Business Context and Reporting Period
Company: The Cato Corporation (Cato Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended May 5, 2007
Business Overview: Cato operates women's fashion specialty retail stores in 31 states, primarily in the southeastern United States. The company also operates a credit segment offering a proprietary credit card. As of May 5, 2007, the company operated 1,286 stores.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenues | $227,228 | $233,060 |
| Retail Sales | $224,134 | $229,741 |
| Net Income | $18,670 | $20,799 |
| Diluted EPS | $0.59 | $0.65 |
| Operating Cash Flow | $38,624 | $28,808 |
| Working Capital | $192,903 | $147,871 |
| Short-term Investments | $132,450 | $95,752 |
| Debt Outstanding | $0 | $0 |
Margins: Gross margin dollars decreased 7.9% to $80.7 million. Net income margin was 8.3% of retail sales compared to 9.1% in the prior year. Selling, general, and administrative (SG&A) expenses decreased to 22.8% of retail sales from 23.8%.
Material Changes vs. Prior Period
- Revenue Decline: Total retail sales decreased 2% to $224.1 million. Same-store sales declined 5% compared to the prior year.
- Profitability: Net income decreased 10.2% to $18.7 million, driven by lower sales and higher markdowns.
- Cost Structure: Cost of goods sold (COGS) increased as a percentage of sales to 64.0% from 61.8%, primarily due to higher markdowns and occupancy costs, partially offset by lower procurement costs.
- Cash Flow Improvement: Net cash provided by operating activities increased 34% to $38.6 million, largely due to an increase in accounts payable compared to a reduction in the prior year.
- Investment Activity: Net cash used in investing activities increased to $37.6 million, primarily due to a net increase in purchases of short-term investments.
Guidance, Outlook, and Risks
- Dividend Increase: On May 24, 2007, the Board increased the quarterly dividend by 10% from $0.15 to $0.165 per share (annualized rate of $0.66).
- Capital Expenditures: The company plans to invest approximately $24.0 to $27.0 million in fiscal 2007 for capital expenditures, including opening 80 new stores, relocating 20, and remodeling 15.
- Liquidity: The company maintains a strong liquidity position with $35 million in available unsecured revolving credit facilities (no borrowings outstanding). Management believes cash flows and investments are adequate for future needs.
- Risks: Key risks include general economic conditions, competitive pricing pressures, ability to predict fashion trends, consumer buying patterns, adverse weather, and inventory risks. The company does not use derivative financial instruments.
- Tax Contingencies: The company adopted FASB Interpretation No. 48, resulting in $6.6 million of unrecognized tax benefits and approximately $4.0 million of accrued interest and penalties.
Investor Verification Checklist
- Same-Store Sales Trend: Verify the 5% decline in same-store sales and its impact on future revenue guidance.
- Markdown Levels: Confirm the extent of markdowns contributing to the increased COGS percentage and reduced gross margin.
- Store Expansion Plan: Monitor progress on the plan to open 80 new stores and the associated capital expenditure budget of $24-$27 million.
- Dividend Sustainability: Assess the ability to maintain the increased dividend rate given the decline in net income.
- Tax Position: Review the $6.6 million in unrecognized tax benefits and potential future impacts on the effective tax rate.