Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2013
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to__________________
Commission file number 1-31340
THE CATO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
56-0484485
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
8100 Denmark Road, Charlotte, North Carolina 28273-5975
(Address of principal executive offices)
(Zip Code)
(704) 554-8510
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of November 2, 2013, there were 27,515,706 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.
Quarter Ended November 2, 2013
Page No.
PART I – FINANCIAL INFORMATION (UNAUDITED)
Item 1.
Financial Statements (Unaudited):
Condensed Consolidated Statements of Income and Comprehensive Income
2
For the Three Months and Nine Months Ended November 2, 2013 and October 27, 2012
Condensed Consolidated Balance Sheets
3
At November 2, 2013, February 2, 2013 and October 27, 2012
Condensed Consolidated Statements of Cash Flows
4
For the Nine Months Ended November 2, 2013 and October 27, 2012
Notes to Condensed Consolidated Financial Statements
5 – 18
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19 – 26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
28
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
29
Item 5.
Other Information
Item 6.
Exhibits
Signatures
30 - 34
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
Nine Months Ended
November 2, 2013
October 27, 2012
(Dollars in thousands, except per share data)
REVENUES
Retail sales
$
198,786
197,575
695,345
701,815
Other revenue (principally finance charges, late fees and
layaway charges)
2,257
2,430
7,114
7,597
Total revenues
201,043
200,005
702,459
709,412
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of depreciation shown below)
128,787
130,399
430,638
430,690
Selling, general and administrative (exclusive of depreciation
shown below)
61,032
58,252
179,386
178,828
Depreciation
5,459
5,346
16,344
16,859
Interest and other income
(723)
(814)
(2,328)
(2,705)
Cost and expenses, net
194,555
193,183
624,040
623,672
Income before income taxes
6,488
6,822
78,419
85,740
Income tax expense
1,603
2,153
27,920
32,016
Net income
4,885
4,669
50,499
53,724
Basic earnings per share
0.17
0.16
1.73
1.84
Diluted earnings per share
Dividends per share
0.05
0.25
0.15
0.73
Comprehensive income:
Unrealized gain (loss) on available-for-sale securities, net of
deferred income taxes of $188 and ($18) for the three and
nine months ended November 2, 2013 and ($47) and ($3) for
the three and nine months ended October 27, 2012, respectively
312
(78)
(30)
(5)
Comprehensive income
5,197
4,591
50,469
53,719
See notes to condensed consolidated financial statements (unaudited).
CONDENSED CONSOLIDATED BALANCE SHEETS
February 2, 2013
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
74,055
31,069
53,075
Short-term investments
159,223
157,578
202,277
Restricted cash and investments
4,706
5,999
Accounts receivable, net of allowance for doubtful accounts of
$2,043, $2,053 and $2,050 at November 2, 2013, February 2, 2013
and October 27, 2012 respectively
41,156
40,016
42,790
Merchandise inventories
131,016
140,738
130,826
Deferred income taxes
4,649
4,631
3,583
Prepaid expenses
6,393
10,183
3,630
Total Current Assets
421,198
390,214
442,180
Property and equipment – net
142,991
134,227
130,635
Other assets
7,938
8,205
7,380
Total Assets
572,127
532,646
580,195
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
89,468
99,247
84,846
Accrued expenses
44,534
43,773
46,443
Accrued bonus and benefits
2,598
2,290
4,597
Accrued income taxes
15,593
14,292
9,999
Total Current Liabilities
152,193
159,602
145,885
3,330
7,887
Other noncurrent liabilities (primarily deferred rent)
28,335
24,480
24,964
Commitments and contingencies:
-
Stockholders' Equity:
Preferred stock, $100 par value per share, 100,000 shares
authorized, none issued
Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 27,515,706 shares, 27,543,376 shares
and 27,540,724 shares at November 2, 2013, February 2, 2013 and
October 27, 2012 respectively
917
918
Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 1,743,525 shares at
November 2, 2013, February 2, 2013 and October 27, 2012
58
Additional paid-in capital
79,325
76,594
74,785
Retained earnings
307,178
266,843
324,767
Accumulated other comprehensive income
791
821
931
Total Stockholders' Equity
388,269
345,234
401,459
Total Liabilities and Stockholders’ Equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts
975
1,004
Share-based compensation
2,264
2,111
Excess tax benefits from share-based compensation
(38)
(146)
Loss on disposal and write-offs of property and equipment
1,532
806
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable
(2,115)
(770)
9,722
(444)
Prepaid and other assets
3,181
1,678
1,339
(4,999)
Accounts payable, accrued expenses and other liabilities
(6,706)
(2,417)
Net cash provided by operating activities
76,997
67,406
Investing Activities:
Expenditures for property and equipment
(23,781)
(30,966)
Purchase of short-term investments
(15,731)
(104,497)
Sales of short-term investments
13,906
107,964
Change in restricted cash and investments
1,293
(674)
