Business Context and Reporting Period
Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-K (Annual Report)
Fiscal Year Ended: February 3, 2007 (53 weeks)
Business Overview: Cato operates 1,276 women's fashion specialty stores in 31 states, primarily in the southeastern United States, under the banners "Cato," "Cato Fashions," "Cato Plus," and "It's Fashion!" The company focuses on value-priced apparel and accessories for junior/missy, plus sizes, and girls. It also operates a credit card division.
Key Financial Metrics
| Metric | Fiscal 2006 | Fiscal 2005 |
|---|---|---|
| Total Revenues | $875.9 million | $836.4 million |
| Retail Sales | $862.8 million | $821.6 million |
| Gross Margin | $290.1 million (33.6%) | $274.7 million (33.4%) |
| Net Income | $51.5 million | $44.8 million |
| Diluted EPS | $1.62 | $1.41 |
| Cash from Operations | $58.7 million | $70.9 million |
| Working Capital | $176.5 million | $139.1 million |
| Total Debt | $0 | $0 |
| Cash & Short-term Investments | $123.5 million | $107.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 5% to $875.9 million. This was driven by sales from 58 new stores and an additional week in the fiscal year (53 weeks vs. 52 weeks). The extra week contributed $17.2 million in sales.
- Comparable Store Sales: On an equivalent 53-week basis, comparable store sales decreased by 2%.
- Profitability: Net income rose 15% to $51.5 million. Gross margin percentage improved slightly to 33.6% due to lower procurement costs and reduced markdowns.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased 4% to $212.2 million but remained flat as a percentage of sales (24.6%). Bad debt expense decreased significantly to $2.6 million from $4.7 million in the prior year.
- Debt Status: The company remains debt-free, having fully repaid its term loan facility in April 2005. It maintains a $35 million unsecured revolving credit facility with no borrowings outstanding.
Guidance, Outlook, and Risks
- Expansion Plans: For fiscal 2007, the company plans to open approximately 90 new stores, relocate 25 stores, close up to 15 stores, and remodel 15 stores. Capital expenditures are projected at approximately $30 million.
- Dividends: The quarterly dividend was increased by 15% to $0.15 per share in May 2006, representing an annualized rate of $0.60.
- Key Risks:
- Fashion Trends: Volatility in customer tastes and the ability to predict trends are critical; failure to do so could lead to inventory markdowns.
- Supply Chain: Significant reliance on overseas manufacturing (principally the Far East) exposes the company to trade disruptions and currency fluctuations.
- Centralized Distribution: All merchandise flows through a single distribution center in Charlotte, North Carolina, creating a concentration risk.
- Seasonality: A disproportionate amount of revenue and income is realized in the first and fourth quarters.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 2% decline in comparable store sales on a 53-week basis and management's strategy to reverse this trend.
- Inventory Levels: Review inventory turnover and markdown exposure given the risks associated with fashion trends and the company's policy of not carrying over seasonal merchandise.
- Capital Allocation: Assess the return on investment for the planned $30 million capital expenditure program, specifically the opening of 90 new stores.
- Credit Portfolio Quality: Monitor the credit segment's bad debt expense, which improved significantly in 2006, to ensure it remains low relative to credit sales.
- Concentration Risk: Evaluate the operational resilience of the single distribution center in Charlotte, NC, against potential disruptions.