CATO CORP - Annual Report: 2023 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
January 28, 2023
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
1-31340
The Cato Corporation
Registrant
Delaware
56-0484485
State of Incorporation
I.R.S. Employer Identification Number
8100 Denmark Road
Charlotte
,
North Carolina
28273-5975
Address of Principal Executive Offices
704
/
554-8510
Registrant’s Telephone Number
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A - Common Stock, par value $.033 per share
CATO
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
☐
No
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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.
Ye
s
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405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files). Yes
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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
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Accelerated filer
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Emerging Growth Company
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Non-accelerated filer
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complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report.
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in the filing reflect the correction of an error to previously issued financial statements.
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received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
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day of the Company’s most recent second quarter, was $
226,038,963
on that date.
18,723,225
1,763,652
DOCUMENTS INCORPORATED BY REFERENCE
annual report:
Part III — Items 10, 11, 12, 13 and 14
2
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1.
Business ..........................................................................................................................
5 – 10
Item 1A.
Risk Factors ....................................................................................................................
10 – 22
Item 1B.
Unresolved Staff Comments ...........................................................................................
22
Item 2.
Properties ........................................................................................................................
22
Item 3.
Legal Proceedings ...........................................................................................................
23
Item 3A.
Executive Officers of the Registrant ...............................................................................
24
Item 4.
Mine Safety Disclosures .................................................................................................
24
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ........................................................................................
25 – 27
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................................................................
28 – 34
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk ........................................
34
Item 8.
Financial Statements and Supplementary Data ..............................................................
35 – 65
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .......................................................................................................................
66
Item 9A.
Controls and Procedures .................................................................................................
66
Item 9B.
Other Information ...........................................................................................................
66
Item 9C.
Disclosures Regarding Foreign Jurisdictions That Prevent Inspections .........................
66
PART III
Item 10.
Directors, Executive Officers and Corporate Governance .............................................
67
Item 11.
Executive Compensation ................................................................................................
67
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ........................................................................................................
67
Item 13.
Certain Relationships and Related Transactions, and Director Independence ...............
68
Item 14.
Principal Accountant Fees and Services .........................................................................
68
PART IV
Item 15.
Exhibits and Financial Statement Schedules ..................................................................
69
Item 16.
Form 10-K Summary ………………………………………………………………….
71
3
Forward-looking Information
including the accompanying Notes appearing in this report. Any of the following are “forward-looking”
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-K and any documents
incorporated by reference that reflect projections or expectations of our future financial or economic
performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions,
plans and objectives for future operations, including those contained in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” (4) statements relating to our operations or
activities for our fiscal year ending February 3, 2024 (“fiscal 2023”) and beyond, including, but not
limited to, statements regarding expected amounts of capital expenditures and store openings, relocations,
remodels and closures, statements regarding the potential impact of the COVID-19 pandemic and related
responses and mitigation efforts, as well as the potential impact of supply chain disruptions, inflationary
pressures and other economic conditions on our business, results of operations and financial condition and
statements regarding new store development strategy; and (5) statements relating to our future
contingencies. When possible, we have attempted to identify forward-looking statements by using words
such as “will,” “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,”
“may,” “plans,” “could,” “would,” “should” and any variations or negative formations of such words and
similar expressions. We can give no assurance that actual results or events will not differ materially from
those expressed or implied in any such forward-looking statements. Forward-looking statements included
in this report are based on information available to us as of the filing date of this report, but subject to
known and unknown risks, uncertainties and other factors that could cause actual results to differ
materially from those contemplated by the forward-looking statements. Such factors include, but are not
limited to, the following: any actual or perceived deterioration in the conditions that drive consumer
confidence and spending, including, but not limited to, prevailing social, economic, political and public
health conditions and uncertainties, levels of unemployment, fuel, energy and food costs, wage rates, tax
rates, interest rates, home values, consumer net worth, the availability of credit and inflation; changes in
laws, regulations or governmental policies affecting our business, including but not limited to tariffs;
uncertainties regarding the impact of any governmental action regarding, or responses to, the foregoing
conditions; competitive factors and pricing pressures; our ability to predict and respond to rapidly
changing fashion trends and consumer demands; our ability to successfully implement our new store
development strategy to increase new store openings and our ability of any such new stores to grow and
perform as expected; adverse weather, public health threats (including the global COVID-19 pandemic)
or similar conditions that may affect our sales or operations; inventory risks due to shifts in market
demand, including the ability to liquidate excess inventory at anticipated margins; and other factors
discussed under “Risk Factors” in Part I, Item 1A of this annual report on Form 10-K for the fiscal year
ended January 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.
and its subsidiaries, unless the context indicates another meaning and except that when used with
reference to common stock or other securities described herein and in describing the positions held by
management of the Company, such terms include only The Cato Corporation. Our website is located at
www.catofashions.com where we make available, free of charge, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports
(including amendments to these reports) filed or furnished pursuant to Section 13(a) or 15(d) under the
Securities Exchange Act of 1934. These reports are available as soon as reasonably practicable after we
electronically file these materials with the SEC. We also post on our website the charters of our Audit,
Compensation and Corporate Governance and Nominating Committees; our Corporate Governance
Guidelines; Code of Business Conduct and Ethics and Code of Ethics for the Principal Executive Officer,
Principal Financial Officer and Principal Accounting Officer and any amendments or waivers thereto for
any of our directors or executive officers; and any other publicly available corporate governance materials
4
contemplated by SEC or New York Stock Exchange regulations. The information contained on our
website, www.catof ashions.com, is not, and should in no way be construed as, a part of this or any other
report that we filed with or furnished to the SEC.
5
PART I
Item 1.
Business:
Background
states, principally in the southeastern United States, under the names “Cato,” “Cato Fashions,” “Cato
Plus,” “It’s Fashion,” “It’s Fashion Metro” and “Versona.” The Cato concept seeks to offer quality
fashion apparel and accessories at low prices every day, in junior/missy and plus sizes. The Cato
concept’s stores and e-commerce website feature a broad assortment of apparel and accessories, including
dressy, career, and casual sportswear, dresses, coats, shoes, lingerie, costume jewelry and handbags. A
major portion of the Cato concept’s merchandise is sold under its private label and is produced by various
vendors in accordance with the concept’s specifications. The It’s Fashion and It’s Fashion Metro
concepts offer fashion with a focus on the latest trendy styles for the entire family at low prices every day.
The Versona concept’s stores and e-commerce website offer quality fashion apparel items, jewelry and
accessories at exceptional values every day. The Company’s stores range in size from 2,200 to 19,000
square feet and are located primarily in strip shopping centers anchored by national discounters or
market-dominant grocery stores. The Company emphasizes friendly customer service and coordinated
merchandise presentations in an appealing store environment. The Company offers its own credit card
and layaway plan. Credit and layaway sales under the Company’s plan represented 6% of retail sales in
fiscal 2022. See Note 13 to the Consolidated Financial Statements, “Reportable Segment Information,”
for a discussion of information regarding the Company’s two reportable segments: retail and credit.
originated as a family-owned business and made its first initial public offering of stock in 1968. In 1980,
the Company went private and in 1987 again conducted an initial public offering.
Business Strategy
in its markets. Management believes the Company’s success is dependent upon its ability to differentiate
its stores from department stores, mass merchandise discount stores and competing specialty stores. The
key elements of the Company’s business strategy are:
Merchandise Assortment.
accessory items in primarily junior/missy, plus sizes, men and kids sizes, toddler to boys size 20 and girls
size 16 with an emphasis on color, product coordination and selection. Colors and styles are coordinated
and presented so that outfit selection is easily made.
Value Pricing.
merchandise offered by department stores and mall specialty apparel chains, but is generally more
fashionable than merchandise offered by discount stores. Management believes that the Company has
positioned itself as the every day low price leader in its market segment.
Strip Shopping Center Locations.
The Company locates its stores principally in convenient strip
centers anchored by national discounters or market-dominant grocery stores that attract large numbers of
potential customers.
Customer Service.
service and to assist customers in merchandise selection and wardrobe coordination.
Credit and Layaway Programs
. The Company offers its own credit card and a layaway plan to make
the purchase of its merchandise more convenient for its customers.
6
Merchandising
Merchandising
accessories to suit the various lifestyles of fashion and value-conscious customers. In addition, the
Company strives to offer on-trend fashion in exciting colors with consistent fit and quality.
lingerie, costume jewelry, handbags, men’s wear and lines for kids and infants. The Company primarily
offers exclusive merchandise with fashion and quality comparable to mall specialty stores at low prices,
every day.
in-house product development and direct sourcing function has enhanced merchandise offerings and
delivers quality, exclusive on-trend styles at lower prices. The product development and direct sourcing
operations provide research on emerging fashion and color trends, technical services and direct sourcing
options.
visit selected stores to monitor the merchandise offerings of other retailers, regularly communicate with
store operations associates and frequently confer with key vendors. The Company also takes aggressive
markdowns on slow-selling merchandise and typically does not carry over merchandise to the next
season.
merchandise is purchased from approximately 100 primary vendors. In fiscal 2022, purchases from the
Company’s largest vendor accounted for approximately 16% of the Company’s total purchases. The
Company is not dependent on its largest vendor or any other vendor for merchandise purchases, and the
loss of any single vendor or group of vendors would not have a material adverse effect on the Company’s
operating results or financial condition. A substantial portion of the Company’s merchandise is sold under
its private labels and is produced by various vendors in accordance with the Company’s strict
specifications. The Company sources a majority of its merchandise directly from manufacturers overseas,
primarily in Southeast Asia. These manufacturers are dependent on materials that are primarily sourced
from China. The Company purchases its remaining merchandise from domestic importers and vendors,
which typically minimizes the time necessary to purchase and obtain shipments; however, these vendors
are dependent on materials primarily sourced from China. The Company opened its own overseas
sourcing operations in the fall of 2014, replacing the Company’s former sourcing agent in 2015. Although
a significant portion of the Company’s merchandise is manufactured overseas, primarily in Southeast
Asia, the Company does not expect that any economic, political, public health or social unrest in any one
country would have a material adverse effect on the Company’s ability to obtain adequate supplies of
merchandise. However, the Company can give no assurance that any changes or disruptions in its
merchandise supply chain would not materially and adversely affect the Company. See “Risk Factors –
Risks Relating To Our Business – Because we source a significant portion of our merchandise directly
and indirectly from overseas, we are subject to risks associated with international operations and risks that
affect the prevailing social, economic, political, public health and other conditions in the areas from
which we source merchandise; changes, disruptions, cost changes or other problems affecting the
Company’s merchandise supply chain have and could continue to materially and adversely affect the
Company’s business, results of operations and financial condition.”
stores based on an analysis of sales trends by merchandise category, customer profiles and climatic
conditions. A merchandise control system provides current information on the sales activity of each
7
merchandise style in each of the Company’s stores. Point-of-sale terminals in the stores collect and
transmit sales and inventory information to the Company’s central database, permitting timely response to
sales trends on a store-by-store basis.
where it is inspected and then allocated by the merchandise distribution staff for shipment to individual
stores. The flow of merchandise from receipt at the distribution center to shipment to stores is controlled
by an online system. Shipments are made by common carrier, and each store receives at least one
shipment per week. The centralization of the Company’s distribution process also subjects it to risks in
the event of damage to or destruction of its distribution facility or other disruptions affecting the
distribution center or the flow of goods into or out of Charlotte, North Carolina. See “Risk Factors –
Risks Relating To Our Information Technology and Related Systems – A disruption or shutdown of our
centralized distribution center or transportation network could materially and adversely affect our
business and results of operations.”
websites and social media as its primary advertising media. The Company’s total advertising
expenditures were approximately 1.0%, 0.9% and 0.8% of retail sales for fiscal years 2022, 2021 and
2020, respectively.
Store Operations
managers and 109 district managers. Regional managers receive a salary plus a bonus based on achieving
targeted goals for sales and payroll. District managers receive a salary plus a bonus based on achieving
targeted objectives for district sales increases. Stores are typically staffed with a manager, two assistant
managers and additional part-time sales associates depending on the size of the store and seasonal
personnel needs. In general, store managers are paid a salary or on an hourly basis as are all other store
personnel. Store managers, assistant managers and sales associates are eligible for monthly and semi-
annual bonuses based on achieving targeted goals for their respective store’s sales increases.
Store Locations
ranging from small towns to large metropolitan areas with trade area populations of 20,000 or more.
Stores average approximately 4,500 square feet in size.
8% in enclosed shopping malls. The Company typically locates stores in strip shopping centers anchored
by a national discounter, primarily Walmart Supercenters, or market-dominant grocery stores. The
Company’s strip center locations provide ample parking and shopping convenience for its customers.
markets, relocating selected existing stores to more desirable locations in the same market area and
closing underperforming stores. The following table sets forth information with respect to the Company’s
development activities since fiscal 2018:
8
Store Development
Number of Stores
Beginning of
Number
Number
Number of Stores
Fiscal Year
Year
Opened
Closed
End of Year
2018………………….……...………….
1,351
40
1,311
2019………………….……...………….
1,311
35
1,281
2020……………………….……...…….
1,281
27
1,330
2021…………....………….……...…….
1,330
25
1,311
2022………….………...….……...…….
1,311
50
1,280
closed based on its sales trends and profitability. The Company intends to continue this review process to
identify underperforming stores.
Credit and Layaway
The Company offers its own credit card, which accounted for 3.1%, 2.5% and 2.7% of retail sales in
fiscal 2022, 2021 and 2020, respectively. The Company’s net bad debt expense was 2.0%, 3.0% and 3.6%
of credit sales in fiscal 2022, 2021 and 2020, respectively.
Customers applying for the Company’s credit card are approved for credit if they have a satisfactory
credit record and the Company has considered the customer’s ability to make the required minimum
payment. Customers are required to make minimum monthly payments based on their account balances.
If the balance is not paid in full each month, the Company assesses the customer a finance charge. If
payments are not received on time, the customer is assessed a late fee subject to regulatory limits.
The Company introduced its loyalty program in October 2021. The loyalty program credits the
customer points based on their purchases of merchandise using the Company’s proprietary credit card.
A
point is earned for every dollar spent on merchandise purchases.
A
$5.00 rewards card is earned for every
250 points accumulated by the customer. The rewards card expires 90 days after the rewards card is
issued. The fiscal 2022 loyalty program impact is immaterial to the fiscal 2022 financial statements. The
loyalty program is accounted for in accordance with ASU 2014-09,
Revenue from Contracts with
Customers (Topic 606)
.
Under the Company’s layaway plan, merchandise is set aside for customers who agree to make
periodic payments. The Company adds a nonrefundable administrative fee to each layaway sale. If no
payment is made within four weeks, the customer is considered to have defaulted, and the merchandise is
returned to the selling floor and again offered for sale, often at a reduced price. All payments made by
customers who subsequently default on their layaway purchase are returned to the customer upon request,
less the administrative fee and a restocking fee.
The Company defers recognition of layaway sales to the accounting period when the customer picks
up and completely pays for layaway merchandise. Administrative fees are recognized in the period in
which the layaway is initiated. Recognition of restocking fees occurs in the accounting period when the
customer defaults on the layaway purchase. Layaway sales represented approximately 2.7%, 2.7% and
2.8% of retail sales in fiscal 2022, 2021 and 2020, respectively.
