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Cabela's Meets, Profit Jumps

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Cabela’s Inc. delivered third-quarter 2012 earnings of 60 cents a share that came in line with the Zacks Consensus Estimate. However, earnings jumped 20% when compared with the prior-year quarter’s adjusted earnings of 50 cents.

Strong performance by the company’s new next-generation stores, increased merchandise margins and strong growth at the Cabela's CLUB Visa program led to the growth in bottom-line.

Management remains optimistic and now expects 2012 earnings to be at the higher end of the previous guidance range of $2.63 to $2.68. For 2013, the company expects earnings to increase at least at a low double-digit rate.

Sales & Margins

Total revenue, comprising retail, direct and financial services revenues, increased 9.2% year over year to $741.2 million, but fell short of the Zacks Consensus Estimate of $750 million.

Total merchandise revenue, including retail and direct revenue, escalated 7.9% to $652.3 million. The company’s branded products, favorable vendor collaboration and operational efficiencies facilitated it to register a 130 basis points expansion (best third quarter merchandise margin in more than 8 years) in merchandise gross margin to 37.2% during the quarter. However, strengthened sales of lower margin products adversely affected the merchandise gross margin by 60 basis points.

Cabela’s, which faces stiff competition from discount stores such as Wal-Mart Stores Inc. (WMT) and Target Corporation (TGT), witnessed retail store revenue of $456 million, up 15.8% year over year. Strong performance at the company’s new next-generation stores and strategic merchandising and inventory planning service facilitated it to register a 3.9% increase in comparable-store sales. The company noted a 5% increase in average ticket. Further, increased merchandise margin and operational efficiencies boosted retail operating margin, which expanded 190 basis points to 18.7% during the quarter.

The quarter’s downside was the decline in the Direct business. Revenue for the segment came in at $196.8 million, down 6.7% year over year. Lower demand for softgoods and footwear, and absence of shipping income from CLUB customers negatively impacted the segment. Consequently, Direct operating margin declined 220 basis points to 15.4%.

Financial services revenue augmented 20.3% to $85.9 million, reflecting higher interest and fee income as well as reduced interest expense. Credit card charge-offs as percentage of average credit card loans for the quarter improved 52 basis points to 1.71% (the lowest level of charge-offs in more than 5 years) compared with 2.23% in the prior-year quarter. The improvement in charge-offs was observed on the back of solid account growth by 9%, lower funding costs and improved delinquencies. Other revenue marked inched up 1.7% year over year to $2.9 million.  

Operating expenses as a percentage of sales expanded 110 basis points to 35.6% compared with 34.5% in the prior-year quarter. The increase reflected higher advertising and pre-opening expenses.

Operating income jumped 17.8% to $67.1 million compared with $57 million in the prior-year quarter, whereas operating margin increased 70 basis points to 9.1%.

Other Financial Aspects

The company ended the quarter with cash and cash equivalents of $265.7 million, long-term debt of $443.2 million and shareholders’ equity of $1,303.5 million.

For the nine-month ended September 29, 2012, the company generated $57.6 million from cash flow from operations and incurred capital expenditures of $144.2 million. For fiscal 2012, management anticipates cash flow from operations to reach $300 million and capital expenditure to be in the range of $175 million to $200 million attributable to store expansion plans.

Our Take

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 150 basis points rise in return on invested capital while remaining on course to increase it further in the coming quarters.

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

In addition, the company aims to capitalize on the under-penetrated markets and unveiled its new ‘Outpost’ store format. The relatively smaller size store will provide shoppers with Cabela's retail experience.

The company remains on track to open six domestic next generation stores, one Canadian next generation store and 2 Outpost sores in fiscal 2013. In fiscal 2014, the company plans to open eight domestic next generation stores.

Further, Cabela's CLUB Visa program continues to register strong growth, reflecting rise in average active accounts with improvements in delinquencies and net charge-offs along with lower funding cost.

Currently, we maintain a long-term Outperform recommendation on the stock. Moreover, Cabela’s holds a Zacks #2 Rank, which translates into a short-term Strong Buy rating.

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