NYSE:CATO The Cato Corporation

Sector financial performance:

This company, who primarily buys and sells off-price apparels for women mainly through their retail stores and web sites, has been grouped into casual clothing retailers (off-price) sector in clothing industry.

There was a clearly downward pressure on stores sales for companies in this sector in 2016 and 2017as indicated by our data that average comparable stores sales decreased by 0.5% and 2% in 2016 and 2017 respectively as compared with increase of 2% in 205. Some of companies in this sector presented stronger resistance to sales pressure than other full-price apparel retailers probably due to better performance of merchandises other than apparels such as home fashion and accessories.

As many companies in other sector, companies in this sector have also been seeing rebounding sales since 2018 driven by coming back traffic accompanies with less discounting. It seems that e-commerce has a very limited impact on this rebounding of sales in this sector.

It seems that, compared with full price apparels, the demand for off-price apparels seems to be more sensitive to economy elastic of price so that those companies’ sales have been supported by lowering price. As a result of price deflation (promotion/markdowns), companies’ gross margins decreased up to 500 basis points with an average decrease of 200 basis points in 2015/17. Plus the deleveraging of SG&A costs as a result of decreased sales, companies’ operating margins decreased by an average of 370 basis points during the same period. However, as sales jumped up with stronger demand in 2018, we have seen the improved gross margin driven less discounting and improved SG&A% driven leverage of expense.

The current average gross margin is 33% in this sector (distribution costs and occupancy costs included) with an average SG&A as percentage of sale of 28%. And this makes an average operating margin of 6%.

According our analysis, companies’ enterprise price/EBI ratios are 29 with interest/EBI ratios of 1%.  Companies’ enterprise price/sales ratios is about  1.0.

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Company performance:

Data indicated a clear downward trend in comparable stores sales of this company until 2017, when it generated a 12% decline in comparable sales. However, it seems that there is a signal indicating that comparable sales may be rebounding in 2018.

The first six months of fiscal 2018 compared with 2017

The retail sales of this company increased slightly (0.9 for 2Q) primarily attributable to the increase of 1% (4% for 2Q) in the comparable stores sales. E-commerce accounts for less than 2.5%.

Fiscal 2017 compared with 2016

The retail sales of this company decreased by 11% primarily attributable to the decrease of 12% in the comparable stores sales. E-commerce accounts for less than 2%.

The retail sales of this company decreased in first 26 weeks of fiscal 2017 compared with sale period of 2016 primarily attributable to the comparable stores sales decrease of 15.5%

The retail sales of this company decreased by 5.4% in fiscal 2016 compared with 2015 primarily attributable to the decrease of 6% in comparable stores sales.

The retail sales of this company increased by 2.4% in fiscal 2015 compared with 2014 primarily attributable to the increase in comparable stores sales.

This company’ gross margins was about 31% (distribution included and stores rental costs included) in the  second quarter of 2017 down from about 36% of 2014 primarily due to markdowns and deleveraging of costs as a result of reduced sales. Due to an additional increase of 400 basis points in SG&A as percentage of sales, its operating margin went down by about 900 basis points to current 0%. However, as merchandize margin was improved as a result of less discounting and leverage of other expenses as a result of sale increase in 2018, its gross margin is up to about 34% and operating margin up to 2.5%.

Stock price

This stock currently has an enterprise price/EBI ratio of 34 ($22). We think that its stock is being relatively fairly valued considering its recent turnover of sales and thus the large increase in cash flow.