Cato Corporation — Form 10-Q Summary
Period: Quarter and six months ended August 3, 2019; comparisons are to August 4, 2018. The request metadata says “2018 Q2,” but the filing itself reports fiscal 2019 second-quarter results.
Business context and results
Cato operates women’s apparel and accessories stores, principally in the southeastern United States, and offers a proprietary credit card. It had 1,299 stores in 31 states at quarter-end, versus 1,350 a year earlier. E-commerce was less than 3% of sales in the first half.
| Metric | Three months | Six months |
|---|---|---|
| Retail sales | $210.4 million, up 1.7% | $438.4 million, down 1.0% |
| Total revenue | $212.6 million, up 1.8% | $442.9 million, down 1.0% |
| Gross margin dollars | $80.0 million, up 3.9% | $172.0 million, up 0.7% |
| Income before tax | $14.0 million, versus $7.5 million | $39.6 million, versus $34.1 million |
| Net income | $11.9 million, versus $6.5 million | $33.1 million, versus $29.9 million |
| Diluted EPS | $0.48, versus $0.26 | $1.34, versus $1.20 |
| Operating cash flow | Not presented for the quarter | $45.2 million, versus $56.5 million |
Margins, liquidity and capital
- Cost of goods sold was 62.0% of retail sales in Q2 and 60.8% for the first half, compared with 62.8% and 61.4%, respectively. Management attributed the improvement mainly to fewer markdowns and lower occupancy costs as a share of sales.
- SG&A was 31.4% of retail sales in Q2 and 30.1% for the first half, compared with 33.3% and 30.4%. Lower insurance costs were partly offset by higher incentive compensation.
- Cash and cash equivalents were $26.0 million and short-term investments were $207.4 million at August 3, 2019. Working capital was $189.7 million, versus $229.5 million at February 2, 2019.
- Operating cash flow declined $11.3 million year over year, primarily because accounts payable and accrued expenses decreased. Capital expenditures were $2.2 million; investing cash use was $23.4 million and financing cash use was $18.8 million. Dividends paid were $16.3 million and share repurchases were $2.8 million.
- No revolver borrowings were outstanding. The unsecured $35 million credit facility was extended to May 2022; the company reported compliance with its covenants. Lease liabilities totaled $176.1 million, including $55.7 million current and $120.3 million noncurrent.
Changes and unusual items
- Q2 same-store sales increased 4%; first-half same-store sales increased 1%. Total first-half sales nevertheless declined slightly, primarily due to store closures.
- ASC 842 lease adoption materially increased reported assets and liabilities—management said each rose 40%—without changing opening retained earnings. The balance sheet includes $165.0 million of right-of-use assets.
- The first-half effective tax rate rose to 16.3% from 12.3%, reflecting more taxable interest income and nondeductible Section 162(m) compensation, among other factors; the prior-year rate benefited from a release of uncertain-tax-position reserves after state audit settlements.
- Unrealized gains on available-for-sale investments contributed $1.3 million to first-half comprehensive income. Management reported no material market-rate exposure.
Outlook, risks and contingencies
- Management expected to open up to 12 stores and close about 50 during fiscal 2019, and planned approximately $13 million in full-year capital expenditures. No earnings or sales guidance is provided in the supplied filing text.
- Management said cash, investments, operating cash flow and available revolver capacity should fund operating needs, expected capital expenditures, dividends and repurchases for fiscal 2019 and the following 12 months.
- The board maintained the quarterly dividend at $0.33 per share on August 29, 2019. The filing states 1,810,961 shares remained authorized for repurchase; no shares were repurchased in Q2.
- Risks cited include consumer-spending conditions, competition and pricing, fashion-trend and demand forecasting, weather, inventory liquidation and markdown risk, and changes in laws or tariffs. Routine litigation is pending; management did not expect reasonably possible losses to materially affect the financial statements, while noting adverse outcomes could have material effects in a reporting period.
Important facts for investors to verify
- Resolve the period-label mismatch: the filing covers fiscal 2019 Q2, not 2018 Q2.
- Track same-store sales against total sales and store closures, and monitor the planned fiscal-year openings and closures.
- Assess whether improved markdowns, occupancy costs and SG&A are sustainable, given the first-half decline in operating cash flow.
- Review lease commitments and liquidity needs alongside the company’s dividend and repurchase plans.
- Monitor investment portfolio values, credit-card receivable performance, tax-rate developments and litigation disclosures.