It was as if investors had camped out all night in anticipation of Cabela's (NYSE: CAB) second-quarter earnings report. The company's stock shot up nearly 20% within the first hour of trading as impressive results sparked a sense of optimism for investors interested in the retailer. But was the stock surge justifiable?

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Despite being faced with softer sales, which rose 4.4% to $549.2 million overall, management diligently cut unnecessary costs, effectively managed inventory and improved overall operating efficiency. The hard work paid off as earnings soared 27%.

Even more impressive, merchandise gross margin increased 62 basis points and operating margin in the retail segment improved 310 basis points.

Tightening The Belt
Given the overall retail landscape and credit environment, I personally am most impressed with management's ability to tidy up the balance sheet. Cabela's cash balance increased $392.6 million from the second quarter of last year. Further, it reduced its debt level by 22.7%.

It's more important than ever for retailers to rely on cash reserves, rather than credit, to operate their businesses. And as Cabela's results show, ridding debt can help firms leverage their fixed expenses against sagging sales. For example, Cabela's was able to reduce its interest expense about 22% by deflating its debt level.

But Cabela's deserves a higher valuation for more reasons than a solid second-quarter report. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

The Tortoise and the Hare
Boasting its massive "tourist attraction" like stores, the company's retail concept is uniquely different from its peers, like Gander Mountain (Nasdaq: GMTN). An even more distinct characteristic is its unique approach to controlled growth. While the majority of the retail industry chased credit card obsessed Americans and wildly expanded operations over the past few years, Cabela's maintained a meticulous expansion method. In total, there are only 29 Cabela stores, about two-thirds of which were opened starting in 2005.

This simple approach to growth has proven beneficial. While many retailers are learning that the "build a store in every strip mall" method has tarnished brands and ultimately wasted capital, Cabela's has been able to preserve its brand name.

By not building a huge store base, Cabela's is still a "special" place to visit since you can't find one on every street corner. In comparison, competitors Dick's Sporting Goods (NYSE: DKS), Big Five Sporting Goods (Nasdaq: BGFV) and Hibbits (Nasdaq: HIBB) have hundreds of stores.

By focusing on existing store sales, management has been able to successfully drive same store sales rather than rely on new stores. This quarter, retail comps rose 6.1%.

Missing the Street's Radar Screen
Despite possessing a strong brand name, sound business model and unique retail strategy, Cabela's hasn't hit Wall Street's radar screen. Eight out of eleven analysts have issued hold or underperform ratings on Cabela's.

Even after yesterday's surge in price, the stock is still selling at less than 15 times trailing earnings; a reasonable price given the firm's financial condition.

The Bottom Line
I think the retail industry still has a long and painful de-leveraging period to go through. This process will kill off many retail concepts. But with its slow and steady growth strategy and robust financial condition, Cabela's looks primed to survive. While I would advise waiting for a slight pull back from the giant upswing in price, I think Cabela's is a great retail play.

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Tickers in this Article: CAB, DKS, HIBB, GMTN, BGFV

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