Higher merchandise costs upset specialty apparel firm Cato

16 Mar '12

5 min read

The Cato Corporation reported net income for the fourth quarter and year ended January 28, 2012. For the fourth quarter, the Company reported net income of $10.1 million or $0.35 per diluted share, compared to net income of $10.9 million or $0.37 per diluted share for the fourth quarter ended January 29, 2011 (the fourth quarter and fiscal year ended January 29, 2011 results have been restated to reflect the January 30, 2011 adoption of the cost method of accounting for merchandise inventories).

For the quarter, net income decreased 7% and earnings per diluted share decreased 5% from the prior year. Full year 2011 net income was a record $64.8 million or $2.21 per diluted share compared to $58.9 million or $2.00 per diluted share for 2010. For the year, net income increased 10% and earnings per diluted share increased 11% over the prior year.

Sales for fiscal fourth quarter ended January 28, 2012 were $221.5 million, a 1% decrease from sales of $224.0 million for the fourth quarter ended January 29, 2011. For the quarter, same-store sales decreased 4%. The Company's sales for 2011 were $920.6 million, an increase of 1% over 2010 sales of $913.1 million. For the year, same-store sales decreased 1%.

"In 2011, Cato delivered its second consecutive year of record earnings," commented John Cato, Chairman, President and Chief Executive Officer. "However, the second half of the year was very difficult both in terms of the sales environment and the increased merchandise costs we faced. In spite of these obstacles, our associates delivered another strong year by continuing to offer excellent customer service, great fashion and exceptional value. In the fourth quarter, sales were below expectations but we were able to generate earnings within our original guidance."

In the fourth quarter, gross margin decreased 70 basis points compared to the prior year to 34.6% of sales primarily due to the deleveraging of store occupancy and other fixed costs. Selling, general and administrative expenses were 26.7% of sales, flat to the prior year. The Company's effective income tax rate decreased to 35.2% from 38.6% last year primarily due to lower state taxes.

For 2011, gross margin decreased 70 basis points to 37.6% of sales primarily due to slightly lower merchandise margin and the deleveraging of store occupancy costs. Selling, general and administrative expenses decreased 160 basis points to 25.9% of sales primarily due to lower insurance costs and incentive compensation. The Company's effective income tax rate decreased to 35.3% from 36.6% last year primarily due to lower state taxes. Net income was 7.0% of sales vs. 6.4% last year.

"Cato continues to maintain a strong financial foundation with approximately $245 million in cash and short-term investments and no debt," commented Mr. Cato. During 2011, the Company returned $25.7 million in profits to shareholders through dividends and repurchased approximately 440,000 shares. The Company's annualized dividend is $0.92 per share after a 24% increase in 2011. This annualized dividend represents a yield of approximately 3.3% based on the March 14 closing price of $27.56.

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