The Cato Corporation — FY2015 Form 10-K
Period clarification: The filing is for the fiscal year ended January 30, 2016, not 2014 Q4 as indicated in the request metadata. Fiscal 2015 contained 52 weeks. The filing also reports fourth-quarter results.
Business context and reporting period
Cato operated 1,372 apparel and accessories stores in 32 states, primarily in the southeastern United States, under the Cato, It’s Fashion, and Versona concepts. It also operated e-commerce websites and a proprietary credit-card program. Retail and credit were its two reportable segments.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Retail sales | $1,001.4 million | $977.9 million |
| Total revenue | $1,011.1 million | $986.9 million |
| Income before taxes | $99.1 million | $91.5 million |
| Net income | $66.8 million | $60.5 million |
| Diluted EPS | $2.39 | $2.15 |
| Operating cash flow | $93.9 million | $117.5 million |
| Capital expenditures | $26.5 million | $28.9 million |
- Retail sales grew 2.4%; same-store sales were flat. Growth was attributed largely to sales from a larger store base. E-commerce remained below 2% of total sales.
- Cost of goods sold was 61.6% of retail sales versus 61.4%; reported gross margin dollars rose 2.0% to $384.9 million. SG&A was 27.6% of retail sales versus 28.3%, mainly reflecting lower incentive compensation, partly offset by higher healthcare costs.
- Net income margin was approximately 6.6% of revenue, compared with 6.1% in FY2014. The effective tax rate declined to 32.6% from 33.9%.
- At year end, cash and cash equivalents were $67.1 million, short-term investments $215.5 million, and restricted cash and investments $4.5 million. Working capital was $279.0 million; current assets were $472.1 million and current liabilities $193.1 million.
- No revolving-credit borrowings were outstanding. The company had a $35 million unsecured revolving facility committed through August 2018 and was in compliance with its covenants.
- Operating cash flow fell $23.6 million, primarily due to inventory growth and lower accrued bonus and benefits. Operating cash flow less capital expenditures was approximately $67.3 million, down from $88.6 million.
- Cash dividends were $1.20 per share for the year. Total noncancelable operating lease commitments were $215.8 million, including $69.6 million due in fiscal 2016.
Fourth quarter: Revenue was $250.5 million versus $240.1 million; net income was $11.8 million versus $9.2 million; diluted EPS was $0.42 versus $0.33.
Material changes versus prior comparable period
- FY2015 revenue increased 2.5% and net income increased 10.5% year over year, after FY2014 revenue growth of 7.3% and net income growth of 11.4% over FY2013.
- Same-store sales slowed from 4% growth in FY2014 to flat in FY2015. The store count rose by 26 net stores, to 1,372.
- Credit revenue decreased to $5.4 million from $5.8 million, and credit segment pretax income fell to $2.0 million from $2.3 million.
- Cash and cash equivalents declined to $67.1 million from $93.9 million, while short-term investments increased to $215.5 million from $162.2 million. Total assets rose to $642.3 million from $608.3 million; stockholders’ equity rose to $412.7 million from $380.2 million.
- Net cash used in investing activities increased to $81.8 million from $27.7 million, primarily reflecting increased purchases of short-term investments and other assets.
Outlook, commentary, risks, and unusual items
- Management expected to open 23 stores in fiscal 2016, close up to 17, relocate 16, and remodel 10. Planned fiscal 2016 capital expenditures were approximately $27 million. Management stated liquidity, operating cash flows, and available credit should cover planned spending, dividends, and operating needs.
- The board maintained the quarterly dividend at $0.30 per share. In February 2016, the company repurchased 148,900 shares for $5.2 million, primarily to offset equity-compensation dilution.
- Key risks include fashion-trend and inventory misjudgments, intense retail and online competition, consumer-spending weakness, weather, overseas sourcing and vendor disruption, higher merchandise and transport costs, reliance on a centralized distribution center, cybersecurity and payment risks, and healthcare and self-insurance costs.
- Operating cash flow and earnings are seasonal; management noted that first- and second-quarter results historically contribute more to annual sales and profitability.
- The company recorded a favorable $1.0 million income-tax expense adjustment in FY2015 related to a prior-period deferred-tax calculation error; it said the correction was not material to prior- or current-period statements. Store-asset impairment charges were $1.9 million, versus $2.2 million in FY2014.
- Gross unrecognized tax benefits were approximately $9.6 million; the filing says about $9.8 million, including interest, would affect the effective tax rate if recognized. No pending litigation was expected to have a material effect. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: this is FY2015, ended January 30, 2016; the filing’s fiscal 2015 fourth-quarter figures are separately presented above.
- Track same-store sales, store productivity, e-commerce growth, and execution of planned openings, closures, relocations, and remodels.
- Monitor merchandise margins, inventory levels and markdowns, and the effect of sourcing and occupancy costs.
- Assess cash-flow conversion and investment-portfolio liquidity alongside dividends, buybacks, capital expenditures, and lease commitments.
- Review the resolution of uncertain tax positions and the assumptions behind self-insurance reserves and store-impairment estimates.