, 2015.

Local economic trends, government regulations, and other restrictions where we own properties may impact management projections that could change undiscounted cash flows in future periods which could trigger possible future write downs.

Restructuring Charges – In the three and six months ended July 2, 2016, we incurred charges totaling $1 million and $3 million for severance and related benefits primarily attributable to our corporate restructuring and reduction in the number of personnel. These charges were recognized in the Merchandising segment.     

16



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


The activity relating to the liability for these severance benefits, which was included in accrued expenses and other liabilities in our condensed consolidated balance sheets, is summarized in the following table for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
July 2, 2016
 
 
 
 
Balance, beginning of period
$
3,731

 
$
2,799

Charges for severance and related benefits
505

 
3,336

Payments
(1,710
)
 
(3,609
)
Balance, end of period
$
2,526

 
$
2,526



7.     INCOME TAXES
 
The effective income tax rate was 39.3% and 38.3% for the three and six months ended July 2, 2016, compared to 34.1% and 35.3% for the respective three and six months ended June 27, 2015.

At July 2, 2016, unrecognized tax benefits totaling $69 million were included in other long-term liabilities in our condensed consolidated balance sheets compared to $73 million at January 2, 2016. At June 27, 2015, unrecognized tax benefits totaling $46 million were included in current liabilities (accrued expenses and other liabilities) and $64 million in other long-term liabilities in our condensed consolidated balance sheets. The changes compared to the balances at June 27, 2015, were due primarily to our assessments of uncertain tax positions related to prior period tax positions and settlement of our 2007 and 2008 Internal Revenue Service examinations. Since the Company is routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. However, we do not expect the change, if any, to have a material effect on the Company’s consolidated financial condition or results of operations within the next 12 months.

8.     COMMITMENTS AND CONTINGENCIES

The Company leases various buildings, computer and other equipment, and storage space under operating leases which expire on various dates through January 2041. Rent expense on these leases, as well as other month to month rentals, was $5 million and $11 million in the three and six months ended July 2, 2016, compared to $6 million and $12 million in the three and six months ended June 27, 2015.    
The following is a schedule of future minimum rental payments under operating leases at July 2, 2016:
For the six months ending December 31, 2016
$
12,500

For the fiscal years ending:
 
2017
23,600

2018
23,386

2019
22,897

2020
22,245

Thereafter
295,318

Total
$
399,946


17



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


The Company leases six retail stores and owns 25 stores subject to ground leases. Certain of these leases include tenant allowances that are amortized over the life of the lease. No tenant allowances were received in the six months ended July 2, 2016, or June 27, 2015. The Company does not expect to receive any tenant allowances under leases during the remainder of fiscal year 2016.
We have entered into real estate purchase, construction, and/or economic incentive agreements for various new retail store site locations. At July 2, 2016, we estimated we had total cash commitments of approximately $117 million outstanding for projected expenditures related to the development, construction, and completion of new retail stores. This amount excludes any estimated costs associated with new stores where the Company does not have a commitment as of July 2, 2016. We expect to fund these estimated capital expenditures over the next 12 months with funds from operations and borrowings.
In the past, we have received grant funding in exchange for commitments, such as assurance of agreed employment and wage levels at the retail store or that the retail store will remain open, made by us to the state or local government providing the funding. If we failed to maintain the commitments during the applicable period, the funds received may have to be repaid or other adverse consequences may arise, which could affect the Company’s cash flows and profitability. The total amount of grant funding subject to a specific contractual remedy was $43 million at each of the periods ending July 2, 2016, January 2, 2016, and June 27, 2015. No grant funding subject to contractual remedy was received in the six months ended July 2, 2016, or June 27, 2015. At July 2, 2016, we had recorded $17 million in the condensed consolidated balance sheets relating to these grants with $16 million in current liabilities and $1 million in long-term liabilities. At January 2, 2016, and June 27, 2015, the amount the Company had recorded in current liabilities in the condensed consolidated balance sheets relating to these grants was $17 million and $23 million, respectively.
The Company operates an open account document instructions program, which provides for Cabela’s-issued letters of credit. We had obligations to pay participating vendors $66 million, $34 million, and $77 million at July 2, 2016, January 2, 2016, and June 27, 2015, respectively.
The Financial Services segment enters into financial instruments with off-balance sheet risk in the normal course of business through the origination of unsecured credit card loans. Unsecured credit card accounts are commitments to extend credit and totaled $36 billion, $35 billion, and $33 billion at July 2, 2016, January 2, 2016, and June 27, 2015, respectively. These commitments are in addition to any current outstanding balances of a cardholder. Unsecured credit card loans involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed consolidated balance sheets. The principal amounts of these instruments reflect the Financial Services segment’s maximum related exposure. The Financial Services segment has the right to reduce or cancel the available lines of credit at any time, and has not experienced, and does not anticipate, that all customers will exercise the entire available line of credit at any given point in time.
Litigation and Claims – The Company is party to various legal proceedings arising in the ordinary course of business. These actions include commercial, intellectual property, employment, regulatory, and product liability claims. Some of these actions involve complex factual and legal issues and are subject to uncertainties. The activities of WFB are subject to complex federal and state laws and regulations. WFB's regulators are authorized to conduct compliance examinations and impose penalties for violations of these laws and regulations and, in some cases, to order WFB to pay restitution. The Company cannot predict with assurance the outcome of the actions brought against it. Accordingly, adverse developments, settlements, or resolutions may occur and have a material effect on the Company's results of operations for the period in which such development, settlement, or resolution occurs. However, the Company does not believe that the outcome of any current legal proceedings will have a material effect on its results of operations, cash flows, or financial position taken as a whole.     
The SEC recently announced a settlement with the Company and its Executive Vice President and Chief Financial Officer, Mr. Ralph Castner, that resolves the previously disclosed SEC investigation into certain disclosures, reserves, and accruals from fiscal year 2012. As part of the settlement, the SEC entered an administrative cease-and-desist order that directs the Company and Mr. Castner to comply with the disclosure, books and records, and internal control provisions of the federal securities laws going forward. The Company and Mr. Castner neither admitted nor denied the allegations related to the settlement. The penalty of $1 million associated with the Company’s settlement was recognized as a liability that was accrued for and expensed by the Company in the third quarter of fiscal year 2015.


18



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


The Company is party to a lawsuit in California state court alleging that the Company violated the California Invasion of Privacy Act by recording various telephone calls from California consumers without their consent. The Company has reached a preliminary settlement in this lawsuit, which is subject to court approval. In connection with this lawsuit the Company recognized a liability of $3.85 million in the three months ended April 2, 2016.

9.     STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFIT PLANS    
    
Stock-Based Compensation – The Company recognized total stock-based compensation expense of $6 million and $13 million for the three and six months ended July 2, 2016, and $6 million and $10 million for the three and six months ended June 27, 2015. Compensation expense related to the Company’s stock-based payment awards is recognized in selling, distribution, and administrative expenses in the condensed consolidated statements of income. At July 2, 2016, the total unrecognized deferred stock-based compensation balance for all equity awards issued, net of expected forfeitures, was $34 million, net of tax, which is expected to be amortized over a weighted average period of 2.8 years.

Employee Stock Plans – Since June 5, 2013, all awards are granted under the Cabela’s Incorporated 2013 Stock Plan (the “2013 Stock Plan”) and have a term of no greater than ten years from the grant date and become exercisable under the vesting schedule determined at the time of grant. As of July 2, 2016, the maximum number of shares available for awards under the 2013 Stock Plan was 1,990,186.

As of July 2, 2016, there were 1,751,392 awards outstanding under the 2013 Stock Plan and 1,109,056 awards outstanding under the Cabela’s Incorporated 2004 Stock Plan. To the extent available, we will issue treasury shares for the exercise of stock options before issuing new shares.
Option Awards. During the six months ended July 2, 2016, there were 163,000 non-statutory stock options (“NSOs”) granted to employees at an exercise price of $48.40 per share and 25,112 NSOs granted to non-employee directors at an exercise price of $50.45 per share. These options have an eight-year term and vest over four years for employees and over one year for non-employee directors. In addition, on March 2, 2016, the Company issued 64,000 premium-priced NSOs to its Chief Executive Officer at an exercise price of $55.66 (which was equal to 115% of the closing price of the Company's common stock on the New York Stock Exchange on March 2, 2016). The premium-priced NSOs vest in three equal annual installments beginning on March 2, 2017, and expire on March 2, 2024.

During the six months ended July 2, 2016, there were 462,367 options exercised. The aggregate intrinsic value of all awards exercised was $31 million and $32 million during the six months ended July 2, 2016, and June 27, 2015, respectively. Based on the Company’s closing stock price of $51.29 at July 2, 2016, the total number of in-the-money awards exercisable as of July 2, 2016, was 976,791.

Nonvested Stock and Stock Unit Awards. During the six months ended July 2, 2016, there were 420,707 units of nonvested stock issued to employees at a weighted average fair value of $47.31 per unit and 12,885 units of nonvested stock issued to non-employee directors at a fair value of $50.45 per unit. These nonvested stock awards vest evenly over four years on the grant date anniversary based on the passage of time for employees and over one year for non-employee directors. On March 2, 2016, the Company also issued 92,500 units of performance-based restricted stock units to certain executives at a fair value of $48.40 per unit. These performance-based restricted stock units will begin vesting in four equal annual installments on March 2, 2017, if the performance criterion is achieved.    
    
Employee Stock Purchase Plan – During the six months ended July 2, 2016, there were 42,660 shares issued under the Cabela’s Incorporated 2013 Employee Stock Purchase Plan with 1,769,635 shares of common stock authorized and available for issuance as of July 2, 2016.
 

19



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


10.
STOCKHOLDERS’ EQUITY AND DIVIDEND RESTRICTIONS

Retained Earnings – The most significant restrictions on the payment of dividends by the Company to stockholders are contained within the covenants under its revolving credit and unsecured senior notes purchase agreements. Also, Nebraska banking laws govern the amount of dividends that WFB can pay to Cabela’s. On February 11, 2016, WFB paid a dividend of $40 million to Cabela’s. At July 2, 2016, the Company had unrestricted retained earnings of $225 million available for dividends. However, the Company has never declared or paid any cash dividends on its common stock, and does not anticipate paying any cash dividends in the foreseeable future.
Accumulated Other Comprehensive Loss – The components of accumulated other comprehensive loss, net of related taxes, are as follows for the periods ended:
 
July 2,
2016
 
January 2,
2016
 
June 27,
2015
 
 
 
 
 
 
Accumulated net unrealized holding gains on economic development bonds
$
11,761

 
$
10,097

 
$
7,906

Cumulative foreign currency translation adjustments
(44,549
)
 
(61,011
)
 
(34,950
)
Total accumulated other comprehensive loss
$
(32,788
)
 
$
(50,914
)
 
$
(27,044
)
Treasury Stock – On September 1, 2015, we announced that our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $500 million of its common stock over a two-year period. This authorization was in addition to the standing annual authorization to repurchase shares to offset dilution resulting from equity-based awards issued under the Company’s equity compensation plans. This share repurchase program does not obligate us to repurchase any outstanding shares of our common stock, and the program may be limited or terminated at any time. There is no guarantee as to the exact number of shares that we will repurchase. In addition, the total amount of share repurchases that we can make in a year is limited to 75% of the Company’s prior year consolidated earnings before interest, taxes, depreciation and amortization, as defined, pursuant to a covenant requirement of its credit agreement. We did not engage in any stock repurchase activity in the three and six months ended July 2, 2016. As of July 2, 2016, we can repurchase up to $426 million of our common stock under this program.
The following table reconciles the Company’s treasury stock activity for the periods presented.
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Balance, beginning of period
3,351,162

 

 
3,776,305

 

Purchase of treasury stock at cost

 
1,000,000

 

 
1,000,000

Treasury shares issued on exercise of stock options and share-based payment awards
(221,224
)
 
(77,744
)
 
(646,367
)
 
(77,744
)
Balance, end of period
3,129,938

 
922,256

 
3,129,938

 
922,256


20



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


11.     EARNINGS PER SHARE
 
The following table reconciles the weighted average number of shares utilized in the earnings per share calculations for the periods presented.
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Common shares – basic
68,388,426

 
71,065,258

 
68,168,772

 
71,168,661

Effect of incremental dilutive securities:
 
 
 
 
 
 
 
Stock options and nonvested stock units
520,977

 
307,717

 
631,208

 
536,473

Common shares – diluted
68,909,403

 
71,372,975

 
68,799,980

 
71,705,134

 
 
 
 
 
 
 
 
Stock options outstanding considered anti-dilutive excluded from calculation
1,287,951

 
663,797

 
1,511,148

 
663,797


12.     SUPPLEMENTAL CASH FLOW INFORMATION
 
The following table sets forth non-cash financing and investing activities and other cash flow information for the six months ended:
 
July 2,
2016
 
June 27,
2015
Non-cash financing and investing activities:
 
 
 
Accrued property and equipment additions (1)
$
5,941

 
$
44,589

 
 
 
 
Other cash flow information:
 
 
 
Interest paid (2)
$
68,230

 
$
39,830

Capitalized interest
(2,284
)
 
(6,429
)
Interest paid, net of capitalized interest
$
65,946

 
$
33,401

Income taxes paid, net of refunds
$
21,845

 
$
42,505

 
 
 
 
(1)
Accrued property and equipment additions are recognized in the condensed consolidated statements of cash flows in the period they are paid.
(2)
Includes interest paid by the Financial Services segment totaling $39 million and $33 million, respectively.


