The Cato Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended February 3, 2024 (53 weeks), compared with the 52-week year ended January 28, 2023. Although the request metadata says “2022 Q4,” this filing reports FY2023 annual results, not a standalone quarter.
Business context
Cato is a value-focused apparel and accessories retailer, operating Cato, It’s Fashion and Versona concepts, primarily in the southeastern United States. It reported 1,178 stores in 31 states at year-end, down from 1,280 a year earlier; it opened 9 stores and closed 111. Retail and proprietary credit are its reportable segments.
Financial results and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Retail sales | $700.3 million | $752.4 million |
| Total revenue | $708.1 million | $759.3 million |
| Same-store sales change | -5.9% | Not clearly stated in the supplied filing text |
| Gross margin dollars | $236.0 million | $242.7 million |
| Gross margin as a share of retail sales | 33.7% | 32.3% |
| SG&A | $252.7 million; 36.1% of retail sales | $242.6 million; 32.3% of retail sales |
| Income (loss) before tax | -$13.8 million | $1.8 million |
| Net income (loss) | -$23.9 million | $0.03 million |
| Diluted earnings (loss) per share | -$1.17 | Less than $0.01 |
| Operating cash flow | $0.5 million | $13.4 million |
| Capital expenditures | $12.5 million | $19.4 million |
Cash and cash equivalents were $23.9 million and short-term investments were $79.0 million at year-end. Working capital was $55.1 million, down from $74.7 million; current assets were $243.1 million and current liabilities were $188.0 million. The company had no revolving-credit borrowings and was in compliance with its covenants. Its unsecured revolver provides up to $35 million and runs through May 2027. Lease liabilities totaled $153.1 million; FY2024 lease obligations were estimated at $66.9 million.
Dividends were $0.68 per share, or $14.0 million in total. Cash used for share repurchases was $2.6 million, compared with $15.2 million in FY2022.
Changes and notable items
- Total revenue fell 6.7%, despite FY2023 having one additional week. Retail sales declined 6.9%; the company attributed the same-store sales decrease mainly to fewer transactions.
- Cost of goods sold fell to 66.3% of retail sales from 67.7%, reflecting lower ocean freight costs and more full-price sales, partly offset by occupancy and buying-cost deleverage. SG&A rose 4.2%, chiefly from payroll, insurance and closed-store costs.
- The net loss included a $10.1 million income tax expense. The company recorded a $12.9 million increase in its deferred-tax valuation allowance, citing uncertainty about realizing deferred tax assets after the pretax loss.
- Store-asset impairment charges were $1.8 million, versus $0.9 million in FY2022. PwC identified store-location long-lived asset impairment as a critical audit matter, emphasizing judgment in projected store cash flows and fair values.
- FY2022 interest and other income included a $1.4 million North Carolina recovery grant and $1.7 million of insurance proceeds; neither was reported in FY2023.
- A $3.2 million estimated corporate-jet repair cost was included in miscellaneous receivables. The company sold investment land for $4.2 million, less commissions, on February 16, 2024, after year-end.
Outlook, risks and contingencies
Management said cash, investments and operating cash flows should fund regular operations, $66.9 million of FY2024 lease obligations and planned FY2024 capital expenditures of $8.7 million. It expected inflation and high interest rates to continue weighing on customer discretionary spending and results. Management also cited higher shipping costs and longer delivery times from Panama Canal drought restrictions and diversions around the Cape of Good Hope, with likely continued effects in FY2024.
Key risks include weak consumer demand, limited ability to pass through higher product, freight and wage costs, fashion and inventory-markdown exposure, overseas sourcing and shipping disruptions, competition, store-location execution, cybersecurity and dependence on a centralized Charlotte distribution center. The company reported no pending litigation it believed likely to have a material adverse effect. It said no cybersecurity incident identified during the year had materially affected, or was reasonably likely to materially affect, the business, while noting ongoing cybersecurity risks.
PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. Results remain subject to estimates, including impairment, tax valuation allowances, credit losses, inventory shrinkage and self-insurance reserves.
Investor verification priorities
- Check the FY2024 quarterly reports for sales trends, store closures, margins and whether freight and consumer-spending pressures persisted.
- Review the assumptions and later developments affecting the $18.0 million deferred-tax valuation allowance and the company’s ability to use tax assets.
- Track operating cash flow, working capital, inventory levels, and the difference between planned and actual capital spending.
- Assess lease obligations and store impairment exposure alongside the company’s ongoing store-base review.
- Verify the corporate-jet repair recovery and the proceeds and accounting treatment for the post-year-end land sale.
- Consider the concentration of voting power: the CEO beneficially owned approximately 51.9% of combined voting power as of March 27, 2024.