Information Technology Systems
9
information that is used by management to enhance the timeliness and effectiveness of purchasing and
pricing decisions. Management uses a daily report comparing actual sales with planned sales and a
weekly ranking report to monitor and control purchasing decisions. Weekly reports are also produced
which reflect sales, weeks of supply of inventory and other critical data by product categories, by store
and by various levels of responsibility reporting. Purchases are made based on projected sales, but can be
modified to accommodate unexpected increases or decreases in demand for a particular item.
actual performance measured by stock keeping unit (SKU). Merchandise allocation models are used to
distribute merchandise to individual stores based upon historical sales trends, climatic differences,
customer demographic differences and targeted inventory turnover rates.
Competition
competitive factors in its industry include merchandise assortment and presentation, fashion, price, store
location and customer service. The Company competes with retail chains that operate similar women’s
apparel specialty stores. In addition, the Company competes with mass merchandise chains, discount store
chains, major department stores, off -price retailers and internet-based retailers. Although we believe we
compete favorably with respect to the principal competitive factors described above, many of our direct
and indirect competitors are well-established national, regional or local chains, and some have
substantially greater financial, marketing and other resources. The Company expects its stores in larger
cities and metropolitan areas to face more intense competition.
Seasonality
expects to continue to experience seasonal fluctuations in its revenues, operating income and net income.
Our stores typically generate a higher percentage of our annual net sales and profitability in the first and
second quarters of our fiscal year compared to other quarters. Results of a period shorter than a full year
may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our
business may affect comparisons between periods.
Regulation
international laws and regulations in a variety of areas, including but not limited to, trade, licensing and
permit requirements, import and export matters, privacy and data protection, credit regulation,
environmental matters, recordkeeping and information management, tariffs, taxes, intellectual property
and anti-corruption. Though compliance with these laws and regulations has not had a material effect on
the capital expenditures, results of operations or competitive position of the Company in fiscal 2022, the
Company faces ongoing risks related to its efforts to comply with these laws and regulations and risks
related to noncompliance, as discussed generally below throughout the “Risk Factors” section and in
particular under “Risk Factors – Risks Relating to Accounting and Legal Matters – Our business
operations subject us to legal compliance and litigation risks, as well as regulations and regulatory
enforcement priorities, which could result in increased costs or liabilities, divert our management’s
attention or otherwise adversely affect our business, results of operations and financial condition.”
Human Capital
associates. The Company also employs additional part-time associates during the peak retailing seasons.
The Company’s full-time team associates are engaged in various executive, operating, and administrative
functions in the Home Office and distribution center and the remainder are engaged in store operations.
The Company is not a party to any collective bargaining agreements and considers its associate relations
10
to be good. The Company offers a broad range of Company-paid benefits to its associates including
medical and dental plans, paid vacation, a 401(k) plan, Employee Stock Purchase Plan, Employee Stock
Ownership Plan, disability insurance, associate assistance programs, life insurance and an associate
discount. The level of benefits and eligibility vary depending on the associate’s full-time or part-time
status, date of hire, length of service and level of pay. The Company endeavors to promote diversity, to
provide opportunities for advancement, and to treat all of its associates with dignity and respect. The
Company constantly strives to improve its training programs to develop associates. Over 80% of store
and field management are promoted from within, allowing the Company to internally staff its store base.
The Company has training programs at each level of store operations. The Company also performs
ongoing reviews of its safety protocols, including measures to promote the health and safety of its
associates.
Item 1A.
Risk Factors:
the following risk factors, in addition to the other information contained in this report, including the
disclosures under “Forward-looking Information” above in evaluating our Company and any potential
investment in our common stock. If any of the following risks or uncertainties occur or persist, our
business, financial condition and operating results could be materially and adversely affected, the trading
price of our common stock could decline and you could lose all or a part of your investment in our
common stock. The risks and uncertainties described in this section are not the only ones facing us.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may
also materially and adversely affect our business, operating results, financial condition and value of our
common stock.
Risks Relating to Our Business:
Increasing interest rates and inflationary conditions have and may continue to adversely impact
our customers’ discretionary income or willingness to purchase discretionary items, which may
adversely affect our business, margins, results of operations and financial condition.
Increasing interest rates have adversely affected our customers’ discretionary income, in part due to
increased interest costs associated with credit accounts including revolving credit accounts, car loans,
mortgage loans and other credit accounts. In addition, the increased payments due to higher interest rates
deter our customers from purchasing discretionary items such as apparel, shoes and jewelry. Inflationary
pressures limit our customers’ willingness to purchase apparel, shoe or jewelry products, as prices
associated with non-discretionary products including food and fuel are increasing, reducing our
customers’ discretionary income. Any reduction in our customers’ discretionary spending on our products
could erode our sales volume and adversely affect our results of operations and financial condition.
Increased product costs, freight costs, wage increases and operating costs due to inflation and
other factors, as well as limitations in our ability to offset these cost increases by increasing the
retail prices of our products or otherwise, have and may continue to adversely affect our business,
margins, results of operations and financial condition.
Tight labor markets are causing wages to increase at the store, distribution center and home office
levels, as well as making it more difficult to hire new associates and retain existing associates. The tight
labor market and inflation also are driving up our operating costs. In addition, inflationary pressures on
labor and raw materials used to make our products may continue to increase the cost we pay for our
products. If we are unable to offset the effects of these increased costs to our business by increasing the
retail prices of our products, reducing other expenses or otherwise, our business, margins, results of
operations and financial condition may be adversely affected.
Our ability to raise retail prices in response to these cost increases is limited, in part due to our
customers’ unwillingness to pay higher prices for discretionary items in light of actual or perceived
11
effects of inflation in increasing our customers’ cost of essential items and diminishing customers’
disposable income or financial outlook. Moreover, the persistence or worsening of inflationary
conditions could also lead our customers to reduce their amount of current discretionary spending on our
products even in the absence of price increases, which could erode our sales volume and adversely affect
our results of operations and financial condition.
Because we source a significant portion of our merchandise directly and indirectly from overseas,
we are subject to risks associated with international operations and risks that affect the prevailing
social, economic, political, public health and other conditions in the areas from which we source
merchandise; changes, disruptions, increased costs or other problems affecting the Company’s
merchandise supply chain have and could continue to materially and adversely affect the
Company’s business, results of operations and financial condition.
directly import some of this merchandise and indirectly import the remaining merchandise from domestic
vendors who acquire the merchandise from foreign sources. Further, our third-party vendors are
dependent on materials primarily sourced from China. As a result, political unrest, labor disputes,
terrorism, war, public health threats, including but not limited to communicable diseases (such as
COVID-19), financial or other forms of instability or other events resulting in the disruption of trade from
countries affecting our supply chain, increased security requirements for imported merchandise, or the
imposition of, or changes in, laws, regulations or changes in duties, quotas, tariffs, taxes or governmental
policies regarding or responses to these matters or other factors affecting the availability or cost of
imports, can cause significant delays or interruptions in the supply of our merchandise or increase our
costs. In addition, geopolitical tensions, sanctions, prohibitions, additional tariffs, compliance and
reporting requirements have resulted in increased costs associated with merchandise produced in certain
regions. Any new sanctions, tariffs and reporting requirements enacted in the future may further increase
our costs associated with sourcing products from those regions or limit our ability to procure the products
we source, and our ability to source these products from other regions may be limited or result in
increased sourcing costs.
We are also subject to supply chain disruptions affecting ocean freight, including lack of overall
ocean container shipping capacity versus the current demand for container shipping capacity, lack of our
ability to access the ocean container capacity that we require, lack of equipment such as containers, port
congestion, including increased dwell times for ocean container ships, and other conditions impacting
ocean freight. We also are subject to domestic supply chain disruptions, including lack of domestic
intermodal transportation (trucks and drivers), domestic port congestion, including increased dwell times
for incoming container ships, lack of container yard capacity and lack of available drayage from the ports
and other conditions that impact our domestic supply chain. These supply chain risks have and may
continue to result in both higher costs to transport our merchandise and delayed merchandise arrivals to
our stores, which adversely affect our ability to sell this merchandise and increase markdowns of it.
Our costs are also affected by currency fluctuations, and changes in the value of the dollar relative to
foreign currencies have and may continue to impact our cost of goods sold. Any of these factors can
materially and adversely affect our business and results of operations. In addition, increased energy and
transportation costs have caused us significant cost increases from time to time, and future adverse
changes in these costs or the disruption of the means by which merchandise is transported to us could
cause additional cost increases or interruptions of our supply chain, which could be significant. Further,
we are subject to increased costs or potential disruptions impacting any port or trade route through which
our products move, or we may be subject to increased costs and delays if forced to route freight through
different ports than the ones through which our products typically move. If we are forced to source
merchandise from other countries or other domestic vendors with foreign sources in different countries,
those goods may be more expensive or of a different or inferior quality from the ones we now sell.
Adverse developments affecting the financial services industry, including events or concerns
involving liquidity, defaults or non-performance by financial institutions or transactional
12
counterparties, could adversely affect our business, financial condition or results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments
that affect financial institutions, transactional counterparties or other companies in the financial services
industry or the financial services industry generally, or concerns or rumors about any events of these
kinds or other similar risks, have in the past and may in the future lead to sporadic or market-wide
liquidity problems that could adversely affect us. For example, on March 10, 2023, Silicon Valley Bank,
or SVB, was closed by the California Department of Financial Protection and Innovation, which
appointed the Federal Deposit Insurance Corporation, or the FDIC, as receiver. Similarly, on March 12,
2023, Signature Bank was swept into receivership. In addition on March 8, 2023, Silvergate Capital
announced that it will liquidate its subsidiary, Silvergate Bank, and that the liquidation process is being
supervised by the California Department of Financial Protection and Innovation. Although a statement by
the Department of the Treasury, the Federal Reserve and the FDIC stated that all depositors of SVB
would have access to all of their money after only one business day of closure, including funds held in
uninsured deposit accounts, borrowers under credit agreements, letters of credit and certain other financial
instruments with SVB, Signature Bank or any other financial institution that is placed into receivership by
the FDIC may be unable to access undrawn amounts thereunder.
If any of our transactional counterparties, such as our merchandise vendors and their factors, our
landlords, our payment processors including credit card, gift card and checks, our transportation vendors
and other vendors that provide services and supplies to us, are unable to access funds or lending
arrangements with such a financial institution, such parties’ ability to pay their obligations could be
adversely affected. If this occurred we could be adversely impacted by not receiving the product we
ordered or the payments generated by our sales, by not being able to receive products to our distribution
center or our stores in a timely manner or at all, or by not being able to retain services from third parties
that we require. These impacts may adversely affect our financial condition, results of operations and our
ability to execute our business strategy.
Furthermore, these adverse developments affecting the financial services or related perceptions may
negatively impact our customers’ discretionary income for or our customers’ willingness to purchase
apparel, shoes or jewelry products. Any reduction in our customers’ discretionary spending on our
products could erode our sales volume and adversely affect our results of operations and financial
condition.
Any actual or perceived deterioration in the conditions that drive consumer confidence and
spending have and may continue to materially and adversely affect consumer demand for our
apparel and accessories and our results of operations.
other things, prevailing social, economic, political and public health conditions and uncertainties (such as
matters under debate in the U.S. from time to time regarding budgetary, spending and tax policies), levels
of employment, fuel, interest rates, energy and food costs, salaries and wage rates and other sources of
income, tax rates, home values, consumer net worth, the availability of consumer credit, inflation,
consumer confidence and consumer perceptions of adverse changes in or trends affecting any of these
conditions. Any perception that these conditions may be worsening or continuing to trend negatively may
significantly weaken many of these drivers of consumer spending habits. Adverse perceptions of these
conditions or uncertainties regarding them also generally cause consumers to defer purchases of
discretionary items, such as our merchandise, or to purchase cheaper alternatives to our merchandise, all
of which may also adversely affect our net sales and results of operations. In addition, numerous events,
whether or not related to actual economic conditions, such as downturns in the stock markets, acts of war
or terrorism, political unrest or natural disasters, outbreaks of disease or similar events, may also dampen
consumer confidence, and accordingly, lead to reduced consumer spending. Any of these events could
have a material adverse effect on our business, results of operations and financial condition.
13
Extreme weather, natural disasters, public health threats or similar events have and may continue
to adversely affect our sales or operations from time to time.
customer trends and shopping habits. For example, heavy rainfall or other extreme weather conditions,
including but not limited to winter weather over a prolonged period, might make it difficult for our
customers to travel to our stores and thereby reduce our sales and profitability. Our business is also
susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm
temperatures during the winter season or cool weather during the summer season can render a portion of
our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or
prolonged unseasonable weather conditions would adversely affect our business. The occurrence or
threat of extreme weather, natural disasters, power outages, terrorist acts, outbreaks of flu or other
communicable diseases (such as COVID-19) or other catastrophic events could reduce customer traffic in
our stores and likewise disrupt our ability to conduct operations, which would materially and adversely
affect us.
Our ability to attract consumers and grow our revenues is dependent on the success of our store
location strategy and our ability to successfully open new stores as planned.
believe our consumers and potential consumers shop. In addition, our ability to grow our revenues has
been substantially dependent on our ability to secure space for and open new stores in attractive locations.
Shopping centers and malls where we currently operate existing stores or seek to open new stores have
been and may continue to be adversely affected by, among other things, general economic downturns or
those particularly affecting the commercial real estate industry, the closing of anchor stores, changes in
tenant mix and changes in customer shopping preferences, including but not limited to an increase in
preference for online versus in-person shopping. To take advantage of consumer traffic and the shopping
preferences of our consumers, we need to maintain and acquire stores in desirable locations where
competition for suitable store locations is intense. A decline in customer popularity of the strip shopping
centers where we generally locate our stores or in availability of space in desirable centers and locations,
or an increase in the cost of such desired space, has limited and could further limit our ability to open new
stores, adversely affecting consumer traffic and reducing our sales and net earnings or increasing our
operating costs.
control. These factors include, but are not limited to, our ability to identify suitable store locations,
negotiate acceptable lease terms, secure necessary governmental permits and approvals and hire and train
appropriate store personnel. In addition, our continued expansion into new regions of the country where
we have not done business before may present new challenges in competition, distribution and
merchandising as we enter these new markets. Our failure to successfully and timely execute our plans for
opening new stores or the failure of these stores to perform up to our expectations could adversely affect
our business, results of operations and financial condition.
If we are unable to anticipate, identify and respond to rapidly changing fashion trends and
customer demands in a timely manner, our business and results of operations could materially
suffer.
rapidly and cannot be predicted with certainty. Our success depends in part upon our ability to
consistently anticipate, design and respond to changing merchandise trends and consumer preferences in a
timely manner. Accordingly, any failure by us to anticipate, identify, design and respond to changing
fashion trends could adversely affect consumer acceptance of our merchandise, which in turn could
adversely affect our business, results of operations and our image with our customers. If we miscalculate
either the market for our merchandise or our customers’ tastes or purchasing habits, we may be required
14
to sell a significant amount of unsold inventory at below-average markups over cost, or below cost, which
would adversely affect our margins and results of operations.
