The Cato Corporation — Form 10-Q Summary
Reporting period: The quarter ended April 28, 2012, compared with the quarter ended April 30, 2011. The filing’s financial statements are unaudited. Although the request metadata identifies 2011 Q1, the filing itself reports fiscal 2012 Q1.
Business context and results
Cato operates women’s apparel, footwear and accessories retail stores, principally in the southeastern United States, and offers a proprietary credit card. It reports retail and credit segments. Management attributed weaker comparable-store sales to the continuing difficult economic environment; the exact same-store sales decline is obscured in the supplied filing text.
| Metric | Quarter ended Apr. 28, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Retail sales | $272.8 million | $270.9 million | Up 0.7% |
| Total revenues | $275.3 million | $273.7 million | Up 0.6% |
| Income before taxes | $51.3 million | $47.5 million | Up 8.0% |
| Net income | $31.7 million | $30.5 million | Up 3.9% |
| Basic and diluted EPS | $1.09 | $1.04 | Up 4.8% |
| Dividends per share | $0.23 | $0.185 | Up 24.3% |
| Operating cash flow | $58.0 million | $43.0 million | Up $15.0 million |
Margins, cash, debt and liquidity
- Cost of goods sold was $157.8 million, or 57.9% of retail sales, versus $158.4 million, or 58.5%. Gross margin dollars, calculated as retail sales less reported cost of goods sold, were $115.0 million versus $112.5 million; gross margin rate improved by about 60 basis points. Management cited lower freight costs and increased vendor allowances.
- SG&A declined to $61.4 million from $63.3 million and to 22.5% of retail sales from 23.4%. Lower incentive compensation was partly offset by higher group health insurance costs. Depreciation rose to $5.8 million from $5.4 million, reflecting store and technology investment.
- Cash and cash equivalents were $70.7 million; short-term investments were $212.2 million. Working capital was $296.1 million, compared with $275.8 million at April 30, 2011. The filing reports no outstanding borrowings under the $35 million unsecured revolving facility, committed through August 2013; the company was in compliance with its covenants.
- Operating cash flow of $58.0 million included a $9.6 million cash source from lower inventories and a $15.2 million cash source from accrued income taxes. Investing activities used $15.7 million, including $9.4 million of capital expenditures; financing activities used $6.4 million, mainly for dividends.
- No material market-risk exposure was identified by management. The company does not use derivatives. It held a $3.5 million auction-rate security whose auctions continued to fail; valuation depends on management estimates and assumptions about future liquidity.
Changes, outlook and risks
- The effective tax rate rose to 38.2% from 35.7%. Management linked the increase partly to the absence of the Work Opportunity Tax Credit, which had not been renewed for 2012 as of the reporting date.
- Management expected approximately $57 million in fiscal 2012 capital expenditures, including store openings and relocations, merchandise-system upgrades, and office and distribution-center expansion. It expected to open about 40 stores and relocate 15. The filing text’s planned closure count is corrupted and does not provide a clear value. Eight new stores had opened in the quarter; the relocation and closure counts for the quarter are likewise unclear in the supplied text.
- Management said available cash, investments, operating cash flow and borrowing capacity should fund operating needs, capital expenditures, dividends and repurchases for fiscal 2012 and the foreseeable future. On May 24, 2012, the board raised the quarterly dividend 9%, from $0.23 to $0.25 per share.
- Principal disclosed business risks include economic conditions and consumer spending, competition and pricing pressure, fashion-trend and buying-pattern uncertainty, adverse weather, inventory-demand shifts, and credit-market conditions. Management also noted that tax examinations and expiring statutes of limitations could affect unrecognized tax benefits and the effective tax rate; the potential amount was not estimable.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Legal proceedings were reported as not applicable.
Important facts for investors to verify
- Obtain the original filing or XBRL for the missing same-store sales percentage and the corrupted store relocation and closure counts in the supplied text.
- Assess the sustainability of improved earnings and margins against declining comparable-store sales and the company’s stated retail risks.
- Review the investment portfolio’s liquidity and valuation assumptions, particularly the failed $3.5 million auction-rate security and Level 3 assets.
- Monitor execution and funding of the $57 million capital plan, store expansion, dividend increase and share-repurchase authorization.
- Track the effective tax rate and potential changes from tax examinations, expiring statutes of limitations and tax-credit policy.