The champagne had barely flowed to ring in the new year before a major roadblock dampened the mood.
Popular outdoors lifestyle retailer Cabela’
s Inc. (CAB) received word that hedge fund Elliott Management — which holds a 6% equity stake in the company and options contracts to buy an additional 5% — is demanding significant changes in its business structure.
On top of this unwanted pressure is an ongoing campaign by a minor CAB shareholder to effectively curtail sales of high-powered semiautomatic rifles — an extremely lucrative source of revenue for Cabela’s and firearms vendors nationwide.
In a story woven in a similar manner with the broad retail sector, Cabela’s stock holders were taken on a wild ride in 2015, producing returns 11% in the red. A dramatic 24% jump in the markets last November — in spite of a slight miss on CAB earnings for the third quarter of fiscal year 2015 — was not enough to overturn serious technical damage inflicted during the late summer months.
Also adding to this dubious note was the fact that Cabela’s had a particularly rough go in 2014, with shares down more than 19%.
From Wall Street’s perspective, it was only a matter of time before a major power broker stepped in.
Angling for Change at Cabela’s
Elliott took aim at Cabela’s somewhat soft balance sheet, demanding the sale of its credit card business unit and even going so far as to suggest offering the entire company up to the highest bidder.
This ushered in an unexpected meeting among Cabela’s top brass to reassess the dynamic situation. It also caused concern among residents of Sidney, Nebraska — where Cabela’s is headquartered — that the company may vacate the small town to which it plays an integral economic role.
The hot seat has been a familiar theme in the past two weeks. Just prior to Christmas, the historic Trinity Wall Street church — an Episcopalian group with deep cultural ties to New York City — pushed a shareholders resolution to be discussed at the next annual meeting of Cabela stake holders.
According to the New York Times, Trinity wants Cabela’s to cease sales of firearms that can shoot more than eight rounds without reloading. Technical jargon aside, the hardly subtle message is crystal clear — get rid of the AR-15s and so-called militarized black rifles.
Such a request, if accepted or otherwise forcibly imposed, would be devastating to Cabela’s. CAB, along with diverse retailers like Wal-Mart Stores, Inc. (WMT) and Dicks Sporting Goods Inc. (DKS), account for roughly 20% of national gun sales, according to research conducted by Brian Ruttenbur of BB&T Capital Markets.
However, Walmart has never been a big seller of AR-15s and similar semiautomatic rifles, instead favoring the far more profitable sales of ammunition. That opens up a significant income stream for Cabela’s, with the popularity of the AR-15 only increasing since the ISIS-inspired terrorist attack of San Bernardino, California.
Surely, these distractions are unpleasant for upper management, perhaps keeping a few do-gooders from investing in CAB stock. Nevertheless, this may be much ado about nothing.
Despite some fundamental aspects that are not necessarily charming — substantially increased debt leverage and cash-flow problems being some of the core challenges — Cabela stock benefits from better-than-industry-average profit margins. Also bolstering the bullish argument is annual revenue growth, which is moving along at a healthy rate of nearly 9%.
Upcoming financial results for the fourth quarter may be poised to lift CAB stock generously in the markets. Low-end analysts’ estimates for annual revenue in 2015 is around $3.9 billion, a very realistic target given that sales total $2.59 billion for the year, and that Q4 typically sees a 40% lift against Q3.
However, because of the increase in gun sales related to political fears linked to recent terrorist attacks, CAB stock could very well hit the upper range of analysts’ revenue estimates in Q4, and thereby deliver stronger-than-normal results for the whole year.
Bottom Line for Cabela’s
This, then, brings us to the moral issue presented by Trinity. While their hearts may be in the right place, the firearms business — which hit nearly $4 billion last year — is too much of a cash cow for Cabela’s or any of its competitors to pass up.
Politically, gun control mandates have met with mixed success in the face of numerous high-profile shootings. And though criticism rages against companies like Walmart for offering guns in their stores, the volume hasn’t been enough to force truly radical changes.
Cabela’s is a business and like any for-profit organization, there will always be an ebb and flow in demand. The company has suffered some lean years in the markets recently, but it would be premature to write it off, especially based on news that really isn’t news.
By looking beyond the superficial headlines, investors can find some strong selling points that may make CAB stock one of the better buys of 2016.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
