Cato Corporation — Form 10-Q Summary
Period note: The request metadata says 2014 Q2, but this filing covers the quarter ended August 1, 2015, and compares results with the quarter ended August 2, 2014. Financial amounts below are in millions unless stated otherwise.
Business context and reporting period
Cato operates women’s apparel and accessories stores, principally in the southeastern United States, and offers a proprietary customer credit card. It reported two segments: Retail and Credit. The company operated 1,358 stores at August 1, 2015, versus 1,328 a year earlier. Results are unaudited; management cautions that interim results may not indicate full-year results.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $251.3 | $246.1 | $535.2 | $530.8 |
| Retail sales | $249.2 | $243.8 | $530.8 | $526.2 |
| Income before taxes | $25.0 | $24.8 | $72.9 | $72.9 |
| Net income | $15.6 | $15.7 | $46.7 | $45.7 |
| Diluted EPS | $0.56 | $0.56 | $1.67 | $1.61 |
- Quarterly retail sales rose 2.2%, driven by non-comparable stores; same-store sales were flat. For the six-month period, retail sales rose 0.9%, while same-store sales declined 2%.
- Cost of goods sold was 62.0% of retail sales in Q2 versus 61.0% a year earlier, and 59.7% for the six months versus 59.5%. Management attributed the quarterly pressure primarily to fewer regular-priced sales and higher purchasing and sourcing costs. Gross margin dollars were $94.7 million in Q2, down 0.4%, and $213.8 million for six months, up 0.3%.
- SG&A was $67.1 million in Q2 (26.9% of retail sales), down from $68.3 million (28.0%); six-month SG&A was nearly unchanged at $135.7 million, or 25.6% of sales. Lower incentive-based compensation was the main driver of the decline.
- Effective tax rate was 37.5% in Q2 versus 36.8%, primarily reflecting lower Work Opportunity Tax Credits. Six-month income tax expense declined to $26.3 million from $27.3 million.
- Six-month operating cash flow was $55.8 million versus $84.7 million. Management attributed the decline primarily to a smaller inventory reduction from fiscal year-end. Investing activities used $62.6 million, mainly reflecting increased short-term investment purchases; financing activities used $16.9 million, chiefly dividends.
- At August 1, cash and cash equivalents were $70.1 million and short-term investments were $213.8 million. Working capital was $288.2 million. No borrowings were outstanding under the $35 million revolving facility, committed through August 2018; the company reported compliance with its covenants. Total debt is not reported as outstanding.
- Capital expenditures were $11.4 million for the first six months. The company expected approximately $47.2 million for fiscal 2015. Dividends were $0.30 per share quarterly; the board maintained that amount on August 27, 2015.
Changes, outlook, and risks
- For fiscal 2015, management expected about 40 new store openings, 14 relocations, and 13 closures. During the first half, it opened 14 stores, relocated five, and closed two. E-commerce represented less than 1% of first-half sales.
- Management said cash, investments, operating cash flow, and available revolver capacity should fund operations, planned capital spending, dividends, and repurchases through fiscal 2015 and the following 12 months. No specific earnings or sales guidance was provided.
- A favorable $1.0 million income-tax benefit was recorded in the first quarter as an out-of-period correction to a prior-period deferred-tax liability calculation; management said the correction was not material to prior- or current-period statements.
- Key stated risks include weaker consumer confidence or spending, competition and pricing pressure, fashion-trend and demand shifts, adverse weather, and inventory risks. The company said interest-rate market exposure was not material and reported no legal proceedings in this filing.
- The company had $2.18 million shares remaining under its repurchase authorization and made no repurchases in Q2. It does not use derivative financial instruments.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2015, not Q2 2014.
- Track same-store sales and regular-price selling, given the decline in first-half comparable sales and higher cost-of-goods-sold rate.
- Assess whether operating cash flow and inventory trends support the planned $47.2 million capital program and continuing dividends.
- Review the tax correction and the effect of lower tax credits on the effective rate; the filing says the correction was not material.
- Monitor execution of planned store openings, relocations, and closures, alongside consumer-demand, weather, and fashion risks.