Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The following
information should
be read
along with
the unaudited
Condensed Consolidated
Financial
Statements, including the accompanying Notes
appearing in this report. Any
of the following are
“forward-looking” statements within the
meaning of Section 27A of the Securities Act of 1933,
as
amended, and
Section 21E of
the Securities
Exchange Act
of 1934,
as amended:
(1) statements in
this
Form 10-Q
that reflect
projections or
expectations of
our future
financial or
economic performance;
(2) statements that
are not
historical information;
(3) statements of
our be
liefs, intentions,
plans and
objectives for future operations, including those
contained in “Management’s Discussion
and Analysis of
Financial Condition and Results
of Operations”; (4) statements relating
to our operations or
activities for
our fiscal
year ending January
29, 2022 (“fiscal 2021”) and beyond, including,
but not limited
to,
statements regarding expected
amounts of capital
expenditures and store
openings, relocations, remodels
and closures
and statements
regarding the
potential impact
of the
COVID-19 pandemic
and related
responses and mitigation efforts
on our business, results of operations and financial
condition; and
(5) statements relating to our future contingencies. When possible, we have attempted to identify forward-
looking statements by
using words such
as “will,” “expects,”
“anticipates,” “approximates,” “believes,”
“estimates,” “hopes,” “intends,” “may,”
“plans,” “could,” “would,” “should” and
any variations or
negative formations of
such words and
similar expressions. We
can give no
assurance that actual
results
or events will not
differ materially from those
expressed or implied in any
such forward-looking
statements. Forward-looking statements included in this report are based on information available to us as
of the filing
date of this
report, but subject
to known and
unknown risks, uncertainties
and other factors
that could
cause actual
results to
differ materially
from those
contemplated by
the forward
-looking
statements.
Such factors include,
but are not
limited to, the
following:
any actual or
perceived
deterioration in the conditions that drive consumer confidence and spending, including, but not limited to,
prevailing social,
economic, political
and public
health conditions
and uncertainties,
levels of
unemployment, fuel, energy
and food costs,
wage rates, tax
rates, interest rates,
home values, consumer
net worth and
the availability of
credit; changes in
laws or regulations
affecting our
business, including
but not
limited to
tariffs;
uncertainties regarding
the impact
of any
governmental action
regarding, or
responses to,
the foregoing
conditions; competitive
factors and
pricing pressures;
our ability
to predict
and respond to rapidly changing fashion trends and consumer demands; our ability to successfully
implement our new store development strategy to increase new store openings and our ability of
any such
new stores to
grow and perform
as expected; adverse weather, public health threats (including
the
COVID-19 pandemic) or similar conditions that may affect
our sales or operations; inventory risks due to
shifts in
market demand, including
the ability
to liquidate
excess inventory at
anticipated margins;
and
other factors discussed under “Risk Factors” in Part I, Item
1A of our annual report on Form 10-
K
for the
fiscal year ended January 30,
2021 (“fiscal 2020”), as amended
or supplemented, and in other
reports we
file with or
furnish to the
Securities and Exchange
Commission (“SEC”) from
time to time.
We do
not
undertake, and expressly
decline, any obligation
to update
any such forward-
looking information
contained in this report, whether as a result of new information, future events,
or otherwise.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
21
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company’s accounting
policies
are more fully
described
in “Management’s
Discussion
and Analysis
of
Financial
Condition
and Results
of Operations”
in the Company’s
Annual
Report
on Form
10-K
for the
fiscal
year ended January
30, 2021.
As disclosed
in “Management’s
Discussion
and Analysis
of Financial
Condition
and Results of Operations,”
the preparation
of the Company’s financial statements
in conformity
with generally
accepted
accounting
principles
in the United States
(“GAAP”)
requires
management
to make
estimates
and assumptions
about future
events that
affect the
amounts
reported
in the financial
statements
and
accompanying
notes. Future
events and
their effects
cannot be
determined
with absolute
certainty. Therefore,
the determination
of estimates requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and
such differences may
be material to
the financial statements. The
most significant
accounting
estimates
inherent
in the preparation
of the Company’s
financial
statements
include
the allowance
for customer credit
losses,
inventory
shrinkage,
the ca
lculation
of potential asset
impairment,
workers’
compensation,
general
and auto insurance liabilities, reserves
relating
to self-insured
health
insurance,
and
uncertain
tax positions.
