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CATO CORP - Quarter Report: 2023 July (Form 10-Q)

cato22qtr3q
 
 
 
 
 
 
 
 
 
 
 
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
 
20549
FORM
10-Q
QUARTERLY REPORT PURSUANT
 
TO SECTION
 
13 OR 15(d)
 
OF THE SECURITIES
 
EXCHANGE
 
ACT OF
1934
For the quarterly period ended
July 29, 2023
OR
TRANSITION
 
REPORT PURSUANT
 
TO SECTION
 
13 OR 15(d)
 
OF THE SECURITIES
 
EXCHANGE
 
ACT OF
1934
For the transition period from ________________to__________________
Commission file number
 
1-31340
 
THE CATO CORPORATION
(Exact name of registrant as specified in its
 
charter)
 
Delaware
56-0484485
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
8100 Denmark Road
,
Charlotte
,
North Carolina
 
28273-5975
(Address of principal executive offices)
(Zip Code)
(704)
554-8510
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
 
changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A - Common Stock, par value $.033 per share
CATO
New York Stock Exchange
Indicate
 
by check
 
mark
 
whether
 
the
 
registrant
 
(1)
 
has
 
filed
 
all
 
reports
 
required
 
to
 
be
 
filed
 
by Section
 
13
 
or
 
15(d)
 
of
 
the
 
Securities
Exchange Act of 1934
 
during the preceding 12
 
months (or for such shorter
 
period that the registrant
 
was required to file such
 
reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
No
Indicate
 
by
 
check
 
mark
 
whether
 
the
 
registrant
 
has
 
submitted
 
electronically
 
every
 
Interactive
 
Data
 
File
 
required
 
to
 
be
 
submitted
pursuant to Rule
 
405 of Regulation
 
S-T (§232.405
 
of this chapter)
 
during the preceding
 
12 months (or
 
for such shorter
 
period that the
registrant was required to submit such files).
Yes
X
No
Indicate by
 
check mark
 
whether the
 
registrant is
 
a large
 
accelerated filer,
 
an accelerated
 
filer, a
 
non-accelerated filer,
 
a smaller
 
reporting
company,
 
or
 
an
 
emerging
 
growth
 
company.
 
See
 
the
 
definitions
 
of
 
“large
 
accelerated
 
filer,”
 
“accelerated
 
filer,”
 
“smaller
 
reporting
company,” and “emerging growth
 
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
Emerging growth company
 
If
 
an
 
emerging
 
growth
 
company,
 
indicate
 
by
 
check
 
mark
 
if
 
the
 
registrant
 
has
 
elected
 
not
 
to
 
use
 
the
 
extended
 
transition
 
period
 
for
complying with any new or revised financial accounting standards provided
 
pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
 
12b-2 of the Exchange Act).
As of July
 
29, 2023, there
 
were
18,825,772
 
shares of Class A common
 
stock and
1,763,652
 
shares of Class B common
 
stock outstanding.
2
THE CATO CORPORATION
FORM 10-Q
Quarter Ended July 29, 2023
Table
 
of Contents
Page No.
PART
 
I – FINANCIAL INFORMATION
 
(UNAUDITED)
Item 1.
Financial Statements (Unaudited):
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
3
For the Three Months and Six Months Ended
 
July 29, 2023 and July 30, 2022
Condensed Consolidated Balance Sheets
4
At July 29, 2023 and January 28, 2023
Condensed Consolidated Statements of Cash Flows
5
For the Six Months Ended July 29, 2023 and July
 
30, 2022
Condensed Consolidated Statements of Stockholders’ Equity
6 – 7
For the Six Months Ended July 29, 2023 and July
 
30, 2022
Notes to Condensed Consolidated Financial Statements
8 – 22
For the Three Months and Six Months Ended
 
July 29, 2023 and July 30, 2022
Item 2.
Management’s Discussion and Analysis
 
of Financial Condition and
Results of Operations
23 – 29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
29
PART
 
II – OTHER INFORMATION
Item 1.
Legal Proceedings
30
Item 1A.
Risk Factors
30
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 3.
Defaults Upon Senior Securities
31
Item 4.
Mine Safety Disclosures
31
Item 5.
Other Information
31
Item 6.
Exhibits
31
Signatures
32
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
PART
 
I FINANCIAL INFORMATION
ITEM 1.
 
FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
 
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(Dollars in thousands, except per share data)
REVENUES
 
Retail sales
$
181,181
$
195,006
$
371,492
$
399,939
 
Other revenue (principally finance charges, late fees and
 
layaway charges)
1,690
1,858
3,429
3,646
 
Total revenues
182,871
196,864
374,921
403,585
COSTS AND EXPENSES, NET
 
Cost of goods sold (exclusive of depreciation shown
 
below)
117,617
131,749
239,704
263,992
 
Selling, general and administrative (exclusive of
 
depreciation
 
shown below)
61,618
60,768
123,552
121,209
 
Depreciation
2,510
2,811
4,867
5,554
 
Interest and other income
(1,334)
(1,884)
(2,231)
(2,287)
 
Costs and expenses, net
180,411
193,444
365,892
388,468
Income before income taxes
2,460
3,420
9,029
15,117
Income tax expense
1,333
5,694
3,475
7,643
Net income (loss)
$
1,127
$
(2,274)
$
5,554
$
7,474
Basic earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
Diluted earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
Comprehensive income:
Net income (loss)
$
1,127
$
(2,274)
$
5,554
$
7,474
Unrealized gain (loss) on available-for-sale securities, net of
 
 
deferred income taxes of $
50
 
and $
156
 
for the three and
 
 
six months ended July 29, 2023 and $
18
 
and $(
343
) for
 
 
the three and six months ended July 30, 2022, respectively
167
61
522
(1,145)
Comprehensive income (loss)
$
1,294
$
(2,213)
$
6,076
$
6,329
See notes to condensed consolidated financial statements (unaudited).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
July 29, 2023
January 28, 2023
ASSETS
(Dollars in thousands)
Current Assets:
Cash and cash equivalents
 
$
55,977
$
20,005
Short-term investments
 
77,222
108,652
Restricted cash
3,877
3,787
Accounts receivable, net of allowance for customer credit losses of
 
$
763
 
and $
761
 
at July 29, 2023 and January 28, 2023, respectively
26,915
26,497
Merchandise inventories
 
92,718
112,056
Prepaid expenses and other current assets
7,098
6,676
 
Total Current Assets
 
263,807
277,673
Property and equipment – net
 
73,871
70,382
Noncurrent deferred income taxes
9,888
9,213
Other assets
 
21,770
21,596
Right-of-Use assets – net
 
138,331
174,276
 
Total Assets
 
$
507,667
$
553,140
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
 
$
84,867
$
91,956
Accrued expenses
 
38,546
41,338
Accrued employee benefits and bonus
997
1,690
Accrued income taxes
 
3,561
613
Current lease liability
32,431
67,360
 
Total Current Liabilities
 
160,402
202,957
Other noncurrent liabilities
16,342
16,183
Lease liability
105,390
107,407
Stockholders' Equity:
Preferred stock, $
100
 
par value per share,
100,000
 
shares
 
authorized, none issued
 
-
-
Class A common stock, $
0.033
 
par value per share,
50,000,000
 
shares authorized;
18,825,772
 
shares and
18,723,225
 
shares
 
issued at July 29, 2023 and January 28, 2023, respectively
636
632
Convertible Class B common stock, $
0.033
 
par value per share,
 
15,000,000
 
shares authorized;
 
1,763,652
 
shares and
1,763,652
 
shares
 
issued at July 29, 2023 and January 28, 2023, respectively
59
59
Additional paid-in capital
 
124,798
122,431
Retained earnings
 
100,756
104,709
Accumulated other comprehensive income (loss)
(716)
(1,238)
 
Total Stockholders' Equity
 
225,533
226,593
 
Total Liabilities and Stockholders' Equity
 
$
507,667
$
553,140
See notes to condensed consolidated financial statements (unaudited).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
 
OF CASH FLOWS
(UNAUDITED)
Six Months Ended
July 29, 2023
July 30, 2022
(Dollars in thousands)
Operating Activities:
Net income
$
5,554
$
7,474
Adjustments to reconcile net income to net cash provided
 
by operating activities:
 
Depreciation
4,867
5,554
 
Provision for customer credit losses
248
145
 
Purchase premium and premium amortization of investments
(97)
607
 
Share-based compensation
2,192
2,028
 
Deferred income taxes
(832)
-
 
Loss on disposal of property and equipment
1
93
 
Changes in operating assets and liabilities which provided
 
(used) cash:
 
Accounts receivable
(666)
30,837
 
Merchandise inventories
19,338
8,314
 
Prepaid and other assets
(667)
(24)
 
Operating lease right-of-use assets and liabilities
(1,001)
(1,207)
 
Accrued income taxes
2,948
5,168
 
Accounts payable, accrued expenses and other liabilities
(10,306)
(42,013)
Net cash provided by operating activities
21,579
16,976
Investing Activities:
Expenditures for property and equipment
 
(8,470)
(10,384)
Purchase of short-term investments
(14,497)
(28,385)
Sales of short-term investments
46,777
48,917
Net cash provided by investing activities
23,810
10,148
Financing Activities:
Dividends paid
(6,962)
(7,270)
Repurchase of common stock
(2,563)
(9,596)
Proceeds from employee stock purchase plan
198
147
Net cash used in financing activities
(9,327)
(16,719)
Net increase in cash, cash equivalents, and restricted cash
36,062
10,405
Cash, cash equivalents, and restricted cash at beginning of period
23,792
23,678
Cash, cash equivalents, and restricted cash at end of period
 
$
59,854
$
34,083
Non-cash activity:
Accrued other assets and property and equipment
$
572
$
751
See notes to condensed consolidated financial statements (unaudited).
 
