CATO CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended May 2, 2020 May 4, 2019 (Dollars in thousands, except per share data) REVENUES Retail sales $ 98,813 $ 228,066 Other revenue (principally finance charges, late fees and layaway charges) 1,919 2,285 Total revenues 100,732 230,351 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 83,597 136,083 Selling, general and administrative (exclusive of depreciation shown below) 52,511 65,990 Depreciation 4,006 3,843 Interest and other income ( 1,851 ) ( 1,136 ) Costs and expenses, net 138,263 204,780 Income (loss) before income taxes ( 37,531 ) 25,571 Income tax expense (benefit) ( 9,114 ) 4,316 Net income (loss) $ ( 28,417 ) $ 21,255 Basic earnings (loss) per share $ ( 1.19 ) $ 0.87 Diluted earnings (loss) per share $ ( 1.19 ) $ 0.87 Comprehensive income: Net income (loss) $ ( 28,417 ) $ 21,255 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of ($ 90 ) and $ 126 for May 2, 2020 ( 298 ) 412 and May 4, 2019, respectively Comprehensive income (loss) $ ( 28,715 ) $ 21,667 See notes to condensed consolidated financial statements (unaudited). 2 Table of Contents THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) May 2, 2020 February 1, 2020 (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents $ 29,809 $ 11,824 Short-term investments 118,020 200,387 Restricted cash 2,585 2,577 Restricted short-term investments 1,330 1,319 Accounts receivable, net of allowance for doubtful accounts of $ 614 and $ 726 at May 2, 2020 and February 1, 2020, respectively 30,462 26,088 Merchandise inventories 122,767 115,365 Prepaid expenses and other current assets 6,131 5,237 Total Current Assets 311,104 362,797 Property and equipment – net 84,151 88,667 Noncurrent deferred income taxes 8,413 8,636 Other assets 22,759 24,073 Right-of-Use assets – net 214,527 200,803 Total Assets $ 640,954 $ 684,976 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 74,934 $ 68,438 Accrued expenses 38,006 47,099 Accrued bonus and benefits 8,888 18,913 Accrued income taxes 1,690 1,703 Current lease liability 61,019 63,149 Total Current Liabilities 184,537 199,302 Other noncurrent liabilities 22,754 21,976 Lease liability 162,011 147,184 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; 22,252,038 and 22,535,779 shares issued at May 2, 2020 and February 1, 2020, respectively 750 761 Convertible Class B common stock, $ 0.033 par value per share, 15,000,000 shares authorized; 1,763,652 and 1,763,652 shares issued at May 2, 2020 and February 1, 2020, respectively 59 59 Additional paid-in capital 111,693 110,813 Retained earnings 158,025 203,458 Accumulated other comprehensive income 1,125 1,423 Total Stockholders' Equity 271,652 316,514 Total Liabilities and Stockholders’ Equity $ 640,954 $ 684,976 See notes to condensed consolidated financial statements (unaudited). 3 Table of Contents THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended May 2, 2020 May 4, 2019 (Dollars in thousands) Operating Activities: Net income (loss) $ ( 28,417 ) $ 21,255 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,006 3,843 Provision for doubtful accounts 28 178 Purchase premium and premium amortization of investments ( 18 ) 58 Share-based compensation 650 691 Deferred income taxes 313 - Loss on disposal of property and equipment 66 182 Impairment of store assets 5,270 - Changes in operating assets and liabilities which provided (used) cash: Accounts receivable ( 4,402 ) ( 1,926 ) Merchandise inventories ( 7,402 ) 8,370 Prepaid and other assets ( 255 ) 8,643 Operating lease right-of-use assets and liabilities ( 1,027 ) - Accrued income taxes ( 13 ) 2,629 Accounts payable, accrued expenses and other liabilities ( 40,134 ) ( 29,255 ) Net cash provided (used) by operating activities ( 71,335 ) 14,668 Investing Activities: Expenditures for property and equipment ( 5,311 ) ( 995 ) Purchase of short-term investments ( 8,275 ) ( 44,709 ) Sales of short-term investments 90,435 53,639 Purchase of other assets - ( 22 ) Sales of other assets 94 4 Net cash provided (used) by investing activities 76,943 7,917 Financing Activities: Dividends paid ( 7,990 ) ( 8,118 ) Repurchase of common stock ( 9,875 ) ( 2,834 ) Proceeds from line of credit 34,000 - Payments on line of credit ( 4,000 ) - Proceeds from employee stock purchase plan 250 261 Net cash provided (used) by financing activities 12,385 ( 10,691 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 17,993 11,894 Cash, cash equivalents, and restricted cash at beginning of period 14,401 25,209 Cash, cash equivalents, and restricted cash at end of period $ 32,394 $ 37,103 Non-cash activity: Accrued other assets and property and equipment $ 1,936 $ 256 See notes to condensed consolidated financial statements (unaudited). 