(CAB) Cabela’s Analyst Reiterates Outperform Rating on Shares

We reiterate our long-term Outperform recommendation on Cabela’s Inc. (CAB), one of the leading specialty retailers and direct marketers of hunting, fishing, camping, and related outdoor merchandise, with a price target of $38.00.

The Company Counts Upon

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 while lowering its 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 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 loyalty rewards program. Eventually, it results in increase in revenues, profitability and customer retention at its Retail and Direct businesses, leading to overall growth in sales and earnings.

Store Expansion Strategy

In order to capitalize the under-penetrated markets, the company unveiled its new ‘Outpost’ store format spanning across 40,000 square feet, which will adopt 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. Thereby, increasing the retail square footage by approximately 10%.

In fiscal 2013, the company expects to open six next generation stores in the U.S. and three additional 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 better-than-expected fourth-quarter 2011 results. The quarter highlights healthy growth in retail and direct segment operating margin, elevated merchandise gross margin, improved performance in Cabela’s CLUB Visa program, and enhancement in market share.

The quarterly earnings of $1.06 a share surpassed the Zacks Consensus Estimate of 99 cents a share and jumped 23.3% from 86 cents delivered in the prior-year quarter. Management now expects double-digit growth in fiscal 2012 earnings.

Total revenue, comprising retail, direct and financial services revenues, increased 5.3% year over year to $983.7 million, exceeding the Zacks Consensus Estimate of $965 million. However, adjusted for divestitures, total revenue increased 5.4%.

Total merchandise revenue, including retail and direct revenue, increased 4.4% to $903.9 million. Merchandise gross margin expanded 40 basis points to 36.4% during the quarter, reflecting strong sales in the firearms and shooting categories.

Further, by the end of fiscal 2012, Cabela’s expects to expand the merchandise margin by 200 to 300 basis points over 2009 levels. The company registered a 120 basis points rise in return on invested capital to 14.3% during fiscal 2011.

Closing Comments

The above analysis supports our unbiased view, and advocates our bullish stance on the stock, which is well defined through our Zacks #1 Rank that translates into a short-term Strong Buy rating. Boasting a sturdy balance sheet, feasible strategy and operating efficiencies, Cabela’s, which competes with Wal-Mart Stores Inc. (WMT) and Target Corporation (TGT), offers investors one of the strongest growth profiles.
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