CATO 10-Q
Cato Corp (CATO)
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 29, 2022, there were
THE CATO CORPORATION
FORM 10-Q
Quarter Ended October 29, 2022
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 29, 2022 and October 30, 2021 |
| ||
|
|
|
| ||
| Condensed Consolidated Balance Sheets | 4 | |||
|
| At October 29, 2022 and January 29, 2022 |
| ||
|
|
|
| ||
| Condensed Consolidated Statements of Cash Flows | 5 | |||
|
| For the Nine Months Ended October 29, 2022 and October 30, 2021 |
| ||
|
|
|
| ||
| Condensed Consolidated Statements of Stockholders’ Equity | 6 – 7 | |||
|
| For the Nine Months Ended October 29, 2022 and October 30, 2021 |
| ||
|
|
|
| ||
| Notes to Condensed Consolidated Financial Statements | 8 – 22 | |||
|
| For the Three Months and Nine Months Ended October 29, 2022 and October 30, 2021 |
| ||
|
|
|
| ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 – 30 | ||
|
|
|
| ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 31 | ||
|
|
| |||
| Item 4. | Controls and Procedures | 31 | ||
|
|
|
| ||
PART II – OTHER INFORMATION |
| ||||
|
|
|
| ||
| Item 1. | Legal Proceedings | 32 | ||
|
|
|
| ||
| Item 1A. | Risk Factors | 32 | ||
|
|
|
| ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 | ||
|
|
|
| ||
| Item 3. | Defaults Upon Senior Securities | 33 | ||
|
|
|
| ||
| Item 4. | Mine Safety Disclosures | 34 | ||
|
|
|
| ||
| Item 5. | Other Information | 34 | ||
|
|
|
| ||
| Item 6. | Exhibits | 34 | ||
|
|
|
| ||
| Signatures | 35 | |||
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 |
| Nine Months Ended | |||||||
| October 29, 2022 |
| October 30, 2021 |
| October 29, 2022 |
| October 30, 2021 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands, except per share data) | |||||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
Retail sales | $ |
| $ |
| $ |
| $ | ||||
Other revenue (principally finance charges, late fees and |
|
|
|
|
|
|
|
|
|
|
|
layaway charges) |
|
|
|
|
|
|
| ||||
Total revenues |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES, NET |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation shown below) |
|
|
|
|
|
|
| ||||
Selling, general and administrative (exclusive of depreciation |
|
|
|
|
|
|
|
|
|
|
|
shown below) |
|
|
|
|
|
|
| ||||
Depreciation |
|
|
|
|
|
|
| ||||
Interest and other income |
| ( |
|
| ( |
|
| ( |
|
| ( |
Costs and expenses, net |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
| ( |
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
| ( |
|
| ( |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | ( |
| $ |
| $ |
| $ | |||
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share | $ | ( |
| $ |
| $ |
| $ | |||
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share | $ | ( |
| $ |
| $ |
| $ | |||
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | ( |
| $ |
| $ |
| $ | |||
Unrealized gain (loss) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
|
deferred income taxes of ($ |
|
|
|
|
|
|
|
|
|
|
|
nine months ended October 29, 2022 and ($ |
|
|
|
|
|
|
|
|
|
|
|
the three and nine months ended October 30, 2021, respectively |
| ( |
|
| ( |
|
| ( |
|
| ( |
Comprehensive income (loss) | $ | ( |
| $ |
| $ |
| $ | |||
See notes to condensed consolidated financial statements (unaudited).
3
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
| October 29, 2022 |
| January 29, 2022 | ||
|
|
|
|
|
|
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 |
|
|
| ||
Total Current Assets |
|
|
| ||
Property and equipment – net |
|
|
| ||
Noncurrent deferred income taxes |
|
|
| ||
Other assets |
|
|
| ||
Right-of-Use assets – net |
|
|
| ||
Total Assets | $ |
| $ | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
Accounts payable | $ |
| $ | ||
Accrued expenses |
|
|
| ||
Accrued employee benefits and bonus |
|
|
| ||
Accrued income taxes |
|
|
| ||
Current lease liability |
|
|
| ||
Total Current Liabilities |
|
|
| ||
Other noncurrent liabilities |
|
|
| ||
Lease liability |
|
|
| ||
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
|
Preferred stock, $ |
|
|
|
|
|
authorized, none issued |
|
|
| ||
Class A common stock, $ |
|
|
|
|
|
shares authorized; |
|
|
|
|
|
issued at October 29, 2022 and January 29, 2022, respectively |
|
|
| ||
Convertible Class B common stock, $ |
|
|
|
|
|
|
|
|
|
| |
issued at October 29, 2022 and January 29, 2022, respectively |
|
|
| ||
Additional paid-in capital |
|
|
| ||
Retained earnings |
|
|
| ||
Accumulated other comprehensive income |
| ( |
|
| ( |
Total Stockholders' Equity |
|
|
| ||
Total Liabilities and Stockholders' Equity | $ |
| $ | ||
See notes to condensed consolidated financial statements (unaudited).
