Cato Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 4, 2019, compared with the 13 weeks ended May 5, 2018. The request metadata says “2018 Q1,” but the filing is for fiscal 2019 Q1.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Retail sales | $228.1 million | $236.0 million | Down 3.4% |
| Total revenue | $230.4 million | $238.3 million | Down 3.3% |
| Income before taxes | $25.6 million | $26.6 million | Down 3.8% |
| Net income | $21.3 million | $23.4 million | Down 9.2% |
| Diluted EPS | $0.87 | $0.94 | Down 7.4% |
| Operating cash flow | $14.7 million | $31.6 million | Down $17.0 million |
- Cost of goods sold declined to 59.7% of retail sales from 60.3%; gross margin dollars were $92.0 million, down 1.9%. Management attributed the improved cost ratio mainly to higher regular-price sales.
- SG&A was approximately flat at $66.0 million, but rose to 28.9% of retail sales from 27.9%, primarily due to higher incentive compensation and closed-store expense. Depreciation was $3.8 million versus $4.2 million.
- Effective tax rate rose to 16.9% from 11.9%, reflecting higher taxable interest income, nondeductible compensation, fewer state tax credits, and the prior-year release of uncertain-tax-position reserves.
Liquidity, debt, and capital
- At May 4, 2019, cash and cash equivalents were $36.5 million and short-term investments were $174.4 million. Working capital was $180.9 million, down from $229.5 million at February 2, 2019; the company said lease accounting adoption increased current liabilities.
- No borrowings were outstanding under the $35 million unsecured revolving credit facility. The facility was extended through May 2022, and the company reported compliance with its financial covenants. The filing reports no conventional debt balance.
- Operating cash flow fell mainly because of lower net income and a decline in accrued liabilities from year-end. Capital expenditures were $1.0 million; investing cash flow was $7.9 million provided, principally reflecting investment sales. Financing cash use was $10.7 million, including $8.1 million of dividends and $2.8 million of share repurchases.
- The board maintained the quarterly dividend at $0.33 per share. The company repurchased 208,041 shares at an average $13.62 and had 1,810,961 shares remaining under its authorization.
Material changes, outlook, and risks
- Same-store sales declined 1.0%; lower total sales also reflected stores closed in 2019 that had been open in the prior-year quarter. The company operated 1,302 stores versus 1,351 at the end of the comparable prior-year quarter and closed nine stores during the quarter.
- Management expected approximately 12 store openings and 50 closures in fiscal 2019, and approximately $13 million of capital expenditures. It said cash, investments, operating cash flow, and available credit should fund operating needs, planned capital expenditures, dividends, and repurchases over the next 12 months.
- Adoption of ASC 842 lease accounting on February 3, 2019 added right-of-use assets and lease liabilities, increasing reported total assets and liabilities by approximately 40% at adoption, with no opening retained-earnings impact. At May 4, right-of-use assets were $179.8 million; current and noncurrent lease liabilities totaled $191.7 million.
- Management cited risks including consumer spending and confidence, competition and pricing, fashion-trend forecasting, weather, inventory liquidation and margins, and changes in laws or regulations, including tariffs. Routine litigation was disclosed; management did not expect currently pending matters to materially affect the financial statements, while noting adverse outcomes remain uncertain.
Important facts for investors to verify
- Whether subsequent same-store sales, store closures, and inventory trends support the outlook, given declining sales and planned net store reductions.
- Whether operating cash flow recovers from the year-over-year decline and supports dividends, repurchases, and planned capital spending.
- The effect of lease obligations on future occupancy costs, cash commitments, and working-capital comparisons after ASC 842 adoption.
- Whether the higher effective tax rate persists and how consumer, fashion, weather, tariff, and litigation risks develop.