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CABELAS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This report contains "forward-looking statements" that are based on our beliefs, assumptions, and expectations of future events, taking into account the information currently available to us. All statements other than statements of current or historical fact contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "plan," and similar statements are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance, or financial condition to differ materially from the expectations of future results, performance, or financial condition we express or imply in any forward-looking statements. These risks and uncertainties include, but are not limited to: • the state of the economy and the level of discretionary consumer spending, including changes in consumer preferences, demand for firearms and ammunition, and demographic trends; • adverse changes in the capital and credit markets or the availability of capital and credit; • our ability to successfully execute our omni-channel strategy; • increasing competition in the outdoor sporting goods industry and for credit card products and reward programs; • the cost of our products, including increases in fuel prices; • the availability of our products due to political or financial instability in countries where the goods we sell are manufactured; • supply and delivery shortages or interruptions, and other interruptions or disruptions to our systems, processes, or controls, caused by system changes or other factors; • increased or adverse government regulations, including regulations relating to firearms and ammunition; • our ability to protect our brand, intellectual property, and reputation; • our ability to prevent cybersecurity breaches and mitigate cybersecurity risks; • the outcome of litigation, administrative, and/or regulatory matters (including a Commissioner's charge we received from the Chair of the U. S. Equal Employment Opportunity Commission ("EEOC") in January 2011), audits by tax authorities, and compliance examinations by the Federal Deposit Insurance Corporation ("FDIC")); • our ability to manage credit, liquidity, interest rate, operational, legal, regulatory capital, and compliance risks; • our ability to increase credit card receivables while managing credit quality; • our ability to securitize our credit card receivables at acceptable rates or access the deposits market at acceptable rates; • the impact of legislation, regulation, and supervisory regulatory actions in the financial services industry, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"); and • other risks, relevant factors, and uncertainties identified in our filings with the Securities and Exchange Commission ("SEC") (including the information set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, and in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the first quarter ended March 29, 2014), which filings are available at the SEC's website at www.sec.gov. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Our forward-looking statements speak only as of the date of this report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. The following discussion and analysis of financial condition, results of operations, liquidity, and capital resources should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, as filed with the SEC, and our unaudited interim condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Cabela's Incorporated and its wholly-owned subsidiaries are referred to herein as "Cabela's," "Company," "we," "our," or "us." Critical Accounting Policies and Use of Estimates Our critical accounting policies and use of estimates utilized in the preparation of the condensed consolidated financial statements as of June 28, 2014, remain unchanged from December 28, 2013. 31 -------------------------------------------------------------------------------- Cabela's® We are a leading specialty retailer, and the world's largest direct marketer, of hunting, fishing, camping, and related outdoor merchandise. We provide a quality service to our customers who enjoy an outdoor lifestyle by supplying outdoor products through our multi-channel retail business consisting of our Retail and Direct segments. Our Retail business segment currently consists of 59 stores, including the nine stores that we opened in 2014 to date located in: • Augusta, Georgia, on March 20, 2014, • Greenville, South Carolina, on April 3, 2014, • Anchorage, Alaska, on April 10, 2014, • Christiana, Delaware, on May 1, 2014, • Woodbury, Minnesota, on May 15, 2014 • Edmonton, Alberta, Canada, on May 22, 2014, • Missoula, Montana, on June 12, 2014, • Lubbock, Texas on June 26, 2014, and • Barrie, Ontario, Canada on July 10, 2014. We now have 53 stores located in the United States and six in Canada with total retail square footage of 6.5 million. For the remainder of 2014, we plan to open five new retail stores located as follows: Acworth, Georgia; Cheektowaga, New York; Tualatin, Oregon; Nanaimo, British Columbia, Canada; and Bowling Green, Kentucky. With the addition of these five retail stores, we expect to have an increase of 17% in retail square footage compared to the end of 2013. Our Direct business segment is comprised of our highly acclaimed website and supplemented by our catalog distributions as a selling and marketing tool. World's Foremost Bank ("WFB," "Financial Services segment," or "Cabela's CLUB") also plays an integral role in supporting our merchandising business. The Financial Services segment is comprised of our credit card services, which reinforce our strong brand and strengthen our customer loyalty through our credit card loyalty programs. Executive Overview Three Months Ended June 28, June 29, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands Except Earnings Per Diluted Share) Revenue: Retail $ 500,436 $ 483,923 $ 16,513 3.4 % Direct 147,116 180,124 (33,008 ) (18.3 ) Total 647,552 664,047 (16,495 ) (2.5 ) Financial Services 109,364 88,578 20,786 23.5 Other revenue 4,285 4,180 105 2.5 Total revenue $ 761,201 $ 756,805 $ 4,396 0.6 Operating income $ 71,991 $ 66,935 $ 5,056 7.6 Net income $ 43,517 $ 44,545 $ (1,028 ) (2.3 ) Earnings per diluted share $ 0.61 $ 0.62 $ (0.01 ) (1.6 ) 32-------------------------------------------------------------------------------- Six Months Ended June 28, June 29, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands Except Earnings Per Diluted Share) Revenue: Retail $ 941,385 $ 970,672 $ (29,287 ) (3.0 )% Direct 326,532 405,282 (78,750 ) (19.4 ) Total 1,267,917 1,375,954 (108,037 ) (7.9 ) Financial Services 207,942 174,350 33,592 19.3 Other revenue 11,165 8,998 2,167 24.1 Total revenue $ 1,487,024 $ 1,559,302 $ (72,278 ) (4.6 ) Operating income $ 112,844 $ 146,050 $ (33,206 ) (22.7 ) Net income $ 69,266 $ 94,392 $ (25,126 ) (26.6 ) Earnings per diluted share $ 0.96 $ 1.32 $ (0.36 ) (27.3 ) Revenues presented in the tables above are consistent with our presentation for total revenue as reported by segment. Revenues in the three months ended June 28, 2014, totaled $761 million, an increase of $4 million, or 0.6%, compared to the three months ended June 29, 2013. Total merchandise sales decreased comparing the three month periods primarily due to a decrease of $61 million, or 14.2%, in comparable store sales that extended across all product categories, led by a decrease in the hunting equipment product category. Direct revenue decreased $33 million, or 18.3%, in the three months ended June 28, 2014, compared to the three months ended June 29, 2013. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a substantial decrease in ammunition sales compared to the second quarter of 2013. Partially offsetting the decreases in comparable store sales and Direct sales was an increase in Retail revenue from new stores of $78 million in the second quarter of 2014. Our new retail store formats continue to generate a significant increase in sales per square foot compared to our legacy stores. Revenues in the six months ended June 28, 2014, totaled $1.5 billion, a decrease of $72 million, or 4.6%, over the six months ended June 29, 2013. Total merchandise sales decreased comparing the six month periods primarily due to a decrease of $161 million, or 18.0%, in comparable store sales that extended across all product categories, led by a decrease in the hunting equipment product category. The sales of firearms and ammunition, which are in the hunting equipment product category, decreased significantly comparing the six months ended June 28, 2014, to the six months ended June 29, 2013. We believe the decreases in ammunition sales have begun to level out and are expected to return to more normalized levels for the remainder of fiscal 2014. Direct revenue decreased $79 million, or 19.4%, in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a substantial decrease in ammunition sales compared to the first half of 2013. Partially offsetting the decreases in comparable store sales and Direct sales was an increase in Retail revenue from new stores of $129 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. In addition, our Cabela's branded products continue to be a core focus for us, as we saw growth in Cabela's branded softgoods and general outdoors categories in the three and six months ended June 28, 2014, compared to the three and six months ended June 29, 2013. Financial Services revenue increased $21 million, or 23.5%, in the three months ended June 28, 2014, compared to the three months ended June 29, 2013. Financial Services revenue increased $34 million, or 19.3%, in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. These increases in Financial Services revenue were primarily due to increases in interest and fee income and interchange income, partially offset by higher customer rewards costs due to the increase in active accounts. 33-------------------------------------------------------------------------------- Operating income increased $5 million, or 7.6%, in the three months ended June 28, 2014, compared to the three months ended June 29, 2013, and operating income as a percentage of revenue increased 70 basis points over the same periods. The increase in total operating income and operating income as a percentage of revenue was primarily due to increased contributions from our Financial Services segment and more favorable sales in merchandise with a higher gross margin combined with a reduction of sales in lower margin merchandise such as firearms and ammunition. This increase was partially offset by higher consolidated operating expenses. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. Operating income decreased $33 million, or 22.7%, in the six months ended June 28, 2014, compared to the six months ended June 29, 2013, and operating income as a percentage of revenue decreased 180 basis points over the same periods. The decreases in total operating income and total operating income as a percentage of total revenue were primarily due to decreases in revenue from our Retail and Direct business segments as well as a decrease in our merchandise gross profit. Partially offsetting these decreases were positive contributions from our Financial Services segment. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. We plan to continue our retail expansion, our omni-channel initiatives, and our Cabela's branded product investments as we focus on expense management and emphasize corporate frugality. Our strategic focus is to be the best omni-channel retail company in the world by creating intense customer loyalty for our outdoor brand. This loyalty will be created through two pillars of excellence: highly engaged outfitters and shareholders who support our short and long term goals. We continue to focus on these areas to achieve our vision: • Intensify Customer Loyalty. We will deepen our customer relationships, aggressively serve current and developing market segments, and increase our innovation in Cabela's products and services. • Grow Profitably and Sustainably. Through sustaining and adapting our culture, we will continuously seek ways to improve profitability and increase revenue in all business segments. • Enhance Technology Capability. We will implement a strategic technology road map, streamline our systems, and accelerate customer-facing technologies. • Simplify Our Business. As we focus on our priorities, we will align our goals to foster collaboration and streamline cross-functional processes. • Improve Marketing Effectiveness. We will optimize all marketing channels and expand our digital and e-commerce capabilities while continuing to strengthen the Cabela's brand. Improvements in these areas have led to an increase in our return on invested capital, an important measure of how effectively we have deployed capital in our operations in generating cash flows. Increases in our return on invested capital, on an after-tax basis, indicate improvements in our use of capital, thereby creating value in our Company. We offer our customers integrated opportunities to access and use our retail store, website, and catalog channels. Our in-store pick-up program allows customers to order products through our catalogs, website, and store kiosks and have them delivered to the retail store of their choice without incurring shipping costs, thereby helping to increase foot traffic in our stores. Conversely, our expanding retail stores introduce customers to our website and catalog channels. We are capitalizing on our omni-channel model by building on the strengths of each channel, primarily through improvements in our merchandise planning system. This system, along with our replenishment system, allows us to identify the correct product mix in each of our retail stores, maintain the proper inventory levels to satisfy customer demand in both our Retail and Direct business channels, and improve our distribution efficiencies. We continue to enhance our omni-channel efforts through greater use of digital marketing, the roll out of omni-channel fulfillment, and the improvements to our mobile platform. We continue to work with vendors to negotiate the best prices on products and to manage inventory levels, as well as to ensure vendors deliver all products and services as expected. Our efforts continue in detailed pre-season planning, in-season monitoring of sales, and management of inventory to focus product assortments on our core customer base. Our merchandise gross margin as a percentage of merchandise revenue decreased 70 basis points to 37.0% in the three months ended June 28, 2014, compared to 37.7% in the three months ended June 29, 2013, and decreased 90 basis points to 35.7% in the six months ended June 28, 2014, compared to 36.6% in the six months ended June 29, 2013. 34 -------------------------------------------------------------------------------- The decrease in the merchandise gross profit as a percentage of merchandise sales comparing the three month periods was entirely due to an adjustment in the presentation of reimbursement between segments for certain promotional costs, which totaled $5 million dollars for the three months ended June 28, 2014. The effect of this change increases Financial Services revenue and merchandise cost. The decrease in the merchandise gross profit as a percentage of merchandise sales comparing the six month periods was primarily due to lower margin in firearms, ammunition, optics, and the shooting product categories as supply has improved in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. The decrease was also partially due to the adjustment in the presentation of reimbursement between segments for certain promotional costs. We have improved our retail store merchandising processes, information technology systems, and distribution and logistics capabilities. We have also improved our visual merchandising within the stores and coordinated merchandise at our stores by adding more regional product assortments. Our outfitters also benefited through the launch of our new retail product information application which is available via hand held devices. This provides quick and convenient access to product information, allowing outfitters to be more efficient and engaging with customers. In addition, to enhance customer service at our retail stores, we have continued our management training and mentoring programs for our retail store managers. Comparing Retail segment results for the three and six months ended June 28, 2014, to the three and six months ended June 29, 2013: • revenue increased $17 million, or 3.4% quarter over quarter, but decreased $29 million, or 3.0% comparing the respective six month periods; • operating income increased $5 million, or 7.6% quarter over quarter, but decreased $24 million, or 13.5% comparing the respective six month periods; • operating income as a percentage of Retail segment revenue increased 110 basis points to 19.9% quarter over quarter, but decreased 190 basis points to 16.2% comparing the respective six month periods; and • comparable store sales decreased 14.2% and 18.0%, respectively. Our Retail business segment currently consists of 59 stores. Our new store formats generate higher sales per square foot and higher returns compared to our legacy stores which will help to increase our return on invested capital. It is expected that the planned openings of our new stores will continue to generate an increase in profit per square foot compared to the legacy store base. With this strong new store performance, retail store expansion remains on track with plans to increase retail square footage between 900,000 to 1,000,000 square feet annually over the next several years. In addition to the five new stores previously mentioned that we plan to open in the last half of 2014, for 2015 and thereafter, we currently have plans to open new retail stores located as follows: • Berlin, Massachusetts; Sun Prairie, Wisconsin; Garner, North Carolina; Fort Mill, South Carolina; Bristol, Virginia; Moncton, New Brunswick, Canada; Ammon, Idaho; Fort Oglethorpe, Georgia; Short Pump, Virginia; Noblesville, Indiana; Huntsville, Alabama; Oklahoma City, Oklahoma; Woodbury, New York; and Calgary, Alberta, Canada. For 2015, we have announced most of our locations and expect to open at last 13 stores or about 940,000 square feet of retail space. This equates to approximately 14% annual square footage growth. Beyond 2015, as we continue our pace of new store openings, we expect to see more stores in smaller markets. We are focusing on improving our customers' digital shopping experiences on Cabelas.com and via mobile devices. Our marketing focus continues to be on developing a seamless omni-channel experience for our customers regardless of their transaction channel. Our digital transformation continues with efforts around enhancing our website to support the Direct business. The amount of traffic coming through mobile devices is growing significantly. As a result, we continue to utilize best-in-class technology to improve our customers' digital shopping experiences and build on the advances we have made to capitalize on the variety of ways customers are shopping at Cabela's today. We have seen successes in our social marketing initiatives and now have over 3 million fans on Facebook. Our omni-channel marketing efforts are resulting in increases in new customers, as well as in customer engagement with a consistent experience across all channels. Our goal is to create a digital presence that mirrors our customers' in-store shopping experience. Continuing into 2014, we realized improvements in our website traffic, growth in multi-channel customers, and progress in our print-to-digital transformation. We have developed a multi-year approach to reverse the downward trend in our Direct segment and transform our legacy catalog business into an omni-channel enterprise supporting transformation to digital, e-commerce, and mobile while optimizing the customer experience with our growing retail footprint. We are continuing our efforts in our print-to-digital transformation. 35 --------------------------------------------------------------------------------Comparing Direct segment results for the three and six months ended June 28, 2014, to the three and six months ended June 29, 2013: • revenue decreased $33 million, or 18.3%, and $79 million, or 19.4%; • operating income decreased $7 million, or 21.7%, and $18 million, or 24.4%; and • operating income as a percentage of Direct segment revenue increased 70 basis points to 16.4%, but decreased 120 basis points to 17.5%, respectively. The decreases in Direct revenue comparing the respective periods was primarily due to a decrease in the hunting equipment product category, primarily due to a substantial decrease in the sales of ammunition and other shooting related categories compared to the first six months of 2013. We are planning to build a 590,000 square foot distribution center in Tooele, Utah, to support our planned growth. We expect to have this distribution center operational by July 2015. At June 28, 2014, construction was in its initial stages. As of August 2013, we have leased a 325,000 square foot distribution center in Tooele, Utah, which is expected to be in use through the third quarter of 2015. Cabela's CLUB continues to manage credit card delinquencies and charge-offs below industry average by adhering to our conservative underwriting criteria and active account management. Comparing Cabela's CLUB results for the three and six months ended June 28, 2014, to the three and six months ended June 29, 2013: • Financial Services revenue increased $21 million, or 23.5%, and $34 million, or 19.3%; • the number of average active accounts increased 7.7%, and 7.8%, respectively, to 1.8 million, and the average balance per active account increased $90 and $87, respectively; • the average balance of our credit card loans increased 12.4% in both the three and the six month periods to $3.8 billion; and • net charge-offs as a percentage of average credit card loans decreased 20 basis points to 1.67%, and 14 basis points to 1.73%, respectively. During the six months ended June 28, 2014, the Financial Services segment completed a term securitization totaling $300 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. Current Business Environment