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2 Companies Facing Major Upheaval in Their Industries

By Daniel B. Kline - Apr 13, 2017 at 7:09AM

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In the past year, we have discussed the management shake-up at Viacom, as well as the $5.5 billion merger between Cabela’s and Bass Pro Shops. Both companies have hit roadblocks with their plans -- here is what you need to know.

With companies like Amazon gobbling up retail market share across various sectors and consumer demand falling for traditional hobbies like hunting and fishing, the outdoor industry will need to brace itself for change.

In this episode of Industry Focus: Consumer Goods, Vincent Shen welcomes contributor Daniel Kline to the show as they revisit companies that have undergone major changes in the past year. First, there is the saga of Viacom (NASDAQ: VIA) (VIAB) and its struggling movie studio. Then, they discuss challenges to the merger between Bass Pro Shops and Cabela's (CAB) before answering a related listener question.

A full transcript follows the video.

This video was recorded on April 11, 2017.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen, and it's Tuesday, April 11th. Joining me this week via Skype is Mr. Daniel Kline. Hey, Dan! Thanks for joining us!

Daniel Kline: Hey, Vince! Thanks for having me! I wish I was there.

Shen: You'll be in town next week.

Kline: I believe you're going to be out of town. I think I'm doing a show with Sarah Priestley.

Shen: Yeah. That will be out in a couple weeks. It will be interesting to have Sarah in the host seat. But for today, Fools, for this episode, Dan and I will be revisiting a few companies in transition that we have covered previously on the show before we dive into a question from one of your fellow listeners. Our first company in question is Viacom and their Paramount Pictures division. Dan, have you had a chance to make it to theaters yet to see Ghost in the Shell?

Kline: [laughs] I have not seen Ghost in the Shell, although I actually want to. But this is one of those movies that, the second you start to get the kind of negative publicity that they got, unless the film is excellent, which reviews suggest it is not, you're in real trouble.

Shen: Yeah, absolutely. Ghost in the Shell is Paramount Picture's biggest release of 2017 so far, and the box office performance, at least domestically, has been disappointing, to say the least. With the production budget estimated at well over $100 million, the film was largely overshadowed during its opening weekend by more family-friendly titles, including Beauty and the Beast, which is well on its way to a billion dollars worldwide gross, and Boss Baby from DreamWorks Animation. Ghost in the Shell's box office underperformance is quite indicative of how films from Paramount and that studio have fared in the past few years. Paramount is the major studio behind Viacom's filmed entertainment segment. Dan, I looked through my show notes, we first talked about the drama going on behind the scenes at Viacom with the Redstone family, that was way back in May 2016. For listeners who have not followed the situation as closely, can you give a quick 30-second summary of what happened and what's driving decisions right now for the company?

Kline: Basically, the long term management of Viacom was forced out by some combination of the Redstone family. We're not sure if it's Sumner, we're not sure if it's his daughter who's actually making the decisions. A lot of that was based on the previous CEO and his successor wanting to sell off Paramount. Now, they're holding on to Paramount, and the problem is, the movie world, especially with these big $100 million temples, has moved to sure things, your Disney and Marvel movies, your Fast and the Furious. And Paramount doesn't have many of those. So, when you're making Ghost in the Shell, a property I had never heard of, you have a lot more risk than Comcast and Disney, which have these franchise machines.

Shen: Yeah. And with some of the management overhaul that took place at the company with Philippe Dauman being ousted, along with quite a few other members of the management team, Bob Bakish now has taken on the CEO role, and it's clear in the latest quarterly results and the conference call that he's working to right the ship and lift results across the company with a focus in vision that's probably been lacking for a few years now.

Viacom has seen revenues decline for about five years running, the worst of it coming from this filmed entertainment segment. In 2011, revenue for that segment stood at about $5.9 billion. Last year, it came in at $2.7 billion. Shrinking from about 40% to just 20% of the top line for the company, quite significant. Then, within that filmed entertainment segment, there's a few different businesses. There's theatrical, which is what we're talking about now with these movies, these big tentpole films. There's home entertainment, which includes things like DVD and Blu-ray sales, also streaming deals. Licensing, which is putting out some of their IP for other businesses to air. All of those in that period from about 2011 to 2016 have seen huge declines, anywhere from 22% for licensing to 72% for the theatrical business. This is all in the context of the fact that Paramount Pictures, from 2007 to 2011, was always either the No. 1 or No. 2 highest grossing studio for Hollywood. Then, from 2012 to 2016, it never even managed to break the top five.

