The Cato Corporation — Form 10-Q Summary
Period note: The request identifies “2017 Q3,” but the supplied filing is for the quarter ended November 3, 2018, and compares results with October 28, 2017. The filing describes the current period as fiscal 2018. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Cato operates women’s apparel, footwear and accessories stores, principally in the southeastern United States, and offers a proprietary credit card. At November 3, 2018, it operated 1,350 stores in 33 states. The report covers the three and nine months ended November 3, 2018.
Financial results and liquidity
| Metric | Three months ended Nov. 3, 2018 | Three months ended Oct. 28, 2017 | Nine months ended Nov. 3, 2018 | Nine months ended Oct. 28, 2017 |
|---|---|---|---|---|
| Total revenue | $190.0 | $190.3 | $637.2 | $637.0 |
| Income before taxes | $2.5 | $(0.1) | $36.6 | $23.8 |
| Net income | $3.8 | $2.7 | $33.7 | $24.0 |
| Diluted EPS | $0.16 | $0.11 | $1.36 | $0.93 |
- Retail sales were $187.9 million for the quarter and $630.8 million year to date. Same-store sales rose 1% in both periods; the quarter’s total retail sales fell 0.3% year over year.
- Gross margin, calculated as retail sales less cost of goods sold excluding depreciation, was $64.9 million (34.5% of retail sales) for the quarter and $235.7 million (37.4%) year to date. Comparable prior-year rates were 33.9% and 34.8%.
- SG&A was $61.8 million (32.9% of retail sales) for the quarter and $196.6 million (31.2%) year to date. Depreciation was $4.1 million and $12.5 million, respectively.
- Operating cash flow was $54.2 million for the first nine months, versus $38.3 million a year earlier. Capital expenditures were $3.2 million; management expected approximately $5.0 million for the full fiscal year.
- Cash and cash equivalents were $26.7 million and short-term investments were $183.2 million at November 3. Working capital was $236.8 million. The company had no borrowings under its $35 million revolving facility, committed through August 2019, and reported compliance with its covenants.
- Dividends paid year to date were $24.5 million; share repurchases were $13.3 million. The quarterly dividend was maintained at $0.33 per share, and the board added 2 million shares to the repurchase authorization on November 20, 2018.
Material changes and management commentary
- Quarterly revenue was nearly flat, while year-to-date revenue was also essentially unchanged. Management attributed modest retail sales declines mainly to store closures and differences in the timing of weeks between comparable periods, partly offset by 1% same-store sales growth.
- Year-to-date cost of goods sold declined to 62.6% of retail sales from 65.2%, which management attributed to improved merchandise margins and lower occupancy, purchasing and sourcing costs as a percentage of sales. Higher gross margin and net income more than offset higher year-to-date SG&A.
- Management expected to relocate one store and close 35 stores in fiscal 2018. It said available cash, investments, operating cash flow and facility capacity should cover operating needs, planned capital expenditures, dividends and repurchases for fiscal 2018 and the following 12 months.
- Investing activities used $68.1 million, primarily because of net purchases of short-term investments; financing activities used $37.1 million. Cash, cash equivalents and restricted cash declined by $50.9 million during the nine-month period.
- The company adopted revenue standard Topic 606 in fiscal 2018; management reported no material cumulative or financial-statement-line-item impact. The new lease standard was expected to materially increase balance-sheet assets and liabilities upon adoption.
Risks, contingencies and unusual items
- Management cited consumer spending and confidence, competition and pricing, fashion-trend forecasting, adverse weather, inventory demand and potential tariffs or other regulatory changes as risks that could affect results.
- The company had approximately $7.2 million accrued for litigation matters. It favorably settled certain cases during the quarter. Management did not expect reasonably possible losses from pending litigation to have a material adverse effect, but cautioned that an adverse outcome could materially affect a reporting period.
- The effective tax rate was 7.9% for the first nine months of 2018, compared with a tax benefit in the prior-year period. The quarterly tax benefit reflected favorable discrete items; the annual estimate included the new GILTI tax.
- The investment portfolio was principally corporate and governmental debt securities; management said underlying ratings were A or better, and that interest-rate exposure was not material. No derivatives were used.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for fiscal 2018 Q3, not 2017 Q3.
- Review the drivers and sustainability of improved merchandise margins and year-to-date earnings, alongside higher SG&A as a percentage of sales.
- Track store closures, same-store sales, inventory levels and the remaining fiscal-year capital expenditure outlook.
- Assess investment-portfolio liquidity and valuation, and the impact of the forthcoming lease-standard adoption on reported leverage and balance-sheet size.
- Monitor litigation accruals and outcomes, tax-rate effects including GILTI, and the company’s ability to maintain dividends and repurchases.