21



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


13.     SEGMENT REPORTING
Guidance under Accounting Standards Codification Topic 280, “Segment Reporting,” requires companies to evaluate their reportable operating segments periodically and when certain events occur. Recent changes in our executive management structure and responsibilities resulted in a change in the Company’s chief operating decision maker function. As a result of these changes, as well as the finalization and implementation of our Vision 2020 strategic plan and operational changes in our organizational structure, the Company updated its reportable segments effective the beginning of fiscal year 2016. The Company now accounts for its operations as two reportable segments: Merchandising and Financial Services.
The Merchandising segment sells products and services through the Company’s retail stores, our e-commerce websites (Cabelas.com and Cabelas.ca), and our catalogs. The United States merchandising and Canada merchandising operating segments have been aggregated into our reportable Merchandising segment. We are an omni-channel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including retail stores, online, and mobile channels, and have it fulfilled, in most cases, either through in-store customer pickup or by direct shipment to the customer from one of our distribution centers, retail stores, or vendor drop-ship. Other non-merchandise revenue included in our Merchandising segment primarily includes the value of unredeemed points earned that are associated with the Company’s loyalty rewards programs for Cabela’s CLUB issued credit cards, net of the estimated costs of the points; real estate rental income; and real estate land sales.

The Financial Services segment issues co-branded credit cards which are available through all of our channels. Our Cabela’s CLUB cardholders also earn points from our loyalty rewards programs that can be redeemed through all of our customer shopping channels.

Results for the three and six months ended June 27, 2015, presented in the tables below and in Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Three Months Ended July 2, 2016, Compared to June 27, 2015,” and “Six Months Ended July 2, 2016, Compared to June 27, 2015,” presented herein, have been recast to reflect these new segments.


22



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


Primary operating costs by segment are summarized below.
Merchandising Segment:
Employee compensation and benefits, advertising and marketing costs, depreciation, and retail store related occupancy costs.
Costs relating to receiving, distribution, and storage of inventory; and merchandising, order processing, and quality assurance costs.
Corporate headquarters occupancy costs, other general and administrative costs, and costs relating to operations of various ancillary subsidiaries such as real estate.

Financial Services Segment:
Advertising and promotion, license fees, third party services for processing credit card transactions, employee compensation and benefits, and other general and administrative costs.

Segment assets are those directly used in each operating segment’s operations. Depreciation, amortization, and property and equipment expenditures are recognized as directly expensed and used in each respective segment. Major assets by segment are summarized below.
Merchandising Segment:
Land, buildings, fixtures, and leasehold improvements, including corporate headquarters and facilities.
In-store inventory, receivables, and prepaid expenses.
Merchandise distribution inventory, technology infrastructure and related information technology systems, corporate cash and cash equivalents, economic development bonds, deferred income taxes, and other corporate long-lived assets.

Financial Services Segment:
Cash, credit card loans, restricted cash, receivables, property and equipment, and other assets.

Under an Intercompany Agreement, the Financial Services segment pays to the Merchandising segment a fixed license fee that includes 70 basis points on all originated charge volume of the Cabela’s CLUB Visa credit card portfolio. In addition, among other items, the agreement requires the Financial Services segment to reimburse the Merchandising segment for certain promotional costs, which are recorded as a reduction to Financial Services segment revenue and as a reduction to merchandise costs associated with the Merchandising segment. This reimbursement from our Financial Services segment to our Merchandising segment for certain promotional costs was eliminated in consolidation. Also, if the total risk-based capital ratio of WFB is greater than 13% at any quarter end, the Financial Services segment must pay an additional license fee to the Merchandising segment equal to 50% of the amount that the total risk-based capital ratio exceeds 13%. No additional license fee was paid in either the six months ended July 2, 2016, or the six months ended June 27, 2015.


23



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


Financial information for our two segments is presented in the following table for the periods presented:
 
 
 
 
 
 
 
 
 
Financial Services
 
 
Three Months Ended July 2, 2016:
Merchandising
 
 
Total
 
 
 
 
 
 
Merchandise sales
$
786,203

 
$

 
$
786,203

Non-merchandise revenue:
 
 
 
 
 
Financial Services

 
129,662

 
129,662

Other
8,613

 

 
8,613

Total revenue before intersegment eliminations
794,816

 
129,662

 
924,478

Intersegment revenue eliminated in consolidation

 
5,419

 
5,419

Total revenue as reported
$
794,816

 
$
135,081

 
$
929,897

 
 
 
 
 
 
Operating income
$
18,024

 
$
49,685

 
$
67,709

Operating income as a percentage of revenue
2.3
%
 
38.3
%
 
7.3
%
Depreciation and amortization
$
38,551

 
$
435

 
$
38,986

Assets
3,112,758

 
5,652,501

 
8,765,259

Property and equipment additions including accrued amounts
36,259

 
412

 
36,671

 
 
 
 
 
 
Three Months Ended June 27, 2015:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
706,068

 
$

 
$
706,068

Non-merchandise revenue:
 
 
 
 
 
Financial Services

 
119,872

 
119,872

Other
5,265

 

 
5,265

Total revenue before intersegment eliminations
711,333

 
119,872

 
831,205

Intersegment revenue eliminated in consolidation

 
5,071

 
5,071

Total revenue as reported
$
711,333

 
$
124,943

 
$
836,276

 
 
 
 
 
 
Operating income
$
17,480

 
$
45,910

 
$
63,390

Operating income as a percentage of revenue
2.5
%
 
38.3
%
 
7.6
%
Depreciation and amortization
$
32,013

 
$
444

 
$
32,457

Assets
3,007,897

 
4,626,057

 
7,633,954

Property and equipment additions including accrued amounts
128,269

 
133

 
128,402

 
 
 
 
 
 


24



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


 
 
 
Financial Services
 
 
Six Months Ended July 2, 2016:
Merchandising
 
 
Total
 
 
 
 
 
 
Merchandise sales
$
1,506,118

 
$

 
$
1,506,118

Non-merchandise revenue:
 
 
 
 
 
Financial Services

 
265,658

 
265,658

Other
12,537

 

 
12,537

Total revenue before intersegment eliminations
1,518,655

 
265,658

 
1,784,313

Intersegment revenue eliminated in consolidation

 
10,246

 
10,246

Total revenue as reported
$
1,518,655

 
$
275,904

 
$
1,794,559

 
 
 
 
 
 
Operating income
$
1,629

 
$
110,436

 
$
112,065

Operating income as a percentage of revenue
0.1
%
 
41.6
%
 
6.2
%
Depreciation and amortization
$
73,845

 
$
851

 
$
74,696

Assets
3,112,758

 
5,652,501

 
8,765,259

Property and equipment additions including accrued amounts
90,663

 
628

 
91,291

 
 
 
 
 
 
Six Months Ended June 27, 2015:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
1,403,722

 
$

 
$
1,403,722

Non-merchandise revenue:
 
 
 
 
 
Financial Services

 
238,308

 
238,308

Other
11,774

 

 
11,774

Total revenue before intersegment eliminations
1,415,496

 
238,308

 
1,653,804

Intersegment revenue eliminated in consolidation

 
9,548

 
9,548

Total revenue as reported
$
1,415,496

 
$
247,856

 
$
1,663,352

 
 
 
 
 
 
Operating income
$
13,536

 
$
94,387

 
$
107,923

Operating income as a percentage of revenue
1.0
%
 
39.6
%
 
6.5
%
Depreciation and amortization
$
62,815

 
$
863

 
$
63,678

Assets
3,007,897

 
4,626,057

 
7,633,954

Property and equipment additions including accrued amounts
225,098

 
724

 
225,822



25



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


The components and amounts of total revenue for the Financial Services segment were as follows for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Interest and fee income
$
141,180

 
$
112,965

 
$
280,928

 
$
224,893

Interest expense
(20,929
)
 
(16,811
)
 
(40,802
)
 
(32,430
)
Provision for loan losses
(32,404
)
 
(15,831
)
 
(55,224
)
 
(29,061
)
Net interest income, net of provision for loan losses
87,847

 
80,323

 
184,902

 
163,402

Non-interest income:
 
 
 
 
 
 
 
Interchange income
104,841

 
98,509

 
199,837

 
186,203

Other non-interest income
875

 
821

 
1,545

 
1,503

Total non-interest income
105,716

 
99,330

 
201,382

 
187,706

Less: Customer rewards costs
(58,482
)
 
(54,710
)
 
(110,380
)
 
(103,252
)
Financial Services revenue
$
135,081

 
$
124,943

 
$
275,904

 
$
247,856

The following table sets forth the percentage of our merchandise revenue contributed by major product categories for our Merchandising segment for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Hunting Equipment
39.7
%
 
34.3
%
 
44.4
%
 
41.0
%
General Outdoors
43.7

 
48.9

 
37.9

 
39.9

Clothing and Footwear
16.6

 
16.8

 
17.7

 
19.1

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

26



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


14.
FAIR VALUE MEASUREMENTS
Financial instrument assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted market prices.
Level 3 – Unobservable inputs corroborated by little, if any, market data. Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are primarily unobservable from objective sources.
At July 2, 2016, the financial instruments carried on our condensed consolidated balance sheets subject to fair value measurements consisted of economic development bonds (included in other assets) and were classified as Level 3 for valuation purposes. For the six months ended July 2, 2016, and June 27, 2015, there were no transfers in or out of Levels 1, 2, or 3.
There were no significant changes in the fair value of the economic development bonds which are measured on a recurring basis using significant unobservable inputs (Level 3) for the six months ended July 2, 2016, compared to the fiscal year ended 2015 or the six months ended June 27, 2015.
There were no other than temporary fair value adjustments of economic development bonds and no adjustments of deferred grant income related to economic development bonds in the six months ended July 2, 2016, or June 27, 2015. In the three months ended July 2, 2016, we recognized an impairment loss of $0.5 million on a property based on a sales contract. The value of this property adjusted for selling costs was $0.3 million and its carrying value was $0.8 million. In addition, in the six months ended July 2, 2016, we recognized an impairment loss of $0.1 million on a parcel of unimproved land based on a sales contract. The value of this property adjusted for selling costs was $1.3 million and its carrying value was $1.4 million. Both of these impairment losses were recognized in the Merchandising segment.
The table below presents the estimated fair values of the Company’s financial instruments that are not carried at fair value on our condensed consolidated balance sheets at the periods indicated. The fair values of all financial instruments listed below were estimated based on internally developed models or methodologies utilizing observable inputs (Level 2).
 
