Cato's growth strategy includes new concept

The Cato Corp. is banking on its large-format retail store called It's Fashion Metro for future growth.

The Charlotte-based retailer expects the strategy will boost sales even as the economy slows.

"Our plans for this year are to accelerate It's Fashion store openings primarily through the development of our It's Fashion Metro concept," said Chief Executive John Cato last week at the company's annual shareholder meeting.

The Cato division of the company has been the primary focus of growth, but that focus is shifting to It's Fashion and It's Fashion Metro. Last fall, Cato opened the first two It's Fashion Metro stores, one in Charlotte and another in Natchitoches, La. Since then, it has opened 11 more locations. By the end of the year, it plans to open 30 It's Fashion Metro stores in the Southeast.

The It's Fashion Metro concept is an expanded version of the It's Fashion store that offers urban-inspired, nationally recognized brands for the entire family. It's Fashion Metro stores average about 12,000 square feet while the traditional It's Fashion stores are about 3,000 square feet.

"The It's Fashion Metro stores are a focus and the primary growth vehicle in the It's Fashion division because of the opportunity we see for its growth," Cato says. "We believe it is a customer base and a market that we know well."

While Cato is expanding in the Southeast, it's pulling back in the Midwest and Northeast because stores aren't performing as well as it had hoped. Cato says it will continue to test and evaluate locations there to improve sales.

Part of that testing involves using a new site-selection tool. Over the last 10 to 15 years, Cato has focused on strip-shopping centers anchored by a national discounter or large grocer. Cato is testing stores in larger shopping centers anchored by two or more big-box chains that generate more traffic. The site-selection tool helps gather demographic information to identify potential store locations.

"It should ultimately help us open more stores in more profitable locations," Cato says. "And we will continue our standard practice of closing underperforming stores."

During the first quarter ended May 3, Cato opened 19 stores and closed 11. The company's first-quarter net income fell to $16.9 million, or 58 cents per diluted share, from $18.7 million, or 59 cents per diluted share. Revenue rose 1% to $225.8 million from $224.1 million, while sales at stores in operation for at least a year decreased 2%.

The company expects earnings of 80 cents to 95 cents per diluted share for the full year, up from a prior estimate of 72 cents to 93 cents. Cato earned $1.03 per diluted share in fiscal 2007.

"Cato remains in good shape financially," wrote Patrick McKeever, an MKM Partners analyst, in a recent research report. "The company's financial performance was significantly better than it could have been had management not taken an aggressive approach to managing inventories down and reducing markdown exposure."

At the end of the quarter, Cato had no debt and $127.2 million in cash and short-term investments.

The retailer thinks the economic stimulus rebate checks will boost sales. "We certainly hope our customers will spend some of their stimulus checks with us," Cato says. "We have heard anecdotal information from our stores that they are seeing some stimulus money being spent."

Source: Charlotte Business Journal

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Cato Corp. to close underperforming stores to stem losses

In an effort to improve its financial outlook for the rest of the fiscal year, The Cato Corp. plans to close 32 underperforming stores and open 75 others.

The Charlotte-based company declines to say where the store closings and openings will be.

"The company periodically reviews its store base to determine whether any particular store should be closed based on its sales trends and profitability," says a recent Cato filing with the Securities and Exchange Commission. "The company intends to continue this review process to close underperforming stores."

The number of stores being closed in the fiscal year that ends in February is a jump over previous years. Twenty were closed last year, and seven were closed in 2003. "Cato is struggling to remain relevant in the women's apparel space," says Patrick McKeever, an MKM Partners retail analyst. "Fiscal year 2008 is likely to be another tough year for the company as its core demographic struggles with high energy and food prices, declining home values and tighter credit markets, among other factors."

The women's apparel retailer says eight of the stores being closed will reopen, bringing the total closed to 24. That is more in line with the number of stores closed in the past few years, a company spokesman says.

But analysts see reasons to worry.

McKeever has lowered his 2008 earnings per share estimate to 83 cents from $1.15. Cato expects 2008 earnings to range between 72 cents to 93 cents per diluted share.

Last year, Cato's net income fell 37% to $32.3 million, or $1.03 per diluted share, from $51.5 million, or $1.62 per diluted share, in fiscal 2006. Retail sales fell 3.4% in fiscal 2007 to $843 million from $862.8 million.

"Our 2007 results reflect the difficult retail environment," Chief Executive John Cato said last week when the company's earnings were released. "Our comparable-store sales decreased, and the resulting markdowns were the primary contributors to the lower earnings."

Comparable-store sales fell 4% last year.

"Cato's same-store sales are likely to remain under pressure in an already competitive and recessionary environment where the company's target demographic is getting squeezed by the adverse macroeconomic conditions," says Stanford Group Co. analyst Marc Bettinger.

Cato operates 1,318 stores in 32 states. Over the last year, its stock price has fallen nearly 30%, closing at $15.99 Wednesday.

Source: Charlotte Business Journal

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