Business Context and Reporting Period
Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended May 3, 2003 (First Quarter of Fiscal 2003)
Business Overview: The Company operates two reportable segments: Retail and Credit. As of May 3, 2003, the Company operated 1,035 stores.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2003 | Q1 2002 |
|---|---|---|
| Total Revenues | $201,210 | $200,491 |
| Net Income | $17,482 | $18,300 |
| Diluted Earnings Per Share | $0.68 | $0.71 |
| Dividends Per Share | $0.15 | $0.135 |
| Net Cash Provided by Operating Activities | $22,486 | $32,214 |
| Cash and Cash Equivalents (End of Period) | $43,986 | $68,392 |
| Short-term Investments | $75,069 | $40,071 |
| Working Capital | $174,151 | $152,197 |
| Long-term Debt | $0 | $0 |
Note: Working Capital calculated as Total Current Assets ($281,814) minus Total Current Liabilities ($107,663).
Material Changes vs. Prior Period
- Revenue: Total revenues increased slightly by 0.4% to $201.2 million. Retail sales were virtually flat at $197.3 million compared to $196.6 million in the prior year.
- Profitability: Net income decreased 4.5% to $17.5 million. Income before taxes declined to $27.4 million from $28.7 million.
- Margins:
- Cost of Goods Sold (COGS): Increased to 64.4% of retail sales from 63.3% due to flat sales and increased markdowns.
- Selling, General & Administrative (SG&A): Decreased to 22.0% of retail sales from 23.1%, driven by reduced incentive-based performance bonuses.
- Depreciation: Increased to 2.3% of retail sales from 1.6% due to store development and a new enterprise-wide information system.
- Cash Flow: Operating cash flow decreased significantly to $22.5 million from $32.2 million, primarily due to lower net income and timing of payments for accounts payable.
- Same-Store Sales: Decreased 7% in the first quarter.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects total capital expenditures to be approximately $25 million for the current fiscal year. Plans include opening approximately 90 new stores, closing 10, and relocating 25.
- Liquidity: The Company maintains an unsecured revolving credit agreement of up to $35 million with no borrowings outstanding. Management believes cash, investments, and operating cash flow are adequate to fund operations and capital expenditures.
- Dividends: In May 2003, the Board increased the quarterly dividend by 7% from $0.15 to $0.16 per share.
- Internal Controls & Contingencies: The Company identified payments made for the benefit of entities with material interests to the Chairman and Former Vice Chairman that were unrelated to business. Amounts have been repaid, and internal controls were strengthened to require CFO approval for future related-party payments. Management concluded disclosure controls are effective.
- Accounting Policies: The Company adopted several new FASB standards (SFAS 142, 144, 145, 146, 148, and Interpretation 45) with no material impact on financial position or results of operations.
Investor Verification Checklist
- Same-Store Sales Decline: Verify the 7% decrease in same-store sales and its impact on future revenue growth given the flat total sales environment.
- Inventory Levels: Review the increase in merchandise inventories to $102.3 million (up from $92.6 million year-over-year) and assess the risk of further markdowns.
- Related Party Transactions: Confirm the full repayment of unrelated payments to entities associated with the Chairman and Former Vice Chairman and the effectiveness of new internal controls.
- Capital Allocation: Monitor the execution of the $25 million capital expenditure plan and the net impact of opening 90 new stores versus closing/relocating others.
- Stock-Based Compensation: Note that the Company uses APB Opinion No. 25; pro-forma net income under SFAS No. 123 would be $17.3 million (a reduction of $0.14 million).