4
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| Nine Months Ended |
| |||
| October 29, 2022 |
| October 30, 2021 |
| ||
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
| |||
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
Net income | $ |
| $ |
| ||
Adjustments to reconcile net income to net cash provided |
|
|
|
|
|
|
by operating activities: |
|
|
|
|
|
|
Depreciation |
|
|
|
| ||
Provision for customer credit losses |
|
|
|
| ||
Purchase premium and premium amortization of investments |
|
|
| ( |
| |
Share-based compensation |
|
|
|
| ||
Loss on disposal of property and equipment |
|
|
|
| ||
Changes in operating assets and liabilities which provided |
|
|
|
|
|
|
(used) cash: |
|
|
|
|
|
|
Accounts receivable |
|
|
| ( |
| |
Merchandise inventories |
|
|
| ( |
| |
Prepaid and other assets |
|
|
| ( |
| |
Operating lease right-of-use assets and liabilities |
| ( |
|
| ( |
|
Accrued income taxes |
|
|
|
| ||
Accounts payable, accrued expenses and other liabilities |
| ( |
|
|
| |
Net cash provided by operating activities |
|
|
|
| ||
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
Expenditures for property and equipment |
| ( |
|
| ( |
|
Purchase of short-term investments |
| ( |
|
| ( |
|
Sales of short-term investments |
|
|
|
| ||
Net cash provided by (used in) investing activities |
|
|
| ( |
| |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
Dividends paid |
| ( |
|
| ( |
|
Repurchase of common stock |
| ( |
|
| ( |
|
Proceeds from employee stock purchase plan |
|
|
|
| ||
Net cash used in financing activities |
| ( |
|
| ( |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash |
| ( |
|
|
| |
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash at beginning of period |
|
|
|
| ||
Cash, cash equivalents, and restricted cash at end of period | $ |
| $ |
| ||
|
|
|
|
|
|
|
Non-cash activity: |
|
|
|
|
|
|
Accrued other assets and property and equipment | $ |
| $ |
| ||
See notes to condensed consolidated financial statements (unaudited).
5
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 | $ | $ | $ | $ | ( | $ | ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
| |||||
Unrealized gain (loss) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
deferred income tax benefit of ($ |
|
|
|
| ( |
| ( | |||
Dividends paid ($ |
|
|
| ( |
|
| ( | |||
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 |
| ( |
|
| ( |
|
| ( | ||
|
|
|
|
|
|
|
|
|
|
|
Balance — April 30, 2022 | $ | $ | $ | $ | ( | $ | ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
| ( |
|
| ( | |||
Unrealized gain (loss) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
deferred income tax expense of $ |
|
|
|
|
| |||||
Dividends paid ($ |
|
|
| ( |
|
| ( | |||
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 |
| ( |
|
| ( |
|
| ( | ||
|
|
|
|
|
|
|
|
|
|
|
Balance — July 30, 2022 | $ | $ | $ | $ | ( | $ | ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
| ( |
|
| ( | |||
Unrealized gain (loss) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
deferred income tax benefit of ($ |
|
|
|
| ( |
| ( | |||
Dividends paid ($ |
|
|
| ( |
|
| ( | |||
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 |
| ( |
|
| ( |
|
| ( | ||
|
|
|
|
|
|
|
|
|
|
|
Balance — October 29, 2022 | $ | $ | $ | $ | ( | $ | ||||
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 30, 2021 | $ | $ | $ | $ | $ | |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
| |||||
Unrealized gain (loss) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
deferred income tax benefit of ($ |
|
|
|
| ( |
| ( | |||
Dividends paid ($ |
|
|
|
|
| |||||
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 |
| ( |
|
| ( |
|
| ( | ||
|
|
|
|
|
|
|
|
|
|
|
Balance — May 1, 2021 | $ | $ | $ | $ | $ | |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
| |||||
Unrealized gain (loss) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
deferred income tax benefit of ($ |
|
|
|
| ( |
| ( | |||
Dividends paid ($ |
|
|
| ( |
|
| ( | |||
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 |
| ( |
|
| ( |
|
| ( | ||
|
|
|
|
|
|
|
|
|
|
|
Balance — July 31, 2021 | $ | $ | $ | $ | $ | |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
| |||||
Unrealized gain (loss) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
deferred income tax benefit of ($ |
|
|
|
| ( |
| ( | |||
Dividends paid ($ |
|
|
| ( |
|
| ( | |||
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 |
| ( |
|
| ( |
|
| ( | ||
|
|
|
|
|
|
|
|
|
|
|
Balance — October 30, 2021 | $ | $ | $ | $ | $ | |||||
See notes to condensed consolidated financial statements (unaudited).
