CAB - Cabela's Incorporated

[tooskinneejs]

Cabela's is a retailer of outdoor sporting goods equipment, such as hunting and camping equipment and clothing.  Their stores are extremely large, draw hard-core sporting enthusiasts and tourists alike, and are known for their displays of taxidermy.  I would not classify the company as an excellent business, as net profit margins and return on equity have averaged about 5% and 12%, respectively, in recent years.  Respectable, but not terrific.  Still, the Company has a great brand and has been slowly and steadily expanding.

 

This may be a positive or a negative, but they actually make a lot of their profit on Cabala's-branded Visa credit cards.  These cards are typical rewards-type cards, where customers earn points for spending on the cards. 

 

Cabala's common stock price has gotten pummeled recently as retail sales growth has slowed, with overall sales increasing due to store count expansion, but same store sales declining slightly.  Management expects earnings next year to be flat with 2015.  As a result, the stock has come down to earth (this was previously a high P/E stock).  The shares are now priced at about 10 to 12 times earnings and 1.2 times book value.  They own about 90% of their stores.

 

Anyway, to the extent this is just a temporary rough patch, this may be a decent opportunity.  Thoughts?

[feynmanresearch]

Took a look at it. Are you comfortable with the relatively high debt level? They also  seem to be burning cash and their asset turnover ratio has been on a continuous downward trend.

 

[tooskinneejs]

I believe the debt relates to, and is offset by, credit card receivables.  Per note 3 to their 2014 Form 10-K, finance assets were $4.7b and finance liabilities (including debt) were $3.5b.

 

http://www.sec.gov/Archives/edgar/data/1267130/000126713015000016/cab-2014122714x10kq4.htm

 

[thepupil]

not knowing much about the biz or the stock, but from a quick glance at the 10-K, I see a significant % of sales are guns.

 

I'm a big believer in the long term "peak gun" thesis that has made the gun stocks popular (and for the most part unprofitable) shorts over the past few years. I would make sure you aren't capitalizing unsustainable earnings or margin from lots of guns and ammo sales.

 

every time there's a mass shooting everyone goes out and buys up more MSR's and ammo, which is a big benefit to these guys, I would think. Eventually that stops and there will be oversupply (since a good weapon lasts a very long time and guns/person has been on the rise, i'd imagine there is a big risk of long term oversupply).

 

Like I said, I don't know much about the stock; I would just try to contextualize the importance of guns and ammo to their earnings and think about the impact of a more dramatic decrease in gun sales (I think they've been coming down after the huge sandy hook spike, but don't follow closely, looked at the gunmakers a long time ago as shorts but the borrow was too high and thought too crowded/too hard to tell the inflection point)

[ItsAValueTrap]

re: gun demand

 

Historically, there's been a secular shift towards higher gun ownership with more women, kids, and minorities getting into guns. 

 

The whole kids thing: there is an increasing trend of parents seeing shooting as a fun, cool, wholesome activity that the whole family can enjoy.  Some parents think that guns help kids learn responsibility and a practical skill (self defense).  Some kids actually don't like shooting but they want to please their parents so they go anyways.  It's not just old white people and army vets, which is the traditional demographic.  Hunting for sustenance is in secular decline.

 

There have also been cycles in demand, as there was a huge gun surge that peaked in 2013.

 

Adjusted NICS for 2000-2014

7,199,282

7,411,707

7,003,858

6,998,748

7,234,219

7,516,826

7,955,604

8,083,470

8,993,964

9,534,131

9,436,182

10,791,275

13,780,285

14,796,872

13,090,383

 

For the trailing twelve months up to August, adjusted NICS are up 3.35%.

 

Eventually that stops and there will be oversupply (since a good weapon lasts a very long time and guns/person has been on the rise, i'd imagine there is a big risk of long term oversupply).

From what I can tell, gun hobbyists tend to buy multiple guns and get excited over new models of guns.  Hobbyists are into all sorts of guns.

 

The MSRs (modern sporting rifles / assault rifles) are the most sensitive to politics as they are the first thing that politicians will ban.  High capacity magazines are also politically sensitive / very cyclical.  Ammo (specific types/calibers) has seen bubble-like behaviour due to ammo shortages causing people to hoard ammo (which makes the shortages worse).  Ammo shortages tend to lower demand for guns of that caliber. 