July 2, 2016
 
January 2, 2016
 
June 27, 2015
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
Credit card loans, net
$
5,062,226

 
$
5,062,226

 
$
5,035,267

 
$
5,035,267

 
$
4,392,769

 
$
4,392,769

 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Time deposits
1,196,874

 
1,215,001

 
879,899

 
879,197

 
827,475

 
825,095

Secured variable funding obligations of the Trust

 

 
655,000

 
655,000

 
65,000

 
65,000

Secured obligations of the Trust, net of unamortized debt issuance costs
3,825,086

 
3,843,397

 
3,230,932

 
3,179,767

 
3,103,414

 
3,074,510

Long-term debt
911,189

 
936,137

 
859,350

 
892,425

 
822,945

 
841,443




27



CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Tables are in Thousands Except Share and Per Share Amounts)
(Unaudited)


15.    ACCOUNTING PRONOUNCEMENTS

The following accounting standards are grouped by their effective date applicable to the Company:
First quarter of fiscal year 2017:
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). Under this standard, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. ASU 2015-11 defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. We have evaluated the provisions of this statement and do not intend to apply early adoption. We believe that the adoption of ASU 2015-11 will not have a material impact on the Company’s consolidated financial position or results of operations.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). This standard is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, and classifications in the statement of cash flows. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. We are evaluating the provisions of this statement and do not intend to apply early adoption. We have not determined what impact the adoption of ASU 2016-09 will have on the Company’s consolidated financial position or results of operations.
First quarter of fiscal year 2018:
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are evaluating the provisions of this statement and do not intend to apply early adoption. We have not determined what impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial position or results of operations.
First quarter of fiscal year 2019:
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under this standard, operating and finance leases with a lease term of more than 12 months will be recorded in the balance sheet as right-of-use assets with offsetting lease liabilities based on the present value of future lease payments. The standard also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted and requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. We are evaluating the provisions of this statement, including which period to adopt, and have not determined what impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial position or results of operations.
First quarter of fiscal year 2020:
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 will change the accounting for credit impairment by adding an impairment model that is based on expected losses rather than incurred losses. Under this standard, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for the first interim period within annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We are evaluating the provisions of this statement, including which period to adopt, and have not determined what impact the adoption of ASU 2016-13 will have on the Company’s consolidated financial position or results of operations.

28


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

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,” “confident,” 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:        
our exploration and evaluation of strategic alternatives may not result in the successful identification or completion of a strategic alternative that yields additional value for shareholders, and the exploration and evaluation process may have an adverse impact on our business;
the state of the economy and the level of discretionary consumer spending, including changes in consumer preferences, demand for firearms and ammunition, and demographic trends;
adverse changes in the capital and credit markets or the availability of capital and credit;
our ability to successfully execute our omni-channel strategy;
increasing competition in the outdoor sporting goods industry and for credit card products and reward programs;
the cost of our products, including increases in fuel prices;
the availability of our products due to political or financial instability in countries where the goods we sell are manufactured;
supply and delivery shortages or interruptions, and other interruptions or disruptions to our systems, processes, or controls, caused by system changes or other factors;
increased or adverse government regulations, including regulations relating to firearms and ammunition;
our ability to protect our brand, intellectual property, and reputation;
our ability to prevent cybersecurity breaches and mitigate cybersecurity risks;
the outcome of litigation, administrative, and/or regulatory matters (including the ongoing audits by tax authorities and compliance examinations by the Federal Deposit Insurance Corporation (“FDIC”));
our ability to manage credit, liquidity, interest rate, operational, legal, regulatory capital, and compliance risks;
our ability to increase credit card receivables while managing credit quality;
our ability to securitize our credit card receivables at acceptable rates or access the deposits market at acceptable rates;
the impact of legislation, regulation, and supervisory regulatory actions in the financial services industry; and
other risks, relevant factors, and uncertainties identified in our filings with the Securities and Exchange Commission (“SEC”) (including the information set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, and in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the first quarter ended April 2, 2016), which filings are available at the SEC’s website at www.sec.gov.

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Our forward-looking statements speak only as of the date of this report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

The following discussion and analysis of financial condition, results of operations, liquidity, and capital resources should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, as filed with the SEC, and our unaudited interim condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Cabela’s Incorporated and its wholly-owned subsidiaries are referred to herein as “Cabela’s,” “Company,” “we,” “our,” or “us.”
 
Critical Accounting Policies and Use of Estimates

Our critical accounting policies and use of estimates utilized in the preparation of the condensed consolidated financial statements as of July 2, 2016, remain unchanged from January 2, 2016.


29


Executive Overview
 
We are a leading specialty omni-channel retailer of hunting, fishing, camping, shooting sports, and related outdoor merchandise. We provide a quality service to our customers who are able to access our multiple channels when making a purchase, including retail stores, online, and mobile channels. We supply our customers products through our multi-channel merchandising distribution network consisting of in-store customer pickup or by direct shipment to the customer from one of our distribution centers, retail stores, or vendor drop-ship. World’s Foremost Bank (“WFB,” “Financial Services segment,” or “Cabela’s CLUB”) also plays an integral role in supporting our merchandising business. The Financial Services segment is comprised of our credit card services, which reinforce our strong brand and strengthen our customer loyalty through our credit card loyalty programs.
Our Vision 2020 is to be the world’s best omni-channel retailer by creating intense loyalty for our outdoor brand through the legendary products and customer service delivered by our highly trained outfitters. Vision 2020 is anchored by the following six strategic focus areas that define objectives and align strategies across the Company: (1) improve top-line sales, (2) increase bottom-line profits, (3) retail store expansion and innovation, (4) customers first, (5) focus on all outfitters, and (6) grow the CLUB. Results on certain of these strategic focus areas are discussed below.
We currently operate 83 stores, including the six new stores that we opened to date in 2016 as follows:    
Lexington, Kentucky; and League City, Texas; in March;
Short Pump, Virginia; Centerville, Ohio; and Farmington, Utah; in April; and
Abbotsford, British Columbia, Canada; in June.

We now have 73 stores located in the United States and 10 in Canada. Our total retail square footage is now 8.4 million square feet, which represents a 6% increase compared to our 7.9 million of retail square feet at the end of 2015. We plan to open two more new stores in the remainder of 2016, both in the third quarter – Avon, Ohio; and Ottawa, Ontario, Canada. We are currently evaluating store locations and counts beyond 2016, and we have announced plans to open new stores in Gainesville, Virginia; Halifax, Nova Scotia, Canada; Lee’s Summit, Missouri; McDonough, Georgia; Albuquerque, New Mexico; and Chesterfield Township, Michigan.
Effective the beginning of fiscal year 2016, we realigned our organizational structure and updated our reportable operating segments into two segments – Merchandising and Financial Services. Results for the six months ended June 27, 2015, presented in the tables below and in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations have been recast to reflect these new segments. For more information on this change in segments see Note 13 “Segment Reporting” of the Notes to Condensed Consolidated Financial Statements.

30


Comparisons and analysis of selected financial data are presented below for the following periods:
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
 
 
 
 
(Dollars in Thousands Except Earnings Per Diluted Share)
Revenue:
 
 
 
 
 
 
 
Merchandise sales
$
786,203

 
$
706,068

 
$
80,135

 
11.3
 %
Financial Services
135,081

 
124,943

 
10,138

 
8.1

Other revenue
8,613

 
5,265

 
3,348

 
63.6

Total revenue
$
929,897

 
$
836,276

 
$
93,621

 
11.2

 
 

 
 

 
 

 
 

Operating income
$
67,709

 
$
63,390

 
$
4,319

 
6.8

 
 

 
 

 
 

 
 

Net income
$
37,759

 
$
40,057

 
$
(2,298
)
 
(5.7
)
 
 
 
 
 
 
 
 
Earnings per diluted share
$
0.55

 
$
0.56

 
$
(0.01
)
 
(1.8
)
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
 
 
 
 
(Dollars in Thousands Except Earnings Per Diluted Share)
Revenue:
 
 
 
 
 
 
 
Merchandise sales
$
1,506,118

 
$
1,403,722

 
$
102,396

 
7.3
 %
Financial Services
275,904

 
247,856

 
28,048

 
11.3

Other revenue
12,537

 
11,774

 
763

 
6.5

Total revenue
$
1,794,559

 
$
1,663,352

 
$
131,207

 
7.9

 
 

 
 

 
 

 
 

Operating income
$
112,065

 
$
107,923

 
$
4,142

 
3.8

 
 
 
 
 
 
 
 
Net income
$
60,648

 
$
66,831

 
$
(6,183
)
 
(9.3
)
 
 

 
 

 
 

 
 

Earnings per diluted share
$
0.88

 
$
0.93

 
$
(0.05
)
 
(5.4
)
Revenues in the three months ended July 2, 2016, totaled $930 million, an increase of $94 million, or 11.2%, compared to the three months ended June 27, 2015. Merchandise sales increased $80 million comparing the respective periods with the most significant factors contributing to the increase as follows:
An increase of $69 million due to the addition of new retail stores.
Comparable store sales on a consolidated basis for the three months ended July 2, 2016, on a shift-adjusted calendar basis, increased $8 million, or 1.5%, compared to the three months ended June 27, 2015. The adjustment of comparable store sales on a shift-adjusted calendar basis provides a more accurate performance of our comparable store sales by aligning the weeks of operation in the current fiscal year to the most comparable weeks in the prior fiscal year. The increase in comparable store sales comparing the respective periods was driven by an increase in the average sales per transaction of 8.9%, partially offset by a decrease in the number of transactions of 6.2%.
Comparable store sales results for our stores in the United States, which exclude Canada results and the impact of foreign currency exchange rate fluctuations, increased 2.0% compared to the three months ended June 27, 2015, reflected mostly in the hunting equipment product category.

31


An increase of $5 million, or 3.3%, in Internet and catalog sales, which was due to increases in the hunting equipment and general outdoors product categories.

32


Revenues in the six months ended July 2, 2016, totaled $1.8 billion, an increase of $131 million, or 7.9%, compared to the six months ended June 27, 2015. Merchandise sales increased $102 million comparing the respective periods with the most significant factors contributing to the net increase as follows:
An increase of $134 million due to the addition of new retail stores.
Comparable store sales on a consolidated basis for the six months ended July 2, 2016, on a shift-adjusted calendar basis, decreased $13 million, or 1.3%, compared to the six months ended June 27, 2015. The decrease in comparable store sales comparing the respective periods was driven by a decrease in the number of transactions of 8.1% partially offset by an increase in the average sales per transaction of 8.2%.
Comparable store sales results for our stores in the United States, which exclude Canada results and the impact of foreign currency exchange rate fluctuations, decreased 0.8% compared to the six months ended June 27, 2015, mostly due to a decrease in the clothing and footwear product category, partially offset by an increase in the hunting equipment product category.
A decrease of $13 million, or 4.3%, in Internet and catalog sales, which was due to decreases in the clothing and footwear and hunting equipment product categories.
Financial Services revenue increased $10 million, or 8.1%, in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, and $28 million, or 11.3%, in the six months ended July 2, 2016, compared to the six months ended June 27, 2015. The increases in Financial Services revenue were primarily due to increases in interest and fee income and interchange income. The increases in interest and fee income were primarily due to increases in credit card loans and interest yield, and the increases in interchange income were primarily due to increases in credit card purchases. Partially offsetting these increases were increases in the provision for loan losses. The increases to the provision for loan losses were due to increases in loan delinquencies and, to a lesser extent, growth in the average outstanding balance of credit card loans.
Merchandise gross profit increased $6 million, or 2.3% and 1.3%, respectively, in both the three and six months ended July 2, 2016, compared to the three and six months ended June 27, 2015, primarily due to new retail store growth.
Merchandise gross profit as a percentage of merchandise sales decreased 290 basis points to 32.9% in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, and 190 basis points to 32.6% in the six months ended July 2, 2016, compared to the six months ended June 27, 2015. The decreases in the 2016 periods compared to the respective 2015 periods were primarily due to our markdown and pricing strategy, which had an impact of approximately 230 basis points and 130 basis points comparing the respective three and six months periods, and increased sales of lower margin firearms, ammunition, and powersports products combined with lower sales in our higher margin soft goods and apparel categories, which had an impact of approximately 60 basis points for both of the respective three and six months periods.

The following discussions related to selling, distribution, and administrative (“SD&A”) expenses; impairment and restructuring charges; operating income; and operating income of the Merchandising segment are presented in accordance with generally accepted accounting principles (“GAAP”) and as non-GAAP adjusted financial measures. In light of the nature and magnitude, we believe these items should be presented separately to enhance a reader’s overall understanding of the Company’s ongoing operations. These non-GAAP adjusted financial measures should be considered in conjunction with the GAAP financial measures.


33


Accordingly, to supplement the following discussions related to SD&A expenses; SD&A expenses as a percentage of total revenue; impairment and restructuring charges; operating income; operating income as a percentage of total revenue; operating income of the Merchandising segment; and operating income of the Merchandising segment as a percentage of total Merchandising segment revenue presented in accordance with GAAP, we are providing non-GAAP adjusted financial measures of operating results that exclude certain items, which are presented below both as GAAP reported and non-GAAP financial measures excluding:
consulting fees and certain expenses primarily related to our corporate restructuring initiatives and the review of strategic alternatives totaling $5 million for the three months ended July 2, 2016, and $8 million for the six months ended July 2, 2016;
a charge recognized on a preliminary settlement totaling $4 million relating to a lawsuit in California state court (a “preliminary lawsuit settlement”) for the six months ended July 2, 2016;
incremental expenses related to the transition and closing of the Company’s distribution center in Canada in the six months ended June 27, 2015; and
impairment and restructuring charges totaling $1 million for the three months ended July 2, 2016, and $4 million for the six months ended July 2, 2016.

