Cato Corporation — Form 10-Q Summary
Reporting period: The filing is for the quarter ended August 2, 2014, and reports the three and six months ended August 2, 2014 versus the comparable 2013 periods. This differs from the request metadata’s “2013 Q2.”
Business context and financial performance
Cato operates women’s fashion specialty stores and a proprietary customer credit-card business. It had 1,328 stores in 32 states at quarter-end.
| Metric | Three months ended Aug. 2, 2014 | Three months ended Aug. 3, 2013 | Six months ended Aug. 2, 2014 | Six months ended Aug. 3, 2013 |
|---|---|---|---|---|
| Total revenue | $246.5 million | $231.7 million | $531.2 million | $501.4 million |
| Net income | $15.7 million | $14.8 million | $45.7 million | $45.6 million |
| Diluted EPS | $0.56 | $0.51 | $1.61 | $1.56 |
| Gross margin on retail sales | 38.9% | 36.8% | 40.4% | 39.2% |
| Net margin on retail sales | 6.4% | 6.4% | 8.7% | 9.2% |
Quarterly retail sales rose 6.3% to $243.8 million; comparable-store sales increased 3%. Six-month retail sales rose to $526.2 million, also with comparable-store sales up 3%. E-commerce was less than 1% of six-month sales.
Cash flow, liquidity and debt
- Six-month operating cash flow was $83.5 million, up from $74.3 million. Investing activities used $11.4 million; financing activities used $59.3 million, including $42.6 million of share repurchases and $17.1 million of dividends.
- Cash and cash equivalents were $92.2 million and short-term investments were $158.2 million at August 2, 2014. Working capital was $254.5 million.
- No borrowings were outstanding under the $35 million unsecured revolving facility, committed through August 2015; the company reported compliance with its covenants. The filing reports no outstanding debt borrowings.
- Capital expenditures were $14.0 million for the first six months. Management expected approximately $36.5 million for fiscal 2014.
Material changes and management commentary
- Quarterly net income increased 6%; diluted EPS increased 10%, helped by share repurchases, which management estimated added $0.03 per share in the quarter. Six-month net income was nearly flat, while diluted EPS increased 3%; repurchases contributed an estimated $0.05 per share.
- Cost of goods sold declined as a share of retail sales, which management attributed chiefly to higher sales of regular-priced merchandise. SG&A increased to 28.0% of retail sales in the quarter from 25.7%, mainly due to higher incentive compensation and point-of-sale equipment rollout costs.
- The effective tax rate was 36.8% for the quarter versus 36.0%, with the increase attributed primarily to the absence of the Work Opportunity Tax Credit, which had not been renewed by Congress.
- Management expected about 46 store openings, six relocations and 17 closures in fiscal 2014. The board maintained the quarterly dividend at $0.30 per share on August 28, 2014.
Risks, contingencies and unusual items
- Management cited risks including economic and consumer-spending conditions, competition and pricing, fashion-trend forecasting, buying patterns, adverse weather and inventory-demand shifts. It said cash, investments, operating cash flow and available credit should fund needs for the next 12 months and foreseeable future.
- A $3.1 million auction-rate security continued to fail its auction and is valued using significant unobservable inputs. Management’s valuation assumes eventual liquidity; it cautioned that the estimate is sensitive to assumptions and market conditions.
- The filing revised the comparative six-month 2013 cash-flow presentation for investment activity, reducing reported operating cash flow and investing cash flow by $1.4 million each; management said the revision was not material.
- No legal proceedings were reported as applicable. The filing states that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing covers fiscal Q2 2014, not Q2 2013.
- Track whether comparable-store sales growth and regular-price merchandise sales continue, and whether SG&A growth moderates.
- Compare actual fiscal 2014 store activity and capital expenditures with management’s stated plans.
- Monitor share repurchases, dividends and cash generation, and verify that liquidity remains sufficient for planned investment and shareholder returns.
- Review subsequent developments in the failed auction-rate security and the assumptions underlying its fair value.