Focus Article: Cabela’s Inc. (CAB)

Cabela’s Inc. (CAB) $36.45

The Company:

Known for it’s big log cabin stores, Cabela’s is a retailer and direct marketer of hunting, fishing, camping and outdoor merchandise. Founded in 1961, the company has grown to 36 retail stores located in 23 states and Canada. The company has mostly adopted a large store format with stores ranging from 80,000 to 100,000 square feet that generate on average $450/Sq. Ft. in revenue. In a spectacle reminiscent of the old Krispy Kreme (KKD) days, thousands of customers are lining up for new store openings, as seen at the new store openings in Wichita, Kansas and Tulalip, Washington.

Seasonal fluctuations have a big impact on Cabela’s revenue and operating results. The company’s merchandise revenue is generally higher in the third and fourth quarter than in the first and second quarter, due to buying patterns around the holidays and the opening of hunting seasons.

The company is planning on opening smaller format “outpost” stores in smaller markets that are close to a parent store for inventory transfer. Firearms and shooting products account for a large portion of the company sales and the only department that will be permanent in its “outpost” stores will be the firearms department. This is one of the keys to investing in Cabela’s as purchasing guns and ammunition is still a brick-and-mortar business on account of gun control laws. The company generated $650 million in revenue through higher margin private-label Cabela’s branded products, representing over 25% of overall product sales. Cabela’s plans on increasing their retail space by 10% this year and 13% in 2013.

Beyond product sales, the company also generates revenue from its CLUB Visa credit card, which is issued as part of its customer loyalty program. In order to provide support for this credit card, the company chartered the “World’s Foremost Bank” in 2001. Amongst retailers, Cabela’s has one of the largest credit card programs, well ahead of companies like Nordstorm. In 2011, Cabela’s sold 29% of its merchandise to customers through their loyalty program. CLUB Visa holders rung up purchases of $13.7 billion, both at Cabela’s stores and at other retailers, generating risk-adjusted revenue of $291.75 million or 10.6% of overall sales of $2.81 billion. Declining provisions for loan losses associated with their credit card division and a 7.5% increase in active accounts in 2011 are also helping the company’s bottom line. Active accounts increased once again by 7.6% in Q1 2012.

Business Statistics & Financials:

For the full year 2011, the company’s retail store business generated revenue of $1.6 billion, representing 61.8% of the total revenue. Cabela’s direct business, which uses catalogs and the internet to generate sales orders generated revenue of $1.0 billion, representing 38.2% of the total revenue. Cabela’s revenue for 2011 totaled $2.81 billion, an increase of $148 million, or 5.6%, over 2010. Total merchandise sales increased $95 million, or 3.9%, in 2011 compared to 2010.

Total revenue for the first quarter of 2012 increased 6.3% to $623.5 million, retail store revenue increased 14.4% to $345.3 million, direct revenue (catalog and internet) decreased 8.3% to $190.2 million, and financial services revenue increased 15.3% to $83.5 million. For the first quarter of 2012, the company saw a 4.2% increase in year-over-year same store sales, which was interesting in light of the fact that the company had generated an 8.9% increase in same store sales in Q1 2011 when compared to the year ago period. Revenue from their direct business declined 8.3% in Q1 2012 after the company decided not to mark down its inventory in response to post-holiday sales by competitors in January. As a result, the company managed to generate better gross and operating margins from its direct business.

At first blush it appears that Cabela’s has a lot of debt on its balance sheet but as of Q1 2012, the company has reclassified that debt to more accurately match it against the $2.9 billion in credit card loans it carries on the asset side of the balance sheet. Yahoo currently shows Cabela’s trading at 13 times EBITDA but once you make the balance sheet adjustment, the company is trading for less than 9 times EBITDA. Cabela’s has a forward P/E of 12.27 and trades for two times book value.

For a retailer that sports operating margins of 9%, expects to grow the top line by 10%, posted a 62% jump in earnings and is seeing expanding margins, Cabela’s trades at a very reasonable valuation.

Competitors:

Cabela’s competes in highly competitive markets which include outdoor recreation, casual apparel and footwear markets. They also compete directly or indirectly with mass merchandisers, discount and departmental stores and catalog and internet-based retailers.

Insider Buying:

One insider purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Cabela’s Inc. here.

Mr. Mark has served on Cabela’s board since 2004 and was the former CEO and Chairman of Colgate-Palmolive (CL).

Risk Factors:

With $3.2 billion in credit outstanding on its CLUB Visa credit cards, the company is especially susceptible to unfavorable economic conditions as it is likely to see a drop in revenue at its stores along with an increase in delinquencies.

The stock has also had a great run over the last year and is up more than 50%, making it susceptible to a sharp pullback if this market weakness continues.

Conclusion:

Cabela’s is a retailer that reminds me a lot of Vera Bradley (VRA) on account of its growth prospects and reasonable valuation. What it lacks in margins when compared to Vera Bradley, it makes up in its diverse product offerings and through its credit card segment. The company is performing better than its larger rival, Dick’s Sporting Goods, in nearly every category (margins, growth, valuation, etc.) and is worth exploring further for a long position.