The Cato Corporation — Form 10-Q summary
Period note: The request metadata says 2020 Q3, but the supplied filing is for the quarter ended October 30, 2021, with comparisons to October 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Cato operates women’s apparel, footwear and accessories stores, principally in the southeastern United States, and offers a proprietary credit card. It reported 1,324 stores at October 30, 2021. The results cover the three and nine months ended October 30, 2021; interim results may not indicate full-year performance.
Financial performance
| Metric | Three months ended Oct. 30, 2021 | Three months ended Oct. 31, 2020 | Nine months ended Oct. 30, 2021 | Nine months ended Oct. 31, 2020 |
|---|---|---|---|---|
| Total revenue | $172.2 | $150.8 | $593.0 | $419.7 |
| Retail sales | $170.5 | $149.2 | $587.7 | $414.3 |
| Income (loss) before tax | $2.9 | $(13.3) | $45.2 | $(61.9) |
| Net income (loss) | $8.6 | $(3.6) | $43.3 | $(39.2) |
| Diluted EPS | $0.39 | $(0.15) | $1.93 | $(1.64) |
Retail sales increased 14% in the quarter and 42% year to date. Same-store sales rose 14% and 41%, respectively, against periods affected by pandemic-related operating restrictions and closures. Management said sales remained well below comparable 2019 levels.
Cost of goods sold was 61.1% of retail sales in the quarter and 58.4% year to date, versus 73.3% and 78.6% in the prior-year periods. Management attributed the improvement mainly to better occupancy, buying and distribution cost leverage and more regular-priced sales. SG&A was 36.6% of retail sales in the quarter and 33.5% year to date, compared with 34.8% and 35.8%. Higher employee benefit and bonus costs and store operating expenses contributed to the quarterly increase.
Quarterly income tax benefit was $5.7 million despite pretax income of $2.9 million. For the nine months, the effective tax rate was 4.3% expense, compared with a 36.7% benefit in 2020. The filing cites foreign tax credits, releases of uncertain-tax-position reserves and a favorable federal NOL carryback adjustment, partly offset by state taxes.
Cash, liquidity and capital
- Cash and cash equivalents were $24.0 million and short-term investments were $176.1 million at October 30, 2021. Restricted cash was $3.9 million.
- Working capital was $147.4 million, up from $108.6 million at January 30, 2021. Merchandise inventory was $90.2 million.
- Operating cash flow was $79.4 million for the nine months, compared with cash used of $26.1 million in the prior-year period. Capital expenditures were $1.8 million.
- No borrowings were outstanding under the $35 million revolving credit facility, committed through May 2023; no letters of credit reduced availability. The company reported compliance with its financial covenants.
- Lease liabilities totaled $134.9 million, including $50.2 million current and $84.6 million noncurrent. These are lease obligations, not reported borrowings under the credit facility.
- The company paid $6.3 million in dividends and repurchased $15.2 million of common stock during the nine months. The board maintained the quarterly dividend at $0.17 per share on November 18, 2021.
Material changes, outlook and risks
- Management expected fiscal 2021 capital expenditures of approximately $4.1 million, fewer than 10 store openings and approximately 25 store closures. Six stores had closed in the first nine months.
- Management said cash, investments, operating cash flow and available credit were expected to fund regular operating needs and planned capital expenditures for fiscal 2021 and the following 12 months.
- COVID-19 effects, potential variants, consumer demand, supply-chain disruption, freight and logistics costs, and labor availability remained material uncertainties, including for the holiday season and beyond.
- A reassessment of renewal assumptions for approximately 80 stores reduced right-of-use assets by $25.8 million during the second quarter of 2021. The company recorded no impairment of store assets in the nine-month 2021 period, versus $7.5 million in the comparable 2020 period.
- The company recorded an estimated $38.1 million of CARES Act loss-carryback refunds in accounts receivable through the third quarter. Routine litigation was disclosed; management did not expect currently pending matters to have a material adverse effect, while noting outcomes are uncertain.
- Other cited risks include fashion and inventory execution, competition and pricing, consumer confidence, weather and public-health conditions. Management stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing is Q3 2021, not Q3 2020.
- Assess how much of the sales and earnings rebound reflects comparisons with pandemic-disrupted 2020 periods, and compare sales with 2019.
- Review the composition, collectability and timing of the $38.1 million estimated tax refund receivable.
- Monitor inventory, gross margin, labor and freight costs, store closures and the performance of planned openings.
- Consider lease obligations and the effect of store renewal decisions alongside cash, investments and undrawn credit availability.