Cabela's (CAB) gun sales have helped boost its top line to a large degree in recent years. The company's hunting equipment category accounted for a good 48% of its overall revenue in 2013, up from just 31% in 2006. The company's recent top- and bottom-line growth has substantially outpaced that of Dick's Sporting Goods (DKS -2.27%), a close peer in the specialty-retail space.
The big problem with gun sales is that they tend to be highly inconsistent. Cabela's saw breakout gun revenue when President Obama got elected in 2008. Many people were concerned that the Obama administration would restrict firearm ownership, and rushed to buy the commodity before legislators passed regulations. The Sandy Hook school shooting incident of December 2012 also inflamed anti-gun crusaders and heightened calls for the banning of private ownership of guns. Cabela's saw another sales spike as people rushed to buy.
However, gun sales for the company have been declining lately as sales fell 10.1% in the fourth quarter. Sales in the first six weeks of 2014 were down by as much as 50%, while in the year before they grew by 100%.
Enthusiasm remains high
Despite the rather unpredictable nature of Cabela's business, consumer and investor enthusiasm for the megaoutdoors sporting concept has remained high. Cabela's shares currently trade at 10 times the $6 low they hit during the global economic meltdown. The shares are up 92% in the last two years alone.
Cabela's shares trade at a small premium to those of Dick's Sporting Goods, even though Cabela's sports a considerably better growth profile. Dick's shares trade at a forward P/E of about 17.6. Here is how the two companies grew in fiscal 2013:
|
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, therefore, outshone Dick's in every growth category.
Small is beautiful
Cabela's is trying to restructure its operations to appeal to investors. First off, it's chucking its huge stores (some are as big as 240,000 square feet) and building smaller stores of 40,000 square feet, with the larger stores clocking in at a modest 50,000-100,000 square feet. Even though it will have smaller stores, the company will add about 15% to its floor space.
According to Mark Miller of the William Blair & Co. analysts, Cabela's should have a valuation a little more in-line with other retail stores such as The Fresh Market, Lululemon and Ulta Salon Cosmetics which have been expanding their square footage at a pace of around 15%-18%. Mr. Miller also predicts that Cabela's sales will grow 7% in fiscal 2014, and he predicts a much faster clip of 16.6% in fiscal 2015.
Cabela's Achilles' heel
Other than the declining firearm sales, perhaps the other big reason why Cabela's shares sport a low valuation is because of the company's high reliance on credit sales. The company derives about 30% of its sales from its CLUB Visa cards. Cardholders use the cards to buy merchandise on credit, after which they earn points and use them to buy Cabela's goods. Cabela's also operates a bank that runs a runs a credit card program. The total outstanding loans at the end of 2013 stood at $3.9 billion, much more than the company's inventories which were valued at $645 million.
As long as Cabela's continues to perform well and the markets remain calm, the credit card business poses little risk for the company or its investors. However, a throwback into the recession period reveals that relying a little bit too heavily on a financing arm can be detrimental to a company. General Electric, which has a finance arm that contributes about 30% of its revenue, suffered heavy losses during the economic meltdown due to huge bad debt write-offs.
On the other hand, Cabela's finance arm could be a great asset. If Cabela's decides to spin it off in the future (like Sears did with Discover Financial), the move could create a lot of value for its shareholders. Study after study has shown that corporate spin-offs tend to create massive value for shareholders.
Foolish bottom line
Cabela's shares look like a good investment for the long haul, despite the company's falling sales and the highly regulated and unpredictable nature of its business. The shares look quite cheap and the spate of new store openings might catch the eyes of investors, who might bid up its share price.
