Cabela's
The company reported margin improvement and revenue growth, particularly in the retail segment. On the back of these results and an upgrade from Wachovia Securities, the stock popped 15%.
As fellow Fool David Meier wrote, this is an interesting company, with plenty of growth potential and an advantage over competitors like Dick's Sporting Goods (NYSE: DKS), Big 5 Sporting Goods
In a nutshell, Cabela's operates three business units: direct, retail, and financial services. The direct business is steady, with $204 million in sales last quarter, up 5% from last year. The retail business is the growth engine, with $199 million in sales, up 32% from last year. The financial-services segment, which includes branded credit cards, is the icing on the cake with $41 million.
I'm most interested in the performance of the retail segment, which looks good overall. In the most recent quarter, operating income increased by 34% to $22 million, and a new store successfully opened in Missouri. Additionally, management confirmed that a total of seven stores would be opened this year, bringing the total number to 26.
As long as management can continue to successfully open new stores, the company should create significant value for shareholders. A new store can cost more than $40 million to open, but local governments often provide significant incentives -- $16.7 million on average, according to a study by Ewald Consulting. According to CEO Dennis Highby, when Cabela's receives that amount of incentives, its net returns on investment are about 30%. In contrast, in a recent $60 million private debt placement, the company agreed to a 6.08% interest rate.
When a retailer can borrow money at 6% and invest it at 30%, it's a great stock to own. My only concern is the most recent quarter's slight drop in same-store sales. Opening new stores isn't a good idea if your current stores are failing. However, Highby indicated that same-store sales ticked up during the beginning of this quarter. Revenue is growing, and the comps slip could just be a blip. Still, I'd continue to keep an eye on same-store sales for the next few quarters.
For more on outdoor sporting-goods scene, check out:
- Interview With Cabela's CEO Dennis Highby
- The Underperform Case for Gander Mountain
- Dick's Knows How to Compete
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.
Fool contributor Brendan Mathews does not own shares of Cabela's nor any of the other companies mentioned. The Fool takes its disclosure policy very seriously.