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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
☑
QUARTERLY REPORT PURSUANT
TO SECTION
13 OR 15(d)
OF THE SECURITIES
EXCHANGE
ACT OF
1934
For the quarterly period ended
April 29, 2023
OR
☐
TRANSITION
REPORT PURSUANT
TO SECTION
13 OR 15(d)
OF THE SECURITIES
EXCHANGE
ACT OF
1934
For the transition period from ________________to__________________
Commission file number
1-31340
THE CATO CORPORATION
(Exact name of registrant as specified in its
charter)
Delaware
56-0484485
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
8100 Denmark Road
,
Charlotte
,
North Carolina
28273-5975
(Address of principal executive offices)
(Zip Code)
(704)
554-8510
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A - Common Stock, par value $.033 per share
CATO
New York Stock Exchange
Indicate
by check
mark
whether
the
registrant
(1)
has
filed
all
reports
required
to
be
filed
by Section
13
or
15(d)
of
the
Securities
Exchange Act of 1934
during the preceding 12
months (or for such shorter
period that the registrant
was required to file such
reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
No
Indicate
by
check
mark
whether
the
registrant
has
submitted
electronically
every
Interactive
Data
File
required
to
be
submitted
pursuant to Rule
405 of Regulation
S-T during the
preceding 12 months
(or for such
shorter period
that the registrant
was required to
submit and post such files).
Yes
X
No
Indicate
by
check
mark
whether
the
registrant
is
a
large
accelerated
filer, an
accelerated
filer, a
non-accelerated
filer,
smaller reporting
company,
or
an
emerging
growth
company.
See
the
definitions
of
“large
accelerated
filer,”
“accelerated
filer,”
“smaller
reporting
company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☑
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If
an
emerging
growth
company,
indicate
by
check
mark
if
the
registrant
has
elected
not
to
use
the
extended
transition
period
for
complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b
-2 of the Exchange Act).
☐
As of April 29, 2023, there were
18,479,615
shares of Class A common stock and
1,763,652
shares of Class B common stock outstanding.
1
THE CATO CORPORATION
FORM 10-Q
Quarter Ended April 29, 2023
Table
of Contents
Page No.
PART
I – FINANCIAL INFORMATION
(UNAUDITED)
Item 1.
Financial Statements (Unaudited):
Condensed Consolidated Statements of Income and Comprehensive Income
2
For the Three Months Ended
April 29, 2023 and April 30, 2022
Condensed Consolidated Balance Sheets
3
At April 29, 2023 and
January 28, 2023
Condensed Consolidated Statements of Cash Flows
4
For the Three Months Ended April 29, 2023 and
April 30, 2022
Condensed Consolidated Statements of Stockholders’ Equity
5
For the Three Months Ended April 29, 2023 and
April 30, 2022
Notes to Condensed Consolidated Financial Statements
6 - 18
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results
of Operations
19 - 25
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.
Controls and Procedures
26
PART
II – OTHER INFORMATION
Item 1.
Legal Proceedings
27
Item 1A.
Risk Factors
27
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
Item 3.
Defaults Upon Senior Securities
27
Item 4.
Mine Safety Disclosures
28
Item 5.
Other Information
28
Item 6.
Exhibits
28
Signatures
29
2
PART
I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
April 29, 2023
April 30, 2022
(Dollars in thousands, except per share data)
REVENUES
Retail sales
$
190,311
$
204,933
Other revenue (principally finance charges, late fees and
layaway charges)
1,739
1,788
Total revenues
192,050
206,721
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of depreciation shown below)
122,087
132,243
Selling, general and administrative (exclusive of depreciation
shown below)
61,934
60,441
Depreciation
2,357
2,743
Interest and other income
(897)
(403)
Costs and expenses, net
185,481
195,024
Income before income taxes
6,569
11,697
Income tax expense
2,141
1,949
Net income
$
4,428
$
9,748
Basic earnings per share
$
0.22
$
0.46
Diluted earnings per share
$
0.22
$
0.46
Comprehensive income:
Net income
$
4,428
$
9,748
Unrealized gain (loss) on available-for-sale securities, net
of deferred income taxes of $
107
and an income tax benefit of $
362
355
(1,206)
for April 29, 2023 and April 30, 2022, respectively
Comprehensive income
$
4,783
$
8,542
See notes to condensed consolidated financial statements (unaudited).
3
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 29, 2023
January 28, 2023
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
39,642
$
20,005
Short-term investments
87,750
108,652
Restricted cash
3,826
3,787
Accounts receivable, net of allowance for customer credit losses of
$
761
and $
761
at April 29, 2023 and January 28, 2023, respectively
28,192
26,497
Merchandise inventories
106,813
112,056
Prepaid expenses and other current assets
7,298
6,676
Total Current Assets
273,521
277,673
Property and equipment – net
74,187
70,382
Deferred income taxes
9,938
9,213
Other assets
21,478
21,596
Right-of-Use assets – net
155,512
174,276
Total Assets
$
534,636
$
553,140
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
88,508
$
91,956
Accrued expenses
42,593
41,338
Accrued bonus and benefits
2,154
1,690
Accrued income taxes
2,679
613
Current lease liability
49,707
67,360
Total Current Liabilities
185,641
202,957
Other noncurrent liabilities
16,449
16,183
Lease liability
105,765
107,407
Stockholders' Equity:
Preferred stock, $
100
par value per share,
100,000
shares
authorized, none issued
-
-
Class A common stock, $
0.033
par value per share,
50,000,000
shares authorized;
18,479,615
and
18,723,225
shares issued
at April 29, 2023 and January 28, 2023, respectively
624
632
Convertible Class B common stock, $
0.033
par value per share,
15,000,000
shares authorized;
1,763,652
and
1,763,652
shares issued at April 29, 2023 and January 28, 2023, respectively
59
59
Additional paid-in capital
123,555
122,431
Retained earnings
103,426
104,709
Accumulated other comprehensive income
(883)
(1,238)
Total Stockholders' Equity
226,781
226,593
Total Liabilities and Stockholders’ Equity
$
534,636
$
553,140
See notes to condensed consolidated financial statements (unaudited).
