What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-27 compared with 2020-06-04 · 73 added, 62 removed, 96 unchanged (58% of the section changed)

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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;

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;

competitive factors and pricing pressures;

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Three Months Ended

Six Months Ended

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

Total retail sales

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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 spread of COVID-19 has resulted in state and local orders mandating store closures and other measures 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 fiscal 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.

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 furloughed associates and in certain instances eliminated positions primarily at its corporate office.

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

As of June 15, 2020, all stores have re-opened.

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.

At this time, the possible effects of national, state or local action, legislation, guidelines or programs that attempt to mitigate the spread of COVID-19 or address its economic effects on our customers, suppliers or the Company are also uncertain.

While the Company currently anticipates that our results for the remainder of fiscal 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 possible new information and understanding about the severity of COVID-19, related potential economic impacts to customers and suppliers, and the effect of actions taken to contain it or mitigate its impact.

Comparison of the Three and Six Months ended August 1, 2020 with August 3, 2019

Total retail sales for the second quarter were $166.3 million compared to last year’s second quarter sales of $210.4 million, a 21.0% decrease.

The Company’s sales decrease in the second quarter of fiscal 2020 is primarily due to a 22% decrease in same-store sales, partially offset by new store openings.

Sales in the second quarter were negatively impacted by the phased store re-openings, reduced operating hours compared to 2019 and high amounts of markdowns.

For the six months ended August 1, 2020, total retail sales were $265.1 million compared to last year’s comparable six month sales of $438.4 million.

Sales in the first six months of fiscal 2020 decreased 40% primarily due to a 39% decrease in same-store sales, partially offset by new store openings.

Sales for the six months ended August 1, 2020 were negatively impacted primarily by store closures in the first quarter and phased re-opening of stores, reduced store hours and high amounts of markdowns in the second quarter.

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 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.

E-commerce sales were less than 6% of sales for the six months ended August 1, 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 and layaway fees),

THE CATO CORPORATION

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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.

were $168.2 million and $268.9 million for the three and six months ended August 1, 2020, compared to $212.6 million and $442.9 million for the three and six months ended August 3, 2019, respectively.

The Company operated 1,333 stores at August 1, 2020 compared to 1,299 stores at the end of last year’s second quarter.

During the first six months of fiscal 2020, the Company closed eight stores.

In total, the Company currently expects to open 76 stores, which had leases prior to the COVID-19 pandemic, and close approximately 40 stores in fiscal 2020.

Credit revenue of $0.6 million represented 0.4% of total revenues in the second 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.

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.

Related expenses principally include payroll, postage and other administrative expenses and totaled $0.3 million in the second quarter of fiscal 2020, compared to last year’s second quarter expense of $0.4 million.

Other revenue in total, as included in total revenues, was $1.9 million and $3.8 million for the three and six months ended August 1, 2020, respectively, compared to $2.2 million and $4.5 million for the prior year’s comparable three and six month periods.

The overall decrease in the three and six months ended August 1, 2020 is primarily due to decreases in finance and layaway charges, partially offset by increases in e-commerce shipping revenues.

Cost of goods sold was $132.7 million, or 79.8% of retail sales and $216.3 million, or 81.6% of retail sales for the three and six months ended August 1, 2020, respectively, compared to $130.4 million, or 62.0% of retail sales and $266.5 million, or 60.8% of retail sales for the comparable three and six month periods of fiscal 2019.

The overall increase in cost of goods sold as a percent of retail sales for the second quarter of fiscal 2020 resulted primarily from an increase in cost of goods sold primarily due to more markdown sales and deleveraging of occupancy and distribution costs, partially offset by a decrease in buying costs.

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) 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.

Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) decreased by 58.1% to $33.5 million for the second quarter of fiscal 2020 and decreased by 71.7% to $48.7 million for the first six months of fiscal 2020, compared to $80.0 million and $172.0 million for the prior year’s comparable three and six months 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.

SG&A expenses were $44.0 million, or 26.4% of retail sales and $96.5 million, or 36.4% of retail sales for the second quarter and first six months of fiscal 2020, respectively, compared to $66.1 million, or 31.4% of retail sales and $132.1 million, or 30.1% of retail sales for the prior year’s comparable three and six month periods.

