Business Context and Reporting Period
Company: The Cato Corporation (Cato Corp)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 31, 2009 (Fiscal 2008)
Business Overview: Cato operates 1,281 women's fashion specialty stores in 31 states, primarily in the southeastern United States. The company operates under the banners "Cato," "Cato Fashions," "Cato Plus," "It's Fashion," and "It's Fashion Metro." It offers apparel and accessories at everyday low prices, with a significant portion of merchandise sold under private labels. The company also operates a credit card division.
Key Financial Metrics
| Metric (in thousands, except per share) | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Retail Sales | $845,676 | $834,341 |
| Total Revenues | $857,718 | $846,437 |
| Net Income | $33,634 | $32,319 |
| Diluted EPS | $1.15 | $1.03 |
| Gross Margin % | 33.5% | 31.4% |
| Operating Cash Flow | $71,567 | $74,164 |
| Working Capital | $164,639 | $144,114 |
| Total Assets | $435,353 | $420,792 |
| Long-Term Debt | $0 | $0 |
Note: Gross Margin % calculated as (Retail Sales - Cost of Goods Sold) / Retail Sales.
Material Changes vs. Prior Period
- Revenue Growth: Retail sales increased 1.4% to $845.7 million, driven by store development. However, comparable store sales decreased by 1%.
- Profitability: Net income rose 4.1% to $33.6 million. Gross margin dollars increased 8.2% to $283.6 million, aided by lower procurement costs and reduced markdowns.
- Expense Pressure: Selling, General, and Administrative (SG&A) expenses increased 7.9% to $227.6 million (26.9% of sales vs. 25.3% prior year), driven by incentive compensation, store development costs, and expenses related to closing underperforming stores.
- Store Count: The company closed 102 stores and opened 65 new stores, resulting in a net decrease of 37 stores (ending count: 1,281).
- Credit Segment: Credit income before taxes decreased $1.2 million to $3.1 million due to lower finance charge income and a $638,000 increase in the bad debt reserve.
Guidance, Outlook, and Risks
Outlook and Guidance:
- Store Development (Fiscal 2009): Plans to open approximately 55 new stores, relocate 5, close 25, and convert up to 20 "It's Fashion" stores to the "It's Fashion Metro" concept.
- Capital Expenditures: Planned investment of approximately $17.7 million for store openings, relocations, remodels, and technology.
- Tax Rate: Effective tax rate expected to be approximately 34.0% to 36.0% for fiscal 2009.
Management Commentary:
- Management emphasizes the impact of the "current recessionary economic and adverse credit market" on consumer confidence and spending.
- The company continues to review its store base to close underperforming locations.
Risks and Contingencies:
- Economic Conditions: Deterioration in the general economy and consumer confidence could materially adversely affect net sales.
- Supply Chain: Disruptions in the merchandise supply chain, particularly regarding imports from the Far East, could increase costs or delay shipments.
- Investment Liquidity: The company held $51.7 million in variable rate demand notes (VRDN) and auction rate securities (ARS). Of this, $3.5 million failed their last auctions as of January 31, 2009. The company expects these to be resolved within a year but notes the liquidity risk.
- Concentration: The Chairman, President, and CEO beneficially controls approximately 39% of the voting power.
Investor Verification Checklist
- Failed Auction Rate Securities: Verify the status and liquidity of the $3.5 million in failed ARS and the company's ability to classify them as short-term investments.
- Comparable Store Sales: Monitor the trend of comparable store sales, which declined 1% in fiscal 2008, amidst a recessionary environment.
- Store Closure Costs: Review the impact of closing 102 stores on SG&A expenses and future profitability.
- Bad Debt Reserves: Track the allowance for doubtful accounts, which increased significantly ($638,000 increase in reserve) due to the credit segment's exposure.
- Capital Allocation: Confirm the execution of the planned $17.7 million capital expenditure program and the success of the new "It's Fashion Metro" store concept.