The Cato Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended May 3, 2014; comparative period ended May 4, 2013. Results are unaudited. Cato operates women’s fashion specialty stores and a proprietary credit business, with 1,324 stores in 32 states at quarter-end.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $284.7 million | $269.7 million |
| Retail sales | $282.5 million | $267.2 million |
| Income before taxes | $48.2 million | $48.8 million |
| Net income | $30.0 million | $30.8 million |
| Diluted EPS | $1.04 | $1.05 |
| Operating cash flow | $54.1 million | $47.7 million |
- Revenue increased 5.6%; retail sales rose 5.7%, including 3.0% same-store sales growth. Management attributed the comparable-store increase to a better Easter season and warmer April weather. E-commerce was less than 1% of sales.
- Gross margin dollars rose 7.1% to $118.1 million. Cost of goods sold fell to 58.2% of retail sales from 58.7%, reflecting lower markdowns, partly offset by higher distribution and freight costs.
- SG&A increased 13.6% to $67.5 million and rose to 23.9% of retail sales from 22.2%, primarily due to higher incentive compensation. Consequently, pretax income declined 1.4% and net income declined 2.7% despite sales growth.
- Net margin was approximately 10.6% of retail sales, versus 11.5%; pretax margin was 17.1%, versus 18.3%. The effective tax rate increased to 37.7% from 36.8%, primarily because of a smaller Work Opportunity Tax Credit benefit.
Cash, liquidity and capital
- At May 3, 2014, cash and cash equivalents were $79.5 million, short-term investments $159.3 million, and working capital $249.9 million. Inventory was $129.7 million, compared with $126.3 million a year earlier.
- Operating cash flow increased by $6.4 million year over year, mainly due to lower inventory. Capital expenditures were $7.4 million. Investing activities used $6.0 million; financing activities used $48.1 million, including $39.7 million of share repurchases and $8.7 million of dividends.
- No revolving-credit borrowings were outstanding. The company had a $35 million unsecured facility, committed through August 2015, and was in compliance with its financial covenants. Management said available liquidity and operating cash flow should cover operating needs, planned capital spending, dividends and repurchases for fiscal 2014 and the next 12 months.
- Quarter-end total liabilities were $209.7 million, principally current liabilities and deferred rent; the filing reports no outstanding borrowings under the credit facility.
Outlook, changes and notable items
- Management expected approximately 64 store openings, 13 relocations and 17 closures in fiscal 2014, and approximately $44.5 million in capital expenditures. In the quarter, Cato opened six stores and closed two.
- The May 20, 2014 board action maintained the quarterly dividend at $0.30 per share and added 2 million shares to the repurchase authorization. The company repurchased 1,426,091 shares during the quarter at an average $27.82 per share; 278,913 shares remained authorized at quarter-end.
- A $3.1 million auction-rate security continued to fail its auction and was valued using Level 3 assumptions, including estimated future liquidity timing. Management noted that this valuation is sensitive to market conditions and assumptions.
- The company disclosed a correction to cash-flow presentation: the 2014 quarter’s operating cash flow and investing cash flow were each reduced by $1.4 million relative to the prior presentation. Management said the revision was not material to prior-period financial statements.
- Management cited consumer spending and economic conditions, competition and pricing, fashion trends, buying patterns, weather, and inventory-demand shifts as risks. It reported effective disclosure controls and no material change in internal control over financial reporting. No legal proceedings were reported as applicable.
Important facts for investors to verify
- Whether sales and same-store growth persist beyond the quarter, particularly given management’s weather- and Easter-related explanation.
- Whether higher SG&A and incentive compensation continue to pressure margins and earnings.
- Progress against the store-opening and capital-expenditure plans, and the effect of substantial share repurchases and dividends on liquidity.
- The liquidity and valuation assumptions for the failed-auction security, and the nature and implications of the disclosed cash-flow presentation correction.
- Current performance of the proprietary credit portfolio and the consumer, competitive, weather and inventory risks identified by management.