CATO CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
QUARTERLY REPORT PURSUANT
TO SECTION
13 OR 15(d)
OF THE SECURITIES
EXCHANGE
ACT OF
1934
For the quarterly period ended
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
(Exact name of registrant as specified in its
charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
,
,
(Address of principal executive offices)
(Zip Code)
(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
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.
X
No
Indicate
by
check
mark
whether
the
registrant
has
submitted
electronically
every
Interactive
Data
File
required
to
be
submitted
pursuant to Rule
405 of Regulation
S-T (§232.405
of this chapter)
during the preceding
12 months (or
for such shorter
period that the
registrant was required to submit such files).
X
No
Indicate by
check mark
whether the
registrant is
a large
accelerated filer,
an accelerated
filer, a
non-accelerated filer,
a smaller
reporting
company,
or
an
emerging
growth
company.
See
the
definitions
of
“large
accelerated
filer,”
“accelerated
filer,”
“smaller
reporting
company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
☑
☐
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
October
28,
2023,
there
were
outstanding.
2
THE CATO CORPORATION
FORM 10-Q
Quarter Ended October 28, 2023
Table
of Contents
Page No.
PART
I – FINANCIAL INFORMATION
(UNAUDITED)
Item 1.
Financial Statements (Unaudited):
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
3
For the Three Months and Nine Months Ended October
28, 2023 and October 29,
2022
Condensed Consolidated Balance Sheets
4
At October 28, 2023 and January 28,
2023
Condensed Consolidated Statements of Cash Flows
5
For the Nine Months Ended October 28, 2023 and
October 29, 2022
Condensed Consolidated Statements of Stockholders’ Equity
6 – 7
For the Nine Months Ended October 28, 2023 and
October 29, 2022
Notes to Condensed Consolidated Financial Statements
8 – 22
For the Three Months and Nine Months Ended October
28, 2023 and October 29,
2022
Item 2.
Management’s Discussion and Analysis
of Financial Condition and
Results of Operations
23 – 29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 4.
Controls and Procedures
30
PART
II – OTHER INFORMATION
Item 1.
Legal Proceedings
31
Item 1A.
Risk Factors
31
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 3.
Defaults Upon Senior Securities
32
Item 4.
Mine Safety Disclosures
32
Item 5.
Other Information
32
Item 6.
Exhibits
32
Signatures
33
3
PART
I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended
Nine Months Ended
October 28,
2023
October 29,
2022
October 28,
2023
October 29,
2022
(Dollars in thousands, except per share data)
REVENUES
$
$
$
$
COSTS AND EXPENSES, NET
(
1,523
)
(
2,278
)
(
3,754
)
(
4,565
)
Income (loss) before income taxes
(
10,349
)
(
9,109
)
(
1,320
)
Income tax (benefit) expense
(
4,272
)
(
4,656
)
(
797
)
Net income (loss)
$
(
6,077
)
$
(
4,453
)
$
(
523
)
$
Basic earnings (loss) per share
$
(
0.30
)
$
(
0.21
)
$
(
0.02
)
$
Diluted earnings (loss) per share
$
(
0.30
)
$
(
0.21
)
$
(
0.02
)
$
Comprehensive income:
Net income (loss)
$
(
6,077
)
$
(
4,453
)
$
(
523
)
$
Unrealized gain (loss) on available-for-sale securities, net of
) and ($
) for
(
629
)
(
1,774
)
Comprehensive income (loss)
$
(
5,876
)
$
(
5,082
)
$
$
See notes to condensed consolidated financial statements (unaudited).
4
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 28, 2023
January 28, 2023
ASSETS
(Dollars in thousands)
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
Noncurrent deferred income taxes
Other assets
Right-of-Use assets – net
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
$
Accrued expenses
Accrued employee benefits and bonus
Accrued income taxes
Current lease liability
Other noncurrent liabilities
Lease liability
Stockholders' Equity:
Preferred stock, $
Class A common stock, $
Convertible Class B common stock, $
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
(
515
)
(
1,238
)
$
$
See notes to condensed consolidated financial statements (unaudited).
5
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
October 28, 2023
October 29, 2022
(Dollars in thousands)
Operating Activities:
Net income (loss)
$
(
523
)
$
Adjustments to reconcile net income (loss) to net cash provided
(
226
)
(
1,981
)
(
1,815
)
(
1,716
)
(
1,499
)
(
1,895
)
(
6,099
)
(
34,418
)
Net cash provided by operating activities
Investing Activities:
Expenditures for property and equipment
(
10,271
)
(
14,382
)
Purchase of short-term investments
(
44,595
)
(
53,765
)
Sales of short-term investments
Net cash provided by investing activities
Financing Activities:
Dividends paid
(
10,457
)
(
10,870
)
Repurchase of common stock
(
2,563
)
(
11,561
)
Proceeds from employee stock purchase plan
Net cash used in financing activities
(
12,663
)
(
22,152
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(
2,653
)
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
$
$
Non-cash activity:
Accrued other assets and property and equipment
$
$
See notes to condensed consolidated financial statements (unaudited).
6
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Accumulated
Additional
Other
Total
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — January 28, 2023
$
$
$
$
(
1,238
)
$
Comprehensive income:
Dividends paid ($
(
3,455
)
(
3,455
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation issuances and exercises
Share-based compensation expense
Repurchase and retirement of treasury shares
(
8
)
(
2,259
)
(
2,267
)
Balance — April 29, 2023
$
$
$
$
(
883
)
$
Comprehensive income:
Dividends paid ($
(
3,507
)
(
3,507
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation issuances and exercises
Share-based compensation expense
Repurchase and retirement of treasury shares
(
1
)
(
293
)
(
294
)
Balance — July 29, 2023
$
$
$
$
(
716
)
$
Comprehensive income:
(
6,077
)
(
6,077
)
Dividends paid ($
(
3,495
)
(
3,495
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation issuances and exercises
Share-based compensation expense
(
1
)
Repurchase and retirement of treasury shares
Balance — October 28, 2023
$
$
$
$
(
515
)
$
See notes to condensed consolidated financial statements (unaudited).