The decrease in SG&A expense for the second quarter is primarily attributable to lower store expenses due to the phased store re-opening, reduced store operating hours, lower corporate expenses and elimination of incentive compensation.

For the first six months of fiscal 2020 the decrease in SG&A expense was primarily attributable to lower store expenses due to stores being closed, phased store re-opening in the second quarter, reduced store operating hours, lower corporate expenses and elimination of incentive compensation, partially offset by higher store impairment charges.

Depreciation expense was $3.5 million, or 2.1% of retail sales and $7.5 million, or 2.8% of retail sales for the second quarter and first six months of fiscal 2020, respectively, compared to $3.8 million, or 1.8% of retail

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

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.

sales and $7.7 million or 1.8% of retail sales for the comparable three and six month periods of fiscal 2019, respectively.

Interest and other income was $1.0 million, or 0.6% of retail sales and $2.8 million, or 1.1% of retail sales for the three and six months ended August 1, 2020, respectively, compared to $1.7 million, or 0.8% of retail sales and $2.8 million, or 0.6% of retail sales for the comparable three and six month periods of fiscal 2019, respectively.

The decrease for the first six months of fiscal 2020 compared to 2019 is primarily attributable to a decrease in short-term investments and lower interest rates.

Income tax benefit was $3.9 million and $13.0 million for the second quarter and first six months of fiscal 2020, respectively, compared to income tax expense of $2.1 million and $6.5 million for the comparable three and six month periods of fiscal 2019, respectively.

For the first six months of 2020, the Company’s effective tax rate was 26.7% (Benefit).

The increase in the 2020 year-to-date 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 increase in the reserves for uncertain tax positions specific to state income taxes in the first quarter of 2020.

The Company assessed the likelihood that deferred tax assets related to state net operating loss carryforwards will be realized 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 against the existing deferred tax assets.

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 judgment 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.

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LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:

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.

Cash used by operating activities during the first six months of fiscal 2020 was $48.2 million as compared to $45.2 million provided in the first six months of fiscal 2019.

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 August 1, 2020 and 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

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

The decrease in cash provided of $93.4 million for the first six months of fiscal 2020 as compared to the first six months of fiscal 2019 was primarily due to a net loss versus net income, an increase in accounts receivable primarily related to income taxes and an increase in prepaid expenses, partially offset by store impairment charges.

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

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.

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

The decrease in working capital is primarily due to reduction in short-term assets and lower inventories, partially offset by lower accounts payable and accrued liabilities.

At August 1, 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 value of revocable letters of credit discussed below.

The revolving credit agreement is committed until May 2023.

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 August 1, 2020.

There were no borrowings outstanding under the credit facility as of August 1, 2020 and February 1, 2020.

Expenditures for property and equipment totaled $9.8 million in the first six months of fiscal 2020, compared to $2.2 million in last fiscal year’s first six months.

The expenditures for the first six months of fiscal 2020 were primarily for additional investments in stores, distribution center and information technology.

For the full fiscal 2020 year, the Company expects to invest approximately $13.0 million for capital expenditures.

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.

Net cash provided by investing activities totaled $91.0 million in the first six months of fiscal 2020 compared to $23.4 million used in investing activities in the comparable period of 2019.

The increase in net cash provided in 2020 is primarily attributable to the increase in net sales of short-term investments, partially offset by expenditures for property and equipment.

Net cash used in financing activities totaled $17.6 million in the first six months of fiscal 2020 compared to $18.8 million used in the comparable period of fiscal 2019.

The decrease was primarily due to lower dividend payments, partially offset by higher share repurchase amounts.

As of August 1, 2020, the Company had 728,466 shares remaining in open authorizations under its share repurchase program.

The Company temporarily suspended dividends in the first quarter of 2020.

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 May 2, 2020 and February 1, 2020.

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.

The state, municipal and corporate bonds have contractual maturities which range from six days to 7 years.

Treasury Notes and Certificates of Deposit have contractual maturities which range from one month to 2 years.

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

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

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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.

Additionally, at August 1, 2020, the Company had $0.6 million of corporate equities and deferred compensation plan assets of $10.5 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.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

See Note 7, Fair Value Measurements.

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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