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Analyst Blog

On Aug 8, we downgraded outdoor and sporting goods retailer, Cabela's Incorporated (CAB - Analyst Report) to Neutral based on the near-term challenges associated with the stock.

Why the Downgrade?

On Jul 25, 2013, Cabela’s came up with strong second-quarter 2013 results wherein the top and bottom line results registered double-digit growth rate and handily surpassed the Zacks Consensus Estimate.

However, the company’s growth is largely attributed to strong sales of firearms and ammunitions, which is now showing signs of moderation. Moreover, the company faces difficult year-over-year comparisons in the third quarter, which further limits its upside potential. 

Alongside, 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 - Analyst Report) and Target Corporation (TGT - Analyst Report), and specialty retailers, such as Dick's Sporting Goods Inc. (DKS - Analyst Report), which may weigh upon its results as these competitors have a large number of stores, greater market presence and brand recognition, alongside adequate financial resources.

Despite the challenges, we believe the strong performance of the company’s next-generation stores will continue to boost its results. Cabela’s next-generation stores are outperforming the company’s legacy stores in terms of both sales and profit per square foot. We remain optimistic about its next generation store format as it requires less capital investment, enhances store productivity, and helps increase sales per square foot.

Moreover, Cabela's CLUB Visa program continues to register strong growth, reflecting a rise in average active accounts with improvement in delinquencies and net charge-offs along with lower funding costs.  Currently, Cabela’s holds a Zacks Rank #3 (Hold).

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