 
 
6
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
 
OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Accumulated
Additional
Other
Total
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — January 28, 2023
$
691
$
122,431
$
104,709
$
(1,238)
$
226,593
Comprehensive income:
 
Net income
-
-
4,428
-
4,428
 
Unrealized net gains on available-for-sale securities, net of
 
deferred income tax expense of $
107
-
-
-
355
355
Dividends paid ($
0.17
 
per share)
-
-
(3,455)
-
(3,455)
Class A common stock sold through employee stock purchase
 
plan
-
195
-
-
195
Share-based compensation issuances and exercises
-
-
3
-
3
Share-based compensation expense
-
929
-
-
929
Repurchase and retirement of treasury shares
(8)
-
(2,259)
-
(2,267)
Balance — April 29, 2023
$
683
$
123,555
$
103,426
$
(883)
$
226,781
Comprehensive income:
 
Net income
 
-
-
1,127
-
1,127
 
Unrealized net gains on available-for-sale securities, net of
 
deferred income tax expense of $
50
-
-
-
167
167
Dividends paid ($
0.17
 
per share)
-
-
(3,507)
-
(3,507)
Class A common stock sold through employee stock purchase
 
plan
1
31
-
-
32
Share-based compensation issuances and exercises
-
-
-
-
-
Share-based compensation expense
12
1,212
3
-
1,227
Repurchase and retirement of treasury shares
(1)
-
(293)
-
(294)
Balance — July 29, 2023
$
695
$
124,798
$
100,756
$
(716)
$
225,533
See notes to condensed consolidated financial statements (unaudited).
 
 
 
7
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
 
OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Accumulated
Additional
Other
Total
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance — January 29, 2022
$
728
$
119,540
$
134,208
$
(280)
$
254,196
Comprehensive income:
 
Net income
-
-
9,748
-
9,748
 
Unrealized net losses on available-for-sale securities, net of
 
deferred income tax benefit of $
362
-
-
-
(1,206)
(1,206)
Dividends paid ($
0.17
 
per share)
-
-
(3,638)
-
(3,638)
Class A common stock sold through employee stock purchase
 
plan
-
111
-
-
111
Share-based compensation issuances and exercises
 
-
-
5
-
5
Share-based compensation expense
-
598
-
-
598
Repurchase and retirement of treasury shares
(20)
-
(9,142)
-
(9,162)
Balance — April 30, 2022
$
708
$
120,249
$
131,181
$
(1,486)
$
250,652
Comprehensive income:
 
Net loss
-
-
(2,274)
-
(2,274)
 
Unrealized net gains on available-for-sale securities, net of
 
 
deferred income tax expense of $
18
-
-
-
61
61
Dividends paid ($
0.17
 
per share)
-
-
(3,632)
-
(3,632)
Class A common stock sold through employee stock purchase
 
plan
-
62
-
-
62
Share-based compensation issuances and exercises
 
7
308
6
-
321
Share-based compensation expense
-
1,077
-
-
1,077
Repurchase and retirement of treasury shares
(1)
-
(433)
-
(434)
Balance — July 30, 2022
$
714
$
121,696
$
124,848
$
(1,425)
$
245,833
See notes to condensed consolidated financial statements (unaudited).
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
8
NOTE 1 - GENERAL
:
The condensed consolidated financial statements
 
as of July 29,
 
2023 and for the
twenty-six-week
 
periods
ended
 
July
 
29,
 
2023
 
and
 
July
 
30,
 
2022
 
have
 
been
 
prepared
 
from
 
the
 
accounting
 
records
 
of
 
The
 
Cato
Corporation and
 
its wholly-owned
 
subsidiaries (the
 
“Company”), and
 
all amounts
 
shown are
 
unaudited.
 
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial
statements have
 
been included.
 
All such
 
adjustments are
 
of a
 
normal, recurring
 
nature unless
 
otherwise
noted.
 
The results of the interim period may not be indicative of the results expected
 
for the entire year.
The interim financial
 
statements should be read
 
in conjunction with
 
the consolidated financial
 
statements
and
 
notes
 
thereto,
 
included
 
in
 
the
 
Company’s
 
Annual
 
Report
 
on
 
Form
 
10-K
 
for
 
the
 
fiscal
 
year
 
ended
January 28, 2023.
 
Amounts as of January 28, 2023 have been derived from the audited balance sheet, but
do not include all disclosures required by
 
accounting principles generally accepted in the United States of
America.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
9
NOTE 2 - EARNINGS PER SHARE:
Accounting Standard Codification (“ASC”) 260 –
Earnings Per Share
 
requires dual presentation of basic and
diluted Earnings Per Share
 
(“EPS”) on the face of
 
all income statements for
 
all entities with complex
 
capital
structures.
 
The Company has presented one basic EPS and one diluted EPS amount for all common shares in
the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
 
While
 
the
 
Company’s
 
certificate
 
of
 
incorporation
 
provides
 
the
 
right
 
for
 
the
 
Board
 
of
 
Directors
 
to
 
declare
dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company
has historically paid the same dividends to both Class A and Class B shareholders
 
and the Board of Directors
has resolved to continue this
 
practice.
 
Accordingly, the Company’s allocation
 
of income for purposes
 
of the
EPS
 
computation
 
is
 
the
 
same
 
for
 
Class
 
A
 
and
 
Class
 
B
 
shares
 
and
 
the
 
EPS
 
amounts
 
reported
 
herein
 
are
applicable to both Class A and Class
 
B shares.
Basic
 
EPS
 
is
 
computed
 
as
 
net
 
income
 
less
 
earnings
 
allocated
 
to
 
non-vested
 
equity
 
awards
 
divided
 
by
 
the
weighted average
 
number of
 
common shares
 
outstanding for
 
the period.
 
Diluted EPS
 
reflects the
 
potential
dilution
 
that
 
could
 
occur
 
from
 
common
 
shares
 
issuable
 
through
 
stock
 
options
 
and
 
the
 
Employee
 
Stock
Purchase Plan.
 
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(Dollars in thousands)
Numerator
Net earnings (loss)
$
1,127
$
(2,274)
$
5,554
$
7,474
(Earnings) loss allocated to non-vested equity awards
(54)
132
(292)
(405)
Net earnings (loss) available to common stockholders
$
1,073
$
(2,142)
$
5,262
$
7,069
Denominator
Basic weighted average common shares outstanding
19,395,484
20,005,315
19,349,266
20,077,258
Diluted weighted average common shares outstanding
19,395,484
20,005,315
19,349,266
20,077,258
Net income (loss) per common share
Basic earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
Diluted earnings (loss) per share
$
0.06
$
(0.11)
$
0.27
$
0.35
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
10
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:
The
 
following
 
table
 
sets
 
forth
 
information
 
regarding
 
the
 
reclassification
 
out
 
of
 
Accumulated
 
other
comprehensive income (in thousands) for the
 
three months ended July 29, 2023:
Changes in Accumulated Other
 
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at April 29, 2023
$
(883)
 
Other comprehensive income before
 
 
reclassification
164
 
Amounts reclassified from accumulated
 
other comprehensive income (b)
3
Net current-period other comprehensive income
167
Ending Balance at July 29, 2023
$
(716)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(b) Includes $
4
 
impact of Accumulated other comprehensive income reclassifications into Interest and other
 
income for net gains on available-for-sale securities. The tax impact of this reclassification was $
1
.
The
 
following
 
table
 
sets
 
forth
 
information
 
regarding
 
the
 
reclassification
 
out
 
of
 
Accumulated
 
other
comprehensive income (in thousands) for the
 
six months ended July 29, 2023:
Changes in Accumulated Other
 
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 28, 2023
$
(1,238)
 
Other comprehensive income before
 
 
reclassification
519
 
Amounts reclassified from accumulated
 
other comprehensive income (b)
3
Net current-period other comprehensive income
522
Ending Balance at July 29, 2023
$
(716)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(b) Includes $
4
 
impact of Accumulated other comprehensive income reclassifications into Interest and other
 
income for net gains on available-for-sale securities. The tax impact of this reclassification was $
1
.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
11
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME
 
(CONTINUED):
The
 
following
 
table
 
sets
 
forth
 
information
 
regarding
 
the
 
reclassification
 
out
 
of
 
Accumulated
 
other
comprehensive income (in thousands) for the
 
three months ended July 30, 2022:
Changes in Accumulated Other
 
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at April 30, 2022
$
(1,486)
 
Other comprehensive income before
 
 
reclassifications
64
 
Amounts reclassified from accumulated
 
other comprehensive income (b)
(3)
Net current-period other comprehensive income
61
Ending Balance at July 30, 2022
$
(1,425)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(b) Includes $
4
 
impact of Accumulated other comprehensive income reclassifications into Interest and other
 
income for net gains on available-for-sale securities. The tax impact of this reclassification was $
1
.
The
 
following
 
table
 
sets
 
forth
 
information
 
regarding
 
the
 
reclassification
 
out
 
of
 
Accumulated
 
other
comprehensive income (in thousands) for the
 
six months ended July 30, 2022:
Changes in Accumulated Other
 
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 29, 2022
$
(280)
 
Other comprehensive income before
 
 
reclassifications
(1,139)
 
Amounts reclassified from accumulated
 
other comprehensive income (b)
(6)
Net current-period other comprehensive income
(1,145)
Ending Balance at July 30, 2022
$
(1,425)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.
(b) Includes $
7
 
impact of Accumulated other comprehensive income reclassifications into Interest and other
 
income for net gains on available-for-sale securities. The tax impact of this reclassification was $
1
.
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
12
NOTE 4 – FINANCING ARRANGEMENTS:
As of July
 
29, 2023, the
 
Company has an
 
unsecured revolving credit
 
line, which
 
provides for borrowings
 
of
up to $
35.0
 
million, less the balance of
 
any revocable letters of credit related
 
to purchase commitments, and is
committed
 
through
 
May
 
2027.
 
