Business Context and Reporting Period
Company: The Cato Corporation (CATO)
Filing Type: Form 10-K (Annual Report)
Fiscal Year Ended: January 29, 2011
Business Overview: Cato operates 1,282 fashion specialty stores in 31 states, primarily in the southeastern U.S., under banners including "Cato," "Cato Plus," "It's Fashion," and "It's Fashion Metro." The company offers apparel and accessories at value prices. It also operates a credit card segment and plans to launch a new "Versona Accessories" division in fiscal 2011.
Key Financial Metrics (Fiscal 2010)
| Metric | Value |
|---|---|
| Total Revenues | $925.5 million |
| Retail Sales | $913.9 million |
| Net Income | $57.7 million |
| Earnings Per Share (Diluted) | $1.96 |
| Gross Margin | 38.1% of retail sales |
| Operating Cash Flow | $79.5 million |
| Working Capital | $239.2 million |
| Total Assets | $522.1 million |
| Debt | No borrowings outstanding under $35.0 million revolving credit facility |
Material Changes vs. Prior Period
- Revenue Growth: Retail sales increased 4.8% to $913.9 million, driven by a 3% increase in same-store sales and store development (37 new stores opened, 26 closed).
- Profitability: Net income rose 26.2% to $57.7 million from $45.8 million in fiscal 2009. Income before taxes increased 31.8% to $90.8 million.
- Margin Expansion: Cost of goods sold decreased as a percentage of retail sales to 61.9% (from 63.3%), improving gross margin dollars by 8.8% to $348.2 million. This was attributed to lower procurement costs and reduced markdowns.
- Expense Management: Selling, general, and administrative (SG&A) expenses increased 2.3% in dollars but decreased as a percentage of sales to 27.5% (from 28.2%).
- Dividends: The quarterly dividend was increased by 12% to $0.185 per share in May 2010.
Guidance, Outlook, and Risks
Outlook and Strategy
- Store Development: Plans to open 54 new stores in fiscal 2011, including 10 Cato, 34 It's Fashion Metro (including conversions), and 10 new Versona Accessories stores.
- Capital Expenditures: Anticipated investment of approximately $32.3 million for store openings, relocations, remodels, and technology.
- Liquidity: Management believes cash, cash equivalents, and operating cash flows are adequate to fund operations and capital needs.
Risks and Contingencies
- Economic Conditions: Continued adverse economic conditions and credit market issues could reduce consumer spending on discretionary items.
- Supply Chain: Significant reliance on overseas manufacturing (Far East) exposes the company to disruptions, shipping costs, and currency fluctuations.
- Competition: Intense competition from discounters, mass merchandisers, and off-price retailers.
- Inventory Risk: Volatility in fashion trends and the need to manage markdowns on slow-moving inventory.
- Concentration: Centralized distribution in Charlotte, North Carolina, creates operational risk if the facility is disrupted.
Investor Verification Checklist
- Same-Store Sales Sustainability: Verify if the 3% same-store sales growth can be maintained in a challenging economic environment.
- Inventory Valuation: Note the change in inventory valuation method from the retail method to the weighted-average cost method effective Q1 2011; assess impact on future margins.
- Store Performance: Monitor the performance of new "Versona Accessories" stores and the conversion of "It's Fashion" to "It's Fashion Metro" formats.
- Bad Debt Trends: Review credit segment performance; bad debt expense decreased to $2.8 million, but monitor for increases if consumer credit tightens.
- Capital Allocation: Track the execution of the $32.3 million capital expenditure plan and the impact on cash flow.