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Cato Corporation (CATO) operates as a specialty retailer of fashion apparel and accessories in the southeastern part of the United States.  As of May 4, 2013, the company operated 1,307 apparel and accessories stores in 31 states under the names “Cato”, “Cato Fashions”, “Cato Plus”, “Its Fashion”, “Its Fashion Metro”, and “Versona Accessories”. These stores offer a wide range of on-trend apparel and accessories for women in both casual and dressy fashions, as well as menswear and lines for children and newborns. For all of fiscal 2013, Cato expects to open approximately 65 stores, relocate 15 stores, and close about 15 others – for a net increase in the total number.

The company has two reportable segments: Retail and Credit. Cato has combined the entirety of its retail operations into one reportable segment given that each of the retail names has similar characteristics, and operates in like ways, as well. The company also offers its own credit card to customers, and reports all activity related to this business under the Credit segment. The availability of store credit cards makes shopping more convenient for many customers and represented 9% total sales in fiscal 2012.

Cato’s goal is to be the leading specialty retailer for fashion and value in its markets – management believes that in order to achieve such an objective, the company must differentiate itself from department stores, mass merchandise discount stores, and competing specialty stores. Certain elements of the company’s business strategy are key to its goal of differentiation. Cato’s stores offer a wide range of trendy apparel for important value-shopping demographics, with an emphasis on color and product coordination.  Styles are displayed so that it is easy for customers to assemble full outfits in stores easily. The company’s merchandise is also generally priced below comparable merchandise offered by department stores like Macy’s (M), Sears (SHLD), J.C. Penney (JCP), and mall-based specialty apparel chains, but is more fashionable than merchandise offered by most discount stores. Cato’s management is confident that it has established a dominant position as the everyday low-price leader in its market segment. The company also operates almost exclusively in convenient strip shopping centers that are anchored by national discounters or market-dominant grocery stores that generally attract high numbers of shoppers on a daily basis.

Quality of merchandise has become perhaps the most important factor to differentiation in this competitive market in the past few years. Cato’s merchandise lines are expansive, perhaps more so than those of its competitors, while also competitively priced. The company typically refreshes its inventory each season, and is able to stick to this strategy by aggressively marking down prices on slow-selling merchandise. This leaves a lot of pressure on the merchandising and product development teams to continuously create top-notch merchandise for all of its store concepts. An in-house product development team has been extremely beneficial in this regard, as close collaboration with the merchandising team has enabled Cato to deliver quality and trendy styles at the competitive pricing points for which the retail chain is known.

Same store sales trends have been quite volatile this year, ranging from down double digits to up a few percent. The underwhelming sales results in the first half of 2013 can be traced back to unseasonable weather and persistent weak economic conditions. Much of Cato’s customer base continues to feel the effects of high food and gas prices, as well as slow job growth and higher payroll taxes. Budgets have been squeezed as a result of all this, and management believes that the next two quarters will continue to be a challenge.

Despite weak comparable sales figures, Cato has been quite generous in rewarding its shareholders. In total, the company returned more than $87 million to shareholders in 2012. This commitment to returning value to shareholders separates Cato from much of its competition as a solid investment choice, and was made possible by the company’s strong financial position. The current large cash balance gives Cato a strong foundation for the future, and will allow the company to fund new concepts, store growth development, and any other needs to help the company move forward.

Those investors interested in a more detailed analysis of the Cato Corporation should read our full-page report in the Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.