Cato Corporation — FY2018 Form 10-K
Period clarification: The filing is for the fiscal year ended February 2, 2019 (FY2018), not FY2017. FY2018 had 52 weeks; FY2017 had 53. The filing also reports FY2018 fourth-quarter results.
Business context
Cato operates value-priced apparel and accessories stores under the Cato, It's Fashion, and Versona concepts, primarily in the southeastern United States, alongside e-commerce and a proprietary credit-card business. It had 1,311 stores in 31 states at year-end, down from 1,351 a year earlier.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Retail sales | $821.1 million | $842.0 million |
| Total revenue | $829.7 million | $850.0 million |
| Income before taxes | $33.1 million | $16.0 million |
| Net income | $30.5 million | $8.5 million |
| Diluted EPS | $1.23 | $0.34 |
| Operating cash flow | $60.2 million | $36.0 million |
Retail sales declined 2.5%; management attributed the decrease largely to flat same-store sales, non-comparable store sales, and FY2017's extra week. Cost of goods sold fell to 63.6% of retail sales from 65.7%, lifting gross margin dollars (excluding depreciation) 3.3% to $298.6 million. SG&A was $262.5 million, or 32.0% of sales, versus 31.6%. Net income benefited from higher pre-tax income and lower income tax expense; the effective tax rate was 7.8%, compared with 46.5% in FY2017, which included one-time Tax Act charges.
FY2018 fourth-quarter revenue was $192.4 million, versus $213.0 million in the prior-year quarter; net loss was $3.2 million, versus $15.5 million. Fourth-quarter gross profit, excluding depreciation, was $65.0 million, versus $71.5 million.
Year-end working capital was $229.5 million, down from $233.4 million. Cash, cash equivalents, short-term investments, and restricted cash totaled $207.9 million as reported in selected financial data. There were no borrowings under the $35 million revolving facility. Non-cancellable operating lease payments totaled $193.6 million; these were off-balance-sheet operating leases under the accounting standard then in effect. Operating cash flow funded operations, capital expenditures, dividends, and repurchases. Capital expenditures were $4.4 million; financing cash outflow was $45.2 million, including $32.6 million in dividends and $13.3 million in share repurchases.
Changes, outlook, risks, and unusual items
- The Company closed 40 stores and relocated one during FY2018. For FY2019, it expected 12 openings, up to 51 closures, and two relocations; planned capital expenditures were approximately $13.3 million.
- The quarterly dividend was maintained at $0.33 per share after year-end. The annual dividend was $1.32 per share.
- FY2018 asset impairment charges declined to $1.5 million from $7.7 million. Topic 606 revenue recognition was adopted without a material cumulative effect; gift-card breakage and credit-related presentation changed, limiting direct comparability in certain line items.
- Key risks include fashion and inventory misjudgments, competitive and pricing pressure, consumer-demand and weather volatility, overseas sourcing and tariffs, and reliance on a single distribution center. The Company also identifies cybersecurity, e-commerce, litigation, regulatory, and self-insurance risks.
- The Company had $8.5 million of gross unrecognized tax benefits. Management said pending litigation was not expected to have a material adverse effect, while noting outcomes remain uncertain. Adoption of the new lease standard in FY2019 was expected to materially increase reported assets and liabilities.
- Management stated available liquidity and operating cash flows should fund planned needs. The independent auditor gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Whether same-store sales and store productivity stabilize after several years of sales declines and continued net store closures.
- Whether the planned FY2019 openings, closures, relocations, and capital spending were executed as expected.
- How recurring earnings and cash generation compare with FY2018, separating operating improvement from the unusually low tax rate.
- The effects of lease capitalization on reported liabilities, leverage measures, and performance comparisons.
- The quality, maturity, and liquidity of the investment portfolio, as well as the status of tax positions, lease commitments, and litigation contingencies.