Cabela’s Inc.
/ (CAB-NYSE)Cabela’s disappointed with its third-quarter fiscal 2014 performance, wherein both the top and bottom-line fell short of the Zacks Consensus Estimate. Slower-than-expected recovery in sales of firearms and ammunition ran down the persistent robust performance of new stores, effective cost management and sustained growth at its CLUB Visa program. However, what came as a little respite was top and bottom-line growth of 17.4% and 4.1% year over year, respectively. As firearms sales remain comparatively weak, Cabela’s expect comps in the fourth quarter to decrease at a mid-single digit and revenues to increase at a high-single digit rate. Management pointed out that preliminary budget reflects that earnings and revenues would return to low double digits growth rate in 2015. Given the pros and cons embedded in the stock, we prefer to stay Neutral.
/ Equity Research / CAB | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/25/2014
Current Price (01/26/15) / $56.62
Target Price / $59.00
SUMMARY
/ Equity Research / CAB | Page 1SUMMARY DATA
52-Week High / $71.5452-Week Low / $46.60
One-Year Return (%) / -14.86
Beta / 1.55
Average Daily Volume (sh) / 829,058
Shares Outstanding (mil) / 71
Market Capitalization ($mil) / $4,025
Short Interest Ratio (days) / 9.46
Institutional Ownership (%) / 84
Insider Ownership (%) / 16
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 8.2
Earnings Per Share (%) / 21.1
Dividend (%) / N/A
P/E using TTM EPS / 18.3
P/E using 2015 Estimate / 16.1
P/E using 2016 Estimate / 14.4
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Blend
Industry / Retail-Misc/Div
Zacks Industry Rank * / 150 out of 267
OVERVIEW
Founded in 1961, Cabela's Inc. (CAB) is a leading specialty retailer and direct marketer of hunting, fishing, camping, and related outdoor merchandise. The company’s offerings include merchandise and equipment for hunting, fishing, marine use, and camping, as well as casual and outdoor apparel and footwear, optics, vehicle accessories, gifts and home furnishings, and furniture restoration related merchandise.
Cabela’s was initially incorporated as a Nebraska corporation in 1965 and was reincorporated as a Delaware corporation in Jan 2004. In Jun 2004, the company completed its initial public offering.
Cabela’s operates three business segments – Retail, Direct and Financial Services.
- Retail Business: Retail business includes merchandise sales and services performed at retail stores, sales from orders placed through retail store Internet kiosks, and sales to customers utilizing the in-store pick-up program. These retail stores range in size from 40,000 to 246,000 square feet and the large-format retail stores are 150,000 square feet or larger. The company’s next-generation stores range in size from approximately 50,000 to 100,000 square feet. The company also developed new "Outpost" store format, which are approximately 40,000 square feet in size.
- Direct Business: The company’s Direct business utilizes catalogs and the Internet as marketing tools to generate sales orders through the Internet, telephone and mail. Its master catalogs offer a wide range of products, while its specialty catalogs trades in products focused on one outdoor activity, such as, fly-fishing, archery, or waterfowl, or one product category, such as women’s clothing.
- Financial Services Business: The wholly-owned subsidiary, World's Foremost Bank issues and manages the Cabela’s Club Visa credit card and related customer loyalty rewards program. The Financial Services business provides merchandise customers with a rewards program that increases revenue, profitability and customer loyalty at its Retail and Direct businesses.
REASONS TO BUY
- Next-Generation Stores Driving Growth: The strong performance of the company’s next-generation stores continues to cushion its top and bottom lines. Moreover, these stores are outperforming the company’s legacy stores in terms of both sales and profit per square foot.We remain optimistic about these next generation store format as they require less capital investment, enhances store productivity, and helps increase sales per square foot.
- Financial Services Remain Strong:We believe that thecompany’s Financial Services Business segment plays an integral role in supporting the merchandising business by encouraging customer loyalty rewards program that boosts revenue, profitability and customer retention at its Retail and Direct businesses, leading to overall growth in sales and earnings. Cabela's CLUB Visa program continues to register strong growth, reflecting a rise in average active accounts with improvement in delinquencies and net charge-offs along with lower funding costs.
- Multi-Channel Approach: Cabela’s multi-channel model facilitates consumers to purchase directly from retail stores or order products through catalog and Internet channels, and have them delivered to the retail store of their choice without incurring shipping costs. We believe that this multi-channel approach gives the company an advantage over its competitors in luring customers and generating incremental sales.
REASONS TO SELL
- Near-Term Challenges: Moderating firearms and ammunition sales keep us anxious about the company’s future results as Cabela’s growth is largely attributed to strong sales of firearms and ammunitions. Slower-than-expected recovery in sales of firearms and ammunition ran down the persistent robust performance of new stores, effective cost management and sustained growth at its CLUB Visa program during the third quarter of fiscal 2014.
