| CABELAS INC ITEM 1A RISK FACTORS Risk Factors Risks Related to Our Merchandising Business If we cannot successfully implement our destination retail store expansion strategy, our growth and profitability would be adversely impacted |
| Since January 1, 1998, we have increased the number of our destination retail stores from two, totaling 124cmam000 square feet, to 14, totaling 2dtta1 million square feet |
| We currently plan to open five additional destination retail stores by the end of 2006 |
| We continue to actively seek additional locations to open new destination retail stores |
| Our ability to open new destination retail stores in a timely manner and operate them profitably depends on a number of factors, many of which are beyond our control, including: • our ability to manage the financial and operational aspects of our retail growth strategy; • our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data to determine consumer demand for our products in the locations we select; • our ability to negotiate and obtain economic development packages with local and state governments where our new destination retail stores would be located; • our ability to properly assess the implications of economic development packages and customer density to project the profitability of potential new destination retail store locations; • our ability to secure required governmental permits and approvals; 15 ______________________________________________________________________ [41]Table of Contents • our ability to hire and train skilled store operating personnel, especially management personnel; • the availability of construction materials and labor and the absence of significant construction delays or cost overruns; • our ability to provide a satisfactory mix of merchandise that is responsive to the needs of our customers living in the areas where new destination retail stores are built; • our ability to supply new destination retail stores with inventory in a timely manner; • our competitors building or leasing stores near our destination retail stores or in locations we have identified as targets for a new destination retail store; • general economic and business conditions affecting consumer confidence and spending and the overall strength of our business; and • the availability of financing on favorable terms |
| We may not be able to sustain the growth in the number of our destination retail stores, the revenue growth historically achieved by our destination retail stores or to maintain consistent levels of profitability in our retail business, particularly as we expand into markets now served by other large-format sporting goods retailers and mass merchandisers |
| In particular, new destination retail stores typically generate lower operating margins because pre-opening costs are fully expensed in the year of opening and because fixed costs, as a percentage of revenue, are higher |
| In addition, the substantial management time and resources which our destination retail store expansion strategy requires may result in disruption to our existing business operations which may harm our profitability |
| Our continued retail expansion will result in a higher number of destination retail stores, which could adversely affect the desirability of our destination retail stores, harm the operating results of our retail business and reduce the revenue of our direct business |
| As the number of our destination retail stores increases, our stores will become more highly concentrated in the geographic regions we serve |
| As a result, the number of customers and related revenue at individual stores may decline and the average amount of sales per square foot at our stores may be reduced |
| In addition, as we open more destination retail stores and as our competitors open stores with similar formats, our destination retail store format may become less unique and may be less attractive to customers as tourist and entertainment shopping locations |
| If either of these events occurs, the operating results of our retail business could be adversely affected |
| The growth in the number of our destination retail stores may also draw customers away from our direct business |
| If we are unable to properly manage the relationship between our direct business and our retail business, the revenue of our direct business could be adversely affected |
| Our failure to successfully manage our direct business could have a material adverse effect on our operating results and cash flows |
| During fiscal 2005, our direct business accounted for 62dtta6prca of the total revenue in our direct and retail businesses |
| Our direct business is subject to a number of risks and uncertainties, some of which are beyond our control, including the following: • our inability to properly adjust the fixed costs of a catalog mailing to reflect subsequent sales of the products marketed in the catalog; • lower and less predictable response rates for catalogs sent to prospective customers; • increases in US Postal Service rates, paper costs and printing costs resulting in higher catalog production costs and lower profits for our direct business; • failures to properly design, print and mail our catalogs in a timely manner; 16 ______________________________________________________________________ [42]Table of Contents • failures to introduce new catalog titles; • failures to timely fill customer orders; • changes in consumer preferences, willingness to purchase goods through catalogs or the Internet, weak economic conditions and economic uncertainty, and unseasonable weather in key geographic markets; • increases in software filters that may inhibit our ability to market our products through e-mail messages to our customers and increases in consumer privacy concerns relating to the Internet; • changes in applicable federal and state regulation, such as the Federal Trade Commission Act, the Children’s Online Privacy Act, the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act; • breaches of Internet security; and • failures in our Internet infrastructure or the failure of systems of third parties, such as telephone or electric power service, resulting in website downtime, customer care center closures or other problems |
