CATO CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
Registrant
State of Incorporation
I.R.S. Employer Identification Number
,
Address of Principal Executive Offices
/
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
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.
☐
☑
☐
☑
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
☑
☐
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
☑
☐
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
☐
☑
Non-accelerated filer
☐
complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
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.
☐
☑
the last
business day
of the
Company’s
most recent
second quarter,
was $
on the New York
Stock Exchange on that date.
A
co
mmon stock
and
outstanding.
DOCUMENTS INCORPORATED
BY REFERENCE
following part of this annual report:
Part III — Items 10, 11, 12, 13 and 14
2
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART
I
Item 1.
Business
..........................................................................................................................
5 – 10
Item 1A.
Risk Factors
....................................................................................................................
10 – 21
Item 1B.
Unresolved Staff Comments
...........................................................................................
21
Item 2.
Properties
........................................................................................................................
21
Item 3.
Legal Proceedings
...........................................................................................................
22
Item 3A.
Executive Officers of the Registrant
...............................................................................
23
Item 4.
Mine Safety Disclosures
.................................................................................................
23
PART
II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
........................................................................................
24 – 26
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................................................................
27 – 33
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
........................................
33
Item 8.
Financial Statements and Supplementary Data ..............................................................
34 – 63
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure
.......................................................................................................................
64
Item 9A.
Controls and Procedures
.................................................................................................
64
Item 9B.
Other Information
...........................................................................................................
64
Item 9C.
Disclosures Regarding Foreign Jurisdictions That Prevent Inspections
.........................
64
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance .............................................
64
Item 11.
Executive Compensation
................................................................................................
66
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
........................................................................................................
66
Item 13.
Certain Relationships and Related Transactions, and Director Independence
...............
66
Item 14.
Principal Accountant Fees and Services
.........................................................................
66
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
..................................................................
68
Item 16.
Form 10-K Summary ………………………………………………………………….
70
3
Forward-looking Information
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
28,
2023
(“fiscal
2022”)
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 pandemic and
related
responses and
mitigation efforts,
as well
as the
potential impact
of supply
chain disruptions,
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, wage rates,
tax
rates, interest
rates, home
values, consumer
net worth,
the availability
of credit
and inflation;
changes in
laws,
regulations
or
governmental
policies
affecting
our
business,
including
but
not
limited
to
tariffs;
uncertainties regarding
the impact
of
any governmental
action regarding,
or
responses to,
the
foregoing
conditions;
competitive
factors
and
pricing
pressures;
our
ability
to
predict
and
respond
to
rapidly
changing
fashion
trends
and
consumer
demands;
our
ability
to
successfully
implement
our
new
store
development strategy to
increase new
store openings and
our ability of
any such
new stores
to grow
and
perform as
expected; adverse
weather,
public health
threats (including
the global
COVID-19 pandemic)
or
similar
conditions
that
may
affect
our
sales
or
operations;
inventory
risks
due
to
shifts
in
market
demand,
including
the
ability
to
liquidate
excess
inventory
at
anticipated
margins;
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 January 29, 2022 (“fiscal 2021”), 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.
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,
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,
4
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
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
2,100 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
5% of
retail sales
in
fiscal
2021.
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.
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
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.
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.
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.
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
the purchase of its merchandise more convenient for its customers.
6
Merchandising
Merchandising
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.
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.
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.
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.
merchandise is
purchased from
approximately 100
primary vendors.
In
fiscal
2021,
purchases from
the
Company’s
largest
vendor
accounted
for
approximately
12%
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 the fall of 2014, replacing the Company’s former sourcing agent in 2015. 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 international operations and risks that
affect
the
prevailing
social,
economic,
political,
public
health
and
other
conditions
in
the
areas
from
which
we
source
merchandise;
changes,
disruptions,
cost
changes
or
other
problems
affecting
the
Company’s
merchandise
supply
chain
could
materially
and
adversely
affect
the
Company’s
business,
results of operations and financial condition.”
stores
based
on
an
analysis
of
sales
trends
by
merchandise
category,
customer
profiles
and
climatic
7
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.
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
on-line
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
and Related
Systems –
A disruption
or shutdown
of our
centralized
distribution
center
or
transportation
network
could
materially
and
adversely
affect
our
business and results of operations.”
websites
and
social
media
as
its
primary
advertising
media.
The
Company’s
total
advertising
expenditures
were
approximately
0.9%,
0.8%
and
0.7%
of
retail
sales
for
fiscal
years
2021,
2020
and
2019, respectively.
Store Operations
managers and 109 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
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.
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.
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 2017:
8
Store Development
Number of Stores
Beginning of
Number
Number
Number of Stores
Fiscal Year
Year
Opened
Closed
End of Year
2017………………….……...………….
1,371
26
1,351
2018………………….……...………….
1,351
40
1,311
2019……………………….……...…….
1,311
35
1,281
2020…………....………….……...…….
1,281
27
1,330
2021………….………...….……...…….
1,330
25
1,311
closed based on its sales
trends and profitability.
The Company intends to continue this
review process to
identify underperforming stores.
Credit and Layaway
The Company offers its own credit card, which accounted for 2.5%, 2.7% and 3.3% of retail
sales in
fiscal 2021, 2020 and 2019, respectively. The Company’s net bad debt expense was 3.0%, 3.6% and 3.2%
of credit sales in fiscal 2021, 2020 and 2019, respectively.
Customers applying for the Company’s credit card are approved for credit if
they have a satisfactory
credit
record
and
the
Company
has
considered
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 fiscal
2021 loyalty
program impact
is immaterial
to
the fiscal
2021 financial
statements.
The
loyalty
program
will
be
accounted
for
in
accordance
with
ASU
2014-09,
Revenue
from
Contracts
with Customers (Topic 606)
.
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
2.7%,
2.8%
and
4.1% of retail sales in fiscal 2021, 2020 and 2019, respectively.
9
Information Technology Systems
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.
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
differences,
customer demographic differences and targeted inventory turnover rates.
Competition
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
expects to continue to
experience seasonal fluctuations in its
revenues, operating income and net
income.
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
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
the capital
expenditures, results of
operations or competitive
position of the
Company in
fiscal 2021, 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.”
Human Capital
associates. The
Company also
employs additional
part-time associates
during the
peak retailing
seasons.
The Company’s
full-time team associates are
engaged in various executive, operating,
and administrative
10
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 diversity,
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
extensive
efforts
undertaken
during
the
COVID-19
pandemic
to
ensure
the
health
and
safety
of
its
associates
by
performing
frequent
cleanings,
ensuring
social distancing and providing masks for all of its stores.
Item 1A.
Risk Factors:
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 the COVID-19 Pandemic:
The outbreak and persistence of the COVID-19 pandemic has and may continue
to adversely affect our
business, financial condition and results of operations.
operating results through fiscal 2021 and will likely
continue to do so in fiscal 2022 and
possibly beyond.
Adverse financial impacts
associated with the
outbreak include, but
are not limited
to, (i)
lower net sales
in markets affected by actual or
potential adverse changes in conditions relating to the pandemic,
whether
due to
increases in
case counts,
state and
local orders,
reductions in
store traffic
and customer
demand,
labor shortages, or all of these factors, (ii) lower net sales caused by the delay of inventory production and
fulfillment,
(iii)
and
incremental
costs
associated
with
efforts
to
mitigate
the
effects
of
the
outbreak,
including increased freight and logistics costs and other expenses.
mitigation measures
that adversely
affected
the Company’s
operations, store
traffic,
sales
and results
of
operations
since
March
2020,
there
continues
to
be
significant
uncertainty
regarding
the
course
of
COVID-19 and
its continuing
effects on
commercial behavior.
These uncertainties
include the
potential
emergence of additional variants, seasonal weather
changes or other factors that may
lead to a resurgence
of the virus
and a reinstitution
of mandated restrictions, public
health advisories or decreased
willingness
of customers,
suppliers, associates
and other
constituencies on
whom our
business depends
to engage
in
commercial activities.
Other uncertainties
include the
extent
to
which and
pace at
which
governments,
businesses and
individuals may adapt
to COVID-19 as
endemic and
no longer
a meaningful
impediment
or deterrent
to commercial activity.
The resurgence
of the
virus and its
related effects
on the
global and
U.S.
economy,
or
the
lingering
uncertainties
and
time
it
may
take
to
transition
to
wide
acceptance
of
11
COVID-19
as
endemic,
will
likely
continue
to
materially
and
adversely
affect
our
business,
operating
results and financial condition.
likely be adversely impacted,
whether and the extent
to which COVID-19 impacts the
Company’s results
will
depend
on
the
course
of
future
developments,
which
are
highly
uncertain,
including
potential
sporadic
surges
of
the
virus,
the
extent
and
pace
of
public
acceptance
of
COVID-19
as
endemic,
the
continuing
evolution,
acceptance
and
success
of
baseline
mitigation
measures
such
as
vaccines,
and
possible new information, understanding or innovation
that could alter the course and
duration of current
measures to combat the spread of the virus.
by customers and others
that could adversely affect
our business, including but
not limited to a
consumer
shift to greater
reliance on online
versus in-person shopping, which
could reduce traffic
to our stores
and
more
broadly
to
the
strip
shopping
centers
and
malls
in
which
most
of
our
stores
are
located
and
disadvantage us relative to
competitors who are better
established in e-commerce sales,
and reductions in
face-to-face work, travel and socializing occasions, which may lead
customers to less frequently desire or
perceive the need to update their wardrobes.
other filings we make from time to time with the SEC.
also have a material adverse effect on the Company’s business, financial condition and operating results.
