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
☐
☑
☐
☑
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
☑
☐
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
☑
☐
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
☐
☑
Emerging Growth Company
Non-accelerated filer
☐
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
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.
in the filing reflect the correction of an error to previously issued financial statements.
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
☐
☑
day of the Company’s most recent second quarter, was $
on that date.
DOCUMENTS INCORPORATED BY REFERENCE
2
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART
I
Item 1.
Business
..........................................................................................................................
5 – 10
Item 1A.
Risk Factors
....................................................................................................................
10 – 22
Item 1B.
Unresolved Staff Comments
...........................................................................................
22
Item 1C.
Cybersecurity
..................................................................................................................
22
Item 2.
Properties
........................................................................................................................
23
Item 3.
Legal Proceedings
...........................................................................................................
24
Item 3A.
Executive Officers of the Registrant
...............................................................................
25
Item 4.
Mine Safety Disclosures
.................................................................................................
25
PART
II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
........................................................................................
26 – 28
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................................................................
29 – 35
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
........................................
35
Item 8.
Financial Statements and Supplementary Data ..............................................................
36 – 66
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure
.......................................................................................................................
67
Item 9A.
Controls and Procedures
.................................................................................................
67
Item 9B.
Other Information
...........................................................................................................
68
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
............................
68
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance .............................................
69
Item 11.
Executive Compensation
................................................................................................
69
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
........................................................................................................
69
Item 13.
Certain Relationships and Related Transactions, and Director Independence
...............
70
Item 14.
Principal Accountant Fees and Services
.........................................................................
70
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
..................................................................
71
Item 16.
Form 10-K Summary ………………………………………………………………….
73
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 ended February 3, 2024 (“fiscal 2023”) and beyond, including,
but not limited
to,
statements
regarding
expected
amounts
of
capital
expenditures
and
store
openings,
relocations,
remodels and closures,
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,
extreme
weather
conditions,
inflationary
pressures
and
other
economic
conditions
on
our
business,
results
of
operations
and
financial
condition
and
statements
regarding
new
store
development
strategy;
and
(5) statements relating to our future contingencies. When possible, we have attempted to identify forward-
looking statements
by using
words
such
as
“will,” “expects,”
“anticipates,” “approximates,”
“believes,”
“estimates,”
“hopes,”
“intends,”
“may,”
“plans,”
“could,”
“would,”
“should”
and
any
variations
or
negative formations
of such
words and
similar expressions.
We
can give
no assurance
that actual
results
or
events
will
not
differ
materially
from
those
expressed
or
implied
in
any
such
forward-looking
statements. Forward-looking statements included in this report are based on information available to us as
of the
filing date
of this
report, but
subject to
known and
unknown risks,
uncertainties and
other factors
that
could
cause
actual
results
to
differ
materially
from
those
contemplated
by
the
forward-looking
statements.
Such
factors
include,
but
are
not
limited
to,
the
following:
any
actual
or
perceived
deterioration in the conditions that drive consumer confidence and spending, including, but not limited to,
prevailing
social,
economic,
political
and
public
health
conditions
and
uncertainties,
levels
of
unemployment, fuel,
energy
and
food
costs, inflation,
wage rates,
tax
rates, interest
rates, home
values,
consumer
net
worth
and
the
availability
of
credit;
changes
in
laws,
regulations
or
government
policies
affecting
our
business,
including
but
not
limited
to
tariffs;
uncertainties
regarding
the
impact
of
any
governmental action regarding, or
responses to, the
foregoing conditions; competitive factors
and pricing
pressures; our
ability to
predict and
respond to
rapidly changing
fashion trends
and consumer
demands;
our ability to
successfully implement our
new store development
strategy to increase
new store openings
and our
ability of
any such
new stores
to grow
and perform
as expected;
adverse weather,
public health
threats
(including
the
global
COVID-19
pandemic)
or
similar
conditions
that
may
affect
our
sales
or
operations;
inventory
risks
due
to
shifts
in
market
demand,
including
the
ability
to
liquidate
excess
inventory
at
anticipated
margins;
adverse
developments
or
volatility
affecting
the
financial
services
industry or broader financial markets; and
other factors discussed under “Risk Factors”
in Part I, Item 1A
of this annual report on Form 10-K for the fiscal year ended February 3, 2024 (“fiscal 2023”), 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,
4
Compensation
and
Corporate
Governance
and
Nominating
Committees;
our
Corporate
Governance
Guidelines; Code of Business Conduct and Ethics and
Code of Ethics for the
Principal Executive Officer,
Principal Financial Officer
and Principal Accounting
Officer and
any amendments or
waivers thereto for
any of our directors or executive officers; and any other publicly available corporate governance materials
contemplated
by
SEC
or
New
York
Stock
Exchange
regulations.
The
information
contained
on
our
website, www.catofashions.com,
is not,
and should in
no way be
construed as, a
part of this
or any other
report that we filed with or furnished to the SEC.
5
PART
I
Item 1.
Business:
Background
states,
principally
in
the
southeastern
United
States,
under
the
names
“Cato,”
“Cato
Fashions,”
“Cato
Plus,”
“It’s
Fashion,”
“It’s
Fashion
Metro”
and
“Versona.”
The
Cato
concept
seeks
to
offer
quality
fashion
apparel
and
accessories
at
low
prices
every
day,
in
junior/missy
and
plus
sizes.
The
Cato
concept’s stores and e-commerce website feature a broad assortment of apparel and accessories, including
dressy,
career,
and
casual
sportswear,
dresses,
coats,
shoes,
lingerie,
costume
jewelry
and
handbags.
A
major portion of the Cato concept’s
merchandise is sold under its private label and is produced by various
vendors
in
accordance
with
the
concept’s
specifications.
The
It’s
Fashion
and
It’s
Fashion
Metro
concepts offer fashion with a focus on the latest trendy styles for the entire family at low prices every day.
The
Versona
concept’s
stores
and
e-commerce website
offer
quality fashion
apparel items,
jewelry
and
accessories at
exceptional values
every day.
The
Company’s
stores
range in
size from
2,400 to
19,000
square
feet
and
are
located
primarily
in
strip
shopping
centers
anchored
by
national
discounters
or
market-dominant
grocery
stores.
The
Company
emphasizes
friendly
customer
service
and
coordinated
merchandise
presentations
in
an
appealing
store
environment.
The
Company
offers
its
own
credit
card
and layaway
plan. Credit
and layaway
sales under
the Company’s
plan represented
6% of
retail sales
in
fiscal
2023.
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
6
the purchase of its merchandise more convenient for its customers.
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
2023,
purchases from
the
Company’s
largest
vendor
accounted
for
approximately
13%
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 changes,
disruptions, increased costs
or
other problems
affecting the
Company’s
merchandise supply
chain; the
risks of
conducting international
operations
and
risks
that
affect
the
prevailing
social,
economic,
political,
public
health
and
other
conditions
in
the
areas
from
which
we
source
merchandise
have
and
could
continue
to
materially
and
adversely affect the Company’s business, results of operations and financial condition.”
7
stores
based
on
an
analysis
of
sales
trends
by
merchandise
category,
customer
profiles
and
climatic
conditions.
A
merchandise
control
system
provides
current
information
on
the
sales
activity
of
each
merchandise
style
in
each
of
the
Company’s
stores.
Point-of-sale
terminals
in
the
stores
collect
and
transmit sales and inventory information to the Company’s central database, permitting timely response to
sales trends on a store-by-store basis.
where it
is inspected
and then
allocated by
the merchandise
distribution staff
for shipment
to individual
stores. The flow
of merchandise from
receipt at
the distribution center
to shipment to
stores is controlled
by
an
online
system.
Shipments
are
made
by
common
carrier,
and
each
store
receives
at
least
one
shipment per
week.
The centralization
of the
Company’s
distribution process
also subjects
it to
risks in
the
event
of
damage
to
or
destruction
of
its
distribution
facility
or
other
disruptions
affecting
the
distribution
center
or
the
flow
of
goods
into
or
out
of
Charlotte,
North
Carolina.
See
“Risk
Factors
–
Risks
Relating
to
Our
Information
Technology,
Related
Systems
and
Cybersecurity
–
A
disruption
or
shutdown of
our centralized
distribution center
or transportation
network could
materially and
adversely
affect our business and results of operations.”
websites
and
social
media
as
its
primary
advertising
media.
The
Company’s
total
advertising
expenditures
were
approximately
1.0%,
1.0%
and
0.9%
of
retail
sales
for
fiscal
years
2023,
2022
and
2021, respectively.
Store Operations
managers and 104 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 2019:
8
Store Development
Number of Stores
Beginning of
Number
Number
Number of Stores
Fiscal Year
Year
Opened
Closed
End of Year
2019………………….……...………….
1,311
35
1,281
2020………………….……...………….
1,281
27
1,330
2021……………………….……...…….
1,330
25
1,311
2022…………....………….……...…….
1,311
50
1,280
2023………….………...….……...…….
1,280
111
1,178
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 3.4%, 3.1% and 2.5% of
retail sales in
fiscal 2023, 2022 and 2021, respectively. The Company’s net bad debt expense was 3.6%, 2.0% and 3.0%
of credit sales in fiscal 2023, 2022 and 2021, 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 2023 loyalty program impact is immaterial to the fiscal 2023 financial statements.
The
loyalty
program
is
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
3.0%,
2.7%
and
2.7% of retail sales in fiscal 2023, 2022 and 2021, 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
conditions,
customer demographics 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.
Our stores
typically generate a
higher percentage of
our annual net
sales and
profitability in the
first and
second quarters of
our fiscal year compared to
other quarters.
Results of a
period shorter than a
full year
may
not
be
indicative
of
results
expected
for
the
entire
year.
Furthermore,
the
seasonal
nature
of
our
business may affect comparisons between periods.
Regulation
international laws
and regulations
in a
variety of
areas, including
but not
limited to,
trade, licensing
and
permit
requirements,
import
and
export
matters,
privacy
and
data
protection,
credit
regulation,
environmental
matters,
recordkeeping
and
information
management,
tariffs,
taxes,
intellectual
property
and anti-corruption.
Though compliance with these
laws and regulations has
not had a
material effect on
our capital
expenditures, results
of operations
or competitive
position in
fiscal 2023,
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
10
associates. The
Company also
employs additional
part-time associates
during the
peak retailing
seasons.
The
Company’s
full-time
associates
are
engaged
in
various
executive,
operating,
and
administrative
functions in
the Home
Office
and distribution
center and
the remainder
are engaged
in store
operations.
The Company is
not a party
to any
collective bargaining agreements
and considers its
associate relations
to
be
good.
The
Company
offers
a
broad
range
of
Company-paid
benefits
to
its
associates
including
medical and
dental plans,
paid vacation,
a 401(k)
plan, Employee
Stock Purchase
Plan, Employee
Stock
Ownership
Plan,
disability
insurance,
associate
assistance
programs,
life
insurance
and
an
associate
discount.
The
level
of
benefits
and
eligibility
vary
depending
on
the
associate’s
full-time
or
part-time
status, date
of hire,
length of
service and
level of
pay.
The Company
endeavors to
promote 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
measures
to
promote
the
health
and
safety
of
its
associates.
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 Our Business:
Continued high interest rates and inflationary conditions have and
may continue to adversely
impact our customers’ discretionary income or willingness to purchase
discretionary items, which
may adversely affect our business, margins, results of operations and financial
condition.
Continued high interest rates have adversely affected our customers’ discretionary income, in part due
to increased
interest costs
associated with
credit accounts
including revolving
credit accounts,
car loans,
mortgage loans and other credit accounts.
In addition, the increased payments due to
higher interest rates
deter our
customers from
purchasing discretionary
items such
as apparel,
shoes and
jewelry.
Continued
inflationary pressures
limit our
customers’ willingness
to purchase
apparel, shoe
or jewelry
products, as
prices associated
with non-discretionary
items, including
food, fuel
and shelter
costs increase
or remain
high,
reducing
our
customers’
discretionary
income.
Any
reduction
in
our
customers’
discretionary
spending on our products could
erode our sales volume and
adversely affect our results
of operations and
financial condition.
Because we source a significant portion of our merchandise directly
and indirectly from overseas,
we are subject to risks associated with changes, disruptions, increased
costs or other problems
affecting the Company’s merchandise supply chain; the risks of conducting international
operations and risks that affect the prevailing social, economic, political, public health
and other
conditions in the areas from which we source merchandise have
and could continue to materially
and adversely affect the Company’s business, results of operations and financial condition.
