Cato Corporation — FY2014 Form 10-K
Business context and reporting period. The metadata labels this “2013 Q4,” but the filing is Cato Corporation’s annual report for the fiscal year ended January 31, 2015 (FY2014), with comparative annual results and unaudited quarterly data. Cato operated 1,346 fashion specialty stores in 32 states, primarily in the Southeast, and also operated e-commerce and a proprietary credit-card business.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Retail sales | $977.9 million | $910.5 million |
| Total revenue | $986.9 million | $920.0 million |
| Income before taxes | $91.5 million | $84.3 million |
| Net income | $60.5 million | $54.3 million |
| Diluted EPS | $2.15 | $1.86 |
| Operating cash flow | $117.5 million | $93.0 million |
- Retail sales rose 7.4%; comparable-store sales increased 4%. E-commerce sales remained below 1% of sales.
- Gross margin dollars, excluding depreciation, increased 11.2% to $377.3 million; cost of goods sold declined to 61.4% of retail sales from 62.7%, reflecting higher regular-price sales and leverage of merchandise and distribution costs.
- SG&A increased 12.4% to $276.2 million and rose to 28.3% of retail sales from 27.0%, primarily due to higher incentive compensation. Net income margin was approximately 6.1% of revenue, versus 5.9% in FY2013.
- Credit-segment income before tax declined to $2.3 million from $2.6 million as credit revenue fell to $5.8 million. Credit-card sales were 3.9% of retail sales; layaway sales were 4.5%.
- Fourth-quarter FY2014 revenue was $240.1 million and net income was $9.2 million, compared with $217.6 million and $3.8 million in the prior-year quarter; diluted EPS was $0.33 versus $0.13.
Liquidity, capital and balance sheet
- Cash, cash equivalents, short-term investments and restricted cash totaled $260.6 million at year-end; working capital was $260.6 million. Total assets were $608.3 million and stockholders’ equity was $380.2 million.
- No borrowings were outstanding under the $35 million unsecured revolving facility, which was committed through August 2015; the company reported compliance with its covenants. The filing reports no material interest-rate exposure.
- Capital expenditures were $28.9 million in FY2014. Management planned approximately $38.1 million for FY2015, including store development, technology and office renovation. The company expected 45 new stores and up to 13 closures in FY2015.
- Cash dividends paid were $1.20 per share in FY2014, versus $0.20 in FY2013; the board maintained a $0.30 quarterly dividend in February 2015. Cato repurchased approximately 1.51 million shares for $42.1 million during FY2014 and made no repurchases in the fourth quarter.
- Non-cancellable operating lease commitments totaled $203.8 million, including $65.3 million due in the next fiscal year. A $5.0 million land purchase commitment was expected to close by November 2015.
Changes, outlook and risks
- Results improved from FY2013: sales, comparable-store sales, net income and EPS increased. FY2013 had declined 2.5% in retail sales and comparable-store sales had fallen 3%.
- Management said available cash, investments, operating cash flow and the revolving facility should fund planned expenditures, dividends and operating requirements for FY2015 and the foreseeable future. No earnings or sales guidance was provided.
- Key risks include fashion-trend and inventory misjudgments, intense competition and pricing pressure, adverse weather and consumer-spending weakness, overseas sourcing and vendor disruptions, and reliance on a centralized Charlotte distribution center and third-party carriers. Cato also cited IT, cybersecurity, e-commerce, staffing, store-location, regulatory and self-insurance risks.
- Unrecognized tax benefits were approximately $9.4 million; accrued interest and penalties related to uncertain tax positions were approximately $4.8 million. The company said ordinary-course litigation was not expected to materially affect results, cash flows or financial position.
- Unusual items and disclosures include redemption at par of an auction-rate security for $3.45 million in the fourth quarter, and immaterial prior-period financial-statement corrections described in the notes. The auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended period: this is FY2014, not a 2013 fourth-quarter filing; use the unaudited quarterly table for quarter-specific comparisons.
- Assess whether the 4% comparable-store-sales increase and stronger regular-price selling continued, and whether e-commerce meaningfully expanded beyond less than 1% of sales.
- Track SG&A growth, incentive compensation, gross-margin performance and credit portfolio quality, including bad debt expense.
- Verify execution of the planned store openings, closures and $38.1 million FY2015 capital program, alongside lease commitments and the land purchase.
- Review the revolving facility’s August 2015 expiration, the resolution of uncertain tax positions and the valuation/liquidity of investment securities.