We believe these non-GAAP adjusted financial measures provide useful supplemental information to investors regarding the underlying business trends and performance of our ongoing operations and are useful for period-over-period comparisons of such operations. In addition, we evaluate results using non-GAAP adjusted operating income. These non-GAAP adjusted financial measures should not be considered in isolation or as a substitute for operating income, or any other measure calculated in accordance with GAAP.

The following table reconciles these financial measures to the related GAAP adjusted financial measures for the periods presented.
 
Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures (1)
 
Three Months Ended
 
July 2, 2016
 
June 27, 2015
 
GAAP Basis as Reported
 
Non-GAAP Adjustments
 
Non-GAAP Amounts
 
GAAP Basis as Reported
 
 
 
 
 (Dollars in Thousands Except Earnings Per Share)
SD&A expenses (2)
$
329,682

 
$
(4,592
)
 
$
325,090

 
$
319,892

SD&A expenses as a percentage of total revenue
35.5
%
 
(0.5
)%
 
35.0
%
 
38.3
%
Impairment and restructuring charges (3)
$
959

 
$
(959
)
 
$

 
$

Operating income (2) (3)
$
67,709

 
$
5,551

 
$
73,260

 
$
63,390

Operating income as a percentage of total revenue
7.3
%
 
0.6
 %
 
7.9
%
 
7.6
%
Merchandising segment:
 
 
 
 
 
 
 
Operating income (2) (3)
$
18,024

 
$
5,551

 
$
23,575

 
$
17,480

Operating income as a percentage of total segment revenue
2.3
%
 
0.7
 %
 
3.0
%
 
2.5
%
 
 
 
 
 
 
 
 
(footnotes follow on the next page)

34


 
Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures (1)
 
Six Months Ended
 
July 2, 2016
 
June 27, 2015
 
GAAP Basis as Reported
 
Non-GAAP Adjustments
 
Non-GAAP Amounts
 
GAAP Basis as Reported
 
Non-GAAP Adjustments
 
Non-GAAP Amounts
 
 
 
 
 
 
 (Dollars in Thousands Except Earnings Per Share)
SD&A expenses (2)
$
658,871

 
$
(12,095
)
 
$
646,776

 
$
635,996

 
$
(1,207
)
 
$
634,789

SD&A expenses as a percentage of total revenue
36.7
%
 
(0.7
)%
 
36.0
%
 
38.2
%
 
 %
 
38.2
%
Impairment and restructuring charges (3)
$
3,931

 
$
(3,931
)
 
$

 
$

 
$

 
$

Operating income (2) (3)
$
112,065

 
$
16,026

 
$
128,091

 
$
107,923

 
$
1,207

 
$
109,130

Operating income as a percentage of total revenue
6.2
%
 
0.9
 %
 
7.1
%
 
6.5
%
 
0.1
 %
 
6.6
%
Merchandising segment:
 
 
 
 
 
 
 
 
 
 
 
Operating income (2) (3)
$
1,629

 
$
16,026

 
$
17,655

 
$
13,536

 
$
1,207

 
$
14,743

Operating income as a percentage of total segment revenue
0.1
%
 
1.1
 %
 
1.2
%
 
1.0
%
 
 %
 
1.0
%
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The presentation includes non-GAAP financial measures. These non-GAAP financial measures are not prepared under any comprehensive set of accounting rules or principles, and do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP. There were no non-GAAP items in the three months ended June 27, 2015.
(2)
Consists of the following for the respective periods:
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016

June 27,
2015

July 2,
2016

June 27,
2015
 
 
 
 
 
 
 
 
Consulting fees and certain expenses primarily related to the Company’s corporate restructuring initiative and the review of strategic alternatives
$
4,592

 
$

 
$
8,245

 
$

Charge related to a preliminary lawsuit settlement

 

 
3,850

 

Incremental expenses related to the transition and closing of the Company’s distribution center in Canada

 

 

 
1,207

 
$
4,592

 
$

 
$
12,095

 
$
1,207

(3)
Consists of the following for the respective periods:
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Charges for employee severance agreements and termination benefits related to the Company’s corporate restructuring and reduction in the number of personnel
$
505

 
$

 
$
3,336

 
$

Impairment losses on property, equipment, and other assets
454

 

 
595

 

 
$
959

 
$

 
$
3,931

 
$






35


SD&A expenses increased $10 million in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, primarily due to increases in costs totaling $5 million related to corporate restructuring initiatives and the review of strategic alternatives in the three months ended July 2, 2016, as well as additional costs from increases in the number of new stores and costs in related support areas. Although operating expenses increased $10 million in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, operating expenses as a percentage of total revenue decreased 280 basis points comparing the respective periods. On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives and the review of strategic alternatives as reflected in the table above entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” SD&A expenses increased $5 million comparing the respective periods, and as a percentage of total revenue, decreased 330 basis points in the three months ended July 2, 2016, compared to the three months ended June 27, 2015.    

SD&A expenses increased $23 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, primarily due to net increases in costs totaling $12 million related to corporate restructuring initiatives, the review of strategic alternatives, and a charge recognized on a preliminary lawsuit settlement in the six months ended July 2, 2016, as well as additional costs from increases in the number of new stores and costs in related support areas. Although operating expenses increased $23 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, operating expenses as a percentage of total revenue decreased 150 basis points comparing the respective periods. On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives, the review of strategic alternatives, a preliminary lawsuit settlement, and the closing of the distribution center in Canada as reflected in the table above entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” SD&A expenses increased $12 million comparing the respective periods, and as a percentage of total revenue, decreased 220 basis points in the six months ended July 2, 2016, compared to the six months ended June 27, 2015.

Impairment and restructuring charges increased $1 million in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, and $4 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015. These increases were primarily due to charges for severance and related benefits due to our corporate restructuring and reduction in the number of personnel.

In the second half of 2015, we launched a major multi-year corporate restructuring project aimed at lowering the Company’s operating expense base to increase our return on invested capital. We have identified numerous meaningful savings opportunities across the Company, including information technology process improvement, indirect procurement, retail labor optimization, merchandise sourcing, retail support functions, and supply chain enhancements, some of which we have already implemented, that are expected to result in a reduction of operating expenses as a percentage of total revenue of up to 150 basis points over the next three years. As we focus on expense management controls consistent with our multi-year corporate restructuring project, we plan to continue our omni-channel initiatives, our Cabela’s branded product investments, and our retail expansion. We will continue to manage our operating costs accordingly through fiscal year 2016 and beyond.    

Operating income increased $4 million in the three and six months ended July 2, 2016, compared to the three and six months ended June 27, 2015. Operating income as a percentage of total revenue decreased 30 basis points over the respective three and six month periods. The increase in operating income was primarily attributable to increases in revenue from our Financial Services segment and in our merchandise gross profit. On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives, the review of strategic alternatives, a preliminary lawsuit settlement, the closing of the distribution center in Canada, and impairment and restructuring charges as reflected in the table above entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” operating income increased $10 million and $19 million, respectively, and operating income as a percentage of total revenue increased 30 and 50 basis points, respectively, comparing the three and six months ended July 2, 2016, to the three and six months ended June 27, 2015.


36


The following summarizes the operating results of our business segments. For a more detailed discussion, see “Results of Operations - Three Months Ended July 2, 2016, Compared to June 27, 2015” and “Results of Operations - Six Months Ended July 2, 2016, Compared to June 27, 2015.”


37


Our Merchandising segment business is seasonal in nature and interim results may not be indicative of results for the full year. Due to buying patterns around the holidays and the opening of hunting seasons, our merchandise revenue is traditionally higher in the third and fourth quarters than in the first and second quarters, and we typically earn a disproportionate share of our operating income in the fourth quarter. Because of our retail store expansion, and fixed costs associated with retail stores, our quarterly operating income may be further impacted by these seasonal fluctuations. Comparing Merchandising segment results in the three and six months ended July 2, 2016, to the three and six months ended June 27, 2015:
total merchandise sales and other revenue increased $83 million, or 11.7%, and $103 million, or 7.3%, respectively;
operating income increased $1 million and decreased $12 million, respectively; and
operating income as a percentage of Merchandising segment revenue decreased 10 basis points and 80 basis points, respectively.
On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives, the review of strategic alternatives, a preliminary lawsuit settlement, the closing of the distribution center in Canada, and impairment and restructuring charges as reflected in the table above entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” the Merchandising segment operating income increased $7 million, to $24 million, comparing the three months ended July 2, 2016, to the three months ended June 27, 2015, and increased $3 million, to $18 million, comparing the six months ended July 2, 2016, to the six months ended June 27, 2015. On a non-GAAP basis, operating income as a percentage of Merchandising segment revenue increased 60 basis points, to 3.0%, and 20 basis points, to 1.2%, comparing the respective three and six month periods.
Cabela’s CLUB continues to manage its credit card delinquencies and charge-offs through active account management. Comparing Cabela’s CLUB results in the three and six months ended July 2, 2016, to the three and six months ended June 27, 2015:
the average number of active accounts increased 7.3%, to 2.0 million in both the three and six month periods, and the average balance per active account increased $173 and $169, respectively;
the average balance of our credit card loans increased 15.5% and 15.4%, to $5.0 billion and $4.9 billion, respectively;
net purchases on credit card accounts increased 6.9% and 7.3%, to $5.4 billion and $10.2 billion, respectively; and
net charge-offs as a percentage of average credit card loans increased 33 and 52 basis points, to 2.13% and 2.19%, respectively.

During the six months ended July 2, 2016, the Financial Services segment issued $497 million in certificates of deposit, completed a term securitization totaling $1.0 billion, and increased a $300 million variable funding facility originally scheduled to mature in March 2016 to $500 million and extended its maturity date to March 2019.    

38


Operations Review    
Our operating results expressed as a percentage of revenue were as follows for the three months ended July 2, 2016, and June 27, 2015, each of which consisted of 13 weeks, and for the six months ended July 2, 2016, and June 27, 2015, each of which consisted of 26 weeks.
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Revenue
100.00
 %
 
100.00
 %
 
100.00
 %
 
100.00
 %
Cost of revenue
57.16

 
54.17

 
56.82

 
55.28

Gross profit (exclusive of depreciation and amortization)
42.84

 
45.83

 
43.18

 
44.72

 
 
 
 
 
 
 
 
Selling, distribution, and administrative expenses
35.46

 
38.25

 
36.72

 
38.23

Impairment and restructuring charges
0.10

 

 
0.22

 

Operating income
7.28

 
7.58

 
6.24

 
6.49

Other income (expense):
 
 
 
 
 

 
 

Interest expense, net
(0.89
)
 
(0.55
)
 
(0.98
)
 
(0.50
)
Other income, net
0.30

 
0.24

 
0.21

 
0.22

Total other income (expense), net
(0.59
)
 
(0.31
)
 
(0.77
)
 
(0.28
)
Income before provision for income taxes
6.69

 
7.27

 
5.47

 
6.21

Provision for income taxes
2.63

 
2.48

 
2.09

 
2.19

Net income
4.06
 %
 
4.79
 %
 
3.38
 %
 
4.02
 %


39



Results of Operations - Three Months Ended July 2, 2016, Compared to June 27, 2015

Revenues    
Comparisons and analysis of our revenues are presented below for the three months ended:
 
July 2,
2016
 
 
 
June 27,
2015
 
 
 
Increase (Decrease)
 
% Change
 
 
%
 
 
%
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Merchandise
$
786,203

 
84.6
%
 
$
706,068

 
84.5
%
 
$
80,135

 
11.3
%
Financial Services
135,081

 
14.5

 
124,943

 
14.9

 
10,138

 
8.1

Other
8,613

 
0.9

 
5,265

 
0.6

 
3,348

 
63.6

Total
$
929,897

 
100.0
%
 
$
836,276

 
100.0
%
 
$
93,621

 
11.2

Merchandise Sales – Comparisons and analysis of our merchandise sales are presented below for the three months ended:
 
July 2,
2016
 
 
 
June 27,
2015
 
 
 
Increase (Decrease)
 
% Change
 
 
%
 
 
%
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Retail store sales
$
644,932

 
82.0
%
 
$
569,315

 
80.6
%
 
$
75,617

 
13.3
%
Internet and catalog sales
141,271

 
18.0

 
136,753

 
19.4

 
4,518

 
3.3

Total merchandise sales
$
786,203

 
100.0
%
 
$
706,068

 
100.0
%
 
$
80,135

 
11.3


Product Sales Mix – The following table sets forth the percentage of our merchandise revenue contributed by major product categories for our Merchandising segment for the three months ended:
 
July 2,
2016
 
June 27,
2015
 
 
 
 
Hunting Equipment
39.7
%
 
34.3
%
General Outdoors
43.7

 
48.9

Clothing and Footwear
16.6

 
16.8

Total
100.0
%
 
100.0
%
Merchandise sales increased $80 million, or 11.3%, in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, primarily due to increases in revenue from the addition of new retail stores of $69 million, comparable store sales of $8 million, and Internet and catalog sales of $5 million.
 