| Any one or more of these factors could result in lower-than-expected revenue for our direct business |
| These factors could also result in increased costs, increased merchandise returns, slower turning inventories, inventory write-downs and working capital constraints |
| Because our direct business accounts for a significant portion of our total revenue, any performance shortcomings experienced by our direct business would likely have a material adverse effect on our operating results and cash flows |
| Intense competition in the outdoor recreation and casual apparel and footwear markets could reduce our revenue and profitability |
| The outdoor recreation and casual apparel and footwear markets are highly fragmented and competitive |
| We compete directly or indirectly with the following categories of companies: • other specialty retailers that compete with us across a significant portion of our merchandising categories through direct or retail businesses, such as Bass Pro Shops, Gander Mountain, Orvis, The Sportsman’s Guide and Sportsman’s Warehouse; • large-format sporting goods stores and chains, such as The Sports Authority, Dick’s Sporting Goods and Big 5 Sporting Goods; • retailers that currently compete with us through retail businesses that may enter the direct business; • mass merchandisers, warehouse clubs, discount stores and department stores, such as Wal-Mart and Target; and • casual outdoor apparel and footwear retailers, such as LL Bean, Land’s End and REI Many of our competitors have a larger number of stores, and some of them have substantially greater market presence, name recognition and financial, distribution, marketing and other resources than we have |
| In addition, if our competitors reduce their prices, we may have to reduce our prices in order to compete |
| Furthermore, some of our competitors have been aggressively building new stores in locations with high concentrations of our direct business customers |
| As a result of this competition, we may need to spend more on advertising and promotion |
| Some of our mass merchandising competitors, such as Wal-Mart, do not currently compete in many of the product lines we offer |
| If these competitors were to begin offering a broader array of competing products, or if any of the other factors listed above occurred, our revenue could be reduced or our costs could be increased, resulting in reduced profitability |
| We depend on vendors and service providers to operate our business and any disruption of their supply of products and services could have an adverse impact on our revenue and profitability |
| We depend on a number of vendors and service providers to operate our business, including: • vendors to supply our merchandise in sufficient quantities at competitive prices in a timely manner; 17 ______________________________________________________________________ [43]Table of Contents • outside printers and catalog production vendors to print and mail our catalogs and to convert our catalogs to digital format for website posting; • shipping companies, such as United Parcel Service, the US Postal Service and common carriers, for timely delivery of our catalogs, shipment of merchandise to our customers and delivery of merchandise from our vendors to us and from our distribution centers to our destination retail stores; • telephone companies to provide telephone service to our in-house customer care centers; • communications providers to provide our Internet users with access to our website and a website hosting service provider to host and manage our website; and • software providers to provide software and related services to run our operating systems for our direct and retail businesses |
| Any disruption in these services could have a negative impact on our ability to market and sell our products, and serve our customers |
| Our ten largest vendors collectively represented 16dtta8prca of our total purchases in fiscal 2005 |
| If we are unable to acquire suitable merchandise or lose one or more key vendors, we may not be able to offer products that are important to our merchandise assortment |
| We also are subject to risks, such as the unavailability of raw materials, labor disputes, union organizing activity, strikes, inclement weather, natural disasters, war and terrorism, and adverse general economic and political conditions, that might limit our vendors’ ability to provide us with quality merchandise on a timely basis |
| We have no contractual arrangements providing for continued supply from our key vendors and our vendors may discontinue selling to us at any time |
| We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality and more expensive than those we currently purchase |
| Any delay or failure in offering products to our customers could have an adverse impact on our revenue and profitability |
| In addition, if the cost of fuel rises, the cost to deliver merchandise to the customers of our direct business and from our distribution centers to our destination retail stores may rise, which could have an adverse impact on our profitability |
| Political and economic uncertainty and unrest in foreign countries where our vendors are located could adversely affect our operating results |
