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CABELAS INC CAB
February 13, 2013 - 5:20pm EST by
bruin821
2013 2014
Price: 49.99 EPS $2.12 $3.15
Shares Out. (in M): 70 P/E 23.0x 16.0x
Market Cap (in $M): 3,490K P/FCF 9.0x 11.0x
Net Debt (in $M): 453,000 EBIT 1,198 1,131
TEV ($): 3,150K TEV/EBIT 11.0x 9.0x

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  • Retail
  • Sports
  • Fragmented market
 

Description

Cabelas is a best in class retailer, in a highly fragmented market that is successfully transitioning from a family run direct business to  a professional retailer. The company is growing annual square footage at a double digit rate and aggresively opening higher margin new stores at a rapid pace. 
 
Cabelas is a leading hunting, fishing and sportswear retailer.  They have approximately 40 stores and are aggressively opening new stores with substantial more profits than legacy stores.  They are a destination retailer that began as direct mail catalog business and are in the early stages of building out their retail footprint.
 
The company was founded in 1961 as a small seller of fly fish equipment through advertisements in magazines.  In 1963 they introduced their first catalog and the first destination store was opened in 1987.  In 1998 the first online store was opened. Through the differing distribution channels catalog, Internet, destination and retail stores the company has over 225,000 SKUs which includes hunting and fishing, marine and camping merchandise, casual and outdoor apparel, vehichle accessories, and home furnishing with outdoor theme.  The museum type destination features wildlife exhibitions and large acquariums. 
 
Under new management, the margins are starting to significantly improve, and are seeing double digit revenue growth.
 
Obviously, the firearm segment of the business has seen a sharp spike up in response to possible gun control legistation, but that is a low margin, small percentage of their business. They do not sell assault weapons and the majority of their business is shotguns and hunting gear.
 
The financial segment is valuable with their private label credit card and rewards program.
 
We estimate they will do approximately $3.15 in FY 2013 with a little over 2/3 of their business coming from merchandise and 1/3 from financial services. If you apply a 20 multiple to the retail business and a 13 multiple to the financial services business you have a $60 stock in the near term, which is a low multiple to their prospective growth rate.  This of course gives them only modest credit for all of the growth iniatitives.
 
The closest comp is Dicks Sporting (DKS) which trades at a 19 multiple with slow revenue growth.
 
Importantly, their new next generation stores are performing 30-40% profit per square foot better than their legacy stores and they plan to open approximately 9 new stores in 2013 and so far have committed to 8 new stores in 2014.
 
The industry is highly fragmented with the great majority of competitors being mom and pop shops so it should be relatively easy for them to gain market share.
 
Management has provided guidance of 13-14% square footage growth in 2013 and 14-17% square footage growth in 2014.
 
Credit card growth has been strong with 12% growth and a 200% + improvement in spread margins, and according to the company they hedged/perhaps over-hedged to rising interest rates.
 
Growth in Cabelus branded merchandise.
 
Shooting and hunting is starting to grow as a sport for the first time in 20+ years, including among women.
 
NICS background checks have been strong as well as permit applications.
 
The prospects for gun control legislation should be an extra impetus for sales in 2013.
 
 
 Risks
 
Biggest risks are potential gun law legislation, but the guns that would be most likely affected are only 2% of sales with lower margins.
If the economy weakens it would obviously put pressure on the business.
 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

 1) Square footage growth.
 2) Substantial increase in next generation stores.
 3) Potential of "category killer" as the industry is highly fragmented.
 4) Clarity on gun law legislation.
 5) Upcoming investor day.
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    Description

    Cabelas is a best in class retailer, in a highly fragmented market that is successfully transitioning from a family run direct business to  a professional retailer. The company is growing annual square footage at a double digit rate and aggresively opening higher margin new stores at a rapid pace. 
     
    Cabelas is a leading hunting, fishing and sportswear retailer.  They have approximately 40 stores and are aggressively opening new stores with substantial more profits than legacy stores.  They are a destination retailer that began as direct mail catalog business and are in the early stages of building out their retail footprint.
     
    The company was founded in 1961 as a small seller of fly fish equipment through advertisements in magazines.  In 1963 they introduced their first catalog and the first destination store was opened in 1987.  In 1998 the first online store was opened. Through the differing distribution channels catalog, Internet, destination and retail stores the company has over 225,000 SKUs which includes hunting and fishing, marine and camping merchandise, casual and outdoor apparel, vehichle accessories, and home furnishing with outdoor theme.  The museum type destination features wildlife exhibitions and large acquariums. 
     