The inability of third-party vendors to produce goods on time and to the Company’s specification
may adversely affect the Company’s business, results of operations and financial condition.
numerous risks that our vendors will fail to perform as we expect. For example, the deterioration in any
of our key vendors’ financial condition, their failure to ship merchandise in a timely manner that meets
our specifications, or other failures to follow our vendor guidelines or comply with applicable laws and
regulations, including compliant labor, environmental practices and product safety, could expose us to
operational, quality, competitive, reputational and legal risks. If we are not able to timely or adequately
replace the merchandise we currently source with merchandise produced elsewhere, or if our vendors fail
to perform as we expect, our business, results of operations and financial condition could be adversely
affected. Activities conducted by us or on our behalf outside the United States further subject us to
numerous U.S. and international regulations and compliance risks, as discussed below under “Risk
Factors – Risks Relating to Accounting and Legal Matters - Our business operations subject us to legal
compliance and litigation risks, as well as regulations and regulatory enforcement priorities, which could
result in increased costs or liabilities, divert our management’s attention or otherwise adversely affect our
business, results of operations and financial condition.”
Existing and increased competition in the women’s retail apparel industry may negatively impact
our business, results of operations, financial condition and market share.
The women’s retail apparel industry is highly competitive. We compete primarily with discount
stores, mass merchandisers, department stores, off-price retailers, specialty stores and internet-based
retailers, many of which have substantially greater financial, marketing and other resources than we have.
Many of our competitors offer frequent promotions and reduce their selling prices. In some cases, our
competitors are expanding into markets in which we have a significant market presence. In addition, our
competitors also compete for the same retail store space. As a result of this competition, we may
experience pricing pressures, increased marketing expenditures, increased costs to open new stores, as
well as loss of market share, which could materially and adversely affect our business, results of
operations and financial condition.
Fluctuating comparable sales or our inability to effectively manage inventory have and may
continue to negatively impact our gross margin and our overall results of operations.
sales include fashion trends, customer preferences, calendar and holiday shifts, competition, weather,
supply chain issues, actual or potential public health threats and economic conditions, including but not
limited to increasing interest rates and higher inflation. In addition, merchandise must be ordered well in
advance of the applicable selling season and before trends are confirmed by sales. If we are not able to
accurately predict customers’ preferences for our fashion items, we may have too much inventory, which
may cause excessive markdowns. If we are unable to accurately predict demand for our merchandise, we
may end up with inventory shortages, resulting in missed sales. A decrease in comparable sales or our
inability to effectively manage inventory may adversely affect our gross margin and results of operations.
The operation of our sourcing offices in Asia present increased operational and legal risks.
to successfully oversee merchandise production to ensure that product is produced on time and within the
Company’s specifications, our business, brand, reputation, costs, results of operations and financial
condition could be materially and adversely affected.
15
In addition, the current business environment, including geopolitical issues, make operating in certain
Asian markets challenging. To the extent we explore other countries to source our product or explore
increasing the amount of product sourced from current countries, we may be subject to additional
increased legal and operational risks associated with doing business in new countries or increasing our
business in other countries.
Further, the activities conducted by our sourcing offices outside the United States subject us to
foreign operational risks, as well as U.S. and international regulations and compliance risks, as discussed
elsewhere in this “Risk Factors” section, in particular below under “Risk Factors – Risks Relating to
Accounting and Legal Matters - Our business operations subject us to legal compliance and litigation
risks, as well as regulations and regulatory enforcement priorities, which could result in increased costs or
liabilities, divert our management’s attention or otherwise adversely affect our business, results of
operations and financial condition.”
Failure to attract, train, and retain skilled personnel could adversely affect our business and our
financial condition.
associates and managers. Moreover, attracting and retaining skilled personnel has become increasingly
challenging in the tight labor market that has persisted since the onset of the COVID-19 pandemic. To
offset this turnover as well as support new store growth, we must continually attract, hire and train new
store associates to meet our staffing needs. A significant increase in the turnover rate among our store
sales associates and managers would increase our recruiting and training costs, as well as possibly cause a
decrease in our store operating efficiency and productivity. We compete for qualified store associates, as
well as experienced management personnel, with other companies in our industry or other industries,
many of whom have greater financial resources than we do.
Company for the support of our existing business and future expansion. The success of executing our
business strategy depends in large part on retaining key management. We compete for key management
personnel with other retailers, and our inability to attract and retain qualified personnel could limit our
ability to continue to grow.
skilled personnel in the future, we may not be able to service our customers effectively or execute our
business strategy, which could adversely affect our business, operating results and financial condition.
causing wages to increase, which has and could continue to adversely affect our business, margins,
operating results and financial condition if we cannot offset these cost increases.
Fluctuations in the price, availability and quality of inventory have and may continue to result in
higher cost of goods, which the Company may not be able to pass on to its customers.
yields, currency value fluctuations, inflation, as well as other factors. Additionally, manufacturers have
and may continue to have increases in other manufacturing costs, such as transportation, labor and benefit
costs. These increases in production costs may result in higher merchandise costs to the Company. Due to
the Company’s limited flexibility in price point, the Company may not be able to pass on those cost
increases to the consumer, which could have a material adverse effect on our margins, results of
operations and financial condition.
If the Company is unable to successfully integrate new businesses into its existing business, the
Company’s financial condition and results of operations will be adversely affected.
16
of new store concepts. This growth may require significant capital expenditures and management
attention. The Company may not realize any of the anticipated benefits of a new business and integration
costs may exceed anticipated amounts. We have incurred substantial financial commitments and fixed
costs related to our retail stores that we will not be able to recover if our stores are not successful and that
have resulted and could result in future impairment charges. If we cannot successfully execute our growth
strategies, our financial condition and results of operations may be adversely impacted.
Risks Relating to Our Information Technology and Related Systems:
A failure or disruption relating to our information technology systems could adversely affect our
business.
merchandise planning, replenishment, pricing, ordering, markdowns and product life cycle management.
In addition to merchandise operations, we utilize our information technology systems for our distribution
processes, as well as our financial systems, including accounts payable, general ledger, accounts
receivable, sales, banking, inventory and fixed assets. Despite the precautions we take, our information
systems are or may be vulnerable to disruption or failure from numerous events, including but not limited
to, natural disasters, severe weather conditions, power outages, technical malfunctions, cyber-attacks, acts
of war or terrorism, similar catastrophic events or other causes beyond our control or that we fail to
anticipate. Any disruption or failure in the operation of our information technology systems, our failure to
continue to upgrade or improve such systems, or the cost associated with maintaining, repairing or
improving these systems, could adversely affect our business, results of operations and financial
condition. Modifications and/or upgrades to our current information technology systems may also disrupt
our operations.
A security breach that results in unauthorized access to or disclosure of employee, Company or
customer information or a ransomware attack could adversely affect our costs, reputation and
results of operations, and efforts to mitigate these risks may continue to increase our costs.
breach, mishandling, human or programming error or other event that results in the misappropriation, loss
or other unauthorized disclosure of employee, Company or customer information, including but not
limited to credit card data or other personally identifiable information, could severely damage the
Company's reputation, expose it to remediation and other costs and the risks of legal proceedings, disrupt
its operations and otherwise adversely affect the Company's business and financial condition. The
security of certain of this information also depends on the ability of third-party service providers, such as
those we use to process credit and debit card payments as described below under “We are subject to
payment-related risks,” to properly handle and protect such information. Our information systems and
those of our third-party service providers are subject to ongoing and persistent cybersecurity threats from
those seeking unauthorized access through means which are continually evolving and may be difficult to
anticipate or detect for long periods of time. Despite measures the Company takes to protect confidential
information against unauthorized access or disclosure, which measures are ongoing and may continue to
increase our costs, there is no assurance that such measures will prevent the compromise of such
information. If any such compromise or unauthorized access to or disclosure of this information were to
occur, it could have a material adverse effect on the Company's reputation, business, operating results,
financial condition and cash flows. In addition, the Company may be subject to ransomware attacks,
which if successful could result in disruptions to the Company’s operations and expose it to remediation
and other costs, risks of legal proceedings, damage the Company’s reputation and otherwise adversely
affect the Company's business and financial condition.
A disruption or shutdown of our centralized distribution center or transportation network could
materially and adversely affect our business and results of operations.
17
and distributed through our network of third-party freight carriers. The merchandise we purchase is
shipped directly to our distribution center, where it is prepared for shipment to the appropriate stores and
subsequently delivered to the stores by our third-party freight carriers. If the distribution center or our
third-party freight carriers were to be shut down or lose significant capacity for any reason, including but
not limited to, any of the causes described above under “A failure or disruption relating to our information
technology systems could adversely affect our business,” our operations would likely be seriously
disrupted. Such problems could occur as the result of any loss, destruction or impairment of our ability to
use our distribution center, as well as any broader problem generally affecting the ability to ship goods
into our distribution center or deliver goods to our stores. As a result, we could incur significantly higher
costs and longer lead times associated with distributing our products to our stores during the time it takes
for us to reopen or replace the distribution center and/or our transportation network. Any such occurrence
could adversely affect our business, results of operations and financial condition.
The Company’s failure to successfully operate its e-commerce websites or fulfill customer
expectations could adversely impact customer satisfaction, our reputation and our business.
provide existing customers the online shopping experience and introduce the Company to a new customer
base, it also exposes us to numerous risks. We are subject to potential failures in the efficient and
uninterrupted operation of our websites, customer contact center or our distribution center, including
system failures caused by telecommunication system providers, order volumes that exceed our present
system capabilities, electrical outages, mechanical problems and human error. Our e-commerce platform
may also expose us to greater potential for security or data breaches involving the unauthorized access to
or disclosure of customer information, as discussed above under “A security breach that results in
unauthorized access to or disclosure of employee, Company or customer information or a ransomware
attack could adversely affect our costs, reputation and results of operations, and efforts to mitigate these
risks may continue to increase our costs.” We are also subject to risk related to delays or failures in the
performance of third parties, such as shipping companies, including delays associated with labor strikes or
slowdowns or adverse weather conditions. If the Company does not successfully meet the challenges of
operating e-commerce websites or fulfilling customer expectations, the Company's business and sales
could be adversely affected.
We are subject to payment-related risks.
credit card, debit cards, gift cards and physical and electronic bank checks. For existing and future
payment methods we offer to our customers, we are subject to fraud risk and to additional regulations and
compliance requirements (including obligations to implement enhanced authentication processes that
could result in increased costs and reduce the ease of use of certain payment methods). For certain
payment methods, including credit and debit cards, we pay interchange and other fees, which have
increased from time to time and may continue to increase over time, raising our operating costs and
lowering profitability. We rely on third-party service providers for payment processing services, including
the processing of credit and debit cards. In each case, it could disrupt our business if these third-party
service providers become unwilling or unable to provide these services to us. We are also subject to
payment card association operating rules, including data security rules, certification requirements and
rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or
impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security
systems are breached or compromised, we may be liable for card-issuing banks’ costs, subject to fines and
higher transaction fees. In addition, we may lose our ability to accept credit and debit card payments from
our customers and process electronic funds transfers or facilitate other types of payments, and our
business and operating results could be adversely affected.
Risks Relating to Accounting and Legal Matters:
18
Changes to accounting rules and regulations may adversely affect our reported results of
operations and financial condition.
environment, accounting regulatory authorities have been in discussions for many years regarding efforts
to either converge U.S. Generally Accepted Accounting Principles with International Financial Reporting
Standards (“IFRS”), have U.S. companies provide supplemental IFRS-based information or continue to
work toward a single set of globally accepted accounting standards. If implemented, these potential
changes in accounting rules or regulations could significantly impact our future reported results of
operations and financial position. Changes in accounting rules or regulations and varying interpretations
of existing accounting rules and regulations have significantly affected our reported financial statements
and those of other participants in the retail industry in the past and may continue to do so in the future.
Future changes to accounting rules or regulations may adversely affect our reported results of operations
and financial position or perceptions of our performance and financial condition.
Continued scrutiny and changing expectations surrounding environmental, social and governance
(“ESG”) matters from investors, customers, government regulators and other stakeholders may
impose additional reporting requirements, additional costs and compliance risks.
Public companies from across all industries are facing increasing scrutiny from investors, customers,
government regulators and other stakeholders concerning ESG matters. In the U.S., there are various
proposals for new or enhanced disclosure requirements regarding climate emissions, sustainability,
workforce diversity and other human capital resources metrics, among other topics. Complying with
these complex reporting obligations or expectations may increase our costs associated with compliance,
disclosure and reporting. Furthermore, evolving ESG laws, regulations and stakeholder expectations may
result in uncertain and potentially burdensome reporting requirements as stakeholders, agencies and
government authorities adjust their expectations or change laws and regulations, such as proposals
currently under consideration regarding climate emissions reporting and auditing requirements. Failure to
comply with all of the currently proposed regulatory requirements in a timely manner may adversely
affect our reputation, business and financial performance.
If we fail to protect our trademarks and other intellectual property rights or infringe the
intellectual property rights of others, our business, brand image, growth strategy, results of
operations and financial condition could be adversely affected.
Central” trademarks are integral to our store designs, brand recognition and our ability to successfully
build consumer loyalty. Although we have registered these trademarks with the U.S. Patent and
Trademark Office (“PTO”) and have also registered, or applied for registration of, additional trademarks
with the PTO that we believe are important to our business, we cannot give assurance that these
registrations will prevent imitation of our trademarks, merchandising concepts, store designs or private
label merchandise or the infringement of our other intellectual property rights by others. Infringement of
our names, concepts, store designs or merchandise generally, or particularly in a manner that projects
lesser quality or carries a negative connotation of our image could adversely affect our business, financial
condition and results of operations.
private label merchandise by claiming that our merchandise violates their trademarks or other proprietary
rights. In the event of such a conflict, we could be subject to lawsuits or other actions, the ultimate
resolution of which we cannot predict; however, such a controversy could adversely affect our business,
financial condition and results of operations.
Our business operations subject us to legal compliance and litigation risks, as well as regulations
and regulatory enforcement priorities, which could result in increased costs or liabilities, divert our
19
management’s attention or otherwise adversely affect our business, results of operations and
financial condition.
foreign laws and regulations relating to our activities in foreign countries from which we source our
merchandise and operate our sourcing offices. Our business is also subject to regulatory and litigation
risk in all of these jurisdictions, including foreign jurisdictions that may lack well-established or reliable
legal systems for resolving legal disputes. Compliance risks and litigation claims have arisen and may
continue to arise in the ordinary course of our business and include, among other issues, intellectual
property issues, employment issues, commercial disputes, product-oriented matters, tax, customer
relations and personal injury claims. International activities subject us to numerous U.S. and international
regulations, including but not limited to, restrictions on trade, license and permit requirements, import and
export license requirements, privacy and data protection laws, environmental laws, records and
information management regulations, tariffs and taxes and anti-corruption laws, such as the Foreign
Corrupt Practices Act, violations of which by employees or persons acting on the Company’s behalf may
result in significant investigation costs, severe criminal or civil sanctions and reputational harm. These
and other liabilities to which we may be subject could negatively affect our business, operating results
and financial condition. These matters frequently raise complex factual and legal issues, which are subject
to risks and uncertainties and could divert significant management time. The Company may also be
subject to regulatory review and audits, the results of which could materially and adversely affect our
business, results of operations and financial condition. In addition, governing laws, rules and regulations,
and interpretations of existing laws are subject to change from time to time. Compliance and litigation
matters could result in unexpected expenses and liability, as well as have an adverse effect on our
operations and our reputation.
related to data privacy, climate change or ESG matters could increase our costs of compliance,
technology and business operations. The interpretation of existing or new laws to existing technology and
business practices can be uncertain and may lead to additional compliance risk and cost.
Adverse litigation matters may adversely affect our business and our financial condition.