Risks Relating to Our Business:
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,
may adversely affect our business, margins, results of operations and
financial
condition.
higher
cost of
ocean freight
from Asia
resulting from
supply chain
disruption, is
continuing to
increase
the
cost
we
pay
for
our
products.
Tight
labor
markets
are
causing
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 inflation also are
driving up our operating
costs.
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 may
be 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
or
financial
outlook.
Moreover,
the
persistence
or
worsening
of
inflationary
conditions 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.
Unusual weather, natural disasters, public
health threats or similar events may adversely affect
our sales or
operations.
12
Extreme
changes
in
weather,
natural
disasters,
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
could 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
could
materially
and
adversely
affect us.
Because we source a significant portion of our merchandise directly and indirectly from
overseas, we are
subject to risks associated with international operations and risks that affect
the prevailing social, economic,
political, public health and other conditions in the areas from which we source merchandise;
changes,
disruptions, increased costs
or other problems affecting the Company’s
merchandise supply chain could
materially and adversely affect the Company’s
business, results of operations and financial condition.
A significant amount of
our merchandise is manufactured
overseas, principally in Southeast
Asia. 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.
As
a
result,
political
unrest,
labor
disputes,
terrorism,
war,
public
health
threats,
including
but
not
limited
to
communicable
diseases
(such
as
COVID-19), 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
these matters
or other
factors affecting
the availability
or cost
of imports,
could cause
significant
delays
or
interruptions
in
the
supply
of
our
merchandise
or
increase
our
costs.
We
are
also
subject
to
supply
chain
disruptions
affecting
ocean
freight,
including
lack
of
overall
ocean
container
shipping capacity versus
the current demand
for container shipping
capacity,
lack of our
ability to access
the
ocean
container
capacity
that
we
require,
lack
of
equipment
such
as
containers,
port
congestion,
including increased
dwell times
for ocean
container ships,
and other
conditions impacting
ocean freight.
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 may impact
our domestic supply chain.
These supply chain risks may
result in both
higher
costs
to
transport
our
merchandise
and
delayed
merchandise
arrivals
to
our
stores,
which
may
adversely
affect
our
ability
to
sell
this
merchandise
and
increase
markdowns
of
it.
Our
costs
are
also
affected by currency fluctuations, and changes in the value of the dollar relative to foreign currencies may
increase our cost of goods
sold. Any of these factors
could have a material adverse effect
on our business
and
results
of
operations.
In
addition,
increased
energy
and
transportation
costs
have
caused
us
significant cost increases from time to time,
and future adverse changes in these
costs or the disruption of
the means by which merchandise is transported to us could cause additional cost increases
or interruptions
of
our
supply
chain,
which
could
be
significant.
Further,
we
are
subject
to
increased
costs
or
potential
disruptions impacting any
port or trade
route through which
our products move,
or we may
be subject
to
increased costs
and delays
if forced
to route
freight through
different ports
than the
ones through
which
our
products
typically
move.
If
we
are
forced
to
source
merchandise
from
other
countries
or
other
domestic vendors with foreign
sources in different
countries, those goods
may be more expensive
or of a
different or inferior quality from the ones we now sell.
The inability of third-party vendors to produce goods on time and to the Company’s
specification may
adversely affect the Company’s
business, results of operations and financial condition.
13
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.”
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 may 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,
could
limit
our
ability
to
open
new
stores,
adversely
affect
consumer
traffic
and
reduce our sales and net earnings or increase our operating costs.
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
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.
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 unsold inventory at below-average markups over cost, or below cost, which
would adversely affect our margins and results of operations.
14
Fluctuating comparable sales or our inability to effectively
manage inventory may negatively impact our
gross margin and our overall results of operations.
sales
include
fashion
trends,
customer
preferences,
calendar
and
holiday
shifts,
competition,
weather,
supply
chain
issues,
actual
or
potential
public
health
threats
and
economic
conditions.
In
addition,
merchandise
must
be
ordered
well
in
advance
of
the
applicable
selling
season
and
before
trends
are
confirmed by sales.
If we are
not able to
accurately predict customers’
preferences for our
fashion items,
we may have too
much inventory, which
may cause excessive markdowns. If we
are unable to accurately
predict demand
for our
merchandise, we may
end up
with inventory shortages,
resulting in
missed sales.
A decrease in
comparable sales or
our inability to
effectively manage inventory may
adversely affect our
gross margin 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.
The operation of our sourcing offices in Asia may present increased legal
and operational risks.
regulatory practices and requirements in Asia
is limited. 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.
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 liabilities,
divert our management’s attention
or otherwise adversely affect our
business, results of operations and financial condition.”
Any actual or perceived deterioration in the conditions that drive consumer confidence
and spending may
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 and
the
impact
of
COVID-19), levels
of
employment, fuel,
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,
inflation, 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,
15
numerous events,
whether or
not
related to
actual
economic conditions,
such
as downturns
in
the
stock
markets,
acts
of
war
or
terrorism,
political
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.
Fluctuations in the price, availability and quality of inventory may result in higher
cost of goods, which the
Company may not be able to pass on to its customers.
Vendors
are
increasingly
passing
on
higher
production
costs,
including
the
costs
to
ship
product,
which may impact our ability to maintain or grow our margins. The price and availability of raw materials
may be
impacted by
demand, regulation,
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
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.
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
could
potentially result
in
impairment charges.
If we
cannot
successfully execute
our
growth
strategies,
our financial condition and results of operations may be adversely
impacted.
Failure to attract, train, and retain skilled personnel could adversely affect
our business and our financial
condition.
associates and
managers.
Moreover,
attracting and
retaining skilled
personnel has
become increasingly
challenging in
the tight
labor market
that has
persisted since
the onset
of the
COVID-19 pandemic.
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
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.
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 continue to grow.
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.
16
causing
wages
to
increase,
which
could
adversely
affect
our
business,
margins,
operating
results
and
financial condition if we cannot offset these cost increases.
Risks Relating to Our Information Technology and Related Systems:
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, cyber-attacks, 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.
A disruption or shutdown of our centralized distribution center or transportation network
could materially
and adversely affect our business and results of operations.
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.
A security breach that results in unauthorized access to or disclosure of employee,
Company or customer
information could adversely affect our costs, reputation and
results of operations, and efforts to mitigate
these risks may continue to increase our costs.
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
17
anticipate or detect for long periods
of time.
Despite measures the Company takes
to protect confidential
information against
unauthorized access
or
disclosure, which
are ongoing
and
may continue
to
increase
our costs,
there is
no assurance
that such
measures will
prevent the
compromise of
such information.
If
any such
compromise or
unauthorized access
to or
disclosure of
this information
were to
occur,
it could
have
a
material
adverse
effect
on
the
Company's
reputation,
business,
operating
results,
financial
condition and cash flows.
We are subject to payment
-related risks.
credit
card,
debit
cards,
gift
cards
and
physical
and
electronic
bank
checks.
For
existing
and
future
payment
methods
we
offer
to
our
customers,
we
may
become
subject
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), as
well as
fraud
risk. For
certain payment
methods, including
credit
and debit
cards, we
pay interchange
and other
fees,
which
may 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, 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.
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,
provide
existing
customers
the
on-line
shopping
experience
and
introduce
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
unauthorized
access
to
or
disclosure
of
employee,
Company
or
customer
information
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.
Risks Relating to Accounting and Legal Matters:
Changes to accounting rules and regulations may adversely affect
our reported results of operations and
financial condition.
In
an
effort
to
provide
greater
comparability
of
financial
reporting
in
an
increasing
global
environment, accounting regulatory authorities
have been in
discussions for many years
regarding efforts
to either converge U.S.
Generally Accepted Accounting Principles with International Financial
Reporting
18
Standards (“IFRS”),
have U.S.
companies
provide supplemental
IFRS-based information
or
continue to
work
toward
a
single
set
of
globally
accepted
accounting
standards.
If
implemented,
these
potential
changes
in
accounting
rules
or
regulations
could
significantly
impact
our
future
reported
results
of
operations and financial
position.
Changes in accounting
rules or
regulations and varying interpretations
of existing
accounting rules
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 or
regulations may adversely
affect our
reported results of
operations
and financial position or perceptions of our performance and financial
condition.
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 from
our
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.
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,
such
as
the
Foreign
Corrupt Practices Act, 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 review and
audits, which results
may have the
potential to 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.
related to
data privacy,
could increase
our costs
of compliance,
technology and
business operations.
