Cato Down on Lackluster Q4 Earnings - Analyst Blog

Shares of the women fashion retailer, Cato Corporation CATO fell approximately 13% yesterday after the company reported disappointing fourth-quarter and fiscal 2013 results and provided a weak outlook for fiscal 2014. Cato's results for both the periods were negatively impacted by the persistently challenging economic scenario, highly promotional holiday sales season and harsh weather conditions in the months of Dec 2013 and Jan 2014.

Cato's earnings for the fourth quarter fell nearly 51.9% year over year to 13 cents per share. However, quarterly earnings were in line with the Zacks Consensus Estimate. For fiscal 2013, the company's earnings of $1.86 per share were in line with the Zacks Consensus Estimate but fell 11.8% from $2.11 per share in fiscal 2012.

Sales for the fourth quarter declined 7.2% year over year to $215.2 million while comparable-store sales (comps) fell 3% primarily due to unfavorable weather conditions during December last year and January this year. The company's fiscal 2013 sales came at $910.5 million, down 2.5% from fiscal 2012 level of $933.8 million. Further, comps for the fiscal declined 3%.

Gross profit for the reported quarter declined 7.6% year over year to $74.5 million while gross margin contracted 10 basis points (bps) to 34.7%. The year-over-year decline in gross margin was due to a highly promotional environment.

Selling general and administrative (SG&A) expenses for the quarter rose 1.4% year over year to $66.6 million while as a percentage of sales, it expanded 260 bps to 30.9%. The rise in SG&A expenses as a percentage of sales was mainly due to higher store payroll costs as well as accrued incentive compensation.

Cato ended fiscal 3013 with cash and cash equivalents of $79.4 million compared with $31.1 million at the end of fiscal 2012. During the fiscal, the company increased its quarterly dividend by 20% to 30 cents per share, thereby returning $5.9 million to shareholders.

Cato opened 32 stores, relocated 5 stores and closed 22 stores during the fiscal. The company was operating 1,320 stores across 32 states at the end of fiscal 2013. The company intends to open 64 stores in fiscal 2014 while shutting down 17 outlets.

Fiscal 2014 Outlook

The company expects fiscal 2014 to be a challenging year due to sluggish job growth and higher costs, which will negatively impact consumer disposable income. Therefore, Cato has provided a weak guidance for fiscal 2014.

For the fiscal, Cato anticipates comps to range from flat to a decrease of 2%. Gross margin is expected to contract 50 bps to 36.8% from 37.3% in fiscal 2013. Moreover, net income is expected to decline in the band of 11%–21% and come in between $43.1 million and $48.5 million. Earnings for the fiscal are projected in the range of $1.47–$1.66 per share.

For the first quarter of fiscal 2014, the company anticipates comps to be in the range of flat to down 2%. Earnings for the quarter are projected to be between 89 cents and 95 cents per share.

Other Stocks to Consider

Looking at Cato's latest quarterly results and disappointing fiscal 2014 outlook, it is preferable to remain away from this stock. Other better-ranked stocks worth considering in the apparel retail space include Hanesbrands Inc. HBI, Michael Kors Holdings Ltd. KORS and American Apparel Inc. APP. While Hanesbrands and Michael Kors sport a Zacks Rank #1 (Strong Buy), American Apparel holds a Zacks Rank #2 (Buy).