4
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
Three Months Ended
April 29, 2023
April 30, 2022
(Dollars in thousands)
Operating Activities:
Net income
$
4,428
$
9,748
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation
2,357
2,743
Provision for customer credit losses
98
72
Purchase premium and premium amortization of investments
(18)
388
Share-based compensation
958
624
Deferred income taxes
(832)
-
(Gain) Loss on disposal of property and equipment
(33)
16
Changes in operating assets and liabilities which provided (used) cash:
Accounts receivable
(1,793)
(4,382)
Merchandise inventories
5,243
(2,669)
Prepaid and other assets
(618)
474
Operating lease right-of-use assets and liabilities
(532)
(590)
Accrued income taxes
2,066
1,142
Accounts payable, accrued expenses and other liabilities
(1,429)
(8,331)
Net cash provided (used) by operating activities
9,895
(765)
Investing Activities:
Expenditures for property and equipment
(6,170)
(4,440)
Purchase of short-term investments
(5,914)
(1,529)
Sales of short-term investments
27,421
25,566
Net cash provided (used) by investing activities
15,337
19,597
Financing Activities:
Dividends paid
(3,455)
(3,638)
Repurchase of common stock
(2,267)
(9,162)
Proceeds from employee stock purchase plan
166
91
Net cash provided (used) by financing activities
(5,556)
(12,709)
Net increase (decrease) in cash, cash equivalents, and restricted cash
19,676
6,123
Cash, cash equivalents, and restricted cash at beginning of period
23,792
23,678
Cash, cash equivalents, and restricted cash at end of period
$
43,468
$
29,801
Non-cash activity:
Accrued other assets and property and equipment
$
644
$
2,971
See notes to condensed consolidated financial statements (unaudited).
5
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Accumulated
Additional
Other
Total
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — January 28, 2023
$
691
$
122,431
$
104,709
$
(1,238)
$
226,593
Comprehensive income:
Net income
-
-
4,428
-
4,428
Unrealized net gains on available-for-sale securities, net of deferred
income tax expense of $
107
-
-
-
355
355
Dividends paid ($
0.17
per share)
-
-
(3,455)
-
(3,455)
Class A common stock sold through employee stock purchase
plan
-
195
-
-
195
Share-based compensation issuances and exercises
-
-
3
-
3
Share-based compensation expense
-
929
-
-
929
Repurchase and retirement of treasury shares
(8)
-
(2,259)
-
(2,267)
Balance — April 29, 2023
$
683
$
123,555
$
103,426
$
(883)
$
226,781
Accumulated
Additional
Other
Total
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — January 29, 2022
$
728
$
119,540
$
134,208
$
(280)
$
254,196
Comprehensive income:
Net income
-
-
9,748
-
9,748
Unrealized net losses on available-for-sale securities, net of deferred
income tax benefit of $
362
-
-
-
(1,206)
(1,206)
Dividends paid ($
0.17
per share)
-
-
(3,638)
-
(3,638)
Class A common stock sold through employee stock purchase
plan
-
111
-
-
111
Share-based compensation issuances and exercises
-
-
5
-
5
Share-based compensation expense
-
598
-
-
598
Repurchase and retirement of treasury shares
(20)
-
(9,142)
-
(9,162)
Balance — April 30, 2022
$
708
$
120,249
$
131,181
$
(1,486)
$
250,652
See notes to condensed consolidated financial statements (unaudited).
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6
NOTE 1 - GENERAL
:
The condensed
consolidated financial
statements as
of April
29, 2023
and for
the thirteen-week
periods
ended
April 29,
2023 and
April
30,
2022
have been
prepared from
the
accounting records
of
The
Cato
Corporation and
its wholly-owned
subsidiaries (the
“Company”), and
all amounts
shown are
unaudited.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial
statements
have been
included.
All such
adjustments are
of a
normal, recurring
nature unless
otherwise
noted.
The results of the interim period may not be indicative of the results expected
for the entire year.
The interim financial
statements should be read
in conjunction with
the consolidated financial statements
and
notes
thereto,
included
in
the
Company’s
Annual
Report
on
Form
10-K
for
the
fiscal
year
ended
January 28, 2023.
Amounts as of January 28, 2023 have been derived from the audited balance sheet, but
do not include all disclosures required by
accounting principles generally accepted in the United States of
America.
On May 18, 2023, the Board of Directors maintained the quarterly dividend at
$
0.17
per share.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7
NOTE 2 - EARNINGS PER SHARE:
Accounting Standard Codification (“ASC”) 260 –
Earnings Per Share
requires dual presentation of basic and
diluted Earnings Per Share
(“EPS”) on the face of
all income statements for
all entities with complex
capital
structures.
The Company has presented one basic EPS and one diluted EPS amount for all common shares in
the accompanying
Condensed Consolidated
Statements of
Income and
Comprehensive Income.
While the
Company’s certificate
of incorporation
provides the
right for
the Board of
Directors to
declare dividends
on
Class
A
shares
without
declaration
of
commensurate
dividends
on
Class
B
shares,
the
Company
has
historically paid the same dividends to both Class A and Class B shareholders and the
Board of Directors has
resolved to continue this practice.
Accordingly, the Company’s allocation of income for purposes of the EPS
computation is the same
for Class A and
Class B shares and
the EPS amounts reported
herein are applicable
to both Class A and Class B
shares.
Basic
EPS
is
computed
as
net
income
less
earnings
allocated
to
non-vested
equity
awards
divided
by
the
weighted average
number of
common shares
outstanding for
the period.
Diluted EPS
reflects the
potential
dilution
that
could
occur
from
common
shares
issuable
through
stock
options
and
the
Employee
Stock
Purchase Plan.
Three Months Ended
April 29, 2023
April 30, 2022
(Dollars in thousands)
Numerator
Net earnings
$
4,428
$
9,748
Earnings allocated to non-vested equity awards
(227)
(541)
Net earnings available to common stockholders
$
4,201
$
9,207
Denominator
Basic weighted average common shares outstanding
19,303,048
20,149,201
Diluted weighted average common shares outstanding
19,303,048
20,149,201
Net income per common share
Basic earnings per share
$
0.22
$
0.46
Diluted earnings per share
$
0.22
$
0.46
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
three months ended April 29, 2023:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 28, 2023
$
(1,238)
Other comprehensive income (loss) before
reclassification
355
Amounts reclassified from accumulated
other comprehensive income
-
Net current-period other comprehensive income (loss)
355
Ending Balance at April 29, 2023
$
(883)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI").
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
three months ended April 30, 2022:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 29, 2022
$
(280)
Other comprehensive income (loss) before
reclassification
(1,203)
Amounts reclassified from accumulated
other comprehensive income (b)
(3)
Net current-period other comprehensive income (loss)
(1,206)
Ending Balance at April 30, 2022
$
(1,486)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI").
(b) Includes
$4
impact of Accumulated other comprehensive income reclassifications into Interest and other
income for net gains on available-for-sale securities. The tax impact of this reclassification was
$1
.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9
NOTE 4 – FINANCING ARRANGEMENTS:
At
April
29,
2023,
the
Company
had
an
unsecured
revolving
credit
agreement,
which
provided
for
borrowings of
up to
$
35.0
million less
the balance
of any
revocable letters
of credit
related to
purchase
commitments,
and
was
committed
through
May
2027.
The
credit
agreement
contains
various
financial
covenants and limitations, including the maintenance of specific financial
ratios with which the Company
was
in
compliance
as
of
April
29,
2023.
There
were
no
borrowings
outstanding,
nor
any
outstanding
letters of
credit that
reduced borrowing availability,
as of
April 29,
2023.