The
interpretation of existing or
new laws to
existing technology and practices
can be uncertain and
may lead
to additional compliance risk and cost.
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.
19
We
believe
that
our
“Cato”,
“It’s
Fashion”,
“It’s
Fashion
Metro”
and
“Versona”
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.
private label merchandise by claiming
that our merchandise violates
their trademarks or other
proprietary
rights.
In
the
event
of
such
a
conflict,
we
could
be
subject
to
lawsuits
or
other
actions,
the
ultimate
resolution of
which we
cannot predict;
however,
such a
controversy could
adversely affect
our business,
financial condition and results of operations.
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.
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
20
these issues declines.
Similarly,
the default by
issuers of the
debt securities we
hold or similar
securities
could impair the 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.
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
execute
our
business
strategy.
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
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.
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.
owned approximately 49.8%
of the combined
voting power of
our common stock.
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 or other fundamental transaction,
all of which could depress
the market price of our common stock.
In addition, Mr.
Cato has the ability to control the
management of
the
Company
as
a
result
of
his
position
as
Chief
Executive
Officer.
If
Mr.
Cato
acquires
beneficial
ownership of more than 50% of the combined voting power of our common stock (including as a result of
continued Company stock
repurchases from time
to time under
our stock repurchase
program that would
reduce
our
outstanding
shares),
we
would
qualify
for
exemption
as
a
“controlled
company”
from
compliance
with
certain
New
York
Stock
Exchange
corporate
governance
rules,
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.
If
we
became
eligible
and
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.
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
21
more volatile.
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.
Item 1B.
Unresolved Staff Comments:
Item 2.
Properties:
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
receiving
and
distribution
of
store
and
office
operating
supplies.
The
Company also
owns
approximately 185
acres
of
land
in
York
County,
South
Carolina as a potential new site for our distribution center.
22
Item 3.
Legal Proceedings
:
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.
23
Item 3A.
Executive Officers of the Registrant:
Name
Age
Position
John P.
D. Cato............................
Chairman, President and Chief Executive Officer
Charles D. Knight........................
Executive Vice President, Chief Financial Officer
John R. Howe
..............................
Executive Vice President
Gordon Smith
..............................
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
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.
John R. Howe
as
Executive Vice
President.
From
September
2008 to
January
2022, he
has
served
as
Executive Vice
President,
Chief
Financial
Officer.
From
June
2007
until
September
2008,
he
served
as
Senior
Vice
President, Controller.
From 1999 to 2007,
he served as Vice
President, Assistant Controller.
From 1997
to 1999,
he served
as Assistant Vice
President, Budgets and
Planning.
From 1995
to 1997,
he served
as
Director, Budgets and Planning.
From 1990 to 1995, he served as
Assistant Tax Manager.
From 1986 to
1990, Mr. Howe held various positions within the finance area.
Gordon Smith
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:
24
PART
II
Item 5.
Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases
of
Equity Securities:
Market & Dividend Information
the symbol CATO.
Stock was 5,000 and there were 2 record holders of the Company’s Class B Common Stock.
25
Stock Performance Graph
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
1/27/2017
100
100
100
2/2/2018
50
114
117
2/1/2019
68
124
113
1/31/2020
81
138
123
1/29/2021
58
147
161
1/28/2022
87
163
159
commencement of the Company’s 2017 fiscal year, and that all dividends were reinvested.
26
Issuer Purchases of Equity Securities
ended January 29, 2022:
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Value) of Shares that may
Average Price
Announced Plans or
yet be Purchased Under
Period
Purchased
Paid per Share (1)
the Plans or Programs (2)
November 2021
111,582
$
16.25
111,582
December 2021
310,884
16.30
310,884
January 2022
-
-
-
Total
422,466
$
16.29
422,466
450,047
(1)
Prices
include
trading
costs.
(2)
During the
fourth quarter ended January
29, 2022,
the Company repurchased and
retired 422,466
shares under this program for
approximately
$6,881,294 or an average market price of
$16.29 per
share. As of the fourth
quarter ended
January 29, 2022,
the Company had
450,047 shares
remaining
in open authorizations.
There is no specified
expiration
date for the Company’s
repurchase
program.
The
Board
of
Directors authorized
an
increase
in
the
Company’s
share
repurchase program
of
1,000,000
shares
at the
February
24, 2022
Board
of Directors’
meeting.
27
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations:
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
report
on
Form 10-K.
This section
of the
Form 10-K
generally discusses
fiscal 2021
and fiscal
2020 and
year-to-
year comparisons between fiscal
2021 and fiscal
2020, as well,
as certain fiscal
2019 items.
Discussions
of
fiscal
2019
items
and
year-to-year
comparisons
between
fiscal
2020
and
fiscal
2019
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 January 30, 2021.
COVID-19 Update
operating
results
through
fiscal
2020
and
to
a
lesser
extent
through
2021.
In
2021,
the
Company
saw
significant
improvements
in
sales
compared
to
2020.
This
improvement
was
primarily
attributable
to
government
stimulus,
increased
customer
traffic,
states
lifting
capacity
limits
as
more
people
were
vaccinated,
consumers’
increasing
comfort
level
with
venturing
out
to
social
events
and
customers’
preparing to return
to work. However,
the Company’s
2021 sales remain
below pre-pandemic 2019
sales
for the
comparable period,
and there
is still
significant uncertainty
regarding the
lingering effects
of the
pandemic,
as
well
as
concerns
over
the
impact
of
new
or
potential
variants
of
the
virus
that
are
more
transmissible or
severe, stagnant
vaccination rates
and related
factors that
may continue
to fuel
periodic
surges of the virus or otherwise impede progress toward the return to pre-pandemic
activities and levels of
consumer
confidence
and
commercial
activity.
The
Company
faces
additional
uncertainty
from
the
continued effects of disruption in the global supply chain, inflation and its
impact on our cost of products,
transportation, wage
rates and
other operating
costs, as
well as,
the impact
on our
customers’ disposable
incomes,
and
the
availability
of
workers.
The
Company
expects
that
these
uncertainties
and
perhaps
others related to
the pandemic will continue
to impact the
Company in fiscal 2022.
The adverse financial
impacts associated with
these continued effects
of, and
uncertainties related to,
the COVID-19 pandemic
include,
but
are
not
limited
to,
(i)
lower
net
sales
in
markets
affected
by
actual
or
potential
adverse
changes in
conditions relating
to
the
pandemic, whether
due to
increases in
case
counts, state
and local
orders, reductions in
store traffic and
customer demand, labor shortages,
or all of
these factors, (ii)
lower
net
sales
caused
by
the
delay
of
inventory
production
and
fulfillment,
(iii)
and
incremental
costs
associated
with
efforts
to
mitigate
the
effects
of
the
outbreak,
including
increased
freight
and
logistics
costs and other expenses.
potential
adverse
impacts
of
COVID-19
during
2022,
the
duration
and
severity
of
these
effects
will
depend
on
the
course
of
future
developments,
which
are
highly
uncertain.
The
extent
to
which
the
COVID-19
pandemic
ultimately
impacts
the
Company’s
business,
financial
condition,
results
of
operations,
cash
flows,
and
liquidity
may
differ
from
management’s
current
estimates
due
to
inherent
uncertainties regarding the duration
and further spread of
the outbreak or its
variants, its severity,
actions
taken to contain the
virus or treat its impact,
and how quickly and to
what extent pre-pandemic economic
and operating conditions can resume.
28
Results of Operations
sales for the years indicated:
Fiscal Year Ended
January 29,
2022
January 30,
2021
Retail sales …………………………………………………………..
100.0
%
100.0
%
Other revenue…………………………………………………………
1.0
1.3
Total revenues ……………………………………………………….
101.0
101.3
Cost of goods sold …………………………………………………..
59.5
76.3
Selling, general and administrative………………………………….
35.1
36.4
Depreciation …………………………………………………………
1.6
2.6
Interest and other income ……………………………………………
0.3
1.2
Income (loss) before income taxes ……………………………
5.1
(12.8)
Net income (loss) ……………………………………………………
4.8
%
(8.4)
%
Fiscal 2021 Compared to Fiscal 2020
The increase in retail sales in fiscal 2021 was primarily
due to a 34% increase in same-store sales
and sales
from
new stores, partially offset by permanently closed stores in 2020.
Same-store sales
for the
fiscal year
2021 increased
primarily due
to increased
store operating
hours in
fiscal 2021
as opposed
to the
store closures
that persisted
from
March 19, 2020
into the second
quarter of 2020.
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
2021 and
fiscal 2020,
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),
increased by 33.8%
to $769.3 million
in fiscal 2021
compared to $575.1
million
in fiscal
2020. The
Company operated 1,311
stores at January
29, 2022
compared to
1,330 stores
operated at
January 30, 2021.
increase resulted
primarily due
to increases
in gift
card breakage
income, e-commerce shipping
revenues and
layaway charges, partially offset by a decrease in finance charges.
compared
to
fiscal
2020
credit
revenue
of
$2.7
million
or
0.5%
of
total
revenue.
