CATO 10-Q Quarterly Report May 1, 2021 | Alphaminr
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CATO 10-Q Quarter ended May 1, 2021

Balance Sheet
Cash Flow
Income Statement
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cato21qtr1q
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UNITED STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM
10-Q
☑
QUARTERLY REPORT PURSUANT
TO SECTION
13 OR 15(d)
OF THE SECURITIES
EXCHANGE
ACT OF
1934
For the quarterly
period ended
May 1, 2021
OR
☐
TRANSITION
REPORT PURSUANT
TO SECTION
13 OR 15(d)
OF THE SECURITIES
EXCHANGE
ACT OF
1934
For the transition
period from
________________to__________________
Commission
file number
1-31340
THE CATO CORPORATION
(Exact name
of registrant
as specified
in its charter)
Delaware
56-0484485
(State or
other jurisdiction
of incorporation
or organization)
(I.R.S.
Employer
Identification
No.)
8100 Denmark Road
,
Charlotte
,
North Carolina
28273-5975
(Address
of principal
executive
offices)
(Zip Code)
(704)
554-8510
(Registrant's
telephone
number, including
area code)
Not Applicable
(Former
name, former
address
and former
fiscal year,
if changed
since last
report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A - Common Stock, par value $.033 per share
CATO
New York Stock Exchange
Indicate by
check mark
whether the
registrant (1)
has filed
all reports
required to
be filed
by Section 13
or 15(d)
of the
Securities
Exchange Act of 1934 during
the preceding 12 months (or
for such shorter period
that the registrant was required
to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
Yes
X
No
Indicate by check
mark whether
the registrant
has submitted
electronically every
Interactive Data
File required
to be
submitted and
posted pursuant
to Rule
405 of
Regulation S
-T during
the preceding
12 months
(or for
such shorter
period that
the registrant
was
required to submit and post such files).
Yes
X
No
Indicate by check mark whether
the registrant is a
large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting
company,
or an
emerging
growth company.
See the
definitions
of “large
accelerated
filer,” “accelerated filer
,”
“smaller
reporting
company,”
and “emerging
growth company”
in Rule 12b-2
of the Exchange
Act.
Large accelerated
filer
☐
Accelerated filer
☑
Non-accelerated
filer
☐
Smaller reporting
company
☐
Emerging
growth company
☐
If an
emerging growth
company, indicate
by check
mark if
the registrant
has elected
not to
use the
extended transition
period for
complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
☐
As of May 1, 2021, there were
20,829,940
shares of Class A
common stock and
1,763,652
shares of Class B
common
stock outstanding.
1
THE CATO CORPORATION
FORM 10-Q
Quarter Ended May 1, 2021
Table
of Contents
Page No.
PART
I – FINANCIAL INFORMATION
(UNAUDITED)
Item 1.
Financial Statements (Unaudited):
Condensed
Consolidated
Statements
of Income
(Loss) and
Comprehensive
Income (Loss)
2
For the Three
Months Ended
May 1, 2021
and May
2, 2020
Condensed
Consolidated
Balance Sheets
3
At May 1,
2021 and
January 30,
2021
Condensed
Consolidated
Statements
of Cash Flows
4
For the Three
Months Ended
May 1, 2021
and May
2, 2020
Condensed
Consolidated
Statements
of Stockholders’
Equity
5
For the Three
Months Ended
May 1, 2021
and May
2, 2020
Notes to Condensed
Consolidated
Financial
Statements
6 - 19
For the Three
Months Ended
May 1, 2021
and May
2, 2020
Item 2.
Management’s Discussion and
Analysis of Financial Condition and Results
of Operations
20 - 26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27
Item 4.
Controls and Procedures
27
PART
II – OTHER INFORMATION
Item 1.
Legal Proceedings
28
Item 1A.
Risk Factors
28
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28
Item 3.
Defaults Upon Senior Securities
28
Item 4.
Mine Safety Disclosures
29
Item 5.
Other Information
29
Item 6.
Exhibits
29
Signatures
30
2
PART
I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended
May 1, 2021
May 2, 2020
(Dollars in thousands, except per share data)
REVENUES
Retail sales
$
211,234
$
98,813
Other revenue (principally finance charges, late fees and
layaway charges)
1,851
1,919
Total revenues
213,085
100,732
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of depreciation shown below)
123,675
83,597
Selling, general and administrative (exclusive of depreciation
shown below)
63,237
52,511
Depreciation
3,042
4,006
Interest and other income
( 663 )
( 1,851 )
Costs and expenses, net
189,291
138,263
Income (loss) before income taxes
23,794
( 37,531 )
Income tax expense (benefit)
3,081
( 9,114 )
Net income (loss)
$
20,713
$
( 28,417 )
Basic earnings (loss) per share
$
0.92
$
( 1.19 )
Diluted earnings (loss) per share
$
0.92
$
( 1.19 )
Comprehensive income:
Net income (loss)
$
20,713
$
( 28,417 )
Unrealized gain (loss) on available-for-sale securities, net
of deferred income taxes of ($
40
) and ($
90
) for May 1, 2021
( 134 )
( 298 )
and May 2, 2020, respectively
Comprehensive income (loss)
$
20,579
$
( 28,715 )
See notes to condensed consolidated financial statements (unaudited).
3
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
May 1, 2021
January 30, 2021
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
22,276
$
17,510
Short-term investments
160,897
126,416
Restricted cash
3,513
3,512
Restricted short-term investments
405
406
Accounts receivable, net of allowance for customer credit losses of
$
658
and $
605
at May 1, 2021 and January 30, 2021, respectively
55,140
52,743
Merchandise inventories
84,849
84,123
Prepaid expenses and other current assets
5,978
5,840
Total Current Assets
333,058
290,550
Property and equipment – net
69,925
72,550
Noncurrent deferred income taxes
5,726
5,685
Other assets
23,350
22,850
Right-of-Use assets – net
185,861
199,817
Total Assets
$
617,920
$
591,452
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
82,262
$
73,769
Accrued expenses
44,682
40,790
Accrued bonus and benefits
14,834
1,916
Accrued income taxes
2,394
2,038
Current lease liability
58,385
63,421
Total Current Liabilities
202,557
181,934
Other noncurrent liabilities
20,327
19,705
Lease liability
133,153
143,315
Stockholders' Equity:
Preferred stock, $
100
par value per share,
100,000
shares
authorized, none issued
-
-
Class A common stock, $
0.033
par value per share,
50,000,000
shares authorized;
20,829,940
and
20,839,795
shares issued
at May 1, 2021 and January 30, 2021, respectively
703
703
Convertible Class B common stock, $
0.033
par value per share,
15,000,000
shares authorized;
1,763,652
and
1,763,652
shares issued at May 1, 2021 and January 30, 2021, respectively
59
59
Additional paid-in capital
115,699
115,278
Retained earnings
144,401
129,303
Accumulated other comprehensive income
1,021
1,155
Total Stockholders' Equity
261,883
246,498
Total Liabilities and Stockholders’ Equity
$
617,920
$
591,452
See notes to condensed consolidated financial statements (unaudited).
