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Item 7. Management’s Discussion and Analysis

2021-03-29 compared with 2020-03-27 · 791 added, 218 removed, 26 unchanged (97% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations:

Management's Discussion and Analysis of Financial Condition

and Results of Operations:

The following information should

conjunction with the Consolidated

Financial Statements,

including the accompanying Notes appearing in Part

II, Item 8 of this

report on Form 10-K.

generally discusses fiscal 2020

and fiscal 2019

and year-to-year comparisons between

Discussions of

year-to-year comparisons

“Management’s

Discussion and

Financial Condition

of Operations”

Company’s Annual Report on Form 10-K

for the fiscal year ended February 1, 2020.

COVID-19 Update

The spread of COVID-19 has caused public health officials to recommend, and in some cases mandate, precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and shopping centers.

Responses by customers, government and the private sector may adversely impact our business operations.

At this time, it is impossible to predict the impact of the COVID-19 pandemic as this unprecedented situation continues to evolve rapidly.

The Company temporarily closed all Cato, Its Fashion, Its Fashion Metro and Versona stores for an expected period of two weeks beginning March 19, 2020.

There is significant uncertainty around the duration, breadth and severity of these store closures and other 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 once they re-open.

The Company is also unable to predict the outcome or effect of national, state or local legislation that attempts to address the economic effects of COVID-19 on our customers, suppliers or the Company.

The Company continues to assess the potential impact of COVID-19, which remains uncertain and fluid at this time.

Primarily in response to potential disruption in the Capital markets, the Company drew $30 million on its $35 million line of credit on March 16, 2020.

The additional $30 million enhances the Company’s liquidity position with over $200 million of cash and short-term investments.

While the Company currently anticipates that our future results, primarily the first quarter 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 and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to contain it or mitigate its impact.

has adversely

Company's business,

financial condition

operating results

through fiscal

will continue

possibly beyond.

financial impacts associated

with the outbreak

include, but are

not limited to,

(i) lower net

sales in markets

affected by the

actual or potential

outbreak, whether due to

state and local

close stores,

reductions in

store traffic

demand, labor

shortages, or

factors, (ii) lower net sales caused

by the delay of inventory production and fulfillment,

incremental costs

associated with

the outbreak,

including increased

freight and logistics costs and other expenses.

by customers,

government and

adversely impact

first quarter

resulted in state and local orders mandating store closures and other measures to mitigate

the spread of the

Though the Company’s stores

were reopened in the second quarter of fiscal 2020,

they continue to

reduced hours.

Periodic increases

communities where

located may prompt

further governmental

public health

reduce public

and gatherings

adversely affect

consumer confidence.

There continues to

be significant uncertainty

regarding the breadth,

business disruptions

economy, consumer willingness to visit malls and shopping centers, and its impact

on appropriate

associate staffing levels for our stores.

The Company’s

pre-pandemic liquidity

by liquidating

short-term investments

repaying under

its revolving

credit facility.

implemented various

conserve cash,

suspending dividend

payments, reducing

non-committed capital

expenditures (only half of planned new stores were opened during 2020)

and reducing corporate field and

store overhead.

The Company is grateful for

associates in helping to address the

challenges created by

the pandemic.

In recognition of

these efforts and

retention, on March

Compensation Committee approved a

discretionary bonus of

$1.6 million ($1.3

of taxes) to key associates as discussed in more detail in “Other Information”

in Part II, Item 9B.

ultimately impacts the

Company’s business,

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

treat its impact,

and how quickly

extent normal economic

operating conditions can resume.

While the Company

currently anticipates a

continuation of the

adverse impacts of

COVID-19 during

2021 and possibly

beyond, the duration

and severity of

these effects will

depend on the

course of future

developments, which are

highly uncertain, including

the relative speed

and success of,

confidence in, mitigation measures

such as the current

effort to vaccinate substantial

portions of the U.S.

population, emerging

information regarding

potential impact on

current mitigation efforts,

public attitudes toward

continued compliance with

containment and

mitigation measures, and

possible new information

and understanding that

the course and duration of current measures to combat the spread of the virus.

Results of Operations

The table below sets forth certain financial data of the Company expressed as a percentage of retail sales for the years indicated:

The table below sets forth certain financial data of the Company expressed

as a percentage of retail sales for the

years indicated:

Fiscal Year Ended

February 1, 2020

February 2, 2019

February 3, 2018

Retail sales …………………………………………………………..

5 unchanged sentences

Interest and other income ……………………………………………

Income before income taxes …………………………………………

Net income …………………………………………………………..

Fiscal 2019 Compared to Fiscal 2018

Retail sales decreased by 0.6% to $816.2 million in fiscal 2019 compared to $821.1 million in fiscal 2018.

