Personal Finance

Did Bass Pro Shops Just Waste $5.5 Billion on Cabela's?

Cabela's will become part of Bass Pro Shops in a $5.5 billion merger, but it may be a high price to pay for the ailing retailer. Image source: David Fulmer via Flickr.

After months of anticipation Bass Pro Shops finally made its play for rival outdoor equipment company Cabela's (NYSE: CAB) and hooked the retailer with an offer of $65.50 per share, or about $5.5 billion, including debt. Although the deal will create a behemoth with almost 200 stores that stretch across the country, 40,000 employees, and a fifth of the market share of the hunting, camping, and fishing industry, it may be paying a bit too much to do so.

Premium price for a heavily discounted chain

The price Bass has bid represents a 19% premium to Cabela's closing price on Sept. 30, the day before the acquisition was announced, and a 40% premium to its Dec. 1 closing price -- the day before Cabela's announced it was exploring strategic alternatives -- but is almost double the price at which it traded last October just before activist investor Elliott Management disclosed it had taken a sizable 11% stake in the retailer and would push management to sell itself.

While the $65.50 price is a level Cabela's hasn't seen in two and a half years, it values the store at 1.1 times trailing sales and more than 24 times net income. Even though Cabela's managed to post revenue in the second quarter that were 11% higher than a year ago as comparable store sales rose 1.5% -- the first quarter since the third quarter of 2013 that it has been able to post positive comparable store sales -- net profits dropped 5.7% in the period to $37.8 million and margins narrowed across the board.

Although the deal has been speculated about for a while, its consummation was delayed while Cabela's sought a buyer for its World's Foremost Bank operations, which accounted for 14.5% of total revenue in the second quarter. Capital One Financial entered a 10-year partnership with Bass Pro Shops for which it will originate and service Cabela's co-branded credit card.

The outsized demand for firearms finally fueled a rebound in sales for Cabela's, but much of the rest of its business remains weak. Image source: zombieite via Flickr.

Gunning for a turnaround

Cabela's struggles are due mostly to decreased demand for clothing and footwear, and its results in the recent quarter were mostly buoyed by sales of firearms. The FBI recently reported criminal background checks for persons wanting to buy a gun notched their 17th consecutive monthly record in September and are running 13% ahead of last year at this time. The demand for guns is masking Cabela's still-weak operations.

It did manage to post higher internet and catalog sales, which rose 3.3%, and it has initiated a number of cost-cutting initiatives that it says allowed it to be more aggressive in pricing and promotion. While that may have helped improve its market share position a bit, it can't maintain such policies for an extended period of time.

Although Cabela's and Bass Pro Shops are similarly situated and appeal to the same consumers, and not just because of the look and setup of their stores, there remains some intense competition in the broader specialty retail market catering to sporting goods and outdoors enthusiasts, which has seen its share of bankruptcies, including Eastern Mountain Sports, Sports Chalet, and, of course, Sports Authority. The combined company will still find itself competing against the likes of Gander Mountain and REI, big-box rivals Dick's Sporting Goods , Wal-Mart , and Target , and e-commerce giant . There is no end to the competitive threats Bass faces.

No doubt there will be economies of scale for it to realize from the combination, and it will certainly look to improve Cabela's profitability and expense management further, but it has paid up for the privilege of doing so at a retailer that has only managed to put together one quarter of, at best, mixed results in the past three years.

There is a lot of sense in this merger, not least of which is Cabela's loyal customers who are willing to drive long distances to its stores, but the price Bass Pro Shops is paying might be too high to give it enough of a sporting chance to succeed.

10 stocks we like better than Cabela's

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Cabela's wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of September 1, 2016

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


Latest Personal Finance Videos

    Growth in Separately Managed Accounts and Why They Are Attractive for Financial Advisors

    Nasdaq Dorsey Wright Client Portfolio Manager Andy Hyer discusses the growth in Separately Managed Accounts and why they are attractive for financial advisors.

    Jul 20, 2021

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More