Fashion Retailer Cato Corp. Isn't Dressed for Success

 | Jan 05, 2018 | 11:08 AM EST
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Fashion retailer Cato Corp. (CATO) issued a holiday-sales report Thursday that was lost in the see of other news, but demonstrates the continuing plight that small specialty chains face. Cato reported same-store-sales numbers that would make your head spin -- a 9% drop for the five weeks ended Dec. 30, with sales for the 11-month period ending the same day down a whopping 13%.

The company, which operates more than 1,355 stores in 33 states under the names Cato, Versona and It's Fashion, also warned that full-year earnings per share will fall to 50 to 65 cents from $1.72 a year earlier. (Interestingly, the company's fourth-quarter projected loss of 30 to 45 cents a share includes 20 to 30 cents of red ink for adjustments due to the new U.S. tax law.)

All of this crushed Cato's stock on Thursday, with investors pushing shares down some 13% to near a 13-year low. CATO had already participated in the retail sector's Great Summer Armageddon this past August, when lots of chains got their clocks cleaned. Many recovered somewhat (including Cato), but Thursday's news provided further evidence of the sector's decline.

I was somewhat intrigued by CATO back in July because it was a "double-net" stock back then. The name traded at between 1x and 2x of net current asset value and yielded more than 8% at the time, but had enough liquidity to back up its dividend obligations. In fact, Cato had nearly $9 per share in cash and short-term investments and expected back then to earn $1.45 a share for 2018.

Cato's decline in business conditions and forward expectations have become much more pronounced since then, even though the company's cash and short-term investments only fell slightly to $8.84 per share as of last quarter. Still, you have to wonder whether a dividend cut is on the horizon. CATO's indicated dividend yield rose to 10% after Thursday's drubbing, but it's unclear when (or if) management can right the ship. When the company releases fourth-quarter results in March, it'll be interesting to see what the balance sheet looks like -- namely, how much cash Cato will have burned through this quarter.

It's true that I've had some success over the past year buying down-and-out retail/restaurant chains like Hibbett Sports (HIBB) , Vera Bradley (VRA) and Zoe's Kitchen (ZOES)  , but I'm glad that I passed on Cato. When investors "threw the baby out with the bathwater" of the retail segment in August, it appears that Cato was bathwater after all.

That said, there's no doubt that there are other retailers in worse shape -- larger names like Sears Holdings  (SHLD) and J.C. Penney (JCP) come to mind. In fact, Cato might have more time than other distressed retailers to try to figure things out given its cash hoard and lack of debt. It's a story that I'll continue to follow, but one that I'm not inclined to participate in any time soon.

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