The weighted
average interest
rate under the credit facility was
zero
at April 29, 2023 due to
no
outstanding borrowings.
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
The
Company
has
determined
that
it
has
four
operating
segments,
as
defined
under
ASC
280
–
Segment
Reporting
, including Cato,
It’s Fashion, Versona
and Credit.
As outlined in
ASC 280-10, the
Company has
two
reportable segments: Retail and Credit.
The Company has aggregated its
three
retail operating segments,
including
e-commerce,
based
on the
aggregation
criteria
outlined in
ASC
280-10, which
states that
two
or
more operating segments may be aggregated into a single reportable segment if aggregation is consistent with
the
objective
and
basic
principles
of
ASC
280-10,
which
require
the
segments
to
have
similar
economic
characteristics, products, production processes, clients and
methods of distribution.
The
Company’s
retail
operating
segments
have
similar
economic
characteristics
and
similar
operating,
financial and
competitive risks.
The products
sold in each
retail operating
segment are
similar in
nature, as
they
all
offer
women’s
apparel,
shoes
and
accessories.
Merchandise
inventory
of
the
Company’s
retail
operating
segments
is
sourced
from
the
same
countries
and
some
of
the
same
vendors,
using
similar
production processes.
Merchandise for the Company’s retail operating segments is distributed to retail stores
in
a
similar
manner
through
the
Company’s
single
distribution
center
and
is
subsequently
distributed
to
clients in a similar manner.
The
Company
operates
its
women’s
fashion
specialty
retail
stores
in
32
states
as
of
April
29,
2023,
principally in
the southeastern
United States. The Company offers its own credit card to its customers
and
all credit authorizations,
payment processing and collection
efforts are performed by
a separate subsidiary of
the Company.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10
NOTE 5 – REPORTABLE SEGMENT INFORMATION
(CONTINUED):
The following schedule summarizes certain segment
information (in thousands):
Three Months Ended
April 29, 2023
Retail
Credit
Total
Revenues
$191,434
$616
$192,050
Depreciation
2,357
-
2,357
Interest and other income
(897)
-
(897)
Income before taxes
6,382
187
6,569
Capital expenditures
6,170
-
6,170
Three Months Ended
April 30, 2022
Retail
Credit
Total
Revenues
$206,208
$513
$206,721
Depreciation
2,743
-
2,743
Interest and other income
(403)
-
(403)
Income before taxes
11,613
84
11,697
Capital expenditures
4,440
-
4,440
Retail
Credit
Total
Total assets as of April 29, 2023
$495,730
$38,906
$534,636
Total assets as of January 28, 2023
514,609
38,531
553,140
The
Company
evaluates
segment
performance
based
on
income
before
taxes.
The
Company
does
not
allocate certain corporate expenses or
income taxes to the credit segment.
The following schedule
summarizes the direct
expenses of the
credit segment which
are reflected in
Selling,
general and administrative expenses (in
thousands):
Three Months Ended
April 29, 2023
April 30, 2022
Payroll
$
134
$
137
Postage
101
93
Other expenses
194
199
Total expenses
$
429
$
429
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11
NOTE 6 – SHARE BASED COMPENSATION:
As of
April 29,
2023, the
Company had
two long-term
compensation plans
pursuant to
which stock-based
compensation
was
outstanding
or
could
be
granted.
The
2018
Incentive
Compensation
Plan
and
2013
Incentive
Compensation
Plan
are
for
the
granting
of
various
forms
of
equity-based
awards,
including
restricted stock and stock options for grant
to officers, directors and key
employees. Effective May 24, 2018,
shares for grant were no longer available
under the 2013 Incentive Compensation Plan.
The
following
table
presents
the
number
of
options
and
shares
of
restricted
stock
initially
authorized
and
available for grant under each of
the plans as of April 29,
2023:
2013
2018
Plan
Plan
Total
Options and/or restricted stock initially authorized
1,500,000
4,725,000
6,225,000
Options and/or restricted stock available for grant:
April 29, 2023
-
3,473,475
3,473,475
In
accordance
with
ASC
718
–
Compensation–Stock Compensation
,
the
fair
value
of
current
restricted
stock awards
is estimated
on the
date of
grant based
on the
market price
of the
Company’s
stock and
is
amortized to
compensation expense
on a
straight-line basis
over the
related vesting
periods. As
of April
29,
2023
and
January
28,
2023,
there
was
$
9,329,000
and
$
10,543,000
,
respectively,
of
total
unrecognized compensation
expense related
to
unvested restricted
stock awards,
which had
a remaining
weighted-average vesting period of
1.9
years and
2.1
years, respectively. The
total compensation expense
during the
three months
ended April
29, 2023
was $
932,000
compared to
$
603,000
for the
three months
ended
April
30,
2022.
These
expenses
are
classified
as
a
component
of
Selling,
general
and
administrative expenses in the Condensed Consolidated Statements of Income.
The following
summary shows the
changes in the
shares of
unvested restricted
stock outstanding
during the
three months ended April
29, 2023:
Weighted
Average
Number of
Grant Date Fair
Shares
Value
Per Share
Restricted stock awards at January 28, 2023
1,059,433
$
13.10
Granted
-
-
Vested
-
-
Forfeited or expired
(12,414)
13.45
Restricted stock awards at April 29, 2023
1,047,019
$
13.09
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12
The
Company’s
Employee
Stock
Purchase
Plan
allows
eligible
full-time
employees
to
purchase
a
limited
number of
shares
of the
Company’s
Class
A
Common Stock
during each
semi-annual offering
period
at
a
15
% discount through payroll deductions. During the three months ended April 29, 2023 and
April 30, 2022,
the Company sold
22,194
and
9,468
shares to employees at an average discount of $
1.32
and $
2.21
per share,
respectively, under
the Employee
Stock Purchase
Plan. The
compensation expense
recognized for
the
15
%
discount
given
under
the
Employee
Stock
Purchase
Plan
was
approximately
$
29,000
and
$
21,000
for
the
three
months
ended
April
29,
2023
and
April
30,
2022,
respectively.
These
expenses
are
classified
as
a
component
of
Selling,
general
and
administrative
expenses
in
the
Condensed
Consolidated
Statements
of
Income.
