Cato Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended April 30, 2022, not 2021 Q1 as stated in the request metadata. The comparative quarter ended May 1, 2021. Results are unaudited and cover 13 weeks.
Business context
Cato operates women’s fashion specialty retail stores and a proprietary credit-card business. Its retail operations include e-commerce; it reported 1,315 stores in 32 states at quarter-end.
Financial performance
| Metric | Quarter ended April 30, 2022 | Prior-year quarter |
|---|---|---|
| Total revenue | $206.7 million | $213.1 million |
| Retail sales | $204.9 million | $211.2 million |
| Income before taxes | $11.7 million | $23.8 million |
| Net income | $9.7 million | $20.7 million |
| Basic and diluted EPS | $0.46 | $0.92 |
| Operating cash flow | $(0.8) million | $44.5 million |
- Total revenue declined 3.0%; net income fell 52.9%. Gross margin dollars decreased 17.0% to $72.7 million.
- Cost of goods sold rose to 64.5% of retail sales from 58.5%, reducing gross margin rate to 35.5% from 41.5%. Management cited higher markdowns and freight costs, including higher fuel prices.
- SG&A was $60.4 million, or 29.5% of retail sales, versus $63.2 million, or 29.9%. Depreciation was $2.7 million versus $3.0 million. The effective tax rate increased to 16.7% from 12.9%.
- Cash and cash equivalents were $25.9 million and short-term investments were $120.0 million at April 30. Working capital was $107.8 million, down from $111.5 million at January 29.
- There were no revolver borrowings at quarter-end. The company reported lease liabilities of $171.0 million, including $63.2 million current. The new $35 million unsecured revolver, signed in May, extends through May 2027.
Changes, outlook and risks
- Management attributed lower same-store sales primarily to cooler, wetter weather, delayed merchandise shipments and inflation pressure on customers’ disposable income. E-commerce was less than 5% of first-quarter sales.
- Operating cash flow swung from $44.5 million provided to $0.8 million used, primarily reflecting lower earnings and a reduction in accounts payable and accrued liabilities, compared with the prior-year period.
- The company repurchased 609,928 shares for approximately $9.2 million and paid $3.6 million in dividends. The board declared a further quarterly dividend of $0.17 per share on May 19. There were 840,119 shares remaining under the repurchase authorization at quarter-end.
- Management expects approximately $22.6 million of fiscal 2022 capital expenditures, including distribution-center automation, and currently expects to close approximately 25 stores during the year. No earnings or sales guidance was provided.
- Management said cash, investments, operating cash flow and revolver availability should fund regular operating needs and expected capital spending for fiscal 2022 and the next 12 months. It also noted continuing uncertainty from COVID-19, global supply-chain disruption, inflation, higher freight and labor costs, consumer spending conditions, fashion trends and inventory risks.
- Management did not believe reasonably possible losses from pending routine litigation would materially affect the financial statements, but noted that an adverse outcome could affect results, financial condition or cash flows. The filing reported no material market-rate exposure and no change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and gross margin recover from weather, markdown, freight and supply-chain pressures, and how inventory levels and margins develop.
- Whether the projected $22.6 million capital program and planned store closures affect cash generation and operating performance as expected.
- Receipt of the remaining income-tax receivable: the company reported receiving $18 million after quarter-end and expected the remainder by the end of Q2 fiscal 2022.
- Compliance with financial covenants under the replacement revolver and ongoing liquidity needs, including lease obligations.
- Potential effects of continuing pandemic-related disruption, inflation and consumer-spending risks, as well as developments in routine litigation.