Cato (NYSE: CTR) is a women's clothing company operating in the southeastern United States - a perfect place, thanks to its high and rising obesity rates, for the company to market its extensive, low-cost, plus-size line of clothing. 2007 and 2008 have been rough years for retail clothing companies. Recessionary fears have forced middle-to-low income consumers to cut back on non-necessary spending, and Cato, a company that produces lower-end clothing, has seen net earnings decrease by $28,472,000 in Fiscal 2008 as a result. The company has attempted to alleviate the market's pressures by producing fewer clothes, in order to keep tight control of its inventory, thereby reducing costs. The credit crunch, which has resulted in growing credit card debt and delinquency rates, has also harmed Cato, which extends lines of credit to its customers - bad debt expenses for the company have increased from 4.1% to 4.9% in the past year, meaning more customers have been defaulting on their credit balances. On the plus side, by extending credit to its customers, Cato reduces some of the effects of the market recession by allowing customers to purchase now and pay later - great for the company as long as defaults don't continue to increase.
Cato Corporation is divided into two segments: retail and credit.
Cato, as a low-income retailer, saw revenues and net income fall in 2007, as its customers curbed their spending because of recessionary fears. In 2008, though, Cato's sales have better than expected. Sales for May 2008 were $80.5 million, compared to $75.9 million in May 2007; in June, store sales increased by 4%. 
Cato defines itself as the "low price leader" of its market segment, which tries to provide trendier clothing at a lower price than its competitors. As customers curb their spending they won't have as much money to spend on clothes, so they will search for the best items they can find at the lowest price.
|Fiscal Year||Stores at Beginning||Stores Opened||Stores Closed||Stores at End of Year|
Cato stores are located mainly in the southeastern United States. In fiscal year 2008 Cato plans to open 75 new stores, 30 of which will be expanded versions of its "It's Fashion" chain. This new version, called "It's Fashion Metro" will sell brand-name clothing not produced by Cato for men, women and children.
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Cato offers customers its own credit card in order to make shopping more convenient - and entice customers without disposable income in the present to shop more on credit. Sales that are made with Cato's credit card are grouped under the credit segment.
Since the middle of 2007, the U.S. economy has been slipping, because of the effects of a housing market collapse, a credit crunch, and rising energy prices. Clothing retailers have been hit pretty hard by the threat of a recession, as consumers, especially those within Cato's low-income demographic, have been spending less money on non-essential goods; the company saw a $28,472,000 drop in revenue between fiscal year 2007 and fiscal year 2008. Cato has attempted to soften the blow by reducing production in order to tighten control of its inventory. By decreasing the amount of inventory buildup as much as it can, Cato cuts unnecessary costs. In addition, Cato make it easier for its customers to shop without having money in the bank: the company provides its own credit cards and offers a layaway plan, so consumers can buy on credit. In fiscal year 2007 credit and layaway represented 11% of total retail sales. The layaway plan lets customers pay for their goods in installments--therefore those who cannot afford full price can still purchase the goods they want.
Cato Corporation extends a line of credit to its customers. Since the middle of 2007, the amount of credit card debt has increased because a looming recession has made it difficult for consumers to secure funds. Furthermore, with housing prices on the decline, fewer people can use home equity or borrow against their homes in order to secure money. Consumers have begun to use their credit cards for an increasing number of purchases, leading to an overall rise in credit card debt. As of the third quarter of 2007, average credit card balance had increased by 7% compared to an average increase of 2% during the previous six years. The larger the debt, the higher the chance of default: In the third quarter of 2007, delinquency rates rose from 4.24% to 4.47%. Higher delinquency rates have also impacted Cato: the company's bad debt expense increased from 4.1% of credit sales in 2006 to 4.9% in 2007. Bad debt expenses are marked down as a loss for the company, meaning that a higher bad debt expense leads to lower profits.
The above picture shows obesity rates in the United States by region. The southeast United States, where Cato stores are primarily located, has some of the highest obesity rates in the country. In addition, obesity rates are highest among low-income communities, putting Cato in a better position to take advantage of the obesity trend than plus-size competitors like Charming Shoppes that operate in other regions and appeal to higher-income consumers.
|Competitor||2007 Sales ($millions)||Number of Stores (2007)||Sales per Store ($thousands)|
Charming Shoppes owns brands that cater to plus-size women, namely Lane Bryant and Catherines Plus Sizes. Its stores are located throughout the entire United States.
Deb Shops sells men's and women's clothing and accessories under the names "DEB" and "Tops 'N Bottoms." Deb's stores are located in the East and Midwest regions of the United States.
Dress Barn sells women's clothing and has expanded into plus sizes. Like Charming Shoppes, it is located throughout the entire United States.