40


Comparable store sales and analysis are presented below for the three months ended:
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Comparable stores sales on a consolidated basis (1)
$
538,130

 
$
529,982

 
$
8,148

 
1.5
%
Comparable stores sales - United States stores only
506,063

 
495,925

 
10,138

 
2.0

Comparable stores sales on a constant currency basis (2)
 
1.8

 
 
 
 
 
 
 
 
(1) Calculated on a shift-adjusted calendar basis.
 
 
 
 
 
 
 
(2) Reflects the elimination of fluctuations in foreign currency exchange rates.
The net increase in comparable store sales of $8 million was due to increases of $10 million in the hunting equipment product category and $2 million in the general outdoors product category, partially offset by a $4 million decrease in the clothing and footwear product category. The increase in comparable store sales on a consolidated basis comparing the respective periods was driven by an increase in the average sales per transaction of 8.9%, partially offset by a decrease in the number of transactions of 6.2%.
Internet and catalog sales increased $5 million, or 3.3%, to $141 million, in the three months ended July 2, 2016, compared to the three months ended June 27, 2015. The net increase was primarily due to increases of $5 million in the hunting equipment product category and $3 million in the general outdoors product category, partially offset by a $3 million decrease in the clothing and footwear product category.
Financial Services Revenue – The following table sets forth the components of Financial Services revenue for the three months ended:    
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Interest and fee income
$
141,180

 
$
112,965

 
$
28,215

 
25.0
%
Interest expense
(20,929
)
 
(16,811
)
 
4,118

 
24.5

Provision for loan losses
(32,404
)
 
(15,831
)
 
16,573

 
104.7

Net interest income, net of provision for loan losses
87,847

 
80,323

 
7,524

 
9.4

Non-interest income:
 

 
 
 
 
 
 
Interchange income
104,841

 
98,509

 
6,332

 
6.4

Other non-interest income
875

 
821

 
54

 
6.6

Total non-interest income
105,716

 
99,330

 
6,386

 
6.4

Less: Customer rewards costs
(58,482
)
 
(54,710
)
 
3,772

 
6.9

Financial Services revenue
$
135,081

 
$
124,943

 
$
10,138

 
8.1

Financial Services revenue increased $10 million, or 8.1%, for the three months ended July 2, 2016, compared to the three months ended June 27, 2015. The increase in interest and fee income of $28 million was due to increases in credit card loans and interest yield. The increase in the provision for loan losses of $17 million was due to increases in loan delinquencies. The increase in interchange income of $6 million was due to increases in credit card purchases.


41


The following table sets forth the components of Financial Services revenue as a percentage of average total credit card loans, including any accrued interest and fees, for the three months ended:
 
July 2,
2016
 
June 27,
2015
 
 
 
Interest and fee income
11.4
 %
 
10.5
 %
Interest expense
(1.7
)
 
(1.6
)
Provision for loan losses
(2.6
)
 
(1.5
)
Interchange income
8.4

 
9.2

Other non-interest income
0.1

 
0.1

Customer rewards costs
(4.7
)
 
(5.1
)
Financial Services revenue
10.9
 %
 
11.6
 %

Key statistics reflecting the performance of Cabela’s CLUB are shown in the following chart for the three months ended:
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands Except Average Balance per Active Account )
 
 
 
 
 
 
 
 
Average balance of credit card loans (1)
$
4,964,603

 
$
4,299,130

 
$
665,473

 
15.5
%
Average number of active credit card accounts
2,041,783

 
1,903,291

 
138,492

 
7.3

Average balance per active credit card account (1)
$
2,432

 
$
2,259

 
$
173

 
7.7

Purchases on credit card accounts, net
5,419,361

 
5,071,387

 
347,974

 
6.9

Net charge-offs on credit card loans (1)
26,490

 
19,337

 
7,153

 
37.0

Net charge-offs as a percentage of average
   credit card loans (1)
2.13
%
 
1.80
%
 
0.33
%
 
 

 
 
 
 
 
 
 
 
(1) Includes accrued interest and fees
 
 
 
 
 
 
 
The average balance of credit card loans increased to $5 billion, or 15.5%, for the three months ended July 2, 2016, compared to the three months ended June 27, 2015, due to an increase in the number of active accounts and the average balance per account. We define an active credit card account as any account with an outstanding debit or credit balance at the end of any respective month. The average number of active accounts increased to 2.0 million, or 7.3%, compared to the three months ended June 27, 2015, due to our successful marketing efforts in new account acquisitions. Net charge-offs as a percentage of average credit card loans increased to 2.13% for the three months ended July 2, 2016, up 33 basis points compared to the three months ended June 27, 2015, primarily due to an increase in delinquencies. Net charge-offs were also impacted by an increase in the average balance of credit card loans. See “Asset Quality of Cabela’s CLUB” in this report for additional information on trends in delinquencies and non-accrual loans and analysis of our allowance for loan losses.

Other Revenue

Other revenue was $9 million in the three months ended July 2, 2016, compared to $5 million in the three months ended June 27, 2015, with the increase primarily due to increases in real estate sales revenues.
    


42


Merchandise Gross Profit    

Comparisons and analysis of our merchandise gross profit on merchandise sales are presented below for the three months ended:    
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Merchandise sales
$
786,203

 
$
706,068

 
$
80,135

 
11.3
%
Merchandise gross profit
258,794

 
253,074

 
5,720

 
2.3

Merchandise gross profit as a percentage
   of merchandise sales
32.9
%
 
35.8
%
 
(2.9
)%
 
 

 Merchandise gross profit increased $6 million, or 2.3%, to $259 million in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, primarily due to new retail store growth. Our merchandise gross profit as a percentage of merchandise sales decreased 290 basis points to 32.9% in the three months ended July 2, 2016, compared to the three months ended June 27, 2015. This decrease was primarily due to our markdown and pricing strategy, which had an impact of approximately 230 basis points, and increased sales of lower margin firearms, ammunition, and powersports products combined with lower sales in our higher margin soft goods and apparel categories, which had an impact of approximately 60 basis points.

Selling, Distribution, and Administrative Expenses        

Comparisons and analysis of our SD&A expenses are presented below for the three months ended:    
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
SD&A expenses
$
329,682

 
$
319,892

 
$
9,790

 
3.1
 %
SD&A expenses as a percentage of total revenue
35.5
%
 
38.3
%
 
(2.8
)%
 
 

Retail store pre-opening costs
$
1,816

 
$
7,893

 
$
(6,077
)
 
(77.0
)
Non-GAAP amounts:
 
 
 
 
 
 
 
SD&A expenses on a non-GAAP basis
$
325,090

 
$
319,892

 
$
5,198

 
1.6
 %
SD&A expenses as a percentage of total revenue on a non-GAAP basis
35.0
%
 
38.3
%
 
(3.3
)%
 
 
SD&A expenses increased $10 million, or 3.1%, in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, but decreased 280 basis points comparing the respective periods to 35.5% as a percentage of total revenue. SD&A expenses increased primarily due to increases in costs totaling $5 million related to corporate restructuring initiatives and the review of strategic alternatives in the three months ended July 2, 2016, as well as additional costs from increases in the number of new stores and costs in related support areas.
On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives and the review of strategic alternatives, as reflected in the table in the Executive Overview section of this report entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” SD&A expenses increased $5 million comparing the respective periods, and as a percentage of total revenue, decreased 330 basis points in the three months ended July 2, 2016, compared to the three months ended June 27, 2015.
In addition, in the three months ended July 2, 2016, we incurred a $1 million charge for severance and related benefits (which was included in impairment and restructuring charges in the condensed consolidated statements of income) primarily attributable to our corporate restructuring and reduction in the number of personnel. We continue to focus on expense management throughout the Company and have identified several expense reduction opportunities that we have implemented or are in the process of implementing that should benefit operating income in upcoming periods.


43


The most significant changes in SD&A expenses in the three months ended July 2, 2016, compared to the three months ended June 27, 2015, related to specific business segments, included:
Merchandising Segment:
A decrease of $8 million in employee compensation, benefits, and contract labor primarily due to our corporate restructuring project aimed at lowering the Company’s operating expenses and a decrease in bonus expense attributable to our corporate restructuring and reduction in the number of personnel.    
An increase of $7 million in building costs and depreciation primarily due to additional costs from increases in the number of new stores and the operations and maintenance of our existing retail stores and corporate offices.
An increase of $5 million related to corporate restructuring initiatives and the review of strategic alternatives.

In the second half of 2015, we launched a major multi-year corporate restructuring project aimed at lowering the Company’s operating expense base to increase our return on invested capital. We have identified numerous meaningful savings opportunities across the Company, including information technology process improvement, indirect procurement, retail labor optimization, merchandise sourcing, retail support functions, and supply chain enhancements, some of which we have already implemented, that are expected to result in a reduction of operating expenses as a percentage of total revenue of up to 150 basis points over the next three years. As we focus on expense management controls consistent with our multi-year corporate restructuring project, we plan to continue our omni-channel initiatives, our Cabela’s branded product investments, and our retail expansion. We will continue to manage our operating costs accordingly through fiscal year 2016 and beyond.
Financial Services Segment:
An increase of $3 million in employee compensation, benefits, and contract labor to support the growth of credit card operations.

Impairment and Restructuring Charges

In the three months ended July 2, 2016, we recognized an impairment loss on a property and incurred restructuring charges totaling $1 million. This increase compared to the three months ended June 27, 2015, was primarily due to charges for severance and related benefits due to our corporate restructuring and reduction in the number of personnel. Both the impairment loss and restructuring charges were recognized in the Merchandising segment. We did not recognize any impairment or restructuring charges during the three months ended June 27, 2015.
Operating Income    
    
Comparisons and analysis of operating income are presented below for the three months ended:
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Operating income
$
67,709

 
$
63,390

 
$
4,319

 
6.8
%
Operating income as a percentage of total revenue
7.3
%
 
7.6
%
 
(0.3
)%
 
 

Non-GAAP amounts:
 
 
 
 
 
 
 
Operating income on a non-GAAP basis
$
73,260

 
$
63,390

 
$
9,870

 
15.6

Operating income as a percentage of total revenue on a non-GAAP basis
7.9
%
 
7.6
%
 
0.3
 %
 
 
 
 
 
 
 
 
 
 
Operating income by business segment:
 

 
 

 
 

 
 

Merchandising
$
18,024

 
$
17,480

 
$
544

 
3.1

Financial Services
49,685

 
45,910

 
3,775

 
8.2

 
 

 
 

 
 

 
 

Operating income as a percentage of segment revenue:
 

 
 

 
 

 
 

Merchandising
2.3
%
 
2.5
%
 
(0.2
)%
 
 

Financial Services
38.3

 
38.3

 

 
 


44


Total operating income increased $4 million, or 6.8%, in the three months ended July 2, 2016, compared to the three months ended June 27, 2015. The net increase in operating income was primarily attributable to increases in revenue from our Financial Services segment and in our merchandise gross profit which was partially offset by increases in consolidated operating expenses and impairment and restructuring charges.

On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives, the review of strategic alternatives, and impairment and restructuring charges as reflected in the table in the Executive Overview section of this report entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” operating income increased $10 million, and total operating income as a percentage of total revenue increased 30 basis points, comparing the three months ended July 2, 2016, to the three months ended June 27, 2015.
Under an Intercompany Agreement, described more fully in Note 13 “Segment Reporting” of the Notes to Condensed Consolidated Financial Statements, the Financial Services segment pays a license fee to the Merchandising segment and, among other items, reimburses the Merchandising segment for certain promotional costs. Total fees paid under this Intercompany Agreement by the Financial Services segment to the Merchandising segment increased $4 million in the three months ended July 2, 2016, compared to the three months ended June 27, 2015.
 
