What Makes Cabela's So Compelling?

Although the sales environment for retailers has substantially improved since the recessionary years, retail company executives are still using words like "difficult" and "challenging" to describe the current economic conditions they are dealing with. But this hasn't stopped them from building sales and building more stores.

Today we focus on one very successful chain, Cabela's  (NYSE: CAB  ) , and compare its strategic success and performance to Dick's Sporting Goods (NYSE: DKS  ) and Big 5 Sporting Goods (NASDAQ: BGFV  ) . 

Gaining same store sales momentum
Cabela's operates 50 retail stores as of December, with a focus on hunting, fishing, and camping merchandise. The company is the leading direct retailer (e-commerce and catalog sales) in these categories. The company also issues its own popular Visa card.   

The company's financial results for the third quarter were excellent. Total revenue was up nearly 15% compared to the same quarter last year, and increased nearly 21% in its retail stores. Revenue from its financial services (Visa card) segment was also robust, up 14.5%.

The company recorded the eighth consecutive quarter of increased comparable-store sales, with a 3.9% increase in the third quarter.

Operating income as a percentage of sales was an outstanding 9% for the quarter and 9.2% for the first nine months of the year. Net income for the quarter was up 16.6% to $49.9 million.

A snapshot of Cabela's strategy
At the recent ICR XChange Conference in Orlando, FL, Cabela's CEO Tommy Millner discussed the company's strategies that are contributing to this fine operating performance. Here are some highlights:

Product innovation: Cabela's has its own brands in certain categories including camouflage gear, optics (such as spotting scopes), and heated performance gear for recreational activities in extreme cold.

In the third quarter, the increased sales contribution from this higher-margin merchandise was a factor in the 10 basis point improvement in gross margin percentage, to 37.3%. These branded products also insulate the company from price competition with other stores.

The success of next-generation stores: In the third quarter, the company's 18 next- generation stores reported 47% higher sales per square foot than its legacy stores. 

Growth opportunities: Chief executive Millner said the company believes it has the potential for 225 stores in North America. With 50 stores now, the company has room to grow its retail footprint by 77%. The company intends to add 13-15 stores each year, which may seem like a less-than-aggressive pace, but management believes that growing its store count too fast can compromise customer service levels. And one of the company's competitive advantages is the knowledge and service level of its in-store personnel, which helps customers make better purchase decisions and encourages them to make a purchase.

Omnichannel strategy: The company's strategy is to serve customers wherever their purchase preference is: buying in-store, through the Internet or mobile devices, or through the Cabela's catalog.

I would also add:

Unique retail experience. Cabela's stores are large, many of them 150,000 sq. ft. or more, and provide a large-scale shopping experience, almost like a theme park for outdoor recreation enthusiasts. The stores have features that bring the outdoors alive for customers such as huge aquariums and wildlife displays.

Revenue up for Dick's, but profit slightly down
Dick's Sporting Goods, a retailer of brand name sports equipment, apparel, and footwear, operates as of year-end 2013 552 Dick's Sporting Goods stores and 86 Golf Galaxy stores. Its omnichannel retail strategy includes selling through e-commerce websites and catalogs.  

Dick's also reported favorable revenue results for the third quarter, with net sales increasing 6.7% compared to the year-ago quarter. Same-store sales growth of 3.3% nearly matched that of Cabela's and exceeded the company's expectations.

Cost of goods sold as a percentage of sales was up 61 basis points compared to the same quarter a year ago. Operating income declined more than $3 million to $79.1 million. Operating income in percent of sales terms was 5.6%.

A strategy of western domination
Big 5 Sporting Goods operates 429 stores, primarily in the Western United States. In California alone it has 215 locations. The company says that on the West Coast it has about three times as many stores as its nearest competitor.

This regional focus creates powerful brand identification for Big 5 with consumers in the region, even going up against competitors that are larger on a national scale.

At the ICR XChange conference, Big 5 Sporting Goods CEO Steve Miller said that firearms and ammo sales were down year over year, but nonetheless net sales rose a healthy 5.6% for 2013, with same-store sales up 3.9%.

What we learned
Big 5 operates smaller stores, 11,000 square feet or so, which gives it the flexibility to place them in lots of different locations and in smaller markets. The company seeks to be known as a neighborhood retailer. But this strategy also forces the company to stock precisely what the customer wants. A key to Big 5's merchandising strategy is to customize the product mix to the individual location's customer base.

Dick's has designed new prototype stores of various sizes, down to 35,000 square feet, which will allow it to establish stores in smaller markets and smaller shopping centers.

Dick's full-line approach to its merchandise mix, in contrast to Cabela's specializing in three sporting sectors, gives it the flexibility to add merchandise to sporting categories experiencing the greatest growth in participation.

Cabela's quarterly sales performance was particularly impressive because the boom in gun and ammunition sales that has occurred in the last year began to seriously slow down in August. The company was able to more than make up for this with sales in its other product lines.

To me, Cabela's seems ideally positioned to provide its customer base with a premier shopping experience and build customer loyalty through its omnichannel approach.

These are three good companies, illustrating that very different strategic paths can take a retailer to the same destination -- solid revenue growth. My favorite is Cabela's because it has so much room to grow its store count.

 


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