 

In my opinion, the ammo shortages reflect the long term secular growth in gun popularity.  In the past few years, manufacturers have started opening new lines of productions and we've seen the pendulum swing the other way.  Some ammo manufacturers have rebate programs to move excess inventory.

 

2- I don't know why some people want to bet against gun demand.  Isn't it easier to bet against Gamestop, electronics retailers, phone books, etc.?  The latter markets are in more obvious secular declines.

[thepupil]

i personally think there is a limit to the number of people out there who feel the need to own many guns and upgrade with every innovation cycle.

 

There are certainly a lot of those people out there (my uncle owns over 30 firearms for example), but the percentage of households that own guns is and has been in decline according to a number of surveys.

 

I never did short them but I do think the short thesis is compelling. I remember looking at RGR or something and it had an 80% ex cash ROE or something insane and its margins and turns had done nothing but go up. If you can short something at a growth multiple, that is over earning based on a temporary spike in demand (from dems in whitehouse plus hoarding and people scared of more gun control from increased coverage of mass shootings) that makes a product with a vibrant used market that basically last forever, it could work out quite nicely.

 

I could envision a scenario where coverage o shootings dies down a bit and people get less scared of bans and you see sales, margins, and earnings all collapse at once (I know the used AR-15 market had a little mini bubble and collapse for example).

 

A bull or bear could interpret the relentless climb of NICS along with the survey results showing decreasing gun ownership in a number of ways.

 

One problem with the short thesis is that making guns is so hated (with the big public pensions shitting on the PE owners of them and divesting the stocks) that you're unlikely to see any new entrants. It's pretty consolidated too as i understand it.

 

http://www.newsweek.com/us-gun-ownership-declines-312822

 

Though the number of firearm purchases has most likely gone up, according to data from the FBI’s National Instant Criminal Background Check system, those firearms are owned by fewer individuals. In other words, the average gun owner probably owns more guns.

 

RGR trades for about $1B, 5X tangible book. The question is what's a normal year/long term ROE? Unless you think 2012 / 2013 are, I don't see why wouldn't want to be short.

 

Pretax income , Free Cash Flow using guru focus

2010 $44MM    $13MM

2011 $63MM    $35MM

2012 $112MM  $59MM

2013 $175MM  $65MM

2014 $57MM    $10MM

TTM  $37MM      $61MM

[ItsAValueTrap]

I remember looking at RGR or something and it had an 80% ex cash ROE or something insane and its margins and turns had done nothing but go up.

RGR trades for about $1B, 5X tangible book.

 

My opinion is that they were better managed than some of their peers.  Ruger was profitable was Colt entered bankruptcy.  The difference in ROEs between the various gun manufacturer shows variation in how well they were run, though all benefited from the gun surge in 2013.  What Ruger did was to put in the R&D + elbow grease to get its costs down. 

 

Their inventory+pricing strategy was quite different than their peers, which seems to be a wash in the end.  If they didn't run their inventory so lean they'd have more stock going into the gun boom; coming off the boom, they were able to sell more guns because they didn't price gouge during the boom.  Ruger did its own version of trying to fight the phenomenon of wildly fluctuating inventory levels at the warehouse and retailer level.

 

*Sorry for going off topic.  Should probably talk about Cabela's.

[thepupil]

 

Cabela's pops after Elliott Associates takes stake

 

    Cabela's (CAB +14.2%) rallies after Elliott Associates discloses it holds a position of 11% in retailer.

    Elliott says the robust environment for private equity investment in retail companies and potential strategic interest in Cabela's make a sale an enticing option.

    SEC Form 13D

 

 

[tede02]

I've been a regular customer of Cabelas for years.  I also got lucky in 2009 when I bought some shares for under $7 and sold in the twenties.  Here are some general thoughts for those looking to invest. 

 

First, I'm personally not interested in a long-term investment here because of the risk of competition from the likes of Amazon.  You pay a significant premium buying anything from Cabelas.  Since becoming an Amazon Prime member in recent years, I've become painfully aware of how much the mark-up is at Cabelas.  My rule of thumb is you pay a 25% premium buying anything from Cabelas. 

 

I would also be a bit cautious looking at the financials since the Sandy Hook incident.  Gun and ammo purchases went crazy for several years and have only recently been tailing off.  Retailers like Cabelas benefited from this significantly but it can't be relied upon going forward. 

