Jeovany Zelaya - UNO Investment Research Report

CFA Institute Research Challenge February 13, 2015

University of Nebraska at Omaha Student Research

This report is published for educational purposes by students competing in the CFA Institute Research Challenge.

Ticker: CAB (NYSE) Recommendation: BUY Current Price: $52.32 Target Price: $64.00

We Initiate Coverage Of Cabela’s Inc. With a Buy Recommendation

We believe the combination of continued new store openings and the continued client satisfaction that has helped them establish its brand puts Cabela's in a strong position relative to its competitors. We estimate revenue growth in 2015 of 10% and 10-13% in 2016 and beyond. Our valuation is based on a P/E multiple of 17-18x 2015 estimated EPS. Highlights New Retail Stores Expansion Remains Robust With 14 Next Generation retail stores opening in 2014, 11 in US and 3 in Canada, and projected new retail stores of 14 in years 2015, 2016, and 2017, Cabela's is looking to capitalize on the more efficient model that has produced great results thus far. Customer Loyalty and Satisfaction Lead the Way The competitive advantage Cabela's has established continues to be a key strategic goal for the company. Cabela's leads its industry in client satisfaction surveys. Cabela’s 2014 key deliverables include: integrating customer services to make the retail outlets a one stop shop and produce a consistent customer experience, continuing to focus on process improvements from both a cost management and labor efficiency side as well as on the customer, and finally sustaining its culture and legacy through various community involvements. CLUB Visa customers are among the most creditworthy in the industry With an average FICO score of over 790, Cabela's credit cardholders remain amongst the highest in the retail industry. These strict credit standards have allowed Cabela's to maintain very low delinquency and charge-off rates. Cabela’s is estimating its total accounts receivables in its CLUB Visa business to grow between 12-14% in 2015. In our valuation we were conservative and used an 11-12% growth rate for future years. Key Metrics in the next 3 to 5 years We view same stores growth to be flat to slightly positive in the near future due to some cannibalization from new stores, and up 2-3% in the next 3-5 years. Management guidance of approximately an additional million square feet in store growth annually will be monitored closely, as this is where we view the most upside in revenue growth over the near term. Lastly, we expect to see a slight deterioration in gross margins and operating margins because of increased competition for market share. However, with the Cabela's brand leading the way, we expect the company to still earn the highest margins compared to industry peers.

Company: Cabela’s Inc. Sector: Consumer Discretionary Industry: Retail-Discretionary Sub-Industry: Sporting Goods Recommendation: Buy Ticker: CAB (NYSE) Price (2/12/15): $52.32 52-Wk. Range: $46.24-$72.53 Market Cap. (MM): 3,899 Shares Outstanding (MM): 71.09 Target Price: $64.00 Share Price as % of Target: 86%

Valuation:

EPS 2014 2015E 2016E Q1 0.36A 0.41 0.55 Q2 0.61A 0.57 0.71 Q3 0.75A 0.85 1.00 Q4 1.35E 1.74 1.70 Year $3.07E $3.58 $3.96 P/E 17.9 15.4 13.9

EPS 2017E 2018E 2019E Q1 0.58 0.62 0.67 Q2 0.74 0.80 0.87 Q3 1.03 1.11 1.20 Q4 1.77 1.90 2.07 Year 4.12 4.43 4.81

Analysts: Scott Irwin, MBA Student Justin Korth, Undergrad. Student Jeovany Zelaya, MBA Student

Cabela’s Inc.

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Business Description Cabela’s Incorporated is a direct marketer and specialty retailer of hunting, fishing, camping, and outdoor recreation merchandise. Established in 1961, headquartered in Sidney, Nebraska, Cabela’s caters to outdoor enthusiasts and customers who enjoy outdoor lifestyles. The company is recognized as the “World’s Foremost Outfitter®.” The company also issues and manages the Cabela’s CLUB® Visa credit card, a rewards-based credit card, through its wholly-owned bank subsidiary, World’s Foremost Bank.

Business Segments – Retail, Direct, and Financial Services Product Categories Cabela's retail business offers merchandise items for sale which are branded into three product categories: (1) hunting equipment, (2) general outdoors, and (3) clothing and footwear. The hunting equipment consists of firearms, ammunition, optics, archery products, and related accessories for every type of hunting and sport shooting. It also provides in-house support services for its customers who are interested in hunting products. The company provides gun bore sighting, scope mounting, and bow tuning. The general outdoors product category includes a full range of equipment and accessories supporting all outdoor activities and wildlife and land management products and services. The final category, clothing and footwear, consists of field-wear apparel and footwear, sportswear apparel and footwear, casual apparel and footwear, and work-wear products. Retail Cabela’s currently operates 64 retail stores across the United States and Canada and has announced plans to open an additional 20 locations over the next three years. Cabela's operates two retail store formats, the legacy stores and the next-generation stores. The legacy stores were the first retail store formats Cabela's introduced to sell its merchandise items. The legacy stores are 150,000 square feet or larger. These stores are more of a tourist attraction for visitors with large displays of the outdoors that include mountains and aquariums. More importantly, they are largely inefficient compared to the next-generation retail stores. The next-generation stores range from 50,000 to 100,000 square feet. These stores are more efficient and deliver a higher return on invested capital than the legacy stores. The next-generation stores average 43% more in sales per square foot and 48% more in profit per square foot compared to the legacy stores. Additionally, these new stores adapt to retail space more conveniently and they require less capital investment requirements. The company has also built smaller retail stores than the next generation formats that are geared towards smaller towns. Direct The direct business segment consists of Cabela's traditional direct mail catalogs and its modern ecommerce websites, Cabelas.com and Cabelas.ca. In 2013, Cabela's mailed more than 130 million catalogs to all 50 states and to more than 165 countries and territories. According to Hitwise.com, Cabela's has been the most visited website in the sporting goods industry. Additionally, Cabela's has been very active on social media and as a result has over 3.4 million "likes" on its Facebook page. Financial Services World's Foremost Bank is a FDIC insured, Nebraska state-chartered bank that issues consumer credit cards and certificates of deposit of one hundred thousand dollars or more. The Cabela's CLUB Visa credit card is a loyalty program that allows customers to earn points whenever they use the CLUB card and redeem earned points for Cabela's products and services. World's Foremost Bank underwrites high-quality credit customers for the CLUB credit card. At the end of 2012 and 2013 the average FICO score of its cardholders was 793. This coincides with the bank's very low charge-offs percentages of 1.87 and 1.80% in the same respective periods.