Macroeconomic Environment - Beginning in August 2013, and continuing through the second quarter of fiscal 2014, we experienced a significant deceleration in the sales of firearms and ammunition as well as a challenging consumer environment across all business channels. To address these trends, we adjusted our promotional spending and implemented operating expense controls to levels consistent with how our business is performing. We will continue to manage our operating costs accordingly through the remainder of fiscal 2014. The Financial Services segment continues to monitor developments in the securitization and certificates of deposit markets to ensure adequate access to liquidity. We expect our charge-off rates and delinquency levels to remain below industry averages. Visa Litigation Settlement - In June 2005, a number of entities sued Visa and several member banks, and other credit card associations, alleging, among other things, that Visa and its member banks violated United States antitrust laws by conspiring to fix the level of interchange fees. In July 2012, the parties to this litigation entered into a settlement agreement to resolve the claims brought by the class members. On December 13, 2013, the settlement received final court approval. Among other things, the settlement agreement required the distribution to class merchants of an amount equal to 10 basis points of default interchange across all credit rate categories for a period of eight consecutive months, which otherwise would have been paid to issuers like WFB. To date, WFB has not been named as a defendant in any credit card industry lawsuits. During the three months ended June 28, 2014, the remaining related liability of $1 million was settled. Therefore, at June 28, 2014, no liability was outstanding for this settlement compared to $4.7 million at December 28, 2013, and $11.3 million at June 29, 2013. 36-------------------------------------------------------------------------------- Operations Review The three months ended June 28, 2014, and June 29, 2013, each consisted of 13 weeks and the six months ended June 28, 2014, and June 29, 2013, each consisted of 26 weeks. Our operating results expressed as a percentage of revenue were as follows for the periods presented. Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, 2014 2013 2014 2013 Revenue 100.00 % 100.00 % 100.00 % 100.00 % Cost of revenue 53.54 54.63 54.84 55.93 Gross profit (exclusive of depreciation and amortization) 46.46 45.37 45.16 44.07 Selling, distribution, and administrative expenses 36.92 36.40 37.53 34.64 Impairment and restructuring charges 0.08 0.12 0.04 0.06 Operating income 9.46 8.85 7.59 9.37 Other income (expense): Interest expense, net (0.74 ) (0.52 ) (0.63 ) (0.59 ) Other income, net 0.13 0.15 0.21 0.17 Total other income (expense), net (0.61 ) (0.37 ) (0.42 ) (0.42 ) Income before provision for income taxes 8.85 8.48 7.17 8.95 Provision for income taxes 3.13 2.59 2.51 2.89 Net income 5.72 % 5.89 % 4.66 % 6.06 % Results of Operations - Three Months Ended June 28, 2014, Compared to June 29, 2013 Revenues Retail revenue includes sales realized and customer services performed at our retail stores, sales from orders placed through our retail store Internet kiosks, and sales from customers utilizing our in-store pick-up program. Direct revenue includes Internet and call center (catalog) sales from orders placed through our website, over the phone, and by mail where the merchandise is shipped to non-retail store locations. Financial Services revenue is comprised of interest and fee income, interchange income, other non-interest income, interest expense, provision for loan losses, and customer rewards costs from our credit card operations. Other revenue sources include fees for our hunting and fishing outfitter services, fees for our full-service travel agency business, real estate rental income and land sales, and other complementary business services. Comparisons and analysis of our revenues are presented below for the three months ended: June 28, June 29, 2014 % 2013 % Increase (Decrease) % Change (Dollars in Thousands) Retail $ 500,436 65.7 % $ 483,923 63.9 % $ 16,513 3.4 % Direct 147,116 19.3 180,124 23.8 (33,008 ) (18.3 ) Financial Services 109,364 14.4 88,578 11.7 20,786 23.5 Other 4,285 0.6 4,180 0.6 105 2.5 Total $ 761,201 100.0 % $ 756,805 100.0 % $ 4,396 0.6 37-------------------------------------------------------------------------------- Product Sales Mix - The following table sets forth the percentage of our merchandise revenue contributed by major product categories for our Retail and Direct segments and in total for the three months ended June 28, 2014, and June 29, 2013. Retail Direct Total June 28, June 29, June 28, June 29, June 28, June 29, 2014 2013 2014 2013 2014 2013 Hunting Equipment 40.2 % 45.0 % 32.0 % 39.6 % 38.3 % 43.5 % General Outdoors 41.2 37.2 45.7 38.9 42.2 37.7 Clothing and Footwear 18.6 17.8 22.3 21.5 19.5 18.8 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % The hunting equipment merchandise category includes a wide variety of firearms, ammunition, optics, archery products, and related accessories and supplies. The general outdoors merchandise category includes a full range of equipment and accessories supporting all outdoor activities, including all types of fishing and tackle products, boats and marine equipment, camping gear and equipment, food preparation and outdoor cooking products, all-terrain vehicles and accessories for automobiles and all-terrain vehicles, wildlife and land management products and services, including compact tractors and tractor attachments, and gifts and home furnishings. The clothing and footwear merchandise category includes fieldwear apparel and footwear, sportswear, casual clothing and footwear, and workwear products. Retail Revenue - Retail revenue increased $17 million, or 3.4%, in the three months ended June 28, 2014, compared to the three months ended June 29, 2013, primarily due to an increase of $78 million in revenue from the addition of new retail stores, as our new retail store formats continue to generate a significant increase in sales per square foot. The increase in retail revenue from new retail stores was partially offset by a decrease in comparable store sales of $61 million. Comparable store sales were down across all major product categories comparing the three months ended June 28, 2014, to the three months ended June 29, 2013, but primarily in the hunting equipment category. We believe the decreases in ammunition sales have begun to level out and are expected to return to more normalized levels for the remainder of fiscal 2014. Comparable store sales and analysis are presented below for the three months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Comparable stores sales $ 370,725 $ 431,876 $ (61,151 ) (14.2 )% Direct Revenue - Direct revenue decreased $33 million, or 18.3%, in the three months ended June 28, 2014, compared to the three months ended June 29, 2013. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a substantial decrease in the sales of ammunition and other shooting related categories compared to the second quarter of 2013. 38--------------------------------------------------------------------------------Financial Services Revenue - The following table sets forth the components of Financial Services revenue for the three months ended: June 28, June 29, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Interest and fee income $ 94,652 $ 81,189 $ 13,463 16.6 % Interest expense (15,804 ) (15,937 ) (133 ) (0.8 ) Provision for loan losses (10,314 ) (11,851 ) (1,537 ) (13.0 ) Net interest income, net of provision for loan losses 68,534 53,401 15,133 28.3 Non-interest income: Interchange income 91,512 85,697 5,815 6.8 Other non-interest income 867 1,400 (533 ) (38.1 ) Total non-interest income 92,379 87,097 5,282 6.1 Less: Customer rewards costs (51,549 ) (51,920 ) 371 0.7 Financial Services revenue $ 109,364 $ 88,578 $ 20,786 23.5 Financial Services revenue increased $21 million, or 23.5%, for the three months ended June 28, 2014, compared to the three months ended June 29, 2013. The increase in interest and fee income of $13 million was due to an increase in credit card loans and an increase in the mix of credit card loans carrying interest, partially offset by lower London Interbank Offered Rate ("LIBOR") rates. The increase in interchange income of $6 million was primarily due to an increase in credit card purchases. The following table sets forth the components of Financial Services revenue as a percentage of average total credit card loans, including any accrued interest and fees, for the three months ended: June 28, June 29, 2014 2013 Interest and fee income 10.0 % 9.6 % Interest expense (1.7 ) (1.9 ) Provision for loan losses (1.1 ) (1.4 ) Interchange income 9.6 10.1 Other non-interest income 0.1 0.2 Customer rewards costs (5.4 ) (6.1 ) Financial Services revenue 11.5 % 10.5 % Key statistics reflecting the performance of Cabela's CLUB are shown in the following chart for the three months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands Except Average Balance per Account ) Average balance of credit card loans (1) $ 3,808,842 $ 3,387,851 $ 420,991 12.4 % Average number of active credit card accounts 1,778,556 1,651,288 127,268 7.7 Average balance per active credit card account (1) $ 2,142 $ 2,052 $ 90 4.4 Net charge-offs on credit card loans (1) $ 15,864 $ 15,879 $ (15 ) (0.1 ) Net charge-offs as a percentage of average credit card loans (1) 1.67 % 1.87 % (0.20 )% (1) Includes accrued interest and fees 39-------------------------------------------------------------------------------- The average balance of credit card loans increased to $3.8 billion, or 12.4%, for the three months ended June 28, 2014, compared to the three months ended June 29, 2013, due to an increase in the number of active accounts and the average balance per account. The average number of active accounts increased to 1.8 million, or 7.7%, compared to the three months ended June 29, 2013, due to our successful marketing efforts in new account acquisitions. We define an active credit card account as any account with an outstanding debit or credit balance at the end of any respective month. Net charge-offs as a percentage of average credit card loans decreased to 1.67% for the three months ended June 28, 2014, down 20 basis points compared to the three months ended June 29, 2013, due to improvements in delinquencies, delinquency roll-rates and recovery rates. 