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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
July 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 (§232.405
of this chapter)
during the preceding
12 months (or
for such shorter
period that the
registrant was required to submit such files).
Yes
X
No
Indicate by
check mark
whether the
registrant is
a large
accelerated filer,
an accelerated
filer, a
non-accelerated filer,
a 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 July
29, 2023, there
were
18,825,772
shares of Class A common
stock and
1,763,652
shares of Class B common
stock outstanding.
2
THE CATO CORPORATION
FORM 10-Q
Quarter Ended July 29, 2023
Table
of Contents
Page No.
PART
I – FINANCIAL INFORMATION
(UNAUDITED)
Item 1.
Financial Statements (Unaudited):
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
3
For the Three Months and Six Months Ended
July 29, 2023 and July 30, 2022
Condensed Consolidated Balance Sheets
4
At July 29, 2023 and January 28, 2023
Condensed Consolidated Statements of Cash Flows
5
For the Six Months Ended July 29, 2023 and July
30, 2022
Condensed Consolidated Statements of Stockholders’ Equity
6 – 7
For the Six Months Ended July 29, 2023 and July
30, 2022
Notes to Condensed Consolidated Financial Statements
8 – 22
For the Three Months and Six Months Ended
July 29, 2023 and July 30, 2022
Item 2.
Management’s Discussion and Analysis
of Financial Condition and
Results of Operations
23 – 29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
29
PART
II – OTHER INFORMATION
Item 1.
Legal Proceedings
30
Item 1A.
Risk Factors
30
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 3.
Defaults Upon Senior Securities
31
Item 4.
Mine Safety Disclosures
31
Item 5.
Other Information
31
Item 6.
Exhibits
31
Signatures
32
3
PART
I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(Dollars in thousands, except per share data)
REVENUES
Retail sales
$
181,181
$
195,006
$
371,492
$
399,939
Other revenue (principally finance charges, late fees and
layaway charges)
1,690
1,858
3,429
3,646
Total revenues
182,871
196,864
374,921
403,585
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of depreciation shown
below)
117,617
131,749
239,704
263,992
Selling, general and administrative (exclusive of
depreciation
shown below)
61,618
60,768
123,552
121,209
Depreciation
2,510
2,811
4,867
5,554
Interest and other income
(1,334)
(1,884)
(2,231)
(2,287)
Costs and expenses, net
180,411
193,444
365,892
388,468
Income before income taxes
2,460
3,420
9,029
15,117
Income tax expense
1,333
5,694
3,475
7,643
Net income (loss)
$
1,127
$
(2,274)
$
5,554
$
7,474
Basic earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
Diluted earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
Comprehensive income:
Net income (loss)
$
1,127
$
(2,274)
$
5,554
$
7,474
Unrealized gain (loss) on available-for-sale securities, net of
deferred income taxes of $
50
and $
156
for the three and
six months ended July 29, 2023 and $
18
and $(
343
) for
the three and six months ended July 30, 2022, respectively
167
61
522
(1,145)
Comprehensive income (loss)
$
1,294
$
(2,213)
$
6,076
$
6,329
See notes to condensed consolidated financial statements (unaudited).
4
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
July 29, 2023
January 28, 2023
ASSETS
(Dollars in thousands)
Current Assets:
Cash and cash equivalents
$
55,977
$
20,005
Short-term investments
77,222
108,652
Restricted cash
3,877
3,787
Accounts receivable, net of allowance for customer credit losses of
$
763
and $
761
at July 29, 2023 and January 28, 2023, respectively
26,915
26,497
Merchandise inventories
92,718
112,056
Prepaid expenses and other current assets
7,098
6,676
Total Current Assets
263,807
277,673
Property and equipment – net
73,871
70,382
Noncurrent deferred income taxes
9,888
9,213
Other assets
21,770
21,596
Right-of-Use assets – net
138,331
174,276
Total Assets
$
507,667
$
553,140
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
84,867
$
91,956
Accrued expenses
38,546
41,338
Accrued employee benefits and bonus
997
1,690
Accrued income taxes
3,561
613
Current lease liability
32,431
67,360
Total Current Liabilities
160,402
202,957
Other noncurrent liabilities
16,342
16,183
Lease liability
105,390
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;
18,825,772
shares and
18,723,225
shares
issued at July 29, 2023 and January 28, 2023, respectively
636
632
Convertible Class B common stock, $
0.033
par value per share,
15,000,000
shares authorized;
1,763,652
shares and
1,763,652
shares
issued at July 29, 2023 and January 28, 2023, respectively
59
59
Additional paid-in capital
124,798
122,431
Retained earnings
100,756
104,709
Accumulated other comprehensive income (loss)
(716)
(1,238)
Total Stockholders' Equity
225,533
226,593
Total Liabilities and Stockholders' Equity
$
507,667
$
553,140
See notes to condensed consolidated financial statements (unaudited).
