The Cato Corporation — FY2021 Form 10-K
Period: Fiscal year ended January 29, 2022. Although the request metadata refers to “2020 Q4,” this filing reports FY2021; it is not a quarter-specific report. Comparisons below are with the fiscal year ended January 30, 2021.
Business context
Cato operates value-focused apparel and accessories stores under Cato, It’s Fashion, and Versona brands, primarily in the southeastern United States. At year-end it operated 1,311 stores in 32 states. Retail and credit are its two reportable segments; e-commerce represented less than 5% of sales in both FY2021 and FY2020.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Retail sales | $761.4 million | $567.5 million |
| Total revenue | $769.3 million | $575.1 million |
| Cost of goods sold | $453.1 million; 59.5% of retail sales | $433.2 million; 76.3% of retail sales |
| SG&A | $267.0 million; 35.1% of retail sales | $206.5 million; 36.4% of retail sales |
| Income (loss) before taxes | $39.0 million | $(72.8) million |
| Net income (loss) | $36.8 million; $1.65 per diluted share | $(47.5) million; $(2.01) per diluted share |
| Cash provided by (used in) operating activities | $59.8 million | $(30.7) million |
| Working capital | $111.5 million | $108.6 million |
Gross margin dollars, defined by the company as retail sales less cost of goods sold and excluding depreciation, rose 129.5% to $308.3 million from $134.3 million. Cash and cash equivalents were $19.8 million and short-term investments were $146.0 million at year-end. The company had no revolving-credit borrowings; its unsecured facility allowed borrowings up to $35.0 million and was due to expire in May 2022. Lease liabilities totaled $184.3 million, including $66.8 million current.
Investing activities used $25.3 million, mainly reflecting net purchases of short-term investments; financing activities used $31.8 million, including $22.0 million for share repurchases and $10.0 million for dividends. Capital expenditures were $4.1 million.
Material changes versus FY2020
- Retail sales increased 34.2%, and same-store sales increased 34%; management attributed much of the recovery to reopened stores, longer operating hours, higher customer traffic, and stimulus-supported spending.
- Despite the recovery, management said FY2021 sales remained below comparable pre-pandemic FY2019 sales.
- Cost of goods sold fell substantially as a share of sales, reflecting sales recovery, better occupancy-cost leverage, and a higher proportion of regular-price sales. SG&A rose in dollars but declined as a share of sales.
- The company returned to profitability after FY2020’s loss. FY2020 included $13.7 million of asset impairment charges and a $2.3 million gain on land; FY2021 impairment charges were $0.9 million.
- The company opened six stores and closed 25, ending the year with 1,311 locations versus 1,330 a year earlier.
Outlook, risks, and unusual items
- Management expected pandemic-related uncertainty, supply-chain disruption, inflation, higher freight and product costs, wage pressure, and worker availability challenges to continue affecting the next fiscal year. It provided no quantified revenue or earnings guidance in the supplied filing text.
- Management said cash, cash equivalents, short-term investments, and operating cash flow should fund normal operations, $71.3 million of lease obligations, and planned FY2022 capital expenditures of $23.0 million. The company was seeking a replacement revolving-credit agreement before the existing facility’s May 2022 expiration.
- Key business risks include overseas sourcing and freight delays, limited ability to pass cost increases to value-conscious customers, fashion and inventory risk, intense competition, store-location performance, labor availability and costs, and dependence on a single distribution center. COVID-19 and possible changes in shopping behavior could also weigh on store traffic and sales.
- The effective tax rate was 5.4% in FY2021, compared with a 34.8% tax benefit rate in FY2020; results included tax credits, releases of uncertain-tax-position reserves, and other tax adjustments.
- The auditor identified store-asset impairment testing as a critical audit matter, citing judgment in projected store contribution margins and fair-value estimates. The auditor nevertheless opined that the financial statements were fairly presented and internal control over financial reporting was effective.
- Routine litigation was disclosed; management did not believe pending matters were likely to have a material adverse effect. The filing notes that an adverse outcome could still materially affect a particular reporting period.
Important facts for investors to verify
- Whether post-pandemic sales recovery continued and how current comparable sales compare with FY2019, not just the pandemic-affected FY2020 base.
- Whether inflation, freight, sourcing delays, and wage increases pressured gross margins or required additional markdowns.
- Completion and terms of the replacement credit facility, and the company’s cash and investment liquidity relative to lease obligations and planned spending.
- Store-opening, closure, and capital-spending plans, as well as performance of new and existing locations.
- The quality and liquidity of the short-term investment portfolio, and the assumptions behind store impairment and tax-asset valuations.
- Share repurchases and dividends: FY2021 repurchases totaled $22.0 million, and the board authorized an additional 1.0 million shares in February 2022.