Cato Corp. 10-Q Summary: Quarter Ended July 31, 2010
Business Context and Reporting Period
The Cato Corporation (Cato) operates women's fashion specialty retail stores, primarily in the southeastern United States, and offers a proprietary credit card. This report covers the quarterly period ended July 31, 2010, and the six months ended July 31, 2010. As of the reporting date, the company operated 1,275 stores across 31 states.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2010 | Six Months Ended July 31, 2010 |
|---|---|---|
| Total Revenues | $234.7 million | $497.4 million |
| Retail Sales | $231.9 million | $491.6 million |
| Net Income | $16.0 million | $43.1 million |
| Diluted EPS | $0.54 | $1.46 |
| Gross Margin % (of Retail Sales) | 38.3% | 41.0% |
| Operating Cash Flow (6 months) | $59.9 million | |
| Cash and Short-Term Investments | $234.1 million (as of July 31, 2010) | |
| Debt | No borrowings outstanding under $35.0M credit facility |
Material Changes vs. Prior Period
- Revenue Growth: Total retail sales increased 2.9% in the quarter and 6.1% for the six-month period compared to the prior year. Same-store sales rose 2.0% for the quarter and 5.0% for the six months.
- Profitability: Net income decreased slightly by 3.8% in the quarter ($16.0M vs. $16.7M) but increased 21.4% for the six-month period ($43.1M vs. $35.5M). Diluted EPS for the quarter declined to $0.54 from $0.56, while the six-month EPS rose to $1.46 from $1.20.
- Expense Trends: Selling, general, and administrative (SG&A) expenses increased as a percentage of retail sales (26.9% vs. 25.1% in the prior quarter) due to higher accrued incentive compensation and workers' compensation costs. Conversely, Cost of Goods Sold (COGS) improved to 61.7% of sales from 63.7%, driven by lower markdowns and higher sell-throughs.
- Tax Rate: The effective tax rate increased to 36.2% for the quarter and 36.6% for the six months, compared to 29.7% and 33.9% in the prior year periods, respectively. The prior year benefited from the closing of state tax audits.
Outlook, Risks, and Management Commentary
- Store Activity: The company opened 13 new stores, relocated three, and closed nine in the first six months of fiscal 2010. Management expects to open approximately 41 stores, relocate six, and close 35 stores for the full fiscal year.
- Capital Expenditures: CapEx for the first six months was $8.9 million. The company expects total fiscal 2010 capital expenditures to be approximately $20.8 million.
- Liquidity: The company maintains a strong liquidity position with $232.3 million in working capital. It has a $35.0 million unsecured revolving credit facility with no outstanding borrowings; the facility was extended to August 2013.
- Dividends: On August 26, 2010, the Board maintained the quarterly dividend at $0.185 per share.
- Risks: Key risks include general economic conditions, consumer spending patterns, competitive pricing pressures, and inventory risks. The company holds a $3.5 million Auction Rate Security (ARS) that continues to fail its auction, valued using Level 3 inputs.
Investor Verification Checklist
- Verify the sustainability of the improved gross margin (lower markdowns) in the context of broader retail economic conditions.
- Monitor the effective tax rate, which has risen significantly compared to the prior year due to the absence of one-time audit benefits.
- Review the valuation and liquidity status of the $3.5 million failed Auction Rate Security (ARS) held in "Other assets."
- Track SG&A expense trends, specifically regarding incentive compensation and workers' compensation costs, which drove expense ratios higher.
- Confirm the execution of the store opening/closing plan (41 opens, 35 closes) and its impact on same-store sales growth.