Business Context and Reporting Period
Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended October 31, 2009
Business Overview: The Company operates women's fashion specialty retail stores in 31 states, primarily in the southeastern United States. It also operates a credit segment offering a proprietary credit card. As of October 31, 2009, the Company operated 1,291 stores.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2009 | Nine Months Ended Oct 31, 2009 |
|---|---|---|
| Total Revenues | $193.8 million | $663.1 million |
| Retail Sales | $191.0 million | $654.4 million |
| Net Income | $3.0 million | $38.5 million |
| Diluted EPS | $0.10 | $1.31 |
| Gross Margin % (of Retail Sales) | 34.8% | 37.4% |
| Operating Cash Flow (9mo) | $61.1 million | |
| Cash & Equivalents | $32.6 million | |
| Short-term Investments | $147.5 million | |
| Working Capital | $193.1 million | |
| Debt | None outstanding (Credit facility: $35M available, $33.3M net capacity) |
Material Changes vs. Prior Period
- Revenue Growth: Total retail sales increased 6.2% in the third quarter and 2.8% for the nine-month period compared to the prior year. Same-store sales increased 4.0% (quarter) and 1.0% (nine months).
- Profitability: Net income rose significantly to $3.0 million for the quarter (from $0.8 million) and $38.5 million for the nine months (from $29.8 million). Income before taxes increased to $4.3 million (quarter) and $58.0 million (nine months).
- Cost Management: Cost of goods sold (COGS) as a percentage of retail sales decreased to 65.2% (quarter) and 62.6% (nine months) from 70.7% and 65.5% respectively, driven by lower markdowns and freight charges.
- Expense Increases: Selling, general, and administrative (SG&A) expenses increased as a percentage of sales to 31.7% (quarter) and 27.7% (nine months), primarily due to higher health insurance costs, payroll, and incentive-based compensation.
- Store Count: The Company operated 1,291 stores at period end, down from 1,305 in the prior year quarter. Net store activity for the nine months included 26 openings, 1 relocation, and 16 closures.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects to invest approximately $12.8 million in capital expenditures for fiscal 2009, including opening 36 new stores and relocating one.
- Dividends: The Board maintained the quarterly dividend at $0.165 per share (annualized $0.66).
- Liquidity: Management believes cash, investments, and operating cash flows are adequate to fund operations and dividends. The Company has a $35 million unsecured revolving credit facility with no borrowings outstanding.
- Investment Portfolio Risk: The Company holds a $3.5 million Auction Rate Security (ARS) that failed its last auction. It is classified as a long-term investment in "Other assets" and valued using Level 3 inputs due to liquidity uncertainty.
- Risk Factors: Risks include general economic conditions, consumer spending patterns, competitive pricing pressures, and inventory risks. The Company notes that forward-looking statements are subject to uncertainties regarding the credit market and recessionary conditions.
Investor Verification Checklist
- ARS Valuation: Verify the fair value methodology and potential liquidity risk associated with the $3.5 million failed Auction Rate Security.
- SG&A Trends: Monitor the sustainability of SG&A expense increases (health insurance, payroll) relative to sales growth.
- Store Performance: Assess the impact of net store closures on future same-store sales growth and total revenue.
- Inventory Levels: Review merchandise inventory levels ($101.1 million) against sales velocity to ensure markdown risks remain low.
- Tax Rate Volatility: Note the effective tax rate fluctuation (30.2% for Q3) due to state tax audit settlements and potential future changes in unrecognized tax benefits.