Yesterday, Cabela's (NYSE:CAB) reported its third-quarter results were as healthy as a breath of fresh, clean air. Cabela's knows a bit about fresh air: It sells recreational products to hunters, anglers, and other outdoor enthusiasts around the country. And apparently these enthusiasts like to shop and love to buy high-margin products. Total sales rose 16% to $383.8 million and operating income increased 45% to $25.5 million for the quarter.
With all of the hype surrounding Google's (NASDAQ:GOOG) Dutch-auction IPO this summer, perhaps you missed Cabela's IPO in July. That's OK. Boring businesses like retailers don't attract much attention, meaning you are more likely to find a good value, something Philip Durell looks for in his Inside Value investment newsletter. Cabela's came public in July to finance the expansion of its bricks-and-mortar retail business. Before opening its first store in 1987, it sold its goods via catalogs just like Hidden Gems pick Sportsman's Guide (NASDAQ:SGDE).
The quarter was not completely rosy, however. Same-store sales declined 3%. Management blamed the decline on a marketing promotion that did not get to the stores on time. Declining same-store sales should arouse suspicion the way a buck senses danger nearby. However, I am not completely alarmed, for two reasons. First, same-store sales are up 1.3% for the year. Not great, but positive nonetheless. And second, the release showed that customers are flocking to its customer loyalty credit card, co-branded by Visa. About 95,000 more people signed up over last year's third quarter and they increased their balance from $1,384 to $1,467. More people spending more money is a good thing for a retailer.
Another thing I noticed was the amount of cash going out of the company. Inventories increased from $262 million to $364 million. A 40% jump always gets my attention. However, I would ascribe the increase to getting ready for the holiday shopping season. Also, Cabela's turns over its inventory at a rate of 2.1 times per year, so it's not like the stuff is just sitting around gathering dust. Capital expenditures were also up, but I attribute those to preparing to open the stores in Texas and Utah, which are scheduled to open in 2005 and will bring the number of retail outlets to 12. Remember that Cabela's came public to finance the expansion of its retail sales channel, so it needs to spend money on stores and inventory.
I love a good retailer, especially when I see it selling Teva sandals and shoes by Deckers Outdoor (NASDAQ:DECK), another Hidden Gems recommendation. Many fortunes have been made from great retailing businesses. Just look at Motley Fool Stock Advisor picks Costco (NASDAQ:COST) and Best Buy (NYSE:BBY), to name a few. Cabela's has been in business since 1961 and knows the category well. According to the proxy, insiders held 70% of the common stock at the time of the IPO, and that aligns them with the interests of all shareholders. But keep an eye on the shareholder dilution, especially because diluted shares outstanding rose 20% during the quarter and insiders said they will float as much as 13.8 million more shares to the public.
All in all, I think Cabela's had a pretty good quarter considering its transformation. I would note that the company has a plan to grow and is proceeding carefully. It's early in the expansion process, and Cabela's has its sights fixed on the goals of customer satisfaction and shareholder value. Given the history of other great retailers, early in the growth cycle can be a good time to buy.
Fool contributor David Meier enjoys the mountains near his home in the Upstate of South Carolina. He does not own shares in any company mentioned.
