The Motley Fool recently interviewed Dennis Highby, CEO of December 2006 Hidden Gems recommendation Cabela's (NYSE: CAB ) . Read on to see what Highby had to say about business priorities, growth opportunities, and Cabela's unique culture as Cabela's competes in the outdoor sporting goods market with Gander Mountain (Nasdaq: GMTN ) , Bass Pro Shops, Wal-Mart (NYSE: WMT ) , Dick's Sporting Goods (NYSE: DKS ) , and many others.
The Motley Fool: What do you think truly differentiates your business in the battle for customers and profits?
Dennis Highby: Cabela's multichannel model provides a significant competitive advantage over other retailers. With our industry-leading direct business, which exceeds $1 billion in revenue, we're able to collect vital information on our customers' purchases. Utilizing this database of purchase history, we're able to track demand by SKU [stockkeeping unit] right down to the ZIP code level. This information is critically important to our retail store expansion.
From a product standpoint, we believe Cabela's is the leading outdoor brand, providing us with a significant competitive advantage. We first introduced Cabela's-branded merchandise 30 years ago, and today Cabela's-branded merchandise represents roughly 37% of our merchandise revenue. Years and years of positive customer experiences have allowed us to grow our merchandise brand to these levels.
Superior customer service has been a key core value since Dick & Jim Cabela started the company. We realize customers are the reason for our success, so everything we do revolves around them. In fact, earlier this year, BusinessWeek magazine conducted its first-ever customer-service ranking. I'm proud to say Cabela's ranked 15th and was one of only two retailers to make the list. We're extremely proud of this accomplishment.
TMF: In last quarter's earnings release, you mentioned the "incremental pre-opening costs related to [the] Hazelwood, Missouri, store." Are you experiencing an increase in the level of pre-opening costs, or was this increase due to the timing of the Hazelwood opening?
DH: The increase in the pre-opening costs in the first quarter was due mostly to the timing of the Hazelwood store opening. Recall that Glendale, Arizona, the first store we opened last year, opened in July of 2006; our Hazelwood, Missouri, store opened in April of 2007. Therefore, we realized more pre-opening expense in the first quarter this year relative to the first quarter a year ago strictly due to this difference in timing.
TMF: You've come to the capital markets a few times for equity and debt capital. Now that store openings seem to be accelerating, will you have to go back to the capital markets one more time, or can you fund the rest of the growth from operating cash flow?
DH: To be clear, Cabela's only sold stock at the IPO in June of 2004. Any subsequent stock offerings were made by existing shareholders, and Cabela's did not receive any money from these transactions. We've completed a couple of transactions in the private-placement debt market. Specifically, we raised $215 million in February of 2006 and $60 million in June of 2007. We expect these two transactions to fund our 2007 growth.
We tend to be an equity-stingy firm and are reluctant to dilute our existing shareholders with a stock offering, which would increase the share count. I think it's important to point out that our debt-to-total-capital ratio (capitalizing leases) is slightly above 30%. We believe our weighted average cost of capital is optimized at a debt-to-total-cap ratio closer to 50%. Therefore, we believe we have significant opportunity to continue to access the debt markets to fund our retail expansion. While we generate significant cash flow from operations, I'd anticipate some form of debt deal in 2008.
TMF: Can you rank the following in order of importance to your business and explain how each helps: your catalog customer database, the ability to use incentives to open stores, and continuous operating improvements?
DH: Our catalog customer database is extremely important to us and provides one of our greatest competitive advantages. We rely on this database for multiple applications. Naturally, we're constantly analyzing data it provides to make our catalogs and Internet [site] more productive. But we also use it [to] help locate potential store sites, determine the size of the various departments throughout the stores, and select the right product mix. It's also very instrumental in targeting customers through email campaigns and other promotional opportunities.
Continuous operating improvements are certainly part of Cabela's growth strategies. We think the opportunities lie mostly in our retail segment, our financial services segment, and leverage of our shared services segment. We have several initiatives under way to improve operating results. In 2007, we'll complete the installation of our warehouse management system in our retail stores, add additional vendors onto our inventory replenishment system, and continue working on the final phase of our merchandise management system.
Over the past couple of years, we've been refining our store format and continue to make improvements. The purpose of these improvements is to reduce the overall costs of the stores with the goal of making them more efficient and more economical to build. These will be matched with particular markets of a certain size and for which incentives would have a reduced impact. However, I do expect a good number of future stores -- or infrastructure for those stores -- to be funded through incentives.
TMF: What are you most proud of from your employees?
DH: Independent surveys have shown Cabela's employees are overwhelmingly proud to tell people where they work, and they frequently recommend Cabela's to other people. They're our best advertising and recruiting outlets.
Jim and Dick Cabela have always stressed that Cabela's success is dependent on the company's family of employees, so I'd say I'm proud of them for building and growing this successful company that I feel lucky to be a part of. We ask a lot of our employees, and they work some long, hard hours to ensure we maintain our position of leadership in the industry. They take ownership in the company, and I'm not just talking about being stockholders themselves. They really get involved, they are end-users of the products we sell, so we have the advantage of thousands of on-staff field-testers who will tell us what works and what doesn't and what they want and need in the field.
I'd like to publicly thank them here for all that hard work and pride in ownership. Without a doubt, they're the reason for our continued success.
TMF: In terms of business, what's been your biggest reward? What's been your biggest regret?
DH: I'm especially proud of our successful IPO. Over the past 30-plus years, I've watched Cabela's grow from a great little family business to a hugely popular public company. It's been an exciting and sometimes wild ride. As with growing any successful business, there have been a few, I don't know if I would call them regrets, but challenges, along the way.
One of them is that as we continue to grow, it becomes more and more challenging to keep our family of thousands of employees spread across the country connected to the culture that makes Cabela's such a legend in the outdoor industry. If I could make one wish come true, it would be that every Cabela's employee meets, sits down, and talks with Dick and Jim to understand how deep our roots are. On the other hand, it is gratifying we've been able to find so many knowledgeable, passionate outdoors people -- Cabela's kind of people -- in every market into which we have expanded.
TMF: If you weren't doing this job, what would you want to do?
DH: Well, I've always loved hunting and fishing, so I'd like to think I'd be involved in the outdoors in some capacity. But if I wasn't working in the outdoor industry, you can bet I'd be spending every spare minute in the outdoors.
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