The
 
revolving
 
credit
 
agreement
 
contains
 
various
 
financial
 
covenants
 
and
limitations,
 
including
 
the
 
maintenance
 
of
 
specific
 
financial
 
ratios.
 
On
 
August
 
9,
 
2023,
 
the
 
Company
amended the revolving credit
 
agreement to modify
 
a definition used in
 
calculating the Company’s
 
minimum
EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating
 
the ratio. For
the quarter ended July
 
29, 2023, after giving
 
effect to the amendment,
 
the Company was in
 
compliance with
the
 
credit
 
agreement.
 
There
 
were
no
 
borrowings
 
outstanding,
no
r
 
any
 
outstanding
 
letters
 
of
 
credit
 
that
reduced
 
borrowing
 
availability,
 
as
 
of
 
July
 
29,
 
2023.
 
The
 
weighted
 
average
 
interest
 
rate
 
under
 
the
 
credit
facility was
zero
 
at July 29, 2023 due to
no
 
borrowings outstanding.
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
The Company
 
has determined
 
that it
 
has
four
 
operating segments,
 
as defined
 
under ASC
 
280-10 –
Segment
Reporting
, including Cato,
 
It’s Fashion, Versona
 
and Credit.
 
As outlined in
 
ASC 280-10, the
 
Company has
two
 
reportable segments: Retail and Credit.
 
The Company has aggregated its three retail operating segments,
including
 
e-commerce,
 
based
 
on the
 
aggregation
 
criteria
 
outlined in
 
ASC
 
280-10, which
 
states that
 
two
 
or
more operating segments may be aggregated into a single reportable segment if aggregation is consistent with
the
 
objective
 
and
 
basic
 
principles
 
of
 
ASC
 
280-10,
 
which
 
require
 
the
 
segments
 
to
 
have
 
similar
 
economic
characteristics, products, production processes, clients and
 
methods of distribution.
 
The
 
Company’s
 
retail
 
operating
 
segments
 
have
 
similar
 
economic
 
characteristics
 
and
 
similar
 
operating,
financial and
 
competitive risks.
 
The products
 
sold in each
 
retail operating
 
segment are
 
similar in
 
nature, as
they
 
all
 
offer
 
women’s
 
apparel,
 
shoes
 
and
 
accessories.
 
Merchandise
 
inventory
 
of
 
the
 
Company’s
 
retail
operating
 
segments
 
is
 
sourced
 
from
 
the
 
same
 
countries
 
and
 
some
 
of
 
the
 
same
 
vendors,
 
using
 
similar
production processes.
 
Merchandise for the Company’s retail operating segments is distributed to retail stores
in a similar manner through
 
the Company’s single distribution center and is
 
subsequently sold to customers in
a similar
 
manner.
 
The
 
Company
 
operates
 
its
 
women’s
 
fashion
 
specialty
 
retail
 
stores
 
in
31
 
states
 
as
 
of
 
July
 
29,
 
2023,
principally in
 
the southeastern
 
United States.
 
The Company offers its own credit
 
card to its customers and
all
 
credit
 
authorizations,
 
payment
 
processing
 
and
 
collection
 
efforts
 
are
 
performed
 
by
 
a
 
wholly-owned
subsidiary of the Company.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
13
NOTE 5 – REPORTABLE SEGMENT INFORMATION
 
(CONTINUED):
The following schedule summarizes certain segment
 
information (in thousands):
Three Months Ended
Six Months Ended
July 29, 2023
Retail
Credit
Total
July 29, 2023
Retail
Credit
Total
Revenues
$182,213
$658
$182,871
Revenues
$373,648
$1,273
$374,921
Depreciation
2,509
1
2,510
Depreciation
4,866
1
4,867
Interest and other income
(1,334)
-
(1,334)
Interest and other income
(2,231)
-
(2,231)
Income before
 
income taxes
2,207
253
2,460
Income before
 
income taxes
8,590
439
9,029
Capital expenditures
2,300
-
2,300
Capital expenditures
8,470
-
8,470
Three Months Ended
Six Months Ended
July 30, 2022
Retail
Credit
Total
July 30, 2022
Retail
Credit
Total
Revenues
$196,314
$550
$196,864
Revenues
$402,523
$1,062
$403,585
Depreciation
2,810
1
2,811
Depreciation
5,553
1
5,554
Interest and other income
(1,884)
-
(1,884)
Interest and other income
(2,287)
-
(2,287)
Income before
 
income taxes
3,289
131
3,420
Income before
 
income taxes
14,903
214
15,117
Capital expenditures
5,944
-
5,944
Capital expenditures
10,384
-
10,384
Retail
Credit
Total
Total assets as of July 29, 2023
$468,923
$38,744
$507,667
Total assets as of January 28, 2023
514,609
38,531
553,140
The
 
Company
 
evaluates
 
segment
 
performance
 
based
 
on
 
income
 
before
 
taxes.
 
The
 
Company
 
does
 
not
allocate certain corporate expenses or
 
income taxes to the credit segment.
The following schedule summarizes the direct expenses
 
of the credit segment, which are
 
reflected in Selling,
general and administrative expenses (in
 
thousands):
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Payroll
$
142
$
132
$
276
$
269
Postage
109
99
210
192
Other expenses
154
187
348
386
Total expenses
$
405
$
418
$
834
$
847
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
14
NOTE 6 – STOCK-BASED COMPENSATION:
As
 
of
 
July
 
29,
 
2023,
 
the
 
Company
 
had
 
two
 
long-term
 
compensation
 
plans
 
pursuant
 
to
 
which
 
stock-based
compensation
 
was
 
outstanding
 
or
 
could
 
be
 
granted.
 
The
 
2018
 
Incentive
 
Compensation
 
Plan
 
and
 
2013
Incentive
 
Compensation
 
Plan
 
are
 
for
 
the
 
granting
 
of
 
various
 
forms
 
of
 
equity-based
 
awards,
 
including
restricted stock and stock options for grant, to officers, directors and key employees. Effective May 24,
 
2018,
shares for grant were no longer available
 
under the 2013 Incentive Compensation Plan.
The
 
following
 
table
 
presents
 
the
 
number
 
of
 
options
 
and
 
shares
 
of
 
restricted
 
stock
 
initially
 
authorized
 
and
available for grant under each of
 
the plans as of July 29,
 
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:
 
 
 
 
July 29, 2023
-
3,095,601
3,095,601
In
 
accordance
 
with
 
ASC
 
718
 
Compensation–Stock Compensation
,
 
the
 
fair
 
value
 
of
 
current
 
restricted
stock awards
 
is estimated
 
on the
 
date of
 
grant based
 
on the
 
market price
 
of the
 
Company’s
 
stock and
 
is
amortized to compensation expense on a straight-line basis over the related vesting periods. As of July 29,
2023 and
 
January 28,
 
2023, there
 
was $
11,597,000
 
and $
10,543,000
, respectively,
 
of total
 
unrecognized
compensation
 
expense
 
related
 
to
 
nonvested
 
restricted
 
stock
 
awards,
 
which
 
had
 
a
 
remaining
 
weighted-
average vesting
 
period
 
of
2.6
 
years
 
and
2.1
 
years,
 
respectively.
 
Total
 
compensation expense
 
during the
three
 
and
 
six
 
months
 
ended
 
July
 
29,
 
2023
 
was
 
$
1,230,000
 
and
 
$
2,158,000
,
 
respectively,
 
compared
 
to
$
1,403,000
 
and
 
$
2,006,000
 
for
 
the
 
three
 
and
 
six
 
months
 
ended
 
July
 
30,
 
2022.
 
These
 
amounts
 
are
classified as a component
 
of Selling, general and
 
administrative expenses in the
 
Condensed Consolidated
Statements of Income (Loss) and Comprehensive Income
 
(Loss).
The following
 
summary shows the
 
changes in the
 
shares of unvested
 
restricted stock
 
outstanding during
 
the
six months ended July
 
29, 2023:
Weighted Average
Number of
Grant Date Fair
Shares
Value
 
Per Share
Restricted stock awards at January 28, 2023
1,059,433
$
13.10
Granted
407,808
8.30
 
Vested
(217,238)
13.97
 
Forfeited or expired
(74,338)
12.28
 
Restricted stock awards at July 29, 2023
1,175,665
$
11.33
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
15
NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED):
The
 
Company’s
 
Employee
 
Stock
 
Purchase
 
Plan
 
allows
 
eligible
 
full-time
 
employees
 
to
 
purchase
 
a
 
limited
number of
 
shares
 
of the
 
Company’s
 
Class
 
A
 
Common Stock
 
during each
 
semi-annual offering
 
period
 
at
 
a
15
% discount through payroll
 
deductions. During the six
 
months ended July 29,
 
2023 and July 30,
 
2022, the
Company sold
26,127
 
and
12,196
 
shares to employees
 
at an
 
average discount of
 
$
1.31
 
and $
2.12
 
per share,
respectively, under
 
the Employee
 
Stock Purchase
 
Plan. The
 
compensation expense
 
recognized for
 
the
15
%
discount given under the Employee
 
Stock Purchase Plan was approximately
 
$
34,000
 
and $
26,000
 
for the six
months ended July 29, 2023 and July 30, 2022, respectively. These expenses are classified as a
 
component of
Selling, general and administrative expenses.
NOTE 7
 
– FAIR VALUE MEASUREMENTS:
The following
 
tables
 
set forth
 
information regarding
 
the
 
Company’s financial
 
assets and
 
liabilities that
 
are
measured at fair value (in thousands)
 
as of July 29, 2023 and
 
January 28, 2023:
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
July 29, 2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
 
