CATO CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended Nine Months Ended October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 (Dollars in thousands, except per share data) REVENUES Retail sales $ 170,513 $ 149,205 $ 587,709 $ 414,283 Other revenue (principally finance charges, late fees and layaway charges) 1,700 1,586 5,335 5,410 Total revenues 172,213 150,791 593,044 419,693 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 104,225 109,404 343,487 325,738 Selling, general and administrative (exclusive of depreciation shown below) 62,466 51,885 196,687 148,353 Depreciation 3,173 3,619 9,352 11,113 Interest and other income ( 541 ) ( 791 ) ( 1,719 ) ( 3,603 ) Costs and expenses, net 169,323 164,117 547,807 481,601 Income (loss) before income taxes 2,890 ( 13,326 ) 45,237 ( 61,908 ) Income tax expense (benefit) ( 5,713 ) ( 9,704 ) 1,929 ( 22,698 ) Net income (loss) $ 8,603 $ ( 3,622 ) $ 43,308 $ ( 39,210 ) Basic earnings (loss) per share $ 0.39 $ ( 0.15 ) $ 1.93 $ ( 1.64 ) Diluted earnings (loss) per share $ 0.39 $ ( 0.15 ) $ 1.93 $ ( 1.64 ) Comprehensive income: Net income (loss) $ 8,603 $ ( 3,622 ) $ 43,308 $ ( 39,210 ) Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of ($ 150 ) and ($ 235 ) for the three and nine months ended October 30, 2021 and ($ 85 ) and ($ 29 ) for the three and nine months ended October 31, 2020, respectively ( 496 ) ( 282 ) ( 775 ) ( 96 ) Comprehensive income (loss) $ 8,107 $ ( 3,904 ) $ 42,533 $ ( 39,306 ) See notes to condensed consolidated financial statements (unaudited). 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) October 30, 2021 January 30, 2021 ASSETS (Dollars in thousands) Current Assets: Cash and cash equivalents $ 23,990 $ 17,510 Short-term investments 176,120 126,416 Restricted cash 3,918 3,512 Restricted short-term investments 1 406 Accounts receivable, net of allowance for customer credit losses of $ 807 and $ 605 at October 30, 2021 and January 30, 2021, respectively 56,017 52,743 Merchandise inventories 90,229 84,123 Prepaid expenses and other current assets 11,478 5,840 Total Current Assets 361,753 290,550 Property and equipment – net 65,115 72,550 Noncurrent deferred income taxes 5,920 5,685 Other assets 23,528 22,850 Right-of-Use assets – net 130,842 199,817 Total Assets $ 587,158 $ 591,452 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 92,922 $ 73,769 Accrued expenses 44,267 40,790 Accrued employee benefits and bonus 20,985 1,916 Accrued income taxes 5,929 2,038 Current lease liability 50,234 63,421 Total Current Liabilities 214,337 181,934 Other noncurrent liabilities 17,408 19,705 Lease liability 84,635 143,315 Stockholders' Equity: Preferred stock, $ 100 par value per share, 100,000 shares authorized, none issued - - Class A common stock, $ 0.033 par value per share, 50,000,000 shares authorized; 20,261,248 shares and 20,839,795 shares issued at October 30, 2021 and January 30, 2021, respectively 683 703 Convertible Class B common stock, $ 0.033 par value per share, 15,000,000 shares authorized; 1,763,652 shares and 1,763,652 shares issued at October 30, 2021 and January 30, 2021, respectively 59 59 Additional paid-in capital 118,427 115,278 Retained earnings 151,229 129,303 Accumulated other comprehensive income 380 1,155 Total Stockholders' Equity 270,778 246,498 Total Liabilities and Stockholders' Equity $ 587,158 $ 591,452 See notes to condensed consolidated financial statements (unaudited). 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended October 30, 2021 October 31, 2020 (Dollars in thousands) Operating Activities: Net income (loss) $ 43,308 $ ( 39,210 ) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation 9,352 11,113 Provision for customer credit losses 368 202 Purchase premium and premium amortization of investments ( 952 ) ( 613 ) Share-based compensation 2,999 3,010 Deferred income taxes - 1,201 Loss on disposal of property and equipment 392 438 Impairment of store assets - 7,525 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable ( 3,641 ) ( 21,814 ) Merchandise inventories ( 6,106 ) 31,084 Prepaid and other assets ( 6,190 ) ( 2,223 ) Operating lease right-of-use assets and liabilities ( 2,892 ) ( 1,422 ) Accrued income taxes 3,891 ( 315 ) Accounts payable, accrued expenses and other liabilities 38,881 ( 15,041 ) Net cash provided (used) by operating activities 79,410 ( 26,065 ) Investing Activities: Expenditures for property and equipment ( 1,790 ) ( 11,228 ) Purchase of short-term investments ( 131,837 ) ( 54,910 ) Sales of short-term investments 82,355 123,860 