The decrease in retail sales in fiscal 2019 was largely attributable to closed stores, partially offset by a 2% increase in same-store sales.

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

Stores that have been relocated or expanded are also included in the same-store sales calculation after they have been open more than 15 months.

In fiscal 2019 and fiscal 2018, e-commerce sales were less than 3% of total sales and same-store sales.

The method of calculating same-store sales varies across the retail industry.

a result, our same-store sales calculation may not be comparable to similarly titled measures reported by other companies.

Total revenues, comprised of retail sales and other revenue (principally finance charges and late fees on customer accounts receivable, gift card breakage, shipping charges for e-commerce purchases and layaway fees), decreased by 0.5% to $825.3 million in fiscal 2019 compared to $829.7 million in fiscal 2018.

The Company operated 1,281 stores at February 1, 2020 compared to 1,311 stores operated at February 2, 2019.

In fiscal 2019, the Company opened five new stores and closed 35 stores.

Other revenue in total increased to $9.2 million in fiscal 2019 from $8.6 million in fiscal 2018.

The increase resulted primarily from increased shipping charges for e-commerce purchases and an increase in gift card breakage income, partially offset by lower finance charges.

Credit revenue of $3.6 million represented 0.4% of total revenue in fiscal 2019, a $0.2 million decrease compared to fiscal 2018 credit revenue of $3.8 million or 0.5% of total revenue.

The decrease in credit revenue was primarily due to reductions in finance and late charge income as a result of lower accounts receivable balances.

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

Related expenses include principally payroll, postage and other administrative expenses and totaled $1.8 million in fiscal 2019 compared to $1.9 million in fiscal 2018.

See Note 14 of Notes to Consolidated Financial Statements for a schedule of credit-related expenses.

Total credit segment income before taxes decreased $0.1 million to $1.8 million in fiscal 2019 from $1.9 million in fiscal 2018.

Total credit income of $1.8 million in fiscal 2019 represented 4.2% of total income before taxes of $43.2 million compared to total credit income of $1.9 million in fiscal 2018, which represented 5.7% of fiscal 2018 total income before taxes of $33.1 million.

Cost of goods sold was $508.9 million, or 62.4% of retail sales, in fiscal 2019 compared to $522.5 million, or 63.6% of retail sales, in fiscal 2018.

The decrease in cost of goods sold as a percentage of sales resulted primarily from higher penetration of regular price sales.

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

Net merchandise costs and in-bound freight are capitalized as inventory costs.

Buying and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments and distribution center.

Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities.

Total gross margin dollars (retail sales less cost of goods sold and excluding depreciation) increased by 2.9% to $307.3 million in fiscal 2019 from $298.6 million in fiscal 2018.

Gross margin as presented may not be comparable to that of other companies.

Selling, general and administrative expenses (“SG&A”), which primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts were $263.8 million in fiscal 2019 compared to $262.6 million in fiscal 2018, an increase of 0.5%.

As a percent of retail sales, SG&A was 32.3% compared to 32.0% in the prior year.

The increase in SG&A as a percent of sales resulted primarily from an increase in incentive compensation, partially offset by lower insurance costs and lower store impairment charges.

Depreciation expense was $15.5 million in fiscal 2019 compared to $16.5 million in fiscal 2018.

Depreciation expense decreased from fiscal 2018 due to fully depreciated older stores and previous impairments of leasehold improvements and fixtures, partially offset by store development and information technology expenditures.

Interest and other income increased to $6.1 million in fiscal 2019 compared to $5.0 million in fiscal 2018.

The increase is primarily due to an increase in interest income due to more short-term investments.

Income tax expense was $7.3 million, or 0.9% of retail sales in fiscal 2019 compared to $2.6 million, or 0.3% of retail sales in fiscal 2018.

The dollar increase resulted primarily from higher pre-tax earnings, more taxable interest income, more non-deductible IRS section 162(m) compensation and a valuation allowance to reduce deferred tax assets associated with state income tax credits.

The effective tax rate was 16.9% in fiscal 2019 compared to 7.8% in fiscal 2018.

See Note 12 to the Consolidated Financial Statements, “Income Taxes,” for further details.

Income (loss) before income taxes ……………………………

Net income (loss) ……………………………………………………

Fiscal 2020 Compared to Fiscal 2019

Retail sales decreased by 2.5% to $821.1 million in fiscal 2018 compared to $842.0 million in fiscal 2017.

The decrease in retail sales in fiscal 2018 was largely attributable to flat same-store sales, non-comparable store sales and an additional week of sales in 2017.

Fiscal 2018 had 52 weeks versus 53 weeks in fiscal 2017.

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

Stores that have been relocated or expanded are also included in the same-store sales calculation after they have been open more than 15 months.

In fiscal 2018 and fiscal 2017, e-commerce sales were less than 3% of total sales and same-store sales.

The method of calculating same-store sales varies across the retail industry.

As a result, our same-store sales calculation may not be comparable to similarly titled measures reported by other companies.

Total revenues, comprised of retail sales and other revenue (principally finance charges and late fees on customer accounts receivable, gift card breakage and layaway fees), decreased by 2.4% to $829.7 million in fiscal 2018 compared to $850.0 million in fiscal 2017.

The Company operated 1,311 stores at February 2, 2019 compared to 1,351 stores operated at February 3, 2018.

In fiscal 2018, the Company relocated one store and closed 40 stores.

Other revenue in total increased to $8.6 million in fiscal 2018 from $8.0 million in fiscal 2017.

The increase resulted primarily from increased shipping charges for e-commerce purchases and gift card breakage being classified in other revenue due to the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), partially offset by lower finance charges and lower layaway charges.

Credit revenue of $3.8 million represented 0.5% of total revenue in fiscal 2018, a $0.4 million decrease compared to fiscal 2017 credit revenue of $4.2 million or 0.5% of total revenue.

The decrease in credit revenue was primarily due to reductions in finance and late charge income as a result of lower accounts receivable balances.

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

Related expenses include principally bad debt expense, payroll, postage and other administrative expenses and totaled $1.9 million in fiscal 2018 compared to $3.0 million in fiscal 2017.

See Note 14 of Notes to Consolidated Financial Statements for a schedule of credit-related expenses.

Total credit segment income before taxes increased $0.7 million to $1.9 million in fiscal 2018 from $1.2 million in fiscal 2017 due to bad debt expense being included in retail sales in fiscal 2018, in accordance with Topic 606, partially offset by lower credit revenue.

Total credit income of $1.9 million in fiscal 2018 represented 5.7% of total income before taxes of $33.1 million compared to total credit income of $1.2 million in fiscal 2017, which represented 7.5% of fiscal 2017 total income before taxes of $16.0 million.

Cost of goods sold was $522.5 million, or 63.6% of retail sales, in fiscal 2018 compared to $553.1 million, or 65.7% of retail sales, in fiscal 2017.

The decrease in cost of goods sold as a percentage of sales resulted primarily from increased sales of regular priced product and decreased buying costs.

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

Net merchandise costs and in-bound freight are capitalized as inventory costs.

Buying and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments and distribution center.

Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities.

Total gross margin dollars (retail sales less cost of goods sold and excluding depreciation) increased by 3.3% to $298.6 million in fiscal 2018 from $288.9 million in fiscal 2017.

Gross margin as presented may not be comparable to that of other companies.

Selling, general and administrative expenses (“SG&A”), which primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts were $262.6 million in fiscal 2018 compared to $266.4 million in fiscal 2017, a decrease of 1.4%.

As a percent of retail sales, SG&A was 32.0% compared to 31.6% in the prior year.

The increase in SG&A as a percent of sales resulted primarily from an increase in incentive bonuses, partially offset by lower impairment expenses, professional fees and litigation.

Asset impairment charges decreased to $1,548,000 in fiscal 2018 compared to $7,698,000 in fiscal 2017

due to fewer stores being impaired in 2018 and a lower average impairment per store.

The impairment charges are related to lower estimated future cash flows resulting from significantly lower sales and income.

See Note 1 to the Consolidated Financial Statements for further discussion.

Depreciation expense was $16.5 million in fiscal 2018 compared to $19.6 million in fiscal 2017.

Depreciation expense decreased from fiscal 2017 due to older stores and previous impairments of leasehold improvements and fixtures, partially offset by store development and information technology expenditures.

Interest and other income decreased slightly to $5.0 million in fiscal 2018 compared to $5.1 million in fiscal 2017.

The decrease is primarily attributable to classifying gift card breakage in Other Revenue in 2018 due to the adoption of Topic 606.

Income tax expense was $2.6 million, or 0.3% of retail sales in fiscal 2018 compared to $7.4 million, or 0.9% of retail sales in fiscal 2017.

The dollar decrease resulted primarily from one-time tax expenses in 2017 resulting from the 2017 Tax Cut and Jobs Act (the “Tax Act”) for the deemed repatriation tax and reduction of the net deferred tax assets to reflect the reduction of the U.S.

statutory rate, partially offset by higher pre-tax income.

The SEC Staff issued Staff Accounting Bulletin No.

118 (“SAB 118”) to address the application of U.S.

GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.

We recognized the provisional tax impacts related to deemed repatriated earnings and revaluation of our deferred tax assets, and included those amounts in our Consolidated Financial Statements for the year ended February 3, 2018.