11
A significant amount of our merchandise is manufactured overseas, principally in Southeast Asia. We
are
subject
to
supply
chain
disruptions
affecting
transit
times
and
costs,
including
issues
related
to
a
sustained drought
in Panama
that is
causing longer
transit times
through the
Panama Canal
and limiting
the number of containers on a vessel due to vessel draft restrictions.
We
also face disruptions from issues
related to
vessels transiting the
Suez Canal and
Red Sea, which
are being forced
to travel
a much
longer
distance around the
Cape of Good
Hope due to
the hostilities in
the Middle East.
These continued issues
have and
may continue to
drive up our
ocean freight costs,
delay merchandise deliveries,
and impact our
ability to access the already limited supply of
ocean container shipping capacity that we require.
We
also
are
subject
to
domestic
supply
chain
disruptions,
including
lack
of
domestic
intermodal
transportation
(trucks
and
drivers),
domestic
port
congestion,
including
increased
dwell
times
for
incoming
container
ships, lack
of container
yard capacity
and lack
of available
drayage from
the ports
and other
conditions
that impact our domestic
supply chain.
These supply chain risks
have and may continue
to result in
both
higher costs to transport our merchandise and delayed merchandise arrivals to our stores, which adversely
affect our ability to sell this merchandise and increase markdowns of it.
We
directly import
some of
this merchandise
and indirectly
import the
remaining merchandise
from
domestic vendors who acquire the merchandise from foreign
sources. Further, our third-party
vendors are
dependent on materials
primarily sourced from China.
As a result,
we are subject
to numerous risks
that
can cause significant delays or interruptions in the supply of our merchandise
or increase our costs.
These
risks
include
political
unrest,
labor
disputes,
terrorism,
war,
public
health
threats,
including
but
not
limited
to
communicable
diseases
(such
as
COVID-19),
financial
or
other
forms
of
instability
or
other
events
resulting in
the
disruption
of
trade
from
countries
affecting
our
supply
chain,
increased
security
requirements for imported
merchandise, or the
imposition of, or
changes in, laws,
regulations or changes
in duties,
quotas, tariffs,
taxes or
governmental policies
regarding or
responses to
these matters
or other
factors
affecting
the
availability
or
cost
of
imports.
In
addition,
geopolitical
tensions,
sanctions,
prohibitions,
additional
tariffs,
compliance
and
reporting
requirements
have
resulted
in
increased
costs
associated
with
merchandise
produced
in
certain
regions.
Any
new
sanctions,
tariffs
and
reporting
requirements enacted in
the future may
further increase our
costs associated with
sourcing products from
those
regions
or
limit
our
ability
to
procure
the
products
we
source,
and
our
ability
to
source
these
products from other regions may be limited or result in increased sourcing
costs.
Our costs are
also affected by currency
fluctuations, and changes in
the value of the
dollar relative to
foreign currencies have impacted and may continue to impact our cost of goods sold. Any of these
factors
can materially
and adversely affect
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 operation of our sourcing offices in Asia presents increased operational and
legal risks.
to successfully oversee merchandise production to ensure
that product is produced on time and
within the
Company’s
specifications,
our
business,
brand,
reputation,
costs,
results
of
operations
and
financial
condition could be materially and adversely affected.
In addition, the current business environment, including geopolitical issues, make operating in
certain
Asian
markets
challenging.
To
the
extent
we
explore
other
countries
to
source
our
product
or
explore
12
increasing
the
amount
of
product
sourced
from
current
countries,
we
may
be
subject
to
additional
increased
legal
and
operational risks
associated
with
doing
business
in
new
countries
or
increasing our
business in other countries.
Further,
the
activities
conducted
by
our
sourcing
offices
outside
the
United
States
subject
us
to
foreign operational risks,
as well as
U.S. and international regulations
and compliance risks, as
discussed
elsewhere
in
this
“Risk
Factors”
section,
in
particular
below
under
“Risk
Factors
–
Risks
Relating
to
Accounting
and
Legal
Matters
-
Our
business
operations
subject
us
to
legal
compliance
and
litigation
risks, as well as regulations and regulatory enforcement priorities, which could result in increased costs or
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 have and may continue to materially and adversely affect consumer demand
for our
apparel and accessories and our results of operations.
other things, prevailing social, economic,
political and public health conditions
and uncertainties (such as
matters under debate in the U.S. from time to
time regarding budgetary, spending and
tax policies), levels
of
employment,
fuel,
inflation,
interest
rates,
energy
and
food
costs,
salaries
and
wage
rates
and
other
sources
of
income,
tax
rates,
home
values,
consumer
net
worth,
the
availability
of
consumer
credit,
-
consumer
confidence
and
consumer
perceptions
of
adverse
changes
in
or
trends
affecting
any
of
these
conditions.
Any perception that these conditions may be worsening or continuing to trend negatively may
significantly
weaken
many
of
these
drivers
of
consumer spending
habits.
Adverse
perceptions
of
these
conditions
or
uncertainties
regarding
them
also
generally
cause
consumers
to
defer
purchases
of
discretionary items, such
as our
merchandise, or
to purchase
cheaper alternatives to
our merchandise,
all
of which may also
adversely affect our
net sales and
results of operations.
In addition, numerous events,
whether or not related to
actual economic conditions, such as downturns
in the stock markets, acts
of war
or terrorism, 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.
Increased product costs, freight costs, wage increases and operating
costs due to inflation and
other factors, as well as limitations in our ability to offset these cost increases by increasing
the
retail prices of our products or otherwise, have and may continue to adversely
affect our business,
margins, results of operations and financial condition.
Tight
labor markets
have caused
wages to
increase
at the
store, distribution
center and
home office
levels, as well
as making it
more difficult to
hire new associates
and retain existing associates.
The tight
labor
market
and
continued
inflation
also
are
driving
up
our
operating
costs.
In
addition,
inflationary
pressures on labor and raw materials
used to make our products may continue
to increase the cost we
pay
for
our
products.
If
we
are
unable
to
offset
the
effects
of
these
increased
costs
to
our
business
by
increasing the
retail prices
of our
products, reducing other
expenses or
otherwise, our business,
margins,
results of operations and financial condition may be adversely affected.
Our
ability
to
raise
retail
prices
in
response
to
these
cost
increases
is
limited,
in
part
due
to
our
customers’
unwillingness
to
pay
higher
prices
for
discretionary
items
in
light
of
actual
or
perceived
effects
of
inflation
in
increasing
our
customers’
cost
of
essential
items
and
diminishing
customers’
disposable income, sentiment or financial outlook.
Moreover, the persistence or worsening of inflationary
conditions
and
high
interest
rates
could
also
lead
our
customers
to
reduce
their
amount
of
current
discretionary
spending
on
our
products
even
in
the
absence
of
price
increases,
which
could
erode
our
sales volume and adversely affect our results of operations and financial condition.
13
Adverse
developments
affecting
the
financial
services
industry
or
events
or
concerns
involving
liquidity,
defaults
or
non-performance
by
financial
institutions
or
transactional
counterparties
could adversely affect our business, financial condition or results of operations.
Actual
events
involving limited
liquidity,
defaults,
non-performance or
other
adverse
developments
that affect
financial institutions,
transactional counterparties
or other
companies in
the financial
services
industry
or
the
financial
services
industry
generally,
or
concerns
or
rumors
about
any
events
of
these
kinds
or
other
similar
risks,
have
in
the
past
and
may
in
the
future
lead
to
sporadic
or
market-wide
liquidity problems that
could adversely affect
us.
If any of
our transactional counterparties,
such as
our
merchandise vendors
and their
factors, our
landlords, our
payment processors
including credit
card, gift
card and checks, our transportation vendors and other vendors that provide services and supplies to us, are
unable to
access funds
or lending
arrangements with
such
a financial
institution, such
parties’ ability
to
pay their obligations could be adversely affected.
If this occurred we could be
adversely impacted by not
receiving
the
product
we
ordered
or
the
payments
generated
by
our
sales,
by
not
being
able
to
receive
products to our distribution center or
our stores in a timely
manner or at all, or
by not being able to
retain
services from
third parties
that we
require.
These impacts
may adversely
affect our
financial condition,
results
of
operations
and
our
ability
to
execute
our
business
strategy.
Furthermore,
these
adverse
developments affecting the financial services or related perceptions may negatively
impact our customers’
discretionary income or
our customers’
willingness to purchase
apparel, shoes or
jewelry products.
Any
reduction
in
our
customers’
discretionary
spending
on
our
products
could
erode
our
sales
volume
and
adversely affect our results of operations and financial condition.
Extreme weather, natural disasters, impacts of climate change, public health threats or similar
events have and may continue to adversely affect our sales or operations from time
to time.
threats or similar
events can influence
customer trends and
shopping habits.
For example, heavy rainfall
or other extreme weather conditions, including but
not limited to winter weather over a
prolonged period,
might
make
it
difficult
for
our
customers
to
travel
to
our
stores
and
thereby
reduce
our
sales
and
profitability.
Our business is also susceptible to unseasonable weather conditions.
For example, extended
periods of unseasonably
warm temperatures during the
winter season or
cool weather during
the summer
season can
render a
portion of
our inventory incompatible
with those unseasonable
conditions.
Reduced
sales
from extreme
or
prolonged unseasonable
weather
conditions
would
adversely affect
our
business.
The occurrence or
threat of extreme
weather, natural
disasters, power outages, terrorist
acts, outbreaks of
flu
or
other
communicable
diseases
(such
as
COVID-19)
or
other
catastrophic
events
could
reduce
customer
traffic
in
our
stores
and
likewise
disrupt
our
ability
to
conduct
operations,
which
would
materially and adversely affect us.
The
potential
impacts
of
climate
change
present
a
variety
of
potential
risks.
The
physical
effects
of
climate
change
such
as
extreme
weather
and
drought
could
adversely
affect
our
results
of
operations,
including disrupting our
supply chain, the
costs of our
products and negatively
impacting our workforce.
In
addition,
the
potential
impacts
of
climate
change
present
transition
risks
including
regulatory
and
reputational
risks.
The
potential
cost
of
compliance
with
any
future
regulations
may
substantially
increase our
costs. For
example, the
use of
certain commodities
in the
manufacture of
our products
and
energy
we
use
in
our
operations
may
face
increased
regulation
due
to
climate
change
or
other
environmental concerns, which could
increase our costs.
Furthermore, any failure of
or perceived failure
by us
to comply
with any
potential future
climate change
regulatory requirements
including stakeholder
expectations regarding the environment, could adversely affect our reputation and
results of operations.
Our ability to attract consumers and grow our revenues is dependent
on the success of our store
location strategy and our ability to successfully open new stores as planned.
14
believe our
consumers and
potential consumers
shop.
In addition,
our ability
to grow
our
revenues has
been substantially dependent on our ability to secure space for and open new stores in attractive locations.
Shopping centers
and malls
where we
currently operate
existing stores
or seek
to
open new
stores have
been and
may continue
to be
adversely affected
by,
among other
things, general
economic downturns
or
those
particularly affecting
the
commercial real
estate industry,
the
closing of
anchor
stores, changes
in
tenant
mix
and
changes
in
customer
shopping
preferences,
including
but
not
limited
to
an
increase
in
preference for online versus in-person shopping.
To take
advantage of consumer traffic and the
shopping
preferences
of
our
consumers,
we
need
to
maintain
and
acquire
stores
in
desirable
locations
where
competition for suitable
store locations is
intense. A decline
in customer popularity
of the
strip shopping
centers where we
generally locate our
stores or in
availability of space in
desirable centers and
locations,
or an increase in the cost of such desired space, has limited and could further limit our ability to open new
stores,
adversely
affecting
consumer
traffic
and
reducing
our
sales
and
net
earnings
or
increasing
our
operating costs.
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.
rapidly
and
cannot
be
predicted
with
certainty.
Our
success
depends
in
part
upon
our
ability
to
consistently anticipate, design and respond to changing merchandise trends and consumer preferences in a
timely
manner.
Accordingly,
any
failure
by
us
to
anticipate,
identify,
design
and
respond
to
changing
fashion
trends
could
adversely
affect
consumer
acceptance
of
our
merchandise,
which
in
turn
could
adversely affect our business, results
of operations and our image with our
customers.
