Cato Corporation — Form 10-Q summary
Period: Quarter and nine months ended October 31, 2015, compared with the periods ended November 1, 2014. The request metadata says “2014 Q3,” but the supplied filing is for 2015 Q3.
Business context and financial results
Cato operates women’s apparel, footwear and accessories stores, principally in the southeastern United States, and offers a proprietary customer credit card. It reported 1,370 stores at quarter-end.
| Metric | Three months | Nine months |
|---|---|---|
| Total revenue | $225.5 million, up 4.4% | $760.6 million, up 1.9% |
| Net income | $8.3 million vs. $5.7 million | $55.0 million vs. $51.4 million |
| Diluted EPS | $0.30 vs. $0.20 | $1.97 vs. $1.82 |
| Operating cash flow | Not stated for quarter | $57.7 million vs. $91.1 million |
Retail sales were $223.3 million for the quarter and $754.1 million for the nine months. Same-store sales rose 2.0% in the quarter but declined 0.6% year to date. Gross margin dollars increased 7.4% in the quarter and 2.2% year to date. Cost of goods sold was 62.8% of retail sales in the quarter, versus 63.8%; it was 60.6% year to date, versus 60.7%. SG&A was 31.6% of retail sales in both quarters and 27.4% year to date, versus 27.5%. Net income was 3.7% of retail sales for the quarter, versus 2.7%, and 7.3% year to date, versus 6.9%.
Liquidity, debt and cash flows
At October 31, 2015, cash and cash equivalents were $43.4 million, short-term investments $216.6 million, working capital $278.4 million and total assets $618.4 million. The company had no borrowings on its $35 million unsecured revolving facility, committed through August 2018, and was in compliance with its covenants. Nine-month capital expenditures were $22.4 million. Investing activities used $77.6 million, primarily reflecting purchases of short-term investments and other assets; financing activities used $30.7 million, including $25.2 million in dividends and $6.1 million in share repurchases.
Changes, outlook and risks
- Quarterly retail sales growth reflected non-comparable stores and higher same-store sales; year-to-date growth came from non-comparable stores despite the same-store sales decline.
- Management expected approximately 31 store openings, 13 relocations and eight closures for fiscal 2015, and approximately $32.5 million in full-year capital expenditures. It said cash, investments, operating cash flow and available credit should cover operating needs, planned capital spending, dividends and repurchases for fiscal 2015 and the following 12 months.
- The board maintained the quarterly dividend at $0.30 per share. The company had 2,015,123 shares remaining under its repurchase authorization at quarter-end.
- Quarterly effective tax rate was 11.1%, down from 20.5%, primarily because of favorable adjustments from an amended federal tax return. Separately, a favorable out-of-period tax adjustment recorded in Q1 reduced long-term deferred tax liability by $1.2 million, reduced tax expense by $1.0 million and increased accrued income taxes by $0.2 million; management said it was not material to prior or current-period statements.
- Operating cash flow declined $33.4 million year over year, which management attributed mainly to a smaller inventory reduction and larger declines in accounts payable and accrued expenses, partly offset by lower accounts receivable.
- Risks cited include consumer spending and confidence, competition and pricing, fashion-trend forecasting, adverse weather and inventory-demand changes. Management said interest-rate exposure was not material; no material control changes were reported, and no legal proceedings were listed as applicable.
Important facts to verify
- Confirm the intended reporting year: the filing covers 2015 Q3, not 2014 Q3 as stated in the request metadata.
- Assess whether weaker year-to-date same-store sales and lower operating cash flow persist into the holiday period and the full year.
- Review the composition, maturity and valuation of the $216.6 million short-term investment portfolio, including Level 3 assets.
- Verify the tax-rate benefit and the out-of-period deferred-tax correction when evaluating earnings quality and comparability.
- Compare actual store activity and capital expenditures with management’s fiscal 2015 expectations.