 

I should also note that gun purchases are not immune from internet forces.  I bought my first rifle from an online merchant this year (and I did so because there was a significant discount buying online vs. from a retailer). 

 

Lastly, I'll note that I've read that the Cabelas culture changed dramatically since the company went public.  I've read a number of accounts and have heard directly from long-time employees that the company is now focused on the bottom line now more than anything (in other words, employees have expressed that the company has greatly moved away from the "family owned" culture).  This is understandable, but I think notable none-the-less.

 

The company also has historically been known for its extremely generous return policy.  This has been scaled back since the public offering which certainly is a financial decision, but also will impact customer loyalty. 

 

On the flip side, and this is true for other retailers like Best Buy, I personally still enjoy shopping at Cabela's, especially for things like footwear.  It's nice to be able to check the products out.  But again, I'll admit that I have found what I like in the store and gone on to order it off Amazon for much cheaper. 

 

I'll also note that Cabelas has their Visa card which I believe is very popular.  I've had one since 2003.  There is a rewards program which creates some loyalty. 

 

I hope some of this insight is helpful.  Retailers are tough, perhaps more so now than ever. 

[bookie71]

We have a fairly new (open for about a year or so) Cabala's in Anchorage and it is very busy, but we have a new Bass Pro Shop and it is giving them a run for their money. That saying the knowledge of the employees at Cabala's is excellent.

Like most big box stores the two have hurt the local family owned stores the most.

[Alpaca]

I haven't been following Cabela's closely, but I am tempted to buy based on the Bass Pro Shop buyout rumors and the big increase in gun sales since the Paris and San Bernardino attacks.

 

Anyone have additional insight?

[thepupil]

http://www.bloomberg.com/news/articles/2016-10-03/cabela-s-agrees-to-be-bought-by-bass-pro-in-5-5-billion-deal

 

up ~88% since beginning of thread, hope someone bought some

[chesko182]

Has anyone looked at this merger arb play? Spread seems attractive at a 40%+ premium even considering the closing date may be delayed due to the FTCs follow up.

[tede02]

I have not looked at it.  But that being said, I was wondering if the FTC would really stop this merger on an anti-competition basis.  Outdoor retailers are getting killed.  Gander Mountain just filed for bankruptcy, as did Eastern Outfitters most recently.  Sports Authority declared bankruptcy last year.  It seems like it would be a tough case to make that this merger would harm consumers.  Outdoor products are sold through a lot of other retailers including Walmart, specialty outlets and of-course, online.  All that being said, I don't know jack about how the FTC operates or makes decisions.  Sounds interesting. 

[solobz]

Downside from here probably something under $40. Wouldn't be shocked if upside is lower due to offer price being renegotiated. Disclaimer: haven't looked at merger agreement. Gander Mountain filing for bankruptcy probably makes the competitive situation much worse and added fuel to the fire for a break. News around COF taking card portfolio less of a concern imo - plenty of other suitors. COF situation unrelated to the deal. Card business is relatively high quality. I don't really know who the incremental buyer is. Industry headwinds + retail sentiment would give me pause. That said, probably a lot of arb fund fatigue here considering what's going on with RAD, which was seen as all but a sure thing not long ago.

[Artha158]

Long CAB

Cabela share holder will receive $61.5 cash from Bass Pro Shops and expected to close in third quarter.

Cabela's banking assets issues address by Synovus transaction.

 

"Under the terms of the Bank Transaction Agreements, Synovus Bank ("Synovus"), a bank subsidiary of Synovus Financial Corp., a financial services company based in Columbus, Georgia, with approximately $30 billion in assets, will acquire certain assets and assume certain liabilities of the Bank, including deposits totaling approximately $1.2 billion. Following the completion of the sale of the Bank's assets and liabilities, Synovus will sell the Bank's credit card assets and related liabilities to Capital One. Synovus will retain the Bank's deposits."

 

Market is discounting the deal as it will fall apart. Buyer is in the same business as seller for decades so it' very unlikely that they have found any surprise regarding to business. Regulators are like spouse and/or loved ones, they are there, by our action and their sole purpose is to protect us from ourselves and others. They are part of our life (business) and their action some time defy all logic and rational and can block the deal for any reason. I would be optimistic and look at bright side that close to 90% of deal goes thru.

Worst case scenario: Deal falls apart and you will end up with a good business in a very challenging environment at a high price.

