After months of anticipation Bass Pro Shops finally made its play for rival outdoor equipment company Cabela's (CAB) and hooked the retailer with an offer of $65.50 per share, or about $5.5 billion, including debt. Although the deal will create a behemoth with almost 200 stores that stretch across the country, 40,000 employees, and a fifth of the market share of the hunting, camping, and fishing industry, it may be paying a bit too much to do so.
Premium price for a heavily discounted chain
The price Bass has bid represents a 19% premium to Cabela's closing price on Sept. 30, the day before the acquisition was announced, and a 40% premium to its Dec. 1 closing price -- the day before Cabela's announced it was exploring strategic alternatives -- but is almost double the price at which it traded last October just before activist investor Elliott Management disclosed it had taken a sizable 11% stake in the retailer and would push management to sell itself.
While the $65.50 price is a level Cabela's hasn't seen in two and a half years, it values the store at 1.1 times trailing sales and more than 24 times net income. Even though Cabela's managed to post revenue in the second quarter that were 11% higher than a year ago as comparable store sales rose 1.5% -- the first quarter since the third quarter of 2013 that it has been able to post positive comparable store sales -- net profits dropped 5.7% in the period to $37.8 million and margins narrowed across the board.
Although the deal has been speculated about for a while, its consummation was delayed while Cabela's sought a buyer for its World's Foremost Bank operations, which accounted for 14.5% of total revenue in the second quarter. Capital One Financial entered a 10-year partnership with Bass Pro Shops for which it will originate and service Cabela's co-branded credit card.
Gunning for a turnaround
Cabela's struggles are due mostly to decreased demand for clothing and footwear, and its results in the recent quarter were mostly buoyed by sales of firearms. The FBI recently reported criminal background checks for persons wanting to buy a gun notched their 17th consecutive monthly record in September and are running 13% ahead of last year at this time. The demand for guns is masking Cabela's still-weak operations.
It did manage to post higher internet and catalog sales, which rose 3.3%, and it has initiated a number of cost-cutting initiatives that it says allowed it to be more aggressive in pricing and promotion. While that may have helped improve its market share position a bit, it can't maintain such policies for an extended period of time.
Although Cabela's and Bass Pro Shops are similarly situated and appeal to the same consumers, and not just because of the look and setup of their stores, there remains some intense competition in the broader specialty retail market catering to sporting goods and outdoors enthusiasts, which has seen its share of bankruptcies, including Eastern Mountain Sports, Sports Chalet, and, of course, Sports Authority. The combined company will still find itself competing against the likes of Gander Mountain and REI, big-box rivals Dick's Sporting Goods, Wal-Mart, and Target, and e-commerce giant Amazon.com. There is no end to the competitive threats Bass faces.
No doubt there will be economies of scale for it to realize from the combination, and it will certainly look to improve Cabela's profitability and expense management further, but it has paid up for the privilege of doing so at a retailer that has only managed to put together one quarter of, at best, mixed results in the past three years.
There is a lot of sense in this merger, not least of which is Cabela's loyal customers who are willing to drive long distances to its stores, but the price Bass Pro Shops is paying might be too high to give it enough of a sporting chance to succeed.