Sales of other assets - 200 Net cash provided (used) in investing activities ( 51,272 ) 57,922 Financing Activities: Dividends paid ( 6,276 ) ( 7,912 ) Repurchase of common stock ( 15,152 ) ( 16,823 ) Proceeds from line of credit - 34,000 Payments on line of credit - ( 34,000 ) Proceeds from employee stock purchase plan 176 391 Net cash provided (used) in financing activities ( 21,252 ) ( 24,344 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 6,886 7,513 Cash, cash equivalents, and restricted cash at beginning of period 21,022 14,401 Cash, cash equivalents, and restricted cash at end of period $ 27,908 $ 21,914 Non-cash activity: Accrued other assets and property and equipment $ 862 $ 2,604 Accrued treasury stock - 556 See notes to condensed consolidated financial statements (unaudited). 5 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Convertible Accumulated Class A Class B Additional Other Total Common Common Paid-in Retained Comprehensive Stockholders' Stock Stock Capital Earnings Income Equity (Dollars in thousands) Balance — January 30, 2021 $ 703 $ 59 $ 115,278 $ 129,303 $ 1,155 $ 246,498 Comprehensive income: Net income (loss) - - - 20,713 - 20,713 Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 40 ) - - - - ( 134 ) ( 134 ) Dividends paid ($0.00 per share) - - - - - - Class A common stock sold through employee stock purchase plan — 19,248 shares 1 - 150 - - 151 Class B common stock sold through stock option plans — 0 shares - - - - - - Class A common stock issued through restricted stock grant plans — 396,558 shares 13 - 271 - - 284 Repurchase and retirement of treasury shares – 425,661 shares ( 14 ) - - ( 5,615 ) - ( 5,629 ) Balance — May 1, 2021 $ 703 $ 59 $ 115,699 $ 144,401 $ 1,021 $ 261,883 Comprehensive income: Net income (loss) - - - 13,992 - 13,992 Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 44 ) - - - - ( 145 ) ( 145 ) Dividends paid ($ 0.11 per share) - - - ( 2,488 ) - ( 2,488 ) Class A common stock sold through employee stock purchase plan — 1,336 shares - - 23 - - 23 Class B common stock sold through stock option plans — 0 shares - - - - - - Class A common stock issued through restricted stock grant plans — 10,018 shares - - 1,590 5 - 1,595 Repurchase and retirement of treasury shares – 64,709 shares ( 2 ) - - ( 1,046 ) - ( 1,048 ) Balance — July 31, 2021 $ 701 $ 59 $ 117,312 $ 154,864 $ 876 $ 273,812 Comprehensive income: Net income (loss) - - - 8,603 - 8,603 Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 150 ) - - - - ( 496 ) ( 496 ) Dividends paid ($ 0.17 per share) - - - ( 3,788 ) - ( 3,788 ) Class A common stock sold through employee stock purchase plan — 1,957 shares - - 34 - - 34 Class B common stock sold through stock option plans — 0 shares - - - - - - Class A common stock issued through restricted stock grant plans — ( 9,028 ) shares - - 1,081 8 - 1,089 Repurchase and retirement of treasury shares – 508,266 shares ( 18 ) - - ( 8,458 ) - ( 8,476 ) Balance — October 30, 2021 $ 683 $ 59 $ 118,427 $ 151,229 $ 380 $ 270,778 See notes to condensed consolidated financial statements (unaudited). 6 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Convertible Accumulated Class A Class B Additional Other Total Common Common Paid-in Retained Comprehensive Stockholders' Stock Stock Capital Earnings Income Equity (Dollars in thousands) Balance — February 1, 2020 $ 761 $ 59 $ 110,813 $ 203,458 $ 1,423 $ 316,514 Comprehensive income: Net income (loss) - - - ( 28,417 ) - ( 28,417 ) Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 90 ) - - - - ( 298 ) ( 298 ) Dividends paid ($ 0.33 per share) - - - ( 7,990 ) - ( 7,990 ) Class A common stock sold through employee stock purchase plan — 26,957 shares 1 - 293 - - 294 Class B common stock sold through stock option plans — 0 shares - - - - - - Class A common stock issued through restricted stock grant plans — 307,354 shares 10 - 587 8 - 605 Repurchase and retirement of treasury shares – 618,056 shares ( 22 ) - - ( 9,034 ) - ( 9,056 ) Balance — May 2, 2020 $ 750 $ 59 $ 111,693 $ 158,025 $ 1,125 $ 271,652 Comprehensive income: Net income (loss) - - - ( 7,170 ) - ( 7,170 ) Unrealized gain (loss) on available-for-sale securities, net of deferred income tax liability of $ 146 - - - - 484 484 Dividends paid ($0.00 per share) - - - - - - Class A common stock sold through employee stock purchase plan — 0 shares - - - - - - Class B common stock sold through stock option plans — 0 shares - - - - - - Class A common stock issued through restricted stock grant plans — ( 57,805 ) shares ( 2 ) - 1,256 ( 1 ) - 