The Cato Corporation — Form 10-Q Summary
Period clarification: The request identifies “2015 Q3,” but the supplied filing is for the quarter ended October 29, 2016, with comparisons to October 31, 2015. Results below reflect the filing’s actual period.
Business context and reporting period
Cato operates women’s apparel, footwear and accessories retail businesses and a proprietary credit-card operation. It reported 1,372 stores across 33 states at October 29, 2016. E-commerce represented less than 2% of sales for the first nine months. The interim statements are unaudited.
Key financial metrics
| Metric | Three months ended Oct. 29, 2016 | Nine months ended Oct. 29, 2016 |
|---|---|---|
| Total revenue | $209.3 million | $736.1 million |
| Net income | $8.3 million | $60.0 million |
| Diluted EPS | $0.30 | $2.17 |
| Operating cash flow | Not separately provided for the quarter | $46.3 million |
Retail sales were $207.0 million for the quarter and $729.2 million for nine months. Gross margin dollars were $73.4 million and $282.5 million, respectively. Cost of goods sold was 64.5% of retail sales in the quarter and 61.3% year to date; SG&A was 32.8% and 28.3%, respectively. Net income margin was 4.0% of retail sales for the quarter and 8.2% year to date.
At October 29, cash and cash equivalents were $32.8 million, short-term investments $210.2 million, working capital $288.9 million, and total stockholders’ equity $411.7 million. The company had no outstanding revolving-credit borrowings and reported no debt on its balance sheet. Its unsecured facility allows borrowing up to $35 million and matures in August 2018; the company was in covenant compliance.
Changes versus comparable prior periods
- Quarterly retail sales fell 7.3%, with same-store sales down 8.0%; nine-month retail sales declined 3.3%, with same-store sales down 4.0%.
- Quarterly revenue decreased from $225.5 million to $209.3 million; nine-month revenue declined from $760.6 million to $736.1 million.
- Quarterly pretax income fell to $3.4 million from $9.4 million, while net income was nearly unchanged at $8.3 million. Nine-month net income rose to $60.0 million from $55.0 million, despite lower pretax income, primarily alongside lower income-tax expense.
- Gross margin dollars declined 11.6% for the quarter and 4.8% for nine months. Management attributed quarterly margin pressure to fewer regular-price sales, more markdowns, and higher occupancy, purchasing and sourcing costs relative to sales.
- Nine-month operating cash flow decreased to $46.3 million from $57.7 million, primarily reflecting increased inventory. Capital expenditures were $24.0 million versus $22.4 million.
- Cash and cash equivalents fell from $67.1 million at fiscal year-end to $32.8 million. The company spent $36.3 million on share repurchases and paid $26.5 million in dividends during the nine months.
Outlook, commentary, risks and unusual items
- Management expected the negative same-store-sales trend to continue in the fourth quarter. It cited merchandise assortment and timing problems, higher markdown inventory, and planned inventory liquidation, warning these factors and a large expected same-store-sales decline would put severe pressure on fourth-quarter earnings. No specific earnings guidance was provided.
- For fiscal 2016, the company expected approximately $27.9 million of capital expenditures, about nine store openings, six relocations and 15 closures. Through the first nine months it had opened three stores, relocated four and closed three.
- The board maintained the quarterly dividend at $0.33 per share and increased the share-repurchase authorization by 2 million shares after quarter-end. The company repurchased 936,100 shares in the quarter for approximately $30.4 million.
- A change in the estimated gift-card dormancy period from 60 to 24 months resulted in $2.4 million of additional breakage income recognized in the first quarter, within interest and other income.
- The third-quarter tax benefit was $4.9 million, including a $6.0 million benefit related to tax initiatives, the PATH Act and early adoption of share-based-payment accounting guidance. The accounting-guidance adoption affected the income statement by $594,000.
- Management cited consumer-spending conditions, competition and pricing, fashion and demand changes, weather, and the risk of excess inventory and markdowns as forward-looking risks. Routine litigation was disclosed; management did not expect reasonably possible losses to materially affect the financial statements, while noting adverse outcomes could have a material effect in a particular period.
- The January 30, 2016 balance sheet was revised to reclassify $13.6 million of uncertain tax benefits from current accrued income taxes to other noncurrent liabilities. Management deemed the revision immaterial; it did not affect earnings or total cash flows.
Important facts for investors to verify
- Whether sales trends, markdown activity and inventory liquidation in the fourth quarter matched management’s warning.
- How much of nine-month earnings growth depended on tax benefits and the gift-card breakage estimate change.
- Inventory levels, gross-margin recovery, and operating cash flow conversion in subsequent reports.
- Actual capital spending, store openings and closures, and continued share repurchases and dividend funding.
- Any material developments in litigation, tax matters, or the company’s investment portfolio and credit-facility availability.