Cato (CATO, Financial), the $365.5 million North Carolina-based apparel retailer, reported a (-)15% revenue decline to $446.7 million and a far more disappointing (-)58.8% drop in profits to $21.4 million in the first half, resulting in margins of 4.8% compared to 9.8% a year earlier.
"Negative sales trends continue to put severe pressure on merchandise margins and profitability as we continue to work through our merchandise missteps.
"It is taking longer to work through these issues than expected, and we expect full-year earnings to be significantly below last year." –Â John Cato, chairman, president and CEO
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Valuations
Cato is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 11.2 times vs. the industry median of 20.3 times, a price-book (P/B) ratio of 0.96 times vs. 1.7 times and a price-sales (P/S) ratio of 0.42 times vs. 0.7 times.
Cato has a very attractive 9.3% dividend yield with a 103% payout ratio.
Average fiscal 2018 revenue and earnings-per-share estimates indicated forward multiples 0.42 times and 10.5 times.
Total returns
Cato provided (-)50.6% total losses to its shareholders so far this year compared to Standard & Poor's 500 index’s 9.76% gains.
Cato
Cato, founded in 1946, operated 1,371 fashion specialty stores as of Jan. 28 in 33 states, principally in the Southeastern U.S., under the names “Cato,” “Cato Fashions,” “Cato Plus,” “It’s Fashion,” “It’s Fashion Metro” and “Versona.”
The Cato concept seeks to offer quality fashion apparel and accessories at low prices every day in junior/misses and plus sizes.
The Cato concept’s stores and e-commerce website feature a broad assortment of apparel and accessories, including dressy, career and casual sportswear, dresses, coats, shoes, lingerie, costume jewelry and handbags.
A major portion of the Cato concept’s merchandise is sold under its private label and is produced by various vendors in accordance with the concept’s specifications (1).
The company’s stores range in size from 2,000 to 19,000 square feet and are located primarily in strip shopping centers anchored by national discounters or market-dominant grocery stores.
In addition, credit and layaway sales under the company’s plan represented 8% of retail sales in fiscal 2016. In the same fiscal year, e-commerce sales were less than 2% of total sales.
Cato has two reportable segments: retail and credit.
Retail
In the first quarter, Cato’s revenue fell (-)16.8% to $238.6 million or 99.5% of sales and generated income before tax margin of 10.7% compared to 17.4% a year earlier.
Credit
In the first quarter, credit revenue also fell (-)13.5% to $1.1 million and generated 40% margin compared to 27% a year earlier.
(10-Q and 10-K Filings)
Comparable store sales
Same-store sales includes stores that have been open more than 15 months. In the first quarter, Cato had store sales figure of (-)17% drop compared to flat a year earlier.
Sales and profits
In the past three years, Cato generated revenue growth average of 1.3%, profit decline average of (-)4.57% and a profit margin average of 5.8%.
Cash, debt and book value*
As of April, Cato had $52 million in cash and cash equivalents and no debt. Overall equity decreased by $54 million year over year while book value declined by (-)12.4% to $380 million.
*Second quarter 10-Q was not available at the time of writing.
Cash flow*
In the first quarter that ended in April, Cato’s cash flow dropped by (-)41.7% year over year to $42 million brought mostly by lower profits in that period. Capital expenditures were $6 million leaving Cato with $35 million in free cash flow compared to $62 million a year earlier.
*Second quarter 10-Q was not available at the time of writing.
The cash flow summary
In the past three years, Cato allocated $83 million in capital expenditures, generated $201 million in free cash flow and provided $194 million in dividends and share repurchases at an average free cash flow payout ratio of 106%.
Conclusion
Cato’s business exhibited an overall decline in the first half of this year. Lacking specific figures for the second quarter including same-store sales from the company’s 8-K, Cato still demonstrated deterioration in its same-store figures – a key metric for retailers –Â in the first quarter that ended in April.
The company also has yet to deliver or grow more business through online sales as its e-commerce sales were less than 2% of sales for the first quarter of fiscal 2017.
Nonetheless, Cato carried zero debt and a reduced book value while having maintained very generous payouts to its shareholders in recent years.
An analyst had a hold recommendation on Cato with a target price of $20.
Meanwhile, declining overall business in all aspects (subjectively speaking) would make Cato a pass despite its juicy yield and admirable balance sheet.
Notes
- Company filings
The It’s Fashion and It’s Fashion Metro concepts offer fashion with a focus on the latest trendy styles for the entire family at low prices every day. The Versona concept’s stores and e-commerce website offer quality fashion apparel items, jewelry and accessories at exceptional values every day.
Disclosure: I do not have shares in any of the companies mentioned.