5
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
Six Months Ended
July 29, 2023
July 30, 2022
(Dollars in thousands)
Operating Activities:
Net income
$
5,554
$
7,474
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation
4,867
5,554
Provision for customer credit losses
248
145
Purchase premium and premium amortization of investments
(97)
607
Share-based compensation
2,192
2,028
Deferred income taxes
(832)
-
Loss on disposal of property and equipment
1
93
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable
(666)
30,837
Merchandise inventories
19,338
8,314
Prepaid and other assets
(667)
(24)
Operating lease right-of-use assets and liabilities
(1,001)
(1,207)
Accrued income taxes
2,948
5,168
Accounts payable, accrued expenses and other liabilities
(10,306)
(42,013)
Net cash provided by operating activities
21,579
16,976
Investing Activities:
Expenditures for property and equipment
(8,470)
(10,384)
Purchase of short-term investments
(14,497)
(28,385)
Sales of short-term investments
46,777
48,917
Net cash provided by investing activities
23,810
10,148
Financing Activities:
Dividends paid
(6,962)
(7,270)
Repurchase of common stock
(2,563)
(9,596)
Proceeds from employee stock purchase plan
198
147
Net cash used in financing activities
(9,327)
(16,719)
Net increase in cash, cash equivalents, and restricted cash
36,062
10,405
Cash, cash equivalents, and restricted cash at beginning of period
23,792
23,678
Cash, cash equivalents, and restricted cash at end of period
$
59,854
$
34,083
Non-cash activity:
Accrued other assets and property and equipment
$
572
$
751
See notes to condensed consolidated financial statements (unaudited).
6
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
Comprehensive income:
Net income
-
-
1,127
-
1,127
Unrealized net gains on available-for-sale securities, net of
deferred income tax expense of $
50
-
-
-
167
167
Dividends paid ($
0.17
per share)
-
-
(3,507)
-
(3,507)
Class A common stock sold through employee stock purchase
plan
1
31
-
-
32
Share-based compensation issuances and exercises
-
-
-
-
-
Share-based compensation expense
12
1,212
3
-
1,227
Repurchase and retirement of treasury shares
(1)
-
(293)
-
(294)
Balance — July 29, 2023
$
695
$
124,798
$
100,756
$
(716)
$
225,533
See notes to condensed consolidated financial statements (unaudited).
7
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 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
Comprehensive income:
Net loss
-
-
(2,274)
-
(2,274)
Unrealized net gains on available-for-sale securities, net of
deferred income tax expense of $
18
-
-
-
61
61
Dividends paid ($
0.17
per share)
-
-
(3,632)
-
(3,632)
Class A common stock sold through employee stock purchase
plan
-
62
-
-
62
Share-based compensation issuances and exercises
7
308
6
-
321
Share-based compensation expense
-
1,077
-
-
1,077
Repurchase and retirement of treasury shares
(1)
-
(433)
-
(434)
Balance — July 30, 2022
$
714
$
121,696
$
124,848
$
(1,425)
$
245,833
See notes to condensed consolidated financial statements (unaudited).
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
8
NOTE 1 - GENERAL
:
The condensed consolidated financial statements
as of July 29,
2023 and for the
twenty-six-week
periods
ended
July
29,
2023
and
July
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.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
9
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 (Loss) and Comprehensive Income (Loss).