The
decrease
in
credit
revenue
was
primarily
due
to
reductions
in
finance
and
late
charge
income
as
a
result
of
lower
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 $1.4
million in
fiscal 2021
compared to
$1.5 million
in fiscal
2020.
See
Note 13
of Notes
to Consolidated Financial
Statements for
a schedule
of credit-related
expenses. Total
credit
segment income before
taxes decreased $0.6
million to $0.6
million in fiscal
2021 from $1.2
million in fiscal
2020.
Cost
of
goods sold
was $453.1
million, or
59.5%
of
retail
sales,
in
fiscal
2021
compared to
$433.2
million, or 76.3% of retail sales, in fiscal 2020. The decrease in cost of goods sold as a percentage of sales
resulted primarily
from the leveraging of occupancy, buying and distribution costs
due to more normalized
sales and
higher sales
of
regular priced
goods.
Cost
of
goods
sold
includes
merchandise
costs,
net
of
discounts
and
allowances,
buying
costs,
distribution
costs,
occupancy
costs,
freight
and
inventory
29
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) increased by 129.5% to
$308.3 million in
fiscal 2021 from
$134.3 million in
fiscal 2020. Gross
margin as presented
may not be
comparable to that
of
other companies.
payroll,
related
payroll
taxes
and
benefits,
insurance,
supplies,
advertising,
bank
and
credit
card
processing
fees were $267.0 million in
fiscal 2021 compared to $206.7
million in fiscal 2020, an
increase of 29.2%. As
a
percent of
retail sales,
SG&A was
35.1% compared
to 36.4%
in the
prior year.
The dollar
increase in
SG&A
expense
was
primarily
attributable to higher employee benefit/bonus expense, store productivity initiatives
and
store operating expenses
as
store operating hours
have increased
substantially compared to
the
prior
year’s phased
store reopening following the
extended store closure
due to
COVID-19,
partially offset by
lower
impairment
charges.
Depreciation
expense
decreased
from
fiscal
2020
due
to
fully
depreciated
older
stores
and
prior
period
impairments of
leasehold
improvements and
fixtures,
partially
offset
by
store
development
and
information
technology expenditures.
The decrease is primarily due to
a gain on the sale
of land held for investment in
2020 and lower interest rates
on our short-term investments, partially
offset by an increase in short-term investments.
benefit of
$25.3 million,
or 4.5%
of retail
sales in
fiscal 2020.
The income
tax expense
was primarily
due to
higher
pre-tax
earnings,
partially
offset
by
the
ability
to
realize
foreign
tax
credits,
release
of
reserves
for
uncertain tax positions due
to the expiration
of the statute
of limitations, a
favorable adjustment to
the federal
net operating loss carryback and a partial release
of valuation allowances against state net
operating losses. The
effective tax rate
was 5.4% (Expense) in
fiscal 2021 compared to
34.8% (Benefit) in fiscal 2020.
See Note 12
to the Consolidated Financial Statements,
“Income Taxes,” for further details.
Off-Balance Sheet Arrangements
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
of Notes 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
inherent
in
the
preparation
of
the
Company’s
financial
statements
include
the
allowance
for
customer
credit losses,
inventory shrinkage,
the calculation
of potential
asset impairment,
workers’ compensation,
general and
auto insurance liabilities,
reserves relating to
self-insured health insurance,
and uncertain tax
positions.
30
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.
realizable value. Physical inventories
are conducted throughout the
year to calculate actual
shrinkage and
inventory on
hand. Estimates
based on
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.
The Company determines whether an arrangement is a lease at inception. The Company has operating
leases
for
stores,
offices
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 for further information.
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.
31
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.
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, or
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.
Liquidity, Capital Resources and Market Risk
The Company
believes that
its cash,
cash equivalents
and short-term
investments, together
with cash
flows from operations,
will be adequate
to fund the
Company’s regular
operating requirements including
$71.3 million
of lease
obligations and
planned investments
of
$23.0 million
of capital
expenditures for
fiscal 2022 and for the foreseeable future.
$30.7 million used
in fiscal
2020 and
$53.4 million
provided in
fiscal 2019.
Cash provided
by operating
activities
during
2021
was
primarily
attributable
to
net
income
adjusted
for
depreciation,
share-based
compensation, impairment and
changes in
working capital. The
increase of
$90.5 million for
fiscal 2021
compared to fiscal 2020 is
primarily
due to net operating
income versus
a net operating
loss and an
increase
in accounts
payable,
partially
offset by
higher
merchandise
inventories
and lower
store impairment
charges.
and $163.5 million at January
30, 2021 and February 1,
2020, respectively.
The slight
increase
in working
capital compared
to the prior year is primarily
due to higher short-term
investments,
inventory
and cash and
cash equivalents,
partially
offset by
higher
accrued
liabilities
and accounts
payable.
borrowings of up to $35.0 million less
the balance of any revocable
letters of credit discussed below.
The
revolving credit
agreement is
committed until
May 2022.
The Company
is in
the process
of obtaining
a
new revolving credit
agreement and expects this
to be completed
by May of
2022.
The credit agreement
contains various financial covenants and limitations, including the maintenance of specific financial ratios
with
which
the
Company
was
in
compliance
as
of
January
29,
2022.
There
were
no
borrowings
outstanding under this credit
facility as of
the fiscal year ended
January 29, 2022
or the fiscal
year ended
January 30, 2021.
32
January 29, 2022, January 30, 2021 and February 1, 2020.
2021,
2020
and
2019,
respectively.
The
expenditures
for
fiscal
2021
were
primarily
for
additional
investments
in six
new stores,
distribution
center
and information
technology.
provided
for
fiscal
2020
and
$22.6
million
used
in
fiscal
2019.
In
fiscal
2021,
the
cash
used
was
primarily
attributable to the
increase in
net purchases of
short-term investments, partially offset by lower
expenditures
for property
and equipment.
$27.2 million for fiscal 2020 and $41.6 million for fiscal 2019. The
increase
in cash
used was
primarily
due
to higher
dividend
payments
and higher
share
repurchase
amounts.
that are measured at fair value.
taxable governmental
debt securities
held in
managed accounts
with underlying
ratings of
A or
better at
January 29,
2022. The
state, municipal
and corporate bonds
and asset-backed securities
have contractual
maturities which range from three
days to 4.9 years. The
U.S. Treasury Notes have
contractual maturities
which
range
from
4.5
months
to
1.1
years.
These securities
are
classified as
available-for-sale and are
recorded as Short-term investments,
Restricted cash, Restricted
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.
The asset-backed
securities
are
bonds comprised of
auto loans
and bank
credit cards that
carry AAA
ratings. The auto
loan asset-backed
securities
are backed by static pools of auto loans that were originated
and serviced by captive auto finance
units, banks
or
finance companies.
The bank
credit card
asset-backed securities are backed by
revolving
pools of
credit card
receivables generated by account holders
of
cards from
American Express, Citibank,
JPMorgan
Chase,
Capital
One, and
Discover.
recorded within Other assets in the
Consolidated Balance Sheets.
At January 30, 2021, the Company had
$0.7
million
of
corporate
equities,
which
are
recorded
within
Other
assets
in
the
Consolidated
Balance
Sheets.
investment
securities
include
corporate
and municipal
bonds for
which quoted
prices may
not be available
on
active exchanges
for identical
instruments.
Their fair
value is principally
based on
market values
determined
by management with assistance of a
third-party pricing service.
Since quoted prices in
active markets for
identical assets
are not available,
these prices are determined
by the pricing service
using observable
market
information
such
as
quotes
from
less
active
markets
and/or
quoted
prices
of
securities
with
similar
characteristics,
among
other factors.
Deferred
compensation plan
assets
consist
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
33
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
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,
Leases
in
Notes
to
the
Consolidated
Financial
Statements
for
the
maturities
of
our
operating
lease obligations.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk:
financing, investing and
cash management activities,
but the Company
does not
believe such exposure
is
material.
34
Item 8.
Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID
) .....................................
35
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
for the fiscal
38
Consolidated Balance Sheets at January 29, 2022 and January 30, 2021
.............................................
39
Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2022,
January 30, 2021
40
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29,
2022,
41
Notes to Consolidated Financial Statements ..........................................................................................
42
Schedule II — Valuation
and Qualifying Accounts for the fiscal years ended January 29, 2022,
72
35
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 January 29, 2022 and
January 30, 2021, 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 January 29, 2022,
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
January 29,2022, based on criteria established in
Internal Control - Integrated Framework
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 January
29, 2022 and January 30, 2021, and the
results of its operations and its cash flows for each of the
three years in the period ended January 29,
2022 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 January 29, 2022, based on criteria established
in
Internal Control - Integrated
Framework
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.
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
36
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 $63.1 million, of which
the store locations were a portion, and
consolidated operating lease right-of-use assets, net balance
was $181.3 million as of January 29, 2022.
