Cato Stock: Outlook Turns Bullish for This 10.9%-Yielder
June 10, 2024
Why Cato Stock Is Worth Watching
The global apparel market took a beating during the 2020 COVID-19 crisis, with lockdowns, store closures, travel bans, and supply-chain disruptions hobbling the industry. Over the last two years, though, the apparel retail sector has come roaring back. It’s not quite back to its pre-pandemic glory days, but there’s certainly a degree of normalcy.
The SPDR S&P Retail ETF (NYSEARCA:XRT) cratered by approximately 40% in the opening weeks of the pandemic, but it has more than made up for those losses since 2021. As of this writing, it’s trading up by seven percent year-to-date and 32% year-over-year.
Some apparel companies have taken longer to rebound than others. One apparel company that has seen its fortunes turn for the better is Cato Corp (NYSE:CATO), a specialty retailer of fashion apparel and accessories.
The company operates roughly 1,300 apparel and accessory stores in 31 states under the banners “Cato,” “It’s Fashion,” “It’s Fashion Metro,” and “Versona.” Through these stores, the company sells various types of fashion items—including clothing, jewelry, accessories, and shoes—for women, men, boys, girls, toddlers, and infants. (Source: “Overview,” Cato Corp, last accessed June 4, 2024.)
Its stores range in size from 3,000 to 8,000 square feet. The Cato and It’s Fashion stores are primarily located in strip shopping centers, and the Versona stores are located in “premier lifestyle centers and power centers.” The company also operates online stores.
Cato Corp Swung to 1st-Quarter Profitability
A large number of apparel stores continue to struggle to be consistently profitable. Until recently, this was the case with Cato Corp’s stores.
For the fourth quarter of its fiscal 2024 (ended February 3), the company reported a net loss of $23.4 million, or $1.14 per diluted share. For its full fiscal year 2023, it reported a net loss of $23.9 million, or $1.17 per share. (Source: “Cato Reports 4Q and Full Year Loss,” Cato Corp, March 31, 2024.)
The company’s chairman, president, and CEO, John Cato, said the company’s fiscal 2023 loss was due to higher interest rates, inflation, and pressure on consumers’ discretionary spending. Despite the challenges, the company continued to invest in key capital projects and efficiency initiatives.
Fast-forward to the first quarter of fiscal 2024 (ended May 4), and Cato generated net income of $11.0 million, or $0.54 per share. That was up by 150% from its first-quarter fiscal 2023 net income of $4.4 million, or $0.22 per share. (Source: “Cato Reports 1Q Earnings,” Cato Corp, May 23, 2024.)
The company’s sales in the first quarter of fiscal 2024 slipped by eight percent year-over-year to $175.3 million, with same-store sales down six percent. Its gross margin as a percentage of sales was 35.8% in 2023 and 2024.
During the quarter, the company permanently shuttered seven stores and didn’t open any new stores.
Commenting on the first-quarter results, John Cato said, “The pressure on our customers’ discretionary spending levels due to high interest rates and inflation continue to negatively impact our sales. With the pressure on our customers’ discretionary spending levels, we remain cautious about the remainder of the year.”
Cato has reason to be cautiously optimistic. According to the National Retail Federation (NRF), American consumers are still willing to spend money despite small job and wage gains and high interest rates curbing the growth of consumer spending. (Source: “Consumers Remain ‘Willing to Spend’ Even as Growth Slows,” National Retail Federation, June 4, 2024.)
On the plus side, the U.S. economy is growing, inflation is moderating, and the overall industry fundamentals look as though they’ll support increased consumer spending.
Core retail sales, as defined by the NRF—which exclude automobile dealers, gas stations, and restaurants—went up by 3.8% on an annual basis in the first four months of this year. That’s in line with the NRF’s forecast for retail sales to grow between 2.5% and 3.5% in 2024, compared to the retail sales in 2023.
Management Maintains Quarterly Payout at $0.17 Per Share
Save for the COVID-19 crisis, in which Cato suspended its dividends for most of 2020 and the first half of 2021, the company has provided investors with reliable quarterly payouts. (Source: Cato Corporation (The) Class A Common Stock (CATO) Dividend History,” Nasdaq, last accessed June 4, 2024.)
To be fair, the company did cut its quarterly dividend from $0.33 per share in early 2020 to $0.11 per share when it reinstated it in the second quarter of 2021. It then raised its payout to $0.17 per share in the third quarter of 2021 and has held it there since then.
In May, Cato again declared a $0.17-per-share quarterly dividend, to be paid on June 24. As of this writing, that works out to a high yield of 10.86%.
Moreover, the company repurchased 431,415 of its own shares during its fiscal first quarter. (Source: Cato Corp, May 23, 2024, op. cit.)
Cato Stock Up 25% Month-Over-Month
Admittedly, Cato Corp’s high dividend yield is a result of its low share price. In late April, its stock hit a 21-year low of $4.56 per share. It has rebounded since then, though, getting a big boost after the company reported solid fiscal first-quarter results.
As of this writing, Cato stock is up by 25% over the last month, although it’s also down by 10.5% year-to-date and 17.6% year-over-year.
The outlook for the stock is solid, though. No analysts are covering Cato Corp at the moment, but industry tailwinds point to the company reporting improved earnings this year, which could help its stock trend higher over the coming quarters.
For technical traders, Cato stock has found support at $5.18 and resistance at $8.25.
Chart courtesy of StockCharts.com
The Lowdown on Cato Corp
Cato Corp is an apparel retailer that has seen its business come under pressure as a result of inflation, high interest rates, and cash-strapped consumers tightening their belts. Despite industry headwinds, the company reported pretty solid fiscal first-quarter results, which saw its net income increase by 150% in the period.
Management is cautious about the remainder of its fiscal year, but with the economy growing, inflation cooling, and interest rates poised to come down, the outlook for Cato’s business and share-price performance is robust.
While investors wait to see where Cato stock’s price goes over the coming quarters, they can at least sit back and take advantage of its reliable, high-yield dividends.