7
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Accumulated
Additional
Other
Total
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — January 29, 2022
$
$
$
$
(
280
)
$
Comprehensive income:
(
1,206
)
(
1,206
)
Dividends paid ($
(
3,638
)
(
3,638
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation issuances and exercises
Share-based compensation expense
Repurchase and retirement of treasury shares
(
20
)
(
9,142
)
(
9,162
)
Balance — April 30, 2022
$
$
$
$
(
1,486
)
$
Comprehensive income:
(
2,274
)
(
2,274
)
Dividends paid ($
(
3,632
)
(
3,632
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation issuances and exercises
Share-based compensation expense
Repurchase and retirement of treasury shares
(
1
)
(
433
)
(
434
)
Balance — July 30, 2022
$
$
$
$
(
1,425
)
$
Comprehensive income:
(
4,453
)
(
4,453
)
(
629
)
(
629
)
Dividends paid ($
(
3,600
)
(
3,600
)
Class A common stock sold through employee stock purchase
plan
Share-based compensation issuances and exercises
(
308
)
(
308
)
Share-based compensation expense
(
3
)
(
228
)
(
226
)
Repurchase and retirement of treasury shares
(
7
)
(
1,958
)
(
1,965
)
Balance — October 29, 2022
$
$
$
$
(
2,054
)
$
See notes to condensed consolidated financial statements (unaudited).
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
8
NOTE 1 - GENERAL
:
The
condensed
consolidated
financial
statements
as
of
October
28,
2023
and
for
the
thirty-nine-week
periods ended October 28, 2023 and October 29, 2022 have been prepared from the accounting records
of
The
Cato
Corporation
and
its
wholly-owned
subsidiaries
(the
“Company”),
and
all
amounts
shown
are
unaudited.
In the opinion of
management, all adjustments considered
necessary for a fair
presentation of
the financial statements have been included.
All such adjustments are of a normal, recurring nature unless
otherwise noted.
The results
of the
interim period
may not
be indicative
of the
results expected
for the
entire year.
The interim financial
statements should be read
in conjunction with
the consolidated financial statements
and
notes
thereto,
included
in
the
Company’s
Annual
Report
on
Form
10-K
for
the
fiscal
year
ended
January 28, 2023.
Amounts as of January 28, 2023 have been derived from the audited balance sheet, but
do not include all disclosures required by
accounting principles generally accepted in the United States of
America.
On November 16, 2023, the Board of Directors maintained the quarterly
dividend at $
During the third quarter of the current fiscal year,
the Company received an estimate for costs to repair its
corporate jet,
which had
sustained damage
at
the
end of
the
second
quarter.
The
Company determined
that
the
cost
of
repair
is
recoverable
and
recorded
a
receivable
for
the
estimated
repair
cost
of
$
million.
Management has determined that it is more
likely than not that the aircraft
will be sold within the next 12
months. The
Company reclassified the
aircraft as
an asset held
for sale
at its
estimated fair value
of $
million, which
is included
in Other
assets in
the accompanying Condensed
Consolidated Balance Sheets
as of October 28, 2023.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
9
NOTE 2 - EARNINGS PER SHARE:
Accounting Standard Codification (“ASC”) 260 –
Earnings Per Share
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
Nine Months Ended
October 28,
2023
October 29,
2022
October 28,
2023
October 29,
2022
(Dollars in thousands)
Numerator
Net earnings (loss)
$
(
6,077
)
$
(
4,453
)
$
(
523
)
$
(Earnings) loss allocated to non-vested equity awards
(
153
)
Net earnings (loss) available to common stockholders
$
(
5,731
)
$
(
4,213
)
$
(
474
)
$
Denominator
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
Net income (loss) per common share
Basic earnings (loss) per share
$
(
0.30
)
$
(
0.21
)
$
(
0.02
)
$
Diluted earnings (loss) per share
$
(
0.30
)
$
(
0.21
)
$
(
0.02
)
$
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
10
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
three months ended October 28, 2023:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at July 29, 2023
$
(
716
)
Net current-period other comprehensive income
Ending Balance at October 28, 2023
$
(
515
)
(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 $
.
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
nine months ended October 28, 2023:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 28, 2023
$
(
1,238
)
Net current-period other comprehensive income
Ending Balance at October 28, 2023
$
(
515
)
(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 $
.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
11
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME
(CONTINUED):
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
three months ended October 29, 2022:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at July 30, 2022
$
(
1,425
)
(
637
)
Net current-period other comprehensive income
(
629
)
Ending Balance at October 29, 2022
$
(
2,054
)
(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 $
.
The
following
table
sets
forth
information
regarding
the
reclassification
out
of
Accumulated
other
comprehensive income (in thousands) for the
nine months ended October 29, 2022:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 29, 2022
$
(
280
)
(
1,788
)
Net current-period other comprehensive income
(
1,774
)
Ending Balance at October 29, 2022
$
(
2,054
)
(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 $
.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
12
NOTE 4 – FINANCING ARRANGEMENTS:
As of October 28, 2023, the Company has an unsecured revolving credit line, which provides for borrowings
of up
to $
and is
committed through
May 2027.
The revolving
credit agreement
contains various
financial covenants
and limitations,
including the
maintenance of
specific financial
ratios.
On October
24, 2023,
the Company
amended the revolving
credit agreement
to link
the calculation
of the
Company’s EBITDAR
coverage ratio
to
the
amount
of
the
Company’s
cash
and
investments.
Though
the
effect
of
the
amendment
reduced
the
minimum EBITDAR
coverage ratio
for the
quarter ended
October 28,
2023 and
is expected
to do
so going
forward, the Company
was in compliance
with the amended
credit agreement for
the quarter ended
October
28, 2023
and also
would have
been in
compliance without
giving effect
to the
amendment.
There were
borrowings
outstanding,
r
any
outstanding
letters
of
credit
that
reduced
borrowing
availability,
as
of
October 28, 2023.
The weighted average
interest rate under
the credit facility
was
due to
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
The Company
has determined
that it
has
Segment
Reporting
, including Cato,
It’s Fashion, Versona
and Credit.
As outlined in
ASC 280-10, the
Company has
including
e-commerce,
based
on the
aggregation
criteria
outlined in
ASC
280-10, which
states that
two
or
more operating segments may be aggregated into a single reportable segment if aggregation is consistent with
the
objective
and
basic
principles
of
ASC
280-10,
which
require
the
segments
to
have
similar
economic
characteristics, products, production processes, clients and
methods of distribution.