The Company’s
critical
accounting
policies
and estimates
are discussed
with the
Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
22
RESULTS OF OPERATIONS:
The following
table sets
forth, for
the periods
indicated,
certain items
in the Company's
unaudited
Condensed
Consolidated
Statements
of Income
as a percentage
of total
retail sales:
Three Months Ended
May 1, 2021
May 2, 2020
Total retail sales
100.0
%
100.0
%
Other revenue
0.9
1.9
Total revenues
100.9
101.9
Cost of goods sold (exclusive of depreciation)
58.5
84.6
Selling, general and administrative (exclusive of depreciation)
29.9
53.1
Depreciation
1.4
4.1
Interest and other income
(0.3)
(1.9)
Income (loss) before income taxes
11.3
(38.0)
Net income (loss)
9.8
(28.8)
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
23
RESULTS OF OPERATIONS
(CONTINUED):
COVID-19
Update
The COVID-19 pandemic adversely
impacted the Company's business,
financial condition and operating
results through fiscal 2020.
The first quarter of
2021 saw significant improvements in
sales compared to
2020.
This improvement was
primarily attributable to
government stimulus, increased
customer traffic,
states continuing
to lift
capacity limits
as more
people are
vaccinated, consumers’
increasing comfort
level with
venturing out
to social
events
and
customers’ preparing
to return
to work.
However, the
Company’s sales
were well below 2019
sales for the
comparable period, and there
is still a
high level of
uncertainty regarding the
lingering effects of
the COVID-19 pandemic
and the
continued impact on
the
Company’s customers’
buying habits.
The Company
faces additional
uncertainty from
the continued
effects of disruption in the global supply chain and available workers as it attempts
to hire associates as its
operating hours
continue to
expand. The
Company expects
that these
uncertainties and
perhaps others
related to the
pandemic will continue
to impact the
Company in fiscal
2021 and possibly
beyond.
The
adverse financial impacts associated with the continued
effects of, and uncertainties related to, the
COVID-19 pandemic 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 orders,
reductions in
store traffic
and customer
demand, labor
shortages, or
all of
these factors,
(ii) lower
net sales
caused by
the delay
of inventory
production and fulfillment,
(iii) and
incremental costs associated
with efforts
to mitigate the
effects of
the outbreak, including increased freight and logistics costs and other
expenses.
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 or its
variants, 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.
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,
as well as
public
confidence in, mitigation measures
such as the current
effort to vaccinate substantial
portions of the U.S.
and global
population, emerging
information regarding
variants of
the virus
or new
viruses and
their
potential impact on
current mitigation efforts,
public attitudes toward
continued compliance with
containment and
mitigation measures, and
possible new information
and understanding that
could alter
the course and duration of current measures to combat the spread of the virus.
Comparison
of First Quarter
of 2021
with 2020
Total retail sales for the first
quarter
were $211.2 million
compared
to last year’s first
quarter
sales of $98.8
million.
Sales increased
primarily
due to an increase
in same-store
sales and
sales from
new stores,
partially
offset by permanently closed stores in
2020. The 111.0%
increase
in same-store sales is primarily due
to
stores being closed from
March 19, 2020
through
the end of
the first quarter of
2020. Same store
sales
include
stores
that have been open more than 15 months.
Stores
that have been relocated or expanded are
also included
in the same
store sales
calculation
after they
have been
open
more than
15 months.
The method
of calculating
same store sales
varies
across the retail
industry.
As a result, our same
store sales
calculation
may not
be comparable
to similarly
titled measures
reported
by other
companies.