If we miscalculate
either the
market for
our merchandise
or our
customers’ tastes or
purchasing habits, we
may be required
to sell a significant amount of inventory at below-average markups over
cost, or below cost, which would
adversely affect our margins and results of operations.
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.
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
15
result in increased costs or liabilities,
divert our management’s attention
or otherwise adversely affect our
business, results of operations and financial condition.”
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.
Our inability to effectively manage inventory has impacted and may continue
to negatively impact
our gross margin and our overall results of operations.
competition,
weather,
supply
chain
issues,
actual
or
potential
public
health
threats
and
economic
conditions, including
but not
limited to
continued high
interest rates
and persistent
inflation. In
addition,
merchandise
must
be
ordered
well
in
advance
of
the
applicable
selling
season
and
before
trends
are
confirmed by sales.
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.
Our
inability
to
effectively
manage
inventory
may
adversely
affect
our
gross
margin
and
results
of
operations.
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
has
affected
and
could
continue
to
adversely
affect
our
business,
margins, operating results and financial condition if we cannot offset these cost increases.
Fluctuations in the price, availability and quality of inventory have and
may continue to result in
higher cost of goods, which the Company may not be able to pass on
to its customers.
yields, currency
value fluctuations,
inflation, as
well as
other factors.
Additionally,
manufacturers have
and may continue to have increases in other manufacturing costs, such as transportation, labor and benefit
costs. These increases in production costs may result in higher merchandise costs to the Company.
Due to
the
Company’s
limited
flexibility
in
price
point,
the
Company
may
not
be
able
to
pass
on
those
cost
increases
to
the
consumer,
which
could
have
a
material
adverse
effect
on
our
margins,
results
of
operations and financial condition.
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.
of
new
store
concepts.
This
growth
may
require
significant
capital
expenditures
and
management
attention. The Company may not
realize any of the
anticipated benefits of a
new business and integration
costs
may
exceed
anticipated
amounts.
We
have
incurred
substantial
financial
commitments
and
fixed
costs related to our retail stores that we
will not be able to recover if our stores
are not successful and that
have
resulted
in
and
could
result
in
future
impairment
charges.
If
we
cannot
successfully
execute
our
growth strategies, our financial condition and results of operations may
be adversely impacted.
Risks Relating to Our Information Technology, Related Systems and Cybersecurity:
A
failure or disruption relating to our information technology systems could
adversely affect our
business.
merchandise planning,
replenishment, pricing, ordering,
markdowns and
product life
cycle management.
In addition to
merchandise operations, we utilize
our information technology systems for
our distribution
processes,
as
well
as
our
financial
systems,
including
accounts
payable,
general
ledger,
accounts
receivable, sales,
banking, inventory
and fixed
assets.
Despite the
precautions we
take, our
information
systems are or may be vulnerable to disruption
or failure from numerous events, including but not limited
to, natural disasters,
severe weather conditions,
power outages, technical malfunctions,
cyberattacks, acts
of
war
or
terrorism,
similar
catastrophic
events
or
other
causes
beyond
our
control
or
that
we
fail
to
anticipate. Any disruption or failure in the operation of our information technology systems, our failure to
continue
to
upgrade
or
improve
such
systems,
or
the
cost
associated
with
maintaining,
repairing
or
improving
these
systems,
could
adversely
affect
our
business,
results
of
operations
and
financial
condition. Modifications and/or upgrades to
our current information technology systems may also
disrupt
our operations.
A security breach that results in unauthorized access to or disclosure of
employee, Company or
customer information or a ransomware attack could adversely affect our costs,
reputation and
results of operations, and efforts to mitigate these risks may continue to
increase our costs.
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
17
Company's reputation, expose it to
remediation and other costs
and the risks of legal
proceedings, disrupt
its
operations
and
otherwise
adversely
affect
the
Company's
business
and
financial
condition.
The
security of certain of
this information also depends on
the ability of third-party
service providers, such as
those
we
use
to
process
credit
and
debit
card
payments
as
described
below
under
“We
are
subject
to
payment-related
risks,”
to
properly
handle
and
protect
such
information.
Our
information
systems
and
those of our
third-party service providers are
subject to ongoing and
persistent cybersecurity threats from
those seeking unauthorized
access through means
which are
continually evolving and
may be difficult
to
anticipate or detect for long periods
of time.
Despite measures the Company takes
to protect confidential
information against
unauthorized access
or disclosure, which
measures are
ongoing and
may continue
to
increase
our
costs,
there
is
no
assurance
that
such
measures
will
prevent
the
compromise
of
such
information. If
our measures
are unsuccessful
due to
cyberattacks or
otherwise, it
could have
a material
adverse
effect
on
the
Company's
reputation,
business,
operating
results,
financial
condition
and
cash
flows.
In addition, the
Company may be
subject to ransomware
attacks, which if
successful could result
in
disruptions
to
the
Company’s
operations
and
expose
it
to
remediation
and
other
costs,
risks
of
legal
proceedings,
damage the
Company’s
reputation
and
otherwise adversely
affect
the
Company's business
and financial condition.
A disruption or shutdown of our centralized distribution center
or transportation network could
materially and adversely affect our business and results of operations.
and
distributed
through
our
network
of
third-party
freight
carriers.
The
merchandise
we
purchase
is
shipped directly to
our distribution center,
where it is
prepared for shipment
to the appropriate
stores and
subsequently delivered
to
the
stores
by our
third-party freight
carriers.
If the
distribution
center or
our
third-party freight carriers were
to be shut down
or lose significant capacity
for any reason, including but
not limited to, any of the causes described above under “A failure or disruption
relating to our information
technology
systems
could
adversely
affect
our
business,”
our
operations
would
likely
be
seriously
disrupted.
Such problems could occur as the result of any loss, destruction or impairment of our ability to
use
our
distribution center,
as
well
as
any broader
problem generally
affecting
the ability
to
ship
goods
into our distribution center or deliver goods
to our stores.
As a result, we could incur significantly higher
costs and longer lead
times associated with distributing our
products to our stores
during the time it
takes
for us to reopen or
replace the distribution center and/or our transportation network. Any such
occurrence
could adversely affect our business, results of operations and financial condition.
The Company’s failure to successfully operate its e-commerce websites or fulfill customer
expectations could adversely impact customer satisfaction, our reputation
and our business.
provide existing customers the online 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
or
a
ransomware
attack could
adversely affect
our costs,
reputation and
results of
operations, and
efforts to
mitigate these
risks may
continue to
increase our
costs.” We
are also
subject to
risk related
to delays
or failures
in the
performance of third parties, such as shipping companies, including
delays associated with labor strikes or
slowdowns or
adverse weather
conditions. If
the Company
does not
successfully meet
the challenges
of
operating
e-commerce
websites
or
fulfilling
customer
expectations,
the
Company's
business
and
sales
could be adversely affected.
18
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 are subject to fraud risk and
to additional regulations and
compliance
requirements
(including
obligations
to
implement
enhanced
authentication
processes
that
could
result
in
increased
costs
and
reduce
the
ease
of
use
of
certain
payment
methods).
For
certain
payment
methods,
including
credit
and
debit
cards,
we
pay
interchange
and
other
fees,
which
have
increased
from
time
to
time
and
may
continue
to
increase
over
time,
raising
our
operating
costs
and
lowering profitability. We
rely on third-party service providers for payment processing
services, including
the
processing
of
credit
and
debit
cards.
In
each
case,
it
could
disrupt
our
business if
these
third-party
service
providers
become
unwilling
or
unable
to
provide
these
services
to
us.
We
are
also
subject
to
payment
card
association
operating
rules,
including
data
security
rules,
certification
requirements
and
rules governing
electronic funds
transfers, which
could change
or be
reinterpreted to
make it
difficult or
impossible for us
to comply.
If we fail
to comply with
these rules or
requirements, or if
our data security
systems are breached or compromised, we may be liable for card-issuing
banks’ costs, subject to fines and
higher transaction fees. In addition, we may lose our ability to accept credit and debit card payments from
our
customers
and
process
electronic
funds
transfers
or
facilitate
other
types
of
payments,
and
our
business and operating results could be adversely affected.
Risks Relating to Accounting and Legal Matters:
Continued scrutiny and changing
expectations surrounding environmental, social and governance
(“ESG”)
matters
from
investors,
customers,
government
regulators
and
other
stakeholders
may
impose additional reporting requirements, additional costs and compliance
risks.
Public companies from
across all
industries are facing
increasing scrutiny from
investors, customers,
government regulators and other stakeholders concerning ESG matters.
In the U.S., there are various new
rules
or
proposals
for
new
or
enhanced
disclosure
requirements
regarding
climate
emissions,
sustainability,
workforce
diversity
and
other
human
capital
resources
metrics,
among
other
topics.
Complying
with
these
complex
reporting
obligations or
expectations
may
increase
our
costs
associated
with compliance, disclosure and reporting.
Furthermore, evolving ESG laws, regulations and stakeholder
expectations may
result in
uncertain and
potentially burdensome
reporting requirements
as stakeholders,
agencies and government authorities adjust
their expectations or change laws
and regulations, such as the
new rules regarding climate emissions reporting and
auditing requirements.
Failure to comply with all
of
the
new
rules
and
regulations
and
proposed
regulatory requirements
in
a
timely
manner
may
adversely
affect our reputation, business and financial performance.
Changes to accounting rules and regulations may adversely affect our reported
results of
operations and financial condition.
changes are
common and have
become more frequent
and significant
in the
past several years.
Changes
in
accounting
rules,
disclosures
or
regulations
and
varying
interpretations
of
existing
accounting
rules,
disclosures and regulations have significantly affected our reported financial statements and those of other
participants in
the retail
industry in
the past
and may
continue to
do so
in
the future.
Future changes
to
accounting
rules,
disclosures
or
regulations may
adversely
affect
our
reported
results
of
operations and
financial position or perceptions of our performance and financial condition.
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
Central”
trademarks
are
integral
to
our
store
designs,
brand
recognition
and
our
ability
to
successfully
build
consumer
loyalty.
Although
we
have
registered
these
trademarks
with
the
U.S.
Patent
and
Trademark Office
(“PTO”) and
have also
registered, or
applied for
registration of,
additional trademarks
with
the
PTO
that
we
believe
are
important
to
our
business,
we
cannot
give
assurance
that
these
registrations
will
prevent
imitation
of
our
trademarks,
merchandising
concepts,
store
designs
or
private
label merchandise or
the infringement of
our other intellectual
property rights by
others. Infringement of
our
names,
concepts,
store
designs
or
merchandise
generally,
or
particularly
in
a
manner
that
projects
lesser quality or carries a negative connotation of
our image could adversely affect our business, financial
condition and results of operations.
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.
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.
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,
the
results
of
which
could
materially
and
adversely
affect
our
business, results of
operations and financial condition.
In addition, governing laws,
rules and regulations,
and interpretations
of existing
laws
are subject
to
change from
time to
time.
Compliance and
litigation
matters
could
result
in
unexpected
expenses
and
liability,
as
well
as
have
an
adverse
effect
on
our
operations and our reputation.
related
to
data
privacy,
climate
change
or
ESG
matters
could
increase
our
costs
of
compliance,
technology and business operations. The interpretation of existing or new laws
to existing technology and
business practices can be uncertain and may lead to additional compliance
risk and cost.
Adverse litigation matters may adversely affect our business and our financial
condition.
Primarily these arise in the
normal course of business but are
subject to risks and uncertainties, and
could
20
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.
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.
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.
state, municipal
and corporate
debt securities.
The value
of those
securities may
be adversely
impacted
by factors relating to these securities,
similar securities or the broader credit
markets in general.
Many of
these factors
are beyond our
control, and include
but are
not limited to
changes to credit
ratings, rates of
default, collateral
value, discount
rates, and
strength and
quality of
market credit
and liquidity,
potential
disruptions in the capital
markets and changes in the
underlying economic, financial and other
conditions
that drive these
factors.
As federal, state
and municipal entities
struggle with declining
tax revenues and
budget deficits,
we cannot
be
assured of
our ability
to timely
access these
investments if
the market
for
these issues declines.
Similarly,
the default by
issuers of the
debt securities we
hold or similar
securities
could impair
the
value or
liquidity of
our investments.
The development
or persistence
of
any of
these
conditions could
adversely affect
our financial
condition, results
of operations
and ability
to execute
our
business
strategy.