The
Company’s
retail
operating
segments
have
similar
economic
characteristics
and
similar
operating,
financial and
competitive risks.
The products
sold in each
retail operating
segment are
similar in
nature, as
they
all
offer
women’s
apparel,
shoes
and
accessories.
Merchandise
inventory
of
the
Company’s
retail
operating
segments
is
sourced
from
the
same
countries
and
some
of
the
same
vendors,
using
similar
production processes.
Merchandise for the Company’s retail operating segments is distributed to retail stores
in a similar manner through
the Company’s single distribution center and is
subsequently sold to customers in
a similar
manner.
The
Company operates
its
women’s
fashion
specialty retail
stores
in
principally in
the southeastern
United States.
The Company offers its own credit
card to its customers and
all
credit
authorizations,
payment
processing
and
collection
efforts
are
performed
by
a
wholly-owned
subsidiary of the Company.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
13
NOTE 5 – REPORTABLE SEGMENT INFORMATION
(CONTINUED):
The following schedule summarizes certain segment
information (in thousands):
Three Months Ended
Nine Months Ended
October 28, 2023
Retail
Credit
Total
October 28, 2023
Retail
Credit
Total
Revenues
$
157,595
$
661
$
158,256
Revenues
$
531,243
$
1,934
$
533,177
Depreciation
Depreciation
Interest and other income
(
1,523
)
(
1,523
)
Interest and other income
(
3,754
)
(
3,754
)
Income (loss) before
(
10,604
)
(
10,349
)
Income (loss) before
(
2,014
)
(
1,320
)
Capital expenditures
Capital expenditures
Three Months Ended
Nine Months Ended
October 29, 2022
Retail
Credit
Total
October 29, 2022
Retail
Credit
Total
Revenues
$
176,057
$
569
$
176,626
Revenues
$
578,580
$
1,631
$
580,211
Depreciation
Depreciation
Interest and other income
(
2,278
)
(
2,278
)
Interest and other income
(
4,565
)
(
4,565
)
Income (loss) before
(
9,280
)
(
9,109
)
Income before
Capital expenditures
Capital expenditures
Retail
Credit
Total
Total assets as of October 28, 2023
$
450,420
$
36,948
$
487,368
Total assets as of January 28, 2023
The Company evaluates segment performance based on
income before income 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
Nine Months Ended
October 28,
2023
October 29,
2022
October 28,
2023
October 29,
2022
Payroll
$
$
$
$
Postage
Other expenses
Total expenses
$
$
$
$
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
14
NOTE 6 – STOCK-BASED COMPENSATION:
As of October 28, 2023,
the Company had
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 October 28,
2023:
2013
2018
Plan
Plan
Total
Options and/or restricted stock initially authorized
Options and/or restricted stock available for grant:
In
accordance
with
ASC
718
–
Compensation–Stock Compensation
,
the
fair
value
of
current
restricted
stock awards
is estimated
on the
date of
grant based
on the
market price
of the
Company’s
stock and
is
amortized to compensation expense on a straight-line basis over the
related vesting periods. As of October
28,
2023
and
January
28,
2023,
there
was
$
,
respectively,
of
total
unrecognized compensation expense
related to nonvested
restricted stock awards,
which had a
remaining
weighted-average
vesting
period
of
during
the
three
and
nine
months
ended
October
28,
2023
was
$
,
respectively,
compared
to
total
compensation
benefit
of
$
the
three
and
nine
months
ended
October
29,
2022,
respectively.
These
amounts
are
classified
as
a
component of Selling,
general and administrative expenses
in the Condensed
Consolidated Statements of
Income (Loss) and Comprehensive Income (Loss).
The following summary
shows the changes
in the number
of shares of
unvested restricted stock
outstanding
during
the nine months ended
October
28, 2023:
Weighted Average
Number of
Grant Date Fair
Shares
Value
Per Share
Restricted stock awards at January 28, 2023
$
Granted
Vested
(
217,238
)
Forfeited or expired
(
109,705
)
Restricted stock awards at October 28, 2023
$
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
15
NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED):
The
Company’s
Employee
Stock
Purchase
Plan
allows
eligible
full-time
employees
to
purchase
a
limited
number of
shares
of the
Company’s
Class
A
Common Stock
during each
semi-annual offering
period
at
a
% discount through
payroll deductions.
During the nine
months ended
October 28,
2023 and
October 29,
2022, the
Company sold
per share, respectively,
under the Employee
Stock Purchase Plan.
The compensation expense
recognized for
the
% discount
given under
the Employee
Stock Purchase
Plan was
approximately $
for
the
nine
months
ended
October
28,
2023
and
October
29,
2022,
respectively.
These
expenses
are
classified as a component of Selling,
general and administrative expenses.
NOTE 7
– FAIR VALUE MEASUREMENTS:
The following
tables
set forth
information regarding
the
Company’s financial
assets and
liabilities that
are
measured at fair value (in thousands)
as of October 28, 2023 and January
28, 2023:
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
October 28, 2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
$
$
$
$
Total Assets
$
$
$
$
Liabilities:
$
(
8,311
)
$
$
$
(
8,311
)
Total Liabilities
$
(
8,311
)
$
$
$
(
8,311
)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
16
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 28, 2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
$
$
$
$
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
tax-exempt and taxable
governmental debt securities held
in managed accounts with
underlying ratings of A
or better at
October 28,
2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
have
contractual
maturities
which
range from
s to
investments, Restricted cash and Other assets on the accompanying Condensed Consolidated Balance Sheets.
These assets
are carried
at fair
value with
unrealized gains
and losses
reported net
of taxes
in Accumulated
other comprehensive income. The
asset-backed securities are bonds
comprised of auto loans
and bank credit
cards that carry
AAA ratings. The
auto loan
asset-backed securities
are backed
by static
pools of
auto loans
that were originated and serviced by captive auto finance units, banks or finance companies.
The bank credit
card
asset-backed
securities
are
backed
by revolving
pools
of credit
card receivables
generated
by account
holders of cards from American Express, Citibank,
JPMorgan Chase, Capital One and Discover.
Additionally,
at
October
28,
2023,
the
Company
had
$
compensation plan assets
of $
equities and deferred compensation plan assets of $
assets in the Condensed Consolidated Balance
Sheets.
Level 1 securities are measured at fair value using quoted active market prices.
