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We reiterate our long-term Outperform recommendation on Cabela's Inc. (CAB - Analyst Report), one of the leading specialty retailers and direct marketers of hunting, fishing, camping, and related outdoor merchandise, with a price target of $40.00.

The Company Counts Upon

Cabela’s next generation store format, multi-channel strategy and seasonal product assortments enable it to focus on increasing its stores’ productivity and sales per square foot while lowering labor costs.

Cabela’s multi-channel model facilitates consumers to purchase directly from retail stores or order products through catalog and Internet channels, and have them delivered to the retail store of their choice, without incurring shipping costs. This multi-channel approach gives the company an advantage over its competitors.

Cabela’s remains confident about its improving balance sheet with the long-term return on invested capital expected to range from 12% to 14%. The new store model of standard sizes requires less capital investment and enhances store productivity.

The company’s Financial Services Business segment plays an integral part in supporting the merchandising business by encouraging customers through a loyalty rewards program. Eventually, it leads to increases in revenues, profitability and customer retention at its Retail and Direct businesses, and in turn overall growth in sales and earnings.

Store Expansion Strategy

In order to capitalize on the under-penetrated markets, the company unveiled its new ‘Outpost’ store format spanning 40,000 square feet that adopts a "core-flex" merchandise strategy (selected core assortment of products and flexible seasonal merchandise).

The company also expects to accelerate its retail square footage growth plans by opening 5 next generation stores (4 in the U.S. and 1 in Canada) during fiscal 2012, along with its first ‘Outpost’ store, in Union Gap, Washington. This increases the retail square footage by approximately 10%.

The company has already opened two next-generation stores in Wichita, Kansas and Tulalip, Washington, and will open three more next-generation stores in Rogers, Arkansas; Charleston, West Virginia; and Saskatoon, Saskatchewan.

In fiscal 2013, the company expects to open next generation stores and Outpost stores, which will result in retail square footage growth of 11% to 13%. During fiscal 2011, the company opened 3 next generation stores (2 in the U.S. and 1 in Canada).

Efforts Reaping Results

Cabela’s delivered solid first-quarter 2012 results, backed by healthy performance at retail stores, strong growth at the financial services division, elevated merchandise gross margin and lower expenses. The quarterly earnings of 40 cents a share exceeded the Zacks Consensus Estimate of 33 cents and jumped 60% from 25 cents earned in the prior-year quarter.

Total revenue, comprising retail, direct and financial services revenues, increased 6.3% year over year to $623.5 million, surpassing the Zacks Consensus Estimate of $621 million.

Merchandise gross margin expanded 150 basis points to 34.5% during the quarter. Management reiterated its long-term goal of increasing the margin by 200–300 basis points.

Closing Comment

The above analysis supports our unbiased view, and advocates our bullish stance on the stock, which is well defined through our Zacks #2 Rank that translates into a short-term Buy rating. Boasting of a sturdy balance sheet, feasible strategy and operating efficiencies, Cabela’s, which competes with Wal-Mart Stores Inc. (WMT - Analyst Report) and Target Corporation (TGT - Analyst Report), offers investors one of the strongest growth profiles.

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