Primarily these arise from our normal course of business but are subject to risks and uncertainties, and
could require significant management time. The Company’s periodic evaluation of litigation-related
matters may change our assessment in light of the discovery of facts with respect to legal actions pending
against us, not presently known to us or by determination of judges, juries or other finders of fact. We
may also be subjected to legal matters not yet known to us. Adverse decisions or settlements of disputes
may negatively impact our business, reputation and financial condition.
Maintaining and improving our internal control over financial reporting and other requirements
necessary to operate as a public company may strain our resources, and any material failure in
these controls may negatively impact our business, the price of our common stock and market
confidence in our reported financial information.
1934, the Sarbanes-Oxley Act of 2002, the rules of the SEC and New York Stock Exchange and certain
aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and
related rule-making that has been and may continue to be implemented over the next several years under
the mandates of the Dodd-Frank Act. The requirements of these rules and regulations have increased, and
may continue to increase, our compliance costs and place significant strain on our personnel, systems and
resources. To satisfy the SEC’s rules implementing the requirements of Section 404 of the Sarbanes-
Oxley Act of 2002, we must continue to document, test, monitor and enhance our internal control over
financial reporting, which is a costly and time-consuming effort that must be re-evaluated frequently. We
cannot give assurance that our disclosure controls and procedures and our internal control over financial
20
reporting, as defined by applicable SEC rules, will be adequate in the future. Any failure to maintain the
effectiveness of internal control over financial reporting or to comply with the other various laws and
regulations to which we are and will continue to be subject, or to which we may become subject in the
future, as a public company could have an adverse material impact on our business, our financial
condition and the price of our common stock. In addition, our efforts to comply with these existing and
new requirements could significantly increase our compliance costs.
Risks Relating to Our Investments and Liquidity:
We may experience market conditions or other events that could adversely impact the valuation
and liquidity of, and our ability to access, our short-term investments, cash and cash equivalents
and our revolving line of credit.
state, municipal and corporate debt securities. The value of those securities may be adversely impacted
by factors relating to these securities, similar securities or the broader credit markets in general. Many of
these factors are beyond our control, and include but are not limited to changes to credit ratings, rates of
default, collateral value, discount rates, and strength and quality of market credit and liquidity, potential
disruptions in the capital markets and changes in the underlying economic, financial and other conditions
that drive these factors. As federal, state and municipal entities struggle with declining tax revenues and
budget deficits, we cannot be assured of our ability to timely access these investments if the market for
these issues declines. Similarly, the default by issuers of the debt securities we hold or similar securities
could impair the liquidity of our investments. The development or persistence of any of these conditions
could adversely affect our financial condition, results of operations and ability to execute our business
strategy. In addition, we have significant amounts of cash and cash equivalents at financial institutions
that are in excess of the federally insured limits. An economic downturn or development of adverse
conditions affecting the financial sector and stability of financial institutions could cause us to experience
losses on our deposits.
market terms, may be impacted by the factors discussed in the preceding paragraph, as well as continued
compliance with covenants under our revolving credit agreement. The development or persistence of any
of these adverse factors or failure to comply with covenants on which our borrowing is conditioned may
adversely affect our financial condition, results of operations and our ability to execute our business
strategy.
Risks Relating to the Market Value of Our Common Stock:
The interests of our principal shareholder may limit the ability of other shareholders to influence
the direction of the Company and otherwise affect our corporate governance and the market price
of our common stock.
owned approximately 51.0% of the combined voting power of our common stock. As a result, Mr. Cato
has the ability to substantially influence or determine the outcome of all matters requiring approval by the
shareholders, including the election of directors and the approval of mergers and other business
combinations or other significant Company transactions. Mr. Cato may have interests that differ from
those of other shareholders, and may vote in a way with which other shareholders disagree or perceive as
adverse to their interests. The concentration of voting power held by Mr. Cato could discourage potential
investors from acquiring our common stock and could also have the effect of preventing, discouraging or
deferring a change in control of the Company or other fundamental transaction, all of which could depress
the market price of our common stock. In addition, Mr. Cato has the ability to control the management of
the Company as a result of his position as Chief Executive Officer. We qualify for exemption as a
“controlled company” from compliance with certain New York Stock Exchange corporate governance
rules, including the requirements that we have a majority of independent directors on our Board, an
21
independent compensation committee and an independent corporate governance and nominating
committee. If we elected to utilize these “controlled company” exceptions, our other shareholders could
lose the benefit of these corporate governance requirements and the market value of our common stock
could be adversely affected.
Our operating results are subject to seasonal and quarterly fluctuations, which could adversely
affect the market price of our common stock.
As a result, our stores typically generate a higher percentage of our annual net sales and profitability in
the first and second quarters of our fiscal year compared to other quarters. Accordingly, our operating
results for any one fiscal period are not necessarily indicative of results to be expected from any future
period, and such seasonal and quarterly fluctuations could adversely affect the market price of our
common stock.
Conditions in the stock market generally, or particularly relating to our industry, Company or
common stock, may materially and adversely affect the market price of our common stock and
make its trading price more volatile.
significant volatility. A variety of factors may cause the price of our common stock to fluctuate, perhaps
substantially, including, but not limited to, those discussed elsewhere in this report, as well as the
following: low trading volume; general market fluctuations resulting from factors not directly related to
our operations or the inherent value of our common stock; announcements of developments related to our
business; fluctuations in our reported operating results; general conditions or trends affecting or perceived
to affect the fashion and retail industry; conditions or trends affecting or perceived to affect the domestic
or global economy or the domestic or global credit or capital markets; changes in financial estimates or
the scope of coverage given to our Company by securities analysts; negative commentary regarding our
Company and corresponding short-selling market behavior; adverse customer relations developments;
significant changes in our senior management team; and legal proceedings. Over the past several years
the stock market in general, and the market for shares of equity securities of many retailers in particular,
have experienced extreme price fluctuations that have at times been unrelated to the operating
performance of those companies. Such fluctuations and market volatility based on these or other factors
may materially and adversely affect the market price of our common stock.
Item 1B.
Unresolved Staff Comments:
Item 2.
Properties:
approximately 552,000 square feet located on a 15-acre tract in Charlotte, North Carolina. The
Company’s automated merchandise handling and distribution activities occupy approximately 418,000
square feet of this building and its general offices and corporate training center are located in the
remaining 134,000 square feet. A building of approximately 24,000 square feet located on a 2-acre tract
adjacent to the Company’s existing location is used for e-commerce storage. The Company also owns
approximately 185 acres of land in York County, South Carolina as a potential new site for our
distribution center.
22
Item 3.
Legal Proceedings:
course of business. The Company currently is not a party to any pending litigation that it believes is
likely to have a material adverse effect on the Company’s financial position, results of operations or cash
flows. See Note 15, “Commitments and Contingencies,” for more information.
23
Item 3A.
Executive Officers of the Registrant:
Name
Age
Position
John P. D. Cato............................
Chairman, President and Chief Executive Officer
Charles D. Knight........................
Executive Vice President, Chief Financial Officer
Gordon Smith ..............................
Executive Vice President, Chief Real Estate and
Store Development Officer
John P. D. Cato
has been employed as an officer of the Company since 1981 and has been a director
of the Company since 1986. Since January 2004, he has served as Chairman, President and Chief
Executive Officer. From May 1999 to January 2004, he served as President, Vice Chairman of the Board
and Chief Executive Officer. From June 1997 to May 1999, he served as President, Vice Chairman of the
Board and Chief Operating Officer. From August 1996 to June 1997, he served as Vice Chairman of the
Board and Chief Operating Officer. From 1989 to 1996, he managed the Company’s off-price concept,
serving as Executive Vice President and as President and General Manager of the It’s Fashion concept
from 1993 to August 1996. Mr. Cato is a former director of Harris Teeter Supermarkets, Inc., formerly
Ruddick Corporation.
Company since January of 2022. From 2018 to 2020, he served in various roles with The Vitamin
Shoppe, first as Senior Vice President, Chief Accounting Officer from 2018 to 2019, and then as
Executive Vice President, Chief Financial Officer from 2019 to 2020. Prior to that, he served in various
roles with Toys “R” Us for 28 years, including as Senior Vice President, Corporate Controller from 2010
to 2018.
Gordon Smith
Executive Vice President, Chief Real Estate and Store Development Officer. From February 2008 until
July 2011, Mr. Smith served as Senior Vice President, Real Estate. From October 1989 to February 2008,
Mr. Smith served as Assistant Vice President, Corporate Real Estate.
Item 4.
Mine Safety Disclosures:
24
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities:
Market & Dividend Information
the symbol CATO.
Stock was 5,000 and there were 2 record holders of the Company’s Class B Common Stock.
25
Stock Performance Graph
return on the Company’s Common Stock (which includes Class A Stock and Class B Stock) for each of
the Company’s last five fiscal years with (i) the Dow Jones U.S. Retailers, Apparel Index and (ii) the
Russell 2000 Index.
THE CATO CORPORATION
STOCK PERFOMANCE TABLE
(BASE 100 – IN DOLLARS)
LAST TRADING DAY
OF THE FISCAL YEAR
THE CATO
CORPORATION
DOW JONES U.S.
RETAILERS, APPL
INDEX
RUSSELL 2000
INDEX
2/2/2018
100
100
100
2/1/2019
135
109
96
1/31/2020
160
121
105
1/29/2021
116
130
137
1/28/2022
173
143
136
1/27/2023
111
157
131
commencement of the Company’s 2018 fiscal year, and that all dividends were reinvested.
26
Issuer Purchases of Equity Securities
ended January 28, 2023:
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Value) of Shares that may
Average Price
Announced Plans or
yet be Purchased Under
Period
Purchased
Paid per Share (1)
the Plans or Programs (2)
November 2022
-
$
-
-
December 2022
403,426
9.06
403,426
January 2023
-
-
-
Total
403,426
$
9.06
403,426
197,769
(1)
Prices include trading costs.
(2)
During the fourth quarter ended January 28, 2023, the Company repurchased and retired 403,426
shares under this program for approximately $3,655,405 or an average market price of $9.06 per
share. As of the fourth quarter ended January 28, 2023, the Company had 197,769 shares remaining
in open authorizations. There is no specified expiration date for the Company’s repurchase program.
The Board of Directors authorized an increase in the Company’s share repurchase program of
1,000,000 shares at the February 23, 2023 Board of Directors’ meeting.
27
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations:
to provide information to assist readers in better understanding and evaluating our financial condition and
results of operations. The following information should be read in conjunction with the Consolidated
Financial Statements, including the accompanying Notes appearing in Part II, Item 8 of this report on
Form 10-K. This section of the Form 10-K generally discusses fiscal 2022 and fiscal 2021 and year-to-
year comparisons between fiscal 2022 and fiscal 2021, as well, as certain fiscal 2020 items. Discussions
of fiscal 2020 items and year-to-year comparisons between fiscal 2021 and fiscal 2020 that are not
included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K
for the fiscal year ended January 29, 2022.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
costs, including costs to ship our products to stores and customers, operating supplies, wages, and fuel. In
addition to the price increases, costs for fuel, food, and housing, including rent, as well as other
consumables across the economy, are increasingly impacting our customers’ disposable income, as well
as our customers’ willingness to purchase discretionary items such as apparel, jewelry or shoes.
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. In
addition, the rising interest rates are increasing the costs related to revolving credit, auto loans and
mortgages, which increasingly is negatively impacting our customers’ discretionary income. In addition,
rising interest rates may negatively impact our customers’ willingness to purchase our products.
and will likely continue to have a negative impact on consumer behavior and, by extension, our results of
operations and financial condition during fiscal 2023.
Labor Challenges and Wage Inflation
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 2023.
28
Results of Operations
retail sales for the years indicated:
Fiscal Year Ended
January 28, 2023
January 29, 2022
Retail sales …………………………………………………………..
100.0
%
100.0
%
Other revenue…………………………………………………………
0.9
1.0
Total revenues ……………………………………………………….
100.9
101.0
Cost of goods sold …………………………………………………..
67.7
59.5
Selling, general and administrative………………………………….
32.3
35.1
Depreciation …………………………………………………………
1.5
1.6
Interest and other income ……………………………………………
0.8
0.3
Income before income taxes …………………………………………
0.2
5.1
Net income …………………………………………………………..
-
%
4.8
%
Fiscal 2022 Compared to Fiscal 2021
2021. The decrease in retail sales in fiscal 2022 was primarily due to a 1% decrease in same-store sales
and sales from closed stores in 2021, partially offset by stores opened in 2022. Same-store sales for the
fiscal year 2022 decreased primarily due to lower average unit selling price resulting from late arriving
merchandise due to supply chain disruptions in the first half of 2022. Same-store sales includes stores that
have been open more than 15 months. Stores that have been relocated or expanded are also included in
the same-store sales calculation after they have been open more than 15 months. In fiscal 2022 and fiscal
2021, e-commerce sales were less than 6% and 5% of total sales and same-store sales, respectively. The
method of calculating same-store sales varies across the retail industry. As a result, our same-store sales
calculation may not be comparable to similarly titled measures reported by other companies. Total
revenues, comprised of retail sales and other revenue (principally finance charges and late fees on customer
accounts receivable, gift card breakage, shipping charges for e-commerce purchases and layaway fees),
decreased by 1.3% to $759.3 million in fiscal 2022 compared to $769.3 million in fiscal 2021. The
Company operated 1,280 stores at January 28, 2023 compared to 1,311 stores operated at January 29,
2022.
million in fiscal 2021. The decrease resulted primarily due to decreases in gift card breakage income and
e-commerce shipping revenues, partially offset by an increase in finance and layaway charges.
increase compared to fiscal 2021 credit revenue of $2.1 million or 0.3% of total revenue. The increase in
credit revenue was primarily due to increases in finance charges and late fee income as a result of higher
accounts receivable balances. Credit revenue is comprised of interest earned on the Company’s private
label credit card portfolio and related fee income. Related expenses include principally payroll, postage
and other administrative expenses and totaled $1.7 million in fiscal 2022 compared to $1.4 million in
fiscal 2021. See Note 13 of Notes to Consolidated Financial Statements for a schedule of credit-related
expenses. Total credit segment income before taxes was $0.6 million in fiscal 2022 and $0.6 million in
fiscal 2021.
million, or 59.5% of retail sales, in fiscal 2021. The increase in cost of goods sold as a percentage of sales
resulted primarily from higher sales of marked down goods and increases in freight and distribution costs.
The Company expects markdown sales to decrease in 2023 and beyond, as the markdown sales increase is
29
primarily attributed to the supply chain disruption in the first half of 2022, causing goods to miss their
optimum selling times. Cost of goods sold includes merchandise costs, net of discounts and allowances,
buying costs, distribution costs, occupancy costs, and freight and inventory shrinkage. Net merchandise
costs and in-bound freight are capitalized as inventory costs. Buying and distribution costs include
payroll, payroll-related costs and operating expenses for the buying departments and distribution center.
Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and
maintenance for stores and distribution facilities. Total gross margin dollars (retail sales less cost of
goods sold and excluding depreciation) decreased by 21.3% to $242.7 million in fiscal 2022 from $308.3
million in fiscal 2021. Gross margin as presented may not be comparable to that of other companies.
payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card
processing fees were $242.6 million in fiscal 2022 compared to $267.0 million in fiscal 2021, a decrease
of 9.1%. As a percent of retail sales, SG&A was 32.3% compared to 35.1% in the prior year. The dollar
decrease in SG&A expense was primarily attributable to lower employee benefit/bonus expense and lower
insurance costs, partially offset by higher store wages resulting from higher hourly rates and increased store
operating hours.
