What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-06-04 compared with 2019-11-26 · 83 added, 73 removed, 75 unchanged (68% of the section changed)

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(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 1, 2020 (“fiscal 2019”) and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodels and closures;

(4) statements relating to our operations or activities for our fiscal year ending January 30, 2021 (“fiscal 2020”) and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodels and closures and statements regarding the potential impact of the COVID-19 pandemic and related responses and mitigation efforts on our business, results of operations and financial condition;

and (5) statements relating to our future contingencies.

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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, levels of unemployment, fuel, energy and food costs, wage rates, tax rates, interest rates, home values, consumer net worth and the availability of credit;

changes in laws, regulations or governmental policies affecting our business, including tariffs;

uncertainties regarding the impact of any governmental actions regarding, or responses to, the foregoing conditions;

any actual or perceived deterioration in the conditions that drive consumer confidence and spending, including, but not limited to, prevailing social, economic, political and public health conditions and uncertainties, levels of unemployment, fuel, energy and food costs, wage rates, tax rates, interest rates, home values, consumer net worth and the availability of credit ;

changes in laws or regulations affecting our business including tariffs ;

uncertainties regarding the impact of any governmental responses to the foregoing conditions;

competitive factors and pricing pressures;

our ability to predict and respond to rapidly changing fashion trends and consumer demands;

adverse weather or similar conditions that may affect our sales or operations;

our ability to successfully implement our new store development strategy to increase new store openings and our ability of any such new stores to grow and perform as expected;

adverse weather, public health threats (including the COVID-19 pandemic) or similar conditions that may affect our sales or operations;

inventory risks due to shifts in market demand, including the ability to liquidate excess inventory at anticipated margins;

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Three Months Ended

Nine Months Ended

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

Total retail sales

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Interest and other income

Income before income taxes

Income (loss) before income taxes

Net income (loss)

THE CATO CORPORATION

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RESULTS OF OPERATIONS (CONTINUED):

Comparison of the Three and Nine Months ended November 2, 2019 with November 3, 2018

Total retail sales for the third quarter were $189.4 million compared to last year’s third quarter sales of $187.9 million, a 0.8% increase.

The Company’s sales increase in the third quarter of fiscal 2019 is primarily due to a 4% increase in same-store sales partially offset by closed stores.

For the nine months ended November 2, 2019, total retail sales were $627.8 million compared to last year’s comparable nine month sales of $630.8 million.

Sales in the first nine months of fiscal 2019 decreased slightly primarily due to closed stores, partially offset by a 2% increase in same-store sales.

COVID-19 Update

The spread of COVID-19 has resulted in state and local orders mandating store closures to mitigate the spread of the virus.

Responses by customers, government and the private sector have and will likely continue to adversely impact our business operations for the remainder of 2020 and possibly beyond.

The extent to which the COVID-19 pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Beginning March 19, 2020, the Company temporarily closed all Cato, Its Fashion, Its Fashion Metro and Versona stores.

In addition, the Company suspended its quarterly dividend, significantly reduced capital expenditures and reduced its SG&A expense through the reduction of non-payroll expenses, as well as, furloughing associates and in certain instances eliminating positions primarily at the corporate office.

Beginning on May 1, 2020, the Company began to re-open stores based on the pertinent state and local orders.

There is significant uncertainty around the duration, breadth and severity of continued business disruptions related to COVID-19, as well as its impact on the U.S.

economy, consumer willingness to visit malls and shopping centers, and associate staffing for our stores.

At this time, it is uncertain as to the effect of national, state or local action or legislation that attempts to address the economic effects of COVID-19 on our customers, suppliers or the Company.

While the Company currently anticipates that our results for the remainder of 2020 will be adversely impacted, the extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain, including new information that may emerge concerning the severity of COVID-19, potential economic impacts to customers and suppliers, and the actions taken to contain it or mitigate its impact.

Comparison of First Quarter of 2020 with 2019

Total retail sales for the first quarter were $98.8 million compared to last year’s first quarter sales of $228.1 million.

Sales decreased primarily due to stores temporarily closed in 2020 due to COVID-19.

The store closures resulted in a 56.0% decrease in same-store sales.

Same store sales include stores that have been open more than 15 months.

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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 3% of sales for the nine months ended November 2, 2019 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, gift card breakage and layaway fees), were $191.5 million and $634.5 million for the three and nine months ended November 2, 2019, respectively, compared to $190.0 million and $637.2 million for the three and nine months ended November 3, 2018, respectively.

The Company operated 1,298 stores at November 2, 2019 compared to 1,350 stores at the end of last year’s third quarter.

During the first nine months of fiscal 2019, the Company closed 13 stores.

