What Sporting Retailer Is a Good Buy Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shareholders of Cabela’s (NYSE: CAB) must be quite happy, as its stock has lately experienced a great gain, from around $5.70 per share in March 2009 to nearly $68.20 per share at the time of writing.

Since the beginning of the year, Cabela’s has gained 63.30%, much more than the S&P 500’s return of only 17.80%. Billionaire Ken Fisher and Vanguard Group are the two big shareholders of Cabela’s, owning more than 2 million and 2.5 million shares, respectively, of the company. Should we invest in Cabela’s at its current price?

Let’s find out.

A cash cow with consistent growth in both revenue and net income

Cabela’s, founded in 1961, is considered the leader in specialty retailing and direct marketing of fishing, hunting and camping outdoor merchandise, operating 37 stores in 24 states in three stores in Canada. The majority of its sales, $1.85 billion, or 66.5% of the total revenue, were generated from its Retail segment while the Direct segment contributed nearly $931 million in 2012 sales. The operating margin of the Retail segment came in at 18.7%, with $345 million in operating income while the Direct segment’s margin was a bit lower, at 16.7%, with $155.24 million in operating profits.

In the past four years, Cabela’s generated consistent growth in its top line and bottom line. Revenue increased from $2.63 billion in 2009 to $3.11 billion in 2012 while the net income rose from $50 million to $174 million during the same period. The company is also producing consistent positive operating cash flow and free cash flow since 2009. In 2012, operating cash flow came in at $364 million and the free cash flow was $124 million.

However, what makes me worry is its high leverage employed in the company’s operations. As of March 2013, it had $1.43 billion in equity, $364 million in cash and nearly $2.48 billion in long-term debt.

Are Dick’s and Foot Locker better buys?

Cabela’s is trading at $68.20 per share, with a total market cap of more than $4.8 billion. The market now values Cabela’s quite highly, at 17.55 times its trailing Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) .

Compared to its peers including Dick’s Sporting Goods (NYSE: DKS) and Foot Locker (NYSE: FL), Cabela’s has the highest valuation among the three. Dick’s is trading at $50.70 per share, with the total market cap of around $6.4 billion. The market values Dick’s at 9.52 times its trailing EBITDA. Dick’s mission is to become the number one specialty omni-channel retailer in sports and fitness. It is considered the biggest full-line sporting retailer in the U.S., with 8.5%  of the U.S. market. For the full year 2013, Dick’s expected to grow its comparable store sales by 2% – 3%, opening around 40 new Dick’s Sporting Goods stores. The non-GAAP diluted EPS was estimated to come in at $2.84 to $2.86 per share.

Foot Locker is the cheapest among the three. At $37 per share, Foot Locker is worth around $5.6 billion on the market. The market values Foot Locker at 6.1 times its trailing EBITDA. The company, incorporated in 1989, operates around 3,335 mall-based stores in several regions including the U.S., Europe, Australia and New Zealand.

Recently, the company announced that it had completed the acquisition of Runners Point Group, the Germany athletic store operator with 200 athletic retail stores in Germany. The acquisition seems to be the good move for Foot Locker to expand its existing European business. The company reported that it already had more than 600 Foot Locker stores with the 2012 revenue of more than $1 billion.

Among the three companies, Dick’s is the most profitable company with the highest Return On Invested Capital (ROIC) at 17.71% while the ROIC of Foot Locker came close at around 16.14%. Cabela’s is the least profitable business with the lowest ROIC at only 5.5%.

My Foolish take

Cabela’s does not seem to be a good pick now because of its extremely high valuation and the lowest profitability.

Among the three, I like Foot Locker the most because it has the lowest EBITDA multiple and the business delivered a good return on invested capital. Personally, I would expect Foot Locker might experience an EBITDA multiple of 9, or $54.60 per share, a 47% premium to its current stock price. 

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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