The Cato Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal quarter ended October 29, 2022, and the nine months then ended; it compares results with periods ended October 30, 2021. The filing therefore covers fiscal 2022 Q3, although the request metadata identifies 2021 Q3. Cato operates women’s apparel and accessories stores and a proprietary credit-card business; it reported 1,317 stores in 32 states.
Financial performance
| Metric | Three months ended October 29, 2022 | Nine months ended October 29, 2022 | Prior-year comparable period |
|---|---|---|---|
| Total revenue | $176.6 million | $580.2 million | $172.2 million; $593.0 million |
| Retail sales | $174.9 million | $574.9 million | $170.5 million; $587.7 million |
| Net income (loss) | $(4.5) million | $3.0 million | $8.6 million; $43.3 million |
| Diluted EPS | $(0.21) | $0.14 | $0.39; $1.93 |
| Operating cash flow | Not stated separately | $19.3 million | $79.4 million for nine months |
Margins and drivers. Cost of goods sold rose to 70.7% of retail sales in Q3 and 67.5% year to date, from 61.1% and 58.4%. Gross margin dollars declined 22.8% in Q3 to $51.2 million and 23.4% year to date to $187.1 million. Management attributed pressure primarily to markdowns and higher freight and distribution costs. SG&A was $61.4 million in Q3 and $182.6 million year to date, down from $62.5 million and $196.7 million, mainly on lower incentive compensation, partly offset by higher payroll and wages.
Q3 retail sales increased 3%, including 3% same-store sales growth; nine-month retail sales declined 2%, including a 2% same-store sales decrease. The nine-month effective tax rate was 49.7%, versus 4.3%, reflecting tax items against lower pretax earnings. Q3 included a $1.4 million North Carolina Business Recovery Program grant recorded in interest and other income. The company also reported a $4.7 million Q3 income tax benefit.
Financial position and liquidity
- At October 29, 2022, cash and cash equivalents were $17.3 million, short-term investments $128.5 million, and restricted cash $3.7 million. Working capital was $95.4 million, versus $111.5 million at January 29, 2022.
- Total assets were $540.5 million and stockholders’ equity $234.8 million. There were no revolving-credit borrowings; the company had a $35 million unsecured facility committed through May 2027 and was in compliance with its covenants. Lease liabilities totaled $141.3 million, including $55.7 million current.
- Nine-month operating cash flow was $19.3 million, down from $79.4 million, principally due to lower earnings and decreases in accounts payable and accrued liabilities. Capital expenditures were $14.4 million, versus $1.8 million.
- Financing activities used $22.2 million, including $10.9 million of dividends and $11.6 million of share repurchases. Cash, cash equivalents and restricted cash ended the period at $21.0 million.
Outlook, risks and notable items
- Management said cash, investments, operating cash flow and available borrowing capacity should be adequate for regular operations and expected capital expenditures for fiscal 2022 and the following 12 months. It expected approximately $20 million of fiscal 2022 capital expenditures.
- The company expected to open approximately 15 stores and close approximately 40 during fiscal 2022. It opened 15 and closed nine in the first nine months. The board maintained the quarterly dividend at $0.17 per share.
- Management highlighted ongoing uncertainty from COVID-19 effects, supply-chain delays, inflation in merchandise, freight, distribution and operating costs, wage pressures, rising interest rates, and possible effects on customers’ disposable income. Late or excess inventory could lead to lost sales or additional markdowns.
- Routine litigation is described as incidental; management did not believe reasonably possible losses would materially affect the financial statements, while noting adverse outcomes could have a material effect in a reporting period. No material changes to previously disclosed risk factors were reported other than discussion of controlled-company status; the CEO beneficially owns a majority of voting power, though the company said it was not then using NYSE controlled-company exemptions.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Confirm the intended period: the supplied filing is for fiscal Q3 2022, not 2021 Q3.
- Assess whether the sharp gross-margin deterioration and nine-month earnings decline persist, especially given markdowns and cost pressures.
- Review cash-flow sustainability, inventory and working-capital trends, and the timing and use of planned capital spending.
- Monitor the store opening and closure plan, consumer demand, supply-chain conditions, and the effect of inflation and wage increases.
- Evaluate the investment portfolio’s fair-value exposure, lease commitments, repurchase activity, dividend policy, and controlled-company governance implications.