Source: Company data



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Company Strategy The current strategy of Cabela's can fall under the following four headlines:

(1) Retail Expansion - Cabela's is currently undergoing an expansion of its next-generation retail stores in the United States and in Canada. The company plans to open 13-15 retail stores per year.

(2) Omni-Channel Strategy – The omni-channel strategy was embarked in 2012 to engage with the customer by direct mail catalog, retail store, and web. This strategy integrates all contact points with the customer and provides a more seamless transition between each medium.

(3) Further market penetration of Cabela's Branded Products (CBP) - Cabela's Branded Products are almost 10 times the size of Cabela's largest national brand. CBP sell for higher margins than name brands. In 2013, these products generated over $800 million in sales for Cabela's and had 30% penetration into Cabela's business. Its Good, Better, Best hierarchy of products has attracted customers with different price elasticity. It is a competitive advantage for the company, and it will continue to be exploited for future years. Additionally, Cabela's can be described has having a differentiation competitive strategy. This is apparent when the company expanded its branded products to include the Best and Better category, focusing not only on the cost but also offering a unique product at a premium price.

(4) Operational Efficiency - With a cyclical business cycle, earnings are highly dependent on fourth quarter sales, Cabela's manages to keep expenses low throughout the year. As a result, it has managed to maintain high gross margins and operating margins compared to comparable sector companies, and plans to maintain these high margins.

Thomas Millner CEO/Pres., 2009-Pres. Ralph Castner CFO, 2003-Pres. Michael Copeland COO, 2010-Pres.

Management and Corporate Governance Cabela's has eight primary executive leaders managing the company. Each professional executive has extensive experience and knowledge in retail which provides the company with a competitive edge. The CEO, CFO, and COO's profile are below (Please reference appendix 2 for complete list).

President and CEO, Thomas Millner Thomas L. Millner has been the Chief Executive Officer and President of Cabela's since April 6, 2009. Prior to joining Cabela's, Mr. Millner served as the CEO and President of Remington Arms Company Inc. since April 1999. He joined Remington Arms Co. in 1994 and served as its Chief Operating Officer until be become the CEO. He also served as the CEO and President of The Pilliod Cabinet Company from 1987 to 1994. Mr. Millner also serves on several boards, including Retail Industry Leaders Association Pac, Best Buy Co., Cabela's, Old London Foods and Atlanta Belting Co., and RACI Holding Inc. He earned a B.A. from Randolph Macon College in 1976.

Chief Financial Officer, Ralph Castner Ralph W. Castner has been the Chief Financial Officer since 2003 at Cabela's. He served as Chairman of World's Foremost Bank from March 2006 to November 2010. Prior to joining Cabela's, Mr. Castner served as Vice President for First Data Corporation from 1990 to 2000. Prior to joining First Data, he served as a Certified Public Accountant for Touche Ross and Company. He earned both a Master’s in Business Administration and a Bachelor of Business Administration degrees from the University of Nebraska.

Chief Operations Officer, Michael Copeland Michael Copeland has been the Chief Operations Officer and an Executive Vice President at Cabela's since January 2010 and served as its Vice President of Retail Operations from 2007 to 2010. Mr. Copeland served as a Regional Vice President at Lowe's from September 2001 to November 2007.

Board of Directors The Board of Directors for Cabela's consists of 8 male directors and 2 female directors who have a range of experience necessary to advise management and review its activities. The Chairman of the Board is James Cabela, co-founder of the company and former President. Thomas Millner, current CEO, is also on the board. Having the former President of Cabela’s and the current CEO on the Board could be a negative factor in terms of holding shareholders' long-term interests because it means other directors might suppress their opinions that might be contrary to those of management. Regarding compensation matters, including executive compensation, the CEO and COO provide recommendations to the Compensation Committee. This might pose a conflict of interest. Also, six of the ten directors have a tenure of 11 years or more. Consequently, this could mean these members might be too closely aligned with management and not keep shareholders' long-term interests. Finally, all directors have stock positions in the company except for the most recent director. Two of the directors collectively have 4.1 percent of all Cabela's stock. This could make the directors more involved in management's actions to make sure nothing unethical or illegal is at play, and be more vested in the long-term future of the company.

