Cato Corporation — Form 10-Q Summary
Reporting period: The quarter ended May 4, 2013, compared with the three months ended April 28, 2012. The request metadata says “2012 Q1,” but the filing is for fiscal 2013 Q1.
Business context and results
Cato operates women’s fashion specialty retail stores and a proprietary customer credit-card business. It reported Retail and Credit segments and operated 1,307 stores at quarter-end.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $269.7 million | $275.3 million | Down 2.1% |
| Retail sales | $267.2 million | $272.8 million | Down 2.1%; same-store sales down 5.0% |
| Gross margin dollars | $110.3 million | $115.0 million | Down 4.1% |
| Income before taxes | $48.8 million | $51.3 million | Down 4.8% |
| Net income | $30.8 million | $31.7 million | Down 2.8% |
| Diluted EPS | $1.05 | $1.09 | Down $0.04 |
| Operating cash flow | $49.1 million | $58.0 million | Down $8.9 million |
Margins, cash, and capital
- Cost of goods sold increased to 58.7% of retail sales from 57.9%; gross margin rate therefore declined to 41.3% from 42.1%. Management attributed pressure to higher occupancy costs and merchandise markdowns, partly offset by lower buying costs.
- SG&A declined to $59.4 million from $61.4 million and to 22.2% of retail sales from 22.5%. Depreciation was $5.4 million versus $5.8 million.
- The effective tax rate was 36.8%, compared with 38.2%, reflecting the Work Opportunity Tax Credit’s availability in 2013.
- Cash and cash equivalents were $65.4 million; short-term investments were $161.1 million. Working capital was $250.4 million. The company reported no borrowings under its revolving facility and had no funded debt disclosed.
- Capital expenditures were $5.6 million. Cash used in investing was $7.8 million; dividends paid were $1.5 million and share repurchases were $5.8 million.
Outlook, risks, and notable items
- Management expected approximately 65 store openings, 15 relocations, and 15 closures in fiscal 2013, and approximately $43.8 million in full-year capital expenditures. It did not provide a specific sales or earnings forecast.
- Management cited difficult economic conditions, higher payroll taxes, delayed tax refunds, and cooler-than-normal March and April weather as factors behind weaker same-store sales. It said available cash, investments, operating cash flow, and credit capacity should fund expected needs.
- The board maintained the quarterly dividend at $0.05 per share on May 23, 2013. The company said it had accelerated the full-year 2013 dividend of $1.00 in December 2012.
- A $3.45 million auction-rate security continued to fail its auctions and was valued using Level 3 assumptions; management recorded it at par and noted valuation sensitivity to assumptions and market conditions.
- Risks discussed include economic and consumer-spending uncertainty, competition and pricing pressure, fashion-trend forecasting, weather, and inventory-demand shifts. The filing reported no applicable legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Confirm the correct period: the filing covers the quarter ended May 4, 2013, despite the request metadata’s 2012 label.
- Reconcile the revolving credit capacity: the financing note and MD&A narrative describe a $35.0 million facility, while one MD&A sentence says $0.0 million. The filing reports no borrowings and an August 2013 commitment end date.
- Assess whether the 5.0% same-store sales decline and gross-margin compression persisted beyond the quarter.
- Review the assumptions and liquidity outlook for the failed-auction $3.45 million security, and the company’s planned store expansion and capital spending.