As Cabela’s struggled to reap rewards of rapid growth, activist investor stepped in

As Cabela’s struggled to reap rewards of rapid growth, activist investor stepped in
Photo Courtesy: World-Herald News Service

Cabela’s in 2010 embarked on an ambitious store expansion that doubled its number of locations in just five years — a span that coincided with retailing trends that spelled trouble for the outdoor sporting-goods chain.

From 2010 through 2014 Cabela’s built 33 new stores, an expansion that was later to collide with an expanding retailer’s worst-case scenario: falling sales at stores already open at least a year, a deteriorating overall consumer outlook and a quickening consumer preference for online purchases as opposed to those at brick-and-mortar stores.

“Retail traffic really began to struggle,” said Andrew Burns, an analyst with investment bank D.A. Davidson who follows retailers. “Traffic was migrating online, and Cabela’s and all the others were feeling the pressure.”

The fallout came this month, when the company agreed to be bought by outdoor retailing rival Bass Pro Shops of Springfield, Missouri, for $5.5 billion. Cabela’s shares will no longer trade on the stock exchange, and at least some of the 2,000 headquarters jobs in Sidney, Nebraska, and more than 500 credit-card unit positions in Lincoln likely are in jeopardy; major acquisitions are almost always based on saving money by eliminating duplication.

The catalyst for the sale was the involvement of Elliott Management, the New York-based investment partnership that bought a large stake last year. Elliott is known for targeting weak companies it thinks it can persuade to make changes, sell to a higher bidder, or do whatever else it takes to boost the share price.

Analysts say no single thing attracted Elliott and led to the Bass Pro buyout. Cabela’s did expand fast, and sales couldn’t keep up, weakening the share price to an attractive level. But there were other aspects that activist investors such as Elliott consider. In Cabela’s case, analysts say, the value of the company’s World’s Foremost Bank and real estate holdings were probably not accurately reflected in the share price, leading to the stake taken by Elliott based on the expectation the company would take steps to unlock that value.

It did. The sale to Bass Pro at $65.50 a share is a 40 percent premium to the Cabela’s stock price just prior to Elliott announcing its stake. Elliott last week cashed in about 3 million shares for a $90 million profit, out of its total holdings of more than 6 million shares.

The status of the other Elliott shares isn’t known because the investment fund is no longer an owner of at least 5 percent of Cabela’s shares, meaning it doesn’t have to publicly report purchases and sales.

But what is clear is that Cabela’s went on a growth tear at the start of 2010. Back then it operated 31 stores, selling the stuff that outdoors aficionados dream about: firearms, hunting gear, fishing lures, paintball guns, talking wall-mounted fish. The enthusiasm at Cabela’s was palpable by early 2013, as firearms sales boomed on concerns there could be stricter gun-buying laws after mass shootings and the 2012 re-election of President Barack Obama.

“We are further encouraged with the exceptional performance of our new stores,” Chief Executive Tommy Millner said in Cabela’s first-quarter earnings release that year. “During the quarter we opened two next-generation stores. … These stores opened very strong, are exceeding expectations and are not cannibalizing nearby legacy stores. Sales and profit per square foot in new stores continue to perform 30 percent to 40 percent better than legacy stores. Given the strong performance of new stores, our board of directors is confident in our continued retail store expansion.”

The excitement seemed warranted: Profits rose by double-digit percentages in three out of the four quarters that year.

And although Cabela’s was far more aggressive than other retailers on a percentage-growth basis, increasing its store count 106 percent from 2010 through 2014, it wasn’t the only large retailer of similar scope that was expanding:

» Chief competitor Bass Pro opened 14 new stores, for a total of 70 stores by the end of 2014. That was a 25 percent increase from 2010.

» Gander Mountain, a Minnesota-based outdoor-sports retailer with 164 locations, was also less aggressive than Cabela’s. In February 2011 Gander Mountain had 116 stores. A company spokesman said precise rundowns of year-by-year openings are unavailable. But from 116 stores in 2011 to 164 now is 41 percent more locations, in a period longer than the five-year span during which Cabela’s doubled its store count.