Depreciation expense decreased from fiscal 2021 due to fully depreciated older stores and prior period
impairments of leasehold improvements and fixtures, partially offset by store development and
information technology expenditures.
2021. The increase is primarily attributable to receiving a Business Recovery Grant from the State of
North Carolina, proceeds from property insurance claims related to hurricanes in fiscal years 2021 and
2020 and an increase in interest income from short-term investments due to rising interest rates, partially
offset by lower short-term investments.
expense of $2.1 million, or 0.3% of retail sales in fiscal 2021. The income tax expense decrease was
primarily due to lower pre-tax income and lower federal, state and local tax benefits, partially offset by
Global Intangible Low-taxed Income (“GILTI”) and non-deductible officer’s compensation. The effective
tax rate was 98.4% (Expense) in fiscal 2022 compared to 5.4% (Expense) in fiscal 2021. See Note 12 to
the Consolidated Financial Statements, “Income Taxes,” for further details.
Off-Balance Sheet Arrangements
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial
Statements. As disclosed in Note 1 of Notes to the Consolidated Financial Statements, the preparation of
the Company’s financial statements in conformity with generally accepted accounting principles in the
United States (“GAAP”) requires management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements. The most significant accounting estimates
inherent in the preparation of the Company’s financial statements include the allowance for customer
credit losses, inventory shrinkage, the calculation of potential asset impairment, workers’ compensation,
general and auto insurance liabilities, reserves relating to self-insured health insurance, uncertain tax
positions, and valuation of deferred tax assets.
30
Allowance for Customer Credit Losses
for customer credit losses based on the accounts receivable aging and estimates of actual write-offs. The
allowance is reviewed for adequacy and adjusted, as necessary, on a quarterly basis. The Company also
provides for estimated uncollectible late fees charged based on historical write-offs. The Company’s
financial results can be impacted by changes in customer loss write-off experience and the aging of the
accounts receivable portfolio.
realizable value. Physical inventories are conducted throughout the year to calculate actual shrinkage and
inventory on hand. Estimates based on actual shrinkage results are used to estimate inventory shrinkage,
which is accrued for the period between the last physical inventory and the financial reporting date. The
Company regularly reviews its inventory levels to identify slow moving merchandise and uses
markdowns to clear slow moving inventory.
The Company determines whether an arrangement is a lease at inception. The Company has operating
leases for stores, offices, warehouse space and equipment. Its leases have remaining lease terms of one
year to 10 years, some of which include options to extend the lease term for up to five years, and some of
which include options to terminate the lease within one year. The Company considers these options in
determining the lease term used to establish its right-of-use assets and lease liabilities. The Company’s
lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated
incremental borrowing rate based on the information available at commencement date of the lease in
determining the present value of lease payments. See Note 11 for further information.
the opening and remodeling of stores and in computer software and hardware. The Company periodically
reviews its store locations and estimates the recoverability of its long-lived assets, which primarily relate
to Fixtures and equipment, Leasehold improvements, Right-of-use assets net of Lease liabilities and
Information technology equipment and software. An impairment charge is recorded for the amount by
which the carrying value exceeds the estimated fair value when the Company determines that projected
cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. This
determination is based on a number of factors, including the store’s historical operating results and future
projected cash flows, which include contribution margin projections. The Company assesses the fair value
of each lease by considering market rents and any lease terms that may adjust market rents under certain
conditions, such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain
criteria. Further, in determining when to close a store, the Company considers real estate development in
the area and perceived local market conditions, which can be difficult to predict and may be subject to
change.
costs. These costs are significant primarily due to the large number of the Company’s retail locations and
associates. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed
31
and estimates of claims incurred but not reported, less amounts paid against such claims, and are not
discounted. Management reviews current and historical claims data in developing its estimates. The
Company also uses information provided by outside actuaries with respect to healthcare, workers’
compensation and general liability claims. If the underlying facts and circumstances of the claims change
or the historical experience upon which insurance provisions are recorded is not indicative of future
trends, then the Company may be required to make adjustments to the provision for insurance costs that
could be material to the Company’s reported financial condition and results of operations. Historically,
actual results have not significantly deviated from estimates.
of the balance sheet date. These liabilities reflect the Company’s best estimate of its ultimate income tax
liability based on the tax codes, regulations, and pronouncements of the jurisdictions in which we do
business. Estimating our ultimate tax liability involves significant judgments regarding the application of
complex tax regulations across many jurisdictions. Despite the Company’s belief that the estimates and
judgments are reasonable, differences between the estimated and actual tax liabilities can and do exist
from time to time. These differences may arise from settlements of tax audits, expiration of the statute of
limitations, and the evolution and application of the various jurisdictional tax codes and regulations. Any
differences will be recorded in the period in which they become known and could have a material effect
on the results of operations in the period the adjustment is recorded.
Company’s current financial performance and projected future financial performance. Based on this
assessment, the Company then determines if a valuation allowance should be recorded. If the Company
concludes that it is more likely than not that the Company will not be able to realize its tax deferred
assets, a valuation allowance is recorded for the proportion of the deferred tax asset it determines may not
be realized.
Liquidity, Capital Resources and Market Risk
flows from operations, will be adequate to fund the Company’s regular operating requirements, including
$71.9 million of lease obligations and planned investments of $22.1 million of capital expenditures, for
fiscal 2023 and for the foreseeable future.
$59.8 million provided in fiscal 2021 and $30.7 million used in fiscal 2020. Cash provided by operating
activities during 2022 was primarily attributable to net income adjusted for depreciation, share-based
compensation, impairment and changes in working capital. The decrease of $46.4 million for fiscal 2022
compared to fiscal 2021 is primarily due to lower net operating income and a decrease in accounts payable
and accrued bonus and benefits, partially offset by lower accounts receivable and merchandise inventories.
and $108.6 million at January 29, 2022 and January 30, 2021, respectively. The decrease in working
capital compared to the prior year is primarily due to lower short-term investments and lower inventory,
partially offset by lower accounts payable and accrued bonus and benefits.
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 January 28, 2023. There were no borrowings outstanding under this credit facility
32
as of the fiscal year ended January 28, 2023 or the fiscal year ended January 29, 2022.
January 28, 2023, January 29, 2022 and January 30, 2021.
fiscal 2022, 2021 and 2020, respectively. The expenditures for fiscal 2022 were primarily for additional
investments in 19 new stores, distribution center and information technology.
million used in fiscal 2021 and $64.5 million provided for fiscal 2020. In fiscal 2022, the cash provided
was primarily attributable to the increase in net sales of short-term investments, partially offset by
expenditures for property and equipment.
$31.8 million for fiscal 2021 and $27.2 million for fiscal 2020. The decrease in cash used was primarily
due to lower share repurchase amounts, partially offset by higher dividend payments.
that are measured at fair value.
taxable governmental debt securities held in managed accounts with underlying ratings of A or better at
January 28, 2023. The state, municipal and corporate bonds and asset-backed securities have contractual
maturities which range from six days to 3.9 years. The U.S. Treasury Notes have contractual maturities
which range from three days to 1.6 years. These securities are classified as available-for-sale and are
recorded as Short-term investments, Restricted cash, Restricted short-term investments and Other assets on
the accompanying Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains
and losses reported net of taxes in Accumulated other comprehensive income. The asset-backed securities are
bonds comprised of auto loans and bank credit cards that carry AAA ratings. The auto loan asset-backed
securities are backed by static pools of auto loans that were originated and serviced by captive auto finance
units, banks or finance companies. The bank credit card asset-backed securities are backed by revolving
pools of credit card receivables generated by account holders of cards from American Express, Citibank,
JPMorgan Chase, Capital One, and Discover.
recorded within Other assets in the Consolidated Balance Sheets. At January 29, 2022, the Company had
$0.8 million of corporate equities, which are recorded within Other assets in the Consolidated Balance
Sheets.
investment securities include corporate and municipal bonds for which quoted prices may not be available on
active exchanges for identical instruments. Their fair value is principally based on market values determined
by management with assistance of a third-party pricing service. Since quoted prices in active markets for
identical assets are not available, these prices are determined by the pricing service using observable market
information such as quotes from less active markets and/or quoted prices of securities with similar
characteristics, among other factors.
Deferred compensation plan assets consist primarily of life insurance policies. These life insurance
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on such factors as the fair value of the underlying assets and discounted cash flow and are therefore
classified within Level 3 of the valuation hierarchy. The Level 3 liability associated with the life
insurance policies represents a deferred compensation obligation, the value of which is tracked via
33
underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the
Consolidated Balance Sheets. These funds are designed to mirror the return of existing mutual funds and
money market funds that are observable and actively traded.
Contractual Obligations
commitments for store leases. Operating leases represent minimum required lease payments under non-
cancellable lease terms. Most store leases also require payment of related operating expenses such as
taxes, utilities, insurance and maintenance, which are not included in our estimated lease obligations. See
Note 11, Leases in Notes to the Consolidated Financial Statements for the maturities of our operating
lease obligations.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk:
financing, investing and cash management activities, but the Company does not believe such exposure is
material.
34
Item 8.
Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID
238
) .....................................
36
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the fiscal
39
Consolidated Balance Sheets at January 28, 2023 and January 29, 2022 .............................................
40
Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2023, January 29, 2022
41
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 28, 2023,
42
Notes to Consolidated Financial Statements ..........................................................................................
43
Schedule II — Valuation and Qualifying Accounts for the fiscal years ended January 28, 2023,
73
35
Report of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of The Cato Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Cato Corporation and its
subsidiaries (the “Company”) as of January 28, 2023 and January 29, 2022, and the related consolidated
statements of income (loss) and comprehensive income (loss), of stockholders’ equity and of cash flows
for each of the three years in the period ended January 28, 2023, including the related notes and financial
statement schedule listed in the accompanying index (collectively referred to as the “consolidated
financial statements”). We also have audited the Company's internal control over financial reporting as of
January 28, 2023, based on criteria established in
Internal Control - Integrated Framework
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the
results of its operations and its cash flows for each of the three years in the period ended January 28, 2023
in conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of January 28, 2023, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s
consolidated financial statements and on the Company's internal control over financial reporting based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
36
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit
committee and that (i) relates to accounts or disclosures that are material to the consolidated financial
statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated
financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a
separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets - Store Location Asset Groupings
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated
property and equipment, net balance was $70.4 million, of which the store locations were a portion, and
consolidated operating lease right-of-use assets, net balance was $174.3 million as of January 28, 2023.
The Company invests in leaseholds, right-of-use assets and equipment, primarily in connection with the
opening and remodeling of stores, and in computer software and hardware. The Company periodically
reviews its store locations and estimates the recoverability of its long-lived assets, which primarily relate
to fixtures and equipment, leasehold improvements, right-of-use assets net of lease liabilities, and
information technology equipment and software. An impairment charge is recorded for the amount by
which the carrying value exceeds the estimated fair value when management determines that projected
cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. This
determination is based on a number of factors, including the store’s historical operating results and future
projected cash flows, which include contribution margin projections. The Company assesses the fair value
of each lease by considering market rents and any lease terms that may adjust market rents under certain
conditions such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain
criteria. An impairment charge for store assets of $0.9 million was recorded during the year ended
January 28, 2023.
The principal considerations for our determination that performing procedures relating to the impairment
of long-lived assets – store location asset groupings is a critical audit matter are (i) the significant
judgment by management when determining the fair value measurement of the store location asset
groupings, which led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing
procedures and evaluating management’s projected cash flow assumptions related to contribution margin
projections.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements. These procedures included testing
the effectiveness of controls relating to management’s long-lived assets – store location recoverability test
and determination of the fair value of the asset group. These procedures also included, among others (i)
testing the completeness and accuracy of underlying data used in the projected cash flows and store
37
location asset groupings, (ii) evaluating the reasonableness of management’s assumptions related to
contribution margin projections by considering current and historical performance of the store location
asset groupings and whether the assumptions were consistent with evidence obtained in other areas of the
audit, (iii) evaluating the appropriateness of the projected cash flow model, and (iv) evaluating
management’s assessment of the fair value of the leased assets included in the store location asset
groupings.
/s/
PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 23, 2023
We have served as the Company’s auditor since 2003.
38
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
Fiscal Year Ended
January 28, 2023
January 29, 2022
January 30, 2021
(Dollars in thousands, except per share data)
REVENUES
$
752,370
$
761,358
$
567,516
6,890
7,913
7,595
759,260
769,271
575,111
COSTS AND EXPENSES, NET
509,664
453,065
433,187
242,561
266,954
206,492
11,080
12,356
14,681
87
72
187
(5,902)
(2,141)
(6,630)
757,490
730,306
647,917
Income (loss) before income taxes
1,770
38,965
(72,806)
Income tax expense (benefit)
1,741
2,121
(25,323)
Net income (loss)
$
29
$
36,844
$
(47,483)
Basic earnings (loss) per share
$
-
$
1.65
$
(2.01)
Diluted earnings (loss) per share
$
-
$
1.65
$
(2.01)
Dividends per share
$
0.68
$
0.45
$
0.33
Comprehensive income:
Net income (loss)
$
29
$
36,844
$
(47,483)
Unrealized gain (loss) on available-for-sale
287
), ($
433
), and ($
79
) for fiscal 2022, 2021
(958)
(1,435)
(268)
Comprehensive (loss) income
$
(929)
$
35,409
$
(47,751)
See notes to consolidated financial statements.
39
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
January 28, 2023
January 29, 2022
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
20,005
$
19,759
Short-term investments
108,652
145,998
Restricted cash
3,787
3,918
Restricted short-term investments
-
1
Accounts receivable, net of allowance for customer credit losses of $
761
803
26,497
55,812
Merchandise inventories
112,056
124,907
Prepaid expenses and other current assets
6,676
5,273
277,673
355,668
Property and equipment – net
70,382
63,083
Deferred income taxes
9,213
9,313
Other assets
21,596
24,437
Right-of-Use assets - net
174,276
181,265
$
553,140
$
633,766
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
91,956
$
109,546
Accrued expenses
41,338
40,373
Accrued bonus and benefits
1,690
26,488
Accrued income taxes
613
920
Current lease liability
67,360
66,808
202,957
244,135
Other noncurrent liabilities
16,183
17,914
Lease liability
107,407
117,521
Commitments and contingencies
-
-
Stockholders' Equity:
Preferred stock, $
100
100,000
-
-
Class A common stock, $
0.033
50,000,000
18,723,225
19,824,093
632
669
Convertible Class B common stock, $
0.033
15,000,000
1,763,652
1,763,652
59
59
Additional paid-in capital
122,431
119,540
Retained earnings
104,709
134,208
Accumulated other comprehensive income
(1,238)
(280)
226,593
254,196
$
553,140
$
633,766
See notes to consolidated financial statements.