Net cash used in investing activities
(24,313)
(28,173)
Financing Activities:
Dividends paid
(4,390)
(21,346)
Repurchase of common stock
(5,783)
(361)
Proceeds from employee stock purchase plan
387
463
38
146
Proceeds from stock options exercised
50
47
Net cash used in financing activities
(9,698)
(21,051)
Net increase in cash and cash equivalents
42,986
18,182
Cash and cash equivalents at beginning of period
34,893
Cash and cash equivalents at end of period
Non-cash investing activity
Accrued plant and equipment
(5,678)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012
NOTE 1 - GENERAL:
The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the three and nine month periods ended November 2, 2013 and October 27, 2012 are unaudited. In the opinion of management, all adjustments considered necessary for a fair statement have been included. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for the entire year.
The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013. Amounts as of February 2, 2013 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.
On November 26, 2013, the Board of Directors maintained the quarterly dividend at $0.05 per share. The Board of Directors previously accelerated the payment of the full fiscal year 2013 dividend of $1.00 on December 28, 2012 and increased the dividend $0.20 per share on an annualized basis during the first quarter.
NOTE 2 - EARNINGS PER SHARE:
ASC 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“EPS”) on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.
Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan.
Numerator
Net earnings
Earnings allocated to non-vested equity awards
(81)
(68)
(818)
(830)
Net earnings available to common stockholders
4,804
4,601
49,681
52,894
Denominator
Basic weighted average common shares outstanding
28,746,459
28,822,403
28,772,006
28,780,682
Dilutive effect of stock options
7,860
3,875
5,309
3,779
Diluted weighted average common shares outstanding
28,754,319
28,826,278
28,777,315
28,784,461
Net income per common share
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:
The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ending November 2, 2013:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at August 3, 2013
479
Other comprehensive income before
reclassifications
294
Amounts reclassified from accumulated
other comprehensive income (b)
18
Net current-period other comprehensive income
Ending Balance at November 2, 2013
(a) All amounts are net-of-tax.
(b) Includes $29 impact of accumulated other comprehensive income reclassifications into Interest and other
income for net gains on available-for-sale securities. The tax impact of this reclassification was $11.
The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the first nine months ending November 2, 2013:
Beginning Balance at February 2, 2013
11
(41)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to OCI.
(b) Includes $47 impact of accumulated other comprehensive income reclassifications into Interest and other
income for net gains on available-for-sale securities. The tax impact of this reclassification was $25.
NOTE 4 – FINANCING ARRANGEMENTS:
As of November 2, 2013, the Company had an unsecured revolving credit agreement to borrow $35.0 million. During 2013, the revolving credit agreement was amended and extended to August 2015. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of November 2, 2013. There were no borrowings outstanding under this credit facility during the periods ended November 2, 2013, February 2, 2013 or October 27, 2012. The weighted average interest rate under the credit facility was zero at November 2, 2013 due to no borrowings during the year.
At November 2, 2013, February 2, 2013 and October 27, 2012, the Company had approximately $0.6 million, $2.9 million and $3.3 million, respectively, of outstanding irrevocable letters of credit related to purchase commitments.
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona Accessories and Credit. As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit. The Company has aggregated its retail operating segments based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of ASC 280-10, if the segments have similar economic characteristics, similar product, similar production processes, similar clients and similar methods of distribution.
The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks. They are similar in nature of product, as they all offer women’s apparel, shoes and accessories. Merchandise inventory of the Company’s operating segments is sourced from the same countries and some of the same vendors, using similar production processes. Clients of the Company’s operating segments have similar characteristics. Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner, through its retail stores.
The Company operates its women’s fashion specialty retail stores principally in the southeastern United States, and does business in 32 states as of November 2, 2013. The Company offers its own credit card to its customers and all credit authorizations, payment processing and collection efforts are performed by a separate subsidiary of the Company.
NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):
The following schedule summarizes certain segment information (in thousands):
Retail
Credit
Total
Revenues
$ 199,540
$ 1,503
$ 201,043
$ 697,782
$ 4,677
$ 702,459
5,451
8
16,314
30
723
2,328
Income before taxes
5,948
540
76,756
1,663
Total assets
505,595
66,532
Capital expenditures
13,087
88
13,175
23,693
23,781
$ 198,247
$ 1,758
$ 200,005
$ 704,019
$ 5,393
$ 709,412
5,333
13
16,820
39
814
2,705
6,153
669
83,433
2,307
503,110
77,085
11,044
30,966
The Company evaluates segment performance based on income before taxes. The Company does not allocate certain corporate expenses or income taxes to the credit segment.
The following schedule summarizes the direct expenses of the credit segment which are reflected in selling, general and administrative expenses (in thousands):
Bad debt expense
279
408
Payroll
231
696
676
Postage
179
170
558
555
Other expenses
266
267
755
812
Total expenses
955
1,076
2,984
3,047
NOTE 6 – STOCK BASED COMPENSATION:
As of November 2, 2013, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan is for the granting of options to officers and key employees and the 2013 Incentive Compensation Plan is for the granting of various forms of equity-based awards, including restricted stock and stock options for grant, to officers, directors and key employees. Effective May 23, 2013, shares for grant were no longer available under the 2004 Amended and Restated Incentive Compensation Plan.
The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of November 2, 2013:
1987
2004
2013
Plan
Options and/or restricted stock initially authorized
5,850,000
1,350,000
1,500,000
8,700,000
Options and/or restricted stock available for grant:
20,127
443,566
463,693
1,489,152
In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of November 2, 2013, February 2, 2013 and October 27, 2012, there was $9.1 million, $6.4 million and $7.0 million of total unrecognized compensation expense related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 2.8 years, 2.3 years and 2.5 years, respectively. The total fair value of the shares recognized as compensation expense during the three and nine months ended November 2, 2013 was $739,000 and $2,187,000, respectively, compared to $631,000 and $2,029,000, respectively, for the three and nine months ended October 27, 2012. These expenses are classified as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income.
The following summary shows the changes in the shares of restricted stock outstanding during the nine months ended November 2, 2013:
Weighted Average
Number of
Grant Date Fair
Shares
Value Per Share
Restricted stock awards at February 2, 2013
440,146
23.70
Granted
214,385
23.57
Vested
(121,692)
19.82
Forfeited or expired
(26,217)
24.70
Restricted stock awards at November 2, 2013
506,622
24.52
The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the nine months ended November 2, 2013 and October 27, 2012, the Company sold 18,811 and 21,463 shares to employees at an average discount of $3.63 and $3.81 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $68,000 and $82,000 for the nine months ended November 2, 2013 and October 27, 2012, respectively. These expenses are classified as a component of selling, general and administrative expenses.
The following is a summary of changes in stock options outstanding during the nine months ended November 2, 2013.
Weighted
Average
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Price
Term
Value(a)
Options outstanding at February 2, 2013
9,550
13.47
2.12 years
136,185
23.56
Exercised
(2,800)
14.19
Outstanding at November 2, 2013
26,877
20.95
7.5 years
185,972
Vested and exercisable at November 2, 2013
6,750
13.17
0.7 years
99,225
(a) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
During the first nine months of fiscal 2013, 20,127 options were granted. No options were granted in the first nine months of fiscal 2012.
The total intrinsic value of options exercised during the three and nine months ended November 2, 2013 was $4,000 and $32,000, respectively, compared to $23,000 and $73,000, respectively, for the three and nine months ended October 27, 2012.
The stock option expense was $4,000 and $9,000 for the three and nine monthsended November 2, 2013, respectively, and zero for the three and nine months ended October 27, 2012.
Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.
NOTE 7 – FAIR VALUE MEASUREMENTS:
The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of November 2, 2013, February 2, 2013 and October 27, 2012.