As of February 2, 2019, the accounting for income tax effects of the Tax Act has been completed.

The effective tax rate was 7.8% in fiscal 2018 compared to 46.5% in fiscal 2017.

See Note 12 to the Consolidated Financial Statements, “Income Taxes,” for further details.

Retail sales decreased by 30.5% to $567.5 million

in fiscal 2020 compared to $816.2 million in fiscal 2019.

The decrease in

retail sales in

fiscal 2020 was

primarily due to

a 32% decrease

in same-store sales,

offset by sales

from new store

Same-store sales

includes stores that

have been open

Stores that have been relocated or expanded

are also included in the same-store sales calculation after

they have been

open more than

In fiscal 2020

and fiscal 2019,

e-commerce sales were

-store sales.

of calculating

same-store sales

varies across

calculation may

comparable to

similarly titled

reported by other

Total revenues, comprised of retail sales and

other revenue (principally

charges and late

fees on customer

accounts receivable, gift card

shipping charges for

and layaway fees),

decreased by 30.3% to

$575.1 million in fiscal 2020

compared to $825.3 million

in fiscal 2019.

The Company operated 1,330

stores at January 30,

2021 compared to 1,281

stores operated at

February 1, 2020.

In fiscal 2020, the Company opened 76 new stores

and closed 27 stores.

Other revenue

decrease resulted primarily due to

decreases in finance and

layaway charges, partially offset

by an increase in

e-commerce shipping revenues.

Credit revenue of

$2.7 million represented

0.5% of total

revenue in fiscal

a $0.9 million

credit revenue

total revenue.

primarily due

to reductions

charge income

lower accounts

receivable balances.

Credit revenue is comprised of interest earned on the Company’s private label credit card

portfolio and

expenses include

principally payroll,

administrative expenses and totaled

$1.5 million in

fiscal 2020 compared

to $1.8 million

in fiscal 2019.

Consolidated Financial Statements for

a schedule of

credit-related expenses.

segment income before taxes

decreased $0.6 million to

$1.2 million in fiscal

2020 from $1.8 million

Cost of goods sold was $433.2 million, or 76.3% of retail sales, in fiscal 2020

compared to $508.9 million,

of retail sales

in fiscal 2019.

The increase in

percentage of sales

from an increase

in markdown sales due

to liquidating spring and

and deleveraging

Cost of goods sold includes

merchandise costs, net

of discounts and

allowances, buying costs, distribution

costs, occupancy costs, freight

and inventory shrinkage.

Net merchandise costs

and in-bound freight are capitalized as inventory

and distribution costs include payroll, payroll-related costs and

operating expenses for the buying departments

and distribution

expenses include rent,

taxes, insurance,

maintenance, utilities and maintenance

for stores and distribution

margin dollars (retail

sales less cost of

goods sold and excluding

depreciation) decreased by 56.3% to

$134.3 million in fiscal 2020

be comparable

administrative expenses

(“SG&A”), which

primarily include

corporate and

payroll, related payroll

benefits, insurance,

supplies, advertising, bank

card processing

fees were $206.7 million

in fiscal 2020 compared

to $263.8 million in

fiscal 2019, a decrease

percent of retail sales,

SG&A was 36.4% compared

to 32.3% in the

dollar decrease in SG&A

expense was primarily

store expenses

due to stores

being closed,

quarter, reduced store

lower corporate expenses

compensation,

from the failure

to meet targets

under the Company’s

annual incentive

plan, partially

Depreciation expense was $14.7

million in fiscal 2020

compared to $15.5 million

in fiscal 2019.

Depreciation expense decreased

from fiscal 2019

fully depreciated older

impairments of leasehold

improvements and fixtures,

partially offset

development and

technology expenditures.

Interest and other income increased to

$6.6 million in fiscal 2020

compared to $6.1 million in fiscal

The increase is primarily due to a gain

on the sale of land held

for investment, partially offset by a decrease in

short-term investments.

$25.3 million,

expense of $7.3 million, or 0.9% of retail sales in

The income tax benefit was primarily due to the

operating loss

carryback provisions

Coronavirus Aid,

Economic Security Act

(“CARES Act”) and

release of reserve

for uncertain tax

positions due to

expiration of statute

of limitations,

partially offset by

valuation allowances against

state net operating

tax losses, less

income tax credits

upward adjustment in the reserves

for uncertain tax positions specifi

to state income taxes

in the first quarter

The effective

16.9% (Expense)

See Note 12 to the Consolidated Financial

Statements, “Income Taxes,” for further details.

Off-Balance Sheet Arrangements

Critical Accounting Policies

The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements.

As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes.