4 Table of Contents THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Convertible Accumulated Class A Class B Additional Other Total Common Common Paid-in Retained Comprehensive Stockholders' Stock Stock Capital Earnings Income Equity (Dollars in thousands) Balance — February 1, 2020 $ 761 $ 59 $ 110,813 $ 203,458 $ 1,423 $ 316,514 Comprehensive income: Net income (loss) - - - ( 28,417 ) - ( 28,417 ) Unrealized gains on available-for-sale securities, net of deferred income tax benefit of ($ 90 ) - - - - ( 298 ) ( 298 ) Dividends paid ($ 0.33 per share) - - - ( 7,990 ) - ( 7,990 ) Class A common stock sold through employee stock purchase plan — 26,957 shares 1 - 293 - - 294 Class B common stock sold through stock option plans — - shares - - - - - - Class A common stock issued through restricted stock grant plans — 307,354 shares 10 - 587 8 - 605 Repurchase and retirement of treasury shares – 618,056 shares ( 22 ) - - ( 9,034 ) - ( 9,056 ) Balance — May 2, 2020 $ 750 $ 59 $ 111,693 $ 158,025 $ 1,125 $ 271,652 Convertible Accumulated Class A Class B Additional Other Total Common Common Paid-in Retained Comprehensive Stockholders' Stock Stock Capital Earnings Income Equity (Dollars in thousands) Balance — February 2, 2019 $ 767 $ 59 $ 105,580 $ 210,507 $ ( 77 ) $ 316,836 Comprehensive income: Net income (loss) - - - 21,255 - 21,255 Unrealized gains on available-for-sale securities, net of deferred income tax liability of $ 126 - - - - 412 412 Dividends paid ($ 0.33 per share) - - - ( 8,118 ) - ( 8,118 ) Class A common stock sold through employee stock purchase plan — 20,676 shares 1 - 307 - - 308 Class B common stock sold through stock option plans — - shares - - - - - - Class A common stock issued through restricted stock grant plans — 355,609 shares 11 - 624 10 - 645 Repurchase and retirement of treasury shares – 208,041 shares ( 7 ) - - ( 2,827 ) - ( 2,834 ) Balance — May 4, 2019 $ 772 $ 59 $ 106,511 $ 220,827 $ 335 $ 328,504 See notes to condensed consolidated financial statements (unaudited). 5 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 NOTE 1 - GENERAL : The condensed consolidated financial statements as of May 2, 2020 and for the thirteen-week periods ended May 2, 2020 and May 4, 2019 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 February 1, 2020. Amounts as of February 1, 2020 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. 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. Accounting Policies - Impairment of Long-Lived Assets: The Company invests in leaseholds, right-of use assets and equipment primarily in connection with the opening and remodeling of stores and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its long-lived assets, which primarily relate 6 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 to Fixtures and equipment, Leasehold improvements, Right-of-use assets net of Lease liabilities and Information technology equipment and software. An impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair value when the Company determines that projected cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s projected cash flows, which include future sales growth projections. The Company assesses the fair value of each lease by considering market rents and any lease terms that may adjust market rents under certain conditions such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain criteria. Further, in determining when to close a store, the Company considers real estate development in the area and perceived local market conditions, which can be difficult to predict and may be subject to change. As a result of store closures, the Company determined a triggering event occurred resulting in an impairment analysis being performed. An asset impairment charge of $ 5.3 million was recorded in the first quarter of 2020. Recently Adopted Accounting Policies In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires companies to measure and recognize expected credit losses for financial assets held at amortized costs based on expected losses rather than incurred losses. The new accounting rules were effective for the Company in the first quarter of 2020 and will have a minimal impact on the financial statements. 7 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 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 and Comprehensive Income. 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 May 2, 2020 May 4, 2019 (Dollars in thousands) Numerator Net earnings (loss) $ ( 28,417 ) $ 21,255 Earnings (loss) allocated to non-vested equity awards 1,135 ( 660 ) Net earnings (loss) available to common stockholders $ ( 27,282 ) $ 20,595 Denominator Basic weighted average common shares outstanding 22,959,887 23,756,695 Diluted weighted average common shares outstanding 22,959,887 23,756,695 Net income (loss) per common share Basic earnings (loss) per share $ ( 1.19 ) $ 0.87 Diluted earnings (loss) per share $ ( 1.19 ) $ 0.87 8 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME: The following tables set forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended May 2, 2020: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at February 1, 2020 $ 1,423 Other comprehensive income before reclassification ( 802 ) Amounts reclassified from accumulated other comprehensive income (b) 504 Net current-period other comprehensive income ( 298 ) Ending Balance at May 2, 2020 $ 1,125 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI"). (b) Includes $ 655 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 $ 151 . The following tables set forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended May 4, 2019: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at February 2, 2019 $ ( 77 ) Other comprehensive income before reclassification 403 Amounts reclassified from accumulated other comprehensive income (b) 9 Net current-period other comprehensive income 412 Ending Balance at May 4, 2019 $ 335 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI"). (b) Includes $ 12 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 $ 3 . 