Cato Corporation — Form 10-Q Summary
Reporting period: Thirteen weeks ended April 29, 2017, compared with the thirteen weeks ended April 30, 2016. Although the request metadata identifies “2016 Q1,” the filing itself reports first-quarter fiscal 2017. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Retail sales | $237.7 | $285.5 |
| Total revenue | $239.7 | $288.0 |
| Cost of goods sold | $145.8 | $164.0 |
| Gross margin dollars | $91.9 | $121.5 |
| SG&A | $63.8 | $71.1 |
| Income before taxes | $26.1 | $50.2 |
| Net income | $22.2 | $35.9 |
| Basic and diluted EPS | $0.85 | $1.29 |
| Operating cash flow | $15.6 | $36.2 |
- Retail sales and total revenue each declined about 16.8%; same-store sales fell 17.0%. E-commerce was less than 2% of sales.
- Gross margin was 38.7% of retail sales, down from 42.6%. Cost of goods sold rose to 61.3% of retail sales from 57.4%, primarily reflecting weaker regular-price sales, more markdowns, and higher occupancy, purchasing and sourcing costs relative to sales.
- SG&A fell 10.3% in dollars but increased to 26.8% of retail sales from 24.9%. Depreciation was $5.1 million versus $5.7 million.
- Net margin was 9.4% of retail sales versus 12.6%. The effective tax rate declined to 14.7% from 28.5%; the filing attributes this to earnings mix, favorable adjustments, tax initiatives, and a change in the estimate for uncertain tax positions.
- Interest and other income was $0.9 million, compared with $2.9 million, mainly because the prior-year quarter included the effect of a change in estimated gift-card breakage income.
Liquidity, cash flow and capital
- At April 29, 2017, cash and cash equivalents were $52.4 million and short-term investments were $178.9 million. Working capital was $269.6 million, compared with $271.9 million at January 28, 2017.
- There was no debt outstanding. The company had a $35 million unsecured revolving facility committed through August 2018 and was in compliance with its financial covenants.
- Operating cash flow was $15.6 million, down $20.6 million year over year, primarily due to lower net income and accrued taxes, partly offset by inventory changes. Investing activities provided $18.4 million, largely from net short-term investment sales; financing activities used $28.8 million.
- Quarterly capital expenditures were $3.4 million. The company expected approximately $16 million of capital expenditures for fiscal 2017.
- The company repurchased 846,000 shares during the quarter for approximately $18.8 million, averaging $22.27 per share; 1,778,641 shares remained authorized for repurchase. Cash-flow statements report $20.5 million of common-stock repurchases, including accrued treasury stock.
- The quarterly dividend was $0.33 per share, up from $0.30 in the prior-year quarter; the board maintained the $0.33 dividend on May 19, 2017. Management said available liquidity and expected cash flows should fund operations, capital spending, dividends and repurchases for fiscal 2017 and the next 12 months.
Changes, outlook and risks
- The company operated 1,374 stores in 33 states at quarter-end. During the quarter it opened three stores and relocated one. For fiscal 2017, it expected approximately nine openings, eight relocations and 19 closures.
- No earnings or sales guidance is provided in the supplied filing text. Management cautioned that interim results may not indicate full-year results.
- A first-quarter change in the estimate for unrecognized tax benefits reduced income-tax expense by $1.5 million, other noncurrent liabilities by $2.5 million, and deferred tax assets by $1.0 million.
- Routine litigation was covered by approximately $9.9 million of accrued litigation expense. Management did not expect reasonably possible losses from pending matters to materially affect the financial statements, but acknowledged that an adverse outcome could materially affect a reporting period.
- Key disclosed business risks include consumer spending and confidence, competition and pricing, fashion trends and demand forecasting, weather, and inventory liquidation and markdown risk.
- After quarter-end, the company reported repurchasing 120,035 additional shares for approximately $2.7 million through May 24, 2017. It also granted 191,919 restricted shares on May 1, with compensation expense to be recognized over the vesting period.
Most important facts for investors to verify
- Confirm the intended period: the filing is for Q1 fiscal 2017, not Q1 2016 as stated in the request metadata.
- Track same-store sales, full-price selling, markdown levels and gross margin recovery after the 17% comparable-store decline.
- Assess whether operating cash flow can sustain planned capital expenditures, dividends and repurchases as earnings and cash generation weaken.
- Review the basis and recurring impact of the lower tax rate, including the uncertain-tax-position estimate change.
- Monitor litigation developments and the adequacy of the $9.9 million accrual, along with execution of planned store closures, openings and relocations.