The Cato Corporation — Form 10-Q Summary
Reporting-period note: The request identifies “2016 Q2,” but the supplied filing is for the quarter ended July 29, 2017, with comparisons to July 30, 2016. This summary covers the filing provided.
Business context and period
Cato operates women’s apparel, footwear and accessories stores, principally in the southeastern United States, and offers a proprietary credit card. It reported two segments: Retail and Credit. At July 29, 2017, it operated 1,374 stores across 33 states. The interim statements are unaudited; amounts below are in millions of dollars unless noted.
Financial results and liquidity
- Quarter: Retail sales were $205.0 million, down 13.4% year over year; total revenue was $207.0 million, down 13.4%. The company recorded a pretax loss of $2.1 million and a net loss of $0.9 million, versus pretax income of $18.0 million and net income of $15.9 million a year earlier. Diluted loss per share was $0.03, compared with earnings per share of $0.57.
- First six months: Retail sales were $442.7 million, down 15.2%; total revenue was $446.7 million, down 15.2%. Net income was $21.4 million, or $0.82 per diluted share, compared with $51.8 million, or $1.86 per share, in the prior-year period.
- Margins and costs: Same-store sales fell 13.9% in the quarter and 15.5% for the six months. Cost of goods sold rose to 68.9% of retail sales for the quarter and 64.8% for the six months, from 63.0% and 60.0%, respectively. Gross margin dollars fell 27.2% for the quarter and 25.6% for the six months. SG&A fell in dollars but increased as a share of retail sales, to 31.4% for the quarter and 28.9% for the six months.
- Cash flow: Operating cash flow was $43.4 million for the six months, versus $55.0 million a year earlier. Capital expenditures were $6.4 million, compared with $10.0 million. Cash and cash equivalents were $77.7 million at quarter-end; short-term investments were $159.9 million.
- Liquidity and debt: Working capital was $254.0 million, compared with $271.9 million at January 28, 2017. The company had no borrowings outstanding under its $35 million revolving facility, committed through August 2020, and reported compliance with its financial covenants. Total liabilities were $186.4 million and stockholders’ equity was $362.6 million.
- Capital returns: The company paid $17.2 million in dividends and repurchased $29.6 million of stock during the six months. It declared a quarterly dividend of $0.33 per share on August 24, 2017.
Material changes and management commentary
- Management attributed the sales decline primarily to lower comparable-store sales. E-commerce represented less than 2% of sales for the six-month period.
- Lower regular-price sales and higher markdown sales, along with higher occupancy, purchasing and sourcing costs relative to sales, pressured gross margin.
- SG&A declined mainly because of lower litigation costs and store expenses, partly offset by higher insurance costs. Six-month interest and other income also declined, primarily because the prior-year period included the impact of a change in gift-card breakage income recognition.
- The six-month effective tax rate was 10.8%, versus 24.1%. Management cited lower earnings, a greater share of income from lower-tax jurisdictions, tax initiatives and a change in the estimate for uncertain tax positions. That estimate change reduced first-quarter tax expense by $1.5 million.
- Management stated that cash, investments, operating cash flow and available credit should be adequate for operating needs, planned capital expenditures, dividends and repurchases for fiscal 2017 and the next 12 months.
Outlook, risks and unusual items
- For fiscal 2017, management expected approximately $13.2 million of capital expenditures, about six store openings, three relocations and 24 closures. The company had opened five stores, relocated two and closed two during the first six months.
- In August 2017, the company repurchased an additional 247,100 Class A shares for approximately $3.6 million. It had 1,257,606 shares remaining under its repurchase authorization at July 29.
- Accrued litigation expense was approximately $10.1 million. Management did not believe reasonably possible losses from pending litigation would materially affect the financial statements, but cautioned that an adverse outcome could materially affect results, financial condition or cash flows in a particular period.
- Key disclosed risks include consumer spending and confidence, pricing and competition, changing fashion trends, adverse weather and inventory demand or markdown risk. The company said interest-rate exposure was not material and that it did not use derivatives.
- The company was assessing the impact of new revenue-recognition guidance, expected to affect gift-card and credit-card transactions; it intended to apply the standard retrospectively. A new lease-accounting standard was also under assessment.
Important facts for investors to verify
- Confirm the requested period: the supplied filing is for Q2 2017, not Q2 2016.
- Track comparable-store sales, markdown levels and gross-margin recovery after the steep sales decline.
- Review cash generation and working-capital trends, including inventory and accounts payable changes, and confirm liquidity remains sufficient for planned capital returns.
- Assess the $10.1 million litigation accrual and potential exposure beyond accrued amounts.
- Monitor execution of the store closure and capital expenditure plans, and the effects of the revenue-recognition and lease-accounting standards.