Interest (Expense) Income, Net
 
Interest expense, net of interest income, was $8 million in the three months ended July 2, 2016, compared to $5 million in the three months ended June 27, 2015. The increase in interest expense was primarily due to the issuances of the new unsecured notes for $250 million in August 2015 and $300 million in December 2015. The amount of interest capitalized decreased $2 million comparing the respective periods due to a slowdown in new store activity and interest that was capitalized in 2015 for our new corporate facility and distribution center in Tooele, Utah.

Other Non-Operating Income, Net

Other non-operating income was $3 million in the three months ended July 2, 2016, compared to $2 million in the three months ended June 27, 2015. Other non-operating income included $0.5 million that we received in the three months ended July 2, 2016, on a note receivable where the balance was written off in a previous period and recognized in impairment and restructuring charges in the condensed consolidated statements of income.

Provision for Income Taxes
 
Our effective tax rate was 39.3% for the three months ended July 2, 2016, compared to 34.1% for the three months ended June 27, 2015. Our effective tax rate increased comparing the respective periods primarily due to increases in nondeductible expenses, tax adjustments attributable to changes in the mix of taxable income between the United States and foreign tax jurisdictions, and state income taxes and a decrease in research and development tax credits received.


Results of Operations - Six Months Ended July 2, 2016, Compared to June 27, 2015

Revenues

Comparisons and analysis of our revenues are presented below for the six months ended:
 
July 2,
2016
 
 
 
June 27,
2015
 
 
 
Increase (Decrease)
 
% Change
 
 
%
 
 
%
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Merchandise
$
1,506,118

 
83.9
%
 
$
1,403,722

 
84.4
%
 
$
102,396

 
7.3
%
Financial Services
275,904

 
15.4

 
247,856

 
14.9

 
28,048

 
11.3

Other
12,537

 
0.7

 
11,774

 
0.7

 
763

 
6.5

Total
$
1,794,559

 
100.0
%
 
$
1,663,352

 
100.0
%
 
$
131,207

 
7.9


45


Merchandise Sales – Comparisons and analysis of our merchandise sales are presented below for the six months ended:
 
July 2,
2016
 
 
 
June 27,
2015
 
 
 
Increase (Decrease)
 
% Change
 
 
%
 
 
%
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Retail store sales
$
1,209,137

 
80.3
%
 
$
1,093,490

 
77.9
%
 
$
115,647

 
10.6
 %
Internet and catalog sales
296,981

 
19.7

 
310,232

 
22.1

 
(13,251
)
 
(4.3
)
Total merchandise sales
$
1,506,118

 
100.0
%
 
$
1,403,722

 
100.0
%
 
$
102,396

 
7.3

Product Sales Mix – The following table sets forth the percentage of our merchandise sales contributed by major product categories for our Merchandising segment for the six months ended:
 
July 2,
2016
 
June 27,
2015
 
 
 
 
Hunting Equipment
44.4
%
 
41.0
%
General Outdoors
37.9

 
39.9

Clothing and Footwear
17.7

 
19.1

Total
100.0
%
 
100.0
%
Merchandise sales increased $102 million, or 7.3%, in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, primarily due to an increase of $134 million in revenue from the addition of new retail stores partially offset by decreases of $13 million in comparable store sales and $13 million in Internet and catalog sales.
Comparable store sales and analysis are presented below for the six months ended:
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Comparable stores sales on a consolidated basis (1)
$
1,011,729

 
$
1,024,906

 
$
(13,177
)
 
(1.3
)%
Comparable stores sales - United States stores only
956,063

 
963,984

 
(7,921
)
 
(0.8
)
Comparable stores sales on a constant currency basis (2)
 
(0.9
)
 
 
 
 
 
 
 
 
(1) Calculated on a shift-adjusted calendar basis.
 
 
 
 
 
 
 
(2) Reflects the elimination of fluctuations in foreign currency exchange rates.
The net decrease in comparable store sales of $13 million was due to a decrease of approximately $18 million in the clothing and footwear product category which was partially offset by an increase in the hunting equipment product category. There was no significant change in comparable store sales in the general outdoors product category comparing the respective periods. The decrease in comparable store sales comparing the respective periods was driven by a decrease in the number of transactions of 8.1% partially offset by an increase in the average sales per transaction of 8.2%. In response to the softness of sales in our clothing and footwear categories, we have taken a number of actions, including testing national brand shops in a number of stores, testing alternate labor strategies in our apparel areas aimed at providing better sales coverage during peak selling times, and focusing more on marketing the “better category” selection of our merchandise assortments.
For fiscal year 2016, we are continuing to monitor and take steps that are needed to respond to a number of consumer-related factors that may impact our planned growth in comparable store sales on an annual basis. These steps include the timing of discounts offered and promotional events to meet consumer preferences or actions taken by our competitors, including demand for firearms and ammunition, which can be very volatile based on current events as well as potential future government regulation. In addition, we are looking at our strategic space allocation and improving space utilization within our stores, as well as changing, as needed in certain locations, our brand assortment between national brands and Cabela’s brand. We also are working closely with our vendors and actively managing our inventory levels to ensure that we have the adequate quantity and assortment of necessary products available to meet any such consumer-related factors.

46


Internet and catalog sales decreased $13 million, or 4.3%, to $297 million, in the six months ended July 2, 2016, compared to the six months ended June 27, 2015. The net decrease was primarily due to decreases of $11 million in the clothing and footwear product category and $4 million in the hunting equipment product category, partially offset by a $2 million increase in the general outdoors product category.
Financial Services Revenue – The following table sets forth the components of Financial Services revenue for the six months ended:    
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Interest and fee income
$
280,928

 
$
224,893

 
$
56,035

 
24.9
%
Interest expense
(40,802
)
 
(32,430
)
 
8,372

 
25.8

Provision for loan losses
(55,224
)
 
(29,061
)
 
26,163

 
90.0

Net interest income, net of provision for loan losses
184,902

 
163,402

 
21,500

 
13.2

Non-interest income:
 

 
 
 
 
 
 
Interchange income
199,837

 
186,203

 
13,634

 
7.3

Other non-interest income
1,545

 
1,503

 
42

 
2.8

Total non-interest income
201,382

 
187,706

 
13,676

 
7.3

Less: Customer rewards costs
(110,380
)
 
(103,252
)
 
7,128

 
6.9

Financial Services revenue
$
275,904

 
$
247,856

 
$
28,048

 
11.3

Financial Services revenue increased $28 million, or 11.3%, for the six months ended July 2, 2016, compared to the six months ended June 27, 2015. The increase in interest and fee income of $56 million was primarily due to increases in credit card loans and interest yield. The increase in interchange income of $14 million was due to increases in credit card purchases. The increase in the provision for loan losses of $26 million was due to increases in loan delinquencies and, to a lesser extent, growth in the average outstanding balance of credit card loans.

The following table sets forth the components of Financial Services revenue as a percentage of average total credit card loans, including any accrued interest and fees, for the six months ended:
 
July 2,
2016
 
June 27,
2015
 
 
 
Interest and fee income
11.4
 %
 
10.6
 %
Interest expense
(1.7
)
 
(1.5
)
Provision for loan losses
(2.2
)
 
(1.4
)
Interchange income
8.1

 
8.7

Other non-interest income
0.1

 
0.1

Customer rewards costs
(4.5
)
 
(4.8
)
Financial Services revenue
11.2
 %
 
11.7
 %

47


Key statistics reflecting the performance of Cabela’s CLUB are shown in the following chart for the six months ended:
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands Except Average Balance per Active Account )
 
 
 
 
 
 
 
 
Average balance of credit card loans (1)
$
4,916,180

 
$
4,260,055

 
$
656,125

 
15.4
%
Average number of active credit card accounts
2,033,919

 
1,894,668

 
139,251

 
7.3

Average balance per active credit card account (1)
$
2,417

 
$
2,248

 
$
169

 
7.5

Purchases on credit card accounts, net
10,245,980

 
9,548,399

 
697,581

 
7.3

Net charge-offs on credit card loans (1)
53,863

 
35,513

 
18,350

 
51.7

Net charge-offs as a percentage of average
   credit card loans (1)
2.19
%
 
1.67
%
 
0.52
%
 
 

 
 
 
 
 
 
 
 
(1) Includes accrued interest and fees
 
 
 
 
 
 
 
The average balance of credit card loans increased to $4.9 billion, or 15.4%, for the six months ended July 2, 2016, compared to the six months ended June 27, 2015, due to increases in the number of active accounts and the average balance per account. We define an active credit card account as any account with an outstanding debit or credit balance at the end of any respective month. The average number of active accounts increased to 2.0 million, or 7.3%, in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, due to our successful marketing efforts in new account acquisitions. Net charge-offs as a percentage of average credit card loans increased to 2.19% in the six months ended July 2, 2016, up 52 basis points compared to the six months ended June 27, 2015, due to increases in loan delinquencies as well as decreases in recovery rates. Net charge-offs were also impacted by an increase in the average balance of credit card loans. Additionally, recovery rates for the six months ended June 27, 2015, were positively impacted due to the acceleration of the timing of a sale of charged-off loans in the first quarter of 2015. See “Asset Quality of Cabela’s CLUB” in this report for additional information on trends in delinquencies and non-accrual loans and analysis of our allowance for loan losses.

Other Revenue

Other revenue was $13 million in the six months ended July 2, 2016, compared to $12 million in the six months ended June 27, 2015, with the increase primarily due to increases in real estate sales revenues, which was partially offset by a decrease related to our exit from certain non-core businesses in fiscal year 2015.

Merchandise Gross Profit
Comparisons and analysis of our merchandise gross profit on merchandise sales are presented below for the six months ended:    
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Merchandise sales
$
1,506,118

 
$
1,403,722

 
$
102,396

 
7.3
%
Merchandise gross profit
490,717

 
484,509

 
6,208

 
1.3

Merchandise gross profit as a percentage
   of merchandise sales
32.6
%
 
34.5
%
 
(1.9
)%
 
 
Merchandise gross profit increased $6 million, or 1.3%, to $491 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, primarily due to new retail store growth. Our merchandise gross margin as a percentage of merchandise sales decreased 190 basis points to 32.6% in the six months ended July 2, 2016, compared to the six months ended June 27, 2015. This decrease was primarily due to our markdown and pricing strategy, which had an impact of approximately 130 basis points, and increased sales of lower margin firearms, ammunition, and powersports products combined with lower sales in our higher margin soft goods and apparel categories, which had an impact of approximately 60 basis points.

48


Selling, Distribution, and Administrative Expenses        

Comparisons and analysis of our SD&A expenses are presented below for the six months ended:    
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
SD&A expenses
$
658,871

 
$
635,996

 
$
22,875

 
3.6
 %
SD&A expenses as a percentage of total revenue
36.7
%
 
38.2
%
 
(1.5
)%
 
 

Retail store pre-opening costs
$
5,666

 
$
14,901

 
$
(9,235
)
 
(62.0
)
Non-GAAP amounts:
 
 
 
 
 
 
 
SD&A expenses on a non-GAAP basis
$
646,776

 
$
634,789

 
$
11,987

 
1.9
 %
SD&A expenses as a percentage of total revenue on a non-GAAP basis
36.0
%
 
38.2
%
 
(2.2
)%
 
 

SD&A expenses increased $23 million, or 3.6%, in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, but decreased 150 basis points comparing the respective periods to 36.7% as a percentage of total revenue. SD&A expenses increased primarily due to increases in costs totaling $12 million related to corporate restructuring initiatives, the review of strategic alternatives, and a charge recognized on a preliminary lawsuit settlement in the six months ended July 2, 2016, as well as additional costs from increases in the number of new stores and costs in related support areas.
On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives, the review of strategic alternatives, a preliminary lawsuit settlement, and the closing of the distribution center in Canada as reflected in the table in the Executive Overview section of this report entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” SD&A expenses increased $12 million comparing the respective periods, and as a percentage of total revenue, decreased 220 basis points in the six months ended July 2, 2016, compared to the six months ended June 27, 2015.
In addition, in the six months ended July 2, 2016, we incurred a $3 million charge for severance and related benefits (which was included in impairment and restructuring charges in the condensed consolidated statements of income) primarily attributable to our corporate restructuring and reduction in the number of personnel. We continue to focus on expense management throughout the Company and have identified several expense reduction opportunities that we have implemented or are in the process of implementing that should benefit operating income in upcoming periods.     
The most significant changes in SD&A expenses in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, related to specific business segments, included:
Merchandising Segment:
An increase of $12 million in building costs and depreciation primarily due to additional costs from increases in the number of new stores and the operations and maintenance of our existing retail stores and corporate offices.
An increase of $8 million related to corporate restructuring initiatives and the review of strategic alternatives.
A decrease of $7 million in employee compensation, benefits, and contract labor primarily due to our corporate restructuring project aimed at lowering the Company’s operating expenses and a decrease in bonus expense attributable to our corporate restructuring and reduction in the number of personnel.
An increase of $4 million related to a charge recognized on a preliminary lawsuit settlement.

