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Cabela's (NYSE: CAB) is a small-cap retailer with big plans.  The company already calls themselves the "World's Foremost Outfitter."  While it can't be said that Cabela's is a household name around the world, or across the country for that matter, it holds a unique place in the hearts -and wallets- of many outdoor enthusiasts.

About Cabela's

Cabela's was founded by Dick Cabela in 1961 as a mail-order company supplying fishing flies and other small outdoor items.  To this day, the foundation of the company is its world-famous, thick, full-color catalogs.  The company isn't living in the past though.  Today, Cabela's operates 40 destination-style retail stores and boasts a fast growing internet business.  Its brand is recognized and adored by a growing, loyal customer base.

Cabela's is a specialty retailer of hunting, fishing, outdoor apparel, footwear and related supplies.  The company sells major brands including The North Face, Under Armour, Columbia, as well as all major brands of guns.  Some of the most appealing merchandise comes from its own line of Cabela's outerwear, footwear, and hunting and fishing supplies.  In fact, if you visit a Cabela's you'll notice that there is far more Cabela's branded merchandise than any other "name-brand" merchandise.

You won't find a Cabela's store in most major cities.  The company knows its customer well and makes sure there are plenty of them to shop at any given location.  Its stores are "destination-style," meaning that the stores are set up with the look and feel of a museum and education center.  Many loyal customers travel long distances just to visit a Cabela's retail store.  Taking a look at the company's store map shows that the company tends to locate stores in population centers around broad, sometimes rural, "outdoor-focused" areas of the country.

<img height="197" src="/media/images/user_12885/cab1_large.png" width="402" />

(Source: www.cabelas.com)

Cabela's business consists of its growing retail footprint, direct business (catalog and internet), and financial services.  Cabela's retail segment represents about 60% of revenue (as of Q3 2012).  This is tremendous considering that Cabela's only has 40 retail stores open.  The direct segment represents about 27% of revenue with financial services bringing in the remaining 13%. The financial services segment consists of the Cabela's Club Visa, which operates as the company's loyalty program as well as consumer financing for large ticket items.  Due to the demographics of Cabela's core customer, the Club Visa program has a very low default rate of less than 1%.  As of the third quarter, 47.2% of Cabela's merchandise sales came from hunting equipment, 33.3% came from general outdoor merchandise, and 19.5% came from clothing and footwear.  Led by gains in same store sales, store count, and merchandise profit, Cabela's increased its operating income by 41% year-over-year as of the third quarter.

The Opportunity

Often it's difficult to find an established company so early in its growth cycle that investors can participate in potentially large future gains.  Most established companies have already grown to a point that large scale gains in profits and share price are very difficult.  Because Cabela's started long ago as a mail-order company and developed a large, loyal following, the story is different in this case.  Despite Cabela's large presence among consumers, the company only has 40 retail stores.  Retail already represents the largest percentage of the company's revenue, but it comes from a very small base.  Management, led by CEO Thomas Millner, recognizes this as a huge opportunity.  The company plans to open nine new stores in 2013 and already has board approval for 8 additional stores in 2014.  That represents a 42.5% increase over the next two years.  Because of management's selective nature in locations, Cabela's retail stores are highly profitable.  The company's newest locations are what it calls "next generation" stores.  These stores are more focused on Cabela's branded merchandise but don't lack in other product mixes.  Cabela's next generation stores are proving to be very successful.  On a per square foot basis the stores are 30-40% more profitable than the company's legacy stores.  Cabela's is also testing smaller "outpost" stores which also favor the higher margin Cabela's branded merchandise.

The favoring of Cabela's branded merchandise is another growth opportunity for the company.  Because Cabela's already has a well-known, trusted name, the company is able to put tremendous focus on its own brand.  Cabela's branded merchandise offers higher margins than traditional name-brand merchandise.  There is always opportunity for Cabela's to increase leverage of its name-sake brand.  I expect the company will continue to grow its product line and take advantage of the higher margin sales.

As Cabela's opens new stores over the coming years, I expect the direct business as well as the financial segment will grow along with it.  Although Cabela's experienced a decrease in sales through its direct business in 2012, it's likely that this will turn around as more retail locations are opened and the brand is introduced to more consumers.  In addition, about 80% of Cabela's Club Visa members sign up in retail locations.  More retail locations will equal many more loyal club members.

Cabela's stock trades at a reasonable 14.4 times next year's projected earnings.  This is above its 10-year historic P/E of 13.5.  However, Cabela's is accelerating earnings growth as same-store sales and the number of stores grow.  Cabela's is projected to earn $4.20 per share by the end of 2015.  If the P/E doesn't expand at all, Cabela's should trade north of $60 per share.  Cabela's price-to-earnings growth (PEG) ratio is 0.99 and the stock trades at only 1.02 times sales.  Management boasts a return on equity of 14.5%.