Compensation The compensation package for the executive team consists of a mix of base pay, short-term incentive compensation, and long-term incentives. The short-term incentive plan provides cash bonuses based on individual and/or corporate performance. The long-term incentives provide restricted stock, performance-based restricted stock, and stock options. The compensation packages are very much tied to key financial metrics that increase shareholder value. The key financial metrics for 2013 were adjusted earnings per share, merchandise gross margin, total revenue, expense, and comparable store sales. Additionally, each executive member owns Cabela's stock but individually it amounts to less than 1 percent of total outstanding shares.

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Industry and Competitive Overview

Because Cabela's has three business segments, Retail, Direct, and Financial Services, the company competes in three distinct industries: Sporting Goods Stores, Mail Order, and Credit Card Issuing. The following will be an overview of all three industries and an integration of Cabela's past, current, and future operations within each industry.

Sporting Goods Stores

• Mature Life Cycle - The Sporting Goods Stores industry is in a mature life cycle stage where extreme competition is at play, and something that will continue to intensify for the coming years to increase market share (See figure below for current market share distribution). Big-box retailers (e.g. Walmart and Target), internet based retailers (e.g. backcountry.com), and other specialty retailers will continue to put pressure on price, to gain market share. An example of this is in the athletic footwear segment. The average price for a pair of shoes has decreased due to the intense promotional environment. This has made major sporting goods companies expand into high-margin, private-label products. Cabela's has done this with both its soft goods and hard goods.

• Private Label Products - In the soft goods arena, Cabela’s customers have embraced ZONZ™ camo, ColorPhase™ technology, the Regulator and Instigator bows and OutfitHER® clothing. Cabela’s hard goods’ brands include Euro Optics spotting scopes, and Northern Flight Waterfowl bags, decoys and blinds for hunters. In 2013, private label products accounted for 30 percent of Cabela’s merchandise sales. Additionally, consumers buy more private labels when the economy is not doing so well, so perhaps the macroeconomic situation of the past five years has helped Cabela's penetrate the market more with its private labels. However, the U.S. is expected to continue to recover and grow by 3.2%, 3.0%, and 2.4% in 2015, 2016, and 2017, respectively (Source: The World Bank). Cabela's has found that during times of economic stability and prosperity the larger markets, for example Dallas, choose the name brands (e.g. Under Armour) but the smaller markets continue to choose the Cabela's labels.

• Competitors’ Products - Staying with the theme of competition, Dick's Sporting Goods plans to roll out a new, multi-brand outdoor specialty store concept under the Field and Stream name to 55 locations by 2017. Field and Stream competes directly with Cabela's. Strategic placement of Cabela's next generation retail stores throughout the United States and Canada will be key to Cabela's future success to gain market share and compete against its numerous competitors.

• Firearms - Now, because Cabela's sells firearms, it must hold a federal firearms license and comply with the Federal Brady Handgun Violence Prevention Act, which requires retailers to perform a presale background check on consumers who want to buy hunting rifles. The background check either confirms that a sale can be made, the sale must be denied or the sale should be delayed for further review. Stricter gun control regulations could prevent Cabela's from increasing sales of firearms and ammunition.

• Recent High Firearm Sales - According to IBISWorld, over the past five years, firearms and hunting equipment have driven sales within the sporting equipment category. However, under the firearms category, the past two years have been the exception rather than the norm for Cabela's. The Aurora, Colorado shooting, the Sandy Hook Elementary shooting and the re-election of the democratic president, Barack Obama, prompted consumers to flood Cabela's and purchase an above-average number of firearms and ammunition during 2012 and 2013. It seems that the more politicians talk about implementing stricter gun control laws the more people are motivated to buy them. However, during 2014 we started to see these high levels stabilize.

• Firearm Sales Stabilizing - Moving beyond 2014, these levels could possibly decline in the future unless Cabela's continues to advertise heavily the benefits of hunting to the market. According to the Pew Research Center, the reason most people buy a gun is for protection and historically crime has been decreasing for the past decade. Cabela's is not in the business of selling guns for protection; it's in the business of selling firearms and ammunition for the purposes of hunting. Currently, Cabela's spends about 20 percent of selling, distribution, and administrative expenses in advertisement. This is percentage that could very well increase because of this culture shift. Also, this poll shows that people that own a gun are owning a gun less for hunting purposes. Again, this is a negative signal for Cabela's because it will mean spending more advertising dollars in encouraging customers to buy more guns to hunt rather than the market reaching this outcome on itself.

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• Future Industry Growth - The industry is poised to grow for the next five years. (See figure below for revenue growth for Sporting Goods Stores Industry.) However, market share distribution could very easily shift to any one company. Providing world-class customer service, operating efficient inventory management processes, keeping up with the latest technology and integrating that technology to deliver a more user-friendly experience, and building a company's brand to increase customer loyalty levels will be key to Cabela's success and existence, as well as the rest of the companies competing in the Sporting Goods Industry. We see Cabela's Retail business segment grow by circa 14% of the expansion of more efficient and profitable retail stores.

