Business Context and Reporting Period
Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended April 30, 2011 (Fiscal Q1 2011)
Business Overview: The Company operates fashion specialty retail stores in 31 states, primarily in the southeastern United States, and offers a proprietary credit card program. As of April 30, 2011, the Company operated 1,282 stores.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $273,660 | $261,963 |
| Retail Sales | $270,933 | $259,040 |
| Net Income | $30,521 | $25,034 |
| Diluted EPS | $1.04 | $0.85 |
| Operating Cash Flow | $43,035 | $33,451 |
| Cash and Cash Equivalents | $81,173 | $53,731 |
| Short-term Investments | $180,113 | $166,404 |
| Working Capital | $275,759 | $231,324 |
| Debt (Revolving Credit) | $0 | $0 |
Margins: Gross margin dollars increased 3.0% to $112.5 million. Net income margin was 11.3% of retail sales compared to 9.7% in the prior year. SG&A expenses decreased to 23.4% of retail sales from 26.3%.
Material Changes vs. Prior Period
- Revenue Growth: Total retail sales increased 4.6% to $270.9 million, driven by a 2.0% increase in same-store sales due to favorable tax refund timing and weather.
- Profitability: Net income rose 22% to $30.5 million. This was supported by a decrease in SG&A expenses (down 290 basis points as a percentage of sales) and higher interest income.
- Cost of Goods Sold (COGS): COGS as a percentage of retail sales increased to 58.5% from 57.9%, primarily due to higher freight costs and product mix changes.
- Accounting Change: The Company changed its inventory accounting method from the retail method to the weighted average cost method effective January 30, 2011. Prior period figures have been retrospectively adjusted. This change resulted in a cumulative increase in inventory of $11.7 million and retained earnings of $7.3 million as of January 31, 2010.
- Store Count: The Company opened 4 new stores, relocated 1, and closed 4 during the quarter, ending with 1,282 stores.
Guidance, Outlook, and Risks
- Dividend Increase: On May 26, 2011, the Board increased the quarterly dividend by 24% from $0.185 to $0.23 per share (annualized rate of $0.92).
- Capital Expenditures: The Company expects to invest approximately $32.3 million in fiscal 2011, including opening 54 new stores and relocating 7.
- Share Repurchases: The Company repurchased 110,000 shares during the quarter at an average price of $23.48. Approximately 332,942 shares remain available under the current authorization.
- Liquidity: The Company maintains a $35.0 million unsecured revolving credit facility with no outstanding borrowings. Management believes cash flows and investments are sufficient to fund operations and dividends.
- Risks: Key risks include general economic conditions, consumer spending patterns, credit market conditions, and the valuation of a $3.5 million Auction Rate Security (ARS) that continues to fail its auction. The effective tax rate may fluctuate due to the resolution of state tax examinations.
Investor Verification Checklist
- Verify the impact of the change in inventory accounting method (retail to weighted average cost) on year-over-year comparability.
- Monitor the status and valuation of the $3.5 million failed Auction Rate Security (ARS) classified as a Level 3 asset.
- Confirm the sustainability of the 2.0% same-store sales growth given the reliance on favorable tax refund timing and weather.
- Review the Company's ability to meet the $32.3 million capital expenditure plan while maintaining dividend growth and share repurchases.
- Assess the potential volatility in the effective tax rate due to pending state tax examinations.