NOTE 7
– FAIR VALUE MEASUREMENTS:
The following
tables
set forth
information regarding
the
Company’s financial
assets
and
liabilities that
are
measured at fair value (in thousands)
as of April 29, 2023 and January
28, 2023:
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
April 29, 2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
22,187
$
-
$
22,187
$
-
Corporate Bonds
40,057
-
40,057
-
U.S. Treasury/Agencies Notes and Bonds
16,541
-
16,541
-
Cash Surrender Value of Life Insurance
9,281
-
-
9,281
Asset-backed Securities (ABS)
7,925
-
7,925
-
Corporate Equities
801
801
-
-
Commercial Paper
1,039
-
1,039
-
Total Assets
$
97,831
$
801
$
87,749
$
9,281
Liabilities:
Deferred Compensation
$
(8,731)
$
-
$
-
$
(8,731)
Total Liabilities
$
(8,731)
$
-
$
-
$
(8,731)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 28,
2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
23,102
$
-
$
23,102
$
-
Corporate Bonds
47,901
-
47,901
-
U.S. Treasury/Agencies Notes and Bonds
27,250
-
27,250
-
Cash Surrender Value of Life Insurance
9,274
-
-
9,274
Asset-backed Securities (ABS)
9,373
-
9,373
-
Corporate Equities
923
923
-
-
Commercial Paper
1,026
-
1,026
-
Total Assets
$
118,849
$
923
$
108,652
$
9,274
Liabilities:
Deferred Compensation
$
(8,903)
$
-
$
-
$
(8,903)
Total Liabilities
$
(8,903)
$
-
$
-
$
(8,903)
The Company’s
investment portfolio
was primarily
invested in
corporate bonds and
tax-exempt and taxable
governmental
debt securities
held in
managed accounts
with underlying
ratings
of
A
or better
at
April 29,
2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
and
asset-backed
securities
have
contractual maturities
which range
from
two days
to
3.6
years. The
U.S. Treasury
Notes and
Certificates of
Deposit have contractual maturities
which range from
one day
to
2.8
years. These securities are
classified as
available-for-sale
and
are
recorded
as
Short-term
investments,
Restricted
cash
and
Other
assets
on
the
accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized
gains
and
losses
reported
net
of
taxes
in
Accumulated
other
comprehensive
income.
The
asset-backed
securities
are
bonds
comprised
of
auto
loans
and
bank
credit
cards
that
carry
AAA
ratings.
The
auto
loan
asset-backed securities are
backed by
static pools
of auto loans
that were
originated and
serviced by
captive
auto finance units,
banks or
finance companies.
The bank
credit card
asset-backed securities
are backed
by
revolving
pools
of
credit
card
receivables
generated
by
account
holders
of
cards
from
American
Express,
Citibank, JPMorgan Chase, Capital One, and
Discover.
Additionally,
at
April
29,
2023,
the
Company
had
$
0.8
million
of
corporate
equities
and
deferred
compensation plan assets
of $
9.3
million.
At January 28,
2023, the Company
had $
0.9
million of corporate
equities and deferred compensation
plan assets of $
9.3
million. All of these
assets are recorded within
Other
assets in the Condensed Consolidated Balance
Sheets.
Level 1 category securities are measured
at fair value using quoted active
market prices.
Level 2 investment
securities
include
corporate
and
municipal
bonds
for
which
quoted
prices
may
not
be
available
on
active
exchanges
for
identical
instruments.
Their
fair
value
is
principally
based
on
market
values
determined
by
management
with
assistance
of
a
third-party
pricing
service.
Since
quoted
prices
in
active
markets
for
identical assets are
not available, these
prices are determined
by the pricing
service using observable
market
information
such
as
quotes
from
less
active
markets
and/or
quoted
prices
of
securities
with
similar
characteristics, among other factors.
Deferred compensation plan
assets consist of
life insurance policies.
These life insurance
policies are valued
based on the cash surrender value of the insurance contract, which is determined based on
such factors as the
fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3
of the
valuation
hierarchy.
The
Level
3
liability
associated
with
the
life
insurance
policies
represents
a
deferred
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14
compensation obligation,
the value
of which
is tracked
via underlying
insurance funds’
net asset
values, as
recorded
in
Other
noncurrent
liabilities
in
the
Condensed
Consolidated
Balance
Sheet.
These
funds
are
designed to mirror mutual funds and money
market funds that are observable and
actively traded.
The
following
tables
summarize
the
change
in
fair
value
of
the
Company’s
financial
assets
and
liabilities
measured using Level 3 inputs as of April
29, 2023 and January 28, 2023
(dollars in thousands):
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at January 28, 2023
$
9,274
Redemptions
-
Additions
-
Total gains or (losses)
Included in interest and other income (or changes in net assets)
7
Included in other comprehensive income
-
Ending Balance at April 29, 2023
$
9,281
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred Compensation
Beginning Balance at January 28, 2023
$
(8,903)
Redemptions
292
Additions
(82)
Total (gains) or losses
Included in interest and other income (or changes in net assets)
(38)
Included in other comprehensive income
-
Ending Balance at April 29, 2023
$
(8,731)
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at January 29, 2022
$
11,472
Redemptions
(1,718)
Additions
-
Total gains or (losses)
Included in interest and other income (or changes in net assets)
(480)
Included in other comprehensive income
-
Ending Balance at January 28, 2023
$
9,274
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
15
Deferred Compensation
Beginning Balance at January 29, 2022
$
(10,020)
Redemptions
1,142
Additions
(379)
Total (gains) or losses
Included in interest and other income (or changes in net assets)
354
Included in other comprehensive income
-
Ending Balance at January 28, 2023
$
(8,903)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:
The
Company
has
reviewed
recent
accounting
pronouncements
and
believe
none
will
have
a
material
impact on the Company’s financial statements.
NOTE 9 – INCOME TAXES:
The Company had an effective tax rate for the
first quarter of 2023 of
32.6
% compared to an effective tax
rate of
16.7
% for the first quarter of 2022. The increase in the 2023 first quarter tax
rate was primarily due
to
higher
Global
Intangible
Low-taxed
Income
(GILTI),
partially
offset
by
the
foreign
rate
differential
and offshore claim, as a percentage on lower pre-tax earnings.
NOTE 10 – COMMITMENTS AND CONTINGENCIES:
The Company is, from time to time, involved in routine litigation incidental to the conduct of its business,
including
litigation
regarding
the
merchandise
that
it
sells,
litigation
regarding
intellectual
property,
litigation instituted
by persons
injured upon
premises under
its control,
litigation with
respect to
various
employment
matters,
including
alleged
discrimination and
wage
and
hour
litigation,
and
litigation
with
present or former employees.
Although such
litigation is
routine and
incidental to
the conduct
of the
Company’s business,
as with
any
business
of
its
size
with
a
significant
number
of
employees
and
significant
merchandise
sales,
such
litigation could
result in
large
monetary awards.
Based on
information currently
available, management
does
not
believe
that
any
reasonably
possible
losses
arising
from current
pending litigation
will
have a
material adverse
effect
on its
condensed consolidated
financial statements.
However,
given the
inherent
uncertainties
involved
in
such
matters,
an
adverse
outcome
in
one
or
more
of
such
matters
could
materially and adversely affect the Company’s
financial condition, results of operations and cash flows in
any
particular
reporting
period.
The
Company
accrues
for
these
matters
when
the
liability
is
deemed
probable and reasonably estimable.
NOTE 11 – REVENUE RECOGNITION:
The
Company
recognizes
sales
at
the
point
of
purchase
when
the
customer
takes
possession
of
the
merchandise
and
pays
for
the
purchase,
generally
with
cash
or
credit.