- Competition Posing as a Challenge: The outdoor recreation and casual apparel and footwear markets are highly fragmented and competitive. Cabela’s faces stiff competition from discount stores such as, Wal-Mart and Target, and specialty retailers, such as GanderMountain, Bass Pro Shops, and Dick’s Sporting Goods. The competitors have large number of stores, greater market presence and brand recognition, and financial resources.
- Secular Headwinds: The company’s Financial Services business depends upon the cash in hand, cash generated from operating activities and borrowings under its existing revolving credit facility. Any disruption in the capital and credit markets may adversely impact its access to financing.
RECENT NEWS
Cabela's Declares Plans to Open Second Store in Utah – December 10, 2015
Cabela's Incorporated announced plans to open a second store in Utah. The construction of the 72,000-square-foot retail store in Farmington, UT, which is in the greater Salt Lake City area, is slated to begin in 2015. This Sidney, NE-based company expects to open its store in spring 2016.
This store will be about half the size of Cabela’s first store in Lehi, UT, opened in 2005, covering an area of 150,000 square feet. Moreover, the company announced that it will construct a 600,000 square foot distribution center in Tooele that should be fully operational by next summer.
Cabela's Falls as Q3 Earnings Miss on Weaker Firearms Sales – October 23, 2014
Cabela’s Inc. third-quarter fiscal 2014 earnings left investors disappointed. Adjusted earnings per share of $0.81 fell short of the Zacks Consensus Estimate of $0.86, while revenue of $886 million also missed the Zacks’ expectation of $927 million.
Slower-than-expected recovery in sales of firearms and ammunition ran down the persistent robust performance of new stores, effective cost management and sustained growth at its CLUB Visa program. Even a 100 basis points (bps) rise in branded products sales penetration could not help Cabela’s quarterly results.
However, what came as a little respite was top and bottom-line growth of 17.4% and 4.1% year over year, respectively.
Including certain one-time items, earnings per share came in at $0.75, up 7.1% year over year.
As firearms sales remain comparatively weak, Cabela’s expect comps in the fourth quarter to decrease at a mid-single digit and revenues to increase at a high-single digit rate taking the full-year adjusted earnings forecast to $3.10–$3.20. Earlier, earnings were projected to grow in the high-single-digit/low-double-digit rate, as against $3.32 recorded in 2013.
Management pointed out that preliminary budget reflects that earnings and revenues would return to low double digits growth rate in 2015.
Quarterly Details
Total merchandise revenue, including retail and direct revenues, increased 3.2% to $773.4 million in the quarter. Merchandise margins contracted 100 bps to 36.3% due to an adjustment pertaining to segmental reimbursement of operating and promotional costs.
Cabela’s retail store revenues increased 8.7% to $598.7 million while comparable-store sales (comps) declined 11.2%. Retail operating margin (as a percentage of segment revenues) contracted 70 bps to 18.1%.
Direct business revenues fell 11.7% year over year to $175.3 million. Also, segment operating margin (as a percentage of segment revenues) contracted 430 bps to 10.4%.
Financial services revenues rose 10.9% to $109.1 million, driven by 7.5% increase in number of average active accounts. Credit card charge-offs as a percentage of average credit card loans for the quarter fell 16 bps to 1.6%.
Other revenues rose 4.5% year over year to approximately $3.4 million.
Adjusted operating income increased 25.7% to $94.8 million, while operating margin expanded 170 bps to 10.7%.
Store Update
In the reported quarter, Cabela’s opened 6 stores including markets of Buffalo, NY; Atlanta, GA; Portland, OR; Ontario and British Columbia in Canada.
Given the robust performance of its new stores, the company remains on track to open 13-15 outlets per year in the future. For 2015, the company has plans to open 14 stores, of which 2 will be opened in the first quarter, 5 in the second, 4 in the third and remaining 3 in the final quarter.
Other Financial Aspects
Cabela’s ended the quarter with cash and cash equivalents of $365.1 million, long-term debt (excluding current maturities) of $657.6 million and shareholders’ equity of $1,739 million.
For 2014, management expects capital expenditures in the range of $400–$450 million owing to its store expansion plans. Further, cash flow from operations is expected to be approximately $225–$275 million.
VALUATION
Cabela’s current trailing 12-month earnings multiple is 18.3X, compared with 25.2X industry average and 18.9X for the S&P 500. Over the last five years, Cabela’s shares have traded in a wide range of 8.7X to 22.2X trailing 12-month earnings. The stock is also trading at a discount to the industry average based on forward earnings estimates. Our target price of $59.00, 16.8X 2015 EPS, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of CAB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114companies covered: Outperform- 15.8%, Neutral- 77.4%, Underperform – 6.3%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / CAB | Page 1