What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-19 compared with 2021-08-25 · 57 added, 57 removed, 104 unchanged (52% of the section changed)

40 unchanged sentences

Three Months Ended

Six Months Ended

July 31, 2021

August 1, 2020

July 31, 2021

August 1, 2020

Nine Months Ended

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

Total retail sales

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The COVID-19 pandemic adversely impacted the Company's business, financial condition and operating results through fiscal 2020.

The first and second quarters of 2021 saw significant improvements in sales compared to 2020.

Through the first three quarters of 2021, the Company saw significant improvements in sales compared to 2020.

This improvement was primarily attributable to government stimulus, increased customer traffic, states lifting capacity limits as more people were 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 pandemic, as well as renewed concerns over the impact of new, more transmissible variants of the virus, slowing vaccination rates and related factors that have in some cases slowed and may continue to slow progress toward the return to pre-pandemic activities and levels of consumer confidence.

However, the Company’s sales remain well below 2019 sales for the comparable period, and there is still significant uncertainty regarding the lingering effects of the pandemic, as well as concerns over the impact of new or potential variants of the virus that are more transmissible or severe, stagnant vaccination rates and related factors continue to impede progress toward the return to pre-pandemic activities and levels of consumer confidence.

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 Company expects that these uncertainties and perhaps others related to the pandemic will continue to impact the Company throughout the upcoming holiday shopping season and remainder of fiscal 2021 and likely 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 actual or potential adverse changes in conditions relating to the pandemic, whether due to increases in case counts, 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.

While the Company currently anticipates a continuation of the adverse impacts of COVID-19 during 2021 and likely 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 the Three and Six Months ended July 31, 2021 with August 1, 2020

Total retail sales for the second quarter were $206.0 million compared to last year’s second quarter sales of $166.3 million, a 24% increase.

The Company’s sales increase in the second quarter of fiscal 2021 is primarily due to a 23% increase in same-store sales and sales from new stores, partially offset by permanently closed stores in 2020.

The increase in same-store sales is primarily due to stores being open in this year’s second quarter, as opposed to closed from March 19, 2020 into the second quarter of 2020.

For the six months ended July 31, 2021, total retail sales were $417.2 million compared to last year’s comparable six month sales of $265.1 million, a 57% increase.

Sales in the first six months of fiscal 2021 increased primarily due to a 56% increase in same-store sales and sales from new stores, partially offset by permanently closed

Comparison of the Three and Nine Months ended October 30, 2021 with October 31, 2020

Total retail sales for the third quarter were $170.5 million compared to last year’s third quarter sales of $149.2 million, a 14% increase.

The Company’s sales increase in the third quarter of fiscal 2021 is primarily due to a 14% increase in same-store sales and sales from new stores, partially offset by permanently closed stores in 2020.

The increase in same-store sales is primarily due to stores being open in this year’s third quarter, as opposed to operating on limited hours during the third quarter of 2020.

For the nine months ended October 30, 2021, total retail sales were $587.7 million compared to last year’s comparable nine month sales of

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

stores in 2020.

Same-store sales for the six months ended July 31, 2021 increased primarily due to stores being open in the first six months of 2021 as opposed to closed from March 19, 2020 into the second quarter of 2020 .

$414.3 million, a 42% increase.

Sales in the first nine months of fiscal 2021 increased primarily due to a 41% increase in same-store sales and sales from new stores, partially offset by permanently closed stores in 2020.

Same-store sales for the nine months ended October 30, 2021 increased primarily due to stores being open in the first nine months of 2021 as opposed to closed from March 19, 2020 into the second quarter of 2020 .

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 5% of total sales for the six months ended July 31, 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 customer accounts receivable and layaway fees), were $207.7 million and $420.8 million for the three and six months ended July 31, 2021, compared to $168.2 million and $268.9 million for the three and six months ended August 1, 2020, respectively.

The Company operated 1,325 stores at July 31, 2021 compared to 1,333 stores at the end of last year’s second quarter.

During the first six months of fiscal 2021, the Company closed five stores.