Mail Order Industry

• Decline Life Cycle - The Mail Order industry is a $71.4 billion market but only 7% is segmented for Sporting Goods, which comes to be about a $5 billion market. The industry is in its decline life cycle stage which will make market participants choose to renovate itself or stop operations all together. There are high levels of e-commerce competition which will decrease revenue (Cabela's integrates its mail order sales with its e-commerce sales from Cabelas.com and Cabelas.ca, so this applies only to a portion of its revenue stream). The industry is estimated to fall at an annualized 1.3% over the next five years. Industry value added, which measures the industry's total contribution to the economy, is estimated to grow at a slower rate than GDP in the 10 years to 2019.

• Postage - Mail Order industry has also faced increasing costs in the production and distribution of catalogs. According to IBISWorld, rising postage rates, one of the highest expenses for those in the industry, have inhibited the industry's ability to increase margins. In 2009, the price of first-class mail posted a two-cent increase to $0.44 per stamp and has since increased to $0.49 per stamp, while the price of paper has risen 1.4% over the past five years. In terms of Cabela's Direct business segment, we believe that an ever-growing number of competitors in the digital landscape will eventually make Cabela's change its business strategy, defined as gaining and sustaining a competitive advantage in the market. Cabela's direct business segment in terms of percentage of revenue has decreased from 40.2% to 27% from 2009 to 2013, respectively. We expect this trend to continue with 20.3% and 13% in 2015E and 2019E, respectively.

• Catalogs - Although the Cabela's story starts with sending out its renown catalogs, we see Cabela's reducing its overall circulation and eventually ending this part of the business, similar to what Sears and Bloomingdale's did, and focus on its Retail and Financial Services segments and integrate sales from its websites to the Retail segment. However, that time has not arrived yet. The company continues to reach its niche target market productively enough to increase revenue 4.5% from 2012 to 2013 in this business segment. However, this increase is attributed from an above-average increase in sales in the hunting equipment product category, specifically an increase in ammunition and shooting related products.

• Future of Mail Order - The future of the Mail Order Industry seems bleak in terms of growth when facing stiff competition against a more convenient, more reliable, more ubiquitous, more transparent and faster ecommerce counterpart. Cabela's does use this segment to market its brand across the world but the world is moving and will continue to move towards a more digital environment, making mail order catalogs obsolete. We see Cabela's direct business segment decline only by 1% year over year because of the integration of mail catalog with e-commerce.

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Credit Card Issuing Industry

• Concentrated Market - The Credit Card Issuing Industry is a concentrated market with six major companies holding 85.3% of the market. There is very intense competition among all market players. To attract customers and be competitive in the market, credit card companies issue no annual fee cards, no interest rate terms for a year, and more ways to earn rewards points and redeem them for basically anything, including cash, gift cards, iPads, airline tickets, and even a Farmville horse. According to Bankrate.com, as of February 1, 2015, the average fixed interest rate on a credit card was 13.02% and 15.7% on a variable interest rate credit card. Cabela's offers the CLUB Visa card without an annual fee, a 9.99% interest rate with purchases made at Cabela's, 2 percent back on purchases made at Cabela's, 1 percent back on everything else, and exclusive member-only events.

• Card Benefits - These benefits to the customer do minimize potential revenue for the financial services segment. However, the retail store expansion and increased market penetration outweigh the cons which will help the financial services sector of Cabela's continue to increase revenue in all phases (i.e. cardholder fees, interchange fees, and interest income). Additionally, because of the retail expansion, we expect to continue to see the double-digit distribution growth of credit cards from the retail and internet channels of origination. (Please reference appendix 9).

• Regulations - The recent regulations implemented after the financial crisis have further put a strain on revenue for the industry moving forward, specifically the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Both acts increase costs for industry participants and reduce profitability. Additionally, Cabela's reached a settlement with the FDIC in 2011 for its credit card policies and practices and had to pay $10 million plus a $250,000 penalty for the charges.

• Industry Growth - The Credit Card Issuing Industry will see a CAGR of 2.17% for the next five years. With GDP growth in the U.S. and Canada poised to accelerate, disposable personal income levels continuing to escalate, consumer expectations and confidence levels at high levels, interest levels at historic low levels and current depressed oil prices, consumers will be using credit cards more often to make purchases and earn more reward points. Credit Card companies will then see revenues from cardholder fees, interchange fees, and interest income increase.

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Investment Risks

Political

• Firearm Regulation - New/revised and stricter regulations concerning firearms may affect the company. An increase in NICS Firearm Background Checks is a leading indicator of firearm sales.

• Decrease in Firearm Sales - A decrease in firearm sales may affect the company. Firearm sales were strong for 2012 and 2013 due to consumer worry about regulatory changes. However, this sales growth was not sustainable and could continue to decrease if regulatory action is taken against the sale of firearms and ammunition.

• Global Uncertainty - Political and economic uncertainty around the globe may affect company performance. Many merchandise vendors are located outside the country in places like China, Mexico and various Far East, Asian, and European countries, so trade restrictions on imports from these countries may affect earnings. Political unrest may also affect the transfer of goods across country borders.

• Banking Regulations - he banking division is highly regulated. If there are changes in capital requirements or any other major regulatory changes to the banking industry, the company may have lower returns. The Dodd-Frank Wall Street Reform and Consumer Protection Act have already impacted the company’s operations.

Competitive

• Price Competition - The retail industry is competitive, and lower prices offered by competitors may negatively impact the company by discounting merchandise items and lower margins. Additionally, discounted merchandise at competitors’ stores may attract some of the company’s loyal customers.