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
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(Dollars in thousands)
Numerator
Net earnings (loss)
$
1,127
$
(2,274)
$
5,554
$
7,474
(Earnings) loss allocated to non-vested equity awards
(54)
132
(292)
(405)
Net earnings (loss) available to common stockholders
$
1,073
$
(2,142)
$
5,262
$
7,069
Denominator
Basic weighted average common shares outstanding
19,395,484
20,005,315
19,349,266
20,077,258
Diluted weighted average common shares outstanding
19,395,484
20,005,315
19,349,266
20,077,258
Net income (loss) per common share
Basic earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
Diluted earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
10
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 July 29, 2023:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at April 29, 2023
$
(883)
Other comprehensive income before
reclassification
164
Amounts reclassified from accumulated
other comprehensive income (b)
3
Net current-period other comprehensive income
167
Ending Balance at July 29, 2023
$
(716)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(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
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
six months ended July 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 before
reclassification
519
Amounts reclassified from accumulated
other comprehensive income (b)
3
Net current-period other comprehensive income
522
Ending Balance at July 29, 2023
$
(716)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(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)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
11
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME
(CONTINUED):
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
three months ended July 30, 2022:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at April 30, 2022
$
(1,486)
Other comprehensive income before
reclassifications
64
Amounts reclassified from accumulated
other comprehensive income (b)
(3)
Net current-period other comprehensive income
61
Ending Balance at July 30, 2022
$
(1,425)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(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
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
six months ended July 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 before
reclassifications
(1,139)
Amounts reclassified from accumulated
other comprehensive income (b)
(6)
Net current-period other comprehensive income
(1,145)
Ending Balance at July 30, 2022
$
(1,425)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(b) Includes $
7
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)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
12
NOTE 4 – FINANCING ARRANGEMENTS:
As of July
29, 2023, the
Company has an
unsecured revolving credit
line, 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
revolving
credit
agreement
contains
various
financial
covenants
and
limitations,
including
the
maintenance
of
specific
financial
ratios.
On
August
9,
2023,
the
Company
amended the revolving credit
agreement to modify
a definition used in
calculating the Company’s
minimum
EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating
the ratio. For
the quarter ended July
29, 2023, after giving
effect to the amendment,
the Company was in
compliance with
the
credit
agreement.
There
were
no
borrowings
outstanding,
no
r
any
outstanding
letters
of
credit
that
reduced
borrowing
availability,
as
of
July
29,
2023.
The
weighted
average
interest
rate
under
the
credit
facility was
zero
at July 29, 2023 due to
no
borrowings outstanding.
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
The Company
has determined
that it
has
four
operating segments,
as defined
under ASC
280-10 –
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 sold to customers in
a similar
manner.
The
Company
operates
its
women’s
fashion
specialty
retail
stores
in
31
states
as
of
July
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
wholly-owned
subsidiary of the Company.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
13
NOTE 5 – REPORTABLE SEGMENT INFORMATION
(CONTINUED):
The following schedule summarizes certain segment
information (in thousands):
Three Months Ended
Six Months Ended
July 29, 2023
Retail
Credit
Total
July 29, 2023
Retail
Credit
Total
Revenues
$182,213
$658
$182,871
Revenues
$373,648
$1,273
$374,921
Depreciation
2,509
1
2,510
Depreciation
4,866
1
4,867
Interest and other income
(1,334)
-
(1,334)
Interest and other income
(2,231)
-
(2,231)
Income before
income taxes
2,207
253
2,460
Income before
income taxes
8,590
439
9,029
Capital expenditures
2,300
-
2,300
Capital expenditures
8,470
-
8,470
Three Months Ended
Six Months Ended
July 30, 2022
Retail
Credit
Total
July 30, 2022
Retail
Credit
Total
Revenues
$196,314
$550
$196,864
Revenues
$402,523
$1,062
$403,585
Depreciation
2,810
1
2,811
Depreciation
5,553
1
5,554
Interest and other income
(1,884)
-
(1,884)
Interest and other income
(2,287)
-
(2,287)
Income before
income taxes
3,289
131
3,420
Income before
income taxes
14,903
214
15,117
Capital expenditures
5,944
-
5,944
Capital expenditures
10,384
-
10,384
Retail
Credit
Total
Total assets as of July 29, 2023
$468,923
$38,744
$507,667
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
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Payroll
$
142
$
132
$
276
$
269
Postage
109
99
210
192
Other expenses
154
187
348
386
Total expenses
$
405
$
418
$
834
$
847
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
14
NOTE 6 – STOCK-BASED COMPENSATION:
As
of
July
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 July 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:
July 29, 2023
-
3,095,601
3,095,601
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 July 29,
2023 and
January 28,
2023, there
was $
11,597,000
and $
10,543,000
, respectively,
of total
unrecognized
compensation
expense
related
to
nonvested
restricted
stock
awards,
which
had
a
remaining
weighted-
average vesting
period
of
2.6
years
and
2.1
years,
respectively.
