Cato Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended February 2, 2013 (53 weeks), compared with the 52-week year ended January 28, 2012. Although the request metadata says “2011 Q4,” the supplied filing is an annual report for FY2012; it includes fourth-quarter data but is not a Q4-only filing. Cato operated 1,310 fashion specialty stores in 31 states, primarily in the southeastern United States.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Retail sales | $933.8 million | $920.6 million | +1.4% |
| Total revenue | $944.0 million | $931.5 million | +1.3% |
| Gross margin dollars, excluding depreciation | $351.8 million | $346.4 million | +1.6% |
| Income before taxes | $99.0 million | $100.3 million | −1.3% |
| Net income | $61.7 million | $64.8 million | −4.9% |
| Diluted EPS | $2.11 | $2.21 | −4.5% |
| Cash from operating activities | $80.4 million | $81.3 million | −$1.0 million |
| Capital expenditures | $45.2 million | $35.9 million | +$9.3 million |
- Comparable-store sales declined 4.0%; management attributed the overall sales increase mainly to new-store sales, partly offset by the comparable-store decline. The extra fiscal week also affects year-over-year comparisons.
- Cost of goods sold was 62.3% of retail sales versus 62.4%; gross margin was approximately 37.7% versus 37.6%. SG&A rose to 26.2% of retail sales from 26.0%. Net margin was 6.6% of retail sales versus 7.0%.
- The effective tax rate increased to 37.7% from 35.3%, reflecting higher state taxes and correction of an immaterial prior-period error.
- At year-end, cash and cash equivalents were $31.1 million and short-term investments were $157.6 million; working capital was $230.6 million, down from $272.1 million. Current assets were $390.2 million against current liabilities of $159.6 million.
- No borrowings were outstanding under the $35 million unsecured revolving facility. It was committed through August 2013, and the company was seeking an extension. The filing reports no funded debt balance.
- Cash dividends paid were $87.2 million, or $2.98 per share, including a $1.00 special dividend and an accelerated $1.00 dividend. Cash declined to $31.1 million from $34.9 million; cash, short-term investments and restricted cash/investments totaled $194.6 million versus $246.0 million.
Changes, outlook and notable items
- Store count increased from 1,288 to 1,310: 34 stores opened and 12 closed; nine were relocated. Average sales per store rose to $722,000 from $716,000, while sales per square foot fell to $161 from $162.
- For FY2013, management planned approximately $43.8 million of capital expenditures, 65 new stores, up to 15 closures, 15 relocations and 10 remodels. Planned openings included 40 Cato, five It’s Fashion, five It’s Fashion Metro and 15 Versona stores; two It’s Fashion-to-Metro conversions were included in the plans. Management stated available liquidity and operating cash flows should fund planned expenditures, dividends and operating needs.
- FY2012 investing activities provided $2.1 million, principally because proceeds from sales of short-term investments exceeded purchases; property and equipment spending increased. Financing activities used $86.3 million, principally for dividends.
- Management recorded out-of-period adjustments in FY2012: $1.2 million of landlord insurance expense relating to periods before FY2008, $1.1 million of FY2011 federal income tax expense, and $0.6 million of state income tax expense, mostly relating to FY2011. The company judged the errors immaterial to the affected periods.
- Store impairment charges were $2.0 million, versus de minimis charges in the prior two years. A $3.5 million auction-rate security remained illiquid; it was valued at par using Level 3 assumptions, with timing of future liquidity uncertain.
- Unrecognized tax benefits were $8.9 million, including $6.2 million that would affect the effective tax rate if recognized. No pending litigation was expected by the company to materially affect its financial position, results or cash flows. The auditor issued an unqualified opinion and concluded internal control over financial reporting was effective.
Principal risks and contingencies
- Fashion-trend misjudgments, markdowns, pricing competition, consumer spending weakness and weather-related disruptions could pressure sales and margins.
- Overseas sourcing exposes the company to supply-chain interruptions, tariffs, currency movements and higher freight, energy, labor or merchandise costs. Store distribution is centralized in one Charlotte facility.
- Retail leases are significant: disclosed minimum operating-lease payments totaled $182.9 million, including $62.6 million due in FY2013. Lease obligations and self-insurance estimates are important financial exposures.
- Other risks include store expansion execution, information-system or data-security failures, labor and health-care costs, regulatory and litigation matters, and valuation or liquidity risks in investments. The failed auction-rate security’s valuation depends on management assumptions.
Investor verification priorities
- Confirm the reporting-period distinction and assess the 53rd week’s impact on sales and comparisons; examine the 4.0% comparable-store sales decline.
- Review the detailed cash and investment portfolio, including restricted balances and the illiquid $3.5 million auction-rate security, rather than treating all reported investments as readily available cash.
- Verify the timing and sustainability of the unusually high $2.98-per-share dividend, the planned FY2013 capital program, and the extension of the revolving credit facility.
- Review the material lease commitments, store impairment assumptions, $8.9 million uncertain-tax-position balance and the disclosed prior-period corrections.