• Competitors’ Growth - The growth of competitors’ stores may affect the company. Such competitors as Dick’s Sporting Goods and others are expanding their footprints in the hunting and fishing sectors, which may impact sales at Cabela’s.

Economic

• Decrease in Discretionary Spending - A decrease in consumers’ discretionary spending and confidence may impact the company. Several macroeconomic factors affect retail spending, such as gasoline prices, unemployment, and tough economic times. This may also impact the company’s banking subsidiary and may result in the customers’ inability to pay balances due.

• Unsuccessful New Stores - New Cabela’s stores may not be successful in new markets. With the expansion plans of the company, there is a risk that the new openings will not adapt to its new markets successfully and may result in fewer store openings in the future. If retail store expansion plans do not materialize, revenues may fall.

• Hack of Financial Division - A hack of the company’s financial division (e.g. credit cards) may cause unrest with customers and a decrease in sales. Also, costs to combat an attack could be substantial.

• Increasing Interest Rates - Increasing interest rates by the middle of the year, as expected, may affect the company’s banking subsidiary financial status.

• Seasonal Business - The company’s business is seasonal, with the highest amount of revenue coming in the fourth quarter. If fourth quarter sales are below the target, earnings may be significantly affected.

• Severe Weather - Severe weather or other environmental factors may affect hunting and other outdoor activities in which customers partake.

Increasing

interest rates

Competitor store growth

Competitor price

competition

Decrease in firearm sales

Low 4th quarter,

seasonal sale

Global threats affecting vendors

New stores not being successful

Increased banking

regulations

Decrease in discretionary

spending

Weather affecting outdoor

Stricter gun regulation

Hack of financial division

Political Risk

Competitive Risk

Economic Risk

Source: Team estimates

Insignificant moderate severe

Low

mod

erat

e

hig

h

PRO

BABI

LITY

IMPACT

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Investment Summary

New Retail Store Expansion Drives Revenue Growth Cabela's continues to track in the 13-15% annual square footage expansion over the next several years. Management has stated that they are striving to lower the break-even point for these new stores and also achieve a target of $400 in sales per square foot. They also have stated that the small store format will be 50,000 square feet versus the previous 40,000 square feet model.

Client Satisfaction and Loyalty remain amongst Industry Best Cabela's ranks as one of the highest companies in the retail industry for client satisfactions. The company achieves this through a variety of ways and continues to look for ways to further separate itself from its competitors. Some of the ways include engaging customers by conducting seminars and demonstrations in stores, having employees be educated about the products they are selling, and reducing customer wait time. Excellent Credit Quality is a competitive advantage Cabela's has one of the lowest delinquency and charge-off percentages in the industry. This is due to its much stricter credit standards than most credit card companies in the retail business. This is the biggest reason we do not view its financing services as a liability like most companies. This business segment is stable and is expected to grow at a stable rate in the future.


Sources: Company data

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Valuation Our valuation is based off a P/E multiple of 17-18 times 2015 estimated earnings per share of $3.58.

Cabela’s currently trades at 18-19x trailing twelve months earnings per share. Our target price of $64 is based off a P/E multiple of 17-18x our estimated 2015 earnings per share of $3.58. We believe this to be an appropriate range due to several factors. Revenue growth in their financial services business and retail store expansion provide upside in the near and long term outlook. The 17-18x P/E multiple factors in the future opportunities and discounted to present time accordingly.

Financial Analysis

Sustainable Revenue Growth Cabela's earned record breaking revenue in 2014. Cabela's revenue CAGR in years 2009 - 2014 (including estimation for fourth quarter results for 2014) was 6.7%, and the CAGR of the company's stock price during that same period was 59.07%. These gains were a result of above-average firearms and ammunition purchases during early 2012, retail store expansion, and a growth of customer ownership and frequent usage of Cabela's CLUB Visa card. However, cannibalization has affected same-store growth since the inception of the next-generation retail stores. Moving beyond 2014, we believe same-store growth will turn positive starting in 2015. The next-generation retail stores have proven to be more efficient and more profitable than the legacy stores; add the retail store expansion strategy of these next-generation stores into new market and we forecast that revenue in the Retail business segment will grow by a healthy amount (forecast revenue for Retail business segment is circa 11.3% CAGR in 2015E - 2019E).We expect Financial Services business will grow by a CAGR of 8.4%. The addition of retail stores will have a direct correlation of the number of applicants apply for the CLUB Visa credit card and thus increase revenues. Additionally, Cabela's has brand loyal and credit worthy customers using the CLUB card more frequently, this lowers loan loss provisions and increases overall revenue. Revenue for the Direct business segment will decrease by -.4% in 2015E - 2019E. Intense competition in the industry and the consumer market migrating to a more technology-based buying behavior, reflects this decrease. We included a higher revenue growth for Retail and Direct in 2016E because it's an election year. There is the possibility that a Democratic candidate could get elected and it might mean another surge in firearms and ammunition sales just like in 2012.