Financial Services Segment:
An increase of $6 million in employee compensation, benefits, and contract labor to support the growth of credit card operations.

Impairment and Restructuring Charges
In the six months ended July 2, 2016, we recognized impairment losses of $1 million and incurred restructuring charges of $3 million for severance and related benefits primarily attributable to our corporate restructuring and reduction in the number of personnel. Both the impairment losses and restructuring charges were recognized in the Merchandising segment. We did not recognize any impairment or restructuring charges during the six months ended June 27, 2015.

49



Operating Income    
    
Comparisons and analysis of operating income are presented below for the six months ended:
 
July 2,
2016
 
June 27,
2015
 
Increase (Decrease)
 
% Change
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Operating income
$
112,065

 
$
107,923

 
$
4,142

 
3.8
%
Operating income as a percentage of total revenue
6.2
%
 
6.5
%
 
(0.3
)%
 
 

Non-GAAP amounts:
 
 
 
 
 
 
 
Operating income on a non-GAAP basis
$
128,091

 
$
109,130

 
$
18,961

 
17.4

Operating income as a percentage of total revenue on a non-GAAP basis
7.1
%
 
6.6
%
 
0.5
 %
 
 

 
 
 
 
 
 
 
 
Operating income by business segment:
 

 
 

 
 

 
 

Merchandising
$
1,629

 
$
13,536

 
$
(11,907
)
 
88.0

Financial Services
110,436

 
94,387

 
16,049

 
17.0

 
 

 
 

 
 

 
 

Operating income as a percentage of segment revenue:
 

 
 

 
 

 
 

Merchandising
0.1
%
 
1.0
%
 
(0.9
)%
 
 

Financial Services
41.6

 
39.6

 
2.0

 
 

Total operating income increased $4 million, or 3.8%, in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, but total operating income as a percentage of total revenue decreased 30 basis points. The net increase in operating income was primarily attributable to increases in revenue from our Financial Services segment and in our merchandise gross profit. The increase in total operating income was partially offset by increases in consolidated operating expenses and impairment and restructuring charges.
On a non-GAAP basis, excluding the impact of costs related to restructuring initiatives, the review of strategic alternatives, a preliminary lawsuit settlement, the closing of the distribution center in Canada, and impairment and restructuring charges as reflected in the table in the Executive Overview section of this report entitled “Reconciliation of GAAP Reported to Non-GAAP Adjusted Financial Measures,” operating income increased $19 million, and total operating income as a percentage of total revenue increased 50 basis points, comparing the six months ended July 2, 2016, to the six months ended June 27, 2015.
Under an Intercompany Agreement, described more fully in Note 13 “Segment Reporting” of the Notes to Condensed Consolidated Financial Statements, the Financial Services segment pays a license fee to the Merchandising segment and, among other items, reimburses the Merchandising segment for certain promotional costs. Total fees paid under this Intercompany Agreement by the Financial Services segment to the Merchandising segment increased $7 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015.

Interest (Expense) Income, Net
 
Interest expense, net of interest income, was $18 million in the six months ended July 2, 2016, compared to $8 million in the six months ended June 27, 2015. The increase in interest expense was primarily due to the issuances of the new unsecured notes for $250 million in August 2015 and $300 million in December 2015. The amount of interest capitalized decreased $4 million comparing the respective periods due to a slowdown in new store activity and interest that was capitalized in 2015 for our new corporate facility and distribution center in Tooele, Utah.

Other Non-Operating Income, Net
Other non-operating income was $4 million in both the six months ended July 2, 2016, and the six months ended June 27, 2015.


50


Provision for Income Taxes
Our effective tax rate was 38.3% for the six months ended July 2, 2016, compared to 35.3% for the six months ended June 27, 2015. Our effective tax rate increased comparing the respective periods primarily due to increases in nondeductible expenses, tax adjustments attributable to changes in the mix of taxable income between the United States and foreign tax jurisdictions, and state income taxes and a decrease in research and development tax credits received.


Asset Quality of Cabela’s CLUB

Delinquencies and Non-Accrual
 
The following table reports delinquencies, including any delinquent non-accrual and restructured credit card loans, as a percentage of our credit card loans, including any accrued interest and fees, in a manner consistent with our monthly external reporting at the periods ended:
 
July 2,
2016
 
January 2,
2016
 
June 27,
2015
Number of days delinquent:
 
 
 
 
 
Greater than 30 days
0.84
%
 
0.82
%
 
0.68
%
Greater than 60 days
0.51

 
0.51

 
0.39

Greater than 90 days
0.26

 
0.26

 
0.20

The table below shows delinquent, non-accrual, and restructured loans as a percentage of our credit card loans, including any accrued interest and fees, at the periods ended:    
 
July 2,
2016
 
January 2,
2016
 
June 27,
2015
Number of days delinquent and still accruing (excludes non-accrual and restructured loans which are presented below):
 
 
 
 
 
Greater than 30 days
0.76
%
 
0.72
%
 
0.60
%
Greater than 60 days
0.46

 
0.45

 
0.35

Greater than 90 days
0.24

 
0.23

 
0.18

 
 
 
 
 
 
Non-accrual
0.14

 
0.14

 
0.13

Restructured
0.59

 
0.57

 
0.66

 

51


Allowance for Loan Losses and Charge-offs
The following table shows the activity in our allowance for loan losses and charge-off activity for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Balance, beginning of period
$
74,753

 
$
55,942

 
$
75,911

 
$
56,572

Provision for loan losses
32,404

 
15,831

 
55,224

 
29,061

 
 

 
 
 
 
 
 
Charge-offs
(29,578
)
 
(22,125
)
 
(59,256
)
 
(43,115
)
Recoveries
6,371

 
5,094

 
12,071

 
12,224

Net charge-offs
(23,207
)
 
(17,031
)
 
(47,185
)
 
(30,891
)
Balance, end of period
$
83,950

 
$
54,742

 
$
83,950

 
$
54,742

 
 

 
 

 
 
 
 
Net charge-offs on credit card loans
$
(23,207
)
 
$
(17,031
)
 
$
(47,185
)
 
$
(30,891
)
Charge-offs of accrued interest and fees (recorded as a reduction in interest and fee income)
(3,283
)
 
(2,306
)
 
(6,678
)
 
(4,622
)
Total net charge-offs including accrued interest and fees
$
(26,490
)
 
$
(19,337
)
 
$
(53,863
)
 
$
(35,513
)
 
 
 
 

 
 
 
 
Net charge-offs, including accrued interest and fees, as a percentage of average credit card loans, including accrued interest and fees
2.13
%
 
1.80
%
 
2.19
%
 
1.67
%
For the six months ended July 2, 2016, net charge-offs as a percentage of average credit card loans increased to 2.19%, up 52 basis points compared to 1.67% for the six months ended June 27, 2015. Net charge-offs as a percentage of average credit card loans increased primarily due to increases in loan delinquencies as well as decreases in recovery rates. Net charge-offs were also impacted by an increase in the average balance of credit card loans. Additionally, recovery rates for the six months ended June 27, 2015, were positively impacted due to the acceleration of the timing of a sale of charged-off loans in the first quarter of 2015.

Liquidity and Capital Resources
 Overview
Our Merchandising segment and our Financial Services segment have significantly differing liquidity and capital needs. We believe that we will have sufficient capital available from cash on hand, our revolving credit facility, and other borrowing sources to fund our cash requirements and near-term growth plans for at least the next 12 months. At July 2, 2016, January 2, 2016, and June 27, 2015, cash on a consolidated basis totaled $542 million, $315 million, and $144 million, respectively, of which $455 million, $157 million, and $83 million, respectively, was cash at the Financial Services segment which is utilized to meet this segment’s liquidity requirements. We evaluate the credit markets for securitizations and certificates of deposit to determine the most cost effective source of funds for the Financial Services segment. In the second half of 2016, the Financial Services segment intends to primarily utilize variable funding facilities. We believe that these liquidity sources are sufficient to fund the Financial Services segment’s foreseeable cash requirements, including maturities and near-term growth plans.
Merchandising Segment – Our credit agreement provides for an unsecured $775 million revolving credit facility and permits the issuance of letters of credit up to $75 million and swing line loans up to $30 million. The credit facility may be increased to $800 million subject to certain terms and conditions. The term of the credit facility expires on June 18, 2019. Advances under the credit facility will be used for the Company’s general business purposes, including working capital support.


52


Our unsecured $775 million revolving credit facility and unsecured senior notes contain certain financial covenants, including the maintenance of minimum debt coverage, a fixed charge coverage ratio, a leverage ratio, and a minimum consolidated net worth standard. In the event that we failed to comply with these covenants, a default would trigger and all principal and outstanding interest would immediately be due and payable. At July 2, 2016, and June 27, 2015, we were in compliance with all financial covenants under our credit agreements and unsecured notes. We anticipate that we will continue to be in compliance with all financial covenants under our credit agreements and unsecured notes through at least the next 12 months.
We have an unsecured $20 million Canadian (“CAD”) revolving credit facility for our operations in Canada. Borrowings are payable on demand with interest payable monthly. The credit facility permits the issuance of letters of credit up to $10 million CAD in the aggregate, which reduce the overall credit limit available under the credit facility.
On September 1, 2015, we announced that our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $500 million of its common stock over a two-year period. This authorization is in addition to the standing annual authorization to repurchase shares to offset dilution resulting from equity-based awards issued under the Company’s equity compensation plans. This share repurchase program does not obligate us to repurchase any outstanding shares of our common stock, and the program may be limited or terminated at any time. We did not engage in any stock repurchase activity in the three and six months ended July 2, 2016, and as of July 2, 2016, the dollar amount of our common stock that may yet be repurchased under the $500 million program is $426 million.
Financial Services Segment – We have been, and will continue to be, particularly reliant on funding from securitization transactions for the Financial Services segment. A failure to renew existing variable funding facilities or to add additional capacity on favorable terms as it becomes necessary could increase our financing costs and potentially limit our ability to grow the business of the Financial Services segment. Unfavorable conditions in the asset-backed securities markets generally, including the unavailability of commercial bank liquidity support or credit enhancements, could have a similar effect.
During the six months ended July 2, 2016, the Financial Services segment completed a term securitization of $1.0 billion, issued $497 million in certificates of deposit, and increased its $300 million variable funding facility originally scheduled to mature in March 2016 to $500 million while extending its maturity date to March 2019. We believe that these liquidity sources are sufficient to fund the Financial Services segment’s foreseeable cash requirements, including maturities and near-term growth plans.