Future events and their effects cannot be determined with absolute certainty.

Therefore, the determination of estimates requires the exercise of judgment.

Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts, inventory shrinkage, the calculation of potential asset impairment, workers’ compensation, general and auto insurance liabilities, reserves relating to self-insured health insurance, and uncertain tax positions.

Critical Accounting Policies and Estimates

ny’s accounting

to Consolidated

As disclosed in

Notes to Consolidated Financial Statements,

the preparation of the

Company’s financial statements in conformity with generally accepted accounting principles in the

United States

(“GAAP”) requires

management to

make estimates

and assumptions

the amounts reported

in the financial

statements and accompanying

Future events

their effects

determined with

absolute certainty.

Therefore, the

determination of

results inevitably

estimates, and

differences may be material to

the financial statements.

The most significant accounting

the preparation

Company’s financial

statements include

the allowance

credit losses, inventory

shrinkage, the calculation

of potential asset

impairment, workers’ compensation,

general and auto insurance

liabilities, reserves relating to

self-insured health insurance, and

uncertain tax

The Company’s critical accounting policies and estimates are discussed with the Audit Committee.

Allowance for Doubtful Accounts

The Company evaluates the collectability of accounts receivable and records an allowance for doubtful accounts based on the accounts receivable aging and estimates of actual write-offs.

The allowance is reviewed for adequacy and adjusted, as necessary, on a quarterly basis.

The Company also provides for estimated uncollectible late fees charged based on historical write-offs.

The Company’s financial results can be impacted by changes in bad debt write-off experience and the aging of the accounts receivable portfolio.

Allowance for Customer Credit Losses

The Company evaluates

the collectability of

customer accounts receivable

and records an

for customer credit

losses based on

the accounts receivable aging

and estimates of

actual write-offs.

allowance is reviewed

for adequacy and

adjusted, as necessary,

on a quarterly

estimated uncollectible

charged based

on historical

financial results can

be impacted by

changes in customer

loss write-off

experience and the

accounts receivable portfolio.

Merchandise Inventories

The Company’s inventory is valued using the weighted-average cost method and is stated at the net realizable value.

Physical inventories are conducted throughout the year to calculate actual shrinkage and inventory on hand.

Estimates based on actual shrinkage results are used to estimate inventory shrinkage, which is accrued for the period between the last physical inventory and the financial reporting date.

The Company regularly reviews its inventory levels to identify slow moving merchandise and uses markdowns to clear slow moving inventory.

The Company’s

inventory is valued

using the weighted

-average cost method

and is stated

realizable value.

Physical inventories are

conducted throughout the year to calculate

actual shrinkage and

inventory on hand.

Estimates based on actual

shrinkage results are

used to estimate

inventory shrinkage,

which is accrued

for the period

between the last

physical inventory and the

financial reporting date.

Company regularly

inventory levels

merchandise and

markdowns to clear slow moving inventory.

Lease Accounting

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Codification (“ASC”) 842 - Leases , with amendments issued in 2018.

The guidance requires lessees to recognize most leases on the balance sheet but does not change the manner in which expenses are recorded in the income statement.

For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.

The Company adopted ASC 842 utilizing the modified retrospective approach as of February 3, 2019.

The modified retrospective approach the Company selected provides a method of transition allowing recognition of existing leases as of the beginning of the period of adoption (i.e., February 3, 2019), and which does not require the adjustment of comparative periods.

The adoption had a material impact on the Company’s financial statements, resulting in an increase of 40% to each of its total assets and total liabilities on its balance sheet, but had no impact to retained earnings as of the beginning of 2019.

See Note 11 for further information.

The Company elected the transition package of practical expedients that is permitted by the standard.

The package of practical expedients allows the Company to not reassess previous accounting conclusions regarding whether existing arrangements are or contain leases, the classification of existing leases, and the treatment of initial direct costs.

The Company did not elect the hindsight transition practical expedient allowed for by the new standard, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets.

the Financial

Accounting Standards

Board (“FASB”)

issued Accounting

Codification (“ASC”) 842

amendments issued in

requires lessees to

recognize most

which expenses

guidance modifies

the classification

accounting for sales-type and direct financing leases.

As of February 3, 2019, the Company adopted ASC 842 utilizing the modified retrospective

retrospective approach

selected provides

of transition

recognition of existing

the beginning of

the period of

adoption (i.e., February

3, 2019), and

which does not require the adjustment of comparative periods.

11 for further information.

The Company elected the transition

package of practical expedients that

is permitted by the

The package of practical expedients allows the

Company to not reassess previous accounting conclusions

regarding whether existing arrangements are or contain leases, the classification

of existing leases, and the

initial direct

the hindsight

transition practical

allowed for by the

new standard, which allows entities

to use hindsight when determining

lease term and

impairment of right-of-use assets.