Total
compensation expense
during the
three
and
six
months
ended
July
29,
2023
was
$
1,230,000
and
$
2,158,000
,
respectively,
compared
to
$
1,403,000
and
$
2,006,000
for
the
three
and
six
months
ended
July
30,
2022.
These
amounts
are
classified as a component
of Selling, general and
administrative expenses in the
Condensed Consolidated
Statements of Income (Loss) and Comprehensive Income
(Loss).
The following
summary shows the
changes in the
shares of unvested
restricted stock
outstanding during
the
six months ended July
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
407,808
8.30
Vested
(217,238)
13.97
Forfeited or expired
(74,338)
12.28
Restricted stock awards at July 29, 2023
1,175,665
$
11.33
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
15
NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED):
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 six
months ended July 29,
2023 and July 30,
2022, the
Company sold
26,127
and
12,196
shares to employees
at an
average discount of
$
1.31
and $
2.12
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
$
34,000
and $
26,000
for the six
months ended July 29, 2023 and July 30, 2022, respectively. These expenses are classified as a
component of
Selling, general and administrative expenses.
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 July 29, 2023 and
January 28, 2023:
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
July 29, 2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
19,367
$
-
$
19,367
$
-
Corporate Bonds
30,026
-
30,026
-
U.S. Treasury/Agencies Notes and Bonds
21,073
-
21,073
-
Cash Surrender Value of Life Insurance
9,524
-
-
9,524
Asset-backed Securities (ABS)
6,108
-
6,108
-
Corporate Equities
852
852
-
-
Commercial Paper
648
-
648
-
Total Assets
$
87,598
$
852
$
77,222
$
9,524
Liabilities:
Deferred Compensation
$
(8,724)
$
-
$
-
$
(8,724)
Total Liabilities
$
(8,724)
$
-
$
-
$
(8,724)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
16
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 July 29, 2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
have
contractual
maturities
which
range
from
one day
to
2.6
years. The U.S. Treasury Notes have contractual
maturities which range from
two days
to
2.6
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
July
29,
2023,
the
Company
had
$
0.9
million
of
corporate
equities
and
deferred
compensation plan assets
of $
9.5
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 securities are measured at fair value using quoted active market prices.
Level 2 investment securities
include
corporate
bonds,
municipal
bonds
and
asset-backed
securities
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)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
17
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 for
the six months
ended July 29,
2023 and the
year ended January
28, 2023
(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)
250
Included in other comprehensive income
-
Ending Balance at July 29, 2023
$
9,524
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred Compensation
Beginning Balance at January 28, 2023
$
(8,903)
Redemptions
646
Additions
(162)
Total (gains) or losses:
Included in interest and other income (or
changes in net assets)
(305)
Included in other comprehensive income
-
Ending Balance at July 29, 2023
$
(8,724)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
18
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)
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)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
19
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 six
months of 2023
of
38.5
% compared to
50.6
% for
the first six months of 2022. The change in the effective tax rate for the first six months of 2023 compared
to the
prior year
was primarily
due to
a decrease
in Global
Intangible Low-taxed
Income (GILTI),
state
income taxes, non-deductible officer’s compensation, and increases in foreign tax credits and employment
credits, partially offset by the foreign rate differential.