In
addition,
we
have
significant
amounts
of
cash
and
cash
equivalents
at
financial
institutions that
are in
excess of
the federally
insured limits.
An economic
downturn or
development of
adverse
conditions
affecting
the
financial
sector
and
stability
of
financial
institutions
could
cause
us
to
experience losses on our deposits.
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
21
of these
adverse factors or
failure to
comply with covenants
on which our
borrowing is conditioned
may
adversely affect
our financial
condition, results
of operations
and our
ability to
access our
revolving line
of credit and to execute our business strategy.
Risks Relating to the Market Value 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 51.9%
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.
We
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
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.
There can be no assurance that we will choose to declare or be able
to declare cash dividends in
the future.
The declaration and payment of any dividend is subject to the approval of our Board of Directors.
Our
Board of
Directors regularly
evaluates
our ability
to
pay a
dividend based
on many
factors,
such as
but
not
limited
to,
applicable
legal
requirements,
the
financial
position
of
the
Company,
contractual
restrictions
and
our
capital
allocation strategy.
There
can
be
no
assurance
that a
cash
dividend
will
be
declared in the future in any particular amount, or at all.
Our operating results are subject to seasonal and quarterly fluctuations,
which could adversely
affect the market price of our common stock.
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.
Conditions in the stock market generally, or particularly relating to our industry, Company or
common stock, may materially and adversely affect the market price of our common
stock and
make its trading price more volatile.
significant volatility.
A variety of
factors may cause
the price of
our common stock to
fluctuate, perhaps
22
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 1C.
Cybersecurity:
Risk Management Strategy
customers
and
employees,
and
we
manage
cybersecurity
risk
as
part
of
our
overall
risk
management
system
and
compliance
processes.
We
maintain
a
process
designed
to
identify,
assess
and
manage
material
risks
from
cybersecurity
threats,
including
risks
relating
to
theft
of
customer
data,
primarily
payment cards, disruption
to business operations
or financial reporting
systems, fraud, extortion,
harm to
employee
data
and
violation
of
privacy
laws.
In
recent
years,
we
have
increased
our
investments
in
cybersecurity
risk
management within
our
environment and
have
developed an
enterprise
cybersecurity
program designed
to
detect, identify,
classify and
mitigate cybersecurity
and other
data security
threats.
This
program classifies
potential threats
by
risk
levels,
and
we
typically prioritize
our
threat
mitigation
efforts
based
on those
risk classifications.
In the
event
we
identify a
potential cybersecurity,
privacy or
other data security issue,
we have defined procedures for
responding to such issues,
including procedures
that
address
when
and
how
to
engage
with
Company
executives,
our
Board
of
Directors,
other
stakeholders and
law enforcement
when responding
to
such
issues. Additionally,
various aspects
of
our
cybersecurity program,
particularly compliance
with the
Payment Card
Industry standards,
are regularly
reviewed by independent third
parties. We
also maintain cybersecurity insurance, which
we believe to
be
commensurate
with
our
size
and
the
nature
of
our
operations,
as
part
of
our
comprehensive
insurance
portfolio.
testing to
monitor our
environment. We
also use
third-party software
to test
our employees' responses
to
suspicious emails and to
inform targeted cyber
awareness training.
Our information security and
privacy
policies
are
informed
by
regulatory
requirements
and
are
reviewed
periodically
for
compliance
and
alignment
with
current
state
and
federal
laws
and
regulations.
We
comply
with
applicable
industry
security
standards,
including the
Payment Card
Industry
Data
Security
Standard (“PCI
DSS”).
Because
we
are
aware
of
the
risks
associated
with
third-party
service
providers,
we
also
have
implemented
processes
to
oversee
and manage
these
risks.
We
conduct
security
assessments
of
third-party
providers
before
engagement
and
maintain ongoing
monitoring to
help
ensure
compliance with
our
cybersecurity
standards.
23
provides
a
framework
for
handling
and
escalating
cybersecurity
incidents
based
on
the
severity
of
the
incident and facilitates cross-functional coordination across the Company.
2024 from current or
past cybersecurity threats or cybersecurity
incidents that have materially affected
or
are
reasonably
likely
to
materially
affect
our
business
strategy,
results
of
operations,
or
financial
condition.
However,
we
face
ongoing
risks
from
certain
cybersecurity
threats
that,
if
realized,
are
reasonably likely
to
materially affect
our
business strategy,
results
of
operations, or
financial condition.
See
the
risk
factors
discussed
under
the
heading,
“Risk
Factors
—
Risks
Relating
to
Our
Information
Technology,
Related Systems and Cybersecurity” for further information.
Governance
cybersecurity and other data security threats
play in our efforts
to protect and maintain the
confidentiality
and security of
customer, employee and
vendor information, as
well as non-public
information about our
Company.
Although
the
Board
as
a
whole
is
ultimately
responsible
for
the
oversight
of
our
risk
management
function,
the
Board
has
delegated
to
its
Audit
Committee
primary
responsibility
for
oversight
of
risk
assessment
and
risk
management,
including
risks
related
to
cybersecurity
and
other
technology
issues.
The
Audit
Committee
also
oversees
the
Company’s
internal
control
over
financial
reporting, including
with respect
to financial
reporting-related information
systems. The
Chief Financial
Officer (CFO) and Chief
Accounting Officer (CAO) meet regularly
with the Audit Committee and
Board
of Directors.
external assessment
results, training
results, and
discussion of
cybersecurity risks
and resolutions,
and is
responsible for elevating
significant matters to
the Board as
events arise.
The Audit
Committee receives
reports
from
our
Chief
Information
Officer
(CIO)
annually
regarding
our
cybersecurity
framework,
as
well as our plans to mitigate cybersecurity risks and respond to any data breaches.
committee, which is chaired by our
CFO and includes our CAO, CIO, Chief
Information Security Officer
(CISO),
as
well
as
key
members
of
financial
management,
information
technology
and
audit.
Our
cybersecurity infrastructure
is
overseen by
our
CISO, who
reports
to
our
CIO.
Our
CIO reports
to
our
CFO
and
has
served
in
various
roles
in
information
technology
and
information
security
for
over
30
years.
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
e-commerce
storage.
The
Company also
owns
approximately
185
acres
of
land
in
York
County,
South
Carolina
as
a
potential
new
site
for
our
distribution center.
24
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.
25
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
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.
Company
since
January
of
2022.
From
2018
to
2020,
he
served
in
various
roles
with
The
Vitamin
Shoppe,
first
as
Senior
Vice
President,
Chief
Accounting
Officer
from
2018
to
2019,
and
then
as
Executive Vice
President, Chief Financial
Officer from 2019
to 2020.
Prior to
that, he served
in various
roles with Toys
“R” Us for 28
years, including as Senior Vice
President, Corporate Controller from 2010
to 2018.
Gordon
Smith
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:
26
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.
27
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
2/1/2019
100
100
100
1/31/2020
118
111
109
1/29/2021
86
119
142
1/28/2022
128
132
140
1/27/2023
82
144
136
2/2/2024
61
161
139
commencement of the Company’s 2019 fiscal year, and that all dividends were reinvested.
28
Issuer Purchases of Equity Securities
ended February 3, 2024:
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 2023
-
$
-
-
December 2023
-
-
-
January 2024
-
-
-
Total
-
$
-
-
909,653
(1)
Prices include trading costs.
(2)
During
the
fourth
quarter
ended
February
3,
2024,
the
Company
did
not
repurchase
or
retire
any
shares under
this program.
As of
February 3,
2024, the
Company had
909,653 shares
remaining in
open authorizations. There is no
specified expiration date for the Company’s
repurchase program.
29
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
annual report
on Form 10-K.
This section of the annual report
on Form 10-K generally discusses fiscal 2023
and fiscal
2022
and
year-to-year
comparisons
between
fiscal
2023
and
fiscal
2022,
as
well
as
certain
fiscal
2021
items.
Discussions
of
fiscal
2021
items
and
year-to-year
comparisons
between
fiscal
2022
and
fiscal
2021 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 28, 2023.
Recent Developments
Inflationary Cost Pressure and High Interest Rates
inflation related to
fuel, food, housing,
including rent, and
other consumable products
and a flattening
of
wage rates in 2023. The
persistence of high interest rates and
inflation negatively affected our customers’
willingness to purchase discretionary items such as apparel, jewelry
and shoes.
maintaining
interest
rates
at
or
near
these
elevated
levels
until
inflation
subsides
to
its
targeted
levels.
These high interest rates have adversely affected the availability and cost of credit for both businesses and
our
customers.
Increasing
costs
related
to
revolving
credit,
auto
loans
and
mortgages
continue
to
negatively
impact
our
customers’
discretionary
income.
Our
customers’
willingness
to
purchase
our
products may continue to be negatively impacted by these inflationary
pressures and high interest rates.
continue to have a negative impact on
consumer behavior and, by extension, our results of
operations and
financial condition during fiscal 2024.
Merchandise Supply Chain
traverses through the Panama Canal or
the Suez Canal.
Due to a sustained regional
drought, the Panama
Canal
has
reduced
the
number
of
transits
by
approximately
37%
and
has
also
reduced
the
permissible
draft of vessels
transiting the Panama Canal,
which reduces the volume
and number of
containers carried
by container
ships and
increases our
costs.
The recent
hostilities affecting
the Red
Sea and
Suez Canal
are
causing
container
ships
to
travel
a
much
longer
distance
around
the
Cape
of
Good
Hope,
which
is
increasing both lead times for merchandise during our key selling times and our costs to ship
these goods.
Both of these situations have negatively impacted 2023 and will likely continue to have a negative impact
on our results of operations and financial condition during fiscal 2024.
30
Results of Operations
retail sales for the years indicated:
Fiscal Year Ended
February 3, 2024
January 28, 2023
Retail sales …………………………………………………………..
100.0
%
100.0
%
Other revenue…………………………………………………………
1.1
0.9
Total revenues ……………………………………………………….
101.1
100.9
Cost of goods sold …………………………………………………..
66.3
67.7
Selling, general and administrative………………………………….
36.1
32.3
Depreciation …………………………………………………………
1.4
1.5
Interest and other income ……………………………………………
0.7
0.8
Income (loss) before income taxes …………………………………………
(2.0)
0.2
Net income (loss)…………………………………………………………..
(3.4)
%
-
%
Fiscal 2023 Compared to Fiscal 2022
2022. The decrease in
retail sales in fiscal
2023 was primarily due
to a 5.9% decrease
in same-store sales
and
sales from
closed stores
in
2022
and
stores
closed
in
the
first
half
of
2023,
partially offset
by
an
additional
week of sales
in 2023 and a
small increase in
sales from stores opened in 2023. Fiscal
2023 had
53 weeks
versus 52
weeks in
fiscal 2022.
Same-store sales
for the
fiscal year
2023 decreased
primarily
due
to
lower
transactions,
partially
offset
by
fewer
returns
and
slightly
higher
average
sales
per
transaction. Same-store
sales includes
stores that
have been
open more
than 15
months. Stores
that have
been relocated or expanded are also included in the same-store sales calculation after they have been open
more
than
15
months.
In
fiscal
2023 and
fiscal
2022,
e-commerce sales
were less
than
5%
and
6%
of
total sales and same-store sales, respectively.
The method of calculating same-store sales varies across the
retail
industry.
As
a
result,
our
same-store
sales
calculation
may
not
be
comparable
to
similarly
titled
measures
reported
by
other
companies.
Total
revenues,
comprised
of
retail
sales
and
other
revenue
(principally finance
charges and
late
fees
on
customer accounts
receivable, gift
card
breakage, shipping
charges for e-commerce purchases
and layaway fees), decreased by 6.7%
to $708.1
million in
fiscal 2023
compared
to
$759.3
million
in
fiscal
2022.
The
Company
operated
1,178
stores
at
February
3,
2024
compared to 1,280 stores operated at January 28, 2023.
million
in
fiscal
2022.
The
increase
was
due
to
increases
in
gift
card
breakage
and
finance
charges
associated
with
the
Company’s
proprietary
credit
card,
partially
offset
by
decreases
in
e-commerce
shipping revenue.
increase compared to fiscal 2022 credit
revenue of $2.2 million or 0.3% of
total revenue.
The increase in
credit revenue was
primarily due to
increases in finance
charges and late
fee income as
a result of
higher
accounts receivable
balances.
