Cabela's Inc. CAB
December 31, 2007 - 9:46pm EST by
gigi404
2007 2008
Price: 15.07 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 992 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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  • Retail
  • Sports
 

Description

Cabela’s (CAB) stock, at $15.07, is down almost 50% from its high of $28.80, and 25% below the June 2004 IPO price of $20, and I believe that at today’s price it presents a rare opportunity to purchase a high-quality growth company at a very reasonable price.  At the current price it is trading at 11.9x trailing earnings, 10.8x expected 2007 earnings of $1.40, and 9.3x 2008 estimated EPS of $1.62.  This seems like a very reasonable price to pay for a unique business that has been growing its top-line at 14% to 15% annually in recent years and should continue growing at 12%-15% annually for some years, with improving operating margins, so that EPS should increase at perhaps 15% annually over the next few years.  This should lead to EPS of over $2.00 in 2010, and a stock price of $30 or higher over a period of two to three years from now, or appreciation of over 100% from the current price.

 

Also, the Cabela brothers, who founded the company in 1961, own over 33% of the outstanding shares, providing them a strong incentive to maximize long-term shareholder value.  Another indicator that the stock represents good value today: co-founder Richard Cabela, who is now Chairman, bought 30,000 shares at prices between $15.59 and $15.75 in November, and purchases were also made by two other directors in November at prices between $16.58 and $16.75 per share.

 

The book value at the end of September was $11.70 per share, and will likely exceed $12.50 per share at the end of 2007, so that the stock is trading at 1.2x BV, providing additional downside protection to an investor.

 

Description of business

Cabela’s, founded in 1961 by brothers Jim and Dick Cabela, bills itself as the “World’s Foremost Outfitters”, selling hunting, fishing, camping and related merchandise for outdoor activities.  It is the world’s largest direct marketer, and a leading retailer (with 26 large stores) of such merchandise, and prides itself for offering “the widest and most distinctive selection of high-quality outdoor products at competitive prices while providing superior customer service”.  The company was originally a direct marketer only, selling through its catalogs, but now also operates 26 large stores, which account for over 40% of the company’s revenues.  To encourage customer loyalty, Cabela’s issues the Cabela’s CLUB Visa credit card, through which it rewards customers for purchases of its merchandise.

 

In 2006, the breakout of sales by category was as follows: Hunting equipment 27.1%; fishing & marine 12.5%; camping equipment 14.8%; clothing & footwear 36.7%; and gifts & furnishings 8.9%.  Clothing & footwear has been declining as a percentage of total sales, from 38.2% in 2004 to 36.7% in 2006.

 

Store rollout

Cabela’s operated as a direct marketer only for over 25 years, selling through its catalogs.  It opened its first store in 1987 in Kearny, NE; this store was 35,000 square feet.  The second store was opened in 1991, also in Nebraska, and was 89,000 s.f.  The third store, in Minnesota, was built in 1998, at 159,000 s.f.  By the time of the IPO in June 2004, Cabela’s had 9 stores, and this had increased to 18 stores at end-2006.  Another 8 stores were opened in 2007 (i.e. a 44% increase in the store base), and 7 additional stores are planned for 2008 (an increase of 26%).  Newer stores are typically between 130,000 to 200,000 square feet in size, and the size of the average store is currently about 150,000 s.f.  The stores should help the company grow overall revenues at a mid-teens rate for some years to come.  In 2006, sales per square foot averaged $348, an impressive number, though lower than the $399 peak in 2004 due to the large number of new stores added over the last couple of years.

 

Financial services business

Cabela’s wholly-owned subsidiary bank (the modestly named World’s Foremost Bank), issues the Cabela’s CLUB Visa credit card, and manages its related customer rewards loyalty program.  During 2006 the bank managed an average of over 850,000 accounts, with an average balance of just under $1,600.  Some investors appear to be concerned that increased delinquencies and charge-offs in this business will significantly hurt Cabela’s profitability in a weakening economy, but I believe that the market has over-reacted to this concern and that it has been factored into the stock price.  Management focuses on lending to customers with very strong credit scores, so that I consider it unlikely that there will be inordinately high losses.

 

Financial performance

As can be seen in the table below, the top-line and profits of the company have grown steadily in recent years, with revenues almost doubling over the last five years, and the operating margin has increased from 5.7% in 2001 to 7.0% in 2006.  Management expects to grow revenues and EPS at a mid-teens rate over the next few years, a goal I believe is attainable.  Earnings growth in 2007 is expected to be in the high single digits, and this has disappointed investors, driving down the stock price and creating the current opportunity.

