The Cato Corporation — Form 10-Q summary
Period: Fiscal third quarter and first nine months ended October 29, 2011; filed December 7, 2011. The request metadata says “2010 Q3,” but the filing covers 2011 Q3. Financial statements are unaudited.
Business context and results
Cato operates fashion specialty retail stores and a proprietary customer credit-card business. It had 1,292 stores in 31 states, principally in the southeastern United States, at quarter-end.
| Metric | Three months ended Oct. 29, 2011 | Comparable 2010 | Nine months ended Oct. 29, 2011 | Comparable 2010 |
|---|---|---|---|---|
| Total revenue | $196.7m | $201.0m | $707.2m | $697.6m |
| Retail sales | $194.1m | $198.2m | $699.1m | $689.1m |
| Income before taxes | $8.9m | $8.7m | $84.7m | $74.9m |
| Net income | $6.1m | $5.9m | $54.7m | $47.9m |
| Diluted EPS | $0.21 | $0.20 | $1.86 | $1.62 |
| Dividends per share | $0.230 | $0.185 | $0.645 | $0.535 |
Financial position and cash flow
- Cash and liquidity: Cash and cash equivalents were $36.5m and short-term investments were $205.8m at October 29, 2011. Working capital was $270.2m; current assets were $420.0m and current liabilities $149.8m.
- Debt: No borrowings were outstanding. The company had a $35.0m unsecured revolving facility committed through August 2013 and was in compliance with its covenants. Letters of credit outstanding were approximately $4.2m.
- Cash flow, first nine months: Operating cash flow was $68.0m versus $60.4m. Capital expenditures were $26.6m versus $14.3m. Investing activities used $51.1m; financing activities used $29.0m. Cash declined $12.1m from the fiscal-year start to $36.5m.
- Capital returns: Dividends paid were $19.0m and share repurchases were $10.6m in the first nine months. The company repurchased 452,778 shares at an average $23.41 per share. The board maintained the quarterly dividend at $0.23 per share on November 22, 2011.
Changes versus comparable periods
- Third-quarter retail sales fell 2.0%; same-store sales declined 3.0%. Nine-month retail sales rose 1.5%, although same-store sales fell 1.0%.
- Third-quarter net income rose 3.5%; nine-month net income rose 14.2%. SG&A fell to 29.6% of retail sales from 30.6% in the quarter, and to 25.7% from 27.7% year to date.
- Cost of goods sold increased as a share of retail sales: 64.8% versus 64.2% for the quarter and 61.4% versus 60.7% year to date. Management attributed the quarterly increase mainly to store-development occupancy costs and the year-to-date increase mainly to weaker full-price sell-throughs. Gross-margin dollars declined 3.8% in the quarter and 0.4% year to date.
- The company changed inventory accounting effective January 30, 2011, from the retail method to weighted-average cost and retrospectively adjusted prior periods. The change increased inventory and retained earnings at January 31, 2010 by $11.7m and $7.3m, respectively; it also affected reported prior-period earnings. Compare periods using the restated figures in this filing.
Outlook, risks, and unusual items
- Management expected approximately 38 store openings, four relocations, and 29 closures for fiscal 2011, and approximately $32.0m of full-year capital expenditures. Through the first nine months, it had opened 23 stores, relocated three, and closed 13.
- Management stated cash, investments, and operating cash flow should be adequate for normal operations, planned capital expenditures, dividends, and repurchases for fiscal 2011 and the following 12 months. No earnings or sales guidance was provided in the supplied filing text.
- Management cited difficult economic conditions and customer uncertainty. Disclosed risks include consumer spending and credit-market conditions, competition and pricing pressure, fashion-trend forecasting, buying patterns, weather, and inventory-demand shifts.
- A $3.5m auction-rate security continued to fail its auction and is valued using Level 3 assumptions; management noted valuation and liquidity uncertainty. Interest-rate exposure was described as not material. The company does not use derivatives.
- The third-quarter effective tax rate was 31.4%, versus 32.0%, partly reflecting a reduction in a reserve after a state tax audit closed. Tax examinations and expiring statutes could change unrecognized tax benefits; the possible amount was not estimable.
- Disclosure controls were judged effective. The company reported no material change in internal control over financial reporting other than the inventory-accounting change. No legal proceedings were reported as applicable.
Important facts for investors to verify
- Confirm the filing period: the document reports the quarter ended October 29, 2011, not 2010 Q3.
- Review same-store sales, full-price sell-throughs, and gross-margin trends against management’s explanations.
- Assess the assumptions and liquidity risk for the failed auction-rate security and other Level 3 investments.
- Track delivery of the stated store-opening, closure, relocation, and capital-expenditure plans, as well as the impact of repurchases and dividends on cash.
- Use the retrospectively restated 2010 comparatives when evaluating earnings, inventory, and margins.