Swap Income For Growth With Cato Corp.

By Ryan C. Fuhrmann | March 11, 2012 AAA

Cato Corporation (NYSE:CATO) focuses on selling fashionable clothing, footwear and related apparel at affordable prices. It operates primarily in the Southeastern part of the United States and is focused primarily on strip mall locations. These factors give Cato a competitive edge over most retail rivals, and though it doesn't grow rapidly, its stock does offer an appealing dividend yield.
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Full Year Recap
Cato's total retail sales rose a bit less than 1% to $920.6 million. During the year, the boost in sales stemmed from the opening of 19 net new stores, but Cato saw comparable store sales fall 1% at existing locations. Including other income that consisted primarily of finance charges and late fees from Cato's own credit cards, as well as layaway charges, total revenue increased 0.7% to $931.5 million.

Cost of goods sold rose faster than the sales but management was able to reduce operating SG&A costs as a percentage of total sales. This helped pre-tax income rise 8.1% to $100.3 million, or 10.9% of sales. A modest increase in income tax expense resulted in a 10.2% jump in net income to $64.8 million, or $2.21 per diluted share. For related reading, see The 4 R's Of Investing In Retail.

Cato didn't provide full year cash flow details but did detail balance sheet information and a very healthy cash balance of $7 per diluted share. It ended the year with no long-term debt.

Outlook and Valuation
Cato expects 2012 to be another year where "its customers will continue to be negatively impacted by slow job growth and higher food and gasoline prices." Analysts expect this to result in sales growth of only about 2% for total sales of just over $951 million. The company projects comps to come in flat to fall as much as 2%, and earnings in a range of $2.10 to $2.25 per diluted share. This would mean profit growth in the neighborhood of a 5% decline to an increase of 2%.

Cato's stock is bumping up its highs over the past year and currently trades at a forward P/E of 11.7. This is at the low end of Cato's valuation range over the past five years and below the average of 13 over this timeframe.

The Bottom Line
Over the past decade, Cato has grown only modestly. Over this period, sales are up less than 4% annually while earnings are up less than 7% annually. Management has done a much better job at boosting earnings over the past three years, with an annual average rise close to 24% while sales are up only 3% annually. However, this period started at a low point in the midst of the credit crisis.

Though future growth trends don't look that impressive, Cato does sport an above average dividend yield of 3.4%. The only other specialty apparel retailers that come close to matching this yield include American Eagle Outfitters (NYSE:AEO) at 2.6% and Bon-Ton Stores (Nasdaq:BONT) at 2.3%. Big-box retailers including Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT) offer decent dividend yields of roughly 2.5% each as well as a decent combination of modest sales growth and solid cash flow generation.

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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