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 $5 million in both the three months ended June 28, 2014, and the three months ended June 29, 2013. Merchandise Gross Profit Comparisons and analysis of our gross profit on merchandising revenue are presented below for the three months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Merchandise sales $ 646,866 $ 663,684 $ (16,818 ) (2.5 )% Merchandise gross profit 239,416 250,219 (10,803 ) (4.3 ) Merchandise gross profit as a percentage of merchandise sales 37.0 % 37.7 % (0.7 )% Merchandise Gross Profit - Our merchandise gross profit decreased $11 million, or 4.3%, to $239 million in the three months ended June 28, 2014, compared to the three months ended June 29, 2013. The decrease in our merchandise gross profit was primarily due to a decrease in the sales of firearms and ammunition, a decrease in comparable store sales, and to an adjustment in the presentation of reimbursement between segments for certain promotional costs. Our merchandise gross profit as a percentage of merchandise sales decreased 70 basis points to 37.0% in the three months ended June 28, 2014, compared to the three months ended June 29, 2013. The decrease in our merchandise gross profit as a percentage of merchandise sales comparing the respective periods was entirely due to an adjustment in the presentation of reimbursement between segments for certain promotional costs. The impact of this adjustment was to increase Financial Services revenue by $5 million and increase merchandise cost of sales by the same amount. This new presentation will be ongoing and had no impact on consolidated operating income or earnings per diluted share. Selling, Distribution, and Administrative Expenses Selling, distribution, and administrative expenses include all operating expenses related to our retail stores, Internet website, distribution centers, product procurement, Cabela's CLUB credit card operations, and overhead costs, including: advertising and marketing, catalog costs, employee compensation and benefits, occupancy costs, information systems processing, and depreciation and amortization. Comparisons and analysis of our selling, distribution, and administrative expenses are presented below for the three months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Selling, distribution, and administrative expenses $ 281,051 $ 275,468 $ 5,583 2.0 % SD&A expenses as a percentage of total revenue 36.9 % 36.4 % 0.5 % Retail store pre-opening costs $ 6,265 $ 4,597 $ 1,668 36.3 40-------------------------------------------------------------------------------- Selling, distribution, and administrative expenses increased $6 million, or 2.0%, in the three months ended June 28, 2014, compared to the three months ended June 29, 2013. Expressed as a percentage of total revenue, selling, distribution, and administrative expenses increased 50 basis points to 36.9% in the three months ended June 28, 2014, compared to the three months ended June 29, 2013. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. The most significant factors contributing to the changes in selling, distribution, and administrative expenses in these respective periods included: • an increase of $8 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores as well as corporate offices; • a decrease of $6 million in employee compensation, benefits, and contract labor primarily in part related to our emphasis on operating expense management; • an increase of $3 million in fraudulent transactions on the Cabela's CLUB credit card; and • an increase of $1 million in software-related expenses primarily to support operational growth. Significant changes in our consolidated selling, distribution, and administrative expenses related to specific business segments included the following: Retail Segment: • An increase of $5 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores. • An increase of $1 million in employee compensation, benefits, and contract labor primarily due to the opening of new retail stores. Direct Segment: • A decrease of $5 million in employee compensation, benefits, and contract labor in part related to our emphasis on operating expense management. Financial Services Segment: • An increase of $3 million in fraudulent transactions on the Cabela's CLUB credit card. • An increase of $1 million in employee compensation, benefits, and contract labor to support operational growth. Corporate Overhead, Distribution Centers, and Other: • An increase of $3 million in building costs primarily related to the operations and maintenance of our corporate office to support operational growth. • A decrease of $3 million in employee compensation, benefits, and contract labor in part related to our emphasis on operating expense management. • An increase of $1 million in software-related expenses primarily to support operational growth. Impairment and Restructuring Charges We evaluate the recoverability of property and equipment, other property, and goodwill and intangibles whenever indicators of impairment exist using significant unobservable inputs. This evaluation includes existing store locations and future retail store sites. 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. On June 11, 2014, we announced the transition to a third-party logistics provider for our distribution needs in Canada and the closing of our distribution center in Winnipeg, Manitoba, in March 2015. The third-party logistics provider will begin processing Canada merchandise in a Calgary, Alberta, distribution center in September 2014. Accordingly, in the three months ended June 28, 2014, the Company recognized a restructuring charge related to employee severance agreements and termination benefits totaling $1 million. This restructuring charge was recorded to the Corporate Overhead and Other segment. We expect to incur approximately $4 million in additional incremental expenses related to the transition to a third-party logistics provider and the closing of our current distribution center - $1 million in the last half of fiscal 2014 and $3 million in the first half of fiscal 2015. 41 -------------------------------------------------------------------------------- We recognized an impairment loss totaling $1 million in the three months ended June 29, 2013, related to the closure of our former Winnipeg retail store and the opening of a new next-generation store in Winnipeg in May 2013. The impairment loss of $1 million included leasehold improvements write-offs as well as lease cancellation and restoration costs. This impairment loss was recorded to the Retail segment ($820) and the Corporate Overhead and Other segment ($117). Operating Income Operating income is revenue less cost of revenue and selling, distribution, and administrative expenses, and impairment and restructuring charges. Operating income for our merchandise business segments excludes costs associated with operating expenses of distribution centers, procurement activities, and other corporate overhead costs. Comparisons and analysis of operating income are presented below for the three months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Total operating income $ 71,991 $ 66,935 $ 5,056 7.6 % Total operating income as a percentage of total revenue 9.5 % 8.8 % 0.7 % Operating income by business segment: Retail $ 99,806 $ 91,073 $ 8,733 9.6 Direct 24,063 30,731 (6,668 ) (21.7 ) Financial Services 23,587 25,915 (2,328 ) (9.0 ) Operating income as a percentage of segment revenue: Retail 19.9 % 18.8 % 1.1 % Direct 16.4 17.1 (0.7 ) Financial Services 22.6 29.3 (6.7 ) Operating income increased $5 million, or 7.6%, in the three months ended June 28, 2014, compared to the three months ended June 29, 2013, and operating income as a percentage of revenue increased 70 basis points to 9.5% in the three months ended June 28, 2014. The increase in total operating income and operating income as a percentage of revenue was primarily due to increased contributions from our Financial Services segment and more favorable sales in merchandise with a higher gross margin combined with a reduction of sales in lower margin merchandise such as firearms and ammunition. This increase was partially offset by higher consolidated operating expenses. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. We plan to continue our retail expansion, our omni-channel initiatives, and our Cabela's branded product investments as we focus on expense management and emphasize corporate frugality. Under an Intercompany Agreement, the Financial Services segment pays to the Retail and Direct business segments a fixed license fee that includes 70 basis points on all originated charge volume of the Cabela's CLUB Visa credit card portfolio. In addition, among other items, the agreement requires the Financial Services segment to reimburse the Retail and Direct segments for certain promotional costs, which are recorded as a reduction to Financial Services segment revenue and as a reduction to merchandise costs associated with the Retail and Direct segments. Also, if the total risk-based capital ratio of WFB is greater than 13% at any quarter end, the Financial Services segment must pay an additional license fee to the Retail and Direct business segments equal to 50% of the amount that the total risk-based capital ratio exceeds 13%. At March 31, 2014, the total risk-based capital ratio of WFB exceeded this 13% threshold; therefore, an additional license fee of $11 million was paid in April 2014 by the Financial Services segment to the Retail segment ($7 million) and the Direct segment ($4 million). Total fees paid under the Intercompany Agreement by the Financial Services segment to these two segments, including the $11 million payment triggered by the excess total risk-based capital ratio provision, increased $15 million in the three months ended June 28, 2014, compared to the three months ended June 29, 2013; a $15 million increase to the Retail segment and no change to the Direct segment. 42 --------------------------------------------------------------------------------Interest (Expense) Income, Net Interest expense, net of interest income, was $6 million in the three months ended June 28, 2014, compared to $4 million in the three months ended June 29, 2013. The increase in interest expense in the three months ended June 28, 2014, is due to an increase in interest expense associated with our uncertain tax positions and increases in interest expense due to increases in the outstanding balances on our revolving credit facility during the three months ended June 28, 2014, compared to the three months ended June 29, 2013. Other Non-Operating Income, Net Other non-operating income was $1 million in both the three months ended June 28, 2014, and the three months ended June 29, 2013. This income is primarily from interest earned on our economic development bonds. Provision for Income Taxes Our effective tax rate was 35.4% for the three months ended June 28, 2014, compared to 30.5% for the three months ended June 29, 2013. The increase in our effective tax rate comparing the respective periods is primarily due to an increase in our state effective tax rate and the mix of taxable income between the United States and foreign tax jurisdictions. Results of Operations - Six Months Ended June 28, 2014, Compared to June 29, 2013 Revenues Comparisons and analysis of our revenues are presented below for the six months ended: June 28, June 29, Increase 2014 % 2013 % (Decrease) % Change (Dollars in Thousands) Retail $ 941,385 63.3 % $ 970,672 62.2 % $ (29,287 ) (3.0 )% Direct 326,532 22.0 405,282 26.0 (78,750 ) (19.4 ) Financial Services 207,942 14.0 174,350 11.2 33,592 19.3 Other 11,165 0.7 8,998 0.6 2,167 24.1 Total $ 1,487,024 100.0 % $ 1,559,302 100.0 % $ (72,278 ) (4.6 ) Product Sales Mix - The following table sets forth the percentage of