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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-K
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
February 1, 2025
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
1-31340
The Cato Corporation
Registrant
Delaware
56-0484485
State of Incorporation
I.R.S. Employer Identification Number
8100 Denmark Road
Charlotte
,
North Carolina
28273-5975
Address of Principal Executive Offices
704
/
554-8510
Registrant’s Telephone
Number
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
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☐
No
☑
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
☐
No
☑
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
☑
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
☑
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
☑
Emerging Growth Company
☐
Non-accelerated filer
☐
Smaller reporting 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
has
filed
a
report
on
and
attestation
to
its
management’s
assessment
of
the
effectiveness
of
its
internal
control over
financial reporting
under Section
404(b) of
the Sarbanes-Oxley
Act (15
U.S.C. 7262(b))
by the
registered public
accounting
firm that prepared or issued its audit report.
☑
If securities are registered
pursuant to Section
12(b) of the
Act, indicate by check
mark whether the
financial statements of
the registrant included
in the filing reflect the correction of an error to previously issued financial statements.
☐
Indicate by check
mark whether any
of those error
corrections are restatements
that required a
recovery analysis of incentive-based
compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
☐
No
☑
The
aggregate
market
value
of
the
Registrant’s
Class A
Common
Stock
held
by
non-affiliates
of
the
Registrant
as
of
August
3,
2024,
the
last
business day of
the Company’s
most recent second
quarter, was
$
88,395,998
based on the
last reported sale
price per share
on the New
York
Stock
Exchange on that date.
As of February 1, 2025, there were
18,313,929
shares of Class A common stock and
1,763,652
shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the 2025 annual meeting of shareholders are incorporated by reference into Part III.
2
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART
I
Item 1.
Business
..........................................................................................................................
5 – 10
Item 1A.
Risk Factors
....................................................................................................................
10 – 23
Item 1B.
Unresolved Staff Comments
...........................................................................................
23
Item 1C.
Cybersecurity
..................................................................................................................
23
Item 2.
Properties
........................................................................................................................
25
Item 3.
Legal Proceedings
...........................................................................................................
25
Item 3A.
Executive Officers of the Registrant
...............................................................................
26
Item 4.
Mine Safety Disclosures
.................................................................................................
26
PART
II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
........................................................................................
27 – 29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................................................................
30 – 36
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
........................................
36
Item 8.
Financial Statements and Supplementary Data ..............................................................
37 – 71
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure
.......................................................................................................................
72
Item 9A.
Controls and Procedures
.................................................................................................
72
Item 9B.
Other Information
...........................................................................................................
73
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
............................
73
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance .............................................
74
Item 11.
Executive Compensation
................................................................................................
74
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
........................................................................................................
74
Item 13.
Certain Relationships and Related Transactions, and Director Independence
...............
75
Item 14.
Principal Accountant Fees and Services
.........................................................................
75
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
..................................................................
76
Item 16.
Form 10-K Summary ………………………………………………………………….
78
3
Forward-looking Information
The
following
information
should
be
read
along
with
the
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-K and any documents
incorporated
by
reference
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
January
31,
2026
(“fiscal
2025”)
and
beyond,
including,
but
not
limited to, statements regarding expected amounts of capital expenditures and store openings, relocations,
remodels
and
closures,
statements regarding
the
potential
impact
of
the
COVID-19 or
other
pandemics
and related
responses and
mitigation efforts,
as well
as the
potential impact
of supply
chain disruptions,
extreme weather
conditions, trade
policies, inflationary
pressures and
other economic
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,
inflation, wage rates, tax rates, interest rates, home values,
consumer
net
worth
and
the
availability
of
credit;
changes
in
laws,
regulations
or
government
policies
affecting our business, including
but not limited to
tariffs and taxes; 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
COVID-19
or
other
pandemics)
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 this annual report on
Form 10-K for the fiscal year ended February 1,
2025 (“fiscal 2024”), 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.
As used herein,
the terms “we,”
“our,”
“us,” the “Company”
or “Cato”
include The Cato
Corporation
and
its
subsidiaries,
unless
the
context
indicates
another
meaning
and
except
that
when
used
with
reference
to
common
stock
or
other
securities
described
herein
and
in
describing
the
positions
held
by
management of
the Company,
such terms
include only
The Cato
Corporation.
Our website
is located
at
www.catofashions.com
where
we
make
available,
free
of
charge,
our
annual
reports
on
Form 10-K,
quarterly
reports
on
Form 10-Q,
current
reports
on
Form 8-K,
proxy
statements
and
other
reports
(including amendments
to
these
reports) filed
or
furnished
pursuant to
Section 13(a) or
15(d)
under
the
Securities Exchange
Act of
1934. These
reports are
available as
soon as
reasonably practicable
after we
electronically file
these
materials with
the
SEC. We
also post
on our
website the
charters of
our
Audit,
4
Compensation
and
Corporate
Governance
and
Nominating
Committees;
our
Corporate
Governance
Guidelines; Code of Business Conduct and Ethics and
Code of Ethics for the
Principal Executive Officer,
Principal Financial Officer
and Principal Accounting
Officer and
any amendments or
waivers thereto for
any of our directors or executive officers; and any other publicly available corporate governance materials
contemplated
by
SEC
or
New
York
Stock
Exchange
regulations.
The
information
contained
on
our
website, www.catofashions.com,
is not,
and should in
no way be
construed as, a
part of this
or any other
report that we filed with or furnished to the SEC.
5
PART
I
Item 1.
Business:
Background
The
Company,
founded
in
1946,
operated
1,117
fashion
specialty
stores
at
February
1,
2025,
in
31
states,
principally
in
the
southeastern
United
States,
under
the
names
“Cato,”
“Cato
Fashions,”
“Cato
Plus,”
“It’s
Fashion,”
“It’s
Fashion
Metro”
and
“Versona.”
The
Cato
concept
seeks
to
offer
quality
fashion
apparel
and
accessories
at
low
prices
every
day,
in
junior/missy
and
plus
sizes.
The
Cato
concept’s stores and e-commerce website feature a broad assortment of apparel and accessories, including
dressy,
career,
and
casual
sportswear,
dresses,
coats,
shoes,
lingerie,
costume
jewelry
and
handbags.
A
major portion of the Cato concept’s
merchandise is sold under its private label and is produced by various
vendors
in
accordance
with
the
concept’s
specifications.
The
It’s
Fashion
and
It’s
Fashion
Metro
concepts offer fashion with a focus on the latest trendy styles for the entire family at low prices every day.
The
Versona
concept’s
stores
and
e-commerce website
offer
quality fashion
apparel items,
jewelry
and
accessories at
exceptional values
every day.
The
Company’s
stores
range in
size from
2,400 to
19,000
square
feet
and
are
located
primarily
in
strip
shopping
centers
anchored
by
national
discounters
or
market-dominant
grocery
stores.
The
Company
emphasizes
friendly
customer
service
and
coordinated
merchandise
presentations
in
an
appealing
store
environment.
The
Company
offers
its
own
credit
card
and layaway
plan. Credit
and layaway
sales under
the Company’s
plan represented
6% of
retail sales
in
fiscal
2024.
See
Note
13
to
the
Consolidated Financial
Statements, “Reportable
Segment
Information,”
for a discussion of information regarding the Company’s two reportable segments: Retail and Credit.
The
Company
has
operated
Cato-branded
retail
stores
for
78
years.
The
Company originated
as
a
family-owned business and
made its
first initial
public offering
of stock
in 1968.
In 1980,
the Company
went private and in 1987 again conducted an initial public offering.
Business Strategy
The Company’s
primary objective
is to
be the
leading fashion
specialty retailer
for fashion
and value
in its
markets. Management believes the
Company’s success
is dependent upon
its ability to
differentiate
its stores
from department
stores, mass
merchandise discount
stores and
competing specialty
stores. The
key elements of the Company’s business strategy are:
Merchandise
Assortment.
The
Company’s
stores
offer
a
wide
assortment
of
on-trend
apparel
and
accessory items in primarily junior/missy,
plus sizes, men and kids sizes, toddler to
boys size 20 and girls
size 16 with
an emphasis on color,
product coordination and selection.
Colors and styles are
coordinated
and presented so that outfit selection is easily made.
Value
Pricing.
The
Company offers
quality
merchandise that
is
generally priced
below comparable
merchandise
offered
by
department
stores
and
mall
specialty
apparel
chains,
but
is
generally
more
fashionable
than
merchandise
offered
by
discount
stores.
Management
believes
that
the
Company
has
positioned itself as the every day low price leader in its market
segment.
Strip
Shopping
Center
Locations.
The
Company
locates
its
stores
principally
in
convenient
strip
centers anchored by
national discounters or
market-dominant grocery stores
that attract large
numbers of
potential customers.
Customer Service.
Store managers
and sales
associates are
trained
to
provide prompt
and courteous
service and to assist customers in merchandise selection and wardrobe
coordination.
Credit and
Layaway Programs
.
The Company offers
its own credit
card and a
layaway plan to
make
6
the purchase of its merchandise more convenient for its customers.
Merchandising
Merchandising
The
Company
seeks
to
offer
a
broad
selection
of
high
quality
and
exceptional
value
apparel
and
accessories
to
suit
the
various
lifestyles
of
fashion
and
value-conscious
customers.
In
addition,
the
Company strives to offer on-trend fashion in exciting colors with consistent fit and
quality.
The Company’s merchandise lines
include dressy, career,
and casual sportswear, dresses,
coats, shoes,
lingerie, costume
jewelry,
handbags, men’s
wear and
lines for
kids and
infants. The
Company primarily
offers exclusive
merchandise with
fashion and
quality comparable
to mall
specialty stores
at low
prices,
every day.
The Company believes that the collaboration of its merchandising and design teams with an expanded
in-house
product
development
and
direct
sourcing
function
has
enhanced
merchandise
offerings
and
delivers quality,
exclusive on-trend
styles at
lower prices.
The product
development and
direct sourcing
operations provide
research on
emerging fashion
and color
trends, technical
services and
direct sourcing
options.
As a
part of
its merchandising
strategy,
members of
the Company’s
merchandising and
design staff
visit selected
stores to
monitor the
merchandise offerings
of other
retailers, regularly
communicate with
store operations
associates and frequently
confer with
key vendors.
The Company
also takes
aggressive
markdowns
on
slow-selling
merchandise
and
typically
does
not
carry
over
merchandise
to
the
next
season.
Purchasing, Allocation and Distribution
Although
the
Company
purchases
merchandise
from
approximately
620
suppliers,
most
of
its
merchandise is
purchased from
approximately 100
primary vendors.
In
fiscal
2024,
purchases from
the
Company’s
largest
vendor
accounted
for
approximately
14%
of
the
Company’s
total
purchases.
The
Company is
not dependent
on its
largest vendor
or any
other vendor
for merchandise
purchases, and
the
loss of any single vendor or group of
vendors would not have a material adverse effect on
the Company’s
operating results or financial condition. A substantial portion of the Company’s merchandise is sold under
its
private
labels
and
is
produced
by
various
vendors
in
accordance
with
the
Company’s
strict
specifications. The Company sources a majority of its
merchandise directly from manufacturers overseas,
primarily in
Southeast Asia.
These manufacturers
are dependent
on materials
that are
primarily sourced
from
China. The
Company purchases
its
remaining merchandise
from
domestic importers
and
vendors,
which typically
minimizes the
time necessary to
purchase and
obtain shipments; however,
these vendors
are
dependent
on
materials
primarily
sourced
from
China.
The
Company
opened
its
own
overseas
sourcing
operations
in
2014.
Although
a
significant
portion
of
the
Company’s
merchandise
is
manufactured
overseas,
primarily
in
Southeast
Asia,
the
Company
does
not
expect
that
any
economic,
political,
public
health
or
social
unrest in
any
one
country
would
have
a
material
adverse effect
on
the
Company’s
ability
to
obtain
adequate
supplies
of
merchandise.
However,
the
Company
can
give
no
assurance
that
any
changes
or
disruptions
in
its
merchandise
supply
chain
would
not
materially
and
adversely affect the
Company.
See “Risk Factors –
Risks Relating to Our
Business – Because we
source
a
significant
portion
of
our
merchandise
directly
and
indirectly
from
overseas,
we
are
subject
to
risks
associated
with
changes,
disruptions,
increased
costs
or
other
problems
affecting
the
Company’s
merchandise
supply
chain,
risks
associated
with
trade
policies,
including
costs
and
uncertainties
as
the
result of
actual or
threatened tariffs,
the risks
of conducting
international operations
and risks
that affect
the prevailing
social, economic,
political, public
health and
other conditions
in the
areas from
which we
source
merchandise.
These
risks
have
and
could
continue
to
materially
and
adversely
affect
the
7
Company’s business, results of operations and financial condition.”
An
important
component
of
the
Company’s
strategy
is
the
allocation
of
merchandise
to
individual
stores
based
on
an
analysis
of
sales
trends
by
merchandise
category,
customer
profiles
and
climatic
conditions.
A
merchandise
control
system
provides
current
information
on
the
sales
activity
of
each
merchandise
style
in
each
of
the
Company’s
stores.
Point-of-sale
terminals
in
the
stores
collect
and
transmit sales and inventory information to the Company’s central database, permitting timely response to
sales trends on a store-by-store basis.
All merchandise is shipped directly to the Company’s distribution
center in Charlotte, North Carolina,
where it
is inspected
and then
allocated by
the merchandise
distribution staff
for shipment
to individual
stores. The flow
of merchandise from
receipt at
the distribution center
to shipment to
stores is controlled
by
an
online
system.
Shipments
are
made
by
common
carrier,
and
each
store
receives
at
least
one
shipment per
week.
The centralization
of the
Company’s
distribution process
also subjects
it to
risks in
the
event
of
damage
to
or
destruction
of
its
distribution
facility
or
other
disruptions
affecting
the
distribution
center
or
the
flow
of
goods
into
or
out
of
Charlotte,
North
Carolina.
See
“Risk
Factors
–
Risks
Relating
to
Our
Information
Technology,
Related
Systems
and
Cybersecurity
–
A
disruption
or
shutdown of
our centralized
distribution center
or transportation
network could
materially and
adversely
affect our business and results of operations.”
Advertising
The
Company
uses
television,
in-store
signage,
graphics,
a
Company
website,
two
e-commerce
websites
and
social
media
as
its
primary
advertising
media.
The
Company’s
total
advertising
expenditures
were
approximately
0.8%,
1.0%
and
1.0%
of
retail
sales
for
fiscal
years
2024,
2023
and
2022, respectively.
Store Operations
The
Company’s
store
operations
management
team
consists
of
four
territorial
managers,
eight
regional
managers and
70 district
managers. Regional
managers receive
a salary
plus
a
bonus based
on
achieving targeted
goals for
sales and
payroll.
District managers
receive a
salary plus
a bonus
based on
achieving targeted
objectives for district
sales increases. Stores
are typically staffed
with a
manager, two
assistant
managers
and
additional
part-time
sales
associates
depending
on
the
size
of
the
store
and
seasonal
personnel
needs.
In
general,
store
managers
are
paid
a
salary
or
on
an
hourly
basis
as
are
all
other
store
personnel.
Store
managers,
assistant
managers
and
sales
associates
are
eligible
for
monthly
and semi-annual bonuses based on achieving targeted goals for their respective
store’s sales increases.
Store Locations
Most
of
the
Company’s
stores
are
located
in
the
southeastern
United
States in
a
variety of
markets
ranging
from
small
towns
to
large
metropolitan
areas
with
trade
area
populations
of
20,000
or
more.
Stores average approximately 4,500 square feet in size.
All of the
Company’s stores
are leased. Approximately 93% are
located in strip shopping
centers and
7% in enclosed
shopping malls. The
Company typically locates stores
in strip shopping
centers anchored
by
a
national
discounter,
primarily
Walmart
Supercenters,
or
market-dominant
grocery
stores.
The
Company’s strip center locations provide ample parking and shopping convenience for its customers.
The
Company’s
store
development
activities
consist
of
opening
new
stores
in
new
and
existing
markets,
relocating
selected
existing
stores
to
more
desirable
locations
in
the
same
market
area
and
closing underperforming stores. The following table sets forth information
with respect to the Company’s
development activities since fiscal 2020:
8
Store Development
Number of Stores
Beginning of
Number
Number
Number of Stores
Fiscal Year
Year
Opened
Closed
End of Year
2020………………….……...………….
1,281
76
27
1,330
2021………………….……...………….
1,330
6
25
1,311
2022……………………….……...…….
1,311
19
50
1,280
2023…………....………….……...…….
1,280
9
111
1,178
2024………….………...….……...…….
1,178
5
66
1,117
The Company periodically reviews its store base to determine whether any particular store should be
closed based on its sales
trends and profitability.
The Company intends to continue this
review process to
identify underperforming stores.
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for 3.4%, 3.4% and 3.1% of
retail sales in
fiscal 2024,
2023 and
2022, respectively.
The Company’s
bad debt
expense,
net of
recovery,
was 3.9%,
3.6% and 2.0% of credit sales in fiscal 2024, 2023 and 2022, respectively.
Customers applying for the Company’s credit card are approved for credit if
they have a satisfactory
credit
record
and
the
Company
has
positively
assessed
the
customer’s
ability
to
make
the
required
minimum payment.
Customers are required to make
minimum monthly payments based on
their account
balances.
If
the
balance
is
not
paid
in
full
each
month,
the
Company
assesses
the
customer
a
finance
charge.
If
payments
are
not
received
on
time,
the
customer
is
assessed
a
late
fee
subject
to
regulatory
limits.
The
Company
introduced
its
loyalty
program
in
October
2021.
The
loyalty
program
credits
the
customer points based on their purchases of
merchandise using the Company’s proprietary
credit card.
A
point is earned for every dollar spent on merchandise purchases.
A
$5.00 rewards card is earned for every
250
points
accumulated
by
the
customer.
The
rewards
card
expires
90
days
after
the
rewards
card
is
issued.
The
impact
of
the
loyalty
program
is
immaterial
to
the
fiscal
2024
financial
statements.
The
loyalty
program
is
accounted
for
in
accordance
with
ASU
2014-09,
Revenue
from
Contracts
with
Customers (Topic 606)
.
Layaway Plan
Under
the
Company’s
layaway
plan,
merchandise
is
set
aside
for
customers
who
agree
to
make
periodic
payments.
The
Company adds
a
nonrefundable
administrative
fee
to
each
layaway
sale.
If
no
payment is made within four weeks,
the customer is considered to have
defaulted, and the merchandise is
returned
to
the
selling floor
and again
offered
for
sale, often
at
a reduced
price. All
payments made
by
customers who subsequently default on their layaway purchase are returned to the customer upon request,
less the administrative fee and a restocking fee.
The Company defers recognition of layaway sales to the accounting period when the customer picks
up
and
completely pays
for
layaway
merchandise.
Administrative fees
are
recognized
in
the
period
in
which the
layaway is
initiated.
Recognition of
restocking fees occurs
in the
accounting period
when the
customer
defaults
on
the
layaway
purchase.
Layaway
sales
represented
approximately
2.8%,
3.0%
and
2.7% of retail sales in fiscal 2024, 2023 and 2022, respectively.
9
Information Technology Systems
The
Company’s
information
technology
systems
provide
daily
financial
and
merchandising
information
that
is
used
by
management to
enhance
the
timeliness
and
effectiveness
of
purchasing
and
pricing
decisions.
Management
uses
a
daily
report
comparing
actual
sales
with
planned
sales
and
a
weekly
ranking
report
to
monitor
and
control
purchasing
decisions.
Weekly
reports
are
also
produced
which reflect
sales, weeks
of
supply of
inventory and
other critical
data by
product categories,
by store
and by various levels of
responsibility reporting. Purchases are made based
on projected sales, but can
be
modified to accommodate unexpected increases or decreases in demand
for a particular item.
Sales information is
projected by merchandise
category and, in
some cases, is
further projected and
actual
performance measured
by
stock
keeping
unit
(SKU).
Merchandise
allocation
models
are
used
to
distribute
merchandise
to
individual
stores
based
upon
historical
sales
trends,
climatic
conditions,
customer demographics and targeted inventory turnover rates.
Competition
The women’s
retail apparel industry is
highly competitive. The Company believes
that the principal
competitive factors
in its
industry include
merchandise assortment
and presentation,
fashion, price,
store
location
and
customer
service. The
Company competes
with
retail
chains that
operate similar
women’s
apparel specialty stores. In addition, the Company competes with
mass merchandise chains, discount store
chains, major
department stores, off
-price retailers
and internet-based
retailers.
Although we
believe we
compete favorably
with respect
to the
principal competitive
factors described
above, many
of our
direct
and
indirect
competitors
are
well-established
national,
regional
or
local
chains,
and
some
have
substantially greater
financial, marketing
and other
resources.
The Company
expects its
stores in
larger
cities and metropolitan areas to face more intense competition.
Seasonality
Due
to
the
seasonal
nature
of
the
retail
business,
the
Company
has
historically
experienced
and
expects to continue to
experience seasonal fluctuations in its
revenues, operating income and
net income.
Our stores
typically generate a
higher percentage of
our annual net
sales and
profitability in the
first and
second quarters of
our fiscal year compared
to other quarters.
Results of a
period shorter than a
full year
may
not
be
indicative
of
results
expected
for
the
entire
year.
Furthermore,
the
seasonal
nature
of
our
business may affect comparisons between periods.
Regulation
The
Company’s
business
and
operations
subject
it
to
a
wide
range
of
local,
state,
national
and
international laws
and regulations
in a
variety of
areas, including
but not
limited to,
trade, licensing
and
permit
requirements,
import
and
export
matters,
privacy
and
data
protection,
credit
regulation,
environmental
matters,
recordkeeping
and
information
management,
tariffs,
taxes,
intellectual
property
and anti-corruption.
Though compliance with these
laws and regulations has
not had a
material effect on
our capital
expenditures, results
of operations
or competitive
position in
fiscal 2024,
the Company
faces
ongoing
risks
related
to
its
efforts
to
comply
with
these
laws
and
regulations
and
risks
related
to
noncompliance,
as
discussed
generally
below
throughout
the
“Risk
Factors”
section
and
in
particular
under
“Risk Factors – Risks Relating to Accounting and Legal Matters –
Our business operations subject
us
to
legal
compliance and
litigation
risks, as
well as
regulations and
regulatory enforcement
priorities,
which
could
result
in
increased
costs
or
liabilities,
divert
our
management’s
attention
or
otherwise
adversely affect our business, results of operations and financial condition.”
10
Human Capital
As
of
February
1,
2025,
the
Company
employed
approximately
7,000
full-time
and
part-time
associates. The
Company also
employs additional
part-time associates
during the
peak retailing
seasons.
The
Company’s
full-time
associates
are
engaged
in
various
executive,
operating,
and
administrative
functions in
the Home
Office
and distribution
center and
the remainder
are engaged
in store
operations.
The Company is
not a party
to any
collective bargaining agreements
and considers its
associate relations
to
be
good.
The
Company
offers
a
broad
range
of
Company-paid
benefits
to
its
associates
including
medical and
dental plans,
paid vacation,
a 401(k)
plan, Employee
Stock Purchase
Plan, Employee
Stock
Ownership
Plan,
disability
insurance,
associate
assistance
programs,
life
insurance
and
an
associate
discount.
The
level
of
benefits
and
eligibility
vary
depending
on
the
associate’s
full-time
or
part-time
status,
date
of
hire,
length
of
service
and
level
of
pay.
