Cato Corp (CATO): A Stock for the Stoic Investor

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Mr. Market favors the stoic investor, though he dares not admit it. In fact, he tries to mask this preference, allowing the emotional investor to triumph in the short term. But should the latter be so foolish (not to be confused with Foolish) as to overestimate the duration of his or her lucky streak, there goes all the gains.

The real strength of a dispassionate approach lies in the ability to tune out the noise and listen to the fundamentals. Many a bargain lurks in the world’s unloved stocks, just as many a talent goes undiscovered in Hollywood or Broadway.

That said, perhaps it is more than mere happenstance that one of today’s more appealing retail stocks bears the name of a famous Stoic and Roman statesman: Cato Corp (NYSE:CATO).

Cato Corp (NYSE:CATO)The company is Cato Corp (CATO), a specialty retailer selling value-priced clothing and accessories. Its stores operate under the Cato, It’s Fashion, and Versona Accessories brands.

The majority of the company’s base, the 1,000+ Cato stores average 4,000 square feet and are mainly located in small-town strip malls, many anchored by Walmarts or chain supermarkets. The approximately 210 It’s Fashion stores are about the same size, except for the subset of It’s Fashion Metro stores that are at least twice the size. Like Cato stores, they too are geared towards a more rural consumer, although they are present in Southeastern metropolitan areas such as Dallas, Orlando, and Charlotte.

Versona, the newest concept, is 10 stores strong, ranging from 6,000 to 10,000 square feet of costume jewelry and fashionable clothing. Offering a more upscale ambiance than Cato or It’s Fashion, it is modeled along the lines of privately held Charming Charlie and the Francesca’s Collections chain run by publicly tradedFrancesca’s Holdings Corp (NASDAQ:FRAN). Its merchandise is more affordable than that of Francesca’s Collections and comparably priced to that of Charming Charlie, but similar in style. In making Versona the focus of the company’s expansion, management hopes to reach women with higher incomes than the typical Cato customer.

Just like Charming Charlie and Francesca’s Holdings Corp (NASDAQ:FRAN) Collections boutiques, Versona stores are found in enclosed malls as well as strip malls and primarily in metropolitan areas. As Versona expands both within and beyond its current boundaries in the Southeast, it may have to base its real estate strategy on leasing space in new strip malls. Francesca’s Collections and Charming Charlie are young companies themselves, but they have rapidly taken over space in many established malls and shopping centers and they already have a greater geographic reach than Versona.

Cato’s Situation

The company as a whole had a challenging Christmas season, characterized by a 2% drop in November same-store sales and a 7% drop in December. Accordingly, it has shed 10% of its market cap since the start of December while the stock has hovered around $27/share this year.

During this challenging period, management also gave signs that it felt shareholders could allocate capital more effectively than it could, declaring a $1.00/share special dividend in December. This payout was in addition to the usual $1.00/share dividend.

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