Sales
from
purchases
made
with
Cato
credit,
gift
cards
and
layaway
sales
from
stores
are
also
recorded
when
the
customer
takes
possession of
the merchandise. E-commerce
sales are
recorded when the
risk of
loss is
transferred to the
customer. Gift cards
are recorded as deferred revenue until they are
redeemed or forfeited. Layaway sales
are
recorded
as
deferred
revenue
until
the
customer
takes
possession
or
forfeits
the
merchandise.
Gift
cards do not have
expiration dates. A provision is
made for estimated merchandise returns
based on sales
volumes
and
the
Company’s
experience;
actual
returns
have
not
varied
materially
from
historical
amounts.
A
provision
is
made
for
estimated
write-offs
associated
with
sales
made
with
the
Company’s
proprietary
credit
card.
Amounts
related
to
shipping
and
handling
billed
to
customers
in
a
sales
transaction are
classified as
Other revenue
and the
costs related
to shipping
product to
customers (billed
and accrued) are classified as Cost of goods sold.
The Company
offers its
own proprietary
credit card
to customers.
All credit
activity is
performed by
the
Company’s
wholly-owned subsidiaries.
No
ne
of the
credit card
receivables are
secured.
The
Company
estimated customer credit losses of
$
121,000
and $
86,000
for the periods ended April
29, 2023 and April
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
17
30, 2022,
respectively,
on sales
purchased by
the Company’s
proprietary credit
card of
$
5.8
million and
$
5.7
million for the periods ended April 29, 2023 and April 30, 2022, respectively.
The
following
table
provides
information
about
receivables
and
contract
liabilities
from
contracts
with
customers (in thousands):
Balance as of
April 29, 2023
January 28, 2023
Proprietary Credit Card Receivables, net
$
10,749
$
10,553
Gift Card Liability
$
7,296
$
8,523
NOTE 12 – LEASES:
The
Company determines
whether
an
arrangement
is
a
lease
at
inception.
The
Company
has
operating
leases for
stores,
offices,
warehouse space
and equipment.
Its leases
have remaining
lease terms
of
one
year
to
10 years
, some of which include options to
extend the lease term for
up to five years
, and some of
which
include
options
to
terminate
the
lease
within one year
.
The
Company considers
these
options
in
determining
the
lease term
used
to
establish its
right-of-use assets
and lease
liabilities. The
Company’s
lease agreements do not contain any material residual value guarantees or material
restrictive covenants.
As
most
of
the
Company’s
leases
do
not
provide
an
implicit
rate,
the
Company
uses
its
estimated
incremental
borrowing
rate
based
on
the
information
available
at
commencement
date
of
the
lease
in
determining the present value of lease payments.
The components of lease cost are shown below (in thousands):
`
Three Months Ended
April 29, 2023
April 30, 2022
Operating lease cost (a)
$
18,078
$
17,754
Variable
lease cost (b)
$
594
$
768
(a) Includes right-of-use asset amortization of ($
0.3
) million and ($
0.4
) million for the three months ended
April 29, 2023 and April 30, 2022, respectively.
(b) Primarily relates to monthly percentage rent for stores not presented on the balance sheet.
Supplemental cash flow
information and non-cash
activity related to
the Company’s
operating leases are
as follows (in thousands):
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
18
Operating cash flow information:
Three Months Ended
April 29, 2023
April 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
17,345
$
16,836
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations, net of rent violations
$
1,904
$
3,515
Weighted-average
remaining
lease
term
and
discount
rate
for
the
Company’s
operating
leases
are
as
follows:
As of
April 29, 2023
April 30, 2022
Weighted-average remaining lease term
2.2
Years
2.4
Years
Weighted-average discount rate
3.20%
2.92%
As of
April 29,
2023, the maturities
of lease
liabilities by fiscal
year for
the Company’s
operating leases
are as follows (in thousands):
Fiscal Year
2023 (a)
$
52,516
2024
49,829
2025
32,563
2026
18,657
2027
8,648
Thereafter
1,603
Total lease payments
163,816
Less: Imputed interest
8,344
Present value of lease liabilities
$
155,472
(a) Excluding the 3 months ended April 29, 2023.
19
THE CATO CORPORATION
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The
following
information
should
be
read
along
with
the
unaudited
Condensed
Consolidated
Financial
Statements,
including
the
accompanying
Notes
appearing
in
this
report.
Any
of
the
following
are
“forward-looking”
statements
within
the
meaning
of
Section 27A
of
the
Securities
Act
of
1933,
as
amended,
and
Section 21E
of
the
Securities
Exchange
Act
of
1934,
as
amended:
(1) statements
in
this
Form 10-Q
that
reflect
projections
or
expectations
of
our
future
financial
or
economic
performance;
(2) statements
that
are
not
historical
information;
(3) statements
of
our
beliefs,
intentions,
plans
and
objectives for future operations,
including those contained in
“Management’s Discussion and
Analysis of
Financial Condition and
Results of Operations”;
(4) statements relating to
our operations or
activities for
our
fiscal
year
ending
February
3,
2024
(“fiscal
2023”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and
closures
and
statements
regarding
the
potential
impact
of
the
COVID-19
pandemic
and
related
responses and
mitigation efforts,
as well
as the
potential impact
of supply
chain disruptions,
inflationary
pressures
and
other
economic
or
market
conditions
on
our
business,
results
of
operations
and
financial
condition
and
statements
regarding
new
store
development
strategy;
and
(5) statements
relating
to
our
future contingencies. When
possible, we
have attempted to
identify forward-looking statements
by using
words
such
as
“will,”
“expects,”
“anticipates,”
“approximates,”
“believes,”
“estimates,”
“hopes,”
“intends,” “may,”
“plans,” “could,” “would,”
“should” and any
variations or negative
formations of such
words
and
similar
expressions.
We
can
give
no
assurance
that
actual
results
or
events
will
not
differ
materially
from
those
expressed
or
implied
in
any
such
forward-looking
statements.
Forward-looking
statements
included
in
this
report
are
based
on
information
available
to
us
as
of
the
filing
date
of
this
report,
but
subject
to
known
and
unknown
risks,
uncertainties and
other
factors
that
could
cause
actual
results
to
differ
materially
from
those
contemplated
by
the
forward-looking
statements.