Quoted
Prices in
Active
Significant
Markets for
Other
Identical
Observable
Unobservable
Assets
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
158,996
Corporate Bonds
978
Auction Rate Securities (ARS)
3,450
U.S. Treasury Notes
3,404
Cash Surrender Value of Life Insurance
2,897
Privately Managed Funds
393
Corporate Equities
606
Certificates of Deposit
100
170,824
4,110
159,974
6,740
Liabilities:
Deferred Compensation
(3,043)
Total Liabilities
151,377
8,035
3,906
2,051
561
474
169,954
4,480
159,412
6,062
(2,178)
177,774
15,414
Variable Rate Demand Notes (VRDN)
10,495
3,203
767
462
211,665
14,260
193,188
4,217
The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and taxable governmental debt securities held in managed accounts with underlying ratings of A or better at November 2, 2013, February 2, 2013 and October 27, 2012. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and investments and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.
Additionally, at November 2, 2013, the Company had $0.4 million of privately managed funds, $0.6 million of corporate equities, a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction, and deferred compensation plan assets of $2.9 million. At February 2, 2013, the Company had $0.6 million of privately managed funds, $0.5 million of corporate equities, a single ARS of $3.5 million and deferred compensation plan assets of $2.1 million. At October 27, 2012, the Company had $0.8 million of privately managed funds, $0.5 million of corporate equities and a single ARS of $3.5 million. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.
Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors.
The ARS of $3,450,000 par value was issued by the Wake County, NC Industrial Facilities & Pollution Control Financing Authority. The security is an obligation of Duke Energy Progress and has a credit rating of Aa3. The Company has collected all interest payments when due since the security was purchased and continues to expect that it will receive all interest due on the security in full and on a timely basis in the future.
The Company’s failed ARS is recorded at par value which approximates fair value using Level 3 inputs at each reporting period. Because there is no active market for this particular ARS, its fair value was determined to approximate par value based on an estimate of fair value through the use of a discounted cash flow analysis. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also considered the financial condition and near-term prospects of the issuer, the probability that the Company will be unable to collect all amounts due according to the contractual terms of the security and whether the security has been downgraded by a rating agency. The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.
The Company’s privately managed funds consist of two types of funds. The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice. As a result, the Company has classified the investments as Level 3.
Deferred compensation plan assets consist of life insurance policies. These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the fair value of the underlying assets and discounted cash flow and are therefore classified within level 3 of the valuation hierarchy. The level 3 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance funds. These funds are designed to mirror existing mutual funds and money market funds that are observable and actively traded. Cash surrender values are provided by third parties and reviewed for reasonableness by the Company.
The following tables summarize the change in fair value of the Company’s financial assets measured using Level 3 inputs as of November 2, 2013 and October 27, 2012 (in thousands):
Fair Value Measurements Using Significant
Unobservable Asset Inputs (Level 3)
Available-For-Sale
Cash
Debt Securities
Other Investments
Surrender
ARS
Private Equity
Value
Redemptions
(174)
Additions
705
Total gains or (losses)
Included in earnings (or changes in net assets)
7
141
148
Included in other comprehensive income
(1)
Unobservable Liability Inputs (Level 3)
Deferred
Compensation
(637)
Total (gains) or losses
(228)
Beginning Balance at January 28, 2012
1,604
5,054
(831)
(6)
Ending Balance at October 27, 2012
Quantitative information regarding the significant unobservable inputs related to the ARS as of November 2, 2013 and October 27, 2012 were as follows:
As of November 2, 2013
Fair Value
(in thousands)
Valuation Technique
Unobservable Inputs
$3,450
Net present value
Total Term
8.9 Years
of cash flows
Yield
0.11%
Comparative bond discount rate
As of October 27, 2012
9.9 Years
0.35%
0.20%
Significant increases or decreases in certain of the inputs could result in a lower fair value measurement. For example, a decrease in the yield, or an increase to the comparative bond discount rate could result in a lower fair value.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:
During the first quarter of 2013, the Company adopted guidance that requires additional disclosures on reclassifications from accumulated other comprehensive income into net income. The new accounting guidance requires entities to report either parenthetically on the face of the financial statements or in the footnotes of these reclassifications for each financial statement line item. This new guidance only impacts disclosures and as such will have no impact on the Company’s consolidated financial position, results of operations or cash flows.
In the first quarter of 2014, the Company will adopt new accounting guidance which eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss, a similar tax loss, or tax credit carry forward exists at the reporting date. The new guidance may affect balance sheet classification of certain unrecognized tax benefits and will have no impact on the Company’s consolidated results of operations or cash flows.
