Cato Corporation — Form 10-K Summary
Reporting period: The supplied filing is for the fiscal year ended January 30, 2021 (fiscal 2020), not 2019 Q4 as indicated in the request metadata. It compares primarily with the year ended February 1, 2020. Cato operates fashion specialty stores and e-commerce businesses, primarily in the southeastern United States, and has retail and credit reporting segments.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Retail sales | $567.5 million | $816.2 million |
| Total revenue | $575.1 million | $825.3 million |
| Gross profit, excluding depreciation | $134.3 million | $307.3 million |
| Gross margin, calculated from reported sales and cost of goods sold | 23.7% | 37.6% |
| SG&A | $206.5 million | $263.8 million |
| Net income (loss) | $(47.5) million | $35.9 million |
| Diluted EPS | $(2.01) | $1.46 |
| Cash from (used in) operating activities | $(30.7) million | $53.4 million |
- Retail sales fell 30.5%; same-store sales declined 32%. E-commerce sales were less than 5% of total sales in both years.
- Cost of goods sold rose to 76.3% of retail sales from 62.4%, reflecting markdowns to clear spring and summer merchandise and deleveraged occupancy, distribution and buying costs. SG&A declined in dollars but increased to 36.4% of sales from 32.3% as revenue contracted.
- Year-end cash, cash equivalents and short-term investments were $143.9 million, down from $212.2 million. Working capital was $108.6 million versus $163.5 million.
- No revolving-credit borrowings were outstanding at year-end. The company had a $35 million unsecured facility committed through May 2023 and reported compliance with its covenants. Balance-sheet lease liabilities totaled approximately $206.7 million; operating lease payment commitments were $227.5 million.
- Capital expenditures were $14.0 million, compared with $8.3 million. The company reported $64.5 million of cash provided by investing activities, primarily from net sales of short-term investments.
Changes, outlook and key risks
- COVID-19 impact: Cato temporarily closed all stores on March 19, 2020 and began reopening them May 1; all were reopened by June 15, generally with reduced hours. Management attributed substantial sales and cash-flow deterioration to closures, weaker traffic and demand, delayed inventory, and mitigation and logistics costs.
- Liquidity actions and outlook: The company suspended quarterly dividends, reduced planned capital spending and operating costs, and used short-term investment sales and revolving-facility activity to manage liquidity. Management expected pandemic-related adverse effects to continue in fiscal 2021 and possibly beyond, while stating available liquidity, operating cash flow and credit capacity should fund regular requirements and planned capital expenditures. Planned FY2021 capital expenditures were approximately $3 million. No specific revenue or earnings guidance was provided.
- Unusual items: FY2020 included $13.7 million of asset impairment charges, including $11.4 million for store assets; a $2.3 million gain on sale of investment land; and a $25.3 million income-tax benefit, primarily reflecting CARES Act federal NOL carrybacks. The company recorded an estimated $32.6 million federal tax refund receivable. Dividends paid were $0.33 per share versus $1.32.
- Store base: Cato ended the year with 1,330 stores, after opening 76 and closing 27. Management said only half of planned new stores were opened during 2020 and continued reviewing underperforming locations.
- Risks to monitor: Uncertainty around the pandemic and consumer traffic; fashion and inventory forecasting and markdown exposure; overseas sourcing, freight and supply-chain disruption; competition and e-commerce execution; cybersecurity and centralized distribution-center continuity; and potential changes in investment liquidity. The company also disclosed $5.9 million of gross unrecognized tax benefits and routine litigation, with no pending matter believed likely to have a material adverse effect.
- Audit and controls: PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Store-asset impairment was identified as a critical audit matter involving judgment about projected sales, margins and expenses.
Most important facts for investors to verify
- Confirm the fiscal-period mismatch: this filing covers the year ended January 30, 2021, not 2019 Q4.
- Review subsequent sales, comparable-store trends, store openings and closures, and the pace of any recovery from pandemic-related disruption.
- Assess whether liquidity remains adequate as cash and short-term investments decline, including lease commitments, credit-facility covenants and cash flow.
- Examine inventory levels, markdowns, gross-margin recovery and whether store impairment assumptions remain supportable.
- Verify the timing and collection of the estimated tax refund, and monitor valuation allowances and uncertain tax positions.
- Confirm capital spending, dividend policy and share repurchases against current operating performance and liquidity needs.