Description

Cato (moderately fast grower)

Valuation Criteria
Price = 21.26
market cap 550m
Trailing P/E = 12.1
Trailing P/CF = 10.2
Trailing P/B = 2.0
Trailing P/S = 0.8

Description
Cato operates 949 stores selling moderately priced apparel for women in 24 states.

Top Lines
Top line growth has been modest here, with sales up 4 to 6% in 3 of the past 5 years and up 11% and 12% in the other two years. Last year, sales were up 6%, though last year was 52 weeks vs. 53 weeks the previous year. Store counts have also grown at a modest pace, at 693 5 years ago, 809 3 years ago, and 937 at the end of last year. Half of all stores were added, remodeled, or relocated in the last 3 years.

Store and Earnings Plans
Plans are for 90 new stores this year, or a 9.6% growth rate. They expect to open 90 to 120 stores per year for the next several and their goal is to ‘deliver annual earnings growth of 10% or more.’

Margins
Margins have been expanding at a steady rate and last year finished at an all-time high net of 6.3%. Operating margins also hit a peak. The improvements are occurring in both gross margins and SGA.

Recent Results
In the first quarter, sales were up 2% with sales up 9% and EPS up 15%, though operating income was up 24%. Lower interest income and a higher tax rate reduced the gain. They only opened 12 new stores in the 1st quarter with 7 remodels.

Balance Sheet
The balance sheet is cash heavy, with 85m in cash and 52m in receivables and only 97m in total liabilities. Stores appear to be all leased.
Inventories were actually down 1% year over year and account receivables were up 11%, in line with sales.

CapEx and Dividend
The CapEx budget for 02 is 29m vs. about 55m in trailing cash flow. They do pay a 54c dividend (14m), for a yield of 2.5% at current prices.

Option Grants and Salaries
Option grants are minimal, with the last two very low. Insiders own 78% of the shares, and salaries are ok considering the lack of option grants. There is an overhang from a major shareholder sale which may account for significant recent price drop in these shares (I'm not sure what else could have caused it).

Forward Comps
Going forward, CACOA has the following comps for June to Nov (+2, -4, -6, 0, +4, -5).

EPS Projections
Cato sees Q2 earnings at 46c vs 42c last year, and full year earnings at 1.84 (a pe of 14.7x), an 11% increase. The would equal a pe of 11.5.

Summary
Cato continues to do well, with margins moving higher and the balance sheet in good shape. Store counts are growing at 10% and while with high margins there might be a limit to EPS increases above that, but with a trailing pe this year of 12x, a 2.5% yield, and a solid historical performance the stock should not be ignored like it is.

Catalyst

Continued sustained performance; end to insider sales