1,253 Repurchase and retirement of treasury shares – 0 shares - - - - - - Balance — August 1, 2020 $ 748 $ 59 $ 112,949 $ 150,854 $ 1,609 $ 266,219 Comprehensive income: Net income (loss) - - - ( 3,622 ) - ( 3,622 ) Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 85 ) - - - - ( 282 ) ( 282 ) Dividends paid ($0.00 per share) - - - 78 - 78 Class A common stock sold through employee stock purchase plan — 21,234 shares 1 - 166 - - 167 Class B common stock sold through stock option plans — 0 shares - - - - - - Class A common stock issued through restricted stock grant plans — ( 8,440 ) shares - - 1,081 1 - 1,082 Repurchase and retirement of treasury shares – 1,036,610 shares ( 32 ) - - ( 7,473 ) - ( 7,505 ) Balance — October 31, 2020 $ 717 $ 59 $ 114,196 $ 139,838 $ 1,327 $ 256,137 See notes to condensed consolidated financial statements (unaudited). 7 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 1 - GENERAL : The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended October 30, 2021 and October 31, 2020 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for the entire year. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021. Amounts as of January 30, 2021 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America. On November 18, 2021, the Board of Directors maintained the quarterly dividend at $0.17 per share. COVID-19 Update The COVID-19 pandemic adversely impacted the Company's business, financial condition and operating results through fiscal 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 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 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. 8 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 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. Recently Adopted Accounting Policies In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The new accounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The Company adopted this accounting standards update on the first day of the first quarter of 2021 with no material impact on its Condensed Consolidated Financial Statements. 9 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 2 - EARNINGS PER SHARE: Accounting Standard Codification (“ASC”) 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“EPS”) on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares. Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan. Three Months Ended Nine Months Ended October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 (Dollars in thousands) Numerator Net earnings (loss) $ 8,603 $ ( 3,622 ) $ 43,308 $ ( 39,210 ) (Earnings) loss allocated to non-vested equity awards ( 464 ) 155 ( 2,239 ) 1,706 Net earnings (loss) available to common stockholders $ 8,139 $ ( 3,467 ) $ 41,069 $ ( 37,504 ) Denominator Basic weighted average common shares outstanding 21,030,099 22,674,507 21,295,693 22,847,776 Diluted weighted average common shares outstanding 21,030,099 22,674,507 21,295,693 22,847,776 Net income (loss) per common share Basic earnings (loss) per share $ 0.39 $ ( 0.15 ) $ 1.93 $ ( 1.64 ) Diluted earnings (loss) per share $ 0.39 $ ( 0.15 ) $ 1.93 $ ( 1.64 ) 10 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME: The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended October 30, 2021: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at July 31, 2021 $ 876 Other comprehensive income before reclassification ( 567 ) Amounts reclassified from accumulated other comprehensive income (b) 71 Net current-period other comprehensive income ( 496 ) Ending Balance at October 30, 2021 $ 380 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes $ 92 impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was $ 21 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 30, 2021: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at January 30, 2021 $ 1,155 Other comprehensive income before reclassification ( 911 ) Amounts reclassified from accumulated other comprehensive income (b) 136 Net current-period other comprehensive income ( 775 ) Ending Balance at October 30, 2021 $ 380 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes $ 177 impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was $ 41 . 