Level 2 investment securities
include
corporate
bonds,
municipal
bonds
and
asset-backed
securities
for
which
quoted
prices
may
not
be
available on active exchanges for identical
instruments.
Their fair value is principally based on market
values
determined
by
management
with
assistance
of
a
third-party
pricing
service.
Since
quoted
prices
in
active
markets
for
identical
assets
are
not
available,
these
prices
are
determined
by
the
pricing
service
using
observable market information such as quotes from less active markets and/or quoted prices of securities with
similar characteristics, among other factors.
Deferred compensation plan
assets consist of
life insurance policies.
These life insurance
policies are valued
based on the cash surrender value of the insurance contract, which is determined based on
such factors as the
fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3
of the
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
17
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
Condensed
Consolidated
Balance
Sheet.
These
funds
are
designed to mirror mutual funds and money
market funds that are observable and
actively traded.
The
following
tables
summarize
the
change
in
fair
value
of
the
Company’s
financial
assets
and
liabilities
measured using
Level 3
inputs for the
nine months
ended October
28, 2023
and the
year ended January
28,
2023 (in thousands):
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at January 28, 2023
$
Redemptions
Additions
Total gains or (losses):
changes in net assets)
(
236
)
Ending Balance at October 28, 2023
$
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred Compensation
Beginning Balance at January 28, 2023
$
(
8,903
)
(
231
)
changes in net assets)
Ending Balance at October 28, 2023
$
(
8,311
)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
18
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at January 29, 2022
$
Redemptions
(
1,718
)
Additions
Total gains or (losses):
changes in net assets)
(
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
)
changes in net assets)
Ending Balance at January 28, 2023
$
(
8,903
)
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
19
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:
The Company has reviewed recent accounting pronouncements and
believe none will have a material
impact on the Company’s financial statements.
NOTE 9 – INCOME TAXES:
The Company had an effective tax rate
for the first nine months of 2023
of
% compared to
% for
the first nine months of 2022.
The change in the effective tax
rate for the first nine months was
primarily
due to increases in foreign rate differential and the release of reserves for uncertain tax positions,
offset by
decreases
in
Global
Intangible Low-taxed
Income (GILTI),
state
income taxes,
non-deductible
officer’s
compensation, and foreign tax credits, as percentages on a pre-tax
loss.
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 the Company’s control, litigation with respect
to
various
employment
matters,
including
alleged
discrimination
and
wage
and
hour
litigation,
and
litigation with present or former employees.
Although such
litigation is
routine and
incidental to
the conduct
of the
Company’s business,
as with
any
business
of
its
size
with
a
significant
number
of
employees
and
significant
merchandise
sales,
such
litigation could
result in
large
monetary awards.
Based on
information currently
available, management
does
not
believe
that
any
reasonably
possible
losses
arising
from current
pending litigation
will
have
a
material adverse
effect
on the
Company’s
condensed consolidated
financial statements.
However,
given
the
inherent uncertainties
involved in
such
matters, an
adverse outcome
in
one or
more of
such
matters
could
materially and
adversely affect
the
Company’s
financial condition,
results of
operations and
cash
flows
in
any
particular
reporting
period.
The
Company
accrues
for
these
matters
when
the
liability
is
deemed probable and reasonably estimable.
NOTE 11 – REVENUE RECOGNITION:
The
Company
recognizes
sales
at
the
point
of
purchase
when
the
customer
takes
possession
of
the
merchandise
and
pays
for
the
purchase,
generally
with
cash
or
credit.
Sales
from
purchases
made
with
Cato
credit,
gift
cards
and
layaway
sales
from
stores
are
also
recorded
when
the
customer
takes
possession of
the merchandise. E-commerce
sales are
recorded when the
risk of
loss is
transferred to the
customer. Gift cards
are recorded as deferred revenue until they are
redeemed or forfeited. Layaway sales
are recorded as deferred
revenue until the customer
takes possession of, or
forfeits, the merchandise. Gift
cards do not have
expiration dates. A provision is
made for estimated merchandise returns
based on sales
volumes
and
the
Company’s
experience;
actual
returns
have
not
varied
materially
from
historical
amounts.
A
provision
is
made
for
estimated
write-offs
associated
with
sales
made
with
the
Company’s
proprietary
credit
card.
Amounts
related
to
shipping
and
handling
billed
to
customers
in
a
sales
transaction are
classified as
Other revenue
and the
costs related
to shipping
product to
customers (billed
and accrued) are classified as Cost of goods sold.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
20
The Company
offers its
own proprietary
credit card
to customers.
All credit
activity is
performed by
the
Company’s wholly-owned
subsidiaries.
and nine months ended October 28, 2023, the
Company estimated customer credit losses of $
$
, respectively,
compared to $
29, 2022,
respectively.
Sales purchased
on the
Company’s
proprietary credit
card for
the three
and nine
months
ended
October
28,
2023
were
$
million and $
The
following
table
provides
information
about
receivables
and
contract
liabilities
from
contracts
with
customers (in thousands):
Balance as of
October 28, 2023
January 28, 2023
Proprietary Credit Card Receivables, net
$
$
Gift Card Liability
$
$
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
21
NOTE 12 – LEASES:
The
Company determines
whether
an
arrangement is
a
lease
at
inception.
The
Company
has
operating
leases for
stores, offices,
warehouse space
and equipment.
Its leases have
remaining lease terms
of up
to
up to
, and some 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.
As
most
of
the
Company’s
leases
do
not
provide
an
implicit
rate,
the
Company
uses
its
estimated
incremental
borrowing
rate
based
on
the
information
available
at
commencement
date
of
the
lease
in
determining the present value of lease payments.
The components of lease cost are shown below (in thousands):
Three Months Ended
October 28, 2023
October 29, 2022
Operating lease cost (a)
$
$
Variable
lease cost (b)
$
$
(a) Includes right-of-use asset amortization of ($
) million and ($
) million for the three months ended October 28, 2023 and
October 29, 2022, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.