 

I believe that earnings per share could exceed $2.00 in 2010, which would justify a price of $30 or more, or a double in two to three years from now.

 

 

2001

2002

2003

2004

2005

2006

 

 

 

 

 

 

 

Revenue

1,078

1,225

1,392

1,556

1,800

2,064

Cost of revenue

(662)

(735)

(828)

(926)

(1,064)

(1,204)

Gross profit

415

489

565

630

735

859

SG&A

(353)

(413)

(480)

(533)

(620)

(715)

Operating income

62

76

85

97

115

144

Other income / (expense)

(3)

(3)

(5)

3

0

(6)

Income before taxes

59

73

80

100

115

137

Taxes

(21)

(26)

(28)

(35)

(43)

(51)

Net income

38

47

51

65

73

86

 

 

 

 

 

 

 

 Avg diluted shares O/S

53.7

53.4

55.3

63.3

66.3

66.6

 

 

 

 

 

 

 

 EPS

 $     0.71

 $     0.88

 $     0.93

 $     1.03

 $     1.10

 $     1.29

 

 

 

 

 

 

 

Number of stores

7

8

9

10

14

18

Avg sales per square foot

 $      367

 $      384

 $      389

 $      399

 $      367

 $      348

Comparable store sales growth

3.8%

3.7%

0.6%

-0.8%

-6.2%

1.3%

Catalogs mailed (000)

83,520

96,723

103,976

120,383

121,606

135,326

 

 

 

 

 

 

 

EBITDA

84

104

117

138

161

199

EBITDA margin %

7.8%

8.5%

8.4%

8.8%

8.9%

9.6%

 

 

 

 

 

 

 

Operating income margin %

5.7%

6.2%

6.1%

6.2%

6.4%

7.0%

 

Competition

Competitors include other specialty retailers that cater to the outdoor recreation, and casual apparel and footwear market, including Gander Mountain (GMTN), Bass Pro Shops, and The Sportsman’s Guide; big-box sporting goods stores such as The Sports Authority, Dick’s Sporting Goods (DKS), and Big 5 Sporting Goods (BGFV); casual outdoor apparel and footwear retailers such as L. L. Bean, Land’s End, and REI; and mass merchandisers and department store chains such as Wal-Mart and Target. 

 

What is clear is that Cabela’s is unique in the breadth of merchandise that it offers and the reputation and loyalty it has built with its customers.  Gander Mountain, with annual sales of about $1 billion, has incurred losses in each of the last three years, with bigger losses in the current year than last year.  It operates about 115 stores currently, and the average store size is about 50,000 square feet, or about one-third the size of Cabela’s stores.  Sales per square foot averaged $175 last year, or about half that of Cabela’s stores.  I believe that GMTN’s model, focused on small stores, is not working, and it is possible that it will eventually shrink significantly, which will work to Cabela’s advantage.

 

Risks

  • Weak results due to a prolonged recession.
  • Significantly higher losses from credit card business.

 

Catalyst

Continued growth in revenues and earnings over the next few quarters.
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    Description

    Cabela’s (CAB) stock, at $15.07, is down almost 50% from its high of $28.80, and 25% below the June 2004 IPO price of $20, and I believe that at today’s price it presents a rare opportunity to purchase a high-quality growth company at a very reasonable price.  At the current price it is trading at 11.9x trailing earnings, 10.8x expected 2007 earnings of $1.40, and 9.3x 2008 estimated EPS of $1.62.  This seems like a very reasonable price to pay for a unique business that has been growing its top-line at 14% to 15% annually in recent years and should continue growing at 12%-15% annually for some years, with improving operating margins, so that EPS should increase at perhaps 15% annually over the next few years.  This should lead to EPS of over $2.00 in 2010, and a stock price of $30 or higher over a period of two to three years from now, or appreciation of over 100% from the current price.

     

    Also, the Cabela brothers, who founded the company in 1961, own over 33% of the outstanding shares, providing them a strong incentive to maximize long-term shareholder value.  Another indicator that the stock represents good value today: co-founder Richard Cabela, who is now Chairman, bought 30,000 shares at prices between $15.59 and $15.75 in November, and purchases were also made by two other directors in November at prices between $16.58 and $16.75 per share.

