The Cato Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended October 27, 2012, compared with periods ended October 29, 2011. The filing period differs from the “2011 Q3” in the request metadata. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Retail sales | $197.6 | $194.1 | $701.8 | $699.1 |
| Total revenue | $200.0 | $196.7 | $709.4 | $707.2 |
| Income before tax | $6.8 | $8.9 | $85.7 | $84.7 |
| Net income | $4.7 | $6.1 | $53.7 | $54.7 |
| Diluted EPS | $0.16 | $0.21 | $1.84 | $1.86 |
| Operating cash flow | — | — | $67.4 | $68.0 |
- Quarterly revenue increased about 1.7%, while net income fell about 23.5%. Nine-month revenue rose about 0.3%, while net income declined about 1.8%.
- Same-store sales decreased 2.0% in both the quarter and nine-month period. Q3 cost of goods sold rose to 66.0% of retail sales from 64.8%, and gross margin dollars fell 1.6% to $67.2 million. For nine months, cost of goods sold remained 61.4% of sales and gross margin dollars rose 0.5% to $271.1 million.
- SG&A was 29.5% of retail sales in Q3 versus 29.6% a year earlier, and 25.5% year to date versus 25.7%. The effective tax rate was 31.6% for Q3 and 37.3% year to date, compared with 31.4% and 35.4%, respectively.
- Cash and cash equivalents were $53.1 million; short-term investments were $202.3 million; working capital was $296.3 million. Current assets were $442.2 million and current liabilities $145.9 million.
- No borrowings were outstanding under the $35 million revolving facility. The facility was committed through August 2013, and the company reported compliance with its financial covenants. Debt is not reported as outstanding.
Material changes and operating context
- Management attributed weak comparable sales to continuing customer uncertainty about the economy and political situation. Q3 gross margin pressure reflected higher store occupancy costs from development and lower merchandise margins.
- At October 27, the company operated 1,306 stores, versus 1,292 a year earlier. In the first nine months it opened 25 stores, relocated seven, and closed seven.
- Capital expenditures were $31.0 million year to date, up from $26.6 million. Operating cash flow was nearly flat year over year; investing cash outflow declined to $28.2 million from $51.1 million, largely reflecting investment-security purchases and sales.
Outlook, dividends and risks
- Management expected approximately 37 store openings, nine relocations, and 14 closures for fiscal 2012, with approximately $43 million of full-year capital expenditures. It considered cash, investments, operating cash flow, and available credit adequate for operations, capital spending, dividends, and repurchases.
- After quarter-end, the board declared a regular $0.25-per-share dividend, a special $1.00-per-share dividend, and accelerated a $1.00-per-share 2013 dividend; all were scheduled for payment December 28, 2012, to holders of record December 14.
- One $3.5 million auction-rate security continued to fail its auction and was valued using Level 3 assumptions; management noted valuation sensitivity to liquidity timing and market assumptions. The company also cited economic and consumer-spending uncertainty, competition and pricing pressure, fashion-trend prediction, buying patterns, weather, and inventory-demand shifts as risks.
- The Work Opportunity Tax Credit had not been renewed for 2012 as of the filing, affecting the current-year tax comparisons. No legal proceedings were reported as applicable. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing covers the quarter ended October 27, 2012, not 2011 Q3.
- Assess whether comparable-sales weakness and Q3 merchandise-margin pressure continued after the reporting date.
- Review the assumptions and potential liquidity exposure associated with the failed $3.5 million auction-rate security.
- Verify the execution and funding implications of the planned store program, capital expenditures, and declared dividends.
- Check the status of the revolving facility, which was committed only through August 2013, and the impact of tax-credit changes.