11 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED): The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended October 31, 2020: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at August 1, 2020 $ 1,609 Other comprehensive income before reclassifications ( 350 ) Amounts reclassified from accumulated other comprehensive income (b) 68 Net current-period other comprehensive income ( 282 ) Ending Balance at October 31, 2020 $ 1,327 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes $ 89 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was $ 21 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 31, 2020: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at February 1, 2020 $ 1,423 Other comprehensive income before reclassifications ( 732 ) Amounts reclassified from accumulated other comprehensive income (b) 636 Net current-period other comprehensive income ( 96 ) Ending Balance at October 31, 2020 $ 1,327 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes $ 827 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was $ 191 . 12 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 4 – FINANCING ARRANGEMENTS: As of October 30, 2021, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $ 35.0 million, less the balance of any revocable letters of credit related to purchase commitments. On June 2, 2020, the Company signed an amendment extending the revolving credit agreement 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 October 30, 2021. There were no borrowings outstanding under this credit facility, nor any outstanding letters of credit that reduced borrowing availability, as of October 30, 2021 or January 30, 2021. The weighted average interest rate under the credit facility was zero at October 30, 2021 due to no borrowings outstanding. NOTE 5 – REPORTABLE SEGMENT INFORMATION: The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona and Credit. As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit. The Company has aggregated its three retail operating segments, including e-commerce, based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of ASC 280-10, which require the segments to have similar economic characteristics, products, production processes, clients and methods of distribution. The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks. They are similar in nature of product, as they all offer women’s apparel, shoes and accessories. Merchandise inventory for the Company’s retail operating segments is sourced from the same countries and some of the same vendors, using similar production processes. Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner. The Company operates its women’s fashion specialty retail stores in 32 states as of October 30, 2021, principally in the southeastern United States . The Company offers its own credit card to its customers and all credit authorizations, payment processing and collection efforts are performed by a wholly-owned subsidiary of the Company. 13 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED): The following schedule summarizes certain segment information (in thousands): Three Months Ended Nine Months Ended October 30, 2021 Retail Credit Total October 30, 2021 Retail Credit Total Revenues $ 171,708 $ 505 $ 172,213 Revenues $ 591,497 $ 1,547 $ 593,044 Depreciation 3,172 1 3,173 Depreciation 9,351 1 9,352 Interest and other income ( 541 ) - ( 541 ) Interest and other income ( 1,719 ) - ( 1,719 ) Income/(Loss) before income taxes 2,863 27 2,890 Income/(Loss) before income taxes 44,769 468 45,237 Capital expenditures 665 - 665 Capital expenditures 1,790 - 1,790 Three Months Ended Nine Months Ended October 31, 2020 Retail Credit Total October 31, 2020 Retail Credit Total Revenues $ 150,203 $ 588 $ 150,791 Revenues $ 417,616 $ 2,077 $ 419,693 Depreciation 3,618 1 3,619 Depreciation 11,112 1 11,113 Interest and other income ( 791 ) - ( 791 ) Interest and other income ( 3,603 ) - ( 3,603 ) Income/(Loss) before income taxes ( 13,559 ) 233 ( 13,326 ) Income/(Loss) before income taxes ( 62,851 ) 943 ( 61,908 ) Capital expenditures 1,428 - 1,428 Capital expenditures 11,228 - 11,228 Retail Credit Total Total assets as of October 30, 2021 $ 544,131 $ 43,027 $ 587,158 Total assets as of January 30, 2021 549,349 42,103 591,452 The Company evaluates segment performance based on income before taxes. The Company does not allocate certain corporate expenses or income taxes to the credit segment. The following schedule summarizes the direct expenses of the credit segment, which are reflected in Selling, general and administrative expenses (in thousands): Three Months Ended Nine Months Ended October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Payroll $ 80 $ 135 $ 362 $ 417 Postage 59 85 252 278 Other expenses 338 134 464 438 Total expenses $ 477 $ 354 $ 1,078 $ 1,133 14 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 6 – STOCK-BASED COMPENSATION: As of