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 to Fixtures and equipment, Leasehold improvements, Right-of-use assets net of Lease liabilities and Information technology equipment and software.

An impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair value when the Company determines that projected cash flows associated with those long-lived assets will not be sufficient to recover the carrying value.

This determination is based on a number of factors, including the store’s historical operating results and 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.

In addition, the Company regularly evaluates its other long-lived assets and may accelerate depreciation over the revised useful life if the asset is expected to be replaced or has limited future value.

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period.

The Company invests

in leaseholds, right-

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

and equipment,

Leasehold improvements,

Right-of-use assets

Lease liabilities

Information technology equipment

and software.

An impairment

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.

determination is

including the

store’s historical

operating results

projected cash flows, which

include future sales growth

rates, margin rates

and expense projections.

Company assesses the fair

value of each

lease by considering market

rents and any

lease terms that

adjust market rents

under certain conditions,

an anchor tenant

shopping center not

meeting certain criteria.

in determining when to

close a store,

considers real

estate development

perceived local

market conditions,

difficult to predict and may be subject to change.

Insurance Liabilities

The Company is primarily self-insured for healthcare, workers’ compensation and general liability costs.

These costs are significant primarily due to the large number of the Company’s retail locations and associates.

The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted.

Management reviews current and historical claims data in developing its estimates.

The Company also uses information provided by outside actuaries with respect to healthcare, workers’ compensation and general liability claims.

If the underlying facts and circumstances of the claims change or the historical experience upon which insurance provisions are recorded is not indicative of future trends, then the Company may be required to make adjustments to the provision for insurance costs that could be material to the Company’s reported financial condition and results of operations.

Historically, actual results have not significantly deviated from estimates.

self-insured for

healthcare, workers’

compensation and

general liability

These costs are significant primarily

due to the large number

of the Company’s retail

locations and

The Company’s

self-insurance liabilities are based

on the total estimated

costs of claims filed

and estimates

not reported,

reviews current

and historical

in developing

its estimates.

Company also uses information provided by outside actuaries

with respect to healthcare, workers’

compensation and general liability claims.

underlying facts and circumstances of the claims

historical experience

insurance provisions

indicative of

trends, then the

Company may be required

to make adjustments

to the provision

for insurance costs

material to the

Company’s reported

financial condition and

results of operations.

Historically,

actual results have not significantly deviated from estimates.

Uncertain Tax Positions

The Company records liabilities for uncertain tax positions primarily related to state income taxes as of the balance sheet date.

These liabilities reflect the Company’s best estimate of its ultimate income tax liability based on the tax codes, regulations, and pronouncements of the jurisdictions in which we do business.

Estimating our ultimate tax liability involves significant judgments regarding the application of complex tax regulations across many jurisdictions.

Despite the Company’s belief that the estimates and judgments are reasonable, differences between the estimated and actual tax liabilities can and do exist from time to time.

These differences may arise from settlements of tax audits, expiration of the statute of limitations, or the evolution and application of the various jurisdictional tax codes and regulations.

Any differences will be recorded in the period in which they become known and could have a material effect on the results of operations in the period the adjustment is recorded.

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.

In accordance with Topic 606, in fiscal 2019 and 2018, the Company recognized $921,000 and $591,000, respectively, of income on unredeemed gift cards (“gift card breakage”) as a component of Other Revenue on the Consolidated Statements of Income and Comprehensive Income.

Under Topic 606, the Company recognizes gift card breakage using an expected breakage percentage based on redeemed gift cards.

In fiscal 2017, the Company recognized $1,380,000 of gift card breakage as a component of Other income on the Consolidated Statements of Income and Comprehensive Income.

See Note 2 for further information on miscellaneous income.

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 $700,000 and $897,000 for the twelve months ended

February 1, 2020 and February 2, 2019, respectively, on the Company’s proprietary credit card sales of $26.6 million and $27.4 million for the twelve months ended February 1, 2020 and February 2, 2019, respectively.

The Company records

liabilities for uncertain

tax positions primarily

related to state

income taxes as

of the balance sheet date.

These liabilities reflect the Company’s

best estimate of its ultimate

liability based

regulations, and

pronouncements of

the jurisdictions

Estimating our ultimate tax liability involves significant judgments regarding the application of

complex tax reg

ulations across many

jurisdictions.

Despite the Company’s

belief that the

estimates and

judgments are

reasonable, differences

estimated and

liabilities can

from time to time.

These differences may arise from settlements of

tax audits, expiration of the statute of

limitations, or the

evolution and application of

the various jurisdictional

tax codes and

differences will be

recorded in the

period in which

they become known and

material effect

on the results of operations in the period the adjustment is recorded.