The
Company
endeavors
to
promote
an
environment where all associates can develop and flourish, to provide opportunities for advancement, and
to
treat
all
of
its
associates
with
dignity
and
respect.
The
Company
constantly
strives
to
improve
its
training
programs
to
develop
associates.
Over
80%
of
store
and
field
management
are
promoted
from
within,
allowing the
Company to
internally
staff
its
store
base.
The
Company has
training
programs
at
each
level
of
store
operations.
The
Company
also
performs
ongoing
reviews
of
its
safety
protocols,
including measures to promote the health and safety of its associates.
Item 1A.
Risk Factors:
An investment in our common stock involves numerous types of risks.
You
should carefully consider
the
following
risk
factors,
in
addition
to
the
other
information
contained
in
this
report,
including
the
disclosures
under
“Forward-looking
Information”
above
in
evaluating
our
Company
and
any
potential
investment
in
our
common
stock.
If
any
of
the
following
risks
or
uncertainties
occur
or
persist,
our
business, financial condition and
operating results could
be materially and
adversely affected, the
trading
price
of
our
common
stock
could
decline
and
you
could
lose
all
or
a
part
of
your
investment
in
our
common
stock.
The
risks
and
uncertainties
described
in
this
section
are
not
the
only
ones
facing
us.
Additional risks
and uncertainties
not presently
known to
us or
that we
currently deem
immaterial
may
also materially
and adversely
affect
our business,
operating results,
financial condition
and value
of our
common stock.
Risks Relating to Our Business:
Because we source a significant portion of our merchandise directly
and indirectly from overseas,
we are subject to risks associated with changes, disruptions, increased
costs or other problems
affecting the Company’s merchandise supply chain, risks associated with trade policies, including
costs and uncertainties as the result of actual or threatened tariffs, the risks of conducting
international operations and risks that affect the prevailing social, economic, political,
public
health and other conditions in the areas from which we source
merchandise. These risks have and
could continue to materially and adversely affect the Company’s business, results of operations
and financial condition.
We
do
not
own
or
operate
any
manufacturing
facilities.
As
a
result,
the
continued
success
of
our
operations
is
tied
to
our
timely
receipt
of
quality
merchandise
from
third
party
manufacturers
at
a
reasonable
cost.
A
significant
amount
of
our
merchandise
is
manufactured
overseas,
principally
in
Southeast
Asia.
We
are
subject
to
supply
chain
disruptions
affecting
transit
times
and
costs,
including
issues related
to
a sustained
drought in
Panama that
is
causing longer
transit times
through the
Panama
Canal
and
limiting
the
number
of
containers
on
a
vessel
due
to
vessel
draft
restrictions.
We
also
face
disruptions from
issues related
to vessels
transiting the
Suez Canal
and Red
Sea, which
are being
forced
to travel a
much longer distance around
the Cape of
Good Hope due
to the hostilities
in the Middle
East.
These
continued
issues
have
and
may
continue
to
drive
up
our
ocean
freight
costs,
delay
merchandise
11
deliveries,
and
impact
our
ability
to
access
the
already
limited
supply
of
ocean
container
shipping
capacity that
we require.
Additionally,
we may
be subject
to additional
costs related
to our
supply chain
such as
increased facility fees,
fuel, peak surcharg
es and
other additional charges
to transport
our goods,
which may increase our costs. We
also are subject to domestic supply chain disruptions, including lack of
domestic
intermodal
transportation
(trucks
and
drivers),
domestic
port
congestion,
including
increased
dwell
times for
incoming container
ships, lack
of container
yard capacity
and lack
of
available drayage
from the ports and
other conditions that impact our
domestic supply chain. These supply chain
risks have
and
may
continue
to
result
in
both
higher
costs
to
transport
our
merchandise and
delayed
merchandise
arrivals to our
stores, which adversely affect
our ability to
sell this merchandise
and increase markdowns
of it.
We
directly import
some of
this merchandise
and indirectly
import the
remaining merchandise
from
domestic vendors who acquire the merchandise from foreign
sources. Further, our third-party
vendors are
dependent
on
materials
primarily
sourced
from
China,
and
our
costs
for
these
materials
are
likely
to
increase as
a result
of newly implemented
tariffs on
Chinese products. We
are subject
to numerous
risks
that can
cause significant
delays or
interruptions in
the supply
of our
merchandise or
increase our
costs.
These risks include political unrest,
labor disputes, terrorism, war,
public health threats, including but
not
limited
to
communicable diseases
(such
as
COVID-19 or
other
pandemics), financial
or
other
forms
of
instability or
other events
resulting in
the
disruption of
trade from
countries
affecting our
supply chain,
increased
security
requirements
for
imported
merchandise,
or
the
imposition
of,
or
changes
in,
laws,
regulations or
changes in
duties, quotas, tariffs,
taxes or
governmental policies regarding
or responses
to
these
matters
or
other
factors
affecting
the
availability
or
cost
of
imports.
In
addition,
geopolitical
tensions,
sanctions,
prohibitions,
additional
actual
or
threatened
tariffs,
compliance
and
reporting
requirements
have resulted
in
increased
costs
associated
with
merchandise
produced
in
certain
regions.
Any new sanctions, tariffs and reporting requirements enacted in the future may further
increase our costs
associated
with
sourcing
products
from
those
regions
or
limit
our
ability
to
procure
the
products
we
source, and
our ability
to source
these products
from other
regions may
be limited
or result
in increased
sourcing costs. If we are unable to
pass these increased sourcing costs onto our vendors or
our customers,
it may adversely impact our results of operations.
Any actual or perceived deterioration in the conditions that drive
consumer confidence and
spending have and may continue to materially and adversely affect consumer demand
for our
apparel and accessories and our results of operations.
Consumer
spending
habits,
including
spending
for
our
apparel
and
accessories,
are
affected
by,
among other
things, prevailing
social, economic,
political and
public health
conditions and
uncertainties
(such
as
matters
under
debate
in
the
U.S.
from
time
to
time
regarding
budgetary,
spending
and
tax
policies),
levels
of
employment, fuel,
inflation,
interest
rates,
energy
and
food
costs,
salaries
and
wage
rates
and
other
sources
of
income,
tax
rates,
home
values,
consumer
net
worth,
the
availability
of
consumer
credit,
consumer
confidence
and
consumer
perceptions
of
adverse
changes
in
or
trends
affecting any of these conditions. Any perception that these conditions may be worsening or continuing to
trend negatively
may significantly
weaken many
of
these drivers
of consumer
spending habits.
Adverse
perceptions of
these conditions
or
uncertainties regarding
them also
generally cause
consumers to
defer
purchases
of
discretionary
items,
such
as
our
merchandise,
or
to
purchase
cheaper
alternatives
to
our
merchandise, all
of which
may also
adversely affect
our
net sales
and results
of operations.
In addition,
numerous events,
whether or
not
related to
actual
economic conditions,
such
as downturns
in
the
stock
markets,
acts
of
war
or
terrorism,
geopolitical
uncertainty
or
unrest
or
natural
disasters,
outbreaks
of
disease
or
similar
events,
may
also
dampen
consumer
confidence,
and
accordingly,
lead
to
reduced
consumer spending.
Any of
these events
could have
a material
adverse effect
on our
business, results
of
operations and financial condition.
12
Continued high interest rates have and may continue to adversely
impact our customers’
discretionary income or willingness to purchase discretionary items, which
may adversely affect
our business, margins, results of operations and financial condition.
Continued high interest rates have adversely affected our customers’ discretionary income, in part due
to increased
interest costs
associated with
credit accounts
including revolving
credit accounts,
car loans,
mortgage loans and other credit accounts. In
addition, the increased payments due to higher
interest rates,
combined
with
continued
inflationary
pressures
on
non-discretionary
items,
including
food,
fuel
and
shelter reduce
our customers’
discretionary income
and their
willingness to
purchase discretionary items
such as apparel, shoes or jewelry products. Any reduction in our customers’ discretionary
spending on our
products
could
erode
our
sales
volume
and
adversely
affect
our
results
of
operations
and
financial
condition.
Increased product costs, freight costs, wage increases and operating
costs due to inflation and
other factors, as well as limitations in our ability to offset these cost increases by increasing
the
retail prices of our products or otherwise, have and may continue to adversely
affect our business,
margins, results of operations and financial condition.
Tight
labor markets
have caused
wages to
increase
at the
store, distribution
center and
home office
levels, as
well as
making it more
difficult to
hire new
associates and
retain existing associates.
The tight
labor
market
and
continued
inflation
also
are
driving
up
our
operating
costs.
In
addition,
inflationary
pressures on labor and raw materials
used to make our products may continue
to increase the cost we
pay
for
our
products.
If
we
are
unable
to
offset
the
effects
of
these
increased
costs
to
our
business
by
increasing the
retail prices
of our
products, reducing other
expenses or
otherwise, our business,
margins,
results of operations and financial condition may be adversely affected.
Our
ability
to
raise
retail
prices
in
response
to
these
cost
increases
is
limited,
in
part
due
to
our
customers’
unwillingness
to
pay
higher
prices
for
discretionary
items
in
light
of
actual
or
perceived
effects
of
inflation
in
increasing
our
customers’
cost
of
essential
items
and
diminishing
customers’
disposable income, sentiment or financial outlook. Moreover,
the persistence or worsening of inflationary
conditions
and
high
interest
rates
could
also
lead
our
customers
to
reduce
their
amount
of
current
discretionary
spending
on
our
products
even
in
the
absence
of
price
increases,
which
could
erode
our
sales volume and adversely affect our results of operations and financial condition.
The operation of our sourcing offices in Asia presents increased operational and
legal risks.
In October 2014, we established our own sourcing offices in Asia. If our sourcing offices are unable to
successfully oversee
merchandise production
to
ensure that
product is
produced on
time
and
within the
Company’s
specifications,
our
business,
brand,
reputation,
costs,
results
of
operations
and
financial
condition could be materially and adversely affected.
In addition, the current business environment, including geopolitical issues, make operating in
certain
Asian
markets
challenging.
To
the
extent
we
explore
other
countries
to
source
our
product
or
explore
increasing
the
amount
of
product
sourced
from
current
countries,
we
may
be
subject
to
additional
increased
legal
and
operational risks
associated
with
doing
business
in
new
countries
or
increasing our
business in other countries.
Further, the activities conducted by
our sourcing offices outside the
United States subject us to foreign
operational
risks,
as
well
as
U.S.
and
international
regulations
and
compliance
risks,
as
discussed
elsewhere
in
this
“Risk
Factors”
section,
in
particular
below
under
“Risk
Factors
–
Risks
Relating
to
Accounting
and
Legal
Matters
–
Our
business
operations
subject
us
to
legal
compliance
and
litigation
risks, as well as regulations and regulatory enforcement priorities, which could result in increased costs or
13
liabilities,
divert
our
management’s
attention
or
otherwise
adversely
affect
our
business,
results
of
operations and financial condition.
Extreme weather, natural disasters, impacts of climate change, public health threats or similar
events have and may continue to adversely affect our sales or operations from time
to time.
Extreme
changes
in
weather,
natural
disasters,
physical
impacts
of
climate
change,
public
health
threats or
similar events
can influence
customer trends
and shopping
habits. For
example, heavy
rainfall
or other extreme weather conditions, including but
not limited to winter weather over a
prolonged period,
might
make
it
difficult
for
our
customers
to
travel
to
our
stores
and
thereby
reduce
our
sales
and
profitability.
Our business is
also susceptible to
unseasonable weather conditions. For
example, extended
periods of unseasonably
warm temperatures during the
winter season or
cool weather during
the summer
season can
render a
portion of
our inventory
incompatible with
those unseasonable
conditions. Reduced
sales
from extreme
or
prolonged unseasonable
weather
conditions
would
adversely affect
our
business.
The occurrence or
threat of extreme
weather, natural
disasters, power outages, terrorist
acts, outbreaks of
flu
or
other
communicable
diseases
(such
as
COVID-19)
or
other
catastrophic
events
could
reduce
customer
traffic
in
our
stores
and
likewise
disrupt
our
ability
to
conduct
operations,
which
would
materially and adversely affect us.
The
long-term
impacts
of
global
climate
change
are
expected
to
be
unpredictable
and
widespread.
The
potential
impacts
of
climate
change
present
a
variety
of
potential
risks.
The
physical
effects
of
climate
change
such
as
extreme
weather
and
drought
could
adversely
affect
our
results
of
operations,
including disrupting our
supply chain, the
costs of our
products and negatively
impacting our workforce.
In
addition,
the
potential
impacts
of
climate
change
present
transition
risks
including
regulatory
and
reputational risks. The potential cost of compliance with any future regulations may substantially increase
our costs. For example, the
use of certain commodities in
the manufacture of our products
and energy we
use
in
our
operations
may
face
increased
regulation
due
to
climate
change
or
other
environmental
concerns, which could increase our costs. Furthermore, any failure of or perceived failure by us to comply
with
any
potential
future
climate
change
regulatory
requirements,
including
stakeholder
expectations
regarding the environment, could adversely affect our reputation and results of operations.
Our ability to attract consumers and grow our revenues is dependent
on the success of our store
location strategy and our ability to successfully open new stores as planned.
Our sales are
dependent in part
on the location
of our stores
in shopping centers
and malls where
we
believe
our
consumers
and
potential
consumers
shop.
In
addition,
our
ability
to
grow
our
revenues
has
been substantially dependent on our ability to secure space for and open new stores in attractive locations.
Shopping centers
and malls
where we
currently operate
existing stores
or seek
to
open new
stores have
been and
may continue
to be
adversely affected
by,
among other
things, general
economic downturns
or
those
particularly affecting
the
commercial real
estate industry,
the
closing of
anchor
stores, changes
in
tenant
mix
and
changes
in
customer
shopping
preferences,
including
but
not
limited
to
an
increase
in
preference for online
versus in-person shopping. To
take advantage of
consumer traffic and
the shopping
preferences
of
our
consumers,
we
need
to
maintain
and
acquire
stores
in
desirable
locations
where
competition for suitable
store locations is
intense. A decline
in customer popularity
of the
strip shopping
centers where we
generally locate our
stores or in
availability of space in
desirable centers and
locations,
or an increase in the cost of such desired space, has limited and could further limit our ability to open new
stores,
adversely
affecting
consumer
traffic
and
reducing
our
sales
and
net
earnings
or
increasing
our
operating costs.
Our ability
to open
and operate
new stores
depends on
many factors,
some of
which are
beyond our
control.
These
factors
include,
but
are
not
limited
to,
our
ability
to
identify
suitable
store
locations,
negotiate acceptable lease terms, secure
necessary governmental permits and approvals and
hire and train
appropriate store
personnel. In
addition, our
continued expansion
into new
regions of
the country
where
14
we
have
not
done
business
before
may
present
new
challenges
in
competition,
distribution
and
merchandising as we enter these new markets. Our failure to successfully and timely
execute our plans for
opening new stores
or the failure
of these stores
to perform up
to our expectations
could adversely affect
our business, results of operations and financial condition.
The inability of third-party vendors to produce goods on time and to
the Company’s specifications
may adversely affect the Company’s business, results of operations and financial condition.
Our
dependence
on
third-party
vendors
to
manufacture
and
supply
our
merchandise
subjects
us
to
numerous risks that our vendors will fail to perform as we expect. For example, the deterioration in any of
our key
vendors’ financial condition,
their failure to
ship merchandise in
a timely manner
that meets
our
specifications,
or
other
failures
to
follow
our
vendor
guidelines
or
comply
with
applicable
laws
and
regulations,
including
compliant
labor,
environmental
practices
and
product
safety,
could
expose
us
to
operational, quality,
competitive, reputational
and legal
risks. If
we are
not able
to timely
or
adequately
replace the merchandise we currently
source with merchandise produced elsewhere,
or if our vendors fail
to
perform as
we
expect,
our
business, results
of
operations
and
financial
condition
could
be
adversely
affected.
Activities
conducted
by
us
or
on
our
behalf
outside
the
United
States
further
subject
us
to
numerous
U.S.
and
international
regulations
and
compliance
risks,
as
discussed
below
under
“Risk
Factors –
Risks Relating
to Accounting
and Legal
Matters –
Our business
operations subject
us to
legal
compliance and litigation
risks, as well
as regulations and
regulatory enforcement priorities,
which could
result in increased costs or liabilities,
divert our management’s attention
or otherwise adversely affect our
business, results of operations and financial condition.”
If we are unable to anticipate, identify and respond to rapidly changing
fashion trends and
customer demands in a timely manner, our business and results of operations could materially
suffer.
Customer
tastes
and
fashion
trends,
particularly
for
women’s
apparel,
are
volatile,
tend
to
change
rapidly
and
cannot
be
predicted
with
certainty.
Our
success
depends
in
part
upon
our
ability
to
consistently anticipate, design and respond to changing merchandise trends and consumer preferences in a
timely
manner.
Accordingly,
any
failure
by
us
to
anticipate,
identify,
design
and
respond
to
changing
fashion
trends
could
adversely
affect
consumer
acceptance
of
our
merchandise,
which
in
turn
could
adversely affect our
business, results of
operations and our
image with our
customers. If we
miscalculate
either the
market for
our merchandise
or our
customers’ tastes or
purchasing habits, we
may be required
to sell a significant amount of inventory at below-average markups over
cost, or below cost, which would
adversely affect our margins and results of operations.
Existing and increased competition in the women’s retail apparel industry may negatively impact
our business, results of operations, financial condition and
market share.
The
women’s
retail
apparel
industry
is
highly
competitive.
We
compete
primarily
with
discount
stores,
mass
merchandisers,
department
stores,
off-price
retailers,
specialty
stores
and
internet-based
retailers, many of which have substantially greater financial, marketing and other resources
than we have.
Many
of
our
competitors
offer
frequent
promotions
and
reduce
their
selling
prices.
In
some
cases,
our
competitors are
expanding into markets
in which
we have a
significant market presence.
In addition, our
competitors
also
compete
for
the
same
retail
store
space.
As
a
result
of
this
competition,
we
may
experience
pricing
pressures,
increased
marketing
expenditures,
increased
costs
to
open
new
stores,
as
well
as
loss
of
market
share,
which
could
materially
and
adversely
affect
our
business,
results
of
operations and financial condition.
15
Fluctuations in the price, availability and quality of inventory have and
may continue to result in
higher cost of goods, which the Company may not be able to pass on
to its customers.
The price
and availability
of raw
materials may
be impacted
by demand,
regulation, tariffs,
weather
and
crop
yields,
currency
value
fluctuations,
inflation,
as
well
as
other
factors.
Additionally,
manufacturers
have
and
may
continue
to
have
increases
in
other
manufacturing
costs,
such
as
transportation,
labor
and
benefit
costs.
These
increases
in
production
costs
may
result
in
higher
merchandise costs to the Company.
Due to the Company’s
limited flexibility in price point, the
Company
may
not
be
able
to
pass
on
those
cost
increases
to
the
consumer,
which
could
have
a
material
adverse
effect on our margins, results of operations and financial condition.
Our inability to effectively manage inventory has impacted and may continue
to negatively impact
our gross margin and our overall results of operations.
Factors
affecting
sales
include
fashion
trends,
customer
preferences,
calendar
and
holiday
shifts,
competition,
weather,
supply
chain
issues,
actual
or
potential
public
health
threats
and
economic
conditions, including
but not
limited to
continued high
interest rates
and persistent
inflation. In
addition,
merchandise
must
be
ordered
well
in
advance
of
the
applicable
selling
season
and
before
trends
are
confirmed
by
sales.
When
we
are
not
able
to
accurately predict
customers’ preferences
for
our
fashion
items, we may have too
much inventory, which
may cause excessive markdowns. When we
are unable to
accurately
predict
demand
for
our
merchandise,
we
may
end
up
with
inventory
shortages,
resulting
in
missed
sales.
Our
inability
to
effectively
manage
inventory
may
continue
to
adversely
affect
our
gross
margin and results of operations.
Adverse developments affecting the financial services industry or events or concerns
involving
liquidity, defaults or non-performance by financial institutions or transactional counterparties
could adversely affect our business, financial condition or results of operations.
Actual
events
involving limited
liquidity,
defaults,
non-performance or
other
adverse
developments
that affect
financial institutions,
transactional counterparties
or other
companies in
the financial
services
industry
or
the
financial
services
industry
generally,
or
concerns
or
rumors
about
any
events
of
these
kinds
or
other
similar
risks,
have
in
the
past
and
may
in
the
future
lead
to
sporadic
or
market-wide
liquidity problems
that
could adversely
affect
us. If
any of
our transactional
counterparties, such
as
our
merchandise vendors
and their
factors, our
landlords, our
payment processors
including credit
card, gift
card and checks, our transportation vendors and other vendors that provide services and supplies to us, are
unable to
access funds
or lending
arrangements with
such
a financial
institution, such
parties’ ability
to
pay their obligations
could be adversely
affected. If this
occurred we could
be adversely impacted
by not
receiving
the
product
we
ordered
or
the
payments
generated
by
our
sales,
by
not
being
able
to
receive
products to our distribution center or
our stores in a timely
manner or at all, or
by not being able to
retain
services
from third
parties that
we
require. These
impacts
may adversely
affect
our
financial condition,
results
of
operations
and
our
ability
to
execute
our
business
strategy.
Furthermore,
these
adverse
developments affecting
the
financial services
industry or
related perceptions
may negatively
impact our
customers’
discretionary
income
or
our
customers’
willingness
to
purchase
apparel,
shoes
or
jewelry
products. Any
reduction in
our customers’
discretionary spending
on our
products could
erode our
sales
volume and adversely affect our results of operations and financial condition.
The competitive hiring environment and our failure to attract, train,
and retain skilled personnel
has and could continue to adversely affect our business and our financial condition.
Like most
retailers, we experience
significant associate turnover
rates, particularly among
store sales
associates
and
managers.
Moreover,
attracting
and
retaining
skilled
personnel
has
been
and
could
continue
to
be
challenging.
To
offset
this
turnover
as
well
as
support
new
store
growth,
we
must
continually attract, hire and train new store associates to meet our staffing needs.
A significant increase in
16
the
turnover
rate
among
our
store
sales
associates
and
managers
would
increase
our
recruiting
and
training costs, as well
as possibly cause a
decrease in our store
operating efficiency and productivity.
We
compete
for
qualified
store
associates,
as
well
as
experienced
management
personnel,
with
other
companies in our industry or other industries, many of whom
have greater financial resources than we do.
In
addition,
we
depend
on
key
management
personnel
to
oversee
the
operational
divisions
of
the
Company
for
the
support
of
our
existing
business
and
future
expansion.
The
success
of
executing
our
business strategy
depends in
large part
on retaining
key management.
We
compete for
key management
personnel
with
other
retailers, and
our
inability
to
attract
and
retain
qualified personnel
could
limit
our
ability to grow.
If
we
are
unable
to
retain
our
key management
and
store
associates or
attract, train,
or
retain
other
skilled
personnel in
the
future,
we
may not
be
able
to
service
our
customers effectively
or
execute
our
business strategy, which could adversely affect our business, operating results and financial condition.
The currently
competitive environment
for hiring
new associates
and retaining
existing associates
is
causing
wages
to
increase,
which
has
affected
and
could
continue
to
adversely
affect
our
business,
margins, operating results and financial condition if we cannot offset these cost increases.
If the Company is unable to successfully integrate new businesses into
its existing business, the
Company’s financial condition and results of operations will be adversely affected.
The Company’s
long-term business
strategy includes
opportunistic growth
through the
development
of
new
store
concepts.
