April 25, 2019 - 11:24am EST by
2019 2020
Price: 14.30 EPS 0 0
Shares Out. (in M): 23,750 P/E 0 0
Market Cap (in $M): 340 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 129 TEV/EBIT 0 0

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  • Terminal Zero
  • Retail
  • Strong Balance Sheet
  • no discussion of valuation?
  • winner


I wrote up this stock 17 years ago on VIC, and the valuation on the stock is lower than it was back then.   That tells you in a nutshell what the issue is, as Cato is a run-of-the-mill apparel retailer with inconsistent results priced like a lot of left-for-dead retailers in this market.  This idea is a cousin to the Chico (CHS) listed earlier, and I have a found that collection of these things can sometimes spike extremely hard on improving results but this is a rental idea.

Some details on Cato:  

*Business - as of Feb, ran 1311 women's apparel stores in 31 states (one division - Versona - is more trinkets though; 1306 as of Apr19).  These are scattered mostly in the SE, and often reside in strips near a Walmart or other similar store.   The store base is in decline - nearly peaking at 1400, there's more closures than open though Cato broke 1,000 in 2002 and saw 2% unit growth until fairly recently before the e-comm revolution began to create meaningful pressures.   But there is no meaningful growth here, with 5 Year sales growth at  1.5% CAGR, 10 year 2%.   

*Balance sheet - many, many years ago Cato nearly hit BK and when they recovered Old Man Cato decided to keep a bullet proof balance sheet (after a secondary) and this has been the philosophy ever since.  Latest BS for 2-19 has 207.3m in cash with no debt, or over $8 a share.  If they do go BK one day, it will take many years unless retail goes under even further. 

*Cash Flow and Use of Cash - CFFO for the last 3 years totals 168.4m, with CapEx at 42.7, though Cato will sharply reduce CapEx when conditions worsen (4.4m in 2018).  Plans for 2019 are 13.3m.   Over same period, dividends are 102m, with buybacks of 95m.  I believe the buybacks are a total waste of money, and hopefully management will get more realistic on this in future years (13.3m in 2018), but dividends are the preferred method of distributing cash.  The yield today is 9.2%, or $1.32.  

*SSS - Cato is one of the few retailers left which reports monthly comps and after a flat performance in 2018 (which was very good - margins expanded), Q1 has started out weak (-8%) though March and April produce a more meaningful number due to Easter sales.  I am not expecting much, but do not believe SSS are  predictable as they once were.  

*plans for 2019 - will open 12 new stores, with 50 closings though as the company notes these will be closed with no financial impact.  I don't know how many money losing stores (and this changes radically in retail anyway) are in this group but the pruning of the store base is a good thing.  I don't have and in recent years have never derived an independent earnings estimate for this business because, ultimately, I believe such things are futile.

so why recommend the stock?   As noted above and in other retail threads, these things fluctuate.  I believe in viewing many of the dead carcass retailers  at this point as a collection of high risk, high return positions where the BS provides the time necessary for something good to happen, even if that something is not predictable, and I am perfectly comfortable with rental position.  What i want is a spike (hopefully 20%).  In early 2018 Cato was a $10.80 stock at the low, but then $26.90 six months later before crashing back down again.  Given the BS, there is no reason to think that Cato can't do a similar move sometime in the next 3 to 5 years, and i have a place in my portfolio for positions like this - particularly if I am also a paid a dividend to wait. 

my biggest issue with things like this in terms of red flags are buyback plans which are anathema to preserving the ability of the company to survive long enough to participate in the next good fortune.   Cato's current authorization is 2m shares which is small enough to make me hope that they won't continue to be foolish with an expenditure of money which has no good meaningful effect.  As noted above, Cato will pivot when things get dicey which is a good quality unlike many retailers who drill the hole bigger in their sinking ship.

for my personal accounts, I would combine Cato with several other retailers in the same boat (these can be easily found in Value Line - citi-trends, chico, etc). I would also limit my buying in all case to 20% moves - both up and down.   ideally, i would want to trade this multiple times a year.  Cato trades in relatively small volumes as you would suspect but this is not a problem for me.   

as for whether Cato has a niche, that is hard to say - the stores are more fashion oriented than the department stores and not everybody is 100% enamored with e-commerce.  Advertising is minimal (less than 1% of sales), and there are a lot of other apparel stores that are closing units too.   In effect, I think Cato is cato cause they are there in the strips already, and who wants to sell clothes in stores these days?   So no = no niche - but it will be hard to kill it off but as noted this is rental.   i don't care if it hits $0 if I can make a steady return in the meantime.  Following this company takes no more than 30 minutes a quarter which is another nice quality it has.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


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