Cato Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 28, 2017; comparable periods ended October 29, 2016. The request metadata says “2016 Q3,” but the filing itself reports fiscal 2017 Q3. Dollar amounts below are in millions unless noted; interim statements are unaudited.
Financial performance
- Third quarter: Retail sales were $188.4 million, down 9.0%; total revenue was $190.3 million, down 9.1%. Same-store sales declined 9.3%. Net income was $2.7 million versus $8.3 million, and diluted EPS was $0.11 versus $0.30. Pretax loss was $0.1 million, compared with pretax income of $3.4 million.
- Nine months: Retail sales were $631.0 million, down 13.5%; total revenue was $637.0 million, down 13.5%. Same-store sales declined 13.7%. Net income was $24.0 million versus $60.0 million, and diluted EPS was $0.93 versus $2.17. Pretax income was $23.8 million versus $71.5 million.
- Margins and expenses: Gross margin was $63.9 million, or 33.9% of retail sales, in Q3, versus $73.4 million, or 35.5%, a year earlier. Nine-month gross margin was $219.5 million, or 34.8%, versus $282.5 million, or 38.7%. Cost of goods sold rose to 66.1% of retail sales in Q3 and 65.2% for nine months, primarily reflecting more markdown sales and occupancy and purchasing costs spread over lower sales. SG&A was $62.1 million in Q3 and $190.2 million for nine months; as a share of retail sales it increased to 33.0% and 30.1%, respectively. Management cited lower litigation and store expenses as reasons SG&A dollars declined.
- Cash flow: Nine-month operating cash flow was $38.3 million, down from $46.3 million. Capital expenditures were $8.8 million versus $24.0 million. Investing activities provided $53.8 million, mainly due to net sales of short-term investments; financing activities used $60.6 million, including $25.5 million of dividends and $35.7 million of share repurchases.
- Liquidity and debt: Cash and cash equivalents were $78.7 million and short-term investments were $136.2 million at October 28, 2017. Working capital was $244.3 million, versus $271.9 million at January 28, 2017. No borrowings were outstanding under the $35 million revolving facility, committed through August 2020; the company reported covenant compliance. Current liabilities were $149.1 million and total stockholders’ equity was $352.4 million.
Changes, outlook, and risks
- Retail weakness was the central deterioration: nine-month same-store sales fell 13.7%, while the store base was 1,370 versus 1,372 at the prior-year quarter-end. E-commerce represented less than 2% of nine-month sales.
- Management expected approximately six store openings, two relocations, and 26 closures for fiscal 2017, with about $11.5 million of capital expenditures for stores and merchandise-system upgrades. It said cash, investments, operating cash flow, and available credit should fund operations, expected capex, dividends, and repurchases for fiscal 2017 and the following 12 months. No earnings or sales guidance was provided.
- The board maintained the quarterly dividend at $0.33 per share. The company repurchased 417,100 shares during Q3 for approximately $5.9 million; 840,506 shares remained authorized at quarter-end. Subsequent to quarter-end, it repurchased 228,100 shares for approximately $3.0 million.
- The nine-month tax benefit was $0.3 million versus $11.5 million of tax expense in the comparable period. The filing attributes tax effects to lower earnings, a higher proportion of income in lower-tax jurisdictions, tax initiatives, and a change in the estimate for uncertain tax positions. That estimate change reduced tax expense by $1.5 million and reduced other noncurrent liabilities by $2.5 million in Q1.
- Accrued litigation expense was $9.9 million. Management did not expect reasonably possible losses from pending litigation to materially affect the statements, but cautioned that adverse outcomes could materially affect financial condition, results, or cash flows in a period.
- Key risks cited include consumer spending and confidence, competition and pricing, fashion-trend and demand forecasting, adverse weather, and inventory liquidation and margin risk. The company expected the new lease standard to increase assets and liabilities; it did not expect the revenue-recognition standard to have a material financial-statement impact.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied metadata says 2016 Q3, while this filing covers Q3 2017.
- Assess whether sales and same-store-sales declines, markdown pressure, and higher expense ratios continued after October 28, 2017.
- Review cash generation and liquidity alongside recurring dividends, repurchases, and planned store closures and investments.
- Monitor the $9.9 million litigation accrual and any changes in case outcomes or estimated liabilities.
- Check subsequent filings for actual fiscal 2017 store activity, capital expenditures, and adoption effects of new accounting standards.