Cato Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended July 30, 2016, compared with periods ended August 1, 2015. The supplied filing is for 2016 Q2, notwithstanding the request metadata identifying 2015 Q2. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Results and key financial metrics
| Metric | Quarter 2016 | Quarter 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Retail sales | $236.7 | $249.2 | $522.2 | $530.8 |
| Total revenue | $238.9 | $251.3 | $526.9 | $535.2 |
| Income before taxes | $18.0 | $25.0 | $68.2 | $72.9 |
| Net income | $15.9 | $15.6 | $51.8 | $46.7 |
| Diluted EPS | $0.57 | $0.56 | $1.86 | $1.67 |
| Operating cash flow | Not stated by quarter | $55.0 | $55.8 |
- Quarterly same-store sales fell 6.0%; the six-month decline was 3.1%. E-commerce was less than 2% of sales for the six-month period.
- Gross margin dollars were $87.6 million for the quarter, down 7.5%, and $209.1 million for six months, down 2.2%. Cost of goods sold rose to 63.0% of retail sales for the quarter from 62.0%, and to 60.0% for six months from 59.7%.
- SG&A was $67.6 million for the quarter and $138.6 million for six months; as a share of retail sales, it increased to 28.5% and 26.5%, respectively, from 26.9% and 25.6%. Management cited higher store expenses, partly offset by lower incentive compensation.
- Net margin was 6.7% of retail sales for the quarter versus 6.3% a year earlier, and 9.9% for six months versus 8.8%. The quarter’s improvement reflected lower income tax expense despite lower pretax income.
- At July 30, cash and cash equivalents were $43.0 million and short-term investments were $262.4 million. Working capital was $329.0 million. There were no borrowings on the $35 million revolving facility, committed through August 2018; the company reported compliance with its covenants. No other debt balance is reported in the supplied filing text.
- Six-month investing cash use was $54.4 million, including $10.0 million of capital expenditures. Financing cash use was $24.6 million, including $17.5 million of dividends and $7.7 million of share repurchases.
Material changes and unusual items
- Quarterly retail sales decreased 5.0%, primarily due to lower same-store sales, partly offset by non-comparable store sales. The company operated 1,373 stores versus 1,358 a year earlier.
- Quarterly effective tax rate fell to 11.6% from 37.5%. Management attributed the change primarily to a $9.6 million benefit related to continuing foreign and domestic tax initiatives, including the PATH Act and early adoption of share-based compensation accounting guidance. The filing also reports a $594,000 income-statement impact from that early adoption.
- In the first quarter, the company changed its gift-card breakage dormancy estimate from 60 to 24 months and recognized $2.4 million of additional breakage income. This was recorded in interest and other income. The company also reported increased interest and other income due partly to this change.
- The January 30, 2016 balance sheet was revised to reclassify $13.6 million from accrued income taxes to other noncurrent liabilities. Management said the correction was immaterial and had no impact on income or cash flows.
- In August 2016, after quarter-end, the company repurchased 294,500 shares for approximately $10.2 million. The board maintained the quarterly dividend at $0.33 per share on August 25, 2016.
Outlook, commentary, and risks
- Management expected fiscal 2016 capital expenditures of approximately $26.8 million and planned approximately 12 store openings, six relocations, and 14 closures. In the first six months, it opened two stores, relocated four, and closed one.
- Management said cash, investments, operating cash flows, and available revolver capacity should fund regular operations, planned capital spending, dividends, and repurchases for fiscal 2016 and the next 12 months. This is management’s expectation, not a guarantee.
- Disclosed risks include consumer confidence and spending, competition and pricing pressure, changing fashion trends and consumer demand, adverse weather, and inventory risks from shifts in demand. The filing states that interim results may not indicate full-year results.
- The company reported no material change in internal controls and said its disclosure controls were effective as of July 30, 2016. Legal proceedings were listed as not applicable.
Important facts for investors to verify
- Whether sales and same-store sales trends improved after the quarter, and how store closures and openings affected comparable performance.
- How much of the earnings and tax-rate improvement is repeatable versus attributable to the $9.6 million tax benefit, gift-card breakage estimate change, and other discrete items.
- Gross-margin and SG&A trends, including the effects of regular-price sales, sourcing costs, and store expenses.
- Actual capital spending, store actions, repurchases, and dividend payments versus management’s plans, along with liquidity and investment-portfolio risks.