Such
factors
include, but
are not
limited to,
the following:
any actual
or perceived
deterioration in
the conditions
that
drive
consumer
confidence
and
spending,
including,
but
not
limited
to,
prevailing
social,
economic,
political
and
public
health conditions
and
uncertainties, levels
of
unemployment, fuel,
energy
and
food
costs, wage rates, tax
rates, interest rates, home
values, consumer net worth,
the availability of
credit and
inflation;
changes
in
laws,
regulations
or
government
policies
affecting
our
business,
including
but
not
limited to
tariffs;
uncertainties regarding
the impact
of any
governmental action
regarding, or
responses
to, the
foregoing conditions; competitive factors
and pricing
pressures; our ability
to predict
and respond
to rapidly changing fashion trends
and consumer demands; our ability to
successfully implement our new
store development strategy to increase new
store openings and our ability
of any such new stores
to grow
and
perform
as
expected;
adverse
weather,
public
health
threats
(including
the
global
COVID-19
pandemic)
or
similar
conditions that
may affect
our
sales
or
operations; inventory
risks
due
to
shifts
in
market
demand,
including
the
ability
to
liquidate
excess
inventory
at
anticipated
margins;
adverse
developments or volatility affecting the financial services industry or broader financial markets; and
other
factors discussed under “Risk Factors” in Part I, Item 1A of our
annual report on Form 10-K for the fiscal
year ended
January 28,
2023 (“fiscal
2022”), as
amended or
supplemented, and
in
other reports
we file
with
or
furnish
to
the
Securities
and
Exchange
Commission
(“SEC”)
from
time
to
time.
We
do
not
undertake,
and
expressly
decline,
any
obligation
to
update
any
such
forward-looking
information
contained in this report, whether as a result of new information, future
events, or otherwise.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
20
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The
Company’s
critical
accounting
policies
and
estimates
are
more
fully
described
in
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in the
Company’s Annual Report
on
Form
10-K
for
the
fiscal
year
ended
January
28,
2023.
The
preparation
of
the
Company’s
financial
statements
in
conformity
with
generally
accepted
accounting
principles
in
the
United
States
(“GAAP”)
requires management to make estimates and assumptions about future events that affect the amounts reported
in
the
financial
statements
and
accompanying
notes.
Future
events
and
their
effects
cannot
be
determined
with absolute
certainty. Therefore,
the determination
of estimates
requires the
exercise of
judgment. Actual
results
inevitably
will
differ
from
those
estimates,
and
such
differences
may
be
material
to
the
financial
statements. The most significant accounting estimates
inherent in the preparation of the
Company’s financial
statements include the
allowance for customer
credit losses, inventory
shrinkage, the calculation
of potential
asset
impairment,
workers’
compensation,
general
and
auto
insurance
liabilities,
reserves
relating
to
self-
insured health insurance, and uncertain tax
positions.
The Company’s critical accounting policies and
estimates are discussed with the Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
21
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in
the Company's unaudited Condensed
Consolidated Statements of Income as a
percentage of total retail sales:
Three Months Ended
April 29, 2023
April 30, 2022
Total retail sales
100.0
%
100.0
%
Other revenue
0.9
0.9
Total revenues
100.9
100.9
Cost of goods sold (exclusive of depreciation)
64.2
64.5
Selling, general and administrative (exclusive of depreciation)
32.5
29.5
Depreciation
1.2
1.3
Interest and other income
(0.5)
(0.2)
Income before income taxes
3.5
5.7
Net income
2.3
4.8
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
22
RESULTS OF OPERATIONS
(CONTINUED):
Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
(“MD&A”) is
intended
to
provide
information
to
assist
readers
in
better
understanding
and
evaluating
our
financial
condition
and
results
of
operations.
We
recommend
reading
this
MD&A
in
conjunction
with
our
Condensed
Consolidated
Financial
Statements
and
the
Notes
to
those
statements
included
in
the
“Financial Statements” section of this Quarterly Report on Form
10-Q, as well as our 2022
Form 10-K.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
The
current
inflationary
environment
continues
to
negatively
impact
the
Company’s
operating
costs,
including
higher
wages,
operating
supplies
and
services.
In
addition,
increased
costs
for
fuel,
food,
and
housing, including rent,
as well as
other consumable products
across the economy,
are negatively impacting
our
customers’
disposable income,
and
our customers’
willingness to
purchase discretionary
items
such as
apparel, jewelry and shoes.
In
response
to
inflationary
pressures,
the
Federal
Reserve
began
raising
interest
rates
and
is
committed
to
continue raising
interest rates
until inflationary
pressures subside.
These rising interest
rates have
adversely
affected
the
availability
and
cost
of
credit
for
both
businesses
and
our
customers.
In
addition,
the
rising
interest rates are increasing the costs
related to revolving credit, auto loans and
mortgages, which continue to
negatively impact
our customers’
discretionary income.
Additionally,
rising interest
rates
may
continue to
negatively impact our customers’ willingness
to purchase our products.
We believe
price increases
and rising
interest rates
impacted the
first quarter
of fiscal
2023 and
will likely
continue
to have
a negative
impact
on
consumer
behavior and,
by
extension,
our
results
of operations
and
financial condition during the remainder of
fiscal 2023.
Labor Challenges and Wage Inflation
The
tight
labor
market
has
increased
competition
for
labor
among
consumer-facing
companies.
This
competition
for
labor
has
driven
significant
increases
in
wages
in
order
to
compete
for
sufficient
labor
availability and/or
to
prevent
the loss
of existing
workforce in
our stores,
distribution center
and corporate
office. We expect these pressures to
continue in fiscal 2023.
Comparison of First Quarter of 2023
with 2022
Total retail sales for the first quarter
were $190.3 million compared to
last year’s first quarter sales of
$204.9
million.
Sales
decreased
primarily
due
to
a
decrease
in
same-store
sales
and
sales
from
stores
that
were
closed in the past 12 months, partially offset by sales from stores opened in the past 12
months. The decrease
in
same-store
sales
is
primarily
from
fewer
transactions
due
to
the
aforementioned
pressures
on
our
customers’
disposable
income,
partially
offset
by
higher
average
sales
per
transaction.
Same
store
sales
include stores
that have
been open
more than
15 months.
Stores that
have been
relocated or
expanded are
also included in the same store
sales calculation after they have been open
more than 15 months.
The method
of calculating same
store sales varies
across the retail
industry.
As a result,
our same store
sales calculation
may not be comparable to similarly titled measures reported by other companies. E-commerce sales were less
than
5.1%
of
sales
for
the
first
quarter
of
fiscal
2023
and
are
included
in
the
same-store
sales
calculation.
Total
revenues,
comprised
of
retail
sales
and
other
revenue
(principally
finance
charges
and
late
fees
on
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
23
customer accounts
receivable, shipping
charged to
customers for
e-commerce purchases
and layaway
fees),
were
$192.1
million
for
the
first
quarter
ended
April
29,
2023,
compared
to
$206.7
million
for
the
first
quarter ended April 30, 2022. The
Company operated 1,264 stores at April 29,
2023 compared to 1,315 stores
at the
end of
last fiscal
year’s first
quarter.
For the
first three
months of
fiscal 2023,
the Company
opened
four stores
and permanently
closed 20 stores.
The Company
currently anticipates closing
approximately 80
stores in fiscal 2023.
Credit revenue of $0.6 million represented 0.3% of total revenues in the first quarter of fiscal 2023,
compared
to
2022
credit
revenue
of
$0.5
million
or
0.2%
of
total
revenues.
