Cato Corporation (CATO), a mid-market retailer of women's apparel and accessories, reported full-year 2011 earnings late last week. Earnings of $2.21 per share appeared to meet Wall Street estimates, as the stock held steady (though it fell 2.4% on Monday). The company also offered guidance for 2012 of $2.10-$2.25 per share, with net income expected to rise or fall modestly over 2011.
It is the guidance that should be of interest to forward-looking investors, as Cato's guidance has, since 2008, been remarkably conservative:
|Year1||EPS Range2||Actual EPS||SSS Guid2||Actual SSS||GNS3||ANS4|
|2008||$0.72-0.93||$1.14*||0 - (3)%||(1)%||43||(37)|
|2009||$0.98-1.17||$1.55||0 - (3)%||1%||10||(10)|
|2010||$1.51-1.64||$2.01*||0 - (3)%||3%||15||11|
|2011||$2.00-2.11||$2.21||0 - (2)%||(1)%||27||6|
1 -- Fiscal year, ending in January of the year following
2 -- guidance issued in conjunction with prior year's earnings (SSS = same store sales)
3 -- Guided Net Store Openings
4 -- Actual Net Store Openings
data from company earnings releases
For the last four years, CATO has smashed its initial earnings guidance, with 2011's 7.3% beat the weakest of the group. That performance was still enough to set company records for both net income and earnings per share.
But the curious thing is how the company has exceeded what appears to be relatively conservative guidance. Same-store sales have been, at worst, toward the high end of the company's range. Perhaps this is a lesson from a difficult 2007, when overly optimistic guidance caused the stock to plunge late in the year. But store openings have consistently been far lower than projected. Only in 2010 did the company come close to expanding its retail base as aggressively as promised.
For 2012, Cato is estimating 32 net new locations (45 openings and 13 closings), with same-store sales in a range between flat and down two percent. 20 of the store locations are planned in the company's new Versona concept, a more upscale brand that focuses more on accessories such as jewelry and handbags. On the comp front, same-store sales were down 6% in January and 5% in February-- disappointing figures given warmer weather and surprising strength elsewhere in the retail sector. As I noted last month, Cato's same-store sales were weak in the second half of 2011, providing easier comparisons for improvement later in 2012. Still, the slow early start for Cato would seem to provide a small headwind toward comp growth, and make beating its guidance less likely.
Without exceeding its comp guidance, can Cato again outrun its full-year earnings estimates? It seems unlikely. The company's strong earnings growth since 2006 has come largely through expense control. Full-year 2011 sales were just 10.3% above those of 2007, but margins rose some 620 basis points over the same period. Margin improvement cannot last forever, though. In fact, gross margin fell in 2011. The company's store opening guidance may be helped by the fact that nearly half of new locations are planned for the Versona brand. The company opened 11 locations after initiating the concept in 2011, and seems intent on expanding that brand. But even 32 net new locations would add less than 3% to Cato's existing total.
In the meantime, CATO looks reasonably priced. At the midpoint of 2012 guidance of $2.10-$2.25 per share, its P/E is just 12.6 at Monday's close of $27.43. Backing out the company's $7.44 per share in net cash, the stock still trades at just 9.2 times earnings.
When adding the company's 3.35% dividend yield -- with dividend raises in both 2010 and 2011 -- CATO looks like a solid stock. But without revenue growth, its ability to again beat its guidance looks less likely in 2012. For a stock that is still trading about 12% off its all-time high, value investors should look for more compelling reasons to purchase the stock. A lower entry point, success in the Versona concept, or an improvement in same-store sales or new store locations might all lead the company toward more significant top-line growth, and higher profits. But right now, CATO looks unlikely to continue its four-year run of racing past its initial earnings guidance.