Is Cabela's Growth a Risk to Investors?

Dick's Sporting Goods (NYSE: DKS  ) and Cabela's (NYSE: CAB  ) have grown at nearly the same rate for the last three years, but in the last 12 months, Cabela's has significantly outperformed Dick's. However, one service and its associated metrics should make investors a bit wary, especially in light of the three-month, 55% stock loss in shares of Conn's (NASDAQ: CONN  ) .

Fundamental separation
Dick's and Cabela's are both large sports retail companies that have grown at a three-year annualized rate of 10%. Both stocks are trading near all-time highs and trade with very similar metrics, at 21 times earnings. However, when we start to look at data from 2013, we can see some fundamental separation.

Metric 

Dick's 

Cabela's 

Revenue Growth

7.8%

15.6%

Same-Store Sales Growth

2.4%

3.9%

Net Income Growth

16%

30%

Operating Margin

8.6%

10.2%

Cabela's was the company to have a breakout year, significantly surpassing Dick's in all four major categories.

How is Cabela's outperforming Dick's?
Sure, there are some slight differences between Dick's and Cabela's businesses, but the core model remains the same. Some might wonder how Cabela's was able to perform so much better in the same industry. The answer to that question lies in its financial services, something most retailers lack but can lead to rapid growth -- and also create substantial risk.

The thought process behind owning a financial services arm of a business -- and more specifically, in-house credit programs -- is that consumers can purchase products now and pay later. These services can lead to enormous short-term growth as consumers buy more products with credit lines. For Cabela's, this service has been very lucrative.

In 2013, Cabela's financial service revenue increased nearly 20%, to $375.8 million, meaning it accounted for more than 10% of total revenue. However, the financing arm's operating income accounted for almost 30% of the company's total profit, showing financial services as a high-margin business.

This fact likely explains how Cabela's has higher margins and faster top-line performance than Dick's, as well as accelerated margin growth. So long as its financial segment is growing and customers are paying their bills, aggressive net income growth should remain intact.

A risk that can not be ignored
For current investors, the growth of Cabela's financial services segment has led to large stock gains. But buyer beware, as such services have a history of rapid and sudden turnarounds, especially with discretionary goods that are paid for with discretionary income.

A perfect example is Conn's, a company that operates in a very different electronics retail space, but which also sells many luxury goods. In the three years prior to 2014, Conn's soared 1,500%, and like Cabela's, much of this performance was due to the margins earned and additional revenue created from its credit program. Also like Cabela's, Conn's has significantly higher margins relative to its industry -- the operating margin was 12.5% in the last 12 months. Given the intense pricing competition, that can only be attributed to inflated prices and the success of its buy-now-and-pay-later approach.

Specifically, Conn's was able to grow same-store sales by more than 20% and produce year-over-year revenue growth greater than 40%, both of which could be attributed to the credit program. Yet in the blink of an eye, customers stopped paying their bills, and Conn's has a major problem, one that's led to a near-60% stock loss in 2014.

In January, Conn's had a $1.065 billion outstanding balance in its credit program, representing a 45% increase over January of last year, showing where the company's growth originated. However, what's hurting the company -- and is responsible for a $7.2 million decrease in total fourth-quarter profit guidance -- is that charge-offs as a percentage of the outstanding balance have also risen about 45% over the last year, to 10.6%. Furthermore, nearly 9% of all current balances are 60 days or more past-due, a big increase from 7% last year.

When you add all of this information together, it shows you how significantly a company can be affected when a credit program allows the customers' eyes to be bigger than their wallets. In regard to Conn's high charge-offs and increased delinquency rates, no one knows how fast the program could worsen or how long the worsening will last, meaning that future stock losses could be a reality.

Final thoughts
Conn's hardships and its lesson of cause and effect is definitely something that Cabela's investors should take very seriously. Hope that Cabela's doesn't make the same mistakes and enroll consumers with spotty credit reports. But given its growth and stock performance, investors might be best-served by taking some profits off the table to avoid such a situation.

On the other hand, Cabela's trades at the same multiples as Dick's, but is growing faster. The problem is that it appears that most of Cabela's growth can attributed to its credit program, which could erode in any quarter and without warning. This risk alone might make Dick's the better long-term investment, almost by default, as it, too, is growing at a rate that exceeds the S&P and is a highly profitable retailer that wasn't affected by the harsh winter or difficult retail environment.

If you're considering an investment in one of these two companies, risk definitely plays a role. With Cabela's, that potential risk of a Conn's-like event cannot be ignored.

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