In total, the Company currently expects to open up to five stores and close about 38 stores in fiscal 2019.

Credit revenue of $0.9 million represented 0.5% of total revenues in the third quarter of fiscal 2019, compared to the third quarter of fiscal 2018 credit revenue of $1.0 million or 0.5% of total revenues.

E-commerce sales were less than 7.0% of sales for the first quarter of fiscal 2020 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, shipping charged to customers for e-commerce purchases and layaway fees), were $100.7 million for the first quarter ended May 2, 2020, compared to $230.4 million for the first quarter ended May 4, 2019.

The Company operated 1,300 stores at May 2, 2020 compared to 1,302 stores at the end of last fiscal year’s first quarter.

For the first three months of fiscal 2020, the Company opened 24 stores and permanently closed five stores.

The Company currently expects to open approximately 80 stores, relocate approximately two stores and close approximately 39 stores in fiscal 2020.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Credit revenue of $0.8 million represented 0.8% of total revenues in the first quarter of fiscal 2020, compared to 2019 credit revenue of $0.9 million or 0.4% of total revenues.

Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income.

Related expenses principally include payroll, postage and other administrative expenses and totaled $0.4 million in the third quarter of fiscal 2019, compared to last year’s third quarter expense of $0.6 million.

Other revenue in total, as included in total revenues, was $2.2 million and $6.7 million for the three and nine months ended November 2, 2019, respectively, compared to $2.1 million and $6.5 million for the prior year’s comparable three and nine month periods.

The overall increase in the three and nine months ended November 2, 2019 is primarily due to increases in e-commerce shipping revenues.

Cost of goods sold was $118.6 million, or 62.6% of retail sales and $385.1 million, or 61.3% of retail sales for the three and nine months ended November 2, 2019, respectively, compared to $123.0 million, or 65.5% of retail sales and $395.1 million, or 62.6% of retail sales for the comparable three and nine month periods of fiscal 2018.

The overall decrease in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2019 resulted primarily from higher penetration of regular price sales.

In addition, occupancy costs as a percent of retail sales decreased.

Credit revenue decreased slightly for the most recent comparable period due to lower finance charge income and lower late fee income from sales using the Company’s proprietary credit card.

Related expenses include principally payroll, postage and other administrative expenses, and totaled $0.5 million in the first quarter of 2020, compared to last year’s first quarter expenses of $0.5 million.

Other revenue, a component of total revenues, was $1.9 million for the first quarter of fiscal 2020, compared to $2.3 million for the prior year’s comparable first quarter.

The decrease of $0.4 million is primarily related to lower layaway fees in the quarter due to stores temporarily closed from COVID-19.

Cost of goods sold was $83.6 million, or 84.6% of retail sales for the first quarter of fiscal 2020, compared to $136.1 million, or 59.7% of retail sales in the first quarter of fiscal 2019.

The overall increase in cost of goods sold as a percent of retail sales for first quarter of 2020 resulted primarily from deleveraging of occupancy, buying and distribution costs due to lower sales from temporary store closures and higher sales of goods marked down.

Cost of goods sold includes merchandise costs (net of discounts and allowances), buying costs, distribution costs, occupancy costs, freight and inventory shrinkage.

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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 8.9% to $70.7 million for the third quarter of fiscal 2019 and increased by 3.0% to $242.7 million for the first nine months of fiscal 2019 compared to $64.9 million and

Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) decreased by 83.5% to $15.2 million for the first quarter of fiscal 2020 compared to $92.0 million in the first quarter of fiscal 2019.

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 decreased 20.4% to $52.5 million, or 53.1% of retail sales for the first quarter of fiscal 2020, compared to $66.0 million, or 28.9% of retail sales in the first quarter of fiscal 2019.

SG&A as a percent of retail sales increased primarily due to the effects of deleveraging of costs due to temporary store closures and store impairment charges, partially offset by reduced incentive compensation.

Depreciation expense was $4.0 million, or 4.1% of retail sales for the first quarter of fiscal 2020, compared to $3.8 million, or 1.7% of retail sales for the first quarter of fiscal 2019.

Interest and other income was $1.9 million, or 1.9% of retail sales for the first quarter of fiscal 2020, compared to $1.1 million, or 0.5% of retail sales for the first quarter of fiscal 2019.

The increase is primarily attributable to gains from the sale of investments.

Income tax benefit was $9.1 million or 9.2% of retail sales for the first quarter of fiscal 2020, compared to income tax expense of $4.3 million, or 1.9% of retail sales for the first quarter of fiscal 2019.

The 2020 quarter decrease in income tax expense resulted from a higher effective tax rate on a pre-tax loss.

