The Return of the Initial Public Offering

After a heyday in the mid- to late 1990s, followed by a drop off during the past three years, it seems that initial public offerings (IPOs) are making a comeback. During the first quarter of 2004, 33 companies debuted on U.S. market exchanges, up from only five companies during the same period last year. According to financial services firm Thomson Financial, last year the market saw only 83 new listings raising $16 billion, the slowest year for IPOs since the 1970s.

And this year, catalogers are getting back in on the IPO action. Sidney, NE-based outdoor sporting goods giant Cabela’s and San Francisco-based modern furnishings and decor cataloger/retailer Design Within Reach both filed IPOs in March.

In its filing, the $1.4 billion Cabela’s said its goal was to raise $230 million to open additional stores. The family-owned business currently operates nine stores, in Michigan, Minnesota, Nebraska, Pennsylvania, South Dakota, and Wisconsin.

Started in 1961 from Dick and Mary Cabela’s home in Chappell, NE, Cabela’s originally sold Japanese fishing lures by mail. During the past four years, Cabela’s has developed a retail arm that has created huge destination stores: The tenth store, which will be 175,000 sq. ft., will open later this year in Wheeling, WV.

‘A good story’

Mal Appelbaum, managing partner of New York-based investment bank and financial consultancy Appletree Advisors, believes that the Cabela’s IPO is well timed. “There’s been a dearth of IPOs in the past few years,” he says, adding that investors may be enticed by the recovering Dow and Nasdaq, along with Cabela’s solid direct marketing and retail presence. “The Cabela’s story — a family business with humble beginnings that rose to the top of the direct marketing industry — is a good story, and I think investors will certainly be interested.”

Even more than a great story, investors love profits, and Cabela’s should be able to deliver on that front as well. In its SEC filing, the company reported an 18% rise in annual operating income over the past five years. Operating income in 2003 was $84.9 million.

Other industry watchers applaud the Cabela’s IPO as well. “The Cabela family will still have some ownership, but now there is an exit strategy,” says Ken Packer, managing partner for Waukee, IA-based investment bank Financial Advisory Partners. “Their move was a given, now that overall revenue has grown and market conditions are improving.”

Compared with the 43-year-old Cabela’s, six-year-old Design Within Reach is a newcomer. Still, the company hopes to bring in as much as $57.5 million in its IPO.

Founded in 1998 by Robert Forbes Jr., DWR has been run by CEO Wayne Badovinus — a veteran of Williams-Sonoma and Eddie Bauer — since 2000. According to its SEC filing, sales for the year ended Dec. 27 were $81.1 million, up more than 40% from $57.3 million in 2002. DWR’s earnings last year were $2.96 million, compared with $2.2 million in 2002. The company plans to use part of the IPO money to open additional stores — it currently has 23 — and to repay its bank credit facility.

Not a sure thing

The catalog industry hasn’t seen this kind of IPO activity in nearly four years, when it seemed any business with a semblance of an Internet connection lined up at the Securities and Exchange Commission. Marketers as diverse as wine marketer Geerlings & Wade, catalog/retail holding company Trendlines, and multititle mailer Brylane, to name just a few, went public to raise cash for growth or acquisitions.

Of course, being public has its downside. When the markets collapsed in 1999 and 2000, some publicly traded marketers were left with little more than a ticker symbol and demanding shareholders who wanted growth at a time when it wasn’t possible. Geerlings & Wade’s stock is now delisted, Trendlines is defunct, and Brylane was purchased in 1998 by Pinault-Printemps-Redoute, itself a publicly traded company on a French exchange.

One of the more recent catalogers to go public, gifts mailer RedEnvelope, is struggling to keep up with analysts’ expectations. The San Francisco-based company, which debuted on Nasdaq in September, fell short of its sales and earnings estimates for its fiscal third quarter ended Dec. 28. RedEnvelope cited inventory problems as the primary reason for the shortfall. Further, RedEnvelope said it expected lower revenue and earnings numbers for its fiscal fourth quarter and year than analysts predicted. The company’s stock plummeted from its high of $16.98 on Dec. 5 to $8.89 on April 6.

Although going public is never a guarantee for success, most believe that Cabela’s and DWR will fare well. As Packer says, “The market has been strong for the past couple of months. It’s a great time for these companies to be doing this.”

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