Outdoor merchandise retailer Cabela's (NYSE:CAB) recently announced its first quarter earnings, and they were a bit of a mixed bag. While revenues and operating income were up, same store sales were down 8.4%. At first glance Cabela's would seem to be another retail casualty, but when you look closer at the fundamentals, beyond the drop in same store sales, there are signs of life.
Retail Slowdown Spreads To Sporting Goods
The retail industry overall is hurting; this much we know. Industry wide, same-store sales fell 0.5% in March as consumers put away their wallets. There was an increase in April but analysts such as Ken Perkins of Retail Metrics said, "Its false hope to think that these numbers show that a rebound is about to take place in consumer spending."
Cabela's specializes in hunting, fishing and backpacking equipment, so its most direct competition is Bass Pro Shops and Orvis, both private companies. However, Cabela's is part of the sporting goods stores industry, operating within the services sector. In terms of market cap, its biggest competitor is Dick's Sporting Goods (NYSE:DKS). Recently, Dick's CEO, Edward Stack, announced same-store sales for the remainder of the year would rise 1% or remain flat. Dour 2008 forecasts have also come in from smaller sporting goods chains including Hibbett Sports (Nasdaq:HIBB) and Big 5 Sporting Goods (Nasdaq:BGFV). Almost across the board, sales were stagnant.
With the exception of warehouse clubs like Costco (Nasdaq:COST) and BJ's Wholesale (NYSE:BJ), it's a dreadful time to be in retail. If you're uncertain, just look at the Gap (NYSE:GPS).
There Is Some Hope
All you need to do is look under the hood at Cabela's and you'll see a story that is actually quite positive. With the exception of same-store sales, it's in terrific shape and will actually benefit from this economic slowdown for years to come. By focusing on the existing business and not concerning itself with massive expansion plans, the company has become a more innovative retailer without resorting to beefed-up numbers generated by adding 8-10 stores a year. The important thing for retailers - in-store or online - is the customer experience. Provide this in a tangible way, and you'll generate significant loyalty and return visits. Failure to do so can be catastrophic as the Linens N Things' bankruptcy demonstrates.
Why So Profitable?
In a quarter where it reported negative same-store sales, it's rather unusual that Cabela's was able to increase merchandise gross margins (as a percentage of revenues) by 190 basis points over the first quarter of 2007. Further, operating income increased 70.2% to $21 million with each of the three operating segments: retail, direct and financial services showing healthy operating margin increases of 120, 50 and 250 basis points respectively. This improvement was a direct result of the company focusing in the first quarter on increasing retail profits through greater store productivity, stronger merchandising, lower store inventory levels and a better advertising strategy.
Numbers that bear this out include a 0.5% increase in sales per labor hour (despite 8.4% negative comps), a 3% increase in average ticket price, and a decrease in inventory per square foot of 5.6%. Clearly, management was doing as much as it could to maintain profits despite decreased foot traffic. With only two stores opening this year and two more in 2009, it will continue to work on improving profits across all three segments. (Take a deeper look at a company's profitability in The Bottom Line On Margins.)
The Price Is Right
Right now, the stock is trading close to its all-time low of $10.08, reached in January of 2008. At one point in 2004, the year of its IPO, the stock was trading close to $30. Can it get there again? Absolutely, here's why:
Same-store sales, while a good indicator of a company's growth, don't always tell the whole story. Retail isn't just about the next hot product; it's about managing inventories, proper pricing, and plenty of financial management. In times of economic difficulty, you can do one of two things: either give the product away (taking a loss) or work harder for the customer in exchange for a better return on investment. Cabela's is clearly choosing the latter. A quick analysis of its retail sales in the first quarter shows us that on average, the 18 stores open at the end of the first quarter a year ago, did $9.03 million apiece. Meanwhile, the nine new stores on average sold $9.44 million in merchandise. Per square foot that works out to $61.80, a 3% increase over the stores open more than a year. It doesn't seem like much, but spread over 1.38 million square feet in new selling space, combined with higher gross and operating margins across four quarters and it adds up. If Cabela's can keep chipping away at productivity, negative comparables won't hurt nearly as much as you'd think.
Bottom Line
In a recent note to clients, Zacks analyst Rob Plaza points out that its long-term earnings growth rate of 12% is intact and says the stock price is reasonable. That's analyst speak for: "You won't get hosed buying at current prices." My opinion is that Cabela's is one of the more interesting retail plays out there, despite the 22.5% short interest.
For further reading, check out Short Interest: What It Tells Us.