9 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 NOTE 4 – FINANCING ARRANGEMENTS: As of May 2, 2020, the Company had an unsecured revolving credit agreement allowing the Company to borrow $ 35.0 million less the balance of any letters of credit as 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 this credit facility at 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. The weighted average interest rate under the credit facility was 1.76 % at May 2, 2020. 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 of 2021. 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. NOTE 5 – REPORTABLE SEGMENT INFORMATION: The Company has determined that it has four operating segments, as defined under ASC 280-10, 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. They are similar in nature of product, as they all offer women’s apparel, shoes and accessories. Merchandise inventory for the Company’s retail operating segments is sourced from the same countries and some of the same vendors, using similar production processes. Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner. The Company operates its women’s fashion specialty retail stores in 31 states as of May 2, 2020, 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 separate subsidiary of the Company. 10 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED): The following schedule summarizes certain segment information (in thousands): Three Months Ended May 2, 2020 Retail Credit Total Revenues $ 99,890 $ 842 $ 100,732 Depreciation 4,006 - 4,006 Interest and other income ( 1,851 ) - ( 1,851 ) Income before taxes ( 37,923 ) 392 ( 37,531 ) Capital expenditures 5,311 - 5,311 Three Months Ended May 4, 2019 Retail Credit Total Revenues $ 229,441 $ 910 $ 230,351 Depreciation 3,843 - 3,843 Interest and other income ( 1,136 ) - ( 1,136 ) Income before taxes 25,178 393 25,571 Capital expenditures 995 - 995 Retail Credit Total Total assets as of May 2, 2020 $ 594,931 $ 46,023 $ 640,954 Total assets as of February 1, 2020 636,503 48,473 684,976 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 May 2, 2020 May 4, 2019 Payroll $ 152 $ 150 Postage 111 124 Other expenses 187 243 Total expenses $ 450 $ 517 11 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 NOTE 6 – STOCK BASED COMPENSATION: As of May 2, 2020, 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 May 2, 2020: 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: May 2, 2020 - 3,885,313 3,885,313 In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of May 2, 2020 and February 1, 2020, there was $ 14,216,000 and $ 11,900,000 , respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 2.9 years and 2.2 years, respectively. The total compensation expense during the three months ended May 2, 2020 was $ 606,000 compared to $ 645,000 for the three months ended May 4, 2019. These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income. The following summary shows the changes in the shares of unvested restricted stock outstanding during the three months ended May 2, 2020: Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at February 1, 2020 942,562 $ 19.55 Granted 330,695 11.11 Vested ( 130,042 ) 34.03 Forfeited or expired ( 23,341 ) 19.38 Restricted stock awards at May 2, 2020 1,119,874 $ 15.38 12 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 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 three months ended May 2, 2020 and May 4, 2019, the Company sold 26,957 and 20,676 shares to employees at an average discount of $ 1.64 and $ 2.23 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 $ 44,000 and $ 46,000 for the three months ended May 2, 2020 and May 4, 2019, respectively. These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income. 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 May 2, 2020 and February 1, 2020: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable May 2, 2020 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 26,161 $ - $ 26,161 $ - Corporate Bonds 62,879 - 62,879 - U.S. Treasury/Agencies Notes and Bonds 6,976 - 6,976 - Cash Surrender Value of Life Insurance 9,749 - - 9,749 Asset-backed Securities (ABS) 23,234 - 23,234 - Corporate Equities 557 557 - - Certificates of Deposit 100 100 - - Total Assets $ 129,656 $ 657 $ 119,250 $ 9,749 Liabilities: Deferred Compensation ( 9,730 ) - - ( 9,730 ) Total Liabilities $ ( 9,730 ) $ - $ - $ ( 9,730 ) 13 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable February 1, 2020 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 36,014 $ - $ 36,014 $ - Corporate Bonds 90,798 - 90,798 - U.S. Treasury/Agencies Notes and Bonds 37,410 - 37,410 - Cash Surrender Value of Life Insurance 10,517 - - 10,517 Asset-backed Securities (ABS) 37,384 - 37,384 - Corporate Equities 732 732 - - Certificates of Deposit 100 100 - - Total Assets $ 212,955 $ 832 $ 201,606 $ 10,517 Liabilities: Deferred Compensation ( 10,391 ) - - ( 10,391 ) Total Liabilities $ ( 10,391 ) $ - $ - $ ( 10,391 ) 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 May 2, 2020 and February 1, 2020. The state, municipal and corporate bonds have contractual maturities which range from two days to seven years . The U.S. 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 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 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. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets. Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third-party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors. Deferred compensation plan assets consist 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 14 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 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. 