I come from a long line of fishermen, one that can probably be traced back to the days before wireless sonar fish finders. Through my years on the water, I've come to several inescapable conclusions: Fish only bite when the weather is miserable, too much beer and too much sun can make you really sick, and trying to dislodge a treble hook from your thumb is no picnic.
I've also learned that fishing is not exactly an inexpensive hobby. After more than four decades in business, Cabela's (NYSE:CAB) would probably agree. The company caters to outdoors enthusiasts, billing itself as the world's largest direct marketer and specialty retailer of fishing, hunting, and camping gear. The stock is hiking uphill this morning after the company posted fourth-quarter earnings of $0.64 per share, easily surpassing expectations.
Revenues for the quarter rose 17% to $675 million, driven by solid increases in each of the firm's distribution channels. As a direct marketer, Cabela's relies heavily on sales generated from the 120 million or so catalogs it sends out every year, as well as from its e-commerce operations. For the year, direct sales climbed 7% to cross the $1 billion threshold, accounting for roughly 57% of the company's total annual revenues.
The smallest but most profitable business segment is the firm's financial services division, which issues Cabela's branded credit cards as part of a loyalty program. Though some retailers have run into problems and sold off their receivables portfolios, this business now accounts for a healthy chunk of Cabela's total operating income.
To date, nearly 800,000 card-carrying customers have racked up an average balance of $1,500, and the interest, fees, and money collected from loans securitized and sold totaled $116 million in 2005 -- up 49% from the prior year.
This brings us to the company's retail operations, which, like fishing with a frayed line, worry me a bit. Since the first retail store opened more than a decade ago, management has sunk an enormous amount of resources into building Cabela's brick-and-mortar presence -- where it must compete with everyone from privately owned Bass Pro Shops to the hunting and fishing section at Wal-Mart (NYSE:WMT).
I have no problem with free cash flow gasping for air as capital is funneled into new stores. After all, the addition of four new mega-outlets (and 700,000 square feet) helped retail revenues rise 24% to $620 million last year. But if the company can't produce positive comps at its existing stores, it will eventually run out of spaces (or cash) to cast its net out for new customers.
During the fourth quarter, same-store sales were down almost 5%, and they registered a steep 6.3% decline for the year. Just like an accomplished fisherman, though, CEO Dennis Highby may have exaggerated a tad when he had nothing but positive things to say about the state of the business. Even more troublingly, year-over-year comparisons should have been relatively easy, since comps were also underwater all of last year.
Aside from the weaker same-store sales, several waves of dilution have increased the outstanding share count from 55 million to 66 million over the past few years. In itself, this is not alarming, but it does bear watching. Apparently, rival Sportsman's Guide (NASDAQ:SGDE) has also caught the eye of game warden Jim Mueller in this department.
Nevertheless, I tend to give Cabela's the benefit of the doubt as it works through some of its growing pains, and today's numbers were encouraging. Still, as they say, there are plenty of other fish in the stock market sea.
Fool contributor Nathan Slaughter is counting the days until spring bass fishing season. He owns none of the companies mentioned.
