Cabela’s Inc. (CAB), one of the leading specialty retailers of hunting, fishing, camping, and related outdoor merchandise, recently posted better-than-expected third-quarter 2011 results.
Healthy performance at its retail stores, strong growth at financial services division and elevated merchandise gross margin enabled the company to deliver quarterly earnings of 50 cents a share, up 61.3% from 31 cents delivered in the prior-year quarter. The quarterly earnings also surpassed the Zacks Consensus Estimate of 44 cents a share.
On a reported basis, including one-time items, quarterly earnings came in at 47 cents a share compared with 29 cents in the prior-year quarter.
Quarterly Performance
Total revenue, which comprises retail, direct and financial services revenue, increased 5.5% year over year to $678.6 million, but fell marginally short of the Zacks Consensus Revenue Estimate of $679 million. However, adjusted for divestitures, total revenue increased 6.2%.
Adjusted operating income jumped 43.7% to $57 million during the quarter.
Total merchandise revenue, comprising retail and direct revenue, inched up 2.9% to $604.3 million. During the reported quarter, the company curtailed its promotional discounts in retail segment, which led to fall of 1.6% in comparable-store sales. However, the strategy favorably impacted the merchandise gross margin, which expanded 140 basis points to 35.9%.
Further, by the end of fiscal 2012, Cabela’s expects to expand the merchandise margin by 200 to 300 basis points beyond 2009 levels.
Cabela’s witnessed retail revenue of $393.8 million, up 6.8% year over year, whereas direct revenue inched up 1.7% to $210.9 million. Other revenue dropped 2.5% from the prior-year quarter to $2.5 million.
Credit card charge-offs for the quarter contracted 162 basis points to 2.23% from 3.85% in the prior-year quarter. The decrease also marks the lowest level of charge-offs in the last three years. Financial services revenue jumped 33.7% to $71.4 million, reflecting lower charge-offs.
Buoyed by the improving trends, the company expects 2011 earnings per share to exceed the expectation of the analysts. Moreover, the company expects earnings to increase in low double-digit rate in fiscal 2012.
Other Financial Aspects
The company ended the quarter with cash and cash equivalents of $81.1 million, long-term debt of $338.7 million and shareholders’ equity of $1,129.8 million.
Investment Rationale
Boasting a sturdy balance sheet, feasible strategy and operating efficiencies, Cabela’s offers its investors one of the strongest growth profiles. The company registered a 210 basis points rise in return on invested capital and remains on course to increase it further in the coming quarters.
Going ahead, Cabela’s announced a new 800,000 share repurchase program to balance shareholder dilution arising out of equity based compensation awards. The company plans to repurchase shares from open market through February 2012.
Cabela’s next generation store format, multi-channel strategy and seasonal product assortments enable it to focus on increasing stores productivity and sales per square foot, lowering its labor costs. During the quarter, the company opened new stores in Edmonton, Alberta, and Canada.
Moreover, the company expects to increase its retail square footage growth by opening 5 stores during fiscal 2012 and accelerating retail expansion in the U.S. and Canada in 2013, beyond the 2012 level.
Further, in a move to supplement its Financial Services Segment, Cabela’s concluded the sale of secured Notes worth $300 million. The company’s Financial Services Business segment plays an integral part in supporting the merchandising business by encouraging customer loyalty rewards program, resulting in increase in revenue, profitability and customer retention at its Retail and Direct businesses, and leading to overall growth in sales and earnings.
The company aims to refinance its secured notes maturing in 2011 through the new securitization, while also augmenting the growth of World’s Foremost Bank’s credit card portfolio.
Moreover, Cabela's CLUB Visa program continues to register strong growth, reflecting increase in average active accounts with enhancements in delinquencies and net charge-offs along with lower funding cost.
However, the outdoor recreation and casual apparel and footwear markets are highly fragmented and competitive. Cabela’s faces stiff competition from discount stores, such as Wal-Mart Stores Inc. (WMT) and Target Corporation (TGT).
Currently, we maintain a long-term ‘Outperform’ rating on Cabela's. Moreover, the company holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
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