Business Context and Reporting Period
Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended August 4, 2001
Business Overview: The Company operates two reportable segments: retail and credit. As of August 4, 2001, the Company operated 895 stores, an increase from 825 stores in the prior year's second quarter.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Aug 4, 2001 |
3 Months Ended July 29, 2000 |
6 Months Ended Aug 4, 2001 |
6 Months Ended July 29, 2000 |
|---|---|---|---|---|
| Total Revenues | $177,401 | $168,682 | $363,132 | $335,922 |
| Net Income | $10,963 | $11,398 | $26,878 | $25,958 |
| Diluted EPS | $0.42 | $0.45 | $1.03 | $1.02 |
| Cash Flow from Operations | N/A | N/A | $27,471 | $24,568 |
| Working Capital | $136,059 | $124,597 | N/A | N/A |
| Cash & Short-term Investments | $88,543 | $80,081 | N/A | N/A |
| Debt (Revolving Credit) | $0 | $0 | $0 | $0 |
Note: Working capital calculated as Current Assets ($218,715) minus Current Liabilities ($82,656). Cash & Short-term Investments calculated as Cash ($21,990) plus Short-term investments ($66,553).
Material Changes vs. Prior Period
- Revenue Growth: Total retail sales increased 6% in the second quarter and 8% for the first six months compared to the prior year. This growth was driven by store development (70 new net stores) and everyday low pricing strategies.
- Same-Store Sales: Same-store sales were flat in the second quarter but increased 2% for the six-month period.
- Profitability: Net income decreased slightly in the quarter ($10.96M vs $11.40M) but increased for the six-month period ($26.88M vs $25.96M). Net income margin as a percentage of retail sales declined from 7.0% to 6.4% in the quarter and from 8.0% to 7.6% for the six months.
- Cost Structure: Cost of goods sold (COGS) as a percentage of retail sales increased to 68.5% in the quarter (from 67.3%) due to increased markdowns. SG&A expenses as a percentage of sales declined 60 basis points in the quarter.
- Other Income: Other income (finance and late charges) decreased 7% in the quarter and 1% for the six months.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects total capital expenditures to be approximately $26 million for the current fiscal year. Expenditures to date for the six months were $11.9 million.
- Store Development: The Company intends to open approximately 85 new stores, close 10 stores, and relocate 24 stores during the current fiscal year. In the first six months, 40 new stores were opened, 4 closed, and 8 relocated.
- Liquidity: Management believes cash, cash equivalents, short-term investments, and operating cash flows are adequate to fund requirements. The Company has a $35 million unsecured revolving credit agreement with no borrowings outstanding.
- Dividends: The Board increased the quarterly dividend by 8% to $0.135 per share in May 2001.
- Accounting Changes: The Company intends to adopt SFAS No. 142 (Goodwill and Other Intangible Assets) in fiscal year 2002. The impact is currently being evaluated.
- Risks: The filing contains forward-looking statements regarding financial position and business strategy, which are subject to uncertainties.
Investor Verification Checklist
- Verify the sustainability of the 8% retail sales growth given flat same-store sales in the most recent quarter.
- Monitor the impact of increased markdowns on gross margins, which rose to 68.5% of sales in the quarter.
- Confirm the execution of the store development plan (85 new stores) against the $26 million capital expenditure budget.
- Review the adoption timeline and potential financial impact of SFAS No. 142 in fiscal 2002.
- Assess the trend in "Other Income" (finance/late charges), which has declined year-over-year.