The Cato Corporation — Form 10-Q summary
Reporting period: Fiscal quarter and first nine months ended November 2, 2013, compared with periods ended October 27, 2012. The interim financial statements are unaudited. Cato operates women’s apparel, footwear and accessories stores and a proprietary credit business.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Total revenue | $201.0 million, up 0.5% | $702.5 million, down 1.0% |
| Retail sales | $198.8 million, up 0.6% | $695.3 million, down 0.9% |
| Same-store sales | Down 1.0% | Down 3.0% |
| Net income | $4.9 million, versus $4.7 million | $50.5 million, versus $53.7 million |
| Diluted EPS | $0.17, versus $0.16 | $1.73, versus $1.84 |
| Operating cash flow | Not separately provided | $77.0 million, versus $67.4 million |
For the quarter, gross margin dollars rose 4.2% to $70.0 million; cost of goods sold declined to 64.8% of retail sales from 66.0%, primarily reflecting lower markdowns. For the nine months, gross margin dollars fell 2.4% to $264.7 million, and cost of goods sold increased to 61.9% of sales from 61.4%. SG&A increased to 30.7% of retail sales for the quarter from 29.5%, and to 25.8% for the nine months from 25.5%. Net income as a percentage of retail sales was 2.5% for the quarter and 7.3% for the nine months, compared with 2.3% and 7.7%, respectively, a year earlier.
Financial position and liquidity
- At November 2, 2013, cash and cash equivalents were $74.1 million and short-term investments were $159.2 million. Working capital was $269.0 million.
- No borrowings were outstanding under the $35 million unsecured revolving credit facility, extended through August 2015; Cato reported compliance with its covenants. The filing reports no funded debt outstanding.
- Nine-month capital expenditures were $23.8 million, compared with $31.0 million. Cato expected approximately $26.2 million for fiscal 2013.
- Nine-month dividends paid were $4.4 million, versus $21.3 million. The board maintained the quarterly dividend at $0.05 per share on November 26, 2013. Prior-period dividend comparisons are affected by the company’s accelerated payment of its full fiscal 2013 dividend in December 2012.
- Nine-month share repurchases were $5.8 million. At November 2, 1,728,004 shares remained authorized for repurchase.
Changes, outlook and risks
- Management attributed the nine-month sales decline to slow economic growth, high unemployment and customers’ limited discretionary spending. It said cooler October weather benefited third-quarter sales relative to the year-to-date trend.
- Quarterly income before taxes declined to $6.5 million from $6.8 million, while nine-month pretax income declined to $78.4 million from $85.7 million. The third-quarter effective tax rate fell to 24.7% from 31.6%; the nine-month rate was 35.6% versus 37.3%. Management cited resolution of tax audits and the Work Opportunity Tax Credit.
- For fiscal 2013, Cato expected approximately 32 store openings, six relocations and 24 closures. During the first nine months it had opened 16 stores, relocated four and closed eight.
- Management believed cash, investments, operating cash flow and available credit would fund operating needs, expected capital expenditures, dividends and repurchases for at least the next 12 months. This is management’s outlook, not a guarantee.
- Risk factors include economic and consumer-spending conditions, competition and pricing, fashion-trend forecasting, weather and inventory-demand shifts. The company held a $3.5 million auction-rate security whose auction continued to fail; it was valued at par using Level 3 assumptions, and management noted valuation sensitivity to liquidity timing and assumptions.
- The filing reported no applicable legal proceedings. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether same-store sales and discretionary spending improved after the reported 3% nine-month decline.
- Whether the store-opening, closure and $26.2 million capital-spending plans were achieved, and their effect on margins and cash flow.
- The liquidity and fair-value assumptions for the failed-auction $3.5 million security.
- The sustainability of dividends and repurchases alongside capital needs and operating performance.