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 the
Company’s
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 of, 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.
None
of the credit
card receivables are
secured. During the
three
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
20
and
six
months
ended
July
29,
2023,
the
Company
estimated
customer
credit
losses
of
$
151,000
and
$
272,000
, respectively,
compared to
$
87,000
and $
173,000
for the
three and
six months
ended July
30,
2022,
respectively.
Sales
purchased
on
the
Company’s
proprietary
credit
card
for
the
three
and
six
months ended July
29, 2023 were
$
5.9
million and $
11.7
million, respectively,
compared to $
5.8
million
and $
11.5
million for the three and six months ended July 30, 2022,
respectively.
The
following
table
provides
information
about
receivables
and
contract
liabilities
from
contracts
with
customers (in thousands):
Balance as of
July 29, 2023
January 28, 2023
Proprietary Credit Card Receivables, net
$
10,737
$
10,553
Gift Card Liability
$
6,924
$
8,523
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
21
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 up
to
10
years based on
the estimated likelihood
of renewal. Some
include options to
extend the lease
term for
up to
five years
, and some 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
July 29, 2023
July 30, 2022
Operating lease cost (a)
$
17,597
$
17,847
Variable
lease cost (b)
$
504
$
578
(a) Includes right-of-use asset amortization of ($
0.3
) million and ($
0.5
) million for the three months ended July 29, 2023 and July 30,
2022, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.
Six Months Ended
July 29, 2023
July 30, 2022
Operating lease cost (a)
$
35,675
$
35,602
Variable
lease cost (b)
$
1,098
$
1,346
(a) Includes right-of-use asset amortization of ($
0.6
) million and ($
0.9
) million for the six months ended July 29, 2023 and July 30,
2022, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
SIX MONTHS ENDED JULY 29, 2023 AND JULY
30, 2022
22
Supplemental cash flow
information and non-cash
activity related to
the Company’s
operating leases are
as follows (in thousands):
Operating cash flow information:
Three Months Ended
July 29, 2023
July 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
16,679
$
17,038
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
$
999
$
2,534
Six Months Ended
July 29, 2023
July 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
34,024
$
33,874
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
$
2,903
$
6,049
Weighted-average
remaining
lease
term
and
discount
rate
for
the
Company’s
operating
leases
are
as
follows:
As of
July 29, 2023
July 30, 2022
Weighted-average remaining lease term
2.0
years
2.2
years
Weighted-average discount rate
3.26%
2.89%
Maturities
of
lease
liabilities
by
fiscal
year
for
the
Company’s
operating
leases
are
as
follows
(in
thousands):
Fiscal Year
2023 (a)
$
33,897
2024
49,250
2025
32,219
2026
19,094
2027
8,991
Thereafter
1,748
Total lease payments
145,199
Less: Imputed interest
7,378
Present value of lease liabilities
$
137,821
(a) Excluding the six months ended July 29, 2023
23
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)
24
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company’s accounting
policies 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.
As
disclosed
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition and
Results of
Operations,” 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
calculation
of
potential
asset
impairment,
reserves
relating
to
self-insured
health
insurance,
workers’
compensation,
general
and
auto
insurance
liabilities,
uncertain
tax
positions,
the
allowance
for
customer
credit losses, and inventory shrinkage.
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)
25
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
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
0.9
1.0
0.9
0.9
Total revenues
100.9
101.0
100.9
100.9
Cost of goods sold (exclusive of depreciation)
64.9
67.6
64.5
66.0
Selling, general and administrative (exclusive
of depreciation)
34.0
31.2
33.3
30.3
Depreciation
1.4
1.4
1.3
1.4
Interest and other income
(0.7)
(1.0)
(0.6)
(0.6)
Income before income taxes
1.4
1.8
2.4
3.8
Net income (loss)
0.6
(1.2)
1.5
1.9
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
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
Annual Report Form 10-K.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
Despite some
reduction in
inflationary pressures
from last
year,
Cato’s
operating costs,
including higher
wages, operating supplies, and service costs continue to be negatively
impacted by the current inflationary
environment.