State/Municipal Bonds
$
19,367
$
-
$
19,367
$
-
 
Corporate Bonds
30,026
-
30,026
-
 
U.S. Treasury/Agencies Notes and Bonds
21,073
-
21,073
-
 
Cash Surrender Value of Life Insurance
9,524
-
-
9,524
 
Asset-backed Securities (ABS)
6,108
-
6,108
-
 
Corporate Equities
852
852
-
-
 
Commercial Paper
648
-
648
-
Total Assets
$
87,598
$
852
$
77,222
$
9,524
Liabilities:
 
Deferred Compensation
$
(8,724)
$
-
$
-
$
(8,724)
Total Liabilities
$
(8,724)
$
-
$
-
$
(8,724)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
16
Quoted
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 28, 2023
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
 
State/Municipal Bonds
$
23,102
$
-
$
23,102
$
-
 
Corporate Bonds
47,901
-
47,901
-
 
U.S. Treasury/Agencies Notes and Bonds
27,250
-
27,250
-
 
Cash Surrender Value of Life Insurance
9,274
-
-
9,274
 
Asset-backed Securities (ABS)
9,373
-
9,373
-
 
Corporate Equities
923
923
-
-
 
Commercial Paper
1,026
-
1,026
-
Total Assets
$
118,849
$
923
$
108,652
$
9,274
Liabilities:
 
Deferred Compensation
$
(8,903)
$
-
$
-
$
(8,903)
Total Liabilities
$
(8,903)
$
-
$
-
$
(8,903)
The Company’s
 
investment portfolio
 
was primarily
 
invested in
 
corporate bonds and
 
tax-exempt and taxable
governmental debt securities held in managed accounts
 
with underlying ratings of A or better
 
at July 29, 2023
and
 
January
 
28,
 
2023.
 
The
 
state,
 
municipal
 
and
 
corporate
 
bonds
 
have
 
contractual
 
maturities
 
which
 
range
from
one day
 
to
2.6
 
years. The U.S. Treasury Notes have contractual
 
maturities which range from
two days
 
to
2.6
 
years.
 
These
 
securities
 
are
 
classified
 
as
 
available-for-sale
 
and
 
are
 
recorded
 
as
 
Short-term
 
investments,
Restricted cash and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets
are
 
carried
 
at
 
fair
 
value
 
with
 
unrealized
 
gains
 
and
 
losses
 
reported
 
net
 
of
 
taxes
 
in
 
Accumulated
 
other
comprehensive income. The asset-backed
 
securities are bonds comprised
 
of auto loans and
 
bank credit cards
that carry
 
AAA ratings.
 
The auto
 
loan asset-backed
 
securities are
 
backed by
 
static pools
 
of auto
 
loans that
were originated and serviced by captive auto finance units, banks or finance companies.
 
The bank credit card
asset-backed securities are backed by revolving pools of credit card receivables generated by account holders
of cards from American Express, Citibank, JPMorgan
 
Chase, Capital One and Discover.
Additionally,
 
at
 
July
 
29,
 
2023,
 
the
 
Company
 
had
 
$
0.9
 
million
 
of
 
corporate
 
equities
 
and
 
deferred
compensation plan assets
 
of $
9.5
 
million.
 
At January 28,
 
2023, the Company
 
had $
0.9
 
million of corporate
equities and deferred compensation plan assets of $
9.3
 
million.
 
All of these assets are recorded within
 
Other
assets in the Condensed Consolidated Balance
 
Sheets.
Level 1 securities are measured at fair value using quoted active market prices.
 
Level 2 investment securities
include
 
corporate
 
bonds,
 
municipal
 
bonds
 
and
 
asset-backed
 
securities
 
for
 
which
 
quoted
 
prices
 
may
 
not
 
be
available on active exchanges for identical
 
instruments.
 
Their fair value is principally based on market values
determined
 
by
 
management
 
with
 
assistance
 
of
 
a
 
third-party
 
pricing
 
service.
 
Since
 
quoted
 
prices
 
in
 
active
markets
 
for
 
identical
 
assets
 
are
 
not
 
available,
 
these
 
prices
 
are
 
determined
 
by
 
the
 
pricing
 
service
 
using
observable market information such as quotes from less active markets and/or quoted prices of securities with
similar characteristics, among other factors.
Deferred compensation plan
 
assets consist of
 
life insurance policies.
 
These life insurance
 
policies are valued
based on the cash surrender value of the insurance contract, which is determined based on
 
such factors as the
fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3
 
of the
valuation
 
hierarchy.
 
The
 
Level
 
3
 
liability
 
associated
 
with
 
the
 
life
 
insurance
 
policies
 
represents
 
a
 
deferred
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
17
compensation obligation,
 
the value
 
of which
 
is tracked
 
via underlying
 
insurance funds’
 
net asset
 
values, as
recorded
 
in
 
Other
 
noncurrent
 
liabilities
 
in
 
the
 
Condensed
 
Consolidated
 
Balance
 
Sheet.
 
These
 
funds
 
are
designed to mirror mutual funds and money
 
market funds that are observable and
 
actively traded.
The
 
following
 
tables
 
summarize
 
the
 
change
 
in
 
fair
 
value
 
of
 
the
 
Company’s
 
financial
 
assets
 
and
 
liabilities
measured using Level
 
3 inputs for
 
the six months
 
ended July 29,
 
2023 and the
 
year ended January
 
28, 2023
(in thousands):
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at January 28, 2023
$
9,274
Redemptions
-
Additions
-
Total gains or (losses):
 
Included in interest and other income (or
changes in net assets)
250
 
Included in other comprehensive income
-
Ending Balance at July 29, 2023
$
9,524
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred Compensation
Beginning Balance at January 28, 2023
$
(8,903)
 
Redemptions
646
 
Additions
(162)
 
Total (gains) or losses:
 
Included in interest and other income (or
changes in net assets)
(305)
 
Included in other comprehensive income
-
Ending Balance at July 29, 2023
$
(8,724)
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
18
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash Surrender Value
Beginning Balance at January 29, 2022
$
11,472
Redemptions
(1,718)
Additions
-
Total gains or (losses):
 
Included in interest and other income (or
changes in net assets)
(480)
 
Included in other comprehensive income
-
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)
 
Redemptions
1,142
 
Additions
(379)
 
Total (gains) or losses:
 
Included in interest and other income (or
changes in net assets)
354
 
Included in other comprehensive income
-
Ending Balance at January 28, 2023
$
(8,903)
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
19
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:
The Company has reviewed recent accounting pronouncements and
 
believe none will have a material
impact on the Company’s financial statements.
NOTE 9 – INCOME TAXES:
The Company had
 
an effective
 
tax rate for
 
the first six
 
months of 2023
 
of
38.5
% compared to
50.6
% for
the first six months of 2022. The change in the effective tax rate for the first six months of 2023 compared
to the
 
prior year
 
was primarily
 
due to
 
a decrease
 
in Global
 
Intangible Low-taxed
 
Income (GILTI),
 
state
income taxes, non-deductible officer’s compensation, and increases in foreign tax credits and employment
credits, partially offset by the foreign rate differential.
NOTE 10 – COMMITMENTS AND CONTINGENCIES:
The Company is, from time to time, involved in routine litigation incidental to the conduct of its business,
including
 
litigation
 
regarding
 
the
 
merchandise
 
that
 
it
 
sells,
 
litigation
 
regarding
 
intellectual
 
property,
litigation instituted
 
by persons
 
injured upon
 
premises under
 
its control,
 
litigation with
 
respect to
 
various
employment
 
matters,
 
including
 
alleged
 
discrimination and
 
wage
 
and
 
hour
 
litigation,
 
and
 
litigation
 
with
present or former employees.
Although such
 
litigation is
 
routine and
 
incidental to
 
the conduct
 
of the
 
Company’s business,
 
as with
 
any
business
 
of
 
its
 
size
 
with
 
a
 
significant
 
number
 
of
 
employees
 
and
 
significant
 
merchandise
 
sales,
 
such
litigation could
 
result in
 
large
 
monetary awards.
 
Based on
 
information currently
 
available, management
does
 
not
 
believe
 
that
 
any
 
reasonably
 
possible
 
losses
 
arising
 
from current
 
pending litigation
 
will
 
have
 
a
material adverse
 
effect
 
on the
 
Company’s
 
condensed consolidated
 
financial statements.
 
However,
 
given
the
 
inherent uncertainties
 
involved in
 
such
 
matters, an
 
adverse outcome
 
in
 
one or
 
more of
 
such
 
matters
could
 
materially and
 
adversely affect
 
the
 
Company’s
 
financial condition,
 
results of
 
operations and
 
cash
flows
 
in
 
any
 
particular
 
reporting
 
period.
 
The
 
Company
 
accrues
 
for
 
these
 
matters
 
when
 
the
 
liability
 
is
deemed probable and reasonably estimable.
NOTE 11 – REVENUE RECOGNITION:
The
 
Company
 
recognizes
 
sales
 
at
 
the
 
point
 
of
 
purchase
 
when
 
the
 
customer
 
takes
 
possession
 
of
 
the
merchandise
 
and
 
pays
 
for
 
the
 
purchase,
 
generally
 
with
 
cash
 
or
 
credit.
 