Credit revenue
is comprised
of interest
earned on
the Company’s
private
label credit
card portfolio
and related
fee income.
Related expenses
include
principally payroll,
postage
and
other
administrative
expenses
and
totaled
$1.7
million
in
fiscal
2023
compared
to
$1.7
million
in
fiscal
2022.
See
Note 13
to
the
Consolidated Financial
Statements,
“Reportable Segment
Information”
for
a schedule
of
credit-related expenses.
Total
credit segment
income before
taxes
was $0.9
million in
fiscal 2023 and $0.6 million in fiscal 2022.
31
million, or 67.7% of retail sales, in fiscal 2022. The decrease in cost of goods sold as a percentage of sales
resulted
primarily
from
lower
ocean
freight
costs
and
increased
sales
of
regular
priced
goods,
partially
offset
by deleveraging
of
occupancy and
buying costs.
Cost of
goods sold
includes
merchandise costs,
net
of
discounts
and
allowances,
buying
costs,
distribution
costs,
occupancy
costs,
and
freight
and
inventory
shrinkage.
Net
merchandise
costs
and
in-bound
freight
are
capitalized
as
inventory
costs.
Buying and distribution costs include
payroll, payroll-related costs and operating expenses for
the buying
departments
and
distribution
center.
Occupancy
expenses
include
rent,
real
estate
taxes,
insurance,
common
area
maintenance,
utilities
and
maintenance
for
stores
and
distribution
facilities.
Total
gross
margin
dollars
(retail
sales
less
cost
of
goods
sold
and
excluding
depreciation)
decreased
by
2.8%
to
$236.0 million
in fiscal
2023 from
$242.7 million
in fiscal
2022. 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 $252.8 million in fiscal
2023 compared to $242.6 million in fiscal
2022, an increase
of 4.2%. As a percent of retail sales, SG&A was 36.1% compared to 32.3% in the prior year. The increase
in SG&A
expense in
fiscal 2023
was primarily
attributable to
higher payroll,
insurance and
closed store
expenses.
Depreciation
expense
decreased
from
fiscal
2022
due
to
fully
depreciated
older
stores
and
prior
period
impairments
of
leasehold
improvements
and
fixtures,
partially
offset
by
store
development
and
information technology expenditures.
2022.
The
decrease
is
primarily
attributable
to
receiving
a
Business
Recovery
Grant
from
the
State
of
North
Carolina
in
fiscal
2022,
partially
offset
by
higher
amounts
earned
on
investments
due
to
higher
interest rates.
expense
of
$1.7
million,
or
0.2%
of
retail
sales
in
fiscal
2022.
The
income
tax
expense
increase
was
primarily due to a valuation allowance
recorded against U.S. federal and state
deferred tax assets due to
a
pre-tax loss,
partially offset
by foreign
rate differential.
The effective
tax rate
was (73.5%)
(Expense) in
fiscal
2023
compared
to
98.4%
(Expense)
in
fiscal
2022.
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
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 calculation of potential asset
impairment, income tax
valuation allowances, reserves relating
to self-insured health
insurance, workers’
32
compensation, general
and auto
insurance liabilities,
uncertain tax
positions, the
allowance for
customer
credit losses, and inventory shrinkage.
Allowance for Customer Credit Losses
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,
warehouse space
and equipment.
Its leases
have remaining
lease terms
of
one
year to 10 years, some of which
include options to extend the lease term for
up to five years, and some of
which
include
options
to
terminate
the
lease
within
one
year.
The
Company considers
these
options
in
determining
the
lease term
used
to
establish its
right-of-use assets
and lease
liabilities. The
Company’s
lease agreements do not contain any material residual value guarantees or material
restrictive covenants.
As
most
of
the
Company’s
leases
do
not
provide
an
implicit
rate,
the
Company
uses
its
estimated
incremental
borrowing
rate
based
on
the
information
available
at
commencement
date
of
the
lease
in
determining the present
value of lease
payments.
See Note 11
to the
Consolidated Financial Statements,
“Leases” for further information.
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.
33
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.
of the balance sheet
date.
These liabilities reflect the
Company’s best
estimate of its ultimate
income tax
liability
based
on
the
tax
codes,
regulations,
and
pronouncements
of
the
jurisdictions
in
which
we
do
business.
Estimating our ultimate tax liability involves significant judgments regarding the
application of
complex tax
regulations across
many jurisdictions.
Despite the
Company’s
belief that
the estimates
and
judgments
are
reasonable,
differences
between
the
estimated
and
actual
tax
liabilities
can
and
do
exist
from time to time.
These differences may arise from settlements
of tax audits, expiration of the statute of
limitations, and the evolution and application of the
various jurisdictional tax codes and regulations.
Any
differences will
be recorded
in the
period in
which they become
known and
could have
a material
effect
on the results of operations in the period the adjustment is recorded.
Company’s
current
financial
performance
and
projected
future
financial
performance.
Based
on
this
assessment, the
Company then
determines if
a valuation
allowance should
be recorded.
If the
Company
concludes
that
it
is
more
likely
than
not
that
the
Company
will
not
be
able
to
realize
its
tax
deferred
assets, a valuation allowance is recorded for the proportion of the deferred tax asset it
determines may not
be realized.
Liquidity, Capital Resources and Market Risk
flows from operations, will be
adequate to fund the Company’s
regular operating requirements, including
$66.9
million
of
lease
obligations
and
planned
investments
of
$8.7
million
of
capital
expenditures,
for
fiscal 2024 and for the foreseeable future.
$13.4 million in
fiscal 2022
and $59.8
in fiscal
2021. Cash
provided by
operating activities
during 2023
was primarily attributable to net income adjusted for depreciation, share-based compensation, impairment
and changes in
working capital. The
decrease of $12.9
million for fiscal
2023 compared to
fiscal 2022 is
primarily
due
to
lower
net
operating
income
partially
offset
by
a
decrease
in
merchandise
inventories
and
deferred taxes.
and
$111.5
million
at
January
28,
2023
and
January
29,
2022,
respectively.
The
decrease in
working
34
capital
compared
to
the
prior
year
is
primarily
due
to
lower
short-term
investments
and
lower
inventory,
partially offset by lower accounts payable
and current lease liability.
borrowings of
up to
$35.0 million less
the
balance of
any revocable
letters of
credit related
to
purchase
commitments,
and
was
committed
through
May
2027.
The
credit
agreement
contains
various
financial
covenants and limitations, including the maintenance of specific financial
ratios with which the Company
was in
compliance as
of
February 3,
2024. There
were no
borrowings outstanding,
nor
any outstanding
letters of
credit that
reduced borrowing
availability,
under this
credit facility
as of
the fiscal
year ended
February 3, 2024 or the fiscal year ended January 28, 2023.
February 3, 2024 or at January 28, 2023.
fiscal 2023,
2022 and
2021, respectively.
The
expenditures for
fiscal 2023
were primarily
for additional
investments in nine new stores, our
distribution center and information technology.
million provided
in fiscal
2022 and
$25.3 million
used in
fiscal 2021.
In fiscal
2023, the
cash provided
was primarily
attributable to
the net
sales of
short-term investments,
partially offset
by expenditures
for
property and equipment.
$29.3
million
for
fiscal
2022
and
$31.8
million
for
fiscal
2021.
The decrease in
cash used during
fiscal
2023 was primarily due to lower
share repurchase amounts.
regarding the Company’s financial assets that are measured at fair value.
governmental debt securities held in managed accounts
with underlying ratings of A or
better at February
3, 2024. The state,
municipal and corporate bonds and
asset-backed securities have contractual maturities
which
range
from
seven
days
to
3.1
years.
The
U.S.
Treasury
Notes
have
contractual
maturities
which
range
from
four
days to
2.0
years. These
securities are
classified as
available-for-sale and
are recorded
as
Short-term investments, Restricted cash, 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.
respectively,
of
corporate
equities,
which
are
recorded
within
Other
assets
in
the
accompanying
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 the assistance of a third-party pricing service.
Since quoted prices in active markets for
35
identical assets are
not available, these
prices are determined
by the pricing
service using observable
market
information
such
as
quotes
from
less
active
markets
and/or
quoted
prices
of
securities
with
similar
characteristics, among other factors.
Deferred
compensation plan
assets
consist
primarily of
life
insurance
policies. These
life
insurance
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on
such
factors
as
the
fair
value
of
the
underlying
assets
and
discounted
cash
flow
and
are
therefore
classified
within
Level
3
of
the
valuation
hierarchy.
The
Level
3
liability
associated
with
the
life
insurance
policies
represents
a
deferred
compensation
obligation,
the
value
of
which
is
tracked
via
underlying
insurance
funds’
net
asset
values,
as
recorded
in
Other
noncurrent
liabilities
in
the
Consolidated Balance Sheets. These
funds are designed
to mirror the
return of existing
mutual funds and
money market funds that are observable and actively traded.
Contractual Obligations
commitments for
store leases.
Operating leases
represent minimum
required lease
payments under
non-
cancellable
lease
terms.
Most
store
leases
also
require
payment
of
related
operating
expenses
such
as
taxes, utilities, insurance and maintenance, which are not included in our estimated lease obligations.
See
Note
11
to
the
Consolidated
Financial
Statements,
“Leases”
for
the
maturities
of
our
operating
lease
obligations.
Recent Accounting Pronouncements
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.
36
Item 8.
Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID
) .....................................
37
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
for the fiscal
40
Consolidated Balance Sheets at February 3, 2024 and January 28, 2023
.............................................
41
Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2024,
January 28, 2023
42
Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 3,
2024,
43
Notes to Consolidated Financial Statements ..........................................................................................
44
Schedule II — Valuation
and Qualifying Accounts for the fiscal years ended February 3, 2024,
75
37
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of The Cato Corporation
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying consolidated balance sheets of The Cato Corporation and its
subsidiaries (the “Company”) as of February 3, 2024 and
January 28, 2023, and the related consolidated
statements of income (loss), of comprehensive income (loss), of stockholders’
equity and of cash flows
for each of the three years in the period ended February 3, 2024, including
the related notes and financial
statement schedule listed in the accompanying index (collectively referred
to as the “consolidated
financial statements”). We also have audited the Company's internal control over financial reporting as of
February 3, 2024, based on criteria established in Internal Control - Integrated
Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above
present fairly, in all material
respects, the financial position of the Company as of February
3, 2024 and January 28, 2023, and the
results of its operations and its cash flows for each of the three years
in the period ended February 3, 2024
in conformity with accounting principles generally accepted in the United
States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control
over financial
reporting as of February 3, 2024, based on criteria established in Internal
Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial
statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions
on the Company’s
consolidated financial statements and on the Company's internal control over
financial reporting based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with
respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud,
and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing
procedures to assess the risks of
material misstatement of the consolidated financial statements, whether
due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal
control over financial reporting included obtaining an understanding
of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits
also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
38
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal
control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles,
and that receipts and expenditures of the company are being made
only in accordance with authorizations
of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk
that controls may become inadequate because of changes in conditions, or
that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising
from the current period audit of the
consolidated financial statements that was communicated or required to
be communicated to the audit
committee and that (i) relates to accounts or disclosures that are material
to the consolidated financial
statements and (ii) involved our especially challenging, subjective, or
complex judgments. The
communication of critical audit matters does not alter in any way
our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating
the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it
relates.
Impairment of Long-Lived Assets - Store Location Asset Groupings
As described in Notes 1 and 6 to the consolidated financial statements,
the Company’s consolidated
property and equipment, net balance was $64.0 million, of which the store
locations were a portion, and
consolidated operating lease right-of-use assets, net balance was $154.7
million as of February 3, 2024.
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 $1.8 million was recorded during
the year ended
February 3, 2024.
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.
39
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
management’s assessment of the fair value of the leased assets included in the store location asset
groupings.
/s/
March 27, 2024
We have served as the Company’s
auditor since 2003.
