Cato Corporation — Form 10-Q Summary
Period: Fiscal third quarter and first nine months ended November 2, 2019, compared with November 3, 2018. The request metadata says “2018 Q3,” but the filing itself covers 2019 Q3.
Business context and results
Cato operates women’s apparel, footwear and accessories stores, principally in the southeastern United States, and offers a proprietary credit card. It reported 1,298 stores at quarter-end, versus 1,350 a year earlier.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $191.5m | $190.0m | $634.5m | $637.2m |
| Net income | $6.0m | $3.8m | $39.1m | $33.7m |
| Diluted EPS | $0.24 | $0.16 | $1.59 | $1.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $49.3m | $54.2m |
Financial position and cash flow
- Retail sales rose 0.8% in Q3 to $189.4m; same-store sales increased 4%. For the first nine months, retail sales decreased 0.5% to $627.8m, while same-store sales rose 2%.
- Gross margin dollars increased 8.9% in Q3 to $70.7m and 3.0% for the first nine months to $242.7m. Cost of goods sold was 62.6% of retail sales in Q3 (65.5% prior year) and 61.3% year to date (62.6% prior year). The filing attributes the Q3 improvement primarily to more regular-price sales and lower occupancy costs as a percentage of sales.
- SG&A was $64.7m in Q3, or 34.2% of retail sales, versus $61.8m and 32.9% a year earlier. Year-to-date SG&A was $196.7m versus $196.6m. Q3 expense rose partly due to higher incentive compensation and prior-year favorable litigation settlements.
- Net margin was 3.2% of retail sales in Q3 versus 2.0% prior year; year-to-date net margin was 6.2% versus 5.3%. Q3 pretax income was $6.0m versus $2.5m; year-to-date pretax income was $45.6m versus $36.6m.
- Cash, cash equivalents and restricted cash totaled $23.4m at November 2; short-term and restricted short-term investments totaled $205.0m. Working capital was $187.5m, down from $229.5m at February 2, 2019.
- Operating cash flow was $49.3m for nine months. Investing used $22.2m and financing used $28.9m, including $24.5m of dividends and $5.0m of share repurchases.
- No borrowings were outstanding under the $35m unsecured revolver, extended through May 2022; the company reported covenant compliance. Lease liabilities were $164.5m, including $53.5m current. The filing reports no other outstanding borrowings.
Changes, outlook and risks
- Income taxes were $0.1m of expense in Q3, compared with a $1.3m benefit a year earlier. The nine-month effective tax rate rose to 14.3% from 7.9%, reflecting higher pretax earnings, taxable interest, nondeductible compensation, fewer state tax credits, and the prior-year release of uncertain-tax-position reserves after state audit settlements.
- Adoption of lease accounting (ASC 842) in February 2019 materially increased reported assets and liabilities by about 40% each, without changing opening retained earnings. It recognized right-of-use assets and lease liabilities; lease accounting did not change the manner expenses are recorded in the income statement.
- Management expected to open up to five stores and close about 38 stores in fiscal 2019; 13 had closed in the first nine months. Expected full-year capital expenditures were approximately $8m, versus $4.9m spent year to date. Management stated available cash, investments, operating cash flow and revolver capacity should fund operations, capex, dividends and repurchases for fiscal 2019 and the next 12 months.
- The board maintained the quarterly dividend at $0.33 per share on November 21, 2019. The company had 1,681,622 shares remaining under its repurchase authorization at quarter-end.
- Management cited consumer spending and confidence, competition and pricing, fashion trends, weather, tariffs and inventory/liquidation risk as factors that could affect results. Routine litigation was not expected to have a material adverse effect based on currently available information, though an adverse outcome could materially affect a period.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for the quarter ended November 2, 2019, despite the request’s “2018 Q3” label.
- Assess whether the Q3 same-store sales and gross-margin improvement can persist as store closures continue and SG&A as a share of sales has risen.
- Review lease obligations and store-closure plans when evaluating liquidity; reported balance-sheet liabilities include substantial lease commitments.
- Monitor working-capital movements and cash generation, including the year-over-year decline in nine-month operating cash flow.
- Consider the stated consumer, fashion, inventory, weather, competitive and litigation risks; no specific full-year earnings guidance is provided in the filing text.