Macro Tsimmis

intelligently hedged investment

BUY Cabela’s (CAB)—“World’s Foremost Outfitter”

Posted by intelledgement on Fri, 19 Sep 08

OK, OK…yes, yes we just shorted a bunch of retailers earlier today. Banks are on thin ice, credit has dried up, real estate is crashing, gold is soaring, the chairman of the Fed and treasury secretary are begging Congress for $700 billion of taxpayer money to bail out the insolvent financial sector, the economy is tanking, consumer spending is drying up…so why are we buying a retailer here?!?

Well, for one thing, Cabela’s—the “world’s foremost outfitter”—is not just any retailer. They are focused on a segment that we expect to remain strong even as the US economy overall suffers: hunting, fishing, camping, and related outdoor merchandise. Secondly, while they have been expanding their network of stores (28 in the USA and one in Canada) rapidly—they increased their square footage 49% in 2007 and opened two more stores this year—their roots are in direct marketing, and it still accounts for about half the company’s revenue. The founders, Dick and Mary Cabela, ran the initial direct mail operation from their kitchen from 1961 to 1964, moving to the basement of Dick’s father’s furniture store in their hometown of Chappell, Nebraska when they needed warehouse space. By 1969, they had expanded to a combined 50,000-ft. warehouse/store in nearby Sidney. Over the decades, revenues from retail operations grew from 0% to 50%, but they still publish nearly 100 catalogs a year…and their direct marketing roots enabled them to make a seamless transition to the internet starting back in 1998. Check out their first-class website.

Not to say that Cabela’s have been unaffected by the current economic travails. They have slowed their expansion plans—originally they intended to open four stores this year—and have had to scramble a bit to keep their financing in order. Their debt has ballooned from $200 million when they went public four years ago to $800 million as of 2Q08, and their profit margins have thinned. Never-the-less, they have increased their year-over-year revenues and turned a profit every single quarter—17 in a row and counting—since the IPO in June 2004. But a receding tide lowers all boats and the stock—which was valued at $20 at the IPO—is down some 40% from where it was a year ago ($25.03 on 19 Sep 07).

Arguably, even if cheap compared to past levels, this is not an optimal time to buy CAB with the economy clearly under pressure here. There is panic in the air and the stock could easily plummet (along with everything else) to bargain-basement levels. But we have two compelling reasons to buy CAB, one tactical and one strategic. The tactical reason is that we are selling short three retailing-related companies today and buying CAB—whom we believe to be in a stronger position than any of the others—serves as a hedge to limit the damage just in case we are wrong. The strategic reason is the one we already mentioned: if things do get rough, we expect that a company selling guns and fishing rods and stuff you can use to “camp out” if needed will do exceedingly well. While not directly targeting the survivalist market, Cabela’s offers a lot of the basic necessities at great prices.

What will most probably happen is that the stock of all four retailing-related stocks will go down, and if we time it right, we will cover our shorts near the bottom (and maybe buy some more CAB!) and then (subsequently) profit on this speculation, too.

Or worst case if things get really bad, hopefully being a Cabella’s shareholder will count for something if and when ammunition gets scarce and we go to one of their stores to restock our cache.  🙂

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