Nine Months Ended
October 28, 2023
October 29, 2022
Operating lease cost (a)
$
$
Variable
lease cost (b)
$
$
(a) Includes right-of-use asset amortization of ($
) million and ($
) million for the nine months ended October 28, 2023 and
October 29, 2022, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND
NINE MONTHS ENDED OCTOBER 28, 2023 AND
OCTOBER 29, 2022
22
Supplemental cash flow
information and non-cash
activity related to
the Company’s
operating leases are
as follows (in thousands):
Operating cash flow information:
Three Months Ended
October 28, 2023
October 29, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
$
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
$
(
1,468
)
$
Nine Months Ended
October 28, 2023
October 29, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
$
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
$
$
Weighted-average
remaining
lease
term
and
discount
rate
for
the
Company’s
operating
leases
are
as
follows:
As of
October 28, 2023
October 29, 2022
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
2023 (a)
$
2024
2025
2026
2027
Thereafter
Total lease payments
Less: Imputed interest
Present value of lease liabilities
$
(a) Excluding the nine months ended October 28, 2023
23
THE CATO CORPORATION
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The
following
information
should
be
read
along
with
the
unaudited
Condensed
Consolidated
Financial
Statements,
including
the
accompanying
Notes
appearing
in
this
report.
Any
of
the
following
are
“forward-looking”
statements
within
the
meaning
of
Section 27A
of
the
Securities
Act
of
1933,
as
amended,
and
Section 21E
of
the
Securities
Exchange
Act
of
1934,
as
amended:
(1) statements
in
this
Form 10-Q
that
reflect
projections
or
expectations
of
our
future
financial
or
economic
performance;
(2) statements
that
are
not
historical
information;
(3) statements
of
our
beliefs,
intentions,
plans
and
objectives for future operations,
including those contained in
“Management’s Discussion and
Analysis of
Financial Condition and
Results of Operations”;
(4) statements relating to
our operations or
activities for
our
fiscal
year
ending
February
3,
2024
(“fiscal
2023”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and
closures
and
statements
regarding
the
potential
impact
of
the
COVID-19
pandemic
and
related
responses and
mitigation efforts,
as well
as the
potential impact
of supply
chain disruptions,
inflationary
pressures
and
other
economic
or
market
conditions
on
our
business,
results
of
operations
and
financial
condition
and
statements
regarding
new
store
development
strategy;
and
(5)
statements
relating
to
our
future contingencies. When
possible, we
have attempted to
identify forward-looking statements
by using
words
such
as
“will,”
“expects,”
“anticipates,”
“approximates,”
“believes,”
“estimates,”
“hopes,”
“intends,” “may,”
“plans,” “could,” “would,”
“should” and any
variations or negative
formations of such
words
and
similar
expressions.
We
can
give
no
assurance
that
actual
results
or
events
will
not
differ
materially
from
those
expressed
or
implied
in
any
such
forward-looking
statements.
Forward-looking
statements
included
in
this
report
are
based
on
information
available
to
us
as
of
the
filing
date
of
this
report,
but
subject
to
known
and
unknown
risks,
uncertainties and
other
factors
that
could
cause
actual
results
to
differ
materially
from
those
contemplated
by
the
forward-looking
statements.
Such
factors
include, but
are not
limited to,
the following:
any actual
or perceived
deterioration in
the conditions
that
drive
consumer
confidence
and
spending,
including,
but
not
limited
to,
prevailing
social,
economic,
political
and
public
health conditions
and
uncertainties, levels
of
unemployment, fuel,
energy
and
food
costs, wage rates, tax
rates, interest rates, home
values, consumer net worth,
the availability of
credit and
inflation;
changes
in
laws,
regulations
or
government
policies
affecting
our
business,
including
but
not
limited to
tariffs;
uncertainties regarding
the impact
of any
governmental action
regarding, or
responses
to, the
foregoing conditions; competitive factors
and pricing
pressures; our ability
to predict
and respond
to rapidly changing fashion trends
and consumer demands; our ability to
successfully implement our new
store development strategy to increase new
store openings and our ability
of any such new stores
to grow
and
perform
as
expected;
adverse
weather,
public
health
threats
(including
the
global
COVID-19
pandemic)
or
similar
conditions that
may affect
our
sales
or
operations; inventory
risks
due
to
shifts
in
market
demand,
including
the
ability
to
liquidate
excess
inventory
at
anticipated
margins;
adverse
developments or volatility affecting the financial services industry or broader financial markets; and
other
factors
discussed
under
“Risk
Factors”
in
Part
I,
Item
1A
of
our
Annual
Report
on
Form
10-K
for
the
fiscal year ended
January 28, 2023
(“fiscal 2022”), as amended
or supplemented, and in
other reports we
file with
or furnish
to the
Securities and
Exchange Commission
(“SEC”) from
time to
time.
We
do not
undertake,
and
expressly
decline,
any
obligation
to
update
any
such
forward-looking
information
contained in this report, whether as a result of new information, future
events, or otherwise.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company’s accounting
policies are more
fully described in
“Management’s Discussion and
Analysis of
Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal
year
ended
January
28,
2023.
As
disclosed
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition and
Results of
Operations,” the
preparation of
the Company’s
financial statements
in conformity
with generally accepted
accounting principles in
the United States
(“GAAP”) requires management
to make
estimates and assumptions about future events that affect the amounts reported in the
financial statements and
accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore,
the
determination
of
estimates
requires
the
exercise
of
judgment.
Actual
results
inevitably
will
differ
from
those
estimates,
and
such
differences
may
be
material
to
the
financial
statements.
The
most
significant
accounting
estimates
inherent
in
the
preparation
of
the
Company’s
financial
statements
include
the
calculation
of
potential
asset
impairment,
reserves
relating
to
self-insured
health
insurance,
workers’
compensation,
general
and
auto
insurance
liabilities,
uncertain
tax
positions,
the
allowance
for
customer
credit losses, and inventory shrinkage.
The Company’s critical accounting policies and
estimates are discussed with the Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in
the Company's unaudited Condensed
Consolidated Statements of Income as a
percentage of total retail sales:
Three Months Ended
Nine Months Ended
October 28, 2023
October 29, 2022
October 28, 2023
October 29, 2022
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
1.0
1.0
0.9
0.9
Total revenues
101.0
101.0
100.9
100.9
Cost of goods sold (exclusive of depreciation)
67.5
70.7
65.4
67.5
Selling, general and administrative (exclusive
of depreciation)
39.4
35.1
35.1
31.8
Depreciation
1.6
1.6
1.4
1.5
Interest and other income
(1.0)
(1.3)
(0.7)
(0.8)
Income (loss) before income taxes
(6.6)
(5.2)
(0.3)
1.0
Net income (loss)
(3.9)
(2.5)
(0.1)
0.5
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
RESULTS OF OPERATIONS
(CONTINUED):
Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
(“MD&A”)
is
intended
to
provide
information
to
assist
readers
in
better
understanding
and
evaluating
our
financial
condition and results of operations.
