Goldman Sachs Downgrades Cabelas, Cites Poor Store Opening Strategies

In a report published Friday, Goldman Sachs analyst Stephen Tanal downgraded shares of Cabelas Inc (NYSE: CAB) to Sell from Neutral with a price target lowered to $49 from a previous $50 as the company's store opening plans are increasingly cannibalizing existing stores that are driving headwinds to the new space productivity.

"Cabelas has long discussed the degree to which its new retail stores cannibalize its Direct business, consistently speaking to a $2-3 million hit to Direct for each new store it opens," Tanal wrote. "As a result, its Direct business has generated some of the softest revenue growth of any Direct arm of a retail company we cover."

Tanal said that he is "confident" in the growth profile of the outdoor sporting goods space. However, Cabelas' store opening strategy could result in continued erosion in Return On Capital (ROC), thereby creating risk to same-store sales and earnings per share estimates.

Naturally, cannibalization signals "redundant investments" as new stores pull sales from the company's already existing revenue bases. In addition, new stores are expensive to open and operate while generating thin margins in the early stages.

Tanal concluded by estimating that 17 percent of targeted Year-one sales from 2015's openings will be derived from existing Retail and Direct revenues, compared with 12 percent in 2014 and seven percent in 2013. As such, these redundant investments will pressure return metrics.