Cato Corp. 10-K Summary: Fiscal Year Ended February 1, 2003
Business Context and Reporting Period
The Cato Corporation operates 1,022 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 1, 2003 (52 weeks).
Key Financial Metrics
| Metric | Fiscal 2002 | Fiscal 2001 |
|---|---|---|
| Total Revenues | $748.3 million | $699.3 million |
| Retail Sales | $732.7 million | $685.7 million |
| Net Income | $45.8 million | $43.1 million |
| Diluted EPS | $1.77 | $1.66 |
| Gross Margin % | 32.3% | 32.0% |
| SG&A % of Sales | 23.1% | 23.6% |
| Operating Cash Flow | $63.7 million | $47.1 million |
| Working Capital | $162.6 million | $139.6 million |
| Total Assets | $383.4 million | $332.0 million |
| Debt | $0 (No borrowings outstanding) | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Retail sales increased 7% to $732.7 million, driven by the opening of 90 new stores, improved merchandise offerings, and an everyday low pricing strategy.
- Profitability: Net income rose 6% to $45.8 million. Gross margin dollars increased 8% to $236.4 million, aided by aggressive markdowns on slow-moving inventory and improved sourcing.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased 4% in absolute terms but decreased as a percentage of sales from 23.6% to 23.1%.
- Investment Loss: Interest and other income decreased 41% due to a $1.8 million non-cash write-down on investments deemed to have other-than-temporary declines in value.
- Store Count: The company expanded from 937 stores to 1,022 stores, with 90 new openings, 26 relocations, and 5 closures in fiscal 2002.
Guidance, Outlook, and Risks
- Expansion Plans: For fiscal 2003, the company plans to open approximately 90 new stores, relocate 25, close 10, and remodel 30. Capital expenditures are projected at approximately $25 million.
- Liquidity: The company maintains a strong liquidity position with $106.9 million in cash and short-term investments and a $35 million unsecured revolving credit facility (unused).
- Dividends: The quarterly dividend was increased by 11% to $0.15 per share in fiscal 2002.
- Internal Controls & Related Parties: The company disclosed that payments totaling approximately $237,000 were made for the benefit of entities related to the Chairman and Co-Founder between 2000 and early 2003. These were deemed unrelated to business operations, have been repaid with interest, and internal controls were strengthened to prevent recurrence.
- Accounting Changes: The company adopted several new FASB standards (SFAS 142, 144, 145, 146) with no material impact on financial position.
Investor Verification Checklist
- Comparable Store Sales: Verify the 0% comparable store sales growth for fiscal 2002 to assess organic performance versus store count expansion.
- Investment Portfolio: Review the $1.8 million write-down on investments and the composition of the $74.9 million short-term investment portfolio.
- Related Party Transactions: Confirm the full repayment of the $362,557 (including interest) related to the Chairman and Co-Founder and the effectiveness of new internal controls.
- Capital Expenditures: Monitor the execution of the $25 million capital plan for fiscal 2003, specifically the opening of 90 new stores.
- Credit Quality: Review the allowance for doubtful accounts ($6.1 million) and bad debt expense trends given the company's significant credit card and layaway operations.