Cabela's (CAB) Tops Q1 Earnings, Revenues Continue to Lag

Cabela's Incorporated CAB posted first-quarter 2017 results, wherein earnings beat the Zacks Consensus Estimate, after missing the same for three straight quarters. However, both top and bottom lines declined year over year, with top-line marking its third consecutive miss.

While merchandise sales were a major let down, the company was impressed with its focus on cost management, as well as the performance by Cabela’s CLUB Visa program in the quarter. However, sluggish traffic trends, which have been looming over the broader retail space, remained a major hindrance that hurt sales.

While results didn’t have much impact on the stock price, this Zacks Rank #4 (Sell) stock has tumbled 9.1% in the past six months, underperforming the Zacks categorized Retail-Miscellaneous/Diversified industry’s growth of 5.8%.

Q1 Highlights

The company recorded adjusted earnings per share of 40 cents, which surpassed the Zacks Consensus Estimate of 36 cents, but declined nearly 7% year over year. Including one-time items, the company’s first-quarter earnings came in at 28 cents per share, plunging 15.2% year over year.

Moreover, the top line dropped 3.4% year over year to $834.9 million, also missing the Zacks Consensus Estimate of $856 million. As stated above, the top-line was largely hampered by lower store traffic, dismal comparable store sales (comps) and sharp decline in merchandise sales. Comps were marred by persistent fall in transactions, somewhat compensated by a rise in average ticket.

Consolidated comps descended 8.9% in the quarter primarily due to tough year-over-year comparisons on account of certain events that weighed upon Firearms and ammunition and the home and goods categories. The apparel category also witnessed negative comps, though it saw some recovery eventually.  Moreover, U.S. comps were down 9.1% in the quarter under review.

Merchandise gross margin contracted 80 basis points (bps) to 31.4% in the quarter. The decline was mainly due to intense promotional activity, sales discounts and unfavorable merchandise mix.

The company’s total adjusted operating income for the quarter declined 8.5% to $50.1 million, while the operating margin fell 30 bps to 6%. However, the profitability was largely cushioned by Cabela’s cost management efforts that resulted in a drop in adjusted SD&A expenses.

Bass Pro Shops to Acquire Cabela's

Bass Pro Shops and Cabela's have entered into a revised deal recently, whereby the former will acquire the latter in an all-cash deal valued at approximately $5.0 billion. The acquisition, which is now expected to conclude in the third quarter of 2017, remains subject to certain regulatory approvals and consent of Cabela’s shareholders. This deal will result in a retail giant that will control over 20% of the U.S. hunting, camping, and fishing market. Cabela's was exploring strategic alternatives, including a potential sale, after it came under pressure from an activist fund, Elliot Management Corp.

Segment Details

Total Merchandise sales, which include revenues from retail stores as well as internet and catalogs, went down 5.8% to $678 million in the first quarter. Retail store revenues fell 3.8% to $542 million, while Internet and catalog revenues decreased 12.6% to $136.1 million. Further, the segment posted an operating loss of $30.1 million, wider than the loss of $16.4 million recorded in the year-ago period.

Financial services revenues inched up 6.5% to approximately $150 million, reflecting advancement in interest and fee income, majorly offset by an increase in the provisional losses for loans and interest expenses. The average number of active credit card accounts grew 2.4%, while average balance of credit card loans of $5.4 billion increased 11%. Additionally, the average balance per active credit card account rose 8.3%. Net charge-offs were 31.8% in the quarter. Further, the segment’s operating margin came in at 47.2% in comparison with 44.7% in the prior-year quarter.

Other Financial Aspects

Cabela’s ended the quarter with cash and cash equivalents of $258.7 million, long-term debt (excluding current maturities) of roughly $670.2 million and shareholders’ equity of $2,034.1 million.

Key Picks in Cabela’s Space

Better-ranked stocks worth considering in the Retail – Miscellaneous/Diversified industry include Big 5 Sporting Goods Corp. BGFV, Build-A-Bear Workshop, Inc. BBW and The Michaels Companies, Inc. MIK.

Big 5 Sporting has a long-term earnings growth rate of 12%, and it flaunts a superb earnings surprise history. Further, the company boasts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Build-A-Bear, with a long-term earnings growth rate of 22.5%, currently sports a Zacks Rank #1.

Michaels Companies which carries a Zacks Rank #2, has a long-term earnings growth rate of 16%.

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