The effective income tax rate for the first quarter of fiscal 2020 was 24.3% compared to 16.9% for the first quarter of 2019.

The increase in the 2020 first quarter tax rate was primarily due to the federal net operating loss carryback provisions of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), offset by valuation allowances against state income net operating losses, and an upward adjustment in the reserves for uncertain tax positions specific to state income taxes in the first quarter of 2020.

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

$235.7 million for the comparable three and nine months of fiscal 2018.

Gross margin as presented may not be comparable to those of other entities.

SG&A expenses were $64.7 million, or 34.2% of retail sales and $196.7 million, or 31.3% of retail sales for the third quarter and first nine months of fiscal 2019, respectively, compared to $61.8 million, or 32.9% of retail sales and $196.6 million, or 31.2% of retail sales for the prior year’s comparable three and nine month periods.

The increase in SG&A expense for the third quarter of fiscal 2019 was primarily attributable to higher incentive compensation in 2019 and favorable litigation settlements in the prior year.

The slight increase in SG&A expense for the first nine months of fiscal 2019 was primarily attributable to higher incentive compensation partially offset by lower insurance cost.

Depreciation expense was $3.8 million, or 2.0% of retail sales and $11.5 million, or 1.8% of retail sales for the third quarter and first nine months of fiscal 2019, respectively, compared to $4.1 million, or 2.2% of retail sales and $12.5 million or 2.0% of retail sales for the comparable three and nine month periods of fiscal 2018, respectively.

Interest and other income was $1.7 million, or 0.9% of retail sales and $4.5 million, or 0.7% of retail sales for the three and nine months ended November 2, 2019, respectively, compared to $1.4 million, or 0.7% of retail sales and $3.6 million, or 0.6% of retail sales for the comparable three and nine month periods of fiscal 2018, respectively.

The increase for the first nine months of fiscal 2019 compared to 2018 is primarily attributable to an increase in short-term investments.

Income tax expense was $0.1 million and $6.5 million for the third quarter and first nine months of fiscal 2019, respectively, compared to an income tax benefit of $1.3 million and income tax expense of $2.9 million for the comparable three and nine month periods of fiscal 2018, respectively.

For the first nine months of 2019, the Company’s effective tax rate was 14.3%.

The increase in the 2019 tax rate was primarily due to higher pre-tax earnings, more taxable interest income, more non-deductible IRS Section 162(m) compensation, an increase in state income taxes due to less credits in 2019 and a release of reserves for uncertain tax positions due to state audit settlements in the first quarter of 2018.

Company assessed the ability to realize these state net operating losses in light of the adverse impact on the Company’s financial statements and operations due to COVID-19.

Based on this assessment, the Company concluded that it is more likely than not that the Company will not be able to realize the state net operating losses and, accordingly, has recorded a valuation allowance for these items including the value of its state net operating loss deferred tax assets as of February 1, 2020.

The estimated annual effective tax rate for the current fiscal year is impacted by the ability to carryback federal net operating losses due to the CARES Act, partially offset by changes in management’s judgement regarding the ability to realize deferred tax assets, primarily state income net operating losses generated in the current fiscal year.

The Company has factored the realizability of these deferred tax assets generated as a result of projected current year losses into its estimated annual effective rate for the current year.

To the extent that actual results and/or events differ from the predicted results, the Company may continue to see effects on the estimated annual effective tax rate.

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:

The Company has consistently maintained a strong liquidity position.

Cash provided by operating activities during the first nine months of fiscal 2019 was $49.3 million as compared to $54.2 million in the first nine months of fiscal 2018.

These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and share repurchases.

In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs.

There were no outstanding borrowings on this facility at November 2, 2019 and February 2, 2019.

Cash provided by operating activities for the first nine months of fiscal 2019 was primarily generated by earnings adjusted for depreciation and changes in working capital.

The decrease in cash provided by operating activities of $4.9 million for the first nine months of fiscal 2019 as compared to the first nine months of fiscal 2018 was primarily due to a decrease in accounts payable and accrued expenses and an increase in inventory and other assets, partially offset by a decrease in prepaid assets and accounts receivable and an increase in net income.

Cash used by operating activities during the first three months of fiscal 2020 was $71.3 million as compared to $14.7 million provided in the first three months of fiscal 2019.

The Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs.

There were $30.0 million in outstanding borrowings on this facility at May 2, 2020 and no outstanding borrowings at February 1, 2020.

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 2020 and the next 12 months.

Cash used by operating activities for the first three months of fiscal 2020 was primarily attributable to net losses adjusted for depreciation and changes in working capital.

