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Module 2 – Reformulation. Wilbur Benitez January 22, 2014. Cabela’s Overview . Was founded in 1961 and has been a leader in outdoor gear since Leading retailer in hunting, fishing and outdoor gear Went public in June 2004 Market Cap of 4.79B (2 nd in the industry)

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module 2 reformulation

Module 2 – Reformulation

Wilbur Benitez

January 22, 2014

cabela s overview
Cabela’s Overview

Was founded in 1961 and has been a leader in outdoor gear since

Leading retailer in hunting, fishing and outdoor gear

Went public in June 2004

Market Cap of 4.79B (2nd in the industry)

Total revenues of 3.1M in 2012

Currently going through an expansion

reformulation purpose
Reformulation Purpose

Separate enterprise operations from non-enterprise operations

Enterprise operations – business/production activities undertaken by the company

Allows us to focus on the core of the business when performing our valuation analysis

cabela s enterprise operations
Cabela’s Enterprise Operations
  • Merchandise Sales
    • Hunting equipment
    • General outdoors
    • Clothing and footwear
  • Financial Service Revenue
    • Cabela’s Club VISA reward card
  • Other Revenue
    • Hunting and fishing services
identification of net enterprise assets
Identification of Net Enterprise Assets
  • We simply go through the balance sheet line by line and determine if the item is related to the enterprise operations
    • This is fairly straight forward if we understand the business of the company we are dealing with
current assets
Current Assets
  • Cash
    • We need to estimate how much cash is required to fund normal operations
    • Purchased of inventory, retail store improvements, etc.
    • General rule is 2% of revenue
  • Restricted cash of trust
    • Needed to pay interest to investors, loan servicing fees, etc.
  • Accounts receivable
  • Credit card loans
    • Related to Cabela’s Club VISA reward card
  • Inventories
  • Prepaid expenses and other current assets
    • Deferred catalog cost
    • Financial services – accrued interest
  • Income tax receivable and deferred income tax
non current assets
Non-current Assets
  • PPE
    • Needed for enterprise operations
  • Land held for sale
  • Economic development bonds
  • Other assets
    • Financial services new account costs
economic development bonds
Economic Development Bonds

Issued by local or state government in order to encourage the construction of new stores in certain locations. Cabela’sutilizes these bonds to reduce the cost of constructing new stores.

Bonds are typically repaid through tax revenues.

If revenues are not sufficient to cover the principal and interest, then the fair value must be adjusted. The adjustment is made in order to fairly depict that Cabela’s will not benefit from the entire government assistance program.

current liabilities
Current Liabilities
  • Account payable
  • Gift instruments, credit card rewards
  • Accrued expenses
  • Time deposits
    • Used to fund credit operations
  • Current maturity of secured variable funding for Trust
    • Due to funding of credit operations
  • Current maturity of secured long-term obligations for the Trust
    • Due to funding of credit operations
  • Current long – term debt
  • Income tax payable
non current liabilities
Non-current Liabilities

Long term time deposits

Secured long-term obligations of the Trust

Long-term debt, less current maturities

Deferred income taxes

Other long term liabilities

net financial liabilities
Net Financial Liabilities

All balance sheet items are related either to enterprise or financial operations

NFL will be useful in equity valuation

enterprise profit after tax
Enterprise Profit After Tax

Similar processes but instead of the balance sheet we use the income statement

We need to separate the enterprise earnings from the financing earnings (expenses)

revenue and expenses
Revenue and Expenses
  • Merchandise sales
  • Financial services revenue
  • Other revenue
    • Hunting and fishing services
  • Merchandise cost
  • Cost of other revenue
    • Credit card revenue
  • SG&A
  • Impairment and restructuring charges
    • Land held for sale
    • PP&E
  • Interest expense
  • Other non-operating income
    • This income is primarily from interest earned on our economic development bonds (financing)
other comprehensive income
Other Comprehensive Income

Effect of adopting ASC Topics 810 and 860

Foreign currency translation adjustments

Unrealized gain (loss) on economic development

Cash flow hedges

tax calculation
Tax Calculation
  • Since the tax on the income statement reflects a tax shield created by interest expense, we need to make adjustments
  • Earnings from continuing operations
    • Start with total reported earnings
    • Apply interest expense to financing operations
    • Compute enterprise earnings
  • Income taxes on continuing operations
    • Begin by using total income tax on income statement
    • Calculate tax shield
    • Compute enterprise tax
  • Earning from continuing operations
    • Subtract tax from earnings
financing expense after tax
Financing Expense After Tax

Again, we have indirectly made calculations for financing related activities

FEAT will be needed when determining the cost of capital

final notes
Final notes
  • Although much of the needed information can be found in the 10K, company management has the most information available, thus they have the ability to perform a much more detailed analysis
  • Going forward it is important to consider additional factors when performing valuation
    • Sales for Cabela’s could be dramatically lower if firearm regulations become too stringent. If firearm regulation is a major concern for an investor, a more detailed analysis could be performed by excluding firearm sales.