Liquidity, Capital Resources and Market Risk

The Company has consistently maintained a strong liquidity position.

Cash provided by operating activities during fiscal 2019 was $53.4 million as compared to $60.2 million in fiscal 2018.

These amounts have enabled the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and selective repurchases of the Company’s common stock.

Cash provided by operating activities for these periods was primarily generated by earnings adjusted for depreciation, share-based compensation and changes in working capital.

The decrease of $6.8 million for fiscal 2019 compared to fiscal 2018 is primarily due to uses of cash for operating lease right-of-use assets and lease liabilities, partially offset by increased net income and accrued income taxes.

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 proposed capital expenditures, including store openings, dividends and other operating requirements for fiscal 2020 and for the foreseeable future.

At February 1, 2020, the Company had working capital of $163.5 million compared to $229.5 million and $233.4 million at February 2, 2019 and February 3, 2018, respectively.

The decrease in working capital is primarily attributable to the adoption of ASC 842 which requires the current portion of lease liability to be recorded in current liabilities.

At February 1, 2020, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $35.0 million less the balance of any 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 February 1, 2020.

There were no borrowings outstanding under this credit facility as of the fiscal year ended February 1, 2020 or the fiscal year ended February 2, 2019.

The Company had no outstanding revocable letters of credit relating to purchase commitments at February 1, 2020, February 2, 2019 and February 3, 2018.

Expenditures for property and equipment totaled $8.3 million, $4.4 million and $11.1 million in fiscal 2019, 2018 and 2017, respectively.

The expenditures for fiscal 2019 were primarily for investments in new technology, stores, automobile and home office improvements.

In fiscal 2020, the Company is planning to invest approximately $20.0 million in capital expenditures.

Net cash used in investing activities totaled $22.6 million for fiscal 2019 compared to $71.1 million used for fiscal 2018 and $67.7 million used in fiscal 2017.

In fiscal 2019, the cash used was due primarily to the purchase of short-term investments, other assets and capital expenditures, partially offset by the sale of short-term investments.

Net cash used by financing activities totaled $41.5 million compared to net cash used of $45.2 million for fiscal 2018 and $72.0 million for fiscal 2017.

The decrease in cash used by financing activities was primarily due to a decrease in share repurchases.

On February 27, 2020, the Board of Directors maintained the quarterly dividend at $0.33 per share, which was paid on March 24, 2020.

The Company believes

that its cash,

cash equivalents and

short-term investments, together

flows from operations and borrowings

available under its revolving credit

agreement, will be adequate to

fund the Company’s

regular operating requirements

and capital expenditures

for fiscal 2021

foreseeable future.

In order to preserve liquidity during

the COVID-19 pandemic and in

light of the uncertainties as

economic impact,

suspended its

quarterly dividend,

significantly reduced

planned capital

expenditures and

decreased its

furloughed associates and in

certain instances eliminated positions

primarily at the corporate

Company’s pre

-pandemic liquidity position has

enabled it to offset

the downturn in operating

since the onset of the pandemic by liquidating short-term investments and

drawing and repaying under its

revolving credit facility.

The Company will

continue to focus

on preserving liquidity

while minimizing

capital expenditures

Additionally, the

Company’s $35.0

million revolving

facility allows

Company flexibility in

managing its short-

term investments, as

quarter of 2020

when the credit markets seized during the early phases of the COVID-19

operating activities during

fiscal 2020 was

$30.7 million as

compared to $53.4

provided in fiscal 2019

and $60.2 provided in

by operating activities during

was primarily attributable

loss adjusted for

depreciation, share-based compensation, impairment

and changes in working

The decrease o

$84.1 million for fiscal

2020 compared to fiscal

net operating

lower merchandise

At January 30, 2021, the Company had working capital

of $108.6 million compared to $163.5 million

2019, respectively.

The decrease in

is primarily due

to reduction in

and lower inventories, partially

higher accounts

At January 30, 2021,

the Company had an

unsecured revolving credit agreement, which

borrowings of up to $35.0 million less the

balance of any revocable letters of credit

discussed below.

revolving credit agreement is committed until

The credit agreement contains

various financial

covenants and limitations, including the maintenance of specific financial ratios

with which the Company

was in compliance as of January 30, 2021.

There were no borrowings outstanding

under this credit facility

as of the fiscal year ended January 30, 2021 or the fiscal year ended February

outstanding revocable

credit relating

commitments at

January 30, 2021, February 1, 2020 and February 2, 2019.

Expenditures for property and equipment totaled $14.0 million, $8.3 million and $4.4

million in fiscal

2020, 2019 and 2018, respectively.