» In 2010, Dick’s Sporting Goods operated 444 Dicks Sporting Goods stores. At the end of 2014 it operated 603 Dick’s Sporting Goods stores. That is 35 percent more stores.

» Hibbett Sports Inc., based in Birmingham, Alabama, is a national chain that mostly sells team sports gear and apparel. It increased its store count from 2010 through 2014 by 27 percent, to 988.

And just as Cabela’s was really getting its expansion humming, things got tougher. The gun run was coming to an end by 2013, with the company acknowledging in a quarterly earnings release that year “sales of firearms significantly moderated during the quarter.”

Then, customers began conducting more and more business online. While Cabela’s has a robust e-commerce site, it also at the time had expensive-to-build stores constructed with the idea they would add to profit, not hurt it.

Sales at stores open at least one year — a key measure of retailing profitability because it captures repeat business at existing locations — cratered. Such “comparable store sales” fell 12 percent in 2014, just as Cabela’s was counting on the doubled store count from years earlier to add up. Instead, the chain couldn’t even support existing stores, much less new ones, as people amped up online buying at the expense of visiting a physical location.

“I would say their struggles were mostly due to the trends in brick-and-mortar retail being out of favor and less to do with them growing too rapidly,” said Jack Holmes, chief investment officer at Omaha-based adviser FeltzWealthPlan. “They are still very small in terms of a national footprint.”

Holmes also said “there were several levers to pull to unlock value” that Elliott was looking to trigger. He cited the company’s complementary businesses, such as the real estate portion that owns valuable land and generates revenue from rental income and property sales. Cabela’s also operates a full-service travel agency for hunters and anglers, and the financial services unit that handles the store-brand credit card; that World’s Foremost Bank unit in Lincoln last year accounted for $500 million of revenue, or 14 percent of the $3.5 billion total. That unit will now be run by Virginia-based mega bank Capital One.

“They had a strong real estate portfolio for which asset value could be unlocked from a sale-leaseback transaction,” Holmes said, referring to when a company sells its real estate to an outside entity and then leases the property back from that entity. “They also have a credit-card portfolio that could have been spun off for a short-term boost to earnings.”

And even during the expansion binge, the company remained profitable, although less so. In 2014 net income was $202 million, down 10 percent from a year earlier. Last year profit fell again, down 6 percent to $189 million.

Matt Powell, sports industry analyst with research firm NPD Group, said Cabela’s may have rushed into new markets in an effort to beat competitors like Gander Mountain or Dick’s Sporting Goods.

“There was probably a little bit of a gold rush here to try to get a stake in the ground in a community to block the other guys from coming in,” Powell said. “When you’re in that kind of a gold rush, you’re probably going to make mistakes.”

Another part of the problem with that might have been what retail types call “cannibalization.” That’s when a chain’s new stores attract not new customers but existing ones who shopped at other locations.

When Cabela’s started building stores in the 1980s (it had been a mail-order house until then), the stores were in remote areas that attracted customers from hundreds of miles around, said John Horan, publisher of Sporting Goods Intelligence newsletter. With wildlife displays and taxidermied animals galore, the stores offered visitors an experience beyond shopping.

The Hamburg, Pennsylvania, store, for example, was opened in the middle of the state and drew as many as 60,000 people per day on weekends, Horan said.

But Cabela’s later promised investors the aggressive expansion plan, saying it would open 12 to 14 new stores per year. And that led the company to build a store just 75 miles away from Hamburg, in Newark, Delaware.

“That’s going to not only take away e-commerce business but detract more from Hamburg,” Horan said. “They were going through a lot of that kind of thing as they got to those stores that they opened up in 2014.”

It all came predictably to an end. Last year management put the brakes on that plan, cutting new store openings down to just seven in 2016. By the third quarter of last year sales at stores open at least a year had fallen for eight straight quarters.

Less than a week after those sales figures and slowed expansion were announced last fall, Elliott Management declared its stake in Cabela’s, after shares had fallen by more than half from March 2014 to October 2015. By December of last year Cabela’s had come to some sort of internal conclusion, saying it planned to “explore strategic alternatives” — corporate jargon for selling or other drastic action.

And less than a year after that — just this month — the company was gone, sold to Bass Pro.