Cabela’s Takes an Unjustified Beating

by Will Ashworth | December 19, 2012 2:14 pm

Part of the fallout from last Friday’s tragic shootings in Newtown, Conn., was an immediate spike[1] in gun sales combined with a significant drop in the price of gun-related stocks. Sturm Ruger (NYSE:RGR[2]) is down 15% since Thursday’s close; Smith & Wesson (NASDAQ:SWHC[3]) is off 18%; and surprisingly, Cabela’s (NYSE:CAB[4]) has lost 13% in three days of trading.

Cabela’s is experiencing an overreaction by investors who’ve grouped the specialty retailer with the gun manufacturers. While Cabela’s sells guns, it’s so much more. This overreaction makes now a good time to consider CAB. Here’s why.

Downward Trend

Cabela’s was on a downward trend long before Newtown happened. Its stock hit a five-year high of $56.78 on Oct. 5. Of the 46 trading days since then through Dec. 13, the day before the shooting, CAB closed down on 23 occasions. History tells us that for every down day, the average stock is up in two days of trading.

On that basis, Cabela’s should have gained on seven more days during that stretch, which clearly demonstrates it was moving lower prior to the tragic event that unfolded in Connecticut.

A big reason for this decline is Cabela’s online sales, which dropped 6.7% year-over-year in the third quarter. For the first nine months of fiscal 2012, they’re off 5.6% to $545 million. The dip on the top line also affects the bottom, resulting in Cabela’s missing analysts’ estimates for earnings by a penny and for revenue by $11.5 million, or 1.5%.

Never mind that earnings per share were 20% higher at 60 cents, overall revenue was up 9% year-over-year to $741.2 million and same-store sales grew 3.9%. Investors spanked Cabela’s with a 16% decline Oct. 25 on the news.

The missed estimates caused those same analysts to revise earnings forecasts for fiscal 2012 and 2013 downward by one cent and five cents, respectively. Frankly, I see very little to worry about. It’s much ado about nothing.

What About the Guns?

According to the Los Angeles Times gun sales[5] were rising before the latest tragedy in Connecticut. Obama’s election victory sparked a marked increase, with purchases by women noticeably higher. Dick’s Sporting Goods (NYSE:DKS[6]), which has temporarily stopped selling assault rifles across its store network, stated last month in its Q3 earnings report: “We expect that the gun and ammunition business will move to be a slightly bigger part of our business going forward and that will help earnings.”

Cabela’s basically admitted the same in its Q3 conference call. Clearly, many gun owners were worried about Obama and gun control before Newtown. Now, I’m sure they’re apoplectic.

Gun sales will likely keep rising until the federal government figures out what to do about this deadly issue. I live in Canada, where it’s estimated there are 30 guns per 100 people, putting us seventh in the ranking of OECD “developed” countries. The U.S. is No. 1 at 90 guns per 100 people.

As the Newtown shooting demonstrates, multiple-gun households contribute to such a high rate of ownership. Obviously, not every American owns a gun.

Switzerland, a country no one would equate with gun ownership or violence, is No. 2, with 45 guns per 100 people. Yet the Swiss aren’t running around shooting each other. The homicide rate in Switzerland (2010) is less than one per 100,000 people. The rate in the U.S. (2011) is 4.7 per 100,000 people, although that’s down considerably from 1980 when it was 10.2 per 100,000.

As Switzerland demonstrates, gun ownership doesn’t necessarily equate to gun violence. There’s no easy solution for a country founded on revolution.

Hunting equipment accounted for 44.1% of Cabela’s merchandise revenue in the first nine months of the year. That’s $763 million out of $1.7 billion. Breaking that down further, gun and ammunition sales were approximately $398 million, or 52%, of overall hunting equipment revenue.

So, let’s focus on that number for a moment. That’s about one-fifth Cabela’s total revenue. Let’s hypothetically assume that the federal government bans the sale of all guns. Worst-case scenario: Cabela’s loses $398 million in revenue plus ancillary sales from gun-related merchandise other than ammunition and weapons. The odds of this happening are slimmer than none.

What’s more likely to happen?

Background checks will become more comprehensive in scope with the onus on the potential gun buyer to make a case why he or she should be allowed to own that particular weapon. In addition, restrictions on the type of weapons and amount of ammunition that may be legally owned by an individual could be increased.

Beyond that, you’d have to ask an expert. The point I’m trying to make is that gun purchases will likely become more time-consuming in the future. However, that’s not going to prevent Cabela’s from successfully operating its business model in any manner whatsoever. Sure, it might take longer to book the revenue, and the type of gun sold could change slightly, but in the end Cabela’s won’t lose its status as one of the biggest specialty retailers of outdoor merchandise.

Bottom Line

Cabela’s has lost $1.1 billion in market cap in the past two months. The almost 30% reduction in its stock price has it trading at fair value from a historical perspective. If you’re a long-term investor, the current uncertainty provides tremendous profit potential that didn’t exist in October. The more CAB falls, the more you should buy. Like guns, it’s business isn’t going to disappear.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

Endnotes:
  1. immediate spike: http://money.cnn.com/2012/12/18/news/companies/gun-sales-massacre/index.html?source=yahoo_quote
  2. RGR: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGR
  3. SWHC: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWHC
  4. CAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAB
  5. gun sales: http://www.latimes.com/business/money/la-fi-mo-walmart-dicks-cabelas-bushmaster-20121218,0,7553838.story
  6. DKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DKS

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