This
growth
may
require
significant
capital
expenditures
and
management
attention. The Company may not
realize any of the anticipated
benefits of a new business
and integration
costs
may
exceed
anticipated
amounts.
We
have
incurred
substantial
financial
commitments
and
fixed
costs related to our retail stores that we will not be able to
recover if our stores are not successful and that
have
resulted
in
and
could
result
in
future
impairment
charges.
If
we
cannot
successfully
execute
our
growth strategies, our financial condition and results of operations may
be adversely impacted.
Risks Relating to Our Information Technology, Related Systems and Cybersecurity:
A failure or disruption relating to our information technology systems
could adversely affect our
business.
We
rely
on
our
existing
information
technology
systems
for
merchandise
operations,
including
merchandise planning,
replenishment, pricing, ordering,
markdowns and
product life
cycle management.
In addition to
merchandise operations, we utilize
our information technology systems for
our distribution
processes,
as
well
as
our
financial
systems,
including
accounts
payable,
general
ledger,
accounts
receivable,
sales, banking,
inventory
and
fixed
assets. Despite
the
precautions we
take,
our
information
systems are or may be vulnerable to disruption
or failure from numerous events, including but not limited
to, natural disasters,
severe weather conditions,
power outages, technical malfunctions,
cyberattacks, acts
of
war
or
terrorism,
similar
catastrophic
events
or
other
causes
beyond
our
control
or
that
we
fail
to
anticipate. Any disruption or failure in the operation of our information technology systems, our failure to
continue
to
upgrade
or
improve
such
systems,
or
the
cost
associated
with
maintaining,
repairing
or
improving
these
systems,
could
adversely
affect
our
business,
results
of
operations
and
financial
condition. Modifications and/or upgrades to
our current information technology systems may
also disrupt
our operations.
17
A security breach that results in unauthorized access to or disclosure
of employee, Company or
customer information or a ransomware attack could adversely affect our costs, reputation
and
results of operations, and efforts to mitigate these risks may continue to increase
our costs.
The
protection
of
employee,
Company
and
customer
data
is
critical
to
the
Company.
Any
security
breach, mishandling, human or programming error or other event that results in the misappropriation, loss
or
other
unauthorized
disclosure
of
employee,
Company
or
customer
information,
including
but
not
limited
to
credit
card
data
or
other
personally
identifiable
information,
could
severely
damage
the
Company's reputation, expose it to
remediation and other costs
and the risks of legal
proceedings, disrupt
its
operations
and
otherwise
adversely
affect
the
Company's
business
and
financial
condition.
The
security of certain of
this information also depends on
the ability of third-party
service providers, such as
those
we
use
to
process
credit
and
debit
card
payments
as
described
below
under
“We
are
subject
to
payment-related
risks,”
to
properly
handle
and
protect
such
information.
Our
information
systems
and
those of our
third-party service providers are
subject to ongoing and
persistent cybersecurity threats from
those seeking unauthorized
access through means
which are
continually evolving and
may be difficult
to
anticipate or detect
for long periods
of time. Despite
measures the Company
takes to
protect confidential
information against
unauthorized access
or disclosure, which
measures are
ongoing and
may continue
to
increase
our
costs,
there
is
no
assurance
that
such
measures
will
prevent
the
compromise
of
such
information. If
our measures
are unsuccessful
due to
cyberattacks or
otherwise, it
could have
a material
adverse
effect
on
the
Company's
reputation,
business,
operating
results,
financial
condition
and
cash
flows. In addition, the Company may be subject to ransomware attacks, which if successful could
result in
disruptions
to
the
Company’s
operations
and
expose
it
to
remediation
and
other
costs,
risks
of
legal
proceedings,
damage the
Company’s
reputation
and
otherwise adversely
affect
the
Company's business
and financial condition.
A disruption or shutdown of our centralized distribution center or
transportation network could
materially and adversely affect our business and results of operations.
The distribution
of our
products is centralized
in one
distribution center in
Charlotte, North Carolina
and
distributed
through
our
network
of
third-party
freight
carriers.
The
merchandise
we
purchase
is
shipped directly to
our distribution center,
where it is
prepared for shipment
to the appropriate
stores and
subsequently
delivered
to
the
stores
by
our
third-party
freight
carriers.
If
the
distribution
center
or
our
third-party freight carriers were
to be shut down
or lose significant capacity
for any reason, including but
not limited to, any of the causes described above under “A failure or disruption
relating to our information
technology
systems
could
adversely
affect
our
business,”
our
operations
would
likely
be
seriously
disrupted. Such problems could occur as
the result of any loss,
destruction or impairment of our ability to
use
our
distribution center,
as
well
as
any broader
problem generally
affecting
the ability
to
ship
goods
into our distribution center
or deliver goods to
our stores. As
a result, we
could incur significantly higher
costs and longer lead
times associated with distributing our
products to our stores during
the time it takes
for us to reopen or
replace the distribution center and/or our transportation network. Any such
occurrence
could adversely affect our business, results of operations and financial condition.
The Company’s failure to successfully operate its e-commerce websites or fulfill customer
expectations could adversely impact customer satisfaction, our reputation
and our business.
Although the
Company's e-commerce
platform provides
another channel
to
drive incremental
sales,
provides
existing
customers
the
online
shopping
experience
and
introduces
the
Company
to
a
new
customer base,
it also
exposes us
to numerous
risks. We
are subject
to potential
failures in
the efficient
and uninterrupted operation
of our
websites, customer contact center
or our distribution
center, including
system
failures
caused
by
telecommunication
system
providers,
order
volumes
that
exceed
our
present
system capabilities,
electrical outages,
mechanical problems and
human error.
Our e-commerce
platform
may also expose us
to greater potential for
security or data
breaches involving the unauthorized access
to
or
disclosure
of
customer
information,
as
discussed
above
under
“A
security
breach
that
results
in
18
unauthorized
access
to
or
disclosure
of
employee,
Company
or
customer
information
or
a
ransomware
attack could
adversely affect
our costs,
reputation and
results of
operations, and
efforts to
mitigate these
risks may
continue to
increase our
costs.” We
are also
subject to
risk related
to delays
or failures
in the
performance of third parties, such as shipping companies, including
delays associated with labor strikes or
slowdowns or
adverse weather
conditions. If
the Company
does not
successfully meet
the challenges
of
operating
e-commerce
websites
or
fulfilling
customer
expectations,
the
Company's
business
and
sales
could be adversely affected.
We are subject to payment-related risks.
We
accept payments using
a variety
of methods,
including third-party credit
cards, our
own branded
credit
card,
debit
cards,
gift
cards
and
physical
and
electronic
bank
checks.
For
existing
and
future
payment methods we offer to our customers, we are subject to fraud risk and
to additional regulations and
compliance
requirements
(including
obligations
to
implement
enhanced
authentication
processes
that
could
result
in
increased
costs
and
reduce
the
ease
of
use
of
certain
payment
methods).
For
certain
payment
methods,
including
credit
and
debit
cards,
we
pay
interchange
and
other
fees,
which
have
increased
from
time
to
time
and
may
continue
to
increase
over
time,
raising
our
operating
costs
and
lowering profitability. We
rely on third-party service providers for payment processing
services, including
the
processing
of
credit
and
debit
cards.
In
each
case,
it
could
disrupt
our
business if
these
third-party
service
providers
become
unwilling
or
unable
to
provide
these
services
to
us.
We
are
also
subject
to
payment
card
association
operating
rules,
including
data
security
rules,
certification
requirements
and
rules governing
electronic funds
transfers, which
could change
or be
reinterpreted to
make it
difficult or
impossible for us
to comply.
If we fail
to comply with
these rules or
requirements, or if
our data security
systems are breached or compromised, we may be liable for card-issuing banks’ costs
and subject to fines
and higher transaction
fees. In addition,
we may lose
our ability to
accept credit and
debit card payments
from our
customers and
process electronic
funds transfers
or facilitate
other types
of payments,
and our
business and operating results could be adversely affected.
Risks Relating to Accounting and Legal Matters:
If we fail to protect our trademarks and other intellectual property
rights or infringe the
intellectual property rights of others, our business, brand image,
growth strategy, results of
operations and financial condition could be adversely affected.
We
believe
that
our
“Cato”,
“It’s
Fashion”,
“It’s
Fashion
Metro”,
“Versona”,
“Cache”
and
“Body
Central”
trademarks
are
integral
to
our
store
designs,
brand
recognition
and
our
ability
to
successfully
build
consumer
loyalty.
Although
we
have
registered
these
trademarks
with
the
U.S.
Patent
and
Trademark Office
(“PTO”) and
have also
registered, or
applied for
registration of,
additional trademarks
with
the
PTO
that
we
believe
are
important
to
our
business,
we
cannot
give
assurance
that
these
registrations
will
prevent
imitation
of
our
trademarks,
merchandising
concepts,
store
designs
or
private
label merchandise or
the infringement of
our other intellectual
property rights by
others. Infringement of
our
names,
concepts,
store
designs
or
merchandise
generally,
or
particularly
in
a
manner
that
projects
lesser quality or carries a negative connotation of
our image could adversely affect our business, financial
condition and results of operations.
The
Company
is
from
time
to
time
subject
to
claims
that
its
products,
processes,
advertising,
or
trademarks
infringe
the
intellectual
property
rights
of
others.
The
defense
of
these
claims,
even
if
ultimately successful, may result in costly litigation, and if the Company is not successful in its defense, it
could be subject to
injunctions and liability for
damages or royalty obligations,
and the Company’s
sales,
profitability, cash flows, financial condition and reputation could be adversely affected.
19
Our business operations subject us to legal compliance and litigation risks,
as well as regulations
and regulatory enforcement priorities, which could result in increased
costs or liabilities, divert our
management’s attention or otherwise adversely affect our business, results of operations and
financial condition.
Our operations
are subject
to federal,
state and
local laws,
rules and
regulations, as
well as
U.S. and
foreign
laws
and
regulations
relating
to
our
activities
in
foreign
countries
from
which
we
source
our
merchandise and operate our sourcing offices. Our business is also subject to regulatory and litigation risk
in all of these
jurisdictions, including foreign jurisdictions that may
lack well-established or reliable legal
systems for resolving legal disputes. Compliance risks and litigation claims have
arisen and may continue
to
arise
in
the
ordinary
course
of
our
business
and
include,
among
other
issues,
intellectual
property
issues,
employment
issues,
commercial
disputes,
product-oriented
matters,
tax,
customer
relations
and
personal injury
claims. International
activities subject
us to
numerous U.S.
and international
regulations,
including
but
not
limited
to,
restrictions
on
trade,
license
and
permit
requirements,
import
and
export
license
requirements,
privacy
and
data
protection
laws,
environmental
laws,
records
and
information
management regulations, tariffs
and taxes
and anti-corruption
laws, violations
of which
by employees or
persons acting
on the
Company’s
behalf may
result
in significant
investigation costs,
severe criminal
or
civil
sanctions
and
reputational
harm.
These
and
other
liabilities
to
which
we
may
be
subject
could
negatively
affect
our
business,
operating
results
and
financial
condition.
These
matters
frequently
raise
complex factual and
legal issues, which
are subject to
risks and uncertainties
and could divert
significant
management
time.
The
Company
may
also
be
subject
to
regulatory
reviews
and
audits,
the
results
of
which could materially and adversely
affect our business, results of
operations and financial condition. In
addition, governing laws,
rules and regulations,
and interpretations of
existing laws are
subject to change
from time to time.
Compliance and litigation matters could result
in unexpected expenses and liability,
as
well as have an adverse effect on our operations and our reputation.
New
legislation
or
regulation
and
interpretation
of
existing
laws
and
regulations,
including
those
related to
data privacy
or sustainability
matters,
could increase
our costs
of compliance,
technology and
business operations.
The interpretation
of existing
or new
laws to
existing and
evolving technology
and
business practices can be uncertain and may lead to additional compliance
risk and cost.
Adverse litigation matters may adversely affect our business and our financial
condition.
From
time
to
time
the
Company
is
involved
in
litigation
and
other
claims
against
our
business.
Primarily these arise in the
normal course of business but are
subject to risks and uncertainties, and
could
require
significant
management
time.
The
Company’s
periodic
evaluation
of
litigation-related
matters
may change our assessment in
light of the discovery of
facts with respect to legal
actions pending against
us, not
presently known to
us or
by determination of
judges, juries
or other
finders of
fact. We
may also
be
subjected
to
legal
matters
not
yet
known
to
us.
Adverse
decisions
or
settlements
of
disputes
may
negatively impact our business, reputation and financial condition.
Continued scrutiny and changing expectations surrounding sustainability
matters from investors,
customers, government regulators and other stakeholders may impose additional
reporting
requirements, additional costs and compliance risks.
Public companies
from across
all industries
have and
may continue
to
face scrutiny
from investors,
customers,
regulators
and
other
stakeholders
concerning
sustainability
matters.
In
the
U.S.,
there
have
been
various
new
rules
or
proposals
for
new
or
enhanced
disclosure
requirements
regarding
climate
emissions,
sustainability,
workforce
composition
and
related
metrics,
among
other
topics.
Complying
with
these
complex
reporting
obligations
or
expectations
could
increase
our
costs
associated
with
compliance, disclosure and reporting. Furthermore, evolving laws, regulations or stakeholder expectations
may
result
in
uncertain,
potentially
burdensome,
and
changing
reporting
requirements
or
expectations,
20
and
our
failure
to
comply
with
such
requirements
or
expectations
may
adversely
affect
our
reputation,
business or financial performance.
Changes to accounting rules and regulations may adversely affect our reported
results of
operations and financial condition.
Changes
to
U.S.
Generally
Accepted
Accounting
Principles
and
SEC
accounting,
disclosure
and
reporting
rules
are
common
and
have
become
more
frequent
and
significant
in
the
past
several
years.
Changes in accounting rules, disclosures
or regulations and varying interpretations of
existing accounting
rules, disclosures
and regulations
have significantly
affected
our reported
financial statements
and those
of
other
participants
in
the
retail
industry
in
the
past
and
may
continue
to
do
so
in
the
future.
Future
changes
to
accounting
rules,
disclosures
or
regulations
may
adversely
affect
our
reported
results
of
operations and financial position or perceptions of our performance and
financial condition.
Maintaining and improving our internal control over financial reporting
and other requirements
necessary to operate as a public company may strain our resources, and
any material failure in
these controls may negatively impact our business, the price of our common
stock and market
confidence in our reported financial information.
As a public
company, we
are subject to
the reporting requirements of
the Securities Exchange Act
of
1934, the
Sarbanes-Oxley Act
of 2002,
the rules
of the
SEC and
New York
Stock Exchange
and certain
aspects of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and
related rule-making that
has been and
may continue to
be implemented over
the next several
years under
the mandates of the Dodd-Frank Act. The
requirements of these rules and regulations have increased, and
may continue to increase, our compliance costs and
place significant strain on our personnel, systems and
resources.
To
satisfy
the
SEC’s
rules
implementing
the
requirements
of
Section
404
of
the
Sarbanes-
Oxley Act
of
2002, we
must continue
to
document, test,
monitor and
enhance our
internal control
over
financial reporting, which is
a costly and time-consuming effort
that must be re-evaluated
frequently. We
cannot give
assurance that
our disclosure
controls and
procedures and
our internal
control over
financial
reporting, as
defined by applicable
SEC rules,
will be adequate
in the future.
Any failure
to maintain the
effectiveness
of
internal
control
over
financial
reporting
or
to
comply
with
the
other
various
laws
and
regulations to
which we
are and
will continue
to be
subject, or
to
which we
may become
subject in
the
future,
as
a
public
company
could
have
an
adverse
material
impact
on
our
business,
our
financial
condition and
the price
of our
common stock.
In addition,
our efforts
to comply
with these
existing and
new requirements could significantly increase our compliance costs.
Changes in tax and accounting laws and the mix and level of earnings
in any of the jurisdictions in
which we operate and the outcome of tax audits can cause fluctuations in
our overall tax rate,
which impact our reported earnings.
We
are subject to income
taxes in the
United States and numerous
domestic states, as well
as foreign
jurisdictions. In
addition, our
products are
subject to
import and
excise duties
and/or sales,
consumption
or value-added taxes in many jurisdictions. Significant judgment is required to determine and estimate tax
liabilities,
and
there
are
many
transactions
and
calculations
where
the
ultimate
tax
termination
is
uncertain. We
record tax
expense based
on our
estimates of
future payments,
which include
reserves for
estimates of probable settlements of domestic
and foreign tax audits. At any
one time, many tax years
are
subject
to
audit
by
various
taxing
jurisdictions.
Adverse
determinations
in
these
audits
may
have
an
adverse effect
on our
reported financial results
in the
period such
determinations are
made, as
well as
in
future periods.
In addition, our
effective tax
rate may be
materially impacted by
changes in tax
rates and
duties,
the
mix
and
level
of
earnings
or
losses
by
taxing
jurisdictions,
or
by
changes
to
existing
accounting rules
or
regulations. As
a result,
we
expect
that throughout
the
year there
could
be
ongoing
variability in
our quarterly
tax rates
as events
occur and
exposures are
evaluated. Changes
to foreign
or
domestic tax
and accounting laws
and regulations, the
outcome of
tax audits and
changes in the
mix and
21
level
of
earnings
by
jurisdictions
could
have
a
material
impact
on
our
effective
tax
rate,
financial
condition, results of operations or cash flows.
Risks Relating to Our Investments and Liquidity:
We may experience market conditions or other events that could adversely impact the valuation
and liquidity of, and our ability to access, our short-term investments,
cash and cash equivalents
and our revolving line of credit.
Our
short-term investments
and cash
equivalents are
primarily comprised
of investments
in
federal,
state, municipal and corporate debt securities. The value of those securities may be adversely impacted by
factors
relating
to
these
securities,
similar
securities
or
the
broader
credit
markets
in
general.
Many
of
these factors
are beyond our
control, and include
but are
not limited to
changes to credit
ratings, rates of
default, collateral
value, discount
rates, and
strength and
quality of
market credit
and liquidity,
potential
disruptions in the capital
markets and changes in the
underlying economic, financial and other
conditions
that drive
these factors.
As federal,
state and
municipal entities
struggle with
declining tax
revenues and
budget deficits,
we cannot
be assured
of our
ability to
timely access
these investments
if the
market for
these issues
declines. Similarly,
the default
by issuers
of the
debt securities
we hold
or similar
securities
could
impair
the
value
or
liquidity of
our
investments.
The
development
or
persistence of
any
of
these
conditions could
adversely affect
our financial
condition, results
of operations
and ability
to execute
our
business
strategy.
In
addition,
we
have
significant
amounts
of
cash
and
cash
equivalents
at
financial
institutions that
are
in excess
of
the federally
insured limits.
An economic
downturn or
development of
adverse
conditions
affecting
the
financial
sector
and
stability
of
financial
institutions
could
cause
us
to
experience losses on our deposits.
Our ability
to access
credit markets
and our
revolving line
of credit,
either generally
or on
favorable
market terms, may be
impacted by the
factors discussed in
the preceding paragraph, as
well as continued
compliance with covenants under
our revolving credit agreement. The
development or persistence of
any
of these
adverse factors or
failure to
comply with covenants
on which our
borrowing is conditioned
may
adversely affect
our financial
condition, results of
operations and
our ability
to access
our revolving
line
of credit and to execute our business strategy.
The terms of our asset-based revolving credit facility (“ABL Facility”)
restrict our operations and
financial flexibility, which could adversely affect our ability to respond to changes in our business
and to manage our operations.
We
are
subject
to
the
borrowing
terms
of
our
ABL
Facility,
which
is
limited
by
a
borrowing
base
consisting of certain eligible accounts
receivable and eligible inventory,
reduced by specified reserves, as
follows:
●
90% of eligible credit card receivables, plus
●
90% of the
net recovery percentage
of eligible inventory
multiplied by the
most recent appraised
value of such inventory, calculated at the lower of (a) cost computed on a first-in first-out basis or
(b) market value (net of intercompany profits and certain other adjustments),
minus
●
applicable reserves.
In
addition,
the
ABL Facility
prohibits
minimum excess
availability at
any time
to
be
less than
the
greater of
(i) 10%
of the
loan cap
(defined as
the lesser
of (A)
the borrowing
base at
such time
and (B)
$35 million (as of the date hereof)) and (ii) $5 million.
In addition, the covenants under
our ABL Facility include
restrictions that, among other things,
limit
our ability
to incur
additional indebtedness,
create liens
on assets,
make investments,
loans or
advances,
engage in mergers, consolidations, sell assets,
make acquisitions, pay dividends and make other restricted
22
payments,
and
enter
in
to
transactions
with
affiliates.
A
failure
by
us
to
comply
with
these
covenants
could result
in an
event of
default, which
could adversely
affect our
ability to
respond to
changes in
our
business and
manage our
operations. Upon the
occurrence of
an event
of default,
the lenders
could elect
to declare all
amounts outstanding to
be immediately due
and payable and
exercise other remedies
as set
forth under
our ABL
Facility,
including without
limitation foreclosing
on the
collateral pledged
to
such
lenders. If
the indebtedness
under our
ABL Facility
was to
be accelerated,
our future
financial condition
could be materially adversely affected.
Risks Relating to the Market Value of Our Common Stock:
Our operating results are subject to seasonal and quarterly fluctuations,
which could adversely
affect the market price of our common stock.
Our business
varies with
general seasonal
trends that
are characteristic
of the
retail apparel
industry.
As a
result, our
stores typically
generate a
higher percentage
of our
annual net
sales and
profitability in
the
first
and
second
quarters
of
our
fiscal
year
compared
to
other
quarters.
Accordingly,
our
operating
results for
any one
fiscal period
are not
necessarily indicative
of results
to
be expected
from any
future
period,
and
such
seasonal
and
quarterly
fluctuations
could
adversely
affect
the
market
price
of
our
common stock.
We cannot provide assurance that we will pay dividends, or that if paid, any dividend payments will
be consistent with historical levels.
The declaration and payment of any dividend is subject to the approval of our Board of Directors.
Our
Board of
Directors regularly
evaluates
our ability
to
pay a
dividend based
on many
factors,
such as
but
not
limited
to,
applicable
legal
requirements,
the
financial
position
of
the
Company,
contractual
restrictions
and
our
capital
allocation
strategy.
Our
Board
of
Directors
most
recently
suspended
the
payment of quarterly dividends in November 2024 and may continue to suspend the
payment of dividends
if it deems such an action to
be in the best interests of the
Company and its shareholders. There can be no
assurance that a cash dividend will be declared in the future in any particular
amount, or at all.
Conditions in the stock market generally, or particularly relating to our industry, Company or
common stock, may materially and adversely affect the market price of our
common stock and
make its trading price more volatile.
The trading
price of
our common
stock at
times has
been, and
is likely
to continue
to be,
subject to
significant volatility.
A variety of
factors may cause
the price
of our
common stock to
fluctuate, perhaps
substantially,
including,
but
not
limited
to,
those
discussed
elsewhere
in
this
report,
as
well
as
the
following: low
trading volume;
general market
fluctuations resulting
from factors
not directly
related to
our operations or the inherent value of
our common stock; announcements of developments related to our
business; fluctuations in our reported operating results; general conditions or trends affecting or perceived
to affect
the fashion and
retail industry; conditions or
trends affecting or
perceived to affect
the domestic
or global
economy or
the domestic
or global
credit or
capital markets;
changes in
financial estimates
or
the scope
of coverage
given to
our Company
by securities
analysts; negative
commentary regarding
our
Company
and
corresponding
short-selling
market
behavior;
adverse
customer
relations
developments;
significant changes in our senior management team; and legal proceedings.
