When a company issues stock to the public, it’s in for a boatload of money, but also opens itself up to constant scrutiny from investors.
Cabela’s is learning that the hard way.
The infusion of money that allowed Sidney, Nebraska-based Cabela’s to expand rapidly across the United States and Canada came with strings: Once it went public in 2004, Cabela’s would have to open its books for investors and Wall Street analysts to examine store sales, company profitability and other things it could have largely kept behind closed doors as a private, family-owned company.
Those books recently have shown flagging sales, a strong credit-card business and a portfolio of valuable real estate. That combination attracted an activist investor that bought up a bunch of Cabela’s shares and is now pressing for change.
That activist could have never made a mark if Cabela’s had stayed private, as it was when Mary and Dick Cabela started it at their kitchen table in the 1960s.
So why would Cabela’s — or any company — expose itself to such scrutiny? When it comes to taking a business public — especially a family-owned retail business — it’s all about the money.
Finance experts say no business would subject itself to the scrutiny of the public markets if it weren’t for the influx of cash that an initial public offering can generate. Cabela’s offered its shares to the public in 2004. Stock sold at about $20 a share as the bell opened on the stock market, raising $156.3 million the first day it was traded.
The company said it wanted to use the money to pay down debt and to build more stores — and build more stores it did. Cabela’s now operates 64 retail stores, up from just nine stores in 2004. In the United States and Canada, the company now employs about 20,000.
For a time, investors greeted that expansion with open arms, sending Cabela’s stock higher and higher. Just two years ago the stock was trading for more than $70 a share. But over the past year the stock has dropped sharply as sales have slowed and competitors have mushroomed.
Cabela’s now faces the possibility of making tough changes at the hands of New York investor Elliott Management Corp., which announced an 11 percent stake in the company last month.
Activist investors like Elliott often are on the hunt for underperforming companies with sagging stock prices, and falling into their cross hairs is just one of the risks of running a publicly traded company. These investors typically amass shares in a company and then press for changes, hoping those changes will lead the stock price to rise enough that they can sell their stake for a profit.
Omaha’s ConAgra Foods came under pressure from another activist investor, Jana Partners, this year. Soon after, the company announced that it would slash its payroll and move its headquarters to Chicago.
Under pressure from activist Elliott, Cabela’s now may be forced to sell itself as a whole, or sell parts of the company — including its real estate and credit card business.
Reuters news agency reported this month that Bass Pro Shops could be considering buying Cabela’s as the Nebraska company faces uncertain waters at the mercy of the activist investor. Reuters cited unnamed sources, and the story couldn’t be independently confirmed. Bass Pro wouldn’t comment.
Cabela’s didn’t comment for this story.
An interesting side note: Bass Pro itself — back in 2004, when Cabela’s went public — had been rumored in the financial press to be considering going public. It didn’t. The Springfield, Missouri-based company, which has 94 stores in the United States and Canada, remains private.
“That rumor has floated for quite some time,” Larry Whitely, a spokesman for Bass Pro Shops, told Reuters in 2004. “We’re going to stay privately held.”
Cabela’s was able to get so much cash from its 2004 offering because publicly traded companies have much higher valuations than those of privately held companies, said Gordon Tunstall, president and founder of Tampa, Florida-based Tunstall Consulting, which helps companies through the IPO process.
For example, a company going public might be valued at 80 times what its earnings are today. If it were valued at $10 million in the private market, it would be valued at $800 million by the public market.
“You can raise money privately, but not at that dimension,” Tunstall said.
Public companies have a wider pool of investors to draw from and, thus, easier access to capital. Most people don’t hold private companies in their retirement accounts, for instance, but they do hold shares of public companies.
But the capital comes at a price. Beyond the threat of activist investors, running a publicly traded company is “a totally different animal” from running a private company, said Jim Zipursky, a middle-market investment banking adviser with Corporate Finance Associates in Omaha.
The costs associated with filing an initial public offering and following Securities and Exchange Commission regulations can be astronomical. The SEC regulates publicly traded companies.
Zipursky said that when he started in investment banking 25 years ago, the cost of being public was estimated at $200,000 to $250,000 per year. “Now with all of the other regulations that have come into play, we figure that ... is $2 million,” he said.
That’s partially because of the Sarbanes-Oxley Act of 2002, which added a slew of new regulations for publicly traded companies to follow. It caused many companies to go private, said Kathleen Farrell, chairwoman of the University of Nebraska-Lincoln’s finance department.
