Cato Corporation — Form 10-Q Summary
Period clarification: The request metadata says 2017 Q2, but the filing is for the quarter ended August 4, 2018, and compares results with the quarter ended July 29, 2017. The filing describes this as fiscal 2018’s second quarter and first six months. Unaudited results may not indicate full-year performance.
Business context
Cato operates women’s fashion retail stores and a proprietary credit-card business. It reported Retail and Credit segments, operated 1,350 stores in 33 states at quarter-end, and had e-commerce sales below 2.5% of first-half sales.
Financial performance
| Metric | Three months ended Aug. 4, 2018 | Six months ended Aug. 4, 2018 | Comparable 2017 period |
|---|---|---|---|
| Total revenue | $208.9 million, up 0.9% | $447.2 million, up 0.1% | $207.0 million; $446.7 million |
| Retail sales | $206.8 million, up 0.9%; same-store sales up 4% | $442.9 million, essentially flat; same-store sales up 1% | $205.0 million; $442.7 million |
| Net income (loss) | $6.5 million; $0.26 per diluted share | $29.9 million; $1.20 per diluted share | $(0.9) million; $(0.03) per share; $21.4 million; $0.82 per share |
| Gross margin dollars | $77.0 million, up 20.7% | $170.8 million, up 9.8% | $63.8 million; $155.6 million |
| Operating cost rates as a share of retail sales | COGS 62.8%; SG&A 33.3%; depreciation 2.0% | COGS 61.4%; SG&A 30.4%; depreciation 1.9% | Quarter: 68.9%, 31.4%, 2.4%; six months: 64.8%, 28.9%, 2.2% |
| Operating cash flow | $56.5 million for six months | $43.4 million for six months |
Quarterly pretax income was $7.5 million, compared with a $2.1 million loss. First-half pretax income was $34.1 million versus $23.9 million. The first-half effective tax rate increased to 12.3% from 10.8%.
Liquidity, debt and capital allocation
- At August 4, cash and cash equivalents were $37.8 million and short-term investments were $187.1 million. Working capital was $240.0 million, versus $233.4 million at February 3, 2018.
- Current assets were $378.4 million and current liabilities $138.4 million. The company reported no borrowings on its unsecured $35 million revolving credit facility, committed through August 2019, and was in compliance with its covenants.
- First-half investing cash outflow was $69.9 million, mainly reflecting purchases of short-term investments; financing cash outflow was $26.3 million, including $16.3 million of dividends and $10.5 million of share repurchases.
- Capital expenditures were $1.9 million in the first half; management expected approximately $7.0 million for fiscal 2018. The board maintained the quarterly dividend at $0.33 per share on August 30, 2018.
Changes, outlook and risks
- Sales were broadly flat year over year, while gross margin improved as regular-price sales increased and occupancy, purchasing and sourcing costs declined as a percentage of sales. SG&A rose, primarily due to incentive compensation and, for the first half, insurance expense.
- Management expected to close 34 stores in fiscal 2018; one store had closed in the first half. The company said cash, investments, operating cash flows and available credit should cover operating needs, planned capital expenditures, dividends and repurchases for fiscal 2018 and the next 12 months.
- The filing gives no earnings or sales guidance. Principal cited risks include consumer spending and confidence, fashion and demand shifts, pricing competition, adverse weather, and inventory liquidation at expected margins.
- Accrued litigation expense was approximately $9.5 million. Management did not expect reasonably possible losses from pending matters to materially affect the financial statements, but noted adverse outcomes could materially affect a reporting period.
- The new lease standard was expected to increase reported assets and liabilities; the company was still assessing its impact. Revenue-standard adoption had no material cumulative or financial-statement effect. Estimated annual taxes include GILTI, for which the company was still evaluating its deferred-tax accounting election.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is fiscal 2018 Q2, not 2017 Q2.
- Review the reported buyback amounts and timing: the filing reports 461,200 shares repurchased in the quarter for approximately $10.65 million, while first-half cash-flow repurchases are $10.46 million; it also discloses a further August repurchase of 44,300 shares for approximately $1.09 million.
- Assess whether improved gross margins and same-store sales can persist as SG&A costs rise and planned store closures continue.
- Monitor litigation accruals, investment-portfolio valuation and credit-card receivables, as well as the eventual balance-sheet effect of the lease standard.