Sales
 
from
 
purchases
 
made
 
with
Cato
 
credit,
 
gift
 
cards
 
and
 
layaway
 
sales
 
from
 
stores
 
are
 
also
 
recorded
 
when
 
the
 
customer
 
takes
possession of
 
the merchandise. E-commerce
 
sales are
 
recorded when the
 
risk of
 
loss is
 
transferred to the
customer. Gift cards
 
are recorded as deferred revenue until they are
 
redeemed or forfeited. Layaway sales
are recorded as deferred
 
revenue until the customer
 
takes possession of, or
 
forfeits, the merchandise. Gift
cards do not have
 
expiration dates. A provision is
 
made for estimated merchandise returns
 
based on sales
volumes
 
and
 
the
 
Company’s
 
experience;
 
actual
 
returns
 
have
 
not
 
varied
 
materially
 
from
 
historical
amounts.
 
A
 
provision
 
is
 
made
 
for
 
estimated
 
write-offs
 
associated
 
with
 
sales
 
made
 
with
 
the
 
Company’s
proprietary
 
credit
 
card.
 
Amounts
 
related
 
to
 
shipping
 
and
 
handling
 
billed
 
to
 
customers
 
in
 
a
 
sales
transaction are
 
classified as
 
Other revenue
 
and the
 
costs related
 
to shipping
 
product to
 
customers (billed
and accrued) are classified as Cost of goods sold.
The Company
 
offers its
 
own proprietary
 
credit card
 
to customers.
 
All credit
 
activity is
 
performed by
 
the
Company’s wholly-owned
 
subsidiaries.
None
 
of the credit
 
card receivables are
 
secured. During the
 
three
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
20
and
 
six
 
months
 
ended
 
July
 
29,
 
2023,
 
the
 
Company
 
estimated
 
customer
 
credit
 
losses
 
of
 
$
151,000
 
and
$
272,000
, respectively,
 
compared to
 
$
87,000
 
and $
173,000
 
for the
 
three and
 
six months
 
ended July
 
30,
2022,
 
respectively.
 
Sales
 
purchased
 
on
 
the
 
Company’s
 
proprietary
 
credit
 
card
 
for
 
the
 
three
 
and
 
six
months ended July
 
29, 2023 were
 
$
5.9
 
million and $
11.7
 
million, respectively,
 
compared to $
5.8
 
million
and $
11.5
 
million for the three and six months ended July 30, 2022,
 
respectively.
The
 
following
 
table
 
provides
 
information
 
about
 
receivables
 
and
 
contract
 
liabilities
 
from
 
contracts
 
with
customers (in thousands):
Balance as of
July 29, 2023
January 28, 2023
Proprietary Credit Card Receivables, net
$
10,737
$
10,553
Gift Card Liability
$
6,924
$
8,523
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
21
NOTE 12 – LEASES:
The
 
Company determines
 
whether
 
an
 
arrangement is
 
a
 
lease
 
at
 
inception.
 
The
 
Company
 
has
 
operating
leases for
 
stores, offices,
 
warehouse space
 
and equipment.
 
Its leases have
 
remaining lease terms
 
of up
 
to
10
 
years based on
 
the estimated likelihood
 
of renewal. Some
 
include options to
 
extend the lease
 
term for
up to
five years
, and some 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.
The components of lease cost are shown below (in thousands):
Three Months Ended
July 29, 2023
July 30, 2022
Operating lease cost (a)
$
17,597
$
17,847
Variable
 
lease cost (b)
$
504
$
578
(a) Includes right-of-use asset amortization of ($
0.3
) million and ($
0.5
) million for the three months ended July 29, 2023 and July 30,
2022, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.
Six Months Ended
July 29, 2023
July 30, 2022
Operating lease cost (a)
$
35,675
$
35,602
Variable
 
lease cost (b)
$
1,098
$
1,346
(a) Includes right-of-use asset amortization of ($
0.6
) million and ($
0.9
) million for the six months ended July 29, 2023 and July 30,
2022, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
FOR THE THREE MONTHS AND
 
SIX MONTHS ENDED JULY 29, 2023 AND JULY
 
30, 2022
22
Supplemental cash flow
 
information and non-cash
 
activity related to
 
the Company’s
 
operating leases are
as follows (in thousands):
Operating cash flow information:
Three Months Ended
July 29, 2023
July 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
16,679
$
17,038
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
$
999
$
2,534
Six Months Ended
July 29, 2023
July 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
$
34,024
$
33,874
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
$
2,903
$
6,049
Weighted-average
 
remaining
 
lease
 
term
 
and
 
discount
 
rate
 
for
 
the
 
Company’s
 
operating
 
leases
 
are
 
as
follows:
As of
July 29, 2023
July 30, 2022
Weighted-average remaining lease term
2.0
 
years
2.2
 
years
Weighted-average discount rate
3.26%
2.89%
Maturities
 
of
 
lease
 
liabilities
 
by
 
fiscal
 
year
 
for
 
the
 
Company’s
 
operating
 
leases
 
are
 
as
 
follows
 
(in
thousands):
Fiscal Year
2023 (a)
$
33,897
2024
49,250
2025
32,219
2026
19,094
2027
8,991
Thereafter
1,748
Total lease payments
145,199
Less: Imputed interest
7,378
Present value of lease liabilities
$
137,821
(a) Excluding the six months ended July 29, 2023
 
 
23
THE CATO CORPORATION
ITEM 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The
 
following
 
information
 
should
 
be
 
read
 
along
 
with
 
the
 
unaudited
 
Condensed
 
Consolidated
 
Financial
Statements,
 
including
 
the
 
accompanying
 
Notes
 
appearing
 
in
 
this
 
report.
 
Any
 
of
 
the
 
following
 
are
“forward-looking”
 
statements
 
within
 
the
 
meaning
 
of
 
Section 27A
 
of
 
the
 
Securities
 
Act
 
of
 
1933,
 
as
amended,
 
and
 
Section 21E
 
of
 
the
 
Securities
 
Exchange
 
Act
 
of
 
1934,
 
as
 
amended:
 
(1) statements
 
in
 
this
Form 10-Q
 
that
 
reflect
 
projections
 
or
 
expectations
 
of
 
our
 
future
 
financial
 
or
 
economic
 
performance;
(2) statements
 
that
 
are
 
not
 
historical
 
information;
 
(3) statements
 
of
 
our
 
beliefs,
 
intentions,
 
plans
 
and
objectives for future operations,
 
including those contained in
 
“Management’s Discussion and
 
Analysis of
Financial Condition and
 
Results of Operations”
 
(4) statements relating to
 
our operations or
 
activities for
our
 
fiscal
 
year
 
ending
 
February
 
3,
 
2024
 
(“fiscal
 
2023”)
 
and
 
beyond,
 
including,
 
but
 
not
 
limited
 
to,
statements regarding expected
 
amounts of
 
capital expenditures and
 
store openings, relocations,
 
remodels
and
 
closures
 
and
 
statements
 
regarding
 
the
 
potential
 
impact
 
of
 
the
 
COVID-19
 
pandemic
 
and
 
related
responses and
 
mitigation efforts,
 
as well
 
as the
 
potential impact
 
of supply
 
chain disruptions,
 
inflationary
pressures
 
and
 
other
 
economic
 
or
 
market
 
conditions
 
on
 
our
 
business,
 
results
 
of
 
operations
 
and
 
financial
condition
 
and
 
statements
 
regarding
 
new
 
store
 
development
 
strategy;
 
and
 
(5)
 
statements
 
relating
 
to
 
our
future contingencies. When
 
possible, we
 
have attempted to
 
identify forward-looking statements
 
by using
words
 
such
 
as
 
“will,”
 
“expects,”
 
“anticipates,”
 
“approximates,”
 
“believes,”
 
“estimates,”
 
“hopes,”
“intends,” “may,”
 
“plans,” “could,” “would,”
 
“should” and any
 
variations or negative
 
formations of such
words
 
and
 
similar
 
expressions.
 
We
 
can
 
give
 
no
 
assurance
 
that
 
actual
 
results
 
or
 
events
 
will
 
not
 
differ
materially
 
from
 
those
 
expressed
 
or
 
implied
 
in
 
any
 
such
 
forward-looking
 
statements.
 
Forward-looking
statements
 
included
 
in
 
this
 
report
 
are
 
based
 
on
 
information
 
available
 
to
 
us
 
as
 
of
 
the
 
filing
 
date
 
of
 
this
report,
 
but
 
subject
 
to
 
known
 
and
 
unknown
 
risks,
 
uncertainties and
 
other
 
factors
 
that
 
could
 
cause
 
actual
results
 
to
 
differ
 
materially
 
from
 
those
 
contemplated
 
by
 
the
 
forward-looking
 
statements.
 
Such
 
factors
include, but
 
are not
 
limited to,
 
the following:
 
any actual
 
or perceived
 
deterioration in
 
the conditions
 
that
drive
 
consumer
 
confidence
 
and
 
spending,
 
including,
 
but
 
not
 
limited
 
to,
 
prevailing
 
social,
 
economic,
political
 
and
 
public
 
health conditions
 
and
 
uncertainties, levels
 
of
 
unemployment, fuel,
 
energy
 
and
 
food
costs, wage rates, tax
 
rates, interest rates, home
 
values, consumer net worth,
 
the availability of
 
credit and
inflation;
 
changes
 
in
 
laws,
 
regulations
 
or
 
government
 
policies
 
affecting
 
our
 
business,
 
including
 
but
 
not
limited to
 
tariffs;
 
uncertainties regarding
 
the impact
 
of any
 
governmental action
 
regarding, or
 
responses
to, the
 
foregoing conditions; competitive factors
 
and pricing
 
pressures; our ability
 
to predict
 
and respond
to rapidly changing fashion trends
 
and consumer demands; our ability to
 
successfully implement our new
store development strategy to increase new
 
store openings and our ability
 
of any such new stores
 
to grow
and
 
perform
 
as
 
expected;
 
adverse
 
weather,
 
public
 
health
 
threats
 
(including
 
the
 
global
 
COVID-19
pandemic)
 
or
 
similar
 
conditions that
 
may affect
 
our
 
sales
 
or
 
operations; inventory
 
risks
 
due
 
to
 
shifts
 
in
market
 
demand,
 
including
 
the
 
ability
 
to
 
liquidate
 
excess
 
inventory
 
at
 
anticipated
 
margins;
 
adverse
developments or volatility affecting the financial services industry or broader financial markets; and
 
other
factors
 
discussed
 
under
 
“Risk
 
Factors”
 
in
 
Part
 
I,
 
Item
 
1A
 
of
 
our
 
Annual
 
Report
 
on
 
Form
 
10-K
 
for
 
the
fiscal year ended
 
January 28, 2023
 
(“fiscal 2022”), as amended
 
or supplemented, and in
 
other reports we
file with
 
or furnish
 
to the
 
Securities and
 
Exchange Commission
 
(“SEC”) from
 
time to
 
time.
 