| In fiscal 2005, approximately 59dtta2prca of our merchandise was obtained directly from vendors located in foreign countries, with approximately 36dtta1prca of our merchandise being obtained from vendors located in China, Taiwan and Japan |
| In addition, we believe that a significant portion of our other vendors obtain their products from foreign countries that may also be subject to political and economic uncertainty |
| We are subject to risks and uncertainties associated with changing economic and political conditions in foreign countries where our vendors are located, such as: • increased import duties, tariffs, trade restrictions and quotas; • work stoppages; • economic uncertainties (including inflation); • adverse foreign government regulations; • wars, fears of war and terrorist attacks and organizing activities; • adverse fluctuations of foreign currencies; and • political unrest |
| We cannot predict when, or the extent to which, the countries in which our products are manufactured will experience any of the above events |
| Any event causing a disruption or delay of imports from foreign locations would likely increase the cost or reduce the supply of merchandise available to us and would adversely affect our operating results, particularly if imports of our Cabela’s branded merchandise were adversely affected as our margins are higher on our Cabela’s branded merchandise |
| 18 ______________________________________________________________________ [44]Table of Contents Due to the seasonality of our business, our annual operating results would be adversely affected if our revenue during the third and fourth fiscal quarters were substantially below expectations |
| We experience seasonal fluctuations in our revenue and operating results |
| Historically, we have realized a significant portion of our revenue and substantially all of our earnings for the year during the third and fourth fiscal quarters, with a majority of the revenue and earnings for these quarters realized in the fourth fiscal quarter |
| In fiscal 2005, we generated 23dtta9prca and 37dtta5prca of our revenue, and 22dtta4prca and 58dtta6prca of our net income, in the third and fourth fiscal quarters, respectively |
| We incur significant additional expenses in the third and fourth fiscal quarters due to higher customer purchase volumes and increased staffing |
| If we miscalculate the demand for our products generally or for our product mix during these two quarters, our revenue could decline, which would harm our financial performance |
| In addition, abnormally warm weather conditions during the third and fourth fiscal quarters can reduce sales of many of the products normally sold during this time period and inclement weather can reduce store traffic or cause us to temporarily close stores causing a reduction in revenue |
| Because a substantial portion of our operating income is derived from our third and fourth fiscal quarter revenue, a shortfall in expected third and fourth fiscal quarter revenue would cause our annual operating results to suffer significantly |
| A decline in discretionary consumer spending could reduce our revenue |
| Our revenue depends on discretionary consumer spending, which may decrease due to a variety of factors beyond our control, including: • unfavorable general business conditions; • increases in interest rates; • increases in inflation; • wars, fears of war and terrorist attacks and organizing activities; • increases in consumer debt levels and decreases in the availability of consumer credit; • adverse or unseasonable weather conditions or events; • increases in gasoline prices reducing the willingness to travel to our destination retail stores; • adverse changes in applicable laws and regulations; • increases in taxation; • adverse unemployment trends; and • other factors that adversely influence consumer confidence and spending |
| Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions |
| If this occurs, our revenue would decline |
| If we lose key management or are unable to attract and retain the talent required for our business, our operating results could suffer |
| Our future success depends to a significant degree on the skills, experience and efforts of Dennis Highby, our President and Chief Executive Officer, and other key personnel, including our senior executive management and merchandising teams |
| With the exception of our Chairman, Richard N Cabela, and our Vice Chairman, James W Cabela, none of our senior management or directors have employment agreements other than our Management Change of Control Severance Agreements |
| We do not carry key-man life insurance on any of our executives or key management personnel |
| In addition, our corporate headquarters is located in a sparsely 19 ______________________________________________________________________ [45]Table of Contents populated rural area which may make it difficult to attract and retain qualified individuals for key management positions |
| The loss of the services of any of these individuals or the inability to attract and retain qualified individuals for our key management positions could cause our operating results to suffer |
| Our business depends on our ability to meet our labor needs and if we are unable to do so, our destination retail store expansion strategy may be delayed and our revenue growth may suffer |
| Our success depends on hiring, training, managing and retaining quality managers, sales associates and employees in our destination retail stores and customer care centers |
| Our corporate headquarters, distribution centers, return center and some of our destination retail stores are located in sparsely populated rural areas |
| It may be difficult to attract and retain qualified personnel, especially management and technical personnel, in these areas |
