Yesterday, struggling apparel retailer CATO (CATO) announced a 5% same-store sales decrease for February, the latest in a long line of disappointing comps. But at least this one was not double digit, like the May, 2017 16% drop, or last February's 25% decline. If you think that's putting lipstick on a pig, you'd probably be right.
CATOs share price decline has been precipitous- shares have fallen 72% over the past three years, 24% year-to-date, and it is one of the few names I've seen that is trading below 2008-2009 market crash levels. It has not participated in the revival that some specialty retailers have experienced since the "Great Summer Armageddon" in August, and the markets are pricing it for death.
So it may come as a surprise (or perhaps not, given my history) that yesterday, as shares were enduring a 7% haircut intraday, I took an initial position. I've been watching CATO since July, when it was trading in the $16 range, and yielding more than 8%, and I passed. I said no again in January, after shares suffered another mini-plunge. Yesterday, I went dumpster diving, and picked up some CATO in the $11.90 range.
I know what I bought; a distressed brick and mortar retailer, a dinosaur of sorts, in an ever-changing retail world. I don't know what the long-term holds for CATO, but if its' recent pace continues, probably not much. But in the here and now, I bought shares in a company that trades for around $12 that has nearly $9 per share in cash and short-term investments, and no debt on the books. In addition, the company owns its distribution center and offices, a total of 552,000 square feet on 15 acres in Charlotte, North Carolina, as well as a 185 acre tract in York County, South Carolina. I'm not sure what the real estate assets are worth, but the whole package was compelling enough to give it a shot. This is a very speculative play, for sure.
To be clear, I am under no assumption that CATO will continue paying its current 33 cent per share quarterly dividend, which equates to an 11% yield. In fact the market is pricing in a dividend cut.
However, all of its liquidity gives CATO a longer runway than most struggling retailers normally have to try and right the ship. It would not take much in the way of good news, if there is any on the horizon that is (perhaps a big if) to right-price CATO shares.
At around $12 a share, investors are theoretically getting about $9 per share in cash and short-term investments, and the business and real estate for about $3. With those levels of cash, shares are currently trading like an option on the near-future of the business. At these levels, the markets and many investors are betting that CATO will not survive. I, on the other hand, am speculating that CATO may be the proverbial "50 cent dollar."
For its part, management, which has admittedly made some costly mistakes with merchandise and inventory, has continued to buy back stock. I like that confidence.
Lastly, with just one analyst following CATO, there's a lot of room for earnings surprises, positive or negative.