40
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
Fiscal Year Ended
February 3, 2024
January 28, 2023
January 29, 2022
(Dollars in thousands, except per share data)
REVENUES
$
$
$
COSTS AND EXPENSES, NET
(
5,101
)
(
5,902
)
(
2,141
)
Income (loss) before income taxes
(
13,801
)
Income tax expense
Net income (loss)
$
(
23,941
)
$
$
Basic earnings (loss) per share
$
(
1.17
)
$
$
Diluted earnings (loss) per share
$
(
1.17
)
$
$
Dividends per share
$
$
$
Comprehensive income:
Net income (loss)
$
(
23,941
)
$
$
Unrealized gain (loss) on available-for-sale
, ($
), and ($
) for fiscal 2023, 2022
(
958
)
(
1,435
)
Comprehensive income (loss)
$
(
22,308
)
$
(
929
)
$
See notes to consolidated financial statements.
41
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
February 3, 2024
January 28, 2023
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
$
Short-term investments
Restricted cash
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
(
1,238
)
$
$
See notes to consolidated financial statements.
42
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Fiscal Year Ended
February 3, 2024
January 28, 2023
January 29, 2022
(Dollars in thousands)
Operating Activities:
Net income (loss)
$
(
23,941
)
$
$
Adjustments to reconcile net income (loss) to net cash provided
(
711
)
(
332
)
(
3,194
)
(
608
)
(
3,499
)
(
40,784
)
(
216
)
(
505
)
(
2,056
)
(
2,573
)
(
3,855
)
(
613
)
(
307
)
(
1,118
)
(
10,053
)
(
43,179
)
Net cash provided by operating activities
Investing Activities:
Expenditures for property and equipment
(
12,532
)
(
19,433
)
(
4,105
)
Purchase of short-term investments
(
48,055
)
(
54,734
)
(
141,937
)
Sales of short-term investments
Purchase of other assets
(
400
)
Sales of other assets
(
8
)
Net cash provided by (used in) investing activities
(
25,332
)
Financing Activities:
Dividends paid
(
13,954
)
(
14,369
)
(
9,972
)
Repurchase of common stock
(
2,562
)
(
15,216
)
(
22,033
)
Proceeds from employee stock purchase plan
Net cash used in financing activities
(
16,132
)
(
29,278
)
(
31,801
)
Net increase in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
$
$
$
Non-cash activity:
Accrued property and equipment expenditures
$
$
$
See notes to consolidated financial statements.
43
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 — January 30, 2021
$
$
$
$
$
Comprehensive income:
)
(
1,435
)
(
1,435
)
Dividends paid ($
(
9,972
)
(
9,972
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation expense
Repurchase and retirement of treasury shares
(
47
)
(
21,986
)
(
22,033
)
Balance — January 29, 2022
$
$
$
$
(
280
)
$
Comprehensive income:
)
(
958
)
(
958
)
Dividends paid ($
(
14,369
)
(
14,369
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation expense
Repurchase and retirement of treasury shares
(
41
)
(
15,176
)
(
15,217
)
Balance — January 28, 2023
$
$
$
$
(
1,238
)
$
Comprehensive income:
(
23,941
)
(
23,941
)
Dividends paid ($
(
13,954
)
(
13,954
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation expense
Repurchase and retirement of treasury shares
(
9
)
(
2,553
)
(
2,562
)
Balance — February 3, 2024
$
$
$
$
$
See notes to consolidated financial statements.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44
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,” “Versona
”
and “Cache,” including e-commerce websites. The stores
are
located
primarily
in
strip
shopping
centers
principally
in
the
southeastern
United
States.
The
Company’s fiscal year ends on the Saturday nearest January 31 of the subsequent year. Fiscal year 2023 is
a 53-week year and 2022 and 2021 are
-week years.
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,
uncertain tax positions and valuation allowances on deferred tax
assets.
Cash
and
Cash
Equivalents:
Cash
and
cash
equivalents
consist
of
highly
liquid
investments
with
original maturities of three months or less.
Short-Term
Investments:
as short-term
investments. See
Note 3
for the
Company’s
estimated fair
value of,
and other
information
regarding,
its
short-term
investments.
The
Company’s
short-term
investments
are
all
classified
as
available-for-sale.
As
they
are
available
for
current
operations,
they
are
classified
on
the
Consolidated
Balance Sheets
as
Current Assets.
Available-for-sale
securities are
carried at
fair value,
with
unrealized
gains
and
temporary
losses,
net
of
income
taxes,
reported
as
a
component
of
Accumulated
other
comprehensive income.
Other than
temporary declines
in the
fair value
of investments
are recorded
as a
reduction
in
the
cost
of
the
investments
in
the
accompanying
Consolidated
Balance
Sheets
and
a
reduction
of
Interest
and
other
income
in
the
accompanying
Consolidated
Statements
of
Income
and
Comprehensive
Income.
The
cost
of
debt
securities
is
adjusted
for
amortization
of
premiums
and
accretion
of
discounts
to
maturity.
The
amortization
of
premiums,
accretion
of
discounts
and
realized
gains and losses are included in Interest and other income.
Restricted Cash:
The Company had $
January 28, 2023, respectively, as security and collateral for administration of the Company’s
self-insured
workers’
compensation
and
general
liability
coverage,
which
is
reported
as
Restricted
cash
on
the
Consolidated Balance Sheets.
Supplemental Cash Flow
Information:
Income tax
payments, net
of refunds
received, for
the fiscal
years ended
February 3,
2024, January
28, 2023
and January
29, 2022
were a
payment of
$
, a
refund 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)
45
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
Buildings
-
Leasehold improvements
-
Fixtures and equipment
-
Information technology equipment and software
-
Aircraft
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 $
, $
incurred in fiscal 2023, fiscal 2022 and fiscal 2021, respectively.
Other Assets:
Other assets are comprised
of long-term assets, primarily
insurance contracts related to
deferred compensation assets and land held for investment purposes.
`
Balance as of
February 3, 2024
January 28, 2023
(Dollars in thousands)
Other Assets
$
$
Total
Other Assets
$
$
Leases:
The
Company
leases
all
of
its
retail
stores.
Most
lease
agreements
contain
construction
allowances and rent escalations.
For purposes of recognizing incentives and minimum rental expenses on
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
46
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.
In addition, a provision is made for estimated rewards cards issued
to
customers
based
on
their
purchases
with
the
Company’s
propriety
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
2023,
2022
and
2021,
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
rewards
cards
issued by the Company have a 90-day expiration.
the
Company’s
wholly-owned
subsidiaries.
None
of
the
credit
card
receivables
are
secured.
The
Company
estimated
customer
credit
losses
of
$
February 3,
2024 and
January 28,
2023, respectively,
on sales
purchased on
the Company’s
proprietary
credit card of $
28, 2023, respectively.
customers (in thousands):
`
Balance as of
February 3, 2024
January 28, 2023
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
the
Company’s
buying
departments
and
distribution
center.
Occupancy expenses include rent, real
estate taxes, insurance, common area
maintenance, utilities
and
maintenance
for
stores
and
distribution
facilities.
Buying,
distribution,
occupancy
and
internal
transfer
costs
are
treated
as
period
costs
and
are
not
capitalized
as
part
of
inventory.
The
direct
costs
associated with shipping goods to customers are recorded as a component
of Cost of goods sold.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
47
Advertising:
Advertising
costs
are
expensed
in
the
period
in
which
they
are
incurred.
Advertising
expense was approximately $
, $
2024, January 28, 2023 and January 29, 2022, respectively.
Stock Repurchase Program:
For the fiscal year ended
February 3, 2024, 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.
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.
divided
by
the
weighted
average
number
of
common
shares
outstanding
for
the
period.
Diluted
EPS
reflects the potential dilution that could occur from common shares issuable through stock options and the
Employee Stock Purchase Plan.
3, 2024, January 28, 2023 and January 29, 2022:
`
Fiscal Year Ended
February 3, 2024
January 28, 2023
January 29, 2022
Numerator
(Dollars in thousands)
Net earnings (loss)
$
(
23,941
)
$
$
(Earnings) loss allocated to non-vested equity awards
(
1,937
)
Net earnings (loss) available to common stockholders
$
(
22,594
)
$
$
Denominator
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
Net income (loss) per common share
Basic earnings (loss) per share
$
(
1.17
)
$
$
Diluted earnings (loss) per share
$
(
1.17
)
$
$
Vendor
Allowances:
The
Company
receives
certain
allowances
from
vendors
primarily
related
to
purchase discounts and markdown and
damage allowances. All allowances are
reflected in Cost of
goods
sold
as
earned
when
the
related
products
are
sold.
Cash
consideration
received
from
a
vendor
is
presumed
to
be
a
reduction
of
the
purchase
cost
of
merchandise
and
is
reflected
as
a
reduction
of
inventory.
The Company does not receive cooperative advertising allowances.
Income
Taxes:
The
Company
files
a
consolidated
federal
income
tax
return.
Income
taxes
are
provided
based
on
the
asset
and
liability
method
of
accounting,
whereby
deferred
income
taxes
are
provided
for
temporary
differences
between
the
financial
reporting
basis
and
the
tax
basis
of
the
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
48
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.
Deferred
Tax
Valuation
Allowance:
The
Company assesses
the
likelihood
that
deferred
tax
assets
will
be
realized
in
light
of
the
Company’s
current
financial
performance
and
projected
future
financial
performance. Based on this
assessment, the Company then
determines if a valuation
allowance should be
recorded.
If the
Company concludes that
it is
more likely than
not that
the Company will
not be
able to
realize its tax deferred assets, a valuation allowance is recorded for
the proportion of the deferred tax asset
it determines may not be realized.
Store
Opening
Costs:
Costs
relating
to
the
opening
of
new
stores
or
the
relocating
or
expanding
of
existing
stores
are
expensed
as
incurred.
A
portion
of
construction,
design,
and
site
selection costs are capitalized to new, relocated and remodeled stores.
Insurance:
The Company is self-insured with respect to employee health care, workers’ compensation
and
general
liability.
The
Company’s
self-insurance
liabilities
are
based
on
the
total
estimated
cost
of
claims filed and estimates of
claims incurred but not reported, less
amounts paid against such claims,
and
are
not discounted.
Management reviews
current and
historical claims
data in
developing its
estimates.
The Company has stop-loss
insurance coverage for individual claims in
excess of $
healthcare, $
Fair Value
of Financial Instruments:
as
cash
and
cash
equivalents,
short-term
investments,
and
restricted
cash,
approximate their
fair
values
due to their short terms to maturity and/or their variable interest rates.
Stock Based
Compensation:
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.
Subsequent
Events:
investment
for
$
consolidated financial statements in the first quarter of fiscal 2024.
Recently
Issued
Accounting
Pronouncements:
Standards Board (“FASB”)
issued Accounting Standards
Update (“ASU”) 2023-07,
“Segment Reporting
(Topic 280):
Improvements to Reportable Segment Disclosures”, which modifies disclosure requirements
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
49
for
all
public
entities
that
are
required
to
report
segment
information.
The
update
will
change
the
reporting of
segments by
adding significant
segment expenses, other
segment items, title
and position
of
the
chief
operating
decision
maker
(“COD”)
and
how
the
COD
uses
the
reported
measures
to
make
decisions.
The update
also requires
all annual
disclosure about
a reportable
segment’s
profit or
loss and
assets in
interim periods.
This guidance
is effective
for fiscal
years beginning
after December
15, 2023
and interim
periods within fiscal
years beginning after
December 15,
2024.
Early adoption is
permitted,
and
the
guidance
is
applicable
retrospectively to
all
prior
periods
presented
in
the
financial
statements.
The
Company
is
currently
in
the
process
of
evaluating
the
potential
impact
of
adoption
of
this
new
guidance on its consolidated financial statements and related disclosures.
Income
Tax
Disclosures”,
which
modifies
the
requirements
on
income
tax
disclosures
to
require
disaggregated
information
about
a
reporting
entity’s
effective
tax
rate
reconciliation
as
well
as
information on
income taxes
paid.
This guidance
is effective
for fiscal
years beginning
after December
15, 2024 for all public
business entities, with early adoption and retrospective application
permitted.
The
Company is
currently in
the process
of evaluating
the potential
impact of
adoption of
this new
guidance
on its consolidated financial statements and related disclosures.
2.
Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
Fiscal Year Ended
February 3, 2024
January 28, 2023
January 29, 2022
Dividend income
$
(
78
)
$
(
47
)
$
(
76
)
Interest income
(
3,919
)
(
1,876
)
(
1,321
)
State recovery grant
(
1,431
)
Insurance proceeds
(
1,683
)
Miscellaneous income
(
1,079
)
(
896
)
(
580
)
Net loss (gain) on investment sales
(
25
)
(
164
)
Interest and other income
$
(
5,101
)
$
(
5,902
)
$
(
2,141
)
In
fiscal
2022,
the
Company
received
$
Recovery
Program,
which
provided
aid
to
eligible
North
Carolina
businesses
that
suffered
significant
economic
damage from
the
COVID-19 pandemic.
