Cato Corporation (CATO) — Form 10-Q Summary
Period: Fiscal third quarter ended October 31, 2020, with nine-month results compared with the periods ended November 2, 2019. The request metadata says “2019 Q3,” but the filing itself reports 2020 Q3.
Business context and financial performance
Cato operates women’s apparel and accessories stores and a proprietary credit business. It operated 1,347 stores in 33 states at quarter-end. Results were substantially affected by COVID-19 store closures and operating restrictions.
| Metric | Three months ended Oct. 31, 2020 | Nine months ended Oct. 31, 2020 |
|---|---|---|
| Total revenue | $150.8 million, down 21.3% | $419.7 million, down 33.9% |
| Retail sales | $149.2 million, down 21% | $414.3 million, down 34% |
| Same-store sales | Down 23% | Down 35% |
| Gross margin dollars | $39.8 million, down 43.7%; margin 26.7% | $88.5 million, down 63.5%; margin 21.4% |
| Net income (loss) | $(3.6) million; $(0.15) per share | $(39.2) million; $(1.64) per share |
| Cash from operations | Not separately presented for the quarter | $(26.1) million, versus $49.3 million provided |
Quarterly SG&A was $51.9 million, or 34.8% of retail sales, versus $64.7 million and 34.2% a year earlier. Year-to-date SG&A was $148.4 million, or 35.8%, versus $196.7 million and 31.3%. The filing attributes lower spending mainly to store closures/reduced hours, reduced corporate costs and reduced incentive compensation; higher impairment charges partly offset the savings.
Liquidity, debt and capital allocation
At October 31, cash and cash equivalents were $18.8 million and short-term investments were $132.6 million. Working capital was $117.8 million, down from $163.5 million at February 1, 2020. Total assets were $590.9 million and stockholders’ equity was $256.1 million. The company reported no borrowings under its $35 million unsecured revolving facility, extended through May 2023, and was in compliance with its covenants. Lease liabilities totaled $192.4 million; these are lease obligations, not reported revolving-credit borrowings.
Year-to-date capital expenditures were $11.2 million. Management expected approximately $13 million for fiscal 2020 and stated that cash, investments, operating cash flows and available credit should fund operating needs and expected capital expenditures for fiscal 2020 and the following 12 months. The company suspended its dividend in the first quarter. It repurchased $16.8 million of stock during the nine months, including 1.04 million shares in Q3 for approximately $7.5 million. A further 320,707 shares were repurchased after quarter-end for about $2.3 million.
Material changes, outlook and risks
- All stores were temporarily closed beginning March 19, 2020; reopening began May 1, and all had reopened by June 15, though with reduced hours and potential for renewed closures or restrictions.
- Management expected COVID-19 to adversely affect results for the remainder of fiscal 2020 and possibly beyond. It cited uncertainty around infection trends, government restrictions, consumer confidence, mall traffic, staffing, suppliers and the broader economy.
- Management expected to close approximately 40 stores in fiscal 2020. The company had closed 10 in the first nine months and reported 76 openings during that period, all with leases predating the pandemic. It decided not to open stores during the remainder of 2020 or in 2021.
- Year-to-date store-asset impairment charges were $7.5 million: $5.3 million in Q1 and $2.3 million in Q3 for fixtures intended for new stores. No additional impairment was recorded in Q2 or Q3 beyond the Q3 fixtures charge.
- The company recorded an estimated $27.0 million CARES Act federal tax-refund receivable in accounts receivable. State net operating loss deferred tax assets were subject to a valuation allowance; tax-rate effects depend partly on future results and estimates.
- Routine litigation was disclosed; management did not believe reasonably possible losses from pending matters would materially affect the financial statements, while noting adverse outcomes could have a material effect in a particular period.
Most important facts for investors to verify
- Whether sales, same-store trends and gross margins recover, given the large declines and continued markdown and occupancy-cost pressure.
- Whether operating cash flow and liquidity remain adequate, including collection of the estimated $27.0 million tax refund and changes in working capital.
- How renewed COVID-19 restrictions, reduced hours, consumer traffic and staffing affect operations and the planned store closures.
- Whether capital spending, repurchases and the dividend suspension remain consistent with liquidity needs; the filing gives no specific timetable for dividend resumption.
- Potential further impairments, tax valuation-allowance changes and material developments in litigation or credit losses.