| Competition for qualified management and technical employees could require us to pay higher wages or grant above market levels of stock compensation to attract a sufficient number of employees |
| If we are unable to attract and retain qualified personnel as needed, the implementation of our destination retail store expansion strategy may be delayed and our revenue growth may suffer |
| Our use tax collection policy for our direct business may subject us to liabilities for unpaid use taxes on past sales |
| Many states have attempted to require that out-of-state direct marketers, whose only contacts with the state are solicitations and delivery to their residents of products purchased through the mail or the Internet, collect use taxes on the sale of these products |
| In addition, a private litigant, purportedly on behalf of various states, has initiated litigation against several out-of-state direct marketers alleging that the failure to collect and remit use tax violates various state false claims laws |
| The US Supreme Court has held that states, absent congressional legislation, may not impose tax collection obligations on out-of-state direct marketers unless the out-of-state direct marketer has nexus with the state |
| Nexus generally is created by the physical presence of the direct marketer, its agents or its property within the state |
| Our use tax collection policy for our direct business is to collect and remit use tax in states where our direct business has established nexus |
| Prior to the opening of a destination retail store, we have historically sought a private letter ruling from the state in which the store will be located as to whether our direct business will have nexus with that state as a result of the store opening |
| Some states have enacted legislation that requires use tax collection by direct marketers with no physical presence in that state |
| In some instances, the legislation assumes nexus exists because of the physical presence of an affiliated entity engaged in the same line of business |
| We have received a use tax assessment from a state |
| In addition, a competitor has commenced an action against us in another state, alleging that our failure to collect and remit use tax in certain states constitutes unfair competition |
| We presently intend to vigorously contest the assessment and the action, and expect that we will challenge any and all future assertions by governmental or private litigants that we have nexus in states in which our direct business has no physical presence, but we may not prevail |
| If we do not prevail, we could be held liable for use taxes on prior direct business sales which could be substantial |
| Our destination retail store expansion strategy may result in our direct business establishing nexus with additional states which may cause our direct business to pay additional income and use taxes and have an adverse effect on the profitability and cash flows of our direct business |
| As we open destination retail stores in additional states, the necessary relationship between the retail stores and the direct business may be deemed by state tax authorities to create nexus for state income and use taxation of our direct business in these states |
| In addition, we may establish nexus in states where our competitors have not established nexus |
| The establishment of nexus and imposition of use taxes by states on sales of our direct business could: • create administrative burdens for us; • increase the tax collection and payment obligations of our direct business; 20 ______________________________________________________________________ [46]Table of Contents • increase the total cost of our products to our customers relative to our competitors that do not collect use taxes; and • decrease the sales of our direct business or cause us to reduce the underlying prices for the products sold through our direct business |
| These events could have an adverse effect on the profitability and cash flows of our direct business |
| We must successfully order and manage our inventory to reflect customer demand and anticipate changing consumer preferences and buying trends or our revenue and profitability will be adversely affected |
| Our success depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner |
| We cannot predict consumer preferences with certainty and they may change over time |
| We usually must order merchandise well in advance of the applicable selling season |
| The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends or changes in prices |
| If we misjudge either the market for our merchandise or our customers’ purchasing habits, our revenue may decline significantly and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins |
| In addition, as we implement our destination retail store expansion strategy, we will need to construct additional distribution centers or expand the size of our existing distribution centers to support our growing number of destination retail stores |
| If we are unable to find suitable locations for new distribution centers or to timely integrate new or expanded distribution centers into our inventory control process, we may not be able to deliver inventory to our destination retail stores in a timely manner which could have an adverse effect on the revenue and cash flows of our retail business |
| A natural disaster or other disruption at our distribution centers or return facility could cause us to lose merchandise and be unable to effectively deliver to our direct customers and destination retail stores |
| We currently rely on distribution centers in Sidney, Nebraska, Mitchell, South Dakota, Prairie du Chien, Wisconsin and Wheeling, West Virginia to handle our distribution needs |
| We operate a return center in Oshkosh, Nebraska, and our Wheeling, West Virginia distribution center also processes returns |