Kline: The problem they have, obviously, they don't have the properties, but if you look at a Disney or a Comcast, they own many of the same assets. They have the cable channels. When you're going to make a movie like Ghost in the Shell, you can introduce it to the audience. For example, two years ago, there could have been a show on Nickelodeon introducing it to young children. There could have been specials on Spike. There's so many things you can do to prime the pump. And what Bob Bakish has done in his reorganization of the company is, he's going to put them in a position to have a strategy where these aren't all silo-ed businesses. Where film entertainment and TV talk the same way they do at Disney. Maybe -- they have a little bit of a theme park deal with some of their properties, but maybe they can make a theme park deal, because they don't own that. They have to figure out a way to either get better properties, and that's very hard, or nurture something from TV to the movies, from the movie to TV, and just find a better way to get these properties in front of people. I have a 13 year old son, and the only time he'd ever heard of Ghost in the Shell was seeing the previews, whereas Boss Baby was everywhere. That became a joke in my house, there were so many ads for it and places you could see it and pop culture references. That just isn't happening with Paramount.

Shen: In addition to Bob Bakish, who is the new CEO for Viacom, there's also new leadership for Paramount Pictures. That's with Jim Gianopulos. He took the reins just last week. It's funny, the way you described how a lot of the businesses at Viacom here silo-ed off from each other. Some people were describing the theatrical division for the filmed entertainment segment as being its own island, in terms of the way it's operated.

In the most recent earnings call, management has talked about how they're really trying to focus their efforts behind six of their major brands, and those include BET, Comedy Central, MTV, Nickelodeon, Nick Jr, and Paramount, and how they're trying to bring more film to television, and more television properties to film. For example, I think their Spike network is now going to be rebranded in the next year or so. By 2018, it's going to be the Paramount Network. Overall, our last question here from me in terms of your view of this company, beyond bringing some of these properties and this IP that they have to different mediums and formats to leverage that revenue and profitability there as much as they can, any other priorities do you see for either Jim or Bob moving forward? Especially, you have the recent news that before, they had this potential $1 billion financing deal with some firms in China, that potentially having fallen through. What do you think?

Kline: I'd stop making movies. They have the problem that there's very little room in the marketplace for out-of-nowhere $200 million movies. You have to have a name property. If I owned these assets -- and clearly, Sumner Redstone or Shari Redstone does not want to do this -- I would sell it off for parts. In many ways, Viacom is a company, like a kid who collects baseball cards and did it based on volume. Instead of having the best cards, he has a lot of cards. So, they have all these TV networks. MTV and Spike, those have value. But maybe they'd have more value if owned by somebody else. If you're making movies just because you have to fill out a film slate every year, you're going to spend $300 million to make $200 million time after time after time. They either need to slow down and just make Transformers films and genre movies that are more reasonable budgets and try to revive a China deal, because if you have local partnership in China, then you can get your films released in the limited number of slots there are there.

And with Ghost in the Shell, that's not going to save its profitability, but being released in China is actually going to take a movie that would have been talked about as a colossal loss and make it, perhaps, more of a manageable loss. That's not good news, but it's like saying, "Vince, the bad news is, you're dying. The good news, it's going to be 20 years from now." But, I just think the smart thing to do is take the assets that make sense within the Viacom CBS family -- because the Redstones also own CBS -- hold on to those, merge them with CBS, and then sell off the rest of the parts. Because right now, you have a lot of stuff that just isn't going to work well together, and a film studio that is not set up to run like a film studio needs to run in 2017.

Shen: I will add that the non-voting B shares for Viacom, they have generally traded between $35 to $45 for some time now. That gives them a forward price to earnings valuation of less than 12 times. So generally quite cheap at this point, but for you, Dan, is this a buy? Do you buy into the turnaround, at least?

Kline: No. Here's the thing, I do think they're going to stabilize. I think they have good management in place. But when you have the person who has the overall control in questionable mental health, and dealing with his child who may or may not be on the same page as him, I don't like any of that palace intrigue. And until that gets settled, until I know, "OK, Shari Redstone is making the decisions, this is where it's going to go," no, I'm staying away from it, because the factors that can influence this company go well beyond whether they can figure out how to spend less money or make profitable movies.

Shen: Okay. Our next update now, moving on, is for the Cabela's and Bass Pro Shops deal. This merger was originally announced last October in what appeared to be a pretty slam dunk transaction, bringing together two of the largest outdoor gear and sports retailers. But there have been a lot of headaches and a lot of uncertainty regarding whether or not the deal would actually go through. What's the story here, Dan?

Kline: It's a very bizarre hang up. You always have to, when you write this story, say regulatory concerns. There was, perhaps, a small amount of concern that because StaplesOffice Depot merger wasn't approved, that maybe we just had a governmental environment where if the two biggest players in a field got together, they were just going to say no. But I think the reality is, the Trump Administration is probably not going to deny this deal on that level. But what happened was one of the conditions of the deal was Cabela's selling its credit card unit, effectively, its in-house loyalty card. There was very quickly, announced on the same day back in October, there was a deal with Capital One. The problem is, Capital One has its own regulatory concerns not necessarily related to that deal that was going to make that impossible and push things past some of the deadlines. What's happened is a small regional bank, Synovus has stepped in, and it looks like they're going to purchase the assets, eventually sell some of them to Capital One but effectively clear the way for the Cabela's-Bass Pro Shops deal, which everyone still seems to want to have happen, to happen.