In
addition,
our
customers’
disposable
income
is
impacted
by
increased
costs
related
to
fuel, food, and
housing, including rent,
as well as
other consumable products
across the economy
which,
in
part,
negatively
impact
our
customers’
willingness
to
purchase
discretionary
items
such
as
apparel,
jewelry and shoes.
In
response
to
inflationary
pressures,
the
Federal
Reserve
began
raising
and
is
committed
to
continue
raising interest
rates until
inflationary pressures
subside to
acceptable levels.
These rising
interest rates
have
adversely
affected
the
availability
and
cost
of
credit
for
both
businesses
and
our
customers.
Increasing costs related
to revolving credit,
auto loans and
mortgages continue to
have a negative
impact
on
our
customers’
discretionary
income.
Our
customers’
willingness
to
purchase
our
products
may
continue to be negatively impacted by high interest rates.
We
believe high prices
and interest rates
impacted the first
half 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.
Comparison of the Three and Six
Months ended July 29, 2023 with
July 30, 2022
Total retail sales
for the second
quarter were
$181.2 million
compared to last
year’s second
quarter sales
of
$195.0
million,
a
7%
decrease.
The
Company’s
sales
decrease
in
the
second
quarter
of
fiscal
2023
is
primarily due
to a
5% decrease
in same-store
sales and
permanently closed
stores, partially
offset by
sales
from new stores.
For the six
months ended July
29, 2023, total
retail sales were
$371.5 million compared
to
last year’s comparable six month sales of $399.9 million, a 7% decrease. The decrease in sales in the first six
months of
fiscal 2023
was also
due primarily
to a
5% decrease
in same-store
sales and
permanently closed
stores,
partially offset
by sales
from
new
stores. 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% of total sales for
the
six
months
ended
July
29,
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
customer accounts
receivable and layaway fees), were $182.9 million
and $374.9 million for the
three and six months ended July
29, 2023, compared
to $196.9 million
and $403.6 million
for the three
and six months
ended July 30,
2022,
respectively. The Company operated 1,247 stores at July 29, 2023 compared to 1,312 stores at the end
of last
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
year’s
second
quarter.
During
the
first
six
months
of
fiscal
2023,
the
Company
opened
eight
stores
and
closed 41 stores.
The Company currently expects to close approximately 80
stores in total in fiscal 2023.
Credit
revenue
of
$0.7
million
represented
0.4%
of
total
revenues
in
the
second
quarter
of
fiscal
2023,
compared to
2022 credit
revenue of
$0.6 million
or 0.3%
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
principally include payroll,
postage and other
administrative expenses and
totaled $0.4 million
in the second
quarter of fiscal 2023, compared to
last year’s second quarter expense of
$0.4 million.
Other revenue, a component of total revenues, was $1.7 million and $3.4 million for the
three and six months
ended July 29, 2023, respectively, compared
to $1.9 million and $3.6 million
for the prior year’s comparable
three
and
six
month
periods.
The
decrease
in
Other
revenue
for
both
the
three
and
six
months
is
due
to
a
decrease
in
gift
card
breakage
and
e-commerce
shipping
revenue
partially
offset
by
increases
in
finance
charges and late fees associated with
the Company’s proprietary credit card.
Cost of
goods sold
was $117.6
million, or
64.9% of
retail sales
and $239.7
million, or
64.5% of retail
sales
for the three and six months
ended July 29, 2023, respectively, compared
to $131.7 million, or 67.6% of retail
sales and
$264.0 million,
or 66.0%
of retail
sales for
the comparable
three and
six month
periods of
fiscal
2022.
The overall
decrease in
cost of
goods sold
as a
percent of
retail sales
for the
second quarter
and first
half of
fiscal 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)
increased
by
0.5%
to
$63.6
million
for
the
second
quarter
of
fiscal
2023
and
decreased
by
3.0%
to
$131.8
million
for
the
first
six
months
of
fiscal
2023,
compared to $63.3
million and $135.9 million
for the prior year’s
comparable three and six
months 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,
bank
and
credit
card
processing
fees.