40
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
January 28, 2023
January 29, 2022
January 30, 2021
(Dollars in thousands)
Operating Activities:
Net income (loss)
$
29
$
36,844
$
(47,483)
Adjustments to reconcile net income (loss) to net cash provided
11,080
12,356
14,681
280
429
306
537
(332)
(691)
-
-
(2,298)
2,606
4,090
4,092
386
(3,194)
3,030
199
629
461
884
901
13,702
29,034
(3,499)
(26,935)
12,851
(40,784)
31,242
1,543
(505)
(1,596)
(2,573)
(3,855)
(2,611)
(307)
(1,118)
335
(43,179)
57,826
(16,945)
Net cash provided by (used in) operating activities
13,370
59,788
(30,710)
Investing Activities:
Expenditures for property and equipment
(19,433)
(4,105)
(13,956)
Purchase of short-term investments
(54,734)
(141,937)
(74,041)
Sales of short-term investments
90,190
121,110
149,298
Purchase of other assets
-
(400)
-
Sales of other assets
-
-
3,205
Net cash provided by (used in) investing activities
16,023
(25,332)
64,506
Financing Activities:
Dividends paid
(14,369)
(9,972)
(7,912)
Repurchase of common stock
(15,216)
(22,033)
(19,654)
Proceeds from line of credit
-
-
34,000
Payments to line of credit
-
-
(34,000)
Proceeds from employee stock purchase plan
307
204
391
Net cash used in financing activities
(29,278)
(31,801)
(27,175)
Net increase in cash, cash equivalents, and restricted cash
115
2,655
6,621
Cash, cash equivalents, and restricted cash at beginning of period
23,677
21,022
14,401
Cash, cash equivalents, and restricted cash at end of period
$
23,792
$
23,677
$
21,022
Non-cash activity:
Accrued plant and equipment
$
685
$
657
$
343
See notes to consolidated financial statements.
41
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional
Other
Total
Common
Paid-In
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — February 1, 2020
$
820
$
110,813
$
203,458
$
1,423
$
316,514
Comprehensive income:
-
-
(47,483)
-
(47,483)
79
-
-
-
(268)
(268)
Dividends paid ($
0.33
-
-
(7,912)
-
(7,912)
Class A common stock sold through employee stock purchase plan
1
459
-
-
460
Share-based compensation expense
8
4,006
8
-
4,022
Repurchase and retirement of treasury shares
(67)
-
(18,768)
-
(18,835)
Balance — January 30, 2021
$
762
$
115,278
$
129,303
$
1,155
$
246,498
Comprehensive income:
-
-
36,844
-
36,844
433
-
-
-
(1,435)
(1,435)
Dividends paid ($
0.45
-
-
(9,972)
-
(9,972)
Class A common stock sold through employee stock purchase plan
-
239
-
-
239
Share-based compensation expense
13
4,023
19
-
4,055
Repurchase and retirement of treasury shares
(47)
-
(21,986)
-
(22,033)
Balance — January 29, 2022
$
728
$
119,540
$
134,208
$
(280)
$
254,196
Comprehensive income:
-
-
29
-
29
287
-
-
-
(958)
(958)
Dividends paid ($
0.68
-
-
(14,369)
-
(14,369)
Class A common stock sold through employee stock purchase plan
-
360
-
-
360
Share-based compensation expense
4
2,531
17
-
2,552
Repurchase and retirement of treasury shares
(41)
-
(15,176)
-
(15,217)
Balance — January 28, 2023
$
691
$
122,431
$
104,709
$
(1,238)
$
226,593
See notes to consolidated financial statements.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATE MENTS
42
1. Summary of Significant Accounting Policies:
Principles of Consolidation:
The Consolidated Financial Statements include the accounts of The Cato
Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts
and transactions have been eliminated.
Description of Business and Fiscal
Year:
two
operation of a fashion specialty stores segment (“Retail Segment”) and a credit card segment (“Credit
Segment”). The apparel specialty stores operate under the names “Cato,” “Cato Fashions,” “Cato Plus,”
“It’s Fashion,” “It’s Fashion Metro,” “Versona ” and “Cache,” including e-commerce websites. The stores
are located primarily in strip shopping centers principally in the southeastern United States. The
Company’s fiscal year ends on the Saturday nearest January 31 of the subsequent year. Fiscal years 2022,
2021 and 2020 are
52
-week years.
Use of Estimates:
accounting principles generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant accounting estimates reflected in the Company’s financial statements include the allowance
for customer credit losses, inventory shrinkage, the calculation of potential asset impairment, workers’
compensation, general and auto insurance liabilities, reserves relating to self-insured health insurance,
uncertain tax positions and valuation allowances on deferred tax assets.
Cash and Cash Equivalents:
Cash and cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Short-Term Investments:
as short-term investments. See Note 3 for the Company’s estimated fair value of, and other information
regarding, its short-term investments.
The Company’s short-term investments are all classified as
available-for-sale. As they are available for current operations, they are classified on the Consolidated
Balance Sheets as Current Assets. Available-for-sale securities are carried at fair value, with unrealized
gains and temporary losses, net of income taxes, reported as a component of Accumulated other
comprehensive income. Other than temporary declines in the fair value of investments are recorded as a
reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a
reduction of Interest and other income in the accompanying Consolidated Statements of Income and
Comprehensive Income. The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized
gains and losses are included in Interest and other income.
Restricted Cash and Restricted Short-term Investments:
The Company had $
3.8
3.9
million in escrow at January 28, 2023 and January 29, 2022, respectively, as security and collateral for
administration of the Company’s self-insured workers’ compensation and general liability coverage,
which is reported as Restricted cash and Restricted short-term investments on the Consolidated Balance
Sheets.
Supplemental Cash Flow Information:
Income tax payments, net of refunds received, for the fiscal
years ended January 28, 2023, January 29, 2022 and January 30, 2021 were a refund of $
29,206,000
, a
payment of $
13,176,000
6,825,000
, respectively.
Inventories:
Merchandise inventories are stated at the net realizable value as determined by the
weighted-average cost method.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
43
Property and Equipment:
Property and equipment are recorded at cost, including land. Maintenance
and repairs are expensed to operations as incurred; renewals and betterments are capitalized. Depreciation
is determined on the straight-line method over the estimated useful lives of the related assets excluding
leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful
life or lease term. For leases with renewal periods at the Company’s option, the Company generally uses
the original lease term plus reasonably assured renewal option periods (generally one five-year option
period) to determine estimated useful lives. Typical estimated useful lives are as follows:
`
Estimated
Classification
Useful Lives
Land improvements
10
Buildings
30
-
40
Leasehold improvements
5
-
10
Fixtures and equipment
3
-
10
Information technology equipment and software
3
-
10
Aircraft
20
Impairment of Long-Lived Assets:
equipment primarily in connection with the opening and remodeling of stores and in computer software and
hardware. The Company periodically reviews its store locations and estimates the recoverability of its long-
lived assets, which primarily relate to Fixtures and equipment, Leasehold improvements, Right-of-use assets
net of Lease liabilities and Information technology equipment and software. An impairment charge is
recorded for the amount by which the carrying value exceeds the estimated fair value when the Company
determines that projected cash flows associated with those long-lived assets will not be sufficient to recover
the carrying value. This determination is based on a number of factors, including the store’s historical
operating results and future projected cash flows, which include contribution margin projections. The
Company assesses the fair value of each lease by considering market rents and any lease terms that may
adjust market rents under certain conditions, such as the loss of an anchor tenant or a leased space in a
shopping center not meeting certain criteria. Further, in determining when to close a store, the Company
considers real estate development in the area and perceived local market conditions, which can be difficult to
predict and may be subject to change. Asset impairment charges of $
884,079
, $
900,719
13,702,022
were incurred in fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
Other Assets:
Other assets are comprised of long-term assets, primarily insurance contracts related to
deferred compensation assets and land held for investment purposes.
`
Balance as of
January 28, 2023
January 29, 2022
(Dollars in thousands)
Other Assets
$
9,274
$
11,472
1,923
1,818
571
1,319
9,334
9,334
494
494
Total Other Assets
$
21,596
$
24,437
Leases:
The Company leases all of its retail stores. Most lease agreements contain construction
allowances and rent escalations. For purposes of recognizing incentives and minimum rental expenses on
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
44
a straight-line basis over the terms of the leases, including renewal periods considered reasonably assured,
the Company begins amortization as of the initial possession date which is when the Company enters the
space and begins to make improvements in preparation for intended use.
Revenue Recognition:
The Company recognizes sales at the point of purchase when the customer
takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from
purchases made with Cato credit, gift cards and layaway sales from stores are also recorded when the
customer takes possession of the merchandise. E-commerce sales are recorded when the risk of loss is
transferred to the customer. Gift cards are recorded as deferred revenue until they are redeemed or
forfeited. Layaway sales are recorded as deferred revenue until the customer takes possession or forfeits
the merchandise. Gift cards do not have expiration dates. A provision is made for estimated merchandise
returns based on sales volumes and the Company’s experience; actual returns have not varied materially
from historical amounts. A provision is made for estimated write-offs associated with sales made with the
Company’s proprietary credit card. In addition, a provision is made for estimated rewards cards issued
based on purchases with the Company’s propriety credit card. Amounts related to shipping and handling
billed to customers in a sales transaction are classified as Other revenue and the costs related to shipping
product to customers (billed and accrued) are classified as Cost of goods sold.
Revenue from Contracts with Customers (Topic 606)
in fiscal 2022, 2021 and 2020, the Company recognized $
256,000
, $
1,482,000
891,000
,
respectively, of income on unredeemed gift cards (“gift card breakage”) as a component of Other
Revenue on the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). Under
Topic 606, the Company recognizes gift card breakage using an expected breakage percentage based on
redeemed gift cards. See Note 2 for further information on miscellaneous income. The rewards cards
issued by the Company have a 90-day expiration.
the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. The
Company estimated customer credit losses of $
349,000
485,000
January 28, 2023 and January 29, 2022, respectively, on sales purchased on the Company’s proprietary
credit card of $
23.3
18.7
29, 2022, respectively.
customers (in thousands):
`
Balance as of
January 28, 2023
January 29, 2022
Proprietary Credit Card Receivables, net
$
10,553
$
8,998
Gift Card Liability
$
8,523
$
8,308
Cost of Goods Sold:
Cost of goods sold includes merchandise costs, net of discounts and allowances,
buying costs, distribution costs, occupancy costs, freight, and inventory shrinkage. Net merchandise costs
and in-bound freight are capitalized as inventory costs. Buying and distribution costs include payroll,
payroll-related costs and operating expenses for the Company’s buying departments and distribution
center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities
and maintenance for stores and distribution facilities. Buying, distribution, occupancy and internal
transfer costs are treated as period costs and are not capitalized as part of inventory. The direct costs
associated with shipping goods to customers are recorded as a component of Cost of goods sold.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
45
Advertising:
Advertising costs are expensed in the period in which they are incurred. Advertising
expense was approximately $
6,868,000
, $
6,037,000
4,385,000
2023, January 29, 2022 and January 30, 2021, respectively.
Stock Repurchase Program:
For the fiscal year ended January 28, 2023, the Company had
197,769
shares remaining in open authorizations. There is no specified expiration date for the Company’s
repurchase program. Share repurchases are recorded in Retained earnings, net of par value. From year
end through March 23, 2023, the Company repurchased
163,580
1,481,433
. The Board of
Directors increased the Company’s open share repurchase authorization by one million shares at the
February 23, 2023 Board of Directors meeting.
Earnings Per Share:
ASC 260 -
Earnings Per Share
diluted EPS on the face of all income statements for all entities with complex capital structures. The
Company has presented one basic EPS and one diluted EPS amount for all common shares in the
accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). While the
Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends
on Class A shares without declaration of commensurate dividends on Class B shares, the Company has
historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors
has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of
EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are
applicable to both Class A and Class B shares.
the weighted average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through stock options and the Employee
Stock Purchase Plan.
28, 2023, January 29, 2022 and January 30, 2021:
`
Fiscal Year Ended
January 28, 2023
January 29, 2022
January 30, 2021
Numerator
(Dollars in thousands)
Net earnings (loss)
$
29
$
36,844
$
(47,483)
(Earnings) loss allocated to non-vested equity awards
12
(1,937)
2,096
Net earnings (loss) available to common stockholders
$
41
$
34,907
$
(45,387)
Denominator
Basic weighted average common shares outstanding
19,930,960
21,113,828
22,536,090
Diluted weighted average common shares outstanding
19,930,960
21,113,828
22,536,090
Net income (loss) per common share
Basic earnings (loss) per share
$
-
$
1.65
$
(2.01)
Diluted earnings (loss) per share
$
-
$
1.65
$
(2.01)
Vendor Allowances:
The Company receives certain allowances from vendors primarily related to
purchase discounts and markdown and damage allowances. All allowances are reflected in Cost of goods
sold as earned when the related products are sold. Cash consideration received from a vendor is
presumed to be a reduction of the purchase cost of merchandise and is reflected as a reduction of
inventory. The Company does not receive cooperative advertising allowances.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
46
Income Taxes:
The Company files a consolidated federal income tax return. Income taxes are
provided based on the asset and liability method of accounting, whereby deferred income taxes are
provided for temporary differences between the financial reporting basis and the tax basis of the
Company’s assets and liabilities.
Income Taxes
these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in
light of changing facts and circumstances. Potential accrued interest and penalties related to
unrecognized tax benefits within operations are recognized as a component of Income before income
taxes.
that assessment, the Company will determine if a valuation allowance should be recorded.
taxed income (“GILTI”). The Company has elected to account for GILTI tax in the period in which it is
incurred, which is included as a component of its current year provision for income taxes.
Store Opening Costs:
Costs relating to the opening of new stores or the relocating or
expanding of existing stores are expensed as incurred. A portion of construction, design, and site
selection costs are capitalized to new, relocated and remodeled stores.
Insurance:
The Company is self-insured with respect to employee health care, workers’ compensation
and general liability. The Company’s self-insurance liabilities are based on the total estimated cost of
claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and
are not discounted. Management reviews current and historical claims data in developing its estimates.
The Company has stop-loss insurance coverage for individual claims in excess of $
325,000
healthcare, $
350,000
250,000
Fair Value of Financial Instruments:
as cash and cash equivalents, short-term investments, restricted cash and short-term investments,
approximate their fair values due to their short terms to maturity and/or their variable interest rates.
Stock Based Compensation:
stock and other forms of equity compensation in accordance with ASC 718 -
Compensation – Stock
Compensation.
includes: 1) amortization related to the remaining unvested portion of all stock awards based on the grant
date fair value and 2) adjustments for the effects of actual forfeitures versus initial estimated forfeitures.
Recently Adopted Accounting Policies:
In 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.
Recently Issued Accounting Pronouncements:
pronouncements and believe none will have a material impact on the Company’s financial statements.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
47
2. Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
Fiscal Year Ended
January 28, 2023
January 29, 2022
January 30, 2021
Dividend income
$
(47)
$
(76)
$
(5)
Interest income
(1,876)
(1,321)
(2,697)
State recovery grant
(1,431)
-
-
Insurance proceeds
(1,683)
-
-
Miscellaneous income
(896)
(580)
(627)
Net loss (gain) on investment sales
31
(164)
(3,301)
Interest and other income
$
(5,902)
$
(2,141)
$
(6,630)
In fiscal 2022, the Company received $
1.4
Recovery Program, which provides aid to eligible North Carolina businesses that suffered significant
economic damage from the COVID-19 pandemic. Additionally, in fiscal 2022, the Company received
$
1.7
in 2021 and 2020. During fiscal 2020, the Company recorded a gain on the sale of land held for
investment of $
2.3
3. Short-Term Investments:
governmental debt securities held in managed accounts. These securities are classified as available-for-
sale as they are highly liquid and are recorded on the Consolidated Balance Sheets at estimated fair value,
with unrealized gains and temporary losses reported net of taxes in Accumulated other comprehensive
income.
