Business

This Charlotte retailer had 'a very disappointing year.' Can it turn things around?

The Cato at 3124 Eastway Crossing Dr. in Charlotte
The Cato at 3124 Eastway Crossing Dr. in Charlotte Charlotte Observer

One of Charlotte's oldest retailers, Cato Fashions, turns 72 this year. But the past year has not been one to remember.

Cato's recently filed annual report showed that the company's profits plummeted nearly 82 percent last year. The retailer is closing stores faster than it's opening them. And a major real estate project on the site of the old Charlotte Knights stadium that Cato announced three years ago continues to lie dormant.

Cato has cited a host of reasons for its sales declines, including "merchandise assortment missteps" last year, weather and the economy, according to recent earnings reports. But unlike other retailers grappling with competition from online shopping, Cato has not laid out a significant turnaround strategy.

Through a spokeswoman, Cato declined to make any executive, including CEO John Cato, available for interviews.

As more customers shop online these days, retailers have to do something creative that sets them apart from one another or they risk failing, said Steven Cox, a marketing professor with Queens University of Charlotte.

He cited Kohl's as an example of a retailer innovating to lure in customers. The department store chain this year announced a program with Amazon.com that will allow it to sell Amazon products and accept returns from the e-commerce giant. The partnership is already helping to drive customer traffic, Cox said.

In another example, Charlotte-based Belk, acquired in late 2015 by private equity firm Sycamore Partners, uses its "Modern. Southern. Style" mantra as an identifier to set itself apart from other department stores. It has expanded its private label brand Crown & Ivy, which features bold colors and patterns, to include menswear and women’s shoes.

"(Discounting is) not going to get you anywhere anymore. You’ve got to have something that hooks you, and now companies are starting to make that change," Cox said.

Strip-mall focus

Nearly all of Cato's 1,351 locations are found in strip malls that are anchored by national discount chains such as Walmart. Most of their stores, which average about 4,500 square feet each, are in the Southeast.

The strip-mall focus stems from a lesson in real estate that Cato learned decades ago.

Cato was founded in 1946, when Wayland Cato Jr. and his brother, Edgar, were discharged from the Navy and helped their father, Wayland Sr., open five women's clothing stores in Charlotte.

By the late 1970s, the company started to flounder, as management diversified away from the women's apparel business and kept its stores in downtown locations at a time when suburban shopping malls thrived.

The company closed dozens of its downtown stores, and settled into a formula that a former executive said in a 1987 Observer profile involves "selling the customer the clothes she wants at what Cato Corp. calls a 'popular' price — lower than department stores but higher than discounters." Cato first went public in 1968, then back private in 1980 then public again in 1987.

These days, retailers are focusing more often on stores in center-city and close-in neighborhoods as young urban dwellers look to work, live and play all within walking distance. That's why popular retailers like Anthropologie, Free People and Warby Parker are popping up in fast-growing neighborhoods such as South End.

A recent visit to a Cato store showed what a typical weekday looks like for the retailer.

The Cato store off Eastway Drive looks a bit like the women's section of a typical department store. The strip mall it's nestled in includes other low-cost retailers such as Family Dollar, Payless ShoeSource and MetroPCS.

On a recent Monday morning, Cato workers neatly arranged racks of pastel-colored slim-fit pants, bedazzled jeans, long patterned cardigans and bright cotton camisole tops. Prices were lower than a typical department store but not as cheap as a discounter such as Walmart: plus-sized orange pants for $24.99, a lavender striped short-sleeved shirt for $11.99, aviator sunglasses on clearance for $4.99.

Besides the rock music that played softly from a radio station overhead and the soft chatter of a customer in the check-out line, the store was quiet.

Sales slumps

Last year was a particularly difficult year for most brick-and-mortar retailers as customers opted to shop more online and as physical store traffic fell. Store closing announcements more than tripled last year to about 7,000, a record, according to retail think tank Fung Global Retail and Technology.

Big national chains that announced major store closures in the Charlotte area and beyond included Toys R Us, Bebe, Macy's and Hhgregg.

Last year, Cato opened six stores and closed 26. For the year ahead, the company said it plans to close 34 stores, and that it won't open any new ones, a sign the retailer is scaling back its physical store presence like other struggling retailers are.

"With the challenges facing retail nationally and the high cost of leasing space in the current market, we are focused this year on our core business and driving sales growth through our existing store base and e-commerce. If rents decline, we are always open to strategically expanding where it makes sense," the company said in a statement to the Observer.

Other numbers are also trending downward.

Cato's same-store sales — a key measure of any retailer's well-being that refers to sales at stores open at least one year, — slumped 12 percent, according to the company's annual report.

Net income plunged to $8.5 million, down from $47.2 million in 2016, resulting in what the company called "a very disappointing year" because of "several mistakes in our merchandise assortment, fit and timing." Cato had to slash prices and liquidate a large portion of its slow-selling inventory, putting "severe pressure" on earnings. The company also cited a $12.3 million one-time charge in 2017 for the new tax law as a reason for its profit decline.

And over the last year, Cato's share price has fallen 28 percent. In midday trading Monday, the company's shares were down over 2 percent at $15.96.

"While Cato remains profitable, the retail environment continues to be challenging, particularly in women's apparel," John Cato, the company's president and CEO said in its annual report. A spokeswoman added the company continues to match associates’ 401(k) savings and provide dividends to shareholders.

Cato's management has said to be successful, the company — which also operates the Versona and It's Fashion brands — has to differentiate itself from department stores, mass merchandise discount stores and competing specialty stores. Key to that goal are: its merchandise assortment, low prices, strip center locations, customer service and credit and layaway programs, the chain's leaders say.

In recent years, Cato has worked to cut costs at its corporate office. Last year, for instance, the company laid off a few employees when it reorganized its real estate department. Cato employs approximately 720 full and part-time workers in the Charlotte area.

"With fewer new store openings, Cato adjusted the size of its real estate department and other areas to align with our needs, and reduced hours and spending at some of our stores," a spokeswoman said.

Real estate woes

In addition to its retailing business, Cato made a high-profile foray into real estate development in 2014, but so far has little to show for it.

That year Cato bought (and later tore down) the old Knights Stadium in Fort Mill from York County for $844,000. The stadium, next to a baseball-shaped water tower visible from Interstate 77, was built in 1990 and was where the Knights played until 2014. Cato's original plan was to build a distribution center on the site.

A few months later, Cato switched gears and partnered with Lincoln Harris in announcing plans to redevelop the property. The massive project, which includes 350 acres of Cato-owned land, was to include 1 million square feet of office space, plus retail, residential, commercial and industrial space. Cato also owns 180 acres south of Rock Hill, which it bought in August 2015, that it says will house the new distribution center.

Three years later, Cato has not broken ground on any of it. On a recent afternoon, the site was quiet and overgrown with weeds. Trash collected in the cracked, abandoned parking lot.

Cato would not say whether its construction delays are tied to its financial performance. The company, a spokeswoman said, is "currently exploring options including a possible mix of offices, retail, residential and hospitality."

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