Cato Corporation — Form 10-K Summary
Period clarification: The request metadata says “2015 Q4,” but the filing is an annual report for the fiscal year ended January 28, 2017 (fiscal 2016), with comparative annual results and unaudited quarterly data.
Business context and reporting period
Cato operates fashion specialty stores under the Cato, It’s Fashion, It’s Fashion Metro and Versona names, primarily in the southeastern United States. At year-end it operated 1,371 stores in 33 states. The company reports Retail and Credit segments; e-commerce was less than 2% of sales.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Retail sales | $947.4 million | $1,001.4 million |
| Total revenue | $956.6 million | $1,011.1 million |
| Income before taxes | $49.1 million | $99.1 million |
| Net income | $47.2 million | $66.8 million |
| Diluted EPS | $1.72 | $2.39 |
| Operating cash flow | $72.1 million | $93.9 million |
| Capital expenditures | $27.3 million | $26.5 million |
- Same-store sales fell 6%. Gross margin dollars, excluding depreciation, declined 10.3% to $345.4 million; cost of goods sold rose to 63.5% of retail sales from 61.6%, reflecting more markdowns and slightly higher buying and occupancy costs.
- SG&A increased 5.0% to $289.6 million, or 30.6% of retail sales versus 27.6%. Store asset impairment charges rose to $13.6 million from $1.9 million.
- Year-end cash, cash equivalents, short-term investments and restricted cash totaled $252.2 million; working capital was $271.9 million. The company had no year-end borrowings and had a $35 million unsecured revolver committed through August 2018.
- Operating cash flow funded operating needs, capital expenditures, dividends and share repurchases. Cash and cash equivalents alone were $47.2 million, down from $67.1 million.
- Fiscal 2016 dividends were $1.29 per share. The company repurchased 1.32 million shares for approximately $42.6 million during the year.
- Operating lease commitments totaled $223.3 million, including $72.0 million due in fiscal 2017. The filing reports no other off-balance-sheet arrangements beyond ordinary-course operating leases.
Material changes and unusual items
- Revenue fell 5.4% and net income fell 29.4% year over year; store sales per square foot declined to $151 from $162.
- Fiscal fourth-quarter revenue was $220.4 million and the company reported a $12.8 million net loss, compared with $250.5 million revenue and $11.8 million net income in the prior-year quarter.
- Interest and other income increased to $7.0 million from $3.5 million, primarily reflecting a change in the estimate for gift-card breakage. The company shortened the dormancy period used to recognize breakage from 60 to 24 months and recognized $3.4 million of breakage income in fiscal 2016, versus $0.5 million in fiscal 2015.
- The effective tax rate was 3.9%, versus 32.6%, reflecting foreign and domestic tax initiatives, including tax benefits associated with charitable inventory contributions. Fiscal 2016 also included early adoption of a stock-compensation tax accounting update, which reduced income tax expense by $0.7 million.
- The company revised its prior-year balance-sheet classification of $13.6 million in uncertain tax benefits from current to noncurrent liabilities, concluding the revision was immaterial; there was no income-statement or cash-flow impact.
Outlook, risks and contingencies
- Management expected to open 13 stores in fiscal 2017, close up to 19, relocate eight and remodel 10. Planned fiscal 2017 capital expenditures were approximately $15.7 million. Management stated available liquidity and operating cash flows should fund planned needs.
- The board maintained the quarterly dividend at $0.33 per share in February 2017. The company reported an additional 160,000 shares repurchased for $4.0 million through March 23, 2017, primarily to offset equity-compensation dilution.
- Key risks include volatile fashion demand and inventory markdowns, intense price competition, consumer-spending weakness, overseas sourcing and transportation disruptions, weather, store-location performance, and dependence on a centralized distribution center and third-party carriers. Cybersecurity, information systems, e-commerce execution, staffing and regulatory compliance are also identified risks.
- The company had $10.7 million of gross unrecognized tax benefits and approximately $9.8 million accrued for litigation at year-end. Management did not believe pending litigation was likely to have a material adverse effect, but noted an adverse outcome could materially affect a reporting period.
- The filing identifies pending lease-accounting changes that will put substantially all leases on the balance sheet. The company was assessing the impact; its disclosed future operating lease commitments are substantial.
Most important facts for investors to verify
- Whether the sharp deterioration in same-store sales and margins continued after year-end, and the drivers and duration of elevated markdowns and store impairments.
- How much fiscal 2016 earnings benefited from the gift-card breakage estimate change and unusually low effective tax rate, and whether either benefit is repeatable.
- Whether planned store openings, closures and capital spending are achieving expected returns, given lower sales per store and impairment charges.
- The liquidity, maturity and credit quality of the investment portfolio, as well as the timing and possible resolution of uncertain tax positions and litigation accruals.
- The metadata-period discrepancy: this summary reflects the 10-K’s fiscal year ended January 28, 2017, not a 2015 fourth quarter filing.