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 $0.9
million was recorded during the year ended
January 29, 2022.
The principal considerations for our determination that
performing procedures relating to the
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.
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 group.
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
37
management’s assessment of the fair value of the leased assets
included in the store location asset
groupings.
/s/
March 23, 2022
We have served as the Company’s auditor since 2003.
38
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
Fiscal Year Ended
January 29, 2022
January 30, 2021
February 1, 2020
(Dollars in thousands, except per share data)
REVENUES
$
$
$
COSTS AND EXPENSES, NET
(
2,141
)
(
6,630
)
(
6,065
)
Income (loss) before income taxes
(
72,806
)
Income tax expense (benefit)
(
25,323
)
Net income (loss)
$
$
(
47,483
)
$
Basic earnings (loss) per share
$
$
(
2.01
)
$
Diluted earnings (loss) per share
$
$
(
2.01
)
$
Dividends per share
$
$
$
Comprehensive income:
Net income (loss)
$
$
(
47,483
)
$
Unrealized gain (loss) on available-for-sale
), ($
), and $
(
1,435
)
(
268
)
Comprehensive income (loss)
$
$
(
47,751
)
$
See notes to consolidated financial statements.
39
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
January 29, 2022
January 30, 2021
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
$
Short-term investments
Restricted cash
Restricted short-term investments
Accounts receivable, net of allowance for customer credit losses of $
Merchandise inventories
Prepaid expenses and other current assets
Property and equipment – net
Deferred income taxes
Other assets
Right-of-Use assets - net
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
$
Accrued expenses
Accrued bonus and benefits
Accrued income taxes
Current lease liability
Other noncurrent liabilities
Lease liability
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $
Class A common stock, $
Convertible Class B common stock, $
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
(
280
)
$
$
See notes to consolidated financial statements.
40
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Fiscal Year Ended
January 29, 2022
January 30, 2021
February 1, 2020
(Dollars in thousands)
Operating Activities:
Net income (loss)
$
$
(
47,483
)
$
Adjustments to reconcile net income to net cash provided
(
332
)
(
691
)
(
694
)
(
2,298
)
(
3,194
)
(
3,499
)
(
26,935
)
(
40,784
)
(
505
)
(
1,596
)
(
3,855
)
(
2,611
)
(
9,803
)
(
1,118
)
(
16,945
)
(
8,629
)
Net cash provided by (used in) operating activities
(
30,710
)
Investing Activities:
Expenditures for property and equipment
(
4,105
)
(
13,956
)
(
8,306
)
Purchase of short-term investments
(
141,937
)
(
74,041
)
(
218,345
)
Sales of short-term investments
Purchase of other assets
(
400
)
(
1,357
)
Sales of other assets
Net cash provided by (used in) investing activities
(
25,332
)
(
22,633
)
Financing Activities:
Dividends paid
(
9,972
)
(
7,912
)
(
32,592
)
Repurchase of common stock
(
22,033
)
(
19,654
)
(
9,605
)
Proceeds from line of credit
Payments to line of credit
(
34,000
)
Proceeds from employee stock purchase plan
Net cash used in financing activities
(
31,801
)
(
27,175
)
(
41,571
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(
10,808
)
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
$
$
$
Non-cash activity:
Accrued plant and equipment
$
$
$
Accrued treasury stock
See notes to consolidated financial statements.
41
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)
Balance — February 2, 2019
$
$
$
$
(
77
)
$
Comprehensive income:
Dividends paid ($
(
32,592
)
(
32,592
)
Class A common stock sold through employee stock purchase
Class A common stock issued through restricted stock grant plans
—
Repurchase and retirement of treasury shares –
(
21
)
(
10,402
)
(
10,423
)
Balance — February 1, 2020
$
$
$
$
$
Comprehensive income:
(
47,483
)
(
47,483
)
)
(
268
)
(
268
)
Dividends paid ($
(
7,912
)
(
7,912
)
Class A common stock sold through employee stock purchase
Class A common stock issued through restricted stock grant plans
—
Repurchase and retirement of treasury shares –
(
67
)
(
18,768
)
(
18,835
)
Balance — January 30, 2021
$
$
$
$
$
Comprehensive income:
)
(
1,435
)
(
1,435
)
Dividends paid ($
(
9,972
)
(
9,972
)
Class A common stock sold through employee stock purchase
Class A common stock issued through restricted stock grant plans
—
Repurchase and retirement of treasury shares –
(
47
)
(
21,986
)
(
22,033
)
Balance — January 29, 2022
$
$
$
$
(
280
)
$
See notes to consolidated financial statements.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
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:
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”
and
“Versona,”
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.
Use
of
Estimates:
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, and
uncertain tax positions.
Cash
and
Cash
Equivalents:
Cash
and
cash
equivalents
consist
of
highly
liquid
investments
with
original maturities of three months or less.
Short-Term
Investments:
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 and Restricted Short-term
Investments:
The Company had $
million in
escrow at
January 29,
2022 and
January 30,
2021, 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
and Restricted
short-term investments
on the
Consolidated Balance
Sheets.
Supplemental Cash Flow
Information:
Income tax
payments, net
of refunds
received, for
the fiscal
years ended January
29, 2022, January 30,
2021 and February 1,
2020 were a
payment of $
, a
payment of $
, 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)
43
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:
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
$
,
$
were incurred in fiscal 2021, fiscal 2020 and fiscal 2019, 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.
`
Fiscal Year
Ended
January 29,
2022
January 30,
2021
(Dollars in thousands)
Other Assets
$
$
Total
Other Assets
$
$
Leases:
In
2016,
the
Financial
Accounting
Standards
Board
(“FASB”)
issued
Accounting
Standard
Codification (“ASC”)
842
-
Leases
,
with
amendments issued
in
2018. The
guidance
requires lessees
to
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
44
recognize
most
leases
on
the
balance
sheet
but
does
not
change
the
manner
in
which
expenses
are
recorded
in
the
income
statement.
For
lessors,
the
guidance
modifies
the
classification
criteria
and
the
accounting for sales-type and direct financing leases.
statements and
related disclosures, including
the increase
in the
assets and
liabilities on
its balance
sheet
and
the
impact
on
its
current
lease
portfolio
from
a
lessee
perspective.
The
Company
completed
its
comprehensive
review
of
its
lease
portfolio,
which
includes
mostly
store
leases
impacted
by
the
new
guidance. The Company reviewed its internal controls over leases and, as a result, the Company enhanced
these
controls;
however,
these
changes
are
not
considered
material.
In
addition,
the
Company
implemented
a
new
software
platform,
and
corresponding
controls,
for
administering
its
leases
and
facilitating compliance with the new guidance.
The package of practical expedients
allows the Company to not
reassess previous accounting conclusions
regarding whether existing arrangements are or contain leases, the classification
of existing leases, and the
treatment
of
initial
direct
costs.
The
Company did
not
elect
the
hindsight
transition
practical
expedient
allowed for by
the new standard,
which allows entities to
use hindsight when
determining lease term and
impairment of right-of-use assets.
The
modified
retrospective
approach
the
Company
selected
provides
a
method
of
transition
allowing
recognition of
existing leases
as of
the beginning
of the
period of
adoption (i.e.,
February 3,
2019), and
which does not require the adjustment of comparative periods. See Note
11 for further information.
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
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. Layaway
sales are
recorded as
deferred revenue
until the
customer takes
possession or
forfeits
the merchandise. Gift
cards do not
have expiration dates.
A provision is
made for estimated
merchandise
returns based
on sales
volumes and
the Company’s
experience; actual
returns have
not varied
materially
from historical amounts. A provision is made for estimated write-offs associated with sales
made with the
Company’s
proprietary
credit
card.
Amounts related
to
shipping and
handling billed
to
customers
in
a
sales
transaction
are
classified
as
Other
revenue
and
the
costs
related
to
shipping product
to
customers
(billed and accrued) are classified as Cost of goods sold.
Revenue from Contracts with Customers (Topic
606)
in
fiscal
2021,
2020
and
2019,
the
Company
recognized
$
,
$
,
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 CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
45
the
Company’s
wholly-owned
subsidiaries.
None
of
the
credit
card
receivables
are
secured.
The
Company
estimated
customer
credit
losses
of
$
January 29,
2022 and
January 30,
2021, respectively,
on sales
purchased on
the Company’s
proprietary
credit card of $
30, 2021, respectively.
customers (in thousands):
`
Balance as of
January 29, 2022
January 30, 2021
Proprietary Credit Card Receivables, net
$
$
Gift Card Liability
$
$
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
our
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.
Advertising:
Advertising
costs
are
expensed
in
the
period
in
which
they
are
incurred.
Advertising
expense was approximately $
, $
2022, January 30, 2021 and February 1, 2020, respectively.
Stock Repurchase Program:
For the fiscal year ended January
29, 2022, the Company had
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
23,
2022,
the
Company repurchased
156,707
shares
for
$2,515,310.
