Three months ago, I introduced you to The Sportsman's Guide (Nasdaq: SGDE), a tiny, Minnesota-based catalog retailer of value-priced outdoor gear. At that time, the stock was priced at $6.06, or only 7.9 times trailing earnings. That bargain price didn't last long. Within days after my article was published -- and before Fool trading restrictions would allow me to purchase -- the stock began a relentless climb, going as high as $9.75 by early July. I thought I'd missed the boat.

But as often happens with wispy, thinly traded small caps, the stock came back on no material news. Now with another quarter of solid earnings under its belt, the stock -- at a recent $6.83 -- trades for a still-low 8.2 times trailing earnings. Not only is the stock cheap, but the business is humming along with record productivity.

By way of review, The Sportsman's Guide (hereafter, TSG) is a retail comeback story. A few years ago, if you had glanced at the company's fiscal 2000 income statement, you probably would've dismissed the business as a failure. Sales for 2000 declined 17.6% en route to an unprofitable year. Only if you had dug deep into the financials and supplementary company data would you have seen that, in fact, the seeds of a turnaround were already taking root.

The decline in 2000 sales didn't result from weak demand or customer dissatisfaction, but because management deliberately chose to mail 22% fewer catalogs than in 1999. The idea was that by streamlining the number of annual catalog offerings and sending mailings to only the most profitable customers, the per-catalog rate of sales productivity would increase.

The plan was a winner, but it took a while for results to kick in. Sales per catalog actually declined in 2000 to $2.10, from $2.16 in 1999. It's no wonder the stock traded under $1 in late 2000. This penny stock, however, was not destined for the corporate graveyard.

In 2001, TSG began to see the fruit of its catalog-productivity labors. Management slashed the number of mailed catalogs by another 23% and finally struck gold: Sales per catalog jumped to $2.78. Also in 2001, TSG began to reap efficiency gains through sales via its website, which accounted for 21.3% of sales that year. Finally, to crown what was a truly spectacular turnaround year, TSG finished 2001 with 254,000 members in its fee-based, Costco-esque discount purchase club. That's almost a quarter of the company's active customer base as Buyers' Club members.

In sum, what once was a sleepy, undistinguished, marginally profitable catalog retailer had become a vibrant, data-focused, highly profitable sales organization, supported by a growing number of loyal, fee-paying customers.

This year, TSG has been building on last year's success. In the most recent quarter, ended June 30, the company reported sales of $34.9 million, up 10% from the year-ago quarter. This was the best level of sales growth in three quarters. Most importantly, the company turned a profit where last year there was a loss. The two key contributions to profitability were catalog productivity and a higher mix of Internet sales:

  • Catalog productivity hit an all-time high during the quarter. Sales per catalog reached $2.95, up from $2.58 in Q1 and $2.56 a year ago, and up from $1.95 in Q2 2000. In a business where printing and postage costs are among the largest expenses, these productivity gains are of paramount importance.

  • Sales through the Internet channel reached a record-high 30%, up from 27% last quarter and 21% a year ago. According to management, an Internet sale costs only $0.50, versus $4 to $5 for a telephone-based sale, which requires the assistance of a telemarketer. Management expects the Internet mix to reach 35% of sales within the coming year.

As a result of the productivity gains through both the online and offline channels, SG&A (sales, general, and administrative) expense dropped to 29.2% of sales, versus 33.4% of sales in the year-ago quarter. Those 4.2 percentage points were the difference between a profit and a loss.

TSG used to only turn a profit in its high-volume fourth quarter, but now the company has a sufficiently low-cost structure to allow profitability in every quarter. The improvements in catalog productivity and Internet sales have made all the difference.

Looking ahead, TSG management is calling for full-year 2002 sales of $175 million to $180 million, which implies combined Q3 and Q4 sales of $98.4 million to $103.4 million. This would represent flat to low single-digit growth, versus last year's second half.

I'll be surprised if sales don't come in at the high end of the estimated range. Management's cautious stance seems to indicate it's leery of the consumer's strength in this economy. I'm not dismissing that, but I would expect a value-oriented, debt-free retailer like TSG to weather this sluggish environment relatively well.

Concerns about the consumer have weighed on all retail stocks lately, but I think TSG has been hit way too hard. I'm not complaining, though -- when TSG stock fell under $7 in late July, I was happy to have the opportunity to scoop up shares at an average price of $6.86. That's about where the stock is right now. At a P/E of 8.2, the earnings yield (E/P) of 12.2% looks mighty attractive. I don't see any reason a consistently profitable, cash-generating business such as TSG shouldn't merit a P/E multiple of at least 10, and perhaps as high as 15.

Matt Richey is a senior investment analyst for The Motley Fool. At the time of publication, he held shares of The Sportsman's Guide. Matt's personal portfolio is available for view in his profile. The Motley Fool is investors writing for investors.