Cato Corporation — Form 10-K Summary
Reporting period: Fiscal 2019, ended February 1, 2020 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are shown below. Filed March 27, 2020.
Business context and key results
Cato operated 1,281 apparel and accessories stores in 31 states, mainly in the Southeast, under the Cato, It’s Fashion and Versona concepts, as well as related brands and e-commerce sites. E-commerce was less than 3% of sales. The company reported retail and credit segments.
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Retail sales | $816.2 million | $821.1 million |
| Total revenue | $825.3 million | $829.7 million |
| Gross profit, excluding depreciation | $307.3 million; 37.6% of retail sales | $298.6 million; 36.4% |
| SG&A | $263.8 million; 32.3% of retail sales | $262.5 million; 32.0% |
| Depreciation | $15.5 million | $16.5 million |
| Income before taxes | $43.2 million | $33.1 million |
| Net income | $35.9 million | $30.5 million |
| Diluted EPS | $1.46 | $1.23 |
| Operating cash flow | $53.4 million | $60.2 million |
Financial position, cash flow and shareholder returns
- Cash and cash equivalents were $11.8 million and short-term investments were $200.4 million at year-end; restricted cash and restricted short-term investments were $3.9 million combined. Working capital was $163.5 million, down from $229.5 million, primarily because the new lease standard put current lease liabilities on the balance sheet.
- No borrowings were outstanding at year-end under the $35 million revolving credit facility, committed through May 2022. On March 16, 2020, after year-end, Cato drew $30 million, citing potential capital-market disruption; management said it then had over $200 million of cash and short-term investments.
- Cash capital expenditures were $8.3 million. Net cash used in investing activities was $22.6 million, principally reflecting purchases of short-term investments and capital spending. Financing activities used $41.6 million, including $32.6 million of dividends and $9.6 million of share repurchases.
- The annual dividend remained $1.32 per share. The board maintained the quarterly dividend at $0.33 per share in February 2020. Fiscal 2020 planned capital expenditures were approximately $20 million.
- Lease adoption added $200.8 million of right-of-use assets and $210.3 million of current and noncurrent lease liabilities at year-end. The company said ASC 842 increased reported total assets and liabilities by about 40%; this was an accounting change, not equivalent to new funded debt.
Changes versus prior period, outlook and risks
- Retail sales fell 0.6%, largely due to store closures, while same-store sales increased 2%. Cato opened five stores and closed 35, ending the year with 30 fewer stores.
- Gross margin improved: cost of goods sold declined to 62.4% of retail sales from 63.6%, primarily due to a higher share of regular-price sales. SG&A rose 0.5% in dollars and increased as a share of sales, primarily reflecting higher incentive compensation.
- Net income increased 17.8%, while the effective tax rate rose to 16.9% from 7.8%. Management attributed the tax increase mainly to higher pretax earnings, taxable interest income, nondeductible compensation and a valuation allowance on certain state tax credits.
- Fiscal 2019 fourth-quarter revenue was $190.9 million versus $192.4 million a year earlier; net loss was $3.2 million versus a $3.2 million loss, and diluted loss per share was $0.13 in both periods.
- Management expected COVID-19 to adversely affect fiscal 2020, especially the first quarter, but said the impact was highly uncertain. All stores were temporarily closed beginning March 19, 2020, initially for an expected two weeks. The filing provides no quantified earnings or sales guidance.
- Key risks include COVID-19 and store disruption, changing consumer demand and fashion trends, competition and markdowns, overseas sourcing and tariff or freight-cost exposure, supply-chain interruption, and reliance on a centralized distribution center. The company reported no pending litigation it believed likely to have a material adverse effect, while noting routine claims and inherent litigation uncertainty.
- Unusual items include the material balance-sheet presentation change from ASC 842 and a $0.5 million asset impairment charge in fiscal 2019, including impairment of the remaining book value of a solar partnership investment.
Important facts for investors to verify
- Track store closures, reopening effects and comparable-store sales after the filing date; the 2% same-store increase predates COVID-19 closures.
- Review subsequent cash flow, investment liquidity and use or repayment of the $30 million post-year-end revolver draw.
- Assess whether the planned $20 million capital spending and $0.33 quarterly dividend remain supportable as trading conditions evolve.
- Distinguish operating lease commitments from funded borrowings; scheduled undiscounted operating lease payments totaled $233.3 million.
- Monitor store productivity and the continuing decline in store count, as well as merchandise margins and inventory markdowns.
- Review the $7.9 million of unrecognized tax benefits and the company’s disclosed sourcing, credit, cybersecurity and litigation exposures.