January 28, 2023 and January 29, 2022 (in thousands):
`
January 28, 2023
January 29, 2022
Debt securities
Debt securities
issued by the U.S
issued by the U.S
Government, its various
Government, its various
States, municipalities
Corporate
States, municipalities
Corporate
and agencies
debt
and agencies
debt
of each
securities
Total
of each
securities
Total
Cost basis
$
51,372
$
59,541
$
110,913
$
50,554
$
96,352
$
146,906
Unrealized gains
-
-
-
-
-
-
Unrealized (loss)
(1,020)
(1,241)
(2,261)
(388)
(520)
(908)
Estimated fair value
$
50,352
$
58,300
$
108,652
$
50,166
$
95,832
$
145,998
Accumulated other comprehensive income on the Consolidated Balance Sheets reflects the
accumulated unrealized gains and losses in short-term investments in addition to unrealized gains and
losses from equity investments and restricted cash investments. The table below reflects gross
accumulated unrealized gains and losses in these investments at January 28, 2023 and January 29, 2022
(in thousands):
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
48
`
January 28, 2023
January 29, 2022
Deferred
Unrealized
Deferred
Unrealized
Unrealized
Tax Benefit/
Net Gain/
Unrealized
Tax Benefit/
Net Gain/
Security Type
Gain/(Loss)
(Expense)
(Loss)
Gain/(Loss)
(Expense)
(Loss)
Short-Term Investments
$
(2,261)
$
521
$
(1,740)
$
(908)
$
211
$
(697)
Equity Investments
652
(150)
502
543
(126)
417
Total
$
(1,609)
$
371
$
(1,238)
$
(365)
$
85
$
(280)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
49
4. Fair Value Measurements:
at fair value as of January 28, 2023 and January 29, 2022 (in thousands):
`
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:
$
23,102
$
-
$
23,102
$
-
47,901
-
47,901
-
27,250
-
27,250
-
9,274
-
-
9,274
9,373
-
9,373
-
923
923
-
-
1,026
-
1,026
-
Total Assets
$
118,849
$
923
$
108,652
$
9,274
Liabilities:
(8,903)
-
-
(8,903)
Total Liabilities
$
(8,903)
$
-
$
-
$
(8,903)
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:
$
30,451
$
-
$
30,451
$
-
76,909
-
76,909
-
19,715
-
19,715
-
11,472
-
-
11,472
18,556
-
18,556
-
818
818
-
-
367
-
367
-
Total Assets
$
158,288
$
818
$
145,998
$
11,472
Liabilities:
(10,020)
-
-
(10,020)
Total Liabilities
$
(10,020)
$
-
$
-
$
(10,020)
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
January 28, 2023. The state, municipal and corporate bonds and asset-backed securities have contractual
maturities which range from
six days
3.9 years
. The U.S. Treasury Notes and Certificates of Deposit
have contractual maturities which range from
three days
1.6 years
. These securities are classified as
available-for-sale and are recorded as Short-term investments, Restricted cash, Restricted short-term
investments and Other assets on the accompanying Consolidated Balance Sheets. These assets are carried at
fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive
income. The asset-backed securities are bonds comprised of auto loans and bank credit cards that carry AAA
ratings. The auto loan asset-backed securities are backed by static pools of auto loans that were originated and
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
50
serviced by captive auto finance units, banks or finance companies. The bank credit card asset-backed
securities are backed by revolving pools of credit card receivables generated by account holders of cards from
American Express, Citibank, JPMorgan Chase, Capital One, and Discover.
0.9
recorded within Other assets in the Consolidated Balance Sheets. At January 29, 2022, the Company had
$
0.8
Sheets.
investment securities include corporate and municipal bonds for which quoted prices may not be available on
active exchanges for identical instruments. Their fair value is principally based on market values determined
by management with assistance of a third-party pricing service. Since quoted prices in active markets for
identical assets are not available, these prices are determined by the pricing service using observable market
information such as quotes from less active markets and/or quoted prices of securities with similar
characteristics, among other factors.
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on such factors as the fair value of the underlying assets and discounted cash flow and are therefore
classified within Level 3 of the valuation hierarchy. The Level 3 liability associated with the life
insurance policies represents a deferred compensation obligation, the value of which is tracked via
underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the
Consolidated Balance Sheets. These funds are designed to mirror the return of existing mutual funds and
money market funds that are observable and actively traded.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
51
The following tables summarize the change in fair value of the Company’s financial assets and liabilities
measured using Level 3 inputs as of January 28, 2023 and
January 29, 2022
`
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at January 29, 2022
$
11,472
(1,718)
(480)
Ending Balance at January 28, 2023
$
9,274
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at January 29, 2022
$
(10,020)
1,142
(379)
354
Ending Balance at January 28, 2023
$
(8,903)
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at January 30, 2021
$
11,263
209
Ending Balance at January 29, 2022
$
11,472
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at January 30, 2021
$
(10,316)
1,010
(304)
(410)
Ending Balance at January 29, 2022
$
(10,020)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
52
5.
Accounts Receivable:
Accounts receivable consist of the following (in thousands):
January 28, 2023
January 29, 2022
Customer accounts — principally deferred payment accounts
$
11,313
$
9,800
Income tax receivable
6,442
38,361
Miscellaneous receivables
3,991
3,540
Bank card receivables
5,512
4,914
Total
27,258
56,615
Less allowance for customer credit losses
761
803
Accounts receivable — net
$
26,497
$
55,812
Finance charge and late charge revenue on customer deferred payment accounts totaled $
2,243,000
,
$
2,066,000
2,658,000
years ended January 28, 2023, January 29, 2022 and January 30,
2021, respectively, and charges against the allowance for customer credit losses were approximately
$
280,000
, $
429,000
306,000
January 30, 2021, respectively. Expenses relating to the allowance for customer credit losses are
classified as a component of Selling, general and administrative expense in the accompanying
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
6.
Property and Equipment:
Property and equipment consist of the following (in thousands):
January 28, 2023
January 29, 2022
Land and improvements
$
13,595
$
13,595
Buildings
35,537
35,403
Leasehold improvements
77,609
79,327
Fixtures and equipment
174,640
178,027
Information technology equipment and software
38,202
34,758
Construction in progress
12,989
1,498
Total
352,572
342,608
Less accumulated depreciation
282,190
279,525
Property and equipment — net
$
70,382
$
63,083
distribution center improvements and investments in new technology.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
53
7.
Accrued Expenses:
Accrued expenses consist of the following (in thousands):
January 28, 2023
January 29, 2022
Accrued employment and related items
$
7,377
$
6,388
Property and other taxes
16,546
16,930
Accrued self-insurance
7,968
8,463
Fixed assets
685
657
Other
8,762
7,935
Total
$
41,338
$
40,373
Prior period balances in the table above have been reclassified to conform to current
period presentation.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
54
8. Financing Arrangements:
borrowings of up to $
35.0
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 January 28, 2023. There were
no
of January 28, 2023 or January 29, 2022. At January 28, 2023, the weighted average interest rate under the
credit facility was
zero
no
no
relating to purchase commitments.
9. Stockholders’ Equity:
one vote per share
, whereas the holders of
Class B Common Stock are entitled to
ten votes per share
. Each share of Class B Common Stock may be
converted at any time into one share of Class A Common Stock
. Subject to the rights of the holders of any
shares of Preferred Stock that may be outstanding at the time, in the event of liquidation, dissolution or
winding up of the Company, holders of Class A Common Stock are entitled to receive a preferential
distribution of $
1.00
Stock cannot be paid unless cash dividends of at least an equal amount are paid on the Class A Common
Stock.
transferred only to certain “Permitted Transferees” consisting generally of the lineal descendants of
holders of Class B Common Stock, trusts for their benefit, corporations and partnerships controlled by
them and the Company’s employee benefit plans. Any transfer of Class B Common Stock in violation of
these restrictions, including a transfer to the Company, results in the automatic conversion of the
transferred shares of Class B Common Stock held by the transferee into an equal number of shares of
Class A Common Stock.
10. Employee Benefit Plans:
associates who meet minimum age and service requirements.
The 401(k) plan allows participants to
contribute up to 75% of their annual compensation up to the maximum elective deferral, designated by
the IRS
. The Company is obligated to make a minimum contribution to cover plan administrative
expenses. Further Company contributions are at the discretion of the Board of Directors. The Company’s
contributions for the years ended January 28, 2023, January 29, 2022 and January 30, 2021 were
approximately $
1,184,000
, $
1,210,000
0
, respectively.
The Company has a trusteed, non-contributory Employee Stock Ownership Plan (“ESOP”), which
covers substantially all associates who meet minimum age and service requirements
. The amount of the
Company’s discretionary contribution to the ESOP is determined by the Compensation Committee of the
Board of Directors and can be made in Company Class A Common stock or cash. The Committee
approved a contribution to the ESOP for the year ended January 28, 2023 of $
32,510
. The Company’s
contribution was $
29,430,000
0
respectively.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
55
large number of the Company’s retail locations and associates. The Company’s self-insurance liabilities
are based on the total estimated costs of claims filed and estimates of claims incurred but not reported,
less amounts paid against such claims. Management reviews current and historical claims data in
developing its estimates. If the underlying facts and circumstances of the claims change or the historical
trend is not indicative of future trends, then the Company may be required to record additional expense or
a reduction to expense which could be material to the Company’s reported financial condition and results
of operations. The Company funds healthcare contributions to a third-party provider.
11
Leases:
The Company determines whether an arrangement is a lease at inception. The Company has operating
leases for stores, offices, warehouse space and equipment. Its leases have remaining lease terms of
one
year
10 years
, some of which include options to extend the lease term for
up to five years
, and some of
which include options to terminate the lease
within one year
. The Company considers these options in
determining the lease term used to establish its right-of-use assets and lease liabilities. The Company’s
lease agreements do not contain any material residual value guarantees or material restrictive covenants.
incremental borrowing rate based on the information available at commencement date of the lease in
determining the present value of lease payments.
`
Fiscal Year Ended
January 28, 2023
January 29, 2022
Operating lease cost (a)
$
71,513
$
68,763
Variable lease cost (b)
$
3,127
$
3,041
(a) Includes right-of-use asset amortization of ($
1.7
) million and ($
2.2
) million for the twelve months
ended January 28, 2023 and January 29, 2022, respectively.
(b) Primarily relates to monthly percentage rent for stores not presented on the balance sheet.
Supplemental cash flow information and non-cash activity related to the Company’s operating leases
are as follows (in thousands):
Operating cash flow information:
Fiscal Year Ended
January 28, 2023
January 29, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
67,194
$
63,201
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations, net of rent violations
$
57,628
$
40,756
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
56
Weighted-average remaining lease term and discount rate for the Company’s operating leases are as
follows:
`
As of
January 28, 2023
January 29, 2022
Weighted-average remaining lease term
2.5
2.7
Weighted-average discount rate
3.13%
3.55%
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in
thousands):
Fiscal Year
2023
$
71,850
2024
50,732
2025
33,236
2026
18,534
2027
8,505
Thereafter
1,513
Total lease payments
184,370
Less: Imputed interest
9,603
Present value of lease liabilities
$
174,767
12. Income Taxes:
liabilities, are established in accordance with ASC 740 when, despite the fact that the tax return positions
are supportable, the Company believes these positions may be challenged and the results are uncertain.
The Company adjusts these liabilities in light of changing facts and circumstances. As of January 28,
2023, the Company had gross unrecognized tax benefits totaling approximately $
4.9
approximately $
6.0
Company had approximately $
2.0
2.0
2.8
related to uncertain tax positions as of January 28, 2023, January 29, 2022 and January 30, 2021,
respectively. The Company recognizes interest and penalties related to the resolution of uncertain tax
positions as a component of income tax expense. The Company recognized $
517,000
, $
452,000
$
424,000
Income (Loss) for the years ended January 28, 2023, January 29, 2022 and January 30, 2021, respectively.
The Company is no longer subject to U.S. federal income tax examinations for years before 2019. In
state and local tax jurisdictions, the Company has limited exposure before 2012. During the next 12
months, various state and local taxing authorities’ statutes of limitations will expire and certain state
examinations may close, which could result in a potential reduction of unrecognized tax benefits for
which a range cannot be determined.
(in thousands):
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
57
`
January 28, 2023
January 29, 2022
January 30, 2021
Fiscal Year Ended
Balances, beginning
$
5,286
$
5,946
$
7,942
431
1,312
286
137
680
-
Reduction for tax positions of prior years for:
-
-
614
(968)
(2,652)
(2,896)
Balances, ending
$
4,886
$
5,286
$
5,946
The provision for income taxes consists of the following (in thousands):
`
January 28, 2023
January 29, 2022
January 30, 2021
Fiscal Year Ended
Current income taxes:
$
(817)
$
2,532
$
(31,927)
(231)
802
1,842
2,403
1,984
1,731
1,355
5,318
(28,354)
Deferred income taxes:
200
(2,558)
1,905
186
(639)
1,129
-
-
(3)
386
(3,197)
3,031
Total income tax expense (benefit)
$
1,741
$
2,121
$
(25,323)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
58
Significant components of the Company’s deferred tax assets and liabilities as of January 28, 2023 and
January 29, 2022 are as follows (in thousands):
`
January 28, 2023
January 29, 2022
Deferred tax assets:
Allowance for customer credit losses
$
162
$
171
Inventory valuation
1,042
1,176
Non-deductible accrued liabilities
1,435
1,367
Other taxes
875
1,135
Federal benefit of uncertain tax positions
851
972
Equity compensation expense
2,892
3,666
Net operating losses
5,567
4,206
Charitable contribution carryover
216
241
State tax credits
340
1,115
Lease liabilities
40,090
42,268
Property and equipment
3,400
2,257
Other
2,822
2,036
Total deferred tax assets before valuation allowance
59,692
60,610
Valuation allowance
(5,058)
(4,473)
Total deferred tax assets after valuation allowance
54,634
56,137
Deferred tax liabilities:
Right-of-Use assets
44,732
46,320
Accrued self-insurance reserves
689
504
Total deferred tax liabilities
45,421
46,824
Net deferred tax assets
$
9,213
$
9,313
The changes in the valuation allowance are presented below:
January 28, 2023
January 29, 2022
Valuation Allowance Beginning Balance
$
(4,473)
$
(5,256)
(585)
783
Valuation Allowance Ending Balance
$
(5,058)
$
(4,473)
As of January 28, 2023, the Company had $
0.3
expense, which are set to expire by fiscal 2023. Based on the available evidence, the Company has recorded
a valuation allowance of $
0.3
5.6
Company assessed the likelihood that deferred tax assets related to state net operating loss carryforwards will
be realized. Based on this assessment, the Company concluded that it is more likely than not the Company
will not be able to realize $
4.8
allowance for the same amount.
