Business Context and Reporting Period
Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended May 1, 2010 (Fiscal Q1 2010)
Business Overview: The Company operates women's fashion specialty retail stores in 31 states, primarily in the southeastern United States. It also operates a credit segment offering a proprietary credit card. As of May 1, 2010, the Company operated 1,272 stores.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $262.7 million | $241.0 million |
| Retail Sales | $259.8 million | $238.1 million |
| Net Income | $27.1 million | $18.8 million |
| Earnings Per Share (Diluted) | $0.92 | $0.64 |
| Gross Margin % | 43.5% | 40.4% |
| Operating Cash Flow | $33.5 million | $30.0 million |
| Cash & Equivalents | $53.7 million | $42.0 million |
| Short-term Investments | $166.4 million | $115.7 million |
| Working Capital | $222.8 million | $177.0 million |
Debt & Liquidity: The Company maintains a $35 million unsecured revolving credit facility. As of May 1, 2010, there were no borrowings outstanding, with $33.3 million available net of letters of credit. The Company holds significant liquid assets in cash and short-term investments.
Material Changes vs. Prior Period
- Revenue Growth: Total retail sales increased 9.1% year-over-year to $259.8 million. Same-store sales rose 8.0%, driven by strong Easter sales and favorable weather.
- Margin Expansion: Gross margin dollars increased 17.5% to $112.9 million. Cost of goods sold as a percentage of retail sales improved to 56.5% (down from 59.6%) due to leveraging higher sales and lower markdowns.
- Profitability: Net income increased 43.8% to $27.1 million. Income before taxes rose to $42.9 million from $30.0 million.
- Expense Management: Selling, general, and administrative (SG&A) expenses increased in absolute dollars to $68.6 million but decreased as a percentage of sales to 26.4% (from 27.2%) due to sales leverage.
- Store Count: The Company operated 1,272 stores at period end, down from 1,285 in the prior year quarter. During the quarter, the Company opened 4 stores, relocated 1, and closed 3.
Guidance, Outlook, and Risks
- Dividend Increase: On May 27, 2010, the Board increased the quarterly dividend by 12% from $0.165 to $0.185 per share (annualized rate of $0.74).
- Capital Expenditures: The Company expects to invest approximately $24.1 million in capital expenditures for fiscal 2010, including opening 50 new stores and relocating 6.
- Share Repurchases: The Company repurchased 144,346 shares during the quarter for approximately $3.1 million. As of May 1, 2010, 551,596 shares remained available under the repurchase program.
- Outlook: Management expects cash flows from operations and existing investments to be adequate to fund dividends, share repurchases, and operating requirements for fiscal 2010.
- Risks: Key risks include general economic conditions, consumer spending patterns, competitive pricing pressures, and the ability to predict fashion trends. The Company also notes uncertainty regarding the timing of liquidity for a $3.5 million Auction Rate Security (ARS) held in its portfolio.
Investor Verification Checklist
- Inventory Management: Verify the sustainability of the reduced markdowns and improved gross margins in subsequent quarters.
- Credit Segment Performance: Monitor the credit segment's bad debt expense and revenue contribution, which saw a slight decline in revenue year-over-year.
- Investment Portfolio Liquidity: Review the status and valuation of the $3.5 million Auction Rate Security (ARS) and privately managed funds classified as Level 3 assets.
- Store Expansion Execution: Track progress against the guidance to open 50 new stores and close 40 stores for the full fiscal year.
- Dividend Sustainability: Assess the impact of the 12% dividend increase on future cash flow and payout ratios.