E-commerce sales were less than 5% of total sales for the nine months ended October 30, 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 customer accounts receivable and layaway fees), were $172.2 million and $593.0 million for the three and nine months ended October 30, 2021, compared to $150.8 million and $419.7 million for the three and nine months ended October 31, 2020, respectively.

The Company operated 1,324 stores at October 30, 2021 compared to 1,347 stores at the end of last year’s third quarter.

During the first nine months of fiscal 2021, the Company closed six stores.

The Company currently expects to open fewer than 10 stores and to close approximately 25 stores in fiscal 2021.

Credit revenue of $0.5 million represented 0.2% of total revenues in the second quarter of fiscal 2021, compared to 2020 credit revenue of $0.6 million or 0.4% of total revenues.

Credit revenue of $0.5 million represented 0.3% of total revenues in the third quarter of fiscal 2021, compared to 2020 credit revenue of $0.6 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 principally include payroll, postage and other administrative expenses and totaled $0.3 million in the second quarter of fiscal 2021, compared to last year’s second quarter expense of $0.3 million.

Other revenue in total, as included in total revenues, was $1.8 million and $3.6 million for the three and six months ended July 31, 2021, respectively, compared to $1.9 million and $3.8 million for the prior year’s comparable three and six month periods.

The overall decrease in the three and six months ended July 31, 2021 is primarily due to decreases in finance charge income, partially offset by increases in layaway charges and gift card breakage income.

Cost of goods sold was $115.6 million, or 56.1% of retail sales and $239.3 million, or 57.3% of retail sales for the three and six months ended July 31, 2021, respectively, compared to $132.7 million, or 79.8% of retail sales and $216.3 million, or 81.6% of retail sales for the comparable three and six month periods of fiscal 2020.

The overall decrease in cost of goods sold as a percent of retail sales for the second quarter of fiscal 2021 resulted primarily from the leveraging of occupancy, buying and distribution costs due to more normalized sales and higher sales of regular priced goods .

Related expenses principally include payroll, postage and other administrative expenses and totaled $0.5 million in the third quarter of fiscal 2021, compared to last year’s third quarter expense of $0.4 million.

Other revenue in total, as included in total revenues, was $1.7 million and $5.3 million for the three and nine months ended October 30, 2021, respectively, compared to $1.6 million and $5.4 million for the prior year’s comparable three and nine month periods.

The overall slight decrease in the nine months ended October 30, 2021 is primarily due to a decrease in finance charge income, partially offset by increases in layaway charges and gift card breakage income.

Cost of goods sold was $104.2 million, or 61.1% of retail sales and $343.5 million, or 58.4% of retail sales for the three and nine months ended October 30, 2021, respectively, compared to $109.4 million, or 73.3% of retail sales and $325.7 million, or 78.6% of retail sales for the comparable three and nine month periods of fiscal 2020.

The overall decrease in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2021 resulted primarily from the leveraging of occupancy, buying and distribution costs due to more 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.

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

Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) increased by 169.9% to $90.4 million for the second quarter of fiscal 2021 and increased by 265.3% to $177.9 million for the first six months of fiscal 2021, compared to $33.5 million and $48.7 million for the prior year’s comparable three and six months of fiscal 2020.

Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) increased by 66.6% to $66.3 million for the third quarter of fiscal 2021 and increased by 175.9% to $244.2 million for the first nine months of fiscal 2021, compared to $39.8 million and $88.5 million for the prior year’s comparable three and nine months 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 $71.0 million, or 34.5% of retail sales and $134.2 million, or 32.2% of retail sales for the second quarter and first six months of fiscal 2021, respectively, compared to $44.0 million, or 26.4% of retail

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

sales and $96.5 million, or 36.4% of retail sales for the prior year’s comparable three and six month periods.

The overall increase in SG&A expense for the second quarter is primarily due to increased employee benefit/bonus expense and store operating expenses as operating hours have increased substantially compared to the prior year’s phased store reopening following the extended store closure due to COVID-19.