The
Board
of
Directors
increased
the
Company’s
open
share
repurchase
authorization
by
one
million
shares
at
the
February 24, 2022 Board of Directors meeting.
Earnings
Per
Share:
ASC
260
-
Earnings
Per
Share
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.
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 CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
46
29, 2022, January 30, 2021 and February 1, 2020:
`
Fiscal Year Ended
January 29, 2022
January 30, 2021
February 1, 2020
Numerator
(Dollars in thousands)
Net earnings (loss)
$
$
(
47,483
)
$
(Earnings) loss allocated to non-vested equity awards
(
1,937
)
(
1,280
)
Net earnings (loss) available to common stockholders
$
$
(
45,387
)
$
Denominator
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
Net income (loss) per common share
Basic earnings (loss) per share
$
$
(
2.01
)
$
Diluted earnings (loss) per share
$
$
(
2.01
)
$
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
provided
for
temporary
differences
between
the
financial
reporting
basis
and
the
tax
basis
of
the
Company’s assets and liabilities.
Income Taxes
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.
that assessment, the Company will determine if a valuation allowance should
be recorded.
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.
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
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
47
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 $
healthcare, $
Fair Value
of Financial Instruments:
as
cash
and
cash
equivalents,
short-term
investments,
restricted
cash
and
short-term
investments,
approximate their fair values due to their short terms to maturity and/or
their variable interest rates.
Stock Based
Compensation:
stock
and
other
forms
of
equity
compensation
in
accordance
with
ASC
718
-
Compensation
–
Stock
Compensation.
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.
Recently Adopted Accounting Policies:
In December 2019, the FASB
issued ASU 2019-12,
Income
Taxes
(Topic
740):
Simplifying
the
Accounting
for
Income
Taxes
.
The
new
accounting
rules
reduce
complexity
by
removing
specific
exceptions
to
general
principles
related
to
intraperiod
tax
allocations,
ownership
changes
in
foreign
investments,
and
interim
period
income
tax
accounting
for
year-to-date
losses
that
exceed
anticipated
losses.
The
new
accounting
rules
also
simplify
accounting
for
franchise
taxes that are
partially based on income,
transactions with a
government that result in
a step up in
the tax
basis
of
goodwill, separate
financial
statements
of
legal
entities
that
are
not
subject
to
tax,
and enacted
changes
in
tax
laws
in
interim
periods.
The
Company adopted
this
accounting
standards
update
on
the
first
day
of
the
first
quarter
of
2021
with
no
material
impact
on
its
Condensed
Consolidated
Financial
Statements.
Update
(ASU)
2020-04,
Reference
Rate
Reform
(Topic
848):
Facilitation
of
Effects
of
Reference
Rate
Reform on Financial Reporting
. The ASU, and subsequent
clarifications, provide practical expedients for
contract modification
accounting related
to the
transition away
from the
London Interbank
Offered Rate
(LIBOR) and other interbank offering rates to alternative reference rates. The expedients are applicable to
contract modifications made and hedging relationships entered into
on or before December 31, 2022. The
Company adopted
this
accounting
standard
the
first
day
of
the
fourth
quarter
of
2021
with
no
material
impact on its Condensed Consolidated Financial Statements.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
48
2.
Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
January 29, 2022
January 30, 2021
February 1, 2020
Dividend income
$
(
76
)
$
(
5
)
$
(
42
)
Interest income
(
1,321
)
(
2,697
)
(
4,954
)
Miscellaneous income
(
580
)
(
627
)
(
709
)
Net loss (gain) on investment sales
(
164
)
(
3,301
)
(
360
)
Interest and other income
$
(
2,141
)
$
(
6,630
)
$
(
6,065
)
of
$2.3
million within
Interest and
other
income
on
the
Consolidated
Statements of
Income (Loss) and Comprehensive Income (Loss).
3.
Short-Term Investments:
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.
January 29, 2022 and January 30, 2021 (in thousands):
`
January 29, 2022
January 30, 2021
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
$
$
$
$
$
$
Unrealized gains
Unrealized (loss)
(
388
)
(
520
)
(
908
)
Estimated fair value
$
$
$
$
$
$
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
in
these
investments
at
January
29,
2022
and
January
30,
2021
(in
thousands):
`
January 29, 2022
January 30, 2021
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
$
(
908
)
$
$
(
697
)
$
$
(
250
)
$
Equity Investments
(
126
)
(
100
)
Total
$
(
365
)
$
$
(
280
)
$
$
(
350
)
$
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
49
4.
Fair Value Measurements:
at fair value as of January 29, 2022 and January 30, 2021 (in thousands):
`
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 29, 2022
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
$
$
$
$
Total Assets
$
$
$
$
Liabilities:
(
10,020
)
(
10,020
)
Total Liabilities
$
(
10,020
)
$
$
$
(
10,020
)
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 30, 2021
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
$
$
$
$
Total Assets
$
$
$
$
Liabilities:
(
10,316
)
(
10,316
)
Total Liabilities
$
(
10,316
)
$
$
$
(
10,316
)
taxable governmental
debt securities
held in
managed accounts
with underlying
ratings of
A or
better at
January 29,
2022. The
state, municipal
and corporate bonds
and asset-backed securities
have contractual
maturities which range from three
days to 4.9 years.
The U.S. Treasury
Notes and Certificates of
Deposit
have
contractual
maturities
which
range
from
4.5
months
to
1.1
years.
These securities are classified as
available-for-sale
and
are
recorded
as
Short-term
investments,
Restricted
cash,
Restricted
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.
The asset-backed
securities
are bonds
comprised
of auto loans
and bank credit
cards that
carry AAA
ratings.
The auto
loan asset-backed
securities
are backed
by static
pools of
auto loans
that were
originated
and
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
50
serviced by
captive auto
finance units,
banks
or
finance companies.
The
bank
credit
card
asset-backed
securities
are backed
by revolving
pools of
credit
card receivables
generated
by account
holders
of cards
from
American
Express,
Citibank,
JPMorgan
Chase,
Capital
One, and
Discover.
recorded within Other assets in the
Consolidated Balance Sheets.
At January 30, 2021, the Company had
$0.7
million
of
corporate
equities,
which
are
recorded
within
Other
assets
in
the
Consolidated
Balance
Sheets.
investment
securities
include
corporate
and municipal
bonds for
which quoted
prices may
not be available
on
active exchanges
for identical
instruments.
Their fair
value is principally
based on
market values
determined
by management with assistance of a
third-party pricing service.
Since quoted prices in
active markets for
identical assets
are not available,
these prices are determined
by the pricing service
using observable
market
information
such
as
quotes
from
less
active
markets
and/or
quoted
prices
of
securities
with
similar
characteristics,
among
other factors.
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)
51
The following
tables summarize
the change in fair
value of the Company’s
financial
assets and liabilities
measured
using
Level
3 inputs
as of January
29, 2022
and
January 30, 2021
`
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at January 30, 2021
$
Ending Balance at January 29, 2022
$
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at January 30, 2021
$
(
10,316
)
1,010
(
304
)
(
410
)
Ending Balance at January 29, 2022
$
(
10,020
)
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at February 1, 2020
$
Ending Balance at January 30, 2021
$
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at February 1, 2020
$
(
10,391
)
1,714
(
652
)
(
987
)
Ending Balance at January 30, 2021
$
(
10,316
)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
52
5.
Accounts Receivable:
Accounts receivable consist of the following (in thousands):
January 29, 2022
January 30, 2021
Customer accounts — principally deferred payment accounts
$
$
Income tax receivable
Miscellaneous receivables
Bank card receivables
Total
Less allowance for customer credit losses
Accounts receivable — net
$
$
Finance charge
and late
charge
revenue on
customer deferred
payment accounts
totaled $
,
$
years ended January 29, 2022, January 30, 2021
and February 1,
2020,
respectively,
and
charges
against
the
allowance
for
customer
credit
losses
were
approximately
$
,
$
February
1,
2020,
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).
6.
Property and Equipment:
Property and equipment consist of the following (in thousands):
January 29, 2022
January 30, 2021
Land and improvements
$
$
Buildings
Leasehold improvements
Fixtures and equipment
Information technology equipment and software
Construction in progress
Total
Less accumulated depreciation
Property and equipment — net
$
$
investments in new technology.
7.
Accrued Expenses:
Accrued expenses consist of the following (in thousands):
January 29,
2022
January 30,
2021
Accrued employment and related items
$
$
Property and other taxes
Accrued self-insurance
Fixed assets
Other
Total
$
$
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
53
8.
Financing Arrangements:
million
less
the
balance
of
any
revocable
credits
discussed
below.
The
revolving
credit
agreement is
committed
until May
2022.
The Company is in the process of
obtaining a new revolving credit agreement
and
expects
this
to
be
completed
by
May
of
2022.
The
credit
agreement contains
various
financial
covenants and limitations, including the maintenance of specific financial ratios with
which the
Company
was in compliance
as of January
29, 2022.
