Cabelas and The Great Sporting Goods Sell-Off

Where there Is smoke, there Is fire
The recent results from two of the biggest sporting goods retailers showed that there is weakness across the industry. Dick's Sporting Goods (NYSE: DKS  ) reported Q1 2014 earnings on May 20, 2014, and it was a swing and a miss. Investors did not want to play ball, and the stock plunged more than 18% in one day due to weakness seen in the golf and hunting segments. However, there was a 65% increase in e-commerce sales, which represents 12.2% of total sales in the quarter. By 2017, it expects online transactions to be more profitable than in store transactions., signaling that the company is shifting its focus to online sales and away from brick-and-mortar. 

Cabela's (NYSE: CAB  ) reported one month earlier, and the results were not much better. Same-store-sales plunged a jaw dropping 21.7% compared to a year earlier, while revenue came in light. Guidance was light too. Q2 2014 is off to a rough start as well, with the company estimating that comparable store sales are down around 16% in the first three weeks of April. 

Bronze statue outside Cabela's in Wheeling, WV Source: Wikimedia

Similar to any retail business, competition is intense, with Hibbett Sports  (NASDAQ: HIBB  ) and Big 5 Sporting Goods  (NASDAQ: BGFV  ) both fighting for a piece of the market share. Hibbett sets itself apart because it is focusing less on gun sales and more on footwear and apparel. It also offers customers discounts and promotions using its VIP Reward Card. While it is not a credit card, it is an important strategy for the company. Customers can also earn points clicking on ads on its website, promoting the company on social media, and taking online surveys. With 939 stores, averaging around 5,000 sqf each, a smaller size store can better serve smaller, rural markets and reach a wider customer base.

Big 5 does not have a branded credit card either, but it also has a rewards program. Customers who distribute rebate flyers earn a check equal to 5% of the sales for customers who redeemed those flyers. It is a good marketing program that creates brand awareness while keeping the cost per acquired customer low. Its 425 stores are also small, averaging around 11,000 sqf each. The company is a little late adapting it e-commerce strategy, only launching last summer. However, management said that since the launch, it has acquired a database of "millions" of customers, which can be used from email lists, promotions, etc. Both competitors are optimizing their e-commerce strategy better than Cabela's.

Cabela's CLUB Card
The Cabela's CLUB Card allows frequent shoppers to sign up for free and use it at any of its retail stores, allowing them to earn points which can be redeemed for valuable discounts and promotions. The card is so popular that nearly one-third of sales are purchased with it. But make no mistake, this is a credit card. Similar to any credit card issuer, the company makes money on the interest payments from customers on their unpaid outstanding balances. Revenue for the card increased 15% to $98.6 million in Q1 2014. Cabela's store-branded credit card is not as enticing as its competitors. All in-store purchases (not online) earn 2% cash back, while Target's REDcard, which has been extremely successful, offers customers 5% cash back on all purchases in-store AND online and no annual fee. Online order also offer free shipping, with no minimum purchase.  While it does not have the same massive sporting goods inventory, a lot of the products Target sells are similar, though the company does not sell guns and ammunition.

Weakness in firearms and ammunition
Despite Cabela's stocking 225,000 SKUs at their massive retail stores, 48% of 2013 sales were guns. Sales were significantly higher in the last year or so due to fears of potential restrictions on sales after several shootings, and sporting goods retailers saw this as an opportunity to attract more customers to their stores by offering promotions on firearms and ammunition. But now that fears have calmed down a little, huge drops in sales are being reported, and whether or not these retailers gained any new customers remains to be seen.

Also, 700 layoffs were announced last February, around the same time that Mr. Richard N. Cabela, the Co-Founder and Chairman Emeritus, passed away at the age of 77. While he did not have an active role in the day-to-day operations of the business, he was a source of inspiration and vision for many people.

The retail stores are too big! 
In a time when many retailers are reducing their brick-and-mortar footprint and focusing on smaller locations and e-commerce, why does Cabela's continue to build massive stores, averaging 50,000-100,000 square feet? The largest Cabela's store is 247,000 square feet! The company has developed some smaller, 40,000 sqf "Outpost" stores, though this is still only a concept that started in 2012 and has not been scaled out.

Cabela's store in St. Paul, MN Source: Wikimedia

In Q1 2014, the company opened three new stores, and now has 53 stores in North America with nine more planned to open in 2014. The company intends to double the number of retail locations within the next four years. Am I the only person that feels this is way too ambitious and perhaps not the best strategy for the company? The company estimates that same store sales will be in the 2%-4% growth range over the next five years. This feels pretty weak to me and I am not sure I would want to invest In a company that is building $9 million dollar stores with such weak sales forecasts.

This year marks the 50th year since the first mail order catalog was mailed, but today, despite still printing more than 100 million catalogs a year, the e-commerce side of the business feels non-existent, and was not even mentioned once during the entire Q1 conference call. Sure, the customers cannot go online and have guns sent to their homes, but what about the rest of their products? Investors should take notice on companies that do not utilize all of their sales channels.

Takeaways
The company should reduce their overall square footage footprint and also optimize their e-commerce strategy immediately. I would also like to see Cabela's further build upon its own brand of apparel that they currently sell in their store, because this is a unique selling proposition and the company should build upon it, and explore strategies such as licensing, etc. Investors want to invest in companies that are market leaders and offer customers a unique experience that sets them apart from the competition. Right now, Cabela's does not provide that. Until it comes out with a new long-term strategy, investors should go fishing for better stocks.

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