Source: Company data, team estimates

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Sound Profit Margins Although in the long-term higher revenues will prevail, we expect cost of revenue and selling, distribution, and administrative expenses to rise, which will lower gross, operating, and net profit margins. The main driver of the increased expense is competition. Cabela's competes in a monopolistic competition economic model. There are many firms selling identical products with minor differences. The market will be do business with a company that provides a quality product at a reasonable price. This "reasonable price" idea will put pressure on price and force Cabela's to increase discounting on products and increase advertising to continue to gain market share. We forecast that cost of revenue will increase as a percentage of revenue from 56% in 2015E to 56.9% in 2019E. Also, we forecast that selling, distribution, and administrative expenses will gradually increase as a percentage of revenue from 33.9% in 2015E to 34.1% in 2019E.

Debt Financing Although Cabela's predicts to eliminate existing debt by 2016 and only have $290 million in debt by 2020, we expect the company to finance its retail expansion and future plans with more debt rather than equity. Equity costs more than debt so it makes sense to take advantage of the low interest environment we are in. We forecast that total debt to equity will increase from 26% in 2014 to 33% to 2019E. The total financing situation is visible in the cash flow statement. Historical CFO has been positive and CFI has been negative. We expect this trend to continue because of the retail expansion. We forecast a negative CFI during 2015E - 2019E mainly due to property and equipment and credit card loans originated externally. We forecast free cash flow being negative in 2015E ($119 million) but the next being positive again and gradually having $378 million in 2019E.

Operational Efficiency Cabela's liquidity ratios are still expected to remain high relative to past performance (Current ratio 2011: 2.54, 2019E: 3.25). Please see appendix () for more information on liquidity ratios.

Activity ratios are forecasted to be a little volatile for 2015 but seem to stabilize and become healthy moving forward. This is due to higher inventory levels. Managing inventory processes are going to be key to keeping costs low. We expect cash conversion cycle to increase from 65 days in 2013 to 98 days in 2014 to gradually decreasing to 76 days. Please see appendix () for more information on activity ratios. Team disclosure: We assign a BUY rating when a security is expected to deliver returns of 15% or greater over the next twelve months. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Sources: Company data

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Appendix Appendix 1 – New Store Locations

Appendix 2 – Additional Management Team

Charles Baldwin has been Chief Administrative Officer and an Executive Vice President at Cabela's since 2010 and served as its Chief Human Resource Officer from October 31, 2007 to January 2010. Mr. Baldwin worked at Wal-Mart for 20 years and worked in Wal-Mart's Human Resources department for 10 years. He served as Wal-Mart’s Vice President of Global Talent Management from 2005 to October 2007 and Vice President of Corporate People Development from 2001 to 2005.

Scott K. Williams has been Chief Marketing Officer, E-Commerce Officer, and an Executive Vice President at Cabela's since October 2011. Mr. Williams served as President of Football Fanatics from June 2010 to February 2011. Football Fanatics is an online retailer of team and league licensed sports apparel and collectibles. Mr. Williams also served as Vice President and General Manager of Samsclub.com from 2006 to May 2010. He also served as Vice President of Marketing at Officemax.com from 2005 to 2006. Mr. Williams has over 20 years of e-commerce and marketing experience.

Sean Baker has been the President of World's Foremost Bank since August 22, 2012 and its Chief Executive Officer since January 1, 2013. Mr. Baker started his career at Cabela's in 1997 as a Financial Analyst. From 2003 to 2012 he went through different titles and positions at Cabela's. He was the Director of Accounting and Finance/Controller, Director of Finance, Senior Director of Finance, and Senior Vice President, Business Development of World’s Foremost Bank. Prior to joining Cabela's, Mr. Baker was a Certified Public Accountant with Grant Thornton.

Brian J. Linneman has been Chief Merchandising Officer and an Executive Vice President at Cabela's since January 2010 and served as its Senior Vice President of Global Supply Chain and Operations from November 2007 to January 2010. Mr. Linneman has been with Cabela's since 1999. His most recent position, prior to joining Cabela's, was as Logistics Manager in the West Region for United Parcel Service. Douglas R. Means has been Chief Supply Chain Officer and an Executive Vice President at Cabela's since April 2010. Prior to joining Cabela's, Mr. Means served as Executive Vice President of Production for Better Sportswear Division at Jones Apparel Group. He worked at Jones Apparel Group for 18 years. Prior to joining Jones Apparel, he was a consultant for Kurt Salmon Associates, where he assisted clients in improving operations, developing strategic distribution and logistics plans, and building logistics optimization models.

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Appendix 3 – Sporting Goods Store Industry Life Cycle Stage

Appendix 4 – Gun Poll

Source: Pew Research Center | 5 facts about the NRA and guns in America

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Appendix 5 – Violent Crime Rates in U.S.

Appendix 6 – Employee Engagement Cabela's invested $1.3 million in training in product knowledge, store operations, and safety compliance. [Source: Raymond James] • Product knowledge

o 250% increase in Cabela's Brand training courses [Source: Company Data] o 479,020 courses completed [Source: Company Data] o 1.04M hours [Source: Company Data] o All of this is important because it speaks to one of Cabela's competitive advantage, its

employees, aka Outfitters. This investment to customer service is also relevant to its bottom line and the company's existence. Providing world-class customer service starts the employees that face the customers on a daily basis and providing them with the tools and resources to do their job at a high level.

o Safety • Over 271K Firearms were safely checked - of which 1,745 were loaded but caught but the

Outfitters. [Source: Company Data] Appendix 7 – Customer Satisfaction • Cabela's scored above-average customer satisfaction scores. This has a direct correlation with higher

retention rates for Cabela's most loyal customers.

