Cato Corporation — Form 10-K Summary
Period note: The supplied filing is the annual report for the fiscal year ended February 3, 2018 (fiscal 2017, 53 weeks), not a 2016 Q4 filing as the request metadata indicates. Comparisons below are to fiscal 2016, ended January 28, 2017.
Business context
Cato operates value-focused apparel and accessories stores under the Cato, It's Fashion, and Versona names, primarily in the southeastern United States. It had 1,351 stores in 33 states at year-end. E-commerce represented less than 2% of sales. The company also operates its own customer credit-card program.
Financial results and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Retail sales | $842.0 million | $947.4 million |
| Total revenue | $850.0 million | $956.6 million |
| Income before taxes | $16.0 million | $49.1 million |
| Net income | $8.5 million | $47.2 million |
| Diluted EPS | $0.34 | $1.72 |
| Cash from operations | $36.0 million | $72.1 million |
| Capital expenditures | $11.1 million | $27.3 million |
- Same-store sales fell 12%; retail sales declined 11.1%, despite an additional fiscal week.
- Gross margin, excluding depreciation, was $288.9 million, or 34.3% of retail sales, versus $345.4 million, or 36.5%, in fiscal 2016. Cost of goods sold rose to 65.7% of retail sales from 63.5%, reflecting more markdown sales and higher buying and occupancy costs.
- SG&A was $266.3 million, down 8.1% in dollars but up to 31.6% of retail sales from 30.6%. Asset impairment charges were $7.7 million, compared with $13.6 million.
- The effective tax rate was 46.5%, versus 3.9%. Fiscal 2017 included provisional Tax Act charges of approximately $6.2 million for deferred-tax-asset revaluation and $6.1 million for the transition tax; the company said its estimates remained subject to refinement.
- Year-end cash, cash equivalents, short-term investments and restricted cash totaled $200.6 million; working capital was $233.4 million. No revolver borrowings were outstanding. The unsecured revolving facility provided up to $35 million, subject to letters of credit and covenants.
- Total assets were $516.1 million and stockholders' equity was $326.4 million. The filing reports $272.9 million of future noncancelable operating-lease payments; these were off balance sheet under the accounting then in effect.
- Dividends paid were $1.32 per share. The company repurchased $38.9 million of stock during fiscal 2017.
Material changes and unusual items
- Performance weakened for a second consecutive year: same-store sales declined 6% in fiscal 2016 and 12% in fiscal 2017. Net income fell from $66.8 million in fiscal 2015 to $47.2 million in fiscal 2016 and $8.5 million in fiscal 2017.
- Fiscal 2017 quarterly results included a $15.5 million fourth-quarter net loss; fiscal 2016 fourth-quarter net loss was $12.8 million. The filing notes retail seasonality, with stronger sales and profitability typically in the first half.
- Gift-card breakage income was $1.4 million in fiscal 2017, versus $3.4 million in fiscal 2016. The company had changed its estimate in fiscal 2016 by shortening the dormancy period used to recognize breakage.
- Fiscal 2017 operating cash flow fell by $36.1 million, primarily due to lower net income and accounts payable, partly offset by lower inventory.
Outlook, risks and contingencies
- For fiscal 2018, management planned approximately $7.2 million in capital expenditures, expected no new-store openings, and anticipated closing up to 34 stores. On March 1, 2018, the board maintained the quarterly dividend at $0.33 per share.
- Management said cash, investments, operating cash flow and available revolver capacity should fund planned spending, dividends and operating needs. This outlook is subject to retail and consumer conditions.
- Key risks include fashion-trend and inventory forecasting, markdown pressure, competition and weak consumer spending; overseas sourcing, currency and freight costs; disruption at the centralized Charlotte distribution center; cybersecurity, payment processing and e-commerce operations; and weather-related disruption.
- The company reported approximately $9.3 million in accrued litigation expense. Management did not believe reasonably possible losses from pending litigation would materially affect the financial statements, while acknowledging adverse outcomes could affect a particular period. It also reported approximately $9.5 million of gross unrecognized tax benefits, with outcomes and timing uncertain.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Confirm the intended period: this filing covers fiscal 2017 ended February 3, 2018, not fiscal 2016 Q4.
- Track whether sales and same-store sales stabilize, and whether markdowns and occupancy costs continue to pressure gross margin.
- Assess the impact of store closures, low planned capital spending and the continuing fixed lease commitments on future earnings and cash flow.
- Review final Tax Act accounting, including the provisional transition-tax and deferred-tax estimates, and developments in uncertain tax positions.
- Monitor liquidity and investment values, litigation and self-insurance estimates, and the sustainability of dividends and share repurchases relative to operating cash generation.