Business Context and Reporting Period
Company: The Cato Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended November 1, 2003
Business Overview: The Company operates two reportable segments: Retail and Credit. As of November 1, 2003, the Company operated 1,082 stores.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Nov 1, 2003 | 9 Months Ended Nov 1, 2003 |
|---|---|---|
| Total Revenues | $157,129 | $550,332 |
| Net Income | $797 | $26,010 |
| Diluted EPS | $0.04 | $1.06 |
| Cash from Operations (9mo) | $43,910 | |
| Cash & Equivalents (Nov 1, 2003) | $17,086 | |
| Short-term Investments (Nov 1, 2003) | $40,036 | |
| Total Debt (Nov 1, 2003) | $29,000 ($6M current / $23M long-term) | |
| Working Capital (Nov 1, 2003) | $105,300 |
Material Changes vs. Prior Period
- Revenue Decline: Total retail sales decreased 3% in the third quarter and 1% for the nine-month period compared to the prior year. Same-store sales dropped 10% in the quarter and 8% for the nine months, attributed to difficult economic conditions, lower average retail sales, and fewer transactions per store.
- Profitability Compression: Net income for the third quarter fell to $797,000 from $5.4 million in the prior year. Net income for the nine months decreased to $26.0 million from $36.0 million. Income before taxes for the retail segment turned negative ($-143,000) in the quarter due to a $2.8 million retirement charge.
- Margin Pressure: Cost of goods sold increased to 70.9% of sales in the quarter (from 69.7%) and 68.3% for the nine months (from 66.6%), driven by lower sales volume and additional markdowns. SG&A expenses rose to 27.9% of sales in the quarter (from 25.6%) primarily due to the retirement charge.
- Liquidity Reduction: Cash and short-term investments decreased from $104.2 million to $57.1 million. This reduction was primarily due to the repurchase of Class B common stock from founders, funded by cash and a new term loan.
Guidance, Outlook, and Unusual Items
- Unusual Items: The Company recognized a $2.8 million expense (after-tax charge of $1.8 million) in the third quarter related to retirement agreements with founders Wayland H. Cato, Jr. and Edgar T. Cato, effective January 31, 2004.
- Capital Allocation: The Company repurchased 5,137,484 shares of Class B stock for approximately $95.6 million and 165,000 shares of Class A stock for $2.7 million. A new $30 million five-year term loan was secured to fund the Class B repurchase.
- Dividends: The quarterly dividend was increased by 7% to $0.16 per share in May 2003.
- Outlook: Management expects total capital expenditures of approximately $27 million for the fiscal year. The Company plans to open 87 new stores, relocate 24, and close 6 stores. Management believes current liquidity and cash flow will be adequate for operations.
- Accounting Change: The Company dismissed Deloitte & Touche LLP and engaged PricewaterhouseCoopers LLP as independent auditors for the fiscal year ending January 31, 2004.
Investor Verification Checklist
- Same-Store Sales Trend: Verify the sustainability of the 10% same-store sales decline and the impact of markdowns on future inventory valuation.
- Debt Covenants: Confirm continued compliance with financial ratios under the new $35 million revolving credit agreement and $30 million term loan.
- Founder Transition: Assess the operational impact of the retirement of the Chairman and a Board member effective January 2004.
- Auditor Change: Review the rationale for dismissing the previous auditor and the status of the new engagement with PricewaterhouseCoopers LLP.
- Capital Expenditures: Monitor the execution of the planned store openings and relocations against the $27 million budget.