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Source: Company Data Appendix 8 – Same Store Sales

Source: Company Data Appendix 9 – New Accounts by Channel

Source: Company Data

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Appendix 10 – Credit Card Issuers

Appendix 11 – Company Debt

Source: Company Data

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Appendix 12 – Cost of Goods Sold

Source: Company Data, Team Data (Averages of Dick's Sporting Goods, Big Five Sporting Goods, Hibbett Sports, and Wal-Mart) Appendix 13 – Selling, General, and Administrative Expenses

Source: Company Data, Team Data (Averages of Dick's Sporting Goods, Big Five Sporting Goods, Hibbett Sports, and Wal-Mart) Appendix 14 – Net Income

Source: Company Data, Team Data (Averages of Dick's Sporting Goods, Big Five Sporting Goods, Hibbett Sports, and Wal-Mart)

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Appendix 15 – Days of Sales Outstanding

Source: Team Estimates Appendix 16 – Percentage of Merchandise Revenue by Product Category

Source: Company Data Appendix 17 – Disposable Personal Income

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Source: Bureau of Economic Analysis Appendix 18 – U.S. Economic Confidence Index

Source: Gallup - Eight-Point Increase in Monthly Economic Confidence Index Appendix 19 – U.S. Economic Confidence Index – by Income

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Source: Gallup - Eight-Point Increase in Monthly Economic Confidence Index Appendix 20 – Cabela’s Stock Price with Major Events

Source: Yahoo Finance - CAB Interactive Stock Chart Appendix 21 – Seasonality Comparisons

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Seasonality

1Q2009 20% 1Q2012 20%

2Q2009 21% 2Q2012 20%

3Q2009 24% 3Q2012 24%

4Q2009 35% 4Q2012 36%

2009 100% 2012 100%

1Q2010 21% 1Q2013 22%

2Q2010 20% 2Q2013 21%

3Q2010 24% 3Q2013 24%

4Q2010 35% 4Q2013 33%

2010 100% 2013 100%

1Q2011 21% 1Q2014 20%

2Q2011 20% 2Q2014 21%

3Q2011 24% 3Q2014 24%

4Q2011 35% 4Q2014E 35%

2011 100% 2014 100%

Source: Company Data, Team Estimates Appendix 22 – Profitability Ratios Profitability Ratios 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

Gross profit margin

42.6% 43.1% 43.6% 43.9% 44.0% 44.0% 43.5% 43.3% 43.1%

Operating profit margin

8.2% 8.9% 10.0% 9.9% 10.2% 10.0% 9.5% 9.2% 9.0%

Pretax margin 7.6% 8.4% 9.5% 9.5% 9.8% 9.5% 9.0% 8.7% 8.5%

Net profit margin 5.1% 5.6% 6.2% 6.1% 6.4% 6.2% 5.8% 5.7% 5.5%

ROA 3.0% 3.2% 3.7% 3.2% 3.5% 3.6% 3.4% 3.3% 3.3%

ROE 12.9% 13.6% 15.0% 12.9% 15.0% 14.9% 15.5% 15.1% 15.3%

EBIT margin 8.2% 8.9% 10.0% 9.9% 10.2% 10.0% 9.5% 9.2% 9.0%

Interest burden 92.6% 94.9% 95.1% 95.7% 96.2% 95.4% 94.6% 94.6% 94.6%

Tax burden 66.5% 66.3% 65.3% 63.7% 65.5% 65.0% 65.0% 65.0% 65.0%

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Appendix 23 – Activity Ratios Activity Ratios