Over the past several years the
stock market in general, and the market for shares of equity securities of many retailers in particular,
have
experienced extreme price
fluctuations that
have at times
been unrelated to
the operating performance
of
those companies.
Such fluctuations
and market
volatility based
on these
or other
factors may
materially
and adversely
affect the
market price
of our
common stock.
Further,
securities class
action litigation
has
often
been
initiated
against
companies
following
periods
of
volatility
in
their
stock
price.
This
type
of
litigation,
should
it
materialize,
could
result
in
substantial
costs
and
divert
our
management’s
attention
23
and
resources,
and
could
also
require
us
to
make subst
antial
payments
to
justify
judgments
or
to
settle
litigation. The threat of class action litigation could also cause the price of
our common stock to decline.
The interests of our principal shareholder may limit the ability of other
shareholders to influence
the direction of the Company and otherwise affect our corporate governance and
the market price
of our common stock.
Our common stock
consists of two
classes: Class
A and
Class B.
Holders of
Class A common
stock
are entitled to one vote per share, and holders of Class B common stock are entitled to
10 votes per share,
on all matters to be voted on by our common shareholders. All of the shares of Class B common stock are
beneficially owned by
John P.
D. Cato. As
a result, Mr.
Cato owns a
significant economic interest in
the
Company and
the
majority
of
the
total
voting
power
of
our
outstanding
common
stock
at
53.3%
as
of
March
24,
2025.
In
addition,
Mr.
Cato
serves
as
Chairman
of
the
Board
of
Directors,
President
and
Chief Executive
Officer.
As a
result, Mr.
Cato has
the ability
to substantially
influence or
determine the
outcome of all
matters requiring approval by
the shareholders, including the
election of directors
and the
approval
of
mergers
and
other
business
combinations
or
other
significant
Company
transactions.
Mr.
Cato may
have interests
that differ
from those
of other
shareholders and
may vote
in a
way with
which
other
shareholders disagree
or
perceive as
adverse to
their
interests. The
concentration of
voting power
held by
Mr.
Cato could
discourage potential
investors from
acquiring our
common stock
and could
also
have the
effect of
preventing, discouraging or
deferring a
change in
control of
the Company,
even if
the
change in
control might
benefit the
shareholders generally.
This ownership
concentration may adversely
impact the trading
of our
Class A common stock
because of
perceptions of a
conflict of interest,
thereby
depressing
the
value
of
our
Class
A
common
stock.
Mr.
Cato
also
has
the
ability
to
control
the
management of
the Company
as a
result
of his
position as
Chief Executive
Officer.
Further,
we qualify
for
exemption
as
a
“controlled
company”
from
compliance
with
certain
New
York
Stock
Exchange
corporate
governance
listing
standards,
including
the
requirements
that
we
have
a
majority
of
independent
directors
on
our
Board,
an
independent
compensation
committee
and
an
independent
corporate
governance
and
nominating
committee.
Although
we
currently
intend
to
continue
to
comply
with these listing
standards even though
we are a
controlled company,
there can be
no assurance that
we
will continue
to comply
with these
optional listing
standards in
the future.
If we
elected to
utilize these
“controlled
company”
exceptions,
our
other
shareholders
could
lose
the
benefit
of
these
corporate
governance requirements and the market value of our common
stock could be adversely affected.
Item 1B.
Unresolved Staff Comments:
None.
Item 1C.
Cybersecurity:
Risk Management Strategy
We
recognize
the
importance
of
effectively
managing
cybersecurity
risk
in
protecting
our
business,
customers
and
employees,
and
we
manage
cybersecurity
risk
as
part
of
our
overall
risk
management
strategy
and
compliance
processes.
We
maintain
a
process
designed
to
identify,
assess
and
manage
material
risks
from
cybersecurity
threats,
including
risks
relating
to
theft
of
customer
data,
primarily
payment cards, disruption to
business operations or
financial reporting systems, fraud,
extortion, external
exposure
of
employee
data
and
violation
of
privacy
laws.
In
recent
years,
we
have
increased
our
investments
in
cybersecurity risk
management and
have developed
an
enterprise cybersecurity
program
designed
to
detect,
identify,
classify
and
mitigate
cybersecurity
and
other
data
security
threats.
This
program classifies potential
threats by risk
levels, and we
typically prioritize our
threat mitigation efforts
based on those risk classifications. In the event we identify a potential cybersecurity, privacy or other data
security
issue,
we
have
defined
procedures
for
responding
to
such
issues,
including
procedures
that
address
when and
how to
engage with
Company executives,
our
Board of
Directors, other
stakeholders
24
and law
enforcement when
responding to
such issues.
Additionally,
various aspects
of our
cybersecurity
program,
particularly
compliance
with
the
Payment
Card
Industry
standards,
are
regularly
reviewed
by
independent
third
parties.
We
also
maintain
cybersecurity
insurance,
which
we
believe
to
be
commensurate
with
our
size
and
the
nature
of
our
operations,
as
part
of
our
comprehensive
insurance
portfolio.
We
utilize
third-party
intrusion
detection
and
prevention
systems
and
vulnerability
and
penetration
testing to
monitor our
environment. We
also use
third-party
software to
test our
employees' responses to
suspicious emails and to
inform targeted cyber
awareness training.
Our information security and
privacy
policies
are
informed
by
regulatory
requirements
and
are
reviewed
periodically
for
compliance
and
alignment
with
current
state
and
federal
laws
and
regulations.
We
comply
with
applicable
industry
security
standards,
including the
Payment Card
Industry
Data
Security
Standard (“PCI
DSS”).
Because
we
are
aware
of
the
risks
associated
with
third-party
service
providers,
we
also
have
implemented
processes
to
oversee
and manage
these
risks.
We
conduct
security
assessments
of
third-party
providers
before
engagement
and
maintain ongoing
monitoring to
help
ensure
compliance with
our
cybersecurity
standards.
Additionally,
we maintain and
regularly review a
cybersecurity incident response
plan that
provides a
framework for
handling and
escalating cybersecurity
incidents based
on the
severity of
the incident
and
facilitates cross-functional coordination across the Company.
Through the
processes described
above,
we
did
not
identify
risks
during the
year
ended
February 1,
2025 from current or
past cybersecurity threats or cybersecurity
incidents that have materially affected
or
are
reasonably
likely
to
materially
affect
our
business
strategy,
results
of
operations,
or
financial
condition.
However,
we
face
ongoing
risks
from
certain
cybersecurity
threats
that,
if
realized,
are
reasonably likely
to
materially affect
our
business strategy,
results
of
operations, or
financial condition.
See
the
risk
factors
discussed
under
the
heading,
“Risk
Factors
—
Risks
Relating
to
Our
Information
Technology,
Related Systems and Cybersecurity” for further information.
Governance
Our
Board
of
Directors
recognizes
the
important
roles
that
information
security
and
mitigating
cybersecurity and other data security threats
play in our efforts
to protect and maintain the
confidentiality
and security of
customer, employee and
vendor information, as
well as non-public
information about our
Company.
Although
the
Board
as
a
whole
is
ultimately
responsible
for
the
oversight
of
our
risk
management
function,
the
Board
has
delegated
to
its
Audit
Committee
primary
responsibility
for
oversight
of
risk
assessment
and
risk
management,
including
risks
related
to
cybersecurity
and
other
technology
issues.
The
Audit
Committee
also
oversees
the
Company’s
internal
control
over
financial
reporting, including
with respect
to financial
reporting-related information
systems. The
Chief Financial
Officer (CFO) and Chief
Accounting Officer (CAO) meet regularly
with the Audit Committee and
Board
of Directors.
The
Audit
Committee
reviews
quarterly
our
cybersecurity
activities,
including
review
of
annual
external assessment
results, training
results, and
discussion of
cybersecurity risks
and resolutions,
and is
responsible
for elevating significant
matters to the
Board as events
arise.
The Audit
Committee receives
reports
from
our
Chief
Information
Officer
(CIO)
annually
regarding
our
cybersecurity
framework,
as
well as our plans to mitigate cybersecurity risks and respond to any data breaches.
From
a
management
perspective,
our
enterprise
cybersecurity
is
overseen
by
our
cybersecurity
committee, which is chaired by our CFO
and includes our CAO, CIO, Chief Information
Security Officer
(CISO),
as
well
as
key
members
of
financial
management,
information
technology
and
audit.
Our
cybersecurity infrastructure
is
overseen by
our
CISO, who
reports
to
our
CIO.
Our
CIO reports
to
our
CFO
and
has
served
in
various
roles
in
information
technology
and
information
security
for
over
30
25
years.
Item 2.
Properties:
The Company’s
distribution center
and general
offices
are located
in a
Company-owned building
of
approximately
552,000
square
feet
located
on
a
15-acre
tract
in
Charlotte,
North
Carolina.
The
Company’s
automated
merchandise
handling
and
distribution
activities
occupy
approximately
418,000
square
feet
of
this
building
and
its
general
offices
and
corporate
training
center
are
located
in
the
remaining 134,000
square feet.
A building
of approximately
24,000 square
feet located
on a
2-acre tract
adjacent
to
the
Company’s
existing
location is
used
for
e-commerce
storage.
The
Company also
owns
approximately
185
acres
of
land
in
York
County,
South
Carolina
as
a
potential
new
site
for
our
distribution center.
Item 3.
Legal Proceedings:
From time
to time,
claims are
asserted against
the Company
arising out
of operations
in the
ordinary
course
of
business.
The
Company
currently
is
not
a
party
to
any
pending
litigation
that
it
believes
is
likely to have a
material adverse effect on
the Company’s
financial position, results of
operations or cash
flows. See Note 15, “Commitments and Contingencies,” for more
information.
26
Item 3A.
Executive Officers of the Registrant:
The executive officers of the Company and their ages as of March 31, 2025
are as follows:
Name
Age
Position
John P.
D. Cato............................
74
Chairman, President and Chief Executive Officer
Charles D. Knight........................
60
Executive Vice President, Chief Financial Officer
Gordon Smith
..............................
69
Executive Vice President, Chief Real Estate and
Store Development Officer
John P.
D. Cato
has been employed
as an officer
of the Company since
1981 and has
been a director
of
the
Company
since
1986.
Since
January
2004,
he
has
served
as
Chairman,
President
and
Chief
Executive Officer.
From May 1999 to
January 2004, he served
as President, Vice
Chairman of the
Board
and Chief Executive Officer.
From June 1997 to May 1999,
he served as President, Vice
Chairman of the
Board and
Chief Operating Officer.
From August 1996
to June
1997, he served
as Vice
Chairman of the
Board
and Chief
Operating Officer.
From 1989
to
1996, he
managed the
Company’s
off-price
concept,
serving
as
Executive Vice
President
and
as
President and
General Manager
of
the
It’s
Fashion
concept
from 1993
to
August 1996.
Mr. Cato
is
a former
director of
Harris Teeter
Supermarkets, Inc.,
formerly
Ruddick Corporation.
Charles
D.
Knight
has
been
employed
as
Executive
Vice
President,
Chief
Financial
Officer
by
the
Company
since
January
of
2022.
From
2018
to
2020,
he
served
in
various
roles
with
The
Vitamin
Shoppe,
first
as
Senior
Vice
President,
Chief
Accounting
Officer
from
2018
to
2019,
and
then
as
Executive Vice
President, Chief Financial
Officer from 2019
to 2020.
Prior to
that, he served
in various
roles with Toys
“R” Us for 28
years, including as Senior Vice
President, Corporate Controller from 2010
to 2018.
Gordon
Smith
has
been
employed
by
the
Company
since
1989.
Since
July
2011,
he
has
served
as
Executive Vice
President, Chief
Real
Estate and
Store Development
Officer.
From February
2008 until
July 2011,
Mr. Smith served as
Senior Vice President, Real
Estate. From October 1989 to February 2008,
Mr. Smith served as Assistant Vice President, Corporate Real Estate.
Item 4.
Mine Safety Disclosures:
No matters requiring disclosure.
27
PART
II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities:
Market & Dividend Information
The
Company’s
Class A Common
Stock
trades
on the
New York
Stock
Exchange (“NYSE”) under
the symbol CATO.
As of March 24, 2025,
the approximate number of record holders of the Company’s Class A Common
Stock was 5,000 and there were 2 record holders of the Company’s Class B Common Stock.
28
Stock Performance Graph
The
following
graph
compares
the
yearly
change
in
the
Company’s
cumulative
total
shareholder
return on
the Company’s
Common Stock (which
includes Class
A Stock
and Class
B Stock)
for each
of
the
Company’s
last
five
fiscal
years
with
(i)
the
Dow
Jones
U.S.
Retailers,
Apparel
Index
and
(ii)
the
Russell 2000 Index.
THE CATO
CORPORATION
STOCK PERFOMANCE TABLE
(BASE 100 – IN DOLLARS)
LAST TRADING DAY
OF THE FISCAL YEAR
THE CATO
CORPORATION
DOW JONES U.S.
RETAILERS,
APPL
INDEX
RUSSELL 2000
INDEX
1/31/2020
100
100
100
1/29/2021
73
107
130
1/28/2022
108
118
129
1/27/2023
69
129
124
2/2/2024
51
145
127
1/31/2025
28
184
152
The graph assumes an initial investment of $100 on January 31, 2020,
the last trading day prior to the
commencement of the Company’s 2020 fiscal year, and that all dividends were reinvested.
29
Issuer Purchases of Equity Securities
The following table summarizes the Company’s purchases of its common stock for the three months
ended February 1, 2025:
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Part of Publicly
Value) of Shares that may
of Shares
Average Price
Announced Plans or
yet be Purchased Under
Period
Purchased
Paid per Share (1)
Programs (2)
the Plans or Programs (2)
November 2024
96,306
$
3.32
96,306
December 2024
320,271
3.35
320,271
January 2025
28,799
3.50
28,799
Total
445,376
$
3.35
445,376
997,455
(1)
Prices include trading costs.
(2)
During
the
fourth
quarter
ended
February
1,
2025,
the
Company
repurchased
and
retired
445,376
shares
under
this
program
for
approximately
$1,491,984
or
an
average
market
price
of
$3.35
per
share. As of the
fourth quarter ended February
1, 2025, the Company
had 997,455 shares remaining
in open authorizations. There is no specified expiration date
for the Company’s repurchase program.
The
Board
of
Directors
authorized
an
increase
of
1,000,000
shares
in
the
Company’s
share
repurchase program on December 23, 2024.
30
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
is intended
to provide information to assist readers in better
understanding and evaluating our financial condition and
results
of
operations.
The
following
information
should
be
read
in
conjunction
with
the
Consolidated
Financial Statements, including the accompanying Notes appearing in
Part II, Item 8 of this
annual report
on Form 10-K.
This section of the annual report
on Form 10-K generally discusses fiscal 2024
and fiscal
2023
and
year-to-year
comparisons
between
fiscal
2024
and
fiscal
2023,
as
well
as
certain
fiscal
2022
items.
Discussions
of
fiscal
2022
items
and
year-to-year
comparisons
between
fiscal
2023
and
fiscal
2022 that are not included
in this Form 10-K can
be found in “Management’s
Discussion and Analysis of
Financial
Condition
and
Results
of
Operations”
in
Part
II,
Item
7
of
the
Company’s
annual
report
on
Form 10-K for the fiscal year ended February 3, 2024.
Recent Developments
Inflationary Cost Pressure and High Interest Rates
The
pressure
on
our
customers’
disposable
income
continued
in
fiscal
2024,
due
to
prolonged
and
persistently high prices caused by high inflation
rates, especially related to housing, groceries and
fuel, as
well as
high interest
rates.
These high
interest rates
have adversely
affected the
availability and
cost of
credit for our customers, including
revolving credit and auto loans,
and continue to negatively impact
our
customers’ disposable income.
Our customers’
willingness to purchase
our products may
continue to
be
negatively impacted by these inflationary pressures and high interest
rates.
Although
interest
rates
and
inflation
have
decreased,
we
believe
the
pressure
on
our
customers’
disposable income
adversely impacted
fiscal 2024
and will
likely continue
to have
a negative
impact on
consumer behavior and, by extension, our results of operations and financial condition during
at least part
of fiscal 2025.
Merchandise Supply Chain and Tariff Pressures
A significant amount of
our merchandise is manufactured
overseas, principally in Southeast
Asia, and
traverses
through
the
Panama
Canal
or
the
Suez
Canal.
In
the
first
quarter
of
2024,
the
drought
conditions
experienced
in
the
region
surrounding
the
Panama
Canal
reduced
the
number
of
transits
by
approximately 37% and
also reduced the
permissible draft of
vessels transiting the
Panama Canal, which
reduced the volume
and number of
containers carried by container
ships and increased
our costs.
These
conditions improved as
the Panama
Canal authority
increased the
daily transits
and the
permissible draft
of vessels, raising the number of
transits to 95% of pre-drought operations in the
second quarter and back
to pre-drought
levels in
the third
and fourth
quarters. The
hostilities affecting
the region
surrounding the
Suez Canal are causing container ships to travel longer distances around the Cape of Good Hope, which is
increasing lead times for merchandise and
our costs to ship these
goods, as well as decreasing the
pool of
containers
available.
The
combination
of
these
situations
has
negatively
impacted
fiscal
2024.
In
addition,
the
third
and
fourth
quarters
were
impacted
by
later
shipments
in
part
due
to
congestion
at
certain Asian
ports. In
the third
quarter,
our shipments
were negatively
impacted by
the U.S.
port strike
on
the
east coast
and civil
unrest in
some Asian
countries that
caused
merchandise to
miss its
shipping
windows.
Though
conditions
incrementally
improved
in
the
fourth
quarter,
we
believe
the
totality
of
these conditions
will likely
continue to
have a
negative impact on
our results
of operations
and financial
condition for the foreseeable future.
In
addition
to
the
supply
chain
issues,
the
newly
implemented
additional
provisional
tariffs
on
Chinese products may have several impacts on the results
of our financial operations. Our costs associated
with products made in China are likely to increase. These cost increases will negatively impact our results
of
operations
and
financial
condition
unless
we
are
able
to
mitigate
these
costs
by
having
our
vendors
31
share
the
costs
of
tariffs,
increase
retail
pricing
or
move
production
to
another
county.
Certain
product
categories
such
as
shoes
and
handbags
will
be
difficult
to
source
in
other
countries.
These
provisional
tariffs
may also
cause supply
chain issues,
as companies
move production
from China.
Potential supply
chain
issues
such
as
products being
late
due
to
port congestion,
longer
transit times
and
dwell
times
at
port,
and
container
availability
may
impact
the
costs
we
pay
for
ocean
freight
or
the
timeliness
of
our
product deliveries, any of which may
negatively impact our results of operations
and financial condition.
Results of Operations
The table below sets forth certain financial data of the Company
expressed as a percentage of
retail sales for the years indicated:
Fiscal Year Ended
February 1, 2025
February 3, 2024
Retail sales …………………………………………………………..
100.0
%
100.0
%
Other revenue…………………………………………………………
1.2
1.1
Total revenues ……………………………………………………….
101.2
101.1
Cost of goods sold …………………………………………………..
68.0
66.3
Selling, general and administrative………………………………….
36.1
36.1
Depreciation …………………………………………………………
1.5
1.4
Interest and other income ……………………………………………
1.8
0.7
Loss before income taxes …………………………………………
(2.5)
(2.0)
Net loss…………………………………………………………..
(2.8)
%
(3.4)
%
Fiscal 2024 Compared to Fiscal 2023
Retail sales
decreased by
8.3% to
$642.1 million
in fiscal
2024 compared
to $700.3
million in
fiscal
2023. Fiscal 2024 had 52 weeks versus 53 weeks in fiscal 2023. The decrease in retail sales
in fiscal 2024
was
primarily
due
to
a
3.2%
decrease
in
same-store sales,
from closed stores in
2023
and
an
additional
week
of
sales
in
2023.
Same-store
sales
for
the
fiscal
year
2024
decreased
primarily
due
to
lower
transactions, partially offset by fewer returns and slightly higher average sales per transaction. Same-store
sales
includes
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.
In fiscal 2024 and fiscal 2023, e-commerce sales were less than 5%
of total sales and same-store
sales. 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.
Total
revenues, comprised of
retail sales
and other
revenue (principally finance
charges and
late fees
on
customer accounts receivable,
gift card breakage, shipping
charges for e-commerce purchases
and layaway
fees), decreased by 8.2% to
$649.8 million in
fiscal 2024 compared to
$708.1 million in
fiscal 2023. The
Company
operated
1,117
stores
at
February
1,
2025
compared
to
1,178
stores
operated
at
February
3,
2024.
In fiscal 2024, the Company opened five new stores and closed 66
stores.
Other revenue,
a component
of total
revenues, remained
flat at
$7.7 million
in fiscal
2024 compared
to fiscal 2023.
Credit
revenue
of
$2.7
million
represented
0.4%
of
total
revenue
in
fiscal
2024,
a
$0.1
million
increase compared to fiscal 2023 credit
revenue of $2.6 million or 0.4% of
total revenue.
The increase in
credit revenue was
primarily due to
increases in finance
charges and late
fee income as
a result of
higher
accounts
receivable
balances.
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
$1.6
million
in
fiscal
2024
compared
to
$1.6
million
in
fiscal 2023.
Total credit
segment income before taxes was $2.2 million in fiscal
2024 and $1.7 million in
32
fiscal 2023.
Cost
of
goods sold
was $436.4
million, or
68.0% of
retail
sales, in
fiscal
2024 compared
to
$464.3
million, or 66.3% of retail sales, in fiscal 2023. The increase in cost of goods sold as a percentage of sales
resulted primarily
from higher
distribution and
freight costs,
increased sales
of markdown
priced goods,
and deleveraging
of occupancy
and buying
costs. Cost
of goods
sold includes
merchandise costs,
net of
discounts
and
allowances,
buying
costs,
distribution
costs,
occupancy
costs,
and
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
expenses
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 and excluding
depreciation) decreased by
12.8% to
$205.7 million in
fiscal 2024 from $236.0
million in fiscal
2023. Gross margin as
presented may not
be comparable to
that
of other companies.
Selling, general
and administrative expenses
(“SG&A”), which
primarily include corporate
and store
payroll,
related
payroll
taxes
and
benefits,
insurance,
supplies,
advertising,
bank
and
credit
card
processing fees were
$231.5 million in
fiscal 2024 compared
to $252.8 million
in fiscal 2023,
a decrease
of
8.4%.
As
a
percent
of
retail
sales,
SG&A
was
36.1%
compared
to
36.1%
in
the
prior
year.
The
decrease in SG&A expense in fiscal 2024 was primarily attributable to decreased incentive compensation,
insurance, closed store and impairment expenses, partially offset by increased professional
fees.
Depreciation
expense
was
$9.8
million
in
fiscal
2024
compared
to
$9.9
million
in
fiscal
2023.
Depreciation expense
decreased slightly
from fiscal
2023 due
to fully
depreciated older
stores and
prior
period impairments of leasehold improvements and fixtures,
partially offset by the distribution
center and
information technology expenditures.
Interest and other
income increased to
$11.8 million
in fiscal 2024
compared to $5.1
million in fiscal
2023. The increase is
primarily attributable to a $3.2
million net gain on
sale of land held
for investment,
gains on
the disposal
of the
Company’s
corporate aircraft
and certain
equity securities,
as well
as higher
interest earned on the Company’s investments.
Income tax
expense was
$1.9 million,
or 0.3%
of retail
sales in
fiscal 2024
compared to
income tax
expense
of
$10.1
million, or
1.4%
of
retail
sales
in
fiscal
2023.