Shen: Yeah, absolutely. I think the key to this all was Cabela's credit card business, and finding some way to pass that on. With the Synovus agreement, from what I've seen, they will hold on to the deposits they get from that transaction and then past the credit card business itself onto Capital One. Some of the backstory behind why Capital One was having a hard time closing that part of the agreement in time based on the broader deal between Bass Pro Shops and Cabela's had to do with a money laundering investigation. Now, with that generally, it seems, kind of this white knight situation, somebody stepping in to save the day, I think overall, investors are still pretty bullish on this deal, and the idea of bringing together these two leading names, well-known for their large and very appealing brick and mortar, physical presence with these huge stores, bringing a lot of customers, trying to maintain traffic.

At the same time, I think investors are a little bit discouraged by Cabela's year-end results. These were reported back in February. Comparable store sales declined 6.5% in the fourth quarter, and online and catalog sales, which really surprised me, took an even bigger hit of 12.4%. If anything, kind of showing that brick-and-mortar having struggled so much in the past few quarters, you see these headlines, store closures, bankruptcies, consolidation might be the best way for these two companies to proceed.

Kline: It is worth noting that Cabela's and Bass Pro Shops run the kind of store that's still going to exist after the retail shakeout. They have destination stores. You might go to Cabela's -- you don't have kids yet, but my son and I -- we've talked about this on the show before -- we used to go to Cabela's to play the games, look at fishing rods, eat lunch, gaze at guns -- every little boy likes guns -- get a piece of fudge in their candy store. Those stores are going to be resilient. But I think they're bumping up against some industry concerns, but more the kind of malaise that sets in when, as employees, you don't know what's happening next. The Cabela's brand name may disappear. None of this has been decided. If you're in the marketing department or the digital department at Cabela's, and you're waiting for this other shoe to drop, I'm not precisely sure that you're advancing plans as if nothing has happened, even though that's what you're supposed to do. So, some of this might just be, everybody thought this deal was going to be closed by now and it wasn't. And some of it is a little bit cyclical. But people are still going to go to these stores. They're entertainment as much as they are shopping.

Shen: On that note, we have a very relevant question from one of our listeners that I wanted to cover to close out the show. This is very much tied to the outdoor equipment industry. This question -- remember, Fools, you can always reach out to us at if you have any comments or questions for the team here. Clifford asks, "Hey do you have a source that confirms that the outdoor equipment market is not shrinking? My suspicion is that with the changing face of America, many people just aren't fishing or hunting or camping." At first glance, you consider some of the major challenges we talked about with brick-and-mortar chains, brands that have in general, encountered over the past year or so. Just some examples, Sports Authority, gone, City Sports, gone, Vestis Retail, which operated Eastern Mountain Sports, Bob's Stores, and Sports Chalet, those chains, it declared bankruptcy last summer, reemerged as Eastern Outfitters, and just in the past week, Eastern Outfitters announced they will be closing a number of stores. Their bounce back has not been as successful as they'd hoped. It seems like Clifford might be on to something in terms of these outdoor retailers finding themselves facing a smaller market than what we may have previously had. Dan, have you taken your son hunting or fishing at all? Even camping?

Kline: We've gone fishing. Knowing we were going to talk about this, I danced around this a little bit in the last segment. I think it's fair to say that there's some softness in some of these markets. You're right, there might be less hunting. We talked a little bit about that gun sales in general, which were at all time highs due to fears that President Obama might pass some regulations against guns, have softened a little bit, or at least, there is some fear that they're going to soften. So there absolutely could be a lower demand, but I don't see how the lower demand has caught up to the incredible loss of retail capacity. If you're Cabela's, you've seen competitors go out of business or get a lot smaller left and right. So, clearly, the Amazons and the REI's and the people who are succeeding in the space -- Dick's, to a very small extent -- they have grown. There might be a smaller pie, but there's less people going after that. Absolutely, have I gone fishing? Sure. But how often do you buy a new fishing rod? You bought camping supplies this year, where did you get them?

Shen: I, admittedly, went online for a lot of that, through some companies that do you have a major physical store presence, like REI, like you mentioned, which is privately held, and sometimes, on Amazon or somewhere that's a strict online operation.

