Cato Corporation — Form 10-K Summary
Business and period: The filing covers fiscal 2013, the 52 weeks ended February 1, 2014; fiscal 2012 had 53 weeks. This is the annual report’s fiscal-year and fourth-quarter information, rather than a filing for calendar 2012. Cato operated 1,320 fashion specialty stores in 32 states, principally in the Southeast, under the Cato, It’s Fashion and Versona names. The filing was signed April 2, 2014.
Financial performance
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Retail sales | $910.5 million | $933.8 million |
| Total revenue | $920.0 million | $944.0 million |
| Income before taxes | $84.3 million | $99.0 million |
| Net income | $54.3 million | $61.7 million |
| Diluted EPS | $1.86 | $2.11 |
| Operating cash flow | $93.0 million | $80.4 million |
| Capital expenditures | $31.5 million | $45.2 million |
- Retail sales fell 2.5%, reflecting one fewer selling week and a 3% same-store sales decline, partly offset by new-store sales. E-commerce, launched during the year, accounted for less than 1% of sales.
- Cost of goods sold rose to 62.7% of retail sales from 62.3%, mainly due to higher occupancy costs. Gross margin dollars declined 3.6% to $339.3 million.
- SG&A increased 0.6% to $245.9 million and rose to 27.0% of retail sales from 26.2%. Management cited higher store impairment charges and incentive compensation, partly offset by lower payroll and advertising costs.
- The effective tax rate was 35.6%, down from 37.7%; the filing attributes the prior-year rate partly to correction of an out-of-period adjustment.
- Fourth-quarter revenue was $217.6 million and net income was $3.8 million, compared with $234.6 million and $7.9 million, respectively, in fiscal 2012’s fourth quarter.
Liquidity, capital and shareholder returns
- At year-end, cash and cash equivalents were $79.4 million, short-term investments $161.1 million and restricted cash and investments $4.7 million. Working capital was $269.6 million.
- The company reported no borrowings under its $35 million unsecured revolving facility, committed through August 2015; it said it was in compliance with its covenants. Total stockholders’ equity was $391.1 million.
- Fiscal 2013 cash dividends paid were $5.9 million, or $0.20 per share, versus $87.2 million, or $2.98 per share, in fiscal 2012. The filing reports a subsequent quarterly dividend set at $0.30 per share.
- The company repurchased $6.4 million of stock during fiscal 2013. It had 1.7 million shares remaining under its authorization at year-end.
- Noncancellable operating lease payments totaled $218.1 million, including $63.0 million due in fiscal 2014. The filing identifies operating leases as its off-balance-sheet arrangements.
Outlook, risks and unusual items
- For fiscal 2014, management planned approximately $44.5 million of capital expenditures, 64 new stores (30 Cato, 10 It’s Fashion and 24 Versona), 13 relocations and 10 Cato remodels; it anticipated closing up to 17 stores.
- Management said cash, investments, operating cash flow and available borrowing capacity should fund planned capital spending, dividends and other operating needs for the foreseeable future.
- Key risks include fashion-trend and inventory misjudgments, competitive pricing, weak consumer spending, adverse weather, overseas sourcing and cost disruptions, reliance on one distribution center, store-location execution, IT and data-security incidents, and staffing and regulatory or litigation exposure.
- A failed auction-rate security was written down by $310,500; its year-end recorded value was approximately $3.1 million and relies on Level 3 valuation inputs. Management noted uncertainty around when the investment may become liquid.
- The filing reports $9.2 million of gross unrecognized tax benefits, including $6.5 million that would affect the effective tax rate if recognized. It also describes prior-period accounting corrections recorded in fiscal 2012 and assessed as immaterial to the periods affected.
- Store impairment charges were $2.6 million, compared with $2.0 million in fiscal 2012. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether same-store sales and e-commerce improve, and whether the planned store expansion generates returns sufficient to offset new-store and occupancy costs.
- Whether gross-margin pressure and SG&A as a share of sales stabilize, particularly given the sales decline and increased impairments.
- The liquidity and valuation assumptions for the failed auction-rate security, alongside the credit quality and accessibility of the broader investment portfolio.
- The sustainability of the dividend and repurchase pace, distinguishing the unusually large fiscal 2012 dividend from the fiscal 2013 payout and subsequent $0.30 quarterly dividend.
- Potential cash or earnings effects from tax uncertainties, lease commitments and other disclosed contingencies; the filing says pending litigation was not expected to have a material effect.