| Any natural disaster or other serious disruption to these centers due to fire, tornado or any other calamity could damage a significant portion of our inventory, and materially impair our ability to adequately stock our destination retail stores, deliver merchandise to customers and process returns to vendors and could result in lost revenue, increased costs and reduced profits |
| We are implementing substantial systems changes in support of our direct business and destination retail store expansion that might disrupt our supply chain operations |
| Our success depends on our ability to source merchandise efficiently through appropriate management information and operational systems and procedures |
| We are implementing modifications to our technology that will involve updating or replacing our systems with successor systems during the course of several years, including changes to our warehouse management and merchandising systems and improvements to our customer relationship management system |
| There are inherent risks associated with replacing or modifying these systems, including supply chain disruptions that could affect our ability to deliver products to our stores and our customers |
| We may be unable to successfully launch these new systems, the launch of these new systems could result in supply chain disruptions or the actual cost may exceed the estimated cost of these new systems, each of which could have an adverse effect on our revenue and profitability |
| 21 ______________________________________________________________________ [47]Table of Contents Our failure to obtain or negotiate economic development packages with local and state governments could cause us to significantly alter our destination retail store strategy or format and/or delay the construction of one or more of our destination retail stores and could adversely affect our revenue, cash flows and profitability |
| We have received economic development packages from many of the local and state governments where our destination retail stores are located |
| In some locations, we have experienced an increased amount of government and citizen resistance and critical review of pending and existing economic development packages |
| This resistance and critical review may cause local and state government officials in future locations to deny or limit economic development packages that might otherwise be available to us |
| The failure to obtain similar economic development packages in the future for any of these reasons could cause us to significantly alter our destination retail store strategy or format |
| As a result, we could be forced to invest less capital in our stores which could have an adverse effect on our ability to construct the stores as attractive tourist and entertainment shopping destinations, possibly leading to a decrease in revenue or revenue growth |
| In addition, the failure to obtain similar economic development packages for stores built in the future would have an adverse impact on our cash flows and on the return on investment in these stores |
| The failure of properties to generate sufficient taxes to amortize economic development bonds owned by us that relate to the development of such properties would have an adverse impact on our cash flows and profitability |
| We often purchase economic development bonds issued by state or local governmental entities in connection with the development of our destination retail stores |
| The proceeds of these bonds are then used to fund the construction and equipping of new destination retail stores and related infrastructure development |
| The repayments of principal and interest on these bonds are typically tied to sales, property or lodging taxes generated from the related destination retail store and, in some cases, from other businesses in the surrounding area, over periods which range between 20 and 30 years |
| However, the governmental entity from which we 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 |
| At the time we purchase these bonds, we make estimates of the discounted future cash flow streams they are expected to generate in the form of interest and principal payments |
| Because these cash flows are based primarily on future property or sales tax collections at our destination retail stores and other facilities (which in many cases may not be operating at the time we make our estimates), these estimates are inherently subjective and the probability of ultimate realization is highly uncertain |
| If sufficient tax revenue is not generated by the subject properties, we will not receive the full amount of the expected payments due under the bonds, which would have an adverse impact on our cash flows and profitability |
| Our failure to comply with the terms of current economic development agreements could result in our repayment of grant money or other adverse consequences that would affect our cash flows and profitability |
| The economic development packages which we have received in connection with the construction of our current stores have, in some instances, contained forfeiture provisions and other remedies in the event we do not fully comply with the terms of the economic development agreements |
| Among the terms which could trigger these remedies are the failure to maintain certain employment and wage levels, failure to timely open and operate a destination retail store and failure to develop property adjacent to a destination retail store |
| As of the end of fiscal 2005, the total amount of grant funding subject to repayment pursuant to a specific contractual remedy was dlra16dtta6 million |
| Portions of seven of our destination retail stores, such as wildlife displays and museums, are subject to forfeiture provisions |
