Cabela’s is the dominant outdoor sportsman brand in the U.S. It started as a catalog operation, but in the past several years has opened a lot of stores so that it now gets more revenues from its stores than it does from its direct business. Of the roughly $2.5 billion in sales, $1.3 billion is in retail, $1.1 billion in direct, and rest from its credit card unit.
The basic thesis is that the direct business is a gem, the retail business is mediocre with lots of room for improvement, and the credit card business won’t be fatal to company at only 10% of earnings.
CAB’s segment reporting leaves something to be desired, as they have a very large unallocated corporate expense line at 9% of revenues. But if you allocate it equally to the retail and direct business, you get high single-digit EBIT margins for the direct business, and low-mid single-digit EBIT margins for the retail business. And given the far lower capital needs of the direct business, the returns on capital are much higher than in retail. Returns on capital were well over 20% until the early part of this decade when CAB really started opening lots of retail stores, so the stores really dilute the profitability. The direct business is seeing sales declines in the low single-digits, which isn’t too bad given the spending environment. The brand has a very loyal customer base.
The bad news is the retail stores are getting crushed, with -9% same-store sales reported in the latest quarter ended September. I would be surprised if that decline didn’t get worse in the fourth quarter and then continue to remain bad well into 2009. Because of the sales weakness and resulting gross margin hit, CAB will probably see its EPS decline this year by 15-20% to $1.00-1.10/share. Since I don’t see sales getting any better and credit card funding costs and bad debts will rise, I wouldn’t surprised to see 2009 EPS come much lower, say $0.50-0.70/share. But this all seems more than reflected in the stock price at $5.83/share. It seems rather foolish to attempt to figure out what earnings will be in 2009 or 2010, but CAB should be able to get back up to $1/share or so within 3-5 years. At any double-digit P/E multiple, the stock should be winner. Several things give me confidence for a reasonable profit performance several years out. First, CAB has throttled back its store opening pace from nine in 2007 to two in 2008, and two in 2009. Second, it is also throttling back its inventory at a very fast pace. Total inventories were down 3% at the end of September despite 12% revenue growth. And third, CAB has always stuck to the very highest quality borrower in its credit card unit, with an average FICO score in the 780s.