Additionally,
in
fiscal
2022,
the
Company received
$
in 2021 and 2020.
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.
February 3, 2024 and January 28, 2023 (in thousands):
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
50
`
February 3, 2024
January 28, 2023
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)
(
335
)
(
335
)
(
1,020
)
(
1,241
)
(
2,261
)
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 and
losses in
these investments
at February
3, 2024
and January
28, 2023
(in thousands):
`
February 3, 2024
January 28, 2023
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
$
(
297
)
$
$
(
229
)
$
(
2,261
)
$
$
(
1,740
)
Equity Investments
(
187
)
(
150
)
Total
$
$
(
119
)
$
$
(
1,609
)
$
$
(
1,238
)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
51
4.
Fair Value Measurements:
at fair value as of February 3, 2024 and January 28, 2023 (in thousands):
`
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
February 3, 2024
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
$
$
$
$
Total Assets
$
$
$
$
Liabilities:
$
(
8,654
)
$
$
$
(
8,654
)
Total Liabilities
$
(
8,654
)
$
$
$
(
8,654
)
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 28, 2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
$
$
$
$
Total Assets
$
$
$
$
Liabilities:
$
(
8,903
)
$
$
$
(
8,903
)
Total Liabilities
$
(
8,903
)
$
$
$
(
8,903
)
The
Company’s
investment
portfolio
was
primarily
invested
in
corporate
bonds
and
taxable
governmental debt securities held in managed accounts
with underlying ratings of A or
better at February
3, 2024. The state,
municipal and corporate bonds and
asset-backed securities have contractual maturities
which
range
from
range from
Short-term
investments,
Restricted
cash,
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
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
52
receivables
generated
by
account
holders
of
cards
from American
Express,
Citibank,
JPMorgan
Chase,
Capital One, and Discover.
respectively,
of
corporate
equities,
which
are
recorded
within
Other
assets
in
the
accompanying
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 the assistance of a third-party pricing service.
Since quoted prices in active markets for
identical assets are
not available, these
prices are determined
by the pricing
service using observable
market
information
such
as
quotes
from
less
active
markets
and/or
quoted
prices
of
securities
with
similar
characteristics, among other factors.
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 following tables summarize
the change in fair
value of the Company’s
financial assets and liabilities
measured using Level 3 inputs for the
years ended February 3, 2024 and
January 28, 2023
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
53
`
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at January 28, 2023
$
(
1,168
)
Ending Balance at February 3, 2024
$
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at January 28, 2023
$
(
8,903
)
(
292
)
(
578
)
Ending Balance at February 3, 2024
$
(
8,654
)
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at January 29, 2022
$
(
1,718
)
(
480
)
Ending Balance at January 28, 2023
$
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at January 29, 2022
$
(
10,020
)
(
379
)
Ending Balance at January 28, 2023
$
(
8,903
)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
54
5.
Accounts Receivable:
Accounts receivable consist of the following (in thousands):
February 3, 2024
January 28, 2023
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 February 3, 2024, January 28, 2023
and January 29,
2022,
respectively,
and
charges
against
the
allowance
for
customer
credit
losses
were
approximately
$
,
$
January
29,
2022,
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).
Company’s corporate jet, which had sustained damage at the end of the second quarter.
6.
Property and Equipment:
Property and equipment consist of the following (in thousands):
February 3, 2024
January 28, 2023
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
$
$
distribution center improvements and investments in new technology.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
55
7.
Accrued Expenses:
Accrued expenses consist of the following (in thousands):
February 3, 2024
January 28, 2023
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)
56
8.
Financing Arrangements:
for
borrowings
of
up
to
$
purchase
commitments,
and
is
committed
through
May
2027.
The
revolving
credit
agreement
contains
various
financial
covenants
and
limitations,
including
the
maintenance
of
specific
financial
ratios.
On
August
9,
2023,
the
Company
amended
the
revolving
credit
agreement
to
modify
a
definition
used
in
calculating
the
Company’s
minimum
EBITDAR
coverage
ratio
to
add
back
certain
income
tax
receivables
for
purposes
of
calculating
the
ratio
through
February
3,
2024.
On
October
24,
2023,
the
Company further
amended
the
revolving
credit
agreement to
flex
the
Company’s
minimum EBITDAR
coverage
ratio
based
upon
the
amount
of
the
Company’s
cash
and
investments.
The
Company
was
in
compliance
with
the
amended
revolving
credit
agreement
as
of
February
3,
2024.
There
were
borrowings outstanding,
r any
outstanding letters
of credit
that reduced
borrowing availability,
under this
credit facility
as of
the fiscal
year ended
February 3,
2024 or
the fiscal
year ended
January 28,
2023.
The
weighted
average interest
rate
under the
credit facility
was
outstanding.
3, 2024 or at January 28, 2023.
9.
Stockholders’ Equity:
,
whereas
the
holders
of
Class B Common Stock are entitled
to
. Each share of
Class B Common Stock may be
. 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 $
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.
administrative expenses.
Further Company
contributions
are
at the
discretion of
the
Board of
Directors.
The
Company’s
contributions
for
the
years
ended
February 3,
2024,
January
28,
2023
and
January
29,
2022 were approximately $
, $
, respectively.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
57
Company’s discretionary
contribution to the ESOP
is determined by the
Compensation Committee of the
Board of Directors and can be
made in Company Class A Common stock or
cash.
Due to a net operating
loss
in
fiscal
2023,
the
Committee
did
not
approve
a
contribution
to
the
ESOP
for
the
year
ended
February
3,
2024.
The
Company’s
contributions
were
$
January 28, 2023 and January 29, 2022, respectively.
large
number of
the Company’s
retail locations
and associates.
The Company’s
self-insurance liabilities
are
based
on the
total
estimated costs
of
claims filed
and estimates
of
claims incurred
but not
reported,
less
amounts
paid
against
such
claims.
Management
reviews
current
and
historical
claims
data
in
developing its
estimates. If
the underlying
facts and
circumstances of
the claims
change or
the historical
trend is not indicative of future trends, then the Company may be required to record
additional expense or
a
reduction
to
expense
which
could
be
material
to
the
Company’s
reported
results
of
operations
in
the
period recorded. The Company funds healthcare contributions
to a third-party provider.
11.
Leases:
The Company determines whether an
arrangement is a lease
at inception. The Company has
operating
leases for
stores,
offices,
warehouse space
and equipment.
Its
leases
have remaining
lease terms
of
, some of which include options to
extend the lease term for
, and some of
which
include
options
to
terminate
the
lease
.
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.
`
Fiscal Year Ended
February 3, 2024
January 28, 2023
Operating lease cost (a)
$
$
Variable
lease cost (b)
$
$
(a) Includes right-of-use asset amortization of ($
) million and ($
) million for the twelve months
ended February 3, 2024 and January 28, 2023, respectively.
(b) Primarily relates to monthly percentage rent for stores not presented on the balance sheet.
Supplemental cash flow
information and
non-cash activity related
to the
Company’s operating
leases
are as follows (in thousands):
Operating cash flow information:
Fiscal Year Ended
February 3, 2024
January 28, 2023
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)
58
Weighted-average
remaining lease
term and
discount rate
for the
Company’s
operating leases
are as
follows:
`
As of
February 3, 2024
January 28, 2023
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
2024
$
2025
2026
2027
2028
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
February
3,
2024,
the
Company had
gross
unrecognized
tax
benefits
totaling
approximately
$
approximately
$
Company had approximately $
related
to
uncertain
tax
positions
as
of
February
3,
2024,
January
28,
2023
and
January
29,
2022,
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 February 3, 2024, January 28, 2023
and January 29, 2022, respectively.
The
Company is
no
longer
subject
to
U.S.
federal
income
tax
examinations
for
years
before
2020.
In
state
and
local
tax
jurisdictions,
the
Company
has
limited
exposure
before
2013.
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)
59
`
February 3, 2024
January 28, 2023
January 29, 2022
Fiscal Year
Ended
Balances, beginning
$
$
$
Reduction for tax positions of prior years for:
(
1,065
)
(
968
)
(
2,652
)
Balances, ending
$
$
$
The provision for income taxes consists of
the following (in thousands):
`
February 3, 2024
January 28, 2023
January 29, 2022
Fiscal Year
Ended
Current income taxes:
$
(
148
)
$
(
817
)
$
(
334
)
(
231
)
Deferred income taxes:
(
2,558
)
(
639
)
(
3,197
)
Total income tax expense
$
$
$
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
60
Significant
components of
the
Company’s deferred
tax assets
and liabilities
as of
February 3,
2024
and
January 28, 2023 are as follows
(in thousands):
`
February 3, 2024
January 28, 2023
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
Federal tax credits
Net operating losses
Charitable contribution carryover
State tax credits
Lease liabilities
Property and equipment
Amortization
Other
Total deferred
tax assets before valuation allowance
Valuation
allowance
(
17,998
)
(
5,058
)
Total deferred
tax assets after valuation allowance
Deferred tax liabilities:
Right-of-Use assets
Accrued self-insurance reserves
Total deferred
tax liabilities
Net deferred tax assets
$
$
The changes in the valuation allowance are presented below:
February 3, 2024
January 28, 2023
Valuation
Allowance Beginning Balance
$
(
5,058
)
$
(
4,473
)
(
12,940
)
(
585
)
Valuation
Allowance Ending Balance
$
(
17,998
)
$
(
5,058
)
The Company had $
during fiscal 2023. The Company had previously
recorded a valuation allowance of $
operating
loss
carryforwards
and
$
Company assessed the likelihood that deferred tax
assets related to state net operating
loss carryforwards and
other deferred tax
assets affecting state
income tax will
be realized. Based
on this assessment,
the Company
concluded that it is more likely than not the Company will not be able to
realize $
of the
net operating losses
and other
deferred assets, respectively,
and accordingly, has
recorded a
valuation
allowance for the same amount.
federal net
operating
loss
carryforwards,
other
credit carryforwards
and
all
other deferred
tax assets
net of
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
61
deferred tax liabilities.
The Company assessed the likelihood that deferred tax
assets related to net operating
loss
carryforwards,
credit
carryforwards
and
all
other
remaining
deferred
tax
assets
net
of
deferred
tax
liabilities will be
realized.
Based on this
assessment, the Company
concluded that it
is more likely
than not
the
Company
will
not
be
able
to
realize
$
credit carryforwards and $
The net change in the
valuation allowance of $
recording a valuation allowance of $
operating loss
carryforwards, other
credit carryforwards
and all
other deferred
tax assets
net of
deferred tax
liabilities
and
increases
in
state
net
operating
losses
and
state
tax
credits.
The
net
change
in
the
valuation
allowance for the year ended January 28, 2023
is due to state net operating losses and
state tax credits.
undistributed
earnings
indefinitely.
Future
unremitted
earnings
when
distributed
are
expected
to
be
either
distributions
of
GILTI-previously
taxed income
or eligible
for
a
%
dividends received
deduction.
The
withholding
tax
rate
on
any
unremitted
earnings
is
considered
immaterial.
Therefore,
the
Company
has
not
provided
deferred
U.S.
income
taxes
on
approximately $
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
62
The reconciliation of the Company’s effective
income tax rate with the
statutory rate is as follows:
`
February 3, 2024
January 28, 2023
January 29, 2022
Fiscal Year
Ended
Federal income tax rate
%
%
%
State income taxes
(
36.4
)
CARES ACT - Carryback differential
(
5.8
)
Global intangible low-taxed income
(
33.4
)
Foreign tax credit
(
11.2
)
(
4.3
)
Foreign rate differential
(
74.4
)
(
2.8
)
Offshore claim
(
141.2
)
(
5.5
)
Limitation on officer compensation
(
3.1
)
Work opportunity credit
(
63.7
)
(
1.8
)
Addback on wage related credits
(
0.3
)
Tax exempt interest
(
14.4
)
Insurance
(
8.1
)
(
1.0
)
Charitable contribution of inventory
(
0.6
)
(
1.1
)
Uncertain tax positions
(
18.7
)
(
3.5
)
Deferred rate change
Valuation
allowance
(
96.0
)
(
2.1
)
Other
(
0.1
)
Effective income tax rate
(
73.5
)
%
%
%
The
largest
driver
for
the
difference
between
the
Company’s
effective
income
tax
rate
for
the
year
ended February 3, 2024 and the
U.S. federal income tax rate is
the valuation allowance (discussed above)
recorded
against
the
Company’s
net
deferred
tax
assets
attributable
to
U.S.
federal
net
operating
loss
carryforwards, other credit carryforwards and all other deferred tax assets
net of deferred tax liabilities.