The
income
tax
expense
decrease
was
primarily due
to a
valuation allowance
recorded against
U.S. federal
and state
deferred tax
assets in
the
prior
fiscal
year
due to
a
pre-tax loss,
partially offset
by foreign
rate
differential. The
effective
tax
rate
was (12.1%)
(Expense) in fiscal
2024 compared to
(73.5%)
(Expense) in fiscal
2023. See Note
12 to
the
Consolidated Financial Statements, “Income Taxes,” for further details.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Company’s
accounting policies are
more fully described
in Note
1 to the
Consolidated Financial
Statements.
As
disclosed
in
Note
1
to
the
Consolidated
Financial
Statements,
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
33
inherent in the preparation of the Company’s financial statements include the calculation of potential asset
impairment, income tax
valuation allowances, 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.
Allowance for Customer Credit Losses
The Company evaluates
the collectability
of customer
accounts receivable
and records
an allowance
for customer
credit losses
based on
the accounts
receivable aging and
estimates of
actual write-offs.
The
allowance is
reviewed for
adequacy and
adjusted, as
necessary,
on a
quarterly basis.
The Company
also
provides
for
estimated
uncollectible
late
fees
charged
based
on
historical
write-offs.
The
Company’s
financial results
can be
impacted by
changes in
customer loss
write-off experience
and the
aging of
the
accounts receivable portfolio.
Merchandise Inventories
The Company’s
inventory is
valued using
the weighted-average
cost method
and is
stated at
the net
realizable value. Physical inventories
are conducted throughout the
year to calculate actual
shrinkage and
inventory on hand. Actual shrinkage results are used to estimate inventory shrinkage, which is accrued for
the
period between
the
last physical
inventory and
the
financial reporting
date. The
Company regularly
reviews
its
inventory
levels
to
identify
slow
moving
merchandise
and
uses
markdowns
to
clear
slow
moving inventory.
Lease Accounting
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.
See Note
11 to
the Consolidated Financial
Statements,
“Leases,” for further information.
Impairment of Long-Lived Assets
The
Company invests
in
leaseholds,
right-of use
assets
and
equipment primarily
in
connection
with
the opening and remodeling of stores
and in computer software and hardware. The
Company periodically
reviews its store
locations and estimates
the recoverability of
its long-lived assets,
which primarily relate
to
Fixtures
and
equipment,
Leasehold
improvements,
Right-of-use
assets
net
of
Lease
liabilities
and
Information
technology
equipment
and
software.
An
impairment
charge
is
recorded
for
the
amount
by
which the
carrying value
exceeds the
estimated fair
value when
the Company
determines that
projected
cash flows associated with those long-lived assets will not be sufficient to recover
the carrying value. This
determination is based on a
number of factors, including the store’s
historical operating results and future
projected cash flows, which include contribution margin projections.
The Company assesses the fair value
of each lease
by considering market
rents and
any lease terms
that may adjust
market rents under
certain
conditions, such as the loss of
an anchor tenant or a leased
space in a shopping center not
meeting certain
criteria. Further,
in determining when
to close a
store, the Company considers
real estate development
in
34
the
area and
perceived local
market conditions,
which can
be difficult
to
predict and
may be
subject
to
change.
Insurance Liabilities
The
Company
is
primarily
self-insured
for
healthcare,
workers’
compensation
and
general
liability
costs. These costs are
significant primarily due to the
large number of the
Company’s retail locations
and
associates. The Company’s
self-insurance liabilities are
based on the
total estimated costs
of claims filed
and
estimates
of
claims
incurred
but
not
reported,
less
amounts
paid
against
such
claims,
and
are
not
discounted.
Management
reviews
current
and
historical
claims
data
in
developing
its
estimates.
The
Company
also
uses
information
provided
by
outside
actuaries
with
respect
to
healthcare,
workers’
compensation and general liability claims.
If the underlying facts and
circumstances of the claims change
or
the
historical
experience
upon
which
insurance
provisions
are
recorded
is
not
indicative
of
future
trends, then
the Company
may be
required to
make adjustments
to the
provision for
insurance costs
that
could
be
material
to
the
Company’s
reported
financial condition
and
results
of
operations.
Historically,
actual results have not significantly deviated from estimates.
Uncertain Tax Positions
The Company records
liabilities for
uncertain tax
positions primarily
related to
state income
taxes as
of the balance sheet
date.
These liabilities reflect the
Company’s best
estimate of its ultimate
income tax
liability
based
on
the
tax
codes,
regulations,
and
pronouncements
of
the
jurisdictions
in
which
we
do
business.
Estimating our ultimate tax liability involves significant judgments regarding the
application of
complex tax
regulations across
many jurisdictions.
Despite the
Company’s
belief that
the estimates
and
judgments
are
reasonable,
differences
between
the
estimated
and
actual
tax
liabilities
can
and
do
exist
from time to time.
These differences may arise from settlements
of tax audits, expiration of the statute of
limitations, and the evolution and application of the
various jurisdictional tax codes and regulations.
Any
differences will
be recorded
in the
period in
which they become
known and
could have
a material
effect
on the results of operations in the period the adjustment is recorded.
Deferred Tax Valuation
Allowance
The
Company
assesses
the
likelihood
that
deferred
tax
assets
will
be
realized
in
light
of
the
Company’s
current
financial
performance
and
projected
future
financial
performance.
Based
on
this
assessment, the
Company then
determines if
a valuation
allowance should
be recorded.
If the
Company
concludes
that
it
is
more
likely
than
not
that
the
Company
will
not
be
able
to
realize
its
tax
deferred
assets, a valuation allowance is recorded for the proportion of the deferred tax asset it determines may not
be realized.
This evaluation
requires significant
judgment and
involves the
consideration of
all available
positive
and
negative
evidence,
including
our
historical
operating
results,
the
existence
of
cumulative
losses
in
recent
years,
ongoing
prudent
and
feasible
tax
planning
strategies,
and
projections
of
future
taxable income.
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
its new
asset-backed revolving line
of credit
(see below),
will be
adequate to
fund
the
Company’s
regular
operating
requirements,
including
$64.6
million
of
lease
obligations
and
planned investments of $7.3 million of capital expenditures,
for the next twelve months from the issuance
of this report.
Cash
used
in
operating
activities
during
fiscal
2024
was
$19.7
million
as
compared
to
$0.5 million
provided in fiscal 2023 and $13.4 million provided in fiscal 2022. Cash used in operating activities during
2024 was
primarily attributable
to net
income adjusted
for depreciation,
changes in
working capital
and
35
subtraction of
net income
for non-operating
gains on
sale of
assets held
for investment.
The decrease
of
$20.2
million
for
fiscal
2024
compared
to
fiscal
2023
is
primarily due
to
an
increase in
merchandise
inventories
and
gains
on
sale
of
assets
held
for
investments,
partially
offset
by
an
increase
in
accounts
payable.
At
February 1,
2025,
the
Company had
working
capital
of
$34.9 million compared
to
$55.1 million
and $74.7 million at February 3,
2024 and January 28, 2023, respectively.
The decrease
in working
capital
compared to the prior
year is primarily due
to lower short-term investments and
accounts receivables, higher
accounts payable and accrued expenses, partially offset
by higher inventory and lower current
lease liability.
At February 1,
2025, 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 contained
various financial
covenants and limitations, including the maintenance of specific financial
ratios with which the Company
was not in compliance as of
February 1, 2025. There were no
borrowings outstanding,
or any outstanding
letters of
credit,
under this
credit facility
as
of the
fiscal year
ended February
1, 2025
or
the fiscal
year
ended
February 3,
2024.
On
March
13,
2025,
the
Company terminated
the
unsecured revolving
line
of
credit when it entered into a
new $35.0 million asset-backed revolving line
of credit (the “ABL Facility”)
secured primarily by
inventory and third-party
credit card receivables.
As of March
31, 2025 there
were
no
borrowings
under
the
ABL
Facility
and
availability
under
the
ABL
Facility
was
$30.0
million.
For
additional information regarding the ABL Facility, see Note 1 to the Consolidated Financial Statements.
The
Company
had
no
outstanding
revocable
letters
of
credit
relating
to
purchase
commitments
at
February 1, 2025 or at February 3, 2024.
On April 25,
2024, the Company amended
the now terminated
unsecured revolving credit agreement
to modify a definition used in calculating the Company’s
minimum EBITDAR coverage ratio to add back
certain
income
tax
receivables
included
in
the
calculation
of
the
ratio.
On
November
1,
2024,
the
Company
amended
the
now
terminated
unsecured
revolving
credit
agreement
to
lower
the
minimum
EBITDAR
coverage
ratio
and
the
corresponding minimum
cash
and
investments
used
to
determine the
EBITDAR coverage ratio in exchange for a secured position in any
future borrowings.
Expenditures
for
property
and
equipment
totaled
$7.9
million,
$12.5
million
and
$19.4
million
in
fiscal 2024, 2023
and
2022, respectively.
The decrease in
expenditures for fiscal
2024 was primarily
due
to finishing projects related to
investments in the distribution center and
information technology.
Net
cash
provided
by
investing
activities
totaled
$29.0
million
for
fiscal
2024
compared
to
$19.8
million provided in
fiscal 2023 and
$16.0 million provided
in fiscal
2022.
In fiscal 2024,
the increase in
cash
provided
was
primarily
attributable
to
sales
of
other
assets
and
the
net
sales
of
short-term
investments and other assets, partially offset by expenditures for property and equipment.
Net cash used in financing activities totaled
$14.1 million in fiscal 2024 compared to
net cash used of
$16.1
million
for
fiscal
2023
and
$29.3
million
for
fiscal
2022.
The decrease in
cash used during
fiscal
2024
was
primarily
due
to
reduction
in
dividends
paid,
partially
offset
by
an
increase
in
share
repurchase
amounts.
The Company does not use derivative financial instruments.
See
Note
4
to
the
Consolidated
Financial
Statements,
“Fair
Value
Measurements,”
for
information
regarding the Company’s financial assets that are measured at fair value.
The
Company’s
investment
portfolio
was
primarily
invested
in
corporate
bonds
and
taxable
governmental debt securities held in managed accounts
with underlying ratings of A or
better at February
36
1, 2025. The state,
municipal and corporate bonds and
asset-backed securities have contractual maturities
which range from nine days to 2.8 years.
The U.S. Treasury notes have contractual maturities which range
from 13 days to 2.5 years. These securities are classified as available-for-sale and are recorded as Short-term
investments and Other
assets on the
accompanying Consolidated Balance
Sheets. These assets
are carried at
fair
value
with
unrealized
gains
and
losses
reported
net
of
taxes
in
Accumulated
other
comprehensive
income.
Additionally,
at
February
1,
2025
and
February
3,
2024,
the
Company
had
$0.0
million
and
$1.1
million of
corporate equities,
respectively,
which are
recorded
within Other
assets in
the
accompanying
Consolidated Balance Sheets.
Level
1
category
securities
are
measured
at
fair
value
using
quoted
active
market
prices.
Level
2
investment
securities
include
corporate,
state
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 the 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
primarily 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
compensation
obligation,
the
value
of
which
is
tracked
via
underlying
insurance
funds’
net
asset
values,
as
recorded
in
Other
noncurrent
liabilities
in
the
Consolidated Balance Sheets. These
funds are designed
to mirror the
return of existing
mutual funds and
money market funds that are observable and actively traded.
Contractual Obligations
Contractual
obligations
for
future
payments
at
February
1,
2025
relate
primarily
to
operating
lease
commitments for
store leases.
Operating leases
represent minimum
required lease
payments under
non-
cancellable
lease
terms.
Most
store
leases
also
require
payment
of
related
operating
expenses
such
as
taxes, utilities, insurance and maintenance, which are not included in our estimated lease obligations.
See
Note
11
to
the
Consolidated
Financial
Statements,
“Leases”
for
the
maturities
of
our
operating
lease
obligations.
Recent Accounting Pronouncements
See
Note 1
to
the
Consolidated Financial
Statements,
“Summary of
Significant Accounting
Policies,
Recently Adopted Accounting Policies and Recently Issued Accounting
Pronouncements.”
Item 7A.
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.
37
Item 8.
Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID
238
) .....................................
38
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
for the fiscal
years ended February 1, 2025, February 3, 2024 and January 28, 2023 ................................
...........
41
Consolidated Balance Sheets at February 1, 2025 and February 3, 2024
.............................................
42
Consolidated Statements of Cash Flows for the fiscal years ended February 1, 2025,
February 3, 2024
and January 28, 2023................................
................................................................
.........................
43
Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 1,
2025,
February 3, 2024 and January 28, 2023 ................................................................
............................
44
Notes to Consolidated Financial Statements ..........................................................................................
45
Schedule II — Valuation
and Qualifying Accounts for the fiscal years ended February 1, 2025,
February 3, 2024 and January 28, 2023 ................................................................
............................
80
38
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of The Cato Corporation
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying consolidated balance sheets of The Cato Corporation and its
subsidiaries (the "Company") as of February 1, 2025 and February 3, 2024,
and the related consolidated
statements of income (loss) and comprehensive income (loss), of stockholders'
equity and of cash flows
for each of the three years in the period ended February 1, 2025, including
the related notes and financial
statement schedule listed in the accompanying index (collectively referred
to as the "consolidated
financial statements"). We also have audited the Company's internal control over financial reporting as of
February 1, 2025, based on criteria established in
Internal Control - Integrated Framework
(2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above
present fairly, in all material
respects, the financial position of the Company as of February
1, 2025 and February 3, 2024, and the
results of its operations and its cash flows for each of the three years
in the period ended February 1, 2025
in conformity with accounting principles generally accepted in the United
States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control
over financial
reporting as of February 1, 2025, based on criteria established
in
Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial
statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions
on the Company’s
consolidated financial statements and on the Company's internal control over
financial reporting based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with
respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud,
and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing
procedures to assess the risks of
material misstatement of the consolidated financial statements, whether
due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal
control over financial reporting included obtaining an understanding
of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits
also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
39
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal
control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles,
and that receipts and expenditures of the company are being made
only in accordance with authorizations
of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk
that controls may become inadequate because of changes in conditions, or
that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising
from the current period audit of the
consolidated financial statements that was communicated or required to
be communicated to the audit
committee and that (i) relates to accounts or disclosures that are material to
the consolidated financial
statements and (ii) involved our especially challenging, subjective, or
complex judgments. The
communication of critical audit matters does not alter in any way
our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating
the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it
relates.
Impairment of Long-Lived Assets - Store Location Asset Groupings
As described in Notes 1 and 6 to the consolidated financial statements,
the Company’s consolidated
property and equipment, net balance was $60.3 million, of which the store
locations were a portion, and
consolidated operating lease right-of-use assets, net balance was $148.9
million as of February 1, 2025.
The Company invests in leaseholds, right-of-use assets and equipment,
primarily in connection with the
opening and remodeling of stores, and in computer software and hardware.
The Company periodically
reviews its store locations and estimates the recoverability
of its long-lived assets, which primarily relate
to fixtures and equipment, leasehold improvements, right-of-use assets net
of lease liabilities, and
information technology equipment and software. An impairment
charge is recorded for the amount by
which the carrying value exceeds the estimated fair value when management
determines that projected
cash flows associated with those long-lived assets will not be sufficient to recover
the carrying value. This
determination is based on a number of factors, including the store’s historical operating results and future
projected cash flows, which include contribution margin projections. The Company
assesses the fair value
of each lease by considering market rents and any lease terms
that may adjust market rents under certain
conditions such as the loss of an anchor tenant or a leased space in a shopping
center not meeting certain
criteria. An impairment charge for store assets of $0.8 million was recorded during
the year ended
February 1, 2025.
The principal considerations for our determination that performing
procedures relating to impairment of
long-lived assets – store location asset groupings is a critical audit
matter are (i) the significant judgment
by management when determining the fair value measurement of the
store location asset groupings,
which led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and
evaluating management’s projected cash flow assumptions related to contribution margin projections.
40
Addressing the matter involved performing procedures and evaluating
audit evidence in connection with
forming our overall opinion on the consolidated financial statements.
These procedures included testing
the effectiveness of controls relating to management’s long-lived assets – store location recoverability test
and determination of the fair value of the asset groupings.
These procedures also included, among others,
(i) testing the completeness and accuracy of underlying data used in
the projected cash flows and store
location asset groupings, (ii) evaluating the reasonableness of management’s assumptions related to
contribution margin projections by considering current and historical performance
of the store location
asset groupings and whether the assumptions were consistent with evidence
obtained in other areas of the
audit, (iii) evaluating the appropriateness of the projected cash flow model,
and (iv) evaluating
management’s assessment of the fair value of the leased assets included in the store location asset
groupings.
/s/
PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 31, 2025
We have served as the Company’s
auditor since 2003.
41
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
Fiscal Year Ended
February 1, 2025
February 3, 2024
January 28, 2023
(Dollars in thousands, except per share data)
REVENUES
Retail sales
$
642,140
$
700,318
$
752,370
Other revenue (principally finance charges,
late fees and layaway charges)
7,666
7,741
6,890
Total revenues
649,806
708,059
759,260
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of
depreciation shown below)
436,440
464,313
509,664
Selling, general and administrative (exclusive
of depreciation shown below)
231,430
252,742
242,561
Depreciation
9,817
9,871
11,080
Interest expense
59
35
87
Interest and other income
(11,827)
(5,101)
(5,902)
Costs and expenses, net
665,919
721,860
757,490
Income (loss) before income taxes
(16,113)
(13,801)
1,770
Income tax expense
1,944
10,140
1,741
Net income (loss)
$
(18,057)
$
(23,941)
$
29
Basic earnings (loss) per share
$
(0.97)
$
(1.17)
$
-
Diluted earnings (loss) per share
$
(0.97)
$
(1.17)
$
-
Dividends per share
$
0.51
$
0.68
$
0.68
Comprehensive income:
Net income (loss)
$
(18,057)
$
(23,941)
$
29
Unrealized gain (loss) on available-for-sale
securities, net of deferred income taxes of
$
0
, $
489
, and ($
287
) for fiscal 2024, 2023
and 2022, respectively
(242)
1,633
(958)
Comprehensive loss
$
(18,299)
$
(22,308)
$
(929)
See notes to consolidated financial statements.
42
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
February 1, 2025
February 3, 2024
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
20,279
$
23,940
Short-term investments
57,423
79,012
Restricted cash
2,799
3,973
Accounts receivable, net of allowance for customer credit losses of $
581
at
February 1, 2025 and $
705
at February 3, 2024
24,540
29,751
Merchandise inventories
110,739
98,603
Prepaid expenses and other current assets
7,406
7,783
Total Current Assets
223,186
243,062
Property and equipment – net
60,326
64,022
Other assets
19,979
25,047
Right-of-Use assets - net
148,870
154,686
Total Assets
$
452,361
$
486,817
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
88,641
$
87,821
Accrued expenses
41,717
37,404
Accrued bonus and benefits
326
1,675
Current lease liability
57,555
61,108
Total Current Liabilities
188,239
188,008
Other noncurrent liabilities
13,485
14,475
Lease liability
88,341
92,013
Commitments and contingencies
-
-
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;
18,313,929
and
18,802,742
shares issued at
February 1, 2025 and February 3, 2024, respectively
619
635
Convertible Class B common stock, $
0.033
par value per share,
15,000,000
shares authorized;
1,763,652
shares issued at
February 1, 2025 and February 3, 2024
59
59
Additional paid-in capital
129,530
126,953
Retained earnings
31,935
64,279
Accumulated other comprehensive income
153
395
Total Stockholders' Equity
162,296
192,321
Total Liabilities and Stockholders’ Equity
$
452,361
$
486,817
See notes to consolidated financial statements.
43
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Fiscal Year Ended
February 1, 2025
February 3, 2024
January 28, 2023
(Dollars in thousands)
Operating Activities:
Net income (loss)
$
(18,057)
$
(23,941)
$
29
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Depreciation
9,817
9,871
11,080
Provision for customer credit losses
654
554
280
Purchase premium and premium amortization of investments
(1,131)
(711)
537
(Gain) Loss on sale of assets held for investment
(5,343)
8
-
Share based compensation
2,283
4,170
2,606
Deferred income taxes
-
8,724
386
Loss on disposal of property and equipment
192
84
199
Impairment of assets
786
1,811
884
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable
1,357
(608)
29,034
Merchandise inventories
(12,136)
13,453
12,851
Prepaid and other assets
(212)
(216)
1,543
Operating lease right-of-use assets and liabilities
(1,410)
(2,056)
(2,573)
Accrued income taxes
-
(613)
(307)
Accounts payable, accrued expenses and other liabilities
3,455
(10,053)
(43,179)
Net cash (used in) provided by operating activities
(19,745)
477
13,370
Investing Activities:
Expenditures for property and equipment
(7,872)
(12,532)
(19,433)
Purchase of short-term investments
(39,612)
(48,055)
(54,734)
Sales of short-term investments
62,782
80,371
90,190
Sales of other assets
13,667
(8)
-
Net cash provided by investing activities
28,965
19,776
16,023
Financing Activities:
Dividends paid
(10,516)
(13,954)
(14,369)
Repurchase of common stock
(3,877)
(2,562)
(15,216)
Proceeds from employee stock purchase plan
338
384
307
Net cash used in financing activities
(14,055)
(16,132)
(29,278)
Net (decrease) increase in cash, cash equivalents, and restricted cash
(4,835)
4,121
115
Cash, cash equivalents, and restricted cash at beginning of period
27,913
23,792
23,677
Cash, cash equivalents, and restricted cash at end of period
$
23,078
$
27,913
$
23,792
Non-cash activity:
Accrued property and equipment expenditures
$
329
$
942
$
685
Accrued treasury stock
27
-
-
See notes to consolidated financial statements.
44
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
Accumulated
Additional
Other
Total
Common
Paid-In
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands, except per share data)
Balance — January 29, 2022
$
728
$
119,540
$
134,208
$
(280)
$
254,196
Comprehensive income:
Net income
-
-
29
-
29
Unrealized loss on available-for-sale securities, net of
deferred income tax benefit of $
287
-
-
-
(958)
(958)
Dividends paid ($
0.68
per share)
-
-
(14,369)
-
(14,369)
Class A common stock sold through employee stock purchase
plan
-
360
-
-
360
Share-based compensation expense
4
2,531
17
-
2,552
Repurchase and retirement of treasury shares
(41)
-
(15,176)
-
(15,217)
Balance — January 28, 2023
$
691
$
122,431
$
104,709
$
(1,238)
$
226,593
Comprehensive income:
Net loss
-
-
(23,941)
-
(23,941)
Unrealized gain on available-for-sale securities, net of
deferred income tax expense of $
489
-
-
-
1,633
1,633
Dividends paid ($
0.68
per share)
-
-
(13,954)
-
(13,954)
Class A common stock sold through employee stock purchase
plan
2
445
-
-
447
Share-based compensation expense
10
4,077
18
-
4,105
Repurchase and retirement of treasury shares
(9)
-
(2,553)
-
(2,562)
Balance — February 3, 2024
$
694
$
126,953
$
64,279
$
395
$
192,321
Comprehensive income:
Net loss
-
-
(18,057)
-
(18,057)
Unrealized loss on available-for-sale securities, net of
deferred income tax benefit of $
0
-
-
-
(242)
(242)
Dividends paid ($
0.51
per share)
-
-
(10,516)
-
(10,516)
Class A common stock sold through employee stock purchase
plan
2
395
-
-
397
Share-based compensation expense
12
2,182
76
-
2,270
Repurchase and retirement of treasury shares
(30)
-
(3,847)
-
(3,877)
Balance — February 1, 2025
$
678
$
129,530
$
31,935
$
153
$
162,296
See notes to consolidated financial statements.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
45
1.