| In addition, there are 30dtta3 acres of undeveloped property subject to forfeiture |
| We expect to forfeit 15dtta3 acres of this undeveloped property as a result of not developing or selling this property during the agreed upon time period |
| Other remedies that have been included in some economic development agreements are loss of priority to tax payments supporting the repayment of bonds held by us |
| Where specific remedies are not set forth, the local governments would be entitled to pursue general contract remedies |
| A default by us under these economic development agreements could have an adverse effect on our cash flows and profitability |
| 22 ______________________________________________________________________ [48]Table of Contents We may incur costs from litigation or increased regulation relating to products that we sell, particularly tree stands and firearms, which could adversely affect our revenue and profitability |
| We may incur damages due to lawsuits relating to products we sell |
| We are currently a defendant in 19 product liability lawsuits, including seven lawsuits relating to tree stands |
| Tree stands are seating platforms used by hunters to elevate themselves in a tree |
| In addition, sales of firearms and ammunition represented approximately 5dtta6prca of our merchandise revenue during fiscal 2005 |
| We may incur losses due to lawsuits, including potential class actions, relating to our performance of background checks on firearms purchases and compliance with other sales laws as mandated by state and federal law |
| We may also incur losses from lawsuits relating to the improper use of firearms or ammunition sold by us, including lawsuits by municipalities or other organizations attempting to recover costs from manufacturers and retailers of firearms and ammunition |
| Our insurance coverage and the insurance provided by our vendors for certain products they sell to us may be inadequate to cover claims and liabilities related to products that we sell |
| In addition, claims or lawsuits related to products that we sell or the unavailability of insurance for product liability claims, could result in the elimination of these products from our product line reducing revenue |
| If one or more successful claims against us are not covered by or exceed our insurance coverage, or if insurance coverage is no longer available, our available working capital may be impaired and our operating results could be adversely affected |
| Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our profitability and on future premiums we would be required to pay on our insurance policies |
| Current and future government regulation may negatively impact demand for our products and our ability to conduct our business |
| Federal, state and local laws and regulations can affect our business and the demand for products |
| These laws and regulations include: • Federal Trade Commission regulations governing the manner in which orders may be solicited and prescribing other obligations in fulfilling orders and consummating sales; • laws and regulations that prohibit or limit the sale, in certain states and localities, of certain items we offer such as firearms, black powder firearms, ammunition, bows, knives and similar products; • the Bureau of Alcohol, Tobacco, Firearms and Explosives governing the manner in which we sell firearms and ammunition; • laws and regulations governing hunting and fishing; • laws and regulations relating to the collecting and sharing of non-public customer information; and • US customs laws and regulations pertaining to proper item classification, quotas, payment of duties and tariffs, and maintenance of documentation and internal control programs which relate to importing taxidermy which we display in our destination retail stores |
| Changes in these laws and regulations or additional regulation could cause the demand for and sales of our products to decrease |
| Moreover, complying with increased or changed regulations could cause our operating expenses to increase |
| This could adversely affect our revenue and profitability |
| Our inability or failure to protect our intellectual property could have a negative impact on our operating results |
| Our trademarks, service marks, copyrights, patents, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success |
| Effective trademark and other intellectual property protection may not be available in every country in which our products are made available |
| The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our revenue |
| Any infringement or other intellectual property claim made against 23 ______________________________________________________________________ [49]Table of Contents us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements |
| Failure to successfully integrate any business we acquire could have an adverse impact on our profitability |
| We may from time to time acquire businesses which we believe to be complementary to our business |
| Acquisitions may result in difficulties in assimilating acquired companies and may result in the diversion of our capital and our management’s attention from other business issues and opportunities |
| We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures |
| If we fail to successfully integrate acquisitions, we could experience increased costs associated with operating inefficiencies which could have an adverse effect on our profitability |
| Risks Related to Our Financial Services Business We may experience limited availability of financing or variation in funding costs for our financial services business, which could limit growth of the business and decrease our profitability |
| Our financial services business requires a significant amount of cash to operate |
