The Cato Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended July 28, 2012; comparable periods ended July 30, 2011. The filing is for fiscal 2012, notwithstanding the “2011 Q2” request metadata. Amounts below are in millions unless otherwise stated.
Business context and results
Cato operates women’s fashion retail stores and a proprietary credit-card business. It had 1,295 stores in 31 states at quarter-end, versus 1,285 a year earlier. Results are unaudited interim figures; management cautions they may not indicate full-year results.
| Metric | Three months ended July 28, 2012 | Three months ended July 30, 2011 | Six months ended July 28, 2012 | Six months ended July 30, 2011 |
|---|---|---|---|---|
| Retail sales | $231.5 | $234.1 | $504.2 | $505.0 |
| Total revenues | $234.1 | $236.8 | $509.4 | $510.5 |
| Income before taxes | $27.6 | $28.3 | $78.9 | $75.8 |
| Net income | $17.3 | $18.1 | $49.1 | $48.6 |
| Diluted EPS | $0.59 | $0.61 | $1.68 | $1.65 |
| Gross margin rate (as % of retail sales) | 38.4% | 38.0% | 40.4% | 39.9% |
Financial position, cash flow and liquidity
- Six-month operating cash flow was $70.5, up from $67.5. Capital expenditures were $19.9 versus $15.8; dividends paid were $14.0 versus $12.2. Cash and cash equivalents increased $31.2 to $66.0.
- At July 28, 2012, short-term investments were $211.4, total current assets $440.8, total current liabilities $138.0, working capital $302.9, and stockholders’ equity $403.3. The filing reports no borrowings under its $35 million revolving facility; it was committed through August 2013, with the company in compliance with covenants.
- Management said cash, investments, operating cash flow and available credit were expected to cover operating needs, planned capital expenditures, dividends and repurchases for fiscal 2012 and the foreseeable future. Fiscal 2012 capital expenditures were projected at approximately $36.5.
Changes, outlook and risks
- Quarterly retail sales declined 1.0% and same-store sales fell 4.0%; first-half retail sales were nearly flat and same-store sales fell 3.0%. Management attributed weakness to customer uncertainty about the economic and political environment.
- First-half net income rose slightly, while quarterly net income declined. Gross margin improved as a percentage of sales, primarily from lower freight costs and increased vendor allowances, partly offset by higher occupancy costs. Quarterly SG&A rose as a percentage of sales, reflecting payroll and professional fees; first-half SG&A declined as a percentage of sales.
- The effective tax rate rose to 37.3% for the quarter and 37.8% for the first half, partly reflecting the absence of the Work Opportunity Tax Credit, which had not been renewed for 2012 as of the reporting date.
- The company expected to open approximately 38 stores, relocate 10 and close approximately 14 in fiscal 2012. It opened 12, relocated five and closed five during the first half. The board maintained the quarterly dividend at $0.25 per share on August 23, 2012.
- Risks cited include weak consumer spending and economic conditions, competition and pricing pressure, fashion-trend and buying-pattern uncertainty, adverse weather, and inventory risk. A $3.5 million auction-rate security continued to fail its auctions; its valuation depends on management estimates of future liquidity and other assumptions.
Important facts for investors to verify
- Whether same-store sales and consumer demand improved after the reported 4.0% quarterly decline.
- Progress against the store-opening, relocation, closure and $36.5 million capital-spending plans.
- Liquidity and valuation developments for the failed $3.5 million auction-rate security and other Level 3 investments.
- Whether the Work Opportunity Tax Credit was renewed and how tax rates affected subsequent results.
- Dividend sustainability and any future use of the share-repurchase authorization; 1,976,704 shares remained authorized at quarter-end.