Cato Corporation — Form 10-Q Summary
Period: The filing reports the 13 weeks ended April 29, 2023, compared with the 13 weeks ended April 30, 2022. The request metadata says 2022 Q1, but the supplied filing is for fiscal 2023 Q1. Cato operates women’s apparel, footwear and accessories stores, plus a proprietary credit-card business; its retail brands include Cato, It’s Fashion and Versona.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Retail sales | $190.3 million | $204.9 million | Down 7.1% |
| Total revenue | $192.1 million | $206.7 million | Down 7.1% |
| Gross margin dollars | $68.2 million | $72.7 million | Down 6.1% |
| Cost of goods sold / retail sales | 64.2% | 64.5% | Improved 0.3 percentage points |
| SG&A / retail sales | 32.5% | 29.5% | Increased 3.0 percentage points |
| Income before taxes | $6.6 million | $11.7 million | Down 43.8% |
| Net income | $4.4 million | $9.7 million | Down 54.6% |
| Diluted EPS | $0.22 | $0.46 | Down $0.24 |
| Operating cash flow | $9.9 million | $(0.8) million | Improved $10.7 million |
Cash and cash equivalents were $39.6 million and short-term investments were $87.8 million at April 29, 2023. Working capital was $87.9 million. Total assets were $534.6 million and stockholders’ equity was $226.8 million. The company had no revolver borrowings and no letters of credit reducing availability under its $35 million unsecured revolving facility, committed through May 2027. Lease liabilities totaled approximately $155.5 million, including current and noncurrent portions.
Investing cash flow was $15.3 million, including $6.2 million of capital expenditures and net proceeds from short-term investment sales. Financing cash use was $5.6 million, including $3.5 million in dividends and $2.3 million in share repurchases. The quarterly dividend was maintained at $0.17 per share.
Material changes and management commentary
- Management attributed lower sales primarily to fewer same-store transactions amid pressure on customers’ disposable income, and to stores closed over the prior 12 months; higher average sales per transaction and newer store openings partly offset the decline. E-commerce was less than 5.1% of sales.
- Cost of goods sold as a share of retail sales improved, mainly from lower ocean and outbound freight costs, partly offset by occupancy and buying-cost deleverage. Gross margin dollars nevertheless declined with sales.
- SG&A increased as a share of sales due chiefly to wage and other operating-cost inflation and expenses associated with closing 20 stores during the quarter; lower insurance expense partly offset these pressures.
- The company operated 1,264 stores at quarter-end, after opening four and permanently closing 20. It anticipated closing approximately 80 stores during fiscal 2023.
- The effective tax rate rose to 32.6% from 16.7%, primarily because of higher GILTI relative to lower pretax earnings.
Outlook, risks and contingencies
Management expected cash, cash equivalents, short-term investments, operating cash flows and available revolver capacity to fund operating needs and expected capital expenditures for fiscal 2023 and the following 12 months. Fiscal 2023 capital expenditures were expected to be approximately $22.1 million, including distribution-center automation projects. Management warned that inflation, wage pressure and higher interest rates were weighing on operating costs and customers’ discretionary spending and could continue to negatively affect fiscal 2023 results. Other cited risks include consumer demand and confidence, competition and pricing, fashion-trend execution, inventory liquidation, weather and public-health disruptions, and supply-chain or broader market conditions.
The company described routine litigation and said it did not believe reasonably possible losses from pending matters would materially adversely affect the financial statements, while noting that an adverse outcome could have a material impact in a particular period. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is fiscal 2023 Q1, not 2022 Q1.
- Track same-store sales, transaction counts and whether inflation and higher rates continue to constrain customer spending.
- Monitor the planned store closures, resulting sales and expense effects, and execution of the capital-spending program.
- Assess whether lower freight costs can continue to offset wage, occupancy and other operating-cost pressures.
- Review investment-portfolio valuation and interest-rate exposure, lease obligations, and the sustainability of dividends and repurchases as earnings change.