our merchandise revenue contributed by major product categories for our Retail and Direct segments and in total for the six months ended June 28, 2014, and June 29, 2013. Retail Direct Total June 28, June 29, June 28, June 29, June 28, June 29, 2014 2013 2014 2013 2014 2013 Hunting Equipment 45.8 % 52.7 % 35.9 % 44.0 % 43.3 % 50.1 % General Outdoors 34.7 29.8 38.6 32.5 35.7 30.6 Clothing and Footwear 19.5 17.5 25.5 23.5 21.0 19.3 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 43-------------------------------------------------------------------------------- Retail Revenue - Retail revenue decreased $29 million, or 3.0%, in the six months ended June 28, 2014, compared to the six months ended June 29, 2013, primarily due to a decrease of $161 million in comparable store sales. Comparable store sales were down across all major product categories comparing the six months ended June 28, 2014, to the six months ended June 29, 2013, but primarily in the hunting equipment category. We believe the decreases in ammunition sales have begun to level out and are expected to return to more normalized levels for the remainder of fiscal 2014. Retail revenue from new stores increased $129 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013, as our new retail store formats continue to generate a significant increase in sales per square foot. Comparable store sales and analysis are presented below for the six months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Comparable stores sales $ 730,983 $ 891,853 $ (160,870 ) (18.0 )% Direct Revenue - Direct revenue decreased $79 million, or 19.4%, in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. The decrease in Direct revenue was primarily due to a decrease in the hunting equipment product category, mostly due to a substantial decrease in the sales of ammunition and other shooting related categories compared to the first half of 2013. Financial Services Revenue - The following table sets forth the components of Financial Services revenue for the six months ended: June 28, June 29, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Interest and fee income $ 188,871 $ 162,438 $ 26,433 16.3 % Interest expense (31,690 ) (29,788 ) 1,902 6.4 Provision for loan losses (23,028 ) (24,626 ) (1,598 ) (6.5 ) Net interest income, net of provision for loan losses 134,153 108,024 26,129 24.2 Non-interest income: Interchange income 173,939 163,327 10,612 6.5 Other non-interest income 1,622 2,683 (1,061 ) (39.5 ) Total non-interest income 175,561 166,010 9,551 5.8 Less: Customer rewards costs (101,772 ) (99,684 ) 2,088 2.1 Financial Services revenue $ 207,942 $ 174,350 $ 33,592 19.3 44-------------------------------------------------------------------------------- Financial Services revenue increased $34 million, or 19.3%, for the six months ended June 28, 2014, compared to the six months ended June 29, 2013. The increase in interest and fee income of $26 million was due to an increase in credit card loans and increase in the mix of credit card loans carrying interest, partially offset by lower LIBOR rates. The increases in interchange income of $11 million and customer rewards costs of $2 million were primarily due to an increase in credit card purchases. The following table sets forth the components of Financial Services revenue as a percentage of average total credit card loans, including any accrued interest and fees, for the six months ended: June 28, June 29, 2014 2013 Interest and fee income 10.0 % 9.7 % Interest expense (1.7 ) (1.8 ) Provision for loan losses (1.2 ) (1.5 ) Interchange income 9.2 9.7 Other non-interest income 0.1 0.2 Customer rewards costs (5.4 ) (5.9 ) Financial Services revenue 11.0 % 10.4 % Key statistics reflecting the performance of Cabela's CLUB are shown in the following chart for the six months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands Except Average Balance per Account ) Average balance of credit card loans (1) $ 3,783,171 $ 3,367,002 $ 416,169 12.4 % Average number of active credit card accounts 1,770,669 1,642,420 128,249 7.8 Average balance per active credit card account (1) $ 2,137 $ 2,050 $ 87 4.2 Net charge-offs on credit card loans (1) $ 32,783 $ 31,464 $ 1,319 4.2 Net charge-offs as a percentage of average credit card loans (1) 1.73 % 1.87 % (0.14 )% (1) Includes accrued interest and fees The average balance of credit card loans increased to $3.8 billion, or 12.4%, for the six months ended June 28, 2014, compared to the six months ended June 29, 2013, due to an increase in the number of active accounts and the average balance per account. The average number of active accounts increased to 1.8 million, or 7.8%, compared to the six months ended June 29, 2013, due to our successful marketing efforts in new account acquisitions. Net charge-offs as a percentage of average credit card loans decreased to 1.73% for the six months ended June 28, 2014, down 14 basis points compared to the six months ended June 29, 2013, due to improvements in delinquencies, delinquency roll-rates, and recovery rates. We define an active credit card account as any account with an outstanding debit or credit balance at the end of any respective month. See "Asset Quality of Cabela's CLUB" in this report for additional information on trends in delinquencies and non-accrual loans and analysis of our allowance for loan losses. Other Revenue Other revenue increased to $12 million in the six months ended June 28, 2014, compared to $10 million in the six months ended June 29, 2013, primarily due to an increase in real estate sales revenue comparing periods. 45 --------------------------------------------------------------------------------Merchandise Gross Profit Comparisons and analysis of our gross profit on merchandising revenue are presented below for the six months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Merchandise sales $ 1,267,063 $ 1,375,397 $ (108,334 ) (7.9 )% Merchandise gross profit 452,970 503,305 (50,335 ) (10.0 ) Merchandise gross profit as a percentage of merchandise sales 35.7 % 36.6 % (0.9 )% Merchandise Gross Profit - Our merchandise gross profit decreased $50 million, or 10.0%, to $453 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. The decrease in our merchandise gross profit was primarily due to a decrease in the sales of firearms and ammunition as well as a decrease in comparable store sales. Additionally, unfavorable weather caused us to experience a late start in sales in our spring products. Our merchandise gross profit as a percentage of merchandise sales decreased 90 basis points to 35.7% in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. The decrease in our merchandise gross profit as a percentage of merchandise sales comparing the respective periods was primarily due to lower margins in firearms, ammunition, optics, and the shooting product categories as supply has improved in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. The decrease in our merchandise gross profit as a percentage of merchandise sales comparing the respective periods was also partially due to the adjustment in the presentation of reimbursement between segments for certain promotional costs. The impact of this adjustment was to increase Financial Services revenue by $5 million and increase merchandise cost of sales by the same amount. This new presentation will be ongoing and had no impact on consolidated operating income or earnings per diluted share. Selling, Distribution, and Administrative Expenses Comparisons and analysis of our selling, distribution, and administrative expenses are presented below for the six months ended: June 28, June 29, Increase 2014 2013 (Decrease) % Change (Dollars in Thousands) Selling, distribution, and administrative expenses $ 558,056 $ 540,155 $ 17,901 3.3 % SD&A expenses as a percentage of total revenue 37.5 % 34.6 % 2.9 % Retail store pre-opening costs $ 13,075 $ 10,275 $ 2,800 27.3 Selling, distribution, and administrative expenses increased $18 million, or 3.3%, in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. The most significant factors contributing to the changes in selling, distribution, and administrative expenses in these respective periods included: • an increase of $17 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores as well as corporate offices; • a decrease of $4 million in employee compensation, benefits, and contract labor in part related to our emphasis on operating expense management; • an increase of $4 million in fraudulent transactions on the Cabela's CLUB credit card; and • an increase of $1 million in software expenses primarily to support operational growth. 46-------------------------------------------------------------------------------- Significant changes in our consolidated selling, distribution, and administrative expenses related to specific business segments included the following: Retail Segment: • An increase of $11 million in building costs and depreciation primarily related to the operations and maintenance of our new and existing retail stores as well as corporate offices. • An increase of $2 million in employee compensation, benefits, and contract labor primarily due to the opening of new retail stores. Direct Segment: • A decrease of $9 million in employee compensation, benefits, and contract labor in part related to our emphasis on operating expense management. • A decrease of $3 million in professional fees. • A decrease of $2 million in software expenses. Financial Services Segment: • An increase of $4 million in fraudulent transactions on the Cabela's CLUB credit card. • An increase of $3 million in employee compensation, benefits, and contract labor to support the growth of credit card operations. Corporate Overhead, Distribution Centers, and Other: • An increase of $6 million in building costs primarily related to the operations and maintenance of our corporate office to support operational growth. • An increase of $3 million in professional fees. • An increase of $3 million in software expenses primarily to support operational growth. Impairment and Restructuring Charges On June 11, 2014, we announced the transition to a third-party logistics provider for our distribution needs in Canada and the closing of our distribution center in Winnipeg, Manitoba, in March 2015. The third-party logistics provider will begin processing Canada merchandise in a Calgary, Alberta, distribution center in September 2014. Accordingly, in the three months ended June 28, 2014, the Company recognized a restructuring charge related to employee severance agreements and termination benefits totaling $1 million. This restructuring charge was recorded to the Corporate Overhead and Other segment. We expect to incur approximately $4 million in additional incremental expenses related to the transition to a third-party logistics provider and the closing of our current distribution center - $1 million in the last half of fiscal 2014 and $3 million in the first half of fiscal 2015. On February 4, 2014, a U. S. district court (the "Court") entered a judgment against the Company in the amount of $14 million relating to litigation regarding a breach of a retail store radius restriction. At December 