We recommend reading this MD&A in conjunction with our Condensed
Consolidated Financial
Statements and
the Notes
to those
statements included in
the “Financial
Statements”
section of this Quarterly Report on
Form 10-Q, as well as our 2022
Annual Report on Form 10-K.
Recent Developments
Inflationary Cost Pressure and High Interest Rates
Despite
some
reduction
in
inflationary
pressures
from last
year,
wages,
operating supplies,
and
service
costs
continue
to
be
negatively
impacted
by
the
current
inflationary
environment.
In
addition,
our
customers’ disposable income is impacted by increased costs related to
fuel, food, housing, including rent,
and other
consumable products relative
to flattening wage
rates, which
negatively impact our
customers’
willingness to purchase discretionary items such as apparel,
jewelry and shoes.
In response,
the Federal
Reserve began
raising, and
is committed
to continue
raising, interest
rates until
inflationary pressures subside to
acceptable levels.
Though the Federal
Reserve has paused
raising rates,
it has
indicated it is
committed to reducing
inflation 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.
We
believe high
prices and
interest rates
negatively impacted
the first
three quarters
of
fiscal 2023
and
will
likely
continue
to
have
a
negative
impact
on
consumer
behavior
and,
by
extension,
our
results
of
operations and financial condition during the remainder of fiscal 2023.
Comparison of the Three and Nine
Months ended October 28, 2023 with
October 29, 2022
Total retail sales for the
third quarter were $156.7 million compared to
last year’s third quarter sales
of $174.9
million, a 10% decrease.
The Company’s sales
decrease in the third quarter
of fiscal 2023 was
primarily due
to an 8% decrease in same-store sales and closed stores, partially offset
by sales from new stores. For the nine
months ended
October 28,
2023,
total
retail sales
were
$528.2
million compared
to last
year’s
comparable
nine month
sales of
$574.9 million,
an 8%
decrease. The
decrease in
sales in
the first
nine months
of fiscal
2023 was due primarily to
a 6% decrease in same-store
sales and closed stores, partially offset
by sales from
new stores. Same-store sales include stores
that have been open more than
15 months.
Stores that have been
relocated or
expanded are
also included
in the
same-store sales
calculation after
they have
been open
more
than 15 months.
The method of calculating same-store sales varies across the retail industry.
As a result, our
same-store sales calculation may not be comparable to similarly titled measures reported by other companies.
E-commerce
sales
were
less
than
5%
of
total
sales
for
the
nine
months
ended
October
28,
2023
and
are
included
in
the
same-store
sales
calculation.
Total
revenues,
comprised
of
retail
sales
and
other
revenue
(principally finance
charges and
late fees
on customer
accounts receivable
and layaway
fees), were
$158.3
million
and
$533.2
million
for
the
three
and
nine
months
ended
October
28,
2023,
compared
to
$176.6
million
and
$580.2
million
for
the
three
and
nine
months
ended
October
29,
2022,
respectively.
The
Company operated
1,245 stores
at October
28, 2023
compared to
1,317 stores
at the end
of last
year’s third
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
quarter.
During the
first nine
months of
fiscal 2023,
the Company
opened nine stores
and closed
44 stores.
The Company currently expects to close
approximately 110 stores in total in
fiscal 2023.
Credit
revenue
of
$0.7
million
represented
0.4%
of
total
revenues
in
the
third
quarter
of
fiscal
2023,
compared to
2022 credit
revenue of
$0.6 million
or 0.3%
of total
revenues. Credit
revenue is
comprised of
interest earned on the Company’s private label credit card portfolio and related fee income.
Related expenses
principally
include payroll,
postage
and
other
administrative expenses
and totaled
$0.4
million in
the third
quarter of fiscal 2023, compared to
last year’s third quarter expense of
$0.4 million.
Other
revenue,
a
component
of
total
revenues,
was
$1.6
million
and
$5.0
million
for
the
three
and
nine
months ended October 28,
2023, respectively, compared to
$1.7 million and $5.4
million for the prior
year’s
comparable three and
nine month periods. The
decrease in Other revenue
for both the three
and nine months
was due to
decreases in gift
card breakage and
e-commerce shipping revenue
partially offset by
increases in
finance charges and late fees
associated with the Company’s proprietary credit card.
Cost of
goods sold
was $105.8
million, or
67.5% of
retail sales
and $345.5
million, or
65.4% of retail
sales
for the three and nine months ended October 28, 2023, respectively, compared to $123.8 million, or 70.7% of
retail sales
and $387.7
million, or
67.5% of
retail sales
for the
comparable three
and nine
month periods
of
fiscal 2022.
The overall
decrease in
cost of
goods sold
as a
percent of
retail sales
for the
third quarter
and
first
nine
months
of
fiscal
2023
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,
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)
decreased by 0.6% to
$50.9 million for
the
third
quarter
of
fiscal
2023
and
by
2.4%
to
$182.6
million
for
the
first
nine
months
of
fiscal
2023,
compared to $51.2 million and $187.1 million for the prior year’s comparable three and nine
months of fiscal
2022, respectively.
Gross margin as presented may not be
comparable to those of other entities.
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related
payroll
taxes
and
benefits,
insurance,
supplies,
advertising,
bank
and
credit
card
processing
fees.
SG&A
expenses were $61.8 million, or 39.4% of retail sales and $185.3 million, or 35.1% of retail sales for the
third
quarter and first nine months of
fiscal 2023, respectively, compared to $61.4
million, or 35.1% of retail sales
and
$182.6
million,
or 31.8%
of retail
sales
for the
prior
year’s
comparable three
and
nine
month periods,
respectively.
The increase in
SG&A for the
third quarter and
first nine months
of fiscal 2023
was primarily
due to higher payroll and insurance
expense.
