Editor's note: This article has been updated to reflect the company's new credit facility.
"If you like the store, chances are you'll love the stock."
Former Fidelity Magellan Fund manager Peter Lynch offers this advice in his excellent book Beating the Street. Companies providing a product or service that consistently keeps the customers coming back usually hold a competitive advantage over the next-best thing. But although Cabela's (NYSE:CAB) is not without a loyal contingent of customers, anyone who has loved this stock but since last July's IPO is either selling short or hates money.
Outdoor-goods retailing is an intensely competitive industry: Privately owned Bass Pro Shops will soon have 40 Outdoor World megastores across the country, which range in size from 100,000 to 800,000 square feet. Galyan's Trading Company tried to play in the same sandbox but finally sold out to Dick's Sporting Goods (NYSE:DKS) last year. Throw direct retailers such as Sportsman's Guide (NASDAQ:SGDE) into the ring and countless locally owned stores, and it's hard to imagine that anyone is making money in this sector.
A strong brand is essential to preserving profit margins in such a competitive landscape, and that's one asset Cabela's firmly holds. However, the cash flow situation here demands watching. Having started this year with nearly $250 million in the bank, Cabela has watched its cash and cash equivalents dwindle to only $44.9 million by the first quarter's end. The quarterly cash flow statement reveals that capital expenditures increased $39.3 million, or 546%, over the year-ago quarter, while inventories were up 40% versus sales growth of 11%. In addition (or should I say subtraction?), cash flow is bleeding red: Free cash flow mounted a $5.6 million loss in all of 2004 and a $171 million loss in the first quarter of 2005 alone.
Opening stores of roughly 200,000 square feet is no small feat, especially considering the money that gets poured into attractions to make each store a tourist destination. (And with Bass Pro Shops in the picture, that game is only becoming more expensive.) While retail revenue growth of 22.6% does account for much of the increase in capital expenditures and inventories, the fact remains that more cash will need to come from one of three places: cash flow from existing stores, or the issuance of new debt or new shares of stock.
With $118.4 million in debt, or 21% of equity, Cabela's doesn't have much flexibility to raise cash through debt. Existing stores should start to provide more cash, but not at the rate necessary to maintain the company's current spending rate. That makes it all the more likely that Cabela's will be issuing additional shares in a secondary offering. If so, let's hope stockholders don't forget to pack the rain fly.
The new credit facility announced Friday provides access to just shy of another $100 million in credit. While this announcement allays concern that Cabela's will need to finance expansion through another offering of stock, questions remain about how effective the retail strategy will be in the long run. If it is, great. If not, the tab must still be paid.
However, if Cabela's can successfully maneuver its way out of this tight spot, Wall Street will likely gain more confidence in the company, and patient shareholders will finally be rewarded. The firm reports second-quarter results after the market closes on July 28. I'll be looking to see how the inventory situation is shaping up, as well as checking out the cash flow situation.
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Fool contributor Jason Ramage looks forward to hearing your feedback. He does not have a financial interest in the companies mentioned in this article.