NOTE 1 - GENERAL:
On November 17, 2022, the Board of Directors maintained the quarterly dividend at $
Recently Adopted Accounting Policies
In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update provides for increased transparency of government assistance, including the disclosure of the types of assistance an entity receives, an entity’s method of accounting for government assistance and the effect of the assistance on an entity’s financial statements. This standard is effective for annual periods beginning after December 15, 2021. The Company adopted this standard on a prospective basis on January 30, 2022.
7
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
8
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
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 |
|
| Nine Months Ended | ||||||
|
|
|
| October 29, 2022 |
|
| October 30, 2021 |
|
| October 29, 2022 |
|
| October 30, 2021 |
|
| (Dollars in thousands) | |||||||||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
| |
| Net earnings (loss) |
| $ | ( |
| $ |
| $ |
| $ | |||
| (Earnings) loss allocated to non-vested equity awards |
|
|
|
| ( |
|
| ( |
|
| ( | |
| Net earnings (loss) available to common stockholders |
| $ | ( |
| $ |
| $ |
| $ | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
| |
| Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
| ||||
| Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
| |
| Basic earnings (loss) per share |
| $ | ( |
| $ |
| $ |
| $ | |||
| Diluted earnings (loss) per share |
| $ | ( |
| $ |
| $ |
| $ | |||
9
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
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 29, 2022:
|
| Changes in Accumulated Other |
| ||||
|
| Comprehensive Income (a) |
| ||||
|
|
|
| Unrealized Gains |
|
|
|
|
|
|
| and (Losses) on |
|
|
|
|
|
|
| Available-for-Sale |
|
|
|
|
|
|
| Securities |
|
|
|
| Beginning Balance at July 30, 2022 |
| $ | ( |
|
|
|
| Other comprehensive income before |
|
|
|
|
|
|
| reclassification |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated |
|
|
|
|
|
|
| other comprehensive income (b) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Ending Balance at October 29, 2022 |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
| (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. | ||||||
| (b) Includes an $ | ||||||
|
| Changes in Accumulated Other |
| ||||
|
| Comprehensive Income (a) |
| ||||
|
|
|
| Unrealized Gains |
|
|
|
|
|
|
| and (Losses) on |
|
|
|
|
|
|
| Available-for-Sale |
|
|
|
|
|
|
| Securities |
|
|
|
| Beginning Balance at January 29, 2022 |
| $ | ( |
|
|
|
| Other comprehensive income before |
|
|
|
|
|
|
| reclassification |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated |
|
|
|
|
|
|
| other comprehensive income (b) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Ending Balance at October 29, 2022 |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
| (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. | ||||||
| (b) Includes an $ | ||||||
10
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
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 30, 2021:
|
| Changes in Accumulated Other |
| ||||
|
| Comprehensive Income (a) |
| ||||
|
|
|
| Unrealized Gains |
|
|
|
|
|
|
| and (Losses) on |
|
|
|
|
|
|
| Available-for-Sale |
|
|
|
|
|
|
| Securities |
|
|
|
| Beginning Balance at July 31, 2021 |
| $ |
|
|
| |
| Other comprehensive income before |
|
|
|
|
|
|
| reclassifications |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated |
|
|
|
|
|
|
| other comprehensive income (b) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Ending Balance at October 30, 2021 |
| $ |
|
|
| |
|
|
|
|
|
|
|
|
| (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. | ||||||
| (b) Includes a $ | ||||||
|
| Changes in Accumulated Other |
| ||||
|
| Comprehensive Income (a) |
| ||||
|
|
|
| Unrealized Gains |
|
|
|
|
|
|
| and (Losses) on |
|
|
|
|
|
|
| Available-for-Sale |
|
|
|
|
|
|
| Securities |
|
|
|
| Beginning Balance at January 30, 2021 |
| $ |
|
|
| |
| Other comprehensive income before |
|
|
|
|
|
|
| reclassifications |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated |
|
|
|
|
|
|
| other comprehensive income (b) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
| Ending Balance at October 30, 2021 |
| $ |
|
|
| |
|
|
|
|
|
|
|
|
| (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. | ||||||
| (b) Includes a $ | ||||||
11
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
NOTE 4 – FINANCING ARRANGEMENTS:
As of October 29, 2022, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
The Company has determined that it has
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
12
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):
The following schedule summarizes certain segment information (in thousands):
Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
October 29, 2022 | Retail | Credit | Total |
| October 29, 2022 | Retail | Credit | Total |
|
|
|
|
|
|
|
|
|
Revenues | $ | $ | $ |
| Revenues | $ | $ | $ |
Depreciation |
| Depreciation | ||||||
Interest and other income | ( | ( |
| Interest and other income | ( | ( | ||
Income (Loss) before income taxes | ( | ( |
| Income (Loss) before income taxes | ||||
Capital expenditures |
| Capital expenditures | ||||||
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
October 30, 2021 | Retail | Credit | Total |
| October 30, 2021 | Retail | Credit | Total |
|
|
|
|
|
|
|
|
|
Revenues | $ | $ | $ |
| Revenues | $ | $ | $ |
Depreciation |
| Depreciation | ||||||
Interest and other income | ( | ( |
| Interest and other income | ( | ( | ||
Income (Loss) before income taxes |
| Income (Loss) before income taxes | ||||||
Capital expenditures |
| Capital expenditures | ||||||
|
|
|
|
|
|
|
|
|
| Retail | Credit | Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of October 29, 2022 | $ | $ | $ |
|
|
|
|
|
Total assets as of January 29, 2022 |
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| October 29, 2022 |
|
| October 30, 2021 |
|
| October 29, 2022 |
|
| October 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll | $ |
| $ |
| $ |
| $ | ||||
Postage |
|
|
|
|
|
|
| ||||
Other expenses |
|
|
|
|
|
|
| ||||
Total expenses | $ |
| $ |
| $ |
| $ | ||||
13
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
NOTE 6 – STOCK-BASED COMPENSATION:
As of October 29, 2022, 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 October 29, 2022:
|
| 2013 |
| 2018 |
|
|
|
| Plan |
| Plan |
| Total |
Options and/or restricted stock initially authorized |
|
|
| |||
Options and/or restricted stock available for grant: |
|
|
|
|
|
|
October 29, 2022 |
|
|
|
|
|
|
| Weighted Average |
| Number of |
|
| Grant Date Fair |
| Shares |
|
| Value Per Share |
Restricted stock awards at January 29, 2022 |
| $ | ||
Granted |
|
| ||
Vested | ( |
|
| |
Forfeited or expired | ( |
|
| |
Restricted stock awards at October 29, 2022 |
| $ |
14
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED):
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 29, 2022 and January 29, 2022:
|
|
|
|
| Quoted |
|
|
|
|
|
| |
|
|
|
|
| Prices in |
|
|
|
|
|
| |
|
|
|
|
| Active |
| Significant |
|
|
| ||
|
|
|
|
| Markets for |
| Other |
| Significant | |||
|
|
|
|
| Identical |
| Observable |
| Unobservable | |||
|
| October 29, 2022 |
| Assets |
| Inputs |
| Inputs | ||||
Description |
|
| Level 1 |
| Level 2 |
| Level 3 | |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal Bonds |
| $ |
| $ |
| $ |
| $ | ||||
Corporate Bonds |
|
|
|
|
|
|
|
| ||||
U.S. Treasury/Agencies Notes and Bonds |
|
|
|
|
|
|
|
| ||||
Cash Surrender Value of Life Insurance |
|
|
|
|
|
|
|
| ||||
Asset-backed Securities (ABS) |
|
|
|
|
|
|
|
| ||||
Corporate Equities |
|
|
|
|
|
|
|
| ||||
Commercial Paper |
|
|
|
|
|
|
|
| ||||
Total Assets |
| $ |
| $ |
| $ |
| $ | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation |
|
| ( |
|
|
|
|
|
| ( | ||
Total Liabilities |
| $ | ( |
| $ |
| $ |
| $ | ( | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
|
|
|
|
| Quoted |
|
|
|
|
|
| |
|
|
|
|
| Prices in |
|
|
|
|
|
| |
|
|
|
|
| Active |
| Significant |
|
|
| ||
|
|
|
|
| Markets for |
| Other |
| Significant | |||
|
|
|
|
| Identical |
| Observable |
| Unobservable | |||
|
|
| January 29, 2022 |
| Assets |
| Inputs |
| Inputs | |||
Description |
|
|
| Level 1 |
| Level 2 |
| Level 3 | ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal Bonds |
| $ |
| $ |
| $ |
| $ | ||||
Corporate Bonds |
|
|
|
|
|
|
|
| ||||
U.S. Treasury/Agencies Notes and Bonds |
|
|
|
|
|
|
|
| ||||
Cash Surrender Value of Life Insurance |
|
|
|
|
|
|
|
| ||||
Asset-backed Securities (ABS) |
|
|
|
|
|
|
|
| ||||
Corporate Equities |
|
|
|
|
|
|
|
| ||||
Commercial Paper |
|
|
|
|
|
|
|
| ||||
Total Assets |
| $ |
| $ |
| $ |
| $ | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation |
|
| ( |
|
|
|
|
|
| ( | ||
Total Liabilities |
| $ | ( |
| $ |
| $ |
| $ | ( | ||
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 29, 2022 and January 29, 2022. The state, municipal and corporate bonds have contractual maturities which range from four days to
Additionally, at October 29, 2022, the Company had $
Level 1 category 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
16
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3 of the valuation hierarchy. The Level 3 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet. These funds are designed to mirror mutual funds and money market funds that are observable and actively traded.
