Question:
Can you comment on Cabela’s please? Was it a mistake? How long are you going to hold on to it? What do you think the future is?
Greg Steinmetz:
Yes, it was a mistake. I thought that by now the company would be getting close to earning $4 a share, and it will be a little over $3 this year if all goes right. We are holding on to it because the opportunity now is the same as when we entered. Unlike a lot of sectors in retailing, the hunting and fishing apparel business has not rolled up into the hands of one or two players. The mom & pops, the independent hunting and fishing goods stores, have 65% of the market. No company we think is better positioned to enjoy the benefits of the consolidation than Cabela’s. Cabela (CAB, Financial)’s has some really good things going for it. One is the brand. Anyone who loves hunting knows Cabela’s and it is a brand that travels across the country. The sale of branded apparel with the Cabela’s name is close to a billion dollars a year; so you have a quarter of your revenue coming from that. There is a much higher margin on the Cabela’s brand product than on the other merchandise. What I underestimated was just how severe the hangover would be from the surge in gun sales as well as the softness that developed in some of the company’s other categories of merchandise.
As you know, right after Newtown gun sales took off because everyone was afraid that the government was going to say no more buying guns. So people ran out and got guns. Cabela’s benefited more maybe than anyone else because it went out and bought every gun it could. So Cabela’s had a lot of guns on the shelf. That has unwound and Cabela’s is feeling it. The question has come up how far are gun sales going to fall?
We have already seen the sales of what they call modern sporting weapons, which are these things that look like AK-47s, really fall off. Handgun sales, on the other hand, have held up. Why is that? The biggest reason is the legislation has gone completely in the favor of the gun industry. It used to be you could only carry a concealed weapon in ten states. Now it is 43 states. So there has been a secular shift with regard to gun legislation that facilitates gun sales. Cabela’s is doing what it said when we bought the stock, which is that it is adding a million square feet of retail space a year. What management has to do is figure out how to get comps back. Cabela’s comparable store sales have been negative now for six quarters. We think later this year the comps are going to turn positive and when that happens, there is going to be more enthusiasm for the stock. At that time, we would have to think again about what we want to do with it. But right now it is priced at a point where it would not make sense to sell it.
From Ruane, Cunniff & Goldfarb Investor Day 2015 Transcript Part II - Sequoia Fund.
