Cato Corp. 10-K Summary: Fiscal Year Ended February 2, 2002
Business Context and Reporting Period
The Cato Corporation operates 937 women's fashion specialty stores under the names "Cato," "Cato Fashions," "Cato Plus," and "It's Fashion!" primarily in the Southeastern United States. The company targets fashion-conscious, low-to-middle-income females with quality apparel and accessories at everyday low prices. The reporting period covers the fiscal year ended February 2, 2002 (52 weeks).
Key Financial Metrics
| Metric | Fiscal 2001 | Fiscal 2000 |
|---|---|---|
| Revenue | $705.7 million | $669.1 million |
| Retail Sales | $685.7 million | $648.5 million |
| Net Income | $43.1 million | $39.0 million |
| Diluted EPS | $1.66 | $1.53 |
| Gross Margin | 32.0% | 31.3% |
| SG&A Expense | 23.6% of sales | 23.8% of sales |
| Operating Cash Flow | $47.1 million | $44.1 million |
| Working Capital | $139.6 million | $125.7 million |
| Cash & Investments | $84.7 million | $83.1 million |
| Debt | $0 (No borrowings outstanding) | $0 |
Material Changes vs. Prior Period
- Sales Growth: Retail sales increased 6% to $685.7 million. On a comparable 52-week basis, total sales increased 7%, driven by the opening of 85 new stores and an everyday low pricing strategy.
- Comparable Store Sales: Increased 1% compared to the prior year.
- Profitability: Net income rose 10% to $43.1 million. Gross margin improved to 32.0% due to aggressive markdowns on slow-moving merchandise and improved inventory flow.
- Store Count: The company ended the year with 937 stores, up from 859 in the prior year (85 opened, 7 closed).
- Other Income: Decreased 3% to $20.0 million, primarily due to lower credit sales and decreased late fee income.
Guidance, Outlook, and Risks
Outlook and Capital Expenditures: For fiscal 2002, the company plans to invest approximately $29 million in capital expenditures. This includes opening 90 new stores, relocating 20, closing 10, and remodeling 35 stores. Management also plans additional investments in enterprise-wide information systems.
Liquidity: The company maintains a strong liquidity position with $84.7 million in cash and investments and a $35 million unsecured revolving credit facility (currently unused). Management believes cash flow and available credit are adequate for the next 12 months.
Risks and Contingencies:
- Competition: The industry is highly competitive; competition is expected to intensify in larger metropolitan areas as the company expands.
- Vendor Concentration: While the company purchases from ~1,500 suppliers, the largest vendor accounted for only 6% of purchases in 2001, mitigating dependency risk.
- Accounting Changes: The company will adopt SFAS No. 142 (Goodwill) and SFAS No. 144 (Impairment) effective February 3, 2002, though management expects no material impact.
- Legal: No material pending legal proceedings were reported.
Investor Verification Checklist
- Store Performance: Verify the sustainability of the 1% comparable store sales increase given the competitive retail environment.
- Capital Allocation: Monitor the execution of the $29 million capital expenditure plan and the profitability of the 90 planned new store openings.
- Credit Risk: Review the allowance for doubtful accounts ($5.97 million) and bad debt expense trends, as credit sales represent a significant portion of revenue.
- Inventory Management: Assess the effectiveness of markdown strategies in maintaining the improved 32.0% gross margin.
- Dividend Policy: Note the 8% dividend increase to $0.135 per share and the company's history of share repurchases ($11.7 million in fiscal 2001).