13.
Reportable Segment Information:
The
Company
has
determined
that
it
has
Segment
Reporting
,
including Cato,
It’s
Fashion, Verso
na
and
Credit.
As
outlined in
ASC
280-10, the
Company
has
operating segments, including e-commerce, based on
the aggregation criteria outlined in ASC
280-10, which
states that two or more operating segments may be aggregated into a single reportable segment if aggregation
is consistent with the objective
and basic principles of ASC 280-10,
which require the segments have similar
economic characteristics, products, production processes, customers
and methods of distribution.
The
Company’s
retail
operating
segments
have
similar
economic
characteristics
and
similar
operating,
financial and
competitive risks.
The products
sold in
each retail
operating segment
are similar
in nature,
as
they
all
offer
women’s
apparel,
shoes
and
accessories.
Merchandise
inventory
of
the
Company’s
retail
operating
segments
is
sourced
from
the
same
countries
and
some
of
the
same
vendors,
using
similar
production processes.
Merchandise for the Company’s retail operating segments is distributed to retail stores
in a similar manner through
the Company’s single distribution center and is
subsequently sold to customers in
a similar
manner.
The Company offers its own credit
card to its customers and
all credit authorizations, payment processing
and collection efforts are performed by a
wholly-owned subsidiary of the Company.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
63
The following schedule summarizes certain segment
information (in thousands):
`
Fiscal 2023
Retail
Credit
Total
Revenues
$
$
$
Depreciation
Interest and other income
Income (loss) before taxes
(
14,746
)
(
13,801
)
Capital expenditures
Fiscal 2022
Retail
Credit
Total
Revenues
$
$
$
Depreciation
Interest and other income
Income before taxes
Capital expenditures
Fiscal 2021
Retail
Credit
Total
Revenues
$
$
$
Depreciation
Interest and other income
Income before taxes
Capital expenditures
Retail
Credit
Total
Total assets as of February 3,
2024
$
$
$
Total assets as of January 28,
2023
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):
Fiscal Year
Ended
`
February 3, 2024
January 28, 2023
January 29, 2022
Payroll
$
$
$
Postage
Other expenses
Total expenses
$
$
$
14.
Stock Based Compensation:
various
forms
of
equity-based
awards,
including
restricted
stock
and
stock
options
for
grant,
to
officers,
directors and key employees.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
64
and available for grant under this plan as of February 3, 2024:
`
2018
Plan
Options and/or restricted stock initially authorized
Options and/or restricted stock available for grant:
In accordance with
ASC 718, the
fair value of
restricted stock awards
is estimated on
the date
of
grant based
on the
market price
of the
Company’s
stock and
is amortized
to compensation
expense on
a
straight-line basis
over a
five-year
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
February
3,
2024,
January 28,
2023 and
January 29,
2022 was
$
, $
, respectively.
The
increase in total compensation expense for fiscal 2023 is
due to a true-up in fiscal 2022 that
resulted from
forfeitures
driven
by
the
retirement
of
several
senior
members
of
management.
The
expenses
are
classified as a
component of Selling, general
and administrative expenses in
the Consolidated Statements
of Income (Loss) and Comprehensive Income (Loss).
The following summary shows
the changes in the
shares of unvested
restricted stock outstanding
during
the years ended February 3, 2024,
January 28, 2023 and January 29, 2022:
`
Weighted Average
Number of
Grant Date Fair
Shares
Value Per
Share
Restricted stock awards at January 30, 2021
$
Granted
Vested
(
176,575
)
Forfeited or expired
(
59,003
)
Restricted stock awards at January 29, 2022
$
Granted
Vested
(
231,638
)
Forfeited or expired
(
224,658
)
Restricted stock awards at January 28, 2023
$
Granted
Vested
(
217,238
)
Forfeited or expired
(
132,824
)
Restricted stock awards at February 3, 2024
$
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
% discount through
payroll deductions. During
the twelve
month period ended
February 3,
2024, the
Company sold
Employee Stock Purchase Plan.
The compensation expense
recognized for the
% discount given
under
the
Employee
Stock
Purchase
Plan
was
approximately
$
,
$
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
65
2023, 2022 and 2021,
respectively.
These expenses are classified
as a component of
Selling, general and
administrative expenses.
15.
Commitments and Contingencies:
business,
including
litigation
regarding
the
merchandise
that
it
sells,
litigation
regarding
intellectual
property,
litigation instituted
by persons
injured upon
premises under
our control,
litigation with
respect
to
various
employment
matters,
including
alleged
discrimination
and
wage
and
hour
litigation,
and
litigation with present or former employees.
any business
of its
size with
a significant
number of
employees and
significant merchandise
sales, such
litigation could
result in
large
monetary awards.
Based on
information currently
available,
management
does
not
believe
that
any
reasonably
possible
losses
arising
from current
pending litigation
will
have a
material adverse effect
on the Company’s
consolidated financial statements. However,
given the inherent
uncertainties
involved
in
such
matters,
an
adverse
outcome
in
one
or
more
of
such
matters
could
materially and adversely affect the Company’s
financial condition, results of operations and cash flows in
any
particular
reporting
period.
The
Company
accrues
for
these
matters
when
the
liability
is
deemed
probable and reasonably estimable.
16.
Accumulated Other Comprehensive Income:
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
year ended February 3, 2024:
`
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 28, 2023
$
(
1,238
)
Net current-period other comprehensive income
(loss)
Ending Balance at February 3, 2024
$
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to
accumulated other
comprehensive income.
(b) Includes $
income for net gains on available-for-sale securities. The
tax impact of this reclassification was $
. Amounts
in parentheses indicate a debit/reduction to accumulated other comprehensive income.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
66
The following table sets forth information regarding the reclassification
out of Accumulated other
comprehensive income (in thousands) for the year ended January 28, 2023:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 29, 2022
$
(
280
)
(
982
)
Net current-period other comprehensive income (loss)
(
958
)
Ending Balance at January 28, 2023
$
(
1,238
)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to
accumulated other
comprehensive income.
(b) Includes $
income for net gains on available-for-sale securities. The
tax impact of this reclassification was $
. Amounts in
parentheses indicate a debit/reduction to accumulated other comprehensive income.
67
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 February
3, 2024.
Based on this
evaluation, our Principal
Executive Officer
and Principal Financial
Officer concluded that,
as
of
February 3,
2024, 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
February
3,
2024
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 February
3,
2024.
effectiveness of our internal
control over financial reporting as
of February 3, 2024, 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
February
3,
2024
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,
the
Company’s
internal
control
over
financial reporting.
Inherent Limitations on Effectiveness of Controls
Officer,
does not
expect our
disclosure controls
and procedures
or internal
controls to
prevent all
errors
and all
fraud. A
control system, no
matter how
well conceived or
operated, can provide
only reasonable,
not absolute,
assurance that
the objectives
of the
control system are
met. Further,
the design
of a
control
system
must
reflect
the
fact
that
there
are
resource
constraints,
and
the
benefits
of
controls
must
be
considered relative to their costs.
Because of the inherent limitations
in all control systems,
no evaluation
of
controls
can
provide
absolute
assurance
all
control
issues
and
instances
of
fraud,
if
any,
within
the
company have
been detected.
These inherent
limitations include
the realities
that judgments
in decision-
making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also
be
circumvented
by
the
individual
acts
of
some
persons,
by
collusion
of
two
or
more
people,
or
by
management
override
of
the
controls.
The
design
of
any
system
of
controls
is
based
in
part
on
certain
assumptions about the likelihood
of future events,
and there can
be no assurance any
design will succeed
68
in
achieving
its
stated
goals
under
all
potential
future
conditions.
Over
time,
controls
may
become
inadequate because of changes
in conditions or
deterioration in the degree
of compliance with policies
or
procedures.
Because
of
the inherent
limitations in
a
cost-effective
control
system, misstatements
due to
error or fraud may occur and not be detected.
Item 9B.
Other Information:
defined
in
Rule 16a-1(f)
of
the
Securities Exchange
Act
of
1934,
as
amended)
“Rule10b5-1 trading arrangement” or a “
-
in Item 408 of Regulation S-K).
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
:
69
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance:
“Corporate
Governance
Matters”
and
“Delinquent
Section
16(a)
Reports”
in
the
Registrant’s
Proxy
Statement
for
its
2024
annual
stockholders’
meeting
(the
“2024
Proxy
Statement”)
is
incorporated
by
reference
in
response
to
this
Item 10.
The
information
in
response
to
this
Item 10
regarding
executive
officers
of the
Company is
contained in
Item 3A, Part I
hereof under
the caption
“Executive Officers
of
the Registrant.”
Item 11.
Executive Compensation:
under
the
heading
“Pay
Versus
Performance”),
“Fiscal
Year
2023
Director
Compensation,”
and
“Corporate
Governance
Matters-Compensation
Committee
Interlocks
and
Insider
Participation”
in
the
Company’s 2024 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 February
3,
2024.
(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
-
-
3,305,360
Equity compensation plans not
-
-
-
Total
-
-
3,305,360
(1)
There are no outstanding stock options, warrants or stock appreciation
rights.
(2)
Includes the following:
Under
the
Company’s
stock
incentive
plan,
referred
to
as
the
2018
Incentive
Compensation
Plan,
3,147,393
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,
157,967 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.
2024 Proxy Statement is incorporated by reference in response to this Item.
70
Item 13.
Certain Relationships and Related Transactions, and Director Independence:
“Corporate
Governance
Matters-Director
Independence”
and
“Meetings
and
Committees”
in
the
2024
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
Services
by
the
Independent
Registered
Public
Accounting
Firm”
in
the
2024
Proxy
Statement
is
incorporated by reference in response to this Item.
71
PART
IV
Item 15.
Exhibits and Financial Statement Schedules:
Page
Report of Independent Registered Public Accounting Firm
....................................................................
37
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss) for the fiscal
40
Consolidated Balance Sheets at February 3, 2024 and January 28, 2023
.................................................
41
Consolidated Statements of Cash Flows for the fiscal years ended
February 3, 2024, January 28, 2023
and January 29, 2022 ................................................................................................................................
42
Consolidated Statements of Stockholders’ Equity for the fiscal years ended
February 3, 2024,
January 28, 2023 and January 29, 2022
....................................................................................................
43
Notes to Consolidated Financial Statements
.............................................................................................
44
Schedule II — Valuation and Qualifying Accounts .................................................................................
75
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.
72
Exhibit
Number
Description of Exhibit
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10
10.11
10.12
10.13
21.1**
23.1**
31.1**
31.2**
32.1**
73
32.2**
97.1**
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.1
Cover Page Interactive Data File (Formatted in Inline XBRL and
contained in the Interactive
Data Files submitted as Exhibit 101.1**).
___________
* Management contract or compensatory plan required to be filed under Item 15 of this report and Item
601
of Regulation S-K.
** Filed or submitted electronically herewith.
Item 16.
Form 10-K Summary:
74
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 27, 2024
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)
75
Schedule II
VALUATION
AND QUALIFYING ACCOUNTS
(in thousands)
Allowance
for
Customer
Self Insurance
Credit Losses(a)
Reserves(b)
Balance at January 30, 2021
$
$
Additions charged to costs and expenses
Additions (reductions) charged to other accounts
(c)
(
1,447
)
Deductions
(
385
)
(d)
(
14,721
)
Balance at January 29, 2022
$
$
Additions charged to costs and expenses
Additions (reductions) charged to other accounts
(c)
Deductions
(
475
)
(d)
(
14,523
)
Balance at January 28, 2023
$
$
Additions charged to costs and expenses
Additions (reductions) charged to other accounts
(c)
Deductions
(
706
)
(d)
(
15,075
)
Balance at February 3, 2024
$
$
(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 11 To The Consolidated Financial Statements, Leases For The Maturities Of Our Operating LeasePart IIIPart IV