NOTE 9 – INCOME TAX
The effective income tax rate for the third quarter of fiscal 2013 was 24.7% compared to 31.6% for the third quarter of 2012. The effective tax rate for the first nine months of fiscal 2013 was 35.6% compared to 37.3% for the first nine months of fiscal 2012. The tax rate for the three and nine months ended November 2, 2013 reflects the resolution of various audits during the third quarter and the benefit of the Work Opportunity Tax Credit this year versus limited benefit in 2012 because the credit had not been renewed as of the end of the third quarter of last year.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The following information should be read along with the unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-Q that reflect projections or expectations of our future financial or economic performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations, including those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2013 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodels and closures; and (5) statements relating to our future contingencies. When possible, we have attempted to identify forward-looking statements by using words such as “will,” “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and any variations or negative formations of such words and similar expressions. We can give no assurance that actual results or events will not differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements included in this report are based on information available to us as of the filing date of this report, but subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements. Such factors include, but are not limited to, the following: any actual or perceived deterioration in, or uncertainties regarding, prevailing U.S. and global economic, political or financial market conditions; changes in other factors that drive consumer or corporate confidence and spending, including, but not limited to, levels of unemployment, fuel, energy and food costs, wage rates, tax rates, home values, consumer net worth and the availability of credit; uncertainties regarding the impact of any governmental responses to the foregoing conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel and accessory buying patterns; adverse weather or similar conditions that may affect our sales or operations; inventory risks due to shifts in market demand; and other factors discussed under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended February 2, 2013 (“fiscal 2012”), as amended or supplemented, and in other reports we file with or furnish to the Securities and Exchange Commission (“SEC”) from time to time. We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES:
The Company’s accounting policies are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013. As disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts receivable, reserves related to self-insured health insurance, workers’ compensation, general and auto insurance liabilities, calculation of potential asset impairment, inventory shrinkage and uncertain tax positions.
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in the Company's unaudited Condensed Consolidated Statements of Income as a percentage of total retail sales:
Total retail sales
100.0
%
Other revenue
1.1
1.2
1.0
101.1
101.2
101.0
Cost of goods sold (exclusive of depreciation)
64.8
66.0
61.9
61.4
Selling, general and administrative (exclusive of depreciation)
30.7
29.5
25.8
25.5
2.7
2.4
(0.4)
(0.3)
3.3
3.4
11.3
12.2
2.5
2.3
7.3
7.7
RESULTS OF OPERATIONS (CONTINUED):
Comparison of the Three and Nine Months ended November 2, 2013 with October 27, 2012
Total retail sales for the third quarter were $198.8 million compared to last year’s third quarter sales of $197.6 million, a 1.0% increase. The Company believes third quarter 2013 sales benefited from cooler weather during October compared to the year to date trend. Same-store sales decreased 1.0% in the third quarter of fiscal 2013. For the nine months ended November 2, 2013, total retail sales were $695.3 million compared to last year’s comparable nine month sales of $701.8 million, and same-store sales decreased 3.0% for the comparable nine month period. Sales in the first nine months of fiscal 2013 were affected by slow economic growth, high unemployment and our customers’ limited discretionary spending. Same-store sales includes stores that have been open more than 15 months. Stores that have been relocated or expanded are also included in the same-store sales calculation after they have been open more than 15 months. The method of calculating same-store sales varies across the retail industry. As a result, our same-store sales calculation may not be comparable to similarly titled measures reported by other companies. Total revenues, comprised of retail sales and other revenue (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $201.0 million and $702.5 million for the three and nine months ended November 2, 2013, compared to $200.0 million and $709.4 million for the three and nine months ended October 27, 2012, respectively. The Company operated 1,318 stores at November 2, 2013 compared to 1,306 stores at the end of last year’s third quarter. For the first nine months of fiscal 2013, the Company opened 16 new stores, relocated four stores and closed eight stores. The Company currently expects to open approximately 32 stores, relocate six stores and close approximately 24 stores in fiscal 2013.
Credit revenue of $1.5 million represented 0.7% of total revenues in the third quarter of fiscal 2013, compared to 2012 credit revenue of $1.8 million or 0.9% of total revenues. Credit revenue dollars decreased slightly for the most recent comparable period due to lower finance charge income and lower late fee income from sales under the Company’s proprietary credit card. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income. Related expenses principally include bad debt expense, payroll, postage and other administrative expenses and totaled $1.0 million in the third quarter of fiscal 2013, compared to last year’s third quarter expense of $1.1 million. The decrease was primarily due to lower bad debt expense.
