Let's get two things out of the way.
First, I own shares of outdoor sporting goods retailer Cabela's (NYSE:CAB). Second, one of management's jobs is to sell the company as a good investment. That's what they do in every presentation they make. So I fully realize the risk of confirmation bias when I read and interpret the bill of goods that Cabela's CEO Dennis Highby was selling last week at a conference on growth stocks.
Still, I liked his focus: competitive advantage. Executing the right strategy will deliver returns over time.
If you've read anything I've written on competitive advantage, you'll know that I focus on the combination of positions and capabilities. Maybe Highby read my articles, too, because that's mainly what he talked about during the presentation.
Position
Cabela's position is pretty clear. It's an outdoor sporting goods retailer with three sales channels: catalogs, bricks-and-mortar stores, and its website. It competes using selection and customer service while giving customers a fair price. According to Highby, it has more than 225,000 stock keeping units (SKUs) and "more than one-third of [its] broad product selection carries the respected Cabela's brand."
He comments that its private-label products carry higher margins, but I think there's something bigger going on than margins. Good house-brand products send a message to suppliers not to bargain for higher prices. Otherwise the company will simply start peddling more of its substitute. That's a good strategy for keeping costs low and gross margins about the 40% line.
Capabilities
For a retailer, position is usually not the most important piece of the puzzle. After all, every retailer stakes out territory and uses a combination of selection, service, and price to make customers happy. Take Dick's Sporting Goods (NYSE:DKS), for example. It sells almost anything related to any kind of sport. Foot Locker (NYSE:FL) and Finish Line (NASDAQ:FINL), on the other hand, mainly sell shoes and apparel.
Capabilities separate the men from the boys. Highby noted most of them in the presentation and they mainly revolve around the customer. After all, the customer has the money that the company is trying to pry out of his wallet.
Its first, and perhaps most important, capability is analyzing customer data. Compiling customer data from its catalog means it knows what people like to buy, how much, how often, and by what ZIP code. That makes merchandising individual stores that much easier and helps the company derive marketing strategies to drive additional purchases.
More importantly, the company knows where its highest concentrations of most-profitable customers are. Think of the advantage Cabela's has when opening a new store. It's the rare case of putting the store in the center of area and watching the faithful flock. Gander Mountain (NASDAQ:GMTN) doesn't have as strong a capability here and I think is at a disadvantage as a result.
With so many customers traveling long distances to spend, on average, "three and a half to four hours" in the stores, it's no wonder that hotels, water parks, restaurants, and other shopping centers spring up next to a Cabela's store. That's a big reason that "states and cities often compete to provide economic incentive packages to entice Cabela's to open one of these large destination stores in their community."
If that isn't enough, Cabela's uses commitment and consistency to keep customers coming back for more. Its loyalty program, the Cabela's CLUB Visa, rewards customers with discount opportunities. Combining great selection, good customer service, and a rewards program keeps customers sticky and willing to look at more than price when deciding whether to buy.
Shareholders' big prize
The best measure of the strength of a competitive advantage is return on invested capital (ROIC). It's one thing to talk a mean game; it's another to deliver. Fortunately, Highby showed the results when combining the aforementioned with continuous operating improvements. A 150,000-square-foot store requires a $44 million investment. If incentive funds one-third of the investment, "the returns on the net investment are nearly 30%."
That's the prize, folks. As the company allocates more and more capital to building new stores, it creates lots of value. And over time, the market will recognize its ability to create value and reward it with a higher stock price.
The Foolish bottom line
In my opinion, Cabela's is not about growth. It could open stores at a faster rate if it really wanted to. No, Cabela's management is about creating shareholder value. It is managing the next phase of the company's life and doing it in such a way that the capital supplied by investors to fund the expansion generates the returns necessary to attract it. I can't control the stock market prices, but I can take advantage of them when I don't think they reflect the true competitive advantage or value creation capabilities of a company.
Cabela's is a Motley Fool Hidden Gems selection. Looking for other great small companies that know how to create value? Well Tom Gardner and Bill Mann are always looking for them, and doing quite well with what they've found so far. To join the crew, simply sign up for your free 30-day trial today.
Retail editor David Meier owns shares of Cabela's but does not own shares in any of the other companies mentioned. He's ranked 9,478 out of 31,123 rated Motley Fool CAPS players. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.
