Cato Corporation — Form 10-Q Summary
Reporting-period discrepancy: Request metadata identifies 2019 Q2, but the supplied filing is for the quarter ended August 1, 2020, with comparisons to August 3, 2019. This summary follows the filing.
Business context and period
Cato operates women’s apparel, footwear and accessories stores under the Cato, It’s Fashion, It’s Fashion Metro and Versona brands, plus a proprietary credit-card business. It reported results for the three and six months ended August 1, 2020. All stores had reopened by June 15 after temporary COVID-19 closures beginning March 19.
Financial results
| Metric | Three months ended Aug. 1, 2020 | Three months ended Aug. 3, 2019 | Six months ended Aug. 1, 2020 | Six months ended Aug. 3, 2019 |
|---|---|---|---|---|
| Total revenue | $168.2 million | $212.6 million | $268.9 million | $442.9 million |
| Retail sales | $166.3 million | $210.4 million | $265.1 million | $438.4 million |
| Net income (loss) | $(7.2) million | $11.9 million | $(35.6) million | $33.1 million |
| Diluted EPS | $(0.30) | $0.48 | $(1.48) | $1.34 |
| Operating cash flow | Not presented for the quarter | $(48.2) million | $45.2 million |
Second-quarter retail sales fell 21%; same-store sales declined 22%. First-half retail sales fell 40%, with same-store sales down 39%. E-commerce was less than 6% of first-half sales.
Gross margin, calculated as retail sales less cost of goods sold excluding depreciation, was $33.5 million in Q2 versus $80.0 million, and $48.7 million for the first half versus $172.0 million. Gross margin rate was 20.2% in Q2 versus 38.0%, and 18.4% for the first half versus 39.2%. The company attributed weaker rates principally to markdowns and deleveraged occupancy and distribution costs.
SG&A declined to $44.0 million in Q2 from $66.1 million, but increased to 36.4% of retail sales from 31.4%. First-half SG&A was $96.5 million versus $132.1 million, or 36.4% of sales versus 30.1%. Lower store and corporate costs and eliminated incentive compensation drove the dollar reductions; first-half expense also included higher store impairment charges. A $5.3 million store-asset impairment was recorded in Q1, with no additional Q2 charge.
At August 1, cash and cash equivalents were $36.6 million and short-term investments were $100.4 million. Working capital was $126.6 million, down from $163.5 million at February 1. Total assets were $596.4 million and stockholders’ equity was $266.2 million. There were no borrowings under the $35 million revolving facility; it was extended through May 2023 and the company was in covenant compliance. Lease liabilities totaled $210.4 million, including $57.9 million current. The company reported $48.2 million of operating cash use for the first half, compared with $45.2 million provided in the prior-year period.
Changes, outlook and risks
- COVID-19 closures, phased reopening, shorter operating hours and markdowns materially affected sales and profitability. Management expected COVID-19 to adversely affect results for the remainder of fiscal 2020 and possibly beyond; the extent and duration were uncertain.
- The company suspended its quarterly dividend, reduced capital expenditures and operating costs, furloughed associates and eliminated some positions. First-half dividends paid were $8.0 million, relating to the earlier period before suspension.
- Management expected approximately $13 million in fiscal-2020 capital expenditures and approximately 76 store openings, for which leases predated the pandemic, and about 40 store closures. Eight stores closed during the first half. The company operated 1,333 stores at August 1.
- Management believed cash, investments, operating cash flows and available credit would fund regular operating needs and expected capital expenditures for fiscal 2020 and the next 12 months. This outlook is subject to substantial pandemic-related uncertainty.
- Subsequent to quarter-end, the company repurchased 72,400 shares for approximately $0.5 million. On August 27, the board authorized an additional 1 million shares for repurchase. The filing also states 728,466 shares remained authorized at August 1; a separate note reports approximately 656,000 remaining after subsequent activity, so the timing and reconciliation merit verification.
- Risks include further COVID-19 disruption, weak consumer demand and store traffic, inventory and markdown exposure, fashion and competitive pressures, and uncertainty in realizing state tax-loss deferred tax assets. Routine litigation was disclosed; management did not expect currently pending matters to have a material adverse effect, while noting adverse outcomes could be material.
Most important facts for investors to verify
- Confirm the intended filing period: the supplied filing is 2020 Q2, not 2019 Q2.
- Review subsequent-quarter sales, same-store sales, margins and cash generation to assess recovery after reopening.
- Reconcile share-repurchase authorization balances and confirm the dividend’s status and any later changes.
- Assess liquidity against ongoing operating cash use, lease obligations, planned capital spending and store-opening/closure plans.
- Monitor impairment assumptions, tax valuation allowances and the evolving COVID-19 effects on demand, operations and guidance.