The Cato Corporation — Form 10-Q summary
Business context and reporting period. Cato operates women’s apparel, shoe and accessory stores, principally in the southeastern United States, and offers a proprietary credit card. The filing covers the three months ended May 2, 2015, compared with the three months ended May 3, 2014. Although the request metadata labels this “2014 Q1,” the filing is for fiscal 2015’s first quarter. Amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $283.9 | $284.7 | Down 0.3% |
| Retail sales | $281.6 | $282.5 | Down 0.3% |
| Income before taxes | $48.0 | $48.2 | Down 0.4% |
| Net income | $31.1 | $30.0 | Up 3.6% |
| Diluted EPS | $1.11 | $1.04 | Up 6.7% |
| Operating cash flow | $29.8 | $55.0 | Down $25.3 |
- Margins and expenses: Gross margin dollars increased 0.8% to $119.1 million; cost of goods sold declined to 57.7% of retail sales from 58.2%. SG&A rose 1.6% to $68.6 million and increased to 24.4% of retail sales from 23.9%. Pretax income was 17.0% of retail sales versus 17.1%; net income was 11.0% versus 10.6%.
- Taxes: Income tax expense was $16.9 million versus $18.2 million. The effective rate was 35.2% versus 37.7%, primarily reflecting a favorable tax adjustment described below.
- Balance sheet and liquidity: At May 2, cash and cash equivalents were $94.3 million, short-term investments $177.5 million, total assets $622.2 million, and working capital $281.2 million. Current liabilities were $185.1 million. No borrowings were outstanding; the company had a $35 million unsecured revolver committed through August 2018 and was in compliance with its covenants.
- Cash uses and capital: Investing activities used $20.8 million, including net purchases of short-term investments; capital expenditures were $4.6 million. Financing activities used $8.6 million, including $8.4 million of dividends and $0.5 million of share repurchases. The quarterly dividend was maintained at $0.30 per share.
Material changes versus the prior comparable quarter
- Same-store sales fell 3.0%, which management attributed primarily to February winter storms. E-commerce was less than 1% of sales and included in same-store sales.
- Management cited lower sales of markdown goods as the primary reason cost of goods sold improved as a percentage of sales, partly offset by higher buying and occupancy costs. SG&A increased mainly because of higher store expenses, partly offset by lower incentive compensation.
- Operating cash flow declined primarily because accounts payable, accrued expenses and other liabilities decreased more, and inventory decreased less from fiscal year-end than in the prior-year period.
- Net cash used in financing fell substantially from $48.1 million to $8.6 million, primarily due to lower share repurchases; repurchases were $0.5 million versus $39.7 million in Q1 2014.
Outlook, risks and unusual items
- Management expected approximately 42 store openings, 10 relocations and 12 closures in fiscal 2015, and approximately $36 million in capital expenditures for store activity, merchandise-system upgrades and home-office renovations. In Q1, eight stores opened and two closed; the company operated 1,352 stores at May 2, 2015.
- Management said cash, investments, operating cash flows and available revolver capacity should fund operating needs, expected capital expenditures, dividends and repurchases for fiscal 2015 and the following 12 months. The filing does not provide a specific earnings or sales forecast.
- Tax adjustment: The company identified an improper prior-period calculation of a long-term deferred tax liability related to captive-insurance premiums. The Q1 out-of-period correction reduced that liability by $1.2 million, reduced income tax expense by $1.0 million and increased accrued income taxes by $0.2 million. Management said the correction was not material to prior- or current-period financial statements.
- Risks highlighted include consumer confidence and spending, competition and pricing, changing fashion trends, inventory demand shifts, and adverse weather. Management considered interest-rate exposure not material. No legal proceedings were reported as applicable; management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: the report is Q1 fiscal 2015, ended May 2, 2015, not 2014 Q1.
- Assess whether the 3.0% same-store sales decline and management’s weather attribution are consistent with subsequent sales trends.
- Review the tax correction and its impact on the reported tax rate, earnings and prior-period comparability.
- Track operating cash flow and working-capital movements, particularly payables, accrued liabilities and inventory.
- Compare planned store openings, relocations, closures and $36 million capital spending with actual execution and returns.
- Review investment portfolio composition, valuation inputs and liquidity, as well as continued revolver covenant compliance.