All day, I waited anxiously to read Cabela's (NYSE:CAB) fourth-quarter and year-end earnings report. I wanted to see how things were going since I wrote about the outdoor sporting goods company in October 2004.

Management chimed in with the usual "it was a great year" jargon. Accounting for the leap year in 2004, retail sales were up 24.4% year over year while direct sales through its catalog and online channels rose only 6.6%, 1.4 percentage points slower than competitor Sportsman's Guide (NASDAQ:SGDE). Its Financial Services business grew 34% as customer loyalty accounts grew 18.5% and their average balance grew 6%.

Same-store sales, an excellent barometer for retail growth, declined 0.6% for the year. Although this was not a surprise, it sure would have been nice to see it positive. I think it means that the environment is still very competitive. Bass Pro Shops and Orvis, both private companies, and even Dick's Sporting Goods (NYSE:DKS) and Wal-Mart (NYSE:WMT) are all tough competitors and aren't going to give anything away without a fight.

Inventory turns (the cost of merchandise sold divided by inventory) declined from 3.1 turns in 2003 to 2.9 turns in 2004. Inventories were up 19% while cost of merchandise sales was up 11%. In addition, corporate costs as a percentage of merchandise sales went from 10.1% to 10.4%. Corporate costs consist of supply chain technology expenses, support expenses such as finance and human resources, and distribution expenses.

Should we be alarmed by rising costs? I don't think so. Cabela's is expanding its retail presence by additional destination stores that are 175,000 square feet or bigger. Seven more destination stores will be built through 2007, adding 1.3 million square feet of retail space. In order for the stores to start up efficiently, the distribution infrastructure has to be able to support it. This is exactly how Amazon.com (NASDAQ:AMZN) and Overstock.com (NASDAQ:OSTK) planned for their growth. Some near-term profitability has to be sacrificed in order to enable future growth and achieve economies of scale.

There will be two things to watch along the way. First, will sales per square foot continue to increase? Cabela's has increased this metric from $367/square foot in 2001 to $386/square foot in 2003. The other thing is to see whether corporate costs decline as a percentage of merchandise sales. This would mean that the infrastructure was becoming more productive, a very important piece of driving down costs. Expanding revenues and lowering costs; what a novel idea for a retailer!

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Fool contributor David Meier does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.