CATO - Cato Corporation: Commercially Doomed But Liquidation Upside Exists

2024-03-19 05:10:54 ET

Summary

• Cato’s revenue has persistently declined during the last decade (CAGR: -3%), owing to a lack of innovation and response to changing industry conditions.
• The company’s brand has experienced a considerable decline in notoriety and consumer visibility, limiting its scope for long-term growth as competition outspends the company.
• Economic conditions have compounded its trajectory, with revenue unable to exceed its pre-pandemic levels. All operating leverage appears to have gone, with EBITDA-M turning negative.
• Cato’s valuation is completely depressed, trading at 0.2x revenue. This is despite having limited solvency risk, reflecting complete disregard by markets for this business.
• If Cato were to be liquidated today, we believe there would be upside at today’s share price. The issue is, we do not believe this to be a likely choice by Management.

Introduction and thesis

The Cato Corporation ( CATO ) is a leading retailer of women's fashion and accessories, with a focus on offering affordable apparel and accessories for juniors, misses, and plus-size customers. Founded in 1946, the company operates primarily under the "Cato," "It's Fashion," and "Versona" brands, with over 1,300 stores across the United States.

We do not see a realistic future where Cato is growing in excess of inflation consistently or one in which its brand is gaining value. The industry is incredibly competitive and, to an extent, is victim to changing consumer trends. To offset this, brands spend a considerable amount on marketing and are also usually part of a diversified conglomerate. Cato does not benefit from either, lacking the financial ability to invest in its brand....

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