Cato Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended August 3, 2013, compared with periods ended July 28, 2012. This differs from the request metadata indicating 2012 Q2.
Business: Women’s fashion specialty retailer operating Cato, It’s Fashion and Versona stores, plus a proprietary credit-card business. The company operated 1,306 stores in 31 states at quarter-end.
Financial performance
| Metric | Three months ended Aug. 3, 2013 | Year-over-year change | Six months ended Aug. 3, 2013 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $231.7 million | Down 1.0% | $501.4 million | Down 1.6% |
| Retail sales | $229.4 million | Down 0.9%; same-store sales down 2.0% | $496.6 million | Down 1.5%; same-store sales down 4.0% |
| Income before taxes | $23.1 million | Down 16.4% | $71.9 million | Down 8.8% |
| Net income | $14.8 million | Down 14.8% | $45.6 million | Down 7.0% |
| Diluted EPS | $0.51 | Compared with $0.59 | $1.56 | Compared with $1.68 |
Margins and costs: Gross margin, measured as retail sales less cost of goods sold before depreciation, was $84.4 million, or 36.8% of retail sales, in the quarter versus $89.0 million, or 38.4%, a year earlier. For six months, it was $194.7 million, or 39.2%, versus $203.9 million, or 40.4%. Higher markdowns and store-development occupancy costs pressured the quarterly margin. SG&A was $59.0 million for the quarter and $118.4 million for six months; as a percentage of retail sales it was 25.7% and 23.8%, respectively.
Cash flow and liquidity: Six-month operating cash flow was $75.8 million, up from $70.5 million; capital expenditures were $10.6 million versus $19.9 million. Cash and cash equivalents were $88.6 million, short-term investments $157.3 million, and working capital $263.6 million at August 3, 2013. The company reported no borrowings under its $35 million unsecured revolving credit facility, extended to August 2015, and was in compliance with its covenants. No debt balance was reported.
Capital returns: The company paid $2.9 million in dividends and repurchased $5.8 million of shares during the six-month period. The reported dividends per share were $0.10 for six months versus $0.48 a year earlier; the company said it had accelerated the full fiscal 2013 dividend of $1.00 in December 2012. On August 29, 2013, the board maintained the quarterly dividend at $0.05 per share.
Changes, outlook and risks
- Management attributed weaker sales to slow economic growth, high unemployment and customers’ limited discretionary spending. Credit revenue also declined modestly, primarily from lower finance-charge and late-fee income.
- Fiscal 2013 plans called for approximately 51 store openings, nine relocations and 17 closures. In the first half, the company opened four stores, relocated three and closed eight. Expected fiscal 2013 capital expenditures were approximately $42 million, including store development, home-office renovations and e-commerce start-up.
- Management expected cash, investments, operating cash flow and available credit to fund operating needs, capital expenditures, dividends and repurchases for fiscal 2013 and the foreseeable future. Interim results may not indicate full-year results.
- Key disclosed risks include economic and consumer-spending conditions, competition and pricing, fashion-trend forecasting, buying patterns, adverse weather and inventory-demand shifts. The company identified estimates involving credit losses, insurance reserves, asset impairment, inventory shrinkage and uncertain tax positions as significant accounting judgments.
- A $3.45 million auction-rate security continued to fail auctions. It was carried at estimated fair value using Level 3 assumptions; management noted that valuation is sensitive to market conditions and assumptions about future liquidity. The company reported no legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: the filing is for Q2 and the first half of fiscal 2013, not 2012 Q2.
- Track same-store sales, markdowns and occupancy costs, which contributed to lower gross margin and earnings.
- Assess execution and funding of the planned $42 million capital program and store openings, relocations and closures.
- Review the auction-rate security’s liquidity assumptions and the status of the $35 million revolver and its covenants.
- Account for the timing of the accelerated fiscal 2013 dividend when comparing dividend payments with prior periods.