Other revenue in total, as included in total revenues, was $2.3 million and $7.1 million for the three and nine months ended November 2, 2013, compared to $2.4 million and $7.6 million for the prior year’s comparable three and nine months. The overall decrease in the three and nine months ended November 2, 2013 resulted primarily from lower finance charges.
Cost of goods sold was $128.8 million, or 64.8% of retail sales and $430.6 million or 61.9% of retail sales for the three and nine months ended November 2, 2013, compared to $130.4 million, or 66.0% of retail sales and $430.7 million or 61.4% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2012. The overall decrease in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2013 resulted primarily from lower markdowns, slightly offset by an increase in occupancy costs due to store development. Cost of goods sold includes merchandise costs (net of discounts and allowances), buying costs, distribution costs, occupancy costs, freight and inventory shrinkage. Net merchandise costs and in-bound freight are capitalized as inventory costs. Buying and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) increased by 4.2% to $70.0 million for the third quarter of fiscal 2013 and decreased by 2.4% to $264.7 million for the first nine months of fiscal 2013 compared to $67.2 million and $271.1 million for the prior year’s comparable three and nine months of fiscal 2012. Gross margin as presented may not be comparable to those of other entities.
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts. SG&A expenses were $61.0 million, or 30.7% of retail sales and $179.4 million, or 25.8% of retail sales for the third quarter and first nine months of fiscal 2013, respectively, compared to $58.3 million, or 29.5% of retail sales and $178.8 million, or 25.5% of retail sales for the prior year’s comparable three and nine month periods, respectively. SG&A expenses as a percentage of retail sales slightly increased for the third quarter of fiscal 2013 as a result of store fixture write-offs and accrued incentive compensation, partially offset by lower insurance expense. For the first nine months of fiscal 2013, SG&A expenses as a percentage of retail sales slightly increased due to higher payroll costs, partially offset by a decrease in incentive compensation expense.
Depreciation expense was $5.5 million, or 2.7% of retail sales and $16.3 million, or 2.4% of retail sales for the third quarter and first nine months of fiscal 2013, respectively, compared to $5.3 million, or 2.7% of retail sales and $16.9 million or 2.4% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2012, respectively. The slight decrease in depreciation expense in fiscal 2013 was due to limited overall store development compared to prior years.
Interest and other income was $0.7 million, or 0.4% of retail sales and $2.3 million, or 0.3% of retail sales for the three and nine months ended November 2, 2013, respectively, compared to $0.8 million, or 0.4% of retail sales and $2.7 million, or 0.4% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2012. The slight decrease was due to lower interest income driven by lower interest rates in the third quarter and first nine months of fiscal 2013.
Income tax expense was $1.6 million or 0.8% of retail sales and $27.9 million, or 4.0% of retail sales for the third quarter and first nine months of fiscal 2013, respectively, compared to $2.2 million, or 1.1% of retail sales and $32.0 million, or 4.6% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2012, respectively. The third quarter decrease resulted from lower pre-tax income and a lower effective tax rate. The effective income tax rate for the third quarter of fiscal 2013 was 24.7% compared to 31.6% for the third quarter of 2012. The effective tax rate for the first nine months of fiscal 2013 was 35.6% compared to 37.3% for the first nine months of fiscal 2012. The tax rate for the third quarter and first nine months of fiscal 2013 reflects the resolution of various audits during the third quarter and the benefit of the Work Opportunity Tax Credit this year versus limited benefit in 2012 because the credit had not been renewed as of the end of the third quarter last year.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first nine months of fiscal 2013 was $77.0 million as compared to $67.4 million in the first nine months of fiscal 2012. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments, and share repurchases. In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at November 2, 2013, February 2, 2013 and October 27, 2012.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
Cash provided by operating activities for the first nine months of fiscal 2013 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $9.6 million for the first nine months of fiscal 2013 as compared to the first nine months of fiscal 2012 was primarily due to lower levels of merchandise inventories, partially offset by a decrease in net income.
The Company believes that its cash, cash equivalents and short-term investments, together with cash flows from operations and borrowings available under its revolving credit agreement, will be adequate to fund the Company’s regular operating requirements, expected capital expenditures, dividends and share repurchases for the next 12 months and for the foreseeable future.