     

    The book value at the end of September was $11.70 per share, and will likely exceed $12.50 per share at the end of 2007, so that the stock is trading at 1.2x BV, providing additional downside protection to an investor.

     

    Description of business

    Cabela’s, founded in 1961 by brothers Jim and Dick Cabela, bills itself as the “World’s Foremost Outfitters”, selling hunting, fishing, camping and related merchandise for outdoor activities.  It is the world’s largest direct marketer, and a leading retailer (with 26 large stores) of such merchandise, and prides itself for offering “the widest and most distinctive selection of high-quality outdoor products at competitive prices while providing superior customer service”.  The company was originally a direct marketer only, selling through its catalogs, but now also operates 26 large stores, which account for over 40% of the company’s revenues.  To encourage customer loyalty, Cabela’s issues the Cabela’s CLUB Visa credit card, through which it rewards customers for purchases of its merchandise.

     

    In 2006, the breakout of sales by category was as follows: Hunting equipment 27.1%; fishing & marine 12.5%; camping equipment 14.8%; clothing & footwear 36.7%; and gifts & furnishings 8.9%.  Clothing & footwear has been declining as a percentage of total sales, from 38.2% in 2004 to 36.7% in 2006.

     

    Store rollout

    Cabela’s operated as a direct marketer only for over 25 years, selling through its catalogs.  It opened its first store in 1987 in Kearny, NE; this store was 35,000 square feet.  The second store was opened in 1991, also in Nebraska, and was 89,000 s.f.  The third store, in Minnesota, was built in 1998, at 159,000 s.f.  By the time of the IPO in June 2004, Cabela’s had 9 stores, and this had increased to 18 stores at end-2006.  Another 8 stores were opened in 2007 (i.e. a 44% increase in the store base), and 7 additional stores are planned for 2008 (an increase of 26%).  Newer stores are typically between 130,000 to 200,000 square feet in size, and the size of the average store is currently about 150,000 s.f.  The stores should help the company grow overall revenues at a mid-teens rate for some years to come.  In 2006, sales per square foot averaged $348, an impressive number, though lower than the $399 peak in 2004 due to the large number of new stores added over the last couple of years.

     

    Financial services business

    Cabela’s wholly-owned subsidiary bank (the modestly named World’s Foremost Bank), issues the Cabela’s CLUB Visa credit card, and manages its related customer rewards loyalty program.  During 2006 the bank managed an average of over 850,000 accounts, with an average balance of just under $1,600.  Some investors appear to be concerned that increased delinquencies and charge-offs in this business will significantly hurt Cabela’s profitability in a weakening economy, but I believe that the market has over-reacted to this concern and that it has been factored into the stock price.  Management focuses on lending to customers with very strong credit scores, so that I consider it unlikely that there will be inordinately high losses.

     

    Financial performance

    As can be seen in the table below, the top-line and profits of the company have grown steadily in recent years, with revenues almost doubling over the last five years, and the operating margin has increased from 5.7% in 2001 to 7.0% in 2006.  Management expects to grow revenues and EPS at a mid-teens rate over the next few years, a goal I believe is attainable.  Earnings growth in 2007 is expected to be in the high single digits, and this has disappointed investors, driving down the stock price and creating the current opportunity.

     

    I believe that earnings per share could exceed $2.00 in 2010, which would justify a price of $30 or more, or a double in two to three years from now.

     

     

    2001

    2002

    2003

    2004

    2005

    2006

     

     

     

     

     

     

     

    Revenue

    1,078

    1,225

    1,392

    1,556

    1,800

    2,064

    Cost of revenue

    (662)

    (735)

    (828)

    (926)

    (1,064)

    (1,204)

    Gross profit

    415

    489

    565

    630

    735

    859

    SG&A

    (353)

    (413)

    (480)

    (533)

    (620)

    (715)

    Operating income

    62

    76

    85

    97

    115

    144

    Other income / (expense)

    (3)

    (3)

    (5)

    3

    0

    (6)

    Income before taxes

    59

    73

    80

    100

    115

    137

    Taxes

    (21)

    (26)

    (28)

    (35)

    (43)

    (51)

    Net income

    38

    47

    51

    65

    73

    86

     

     

     

     

     

     

     

     Avg diluted shares O/S

    53.7

    53.4

    55.3

    63.3

    66.3

    66.6

     

     

     

     

     

     

     

