The Cato Corporation — Form 10-Q summary
Business context and period: Cato operates women’s apparel, footwear and accessories stores, plus a proprietary customer credit-card business. This unaudited report covers the 13 weeks ended May 5, 2018 (fiscal 2018 first quarter), compared with the 13 weeks ended April 29, 2017. The request metadata says “2017 Q1,” but the filing itself is for 2018 Q1.
Key financial results
| Metric | Quarter ended May 5, 2018 | Comparable 2017 quarter | Change |
|---|---|---|---|
| Retail sales | $236.0 million | $237.7 million | Down 0.7% |
| Total revenue | $238.3 million | $239.7 million | Down 0.6% |
| Income before taxes | $26.6 million | $26.1 million | Up 2.0% |
| Net income | $23.4 million | $22.2 million | Up 5.3% |
| Basic and diluted EPS | $0.94 | $0.85 | Up $0.09 |
| Operating cash flow | $31.6 million | $15.6 million | Up $16.0 million |
Gross margin dollars, defined as retail sales less cost of goods sold excluding depreciation, increased 2.0% to $93.7 million. Gross margin rate rose to 39.7% of retail sales from 38.7%. SG&A increased 3.4% to $66.0 million and rose to 27.9% of retail sales from 26.8%. Net income margin was 9.9% of retail sales versus 9.4%; pretax margin was 11.3% versus 11.0%.
The effective tax rate declined to 11.9% from 14.7%, mainly due to the federal statutory rate reduction under the Tax Cuts and Jobs Act, income mix in lower-tax jurisdictions and ongoing tax initiatives. The company’s estimated annual rate includes the new GILTI tax; its accounting policy election for deferred taxes under GILTI remained under evaluation.
Balance sheet, liquidity and capital allocation
At May 5, 2018, cash and cash equivalents were $71.5 million and short-term investments were $147.1 million. Working capital was $247.9 million, compared with $233.4 million at February 3, 2018. Total assets were $518.5 million and stockholders’ equity was $341.2 million. There were no borrowings under the $35 million unsecured revolver, committed through August 2019; the company reported compliance with its financial covenants. The filing reports no debt borrowings outstanding.
Operating cash flow was $31.6 million; capital expenditures were $0.7 million; dividends paid were $8.2 million; and share repurchases were $0.8 million. The board maintained the quarterly dividend at $0.33 per share on May 24, 2018. After quarter-end, the company repurchased 78,500 shares for approximately $1.4 million. At May 5, 559,502 shares remained authorized for repurchase. Management said available cash, investments, operating cash flow and revolver capacity should fund operating needs, planned capital expenditures, dividends and repurchases for fiscal 2018 and the following 12 months.
Material changes, outlook and risks
- Same-store sales declined 1.0%; e-commerce accounted for less than 2.5% of sales. The company operated 1,351 stores, versus 1,374 at the end of the prior-year first quarter, and expected to close approximately 34 stores during fiscal 2018.
- Management attributed improved merchandise margin mainly to a higher share of regular-priced sales and lower occupancy, purchasing and sourcing costs as a percentage of sales. SG&A rose mainly because of higher incentive compensation and insurance expense, partly offset by lower store and corporate expenses.
- Planned fiscal 2018 capital expenditures were approximately $7 million, primarily for technology investments. No full-year revenue or earnings guidance was provided in the supplied filing text.
- Revenue-standard adoption (Topic 606) had no material cumulative effect; the 2018 quarter is reported under Topic 606 while the prior-year comparison was not restated. Management said the forthcoming lease standard was expected to increase assets and liabilities.
- Accrued litigation expense was approximately $9.3 million. Management did not expect reasonably possible losses from current litigation to materially affect the financial statements, but cautioned that an adverse outcome could materially affect results, financial condition or cash flows in a particular period.
- Risks cited include consumer spending and confidence, competition and pricing, fashion-trend and demand forecasting, weather, inventory liquidation and changes in laws or regulations. Management considered exposure to market interest-rate changes not material. Disclosure controls were assessed as effective, with no material change in internal control reported.
Investor facts to verify
- Confirm the reporting-period mismatch in the request metadata: the filing is for fiscal 2018 Q1, not 2017 Q1.
- Track same-store sales, store closures and whether sales and gross-margin improvement persist as the store base contracts.
- Monitor SG&A growth, inventory and cash conversion, along with the planned $7 million capital expenditure program.
- Review subsequent share repurchases, dividend continuation and remaining authorization; reconcile liquidity and investment balances over time.
- Assess the $9.3 million litigation accrual and developments in litigation, as well as the eventual accounting impact of GILTI and lease-standard adoption.