| Fair Value | |
| Measurements Using | |
| Significant Unobservable | |
| Asset Inputs (Level 3) | |
| Cash Surrender Value | |
Beginning Balance at January 29, 2022 | $ | |
Redemptions |
| ( |
Additions |
| |
Total gains or (losses): |
|
|
Included in interest and other income (or changes in net assets) |
| ( |
Included in other comprehensive income |
| |
Ending Balance at October 29, 2022 | $ | |
|
|
|
| Fair Value | |
| Measurements Using | |
| Significant Unobservable | |
| Liability Inputs (Level 3) | |
| Deferred Compensation | |
Beginning Balance at January 29, 2022 | $ | ( |
Redemptions |
| |
Additions |
| ( |
Total (gains) or losses: |
|
|
Included in interest and other income (or changes in net assets) |
| |
Included in other comprehensive income |
| - |
Ending Balance at October 29, 2022 | $ | ( |
17
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
| Fair Value | ||
| Measurements Using | ||
| Significant Unobservable |
| |
| Asset Inputs (Level 3) |
| |
| Cash Surrender Value |
| |
Beginning Balance at January 30, 2021 | $ |
| |
Additions |
|
| |
Total gains or (losses): |
|
|
|
Included in interest and other income (or changes in net assets) |
|
| |
Included in other comprehensive income |
|
| |
Ending Balance at January 29, 2022 | $ |
| |
|
|
|
|
| Fair Value |
| |
| Measurements Using |
| |
| Significant Unobservable |
| |
| Liability Inputs (Level 3) |
| |
| Deferred Compensation |
| |
Beginning Balance at January 30, 2021 | $ | ( |
|
Redemptions |
|
| |
Additions |
| ( |
|
Total (gains) or losses: |
|
|
|
Included in interest and other income (or changes in net assets) |
| ( |
|
Included in other comprehensive income |
| - |
|
Ending Balance at January 29, 2022 | $ | ( |
|
18
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
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 the Company’s 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 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 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. During the three
19
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
and nine months ended October 29, 2022, the Company estimated customer credit losses of $,
The following table provides information about receivables and contract liabilities from contracts with customers (in thousands):
| Balance as of | ||||
|
| October 29, 2022 |
|
| January 29, 2022 |
|
|
|
|
|
|
Proprietary Credit Card Receivables, net | $ |
| $ | ||
Gift Card Liability | $ |
| $ | ||
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 up to
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):
20
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
| Three Months Ended | ||||
|
| October 29, 2022 |
|
| October 30, 2021 |
|
|
|
|
|
|
Operating lease cost (a) | $ |
| $ | ||
Variable lease cost (b) | $ |
| $ | ||
|
|
|
|
|
|
(a) Includes right-of-use asset amortization of ($ | |||||
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. | |||||
| Nine Months Ended | ||||
|
| October 29, 2022 |
|
| October 30, 2021 |
|
|
|
|
|
|
Operating lease cost (a) | $ |
| $ | ||
Variable lease cost (b) | $ |
| $ | ||
|
|
|
|
|
|
(a) Includes right-of-use asset amortization of ($ | |||||
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. | |||||
21
|
|
THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 |
|
|
Operating cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
| October 29, 2022 |
| October 30, 2021 | ||
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities | $ |
| $ | ||
Non-cash activity: |
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations | $ |
| $ | ||
|
|
|
|
|
|
| Nine Months Ended | ||||
| October 29, 2022 |
| October 30, 2021 | ||
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities | $ |
| $ | ||
Non-cash activity: |
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations | $ |
| $ | ||
| As of | ||
| October 29, 2022 |
| October 30, 2021 |
|
|
|
|
Weighted-average remaining lease term |
| ||
Weighted-average discount rate |
| ||
Fiscal Year |
|
|
|
|
|
2022 (a) | $ | |
2023 |
| |
2024 |
| |
2025 |
| |
2026 |
| |
Thereafter |
| |
Total lease payments |
| |
Less: Imputed interest |
| |
Present value of lease liabilities | $ | |
|
|
|
(a) Excluding the nine months ended October 29, 2022 | ||
22
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 January 28, 2023 (“fiscal 2022”) and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodels and closures 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, the availability of credit and inflation; changes in laws, regulations and government policies affecting our business, including, but not limited to, tariffs; uncertainties regarding the impact of any governmental actions 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 29, 2022 (“fiscal 2021”), as amended or supplemented, and in other reports we file with or furnish to the Securities and Exchange Commission (“SEC”) from time to time. We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise.
23
THE CATO CORPORATION |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
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 29, 2022. 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 calculation 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.
