Business Context and Reporting Period
Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended November 1, 2008
Business Overview: The Company operates women's fashion specialty retail stores in 31 states, primarily in the southeastern United States, and offers a proprietary credit card program. As of November 1, 2008, the Company operated 1,305 stores.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Nov 1, 2008 | 9 Months Ended Nov 1, 2008 |
|---|---|---|
| Total Revenues | $182,785 | $645,480 |
| Net Income | $823 | $29,767 |
| Diluted EPS | $0.03 | $1.02 |
| Cash from Operating Activities | N/A | $55,737 |
| Cash and Cash Equivalents | $35,959 | $35,959 |
| Short-term Investments | $99,869 | $99,869 |
| Total Debt | $0 | $0 |
| Working Capital | $159,538 | $159,538 |
Note: Debt is zero as there were no borrowings outstanding under the $35 million revolving credit facility.
Material Changes vs. Prior Period
- Revenue: Total retail sales decreased 1.2% in the third quarter to $179.8 million but increased 1.9% for the nine-month period to $636.6 million. Same-store sales decreased 2.4% in the quarter and 0.6% for the nine months.
- Profitability: Net income for the third quarter dropped significantly to $0.8 million from $2.9 million in the prior year. For the nine months, net income was $29.8 million compared to $34.1 million.
- Margins: Gross margin dollars decreased 5.6% in the quarter due to higher markdowns and occupancy costs. SG&A expenses as a percentage of retail sales increased to 28.3% in the quarter (from 28.2%) and 26.8% for the nine months (from 24.8%), driven by new store costs, higher bad debt expense, and store closing costs.
- Bad Debt: Bad debt expense for the credit segment increased to $1.2 million in the quarter from $0.7 million in the prior year.
- Store Count: The Company closed 70 stores and opened 57 new stores during the first nine months of 2008.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects to invest approximately $19.7 million for capital expenditures for the full fiscal 2008 year, including 70 planned new stores and 9 relocations.
- Dividends: The Board maintained the quarterly dividend at $0.165 per share (annualized $0.66).
- Share Repurchases: The Company repurchased 198,618 shares in the quarter. Approximately 196,042 shares remain available under the current authorization.
- Liquidity: The Company maintains a strong liquidity position with $35.9 million in cash and $99.9 million in short-term investments. It has a $35 million unsecured revolving credit facility with no outstanding borrowings.
- Risks and Contingencies:
- Auction Rate Securities (ARS): The Company holds $48.1 million in ARS and variable rate demand notes. $7.4 million of these failed their last auctions as of November 1, 2008. The Company values these at par and expects them to be called or successfully auctioned within a year.
- Hurricane Gustav: 76 stores were closed due to the hurricane; only two were closed for over 30 days. The Company is determining business interruption losses.
- Economic Conditions: Management cites adverse economic conditions and credit market issues as potential risks to future performance.
Investor Verification Checklist
- Verify the valuation and liquidity status of the $7.4 million in failed Auction Rate Securities (ARS) and the timeline for their resolution.
- Monitor the trend in bad debt expense for the credit segment, which increased significantly in the quarter.
- Assess the impact of store closures (70 closed vs. 57 opened) on future same-store sales growth.
- Review the effectiveness of inventory management strategies given the increase in markdowns during the third quarter.
- Confirm the status of business interruption loss calculations related to Hurricane Gustav.