Depreciation expense was $2.5 million, or 1.6% of retail sales and $7.4 million, or 1.4% of
retail sales for the
third quarter
and first
nine months
of fiscal
2023, respectively,
compared to
$2.9 million,
or 1.6%
of retail
sales and $8.4 million or 1.5%
of retail sales for the comparable three
and nine month periods of fiscal
2022,
respectively.
Interest and other income was $1.5 million, or 1.0% of retail sales and $3.8 million, or 0.7% of retail sales for
the three and
nine months ended October
28, 2023, respectively, compared
to $2.3 million, or
1.3% of retail
sales and $4.6 million, or 0.8% of retail sales for the comparable three and nine month periods of fiscal
2022,
respectively.
The decrease for the
third quarter and first
nine months of
fiscal 2023 compared
to fiscal 2022
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
28
was
primarily
attributable
to the
Company’s
receipt
of
a
Business
Recovery
Grant from
the state
of
North
Carolina in 2022, partially offset by higher
amounts earned on investments due to
higher interest rates.
Income tax
benefit was
$4.3 million
and $0.8
million for the
third quarter
and first
nine months of fiscal
2023,
respectively,
compared to
a
tax
benefit
of
$4.7 million
and
a
tax
expense
of
$3.0
million
for
the
comparable three
and nine month
periods of
fiscal 2022,
respectively.
For the
first nine
months of
fiscal
2023, the
Company’s effective
tax rate
was 60.4% compared
to 49.7%
for the first
nine months of
fiscal
2022.
The change in the 2023 year-to-date effective tax rate was primarily due to increases in foreign rate
differential and the release of reserves for uncertain tax positions, offset by decreases in
Global Intangible
Low-taxed
Income (GILTI),
state
income taxes,
non-deductible officer’s
compensation, and
foreign tax
credits, as percentages on a pre-tax loss.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company
believes that
its cash,
cash equivalents
and short-term
investments, together
with cash
flows
from operations
and borrowings available
under its revolving
credit agreement,
will be
adequate to fund
the
Company’s regular operating requirements
and expected capital expenditures
for fiscal 2023 and the
next 12
months.
Cash
provided
by
operating
activities
during
the
first
nine
months
of
fiscal
2023
was
$11.7
million
as
compared to $19.3 million provided
in the first nine months of fiscal
2022. The decrease in cash provided
of
$7.6 million for
the first nine
months of fiscal
2023 as compared
to the first
nine months of
fiscal 2022 was
primarily due to a net loss in 2023 compared to net income in 2022,
and higher accounts receivable, partially
offset by lower accounts payable and
accrued liabilities.
At
October
28,
2023,
the
Company
had
working
capital
of
$76.8
million
compared
to
$74.7
million
at
January 28,
2023.
The increase
in working
capital was
primarily attributable
to a
decrease in
current lease
liability and an increase in
cash, partially offset by a decrease
in inventory and short-term investments.
As of October 28, 2023, the Company has an unsecured revolving credit line, which provides for borrowings
of up
to $35.0
million, less
the balance
of any
revocable letters
of credit
related to
purchase commitments,
and is
committed through
May 2027.
The revolving
credit agreement
contains various
financial covenants
and limitations,
including the
maintenance of
specific financial
ratios.
On October
24, 2023,
the Company
amended the revolving
credit agreement
to link
the calculation
of the
Company’s EBITDAR
coverage ratio
to
the
amount
of
the
Company’s
cash
and
investments.
Though
the
effect
of
the
amendment
reduced
the
minimum EBITDAR
coverage ratio
for the
quarter ended
October 28,
2023 and
is expected
to do
so going
forward, the Company
was in compliance
with the amended
credit agreement for
the quarter ended
October
28, 2023
and also
would have
been in
compliance without
giving effect
to the
amendment.
There were
no
borrowings
outstanding,
nor
any
outstanding
letters
of
credit
that
reduced
borrowing
availability,
as
of
October 28, 2023.
The weighted average
interest rate under
the credit facility
was zero at
October 28, 2023
due to no borrowings outstanding.
Expenditures
for
property
and
equipment
totaled
$10.3
million
in
the
first
nine
months
of
fiscal
2023,
compared to
$14.4 million
in last
fiscal year’s
first nine
months. The
decrease in
expenditures for
property
and equipment
was
primarily
due to
finishing
projects related
to investments
in the
distribution center
and
information
technology.
For
the
full
fiscal
2023
year,
the
Company
expects
to
invest
approximately
$12.0
million for capital expenditures.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
29
Net cash provided by investing activities totaled $6.1 million in the first nine months of fiscal 2023 compared
to
$0.2
million net
cash
provided in
the comparable
period
of
2022.
The
increase
in net
cash provided
in
2023 was primarily due to a
decrease in capital expenditures.
Net cash used in financing activities totaled $12.7 million in the first nine months of fiscal
2023 compared to
$22.2 million used in the comparable period of fiscal 2022.
The decrease in net cash used in fiscal 2023 was
primarily due to lower stock repurchases.
On November 16, 2023, the Board
of Directors maintained the quarterly dividend at
$0.17 per share.
As of
October 28,
2023, the
Company had
909,653 shares
remaining in
open authorizations
under its
share
repurchase program.
The Company does not use
derivative financial instruments.
The Company’s
investment portfolio
was primarily
invested in
corporate bonds and
tax-exempt and taxable
governmental debt securities held
in managed accounts with
underlying ratings of A
or better at
October 28,
2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
have
contractual
maturities
which
range from four days to 3.1 years.
The U.S. Treasury Notes have contractual
maturities which range from 79
days
to
2.3
years.
These
securities
are
classified
as
available-for-sale
and
are
recorded
as
Short-term
investments, Restricted cash and Other assets on the accompanying Condensed Consolidated Balance Sheets.
These assets
are carried
at fair
value with
unrealized gains
and losses
reported net
of taxes
in Accumulated
other comprehensive income. The
asset-backed securities are bonds
comprised of auto loans
and bank credit
cards that carry
AAA ratings. The
auto loan
asset-backed securities
are backed
by static
pools of
auto loans
that were originated and serviced by captive auto finance units, banks or finance companies.
The bank credit
card
asset-backed
securities
are
backed
by revolving
pools
of credit
card receivables
generated
by account
holders of cards from American Express, Citibank,
JPMorgan Chase, Capital One and Discover.
Additionally,
at
October
28,
2023,
the
Company
had
$0.8
million
of
corporate
equities
and
deferred
compensation plan assets
of $9.0 million.