     EPS

     $     0.71

     $     0.88

     $     0.93

     $     1.03

     $     1.10

     $     1.29

     

     

     

     

     

     

     

    Number of stores

    7

    8

    9

    10

    14

    18

    Avg sales per square foot

     $      367

     $      384

     $      389

     $      399

     $      367

     $      348

    Comparable store sales growth

    3.8%

    3.7%

    0.6%

    -0.8%

    -6.2%

    1.3%

    Catalogs mailed (000)

    83,520

    96,723

    103,976

    120,383

    121,606

    135,326

     

     

     

     

     

     

     

    EBITDA

    84

    104

    117

    138

    161

    199

    EBITDA margin %

    7.8%

    8.5%

    8.4%

    8.8%

    8.9%

    9.6%

     

     

     

     

     

     

     

    Operating income margin %

    5.7%

    6.2%

    6.1%

    6.2%

    6.4%

    7.0%

     

    Competition

    Competitors include other specialty retailers that cater to the outdoor recreation, and casual apparel and footwear market, including Gander Mountain (GMTN), Bass Pro Shops, and The Sportsman’s Guide; big-box sporting goods stores such as The Sports Authority, Dick’s Sporting Goods (DKS), and Big 5 Sporting Goods (BGFV); casual outdoor apparel and footwear retailers such as L. L. Bean, Land’s End, and REI; and mass merchandisers and department store chains such as Wal-Mart and Target. 

     

    What is clear is that Cabela’s is unique in the breadth of merchandise that it offers and the reputation and loyalty it has built with its customers.  Gander Mountain, with annual sales of about $1 billion, has incurred losses in each of the last three years, with bigger losses in the current year than last year.  It operates about 115 stores currently, and the average store size is about 50,000 square feet, or about one-third the size of Cabela’s stores.  Sales per square foot averaged $175 last year, or about half that of Cabela’s stores.  I believe that GMTN’s model, focused on small stores, is not working, and it is possible that it will eventually shrink significantly, which will work to Cabela’s advantage.

     

    Risks

     

    Catalyst

    Continued growth in revenues and earnings over the next few quarters.

    Messages


    SubjectRisks
    Entry01/02/2008 03:41 AM
    Memberneo628
    Thanks - this is quite an interesting idea and valuation for a business of this quality.

    I'd appreciate your comments on the following:

    1.) This have been expanding at a breakneck pace with larger stores - what are the chances that they are overexpanding and will have serious issues with some of their stores?

    2.) What are the returns on invested capital for each new store? How long to break even and what are the cash on cash returns?

    3.) How economically sensitive are the buyers of these items - potentially it is discretionary, but appreciate your thoughts on average ticket size, etc.

    SubjectCouple of Question
    Entry01/03/2008 03:11 PM
    Membernantembo629
    Thanks for the interesting idea.

    1. Do you have any sense of what the company is doing to stem the loss of government muni bonds which help pay for the store openings? Originally it looks like they were getting up to 30% of the store paid for by local munis but this seems to have been falling year by year as these no longer become a tourist attractions? Any sense of what a normalized ROIC will be on these stores if they lose the help?
    2. How do you think about competition and over saturation? Looking back at older transcripts they clearly cannibalized sales in some locations as they opened new stores. How do you think about the store opening effect on the catalogue sales?
    3. Aren’t a large portion of the earnings coming from the credit card business (especially sense they improved store margins by charging the CC higher origination fees last year) which should deserve a lower multiple? Any sense of what the company is worth on a SOTP?
    4. It appears that the entire growth of the company has been funded by debt issuance? Given the troubles in the debt market do you see this being an issue for future growth?

    Thanks in advance


    SubjectMore questions, comment
    Entry01/04/2008 08:24 PM
    Memberedward965
    Thanks for the idea-

    My memory may be hazy and I´m traveling on vacation so many be rambling, but I thought that Cabelas was shrinking the store size somewhat as the largest formats didn´t work as well.

    Also, to retouch on saturation, I thought the old formula was that these were tourist attractions within a 250 mile radius. Now, it seems many areas have both a Bass Pro Shops and a Cabelas within that radius. Any calculations on where they can expand, if at all?

    Third, how much of earnings are from the catalog business? I looked at that and thought a decent % came from that, which is very low capital intensive.

    Finally, Bass Pro Shops is the main store competitor. How are they different?

    I like the idea in general, but feel the writeup missed practically all the major issues I touch on above.

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