The Cato Corporation — Form 10-Q
Reporting period: Quarter ended July 30, 2022, with six-month results compared with the periods ended July 31, 2021. The request metadata says “2021 Q2,” but the filing itself is for 2022 Q2.
Business context and results
Cato operates women’s apparel, footwear and accessories stores and a proprietary credit-card business. It operated 1,312 stores in 32 states at quarter-end. E-commerce represented less than 5% of first-half sales.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $196.9 million | $207.7 million | $403.6 million | $420.8 million |
| Retail sales | $195.0 million | $206.0 million | $399.9 million | $417.2 million |
| Income before taxes | $3.4 million | $18.6 million | $15.1 million | $42.3 million |
| Net income (loss) | $(2.3) million | $14.0 million | $7.5 million | $34.7 million |
| Diluted EPS | $(0.11) | $0.62 | $0.35 | $1.54 |
| Gross margin, as a share of retail sales | 32.4% | 43.9% | 34.0% | 42.6% |
Financial position and cash flow
- Cash and cash equivalents were $30.2 million and short-term investments were $123.4 million at July 30, 2022. Working capital was $106.2 million.
- Operating cash flow for the first six months was $17.0 million, versus $82.0 million a year earlier. Capital expenditures were $10.4 million, compared with $1.1 million.
- The company reported no revolver borrowings and no outstanding letters of credit reducing availability. Its unsecured revolving facility provides up to $35 million and runs through May 2027; the company was in covenant compliance.
- Lease liabilities totaled $156.5 million, including $59.5 million current and $97.0 million noncurrent. The filing reports no other borrowings outstanding.
- First-half dividends paid were $7.3 million and share repurchases were $9.6 million. A quarterly dividend of $0.17 per share was declared on August 25, 2022.
Material changes and management commentary
- Q2 retail sales fell 5%, including a 5% decline in same-store sales, primarily from fewer transactions. First-half retail sales fell 4%; same-store sales declined 4% on fewer transactions and lower average sales per transaction.
- Cost of goods sold rose to 67.6% of retail sales in Q2 from 56.1%; first-half cost of goods sold rose to 66.0% from 57.4%. Management attributed the deterioration primarily to more marked-down sales and higher freight, distribution and occupancy costs. Gross-margin dollars declined 30.0% in Q2 and 23.6% for the first half.
- SG&A declined in dollars but remained substantial: $60.8 million in Q2 and $121.2 million for the first half. Lower incentive compensation partly offset increased payroll and wage costs.
- First-half effective tax rate was 50.6%, versus 18.0%, reflecting GILTI, state taxes and nondeductible officer compensation against lower pretax earnings, partly offset by foreign tax items.
- Interest and other income was $1.9 million in Q2 versus $0.5 million a year earlier; management primarily attributed the increase to insurance proceeds related to 2021 hurricanes.
Outlook, risks and contingencies
- Management expects about 25 store openings and 40 closures in fiscal 2022, and approximately $20.5 million of full-year capital expenditures. Eight stores opened and seven closed in the first half.
- Management believes cash, investments, operating cash flow and available revolver capacity will fund normal operations and expected capital spending for fiscal 2022 and the following 12 months. No earnings or sales guidance is provided.
- Management cited continuing uncertainty from COVID-19 effects, supply-chain and shipping disruption, inflation, merchandise and transportation costs, wage pressure, labor availability, and potential effects on customer spending and inventory markdowns.
- Routine litigation is pending; management does not believe reasonably possible losses are expected to materially affect the financial statements, while noting an adverse outcome could have a material impact in a particular period.
- Chairman, President and CEO John P. D. Cato beneficially owns a majority of voting power, making the company eligible for NYSE “controlled company” exemptions. The company said it was not then relying on those exemptions.
Important facts for investors to verify
- Confirm the correct period: this filing reports the quarter ended July 30, 2022, not 2021 Q2.
- Assess whether markdowns, freight and occupancy costs continue to pressure gross margin, and whether lower sales transactions persist.
- Review the sustainability of earnings and cash generation, including the unusually high first-half effective tax rate and the effects of working-capital movements.
- Track planned store openings and closures, capital spending, lease obligations, dividends and repurchases against available liquidity.
- Monitor inflation, supply-chain, labor and consumer-spending risks, as well as any material developments in litigation or governance.