Cabela's (CAB) Strategic Efforts Bode Well: Should You Hold?

A prudent investment decision involves buying stocks that offer solid prospects and selling those that appear risky. Again, at times it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions. These stocks rally as soon as the market enters into a correction mode. Here we have discussed one such stock, Cabela's Incorporated (NYSE:CAB) , with expected long-term earnings per share growth rate of 12.7% and a VGM Score of “A”.

Strategic Efforts

Leading specialty retailer and direct marketer of hunting, fishing, camping, and related outdoor merchandise, Cabela's continues to witness growth on the back of robust performance of its next-generation stores and cost-saving initiatives.

The strong performance by the company’s next-generation stores continues to boost its top line. Moreover, these stores are outperforming the company’s legacy stores in terms of both sales and profit per square foot. We remain optimistic about these next-generation store formats as they require less capital investment, enhance store productivity, and help increase sales per square foot.

The company has undertaken several cost-saving initiatives to improve operational performance. These endeavors include an improvement in IT process, optimum utilization of retail labor, indirect procurement, merchandise sourcing along with retail support functions and supply chain efficiencies. During its second-quarter 2016 conference call, the company revealed that its efforts to curtail operating expenses have been generating better-than-expected results.

Consequently, Cabela’s is now on track to invest these savings into pricing and promotional activities. With these efforts underway, the company remains committed toward achieving its target of lowering operating expenses as a percentage of total revenue by 75–150 basis points over the next three years (announced during third-quarter 2015). The company also expects these costs-saving initiatives to enhance store productivity and help increase return on capital.

CABELAS INC Price, Consensus and EPS Surprise

CABELAS INC Price, Consensus and EPS Surprise | CABELAS INC Quote

Efforts Find Reflection in Results

Cabela’s performance remained strong in second-quarter 2016, as both earnings and sales jumped year over year, and the top line beat the Zacks Consensus Estimate. While the bottom line gained from sales growth and management’s robust cost-saving initiatives, the increase in the top line was fueled by strong revenues from Cabela’s retail stores, Internet and catalogs, and Financial Services. Notably, the company also marked its first ever quarter of positive comparable store sales (comps), in over two years.

Management expects revenues to improve at a high-single-digit rate in 2016. It envisions earnings per share to grow in the range of high-single-digits or low-double-digits in comparison with adjusted earnings per share of $2.88 in 2015.

Hurdles

The outdoor recreation and casual apparel and footwear markets are highly fragmented and Cabela’s faces stiff competition. Moreover, the company’s expansion in the geographies it already serves could boomerang. This may cannibalize sales performance and lower traffic count at individual stores, thus adversely impacting operating results at the Retail business. Evidently, management stated that Cabela’s second-quarter comps were somewhat dented by either competitive forces or cannibalization.

Given the pros and cons embedded, the stock currently carries a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

Investors may consider better-ranked stocks such as ULTA Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) , sporting a Zacks Rank #1 (Strong Buy), Big 5 Sporting Goods Corp. (NASDAQ:BGFV) and Five Below, Inc. (NASDAQ:FIVE) , both carrying a Zacks Rank #2 (Buy).

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