E-commerce
sales were
less
than 5.0% of sales for
the first quarter of fiscal 2021
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
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
customer
accounts
receivable,
shipping
charged to customers
for e-commerce
purchases
and layaway fees),
were $213.1
million
for the first
quarter
ended May
1, 2021, compared
to $100.7
million
for the first
quarter
ended May
2, 2020. The
Company
operated
1,325 stores
at May 1, 2021
compared
to 1,300 stores
at the end
of last fiscal
year’s first
quarter.
For the first
three months
of fiscal 2021,
the Company
permanently
closed
five stores.
The Company
currently
expects
to close
approximately
25 stores
in fiscal
2021.
Credit revenue
of $0.5
million
represented
0.3% of
total revenues
in the first
quarter
of fiscal
2021, compared
to 2020 credit revenue of
$0.8 million or 0.8% 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 $0.3
million
in the first
quarter
of 2021, 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
2021, compared
to $1.9
million
for the
prior year’s
comparable
first quarter.
Cost of goods
sold was $123.7
million,
or 58.5% of retail
sales for the
first quarter
of fiscal 2021,
compared
to $83.6 million,
or 84.6% of retail sales in the first quarter of fiscal 2020.
The overall
decrease
in cost of
goods sold as
a percent of
retail sales for first
quarter
of 2021 resulted primarily from
the leveraging of
occupancy, buying and distribution
costs due to normalized sales and higher sales of regular priced goods.
Cost of goods sold includes merchandise
costs (net of discounts
and allowances),
buying costs,
distribution
costs, occupancy costs, freight and
inventory
shrinkage.
Net merchandise costs and in
-bound
freight
are
capitalized
as inventory costs.
Buying
and distribution costs
include
payroll,
payroll-related
costs and
operating
expenses
for the buying departments and distribution center.
Occupancy
costs include rent, real
estate taxes, insurance,
common
area maintenance, utilities and
maintenance
for stores
and distribution
facilities.
Total gross margin
dollars
(retail
sales less
cost of goods
sold exclusive
of depreciation)
increased
by 475.4%
to $87.6
million
for the
first quarter
of fiscal
2021 compared
to $15.2
million
in the first
quarter
of
fiscal 2020.
Gross margin
as presented
may not
be comparable
to those
of other
entities.
Selling,
general
and administrative
expenses
(“SG&A”)
primarily
include
corporate
and store
payroll,
related
payroll
taxes and benefits, insurance, supplies, advertising, bank and
credit
card processing fees.
SG&A
expenses
were 29.9% of retail sales
for the first quarter
of fiscal 2021, compared
to 53.1% of retail sales in
the first quarter of
fiscal 2020. SG&A as
a p
ercent of retail sales
decreased
primarily
due to
leveraging
expenses as a
result of normalized
sales and a
decrease in impairment
charges, partially offset
by higher
incentive compensation.
Depreciation
expense
was $3.0
million,
or 1.4%
of retail
sales for
the first
quarter
of fiscal
2021, compared
to
$4.0 million,
or 4.1%
of retail
sales for
the first
quarter
of fiscal
2020. The
decrease
in depreciation
expense
is
attributable
to lower
net fixed
assets
primarily
due to $13.7
million
of impairment
charges in
2020.
Interest
and other income
was $0.7
million,
or 0.3%
of retail sales
for the
first quarter of
fiscal 2
021,
compared
to $1.9 million,
or 1.9% of
retail sales
for the first
quarter
of fiscal
2020.
The decrease
is primarily
attributable
to lower interest
rates and smaller
gains from the
sale of investments,
partially
offset by an
increase
in short-term
investing.
Income tax expense was $3.1
million or 1.5% of retail
sales for the first
quarter of fiscal 2021, compared
to an income tax benefit of $9.1 million, or 9.2% of
retail sales for the first quarter of fiscal 2020. Income
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
tax expense for
the first quarter
of fiscal 2021
increased primarily as
a result of
higher pre-tax earnings.
