The Cato Corporation — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended November 1, 2014, compared with periods ended November 2, 2013. Although the request metadata says “2013 Q3,” the filing itself is for fiscal 2014 Q3.
Business context and results
Cato operates women’s fashion specialty stores and a proprietary credit-card business. It reported 1,343 stores in 32 states at November 1, 2014. E-commerce was less than 1% of nine-month sales.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Retail sales | $213.8M | $198.8M | $740.0M | $695.3M |
| Total revenue | $216.0M | $201.0M | $746.8M | $702.5M |
| Income before taxes | $7.2M | $6.5M | $80.1M | $78.4M |
| Net income | $5.7M | $4.9M | $51.4M | $50.5M |
| Diluted EPS | $0.20 | $0.17 | $1.82 | $1.73 |
Financial position, cash flow and capital allocation
- Q3 same-store sales rose 4.0%; nine-month same-store sales rose 3.0%. Retail sales increased 7.5% in Q3 and about 6.4% for the nine-month period.
- Gross margin dollars were $77.3M in Q3, up 10.4%, and $290.5M for nine months, up 9.7%. Cost of goods sold was 63.8% of retail sales in Q3 versus 64.8%; for nine months it was 60.7% versus 61.9%.
- SG&A was $67.6M in Q3 and $203.4M for nine months, rising to 31.6% and 27.5% of retail sales, respectively, from 30.7% and 25.8%. Management cited incentive compensation and insurance costs for the quarter, and incentive compensation and POS equipment upgrades for the nine-month increase.
- Operating cash flow was $89.9M for nine months, versus $75.7M. Capital expenditures were $21.4M versus $23.8M; management attributed the operating cash-flow improvement mainly to a larger inventory decrease from fiscal year-end.
- At November 1, cash and cash equivalents were $83.7M, short-term investments $157.5M, working capital $253.4M, and current liabilities $171.8M. The company had no revolving-credit borrowings; its unsecured $35.0M facility was committed through August 2015, subject to letters of credit and covenants. It reported covenant compliance.
- There were no reported borrowings or long-term debt balances. Financing cash outflows included $25.5M of dividends and $42.6M of share repurchases during the nine months. The company maintained its quarterly dividend at $0.30 per share on November 25, 2014; 2,195,113 shares remained authorized for repurchase at quarter-end.
Outlook, risks and unusual items
- Management expected approximately 33 store openings, six relocations and eight closures for fiscal 2014, and approximately $30.6M of capital expenditures for the year. It said cash, investments, operating cash flow and available credit should fund expected needs, dividends and repurchases for the next 12 months and foreseeable future.
- Management cited risks including economic and consumer-spending conditions, competition and pricing, fashion-trend forecasting, buying patterns, adverse weather, inventory-demand shifts, and information-system failures or security breaches.
- A $3.14M auction-rate security continued to fail its auction and was valued using Level 3 assumptions; management noted valuation sensitivity and uncertainty about timing of liquidity. It said interest had been received as due and expected future interest payments in full and on time.
- The company disclosed a prior-period cash-flow presentation correction: operating cash flow and investing cash flow for the nine months ended November 2, 2013 each decreased by $1.3M; management deemed the revision not material. No legal proceedings were reported. Disclosure controls were judged effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether sales and same-store-sales momentum continued after November 1, 2014, and whether the fiscal-year store and capital-spending plans were achieved.
- Whether higher SG&A as a percentage of sales affected subsequent operating margins.
- Cash-flow sustainability and the effects of dividends and repurchases on liquidity and equity.
- The liquidity, valuation assumptions and eventual resolution of the failed auction-rate security.
- Whether the $35.0M credit facility was renewed or replaced before its August 2015 commitment expiry.