CTR: Cato Earnings Outlook Difficult

By William Trent, CFA of Stock Market Beat

Small Cap Watch List and Mid Cap Watch List member Cato Corporation (CTR) reported earnings of $0.40 for the fourth quarter and $1.62 for the full year on $862.8 million in sales. While the EPS results compare favorably to consensus estimates of $0.36 for the quarter and $1.57 for the year, management notes that the company benefitted from several one-time items – not the least of which being an extra week of sales:

Similar to other retailers that use the National Retail Federation 4-5-4 calendar, the Company’s fiscal year 2006 included 53 weeks as compared to 52 weeks in 2005. During the year the Company received an insurance settlement related to hurricanes in the southeast in 2005 and a settlement related to excess credit card service fees the Company paid over a number of years. The after-tax effect of these items was an additional $3.0 million in net income or $.10 per diluted share.

Seen in context, then, the results look like a “miss,” particularly when the consensus revenue estimate of $870 million for the year is factored in. Guidance falls short of the $1.68 currently expected by analysts:

Due to the one-time items noted above and a return to a 52-week year, the Company expects 2007 to be a more challenging year for earnings growth. The Company estimates that 2007 net income will be in a range of $51.5 million to $53.3 million, a flat to 3.5% increase over 2006, or $1.60 to $1.66 per diluted share. This estimate reflects a 1% to 3% comparable store sales increase over 2006.

The company expects to open 90 new stores this year and close 15 existing ones. The latter number appears oddly specific given that “at this time, no stores have been identified for closure.” We say if they can’t figure out which stores are doing so poorly they need to be closed it’s no wonder the company is missing earnings.

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