2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

Inventory turnover

3.21 3.38 3.39 2.58

2.38

2.45

2.55

2.78

2.87

DOH 113.57 108.01 107.61 141.35

153.20

149.18

143.29

131.30

127.22

Receivables turnover

59.59 66.79 80.94 82.72 86.66 92.85 97.79 103.26 109.29

DSO 6.12 5.46 4.51 4.41 4.21 3.93 3.73 3.53 3.34

Payables Turnover

6.64 6.62 7.77 7.59 6.06 6.59 6.22 6.47 6.64

DPO 54.96 55.11 46.95 48.11 60.18 55.36 58.72 56.41 54.98

Cash Conversion Cycle

65 58 65 98 97 98 88 78 76

Appendix 24 – Liquidity Ratios Liquidity Ratios

2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

Current Ratio

2.54 3.21 4.48 3.33 3.27 3.57 3.55 3.27 3.25

Quick Ratio

2.14 2.69 3.78 2.87

2.63

2.62

2.83

2.88

2.68

Appendix 25 – Solvency Ratios

Solvency Ratios

2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

Total Debt excluding Financial Services segment

344,922 336,535 331,065 484,802 533,282 586,610 645,271 709,798 780,778

Debt-to- 6.7% 5.9% 5.2% 6.79% 7.08% 7.19% 7.24% 7.16% 7.18%

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assets percentage

Debt-to-equity ratio

0.29 0.24 0.21 0.27 0.32 0.30 0.31 0.33 0.33

Depreciation and amortization

71,343 79,269 93,407 90,872 99,954 112,445 124,353 137,875 153,229

Free Cash Flow

239,728 20,362 11,995 (119,408) 510,801 128,073 429,324 384,605 378,025

Appendix 26 – Income Statement Income Statement (USD thousands) 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019ERevenue:Merchandise sales 2,505,733 2,778,903 3,205,632 3,181,055 3,498,954 3,936,835 4,357,032 4,836,217 5,382,488 Retail 1,548,899 1,847,960 2,232,018 2,361,269 2,685,943 3,115,694 3,544,102 4,031,417 4,585,736 Direct 956,834 930,943 973,614 821,223 813,011 821,141 812,929 804,800 796,752 Financial services revenue 291,746 319,399 375,810 430,437 473,481 532,666 585,932 644,526 708,978 Other revenue 13,687 14,380 18,135 23,395 25,735 28,308 31,139 34,253 37,678 Total revenue 2,811,166 3,112,682 3,599,577 3,634,887 3,998,169 4,497,809 4,974,103 5,514,995 6,129,145 COGS 1,613,249 1,769,798 2,030,829 2,039,862 2,238,975 2,518,773 2,810,368 3,127,002 3,487,483 Gross Profit 1197917 1342884 1568748 1,595,025 1,759,195 1,979,036 2,163,735 2,387,993 2,641,661 SG&A 954,125 1,046,861 1,201,519 1,233,678 1,353,380 1,529,255 1,691,195 1,880,613 2,090,038 Impairment & Restructuring Charges 12,244 20,324 5,868 641 - - - - - Operating Profit (EBIT) 231,548 275,699 361,361 360,706 405,814 449,781 472,540 507,380 551,623 EBITDA 315,135 375,292 460,636 452,219 505,768 562,226 596,892 645,254 704,852 EDBITDA Margin 11% 12% 13% 12% 13% 13% 12% 12% 12%Deprciation and Amortization 71,343 79,269 93,407 90,872 99,954 112,445 124,353 137,875 153,229 EBT 214,467 261,714 343,528 345,287 390,314 429,281 447,040 479,880 521,623 TAX 71,847 88,201 119,138 125,366 134,658 150,248 156,464 167,958 182,568 Tax Rate 34% 34% 35% 36% 35% 35% 35% 35% 35%Net Profit 142,620 173,513 224,390 219,921 255,656 279,033 290,576 311,922 339,055 Diluted EPS 2.00$ 2.42$ 3.13$ 3.07$ 3.58$ 3.96$ 4.12$ 4.43$ 4.81$ Appendix 27 – Balance Sheet (USD in Thousands) Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended

2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

Cash and cash equivalents 304,679 288,750 199,072 145,059 402,774 370,218 474,703 681,247 721,045

Restricted cash of the Trust 18,296 17,292 23,191 28,989 26,380 36,404 40,044 44,049 48,454

Accounts receivable, net 47,127 46,081 42,868 45,011 47,262 49,625 52,106 54,712 57,447

Credit card loans 3,094,163 3,497,472 3,938,630 4,096,175 4,178,099 4,470,566 4,917,622 5,409,384 5,950,323

Inventories 494,828 552,575 644,883 935,080 944,431 1,114,429 1,092,140 1,157,669 1,273,435

Other current assets 152,188 186,858 137,868 202,316 207,373 179,204 197,124 216,836 238,520

Total current assets 4,111,281 4,589,028 4,986,512 5,452,632 5,806,318 6,220,445 6,773,740 7,563,897 8,289,224

Property and equipment, net 866,899 1,021,656 1,287,545 1,557,929 1,589,088 1,795,669 1,975,236 2,172,760 2,390,036

Other long-term assets 155,591 137,479 122,807 129,794 133,476 146,824 161,506 177,657 195,423

Total assets 5,133,771 5,748,163 6,396,864 7,140,355 7,528,883 8,162,938 8,910,483 9,914,314 10,874,683

Liabilties

Accounts payable 266,793 285,039 261,200 353,062 388,368 427,205 469,926 516,918 568,610

Current liabilties from Financial Services 1,200,815 955,003 639,089 1,116,518 1,144,066 1,046,301 1,143,121 1,469,123 1,627,494

Accrued expenses 143,695 180,906 204,073 158,087 231,862 255,048 280,553 308,608 339,469

Current maturities of long-term debt 8,387 8,402 8,418 11,175 11,593 12,752 14,028 15,430 16,973

Total current liabilities 1,619,690 1,429,350 1,112,780 1,639,043 1,775,889 1,741,307 1,907,627 2,310,080 2,552,546

Long-term time deposits 893,912 680,668 771,717 579,654 637,620 701,381 771,520 848,672 933,539

Secured long-term obligations of the Trust, less current maturities 977,500 1,827,500 2,452,250 2,503,052 2,753,357 3,028,693 3,331,562 3,664,718 4,031,190

Long-term debt, less current maturities 336,535 328,133 322,647 474,262 521,689 573,858 631,243 694,368 763,804

Total Liabilities 3,952,455 4,372,184 4,790,530 5,343,560 5,850,857 6,223,772 6,838,339 7,733,863 8,518,707

Stockholder's Equity 1,181,316 1,375,979 1,606,334 1,796,796 1,678,025 1,939,166 2,072,144 2,180,451 2,355,976

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Appendix 28 – Cash Flow Statement

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Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Nebraska, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock. CFA Institute Research Challenge

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Economy & Finance

Jeovany Zelaya - UNO Investment Research Report