15 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 The following tables summarize the change in fair value of the Company’s financial assets measured using Level 3 inputs as of May 2, 2020 and February 1, 2020 (dollars in thousands): Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at February 1, 2020 $ 10,517 Redemptions - Additions - Total gains or (losses) Included in interest and other income (or changes in net assets) ( 768 ) Included in other comprehensive income - Ending Balance at May 2, 2020 $ 9,749 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at February 1, 2020 $ ( 10,391 ) Redemptions - Additions ( 36 ) Total (gains) or losses Included in interest and other income (or changes in net assets) 697 Included in other comprehensive income - Ending Balance at May 2, 2020 $ ( 9,730 ) Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at February 2, 2019 $ 9,093 Redemptions - Additions 748 Total gains or (losses) Included in interest and other income (or changes in net assets) 676 Included in other comprehensive income - Ending Balance at February 1, 2020 $ 10,517 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at February 2, 2019 $ ( 8,908 ) Redemptions - 16 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 Additions ( 554 ) Total (gains) or losses Included in interest and other income (or changes in net assets) ( 929 ) Included in other comprehensive income - Ending Balance at February 1, 2020 $ ( 10,391 ) 17 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS: In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The new accounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new accounting rules will be effective for the Company in the first quarter of 2021. The Company is currently in the process of evaluating the impact of adoption of the new accounting rules on the Company’s financial position, results of operations, cash flows and disclosures. NOTE 9 – INCOME TAXES: The Company had an effective tax rate for the first quarter of 2020 of 24.3 % (Benefit) compared to an effective tax rate of 16.9 % (Expense) 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 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. 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 its condensed consolidated financial statements. However, given the inherent 18 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 uncertainties involved in such matters, an adverse outcome in one or more such matters could materially and adversely affect the Company’s financial condition, results of operations and cash flows in any particular reporting period. The Company accrues for these matters when the liability is deemed probable and reasonably estimable. NOTE 11 – REVENUE RECOGNITION: The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales are recorded as deferred revenue until the customer takes possession 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. The Company estimated uncollectible amounts of $ 69,000 and $, 226000 for the periods ended May 2, 2020 and May 4, 2019, respectively, on sales purchased by the Company’s proprietary credit card of $ 2.6 million and $ 6.9 million for the periods ended May 2, 2020 and May 4, 2019, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): Balance as of May 2, 2020 February 1, 2020 Proprietary Credit Card Receivables, net $ 11,364 $ 15,241 Gift Card Liability $ 6,864 $ 7,658 NOTE 12 – LEASES: The Company determines whether an arrangement is a lease at inception. The Company has operating leases for stores, offices and equipment. Its leases have remaining lease terms of one year to 10 years, some of which include options to extend the lease term for up to five years, and some of which include options to terminate the lease within one year. The Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company’s leases do not provide an implicit rate, it 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. 19 Table of Contents THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019 The components of lease cost are shown below (in thousands): Three Months Ended May 2, 2020 May 4, 2019 Operating lease cost (a) $ 16,993 $ 9,732 Variable lease cost (b) $ 80 $ 606 ASC 840 prepaid rent expense (c) $ - $ 5,975 (a) Includes right-of-use asset amortization of ($1.7) million and ($2.0) million for the three months ended May 2, 2020 and May 4, 2019, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the balance sheet. (c) Related to ASC 840 rent expense due to prepaid rent on the balance sheet as of February 3, 2019. 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 May 2, 2020 May 4, 2019 Cash paid for amounts included in the measurement of lease liabilities $ 15,499 $ 10,091 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 28,197 $ 282 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: May 2, 2020 May 4, 2019 Weighted-average remaining lease term 3.2 years 3.2 years Weighted-average discount rate 4.36 % 4.65 % As of May 2, 2020, the maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2020 (a) $ 49,740 2021 58,511 2022 42,379 2023 31,197 2024 20,376 Thereafter 48,246 Total lease payments 250,449 Less: Imputed interest 27,419 Present value of lease liabilities $ 223,030 (a) Excluding the 3 months ended May 2, 2020. 20 Table of Contents THE CATO CORPORATION