Summary of Significant Accounting Policies:
Principles of Consolidation:
The Consolidated Financial Statements include the accounts of The Cato
Corporation and
its
wholly-owned subsidiaries
(the “Company”).
All
significant intercompany
accounts
and transactions have been eliminated.
Description
of
Business
and
Fiscal
Year:
The
Company
has
two
reportable
segments
—
the
operation
of
a
fashion
specialty
stores
segment
(“Retail
Segment”)
and
a
credit
card
segment
(“Credit
Segment”). The
apparel specialty
stores operate
under the
names “Cato,”
“Cato Fashions,”
“Cato Plus,”
“It’s Fashion,” “It’s
Fashion Metro,” “Versona
”
and “Cache,” including e-commerce websites. The stores
are
located
primarily
in
strip
shopping
centers
principally
in
the
southeastern
United
States.
The
Company’s fiscal year ends on the Saturday nearest January 31 of the subsequent year. Fiscal year 2024 is
a
52
-week year, 2023 is a
53
-week year and 2022 is a
52
-week year.
Use
of
Estimates:
The
preparation
of
the
Company’s
financial
statements
in
conformity
with
accounting
principles
generally accepted
in
the
United
States
(“GAAP”)
requires
management to
make
estimates
and
assumptions
that
affect
the
reported
amounts
of
assets
and
liabilities
and
disclosure
of
contingent
assets
and
liabilities
at
the
date
of
the
financial
statements
and
the
reported
amounts
of
revenues
and
expenses
during
the
reporting
period.
Actual
results
could
differ
from
those
estimates.
Significant
accounting
estimates
reflected
in
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,
uncertain tax positions and valuation allowances on deferred tax
assets.
Cash
and
Cash
Equivalents:
Cash
and
cash
equivalents
consist
of
highly
liquid
investments
with
original maturities of three months or less.
Short-Term
Investments:
Investments with
original maturities
beyond three
months are
classified
as short-term
investments. See
Note 3
for the
Company’s
estimated fair
value of,
and other
information
regarding,
its
short-term
investments.
The
Company’s
short-term
investments
are
all
classified
as
available-for-sale.
As
they
are
available
for
current
operations,
they
are
classified
on
the
Consolidated
Balance Sheets
as
Current Assets.
Available-for-sale
securities are
carried at
fair value,
with
unrealized
gains
and
temporary
losses,
net
of
income
taxes,
reported
as
a
component
of
Accumulated
other
comprehensive income.
Other than
temporary declines
in the
fair value
of investments
are recorded
as a
reduction
in
the
cost
of
the
investments
in
the
accompanying
Consolidated
Balance
Sheets
and
a
reduction
of
Interest
and
other
income
in
the
accompanying
Consolidated
Statements
of
Income
and
Comprehensive
Income.
The
cost
of
debt
securities
is
adjusted
for
amortization
of
premiums
and
accretion
of
discounts
to
maturity.
The
amortization
of
premiums,
accretion
of
discounts
and
realized
gains and losses are included in Interest and other income.
Restricted Cash:
The Company had $
2.8
million and $
4.0
million in escrow at February 1, 2025 and
February 3, 2024, respectively, as security and collateral for administration of the Company’s
self-insured
workers’
compensation
and
general
liability
coverage,
which
is
reported
as
Restricted
cash
on
the
Consolidated Balance Sheets.
Supplemental Cash Flow
Information:
Income tax
payments, net
of refunds
received, for
the fiscal
years ended
February 1,
2025, February
3, 2024
and January
28, 2023
were a
payment of
$
1,874,000
, a
payment of $
4,121,000
and a refund of $
29,206,000
, respectively.
Inventories:
Merchandise
inventories
are
stated
at
the
net
realizable
value
as
determined
by
the
weighted-average cost method.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
46
Property and Equipment:
Property and equipment are
recorded at cost, including
land. Maintenance
and repairs are expensed to operations as incurred; renewals and betterments are capitalized. Depreciation
is
determined on
the
straight-line method
over the
estimated useful
lives of
the
related assets
excluding
leasehold improvements.
Leasehold improvements are amortized over the
shorter of the estimated useful
life or lease term.
For leases with renewal periods at
the Company’s
option, the Company generally uses
the
original
lease
term
plus
reasonably
assured
renewal
option
periods
(generally
one
five-year
option
period) to determine estimated useful lives.
Typical estimated useful lives are as follows:
`
Estimated
Classification
Useful Lives
Land improvements
10
years
Buildings
30
-
40
years
Leasehold improvements
5
-
10
years
Fixtures and equipment
3
-
10
years
Information technology equipment and software
3
-
10
years
Aircraft
20
years
Impairment
of
Long-Lived
Assets:
The
Company
invests
in
leaseholds,
right-of-use
assets
and
equipment primarily
in connection
with the
opening and
remodeling of
stores and
in computer
software
and hardware. The Company periodically reviews its store locations and estimates the recoverability of its
long-lived assets,
which primarily
relate to
Fixtures and
equipment, Leasehold
improvements, Right-of-
use
assets
net
of
Lease
liabilities
and
Information
technology
equipment
and
software.
An
impairment
charge is
recorded for the
amount by which
the carrying value
exceeds the estimated
fair value when
the
Company
determines
that
projected
cash
flows
associated
with
those
long-lived
assets
will
not
be
sufficient to recover the
carrying value. This determination is
based on a number of
factors, including the
store’s
historical
operating
results
and
future
projected
cash
flows,
which
include
contribution
margin
projections. The Company assesses the fair
value of each lease by
considering market rents and any lease
terms
that
may
adjust
market
rents
under
certain
conditions,
such
as
the
loss
of
an
anchor
tenant
or
a
leased
space
in
a
shopping
center
not
meeting
certain
criteria.
Further,
in
determining when
to
close
a
store, the
Company considers real
estate development
in the
area and
perceived local
market conditions,
which can
be difficult
to
predict and
may be
subject
to
change. Asset
impairment charges
of
$
786,000
,
$
1,811,000
and $
884,000
were incurred in fiscal 2024, fiscal 2023 and fiscal 2022, respectively.
Other Assets:
Other assets are comprised
of long-term assets, primarily
insurance contracts related to
deferred compensation assets and land held for investment purposes.
`
Balance as of
February 1, 2025
February 3, 2024
(Dollars in thousands)
Other Assets
Deferred Compensation Investments
$
9,301
$
8,586
Land Held for Investment
8,679
9,334
Miscellaneous Investments
1,139
2,076
Asset Held for Sale
-
4,183
Other Deposits
596
604
Other
264
264
Total
Other Assets
$
19,979
$
25,047
Leases:
The
Company
leases
all
of
its
retail
stores.
Most
lease
agreements
contain
construction
allowances and rent escalations.
For purposes of recognizing incentives and minimum rental expenses on
a straight-line basis over the terms of the leases, including renewal periods considered reasonably
assured,
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
47
the Company begins amortization
as of the
initial possession date which
is when the Company
enters the
space and begins to make improvements in preparation for intended use.
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. Gift
cards do
not have
expiration dates.
Layaway sales
are recorded
as deferred
revenue until
the customer takes possession or forfeits the merchandise. 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.
In addition, a provision is made for estimated rewards cards issued to
customers based
on their
purchases with the
Company’s propriety
credit card.
The rewards
cards issued
by the Company have a
90
-day expiration.
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.
In accordance with ASU 2014-09,
Revenue from Contracts with Customers (Topic
606)
(“Topic 606”),
in
fiscal
2024,
2023
and
2022,
the
Company
recognized
$
1,447,934
,
$
1,116,000
and
$
256,000
,
respectively,
of
income
on
unredeemed
gift
cards
(“gift
card
breakage”)
as
a
component
of
Other
Revenue
on
the
Consolidated
Statements
of
Income (Loss)
and
Comprehensive Income
(Loss).
Under
Topic
606, the
Company recognizes
gift card
breakage using
an expected
breakage percentage
based on
redeemed gift cards. See Note 2 for further information on miscellaneous
income.
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.
The
Company
estimated
customer
credit
losses
of
$
654,000
and
$
578,000
for
the
twelve
months
ended
February 1,
2025 and
February 3,
2024, respectively,
on sales
purchased on
the Company’s
proprietary
credit
card
of
$
21.8
million
and
$
23.5
million
for
the
twelve
months
ended
February
1,
2025
and
February 3, 2024, respectively.
The following table provides information about receivables
and contract liabilities from contracts with
customers (in thousands):
`
Balance as of
February 1, 2025
February 3, 2024
Proprietary Credit Card Receivables, net
$
10,848
$
10,909
Gift Card Liability
$
7,541
$
8,143
Cost of Goods Sold:
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
Company’s
buying
departments
and
distribution
center.
Occupancy expenses include rent, real
estate taxes, insurance, common area
maintenance, utilities
and
maintenance
for
stores
and
distribution
facilities.
Buying,
distribution,
occupancy
and
internal
transfer
costs
are
treated
as
period
costs
and
are
not
capitalized
as
part
of
inventory.
The
direct
costs
associated with shipping goods to customers are recorded as a component
of Cost of goods sold.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
48
Advertising:
Advertising
costs
are
expensed
in
the
period
in
which
they
are
incurred.
Advertising
expense was approximately $
4,686,000
, $
6,277,000
and $
6,868,000
for the fiscal years ended February 1,
2025, February 3, 2024 and January 28, 2023, respectively.
Stock Repurchase Program:
For the fiscal year ended
February 1, 2025, the Company had
997,455
shares
remaining
in
open
authorizations.
There
is
no
specified
expiration
date
for
the
Company’s
repurchase
program. Share
repurchases
are
recorded in
Retained
earnings, net
of par
value.
From year
end
through
March
31,
2025,
the
Company
repurchased
264,282
shares
for
$
828,181
.
The
Board
of
Directors
authorized
an
increase
of
1,000,000
shares
in
the
Company’s
share
repurchase
program
on
December 23, 2024.
Earnings
Per
Share:
ASC
260
–
Earnings
Per
Share
requires
dual
presentation
of
basic
EPS
and
diluted
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 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
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
earnings
(loss)
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.
The following table reflects
the basic and
diluted EPS calculations for
the fiscal years ended
February
1, 2025, February 3, 2024 and January 28, 2023:
`
Fiscal Year Ended
February 1, 2025
February 3, 2024
January 28, 2023
Numerator
(Dollars in thousands)
Net earnings (loss)
$
(18,057)
$
(23,941)
$
29
(Earnings) loss allocated to non-vested equity awards
(548)
1,347
12
Net earnings (loss) available to common stockholders
$
(18,605)
$
(22,594)
$
41
Denominator
Basic weighted average common shares outstanding
19,249,081
19,389,907
19,930,960
Diluted weighted average common shares outstanding
19,249,081
19,389,907
19,930,960
Net income (loss) per common share
Basic earnings (loss) per share
$
(0.97)
$
(1.17)
$
-
Diluted earnings (loss) per share
$
(0.97)
$
(1.17)
$
-
Vendor
Allowances:
The
Company
receives
certain
allowances
from
vendors
primarily
related
to
purchase discounts and markdown and
damage allowances. All allowances are
reflected in Cost of
goods
sold
as
earned
when
the
related
products
are
sold.
Cash
consideration
received
from
a
vendor
is
presumed
to
be
a
reduction
of
the
purchase
cost
of
merchandise
and
is
reflected
as
a
reduction
of
inventory.
The Company does not receive cooperative advertising allowances.
Income
Taxes:
The
Company
files
a
consolidated
federal
income
tax
return.
Income
taxes
are
provided
based
on
the
asset
and
liability
method
of
accounting,
whereby
deferred
income
taxes
are
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
49
provided
for
temporary
differences
between
the
financial
reporting
basis
and
the
tax
basis
of
the
Company’s assets and liabilities.
Unrecognized tax
benefits for
uncertain tax
positions are
established in
accordance
with
ASC 740
–
Income Taxes
when, despite
the fact
that the
tax return
positions are
supportable, the
Company believes
these positions may be
challenged and the
results are uncertain.
The Company adjusts
these liabilities in
light
of
changing
facts
and
circumstances.
Potential
accrued
interest
and
penalties
related
to
unrecognized
tax
benefits
within
operations
are
recognized
as
a
component
of
Income
before
income
taxes.
The Company assesses the
likelihood that deferred tax
assets will be
able to be
realized, and based
on
that assessment, the Company will determine if a valuation allowance should
be recorded.
In addition,
the Tax
Cuts and
Jobs
Act implemented
a
new minimum
tax
on
global intangible
low-
taxed income
(“GILTI”).
The Company has
elected to
account for
GILTI
tax in
the period
in which
it is
incurred, which is included as a component of its current year provision
for income taxes.
Deferred
Tax
Valuation
Allowance:
The
Company assesses
the
likelihood
that
deferred
tax
assets
will
be
realized
in
light
of
the
Company’s
current
financial
performance
and
projected
future
financial
performance. Based on this
assessment, the Company then
determines if a valuation
allowance should be
recorded.
If the
Company concludes that
it is
more likely than
not that
the Company will
not be
able to
realize its tax deferred assets, a valuation allowance is recorded for
the proportion of the deferred tax asset
it determines may not be realized.
Store
Opening
Costs:
Costs
relating
to
the
opening
of
new
stores
or
the
relocating
or
expanding
of
existing
stores
are
expensed
as
incurred.
A
portion
of
construction,
design,
and
site
selection costs are capitalized to new, relocated and remodeled stores.
Insurance:
The Company is self-insured with respect to employee health care, workers’ compensation
and
general
liability.
The
Company’s
self-insurance
liabilities
are
based
on
the
total
estimated
cost
of
claims filed and estimates of
claims incurred but not reported, less
amounts paid against such claims,
and
are
not discounted.
Management reviews
current and
historical claims
data in
developing its
estimates.
The Company has stop-loss
insurance coverage for individual claims in
excess of $
375,000
for employee
healthcare, $
350,000
for workers’ compensation and $
250,000
for general liability.
Fair Value
of Financial Instruments:
The Company’s
carrying values of
financial instruments, such
as
cash
and
cash
equivalents,
short-term
investments,
and
restricted
cash,
approximate their
fair
values
due to their short terms to maturity and/or their variable interest rates.
Stock Based
Compensation:
The Company records
compensation expense associated
with restricted
stock
and
other
forms
of
equity
compensation
in
accordance
with
ASC
718
-
Compensation
–
Stock
Compensation.
Compensation
cost
associated
with
stock
awards
recognized
in
all
years
presented
includes: 1) amortization related to
the remaining unvested portion of
all stock awards based
on the grant
date fair value and 2) adjustments for the effects of actual forfeitures versus initial
estimated forfeitures.
Subsequent
Events:
On
March
13,
2025,
the
Company,
as
borrower,
and
certain
other
domestic
subsidiaries,
as
borrowers
and
guarantors,
entered
into
a
Credit
Agreement
(the
“ABL
Credit
Agreement”) and
related
loan
documents, by
and
among the
Company,
certain
other
of
the
Company’s
domestic
subsidiaries,
and
Wells
Fargo
Bank,
National
Association,
as
the
lender
(the
“Lender”),
to
establish an asset-based revolving credit facility (the “ABL Facility”) in an amount up to $
35
million. The
proceeds from the ABL
Facility may be used to
provide funding for ongoing working capital
and general
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
50
corporate purposes. The ABL Credit Agreement replaces
the credit agreement, dated as of
May 19, 2022,
as
amended from
time to
time, between
the Company,
as
borrower,
certain domestic
subsidiaries of
the
Company,
as
guarantors,
and
the
Lender,
as
lender
and
agent
(the
“Prior
Credit
Agreement”).
No
principal or accrued interest was outstanding under
the credit facility under the Prior
Credit Agreement at
the time of its termination on March 13, 2025.
The ABL Facility may be
used for revolving credit
loans and letters of
credit from time to
time up to
a maximum principal amount of $
35
million, less an amount equal to the greater of (a)
10.0
% of the lesser
of the borrowing base described below and $
35
million and (b) $
5
million, subject to the other limitations
described below. The ABL Facility includes a $
15
million uncommitted accordion feature that permits the
borrowers,
under
certain
conditions,
to
solicit
the
Lender
to
provide
additional
revolving
loan
commitments
to
increase
the
aggregate
amount
of
the
revolving
loan
commitments
up
to
a
maximum
principal amount
of
$
50
million.
The
ABL Facility
contains
a
sub-facility that
allows
the
Company to
issue
letters
of
credit
in
an
aggregate
amount
not
to
exceed
$
5
million.
Availability
under
the
ABL
Facility at closing of the ABL Credit Agreement was $
30
million.
The
amount
available
under
the
ABL
Facility
is
limited
by
a
borrowing
base
consisting
of
certain
eligible credit card receivables and inventory, reduced by specified reserves, as follows:
●
90
% of eligible credit card receivable, plus
●
90
% of net recovery percentage of eligible inventory multiplied by most recent appraised value of
such
inventory,
calculated at
the
lower
of
(a)
cost
computed on
a
first-in first-out
basis and
(b)
market value (net of intercompany profits and certain other adjustments), minus
●
applicable reserves (as defined in the ABL Credit Agreement).
The
ABL Facility
permits borrowings
based
upon (a)
base
rate (calculated
as
the
greatest of
(i) the
federal funds rate plus
1/2%
, (ii) the SOFR rate
described below for an interest period of
one month, plus
1
%, (iii) the
rate of interest
announced, from time to
time, as the
Lender’s “prime rate”
and (iv)
0
%) and
(b)
SOFR rate
of
one, three
or
six-month interest
periods (with
SOFR defined
as
the
secured overnight
financing
rate
administered
by
the
Federal
Reserve
Bank
of
New
York
(or
its
successor)).
Base
rate
borrowings
bear
interest
at
an
annual
rate
equal
to
50
basis
points
above
base
rate.
SOFR
borrowings
bear interest at an annual
rate equal to SOFR for
the interest period selected plus
10
basis points plus
150
basis points.
The ABL
Facility charges
a fee
on unutilized
commitments at
an annual
rate of
37.5
basis
points if
at least
half of
the ABL
commitments are
unutilized and
at an
annual rate
of
25
basis points
if
less than
half of
the ABL
commitments are
unutilized.
In addition,
the ABL
Facility charges
a monthly
collateral monitoring fee and customary fees for letters of credit.
The ABL Facility
matures on March
13, 2028.
The ABL Facility
may be prepaid
from time to
time,
in
whole
or
in
part,
without
a
prepayment
penalty
or
premium.
In
addition,
customary
mandatory
prepayments
of
the
loans
under
the
ABL
Facility
are
required
upon
the
occurrence
of
certain
events
including, without limitation, outstanding borrowing exposures
exceeding the borrowing base and
certain
dispositions of assets outside of the ordinary course of business.
Accrued interest is payable (a) at the end
of each interest period for borrowings based upon the SOFR
rate (but not to exceed three months) and
(b)
monthly for borrowings based upon the base rate.
The
Company’s
obligations under
the
ABL Facility
(and
certain related
obligations) are
guaranteed
by the
other borrowers
and the
guarantors.
Each of
the Company’s
future domestic
subsidiaries is
also
required
to
guarantee
the
ABL
Facility
on
a
senior
secured
basis
(such
future
guarantors
and
the
borrowers
and
guarantors
referred
to
in
the
first
sentence
of
this
paragraph,
the
“Loan
Parties”).
In
addition, the
borrowers’ obligations are
secured on
a first-priority
basis by
all assets
of the
Loan Parties,
subject to certain exceptions.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
51
Cash Dominion.
Under the
terms of
the
ABL Facility,
if (i)
an event
of
default exists
or (ii)
excess
borrowing availability
under
the
ABL Facility
(the
“Excess
Availability”)
falls
below
the
greater of
(a)
15.0
%
of
the
lesser
of
the
borrowing
base
and
$
35
million
and
(b)
$
10
million,
the
Loan
Parties
will
become subject
to
cash dominion,
which will
require prepayment
of
loans
under the
ABL Facility
with
the cash deposited in
certain deposit accounts of
the Loan Parties, including
a concentration account, and
will
restrict
the
Loan
Parties’
ability
to
transfer
cash
from
their
concentration
account.
Such
cash
dominion period
will end,
in the
case of
an event
of default,
when the
event of
default no
longer exists,
and in the case of when Excess Availability falls below the threshold described in the first sentence of this
paragraph, when Excess Availability exceeds such threshold for a period of
30
consecutive days.
Affirmative
and
Restrictive
Covenants.
The
ABL
Credit
Agreement
governing
the
ABL
Facility
contains
customary representations
and
warranties, affirmative
and
negative covenants
(subject, in
each
case,
to
exceptions
and
qualifications),
and
events
of
defaults,
including
covenants
that
limit
the
Company’s ability to, among other things:
●
incur additional indebtedness;
●
create liens on its assets;
●
make investments, including loans and advances to foreign subsidiaries;
●
pay dividends and make other restricted payments;
●
sell certain assets outside of the ordinary course of business;
●
consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets;
●
make acquisitions; and
●
enter into transactions with affiliates.
Restrictions
relating
to
permitted
acquisitions,
permitted
investments,
prepayment
of
other
indebtedness,
and
restricted
payments
are
substantially
less,
or
not
applicable
in
the
case
of
restricted
payments, if the Company can satisfy the following payment conditions: (i) there is
no default or event of
default under
the ABL
Facility,
(ii) there
are
no
revolving credit loans
outstanding, (iii) the
Loan Parties
have unrestricted
cash of
greater than
$
20
million, (iv)
the Lender
receives at
least three
business days’
prior
written
notice
of
such
event,
including
information
about
the
estimated
date
and
amount
of
the
payment
and
a
reasonable
description
of
such
event,
and
(v)
Lender
receives
a
certificate
certifying
compliance with the foregoing clauses and demonstrating the calculations required
thereby.
Recently Adopted Accounting
Pronouncements:
In November 2023,
the FASB
issued ASU
2023-
07, “Segment Reporting (Topic
280): Improvements to Reportable Segment Disclosures,”
which requires
enhanced
disclosures
about
significant
segment
expenses.
This
guidance
was
adopted
by
the
Company
during the
fourth quarter
of 2024
and requires
retrospective application
to
all prior
periods presented
in
the
financial statements.
Refer to
Note 13
of
the
Company's financial
statements in
this
Form 10-K
for
additional information related to segment expenses.
Recently Issued Accounting Pronouncements:
In December 2023, the
FASB
issued ASU 2023-09,
“Income Taxes (Topic
740): Improvements to Income Tax Disclosures,” which modifies the requirements
on income tax disclosures to require disaggregated information about
a reporting entity’s effective tax rate
reconciliation
as
well
as
information
on
income
taxes
paid.
This
guidance
is
effective
for
fiscal
years
beginning after
December 15, 2024
for all
public business
entities, with early
adoption and retrospective
application
permitted.
The
Company
is
currently
in
the
process
of
evaluating
the
potential
impact
of
adoption of this new guidance on its consolidated financial statements and
related disclosures.
In November
2024, the
FASB
issued
ASU 2024-03,
“Income Statement—Reporting
Comprehensive
Income—Expense
Disaggregation
Disclosures
(Subtopic
220-40):
Disaggregation
of
Income
Statement
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
52
Expenses,”
which
requires
public
entities
to
disclose,
on
an
annual
and
interim
basis,
disaggregated
information
in
the
footnotes
about
specified
information
related
to
certain
costs
and
expenses.