SG&A
expenses
were
$61.6
million,
or
34.0%
of
retail
sales
and
$123.6
million,
or
33.3%
of
retail
sales
for
the
second quarter and first six months of fiscal 2023, respectively, compared to $60.8 million, or
31.2% of retail
sales and $121.2 million, or 30.3% of retail sales for the prior year’s comparable three and
six month periods.
The increase
in SG&A
for the
second quarter
and first
six months
of fiscal
2023 is
primarily due
to higher
payroll and insurance expense.
Depreciation expense was $2.5 million, or 1.4% of retail sales and $4.9 million, or 1.3% of
retail sales for the
second quarter
and first
six months
of fiscal
2023, respectively,
compared to
$2.8 million,
or 1.4%
of retail
sales and $5.6
million or 1.4%
of retail sales
for the comparable
three and six
month periods of
fiscal 2022,
respectively.
Interest and other income was $1.3 million, or 0.7% of retail sales and $2.2 million, or 0.6% of retail sales for
the three and six
months ended July 29,
2023, respectively, compared to
$1.9 million, or 1.0%
of retail sales
and
$2.3
million,
or
0.6%
of
retail
sales
for
the
comparable
three
and
six
month
periods
of
fiscal
2022,
respectively.
The decrease for the second quarter and first six months of fiscal 2023 compared to fiscal 2022
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
28
is primarily attributable
to the Company’s
receipt of insurance
proceeds in the
second quarter of
fiscal 2022
related to hurricane damage in 2021.
Income tax expense was $1.3 million and $3.5 million for the second quarter and first six months of fiscal
2023,
respectively,
compared
to
$5.7
million
and
$7.6
million
for
the
comparable
three
and
six month
periods of
fiscal 2022,
respectively.
For the
first six
months of
fiscal 2023,
the Company’s
effective tax
rate was
38.5% compared to
50.6% for
the first
six months
of fiscal 2022.
The change
in the
2023 year-
to-date effective tax rate was primarily due to a decrease in Global Intangible Low-taxed Income
(GILTI),
state
income
taxes,
non-deductible
officer’s
compensation,
and
increases
in
foreign
tax
credits
and
employment credits, partially offset by the foreign rate differential.
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
during
the
first
six
months
of
fiscal
2023
was
$21.6
million
as
compared
to
$17.0
million
provided
in
the
first
six
months
of
fiscal
2022.
Cash
provided
by
operating
activities for the first six months of fiscal 2023 was primarily generated by earnings adjusted for
depreciation
and changes in working capital. The increase in cash provided of $4.6 million
for the first six months of fiscal
2023 as compared
to the
first six
months of
fiscal 2022
was primarily
due to
a smaller
decrease in
accounts
payable
and
accrued
liabilities
from
the
fiscal
year
end
and
lower
inventory,
partially
offset
by
higher
accounts receivable and lower net income.
At July 29, 2023,
the Company had
working capital of $103.4
million compared to $74.7
million at January
28, 2023.
The increase in working capital is
primarily attributable to a decrease in
current lease liability and
an increase in cash, partially offset
by a decrease in inventory
and short-term investments.
As of July
29, 2023, the
Company has an
unsecured revolving credit
line, 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
revolving
credit
agreement
contains
various
financial
covenants
and
limitations,
including
the
maintenance
of
specific
financial
ratios.
On
August
9,
2023,
the
Company
amended the revolving credit
agreement to modify
a definition used in
calculating the Company’s
minimum
EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating
the ratio. For
the quarter ended July
29, 2023, after giving
effect to the amendment,
the Company was in
compliance with
the
credit
agreement.
There
were
no
borrowings
outstanding,
nor
any
outstanding
letters
of
credit
that
reduced
borrowing
availability,
as
of
July
29,
2023.
The
weighted
average
interest
rate
under
the
credit
facility was zero at July 29, 2023
due to no borrowings outstanding.