28, 2013, pursuant to this judgment, we recognized a liability of $14 million, including an estimated amount for legal fees and costs, in its consolidated balance sheet. We are currently in the process of appealing the Court's ruling. On March 21, 2014, through a supplemental judgment, the Court ordered that we pay interest in the amount of $1 million to the plaintiff. Therefore, at March 29, 2014, our liability relating to this judgment totaled $16 million, which included an additional amount for estimated legal fees and costs. At June 28, 2014, this liability remained at $16 million. The increase to this liability in the first quarter of fiscal 2014 resulted in the Company recording an increase to the carrying amount of the related retail store property through a reduction in deferred grant income by the additional amounts accrued, plus legal and other costs. The additional depreciation adjustment that reduced the deferred grant income of this retail store property resulted in an increase in depreciation expense of $1 million that was recognized in the three months ended March 29, 2014. This increase in depreciation expense was included in selling, distribution, and administrative expenses in the condensed consolidated statements of income and was recorded to the Retail segment. There was no depreciation expense adjustment recognized in the three months ended June 28, 2014. We recognized an impairment loss totaling $1 million in the three months ended June 29, 2013, related to the closure of our former Winnipeg retail store and the opening of a new next-generation store in Winnipeg in May 2013. The impairment loss of $1 million included leasehold improvements write-offs as well as lease cancellation and restoration costs. This impairment loss was recorded to the Retail segment ($820) and the Corporate Overhead and Other segment ($117). 47 -------------------------------------------------------------------------------- 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. Operating Income Comparisons and analysis of operating income are presented below for the six months ended: June 28, June 29, 2014 2013 Increase (Decrease) % Change (Dollars in Thousands) Total operating income $ 112,844 $ 146,050 $ (33,206 ) (22.7 )% Total operating income as a percentage of total revenue 7.6 % 9.4 % (1.8 )% Operating income by business segment: Retail $ 152,104 $ 175,751 $ (23,647 ) (13.5 ) Direct 57,193 75,628 (18,435 ) (24.4 ) Financial Services 56,689 50,016 6,673 13.3 Operating income as a percentage of segment revenue: Retail 16.2 % 18.1 % (1.9 )% Direct 17.5 18.7 (1.2 ) Financial Services 27.9 28.7 (0.8 ) Operating income decreased $33 million, or 22.7%, in the six months ended June 28, 2014, compared to the six months ended June 29, 2013, and operating income as a percentage of revenue decreased 180 basis points over the same periods. The decreases in total operating income and total operating income as a percentage of total revenue were primarily due to decreases in revenue from our Retail and Direct business segments as well as a decrease in our merchandise gross profit. Selling, distribution, and administrative expenses increased primarily due to increases in new store costs and related support areas. These decreases to operating income were partially offset by increased operating income contributions from our Financial Services segment. We are focusing on expense management throughout the Company and have implemented many expense reduction efforts that should benefit operating income in upcoming periods. We plan to continue our retail expansion, our omni-channel initiatives, and our Cabela's branded product investments as we focus on expense management and emphasize corporate frugality. Under an Intercompany Agreement, the Financial Services segment pays to the Retail and Direct business segments a fixed license fee that includes 70 basis points on all originated charge volume of the Cabela's CLUB Visa credit card portfolio. In addition, among other items, the agreement requires the Financial Services segment to reimburse the Retail and Direct segments for certain promotional costs, which are recorded as a reduction to Financial Services segment revenue and as a reduction to merchandise costs associated with the Retail and Direct segments. Also, if the total risk-based capital ratio of WFB is greater than 13% at any quarter end, the Financial Services segment must pay an additional license fee to the Retail and Direct business segments equal to 50% of the amount that the total risk-based capital ratio exceeds 13%. At March 31, 2014, the total risk-based capital ratio of WFB exceeded this 13% threshold; therefore, an additional license fee of $11 million was paid in April 2014 by the Financial Services segment to the Retail segment ($7 million) and the Direct segment ($4 million). Total fees paid under the Intercompany Agreement by the Financial Services segment to these two segments, including the $11 million payment triggered by the excess total risk-based capital ratio provision, increased $15 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013; a $15 million increase to the Retail segment and no change to the Direct segment. 48 --------------------------------------------------------------------------------Interest (Expense) Income, Net Interest expense, net of interest income, was $9 million in both the six months ended June 28, 2014, and the six months ended June 29, 2013. The amount of interest capitalized in the six months ended June 28, 2014, compared to the six months ended June 29, 2013, increased due to more stores opened comparing the respective periods. However, the increase in the amount of interest capitalized comparing the respective periods was offset due to additional interest expense recognized in the six months ended June 28, 2014, associated with our uncertain tax positions and increases in interest expense due to increases in the outstanding balances on our revolving credit facility during the six months ended June 28, 2014, compared to the six months ended June 29, 2013. Other Non-Operating Income, Net Other non-operating income was $3 million in both the six months ended June 28, 2014, and the six months ended June 29, 2013. Provision for Income Taxes Our effective tax rate was 35.1% for the six months ended June 28, 2014, compared to 32.3% for the six months ended June 29, 2013. The increase in our effective tax rate comparing the respective periods is primarily due to an increase in our state effective tax rate and the mix of taxable income between the United States and foreign tax jurisdictions. Asset Quality of Cabela's CLUBDelinquencies and Non-Accrual We use the scores of Fair Isaac Corporation ("FICO"), a widely-used tool for assessing an individual's credit rating, as the primary credit quality indicator. The median FICO score of our credit cardholders was 795 at June 28, 2014, compared to 793 at December 28, 2013, and June 29, 2013. The following table reports delinquencies, including any delinquent non-accrual and restructured credit card loans, as a percentage of our credit card loans, including any accrued interest and fees, in a manner consistent with our monthly external reporting at the periods ended: June 28, December 28, June 29, 2014 2013 2013 Number of days delinquent: Greater than 30 days 0.65 % 0.69 % 0.66 % Greater than 60 days 0.36 0.42 0.39 Greater than 90 days 0.18 0.22 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: June 28, December 28, June 29, 2014 2013 2013 Number of days delinquent and still accruing (1): Greater than 30 days 0.55 % 0.57 % 0.54 % Greater than 60 days 0.30 0.35 0.32 Greater than 90 days 0.15 0.19 0.16(1) Excludes non-accrual and restructured loans which are presented below. Non-accrual 0.13 0.13 0.16 Restructured 0.86 0.95 1.19 49--------------------------------------------------------------------------------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 June 28, June 29, June 28, June 29, 2014 2013 2014 2013 (Dollars in Thousands) Balance, beginning of period $ 51,010 $ 64,700 $ 53,110 $ 65,600 Provision for loan losses 10,314 11,851 23,028 24,626 Charge-offs (18,655 ) (18,648 ) (38,620 ) (36,948 ) Recoveries 4,681 4,597 9,832 9,222 Net charge-offs (13,974 ) (14,051 ) (28,788 ) (27,726 ) Balance, end of period $ 47,350 $ 62,500 $ 47,350 $ 62,500 Net charge-offs on credit card loans $ (13,974 ) $ (14,051 ) $ (28,788 ) $ (27,726 ) Charge-offs of accrued interest and fees (recorded as a reduction in interest and fee income) (1,890 ) (1,828 ) (3,995 ) (3,738 ) Total net charge-offs including accrued interest and fees $ (15,864 ) $ (15,879 ) $ (32,783 ) $ (31,464 ) Net charge-offs including accrued interest and fees as a percentage of average credit card loans 1.67 % 1.87 % 1.73 % 1.87 % For the six months ended June 28, 2014, net charge-offs as a percentage of average credit card loans decreased to 1.73%, down 14 basis points compared to 1.87% for the six months ended June 29, 2013. We believe our charge-off levels remain well below industry averages. Our net charge-off rates and allowance for loan losses have decreased due to improved outlooks in the quality of our credit card portfolio evidenced by lower delinquencies, lower delinquency roll-rates, favorable charge-off trends, and declining loan balances in our restructured loan portfolio. Liquidity and Capital Resources Overview Our Retail and Direct segments and our Financial Services segment have significantly differing liquidity and capital needs. We believe that we will have sufficient capital available from cash on hand, our revolving credit facility, and other borrowing sources to fund our cash requirements and near-term growth plans for at least the next 12 months. At June 28, 2014, December 28, 2013, and June 29, 2013, cash on a consolidated basis totaled $134 million, $199 million, and $346 million, respectively, of which $91 million, $94 million, and $283 million, respectively, was cash at the Financial Services segment which will be utilized to meet this segment's liquidity requirements. During the six months ended June 28, 2014, the Financial Services segment completed a term securitization totaling $300 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. We evaluate the credit markets for certificates of deposit and securitizations to determine the most cost effective source of funds for the Financial Services segment. 