For more than four years, Cabela's (CAB +0.00%), the specialty retailer of hunting, camping and other outdoor merchandise, has experienced a consistent rise in its stock price. It has risen from around $5.70 per share to more than $71 per share. However, since August 2013, Cabela's has dropped to nearly $61 per share. Many people argued that this recent decline creates a buying opportunity, but the stock still seems expensive trading at more than 16 times its EV/EBITDA, or earnings before interest, taxes, depreciation and amortization. Is Cabela's attractive at the current trading price?
Impressive business performance
Cabela's management has done a great job improving the company's business performance for the past four years. Since 2009, the retailer raised its gross margin from around 39% to 43%. It has focused its efforts on managing merchandise and inventory. Interestingly, inventory as a percentage of total assets went down from 17.66% at the end of 2009 to only 11.52% in June 2013. The merchandise gross margin improvement and the reduction in SG&A costs led Cabela's to better profitability over time. The company improved its retail profitability by nearly 700 basis points between 2009 and 2012. Cabela's also experienced an additional 230 basis point improvement in retail profitability year-to-date through June 2013.
Interestingly, Cabela's brand is quite strong, and it could be considered a huge source of profitability. The retailer's own branded merchandise accounted for around 30% of its total sales, which were equivalent to around $1 billion of sales in 2012. Cabela's branded products enjoy higher margin, by around 800 basis points to 1,200 basis points, than the rest of its product categories. According to the company, having its own branded products gives Cabela's a strategic advantage against other online Internet players which offer similar products. Thus, greater focus on its own branded products will increase the company's profitability in the near future.
High leverage
What I worry about with Cabela's is its high level of leverage. While its shareholders' equity is around $1.47 billion, its long-term debt is around $2.53 billion. With around $409 million in EBITDA (earnings before interest, taxes, depreciation and amortization), its net debt/EBITDA is around 5. In contrast, peers Dick's Sporting Goods (DKS +3.55%) and Under Armour (UA +0.10%) have minimal debt. Dick's has no debt, and Under Armour has only $55 million in both long and short-term debt. With $224 million in cash, Under Armour actually has net cash of around $169 million.
Dick's has set high targets for the next five years. It plans to raise its top line from $6 billion in 2012 to $10 billion in 2017. It also plans to expand operating margin by 150 basis points to 10.5% by 2017. Moreover, the number of Dick's Sporting Goods stores will grow to more than 800 in the next five years. Rising sales combined with margin expansion will help Dick's improve its profitability in the future. Dick's is considered one of the most important wholesale partners of Under Armour. In the fourth quarter last year, Under Armour had store-in-store exposure at a bit more than 20% of Dick's stores. This exposure is expected to increase to more than 40%, reaching more than 240 stores.
My Foolish take
Among the three, Dick's has the lowest valuation at only 9.5 times EV/EBITDA. The EV/EBITDA of Cabela's and Under Armour are 16.2 and 30.6, respectively. Although Cabela's could have a lot of potential for growth and profitability improvement in the future, I would not consider it as a good investment for now due to its high valuation and extremely high leverage level.