| These cash requirements will increase if our credit card originations increase or if our cardholders’ balances or spending increase |
| Historically, we have relied upon external financing sources to fund these operations, and we intend to continue to access external sources to fund our growth |
| A number of factors such as our financial results and losses, changes within our organization, disruptions in the capital markets, our corporate and regulatory structure, interest rate fluctuations, general economic conditions and accounting and regulatory changes and relations could make such financing more difficult or impossible to obtain or more expensive |
| We have been, and will continue to be, particularly reliant on funding from securitization transactions for our financial services business |
| Securitization funding sources include both a commercial paper conduit facility and fixed and floating rate term securitizations |
| Our commercial paper conduit facility renews annually in June, and our first term securitization expires in November 2006 |
| A failure to renew this facility, to resecuritize the term securitizations as they mature or to add additional term securitizations and commercial paper conduits on favorable terms as it becomes necessary could increase our financing costs and potentially limit our ability to grow our financial services business |
| Unfavorable conditions in the asset-backed securities markets generally, including the unavailability of commercial bank liquidity support or credit enhancements, such as financial guaranty insurance, could have a similar effect |
| Furthermore, even if we are able to securitize our credit card loans consistent with past practice, poor performance of our securitized loans, including increased delinquencies and credit losses, lower payment rates or a decrease in excess spreads below certain thresholds, could result in a downgrade or withdrawal of the ratings on the outstanding securities issued in our securitization transactions, cause early amortization of these securities or result in higher required credit enhancement levels |
| This could jeopardize our ability to complete other securitization transactions on acceptable terms, decrease our liquidity and force us to rely on other potentially more expensive funding sources, to the extent available, which would decrease our profitability |
| We may have to reallocate capital from our direct and retail businesses to meet the capital needs of our financial services business, which could alter our destination retail store expansion program |
| Our bank subsidiary must satisfy the capital maintenance requirements of government regulators and its agreement with VISA International, Inc, or VISA A variety of factors could cause the capital requirements of our bank subsidiary to exceed our ability to generate capital internally or from third party sources |
| For example, 24 ______________________________________________________________________ [50]Table of Contents government regulators or VISA could unilaterally increase their minimum capital requirements |
| Also, we have significant potential obligations in the form of the unused credit lines of our cardholders |
| As of the end of fiscal 2005, these unfunded amounts were approximately dlra7dtta5 billion |
| Draws on these lines of credit could materially exceed predicted line usage |
| In addition, the occurrence of certain events, such as significant defaults in payment of securitized loans or failure to comply with the terms of securitization covenants, may cause previously completed securitization transactions to amortize earlier than scheduled or be reclassified as a liability for financial accounting purposes, both of which would have a significant effect on our ability to meet the capital maintenance requirements of our bank subsidiary, as affected off-balance sheet loans would immediately be recorded on our consolidated balance sheet and would be subject to regulatory capital requirements |
| If any of these factors occur, we may have to contribute capital to our bank subsidiary, which may require us to raise additional debt or equity capital and/or divert capital from our direct and retail businesses, which in turn could significantly alter our destination retail store expansion strategy |
| It may be difficult to sustain the historical growth and profitability of our financial services business, and we will be subject to various risks as we attempt to grow the business |
| We may not be able to retain existing cardholders, grow account balances or attract new cardholders and the profits from our financial services business could decline, for a variety of reasons, many of which are beyond our control, including: • credit risk related to the loans we make to cardholders and the charge-off levels of our credit card accounts; • lack of growth of potential new customers generated by our direct and retail businesses; • liquidity and funding risk relating to our ability to create the liquidity necessary to extend credit to our cardholders and provide the capital necessary to meet the requirements of government regulators and VISA; and • operational risk related to our ability to acquire the necessary operational and organizational infrastructure, manage expenses as we expand, and recruit management and operations personnel with the experience to run an increasingly complex and highly-regulated business |
| Economic downturns and social and other factors could cause our credit card charge-offs and delinquencies to increase, which would decrease our profitability |
| Economic downturns generally lead to increased charge-offs and credit losses in the consumer finance industry, which would cause us to experience increased charge-offs and delinquencies in our credit card loan portfolio |