The Great Recession also may have played a part in fewer companies going the IPO route over the past 10 years or so, she said.
Public companies must disclose their future plans to the Securities and Exchange Commission — and thereby to their competitors — and answer to Wall Street investors when it comes to falling sales or unmet earnings expectations.
Sometimes they don’t want to deal with those headaches, Tunstall said.
“Why do they want to do it? Only because it’s the cheapest form of capital they can have to grow, and it is far — way beyond — a private valuation or a private raise of capital in the marketplace,” Tunstall said.
Still, companies that go public can expose themselves to what some on Wall Street deem “quarteritis”: the quarter-to-quarter short-termism that some contend keeps companies focused on the small stuff at the expense of bigger-picture thinking. For example, slashing a bunch of jobs to boost quarterly profits rather than thinking ahead and making a big purchase that will help grow a business, but eat into profitability in the short term.
That “quarteritis” might be one reason Cabela’s stock price has taken a hit over the past year. It was down about 37 percent so far this year before Elliott announced its stake.
“Public companies now live quarter to quarter to quarter to quarter,” said Zipursky, the Omaha investment banker. Investors “want to know ‘What have you done lately, and where’s your stock price now?’ ”
Tunstall, the IPO consultant, agreed: “When you’re making decisions about your company, a lot of decisions have to be more short-term than when you were a private company, because every quarter you’re evaluated on your performance.”
At Cabela’s, same-store comparable store sales — often used by Wall Street to measure a retailer’s growth — have been suffering for about a year.
In October the company’s earnings missed the expectations of Wall Street analysts. Comparable store sales were down 4.2 percent. That same day, the company announced cost-cutting measures and also scaled back its growth plans. Its stock tanked, dropping more than 17 percent in one day.
Less than a week later, activist Elliott announced its stake.
“Retail is complicated at the best of times, but right now there’s more unknowns than ever before,” said Justin Bailey Craig, clinical professor of family enterprise and co-director of the Center for Family Enterprises at Northwestern University’s Kellogg School of Management.
Back in Sidney, some people wonder whether Cabela’s decision to go public was a mistake.
“It’s kind of a shame that they went public the way they did,” said Sidney hotelier Wayne Waller.
Wall Street types “sell people on ‘Well, you can make more money,’ but sometimes it’s a little smarter to exercise the wisdom to show restraint,” said Waller, who owns Sidney’s Sleep for Less Motel.
Aside from raising capital to expand the business, family-owned companies like Cabela’s may have other motivations for taking the company public.
In a privately held, family-owned business, some members of the family may want to sell their stakes in the company; others might want to build more stores and continue to have a role in the company. When a company is taken public, it allows each individual shareholder to decide what to do with his or her ownership stakes: cash out and let new owners take over, or hang onto shares and stay involved in the company.
Some publicly traded companies on the S&P 500 are still effectively controlled by families, which sometimes have a certain class of stock that gives them extra voting rights, or they simply hold a majority of the company’s stock. Some of those include Dick’s Sporting Goods, cosmetics company Estée Lauder and the New York Times Co.
As of April, Jim Cabela, chairman of Cabela’s board of directors, owned nearly 16 percent of the company, according to government filings. The Cabela’s Family LLC owned 8 percent.
Jim Cabela declined to comment for this story. He referred questions to company Chief Executive Tommy Millner, who didn’t respond to multiple messages. Mary Cabela, whose husband, Dick, died in 2014, couldn’t be reached for comment.
There’s another aspect of family ownership that has little to do with Wall Street expectations: A family’s view of a company often differs from that of investors, said Craig, the Northwestern professor. Tradition may trump changes necessary to improve the company.
That might be seen in Sidney, where 2,000 people work for the company in a town of around 6,800.
The effect that family-owned companies like Cabela’s can have on their headquarters cities, especially in a company town like Sidney, is “immense,” Craig said.
Such companies are “the backbone of the economy” in their hometowns, Craig said. For such companies, success might be measured not in a share price but in the people it employs and the local schools and nonprofits it supports.
“In a town like Sidney, it’s evident that there is a huge reliance on the success of this company or the sustainability of this company,” Craig said. “And there’s a lot more at stake than there would be with a faceless public entity.”
Another faceless entity — investors in the stock market — know there’s a lot at stake, too. Their actions might decide the fate of both the company and the city.
World-Herald staff writer Barbara Soderlin contributed to this report.
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