There were
no borrowings
outstanding
under this
credit
facility
as
of
January 29,
2022, January 30,
2021 or
February 1,
2020.
At January
29, 2022,
the
weighted average
interest
rate under
the credit
facility
was zero
due to
no borrowings
outstanding
at the
end of
the year.
letters
of credit
relating
to purchase
commitments.
9.
Stockholders’ Equity:
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.
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:
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
IRS.
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’s
contributions
for
the
years
ended
January
29,
2022,
January
30,
2021
and
February
1,
2020
were
approximately $
, $
, respectively.
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.
The
Committee
approved
a
contribution
to
the
ESOP
for
the
year
ended
January
29,
2022
of
$29,430,000,
of
which
$15,000,000 was contributed in the third
quarter of fiscal 2021.
The Company’s contribution
was $
$
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
54
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
financial condition and results
of operations. The Company funds healthcare contributions to a third-party
provider.
11.
Leases:
leases
for
stores,
offices
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.
incremental
borrowing
rate
based
on
the
information
available
at
commencement
date
of
the
lease
in
determining the present value of lease payments.
`
Twelve Months Ended
January 29, 2022
January 30, 2021
Operating lease cost (a)
$
$
Variable
lease cost (b)
$
$
(a) Includes right-of-use asset amortization of ($
) million and ($
) million for the twelve months
ended January 29, 2022 and January 30, 2021, respectively.
(b) Primarily related 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):
Operating cash flow information:
Twelve Months Ended
January 29, 2022
January 30, 2021
Cash paid for amounts included in the measurement of lease liabilities
$
$
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations, net of rent violations
$
$
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
55
Weighted-average
remaining
lease term
and
discount rate
for
the
Company’s
operating leases
are
as
follows:
`
As of
January 29, 2022
January 30, 2021
Weighted-average remaining lease term
Weighted-average discount rate
Maturities
of
lease
liabilities
by
fiscal
year
for
the
Company’s
operating
leases
are
as
follows
(in
thousands):
Fiscal Year
2022
$
2023
2024
2025
2026
Thereafter
Total lease payments
Less: Imputed interest
Present value of lease liabilities
$
12.
Income Taxes:
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
January
29,
2022,
the
Company had
gross
unrecognized
tax
benefits
totaling
approximately
$5.3
million,
of
which
approximately
$
Company had approximately $
related
to
uncertain
tax
positions
as
of
January
29,
2022,
January
30,
2021
and
February
1,
2020,
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
$
,
$
$
Income (Loss) for the years ended January 29, 2022, January 30, 2021
and February 1, 2020, respectively.
The
Company is
no
longer
subject
to
U.S.
federal
income
tax
examinations
for
years
before
2018.
In
state
and
local
tax
jurisdictions,
the
Company
has
limited
exposure
before
2011.
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.
(in thousands):
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
56
`
January 29,
2022
January 30,
2021
February 1,
2020
Fiscal Year
Ended
Balances, beginning
$
$
$
8,485
680
-
-
Reduction for tax positions of prior years for:
(
2,652
)
(
2,896
)
(
920
)
Balances, ending
$
$
$
The provision
for income
taxes consists
of the
following
(in thousands):
`
January 29,
2022
January 30,
2021
February 1,
2020
Fiscal Year
Ended
Current income taxes:
$
$
(
31,927
)
$
(
28,354
)
Deferred income taxes:
(
2,558
)
(
639
)
(
3
)
(
3,197
)
Total income tax expense (benefit)
$
$
(
25,323
)
$
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
57
Significant components
of the
Company’s deferred tax assets and liabilities as of
January 29, 2022 and
January
30, 2021
are as
follows
(in thousands):
`
January 29, 2022
January 30, 2021
Deferred tax assets:
Allowance for customer credit losses
$
$
Inventory valuation
Non-deductible accrued liabilities
Other taxes
Federal benefit of uncertain tax positions
Equity compensation expense
Net operating losses
Charitable contribution carryover
State tax credits
Lease liabilities
Other
Total deferred
tax assets before valuation allowance
Valuation
allowance
(
4,473
)
(
5,256
)
Total deferred
tax assets after valuation allowance
Deferred tax liabilities:
Property and equipment
Accrued self-insurance reserves
Right-of-Use assets
Other
Total deferred
tax liabilities
Net deferred tax assets
$
$
The changes in the valuation allowance are presented below:
January 29, 2022
January 30, 2021
Valuation
Allowance Beginning Balance
$
(5,256)
$
(1,079)
783
(4,177)
Valuation
Allowance Ending Balance
$
(4,473)
$
(5,256)
As of January
29, 2022,
the Company
had $1.1
million
of state
tax credits
to offset
future state
income tax
expense,
which are
set to expire
by fiscal 2023.
Based on the
available
evidence,
the Company
has recorded
a valuation
allowance
of $1.1
million.
Company
assessed
the likelihood
that deferred
tax assets
related
to state net
operating
loss carryforwards
will
be
realized in
light
of
the
adverse impact
on
the
Company’s financial
statements and
operations due
to
COVID-19.
Based on this assessment,
the Company concluded
that it is more likely than not the Company
will not be able to realize net operating losses and, accordingly,
has recorded a valuation allowance
of $3.4
million
for the
portion
it expects
to not
be realized.
The net
change in the
valuation allowance for January 29,
2022
and
January
30,
2021
is for
state net
operating
losses.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
58
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
$26.9 million
of earnings
from non-U.S.
subsidiaries.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
59
The reconciliation
of the
Company’s effective
income
tax rate
with the
statutory
rate is
as follows:
`
January 29,
2022
January 30,
2021
February 1,
2020
Fiscal Year
Ended
Federal income tax rate
%
%
%
State income taxes
CARES ACT - Carryback differential
(
5.8
)
Global intangible low-taxed income
(
5.3
)
Foreign tax credit
(
4.3
)
(
3.7
)
Foreign rate differential
(
2.8
)
(
2.5
)
Offshore claim
(
5.5
)
(
5.2
)
Limitation on officer compensation
(
0.4
)
Work opportunity credit
(
1.8
)
(
3.2
)
Addback on wage related credits
Tax exempt interest
(
0.2
)
Charitable contribution of inventory
(
1.1
)
(
0.2
)
Uncertain tax positions
(
3.5
)
(
1.0
)
Deferred rate change
(
0.1
)
Valuation
allowance
(
2.1
)
(
5.7
)
Other
(
0.5
)
(
4.0
)
(
0.6
)
Effective income tax rate
%
%
%
13.
Reportable Segment Information:
The
Company
has
determined that
it
has
four
operating
segments,
as
defined
under
ASC
280-10,
including
Cato,
It’s
Fashion,
Versona
and
Credit.
As
outlined
in
ASC
280-10,
the
Company
has
two
reportable segments: Retail and
Credit.
The
Company has
aggregated its three
retail operating segments,
including e-commerce,
based on the
aggregation criteria
outlined in ASC 280-10, which
states that two or
more operating
segments
may be
aggregated
into a single
reportable
segment
if aggregation
is consistent
with
the
objective
and
basic
principles of
ASC
280-10,
which
require
the
segments
have
similar
economic
characteristics,
products,
production
processes,
clients
and methods
of distribution.
The Company’s retail
operating segments have similar economic characteristics
and similar operating,
financial and
competitive risks.
They
are
similar in
terms of
product offered,
as
they
all
offer
women’s
apparel,
shoes
and
accessories.
Merchandise inventory
of
the
Company’s
retail
operating
segments
is
sourced
from
the
same
countries
and
some
of
the
same
vendors,
using
similar
production
processes.
Merchandise for the Company’s retail operating segments
is distributed to retail stores in a
similar manner
through
the
Company’s
single
distribution center
and
is
subsequently distributed to
clients
in
a
similar
manner.
The
Company
offers
its
own
credit
card
to
its
customers
and
all
credit
authorizations, payment
processing,
and collection
efforts
are performed
by a separate
subsidiary
of the
Company.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
60
The following
schedule
summarizes
certain
segment
information
(in thousands):
`
Fiscal 2021
Retail
Credit
Total
Revenues
$
$
$
Depreciation
Interest and other income
Income (loss) before taxes
Capital expenditures
Fiscal 2020
Retail
Credit
Total
Revenues
$
$
$
Depreciation
Interest and other income
Income (loss) before taxes
(
73,972
)
(
72,806
)
Capital expenditures
Fiscal 2019
Retail
Credit
Total
Revenues
$
$
$
Depreciation
Interest and other income
Income (loss) before taxes
Capital expenditures
Retail
Credit
Total
Total assets as of January 29,
2022
$
$
$
Total assets as of January 30,
2021
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 Company
does not
allocate
certain
corporate
expenses
to the
credit
segment.
The
following schedule summarizes the
direct expenses of
the
credit segment
which are
reflected in
Selling,
general
and administrative
expenses
(in thousands):
`
January 29, 2022
January 30, 2021
February 1, 2020
Payroll
$
$
$
Postage
Other expenses
Total expenses
$
$
$
14.