Expenditures for property and equipment totaled $8.5 million in the first six months of fiscal 2023, compared
to $10.4 million in last
fiscal year’s first six months. The
decrease in expenditures for property and equipment
was
primarily
due
to
finishing
projects
related
to
investments
in
the
distribution
center
and
information
technology.
For
the
full
fiscal
2023
year,
the
Company
expects
to
invest
approximately
$17.0
million
for
capital expenditures.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
29
Net cash provided by investing activities totaled $23.8 million in the first six months of fiscal 2023
compared
to $10.1
million net
cash provided
in the
comparable period
of 2022.
The increase
in net
cash provided
in
2023 was primarily due
to a net decrease
in the purchase of
short-term investments and a
decrease in capital
expenditures.
Net cash
used in
financing activities
totaled $9.3
million in
the first
six months
of fiscal
2023 compared
to
$16.7 million used in the comparable period of fiscal 2022.
The decrease in net cash used in fiscal 2023 was
primarily due to lower stock repurchases and
lower dividends.
As
of
July
29,
2023,
the
Company
had
909,653
shares
remaining
in
open
authorizations
under
its
share
repurchase program.
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 July 29, 2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
have
contractual
maturities
which
range
from one day to 2.6 years. The U.S.
Treasury Notes have contractual maturities which range from two
days to
2.6
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
July
29,
2023,
the
Company
had
$0.9
million
of
corporate
equities
and
deferred
compensation plan assets
of $9.5 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
30
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
based
on
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
July
29,
2023.
Based
on
this
evaluation,
our
Principal
Executive
Officer
and
Principal
Financial
Officer
concluded
that,
as
of
July
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 July 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
31
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.
THE CATO CORPORATION
PART II OTHER
INFORMATION
32
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 July 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
Fiscal
of Shares
Price Paid
Announced Plans or
Yet be Purchased
Under
Period
Purchased
per Share (1)
Programs (2)
The Plans or Programs (2)
May 2023
34,726
$
8.30
34,726
June 2023
-
-
-
July 2023
-
-
-
Total
34,726
$
8.30
34,726
909,653
(1)
Prices include trading costs.
(2)
As of April
29, 2023, the Company’s
share repurchase program had
944,379 shares remaining in
open
authorizations. During
the
second
quarter
ended July
29,
2023, the
Company repurchased
and
retired 34,726
shares under
this
program for
approximately $288,226
or
an average
market
price
of
$8.30
per
share.
As
of
July
29,
2023,
the
Company
had
909,653
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
33
ITEM 4.
MINE SAFETY DISCLOSURES:
Not Applicable.
ITEM 5.
OTHER INFORMATION:
During the three
months ended July
29, 2023, none
of the
Company’s directors
or officers
(as defined in
Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted or
terminated a “Rule 10b5-1
trading arrangement” or a “non-Rule 10b5-1
trading arrangement” (as such terms are
defined in Item 408
of Regulation S-K).
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.
10.1*
Second Amendment, dated as of August 9, 2023, to Credit Agreement, dated as
of May 19 2022, among the Registrant, the party hereto, the banks party thereto
and Wells Fargo Bank, National Association.
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
July
29,
2023,
formatted
in
Inline
XBRL:
(i)
Condensed
Consolidated Statements
of Income
(Loss) and
Comprehensive Income
(Loss) for
the
Three
Months
and
Six
Months
Ended
July
29,
2023
and
July
30,
2022;
(ii)
Condensed
Consolidated
Balance
Sheets
at
July
29,
2023
and
January
28,
2023;
(iii) Condensed Consolidated Statements of
Cash Flows for the Six
Months Ended
July
29,
2023
and
July
30,
2022;
(iv)
Condensed
Consolidated
Statements
of
Stockholders’ Equity
for the
Six Months
Ended July
29, 2023
and July
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
34
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
August 23, 2023
/s/ John P.
D. Cato
Date
John P.
D. Cato
Chairman, President and
Chief Executive Officer
August 23, 2023
/s/ Charles D. Knight
Date
Charles D. Knight
Executive Vice President
Chief Financial Officer