50 -------------------------------------------------------------------------------- As of June 28, 2014, cash and cash equivalents held by our foreign subsidiaries totaled $38 million. Our intent is to permanently reinvest these funds outside the United States for capital expansion. The Company has not provided United States income taxes and foreign withholding taxes on the portion of undistributed earnings of foreign subsidiaries that the Company considers to be indefinitely reinvested outside of the United States as of December 28, 2013. If these foreign earnings were to be repatriated in the future, the related United States tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of the year ended 2013, the cumulative amount of earnings upon which United States income taxes have not been provided is approximately $152 million. If those earnings were not considered indefinitely invested, the Company estimates that an additional income tax expense of approximately $30 million would be recorded. Based on the Company's current projected capital needs and the current amount of cash and cash equivalents held by our foreign subsidiaries, we do not anticipate incurring any material tax costs beyond our accrued tax position in connection with any repatriation, but we may be required to accrue for unanticipated additional tax costs in the future if our expectations or the amount of cash held by our foreign subsidiaries change. Retail and Direct Segments - The primary cash requirements of our merchandising business relate to capital for new retail stores, purchases of inventory, investments in our management information systems and infrastructure, and general working capital needs. We historically have met these requirements with cash generated from our merchandising business operations, borrowing under revolving credit facilities, and issuing debt and equity securities. The cash flow we generate from our merchandising business is seasonal, with our peak cash requirements for inventory occurring from April through November. While we have consistently generated overall positive annual cash flow from our operating activities, other sources of liquidity are required by our merchandising business during these peak cash use periods. These sources historically have included short-term borrowings under our revolving credit facility and access to debt markets. While we generally have been able to manage our cash needs during peak periods, if any disruption occurred to our funding sources, or if we underestimated our cash needs, we would be unable to purchase inventory and otherwise conduct our merchandising business to its maximum effectiveness, which could result in reduced revenue and profits. On June 18, 2014, we amended our credit agreement which now provides for an unsecured $775 million revolving credit facility and permits the issuance of letters of credit up to $75 million and swing line loans up to $30 million. The credit agreement formerly provided for a $415 million revolving credit facility with the issuance of letters of credit up to $100 million and a $20 million limit on swing line loans. The credit facility may be increased to $800 million subject to certain terms and conditions. The term of the credit facility, which formerly expired on November 2, 2016, now expires on June 18, 2019. Advances under the credit facility will be used for the Company's general business purposes, including working capital support. Our unsecured $775 million revolving credit facility and unsecured senior notes contain certain financial covenants, including the maintenance of minimum debt coverage, a fixed charge coverage ratio, a leverage ratio, and a minimum consolidated net worth standard. In the event that we failed to comply with these covenants, a default would trigger and all principal and outstanding interest would immediately be due and payable. At June 28, 2014, and June 29, 2013, we were in compliance with all financial covenants under our credit agreements and unsecured notes. We anticipate that we will continue to be in compliance with all financial covenants under our credit agreements and unsecured notes through at least the next 12 months. We have an unsecured $20 million Canadian ("CAD") revolving credit facility for our operations in Canada. Borrowings are payable on demand with interest payable monthly. The credit facility permits the issuance of letters of credit up to $10 million CAD in the aggregate, which reduce the overall credit limit available under the credit facility. On February 13, 2014, we announced our intent to repurchase up to 650,000 shares of our common stock in open market transactions through February 2015. 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. Financial Services Segment - The primary cash requirements of the Financial Services segment relate to the financing of credit card loans. These cash requirements will increase if our credit card originations increase or if our cardholders' balances or spending increase. The Financial Services segment sources operating funds in the ordinary course of business through various financing activities, which include funding obtained from securitization transactions, obtaining brokered and non-brokered certificates of deposit, borrowing under its federal funds purchase agreements, and generating cash from operations. During the six months ending June 28, 2014, the Financial Services segment completed a term securitization totaling $300 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. We believe that these liquidity sources are sufficient to fund the Financial Services segment's foreseeable cash requirements including maturities and near-term growth plans. 51 -------------------------------------------------------------------------------- Operating, Investing, and Financing Activities The following table presents changes in our cash and cash equivalents for the six months ended: June 28, June 29, 2014 2013 (In Thousands) Net cash provided by operating activities $ 46,914 $ 182,712 Net cash used in investing activities (296,972 ) (309,420 ) Net cash provided by financing activities 185,373 183,462 2014 versus 2013 Operating Activities - Cash from operating activities decreased $136 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. Comparing the respective periods, cash generated from operations decreased $25 million, and we had net decreases of $67 million in accounts payable and accrued expenses, $46 million in prepaid expenses and other assets, and $14 million in inventories. Partially offsetting these decreases in cash from operating activities was an increase of $12 million relating to credit card loans originated from internal operations. Inventories increased $158 million at June 28, 2014, to $803 million, compared to December 28, 2013, while inventories increased $144 million at June 29, 2013, to $696 million, compared to fiscal year end 2012. The increase in inventories in 2014 is primarily due to the addition of new retail stores. Investing Activities - Cash provided by investing activities increased $12 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. Cash paid for property and equipment totaled $227 million in the six months ended June 28, 2014, compared to $135 million in the six months ended June 29, 2013. At June 28, 2014, the Company estimated it had total cash commitments of approximately $464 million outstanding for projected expenditures related to the development, construction, and completion of new retail stores and a new distribution center. This amount excludes any estimated costs associated with new stores where the Company does not have a commitment as of June 28, 2014. We expect to fund these estimated capital expenditures over the next 12 months with cash generated from operations and borrowings. In addition, net cash flows from credit card loans originated externally decreased $32 million. The Financial Services segment also purchased $135 million of U.S. government agency held-to-maturity securities during the six months ended June 29, 2013. Financing Activities - Cash provided by financing activities increased $2 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. Comparing the respective periods, this net change was primarily due to an increase in net borrowings on secured obligations of the Trust of the Financial Services segment of $203 million in the six months ended June 28, 2014, compared to the six months ended June 29, 2013. Additionally, we had increases of $178 million in net borrowings on our revolving credit facilities and inventory financing. Partially offsetting these increases were decreases of $370 million relating to changes in time deposits and $10 million relating to the change in unpresented checks. The following table presents the borrowing activities of our merchandising business and the Financial Services segment for the six months ended: June 28, June 29, 2014 2013 (In Thousands) Borrowings on revolving credit facilities and inventory financing, net of repayments $ 233,072 $ 55,013 Secured obligations of the Trust, net 205,000 2,250 Repayments of long-term debt (8,278 ) (8,270 ) Borrowings, net of repayments $ 429,794 $ 48,993 52-------------------------------------------------------------------------------- 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: June 28, June 29, 2014 2013 (In Thousands) Amounts available for borrowing under credit facilities (1) $ 795,000 $ 415,000 Principal amounts outstanding (236,245 ) (55,000 ) Outstanding letters of credit and standby letters of credit (38,112 ) (35,950 ) Remaining borrowing capacity, excluding the Financial Services segment facilities $ 520,643 $ 324,050 (1) Consists of our revolving credit facilities of $775 million and $415 million at June 28, 2014, and June 29, 2013, respectively, and $20 million CAD in a credit facility at June 28, 2014, for our operations in Canada. The Financial Services segment also has total borrowing availability of $85 million under its agreements to borrow federal funds. At June 28, 2014, the entire $85 million of borrowing capacity was available. Our $775 million unsecured credit agreement requires us to comply with certain financial and other customary covenants, including: • a fixed charge coverage ratio (as defined) of no less than 2.00 to 1 as of the last day of any fiscal quarter for the most recently ended four fiscal quarters (as defined); • a leverage ratio (as defined) of no more than 3.00 to 1 as of the last day of any fiscal quarter; and • a minimum consolidated net worth standard (as defined) as of the last day of each fiscal quarter. In addition, our unsecured senior notes contain various covenants and restrictions that are usual and customary for transactions of this type. Also, the debt agreements contain cross default provisions to other outstanding credit facilities. In the event that we failed to comply with these covenants, a default would trigger and all principal and outstanding interest would immediately be due and payable. At June 28, 2014, we were in compliance with all financial covenants under our credit agreements and unsecured notes. We anticipate that we will continue to be in compliance with all financial covenants under our credit agreements and unsecured notes through the next 12 months. Our unsecured $20 million CAD revolving credit facility also permits the issuance of letters of credit up to $10 million CAD in the aggregate, which reduce the overall credit limit available under the credit facility. 