Stock Based Compensation:
based
compensation
was
outstanding.
The
2018
Incentive
Compensation
Plan
and
2013
Incentive
Compensation
Plan are for the
granting of various forms of equity-based awards,
including restricted
stock
and stock
options
for grant,
to officers,
directors
and key
employees.
Effective
May 24,
2018, shares
for grant
were no
longer
available
under
the 2013
Incentive
Compensation
Plan.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
61
and available for grant under each of the plans as of January 29, 2022:
`
2013
2018
Plan
Plan
Total
Options and/or restricted stock initially authorized
Options and/or restricted stock available for grant:
In accordance with ASC 718, the
fair value of current restricted
stock awards is estimated on
the date
of grant based on the market price of the Company’s stock and is amortized to compensation expense on a
straight-line basis over a five-year
vesting period. As of January
29, 2022, there was
$
unrecognized compensation
expense related
to unvested
restricted stock
awards, which
is expected
to be
recognized over a remaining weighted-average vesting period of
of
the
shares
recognized
as
compensation
expense
during
the
twelve
months
ended
January
29,
2022,
January 30,
2021 and
February 1,
2020 was
$
, $
, 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
January
29, 2022,
January
30, 2021
and February
1, 2020:
`
Weighted Average
Number of
Grant Date Fair
Shares
Value Per
Share
Restricted stock awards at February 2, 2019
$
Granted
Vested
(
129,108
)
Forfeited or expired
(
61,351
)
Restricted stock awards at February 1, 2020
$
Granted
Vested
(
129,682
)
Forfeited or expired
(
124,241
)
Restricted stock awards at January 30, 2021
$
Granted
Vested
(
176,575
)
Forfeited or expired
(
59,003
)
Restricted stock awards at January 29, 2022
$
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 January 29,
2022, the
Company sold
Employee Stock Purchase Plan.
The compensation expense
recognized for the 15%
discount given under
the
Employee
Stock
Purchase
Plan
was
approximately
$
,
$
2021, 2020 and 2019,
respectively.
These expenses are classified
as a component of
Selling, general and
administrative expenses.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
62
15.
Commitments and Contingencies:
business,
including
litigation
regarding
the
merchandise
that
we
sell,
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.
of
our
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
our
Consolidated
Financial
Statements.
However,
given
the
inherent
uncertainties
involved in such matters, an adverse
outcome in one or more 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)
as of
January
29, 2022:
`
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 30, 2021
$
(
1,561
)
Net current-period other comprehensive income
(loss)
(
1,435
)
Ending Balance at January 29, 2022
$
(
280
)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to
other comprehensive
income (“OCI”).
(b) Includes $
other income for net gains on available-for-sale securities.
The tax impact of this reclassification was $
.
Amounts in parentheses indicate a debit/reduction to OCI.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
63
The following table sets forth information regarding the reclassification
out of Accumulated other
comprehensive income (in thousands) as of January 30, 2021:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at February 1, 2020
$
(
1,038
)
Net current-period other comprehensive income (loss)
(
268
)
Ending Balance at January 30, 2021
$
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to
OCI.
(b) Includes
$
1,003
income for net gains on available-for-sale securities. The
tax impact of this reclassification was $
. Amounts
in parentheses indicate a debit/reduction to OCI.
64
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure:
Item 9A.
Controls and Procedures:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Financial Officer,
of the
effectiveness of
our disclosure
controls and
procedures as
of January
29, 2022.
Based on this
evaluation, our Principal
Executive Officer and
Principal Financial Officer
concluded that,
as
of January
29, 2022,
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
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
January
29,
2022
based
on
the
(2013)
Sponsoring
Organizations
of
the
Treadway
Commission
(“COSO”).
Based
on
this
evaluation,
management concluded
that our
internal control
over financial
reporting was
effective as
of January
29,
2022.
effectiveness of our internal
control over financial reporting as
of January 29, 2022, as
stated in its report
which is included herein.
Changes in Internal Control Over Financial Reporting
Rule
13a-15(f))
has
occurred
during
the
Company’s
fiscal
quarter
ended
January
29,
2022
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,
the
Company’s
internal
control
over
financial reporting.
Item 9B.
Other Information:
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
:
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance:
“Corporate
Governance
Matters”
in
the
Registrant’s
Proxy
Statement
for
its
2022
annual
stockholders’
meeting
(the
“2022
Proxy
Statement”)
is
incorporated
by
reference
in
response
to
this
Item 10.
The
65
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.”
66
Item 11.
Executive Compensation:
Compensation,”
“Corporate
Governance
Matters-Compensation
Committee
Interlocks
and
Insider
Participation”
in
the
Company’s
2022
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
future awards under all of the Company’s equity compensation plans. The information is as of January
29,
2022.
(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
-
-
3,825,321
Equity compensation plans not
-
-
-
Total
-
-
3,825,321
(1)
There are no outstanding stocking 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,
3,580,471
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,
244,850 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.
in the 2022 Proxy Statement is incorporated by reference in response
to this Item.
Item 13.
Certain Relationships and Related Transactions, and Director Independence:
“Corporate
Governance
Matters-Director
Independence”
and
“Meetings
and
Committees”
in
the
2022
Proxy Statement is incorporated by reference in response to this Item.
Principal Accountant Fees and Services:
Firm-Audit Fees”
and
“-Policy on
Audit
Committee Pre-Approval
of
Audit
and Permissible
Non-Audit
67
Service
by
the
Independent
Registered
Public
Accounting
Firm”
in
the
2022
Proxy
Statement
is
incorporated by reference in response to this Item.
68
PART
IV
Item 15.
Exhibits and Financial Statement Schedules:
Page
Report of Independent Registered Public Accounting Firm
....................................................................
35
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss) for the fiscal
38
Consolidated Balance Sheets at January 29, 2022 and January 30, 2021
.................................................
39
Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 2022, January 30, 2021
and February 1, 2020 ................................................................................................................................
40
Consolidated Statements of Stockholders’ Equity for the fiscal years ended
January 29, 2022,
January 30, 2021 and February 1, 2020
....................................................................................................
41
Notes to Consolidated Financial Statements
.............................................................................................
42
Schedule II — Valuation and Qualifying Accounts .................................................................................
72
presented in the Consolidated Financial Statements or related Notes thereto.
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.
69
Exhibit
Number
Description of Exhibit
3.1
3.2
4.1
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12
70
10.13
21.1**
23.1**
31.1**
31.2**
32.1**
32.2**
101.1**
The following materials from Registrant’s Annual Report on form 10-K for the fiscal year
ended January 29, 2022, formatted in Inline XBRL:
(i) Consolidated Statements of Income
(Loss) and Comprehensive Income (Loss) for the fiscal years ended
January 29, 2022, January
30, 2021 and February 1, 2020;
(ii) Consolidated Balance Sheets at January 29, 2022 and
January 30, 2021; (iii) Consolidated Statements of Cash Flows for
the fiscal years ended
January 29, 2022, January 30, 2021 and February 1, 2020; (iv) Consolidated
Statements of
Stockholders’ Equity for the fiscal years ended January 29, 2022,
January 30, 2021 and
February 1, 2020; and (v) Notes to Consolidated Financial Statements.
104.1
Cover Page Interactive Data File (Formatted in Inline XBRL and
contained in the Interactive
Data Files submitted as Exhibit 101.1**).
___________
* 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:
71
SIGNATURES
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 23, 2022
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
/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/ THOMAS E. MECKLEY
Thomas E. Meckley
(Director)
/s/ D. HARDING STOWE
D. Harding Stowe
/s/ THERESA J. DREW
Theresa J. Drew
(Director)
/s/ PAMELA
L. DAVIES
Pamela L. Davies
(Director)
72
Schedule II
VALUATION
AND QUALIFYING ACCOUNTS
(in thousands)
Allowance
for
Customer
Self Insurance
Credit Losses(a)
Reserves(b)
Balance at February 2, 2019
$
842
$
10,966
Additions charged to costs and expenses
700
16,687
Additions (reductions) charged to other accounts
188
(c)
(635)
Deductions
(1,004)
(d)
(16,483)
Balance at February 1, 2020
$
726
$
10,535
Additions charged to costs and expenses
435
15,500
Additions (reductions) charged to other accounts
171
(c)
(205)
Deductions
(727)
(d)
(14,855)
Balance at January 30, 2021
$
605
$
10,975
Additions charged to costs and expenses
485
13,464
Additions (reductions) charged to other accounts
98
(c)
(1,447)
Deductions
(385)
(d)
(14,721)
Balance at January 29, 2022
$
803
$
8,271
(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.
TABLE OF CONTENTS
Part IPart IINote 13 Of Notes To Consolidated Financial Statements For A Schedule Of Credit-related Expenses. Total CreditNote 11, Leases in Notes To The Consolidated Financial Statements For The Maturities Of Our OperatingPart IIIItem 3a, Part I Hereof Under The Caption Executive Officers Of The RegistrantPart IV