The net change in the valuation allowance for the years ended January 28, 2023 and January 29, 2022 is
due to state net operating losses and state tax credits.
undistributed earnings indefinitely. Future unremitted earnings when distributed are expected to be either
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
59
distributions of GILTI-previously taxed income or eligible for a
100
% dividends received deduction. The
withholding tax rate on any unremitted earnings is
zero
considered immaterial. Therefore, the Company has not provided deferred U.S. income taxes on
approximately $
31.7
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
60
The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows:
`
January 28, 2023
January 29, 2022
January 30, 2021
Fiscal Year Ended
Federal income tax rate
21.0
%
21.0
%
21.0
%
State income taxes
(36.4)
2.7
4.0
CARES ACT - Carryback differential
-
(5.8)
18.3
Global intangible low-taxed income
333.0
6.7
(5.3)
Foreign tax credit
(11.2)
(4.3)
-
Foreign rate differential
(74.4)
(2.8)
1.2
Offshore claim
(141.2)
(5.5)
2.5
Limitation on officer compensation
27.2
1.9
(0.4)
Work opportunity credit
(63.7)
(1.8)
0.2
Addback on wage related credits
13.4
0.4
-
Tax exempt interest
(14.4)
-
-
Insurance
(8.1)
(1.0)
-
Charitable contribution of inventory
-
(1.1)
(0.2)
Uncertain tax positions
(18.7)
(3.5)
3.3
Deferred rate change
1.1
0.1
(0.1)
Valuation allowance
70.9
(2.1)
(5.7)
Other
(0.1)
0.5
(4.0)
Effective income tax rate
98.4
%
5.4
%
34.8
%
13. Reportable Segment Information:
The Company has determined that it has
four
including Cato, It’s Fashion, Versona and Credit. As outlined in ASC 280-10, the Company has
two
reportable segments: Retail and Credit. The Company has aggregated its three retail operating segments,
including e-commerce, based on the aggregation criteria outlined in ASC 280-10, which states that two or
more operating segments may be aggregated into a single reportable segment if aggregation is consistent with
the objective and basic principles of ASC 280-10, which require the segments have similar economic
characteristics, products, production processes, clients and methods of distribution.
The Company’s retail operating segments have similar economic characteristics and similar operating,
financial and competitive risks. They are similar in terms of product offered, as they all offer women’s
apparel, shoes and accessories. Merchandise inventory of the Company’s retail operating segments is
sourced from the same countries and some of the same vendors, using similar production processes.
Merchandise for the Company’s retail operating segments is distributed to retail stores in a similar manner
through the Company’s single distribution center and is subsequently distributed to clients in a similar
manner.
The Company offers its own credit card to its customers and all credit authorizations, payment
processing, and collection efforts are performed by a separate subsidiary of the Company.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
61
The following schedule summarizes certain segment information (in thousands):
`
Fiscal 2022
Retail
Credit
Total
Revenues
$
757,017
$
2,243
$
759,260
Depreciation
11,078
2
11,080
Interest and other income
5,902
-
5,902
Income (loss) before taxes
1,179
591
1,770
Capital expenditures
19,433
-
19,433
Fiscal 2021
Retail
Credit
Total
Revenues
$
767,205
$
2,066
$
769,271
Depreciation
12,354
2
12,356
Interest and other income
2,141
-
2,141
Income (loss) before taxes
38,340
625
38,965
Capital expenditures
4,101
4
4,105
Fiscal 2020
Retail
Credit
Total
Revenues
$
572,453
$
2,658
$
575,111
Depreciation
14,680
1
14,681
Interest and other income
6,630
-
6,630
Income (loss) before taxes
(73,972)
1,166
(72,806)
Capital expenditures
13,955
1
13,956
Retail
Credit
Total
Total assets as of January 28, 2023
$
514,609
$
38,531
$
553,140
Total assets as of January 29, 2022
595,487
38,279
633,766
The accounting policies of the segments are the same as those described in the Summary of Significant
Accounting Policies in Note 1. The Company evaluates performance based on profit or loss from operations
before income taxes. The Company does not allocate certain corporate expenses to the credit segment.
The following schedule summarizes the direct expenses of the credit segment which are reflected in
Selling, general and administrative expenses (in thousands):
Fiscal Year Ended
`
January 28, 2023
January 29, 2022
January 30, 2021
Payroll
$
527
$
501
$
541
Postage
406
342
360
Other expenses
717
595
590
Total expenses
$
1,650
$
1,438
$
1,491
14. Stock Based Compensation:
two
based compensation was outstanding. The 2018 Incentive Compensation Plan and 2013 Incentive
Compensation Plan are for the granting of various forms of equity-based awards, including restricted stock
and stock options for grant, to officers, directors and key employees. Effective May 24, 2018, shares for grant
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
62
were no longer available under the 2013 Incentive Compensation Plan.
and available for grant under each of the plans as of January 28, 2023:
`
2013
2018
Plan
Plan
Total
Options and/or restricted stock initially authorized
1,500,000
4,725,000
6,225,000
Options and/or restricted stock available for grant:
-
3,580,471
3,580,471
-
3,461,061
3,461,061
In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the
date of grant based on the market price of the Company’s stock and is amortized to compensation expense
on a straight-line basis over a
five year
10,543,000
total unrecognized compensation expense related to unvested restricted stock awards, which is expected
to be recognized over a remaining weighted-average vesting period of
2.1
value of the shares recognized as compensation expense during the twelve months ended January 28,
2023, January 29, 2022 and January 30, 2021 was $
2,556,000
, $
4,055,000
4,023,000
, respectively.
The decrease in total compensation expense for fiscal 2022 is due to a true-up resulting from forfeitures
driven by the retirement of several senior members of management. The expenses are classified as a
component of Selling, general and administrative expenses in the Consolidated Statements of Income
(Loss) and Comprehensive Income (Loss).
The following summary shows the changes in the shares of unvested restricted stock outstanding during
the years ended January 28, 2023, January 29, 2022 and January 30, 2021:
`
Weighted Average
Number of
Grant Date Fair
Shares
Value Per Share
Restricted stock awards at February 1, 2020
942,562
$
19.55
Granted
335,317
11.11
Vested
(129,682)
34.01
Forfeited or expired
(124,241)
16.37
Restricted stock awards at January 30, 2021
1,023,956
$
15.33
Granted
407,910
13.49
Vested
(176,575)
22.22
Forfeited or expired
(59,003)
13.95
Restricted stock awards at January 29, 2022
1,196,288
$
13.76
Granted
319,441
13.70
Vested
(231,638)
16.99
Forfeited or expired
(224,658)
13.43
Restricted stock awards at January 28, 2023
1,059,433
$
13.10
The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a
limited number of shares of the Company’s Class A Common Stock during each semi-annual offering
period at a
15
% discount through payroll deductions. During the twelve month period ended January 28,
2023, the Company sold
31,994
1.70
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
63
Employee Stock Purchase Plan. The compensation expense recognized for the
15
% discount given under
the Employee Stock Purchase Plan was approximately $
54,000
, $
36,000
69,000
2022, 2021 and 2020, respectively. These expenses are classified as a component of Selling, general and
administrative expenses.
15. Commitments and Contingencies:
business, including litigation regarding the merchandise that we sell, litigation regarding intellectual
property, litigation instituted by persons injured upon premises under our control, litigation with respect
to various employment matters, including alleged discrimination and wage and hour litigation, and
litigation with present or former employees.
of our size with a significant number of employees and significant merchandise sales, such litigation
could result in large monetary awards. Based on information currently available, management does not
believe that any reasonably possible losses arising from current pending litigation will have a material
adverse effect on our Consolidated Financial Statements. However, given the inherent uncertainties
involved in such matters, an adverse outcome in one or more such matters could materially and adversely
affect the Company’s financial condition, results of operations and cash flows in any particular reporting
period. The Company accrues for these matters when the liability is deemed probable and reasonably
estimable.
16. Accumulated Other Comprehensive Income:
The following table sets forth information regarding the reclassification out of Accumulated other
comprehensive income (in thousands) as of January 28, 2023:
`
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 29, 2022
$
(280)
(982)
24
Net current-period other comprehensive income
(loss)
(958)
Ending Balance at January 28, 2023
$
(1,238)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive
income (“OCI”).
(b) Includes $
31
income for net gains on available-for-sale securities. The tax impact of this reclassification was $
7
. Amounts
in parentheses indicate a debit/reduction to OCI.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
64
The following table sets forth information regarding the reclassification out of Accumulated other
comprehensive income (in thousands) as of January 29, 2022:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 30, 2021
$
1,155
(1,561)
126
Net current-period other comprehensive income (loss)
(1,435)
Ending Balance at January 29, 2022
$
(280)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to OCI.
(b) Includes $
164
income for net gains on available-for-sale securities. The tax impact of this reclassification was $
38
. Amounts in
parentheses indicate a debit/reduction to OCI.
65
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
Item 9A.
Controls and Procedures:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Financial Officer, of the effectiveness of our disclosure controls and procedures as of January 28, 2023.
Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that,
as of January 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.
Management’s Report on Internal Control Over Financial Reporting
reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of
our management, including our Principal Executive Officer and Principal Financial Officer, we carried
out an evaluation of the effectiveness of our internal control over financial reporting as of January 28,
2023 based on the
(2013)
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of January 28,
2023.
effectiveness of our internal control over financial reporting as of January 28, 2023, as stated in its report
which is included herein.
Changes in Internal Control Over Financial Reporting
Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended January 28, 2023 that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item 9B.
Other Information:
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
:
66
PART III
Item 10.
Directors, Executive Officers and Corporate Governance:
“Corporate Governance Matters” and “Delinquent Section 16(a) Reports” in the Registrant’s Proxy
Statement for its 2023 annual stockholders’ meeting (the “2023 Proxy Statement”) is incorporated by
reference in response to this Item 10. The information in response to this Item 10 regarding executive
officers of the Company is contained in Item 3A, Part I hereof under the caption “Executive Officers of
the Registrant.”
Item 11.
Executive Compensation:
under the heading “Pay Versus Performance”), “Fiscal Year 2022 Director Compensation,” and
“Corporate Governance Matters-Compensation Committee Interlocks and Insider Participation” in the
Company’s 2023 Proxy Statement is incorporated by reference in response to this Item.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters:
Equity Compensation Plan Information
future awards under all of the Company’s equity compensation plans. The information is as of January 28,
2023.
(a)
Number of Securities to
be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
(1)
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(1)
(c)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a)) (2)
Plan Category
Equity compensation plans approved
-
-
3,673,917
Equity compensation plans not
-
-
-
Total
-
-
3,673,917
(1)
There are no outstanding stock options, warrants or stock appreciation rights.
(2)
Includes the following:
Under the Company’s stock incentive plan, referred to as the 2018
Incentive Compensation Plan, 3,461,061 shares are available for grant. Under this plan, non-
qualified stock options may be granted to key associates.
Under the 2021 Employee Stock Purchase Plan, 212,856 shares are available. Eligible associates
may participate in the purchase of designated shares of the Company’s common stock. The
purchase price of this stock is equal to 85% of the lower of the closing price at the beginning or the
end of each semi-annual stock purchase period.
in the 2023 Proxy Statement is incorporated by reference in response to this Item.
67
Item 13.
Certain Relationships and Related Transactions, and Director Independence:
“Corporate Governance Matters-Director Independence” and “Meetings and Committees” in the 2023
Proxy Statement is incorporated by reference in response to this Item.
Principal Accountant Fees and Services:
Firm-Audit Fees” and “-Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Service by the Independent Registered Public Accounting Firm” in the 2023 Proxy Statement is
incorporated by reference in response to this Item.
68
PART IV
Item 15.
Exhibits and Financial Statement Schedules:
Page
Report of Independent Registered Public Accounting Firm ....................................................................
36
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the fiscal
39
Consolidated Balance Sheets at January 28, 2023 and January 29, 2022 .................................................
40
Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2023, January 29, 2022
and January 30, 2021 ................................................................................................................................
41
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 28, 2023,
January 29, 2022 and January 30, 2021 ....................................................................................................
42
Notes to Consolidated Financial Statements .............................................................................................
43
Schedule II — Valuation and Qualifying Accounts .................................................................................
73
presented in the Consolidated Financial Statements or related Notes thereto.
noted, incorporated by reference herein. The Company will supply copies of the following exhibits to any
shareholder upon receipt of a written request addressed to the Corporate Secretary, The Cato Corporation,
8100 Denmark Road, Charlotte, NC 28273 and the payment of $.50 per page to help defray the costs of
handling, copying and postage. In most cases, documents incorporated by reference to exhibits to our
registration statements, reports or proxy statements filed by the Company with the Securities and
Exchange Commission are available to the public over the Internet from the SEC’s web site at
http://www.sec.gov.
69
Exhibit
Number
Description of Exhibit
3.1
3.2
4.1
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.10*
10.11*
10.12
10.13
70
21.1**
23.1**
31.1**
31.2**
32.1**
32.2**
101.1**
The following materials from Registrant’s Annual Report on form 10-K for the fiscal year
ended January 28, 2023, formatted in Inline XBRL: (i) Consolidated Statements of Income
(Loss) and Comprehensive Income (Loss) for the fiscal years ended January 28, 2023, January
29, 2022 and January 30, 2021; (ii) Consolidated Balance Sheets at January 28, 2023 and
January 29, 2022; (iii) Consolidated Statements of Cash Flows for the fiscal years ended
January 28, 2023, January 29, 2022 and January 30, 2021; (iv) Consolidated Statements of
Stockholders’ Equity for the fiscal years ended January 28, 2023, January 29, 2022 and
January 30, 2021; and (v) Notes to Consolidated Financial Statements.
104.1
Cover Page Interactive Data File (Formatted in Inline XBRL and contained in the Interactive
Data Files submitted as Exhibit 101.1**).
___________
* Management contract or compensatory plan required to be filed under Item 15 of this report and Item 601
of Regulation S-K.
** Filed or submitted electronically herewith.
Item 16.
Form 10-K Summary:
71
SIGNATURES
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Cato Corporation
By
/s/ JOHN P. D. CATO
By
/s/ CHARLES D. KNIGHT
John P. D. Cato
Chairman, President and
Chief Executive Officer
Charles D. Knight
Executive Vice President
Chief Financial Officer
By
/s/ JEFFREY R. SHOCK
Jeffrey R. Shock
Senior Vice President
Controller
Date: March 23, 2023
by the following persons on behalf of the Registrant and in the capacities indicated:
/s/ JOHN P. D. CATO
John P. D. Cato
(President and Chief Executive Officer
(Principal Executive Officer) and Director)
/s/ BAILEY W. PATRICK
Bailey W. Patrick
(Director)
/s/ CHARLES D. KNIGHT
Charles D. Knight
(Executive Vice President
Chief Financial Officer (Principal Financial Officer))
/s/ THOMAS B. HENSON
Thomas B. Henson
/s/ JEFFREY R. SHOCK
Jeffrey R. Shock
(Senior Vice President
Controller (Principal Accounting Officer))
/s/ BRYAN F. KENNEDY III
Bryan F. Kennedy III
(Director)
/s/ THOMAS E. MECKLEY
Thomas E. Meckley
(Director)
/s/ D. HARDING STOWE
D. Harding Stowe
/s/ THERESA J. DREW
Theresa J. Drew
(Director)
/s/ PAMELA L. DAVIES
Pamela L. Davies
(Director)
72
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Allowance
for
Customer
Self Insurance
Credit Losses(a)
Reserves(b)
Balance at February 1, 2020
$
726
$
10,535
Additions charged to costs and expenses
435
15,500
Additions (reductions) charged to other accounts
171
(c)
(205)
Deductions
(727)
(d)
(14,855)
Balance at January 30, 2021
$
605
$
10,975
Additions charged to costs and expenses
485
13,464
Additions (reductions) charged to other accounts
98
(c)
(1,447)
Deductions
(385)
(d)
(14,721)
Balance at January 29, 2022
$
803
$
8,271
Additions charged to costs and expenses
349
13,287
Additions (reductions) charged to other accounts
84
(c)
638
Deductions
(475)
(d)
(14,523)
Balance at January 28, 2023
$
761
$
7,673
(a) Deducted from trade accounts receivable.
(b) Reserve for Workers' Compensation, General Liability and Healthcare.
(c) Recoveries of amounts previously written off.
(d) Uncollectible accounts written off.
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