Gun sales have surged this year and manufacturers have been on fire. Sturm Ruger recently reported a 50% increase in net sales for its second quarter. Smith & Wesson, the other major American firearms manufacturer, saw record sales during its last quarter– reporting an increase in sales of 43%.
Back to normal…
Ruger’s CEO, Mike Fifer, told analysts at a recent conference that, “We haven’t seen any slowing in demand for Ruger products… But we have heard anecdotally that the normal seasonal slowdown is starting.” Fifer also acknowledged that gun demand seems to be heading back down to “more normalized growth rates.”
Firearm sales contribute to the majority of Ruger’s earnings, so a sharp drop in these firearms sales could cause an equally sharp drop in the share price. The company’s profits soared to a 20-year high in 2012, but it is unlikely that this trend is sustainable. Smith & Wesson is in a similar boat.
Wells Fargo analyst Matt Nemer echoed Fifer’s sentiments of slowing gun demand, stating that Cabelas Inc (NYSE:CAB)’s gun sales “will slow down… Guns aren’t going to jump by 30% forever.”
While Cabelas Inc (NYSE:CAB) is also sensitive to a drop-off in gun sales like the manufacturers, it is also better insulated to weather a decline as well, due to its diversification.
Sporting-goods stores are safer?
Sporting-goods stores will allow you to continue to capture exposure from the surge in gun sales, but will also have other revenue streams to fall back on if the trend reverses.
Like Cabelas Inc (NYSE:CAB), Dicks Sporting Goods Inc (NYSE:DKS) sells guns and ammunition, which account for as much as 10% of total sales, according to analyst Alan Rifkin. Rifkin further elaborated that “Dick’s faces significant headline risk given the controversy surrounding this category,” but also remained bullish on the stock long-term because of things such as store growth and e-commerce opportunities. The company carries no debt, which is always a strength and gives it more maneuvering room than more debt-saddled companies. Dick’s also has strong private brands such as Top-Flite golf products that will continue to lure customers and will contribute to future growth..
Shares of Big 5 Sporting Goods Corporation (NASDAQ:BGFV) have more than doubled this year. The company credited firearm and ammunition sales for a large part of its double-digit same-store sales growth in its first quarter, but also pointed out that sales of non-gun-related merchandise still rose in the mid-single-digits. Big 5 Sporting Goods Corporation (NASDAQ:BGFV) doesn’t sell products online like its rivals, a problem it plans to address sometime this year– which should create new growth in sales.
CAB EPS Diluted TTM data by YCharts
While Big 5 Sporting Goods Corporation (NASDAQ:BGFV) has opportunities for new growth in online sales, and Dick’s also has many growth opportunities– such as an expansion of sales of its private brands, Cabelas Inc (NYSE:CAB) is the current and proven leader in earnings growth.
Trading at almost 25 times earnings, Cabelas Inc (NYSE:CAB) is more expensive than rivals Dick’s Sporting Goods and Big 5, who trade at 22 times earnings and 17 times earnings, respectively, but the premium is deserved. You get what you pay for.
Cabelas Inc (NYSE:CAB) also has an unique asset that gives it a further advantage over its competitors as well.
The bank of Cabela’s?
It wasn’t just guns and outdoor goods that led an increase of over 30% in net income for the company’s most recent quarter.
According to Bloomberg, the Cabela’s-owned World’s Foremost Bank (WFB) is chartered in Nebraska, and offers consumers charge cards and even sells certificates of deposit of over $100,000. This allows its owner to not only avoid paying fees when its own credit cards are swiped, but also allows the company to collect revenue from interest payments.
Cabela’s credit cards were used in 30% of store transactions, and created a “stickier” customer base because they are tied to a loyalty program, according to . The company now manages over 1.7 million credit card accounts for its customers, with an average balance of around $2,000.
Fnancial revenue now accounts for an estimated 12% of overall sales, says Bloomberg, and these revenues maintain a nice 30% operating margin– which is 10% more than its retail margins.
Cabela’s has found a new lucrative revenue stream with its financial operations and a way to retain customers by issuing things such as its Club Rewards Visa card. The company also collects valuable data both in-store and online when customers sign up for a card, or join the company’s Club Rewards loyalty program. Customers who are part of the rewards program can then use accumulated points at checkout.
The bottom line
Many retailers have fallen victim to the likes of , but Cabela’s is unique in that it specializes in many items such as firearms that Amazon simply can’t or doesn’t want to sell. While this same argument could be extended to Dicks Sporting Goods Inc (NYSE:DKS) or Big 5– Cabela’s has the distinct advantage of owning its own bank.
This advantage over competitors creates a wider moat, and the increasing revenues from financial services should also help the company offset the potential weakening in firearms sales, especially since its financial margins are much higher. Cabela’s has a very bullish future.
The article Why This Retailer Has a Unique Advantage originally appeared on Fool.com and is written by Joseph Harry.
Joseph Harry owns shares of Wal-Mart Stores. The Motley Fool owns shares of Sturm, Ruger & Company. Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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