We
 
do not
undertake,
 
and
 
expressly
 
decline,
 
any
 
obligation
 
to
 
update
 
any
 
such
 
forward-looking
 
information
contained in this report, whether as a result of new information, future
 
events, or otherwise.
 
 
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
(CONTINUED)
24
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company’s accounting
 
policies are more
 
fully described in
 
“Management’s Discussion and
 
Analysis of
Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal
year
 
ended
 
January
 
28,
 
2023.
 
As
 
disclosed
 
in
 
“Management’s
 
Discussion
 
and
 
Analysis
 
of
 
Financial
Condition and
 
Results of
 
Operations,” the
 
preparation of
 
the Company’s
 
financial statements
 
in conformity
with generally accepted
 
accounting principles in
 
the United States
 
(“GAAP”) requires management
 
to make
estimates and assumptions about future events that affect the amounts reported in the
 
financial statements and
accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore,
the
 
determination
 
of
 
estimates
 
requires
 
the
 
exercise
 
of
 
judgment.
 
Actual
 
results
 
inevitably
 
will
 
differ
 
from
those
 
estimates,
 
and
 
such
 
differences
 
may
 
be
 
material
 
to
 
the
 
financial
 
statements.
 
The
 
most
 
significant
accounting
 
estimates
 
inherent
 
in
 
the
 
preparation
 
of
 
the
 
Company’s
 
financial
 
statements
 
include
 
the
calculation
 
of
 
potential
 
asset
 
impairment,
 
reserves
 
relating
 
to
 
self-insured
 
health
 
insurance,
 
workers’
compensation,
 
general
 
and
 
auto
 
insurance
 
liabilities,
 
uncertain
 
tax
 
positions,
 
the
 
allowance
 
for
 
customer
credit losses, and inventory shrinkage.
The Company’s critical accounting policies and
 
estimates are discussed with the Audit Committee.
 
 
 
 
 
 
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
(CONTINUED)
25
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in
 
the Company's unaudited Condensed
Consolidated Statements of Income as a
 
percentage of total retail sales:
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
0.9
1.0
0.9
0.9
Total revenues
100.9
101.0
100.9
100.9
Cost of goods sold (exclusive of depreciation)
64.9
67.6
64.5
66.0
Selling, general and administrative (exclusive
of depreciation)
34.0
31.2
33.3
30.3
Depreciation
1.4
1.4
1.3
1.4
Interest and other income
(0.7)
(1.0)
(0.6)
(0.6)
Income before income taxes
1.4
1.8
2.4
3.8
Net income (loss)
0.6
(1.2)
1.5
1.9
 
 
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
(CONTINUED)
26
RESULTS OF OPERATIONS
 
(CONTINUED):
Management’s
 
Discussion
 
and
 
Analysis
 
of
 
Financial
 
Condition
 
and
 
Results
 
of
 
Operations
 
(“MD&A”)
 
is
intended
 
to
 
provide
 
information
 
to
 
assist
 
readers
 
in
 
better
 
understanding
 
and
 
evaluating
 
our
 
financial
condition and results of operations.
 
We recommend reading this MD&A in conjunction with our Condensed
Consolidated Financial
 
Statements and
 
the Notes
 
to those
 
statements included in
 
the “Financial
 
Statements”
section of this Quarterly Report on
 
Form 10-Q, as well as our 2022
 
Annual Report Form 10-K.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
Despite some
 
reduction in
 
inflationary pressures
 
from last
 
year,
 
Cato’s
 
operating costs,
 
including higher
wages, operating supplies, and service costs continue to be negatively
 
impacted by the current inflationary
environment.
 
In
 
addition,
 
our
 
customers’
 
disposable
 
income
 
is
 
impacted
 
by
 
increased
 
costs
 
related
 
to
fuel, food, and
 
housing, including rent,
 
as well as
 
other consumable products
 
across the economy
 
which,
in
 
part,
 
negatively
 
impact
 
our
 
customers’
 
willingness
 
to
 
purchase
 
discretionary
 
items
 
such
 
as
 
apparel,
jewelry and shoes.
In
 
response
 
to
 
inflationary
 
pressures,
 
the
 
Federal
 
Reserve
 
began
 
raising
 
and
 
is
 
committed
 
to
 
continue
raising interest
 
rates until
 
inflationary pressures
 
subside to
 
acceptable levels.
 
These rising
 
interest rates
have
 
adversely
 
affected
 
the
 
availability
 
and
 
cost
 
of
 
credit
 
for
 
both
 
businesses
 
and
 
our
 
customers.
Increasing costs related
 
to revolving credit,
 
auto loans and
 
mortgages continue to
 
have a negative
 
impact
on
 
our
 
customers’
 
discretionary
 
income.
 
Our
 
customers’
 
willingness
 
to
 
purchase
 
our
 
products
 
may
continue to be negatively impacted by high interest rates.
We
 
believe high prices
 
and interest rates
 
impacted the first
 
half of fiscal
 
2023 and will
 
likely continue to
have a
 
negative impact
 
on consumer
 
behavior and,
 
by extension,
 
our results
 
of
 
operations and
 
financial
condition during the remainder of fiscal 2023.
Comparison of the Three and Six
 
Months ended July 29, 2023 with
 
July 30, 2022
Total retail sales
 
for the second
 
quarter were
 
$181.2 million
 
compared to last
 
year’s second
 
quarter sales
 
of
$195.0
 
million,
 
a
 
7%
 
decrease.
 
The
 
Company’s
 
sales
 
decrease
 
in
 
the
 
second
 
quarter
 
of
 
fiscal
 
2023
 
is
primarily due
 
to a
 
5% decrease
 
in same-store
 
sales and
 
permanently closed
 
stores, partially
 
offset by
 
sales
from new stores.
 
For the six
 
months ended July
 
29, 2023, total
 
retail sales were
 
$371.5 million compared
 
to
last year’s comparable six month sales of $399.9 million, a 7% decrease. The decrease in sales in the first six
months of
 
fiscal 2023
 
was also
 
due primarily
 
to a
 
5% decrease
 
in same-store
 
sales and
 
permanently closed
stores,
 
partially offset
 
by sales
 
from
 
new
 
stores. Same-store
 
sales include
 
stores that
 
have
 
been open
 
more
than
 
15
 
months.
 
Stores
 
that
 
have
 
been
 
relocated
 
or
 
expanded
 
are
 
also
 
included
 
in
 
the
 
same-store
 
sales
calculation
 
after
 
they
 
have
 
been
 
open
 
more
 
than
 
15
 
months.
 
The
 
method
 
of
 
calculating
 
same-store
 
sales
varies
 
across
 
the
 
retail
 
industry.
 
As
 
a
 
result,
 
our
 
same-store
 
sales
 
calculation
 
may
 
not
 
be
 
comparable
 
to
similarly titled measures reported by other
 
companies. E-commerce sales were less than
 
5% of total sales for
the
 
six
 
months
 
ended
 
July
 
29,
 
2023
 
and
 
are
 
included
 
in
 
the
 
same-store
 
sales
 
calculation.
 
Total
 
revenues,
comprised of
 
retail sales
 
and other
 
revenue (principally
 
finance charges
 
and late
 
fees on
 
customer accounts
receivable and layaway fees), were $182.9 million
 
and $374.9 million for the
 
three and six months ended July
29, 2023, compared
 
to $196.9 million
 
and $403.6 million
 
for the three
 
and six months
 
ended July 30,
 
2022,
respectively. The Company operated 1,247 stores at July 29, 2023 compared to 1,312 stores at the end
 
of last
 
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
(CONTINUED)
27
year’s
 
second
 
quarter.
 
During
 
the
 
first
 
six
 
months
 
of
 
fiscal
 
2023,
 
the
 
Company
 
opened
 
eight
 
stores
 
and
closed 41 stores.
 
The Company currently expects to close approximately 80
 
stores in total in fiscal 2023.
Credit
 
revenue
 
of
 
$0.7
 
million
 
represented
 
0.4%
 
of
 
total
 
revenues
 
in
 
the
 
second
 
quarter
 
of
 
fiscal
 
2023,
compared to
 
2022 credit
 
revenue of
 
$0.6 million
 
or 0.3%
 
of total
 
revenues. Credit
 
revenue is
 
comprised of
interest earned on the Company’s private label credit card portfolio and related fee income.
 
Related expenses
principally include payroll,
 
postage and other
 
administrative expenses and
 
totaled $0.4 million
 
in the second
quarter of fiscal 2023, compared to
 
last year’s second quarter expense of
 
$0.4 million.
Other revenue, a component of total revenues, was $1.7 million and $3.4 million for the
 
three and six months
ended July 29, 2023, respectively, compared
 
to $1.9 million and $3.6 million
 
for the prior year’s comparable
three
 
and
 
six
 
month
 
periods.
 