At November 2, 2013, the Company had working capital of $269.0 million compared to $230.6 million at February 2, 2013 and $296.3 million at October 27, 2012. Additionally, the Company had $1.0 million, $1.0 million and $1.3 million invested in privately managed investment funds and other miscellaneous equities and a single auction rate security of $3.5 million at November 2, 2013, February 2, 2013 and October 27, 2012, respectively, which are included in Other assets on the Condensed Consolidated Balance Sheets.
At November 2, 2013, February 2, 2013 and October 27, 2012, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million. The revolving credit agreement is committed until August 2015. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of November 2, 2013. There were no borrowings outstanding under the credit facility as of November 2, 2013, February 2, 2013 and October 27, 2012.
At November 2, 2013, February 2, 2013 and October 27, 2012, the Company had approximately $0.6 million, $2.9 million and $3.3 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
Expenditures for property and equipment totaled $23.8 million in the first nine months of fiscal 2013, compared to $31.0 million in last year’s first nine months. The expenditures for the first nine months of 2013 were primarily for the development of 16 new stores, additional investments in new technology, home office expansion and renovations and the e-commerce initiative. For the full fiscal 2013 year, the Company expects to invest approximately $26.2 million for capital expenditures. This includes expenditures to open 32 new stores and relocate six stores, home office expansion and renovations and the e-commerce initiative.
Net cash used in investing activities totaled $24.3 million in the first nine months of fiscal 2013 compared to $28.2 million used in the comparable period of 2012. The decrease was due primarily to a decrease in expenditures for property and equipment and a net decrease in purchases and sales of short-term investments.
On November 26, 2013, the Board of Directors maintained the quarterly dividend at $0.05 per share. The Board of Directors previously accelerated the full fiscal year 2013 dividend of $1.00 on December 28, 2012.
As of November 2, 2013, the Company had 1,728,004 shares remaining in open authorizations under its share repurchase program.
The Company does not use derivative financial instruments.
The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and taxable governmental debt securities held in managed accounts with underlying ratings of A or better at November 2, 2013, February 2, 2013 and October 27, 2012. At October 27, 2012, the Company also held tax-exempt variable rate demand notes (“VRDN”). These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and investments and Other assets on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.
RECENT ACCOUNTING PRONOUNCEMENTS:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of November 2, 2013. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of November 2, 2013, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended November 2, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended February 2, 2013. These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company’s purchases of its common stock for the three months ended November 2, 2013:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Part of Publicly
Value) of Shares that may
of Shares
Price Paid
Announced Plans or
Yet be Purchased Under
Period
Purchased
per Share (1)
Programs (2)
The Plans or Programs (2)
August 2013
111
28.61
September 2013
October 2013
1,728,004
(1) Prices include trading costs.
(2) As of August 3, 2013, the Company’s share repurchase program had 1,728,115 shares remaining in open authorizations. During the third quarter ending November 2, 2013, the Company repurchased and retired 111 shares under this program for approximately $3,176 or an average market price of $28.61 per share. As of the third quarter ending November 2, 2013, the Company had 1,728,004 shares remaining in open authorizations. There is no specified expiration date for the Company’s repurchase program.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No.
Item
3.1
Registrant’s Restated Certificate of Incorporation dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283).
3.2
Registrant’s By Laws incorporated by reference to Exhibit 99.2 to Form 8-K of the Registrant Filed December 10, 2007.
4.1
Rights Agreement dated December 18, 2003, incorporated by reference to Exhibit 4.1 to Form 8-A12G of the Registrant filed December 22, 2003 and as amended in Form 8-A12B/A filed January 6, 2004.
31.1*
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2*
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
32.1*
Section 1350 Certification of Principal Executive Officer.
32.2*
Section 1350 Certification of Principal Financial Officer.
101.1*
The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 2, 2013, formatted in XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Nine Months Ended November 2, 2013 and October 27, 2012; (ii) Condensed Consolidated Balance Sheets at November 2, 2013, February 2, 2013 and October 27, 2012; (iii) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 2, 2013 and October 27, 2012; and (iv) Notes to Condensed Consolidated Financial Statements.
* Submitted electronically herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 26, 2013
/s/ John P. D. Cato
Date
John P. D. Cato
Chairman, President and
Chief Executive Officer
/s/ John R. Howe
John R. Howe
Executive Vice President
Chief Financial Officer