    Under new management, the margins are starting to significantly improve, and are seeing double digit revenue growth.
     
    Obviously, the firearm segment of the business has seen a sharp spike up in response to possible gun control legistation, but that is a low margin, small percentage of their business. They do not sell assault weapons and the majority of their business is shotguns and hunting gear.
     
    The financial segment is valuable with their private label credit card and rewards program.
     
    We estimate they will do approximately $3.15 in FY 2013 with a little over 2/3 of their business coming from merchandise and 1/3 from financial services. If you apply a 20 multiple to the retail business and a 13 multiple to the financial services business you have a $60 stock in the near term, which is a low multiple to their prospective growth rate.  This of course gives them only modest credit for all of the growth iniatitives.
     
    The closest comp is Dicks Sporting (DKS) which trades at a 19 multiple with slow revenue growth.
     
    Importantly, their new next generation stores are performing 30-40% profit per square foot better than their legacy stores and they plan to open approximately 9 new stores in 2013 and so far have committed to 8 new stores in 2014.
     
    The industry is highly fragmented with the great majority of competitors being mom and pop shops so it should be relatively easy for them to gain market share.
     
    Management has provided guidance of 13-14% square footage growth in 2013 and 14-17% square footage growth in 2014.
     
    Credit card growth has been strong with 12% growth and a 200% + improvement in spread margins, and according to the company they hedged/perhaps over-hedged to rising interest rates.
     
    Growth in Cabelus branded merchandise.
     
    Shooting and hunting is starting to grow as a sport for the first time in 20+ years, including among women.
     
    NICS background checks have been strong as well as permit applications.
     
    The prospects for gun control legislation should be an extra impetus for sales in 2013.
     
     
     Risks
     
    Biggest risks are potential gun law legislation, but the guns that would be most likely affected are only 2% of sales with lower margins.
    If the economy weakens it would obviously put pressure on the business.
     
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

     1) Square footage growth.
     2) Substantial increase in next generation stores.
     3) Potential of "category killer" as the industry is highly fragmented.
     4) Clarity on gun law legislation.
     5) Upcoming investor day.

    Messages

    Subjectthoughts
    Entry02/14/2013 09:27 AM
    MemberMJS27
    Thanks for the write up.
     
    First, I have to say that CAB is one of those companies that has a very unique customer base.  I have visited several of the older big foot print stores in various parts of the country - always on a saturday afternoon - and in all but one instance when i pulled into the parking lot there were people tailgating. 
     
    I don't know of any other retailers that sell products that are so important to a life style that their customers arrange to meet friends in the parking lot and grill sausages before / after their shopping experience.  This is largely tied to in store educational programs that strengthen brand loyalty.
     
    Second, i think it is worth mentioning that the default rate on their credit cards is amongst the lowest of any retail branded cards - again, a sign that CAB customers consider CAB products a part of their life style.
     
    Third, i think it is worth mentioning the tailwind that CAB gets from the energy boom in the interior of the country.  Disposable cash levels for those working in the often remote areas like north dakota are growing every day, and these are not people that will spend their disposable cash on broadway shows and the like.  These are people that spend their money on big boy toys like fishing and hunting gear that CAB sells.
     
    Fourth, CAB has been concentrating on shifting their mix toward CAB branded gear which improves margins.  In my experience the CAB branded gear is high quality, and the customer service is top notch.  Information taken from message boards focused on the sporting community supports the notion that cabelas puts out a respected product.
     
    Fifth, maybe it is nothing, but maybe it is everything... board member John Gottschalk is the former CEO and Chairman of the Omaha World Herald.  I have often wondered if there is anyone based in Omaha who might be interested in a company that is the clear leader in a niche market.
     
    All that being said, I do have concerns regarding gun sales.  It is important to recognize that the recent spike in gun sales and news associated with the Newtown shooting and potential bans etc is only the latest chapter in changing trend in gun sales.  Sales started to spike as early as 2006 / 2007 when the Obama / McCain election was starting to warm up, and they have continued since then to the parabolic level they are at now.  While they may be low margin, they are significant.  For example, last quarter com sales increased 3.9% total, but only 1.6% with firearms stripped out.
     
    Beyond that, its not clear to me what affect gun sales have to non gun sales.  Cabela's hopes to be the "easiest, fastest place to shop for firearms."  They are also often cheaper than mom and pop stores due to economies of scale etc.   It makes sense that for a big ticket item like a gun the consumer would go to CAB where they can save a meaningful amount of money.  Since they are already there for the gun, they buy whatever else they need.
     