53


The total amounts and maturities for our credit card securitizations as of July 2, 2016, were as follows:
Series
 
Type
 
Total
Available Capacity
 
Third Party Investor Available Capacity
 
Third Party Investor Outstanding
 
Interest
Rate
 
Expected
Maturity
 
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011-IV
 
Term
 
$
210,000

 
$
165,000

 
$
165,000

 
Fixed
 
October 2016
2011-IV
 
Term
 
90,000

 
90,000

 
90,000

 
Floating
 
October 2016
2012-I
 
Term
 
350,000

 
275,000

 
275,000

 
Fixed
 
February 2017
2012-I
 
Term
 
150,000

 
150,000

 
150,000

 
Floating
 
February 2017
2012-II
 
Term
 
375,000

 
300,000

 
300,000

 
Fixed
 
June 2017
2012-II
 
Term
 
125,000

 
125,000

 
125,000

 
Floating
 
June 2017
2013-I
 
Term
 
385,000

 
327,250

 
327,250

 
Fixed
 
February 2023
2013-II
 
Term
 
152,500

 
100,000

 
100,000

 
Fixed
 
August 2018
2013-II
 
Term
 
197,500

 
197,500

 
197,500

 
Floating
 
August 2018
2014-I
 
Term
 
45,000

 

 

 
Fixed
 
March 2017
2014-I
 
Term
 
255,000

 
255,000

 
255,000

 
Floating
 
March 2017
2014-II
 
Term
 
60,000

 

 

 
Fixed
 
July 2019
2014-II
 
Term
 
340,000

 
340,000

 
340,000

 
Floating
 
July 2019
2015-I
 
Term
 
275,000

 
218,750

 
218,750

 
Fixed
 
March 2020
2015-I
 
Term
 
100,000

 
100,000

 
100,000

 
Floating
 
March 2020
2015-II
 
Term
 
300,000

 
240,000

 
240,000

 
Fixed
 
July 2020
2015-II
 
Term
 
100,000

 
100,000

 
100,000

 
Floating
 
July 2020
2016-I
 
Term
 
720,000

 
570,000

 
570,000

 
Fixed
 
June 2019
2016-I
 
Term
 
280,000

 
280,000

 
280,000

 
Floating
 
June 2019
Total term
 
 
 
4,510,000

 
3,833,500

 
3,833,500

 
 
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
2008-III
 
Variable Funding
346,821

 
300,000

 

 
Floating
 
March 2018
2011-I
 
Variable Funding
588,235

 
500,000

 

 
Floating
 
March 2019
2011-III
 
Variable Funding
588,235

 
500,000

 

 
Floating
 
March 2017
Total variable
 
 
 
1,523,291

 
1,300,000

 

 
 
 
 
Total available
 
$
6,033,291


$
5,133,500


$
3,833,500

 
 
 
 
The securitized credit card loans of the Financial Services segment could experience poor performance, including increased delinquencies and credit losses, lower payment rates, or a decrease in excess spreads below certain thresholds. This could result in a downgrade or withdrawal of the ratings on the outstanding securities issued in the Financial Services segment’s securitization transactions, cause early amortization of these securities, or result in higher required credit enhancement levels. Credit card loans performed within established guidelines and no events which could trigger an early amortization occurred during the six months ended July 2, 2016, and June 27, 2015.  

The Financial Services segment utilizes brokered and non-brokered certificates of deposit to partially finance its operating activities. At July 2, 2016, the Financial Services segment had $1.2 billion of certificates of deposit outstanding with maturities ranging from July 2016 to July 2023 and with a weighted average effective annual fixed rate of 1.92%. This outstanding balance compares to $880 million and $827 million at January 2, 2016, and June 27, 2015, respectively, with weighted average effective annual fixed rates of 2.23% and 2.29%, respectively.


54


Operating, Investing, and Financing Activities
The following table presents changes in our cash and cash equivalents for the six months ended:
 
July 2,
2016
 
June 27,
2015
 
(In Thousands)
 
 
 
 
Net cash provided by operating activities
$
177,223

 
$
81,877

Net cash (used in) provided by investing activities
(258,960
)
 
89

Net cash provided by (used in) financing activities
305,042

 
(77,029
)
2016 versus 2015    

Operating Activities – Cash provided by operating activities increased $95 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, primarily due to a net change of $80 million in inventories, and net increases of $33 million related to income taxes and $26 million in the provision for loan losses. Inventory levels totaled $888 million at July 2, 2016, compared to $901 million at June 27, 2015. Partially offsetting these increases to operating activities was a $54 million decrease in accounts payable and accrued expenses and other liabilities.
 
Investing Activities – Cash used in investing activities increased $259 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, primarily due to the use of $301 million in restricted cash of the Trust, which was used to repay $255 million of Series 2010-I notes in full on January 15, 2015, and a decrease in cash of $81 million related to our credit card loan activity from outside sources. Cash paid for property and equipment totaled $99 million in the six months ended July 2, 2016, compared to $221 million in the six months ended June 27, 2015. As of July 2, 2016, the Company estimated it had total cash commitments of approximately $117 million outstanding for projected expenditures related to the development, construction, and completion of new retail stores. We expect to fund these estimated capital expenditures over the next 12 months with cash generated from operations and borrowings.

Financing Activities – Cash provided by financing activities increased $382 million in the six months ended July 2, 2016, compared to the six months ended June 27, 2015, primarily due to net increases of $296 million in time deposits and $291 million in net borrowings on secured obligations of the Trust by the Financial Services segment. In addition, in the six months ended June 27, 2015, we repurchased shares of our common stock at a cost of $53 million. We did not engage in any stock repurchase activity in the six months ended July 2, 2016. Partially offsetting these increases was a decrease related to a repayment of our $215 million unsecured debt in February 2016 and $71 million decrease in net borrowings on our revolving credit facilities.
The following table presents the borrowing activities of our merchandising business and the Financial Services segment for the six months ended:
 
July 2,
2016
 
June 27,
2015
 
(In Thousands)
 
 
 
 
Borrowings on revolving credit facilities and inventory financing, net of repayments
$
263,271

 
$
334,069

Secured obligations of the Trust, net of repayments
(60,000
)
 
(351,250
)
Repayments of long-term debt
(223,295
)
 
(8,286
)
Borrowings, net of repayments
$
(20,024
)
 
$
(25,467
)

55


The following table summarizes our availability under the Company’s debt and credit facilities, excluding the facilities of the Financial Services segment, at the periods ended:
 
July 2,
2016
 
June 27,
2015
 
(In Thousands)
 
 
 
 
Amounts available for borrowing under credit facilities (1)
$
775,000

 
$
775,000

Principal amounts outstanding
(275,000
)
 
(511,632
)
Outstanding letters of credit and standby letters of credit
(33,758
)
 
(30,392
)
Remaining borrowing capacity, excluding the Financial Services segment facilities
$
466,242

 
$
232,976

 
 
 
 
(1)
Consists of our revolving credit facility which expires on June 18, 2019.

We also have an unsecured $20 million CAD credit facility with no amounts outstanding at July 2, 2016, and June 27, 2015. The Financial Services segment also has total borrowing availability of $100 million under its agreements to borrow federal funds. At July 2, 2016, the entire $100 million of borrowing capacity was available.

The following table provides summary information concerning other commercial commitments at July 2, 2016:
 
(In Thousands)
 
 
Letters of credit (1)
$
22,486

Standby letters of credit (1)
11,272

Revolving line of credit for boat and all-terrain vehicle inventory (2)
6,175

Cabela’s issued letters of credit
65,721

Total
$
105,654

 
 
(1)
Our credit agreement permits the issuance of letters of credit up to $75 million and swing line loans up to $30 million.
(2)
The line of credit for boat and all-terrain vehicles financing is limited by the $775 million revolving line of credit to $75 million of secured collateral.
Our $775 million unsecured credit agreement requires us to comply with certain financial and other customary covenants, including:
a fixed charge coverage ratio (as defined) of no less than 2.00 to 1 as of the last day of any fiscal quarter for the most recently ended four fiscal quarters (as defined);
a leverage ratio (as defined) of no more than 3.00 to 1 as of the last day of any fiscal quarter; and
a minimum consolidated net worth standard (as defined) as of the last day of each fiscal quarter.
 
In addition, our unsecured senior notes contain various covenants and restrictions that are usual and customary for transactions of this type. Also, the debt agreements contain cross default provisions to other outstanding credit facilities. In the event that we failed to comply with these covenants, a default would trigger and all principal and outstanding interest would immediately be due and payable. At July 2, 2016, we were in compliance with all financial covenants under our credit agreements and unsecured notes. We anticipate that we will continue to be in compliance with all financial covenants under our credit agreements and unsecured notes through the next 12 months.
  

56


Economic Development Bonds and Grants        
Economic Development Bonds – At July 2, 2016, January 2, 2016, and June 27, 2015, economic development bonds totaled $85 million, $84 million, and $78 million, respectively. On a quarterly basis, we perform various procedures to analyze the amounts and timing of projected cash flows to be received from our economic development bonds. For the six months ended July 2, 2016, and June 27, 2015, there were no other than temporary fair value adjustments of economic development bonds and no adjustments of deferred grant income related to economic development bonds. However, at July 2, 2016, we identified economic development bonds totaling $21 million where the actual tax revenues associated with these properties were lower than previously projected. We will continue to closely monitor the amounts and timing of projected cash flows from the properties related to these economic development bonds.     

Grants – At July 2, 2016, and June 27, 2015, the total amount of grant funding subject to a specific contractual remedy was $43 million and $43 million, respectively. At July 2, 2016, we had recorded $17 million in the condensed consolidated balance sheets relating to these grants with $16 million in current liabilities and $1 million in long-term liabilities. At January 2, 2016, and June 27, 2015, the amount the Company had recorded in current liabilities in the condensed consolidated balance sheets relating to these grants was $17 million, and $23 million, respectively.

Impact of Inflation
 
We do not believe that our operating results have been materially affected by inflation during the preceding three years. We cannot assure, however, that our operating results will not be adversely affected by inflation in the future.
 
In the normal course of business, we enter into various contractual obligations that may require future cash payments. For a description of our contractual obligations and other commercial commitments as of January 2, 2016, see our annual report on Form 10-K for the fiscal year ending January 2, 2016, under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations and Other Commercial Commitments.”

 Off-Balance Sheet Arrangements
 
Operating Leases – We lease various items of office equipment and buildings. Rent expense for these operating leases is recorded in selling, distribution, and administrative expenses in the condensed consolidated statements of income.
 
Credit Card Limits – The Financial Services segment bears off-balance sheet risk in the normal course of its business. One form of this risk is through the Financial Services segment’s commitment to extend credit to cardholders up to the maximum amount of their credit limits. The aggregate of such potential funding requirements totaled $36 billion above existing balances at the end of July 2, 2016. These funding obligations are not included on our condensed consolidated balance sheet. While the Financial Services segment has not experienced, and does not anticipate that it will experience, a significant draw down of unfunded credit lines by its cardholders, such an event would create a cash need at the Financial Services segment which likely could not be met by our available cash and funding sources. The Financial Services segment has the right to reduce or cancel these available lines of credit at any time.


57


Item 3.    Quantitative and Qualitative Disclosures About Market Risk    
We are exposed to interest rate risk through the operations of the Financial Services segment, and, to a lesser extent, through our merchandising operations. We also are exposed to foreign currency risk through our merchandising operations.

There were no material changes to our exposures to our market risks in the six months ended July 2, 2016, compared to fiscal year ended January 2, 2016.

Item 4.
Controls and Procedures        
 
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within specified time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that our disclosure controls and procedures were effective as of July 2, 2016.
Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended July 2, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


58


PART II - OTHER INFORMATION

Item 1.
Legal Proceedings.    

For a discussion of legal proceedings, see Note 8 “Commitments and Contingencies - Litigation and Claims” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, which is incorporated herein by reference.

Item 1A.
Risk Factors.    
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, and in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2016.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.    

We did not engage in any stock repurchase activity in any of the three fiscal months in the second fiscal quarter ended July 2, 2016. We can repurchase up to $426 million of our common stock under the Company’s $500 million share repurchase program announced on September 1, 2015. This share repurchase program does not obligate the Company to repurchase any outstanding shares of its common stock, and the program may be limited or terminated at any time. There is no guarantee as to the exact number of shares that the Company will repurchase.
Item 3.
Defaults Upon Senior Securities.
Not applicable.

Item 4.
Mine Safety Disclosures.
Not applicable.

Item 5.
Other Information.
Not applicable.

Item 6.
Exhibits.
The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.



59


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
CABELA’S INCORPORATED
 
 
 
 
 
 
 
 
 
 
 
 
Dated:
July 28, 2016
By:
/s/ Thomas L. Millner
 
 
 
Thomas L. Millner
 
 
 
Chief Executive Officer

 
 
 
 
 
 
 
 
 
 
 
 
Dated:
July 28, 2016
By:
/s/ Ralph W. Castner
 
 
 
Ralph W. Castner
 
 
 
Executive Vice President and Chief Financial Officer



60


Exhibit Index

Exhibit
Number
 
Description
 
 
 
 
 
 
 
31.1
 
Certification of CEO Pursuant to Rule 13a-14(a) under the Exchange Act
 
 
 
 
 
31.2
 
Certification of CFO Pursuant to Rule 13a-14(a) under the Exchange Act
 
 
 
 
 
32.1
 
Certifications Pursuant to 18 U.S.C. Section 1350
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
Filed with this report.
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Submitted electronically with this report.
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
Submitted electronically with this report.
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
Submitted electronically with this report.
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Submitted electronically with this report.
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Submitted electronically with this report.





61