I expect that with management's intentions of growing a very small but highly profitable retail footprint, Cabela's can exceed its earnings expectations in the coming years.  Even if the company only matches earnings expectations next year, it's likely that the stock won't lose any ground.  As management rolls out its growth plans, Wall Street should get excited.

The Risk

Like most retailers, Cabela's faces a host of competition.  Specialty retailers such as privately held Bass Pro Shops and Gander Mountain are continuing to grow in popularity among outdoor enthusiasts.  Both companies have a larger retail footprint than Cabela's.  Gander Mountain sold its direct to consumer business to Cabela's in 1999.  Competition also comes from fast-growing Dick's Sporting Goods (NYSE: DKS), which I wrote favorably about in this forum (Can Dick's Sporting Goods Keep Sprinting Ahead?).  Dick's owns the trademark name Field and Stream and sells its line of hunting and fishing gear in its 592 stores across the United States.  While Dick's is less of a direct competitor, its outdoor category is increasingly treading on Cabela's territory,  Dick's sells guns, hunting and fishing accessories, and some outdoor clothing that is also found at Cabela's. 

Wal-Mart (NYSE: WMT) may be the 800 pound gorilla in the room for Cabela's in terms of competition.  While Cabela's focuses on a different, if not more affluent, customer; it's very easy for customers to pick up hunting and fishing supplies at one of Wal-Mart's one-stop sporting goods centers.  In addition to simple outdoor apparel and supplies, many Wal-Mart stores sell a broad selection of guns.  Wal-Mart doesn't breakdown its sales specifically to sporting goods.  Sporting goods is included in a segment called hardline merchandise which accounts for 10% Wal-Mart's merchandise sales, but includes other items such as hardware and automotive.  Nevertheless, it's widely assumed that Wal-Mart sells a lot of outdoor equipment.  Cabela's will have to continue to leverage its quality brand and customer loyalty, as well as innovative product mix to keep the competition at bay.  They've been doing it successfully since 1961, so I expect they know what they're doing.

The mention of guns brings me to the next important risk for Cabela's.  Guns are an important category for any outdoor retailer specializing in hunting equipment.  Hunting equipment accounts for nearly half of Cabela's merchandise sales.  In light of the tragedy at Sandy Hook Elementary, there is an increased focus on regulation concerning the sale of guns.  It appears that there is broad-based support for limiting or banning the sale of certain types of guns.  Some of these are guns that Cabela's sells.  This regulation could affect what types of guns and accessories Cabela's is able to offer.  Therefore, gun regulation could affect sales in the important hunting category.  I believe this is something that Cabela's can work through.  No regulation is going to ban the sale of all guns - that's a guarantee.  Most, if not all hunting rifles will still be available for sale and purchase.  If anything, new regulations will affect Cabela's product mix and possibly increase some costs associated with selling guns. 

Because there has been a rush to purchase guns over the last several months, Cabela's short-term results could be affected.  Guns are a low margin item and increasing the amount of guns sold could negatively affect Cabela's overall margins in the fourth quarter.  This would likely be a short-term blip that would smooth out in the coming quarters.

The final risk for Cabela's is the company's debt.  Cabela's has $2.27 billion in long-term debt versus a market-cap of $3.1 billion dollars. As Cabela's continues to grow its store count it's likely that the company may increase its debt load.  This is a key area that I will be watching to make sure Cabela's doesn't over-extend itself.  The company has a history of conservative growth which I expect will continue.

The Foolish Bottom Line

Cabela's story is one that appears to offer investors the security of an established company with the growth of a start-up.  Since 1961 Cabela's has been growing its loyal customer base through catalog sales, internet and retail.  With a footprint of only 40 stores, Cabela's retail business has grown to 60% of sales.  The opportunity for growth as Cabela's expands its store count is tremendous.  I believe that with conservative growth of around eight stores per year, Cabela's will double its store count in the next five years.  Still, the company will be nowhere near saturating its target market.  In addition, as the store count grows so does its opportunity in its branded merchandise, internet sales, and financial services business.  Cabela's stock appears to be trading around its current fair value.  However, the company should be able to expand earnings at a double-digit growth rate over the next several years.  If Cabela's trades below $41 per share I will be adding to my personal position.  Investors should consider outfitting their portfolio for long-term growth with the World's Foremost Outfitter.


fjconstantino owns shares of Cabela's Incorporated and Dick's Sporting Goods, Inc. The Motley Fool owns shares of Dick's Sporting Goods, Inc.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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