Cato Corporation — FY2022 Form 10-K
Period clarification: The filing is for the 52-week fiscal year ended January 28, 2023, compared primarily with the year ended January 29, 2022. It does not provide standalone 2021 Q4 results, despite the request metadata.
Business context and reporting period
Cato operates value-priced fashion specialty stores and e-commerce businesses under several brands, principally in the southeastern United States. At year-end it operated 1,280 stores in 32 states, down from 1,311 a year earlier; during FY2022 it opened 19 stores and closed 50. Retail and credit are its reportable segments.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Retail sales | $752.4 million | $761.4 million |
| Total revenue | $759.3 million | $769.3 million |
| Same-store sales change | Down 1% | Not stated here |
| Gross margin dollars | $242.7 million | $308.3 million |
| Gross margin as a share of retail sales | 32.3% | 40.5% |
| Operating income | Not presented as a separate line item | Not presented as a separate line item |
| Income before taxes | $1.8 million | $39.0 million |
| Net income | $29,000 | $36.8 million |
| Basic and diluted EPS | Rounded to $0.00 | $1.65 |
| Cash provided by operating activities | $13.4 million | $59.8 million |
| Capital expenditures | $19.4 million | $4.1 million |
| Working capital at year-end | $74.7 million | $111.5 million |
At year-end, cash and cash equivalents were $20.0 million and short-term investments were $108.7 million. The company had no borrowings under its $35 million revolving facility, committed through May 2027, and reported compliance with its covenants. Lease liabilities totaled $174.8 million, including $67.4 million current. The company paid $0.68 per share in dividends during FY2022.
Material changes versus FY2021
- Retail sales declined 1.2%; total revenue declined 1.3%. Management attributed weaker same-store sales mainly to lower average selling prices after supply-chain delays caused merchandise to arrive late in the first half of FY2022.
- Cost of goods sold rose to 67.7% of retail sales from 59.5%, reflecting more markdown sales and higher freight and distribution costs. Gross margin dollars fell 21.3%.
- SG&A declined 9.1% to $242.6 million, or 32.3% of retail sales versus 35.1%, principally due to lower employee benefit/bonus and insurance costs, partly offset by higher store wages and hours.
- Net income fell sharply to $29,000 from $36.8 million. Interest and other income increased to $5.9 million from $2.1 million, including a $1.4 million North Carolina recovery grant, $1.7 million in property-insurance proceeds, and higher investment interest income.
- Operating cash flow declined to $13.4 million from $59.8 million, primarily due to lower operating income and decreases in accounts payable and accrued bonus and benefits.
- Working capital fell by $36.8 million, principally because of lower short-term investments and inventory. Accounts receivable also decreased, in part reflecting a $29.2 million income-tax refund recorded in cash flow disclosures.
Outlook, risks, contingencies, and unusual items
- Management said cash, investments, and operating cash flow should fund regular operations, $71.9 million of FY2023 lease obligations, and planned FY2023 capital expenditures of $22.1 million. It expected inflation, higher interest rates, and wage pressures to continue weighing on consumers and costs during FY2023; no earnings or sales guidance was provided.
- Management expects markdown sales to decrease from FY2022 levels as the prior-year increase was attributed largely to supply-chain delays. The outcome depends on merchandise timing, demand, and inventory management.
- Key risks include weaker discretionary consumer spending, inflation and labor costs, fashion and inventory misjudgments, overseas sourcing and freight disruptions, intense retail competition, weather and public-health events, cyber and technology disruption, and reliance on a single Charlotte distribution center.
- The effective tax rate was 98.4%, reflecting very low pre-tax income and significant tax items, including GILTI. The company reported $4.9 million of gross unrecognized tax benefits and accrued approximately $2.0 million of related interest and penalties.
- Store-asset impairment charges were $0.9 million. The auditor identified long-lived asset impairment testing for store locations as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
- The company reported routine litigation but said pending matters were not expected to have a material adverse effect based on currently available information. It cautioned that outcomes remain uncertain.
Important facts for investors to verify
- Confirm the intended period: this is an annual FY2022 filing, not a standalone 2021 Q4 report.
- Review the severity and drivers of the gross-margin decline, particularly markdowns, freight, and distribution costs, and whether those pressures eased after year-end.
- Assess whether the near-break-even FY2022 result and lower operating cash flow are recurring, while separating recurring performance from grant and insurance proceeds.
- Check liquidity and investment-portfolio quality, including the effect of unrealized losses, access to deposits, lease commitments, and revolving-credit covenants.
- Monitor store closures and openings, comparable sales, inventory levels, and management’s stated FY2023 capital-spending and cost outlook.