This
guidance is effective for annual periods beginning after December 15, 2026 and for interim periods within
fiscal years beginning after December 15, 2027, with early adoption permitted.
The Company is currently
in
the
process
of
evaluating
the
potential
impact
of
adoption
of
this
new
guidance
on
its
consolidated
financial statements and related disclosures.
2.
Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
Fiscal Year Ended
February 1, 2025
February 3, 2024
January 28, 2023
Dividend income
$
(75)
$
(78)
$
(47)
Interest income
(5,019)
(3,919)
(1,876)
State recovery grant
-
-
(1,431)
Insurance proceeds
-
-
(1,683)
Miscellaneous income
(1,389)
(1,079)
(896)
Net loss (gain) on investment sales
(5,344)
(25)
31
Interest and other income
$
(11,827)
$
(5,101)
$
(5,902)
In
fiscal
2022,
the
Company
received
$
1.4
million
from
the
state
of
North
Carolina’s
Business
Recovery
Program,
which
provided
aid
to
eligible
North
Carolina
businesses
that
suffered
significant
economic
damage from
the
COVID-19 pandemic.
Additionally,
in
fiscal
2022,
the
Company received
$
1.7
million in property insurance claims, including business interruption, from Hurricanes
Ida and Laura
in 2021 and 2020.
3.
Short-Term Investments:
At
February
1,
2025,
the
Company’s
investment
portfolio
was
primarily
invested
in
corporate
and
governmental debt
securities held
in managed
accounts.
These securities
are classified
as available-for-
sale as they are highly liquid and are recorded on the Consolidated Balance Sheets at estimated fair value,
with
unrealized
gains
and
temporary
losses
reported
net
of
taxes
in
Accumulated
other
comprehensive
income.
The
table
below
reflects
gross
accumulated
unrealized
gains
(losses)
in
short-term
investments
at
February 1, 2025 and February 3, 2024 (in thousands):
`
February 1, 2025
February 3, 2024
Debt securities
Debt securities
issued by the U.S
issued by the U.S
Government, its various
Government, its various
States, municipalities
Corporate
States, municipalities
Corporate
and agencies
debt
and agencies
debt
of each
securities
Total
of each
securities
Total
Cost basis
$
5,878
$
51,392
$
57,270
$
30,989
$
48,320
$
79,309
Unrealized gains
-
163
163
-
38
38
Unrealized (loss)
(10)
-
(10)
(335)
-
(335)
Estimated fair value
$
5,868
$
51,555
$
57,423
$
30,654
$
48,358
$
79,012
Accumulated
other
comprehensive
income
on
the
Consolidated
Balance
Sheets
reflects
the
accumulated
unrealized
gains
and
losses
in
short-term investments
in
addition
to
unrealized
gains
and
losses
from
equity
investments
and
restricted
cash
investments.
The
table
below
reflects
gross
accumulated unrealized
gains and
losses in
these investments
at February
1, 2025
and February
3, 2024
(in thousands):
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
53
`
February 1, 2025
February 3, 2024
Deferred
Unrealized
Deferred
Unrealized
Unrealized
Tax Benefit/
Net Gain/
Unrealized
Tax Benefit/
Net Gain/
Security Type
Gain/(Loss)
(Expense)
(Loss)
Gain/(Loss)
(Expense)
(Loss)
Short-Term Investments
$
153
$
-
$
153
$
(297)
$
68
$
(229)
Equity Investments
-
-
-
811
(187)
624
Total
$
153
$
-
$
153
$
514
$
(119)
$
395
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
54
4.
Fair Value Measurements:
The following tables set forth information regarding the Company’s financial
assets that are measured
at fair value as of February 1, 2025 and February 3, 2024 (in thousands):
`
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
February 1, 2025
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
1,244
$
-
$
1,244
$
-
Corporate Bonds
51,326
-
51,326
-
U.S. Treasury/Agencies Notes and Bonds
4,624
-
4,624
-
Cash Surrender Value of Life Insurance
9,301
-
-
9,301
Asset-backed Securities (ABS)
229
-
229
-
Total Assets
$
66,724
$
-
$
57,423
$
9,301
Liabilities:
Deferred Compensation
$
(8,548)
$
-
$
-
$
(8,548)
Total Liabilities
$
(8,548)
$
-
$
-
$
(8,548)
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
February 3, 2024
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
12,540
$
-
$
12,540
$
-
Corporate Bonds
45,400
-
45,400
-
U.S. Treasury/Agencies Notes and Bonds
18,114
-
18,114
-
Cash Surrender Value of Life Insurance
8,586
-
-
8,586
Asset-backed Securities (ABS)
2,958
-
2,958
-
Corporate Equities
1,084
1,084
-
-
Total Assets
$
88,682
$
1,084
$
79,012
$
8,586
Liabilities:
Deferred Compensation
$
(8,654)
$
-
$
-
$
(8,654)
Total Liabilities
$
(8,654)
$
-
$
-
$
(8,654)
The
Company’s
investment
portfolio
was
primarily
invested
in
corporate
bonds
and
taxable
governmental debt securities held in managed accounts
with underlying ratings of A or
better at February
1, 2025. The state,
municipal and corporate bonds and
asset-backed securities have contractual maturities
which range from
nine days
to
2.8 years
. The U.S. Treasury notes have contractual maturities which range
from
13 days
to
2.5 years
. These
securities are classified
as available-for-sale
and are
recorded as
Short-
term
investments
and Other
assets
on the
accompanying Consolidated
Balance Sheets.
These
assets
are
carried
at
fair
value
with
unrealized
gains
and
losses
reported
net
of
taxes
in
Accumulated
other
comprehensive income.
Additionally,
at
February
1,
2025
and
February
3,
2024,
the
Company
had
$
0.0
million
and
$
1.1
million of
corporate equities,
respectively,
which are
recorded within
Other assets
in the
accompanying
Consolidated Balance Sheets.
Level
1
category
securities
are
measured
at
fair
value
using
quoted
active
market
prices.
Level
2
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
55
investment
securities
include
corporate,
state
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 the 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
primarily
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
compensation
obligation,
the
value
of
which
is
tracked
via
underlying
insurance
funds’
net
asset
values,
as
recorded
in
Other
noncurrent
liabilities
in
the
Consolidated Balance Sheets. These
funds are designed
to mirror the
return of existing
mutual funds and
money market funds that are observable and actively traded.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
56
The following tables summarize
the change in fair
value of the Company’s
financial assets and liabilities
measured using Level 3 inputs for the
years ended February 1, 2025 and
February 3, 2024
(in thousands):
`
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at February 3, 2024
$
8,586
Total gains or (losses)
Included in interest and other income (or
changes in net assets)
715
Ending Balance at February 1, 2025
$
9,301
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at February 3, 2024
$
(8,654)
Redemptions
1,175
Additions
(220)
Total (gains) or losses
Included in interest and other income (or
changes in net assets)
(849)
Ending Balance at February 1, 2025
$
(8,548)
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at January 28, 2023
$
9,274
Withdrawals
(1,168)
Total gains or (losses)
Included in interest and other income (or
changes in net assets)
480
Ending Balance at February 3, 2024
$
8,586
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at January 28, 2023
$
(8,903)
Redemptions
1,119
Additions
(292)
Total (gains) or losses
Included in interest and other income (or
changes in net assets)
(578)
Ending Balance at February 3, 2024
$
(8,654)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
57
5.
Accounts Receivable:
Accounts receivable consist of the following (in thousands):
February 1, 2025
February 3, 2024
Customer accounts — principally deferred payment accounts
$
11,428
$
11,614
Income tax receivable
5,425
6,285
Miscellaneous receivables
3,365
7,171
Bank card receivables
4,903
5,386
Total
25,121
30,456
Less allowance for customer credit losses
581
705
Accounts receivable — net
$
24,540
$
29,751
Finance charge
and late
charge
revenue on
customer deferred
payment accounts
totaled $
2,696,000
,
$
2,640,000
and $
2,243,000
for the fiscal
years ended February 1, 2025, February 3, 2024
and January 28,
2023,
respectively,
and
charges
against
the
allowance
for
customer
credit
losses
were
approximately
$
654,000
,
$
554,000
and
$
280,000
for
the
fiscal
years
ended
February
1,
2025,
February
3,
2024
and
January
28,
2023,
respectively.
Expenses
relating
to
the
allowance
for
customer
credit
losses
are
classified
as
a
component
of
Selling,
general
and
administrative
expense
in
the
accompanying
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss).
During fiscal 2024, the Company received $
8.6
million from the insurance claim settlement and sale of
its corporate
jet, which
had sustained
damage in
fiscal 2023.
The Company
recorded a
net gain
of $
3.2
million which
is included
in Interest
and other
income in
the accompanying
Consolidated Statements
of
Income (Loss) and Comprehensive Income (Loss) for the year ended February
1, 2025.
6.
Property and Equipment:
Property and equipment consist of the following (in thousands):
February 1, 2025
February 3, 2024
Land and improvements
$
13,593
$
13,755
Buildings
35,950
35,756
Leasehold improvements
72,608
74,782
Fixtures and equipment
161,950
155,357
Information technology equipment and software
33,751
39,904
Construction in progress
928
18,034
Total
318,780
337,588
Less accumulated depreciation
258,454
273,566
Property and equipment — net
$
60,326
$
64,022
Construction in progress primarily represents costs related to new
store development,
distribution center improvements and investments in new technology.
7.
Accrued Expenses:
Accrued expenses consist of the following (in thousands):
February 1, 2025
February 3, 2024
Accrued employment and related items
$
8,189
$
4,736
Property and other taxes
13,261
13,544
Accrued self-insurance
8,593
9,500
Fixed assets
329
942
Other
11,345
8,682
Total
$
41,717
$
37,404
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
58
8.
Financing Arrangements:
At February 1,
2025, 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
contained various
financial
covenants and limitations, including the maintenance of specific
financial ratios with which the Company
was not in compliance as of
February 1, 2025. There were
no
borrowings outstanding, or any outstanding
letters of
credit, under
this credit
facility as
of the
fiscal year
ended February
1, 2025
or
the fiscal
year
ended
February 3,
2024.
On
March
13,
2025,
the
Company terminated
the
unsecured revolving
line
of
credit when it entered into
a new $
35.0
million asset-backed revolving line of credit
(the “ABL Facility”)
secured primarily by
inventory and third-party
credit card receivables.
As of March
31, 2025 there
were
no
borrowings
under
the
ABL
Facility
and
availability
under
the
ABL
Facility
was
$
30.0
million.
For
additional information regarding the ABL Facility, see Note 1 to the Consolidated Financial Statements.
The
Company
had
no
outstanding
revocable
letters
of
credit
relating
to
purchase
commitments
at
February 1, 2025 or at February 3, 2024.
On April 25,
2024, the Company amended
the now terminated
unsecured revolving credit agreement
to modify a definition used in calculating the Company’s
minimum EBITDAR coverage ratio to add back
certain
income
tax
receivables
included
in
the
calculation
of
the
ratio.
On
November
1,
2024,
the
Company
amended
the
now
terminated
unsecured
revolving
credit
agreement
to
lower
the
minimum
EBITDAR
coverage
ratio
and
the
corresponding minimum
cash
and
investments
used
to
determine the
EBITDAR coverage ratio in exchange for a secured position in any
future borrowings.
9.
Stockholders’ Equity:
The
holders
of
Class A
Common
Stock
are
entitled
to
one vote per share
,
whereas
the
holders
of
Class B Common Stock are entitled
to
ten votes per share
. Each share of
Class B Common Stock may be
converted at any time into one share of Class A Common Stock. Subject to the rights of
the holders of any
shares of
Preferred Stock
that may
be outstanding
at the
time, in
the event
of liquidation,
dissolution or
winding
up
of
the
Company,
holders
of
Class A
Common
Stock
are
entitled
to
receive
a
preferential
distribution of $
1.00
per share of the
net assets of the Company.
Cash dividends on the
Class B Common
Stock cannot be
paid unless cash
dividends of at
least an equal
amount are paid
on the Class A
Common
Stock.
The
Company’s
certificate of
incorporation
provides that
shares
of
Class B Common
Stock
may be
transferred
only
to
certain
“Permitted
Transferees”
consisting
generally
of
the
lineal
descendants
of
holders
of
Class B
Common
Stock,
trusts
for
their
benefit,
corporations
and
partnerships
controlled
by
them and the
Company’s employee benefit
plans. Any transfer
of Class B Common Stock
in violation of
these
restrictions,
including
a
transfer
to
the
Company,
results
in
the
automatic
conversion
of
the
transferred
shares
of
Class B
Common
Stock
held
by
the
transferee
into
an
equal
number
of
shares
of
Class A Common Stock.
10.
Employee Benefit Plans:
The
Company
has
a
defined
contribution
retirement
savings
plan
(“401(k)
plan”)
which
covers
all
associates
who
meet
minimum
age
and
service
requirements.
The 401(k) plan allows participants to
contribute up to 75% of their annual compensation up to the maximum elective deferral, designated by
the Internal Revenue Service.
The Company
is obligated
to make
a minimum
contribution to
cover plan
administrative expenses.
Further Company
contributions
are
at the
discretion of
the
Board of
Directors.
The Company
made no
contribution for
the year
ended February
1, 2025.
The Company’s
contributions
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
59
for
the
years
ended
February
3,
2024
and
January
28,
2023
were
approximately
$
1,099,000
and
$
1,184,000
, respectively.
The Company has a trusteed, non-contributory Employee Stock Ownership Plan (“ESOP”), which
covers substantially all associates who meet minimum age and service requirements.
The amount
of the
Company’s discretionary
contribution to the ESOP
is determined by the
Compensation Committee of the
Board of Directors and
can be made in
Company Class A Common
stock or cash.
Due to a
net operating
loss
in
fiscal
2024
and
fiscal
2023,
the
Committee did
not
approve
a
contribution
to
the
ESOP
for
the
years
ended
February 1,
2025
and
February 3,
2024.
The
Company’s
contribution was
$
32,510
for
the
year ended January 28, 2023.
The Company is primarily self-insured for healthcare.
These costs are significant primarily due to the
large
number of
the Company’s
retail locations
and associates.
The Company’s
self-insurance liabilities
are
based
on the
total
estimated costs
of
claims filed
and estimates
of
claims incurred
but not
reported,
less
amounts
paid
against
such
claims.
Management
reviews
current
and
historical
claims
data
in
developing its
estimates. If
the underlying
facts and
circumstances of
the claims
change or
the historical
trend is not indicative of future trends, then the Company may be required to
record additional expense or
a
reduction
to
expense
which
could
be
material
to
the
Company’s
reported
results
of
operations
in
the
period recorded. The Company funds healthcare contributions
to a third-party provider.
11.
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):
`
Fiscal Year Ended
February 1, 2025
February 3, 2024
January 28, 2023
Operating lease cost (a)
$
67,174
$
70,363
$
71,513
Variable
lease cost (b)
$
2,275
$
2,646
$
3,127
(a) Includes right-of-use asset amortization of ($
0.8
) million, ($
1.3
) million, and ($
1.7
) million for the twelve months ended
February 1, 2025, February 3, 2024, and January 28, 2023 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 CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
60
Operating cash flow information:
Fiscal Year Ended
February 1, 2025
February 3, 2024
January 28, 2023
Cash paid for amounts included in the measurement of
lease liabilities
$
60,717
$
65,872
$
67,194
Non-cash activity:
Right-of-use assets obtained in exchange for lease
obligations, net of rent violations
$
53,419
$
44,284
$
57,628
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
61
Weighted-average
remaining lease
term and
discount rate
for the
Company’s
operating leases
are as
follows:
`
As of
February 1, 2025
February 3, 2024
Weighted-average remaining lease term
2.3
years
2.3
years
Weighted-average discount rate
4.83%
4.58%
Maturities
of
lease
liabilities
by
fiscal
year
for
the
Company’s
operating
leases
are
as
follows
(in
thousands):
Fiscal Year
2025
$
64,565
2026
43,208
2027
28,057
2028
16,596
2029
7,931
Thereafter
1,280
Total lease payments
161,637
Less: Imputed interest
15,741
Present value of lease liabilities
$
145,896
12.
Income Taxes:
Unrecognized
tax
benefits
for
uncertain
tax
positions,
primarily
recorded
in
Other
noncurrent
liabilities, are established in accordance
with ASC 740 when, despite
the fact that the
tax return positions
are
supportable, the
Company believes
these
positions may
be
challenged
and the
results
are
uncertain.
The
Company adjusts
these
liabilities
in
light
of
changing
facts
and
circumstances.
As
of
February
1,
2025, the
Company had
gross unrecognized
tax benefits
totaling approximately
$
3.2
million.
Including
the gross unrecognized tax benefits,
and interest and penalties, $
4.3
million would affect the
effective tax
rate
if
recognized.
The
Company
had
approximately
$
1.7
million,
$
1.8
million
and
$
2.0
million
of
interest and
penalties accrued related
to uncertain tax
positions as of
February 1, 2025,
February 3, 2024
and
January
28,
2023,
respectively.
The
Company
recognizes
interest
and
penalties
related
to
the
resolution of
uncertain tax
positions as
a component
of
income tax
expense.
The Company
recognized
$
295,000
,
$
393,000
and
$
517,000
of
interest
and
penalties
in
the
Consolidated
Statements
of
Income
(Loss)
and
Comprehensive Income
(Loss)
for
the
years
ended
February 1,
2025,
February
3,
2024
and
January
28,
2023,
respectively.
The
Company
is
no
longer
subject
to
U.S.
federal
income
tax
examinations
for
years
before
2021.
In
state
and
local
tax
jurisdictions,
the
Company
has
limited
exposure before
2014.
During the
next 12
months, various
state and
local taxing
authorities’ statutes
of
limitations
will
expire
and
certain
state
examinations
may
close,
which
could
result
in
a
potential
reduction of unrecognized tax benefits for which a range cannot be determined.
A reconciliation
of the
beginning and
ending amount
of gross
unrecognized tax benefits
is as
follows
(in thousands):
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
62
`
February 1, 2025
February 3, 2024
January 28, 2023
Fiscal Year
Ended
Balances, beginning
$
3,897
$
4,886
$
5,286
Additions for tax positions of the current year
65
76
431
Additions for tax positions of prior years
-
-
137
Reduction for tax positions of prior years for:
Lapses of applicable statutes of limitations
(728)
(1,065)
(968)
Balances, ending
$
3,234
$
3,897
$
4,886
The provision for income taxes consists of
the following (in thousands):
`
February 1, 2025
February 3, 2024
January 28, 2023
Fiscal Year
Ended
Current income taxes:
Federal
$
(128)
$
(148)
$
(817)
State
395
(334)
(231)
Foreign
1,677
1,898
2,403
Total
1,944
1,416
1,355
Deferred income taxes:
Federal
-
6,613
200
State
-
2,093
186
Foreign
-
18
-
Total
-
8,724
386
Total income tax expense
$
1,944
$
10,140
$
1,741
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
63
Significant
components of
the
Company’s deferred
tax assets
and liabilities
as of
February 1,
2025
and
February 3, 2024 are as follows
(in thousands):
February 1, 2025
February 3, 2024
Deferred tax assets:
Allowance for customer credit losses
$
124
$
150
Inventory valuation
1,584
1,076
Non-deductible accrued liabilities
1,587
1,367
Other taxes
834
862
Federal benefit of uncertain tax positions
655
712
Equity compensation expense
2,750
2,975
Federal tax credits
928
379
Net operating losses
11,147
7,854
Charitable contribution carryover
264
265
Lease liabilities
33,077
34,810
Property and equipment
4,735
3,885
Amortization
1,774
1,401
Other
1,776
2,150
Total deferred
tax assets before valuation allowance
61,235
57,886
Valuation
allowance
(23,151)
(17,998)
Total deferred
tax assets after valuation allowance
38,084
39,888
Deferred tax liabilities:
Right-of-Use assets
38,000
39,721
Accrued self-insurance reserves
84
167
Total deferred
tax liabilities
38,084
39,888
Net deferred tax assets
$
-
$
-
The changes in the valuation allowance are presented below:
February 1, 2025
February 3, 2024
January 28, 2023
Valuation
Allowance Beginning Balance
$
(17,998)
$
(5,058)
$
(4,473)
Net Valuation
Allowance (Additions) / Reductions
(5,153)
(12,940)
(585)
Valuation
Allowance Ending Balance
$
(23,151)
$
(17,998)
$
(5,058)
As of February
1, 2025, the
Company had $
8.0
million of net
deferred tax assets
attributable to state
net
operating
loss
carryforwards
and
$
0.2
million
of
other
deferred
tax
assets
affecting
state
income
tax.
The
Company assessed the likelihood that deferred tax
assets related to state net operating
loss carryforwards and
other deferred tax
assets affecting state
income tax will
be realized. Based
on this assessment,
the Company
concluded that it is more likely than not the Company will not be able to
realize $
8.0
million and $
0.2
million
of the
net operating losses
and other
deferred assets, respectively,
and accordingly, has
recorded a
valuation
allowance for the same amount.
As
of
February
1,
2025,
the
Company
had
$
14.9
million
of
net
deferred tax
assets
attributable to
U.S.
federal net
operating
loss
carryforwards,
other
credit carryforwards
and
all
other deferred
tax assets
net of
deferred tax liabilities.
The Company assessed the likelihood that deferred tax
assets related to net operating
loss
carryforwards,
credit
carryforwards
and
all
other
remaining
deferred
tax
assets
net
of
deferred
tax
liabilities will be
realized.
Based on this
assessment, the Company
concluded that it
is more likely
than not
the
Company
will
not
be
able
to
realize
$
3.2
million
of
net
operating
loss
carryforwards,
$
0.9
million
of
credit carryforwards and $
10.8
million of remaining deferred tax assets
net of deferred tax liabilities.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
64
The net change
in the valuation
allowance of $
5.2
million for the
year ended February
1, 2025
is due to
recording a valuation allowance of
$
3.9
million against net deferred tax assets
attributable to U.S. federal net
operating loss
carryforwards, other
credit carryforwards
and all
other deferred
tax assets
net of
deferred tax
liabilities, including $
1.3
million against state net operating losses. The net change in the valuation allowance
for
the
year
ended
February
3,
2024
is
U.S.
federal
net
operating
loss
carryforwards,
other
credit
carryforwards, all
other deferred
tax assets
net of
deferred tax
liabilities, state
net operating
losses and
state
tax credits.
As
of
February
1,
2025,
the
Company’s
position
is
that
its
overseas
subsidiaries
will
not
invest
undistributed
earnings
indefinitely.
Future
unremitted
earnings
when
distributed
are
expected
to
be
either
distributions
of
GILTI-previously
taxed income
or eligible
for
a
100
%
dividends received
deduction.
The
withholding
tax
rate
on
any
unremitted
earnings
is
zero
and
state
income
taxes
on
such
earnings
are
considered
immaterial.