The expenditures for fiscal 2020 were

primarily for additional

in 76 new stores,

and information

In fiscal 2021, the

is planning to invest approximately $3.0 million in capital expenditures.

investing activities

totaled $64.5

million used for fiscal

2019 and $71.1 million used

in fiscal 2018.

In fiscal 2020, the

cash provided was

primarily attributable

to the increase in net sales of short-term investments,

offset by expenditures

and equipment.

Net cash used by financing activities totaled $27.2 million in fiscal 2020 compared to net cash used of

$41.6 million for

fiscal 2019 and

$45.2 million for

was primarily

The Company does not use derivative financial instruments.

See Note 4, “Fair Value Measurements,” for information regarding the Company’s financial assets that are measured at fair value.

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 February 1, 2020.

The state, municipal and corporate bonds and asset-backed securities have contractual maturities which range from five days to 7.5 years.

Treasury Notes and Certificates of Deposit have contractual maturities which range from 1 month to 2.75 years.

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

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

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

The auto loan asset-backed securities are backed by static pools of auto loans that were originated and serviced by captive auto finance units, banks or finance companies.

The bank credit card asset-backed securities are backed by revolving pools of credit card receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase, Capital One, and Discover.

Additionally, at February 1, 2020, the Company had $0.7 million of corporate equities, which are recorded within Other assets in the Consolidated Balance Sheets.

At February 2, 2019, the Company had $0.7 million of corporate equities, which are recorded within Other assets in the 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 primarily of life insurance policies.

These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3 of the valuation hierarchy.

The Level 3 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the Consolidated Balance Sheets.

These funds are designed to mirror the return of existing mutual funds and money market funds that are observable and actively traded.

The following table shows the Company's obligations and commitments as of February 1, 2020, to make future payments under noncancellable contractual obligations (in thousands):

Measurements,” for

information regarding the

Company’s financial

that are measured at fair value.

The Company’s

investment portfolio

was primarily invested

bonds and tax-

taxable governmental debt

securities held in

managed accounts with

underlying ratings of

January 30, 2021.

The state, municipal

and corporate bonds and

asset-backed securities have contractual

maturities which range

from two days

to 7.5 years.

Notes and Certificates

have contractual maturities

which range from

three months to

These securities are classified

available-for-sale

and are recorded as Short

-term investments,

cash, Restricted

and Other assets

on the accompanying

fair value with

other comprehensive

The asset-backed

of auto loans

loan asset-backed

by captive auto

units, banks or

The bank credit

card asset-backed

card receivables

JPMorgan Chase,

Additionally, at

equities, which

recorded within Other assets in the Consolidated Balance

At February 1, 2020, the Company had

equities, which are

recorded within

Consolidated Balance

are measured at

fair value using

market prices.

and municipal

active exchanges

for identical

market values

by management with assistance of a third-party pricing service.

Since quoted prices in active markets for

are not available,

are determined

by the pricing

using observable

such as quotes from less active markets

and/or quoted

of securities

characteristics,

Deferred compensation plan

assets consist

primarily of life

insurance policies.

policies are valued based on the cash surrender value of the insurance contract, which is determined based

the underlying

discounted cash

are therefore

classified within Level 3 of the valuation hierarchy.

The Level 3 liability associated with the life

insurance policies

deferred compensat

ion obligation,

underlying insurance

Other noncurrent

liabilities in

Consolidated Balance Sheets.

These funds are designed

to mirror the return

of existing mutual funds

money market funds that are observable and actively traded.

The following table shows the Company's obligations and commitments

as of January 30, 2021,

to make future payments under noncancellable contractual obligations

(in thousands):

Payments Due During One Year Fiscal Period Ending

2 unchanged sentences

Total Contractual Obligations

(1) In addition to the amounts shown in the table above, $7.9 million of unrecognized tax benefits have been recorded as liabilities in accordance with ASC 740 and we are uncertain if or when such amounts may be settled.

See Note 12, Income Taxes, of the Consolidated Financial Statements for additional information.

(1) In addition to the amounts shown in the table above, $5.9 million of unrecognized tax benefits have been recorded

as liabilities in accordance

with ASC 740 and we are uncertain if or when such amounts may

See Note 12, Income Taxes, of the Consolidated Financial

Statements for additional information.

Recent Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, Recently Adopted Accounting Policies and Recently Issued Accounting Pronouncements.

See Note 1, Summary of Significant

Accounting Policies, Recently Adopted Accounting Policies and

Recently Issued Accounting Pronouncements.

Quantitative and Qualitative Disclosures About Market Risk:

The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.

from exposure

financing, investing and cash

management activities, but the

Company does not believe

such exposure is

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-K

Item 7. Management’s Discussion and Analysis