Credit
revenue
is
comprised
of
interest
earned on the Company’s private label credit card portfolio and related fee income.
Related expenses include
principally payroll, postage and
other administrative expenses, and
totaled $0.4 million in
the first quarter of
2023, compared to last year’s
first quarter expenses of $0.4 million.
Other revenue, a component of
total revenues, was $1.7 million for the first
quarter of fiscal 2023, compared
to
$1.8
million
for
the
prior
year’s
comparable
first
quarter.
The
slight
decrease
was
due
to
lower
e-
commerce shipping revenue, partially offset by higher finance
charges and layaway fees.
Cost of goods
sold was $122.1
million, or 64.2%
of retail sales for
the first quarter of
fiscal 2023, compared
to $132.2 million,
or 64.5% of
retail sales in
the first quarter
of fiscal 2022.
The overall decrease
in cost of
goods sold as
a percent of
retail sales
for the first
quarter of 2023
resulted primarily
from both
lower ocean
freight
costs
and
outbound
freight
costs
to
our
stores,
partially
offset
by
deleveraging
of
occupancy
and
buying costs. Cost of goods sold
includes merchandise costs (net of discounts
and allowances), buying costs,
distribution
costs,
occupancy
costs,
freight
and
inventory
shrinkage.
Net
merchandise
costs
and
in-bound
freight are capitalized as
inventory costs.
Buying and distribution costs
include payroll, payroll-related costs
and operating
expenses for
the
buying
departments
and
distribution center.
Occupancy
costs
include rent,
real estate
taxes, insurance,
common area
maintenance, utilities
and maintenance
for stores
and distribution
facilities.
Total gross margin dollars (retail sales
less cost of goods sold exclusive
of depreciation) decreased
by 6.1% to
$68.2 million for
the first quarter
of fiscal 2023
compared to $72.7
million in the
first quarter of
fiscal 2022.
Gross margin as presented may not be comparable
to those of other entities.
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related
payroll taxes and benefits, insurance, supplies, advertising,
and bank and credit card processing fees.
SG&A
expenses were
32.5% of
retail sales for
the first
quarter of
fiscal 2023,
compared to
29.5% of
retail sales
in
the first quarter of fiscal 2022. The
increase in SG&A as a
percent of retail sales was due
primarily to higher
operating costs, driven in part by higher wages as a result of the tight labor market and expenses
related to the
closure of 20 stores in
the quarter, partially offset by lower insurance
expense.
Depreciation expense was $2.4 million, or 1.2% of retail sales for the first quarter of fiscal 2023, compared to
$2.7 million, or
1.3% of retail
sales for the
first quarter of
fiscal 2022. The
decrease in depreciation
expense
was attributable to older stores being
fully depreciated.
Interest
and
other
income
was
$0.9
million,
or
0.5%
of
retail
sales
for
the
first
quarter
of
fiscal
2023,
compared
to
$0.4
million,
or
0.2%
of
retail
sales
for
the
first
quarter
of
fiscal
2022.
The
increase
was
primarily attributable
to an
increase in
interest rates
earned on
short-term investments,
partially offset
by a
decrease in short-term investments.
Income tax expense
was $2.1 million or
1.1% of retail sales
for the first quarter
of fiscal 2023,
compared
to
income
tax
expense
of
$1.9
million,
or
1.0%
of
retail
sales
for
the
first
quarter
of
fiscal
2022.
The
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
effective
income tax
rate for
the first
quarter of
fiscal 2023
was 32.6%
compared to
16.7% for
the first
quarter
of
2022.
The
increase
in
the
2023
first
quarter
tax
rate
was
primarily
due
to
higher
Global
Intangible Low-taxed Income (GILTI), partially offset by the foreign rate differential and offshore claim.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company
believes that
its cash,
cash equivalents
and short-term
investments, together
with cash
flows
from operations
and borrowings available
under its revolving
credit agreement,
will be
adequate to fund
the
Company’s regular operating requirements
and expected capital expenditures
for fiscal 2023 and the
next 12
months.
Cash
provided
by
operating
activities
for
the
first
three
months
of
fiscal
2023
was
primarily
generated
by
earnings adjusted
for
depreciation and
changes in
working
capital. The
increase in
cash
provided
of
$10.7
million
for
the
first
three
months
of
fiscal
2023
as
compared
to
the
first
three
months
of
fiscal
2022
was
primarily due
to a
decrease in
inventory and
a smaller
decrease in
accounts payable,
accrued expenses
and
other liabilities compared to year-end,
partially offset by lower net income.
At April 29,
2023, the Company
had working capital
of $87.9 million
compared to $74.7
million at January
28,
2023.
The
increase
is
primarily
attributable
to
an
increase
in
accounts
receivable,
lower
current
lease
liability and accounts payable partially offset by
lower merchandise inventory.
At
April
29,
2023,
the
Company
had
an
unsecured
revolving
credit
agreement,
which
provides
for
borrowings of
up to
$35.0 million
less the
balance of
any revocable
letters of
credit related
to purchase
commitments,
and
is
committed
through
May
2027.
The
credit
agreement
contains
various
financial
covenants and limitations, including the maintenance of specific financial
ratios with which the Company
was
in
compliance
as
of
April
29,
2023.
There
were
no
borrowings
outstanding,
nor
any
outstanding
letters of
credit that
reduced borrowing availability,
as of
April 29,
2023.
The weighted
average interest
rate under the credit facility was zero at April 29, 2023 due to no outstanding
borrowings.
Expenditures
for
property
and
equipment
totaled
$6.2
million
in
the
first
three
months
of
fiscal
2023,
compared
to
$4.4
million
in
last
year’s
first
three
months.
The
increase
in
expenditures
for
property
and
equipment
was
primarily
due
to
costs
associated
with
opening
four
new
stores
and
capital
investments
in
information
technology
and
the
distribution
center.
For
the
full
fiscal
2023
year,
the
Company
expects
to
invest approximately $22.1 million in capital
expenditures, including distribution center automation projects.
Net
cash
provided
by
investing
activities
totaled
$15.3
million
in
the
first
three
months
of
fiscal
2023
compared to $19.6 million provided in the comparable period of fiscal 2022. The decrease is primarily due
to
higher purchases of short-term
investments and an increase
in capital expenditures, partially
offset by higher
sales of short-term investments.
Net cash used in
financing activities totaled $5.6
million in the first
three months of fiscal
2023 compared to
$12.7 million used
in the comparable
period of fiscal
2022, primarily due
to a decrease
in share repurchases
and dividends paid.
On May 18, 2023, the Board of
Directors maintained the quarterly dividend at
0.17 per share.
As
of
April
29,
2023,
the
Company
had
944,379
shares
remaining
in
open
authorizations
under
its
share
repurchase program.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
The Company does not use
derivative financial instruments.