I have data here, specifically, from the U.S. Fish and Wildlife Service that shows ongoing declines in the number of hunters and fishermen in this country over the past several decades. In 1970, I think it was 40 million Americans had hunting licenses compared to just 14 million or so today. You have to keep in mind, as well, the country's population has grown in that same time period from about 200 million to over 320 million. So the rate of participation is even gloomier, I would say. Fishing fares a little bit better, with estimates that the number of anglers in the U.S. is about 40 to 50 million. But even then, participation among especially the youth, called the next generation of fishermen, and hunters, both these activities show a far less encouraging outlook. But they're still huge multi-billion dollar industries.

I think the bright spot is, Clifford mentioned camping as well. Despite what amounts to a huge number of entertainment alternatives and activities out there that are available to people today -- the internet, streaming, television, video games, school sports, all these activities that keep both adults and younger consumers and kids busy these days, they haven't really completely abandoned the outdoors. National Park Service actually reported record visitation in recent years with annual visitors topping 300 million. Pretty impressive in that regard. But the last point I'll make, you brought up gun sales and gun ownership.

That's really reflected even in Cabela's results. They have their hunting equipment, which includes firearms, scopes, archery equipment and related accessories and supplies. Hunting equipment as a percentage of Cabela's sales went up from 40% in 2010 to 48% in 2016. This, I would say generally reflected a huge boom period during the administration for President Obama in gun sales. But, when it comes down to it, there's definitely a lot of debate in terms of gun ownership, different surveys, different data, is it actually going down? You have these record sales, is it more people buying firearms? But the rate of ownership among households is declining. What do you think, Dan?

Kline: There was compelling pressure, at least in a certain political lobby to, when you had a Democrat who was perceived as being anti-gun -- although he never particularly did anything anti-gun -- in charge to go out right now and buy guns. And that created a bit of a frenzy, because if you are a gun manufacturer, let's say Sturm, Ruger, you're going to be very careful about increasing capacity because, if you build a new factory, which they did, a couple of years ago, but if you build a new factory for short-term demand without factoring in that that demand may cool off, you're going to end up with a lot of excess factory space, and all of the negatives that go with that. So, during this whole peak period, even as there were ebbs and flows in how people felt about Obama, the gun sales were still high because a guy got on the waiting list for a model he wanted nine months before and then he got it.

We're still dealing with the industry shaking some of that off. And I do think there will be a softening, because there is no possibility of upcoming gun legislation, at least until 2018. Guns are not cheap, so if you already own a few of them, you're probably going to back off. But the reality is, the Cabela's and the Bass Pro Shops are so diverse in what they sell, I think the mistake here might be them not shifting their merchandise or their focus based on changing needs. If camping is more popular than fishing, the Cabela's I went to in Connecticut pretty regularly didn't change that much. Their displays, their allocation of space, was about the same. Maybe that's something that the merged company can deal with. If traditional retailers do a lot more seasonal moving around, then maybe some of these sporting goods type retailers -- obviously, they deal with seasons, winter, summer -- but maybe you do need to massively change how much space you allocate for fishing in certain markets, because it's not as popular. The same with hunting, and the same with all the other categories.

Shen: For Clifford, final takeaways, I think it's interesting to see this balance, with hunting and fishing, with that ongoing decline, you still have what amount to be very significant businesses for these various chains and retailers. I think the best way that you put it, Dan, was shifting that product mix.

Kline: They need to get more sophisticated. When your competitor is Amazon -- and I think we're seeing this with Costco and some of the other companies we're talking about, no matter how immune your business is, eventually, the sheer efficiency of Amazon and their one-click ordering, their return process -- I just bought something from a third party on Amazon that never showed up, even though they said they shipped it, and within 48 hours, I had a complete refund. That's where the old world retailers like Cabela's and Bass Pro Shops, they're still thinking like physical stores. And they need to go more like Costco and Wal-Mart and say, "We have this asset of physical stores. How do we tie that into, now, we're not limited to what we have here, we have this entire world of stores, you can try it here, you can buy one that's there, the size doesn't fit, we have that in another place, you can drop off a return." And they've really got to step that up. I would love to see Bass Pro Shops when these companies combine do what Marc Lore from Wal-Mart has said and go out and buy a start-up, go hire some talent and really rethink how you approach all of this for the digital age.

Shen: Yeah. And I'll say, too, with firearm sales, for example, I think that is still a space where the physical presence is still really important to buyers, and it makes sense that some of these, during the Obama Administration, when sales were really booming, they shifted their product mix. Now, it seems like they'll be shifting again potentially, if that part of the industry is softening. And as you mentioned, if camping is more popular, especially with, for example, the National Park visitation numbers going higher. But, any other final takeaways from you, Dan, before we wrap up?

Kline: There is no scenario where I'll be camping, but if you'd like to go shooting sometime, that seems like a good time.

Shen: There you go. Thanks again for joining us today, Dan. Fools, you can reach out to us and the rest of the Industry Focus crew via Twitter @MFIndustryFocus, or send questions to People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening and Fool on!

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