For the first six months of fiscal 2021, the overall increase in SG&A expense was primarily attributable to increased employee benefit/bonus expense and store operating expenses as operating hours have increased substantially compared to the prior year’s phased store reopening following the extended store closure due to COVID-19, partially offset by a $5.3 million non-cash impairment charge in 2020.

Depreciation expense was $3.1 million, or 1.5% of retail sales and $6.2 million, or 1.5% of retail sales for the second quarter and first six months of fiscal 2021, respectively, compared to $3.5 million, or 2.1% of retail sales and $7.5 million or 2.8% of retail sales for the comparable three and six month periods of fiscal 2020, respectively.

expenses were $62.5 million, or 36.6% of retail sales and $196.7 million, or 33.5% of retail sales for the third quarter and first nine months of fiscal 2021, respectively, compared to $51.9 million, or 34.8% of retail sales and $148.4 million, or 35.8% of retail sales for the prior year’s comparable three and nine month periods.

The overall increase in SG&A expense for the third quarter is primarily due to increased employee benefit/bonus expense and store operating expenses as store operating hours have increased substantially compared to the prior year’s phased store reopening following the extended store closure due to COVID-19, partially offset by a decrease in insurance expense.

For the first nine months of fiscal 2021, the overall increase in SG&A expense was primarily attributable to increased employee benefit/bonus expense and store operating expenses as operating hours have increased substantially compared to the prior year’s phased store reopening following the extended store closure due to COVID-19, partially offset by a $5.3 million non-cash impairment charge in 2020.

Depreciation expense was $3.2 million, or 1.9% of retail sales and $9.4 million, or 1.6% of retail sales for the third quarter and first nine months of fiscal 2021, respectively, compared to $3.6 million, or 2.4% of retail sales and $11.1 million or 2.7% of retail sales for the comparable three and nine month periods of fiscal 2020, respectively.

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 $0.5 million, or 0.3% of retail sales and $1.2 million, or 0.3% of retail sales for the three and six months ended July 31, 2021, respectively, compared to $1.0 million, or 0.6% of retail sales and $2.8 million, or 1.1% of retail sales for the comparable three and six month periods of fiscal 2020, respectively.

The decrease for the first six months of fiscal 2021 compared to 2020 is primarily attributable to lower interest rates and smaller gains from the sale of investments, partially offset by an increase in short-term investments.

Income tax expense was $4.6 million and $7.6 million for the second quarter and first six months of fiscal 2021, respectively, compared to an income tax benefit of $3.9 million and $13.0 million for the comparable three and six month periods of fiscal 2020, respectively.

For the first six months of fiscal 2021, the Company’s effective tax rate was 18.0% (Expense) compared to 26.7% (Benefit) for the first six months of 2020.

The change in the 2021 year-to-date effective tax rate was primarily due to higher pre-tax earnings and ability to realize foreign tax credits, partially offset by increases in state income taxes in the first quarter of fiscal 2021.

Interest and other income was $0.5 million, or 0.3% of retail sales and $1.7 million, or 0.3% of retail sales for the three and nine months ended October 30, 2021, respectively, compared to $0.8 million, or 0.5% of retail sales and $3.6 million, or 0.9% of retail sales for the comparable three and nine month periods of fiscal 2020, respectively.

The decrease for the first nine months of fiscal 2021 compared to 2020 is primarily attributable to lower interest rates and smaller gains from the sale of investments, partially offset by an increase in short-term investments.

Income tax benefit was $5.7 million for the third quarter and $1.9 million expense for the first nine months of fiscal 2021, respectively, compared to an income tax benefit of $9.7 million and $22.7 million for the comparable three and nine month periods of fiscal 2020, respectively.

For the first nine months of fiscal 2021, the Company’s effective tax rate was 4.3% (Expense) compared to 36.7% (Benefit) for the first nine months of 2020.

The change in the 2021 year-to-date tax rate was primarily due to higher pre-tax earnings, ability to realize foreign tax credits, release of reserves for uncertain tax positions due to the expiration of the statute of limitations and a favorable adjustment to the federal net operating loss carryback, partially offset by increases in state income taxes.