The Company’s
investment portfolio
was primarily
invested in
corporate bonds and
tax-exempt and taxable
governmental
debt securities
held in
managed accounts
with underlying
ratings
of
A
or better
at
April 29,
2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
and
asset-backed
securities
have
contractual maturities
which range
from two
days to
3.6 years.
The U.S.
Treasury Notes
and Certificates
of
Deposit have contractual maturities
which range from
one day to 2.8
years. These securities are
classified as
available-for-sale
and
are
recorded
as
Short-term
investments,
Restricted
cash
and
Other
assets
on
the
accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized
gains
and
losses
reported
net
of
taxes
in
Accumulated
other
comprehensive
income.
The
asset-backed
securities
are
bonds
comprised
of
auto
loans
and
bank
credit
cards
that
carry
AAA
ratings.
The
auto
loan
asset-backed securities are
backed by
static pools
of auto loans
that were
originated and
serviced by
captive
auto finance units,
banks or
finance companies.
The bank
credit card
asset-backed securities
are backed
by
revolving
pools
of
credit
card
receivables
generated
by
account
holders
of
cards
from
American
Express,
Citibank, JPMorgan Chase, Capital One, and
Discover.
Additionally,
at
April
29,
2023,
the
Company
had
$0.8
million
of
corporate
equities
and
deferred
compensation plan assets
of $9.3 million.
At January 28,
2023, the Company
had $0.9 million
of corporate
equities and deferred compensation
plan assets of $9.3
million. All of these
assets are recorded within
Other
assets in the Condensed Consolidated Balance
Sheets. See Note 7, Fair Value
Measurements.
RECENT ACCOUNTING PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
26
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
related
to
its
financing, investing and
cash management activities,
but the Company
does not
believe such exposure
is
material.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out an evaluation, with the
participation of our Principal Executive Officer and
Principal Financial
Officer, of
the effectiveness
of our
disclosure controls
and procedures
as of
April 29,
2023.
Based on
this
evaluation,
our
Principal
Executive
Officer
and
Principal
Financial
Officer
concluded
that,
as
of
April
29,
2023, our
disclosure controls
and
procedures,
as defined
in
Rule
13a-15(e), under
the
Securities
Exchange
Act of 1934 (the “Exchange
Act”), were effective to ensure that
information we are required to disclose
in the
reports
that
we
file
or
submit
under
the
Exchange
Act
is
recorded,
processed,
summarized
and
reported
within the time periods
specified in the SEC’s
rules and forms and
that such information is
accumulated and
communicated to our management, including our Principal Executive Officer and Principal Financial Officer,
as appropriate to allow timely decisions
regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
No change in the Company’s internal control
over financial reporting (as defined in
Exchange Act Rule 13a-
15(f)) has occurred during the Company’s fiscal
quarter ended April 29, 2023
that has materially affected, or
is
reasonably
likely
to
materially
affect,
the
Company’s
internal
control
over
financial
reporting.
THE CATO CORPORATION
PART
II OTHER
INFORMATION
27
ITEM 1.
LEGAL PROCEEDINGS:
Not Applicable
ITEM 1A.
RISK FACTORS:
In addition to the other information
in this report, you should carefully
consider the factors discussed in
Part I,
“Item
1A.
Risk
Factors”
in
our
Annual
Report
on
Form
10-K
for
our
fiscal
year
ended
January
28,
2023.
These risks
could materially
affect our
business, financial
condition or
future results;
however, they
are not
the only risks we face.
Additional risks and uncertainties not currently known to
us or that we currently deem
to
be
immaterial
may
also
materially
adversely
affect
our
business,
financial
condition
or
results
of
operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS:
The following table summarizes the Company’s purchases of its common stock for the three months
ended April 29, 2023:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Average
Part of Publicly
Value)
of Shares that may
of Shares
Price Paid
Announced Plans or
Yet be Purchased
Under
Period
Purchased
per Share (1)
Programs (2)
The Plans or Programs (2)
February 2023
57,930
$
9.39
57,930
March 2023
195,460
8.81
195,460
April 2023
-
-
-
Total
253,390
$
8.95
253,390
944,379
(1)
Prices include trading costs.
(2)
As of January
28, 2023, the
Company’s share
repurchase program had
197,769 shares remaining
in
open
authorizations.
The
Board
of
Directors
authorized
an
additional
1,000,000
shares
for
repurchase under
the
program at
its
February 23,
2023 meeting.
During the
first
quarter ended
April
29,
2023,
the
Company
repurchased
and
retired
253,390
shares
under
this
program
for
approximately $2,266,727
or an
average market
price of
$8.95 per
share.
As of
April 29,
2023,
the
Company
had
944,379
shares
remaining
in
open
authorizations.
There
is
no
specified
expiration date for the Company’s repurchase program.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES:
Not Applicable
THE CATO CORPORATION
PART
II OTHER
INFORMATION
28
ITEM 4.
MINE SAFETY DISCLOSURES:
Not Applicable
ITEM 5.
OTHER INFORMATION:
Not Applicable
ITEM 6.
EXHIBITS:
Exhibit No.
Item
3.1
Registrant’s Amended and Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3.1 to Form 10-Q of the Registrant
for the quarter ended May 2, 2020.
3.2
Registrant’s Amended and Restated By-Laws, incorporated by
reference to Exhibit 3.2 to Form 10-Q of the Registrant for the quarter
ended May 2, 2020.
31.1*
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2*
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
32.1*
Section 1350 Certification of Principal Executive Officer.
32.2*
Section 1350 Certification of Principal Financial Officer.
101.1*
The
following
materials
from
Registrant’s
Quarterly
Report
on
Form
10-Q
for
the
fiscal
quarter
ended
April
29,
2023,
formatted
in
Inline
XBRL:
(i)
Condensed
Consolidated
Statements
of
Income
and
Comprehensive
Income
for
the
Three
Months
ended
April
29,
2023
and
April
30,
2022;
(ii)
Condensed
Consolidated
Balance
Sheets
at
April
29,
2023
and
January
28,
2023;
(iii)
Condensed
Consolidated
Statements of Cash Flows
for the Three Months
Ended April 29, 2023
and
April
30,
2022;
(iv)
Condensed
Consolidated
Statements
of
Stockholders’ Equity
for the
Three Months
Ended April
29, 2023
and
April
30,
2022;
and
(v)
Notes
to
Condensed
Consolidated
Financial
Statements.
104.1
Cover
Page
Interactive
Data
File
(Formatted
in
Inline
XBRL
and
contained in the Interactive Data Files submitted as Exhibit 101.1*)
* Submitted electronically herewith.
THE CATO CORPORATION
PART
II OTHER
INFORMATION
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
THE CATO
CORPORATION
May 25, 2023
/s/ John P.
D. Cato
Date
John P.
D. Cato
Chairman, President and
Chief Executive Officer
May 25, 2023
/s/ Charles D. Knight
Date
Charles D. Knight
Executive Vice President
Chief Financial Officer