The
 
decrease
 
in
 
Other
 
revenue
 
for
 
both
 
the
 
three
 
and
 
six
 
months
 
is
 
due
 
to
 
a
decrease
 
in
 
gift
 
card
 
breakage
 
and
 
e-commerce
 
shipping
 
revenue
 
partially
 
offset
 
by
 
increases
 
in
 
finance
charges and late fees associated with
 
the Company’s proprietary credit card.
Cost of
 
goods sold
 
was $117.6
 
million, or
 
64.9% of
 
retail sales
 
and $239.7
 
million, or
 
64.5% of retail
 
sales
for the three and six months
 
ended July 29, 2023, respectively, compared
 
to $131.7 million, or 67.6% of retail
sales and
 
$264.0 million,
 
or 66.0%
 
of retail
 
sales for
 
the comparable
 
three and
 
six month
 
periods of
 
fiscal
2022.
 
The overall
 
decrease in
 
cost of
 
goods sold
 
as a
 
percent of
 
retail sales
 
for the
 
second quarter
 
and first
half of
 
fiscal 2023
 
resulted primarily
 
from both
 
lower ocean
 
freight costs
 
and outbound
 
freight costs
 
to our
stores,
 
partially
 
offset
 
by
 
deleveraging
 
of
 
occupancy
 
and
 
buying
 
costs.
 
Cost
 
of
 
goods
 
sold
 
includes
merchandise costs (net of discounts and
 
allowances), buying costs, distribution costs, occupancy costs,
 
freight
and
 
inventory
 
shrinkage.
 
Net
 
merchandise
 
costs
 
and
 
in-bound
 
freight
 
are
 
capitalized
 
as
 
inventory
 
costs.
 
Buying
 
and
 
distribution
 
costs
 
include
 
payroll,
 
payroll-related
 
costs
 
and
 
operating
 
expenses
 
for
 
the
 
buying
departments and distribution center.
 
Occupancy costs include rent, real estate taxes, insurance, common area
maintenance, utilities and
 
maintenance for stores and
 
distribution facilities. Total gross
 
margin dollars (retail
sales
 
less
 
cost
 
of
 
goods
 
sold
 
exclusive
 
of
 
depreciation)
 
increased
 
by
 
0.5%
 
to
 
$63.6
 
million
 
for
 
the
 
second
quarter
 
of
 
fiscal
 
2023
 
and
 
decreased
 
by
 
3.0%
 
to
 
$131.8
 
million
 
for
 
the
 
first
 
six
 
months
 
of
 
fiscal
 
2023,
compared to $63.3
 
million and $135.9 million
 
for the prior year’s
 
comparable three and six
 
months of fiscal
2022.
 
Gross margin as presented may not be
 
comparable to those of other
 
entities.
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related
payroll
 
taxes
 
and
 
benefits,
 
insurance,
 
supplies,
 
advertising,
 
bank
 
and
 
credit
 
card
 
processing
 
fees.
 
SG&A
expenses
 
were
 
$61.6
 
million,
 
or
 
34.0%
 
of
 
retail
 
sales
 
and
 
$123.6
 
million,
 
or
 
33.3%
 
of
 
retail
 
sales
 
for
 
the
second quarter and first six months of fiscal 2023, respectively, compared to $60.8 million, or
 
31.2% of retail
sales and $121.2 million, or 30.3% of retail sales for the prior year’s comparable three and
 
six month periods.
 
The increase
 
in SG&A
 
for the
 
second quarter
 
and first
 
six months
 
of fiscal
 
2023 is
 
primarily due
 
to higher
payroll and insurance expense.
Depreciation expense was $2.5 million, or 1.4% of retail sales and $4.9 million, or 1.3% of
 
retail sales for the
second quarter
 
and first
 
six months
 
of fiscal
 
2023, respectively,
 
compared to
 
$2.8 million,
 
or 1.4%
 
of retail
sales and $5.6
 
million or 1.4%
 
of retail sales
 
for the comparable
 
three and six
 
month periods of
 
fiscal 2022,
respectively.
 
Interest and other income was $1.3 million, or 0.7% of retail sales and $2.2 million, or 0.6% of retail sales for
the three and six
 
months ended July 29,
 
2023, respectively, compared to
 
$1.9 million, or 1.0%
 
of retail sales
and
 
$2.3
 
million,
 
or
 
0.6%
 
of
 
retail
 
sales
 
for
 
the
 
comparable
 
three
 
and
 
six
 
month
 
periods
 
of
 
fiscal
 
2022,
respectively.
 
The decrease for the second quarter and first six months of fiscal 2023 compared to fiscal 2022
 
 
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
(CONTINUED)
28
is primarily attributable
 
to the Company’s
 
receipt of insurance
 
proceeds in the
 
second quarter of
 
fiscal 2022
related to hurricane damage in 2021.
Income tax expense was $1.3 million and $3.5 million for the second quarter and first six months of fiscal
2023,
 
respectively,
 
compared
 
to
 
$5.7
 
million
 
and
 
$7.6
 
million
 
for
 
the
 
comparable
 
three
 
and
 
six month
periods of
 
fiscal 2022,
 
respectively.
 
For the
 
first six
 
months of
 
fiscal 2023,
 
the Company’s
 
effective tax
rate was
 
38.5% compared to
 
50.6% for
 
the first
 
six months
 
of fiscal 2022.
 
The change
 
in the
 
2023 year-
to-date effective tax rate was primarily due to a decrease in Global Intangible Low-taxed Income
 
(GILTI),
state
 
income
 
taxes,
 
non-deductible
 
officer’s
 
compensation,
 
and
 
increases
 
in
 
foreign
 
tax
 
credits
 
and
employment credits, partially offset by the foreign rate differential.
 
LIQUIDITY, CAPITAL
 
RESOURCES
 
AND MARKET
 
RISK:
 
The Company
 
believes that
 
its cash,
 
cash equivalents
 
and short-term
 
investments, together
 
with cash
 
flows
from operations
 
and borrowings available
 
under its revolving
 
credit agreement,
 
will be
 
adequate to fund
 
the
Company’s regular operating requirements
 
and expected capital expenditures
 
for fiscal 2023 and the
 
next 12
months.
Cash
 
provided
 
by
 
operating
 
activities
 
during
 
the
 
first
 
six
 
months
 
of
 
fiscal
 
2023
 
was
 
$21.6
 
million
 
as
compared
 
to
 
$17.0
 
million
 
provided
 
in
 
the
 
first
 
six
 
months
 
of
 
fiscal
 
2022.
 
Cash
 
provided
 
by
 
operating
activities for the first six months of fiscal 2023 was primarily generated by earnings adjusted for
 
depreciation
and changes in working capital. The increase in cash provided of $4.6 million
 
for the first six months of fiscal
2023 as compared
 
to the
 
first six
 
months of
 
fiscal 2022
 
was primarily
 
due to
 
a smaller
 
decrease in
 
accounts
payable
 
and
 
accrued
 
liabilities
 
from
 
the
 
fiscal
 
year
 
end
 
and
 
lower
 
inventory,
 
partially
 
offset
 
by
 
higher
accounts receivable and lower net income.
At July 29, 2023,
 
the Company had
 
working capital of $103.4
 
million compared to $74.7
 
million at January
28, 2023.
The increase in working capital is
 
primarily attributable to a decrease in
 
current lease liability and
an increase in cash, partially offset
 
by a decrease in inventory
 
and short-term investments.
As of July
 
29, 2023, the
 
Company has an
 
unsecured revolving credit
 
line, which provides
 
for borrowings of
up to $35.0 million, less
 
the balance of any revocable letters
 
of credit related to purchase commitments,
 
and is
committed
 
through
 
May
 
2027.
 
The
 
revolving
 
credit
 
agreement
 
contains
 
various
 
financial
 
covenants
 
and
limitations,
 
including
 
the
 
maintenance
 
of
 
specific
 
financial
 
ratios.
 
On
 
August
 
9,
 
2023,
 
the
 
Company
amended the revolving credit
 
agreement to modify
 
a definition used in
 
calculating the Company’s
 
minimum
EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating
 
the ratio. For
the quarter ended July
 
29, 2023, after giving
 
effect to the amendment,
 
the Company was in
 
compliance with
the
 
credit
 
agreement.
 
There
 
were
 
no
 
borrowings
 
outstanding,
 
nor
 
any
 
outstanding
 
letters
 
of
 
credit
 
that
reduced
 
borrowing
 
availability,
 
as
 
of
 
July
 
29,
 
2023.
 
The
 
weighted
 
average
 
interest
 
rate
 
under
 
the
 
credit
facility was zero at July 29, 2023
 
due to no borrowings outstanding.
Expenditures for property and equipment totaled $8.5 million in the first six months of fiscal 2023, compared
to $10.4 million in last
 
fiscal year’s first six months. The
 
decrease in expenditures for property and equipment
was
 
primarily
 
due
 
to
 
finishing
 
projects
 
related
 
to
 
investments
 
in
 
the
 
distribution
 
center
 
and
 
information
technology.
 
For
 
the
 
full
 
fiscal
 
2023
 
year,
 
the
 
Company
 
expects
 
to
 
invest
 
approximately
 
$17.0
 
million
 
for
capital expenditures.
 
 
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
(CONTINUED)
29
Net cash provided by investing activities totaled $23.8 million in the first six months of fiscal 2023
 
compared
to $10.1
 
million net
 
cash provided
 
in the
 
comparable period
 
of 2022.
 