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 during the first six months of fiscal 2021 was $82.0 million as compared to $48.2 million used in the first six months of fiscal 2020.

Cash provided by operating activities for the first six months of fiscal 2021 was primarily generated by earnings adjusted for depreciation and changes in working capital.

The increase in cash provided of $130.2 million for the first six months of fiscal 2021 as compared to the first six months of fiscal 2020 was primarily due to a net income versus a net loss and an increase in accounts payable and accrued liabilities, partially offset by a decrease in store impairment charges.

At July 31, 2021, the Company had working capital of $148.2 million compared to $108.6 million at January 30, 2021.

The increase in working capital is primarily attributable to higher short-term investments, partially offset by higher accrued employee benefits and bonus.

Cash provided by operating activities during the first nine months of fiscal 2021 was $79.4 million as compared to $26.1 million used in the first nine months of fiscal 2020.

Cash provided by operating activities for the first nine months of fiscal 2021 was primarily generated by earnings adjusted for depreciation and changes in working capital.

The increase in cash provided of $105.5 million for the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020 was primarily due to a net income versus a net loss and an increase in accounts payable and accrued liabilities, partially offset by an increase in inventory and a decrease in impairment charges.

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

At July 31, 2021 and January 30, 2021, 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 relating to purchase commitments.

At October 30, 2021, the Company had working capital of $147.4 million compared to $108.6 million at January 30, 2021.

The increase in working capital is primarily attributable to higher inventory, accounts receivable and short-term investments, partially offset by higher accounts payable and accrued employee benefits and bonus.

At October 30, 2021 and January 30, 2021, 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 relating to purchase commitments.

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 July 31, 2021.

There were no borrowings outstanding under the credit facility, nor outstanding letters of credit that reduced borrowing availability, as of July 31, 2021 and January 30, 2021.

Expenditures for property and equipment totaled $1.1 million in the first six months of fiscal 2021, compared to $9.8 million in last fiscal year’s first six months.

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 October 30, 2021.

There were no borrowings outstanding under the credit facility, nor outstanding letters of credit that reduced borrowing availability, as of October 30, 2021 and January 30, 2021.

Expenditures for property and equipment totaled $1.8 million in the first nine months of fiscal 2021, compared to $11.2 million in last fiscal year’s first nine months.

For the full fiscal 2021 year, the Company expects to invest approximately $4.1 million for capital expenditures.

Net cash used by investing activities totaled $64.9 million in the first six months of fiscal 2021 compared to $91.0 million provided by investing activities in the comparable period of 2020.

Net cash used by investing activities totaled $51.3 million in the first nine months of fiscal 2021 compared to $57.9 million provided by investing activities in the comparable period of 2020.

The increase in net cash used in 2021 is 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 in financing activities totaled $8.8 million in the first six months of fiscal 2021 compared to $17.6 million used in the comparable period of fiscal 2020.

Net cash used in financing activities totaled $21.3 million in the first nine months of fiscal 2021 compared to $24.3 million used in the comparable period of fiscal 2020.

The decrease was primarily due to less dividends paid and stock repurchases.

As of July 31, 2021, the Company had 1,380,779 shares remaining in open authorizations under its share repurchase program.

As of October 30, 2021, the Company had 872,513 shares remaining in open authorizations under its share repurchase program.

On November 18, 2021, the Board of Directors maintained the quarterly dividend at $0.17 per share.

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 July 31, 2021 and January 30, 2021.

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

Treasury Notes have contractual maturities which range from two months to two years.

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

Treasury Notes have contractual maturities which range from six months to two 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.

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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 July 31, 2021, the Company had $0.8 million of corporate equities and deferred compensation plan assets of $11.7 million.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Additionally, at October 30, 2021, the Company had $0.8 million of corporate equities and deferred compensation plan assets of $11.8 million.

At January 30, 2021, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $11.3 million.

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RECENT ACCOUNTING PRONOUNCEMENTS:

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

See Note 8, Recent Accounting Pronouncements.

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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