Therefore,
the
Company
has
not
provided
deferred
U.S.
income
taxes
on
approximately $
21.3
million of cumulative earnings from non-U.S. subsidiaries.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
65
The reconciliation of the Company’s effective
income tax rate with the
statutory rate is as follows:
`
February 1, 2025
February 3, 2024
January 28, 2023
Fiscal Year
Ended
Federal income tax rate
21.0
%
21.0
%
21.0
%
State income taxes
4.4
4.5
(36.4)
Global intangible low-taxed income
(24.6)
(33.4)
333.0
Foreign tax credit
-
0.3
(11.2)
Foreign rate differential
5.5
7.8
(74.4)
Offshore claim
11.0
15.2
(141.2)
Limitation on officer compensation
(2.7)
(3.1)
27.2
Work opportunity credit
1.9
1.5
(63.7)
Addback on wage related credits
(0.4)
(0.3)
13.4
Tax credits - Other
0.6
0.5
(14.4)
Insurance
-
-
(8.1)
Charitable contribution of inventory
-
(0.6)
-
Uncertain tax positions
4.5
7.4
(18.7)
Deferred rate change
-
-
1.1
Valuation
allowance
(31.0)
(96.0)
70.9
Other
(2.3)
1.7
(0.1)
Effective income tax rate
(12.1)
%
(73.5)
%
98.4
%
The
largest
driver
for
the
difference
between
the
Company’s
effective
income
tax
rate
for
the
year
ended February 1, 2025 and the
U.S. federal income tax rate is
the valuation allowance (discussed above)
recorded
against
the
Company’s
net
deferred
tax
assets
attributable
to
U.S.
federal
net
operating
loss
carryforwards, other credit carryforwards and all other deferred tax assets net
of deferred tax liabilities.
13.
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, Verso
na
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 have similar
economic characteristics, products, production processes, customers
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 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 Company
does not
allocate certain corporate expenses to the Credit segment.
The
Company’s
President
and
Chief
Executive
Officer
is
the
Company’s
chief
operating
decision
maker
(“CODM”).
The
structure
described
above
reflects
the
manner
in
which
the
CODM
regularly
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
66
assesses information for
decision-making purposes, including
the allocation
of resources.
The Company
also provides corporate services, including finance, information technology, and corporate administration,
to its segments which
are fully allocated to
the retail segment.
Interest and other income
from assets held
for
investment
and
sale
are
not
included
in
assessing
the
segments’
performance
and
therefore
not
allocated to either segment.
The
CODM
manages
and
evaluates
the
segments’
operating
performance
based
on
segment
sales,
expenses, and
profit or
loss from
operations before
income taxes
as presented
in the
Company’s
annual
budget and forecasting process,
as well as
monthly analyses of budget-to-actual
and prior year
variances.
Segment
expenses
and
other
items
primarily
include
cost
of
goods
sold,
selling,
general
and
administrative
expenses,
depreciation
and
interest
and
other
income.
Assessment
and
approval
of
all
capital
expenditures
are
determined
to
be
in
support
of
and
based
on
the
needs
of
the
retail
segment;
however,
the
CODM
does
not
evaluate
performance
or
allocate
resources
based
on
segment
asset
balances; therefore, total segment assets are not presented in the tables below.
The accounting
policies of
the segments are
the same
as those
described in the
Summary of
Significant
Accounting Policies in
Note 1. The Company
evaluates performance based on
profit or loss from
operations
before income taxes.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
67
The following schedule summarizes certain segment
information (in thousands):
`
Fiscal 2024
Retail
Credit
Total
Total Revenues
$
647,110
$
2,696
$
649,806
Cost of goods sold (a)
436,440
-
436,440
Selling, general, and administrative (b)
162,367
1,630
163,997
Corporate overhead
67,492
-
67,492
Depreciation
9,817
-
9,817
Interest and other income
(410)
(1,162)
(1,572)
Income (loss) before income taxes
$
(28,596)
$
2,228
$
(26,368)
Corporate interest and other income
(10,255)
Net income (loss) before income taxes
$
(16,113)
Capital expenditures
$
7,872
$
-
$
7,872
Fiscal 2023
Retail
Credit
Total
Total Revenues
$
705,419
$
2,640
$
708,059
Cost of goods sold (a)
464,313
-
464,313
Selling, general, and administrative (b)
176,205
1,632
177,837
Corporate overhead
74,940
-
74,940
Depreciation
9,871
-
9,871
Interest and other income
(267)
(737)
(1,004)
Income (loss) before income taxes
$
(19,643)
$
1,745
$
(17,898)
Corporate interest and other income
(4,097)
Net income (loss) before income taxes
$
(13,801)
Capital expenditures
$
12,532
$
-
$
12,532
Fiscal 2022
Retail
Credit
Total
Total Revenues
$
757,017
$
2,243
$
759,260
Cost of goods sold (a)
509,664
-
509,664
Selling, general, and administrative (b)
173,854
1,497
175,351
Corporate overhead
67,297
-
67,297
Depreciation
11,079
1
11,080
Interest and other income
(167)
(388)
(555)
Income (loss) before income taxes
$
(4,710)
$
1,133
$
(3,577)
Corporate interest and other income
(5,347)
Net income (loss) before income taxes
$
1,770
Capital expenditures
$
19,433
$
-
$
19,433
(a) Refer to Note 1 for additional information on the components of Cost of goods sold.
(b) Selling, general, and administrative expense include corporate and store payroll, related payroll taxes
and benefits, insurance, supplies, advertising, bank and credit card processing fees.
14.
Stock Based Compensation:
As
of
February
1,
2025,
the
Company’s
2018
Incentive
Compensation
Plan
was
available
for
the
granting
of
various
forms
of
equity-based awards,
including
restricted stock
and stock
options for
grant to
officers, directors and key employees.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
68
The following table presents the number of options and shares of restricted
stock initially authorized
and available for grant under this plan as of February 1, 2025:
`
2018
Plan
Options and/or restricted stock initially authorized
4,725,000
Options and/or restricted stock available for grant:
February 3, 2024
3,147,393
February 1, 2025
2,797,601
In accordance with ASC 718, the fair value of 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 a
five-year
vesting period.
As of
February 1,
2025, there
was $
7,276,356
of total
unrecognized compensation
expense related
to unvested
restricted stock
awards, which
is expected
to be
recognized over a remaining weighted-average vesting period of
1.9
years.
The total grant date fair value
of
the
shares
recognized
as
compensation
expense
during
the
twelve
months
ended
February
1,
2025,
February 3,
2024 and
January 28,
2023 was
$
2,270,000
, $
4,105,000
and $
2,556,000
, respectively.
The
expenses
are
classified
as
a
component
of
Selling,
general
and
administrative
expenses
in
the
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 years ended February 1, 2025,
February 3, 2024 and January 28, 2023:
`
Weighted Average
Number of
Grant Date Fair
Shares
Value Per
Share
Restricted stock awards at January 29, 2022
1,196,288
$
13.76
Granted
319,441
13.70
Vested
(231,638)
16.99
Forfeited or expired
(224,658)
13.43
Restricted stock awards at January 28, 2023
1,059,433
$
13.10
Granted
414,502
8.29
Vested
(217,238)
13.97
Forfeited or expired
(132,824)
11.73
Restricted stock awards at February 3, 2024
1,123,873
$
11.32
Granted
386,900
4.80
Vested
(232,696)
13.22
Forfeited or expired
(62,896)
9.21
Restricted stock awards at February 1, 2025
1,215,181
$
8.98
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 twelve
month period ended
February 1,
2025, the
Company sold
73,593
shares to
employees at an
average discount of
$
0.81
per share
under the
Employee Stock Purchase Plan.
The compensation expense
recognized for the
15
% discount given
under
the
Employee
Stock
Purchase
Plan
was
approximately
$
60,000
,
$
67,000
and
$
54,000
for
fiscal
years
2024, 2023 and 2022,
respectively.
These expenses are classified
as a component of
Selling, general and
administrative expenses.
15.
Commitments and Contingencies:
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
69
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
our 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
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.
16.
Accumulated Other Comprehensive Income:
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
year ended February 1, 2025:
`
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at February 3, 2024
$
395
Other comprehensive income (loss) before
reclassification
541
Amounts reclassified from accumulated
other comprehensive income (b)
(783)
Net current-period other comprehensive income
(loss)
(242)
Ending Balance at February 1, 2025
$
153
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to
accumulated other
comprehensive income.
(b) Includes
$1,015
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 $
232
.
Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
70
The following table sets forth information regarding the reclassification
out of Accumulated other
comprehensive income (in thousands) for the year ended February 3, 2024:
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
1,614
Amounts reclassified from accumulated
other comprehensive income (b)
19
Net current-period other comprehensive income (loss)
1,633
Ending Balance at February 3, 2024
$
395
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to
accumulated other
comprehensive income.
(b) Includes $
25
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 $
6
. Amounts in
parentheses indicate a debit/reduction to accumulated other comprehensive income.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
71
The following table sets forth information regarding the reclassification
out of Accumulated other
comprehensive income (in thousands) for the year ended January 28, 2023:
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
(982)
Amounts reclassified from accumulated
other comprehensive income (b)
24
Net current-period other comprehensive income (loss)
(958)
Ending Balance at January 28, 2023
$
(1,238)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to
accumulated other
comprehensive income.
(b) Includes $
31
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 $
7
. Amounts in
parentheses indicate a debit/reduction to accumulated other comprehensive income.
72
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure:
None.
Item 9A.
Controls and Procedures:
Conclusion Regarding the Effectiveness of Disclosure 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 February
1, 2025.
Based on this
evaluation, our Principal
Executive Officer
and Principal Financial
Officer concluded that,
as
of
February 1,
2025, 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.
Management’s Report on Internal Control Over Financial Reporting
Management is
responsible
for
establishing
and
maintaining adequate
internal
control
over
financial
reporting, as defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of
our
management, including
our
Principal
Executive Officer
and
Principal
Financial
Officer,
we
carried
out
an
evaluation
of
the
effectiveness
of
our
internal
control
over
financial
reporting
as
of
February
1,
2025
based
on
the
Internal
Control
–
Integrated
Framework
(2013)
issued
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(“COSO”).
Based
on
this
evaluation,
management concluded
that our
internal control
over financial
reporting was
effective as
of February
1,
2025.
PricewaterhouseCoopers
LLP,
an
independent
registered
public
accounting
firm,
has
audited
the
effectiveness of our internal
control over financial reporting as
of February 1, 2025, as
stated in its report
which is included herein.
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
February
1,
2025
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,
the
Company’s
internal
control
over
financial reporting.
Inherent Limitations on Effectiveness of Controls
The
Company’s
management,
including
its
Principal
Executive
Officer
and
Principal
Financial
Officer,
does not
expect our
disclosure controls
and procedures
or internal
controls to
prevent all
errors
and all
fraud. A
control system, no
matter how
well conceived or
operated, can provide
only reasonable,
not absolute,
assurance that
the objectives
of the
control system are
met. Further,
the design
of a
control
system
must
reflect
the
fact
that
there
are
resource
constraints,
and
the
benefits
of
controls
must
be
considered relative to their costs.
Because of the inherent limitations
in all control systems,
no evaluation
of
controls
can
provide
absolute
assurance
all
control
issues
and
instances
of
fraud,
if
any,
within
the
company have
been detected.
These inherent
limitations include
the realities
that judgments
in decision-
making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also
be
circumvented
by
the
individual
acts
of
some
persons,
by
collusion
of
two
or
more
people,
or
by
management
override
of
the
controls.
The
design
of
any
system
of
controls
is
based
in
part
on
certain
73
assumptions about the likelihood
of future events,
and there can
be no assurance any
design will succeed
in
achieving
its
stated
goals
under
all
potential
future
conditions.
Over
time,
controls
may
become
inadequate because of changes
in conditions or
deterioration in the degree
of compliance with policies
or
procedures.
Because
of
the inherent
limitations in
a
cost-effective
control
system, misstatements
due to
error or fraud may occur and not be detected.
Item 9B.
Other Information:
During
the
three
months
ended
February
1,
2025,
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
“Rule10b5-1 trading arrangement” or a “
non
-
Rule10b5-1
trading arrangement” (as such terms are defined
in Item 408 of Regulation S-K).
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
:
None.
74
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance:
Information
contained
under
the
captions
“Election
of
Directors,”
“Meetings
and
Committees,”
“Corporate
Governance
Matters”
and
“Delinquent
Section
16(a)
Reports”
in
the
Registrant’s
Proxy
Statement
for
its
2025
annual
stockholders’
meeting
(the
“2025
Proxy
Statement”)
is
incorporated
by
reference
in
response
to
this
Item 10.
The
information
in
response
to
this
Item 10
regarding
executive
officers
of the
Company is
contained in
Item 3A, Part I
hereof under
the caption
“Executive Officers
of
the Registrant.”
Item 11.
Executive Compensation:
Information contained under the captions
“2024 Executive Compensation” (except for
the information
under
the
heading
“Pay
Versus
Performance”),
“Fiscal
Year
2024
Director
Compensation,”
and
“Corporate
Governance
Matters-Compensation
Committee
Interlocks
and
Insider
Participation”
in
the
Company’s 2025 Proxy Statement is incorporated by reference in response to this Item.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters:
Equity Compensation Plan Information
The
following
table
provides
information
about
stock
options
outstanding
and
shares
available
for
future awards under all of the Company’s equity compensation plans. The information is as of February
1,
2025.
(a)
Number of Securities to
be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
(1)
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(1)
(c)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a)) (2)
Plan Category
Equity compensation plans approved
by security holders
-
-
2,881,975
Equity compensation plans not
approved by security holders
-
-
-
Total
-
-
2,881,975
(1)
There are no outstanding stock options, warrants or stock appreciation
rights.
(2)
Includes the following:
Under
the
Company’s
stock
incentive
plan,
referred
to
as
the
2018
Incentive
Compensation
Plan,
2,797,601
shares
are
available
for
grant.
Under
this
plan,
non-
qualified stock options may be granted to key associates.
Under
the
2021
Employee
Stock
Purchase
Plan,
84,374
shares
are
available.
Eligible
associates
may
participate
in
the
purchase
of
designated
shares
of
the
Company’s
common
stock.
The
purchase price of this stock is equal to 85% of the lower of the
closing price at the beginning or the
end of each semi-annual stock purchase period.
75
Information contained under “Security Ownership of Certain Owners
and Management” in the
2025 Proxy Statement is incorporated by reference in response to this Item.
Item 13.
Certain Relationships and Related Person Transactions, and Director Independence:
Information
contained
under
the
caption
“Certain
Relationships
and
Related
Person
Transactions,”
“Corporate
Governance
Matters-Director
Independence”
and
“Meetings
and
Committees”
in
the
2025
Proxy Statement is incorporated by reference in response to this Item.
Item 14.
Principal Accountant Fees and Services:
Information contained
under the
captions “Ratification
of
Independent Registered
Public Accounting
Firm-Audit Fees”
and
“-Policy on
Audit
Committee Pre-Approval
of
Audit
and Permissible
Non-Audit
Services
by
the
Independent
Registered
Public
Accounting
Firm”
in
the
2025
Proxy
Statement
is
incorporated by reference in response to this Item.
76
PART
IV
Item 15.
Exhibits and Financial Statement Schedules:
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Page
Report of Independent Registered Public Accounting Firm
....................................................................
38
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss) for the fiscal
years ended February 1, 2025, February 3, 2024 and January 28, 2023
................................................
41
Consolidated Balance Sheets at February 1, 2025 and February
3, 2024
.................................................
42
Consolidated Statements of Cash Flows for the fiscal years ended
February 1, 2025, February 3, 2024
and January 28, 2023 ................................................................................................................................
43
Consolidated Statements of Stockholders’ Equity for the fiscal years ended
February 1, 2025,
February 3, 2024 and January 28, 2023
....................................................................................................
44
Notes to Consolidated Financial Statements
.............................................................................................
45
(2) Financial Statement Schedule: The following report and
financial statement schedule is filed
herewith:
Schedule II — Valuation and Qualifying Accounts .................................................................................
80
All
other
schedules
are
omitted
as
the
required
information
is
inapplicable
or
the
information
is
presented in the Consolidated Financial Statements or related Notes thereto.
(3) Index to Exhibits: The
following exhibits listed in
the Index below are
filed with this report
or, as
noted, incorporated by reference herein.
The Company will supply copies of the following exhibits to any
shareholder upon receipt of a written request addressed to the Corporate Secretary,
The Cato Corporation,
8100 Denmark
Road, Charlotte,
NC 28273
and the
payment of
$.50 per
page to
help defray
the costs
of
handling,
copying
and
postage.
In
most
cases,
documents
incorporated
by
reference
to
exhibits
to
our
registration
statements,
reports
or
proxy
statements
filed
by
the
Company
with
the
Securities
and
Exchange
Commission
are
available
to
the
public
over
the
Internet
from
the
SEC’s
web
site
at
http://www.sec.gov.
77
Exhibit
Number
Description of Exhibit
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.
4.1
Description of the Registrant's Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934, incorporated by reference to Exhibit 4.1 to Form 10-K of
the Registrant for the year ended February 1, 2020.
10.1*
The Cato Corporation 2013 Employee Stock Purchase Plan (Amended and Restated as of
April 1, 2021) incorporated by reference to Appendix A to Proxy Statement of the
Registrant filed on April 8, 2021.
10.2*
2013 Incentive Compensation Plan, incorporated by reference to Exhibit 4.1 to Form S-8
of the Registrant filed May 31, 2013 (SEC file No. 333-188993).
10.3*
2018 Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 to Form S-8
of the Registrant filed June 1, 2018 (SEC file No. 333-225350).
10.4*
Form of Agreement, dated as of August 29, 2003, between the Registrant and Wayland H.
Cato, Jr., incorporated by reference to Exhibit 99(c) to Form 8-K of the Registrant filed on
July 22, 2003.
10.5*
Form of Agreement, dated as of August 29, 2003, between the Registrant and Edgar T.
Cato, incorporated by reference to Exhibit 99(d) to Form 8-K of the Registrant filed on
July 22, 2003.
10.6*
Retirement Agreement between Registrant and Wayland H. Cato, Jr. dated August 29,
2003 incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for quarter
ended August 2, 2003.
10.7*
Retirement Agreement between Registrant and Edgar T. Cato dated August 29, 2003,
incorporated by reference to Exhibit 10.2 to Form 10-Q of the Registrant for the quarter
ended August 2, 2003.
10.8*
Deferred Compensation Plan effective July 28, 2011, incorporated by reference to Exhibit
10.1 to Form 8-K of the Registrant filed on July 19, 2011.
10.9*
Letter Agreement between the Registrant and Charles Knight dated as of January 4, 2022,
incorporated by reference to Exhibit 10.1 to Form 8-K of the Registrant filed on January 6,
2022.
10.10
Credit Agreement, dated as of May 19, 2022, among the Registrant, the guarantors party
thereto, the banks party thereto and Wells Fargo Bank, National Association, as Agent,
incorporated by reference to Exhibit 10.1 to Form 8-K of the Registrant filed May 20,
2022.
10.11
First Amendment, dated as of June 6, 2022, to Credit Agreement, dated as of May 19,
2022, among the Registrant, the guarantors party hereto, the banks party thereto and Wells
Fargo Bank, National Association, as Agent, incorporated by reference to Exhibit 10.1 to
Form 10-Q of the Registrant for the quarter ended July 30, 2022.
10.12
Second Amendment, dated as of August 9, 2023, to Credit Agreement, dated as of May 19
2022, among the Registrant, the banks party thereto and Wells Fargo Bank, National
Association incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for
the quarter ended July 29, 2023.
10.13
Third Amendment, dated as of October 24, 2023, to Credit Agreement, dated as of May 19
2022, among the Registrant, the banks party thereto and Wells Fargo Bank, National
Association incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for
the quarter ended October 28, 2023.
10.14
Fourth Amendment, dated as of April 25, 2024, to Credit Agreement, dated as of May 19
2022, among the Registrant, the banks party thereto and Wells Fargo Bank, National
Association incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for
the Quarter ended May 4, 2024.
78
10.15
Fifth Amendment, dated as of November 1, 2024, to Credit Agreement, dated as of May
19, 2022, among the Registrant, the banks party thereto and Wells Fargo Bank, National
Association incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for
the quarter ended November 2, 2024.
10.16
Credit Agreement, dated as of March 13, 2025, by and among Wells Fargo Bank, National
Association, as Lender, and The Cato Corporation and certain of its subsidiaries as
Borrowers and certain of its other subsidiaries as Guarantors, incorporated by reference to
Exhibit 10.1 to Form 8-K of the Registrant filed March 19, 2025.
19.1**
Insider Trading Policy of the Registrant.
21.1**
Subsidiaries of Registrant.
23.1**
Consent of Independent Registered Public Accounting Firm.
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 Chief Executive Officer.
32.2**
Section 1350 Certification of Chief Financial Officer.
97.1
Registrant’s Dodd-Frank Clawback Policy incorporated by reference to Exhibit 97.1 to
Form 10-K of the Registrant for the fiscal year ended February 3, 2024.
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.1
Cover Page Interactive Data File (Formatted in Inline XBRL and
contained in the Interactive
Data Files submitted as Exhibit 101.1**).
___________
* Management contract or compensatory plan required to be filed under Item 15 of this report and Item
601
of Regulation S-K.
** Filed or submitted electronically herewith.
Item 16.
Form 10-K Summary:
None.
79
SIGNATURES
Pursuant
to
the
requirements
of
Section 13
or
15(d)
of
the
Securities
Exchange
Act
of
1934,
Cato
has
duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Cato Corporation
By
/s/ JOHN P.
D. CATO
By
/s/ CHARLES D. KNIGHT
John P.
D. Cato
Chairman, President and
Chief Executive Officer
Charles D. Knight
Executive Vice President
Chief Financial Officer
By
/s/ JEFFREY R. SHOCK
Jeffrey R. Shock
Senior Vice President
Controller
Date: March 31, 2025
Pursuant to the
requirements of the
Securities Exchange
Act of 1934,
this report has
been signed below
on March 31,
2025
by the following persons on behalf of the Registrant and in the capacities indicated:
/s/ JOHN P.
D. CATO
John P.
D. Cato
(President and Chief Executive Officer
(Principal Executive Officer) and Director)
/s/ BAILEY W.
PATRICK
Bailey W.
Patrick
(Director)
/s/ CHARLES D. KNIGHT
Charles D. Knight
(Executive Vice President
Chief Financial Officer (Principal Financial Officer))
/s/ THOMAS B. HENSON
Thomas B. Henson
(Director)
/s/ JEFFREY R. SHOCK
Jeffrey R. Shock
(Senior Vice President
Controller (Principal Accounting Officer))
/s/ BRYAN
F. KENNEDY
III
Bryan F. Kennedy III
(Director)
/s/ D. HARDING STOWE
D. Harding Stowe
(Director)
/s/ THERESA J. DREW
Theresa J. Drew
(Director)
/s/ PAMELA
L. DAVIES
Pamela L. Davies
(Director)
80
Schedule II
VALUATION
AND QUALIFYING ACCOUNTS
(in thousands)
Allowance
for
Customer
Self Insurance
Credit Losses(a)
Reserves(b)
Balance at January 29, 2022
$
803
$
8,271
Additions charged to costs and expenses
349
13,287
Additions (reductions) charged to other accounts
84
(c)
638
Deductions
(475)
(d)
(14,523)
Balance at January 28, 2023
$
761
$
7,673
Additions charged to costs and expenses
578
16,063
Additions (reductions) charged to other accounts
72
(c)
467
Deductions
(706)
(d)
(15,075)
Balance at February 3, 2024
$
705
$
9,128
Additions charged to costs and expenses
654
14,304
Additions (reductions) charged to other accounts
65
(c)
(522)
Deductions
(843)
(d)
(14,791)
Balance at February 1, 2025
$
581
$
8,119
(a)
Deducted from trade accounts receivable.
(b)
Reserve for Workers' Compensation,
General Liability and Healthcare.
(c)
Recoveries of amounts previously written off.
(d)
Uncollectible accounts written off.