Cato Corporation — Form 10-Q Summary
Reporting period: Quarter ended July 30, 2011; six months ended July 30, 2011, compared with the periods ended July 31, 2010. The request metadata says “2010 Q2,” but the filing is for the second quarter of 2011.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Retail sales | $234.1 million | $231.8 million | $505.0 million | $490.9 million |
| Total revenues | $236.8 million | $234.7 million | $510.5 million | $496.7 million |
| Income before taxes | $28.3 million | $26.6 million | $75.8 million | $66.3 million |
| Net income | $18.1 million | $17.0 million | $48.6 million | $42.0 million |
| Diluted EPS | $0.61 | $0.58 | $1.65 | $1.42 |
- Retail sales rose about 1% in Q2 and 3% in the first half. Same-store sales fell 1% in Q2 and were flat for the first half.
- Cost of goods sold rose to 62.0% of retail sales in Q2 from 61.0%, and to 60.1% in the first half from 59.3%. Management attributed the increase primarily to weaker sell-through of regular-price merchandise. Gross margin dollars were down 1.7% in Q2 and up 0.9% in the first half.
- SG&A declined to 25.2% of retail sales in Q2 from 26.9%, and to 24.2% in the first half from 26.6%, mainly due to lower incentive compensation and insurance costs. Net income was 7.7% of retail sales in Q2 versus 7.3%, and 9.6% in the first half versus 8.6%.
- Operating cash flow was $67.5 million in the first half, versus $59.9 million a year earlier. Capital expenditures were $15.8 million; dividends paid were $12.2 million; share repurchases were $2.9 million.
- At July 30, cash and cash equivalents were $77.4 million and short-term investments were $190.5 million. Working capital was $279.7 million, versus $242.3 million a year earlier. The company had no borrowings under its $35 million revolving facility and reported compliance with its covenants.
Changes, outlook and risks
- The company operated 1,285 stores in 31 states. In the first half it opened 12 stores, relocated one and closed nine. Fiscal 2011 plans called for approximately 41 openings, six relocations and 23 closures, with about $33 million of capital expenditures.
- The board maintained the quarterly dividend at $0.23 per share, or $0.92 annualized. It also authorized an additional two million shares for repurchase; 33,600 shares were repurchased after quarter-end.
- Effective January 30, 2011, Cato changed inventory accounting from the retail method to weighted-average cost and retrospectively adjusted prior periods. The filing says this method better matches cost of sales with sales. The change increased inventory and retained earnings; it reduced previously reported first-half 2010 net income by $1.067 million. Comparisons should therefore use the restated figures.
- One $3.5 million auction-rate security continued to fail its auction. Its estimated fair value relies on significant unobservable assumptions, including expected timing of liquidity; management noted that valuation could change materially with assumptions or market conditions.
- Management cited difficult economic conditions and consumer uncertainty. Other identified risks include competition and pricing pressure, fashion-trend and buying-pattern uncertainty, adverse weather, inventory-demand shifts, and credit-market conditions. Tax audits and expiring statutes could also change unrecognized tax benefits; the potential amount was not estimable.
- The company stated that cash, investments and operating cash flow should fund planned spending, dividends and repurchases for fiscal 2011 and the foreseeable future. It did not provide earnings guidance in the supplied filing text.
Important facts for investors to verify
- Confirm the period being analyzed: this filing covers Q2 2011, notwithstanding the request metadata’s 2010 label.
- Assess sales quality and margin pressure, particularly declining Q2 same-store sales and higher merchandise costs as a share of sales.
- Review the retrospective inventory-accounting change and its effect on prior-period comparability.
- Monitor planned store expansion and the approximately $33 million fiscal-year capital expenditure outlook against operating cash generation.
- Track the failed auction-rate security’s liquidity and valuation assumptions, and developments in tax audits and unrecognized tax benefits.