| An economic downturn can hurt our financial performance as cardholders default on their balances or carry lower balances |
| A variety of social and other factors also may cause changes in credit card use, payment patterns and the rate of defaults by cardholders |
| These social factors include changes in consumer confidence levels, the public’s perception of the use of credit cards, changing attitudes about incurring debt and the stigma of personal bankruptcy |
| Additionally, credit card accounts tend to exhibit a rising trend in credit loss and delinquency rates between 18 to 30 months after they are issued |
| If the rate of growth in new account generation slows, the proportion of accounts in the portfolio that have been open for between 18 to 30 months will increase and the percentage of charge-offs and delinquencies may increase |
| Our underwriting criteria and product design may be insufficient to protect the growth and profitability of our financial services business during a sustained period of economic downturn or recession or a material shift in social attitudes, and may be insufficient to protect against these additional negative factors |
| The performance of our financial services business may be negatively affected by the performance of our merchandising businesses |
| Negative developments in our direct and retail businesses could affect our ability to grow or maintain our financial services business |
| We believe our ability to maintain cardholders and attract new cardholders is highly 25 ______________________________________________________________________ [51]Table of Contents correlated with customer loyalty to our merchandising businesses and to the strength of the Cabela’s brand |
| In addition, transactions on cardholder accounts produce loyalty points which the cardholder may apply to future purchases from us |
| Adverse changes in the desirability of products we sell, negative trends in retail customer service and satisfaction or the termination or modification of the loyalty program could have a negative impact on our bank subsidiary’s ability to grow its account base and to attract desirable co-branding opportunities with third parties |
| In connection with our financial services business, we borrow money from institutions and accept funds by issuing certificates of deposit, which we then lend to cardholders |
| We earn interest on the cardholders’ account balances, and pay interest on the certificates of deposit and borrowings we use to fund those loans |
| Changes in these two interest rates affect the value of the assets and liabilities of our financial services business |
| If the rate of interest we pay on borrowings increases more (or more rapidly) than the rate of interest we earn on loans, our net interest income, and therefore our earnings, could fall |
| Our earnings could also be adversely affected if the rates on our credit card account balances fall more quickly than those on our borrowings |
| In addition, as of the end of fiscal 2005, approximately 38dtta9prca of our cardholders did not maintain balances on their credit card accounts |
| We do not earn any interest from these accounts but do earn other fees from these accounts such as VISA interchange fees |
| In the event interest rates rise, the spread between the interest rate we pay on our borrowings and the fees we earn from these accounts may change and our profitability may be adversely affected |
| The VISA interchange litigation could adversely impact the amount of revenue generated by our financial services business |
| Groups of small and large merchants have recently sued VISA alleging, among other things, that VISA and its member banks have violated US antitrust laws by conspiring to fix the level of interchange fees |
| To date, we have not been named as a defendant in any interchange lawsuits |
| If the VISA interchange fees that are charged to merchants are reduced as a result of the interchange lawsuits, the amount of revenue our financial services business generates through collecting interchange fees may be negatively impacted |
| Fluctuations in the value of our interests in our securitizations relating to our financial services business may adversely affect our earnings |
| In connection with our securitizations relating to our financial services business, we retain certain interests in the assets included in the securitization |
| These interests are carried in our consolidated financial statements at fair value and include our retained interest, or a “transferor interest,” in the securitized loans, an “interest-only strip” which represents our right to receive excess cash available after repayment of all amounts due to the investors, and in some cases Class B certificates which are subordinate to the investors certificates |
| The fair value of these retained interests depends upon income earned on these interests which is affected by many factors not within our control, including the performance of the securitized loans, interest paid to the holders of securitization securities, credit losses and transaction expenses |
| The value of our interests in the securitizations will vary over time as the amount of loans in the securitized pool and the performance of those loans fluctuate |
| The performance of the loans included in our securitizations is subject to the same risks and uncertainties that affect the loans that we have not securitized, including, among others, increased delinquencies and credit losses, economic downturns and social factors, interest rate fluctuations, changes in government policies and regulations, competition, expenses, dependence upon third-party vendors, fluctuations in accounts and account balances, and industry risks |