The decrease in cash provided of $86.0 million for the first three months of fiscal 2020 as compared to the first three months of fiscal 2019 was primarily due to a net loss versus net income, an increase in inventory, a decrease in accounts payable and accrued liabilities, partially offset by store impairment charges.

At May 2, 2020, the Company had working capital of $126.6 million compared to $163.5 million at February 1, 2020.

This decrease is primarily attributable to lower short-term investments, partially offset by higher inventory amounts.

At May 2, 2020 and February 1, 2020, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million less the balance of letters of credit discussed below.

The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of May 2, 2020.

There were $30.0 million in outstanding borrowings under the credit facility as of May 2, 2020 and no outstanding borrowings at February 1, 2020.

As of May 2, 2020, the $30.0 million of outstanding borrowings is recorded in Accounts payable in the Condensed Consolidated Balance Sheets.

On June 2, 2020, the Company signed an amendment extending the revolving credit agreement through May 2023.

This new amendment, among other items, temporarily lowers the liquidity amount the Company is required to maintain.

In addition, a fixed charge ratio covenant is applicable beginning in the fourth quarter

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

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, expected capital expenditures, dividends and share repurchases for fiscal 2019 and the next 12 months.

At November 2, 2019, the Company had working capital of $187.5 million compared to $229.5 million at February 2, 2019.

At November 2, 2019 and February 2, 2019, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million, less the value of revocable letters of credit discussed below.

The revolving credit agreement is committed until May 2022.

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 November 2, 2019.

There were no borrowings outstanding under the credit facility as of November 2, 2019 and February 2, 2019.

At November 2, 2019 and February 2, 2019, the Company had no outstanding revocable letters of credit relating to purchase commitments.

Expenditures for property and equipment totaled $4.9 million in the first nine months of fiscal 2019, compared to $3.2 million in last fiscal year’s first nine months.

The expenditures for the first nine months of fiscal 2019 were primarily for additional investments in home office, stores, distribution center, cars and information technology.

As of June 4, 2020, the company had paid down $7.0 million of its outstanding line of credit, reducing the outstanding borrowings to $23.0 million.

At May 2, 2020 and February 1, 2020, the Company had no outstanding letters of credit relating to purchase commitments.

Expenditures for property and equipment totaled $5.3 million in the first three months of fiscal 2020, compared to $1.0 million in last year’s first three months.

The expenditures for the first three months of 2020 were primarily for investments in new stores.

For the full fiscal 2020 year, the Company expects to invest approximately $13 million for capital expenditures.

Net cash used in investing activities totaled $22.2 million in the first nine months of fiscal 2019 compared to net cash used of $68.1 million by investing activities in the comparable period of 2018.

The decrease in net cash used in investing activities in 2019 is primarily attributable to the decrease in net purchases of short-term investments.

Net cash used in financing activities totaled $28.9 million in the first nine months of fiscal 2019 compared to $37.1 million used in the comparable period of fiscal 2018.

The decrease in net cash used in financing activities was primarily due to lower share repurchase amounts.

As of November 2, 2019, the Company had 1,681,622 shares remaining in open authorizations under its share repurchase program.

On November 21, 2019, the Board of Directors maintained the quarterly dividend at $0.33 per share.

Net cash provided by investing activities totaled $76.9 million in the first three months of fiscal 2020 compared to $7.9 million in the comparable period of fiscal 2019, primarily due to an increase in the sale of short-term investments, partially offset by short-term investments purchased and capital expenditures.

Net cash provided by financing activities totaled $12.4 million in the first three months of fiscal 2020 compared to $10.7 million used in the comparable period of fiscal 2019, primarily due to proceeds from the line of credit partially offset by an increase in share repurchases and payments on the line of credit.

As of May 2, 2020, the Company had 728,466 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 November 2, 2019 and February 2, 2019.

The state, municipal and corporate bonds have contractual maturities which range from one month to 6.0 years.

Treasury Notes and Certificates of Deposit have contractual maturities which range from 13 days to 3.0 years.

These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and Restricted short-term investments on the accompanying Condensed Consolidated Balance Sheets.

The state, municipal and corporate bonds have contractual maturities which range from two days to seven years.

Treasury Notes and Certificates of Deposit have contractual maturities which range from one month to two years.

These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash, Restricted short-term investments and Other assets on the accompanying Condensed Consolidated Balance Sheets.

These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.

The asset-backed

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

securities are bonds comprised of auto loans and bank credit cards that carry AAA ratings.

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 November 2, 2019, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $10.3 million.

Additionally, at May 2, 2020, the Company had $0.6 million of corporate equities and deferred compensation plan assets of $9.7 million.

At February 1, 2020, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $10.5 million.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis