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Cabelas 1Q14 Earnings Preview; Expect solid LT growth

4/21/2014
Cabelas Inc. (CAB) - $65.08

Why Read?
Cabelas, a retailer of outdoor, hunting and fishing equipment offers a compelling square footage growth story, increasing square footage productivity, its own credit card company, and all at a reasonable price. We believe concerns that Cabelas is a one trick pony that only sells firearms is overdone. We expect Cabelas to beat expectations in FY14 and continue to roll out new stores at an accelerated pace. """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""! ! Gun sales normalizing: Starting in 4Q12, Cabelas experienced a huge boost in firearm and ammunition sales after consumers were worried about stringent firearm legislation resulting from the Sandy Hook school shooting, peaking in 1Q13 with a +15% comparable store sales benefit from elevated firearm sales. As we begin to lap these inflated numbers and firearm sales begin to normalize, we expect firearm sales to still remain above their long-term average and see a benefit in the ammunition and accessories business from incremental first-time firearms owners needing supplies. ! Square footage productivity: Cabelas is a square footage growth story and a relatively new one at that. Cabelas only opened 4 new stores from FY07 to FY10, but since Cabelas has opened 19 new stores and increased square footage by +34%. Older Legacy stores average 150,000 square feet but new Next Generation stores average 75,000 square feet. These smaller stores generally run +50% higher on a sales per sq. foot basis and +60% on a profit per sq. foot basis. The best part about these smaller format stores is their ability to penetrate smaller markets with lower competition as well as increase Cabelas brand followers, an intensely loyal customer base. Margin boost: Firearms sales carry a lower merchandise margin than the average SKU at Cabelas. As customer spending shifts from firearms to general sporting goods and clothing & footwear we expect to see an uptick in merchandise margin. Strength in Financial Services: Unlike many retailers who partner with outside financial service firms, such as CITI, to create branded credit cards; Cabelas operates their own bank, WFB: Worlds Foremost Bank. WFB has ~$4.0bn in loans outstanding as of 4Q13, with an industry leading charge-off rate of 1.76% and an average FICO score of 793. This segment has been a significant driver to Cabelas top and bottom line results, growing segment sales +17.7% to $375.8mn and boasting a 27.8% EBIT margin in FY13. As Cabelas expands into more markets with their new smaller format Next Generation stores, we expect credit card penetration and attachment rates to increase. Estimates: We expect 1Q14E revenue of $761.0mn vs. consensus of $734.2mn. For 1Q14E we expect Cabelas to earn $0.44 vs. consensus of $0.37 and company guidance range of $0.32 to $0.42 EPS. For FY14E we expect $3.94bn in sales vs. a consensus of $3.90bn. For FY14E we expect Cabelas to earn $3.65 vs. a consensus of $3.59.

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Gun Sales Normalizing:

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With only 21 new stores built since 2008, for a total of 50 stores, Cabelas comparable store sales have proven to be quite robust. 1Q13, Cabelas experienced a huge spike up to +24% in comparable store sales driven by firearms sales. As we begin to lap these inflated numbers, Cabelas is likely to comp negative through the first 3 quarters of the year. Through the first 6 weeks of 1Q14, comparable store sales are down -25% to -30% compared to being up +35% to +40% over the same time period last year. With easier compares in the second half of the quarter (remember, total quarter was only up +24% in 1Q13), and strong observed delayed demand, we expect comparable store sales to easily beat the companys guidance of -20%. Additionally, the company confirmed firearm and ammunition comparable store sales were down approximately -50% through the first 6 weeks of 1Q14. During our handgun survey conducted in March, we observed strong delayed demand for firearms as the weather improved throughout the quarter. We believe this leaves an opportunity for Cabelas to beat on both comparable store sales and total topline metrics.

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Margin boost:

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Firearms sales carry a lower merchandise margin than the average SKU at Cabelas. As shown in the graph above, merchandise gross profit margins decreased in 4Q12, the beginning of the surge in firearm sales, but continued to rise through FY13. As customer spending shifts from firearms to General Outdoors and Clothing & Footwear we expect to see an uptick in merchandise margin.
Going forward, we expect sales to shift out of firearms and ammunition and into our other highermargin categories. Thomas Millner CEO, 4Q13 conference call

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Square footage productivity:

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Cabelas is growing square footage, increasing square footage by +15% from 5.14mn to 5.89mn square feet in FY13 and we expect square footage to increase +17% to 6.87mn square feet by the end of FY14. Since FY08 Cabelas has opened 31 new stores, most in their Next Generation format, which boasts an average size of 75,000 square feet and +50% sales per square foot and +60% profits per square foot compared to the 150,000 square foot Legacy format. Notice sales per average store for General Outdoors and Clothing & Footwear have been in decline. But

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We are happy to see sales per average store decline while sales per average square foot have been steadily increasing, showcasing a more efficient square footage growth strategy. As firearm sales have began to normalize in 4Q13, we have seen an uptick in Clothing & Footwear, despite lower foot traffic from the decline in firearm sales, which carries higher gross margins. Additionally, the smaller Next Generation format stores are comping several hundred BPS higher than the larger Legacy stores. We expect this benefit to increase as Next Generation stores continue to make up a greater portion of the comparable store base.

Strength in Financial Services:

The average balance of credit card loans has increased from $2.47bn in FY10 to $3.50bn in FY13. We have seen a healthy mix between average number of active accounts and average account balance over this time period. Notice average number of active accounts increases during 4Qs, the average account balance decreases, reflecting the incremental smaller balance accounts activated for holiday spending.

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Charge-off rates have declined from 4.23% in FY10 to 1.80% in FY13. This is near industry lows and reflective of the incredibly high 793 average FICO score for Cabelas credit card holders.

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Since FY10, revenue per average active account has increased +29%, from $173 to $223. (Continued on next page)

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The increase in revenue per average active account has mainly been driven by stronger NIM and interchange income growth as well as growing average balances. What is even more amazing is that the decrease in charge off rates and revenue growth has been driven by growth in the lower two buckets of their FICO buckets, the 692-758 and Below 691 bucket. Impressively, the Restructured segment, which only makes up 1.1% of total loan balance but 11.1% of past due balances as of 4Q13, has been steadily decreasing at a double digit pace.

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Wrap-up:
We believe at these levels Cabelas offers a compelling square footage growth story coupled with increasing operation improvements. With a P/E ratio of just 17.9x our FY14E earnings estimates of $3.65, we believe now is an opportune entry price from a promising retail growth story in a growing market. Compared to Dicks Sporting Goods (DKS), which trades at 19.3x FY14 analyst estimates and Hibbett Sports (HIBB), which trades at 18.2 FY14 analyst estimates, we believe Cabelas value at this current price is even more enticing. These comparable businesses do not own their own credit card business, do not own the majority of their real estate, and do not have nearly the same customer loyalty as Cabelas. Cabelas even receives land grants and local government bonds to entice them to open stores in new markets, how many retailers can boast that? After the disappointing decline in comparable store sales from the lack of elevated firearm sales, we believe Cabelas management is being conservative in their FY14 guidance and will have the opportunity to raise guidance once visibility is clearer after lapping the elevated comparable store sales of FY13.

Disclaimer: The information contained herein reflects the views of Consumer Fox as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. All information provided in this presentation is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell the securities mentioned or to invest in any specific security or investment product. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trade-marks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. This presentation is confidential and may not be reproduced without prior written permission from Consumer Fox. It should be noted that Consumer Fox has no position in any security of the company mentioned in the report/presentation.

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