Cabela's CAB
January 01, 2009 - 12:01am EST by
abrams705
2009 2010
Price: 5.63 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 388 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Cabela’s is the dominant outdoor sportsman brand in the U.S. It started as a catalog operation, but in the past several years has opened a lot of stores so that it now gets more revenues from its stores than it does from its direct business. Of the roughly $2.5 billion in sales, $1.3 billion is in retail, $1.1 billion in direct, and rest from its credit card unit.
 
 
The basic thesis is that the direct business is a gem, the retail business is mediocre with lots of room for improvement, and the credit card business won’t be fatal to company at only 10% of earnings.
 
 
CAB’s segment reporting leaves something to be desired, as they have a very large unallocated corporate expense line at 9% of revenues. But if you allocate it equally to the retail and direct business, you get high single-digit EBIT margins for the direct business, and low-mid single-digit EBIT margins for the retail business. And given the far lower capital needs of the direct business, the returns on capital are much higher than in retail. Returns on capital were well over 20% until the early part of this decade when CAB really started opening lots of retail stores, so the stores really dilute the profitability. The direct business is seeing sales declines in the low single-digits, which isn’t too bad given the spending environment. The brand has a very loyal customer base.
 
 

The bad news is the retail stores are getting crushed, with -9% same-store sales reported in the latest quarter ended September. I would be surprised if that decline didn’t get worse in the fourth quarter and then continue to remain bad well into 2009. Because of the sales weakness and resulting gross margin hit, CAB will probably see its EPS decline this year by 15-20% to $1.00-1.10/share. Since I don’t see sales getting any better and credit card funding costs and bad debts will rise, I wouldn’t surprised to see 2009 EPS come much lower, say $0.50-0.70/share. But this all seems more than reflected in the stock price at $5.83/share. It seems rather foolish to attempt to figure out what earnings will be in 2009 or 2010, but CAB should be able to get back up to $1/share or so within 3-5 years. At any double-digit P/E multiple, the stock should be winner. Several things give me confidence for a reasonable profit performance several years out. First, CAB has throttled back its store opening pace from nine in 2007 to two in 2008, and two in 2009. Second, it is also throttling back its inventory at a very fast pace. Total inventories were down 3% at the end of September despite 12% revenue growth. And third, CAB has always stuck to the very highest quality borrower in its credit card unit, with an average FICO score in the 780s.

Catalyst

Valuation
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    Description

    Cabela’s is the dominant outdoor sportsman brand in the U.S. It started as a catalog operation, but in the past several years has opened a lot of stores so that it now gets more revenues from its stores than it does from its direct business. Of the roughly $2.5 billion in sales, $1.3 billion is in retail, $1.1 billion in direct, and rest from its credit card unit.
     
     
    The basic thesis is that the direct business is a gem, the retail business is mediocre with lots of room for improvement, and the credit card business won’t be fatal to company at only 10% of earnings.
     
     
    CAB’s segment reporting leaves something to be desired, as they have a very large unallocated corporate expense line at 9% of revenues. But if you allocate it equally to the retail and direct business, you get high single-digit EBIT margins for the direct business, and low-mid single-digit EBIT margins for the retail business. And given the far lower capital needs of the direct business, the returns on capital are much higher than in retail. Returns on capital were well over 20% until the early part of this decade when CAB really started opening lots of retail stores, so the stores really dilute the profitability. The direct business is seeing sales declines in the low single-digits, which isn’t too bad given the spending environment. The brand has a very loyal customer base.
     
     

    The bad news is the retail stores are getting crushed, with -9% same-store sales reported in the latest quarter ended September. I would be surprised if that decline didn’t get worse in the fourth quarter and then continue to remain bad well into 2009. Because of the sales weakness and resulting gross margin hit, CAB will probably see its EPS decline this year by 15-20% to $1.00-1.10/share. Since I don’t see sales getting any better and credit card funding costs and bad debts will rise, I wouldn’t surprised to see 2009 EPS come much lower, say $0.50-0.70/share. But this all seems more than reflected in the stock price at $5.83/share. It seems rather foolish to attempt to figure out what earnings will be in 2009 or 2010, but CAB should be able to get back up to $1/share or so within 3-5 years. At any double-digit P/E multiple, the stock should be winner. Several things give me confidence for a reasonable profit performance several years out. First, CAB has throttled back its store opening pace from nine in 2007 to two in 2008, and two in 2009. Second, it is also throttling back its inventory at a very fast pace. Total inventories were down 3% at the end of September despite 12% revenue growth. And third, CAB has always stuck to the very highest quality borrower in its credit card unit, with an average FICO score in the 780s.

    Catalyst

    Valuation

    Messages


    SubjectAnecdotal evidence
    Entry01/01/2009 10:44 AM
    Memberedward965
    I’m a fairly avid fisherman and hunter and know Cabela’s pretty well from a customer standpoint. Ten years back, Cabela’s and 'very similar competitor' Bass Pro Shops were “destination” shops where, according to the company, people came from a 250-mile radius to shop and just see the absolutely massive store which could entertain for half a day. Judging by the charter buses in the parking lot, this seemed true. I can remember 20 years ago driving out of the way to go to the Bass Pro Shops in Missouri to see it and being in awe. Flash forward to today: every big metro area in Texas has one (Cabelas or Bass Pro). I assume it’s similar in other states although don’t know. Plus, Dick’s Sporting goods and Academy offer quite good prices and good selection for people in metro areas. True, people in the countryside still need to order catalog, but generally that is a shrinking population. I have a Cabela’s 25 miles away but would only go there if I need something specialized, such as far-offshore equipment which is hard to get inland because Academy’s/etc cater their inventory to the local area while Cabela’s does it to a far lesser degree. I really like Cabela’s, but with the supply of sporting goods stores large and growing (I see a few competitors still opening stores locally), I think there is an oversupply that won’t be fixed until there are some store closings because generally Americans are fishing and hunting less and less (hence supply going up, demand down). So, if the company is at 8-10x PE run rate, is that good in this market? On a short-term bright note, they should have sold a lot of guns the last two months. Every gun store in Texas was sold out after the Obama win. My friend went to the gun store the day after the election and said it was standing room only, and the store said, “minimum purchase is $1,000” and the store sold every gun they had that night. Another friend hit the local gun show and said crappy SKS/AKS rifles were selling for $700 when a year ago they were $100 - $200 each. Cabela’s surely sold more handguns, ammunition, assault rifles and accessories, etc. Thanks for the write-up.
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