24
THE CATO CORPORATION |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
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 29, 2022 |
| October 30, 2021 |
|
| October 29, 2022 |
| October 30, 2021 |
|
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) | 70.7 |
| 61.1 |
|
| 67.5 |
| 58.4 |
|
Selling, general and administrative (exclusive of depreciation) | 35.1 |
| 36.6 |
|
| 31.8 |
| 33.5 |
|
Depreciation | 1.6 |
| 1.9 |
|
| 1.5 |
| 1.6 |
|
Interest and other income | (1.3) |
| (0.3) |
|
| (0.8) |
| (0.3) |
|
Income (loss) before income taxes | (5.2) |
| 1.7 |
|
| 1.0 |
| 7.7 |
|
Net income (loss) | (2.5) |
| 5.0 |
|
| 0.5 |
| 7.4 |
|
25
THE CATO CORPORATION |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
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 2021 Form 10-K.
Recent Developments
COVID-19 Update
There is still significant uncertainty regarding the lingering effects of the COVID-19 pandemic on our business, financial condition, results of operations, cash flows, and liquidity. In particular, the Company is subject to the continued effects of disruption in the global supply chain, including as a result of government responses to COVID-19 surges in the foreign countries where our merchandise is produced, inflation and its impact on our cost of products, transportation, wage rates and other operating costs, as well as, the impact on our customers’ disposable incomes, and the availability of workers at our stores, distribution center and corporate office. The Company expects that these uncertainties and perhaps others related to the pandemic will continue to impact the Company in fiscal 2022.
Inflationary Cost Pressure and Rising Interest Rates
The COVID-19 pandemic and resulting supply chain disruptions, as well as certain geo-political matters, have resulted in significant price increases associated with the acquisition, shipping, transportation and distribution costs for the merchandise we purchase for sale to our customers. In addition to the price increases relating to our merchandise, costs for fuel, food, and housing, including rent, as well as other consumables across the economy, are increasingly impacting our customers’ disposable income. In response to the inflationary pressures, the Federal Reserve began raising interest rates and is committed to continue raising interest rates until the inflationary pressures subside. These rising interest rates have adversely affected the availability and cost of credit for businesses and our customers.
We believe that these price increases and rising interest rates have had, and will likely continue to have, a negative impact on consumer behavior and, by extension, our results of operations and financial condition during fiscal 2022
Supply Chain Disruptions
We source a significant portion of our merchandise assortment from third parties who manufacture their products in countries that have experienced widespread issues with the pandemic, thereby significantly impacting the global supply chain for merchandise inventories. Disruptions in the global transportation network remain prevalent, particularly in key ports or shipping lanes that are used for the transportation of our merchandise. These issues are resulting in shipping delays and increased shipping costs throughout the retail industry, including us. Any untimely delivery of merchandise could have a negative impact on our ability to serve our customers with the specific merchandise they want in the quantities they wish to purchase in a timely manner, thereby potentially resulting in lost sales or increased markdowns to move through excess fashion and seasonal inventories that were delivered late. We continue to monitor the situation closely and are in contact with our supply chain partners and key suppliers to constantly assess
26
THE CATO CORPORATION |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
delivery delays. However, we are unable to predict the specific effects these factors will have on our fiscal 2022 results of operations.
Labor Challenges and Wage Inflation
The COVID-19 pandemic and the resulting factors above have also created challenges related to the availability of sufficient labor from time to time, and have caused a significant increase in the competition for labor among consumer facing companies. This competition for labor has driven significant increases in wages in order to compete for sufficient labor availability and/or to prevent the loss of existing workforce in our stores, distribution center and corporate office. We expect these pressures to continue throughout fiscal 2022.
Comparison of the Three and Nine Months ended October 29, 2022 with October 30, 2021
Total retail sales for the third quarter were $174.9 million compared to last year’s third quarter sales of $170.5 million, a 3% increase. The Company’s sales increase in the third quarter of fiscal 2022 is primarily due to a 3% increase in same-store sales and sales from new stores, partially offset by permanently closed stores. For the nine months ended October 29, 2022, total retail sales were $574.9 million compared to last year’s comparable nine month sales of $587.7 million, a 2% decrease. Sales in the first nine months of fiscal 2022 decreased primarily due to a 2% decrease in same-store sales, 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 29, 2022 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 $176.6 million and $580.2 million for the three and nine months ended October 29, 2022, compared to $172.2 million and $593.0 million for the three and nine months ended October 30, 2021, respectively. The Company operated 1,317 stores at October 29, 2022 compared to 1,324 stores at the end of last year’s third quarter. During the first nine months of fiscal 2022, the Company opened 15 stores and closed nine stores. The Company currently expects to open approximately 15 stores and to close approximately 40 stores in total in fiscal 2022.
Credit revenue of $0.6 million represented 0.3% of total revenues in the third quarter of fiscal 2022, compared to 2021 credit revenue of $0.5 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 2022, compared to last year’s third quarter expense of $0.5 million.
Other revenue, a component of total revenues, was $1.7 million and $5.4 million for the three and nine months ended October 29, 2022, respectively, compared to $1.7 million and $5.3 million for the prior year’s comparable three and nine month periods.
Cost of goods sold was $123.8 million, or 70.7% of retail sales and $387.7 million, or 67.5% of retail sales for the three and nine months ended October 29, 2022, respectively, compared to $104.2 million, or 61.1% of retail sales and $343.5 million, or 58.4% of retail sales for the comparable three and nine month periods of fiscal 2021. The overall increase in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2022 resulted primarily from higher sales of marked down goods and increases in freight and distribution costs. Cost of goods sold includes merchandise costs (net of discounts and allowances), buying costs,
27
THE CATO CORPORATION |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
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 22.8% to $51.2 million for the third quarter of fiscal 2022 and decreased by 23.4% to $187.1 million for the first nine months of fiscal 2022, compared to $66.3 million and $244.2 million for the prior year’s comparable three and nine months of fiscal 2021. 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 $61.4 million, or 35.1% of retail sales and $182.6 million, or 31.8% of retail sales for the third quarter and first nine months of fiscal 2022, respectively, compared to $62.5 million, or 36.6% of retail sales and $196.7 million, or 33.5% of retail sales for the prior year’s comparable three and nine month periods. The overall decrease in SG&A expense for the third quarter and first nine months of fiscal 2022 is primarily due to lower incentive compensation expense, partially offset by increased payroll expense, which is a reflection of normalized store operations and higher wages.
Depreciation expense was $2.9 million, or 1.6% of retail sales and $8.4 million, or 1.5% of retail sales for the third quarter and first nine months of fiscal 2022, respectively, compared to $3.2 million, or 1.9% of retail sales and $9.4 million or 1.6% of retail sales for the comparable three and nine month periods of fiscal 2021, respectively.
Interest and other income was $2.3 million, or 1.3% of retail sales and $4.6 million, or 0.8% of retail sales for the three and nine months ended October 29, 2022, respectively, compared to $0.5 million, or 0.3% of retail sales and $1.7 million, or 0.3% of retail sales for the comparable three and nine month periods of fiscal 2021, respectively. The increase for the third quarter and first nine months of fiscal 2022 compared to fiscal 2021 is primarily attributable to receiving a Business Recovery Grant from the state of North Carolina.
Income tax benefit was $4.7 million for the third quarter and $3.0 million expense for the first nine months of fiscal 2022, respectively, compared to an income tax benefit of $5.7 million and $1.9 million expense for the comparable three and nine month periods of fiscal 2021, respectively. For the first nine months of fiscal 2022, the Company’s effective tax rate was 49.7% compared to 4.3% for the first nine months of fiscal 2021. The change in the 2022 year-to-date effective tax rate was primarily due to an increase in Global Intangible Low-taxed Income (GILTI), state income taxes and non-deductible officer’s compensation, offset by the foreign rate differential, foreign tax credits and release of reserves for uncertain tax positions, as a percentage on lower pre-tax earnings.
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 2022 and the next 12 months.
Cash provided by operating activities during the first nine months of fiscal 2022 was $19.3 million as compared to $79.4 million provided in the first nine months of fiscal 2021. Cash provided by operating
28
THE CATO CORPORATION |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
activities for the first nine months of fiscal 2022 was primarily generated by earnings adjusted for depreciation and changes in working capital. The decrease in cash provided of $60.1 million for the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021 was primarily due to lower net income and decreases in accounts payable and accrued liabilities primarily related to incentive compensation, partially offset by decreases in accounts receivable and prepaid and other assets.
At October 29, 2022, the Company had working capital of $95.4 million compared to $111.5 million at January 29, 2022. The decrease in working capital is primarily attributable to a decrease in short-term investments and accounts receivable, partially offset by a decrease in accounts payable and accrued bonus and benefits.
As of October 29, 2022, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $35.0 million, less the balance of any revocable letters of credit related to purchase commitments, and was committed through May 2027. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of October 29, 2022. There were no borrowings outstanding, nor any outstanding letters of credit that reduced borrowing availability, as of October 29, 2022 or January 29, 2022. The weighted average interest rate under the credit facility was zero at October 29, 2022 due to no borrowings outstanding.
Expenditures for property and equipment totaled $14.4 million in the first nine months of fiscal 2022, compared to $1.8 million in last fiscal year’s first nine months. The increase in expenditures for property and equipment was primarily due to capital investments in the distribution center and information technology, as well as costs associated with opening 15 new stores. For the full fiscal 2022 year, the Company expects to invest approximately $20.0 million for capital expenditures.