4
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
Three Months Ended
May 1, 2021
May 2, 2020
(Dollars in thousands)
Operating Activities:
Net income (loss)
$
20,713
$
( 28,417 )
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation
3,042
4,006
Provision for customer credit losses
113
28
Purchase premium and premium amortization of investments
( 1,121 )
( 18 )
Share-based compensation
306
650
Deferred income taxes
( 1 )
313
Loss on disposal of property and equipment
58
66
Impairment of store assets
-
5,270
Changes in operating assets and liabilities which provided (used) cash:
Accounts receivable
( 2,510 )
( 4,402 )
Merchandise inventories
( 726 )
( 7,402 )
Prepaid and other assets
( 493 )
( 255 )
Operating lease right-of-use assets and liabilities
( 1,242 )
( 1,027 )
Accrued income taxes
356
( 13 )
Accounts payable, accrued expenses and other liabilities
26,005
( 40,134 )
Net cash provided (used) by operating activities
44,500
( 71,335 )
Investing Activities:
Expenditures for property and equipment
( 554 )
( 5,311 )
Purchase of short-term investments
( 62,075 )
( 8,275 )
Sales of short-term investments
28,397
90,435
Sales of other assets
-
94
Net cash provided (used) by investing activities
( 34,232 )
76,943
Financing Activities:
Dividends paid
-
( 7,990 )
Repurchase of common stock
( 5,629 )
( 9,875 )
Proceeds from line of credit
-
34,000
Payments on line of credit
-
( 4,000 )
Proceeds from employee stock purchase plan
128
250
Net cash provided (used) by financing activities
( 5,501 )
12,385
Net increase (decrease) in cash, cash equivalents, and restricted cash
4,767
17,993
Cash, cash equivalents, and restricted cash at beginning of period
21,022
14,401
Cash, cash equivalents, and restricted cash at end of period
$
25,789
$
32,394
Non-cash activity:
Accrued other assets and property and equipment
$
263
$
1,936
See notes to condensed consolidated financial statements (unaudited).
5
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Convertible
Accumulated
Class A
Class B
Additional
Other
Total
Common
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — January 30, 2021
$
703
$
59
$
115,278
$
129,303
$
1,155
$
246,498
Comprehensive income:
Net income (loss)
-
-
-
20,713
-
20,713
Unrealized gains on available-for-sale securities, net of deferred
income tax benefit of ($
40
)
-
-
-
-
( 134 )
( 134 )
Dividends paid ($0.00 per share)
-
-
-
-
-
-
Class A common stock sold through employee stock purchase
plan —
19,248
shares
1
-
150
-
-
151
Class B common stock sold through stock option plans —
0 shares
-
-
-
-
-
-
Class A common stock issued through restricted stock grant plans —
396,558
shares
13
-
271
-
-
284
Repurchase and retirement of treasury shares –
425,661
shares
( 14 )
-
-
( 5,615 )
-
( 5,629 )
Balance — May 1, 2021
$
703
$
59
$
115,699
$
144,401
$
1,021
$
261,883
Convertible
Accumulated
Class A
Class B
Additional
Other
Total
Common
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — February 1, 2020
$
761
$
59
$
110,813
$
203,458
$
1,423
$
316,514
Comprehensive income:
Net income (loss)
-
-
-
( 28,417 )
-
( 28,417 )
Unrealized gains on available-for-sale securities, net of deferred
income tax benefit of ($
90
)
-
-
-
-
( 298 )
( 298 )
Dividends paid ($
0.33
per share)
-
-
-
( 7,990 )
-
( 7,990 )
Class A common stock sold through employee stock purchase
plan —
26,957
shares
1
-
293
-
-
294
Class B common stock sold through stock option plans —
0 shares
-
-
-
-
-
-
Class A common stock issued through restricted stock grant plans —
307,354
shares
10
-
587
8
-
605
Repurchase and retirement of treasury shares –
618,056
shares
( 22 )
-
-
( 9,034 )
-
( 9,056 )
Balance — May 2, 2020
$
750
$
59
$
111,693
$
158,025
$
1,125
$
271,652
See notes to condensed consolidated financial statements (unaudited).
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
6
NOTE 1 -
GENERAL
:
The condensed
consolidated financial
statements as
of May
1, 2021
and for
the thirteen-
week periods
ended May
1, 2021
and May
2, 2020
have been
prepared from
the accounting
records of
The Cato
Corporation and its
wholly-owned subsidiaries (the
“Company”), and all
amounts shown are
unaudited.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial
statements have been
included.
All such adjustments
are of a
normal, recurring nature
unless otherwise
noted.
The results of the interim period may not be indicative of the results expected for
the entire year.
The interim financial statements should
be read in conjunction with
the consolidated financial statements
and notes
thereto, included
in the
Company’s Annual
Report on
Form 10-
K
for the
fiscal year
ended
January 30, 2021.
Amounts as of January 30, 2021 have been derived from the audited balance sheet, but
do not include all disclosures required by accounting principles generally
accepted in the United States of
America.
On May 20, 2021, the Board of Directors declared the quarterly dividend at $0.11 per share.
COVID-19
Update
The COVID-19 pandemic adversely
impacted the Company's business,
financial condition and operating
results through fiscal 2020.
The first quarter of
2021 saw significant improvements in
sales compared to
2020.
This improvement was
primarily attributable to
government stimulus, increased
customer traffic,
states continuing
to lift
capacity limits
as more
people are
vaccinated, consumers’
increasing comfort
level with
venturing out
to social
events
and
customers’ preparing
to return
to work.
However, the
Company’s sales
were well below 2019
sales for the
comparable period, and there
is still a
high level of
uncertainty regarding the
lingering effects of
the COVID-19 pandemic
and the
continued impact on
the
Company’s customers’
buying habits.
The Company
faces
additional uncertainty
from the
continued
effects of disruption in the global supply chain and available workers as it attempts
to hire associates as its
operating hours
continue to
expand. The
Company expects
that these
uncertainties and
perhaps others
related to the
pandemic will continue
to impact the
Company in fiscal
2021 and possibly
beyond.
The
adverse financial impacts associated with the continued
effects of, and uncertainties related to, the
COVID-19 pandemic include, but
are not limited
to, (i) lower net
sales in markets affected
by the actual
or potential
outbreak, whether
due to
state and
local orders,
reductions in
store traffic
and customer
demand, labor
shortages, or
all of
these factors,
(ii) lower
net sales
caused by
the delay
of inventory
production and fulfillment,
(iii) and
incremental costs associated
with efforts
to mitigate the
effects of
the outbreak, including increased freight and logistics costs and other
expenses.
The extent
to which
the COVID
-19 pandemic
ultimately impacts
the Company’s
business, financial
condition, results of operations, cash flows, and liquidity may
differ from management’s current estimates
due to inherent
uncertainties regarding the
duration and further
spread of the
outbreak or its
variants, its
severity, actions taken
to contain the virus or
treat its impact, and how
quickly and to what extent normal
economic and operating conditions can resume.
While the Company currently anticipates a continuation of the adverse impacts
of COVID-19 during 2021
and possibly
beyond, the
duration and
severity of
these effects
will depend
on the
course of
future
developments, which are
highly uncertain, including
the relative speed
and success of,
as well as
public
confidence in, mitigation measures
such as the current
effort to vaccinate substantial
portions of the U.S.
and global
population, emerging
information regarding
variants of
the virus
or new
viruses and
their
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
7
potential impact on
current mitigation efforts,
public attitudes toward
continued compliance with
containment and
mitigation measures, and
possible new information
and understanding that
could alter
the course and duration of current measures to combat the spread of the virus.