The effective income tax rate for the first quarter of fiscal
2021 was 12.9%
(Expense) compared to 24.3%
(Benefit) for the first quarter
of 2020. The decrease in the
2021 first quarter tax rate was
primarily due to
higher pre-tax earnings
and the ability
to realize foreign
tax credits, partial
ly offset by
increases in state
income taxes in the first quarter of 2020.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company believes
that its cash, cash equivalents
and short-term
investments,
together
with cash flows
from operations
and borrowings
available
under its revolving
credit
agreement,
will be adequate
to fund the
Company’s regular
operating
requirements
and expected
capital
expenditures
for fiscal
2021 and the
next 12
months.
Cash provided by operating activities for the first
three months of fiscal 2021 was
primarily
generated
by
earnings
adjusted
for depreciation
and changes in working
capital.
The increase
in cash provided of $115.8
million
for the first three
months of fiscal 2021
as compared to the
first three months of
fiscal 2020 was
primarily
due to net income versus a net loss
,
a decrease in inventory, and an
increase
in accounts payable
and accrued
liabilities,
partially
offset by
a decrease
in store
impairment
charges.
At May 1, 2021,
the Company
had working
capital
of $130.5
million
compared
to $108.6
million
at January
30, 2021.
This increase
is primarily attributable
to higher short-term
investments,
partially
offset
by higher
accrued
incentive
compensation.
At May 1, 2021 and January 30,
2021, the Company had an unsecured
revolving credit agreement, which
provides for borrow
ings of up
to $35.0 million
less the balance
of letters of
credit discussed below.
The
revolving credit
agreement is
committed through
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 May 1, 2021.
There were no borrowings outstanding
under the credit
facility as of May 1, 2021 or January 30, 2021.
At May 1, 2021
and January
30, 2021,
the Company
had no outstanding
letters
of credit
relating
to purchase
commitments.
Expenditures
for pro
perty and
equipment
totaled
$0.6 million in
the first
three months of
fiscal 2021,
compared
to $5.3 million
in last year’s
first three
months.
For the full
fiscal 2021
year, the Company
expects
to invest
approximately
$3.1 million
in capital
expenditures.
Net cash
used by
investing
activities
totaled
$34.2 million
in the first
three months
of fiscal
2021 compared
to
$76.9 million provided
in the comparable period of fiscal 2020,
primarily
due to a
decrease
in the sale of
short-term
investments
and an
increase
in the
purchase
of short
-term investments,
partially
offset by
a
decrease
in capital
expenditures.
Net cash used
by financing
activities
totaled
$5.5 million
in the first
three months
of fiscal
2021 compared
to
$12.4 million
provided
in the comparable
period
of fiscal
2020, primarily
due to a decrease
in proceeds
from
the line of
credit,
partially
offset by no
dividends
paid in the
first quarter of fiscal 2021
and fewer stock
repurchases.
On May 20,
2021, the
Board of
Directors
declared
the quarterly
dividend
at $0.11 per
share.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
As of May
1, 2021, the
Company
had 1,445,488 shares remaining in open
authorizations
under its share
repurchase
program.
The Company
does not
use derivative
financial
instruments.
The Company’s investment
portfolio
was primarily
invested
in corporate
bonds and tax-exempt
and taxable
governmental
debt securities
held in managed
accounts
with underlying
ratings
of A or better
at May 1, 2021
and January 30, 2021.
The state, municipal and corporate bonds have contractual maturities which range
from four days
to 4.5 years.
The U.S. Treasury
Notes have
contractual
maturities
which range
from 14 days
to 2.5 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 1,
2021,
the Company
had $0.8
million
of corporate
equities
and deferred
compensation
plan assets of $11.6 million.
At January 30, 2021, the Company
had $0.7 million
of corporate
equities
and
deferred
compensation
plan assets
of $11.3 million.
All
of these
assets are
recorded
within Other
assets in
the
Condensed
Consolidated
Balance
Sheets.
See Note
7, Fair
Value Measurements.
RECENT
ACCOUNTING
PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
27
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The Company
is subject
to market
rate risk
from exposure
to changes
in interest
rates based
on its
financing, investing and cash
management activities, but the
Company does not believe
such exposure is
material.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.