That’s the risk I am taking. Any thoughts?

 

[racemize]

I was in this when the spread was much wider, and then sold on that announcement as the spread had closed to 10% or less.  I think it's going to go through, but I just want a wider spread to be in.  Starting to be interesting again it seems.

 

All that being said, I wouldn't want to own CAB if the deal fails.

[Artha158]

https://finance.yahoo.com/news/u-judge-allows-first-transgender-person-sue-under-010304130--finance.html

[Gregmal]

Currently at $53.4 you get $8.10 or about 15% in ~4 months. I don't really see a basis for this not going through, but the size of the spread seems to say otherwise. Even outside of Amazon, you've got Walmart and Dicks which dominate the hunting/fishing market in many places. We've even seen UA venture into apparel here. Best comparison for this being held up would I guess be Staples and Office Depot, but CAB and Bass Pro are far from a duopoly. I've tepidly bought about a very small position.

[writser]

I also bought a few shares. Canada regulators already OK-ed the deal and, as mentioned in this topic, with retail getting slaughtered and both WMT and AMZN as competitors I don't see why this deal would be a big problem in the US either. Not my highest conviction idea however.

[writser]

It's now roughly three weeks later. The definitive proxy has been filed. I quickly glanced through it but didn't see anything new. Also there is still no news from the FTC. Despite that CAB is up ~8%. Spread now a more reasonable 7%. Might be an opportune time to take some money off the table if you have doubts about the FTC review. I only have a small position - not selling yet.

[writser]

latest filing:

 

Parent has informed the Company that Parent, with the consent of the Company, has agreed to enter into a timing agreement with the United States Federal Trade Commission (the “FTC”), pursuant to which Parent will agree to extend the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 until July 5, 2017 at the request of the FTC staff to enable the FTC staff to brief the FTC commissioners on the Merger and to address any questions the FTC commissioners may have. The consummation of the Merger remains subject to (i) the approval of the Company’s stockholders at the July 11, 2017 Special Meeting of Stockholders, (ii) the closing of the purchase and sale of substantially all of the business of World’s Foremost Bank, a Nebraska banking corporation and wholly owned subsidiary of the Company, pursuant to the Framework Agreement described in Item 1.01 of the Current Report on Form 8-K filed by the Company on April 18, 2017 and (iii) other customary closing conditions. The Company and Parent are continuing to work closely and cooperatively with the FTC in its review of the proposed Merger.

 

This deal has been in the works for a long time, and now the FTC needs 5 more days .. What is more likely?

 

1) The FTC has decided to block the deal but last-minute they need an extra week to come to a verdict.

2) The FTC struck some sort of deal (maybe Cabela has to sell some stores) and needs a few more days to come up with final terms.

 

I'd say the latter scenario is much more likely. Also, I still believe in my original thesis: you can buy guns and hiking gear at WMT or AMZN, it's not like the Cabela merger will result in a dangerous monopoly. Despite shares being up significantly the past few weeks I bought a little bit more today. Some good background reading: link.

 

Still a small position, I could very well be mistaken.

[racemize]

At this spread, what's the point in holding any longer?  The downside of 1) is way bigger than a 5% upside in 2) no?

[writser]

At this spread, what's the point in holding any longer?  The downside of 1) is way bigger than a 5% upside in 2) no?

 

Fair value depends on how you handicap the chances of the FTC blocking this deal .. What's your best guess? Given A) I don't think this deal results in a monopoly, B) Canada had no problems at all with this deal and C) I don't think the FTC needs 5 more days to block a deal they've been looking at for a long time, I'd say chances of FTC approval are ~90% and then it should pop 4%/5%, giving me a lot of leeway in case things go wrong.

 

Not my best idea ever but most investors think like you and don't like the skewed downside / upside hence this might be a decent opportunity for a small, uncorrelated bet.

[racemize]

Well, don't get me wrong, I think it is going to close.  I just liked the spread at 50% instead of 5%.  When it gets to 5%, even a 10% chance of it going wrong gives a pretty bad expected return.  I haven't tried this math before, but:

 

In case A) price likely drops to where it was a few months ago, $45, which is around -25%.  I think it could go lower though.

In case B) you get 5%.

 

At 90/10 you get an expected value of 0.9*5%+0.1*(-25%)=2%

 

Expected value of 2% just seems really bad.  And I wouldn't want any part of -25% at this level.