53 -------------------------------------------------------------------------------- Economic Development Bonds and Grants Economic Development Bonds - The governmental entity from which we purchase the bonds is not otherwise liable for repayment of principal and interest on the bonds to the extent that the associated taxes are insufficient to pay the bonds. If sufficient tax revenue is not generated by the subject properties, we will not receive scheduled payments and will be unable to realize the full value of the bonds carried on our condensed consolidated balance sheet. At June 28, 2014, December 28, 2013, and June 29, 2013, economic development bonds totaled $78 million, $79 million, and $79 million, respectively. On a quarterly basis, we perform various procedures to analyze the amounts and timing of projected cash flows to be received from our economic development bonds. We revalue each economic development bond using discounted cash flow models based on available market interest rates (Level 2 inputs) and management estimates, including the estimated amounts and timing of expected future tax payments (Level 3 inputs) to be received by the municipalities under tax increment financing districts. Projected cash flows are derived from sales and property taxes. Due to the seasonal nature of the Company's business, fourth quarter sales are significant to projecting future cash flows under the economic development bonds. We evaluate the impact of bond payments that have been received since the most recent quarterly evaluation, including those subsequent to the end of the quarter. Typically, bond payments are received twice annually. The payments received around the end of the fourth quarter provide us with additional facts for our fourth quarter projections. We make inquiries of local governments and/or economic development authorities for information on any anticipated third-party development, specifically on land owned by the Company, but also on land not owned by the Company in the tax increment financing development district, and to assess any current and potential development where cash flows under the bonds may be impacted by additional development and the anticipated development is material to the estimated and recorded carrying value based on projected cash flows. We make revisions to the cash flow estimates of each bond based on the information obtained. In those instances where the expected cash flows are insufficient to recover the current carrying value of the bond, we adjust the carrying value of the individual bonds to their revised estimated fair value. The governmental entity from which the Company purchases the bonds is not liable for repayment of principal and interest on the bonds to the extent that the associated taxes are insufficient to fund principal and interest amounts under the bonds. Should sufficient tax revenue not be generated by the subject properties, the Company may not receive all anticipated payments and thus will be unable to realize the full carrying values of the economic development bonds, which result in a corresponding decrease to deferred grant income. For the six months ended June 28, 2014, and June 29, 2013, there were no other than temporary fair value adjustments of economic development bonds and no adjustments of deferred grant income related to economic development bonds. However, at June 28, 2014, we identified economic development bonds with carrying values of $18 million where the actual tax revenues associated with these properties were lower than previously projected. We will continue to closely monitor the amounts and timing of projected cash flows from the properties related to these economic development bonds. However, if the subject properties do not generate sufficient tax revenue, the Company may not receive all anticipated payments which may result in the Company being unable to realize the full carrying value of these bonds, which would result in a corresponding decrease to deferred grant income. Grants - We generally have received grant funding in exchange for commitments made by us to the state or local government providing the funding. The commitments, such as assurance of agreed employment and wage levels at our retail stores or that the retail store will remain open, typically phase out over approximately five to ten years. If we fail to maintain the commitments during the applicable period, the funds we received may have to be repaid or other adverse consequences may arise, which could affect our cash flows and profitability. At June 28, 2014, the total amount of grant funding subject to a specific contractual remedy was $44 million. At June 28, 2014, December 28, 2013, and June 29, 2013, the amount the Company had recorded in liabilities in its condensed consolidated balance sheets relating to these grants was $23 million, $23 million, and $7 million, respectively. 54 -------------------------------------------------------------------------------- Securitization of Credit Card Loans The total amounts and maturities for our credit card securitizations as of June 28, 2014, were as follows: Third Party Total Investor Third Party Available Available Investor Interest Expected Series Type Capacity Capacity Outstanding Rate Maturity (Dollars in Thousands) 2010-I Term $ 45,000 $ - $ - Fixed January 2015 2010-I Term 255,000 255,000 255,000 Floating January 2015 2010-II Term 165,000 127,500 127,500 Fixed September 2015 2010-II Term 85,000 85,000 85,000 Floating September 2015 2011-II Term 200,000 155,000 155,000 Fixed June 2016 2011-II Term 100,000 100,000 100,000 Floating June 2016 2011-IV Term 210,000 165,000 165,000 Fixed October 2016 2011-IV Term 90,000 90,000 90,000 Floating October 2016 2012-I Term 350,000 275,000 275,000 Fixed February 2017 2012-I Term 150,000 150,000 150,000 Floating February 2017 2012-II Term 375,000 300,000 300,000 Fixed June 2017 2012-II Term 125,000 125,000 125,000 Floating June 2017 2013-I Term 385,000 327,250 327,250 Fixed February 2023 2013-II Term 152,500 100,000 100,000 Fixed August 2018 2013-II Term 197,500 197,500 197,500 Floating August 2018 2014-I Term 45,000 - - Fixed March 2017 2014-I Term 255,000 255,000 255,000 Floating March 2017 Total term 3,185,000 2,707,250 2,707,250 2008-III Variable Funding 260,115 225,000 - Floating March 2015 2011-I Variable Funding 352,941 300,000 - Floating March 2016 2011-III Variable Funding 588,235 500,000 - Floating March 2017Total variable 1,201,291 1,025,000 - Total available $ 4,386,291 $ 3,732,250 $ 2,707,250 We have been, and will continue to be, particularly reliant on funding from securitization transactions for the Financial Services segment. A failure to renew existing facilities or to add additional capacity on favorable terms as it becomes necessary could increase our financing costs and potentially limit our ability to grow the business of the Financial Services segment. Unfavorable conditions in the asset-backed securities markets generally, including the unavailability of commercial bank liquidity support or credit enhancements, could have a similar effect. During the six months ended June 28, 2014, the Financial Services segment completed a term securitization totaling $300 million and renewed one of its variable funding facilities for an additional three years and increased the commitment from $350 million to $500 million. We believe that these liquidity sources are sufficient to fund the Financial Services segment's foreseeable cash requirements, including maturities, and near-term growth plans. Furthermore, the securitized credit card loans of the Financial Services segment could experience poor performance, including increased delinquencies and credit losses, lower payment rates, or a decrease in excess spreads below certain thresholds. This could result in a downgrade or withdrawal of the ratings on the outstanding securities issued in the Financial Services segment's securitization transactions, cause early amortization of these securities, or result in higher required credit enhancement levels. Credit card loans performed within established guidelines and no events which could trigger an early amortization occurred during the six months ended June 28, 2014, the year ended December 28, 2013, and the six months ended June 29, 2013. 55 -------------------------------------------------------------------------------- Certificates of Deposit The Financial Services segment utilizes brokered and non-brokered certificates of deposit to partially finance its operating activities that are issued in minimum amounts of one hundred thousand dollars in various maturities. At June 28, 2014, the Financial Services segment had $841 million of certificates of deposit outstanding with maturities ranging from July 2014 to July 2023 and with a weighted average effective annual fixed rate of 2.21%. This outstanding balance compares to $1.1 billion at December 28, 2013, and $1.2 billion at June 29, 2013, with weighted average effective annual fixed rates of 2.14% and 2.30%, respectively. Impact of Inflation We do not believe that our operating results have been materially affected by inflation during the preceding three years. We cannot assure, however, that our operating results will not be adversely affected by inflation in the future. Contractual Obligations and Other Commercial Commitments In the normal course of business, we enter into various contractual obligations that may require future cash payments. For a description of our contractual obligations and other commercial commitments as of December 28, 2013, see our annual report on Form 10-K for the fiscal year ending December 28, 2013, under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations and Other Commercial Commitments." Off-Balance Sheet Arrangements Operating Leases - We lease various items of office equipment and buildings. Rent expense for these operating leases is recorded in selling, distribution, and administrative expenses in the condensed consolidated statements of income. Credit Card Limits - The Financial Services segment bears off-balance sheet risk in the normal course of its business. One form of this risk is through the Financial Services segment's commitment to extend credit to cardholders up to the maximum amount of their credit limits. The aggregate of such potential funding requirements totaled $29 billion above existing balances at the end of June 28, 2014. These funding obligations are not included on our condensed consolidated balance sheet. While the Financial Services segment has not experienced, and does not anticipate that it will experience, a significant draw down of unfunded credit lines by its cardholders, such an event would create a cash need at the Financial Services segment which likely could not be met by our available cash and funding sources. The Financial Services segment has the right to reduce or cancel these available lines of credit at any time. Seasonality Our business is seasonal in nature and interim results may not be indicative of results for the full year. Due to buying patterns around the holidays and the opening of hunting seasons, our merchandise revenue is traditionally higher in the third and fourth quarters than in the first and second quarters, and we typically earn a disproportionate share of our operating income in the fourth quarter. Because of our retail store expansion, and fixed costs associated with retail stores, our quarterly operating income may be further impacted by these seasonal fluctuations. We anticipate our sales will continue to be seasonal in nature. 56-------------------------------------------------------------------------------- |