I've been bullish on Cato Corporation (CATO) for a while now -- my October piece on the stock was definitely one of the better predictions I've made here on SeekingAlpha -- but with the stock again approaching all-time highs, I'm wondering if it might have outrun its value.
As I noted in December, same-store sales are flagging, and January was no exception. Sales dropped 4% and 6% on a comparable basis, continuing a weak run for the company:
| Month | SSS Change |
| February | 5% |
| March | 1%* |
| April | 1%* |
| May | (3%) |
| June | 1% |
| July | (3%) |
| August | (3%) |
| September | (3%) |
| October | (3%) |
| November | (5%) |
| December | (1%) |
| January | (6%) |
* -- Combined for March/April; actual figures were (9%) for March, 17% for April, due to movement of Easter into April 2011 from March 2010. Data from company releases.
Despite the January weakness, Cato still raised its fourth-quarter and full-year guidance back to previously announced ranges of 32 to 35 cents for the quarter and $2.18-$2.21 per share for the year. (The company had previously forecast earnings at the low end of each of those ranges.) The market chose to focus on the small increase in guidance, rather than the more drastic fall in sales, and CATO continued its impressive bull run here in 2012.
(Click chart to enlarge)
chart courtesy finviz.com
At Tuesday's close of $29.19, the stock is approaching its all-time high of $30.19, set in July, and is up nearly 18% year-to-date.
But at these levels, how much upside does CATO have left? The slightly raised guidance for the fourth quarter, given the weakness in comps, may be simply due to the company's share repurchase program, which had 2 million shares remaining heading into the fourth quarter (about 7.4% of the total Class A float; the Class B shares are controlled by the Cato family and have significantly enhanced voting rights). According to the most recent 10-Q, the company retired 330,400 shares in the third quarter; a slightly more aggressive program in the fourth quarter could have reduced share count by 2-3%, accounting for the upside guidance revision.
But such engineering does little to provide confidence in the company's ability to grow earnings. Even at the high end of guidance, per-share earnings will decrease in the fourth quarter. (Cato earned 37 cents in the January 2011 quarter, versus 32 to 35 cents a year later.) For the year, sales rose 1%, due to a small increase in store count and total square footage, while comps fell 1%. Net income will be up for the year, likely in the range of 5%-6%, compared with 9%-10% growth on a per-share basis.
With substantial economic headwinds, future growth for Cato looks difficult to achieve. As I noted in December, over 300 -- nearly one quarter of total store count -- of the company's stores are in the Carolinas, Georgia, and Florida, states bearing the brunt of the current recession. Store count grew 3% in 2011 -- slightly below guidance -- but will not provide a substantial tailwind for overall earnings. In short, the company looks set for modest per-share earnings growth, as single-digit increases in square footage combine with single-digit decreases in share count and same-store sales to push EPS up slightly.
At October's levels of $23, such growth was more than acceptable. But with the stock now trading at 13 times the midpoint of FY12 earnings -- and even near 10, when backing out the substantial net cash on the book -- investors should wonder if it's not time to take profits on CATO. The company is well-managed, has an impressive balance sheet (with over 25% of market cap in net cash), and offers an enticing 3.15% yield. But, as the stock nears an all-time high, it seems that is all priced in. Without some catalyst for top-line growth, CATO just isn't the buy that it used to be.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