    However, one of my concerns is that contrary to your view regarding how it should be easy to gain market share from mom and pop stores, that it may be rather difficult outside of the recent spike in gun sales.  A big part of hunting and fishing is local knowledge.  Where are the fish biting?  Where are the birds flying?  How is the acorn crop for deer season this year?  Information like this keeps sportsman going to their mom and pop store rather than cabelas.
     
    Do you have any thoughts on this?
     
    Another concern i have is managements commitment to the obscene amount of printed catalogues they mail out.  If you are not a subscriber, I would estimate that I get somewhere north of 1,000 printed glossy pages a year from them, including an annual guide that is bigger than a text book, and is hard bound as well.  This seems like an easy way to cut SG&A, but as of the last time i spoke with management (more than a year ago) they were committed to keeping the printed catalogues going.
     
    One thing that i would like to hear your thoughts on is the eventual sale of the credit card biz.  In the past they have expressed reluctance as they like to have control so they can keep consumers close - as was the case during the financial crisis - rather than risk having an outside CC company kill off their customers.  I think it would unlock real value if they spun it off however.
    SubjectRE: thoughts
    Entry02/14/2013 11:25 AM
    Memberbruin821
    You make several good points.
     
    I don't think they should have trouble competing with mom and pops as the CAB employees are locals.
     
    I think the company is comfortable with the ROI of the catalogs.
     
    Don't know if they would spin out the credit card business, but it might make sense.
    SubjectQuarter
    Entry02/14/2013 11:27 AM
    Memberbruin821
    Probably anticipated by the market but CAB reported a very strong quarter with very good revenue growth and same store sales.
    SubjectRE: RE: thoughts
    Entry02/14/2013 12:05 PM
    MemberMJS27
    right... the CAB employees are local to where the store is, and the stores are based near population centers in areas that are as a whole not very densely populated.
     
    alot of the customer base drives from "out in the country" into the store for special events like a duck calling class, or once a year before hunting/fishing season etc to stock up on what they need for the season.....  they arrange to meet friends that they may not see often, and that is why they tailgate in the parking lot etc.
     
    but my feeling is that alot of these customers do not live by the store, so the local knowledge that store employees have is not local to where the customers live.  As a result customers likely make their last minute or maintenance type trips to their mom and pop shop.
     
    to be clear, i think this is a great business, but i'm not convinced that the stock is at a great price with P/E above long term averages and the "E" at risk of slipping materially as the gun control issue (and sales that are add ons to gun purchases) is uncertain.
     
    That being said, uncertainty is of course what makes stocks cheap... but i think to buy here you have to have complete faith in the growth strategy.
     
    Curious btw how many stores you think they can get to in north america?  CAB is definitely the leader, but DKS, TSA, and WMT have been catering more to the last minute / maintenance type trips for sportsmen, and Bass Pro and Gander Mountain are a significant presence on the full service side, although they admittedly have more of a warehouse feel than the Cabella's "experience" stores
    SubjectRE: RE: RE: thoughts
    Entry02/14/2013 05:09 PM
    Memberbruin821
    Hard to say but I think they can add 8-10 per year indefinetely
     
    SubjectCAB pre-announces a very strong quarter
    Entry03/12/2013 11:45 AM
    Memberbruin821
    CAB said this morning that business accelerated in the prevous quarter and they expect to earn $0.10-0.15 above the concensus.
     
    Management is executing beautifully and the stock is printing $60.
    Subjectanother low rated idea with stellar performance
    Entry03/19/2013 01:04 PM
    Memberbaileyb906
    No strong opinion on CAB, but I do think the lower the rating, offer the stronger the performance on VIC!!!
    SubjectRE: another low rated idea with stellar
    Entry03/19/2013 02:44 PM
    Memberbruin821
    I didn't expect it to start moving so quickly, but thank you.
    SubjectGreat quarter
    Entry04/26/2013 11:50 AM
    Memberbruin821
    CAB posted a great quarter with strong same store sales growth and direct sales growth.
    SubjectRE: Author Exit Recommendation
    Entry05/21/2013 09:37 AM
    Memberspike945
    Congratulations, very nice return.
    SubjectRE: RE: Author Exit Recommendation
    Entry05/21/2013 11:12 AM
    Memberbruin821
    Thanks, appreciate it.  
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