At January 28,
2023, the Company
had $0.9 million
of corporate
equities and deferred compensation plan assets of $9.3
million.
All of these assets are recorded within
Other
assets in the Condensed Consolidated Balance
Sheets.
See Note 7, Fair Value Measurements.
RECENT ACCOUNTING PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
30
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
based
on
its
financing, investing and
cash management activities,
but the Company
does not
believe such exposure
is
material.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out an evaluation, with the
participation of our Principal Executive Officer and
Principal Financial
Officer, of the effectiveness of our disclosure
controls and procedures as of
October 28, 2023.
Based on this
evaluation, our Principal Executive
Officer and Principal
Financial Officer concluded
that, as of
October 28,
2023, our
disclosure controls
and
procedures,
as defined
in
Rule
13a-15(e), under
the
Securities
Exchange
Act of 1934 (the “Exchange
Act”), were effective to ensure that
information we are required to disclose
in the
reports
that
we
file
or
submit
under
the
Exchange
Act
is
recorded,
processed,
summarized
and
reported
within the time periods
specified in the SEC’s
rules and forms and
that such information is
accumulated and
communicated to our management, including our Principal Executive Officer and Principal Financial Officer,
as appropriate to allow timely decisions
regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
No change in the Company’s internal control
over financial reporting (as defined in
Exchange Act Rule 13a-
15(f)) has occurred during the Company’s fiscal
quarter ended October 28, 2023
that has materially affected,
or is reasonably likely to
materially affect, the Company’s internal control
over financial reporting.
THE CATO CORPORATION
PART II OTHER
INFORMATION
31
ITEM 1.
LEGAL PROCEEDINGS:
Not Applicable.
ITEM 1A.
RISK FACTORS:
In addition to the other information
in this report, you should carefully
consider the factors discussed in
Part I,
“Item
1A.
Risk
Factors”
in
our
Annual
Report
on
Form
10-K
for
our
fiscal
year
ended
January
28,
2023.
These risks
could materially
affect our
business, financial
condition or
future results;
however, they
are not
the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem
to
be
immaterial
may
also
materially
adversely
affect
our
business,
financial
condition
or
results
of
operations.
THE CATO CORPORATION
PART II OTHER
INFORMATION
32
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS:
The following table summarizes the Company’s purchases of its common stock for the three months
ended October 28, 2023:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Average
Part of Publicly
Value)
of Shares that may
Fiscal
of Shares
Price Paid
Announced Plans or
Yet be Purchased
Under
Period
Purchased
per Share (1)
Programs (2)
The Plans or Programs (2)
August 2023
-
$
-
-
September 2023
-
-
-
October 2023
-
-
-
Total
-
$
-
-
909,653
(1)
Prices include trading costs.
(2)
As of
July 29,
2023, the
Company’s
share repurchase
program had
909,653 shares
remaining in
open
authorizations.
During
the
third
quarter
ended
October
28,
2023,
the
Company
did
not
repurchase or
retire any
shares
under this
program.
As of
October 28,
2023, the
Company had
909,653
shares
remaining
in
open
authorizations.
There
is
no
specified
expiration
date
for
the
Company’s repurchase program.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES:
Not Applicable.
THE CATO CORPORATION
PART II OTHER
INFORMATION
33
ITEM 4.
MINE SAFETY DISCLOSURES:
Not Applicable.
ITEM 5.
OTHER INFORMATION:
During the three months ended October 28, 2023,
none of the Company’s
directors or officers (as defined
in
Rule
16a-1(f)
of
the
Securities
Exchange
Act
of
1934,
as
amended)
10b5-1 trading
arrangement” or
a “
Item 408 of Regulation S-K).
ITEM 6.
EXHIBITS:
Exhibit No.
Item
10.1**
10.2*
101.1*
The following materials
from Registrant’s Quarterly
Report on Form
10-Q for the
fiscal quarter
ended October
28, 2023,
formatted in
Inline XBRL:
(i) Condensed
Consolidated Statements
of Income
(Loss) and
Comprehensive Income
(Loss) for
the
Three
Months
and
Nine
Months
Ended
October
28,
2023
and
October
29,
2022;
(ii)
Condensed
Consolidated
Balance
Sheets
at
October
28,
2023
and
January 28, 2023;
(iii) Condensed Consolidated Statements
of Cash Flows for
the
Nine
Months
Ended
October
28,
2023
and
October
29,
2022;
(iv)
Condensed
Consolidated
Statements
of
Stockholders’
Equity
for
the
Nine
Months
Ended
October 28, 2023 and October 29, 2022; and (v) Notes to Condensed Consolidated
Financial Statements.
104.1
Cover Page
Interactive Data
File
(Formatted in
Inline
XBRL
and
contained
in
the Interactive Data Files submitted as Exhibit 101.1*)
THE CATO CORPORATION
PART II OTHER
INFORMATION
34
* Submitted electronically herewith.
THE CATO CORPORATION
PART II OTHER
INFORMATION
35
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.
November 21, 2023
/s/ John P.
D. Cato
Date
John P.
D. Cato
Chairman, President and
Chief Executive Officer
November 21, 2023
/s/ Charles D. Knight
Date
Charles D. Knight
Executive Vice President
Chief Financial Officer
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 - General:Note 1 - GeneralNote 2 - Earnings Per Share:Note 3 Accumulated Other Comprehensive Income:Note 3 Accumulated Other Comprehensive Income (continued):Note 4 Financing Arrangements:Note 5 Reportable Segment Information:Note 5 Reportable Segment Information (continued):Note 6 Stock-based Compensation:Note 6 Stock Based-compensation (continued):Note 7 Fair Value Measurements:Note 8 Recent Accounting Pronouncements:Note 9 Income Taxes:Note 10 Commitments and Contingencies:Note 11 Revenue Recognition:Note 12 Leases:Item 2. Management S Discussion and Analysis Of FinancialItem 3. Quantitative and Qualitative Disclosures About Market Risk:Item 4. Controls and Procedures:Part II Other InformationItem 1. Legal Proceedings:Item 1A. Risk Factors:Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds:Item 3. Defaults Upon Senior Securities:Item 4. Mine Safety Disclosures:Item 5. Other Information:Item 408 Of Regulation S-k)Item 6. Exhibits: