On Wednesday, under-the-radar fashion retailer Cato Corp. (CATO) reported third-quarter earnings. Revenue of $170.5 million was up 14% year/year, while net income flipped from the red (-$3.6 million) into the black, to the tune of $8.6 million, good for earnings per share of $0.39. That performance puts trailing nine-month EPS at $1.93 with one quarter to go this fiscal year, which is somewhat impressive -- at least in my view.
This was one earnings report I was patiently waiting for, and while I was not disappointed by the results, the market did not react well, as CATO fell 19% on Wednesday. CATO shares are still up 64% year-to-date, and 91% over the past year, but Wednesday's drop erased the past 3+ months of share price "progress."
Interestingly, the company still garners no analyst coverage, so it's not as though this was an earnings miss, per se. But this is yet another example of what makes the pursuit of cheap companies all the more interesting.
Reasons for the drubbing CATO shares took on Wednesday are likely due to comments made by Chairman, President, and CEO John Cato, who mentioned challenges due to the "lingering effects of the pandemic," as well as third-quarter sales being negatively impacted by "lower inventory levels related to further deterioration in the supply chain." Cato went on to say that, "As we see these conditions persisting, coupled with the effects of rising inflation and potential government vaccine mandates, we believe the fourth quarter will be very challenging."
One of my primary reasons for owning CATO has been the extremely strong balance sheet, and that did not change during the third quarter. The company ended the quarter with $200 million, or more than $9 per share in cash, and that's a net number, as CATO has no debt. What we don't know yet is how much, if any, cash the company utilized to buy back shares during the quarter. Historically, it has been a serial repurchaser of shares, and I wonder whether the company will take advantage of the recent drop to buy back more. CEO comments about Q3 and Q4 might suggest not, but we'll see.
In summary, CATO is a fashion retailer, trading at $15.75, with more than $9 in net cash, that currently yields 4.3%.
The CEO just put shareholders on notice that conditions for Q4 will be challenging. Time will tell to what extent the CEO is being cautious, or whether this will be an ugly retail season.
