Cato Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 2, 2020, compared with the 13 weeks ended May 4, 2019. Although the request metadata says 2019 Q1, the filing itself reports fiscal 2020 first-quarter results. Cato operates women’s fashion retail stores and a proprietary credit-card business; it had 1,300 stores in 31 states at quarter-end.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Retail sales | $98.8 million | $228.1 million |
| Total revenue | $100.7 million | $230.4 million |
| Gross margin dollars | $15.2 million | $92.0 million |
| Operating costs and expenses, net | $138.3 million | $204.8 million |
| Pre-tax income (loss) | $(37.5) million | $25.6 million |
| Net income (loss) | $(28.4) million | $21.3 million |
| Diluted EPS | $(1.19) | $0.87 |
| Cash from (used in) operating activities | $(71.3) million | $14.7 million |
Same-store sales fell 56.0%. Cost of goods sold rose to 84.6% of retail sales from 59.7%; SG&A rose to 53.1% from 28.9%; and pre-tax margin was (38.0)% versus 11.2%. Management attributed the sharp deterioration mainly to temporary store closures, lower sales, cost deleverage and increased markdowns. A $5.3 million store-asset impairment charge was recorded.
Cash and cash equivalents were $29.8 million and short-term investments were $118.0 million at May 2. Working capital was $126.6 million, down from $163.5 million at February 1. The company had $30.0 million outstanding on its $35.0 million revolving facility at quarter-end, with no letters of credit; it reported compliance with financial covenants. The borrowing was included in accounts payable on the balance sheet. Lease liabilities totaled $223.0 million, including $61.0 million current. Capital expenditures were $5.3 million. Investing cash flow was $76.9 million, chiefly reflecting sales of short-term investments.
Material changes and notable items
- COVID-19-related closures began March 19; stores started reopening May 1 as permitted by state and local orders. E-commerce was less than 7% of sales.
- Management suspended the quarterly dividend, significantly reduced capital spending and cut expenses through lower non-payroll spending, furloughs and some position eliminations. The quarter nevertheless included $8.0 million of dividends paid and $9.9 million of share-repurchase cash outflow.
- After quarter-end, the credit agreement was amended on June 2, extending it through May 2023 and temporarily lowering the required liquidity amount. By June 4, borrowings had been reduced to $23.0 million.
- The income-tax benefit was $9.1 million. The 24.3% effective tax benefit rate reflected CARES Act federal NOL carryback provisions, partly offset by valuation allowances on state NOLs and increased reserves for uncertain state tax positions.
- Retail segment pre-tax loss was $37.9 million; the credit segment reported $0.4 million of pre-tax income on $0.8 million of revenue.
Outlook, risks and contingencies
Management expected COVID-19 to adversely affect results for the remainder of fiscal 2020 and possibly beyond, but said the impact was highly uncertain. It believed cash, investments, operating cash flows and available borrowing capacity would fund regular operations and expected capital expenditures for fiscal 2020 and the next 12 months. The company expected approximately $13 million of fiscal 2020 capital expenditures, about 80 store openings, two relocations and 39 closures. These expectations were subject to pandemic-related uncertainty. Management cited risks including prolonged disruptions, reduced customer traffic and demand, inventory and supply-chain challenges, and increased freight and logistics costs.
Routine litigation was pending; management did not believe reasonably possible losses would materially affect the financial statements, while acknowledging an adverse outcome could have a material effect in a reporting period. The filing reported disclosure controls as effective and no material change in internal control over financial reporting.
Investor facts to verify
- Whether store reopenings and customer demand recovered sufficiently to stabilize sales, margins and operating cash flow.
- Liquidity, remaining revolver availability and compliance with the amended credit-facility requirements.
- Whether planned store openings, relocations, closures and capital spending changed as pandemic conditions evolved.
- Realization of deferred tax assets and the effect of state NOL valuation allowances and tax reserves.
- Future impairment charges, inventory markdowns, lease obligations and any material litigation developments.
- Whether the dividend remained suspended and whether share repurchases continued.