The increase
 
in net
 
cash provided
 
in
2023 was primarily due
 
to a net decrease
 
in the purchase of
 
short-term investments and a
 
decrease in capital
expenditures.
Net cash
 
used in
 
financing activities
 
totaled $9.3
 
million in
 
the first
 
six months
 
of fiscal
 
2023 compared
 
to
$16.7 million used in the comparable period of fiscal 2022.
 
The decrease in net cash used in fiscal 2023 was
primarily due to lower stock repurchases and
 
lower dividends.
As
 
of
 
July
 
29,
 
2023,
 
the
 
Company
 
had
 
909,653
 
shares
 
remaining
 
in
 
open
 
authorizations
 
under
 
its
 
share
repurchase program.
 
The Company does not use
 
derivative financial instruments.
The Company’s
 
investment portfolio
 
was primarily
 
invested in
 
corporate bonds and
 
tax-exempt and taxable
governmental debt securities held in managed accounts
 
with underlying ratings of A or better
 
at July 29, 2023
and
 
January
 
28,
 
2023.
 
The
 
state,
 
municipal
 
and
 
corporate
 
bonds
 
have
 
contractual
 
maturities
 
which
 
range
from one day to 2.6 years. The U.S.
 
Treasury Notes have contractual maturities which range from two
 
days to
2.6
 
years.
 
These
 
securities
 
are
 
classified as
 
available-for-sale and
 
are
 
recorded as
 
Short-term
 
investments,
Restricted cash and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets
are
 
carried
 
at
 
fair
 
value
 
with
 
unrealized
 
gains
 
and
 
losses
 
reported
 
net
 
of
 
taxes
 
in
 
Accumulated
 
other
comprehensive income. The asset-backed
 
securities are bonds comprised
 
of auto loans and
 
bank credit cards
that carry
 
AAA ratings.
 
The auto
 
loan asset-backed
 
securities are
 
backed by
 
static pools
 
of auto
 
loans that
were originated and serviced by captive auto finance units, banks or finance companies.
 
The bank credit card
asset-backed securities are backed by revolving pools of credit card receivables generated by account holders
of cards from American Express, Citibank, JPMorgan
 
Chase, Capital One and Discover.
Additionally,
 
at
 
July
 
29,
 
2023,
 
the
 
Company
 
had
 
$0.9
 
million
 
of
 
corporate
 
equities
 
and
 
deferred
compensation plan assets
 
of $9.5 million.
 
At January 28,
 
2023, the Company
 
had $0.9 million
 
of corporate
equities and deferred compensation plan assets of $9.3
 
million.
 
All of these assets are recorded within
 
Other
assets in the Condensed Consolidated Balance
 
Sheets.
 
See Note 7, Fair Value Measurements.
RECENT ACCOUNTING PRONOUNCEMENTS:
 
See Note 8, Recent Accounting Pronouncements.
 
 
 
 
THE CATO CORPORATION
QUANTITATIVE
 
AND QUALITATIVE
 
DISCLOSURES ABOUT MARKET RISK
30
ITEM 3. QUANTITATIVE
 
AND QUALITATIVE
 
DISCLOSURES ABOUT MARKET RISK:
The
 
Company
 
is
 
subject
 
to
 
market
 
rate
 
risk
 
from
 
exposure
 
to
 
changes
 
in
 
interest
 
rates
 
based
 
on
 
its
financing, investing and
 
cash management activities,
 
but the Company
 
does not
 
believe such exposure
 
is
material.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out an evaluation, with the
 
participation of our Principal Executive Officer and
 
Principal Financial
Officer,
 
of
 
the
 
effectiveness
 
of
 
our
 
disclosure
 
controls
 
and
 
procedures
 
as
 
of
 
July
 
29,
 
2023.
 
Based
 
on
 
this
evaluation,
 
our
 
Principal
 
Executive
 
Officer
 
and
 
Principal
 
Financial
 
Officer
 
concluded
 
that,
 
as
 
of
 
July
 
29,
2023, our
 
disclosure controls
 
and
 
procedures,
 
as defined
 
in
 
Rule
 
13a-15(e), under
 
the
 
Securities
 
Exchange
Act of 1934 (the “Exchange
 
Act”), were effective to ensure that
 
information we are required to disclose
 
in the
reports
 
that
 
we
 
file
 
or
 
submit
 
under
 
the
 
Exchange
 
Act
 
is
 
recorded,
 
processed,
 
summarized
 
and
 
reported
within the time periods
 
specified in the SEC’s
 
rules and forms and
 
that such information is
 
accumulated and
communicated to our management, including our Principal Executive Officer and Principal Financial Officer,
as appropriate to allow timely decisions
 
regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
No change in the Company’s internal control
 
over financial reporting (as defined in
 
Exchange Act Rule 13a-
15(f)) has occurred during the Company’s fiscal quarter
 
ended July 29, 2023 that has
 
materially affected, or is
reasonably likely to materially affect, the
 
Company’s internal control over financial
 
reporting.
 
 
 
THE CATO CORPORATION
PART II OTHER
 
INFORMATION
31
ITEM 1.
 
LEGAL PROCEEDINGS:
Not Applicable.
ITEM 1A.
 
RISK FACTORS:
In addition to the other information
 
in this report, you should carefully
 
consider the factors discussed in
 
Part I,
“Item
 
1A.
 
Risk
 
Factors”
 
in
 
our
 
Annual
 
Report
 
on
 
Form
 
10-K
 
for
 
our
 
fiscal
 
year
 
ended
 
January
 
28,
 
2023.
These risks
 
could materially
 
affect our
 
business, financial
 
condition or
 
future results;
 
however, they
 
are not
the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem
to
 
be
 
immaterial
 
may
 
also
 
materially
 
adversely
 
affect
 
our
 
business,
 
financial
 
condition
 
or
 
results
 
of
operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE CATO CORPORATION
PART II OTHER
 
INFORMATION
32
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES
 
AND USE OF PROCEEDS:
The following table summarizes the Company’s purchases of its common stock for the three months
ended July 29, 2023:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Average
Part of Publicly
Value)
 
of Shares that may
Fiscal
of Shares
Price Paid
Announced Plans or
Yet be Purchased
 
Under
Period
Purchased
per Share (1)
Programs (2)
The Plans or Programs (2)
May 2023
34,726
$
8.30
34,726
June 2023
-
-
-
July 2023
-
-
-
Total
34,726
$
8.30
34,726
909,653
(1)
Prices include trading costs.
(2)
As of April
 
29, 2023, the Company’s
 
share repurchase program had
 
944,379 shares remaining in
open
 
authorizations. During
 
the
 
second
 
quarter
 
ended July
 
29,
 
2023, the
 
Company repurchased
and
 
retired 34,726
 
shares under
 
this
 
program for
 
approximately $288,226
 
or
 
an average
 
market
price
 
of
 
$8.30
 
per
 
share.
 
As
 
of
 
July
 
29,
 
2023,
 
the
 
Company
 
had
 
909,653
 
shares
 
remaining
 
in
open authorizations. There is no specified expiration date for the Company’s repurchase program.
ITEM 3.
 
DEFAULTS
 
UPON SENIOR SECURITIES:
Not Applicable.
 
 
 
 
 
 
THE CATO CORPORATION
PART II OTHER
 
INFORMATION
33
ITEM 4.
 
MINE SAFETY DISCLOSURES:
Not Applicable.
ITEM 5.
 
OTHER INFORMATION:
During the three
 
months ended July
 
29, 2023, none
 
of the
 
Company’s directors
 
or officers
 
(as defined in
Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted or
 
terminated a “Rule 10b5-1
trading arrangement” or a “non-Rule 10b5-1
 
trading arrangement” (as such terms are
 
defined in Item 408
of Regulation S-K).
ITEM 6.
 
EXHIBITS:
Exhibit No.
Item
 
3.1
 
3.2
10.1*
 
31.1*
 
31.2*
 
32.1*
 
32.2*
101.1*
The following materials
 
from Registrant’s Quarterly
 
Report on Form
 
10-Q for the
fiscal
 
quarter
 
ended
 
July
 
29,
 
2023,
 
formatted
 
in
 
Inline
 
XBRL:
 
(i)
 
Condensed
Consolidated Statements
 
of Income
 
(Loss) and
 
Comprehensive Income
 
(Loss) for
the
 
Three
 
Months
 
and
 
Six
 
Months
 
Ended
 
July
 
29,
 
2023
 
and
 
July
 
30,
 
2022;
 
(ii)
Condensed
 
Consolidated
 
Balance
 
Sheets
 
at
 
July
 
29,
 
2023
 
and
 
January
 
28,
 
2023;
 
(iii) Condensed Consolidated Statements of
 
Cash Flows for the Six
 
Months Ended
July
 
29,
 
2023
 
and
 
July
 
30,
 
2022;
 
(iv)
 
Condensed
 
Consolidated
 
Statements
 
of
Stockholders’ Equity
 
for the
 
Six Months
 
Ended July
 
29, 2023
 
and July
 
30, 2022;
and (v) Notes to Condensed Consolidated Financial Statements.
104.1
Cover Page
 
Interactive Data
 
File
 
(Formatted in
 
Inline
 
XBRL
 
and
 
contained
 
in
the Interactive Data Files submitted as Exhibit 101.1*)
 
* Submitted electronically herewith.
 
 
 
 
 
 
 
THE CATO CORPORATION
PART II OTHER
 
INFORMATION
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
 
Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly
 
authorized.
 
THE CATO
 
CORPORATION
August 23, 2023
/s/ John P.
 
D. Cato
Date
John P.
 
D. Cato
Chairman, President and
Chief Executive Officer
August 23, 2023
/s/ Charles D. Knight
Date
Charles D. Knight
Executive Vice President
Chief Financial Officer