Net cash provided by investing activities totaled $0.2 million in the first nine months of fiscal 2022 compared to $51.3 million used in investing activities in the comparable period of 2021. The increase in net cash provided in 2022 is primarily due to a net decrease in the purchase of short-term investments, partially offset by an increase in capital expenditures.
Net cash used in financing activities totaled $22.2 million in the first nine months of fiscal 2022 compared to $21.3 million used in the comparable period of fiscal 2021. The increase in net cash used in fiscal 2022 is primarily due to higher dividends paid, partially offset by lower stock repurchases.
On November 17, 2022, the Board of Directors maintained the quarterly dividend at $0.17 per share.
As of October 29, 2022, the Company had 601,195 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 29, 2022 and January 29, 2022. The state, municipal and corporate bonds have contractual maturities which range from four days to 4.1 years. The U.S. Treasury Notes have contractual maturities which range from two days to 1.9 years. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and Restricted short-term investments on the accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported
29
THE CATO CORPORATION |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
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 29, 2022, the Company had $0.9 million of corporate equities and deferred compensation plan assets of $8.8 million. At January 29, 2022, the Company had $0.8 million of corporate equities and deferred compensation plan assets of $11.5 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 1, General, and Note 8, Recent Accounting Pronouncements.
30
THE CATO CORPORATION |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|
|
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 29, 2022. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of October 29, 2022, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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 29, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
31
THE CATO CORPORATION
PART II OTHER INFORMATION
|
|
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 29, 2022. 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. Other than as noted below, there have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for our fiscal year ended January 29, 2022.
We qualify for exemption as a “controlled company” from compliance with certain corporate governance rules of the New York Stock Exchange (“NYSE”) relating to independent directors and independent board committees. While we do not currently rely on any of these exemptions, if we elect to do so in the future, you will not have the same protections afforded to shareholders of companies that are subject to these requirements, and the market price of our common stock could be adversely affected.
As previously disclosed, as a result of repurchases of our Class A Common Stock occurring between March 22, 2022 and March 29, 2022 pursuant to the Company’s stock repurchase program that have reduced the total outstanding shares of our Class A Common Stock, Mr. John P. D. Cato, Chairman, President and Chief Executive Officer of the Company and the largest shareholder of the Company, currently beneficially owns a majority of the outstanding voting power of our common stock, which includes both our Class A Common Stock and Class B Common Stock. Consequently, we qualify for exemption as a “controlled company” from compliance with certain corporate governance standards of the NYSE, including the requirements that we have a majority of independent directors on our board, as well as fully independent compensation and nominating and corporate governance committees that are governed by written charters and subject to annual performance evaluations.
Though we currently are not relying on any these exemptions, if in the future we continue to be eligible to do so and elect to take advantage of any of these exemptions, our board of directors may not have a majority of independent directors, our compensation committee may not consist entirely of independent directors, and our directors may not be nominated or selected by independent directors. Accordingly, you would not have the same protections afforded to shareholders of companies that are subject to all of these corporate governance requirements of the NYSE, and the market price of our common stock could be adversely affected.
32
THE CATO CORPORATION
PART II OTHER INFORMATION
|
|
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 29, 2022:
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 2022 |
| - |
| $ | - |
| - |
|
|
September 2022 |
| 197,450 |
|
| 9.48 |
| 197,450 |
|
|
October 2022 |
| 9,782 |
|
| 9.53 |
| 9,782 |
|
|
Total |
| 207,232 |
| $ | 9.48 |
| 207,232 |
| 601,195 |
(1) Prices include trading costs.
(2) As of July 30, 2022, the Company’s share repurchase program had 808,427 shares remaining in open authorizations. During the third quarter ended October 29, 2022, the Company repurchased and retired 207,232 shares under this program for approximately $1,965,040 or an average market price of $9.48 per share. As of October 29, 2022, the Company had 601,195 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
33
THE CATO CORPORATION
PART II OTHER INFORMATION
|
|
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* |
| Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. |
|
|
|
31.2* |
| Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. |
|
|
|
32.1* |
| |
|
|
|
32.2* |
| |
|
|
|
101.1* |
| The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three Months and Nine Months Ended October 29, 2022 and October 30, 2021; (ii) Condensed Consolidated Balance Sheets at October 29, 2022 and January 29, 2022; (iii) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 29, 2022 and October 30, 2021; (iv) Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended October 29, 2022 and October 30, 2021; 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.
34
THE CATO CORPORATION
PART II OTHER INFORMATION
|
|
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
November 22, 2022 |
| /s/ John P. D. Cato |
Date |
| John P. D. Cato Chairman, President and Chief Executive Officer |
|
|
|
November 22, 2022 |
| /s/ Charles D. Knight |
Date |
| Charles D. Knight Executive Vice President Chief Financial Officer |
35