Recently
Adopted
Accounting
Policies
In December 2019,
the FASB
issued ASU 2019-
12,
Income Taxes
(Topic 740):
Simplifying the
Accounting for Income Taxes
. The new accounting
rules reduce complexity by
removing specific
exceptions to
general principles
related to
intraperiod tax
allocations, ownership
changes in
foreign
investments, and
interim period
income tax
accounting for
year-to-date losses
that exceed
anticipated
losses. The new
accounting
rules also simplify
accounting for franchise
taxes that are
partially based on
income, transactions
with a
government that
result in
a step
up in
the tax
basis of
goodwill, separate
financial statements of legal entities that are not subject
to tax, and enacted changes in tax laws
in interim
periods. The
Company adopted this
accounting standards update
on the
first day
of the
first quarter
of
2021 with no material impact on its Condensed Consolidated Financial
Statements.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
8
NOTE 2 -
EARNINGS
PER SHARE:
Accounting
Standard
Codification
(“ASC”)
260 –
Earnings
Per Share
requires
dual presentation
of basic
and
diluted
Earnings
Per Share
(“EPS”)
on the face of all
income statements
for all entities
with complex
capital
structures.
The Company
has presented
one basic
EPS and
one diluted
EPS amount
for all common
shares in
the accompanying
Condensed
Consolidated
Statements
of Income
(Loss) and
Comprehensive
Income
(Loss).
While the Company’s certificate of
incorporation
provides
the right for
the Board of
Directors
to declare
dividends
on Class
A shares
without
declaration
of commensurate
dividends
on Class
B shares,
the Company
has historically
paid the
same dividends
to both Class
A and Class
B shareholders
and the Board
of Directors
has resolved
to continue
this practice.
Accordingly,
the Company’s
allocation
of income
for purposes
of the
EPS computation is the
same for Class
A and Class
B shares and
the EPS amounts
reported
herein
are
applicable
to both
Class A
and Class
B shares.
Basic EPS is
computed
as net income less
earnings
allocated
to non-vested equity awards divided by
the
weighted
average
number of common shares outstanding
for the period.
Diluted
EPS reflects the potential
dilution
that could occur
from common shares
issuable
through
stock options and
the Employee Stock
Purchase
Plan.
Three Months Ended
May 1, 2021
May 2, 2020
(Dollars in thousands)
Numerator
Net earnings (loss)
$
20,713
$
( 28,417 )
Earnings (loss) allocated to non-vested equity awards
( 942 )
1,135
Net earnings (loss) available to common stockholders
$
19,771
$
( 27,282 )
Denominator
Basic weighted average common shares outstanding
21,489,162
22,959,887
Diluted weighted average common shares outstanding
21,489,162
22,959,887
Net income (loss) per common share
Basic earnings (loss) per share
$
0.92
$
( 1.19 )
Diluted earnings (loss) per share
$
0.92
$
( 1.19 )
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
9
NOTE 3 –
ACCUMULATED
OTHER COMPREHENSIVE
INCOME:
The following table sets
forth information
regarding
the reclassification
out of A
ccumulated
other
comprehensive
income
(in thousands)
for the
three months
ended May
1, 2021:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 30, 2021
$
1,155
Other comprehensive income (loss) before
reclassification
( 173 )
Amounts reclassified from accumulated
other comprehensive income (b)
39
Net current-period other comprehensive income (loss)
( 134 )
Ending Balance at May 1, 2021
$
1,021
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI").
(b) Includes $
51
impact of accumulated other comprehensive income reclassifications into Interest and other
income for
net gains on available-for-sale securities. The tax impact of this reclassification was $
12
.
The following table sets
forth information
regarding
the reclassification
out of A
ccumulated
other
comprehensive
income
(in thousands)
for the
three months
ended May
2, 2020:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at February 1, 2020
$
1,423
Other comprehensive income (loss) before
reclassification
( 802 )
Amounts reclassified from accumulated
other comprehensive income (b)
504
Net current-period other comprehensive income (loss)
( 298 )
Ending Balance at May 2, 2020
$
1,125
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI").
(b) Includes $
655
impact of accumulated other comprehensive income reclassifications into Interest and other
income for net gains on available-for-
sale securities. The tax impact of this reclassification was $
151
.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
10
NOTE 4 – FINANCING ARRANGEMENTS:
As of May
1, 2021, the Company had
an unsecured revolving credit agreement
allowing
the Company to
borrow $
35.0
million
less the balance
of any letters
of credit as
discussed
below. On
June 2, 2020,
the
Company
signed an amendment extending the revolving credit agreement through May 2023.
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 May 1, 2021.
There were no borrowings
outstanding
under this credit
facility
as of May 1, 2021 or January 30, 2021.
The weighted
average
interest
rate under
the credit
facility
was zero
at May 1,
2021 due
to no borrowings
outstanding.
At May 1, 2021
and January
30, 2021,
the Company
had no outstanding
letters
of credit
relating
to purchase
commitments.
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
The Company has determined
that it has four operating segments,
as defined under ASC 280-10,
including
Cato, It’s
Fashion,
Versona and
Credit.
As outlined in
ASC 280-10, the
Company
has two
reportable
segments:
Retail and Credit.
The Company has aggregated
its three retail operating
segments,
including
e-
commerce,
based on
the aggregation
criteria
outlined
in ASC 280-10,
which states
that two
or more
operating
segments
may be aggregated
into a single reportable
segment
if aggregation
is consistent
with the objective
and basic principles of ASC 280
-10, which require the segments to have
similar
economic
characteristics,
products,
production
processes,
clients
and methods
of distribution.
The Company’s
retail operating
segments
have similar
economic
characteristics
and similar
operating,
financial
and competitive
risks.
They are similar in
nature of product, as they
all offer women’s apparel,
shoes and accessories.
Merchandise
inventory
for 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 operating segments is distributed to
retail stores in a
similar
manner
through
the Company’s
single distribution
center and
is subsequently
distributed
to clients
in a similar
manner.
The Company
operates its
women’s fashion
specialty retail
stores in
32 states
as of
May 1,
2021,
principally in the
southeastern United States. The Company offers its own credit card to its customers
and
all credit
authorizations,
payment
processing
and collection
efforts are
performed
by a separate
subsidiary
of
the Company.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
11
NOTE 5 – REPORTABLE
SEGMENT INFORMATION (CONTINUED):
The following
schedule
summarizes
certain
segment information
(in thousands):
Three Months Ended
May 1, 2021
Retail
Credit
Total
Revenues
$ 212,547
$ 538
$ 213,085
Depreciation
3,042
-
3,042
Interest and other income
( 663 )
-
( 663 )
Income (loss) before taxes
23,540
254
23,794
Capital expenditures
554
-
554
Three Months Ended
May 2, 2020
Retail
Credit
Total
Revenues
$ 99,890
$ 842
$ 100,732
Depreciation
4,006
-
4,006
Interest and other income
( 1,851 )
-
( 1,851 )
Income (loss) before taxes
( 37,923 )
392
( 37,531 )
Capital expenditures
5,311
-
5,311
Retail
Credit
Total
Total assets as of May 1, 2021
$ 575,335
$ 42,585
$ 617,920
Total assets as of January 30, 2021
549,349
42,103
591,452
The Company evaluates
segment
performance
based on
income
before taxes.
The Company does
not
allocate
certain
corporate
expenses
or income
taxes to
the credit
segment.
The following
schedule
summarizes
the direct
expenses
of the credit segment
which are reflected
in Selling,
general
and administrative
expenses
(in thousands):
Three Months Ended
May 1, 2021
May 2, 2020
Payroll
$
117
$
152
Postage
78
111
Other expenses
89
187
Total expenses
$
284
$
450
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
12
NOTE 6 – STOCK BASED COMPENSATION:
As of May
1, 2021,
the Company had two
long-term
compensation
plans pursuant to which
stock-based
compensation
was outstanding or
could be
granted.
The 2018
Incentive
Compensation
Plan and
2013
Incentive
Compensation
Plan are
for the granting
of various
forms
of equity-based
awards,
including
restricted
stock and
stock options
for grant,
to officers,
directors
and key
employees.
Effective
May 24,
2018,
shares for
grant were
no longer
available
under the
2013 Incentive
Compensation
Plan.
The following table presents the
number
of options and shares
of restricted stock initially authorized and
available
for grant
under each
of the plans
as of May
1, 2021:
2013
2018
Plan
Plan
Total
Options and/or restricted stock initially authorized
1,500,000
4,725,000
6,225,000
Options and/or restricted stock available for grant:
May 1, 2021
-
3,564,915
3,564,915
In accordance with ASC
718, the fair value
of current restricted stock
awards is estimated on
the date of
grant based on
the market price
of the Company’s
stock and is
amortized to compensation
expense on a
straight-line basis over
the related
vesting periods. As
of May 1,
2021 and January
30, 2021, there
was
$
14,763,000
and $
10,550,000
, respectively,
of total unrecognized compensation
expense related to
nonvested restricted stock
awards, which had
a remaining weighted-average
vesting period of
3.0
years
and
2.1
years, respectively. The
total compensation expense during
the three months
ended May 1, 2021
was $
283,000
compared to
$
606,000
for the
three months
ended May
2, 2020.
These expenses
are
classified as a component of
Selling, general and administrative expenses in
the Condensed Consolidated
Statements of Income (Loss).
The following
summary
shows the changes
in the shares of unvested
restricted
stock outstanding
during
the
three months ended May 1,
2021:
Weighted
Average
Number of
Grant Date Fair
Shares
Value
Per Share
Restricted stock awards at January 30, 2021
1,023,956
$
15.33
Granted
406,994
13.48
Vested
( 175,673 )
22.21
Forfeited or expired
( 10,436 )
13.67
Restricted stock awards at May 1, 2021
1,244,841
$
13.77
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
13
The Company’s Employee Stock Purchase Plan
allows
eligible
full-time
employees
to purchase a limited
number of shares of the Company’s Class
A Common Stock during each semi-annual offering period at a
15% discount
through
payroll
deductions.
During
the three
months
ended May
1, 2021 and
May 2, 2020,
the
Company
sold
19,248
and
26,957
shares to employees
at an average discount
of $
1.17
and $
1.64
per share,
respectively,
under the Employee Stock Purchase
Plan. The compensation
expense recognized
for the 15%
discount
given under the Employee Stock Purchase
Plan was approximately $
23,000
and $
44,000
for the
three months ended
May 1,
2021 and
May 2,
2020, respectively.
These expenses ar
e
classified
as a
component
of S
elling,
general
and administrative
expenses
in the Condensed Consolidated Statements o
f
Income
(Loss).
NOTE 7 –
FAIR VALUE MEASUREMENTS:
The following tables
set forth information regarding
the Company’s financial assets and liabilities that are
measured
at fair
value (in
thousands)
as of May
1, 2021
and January
30, 2021:
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
May 1, 2021
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
24,490
$
-
$
24,490
$
-
Corporate Bonds
90,093
-
90,093
-
U.S. Treasury/Agencies Notes and Bonds
29,120
-
29,120
-
Cash Surrender Value of Life Insurance
11,585
-
-
11,585
Asset-backed Securities (ABS)
15,778
-
15,778
-
Corporate Equities
846
846
-
-
Commercial Paper
1,821
-
1,821
-
Total Assets
$
173,733
$
846
$
161,302
$
11,585
Liabilities:
Deferred Compensation
( 10,271 )
-
-
( 10,271 )
Total Liabilities
$
( 10,271 )
$
-
$
-
$
( 10,271 )
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
14
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 30,
2021
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
23,254
$
-
$
23,254
$
-
Corporate Bonds
67,566
-
67,566
-
U.S. Treasury/Agencies Notes and Bonds
17,869
-
17,869
-
Cash Surrender Value of Life Insurance
11,263
-
-
11,263
Asset-backed Securities (ABS)
16,064
-
16,064
-
Corporate Equities
703
703
-
-
Commercial Paper
2,069
-
2,069
-
Total Assets
$
138,788
$
703
$
126,822
$
11,263
Liabilities:
Deferred Compensation
( 10,316 )
-
-
( 10,316 )
Total Liabilities
$
( 10,316 )
$
-
$
-
$
( 10,316 )
The Company’s investment
portfolio
was primarily
invested
in corporate
bonds and tax-exempt
and taxable
governmental
debt securities
held in managed
accounts
with underlying
ratings
of A or better
at May 1, 2021
and January 30, 2021.
The state, municipal and corporate bonds have con
tractual
maturities
which range
from
four days
to
4.5
years.
The U.S. Treasury
Notes have
contractual
maturities
which range
from
14
days
to
2.5
years. These
securities
are classified
as available-for-sale
and are recorded
as Short-term
investments,
Restricted
cash, Restricted
short-term
investments
and Other assets
on the accompanying
Condensed
Consolidated
Balance
Sheets.
These assets
are carried
at fair value with
unrealized
gains and
losses reported
net of taxes in Accumulated
other comprehensive
income.
The asset-backed
securities
are bonds comprised
of auto loans
and bank credit
cards that
carry AAA
ratings.
The auto loan
asset-backed
securities
are backed
by static
pools of auto
loans that
were originated
and serviced
by captive
auto finance
units, banks
or finance
companies.
The bank
credit card asset
-backed
securities
are backed by
revolving
pools of
credit
card
receivables
generated
by account holders
of cards
from American Express,
Citibank,
JPMorgan Chase,
Capital
One, and
Discover.
Additionally,
at May 1,
2021, the
Company
had $
0.8
million
of corporate
equities
and deferred
compensation
plan assets of $
11.6
million.
At January 30, 2021, the Company
had $
0.7
million
of corporate
equities
and
deferred
compensation
plan assets
of $
11.3
million.
All of these
assets are
recorded
within Other
assets in
the
Condensed
Consolidated
Balance
Sheets.
Level 1 category
securities
are measured
at fair value
using quoted
active market
prices.
Level 2 investment
securities
include
corporate
and municipal bonds for
which quoted prices may
not be available on
active
exchanges
for identical instruments.
Their fair value is principally based on market
values
determined
by
management
with assistance of
a third
-party
pricing
service.
Since quoted prices
in active markets
for
identical
assets
are not available,
these prices
are determined
by the pricing
service
using observable
market
information
such as quotes from less active markets
and/or quoted
prices
of securities
with similar
characteristics,
among other
factors.
Deferred
compensation
plan assets
consist
of life insurance
policies.
These life
insurance
policies
are valued
based on the
cash surrender
value of the
insurance
contract,
which is
determined
based on
such factors
as the
fair value
of the underlying
assets and
discounted
cash flow
and are therefore
classified
within Level
3 of the
valuation
hierarchy.
The Level 3
liability
associated
with the life
insurance
policies
represents
a deferred
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
15
compensation
obligation,
the value of which is tracked via underlying insurance funds’
net asset values, as
recorded
in Other
noncurrent
liabilities
in the
Condensed
Consolidated
Balance
Sheet.
These funds are
designed
to mirror
mutual
funds and
money
market
funds that
are observable
and actively
traded.
The following tables summarize the change in
fair value of the
Company’s financial
assets and liabilities
measured
using Level
3 inputs
as of May
1, 2021
and January
30, 2021
(dollars
in thousands):
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at January 30, 2021
$
11,263
Redemptions
-
Additions
-
Total gains or (losses)
Included in interest and other income (or changes in net assets)
322
Included in other comprehensive income
-
Ending Balance at May 1, 2021
$
11,585
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred Compensation
Beginning Balance at January 30, 2021
$
( 10,316 )
Redemptions
547
Additions
( 145 )
Total (gains) or losses
Included in interest and other income (or changes in net assets)
( 357 )
Included in other comprehensive income
-
Ending Balance at May 1, 2021
$
( 10,271 )
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at February 1, 2020
$
10,517
Redemptions
-
Additions
-
Total gains or (losses)
Included in interest and other income (or changes in net assets)
746
Included in other comprehensive income
-
Ending Balance at January 30, 2021
$
11,263
Fair Value
Measurements Using
Significant Unobservable
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
16
Liability Inputs (Level 3)
Deferred Compensation
Beginning Balance at February 1, 2020
$
( 10,391 )
Redemptions
1,714
Additions
( 652 )
Total (gains) or losses
Included in interest and other income (or changes in net assets)
( 987 )
Included in other comprehensive income
-
Ending Balance at January 30, 2021
$
( 10,316 )
The presentation in the table above has been revised to reflect current year presentation.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
17
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:
In March 2020
,
the FASB
issued ASU 2020-
04,
Reference Rate
Reform (Topic
848): Facilitation of
the
Effects of Referenc
e
Rate Reform on Financial Reporting
. In January 2021,
the FASB clarified
the scope
of that guidance
with the issuance of
ASU 2021-01, “Reference Rate
Reform: Scope.” The new
accounting rules provide
optional expedients and
exceptions for
applying GAAP to
contracts and
other
transactions affected by reference
rate reform. The amendments
in this standard can
be adopted any time
before the
fourth quarter of
2022. The Company
is currently in
the process of
evaluating the
impact of
adoption of
the new
rules on
the Company’s
financial condition,
results of
operations, cash
flows and
disclosures.
NOTE 9 – INCOME TAXES:
The Company had
an effective tax
rate for the
first quarter of
2021 of
12.9
% (Expense) compared
to an
effective tax
rate of
24.3
% (Benefit) for
the first quarter
of 2020. The
decrease in the
2021 first quarter
tax rate
was primarily due
to higher
pre-tax earnings and
ability to realize
foreign tax credits,
offset by
increases in
state income
taxes and
an upward
adjustment in
the reserves
for uncertain
tax positions
specific to
state income
taxes in
the first
quarter of
2020. Further,
the Coronavirus
Aid, Relief
and
Economic Security
Act (“
CARES”) allows
the Company
to carryback
losses five
years; therefore,
the
Company has recorded $33.0
million of estimated refunds
calculated through the first
quarter of 2021 in
Accounts receivable in the Condensed Consolidated Balance Sheets.
NOTE 10 – COMMITMENTS AND CONTINGENCIES:
The Company is, from time to time, involved in routine litigation incidental to the conduct of its business,
including litigation
regarding the
merchandise that
it sells,
litigation regarding
intellectual property,
litigation instituted by
persons injured upon
premises under its
control, litigation with
respect to various
employment matters, including
alleged discrimination and
wage and
hour litigation, and
litigation with
present or former employees.
Although such litigation
is routine and
incidental to the conduct
of the Company’s
business, as with
any
business of
its size
with a
significant number
of employees
and significant
merchandise sales,
such
litigation could result
in large
monetary awards. Based
on information currently
available, management
does not
believe that
any reasonably possible
losses arising
from current
pending litigation
will have a
material adverse effect
on its condensed
consolidated financial statements.
However, given
the inherent
uncertainties involved in such
matters, an adverse outcome
in one or
more such matters could
materially
and adversely
affect the
Company’s financial
condition, results
of opera
tions and
cash flows
in any
particular reporting period. The Company accrues for
these matters when the liability is deemed probable
and reasonably estimable.
NOTE 11 – REVENUE RECOGNITION:
The Company
recognizes sales
at the
point of
purchase when
the customer
takes possession
of the
merchandise and
pays for
the purchase,
generally with cash
or credit.
Sales from purchases
made with
Cato credit, gift cards
and layaway sales from stores
are also recorded when
the customer takes
possession of the merchandise.
E-commerce sales are recorded
when the risk of
loss is transferred to
the
customer. Gift cards are recorded
as deferred revenue until they are redeemed or
forfeited. Layaway sales
are recorded
as deferred
revenue until
the customer
takes possession
or forfeits
the merchandise.
Gift
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
18
cards do not have expiration
dates. A provision is made
for estimated merchandise returns based on
sales
volumes and the
Company’s experience;
actual returns have
not varied materially from
historical
amounts. A
provision is
made for
estimated write-offs
associated with
sales made with
the Company’s
proprietary credit card.
Amounts related to
shipping and handling
billed to customers
in a sales
transaction are classified
as Other revenue
and the costs
related to shipping
product to customers
(billed
and accrued) are classified as Cost of goods sold.
The Company offers
its own proprietary credit
card to customers.
All credit activity is
performed by the
Company’s wholly-
owned subsidiaries.
None of the
credit card receivables
are secured.
The Company
estimated customer credit losses of $
131,000
and $
69,000
for the periods ended May 1,
2021 and May 2,
2020, respectively, on
sales purchased by the Company’s
proprietary credit card of $
4.4
million and $
2.6
million for the periods ended May 1, 2021 and May 2, 2020, respectively.
The following
table provides
information about
receivables and
contract liabilities
from contracts
with
customers (in thousands):
Balance as of
May 1, 2021
January 30, 2021
Proprietary Credit Card Receivables, net
$
9,094
$
9,606
Gift Card Liability
$
6,832
$
8,155
NOTE 12 – LEASES:
The Company
determines whether
an arrangement
is a
lease at
inception. The
Company has
operating
leases for
stores, offices
and equipment. Its
leases have remaining
lease terms of
one year
to 10
years,
some of which
include options to
extend the lease
term for up
to five years,
and some of
which
include
options to terminate
the lease within
one year.
The Company considers
these options in
determining the
lease term used
to establish its
right-of-use assets and
lease liabilities. The
Company’s lease
agreements
do not contain any material residual value guarantees or material restrictive
covenants.
As most
of the
Company’s leases
do not
provide an
implicit rate,
it uses
its estimated
incremental
borrowing rate based on
the information available at
commencement date of the
lease in determining the
present value of lease payments.
The components of lease cost are shown below (in thousands):
Three Months Ended
May 1, 2021
May 2, 2020
Operating lease cost (a)
$
16,726
$
16,993
Variable
lease cost (b)
$
793
$
80
(a) Includes right-of-use asset amortization of ($1.2) million and
($1.7) million for the three months ended
May 1, 2021 and May 2, 2020, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the balance sheet.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY
2, 2020
19
Supplemental cash flow information
and non-cash activity related
to the Company’s
operating leases are
as follows (in thousands):
Operating cash flow information:
Three Months Ended
May 1, 2021
May 2, 2020
Cash paid for amounts included in the measurement of lease liabilities
$
15,947
$
15,499
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
$
734
$
28,197
Weighted-average remaining
lease term
and discount
rate for
the Company’s
operating leases
are as
follows:
As of
May 1, 2021
May 2, 2020
Weighted-average remaining lease term
2.7 years
3.2 years
Weighted-average discount rate
3.73 %
4.36 %
As of May 1, 2021,
the maturities of lease liabilities by fiscal year for the Company’s operating leases
are
as follows (in thousands):
Fiscal Year
2021 (a)
$
51,803
2022
48,971
2023
36,102
2024
22,731
2025
13,915
Thereafter
36,870
Total lease payments
210,392
Less: Imputed interest
18,854
Present value of lease liabilities
$
191,538
(a) Excluding the 3 months ended May 1, 2021.
20
THE CATO CORPORATION
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The following
information should
be read
along with
the unaudited
Condensed Consolidated
Financial
Statements, including the accompanying Notes
appearing in this report. Any
of the following are
“forward-looking” statements within the
meaning of Section 27A of the Securities Act of 1933,
as
amended, and
Section 21E of
the Securities
Exchange Act
of 1934,
as amended:
(1) statements in
this
Form 10-Q
that reflect
projections or
expectations of
our future
financial or
economic performance;
(2) statements that
are not
historical information;
(3) statements of
our be
liefs, intentions,
plans and
objectives for future operations, including those
contained in “Management’s Discussion
and Analysis of
Financial Condition and Results
of Operations”; (4) statements relating
to our operations or
activities for
our fiscal
year ending January
29, 2022 (“fiscal 2021”) and beyond, including,
but not limited
to,
statements regarding expected
amounts of capital
expenditures and store
openings, relocations, remodels
and closures
and statements
regarding the
potential impact
of the
COVID-19 pandemic
and related
responses and mitigation efforts
on our business, results of operations and financial
condition; and
(5) statements relating to our future contingencies. When possible, we have attempted to identify forward-
looking statements by
using words such
as “will,” “expects,”
“anticipates,” “approximates,” “believes,”
“estimates,” “hopes,” “intends,” “may,”
“plans,” “could,” “would,” “should” and
any variations or
negative formations of
such words and
similar expressions. We
can give no
assurance that actual
results
or events will not
differ materially from those
expressed or implied in any
such forward-looking
statements. Forward-looking statements included in this report are based on information available to us as
of the filing
date of this
report, but subject
to known and
unknown risks, uncertainties
and other factors
that could
cause actual
results to
differ materially
from those
contemplated by
the forward
-looking
statements.
Such factors include,
but are not
limited to, the
following:
any actual or
perceived
deterioration in the conditions that drive consumer confidence and spending, including, but not limited to,
prevailing social,
economic, political
and public
health conditions
and uncertainties,
levels of
unemployment, fuel, energy
and food costs,
wage rates, tax
rates, interest rates,
home values, consumer
net worth and
the availability of
credit; changes in
laws or regulations
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
COVID-19 pandemic) or similar conditions that may affect
our sales or operations; inventory risks due to
shifts in
market demand, including
the ability
to liquidate
excess inventory at
anticipated margins;
and
other factors discussed under “Risk Factors” in Part I, Item
1A of our annual report on Form 10-
K
for the
fiscal year ended January 30,
2021 (“fiscal 2020”), as amended
or supplemented, and in other
reports we
file with or
furnish to the
Securities and Exchange
Commission (“SEC”) from
time to time.
We do
not
undertake, and expressly
decline, any obligation
to update
any such forward-
looking information
contained in this report, whether as a result of new information, future events,
or otherwise.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
21
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company’s accounting
policies
are more fully
described
in “Management’s
Discussion
and Analysis
of
Financial
Condition
and Results
of Operations”
in the Company’s
Annual
Report
on Form
10-K
for the
fiscal
year ended January
30, 2021.
As disclosed
in “Management’s
Discussion
and Analysis
of Financial
Condition
and Results of Operations,”
the preparation
of the Company’s financial statements
in conformity
with generally
accepted
accounting
principles
in the United States
(“GAAP”)
requires
management
to make
estimates
and assumptions
about future
events that
affect the
amounts
reported
in the financial
statements
and
accompanying
notes. Future
events and
their effects
cannot be
determined
with absolute
certainty. Therefore,
the determination
of estimates requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and
such differences may
be material to
the financial statements. The
most significant
accounting
estimates
inherent
in the preparation
of the Company’s
financial
statements
include
the allowance
for customer credit
losses,
inventory
shrinkage,
the ca
lculation
of potential asset
impairment,
workers’
compensation,
general
and auto insurance liabilities, reserves
relating
to self-insured
health
insurance,
and
uncertain
tax positions.
The Company’s
critical
accounting
policies
and estimates
are discussed
with the
Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
22
RESULTS OF OPERATIONS:
The following
table sets
forth, for
the periods
indicated,
certain items
in the Company's
unaudited
Condensed
Consolidated
Statements
of Income
as a percentage
of total
retail sales:
Three Months Ended
May 1, 2021
May 2, 2020
Total retail sales
100.0
%
100.0
%
Other revenue
0.9
1.9
Total revenues
100.9
101.9
Cost of goods sold (exclusive of depreciation)
58.5
84.6
Selling, general and administrative (exclusive of depreciation)
29.9
53.1
Depreciation
1.4
4.1
Interest and other income
(0.3)
(1.9)
Income (loss) before income taxes
11.3
(38.0)
Net income (loss)
9.8
(28.8)
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
23
RESULTS OF OPERATIONS
(CONTINUED):
COVID-19
Update
The COVID-19 pandemic adversely
impacted the Company's business,
financial condition and operating
results through fiscal 2020.
The first quarter of
2021 saw significant improvements in
sales compared to
2020.
This improvement was
primarily attributable to
government stimulus, increased
customer traffic,
states continuing
to lift
capacity limits
as more
people are
vaccinated, consumers’
increasing comfort
level with
venturing out
to social
events
and
customers’ preparing
to return
to work.
However, the
Company’s sales
were well below 2019
sales for the
comparable period, and there
is still a
high level of
uncertainty regarding the
lingering effects of
the COVID-19 pandemic
and the
continued impact on
the
Company’s customers’
buying habits.
The Company
faces additional
uncertainty from
the continued
effects of disruption in the global supply chain and available workers as it attempts
to hire associates as its
operating hours
continue to
expand. The
Company expects
that these
uncertainties and
perhaps others
related to the
pandemic will continue
to impact the
Company in fiscal
2021 and possibly
beyond.
The
adverse financial impacts associated with the continued
effects of, and uncertainties related to, the
COVID-19 pandemic include, but
are not limited
to, (i) lower net
sales in markets affected
by the actual
or potential
outbreak, whether
due to
state and
local orders,
reductions in
store traffic
and customer
demand, labor
shortages, or
all of
these factors,
(ii) lower
net sales
caused by
the delay
of inventory
production and fulfillment,
(iii) and
incremental costs associated
with efforts
to mitigate the
effects of
the outbreak, including increased freight and logistics costs and other
expenses.
The extent
to which
the COVID
-19 pandemic
ultimately impacts
the Company’s
business, financial
condition, results of operations, cash flows, and liquidity may differ from management’s current
estimates
due to inherent
uncertainties regarding the
duration and further
spread of the
outbreak or its
variants, its
severity, actions taken
to contain the virus or
treat its impact, and how
quickly and to what extent normal
economic and operating conditions can resume.
While the Company currently anticipates a continuation of the adverse impacts
of COVID-19 during 2021
and possibly
beyond, the
duration and
severity of
these effects
will depend
on the
course of
future
developments, which are
highly uncertain, including
the relative speed
and success of,
as well as
public
confidence in, mitigation measures
such as the current
effort to vaccinate substantial
portions of the U.S.
and global
population, emerging
information regarding
variants of
the virus
or new
viruses and
their
potential impact on
current mitigation efforts,
public attitudes toward
continued compliance with
containment and
mitigation measures, and
possible new information
and understanding that
could alter
the course and duration of current measures to combat the spread of the virus.
Comparison
of First Quarter
of 2021
with 2020
Total retail sales for the first
quarter
were $211.2 million
compared
to last year’s first
quarter
sales of $98.8
million.
Sales increased
primarily
due to an increase
in same-store
sales and
sales from
new stores,
partially
offset by permanently closed stores in
2020. The 111.0%
increase
in same-store sales is primarily due
to
stores being closed from
March 19, 2020
through
the end of
the first quarter of
2020. Same store
sales
include
stores
that have been open more than 15 months.
Stores
that have been relocated or expanded are
also included
in the same
store sales
calculation
after they
have been
open
more than
15 months.
The method
of calculating
same store sales
varies
across the retail
industry.
As a result, our same
store sales
calculation
may not
be comparable
to similarly
titled measures
reported
by other
companies.
E-commerce
sales were
less
than 5.0% of sales for
the first quarter of fiscal 2021
and are included in the
same-store
sales calculation.
Total revenues, comprised of
retail sales and
other revenue (principally finance charges and
late fees on
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
customer
accounts
receivable,
shipping
charged to customers
for e-commerce
purchases
and layaway fees),
were $213.1
million
for the first
quarter
ended May
1, 2021, compared
to $100.7
million
for the first
quarter
ended May
2, 2020. The
Company
operated
1,325 stores
at May 1, 2021
compared
to 1,300 stores
at the end
of last fiscal
year’s first
quarter.
For the first
three months
of fiscal 2021,
the Company
permanently
closed
five stores.
The Company
currently
expects
to close
approximately
25 stores
in fiscal
2021.
Credit revenue
of $0.5
million
represented
0.3% of
total revenues
in the first
quarter
of fiscal
2021, compared
to 2020 credit revenue of
$0.8 million or 0.8% of
total revenues.
Credit revenue is comprised of interest
earned on
the Company’s
private
label credit
card portfolio
and related
fee income.
Credit revenue
decreased
slightly
for the most
recent comparable
period due
to lower
finance
charge income
and lower
late fee
income
from sales
using the
Company’s proprietary
credit
card. Related
expenses
include
principally
payroll,
postage
and other administrative expenses, and totaled $0.3
million
in the first
quarter
of 2021, compared to
last
year’s first
quarter
expenses
of $0.5
million.
Other revenue,
a component
of total revenues,
was $1.9 million
for the first
quarter
of fiscal
2021, compared
to $1.9
million
for the
prior year’s
comparable
first quarter.
Cost of goods
sold was $123.7
million,
or 58.5% of retail
sales for the
first quarter
of fiscal 2021,
compared
to $83.6 million,
or 84.6% of retail sales in the first quarter of fiscal 2020.
The overall
decrease
in cost of
goods sold as
a percent of
retail sales for first
quarter
of 2021 resulted primarily from
the leveraging of
occupancy, buying and distribution
costs due to normalized sales and higher sales of regular priced goods.
Cost of goods sold includes merchandise
costs (net of discounts
and allowances),
buying costs,
distribution
costs, occupancy costs, freight and
inventory
shrinkage.
Net merchandise costs and in
-bound
freight
are
capitalized
as inventory costs.
Buying
and distribution costs
include
payroll,
payroll-related
costs and
operating
expenses
for the buying departments and distribution center.
Occupancy
costs include rent, real
estate taxes, insurance,
common
area maintenance, utilities and
maintenance
for stores
and distribution
facilities.
Total gross margin
dollars
(retail
sales less
cost of goods
sold exclusive
of depreciation)
increased
by 475.4%
to $87.6
million
for the
first quarter
of fiscal
2021 compared
to $15.2
million
in the first
quarter
of
fiscal 2020.
Gross margin
as presented
may not
be comparable
to those
of other
entities.
Selling,
general
and administrative
expenses
(“SG&A”)
primarily
include
corporate
and store
payroll,
related
payroll
taxes and benefits, insurance, supplies, advertising, bank and
credit
card processing fees.
SG&A
expenses
were 29.9% of retail sales
for the first quarter
of fiscal 2021, compared
to 53.1% of retail sales in
the first quarter of
fiscal 2020. SG&A as
a p
ercent of retail sales
decreased
primarily
due to
leveraging
expenses as a
result of normalized
sales and a
decrease in impairment
charges, partially offset
by higher
incentive compensation.
Depreciation
expense
was $3.0
million,
or 1.4%
of retail
sales for
the first
quarter
of fiscal
2021, compared
to
$4.0 million,
or 4.1%
of retail
sales for
the first
quarter
of fiscal
2020. The
decrease
in depreciation
expense
is
attributable
to lower
net fixed
assets
primarily
due to $13.7
million
of impairment
charges in
2020.
Interest
and other income
was $0.7
million,
or 0.3%
of retail sales
for the
first quarter of
fiscal 2
021,
compared
to $1.9 million,
or 1.9% of
retail sales
for the first
quarter
of fiscal
2020.
The decrease
is primarily
attributable
to lower interest
rates and smaller
gains from the
sale of investments,
partially
offset by an
increase
in short-term
investing.
Income tax expense was $3.1
million or 1.5% of retail
sales for the first
quarter of fiscal 2021, compared
to an income tax benefit of $9.1 million, or 9.2% of
retail sales for the first quarter of fiscal 2020. Income
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
tax expense for
the first quarter
of fiscal 2021
increased primarily as
a result of
higher pre-tax earnings.
The effective income tax rate for the first quarter of fiscal
2021 was 12.9%
(Expense) compared to 24.3%
(Benefit) for the first quarter
of 2020. The decrease in the
2021 first quarter tax rate was
primarily due to
higher pre-tax earnings
and the ability
to realize foreign
tax credits, partial
ly offset by
increases in state
income taxes in the first quarter of 2020.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company believes
that its cash, cash equivalents
and short-term
investments,
together
with cash flows
from operations
and borrowings
available
under its revolving
credit
agreement,
will be adequate
to fund the
Company’s regular
operating
requirements
and expected
capital
expenditures
for fiscal
2021 and the
next 12
months.
Cash provided by operating activities for the first
three months of fiscal 2021 was
primarily
generated
by
earnings
adjusted
for depreciation
and changes in working
capital.
The increase
in cash provided of $115.8
million
for the first three
months of fiscal 2021
as compared to the
first three months of
fiscal 2020 was
primarily
due to net income versus a net loss
,
a decrease in inventory, and an
increase
in accounts payable
and accrued
liabilities,
partially
offset by
a decrease
in store
impairment
charges.
At May 1, 2021,
the Company
had working
capital
of $130.5
million
compared
to $108.6
million
at January
30, 2021.
This increase
is primarily attributable
to higher short-term
investments,
partially
offset
by higher
accrued
incentive
compensation.
At May 1, 2021 and January 30,
2021, the Company had an unsecured
revolving credit agreement, which
provides for borrow
ings of up
to $35.0 million
less the balance
of letters of
credit discussed below.
The
revolving credit
agreement is
committed through
May 2023.
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 May 1, 2021.
There were no borrowings outstanding
under the credit
facility as of May 1, 2021 or January 30, 2021.
At May 1, 2021
and January
30, 2021,
the Company
had no outstanding
letters
of credit
relating
to purchase
commitments.
Expenditures
for pro
perty and
equipment
totaled
$0.6 million in
the first
three months of
fiscal 2021,
compared
to $5.3 million
in last year’s
first three
months.
For the full
fiscal 2021
year, the Company
expects
to invest
approximately
$3.1 million
in capital
expenditures.
Net cash
used by
investing
activities
totaled
$34.2 million
in the first
three months
of fiscal
2021 compared
to
$76.9 million provided
in the comparable period of fiscal 2020,
primarily
due to a
decrease
in the sale of
short-term
investments
and an
increase
in the
purchase
of short
-term investments,
partially
offset by
a
decrease
in capital
expenditures.
Net cash used
by financing
activities
totaled
$5.5 million
in the first
three months
of fiscal
2021 compared
to
$12.4 million
provided
in the comparable
period
of fiscal
2020, primarily
due to a decrease
in proceeds
from
the line of
credit,
partially
offset by no
dividends
paid in the
first quarter of fiscal 2021
and fewer stock
repurchases.
On May 20,
2021, the
Board of
Directors
declared
the quarterly
dividend
at $0.11 per
share.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
As of May
1, 2021, the
Company
had 1,445,488 shares remaining in open
authorizations
under its share
repurchase
program.
The Company
does not
use derivative
financial
instruments.
The Company’s investment
portfolio
was primarily
invested
in corporate
bonds and tax-exempt
and taxable
governmental
debt securities
held in managed
accounts
with underlying
ratings
of A or better
at May 1, 2021
and January 30, 2021.
The state, municipal and corporate bonds have contractual maturities which range
from four days
to 4.5 years.
The U.S. Treasury
Notes have
contractual
maturities
which range
from 14 days
to 2.5 years.
These securities
are classified
as available-for-sale
and are recorded
as Short-term
investments,
Restricted
cash, Restricted
short-term
investments
and Other assets
on the accompanying
Condensed
Consolidated
Balance
Sheets.
These assets
are carried
at fair value with
unrealized
gains and
losses reported
net of taxes in Accumulated
other comprehensive
income.
The asset-backed
securities
are bonds comprised
of auto loans
and bank credit
cards that
carry AAA
ratings.
The auto loan
asset-backed
securities
are backed
by static
pools of auto
loans that
were originated
and serviced
by captive
auto finance
units, banks
or finance
companies.
The bank
credit card asset
-backed
securities
are backed by
revolving
pools of
credit
card
receivables
generated
by account holders
of cards
from American Express,
Citibank,
JPMorgan Chase,
Capital
One, and
Discover.
Additionally,
at May 1,
2021,
the Company
had $0.8
million
of corporate
equities
and deferred
compensation
plan assets of $11.6 million.
At January 30, 2021, the Company
had $0.7 million
of corporate
equities
and
deferred
compensation
plan assets
of $11.3 million.
All
of these
assets are
recorded
within Other
assets in
the
Condensed
Consolidated
Balance
Sheets.
See Note
7, Fair
Value Measurements.
RECENT
ACCOUNTING
PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
27
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The Company
is subject
to market
rate risk
from exposure
to changes
in interest
rates based
on its
financing, investing and cash
management activities, but the
Company does not believe
such exposure is
material.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out
an evaluation,
with the
participation
of our Principal
Executive
Officer
and Principal
Financial
Officer, of the
effectiveness
of our disclosure controls and proc
edures as of
May 1, 2021
.
Based on this
evaluation,
our Principal
Executive
Officer and
Principal
Financial
Officer concluded
that, as
of May 1,
2021,
our disclosure
controls
and procedures,
as defined in Rule 13a-15(e),
under the Securities
Exchange
Act of
1934 (the “Exchange Act”),
were effective to
ensure
that information we are
required
to disclose in
the
reports
that we file
or submit under
the Exchange Act
is recorded, processed, summarized and
reported
within the
time periods
specified
in the SEC’s rules and
forms and that
such information
is accumulated
and
communicated
to our management,
including
our Principal
Executive
Officer
and Principal
Financial
Officer,
as appropriate
to allow
timely
decisions
regarding
required
disclosure.
CHANGES
IN INTERNAL
CONTROL
OVER FINANCIAL
REPORTING:
No change
in the Company’s
internal
control
over financial
reporting
(as defined
in Exchange
Act Rule
13a-
15(f)) has
occurred
during
the Company’s
fiscal quarter
ended May
1, 2021 that
has materially
affected,
or is
reasonably
likely to materially
affect, the Company’s
internal
control
over financial
reporting.
THE CATO CORPORATION
PART
II OTHER
INFORMATION
28
ITEM 1.
LEGAL PROCEEDINGS:
Not Applicable
ITEM 1A.
RISK FACTORS:
In addition
to the other
information
in this
report,
you should
carefully
consider
the factors
discussed
in Part
I,
“Item 1A. Risk Factors” in our
Annual
Report
on Form 10-K
for our fiscal year ended January 30,
2021.
These risks could materially
affect our business,
financial
condition
or future results;
however, they are not
the only
risks we
face.
Additional
risks and
uncertainties
not currently
known to
us or that
we currently
deem
to be immaterial
may also materially
adversely
affect our business,
financial
condition
or results of
operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS:
The following table summarizes the Company’s purchases of its common stock for the three months
ended May 1, 2021:
ISSUER
PURCHASES
OF EQUITY
SECURITIES
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Average
Part of Publicly
Value)
of Shares that may
of Shares
Price Paid
Announced Plans or
Yet be Purchased
Under
Period
Purchased
per Share (1)
Programs (2)
The Plans or Programs (2)
February 2021
-
$
-
-
March 2021
122,119
11.77
122,119
April 2021
303,542
13.81
303,542
Total
425,661
$
13.22
425,661
1,445,488
(1)
Prices include trading costs.
(2)
As of January
30, 2021, the
Company’s share
repurchase program had
1,871,149 shares
remaining in
open authorizations.
During the
first quarter
ended May
1, 2021,
the Company
repurchased and
retired 425,661 shares
under this
program for approximately
$5,629,130 or
an
average market price of $13.22 per share.
As of May 1, 2021, the Company had 1,445,488 shares
remaining in
open authorizations.
There is
no specified
expiration date
for the
Company’s
repurchase program.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES:
Not Applicable
THE CATO CORPORATION
PART
II OTHER
INFORMATION
29
ITEM 4.
MINE SAFETY DISCLOSURES:
Not Applicable
ITEM 5.
OTHER INFORMATION:
Not Applicable
ITEM 6.
EXHIBITS:
Exhibit
No.
Item
3.1
3.2
31.1*
31.2*
32.1*
32.2*
101.1*
The following materials from Registrant’s Quarterly Report on Form
10-Q
for the
fiscal quarter ended
May 1,
2021, formatted in
Inline
XBRL:
(i) Condensed
Consolidated
Statements
of Income
(Loss) and
Comprehensive
Income
(Loss)
for the Three
Months
ended May 1,
2021 and
May 2, 2020;
(ii) Condensed
Consolidated
Balance
Sheets at
May 1,
2021 and
January
30,
2021;
(iii) Condensed Consolidated
Statements
of Cash Flows for the
Three Months Ended May 1, 2021
and May 2,
2020;
(iv) Condensed Consolidated
Statements
of
Stockholders’
Equity for the
Three Months Ended May
1, 2021 and
May 2, 2020; and
(v) Notes
to Condensed
Consolidated
Financial
Statements.
104.1
Cover Page
Interactive Data
File (Formatted
in Inline
XBRL and
contained in the Interactive Data Files submitted as Exhibit 101.1*)
* Submitted electronically herewith.
THE CATO CORPORATION
PART
II OTHER
INFORMATION
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
THE CATO
CORPORATION
May 27, 2021
/s/ John P.
D. Cato
Date
John P.
D. Cato
Chairman, President and
Chief Executive Officer
May 27, 2021
/s/ John R. Howe
Date
John R. Howe
Executive Vice President
Chief Financial Officer
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