October 30, 2021, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The 2018 Incentive Compensation Plan and 2013 Incentive Compensation Plan are for the granting of various forms of equity-based awards, including restricted stock and stock options for grant, to officers, directors and key employees. Effective May 24, 2018, shares for grant were no longer available under the 2013 Incentive Compensation Plan. The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of October 30, 2021: 2013 2018 Plan Plan Total Options and/or restricted stock initially authorized 1,500,000 4,725,000 6,225,000 Options and/or restricted stock available for grant: October 30, 2021 - 3,563,925 3,563,925 In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of October 30, 2021 and January 30, 2021, there was $ 12,323,000 and $ 10,550,000 , respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 2.5 years and 2.1 years, respectively. The total compensation expense during the three and nine months ended October 30, 2021 was $ 1,088,000 and $ 2,968,000 , respectively, compared to $ 1,082,000 and $ 2,941,000 , respectively, for the three and nine months ended October 31, 2020. These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). The following summary shows the changes in the shares of unvested restricted stock outstanding during the nine months ended October 30, 2021: Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at January 30, 2021 1,023,956 $ 15.33 Granted 407,910 13.49 Vested ( 176,575 ) 22.22 Forfeited or expired ( 42,457 ) 13.98 Restricted stock awards at October 30, 2021 1,212,834 $ 13.76 15 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED): The Company’s Amended and Restated Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the nine months ended October 30, 2021 and October 31, 2020, the Company sold 22,541 and 48,191 shares to employees at an average discount of $ 1.38 and $ 1.43 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $ 31,000 and $ 69,000 for the nine months ended October 30, 2021 and October 31, 2020, respectively. These expenses are classified as a component of Selling, general and administrative expenses. NOTE 7 – FAIR VALUE MEASUREMENTS: The following tables set forth information regarding the Company’s financial assets and liabilities that are measured at fair value (in thousands) as of October 30, 2021 and January 30, 2021: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable October 30, 2021 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 31,104 $ - $ 31,104 $ - Corporate Bonds 99,364 - 99,364 - U.S. Treasury/Agencies Notes and Bonds 22,388 - 22,388 - Cash Surrender Value of Life Insurance 11,759 - - 11,759 Asset-backed Securities (ABS) 21,920 - 21,920 - Corporate Equities 828 828 - - Commercial Paper 1,344 - 1,344 - Total Assets $ 188,707 $ 828 $ 176,120 $ 11,759 Liabilities: Deferred Compensation ( 10,497 ) - - ( 10,497 ) Total Liabilities $ ( 10,497 ) $ - $ - $ ( 10,497 ) 16 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable January 30, 2021 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 23,254 $ - $ 23,254 $ - Corporate Bonds 67,566 - 67,566 - U.S. Treasury/Agencies Notes and Bonds 17,869 - 17,869 - Cash Surrender Value of Life Insurance 11,263 - - 11,263 Asset-backed Securities (ABS) 16,064 - 16,064 - Corporate Equities 703 703 - - Commercial Paper 2,069 - 2,069 - Total Assets $ 138,788 $ 703 $ 126,822 $ 11,263 Liabilities: Deferred Compensation ( 10,316 ) - - ( 10,316 ) Total Liabilities $ ( 10,316 ) $ - $ - $ ( 10,316 ) 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 October 30, 2021 and January 30, 2021. The state, municipal and corporate bonds have contractual maturities which range from two days to five years . The U.S. 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. 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 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. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets. Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate bonds, municipal bonds and asset-backed securities for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third-party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors. Deferred compensation plan assets consist of life insurance policies. These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the 17 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 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 Condensed Consolidated Balance Sheet. These funds are designed to mirror mutual funds and money market funds that are observable and actively traded. The following tables summarize the change in fair value of the Company’s financial assets and liabilities measured using Level 3 inputs as of October 30, 2021 and January 30, 2021 (in thousands): Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 30, 2021 $ 11,263 Additions - Total gains or (losses) Included in interest and other income (or changes in net assets) 496 Included in other comprehensive income - Ending Balance at October 30, 2021 $ 11,759 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 30, 2021 $ ( 10,316 ) Redemptions 714 Additions ( 245 ) Total (gains) or losses Included in interest and other income (or changes in net assets) ( 650 ) Included in other comprehensive income - Ending Balance at October 30, 2021 $ ( 10,497 ) 18 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at February 1, 2020 $ 10,517 Additions - Total gains or (losses) Included in interest and other income (or changes in net assets) 746 Included in other comprehensive income - Ending Balance at January 30, 2021 $ 11,263 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at February 1, 2020 $ ( 10,391 ) Redemptions 1,714 Additions ( 652 ) Total (gains) or losses Included in interest and other income (or changes in net assets) ( 987 ) Included in other comprehensive income - Ending Balance at January 30, 2021 $ ( 10,316 ) 19 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS: In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . In January 2021, the FASB clarified the scope of that guidance with the issuance of ASU 2021-01, Reference Rate Reform: Scope . The new accounting rules provide optional expedients and exceptions for applying GAAP to contracts and other transactions affected by reference rate reform. The amendments in this standard can be adopted any time before the fourth quarter of 2022. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures. NOTE 9 – INCOME TAXES: The Company had an effective tax rate for the first nine months of 2021 of 4.3 % (Expense) compared to 36.7 % (Benefit) for the first nine months of 2020. The change in the effective tax rate for the first nine months 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. Further, the Coronavirus Aid, Relief and Economic Security Act (“CARES”) allows the Company to carryback losses five years; therefore, the Company has recorded $38.1 million of estimated refunds calculated through the third quarter of 2021 in Accounts receivable in the Condensed Consolidated Balance Sheets. NOTE 10 – COMMITMENTS AND CONTINGENCIES: The Company is, from time to time, involved in routine litigation incidental to the conduct of its business, including litigation regarding the merchandise that it sells, litigation regarding intellectual property, litigation instituted by persons injured upon premises under its control, litigation with respect to various employment matters, including alleged discrimination and wage and hour litigation, and litigation with present or former employees. Although such litigation is routine and incidental to the conduct of the Company’s business, as with any business of its size with a significant number of employees and significant merchandise sales, such litigation could result in large monetary awards. Based on information currently available, management does not believe that any reasonably possible losses arising from current pending litigation will have a material adverse effect on the Company’s condensed consolidated financial statements. However, given the inherent uncertainties involved in such matters, an adverse outcome in one or more such matters could materially and adversely affect the Company’s financial condition, results of operations and cash flows in any particular reporting period. The Company accrues for these matters when the liability is deemed probable and reasonably estimable. NOTE 11 – REVENUE RECOGNITION: The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales 20 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 are recorded as deferred revenue until the customer takes possession of, or forfeits, the merchandise. Gift cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales volumes and the Company’s experience; actual returns have not varied materially from historical amounts. A provision is made for estimated write-offs associated with sales made with the Company’s proprietary credit card. Amounts related to shipping and handling billed to customers in a sales transaction are classified as Other revenue and the costs related to shipping product to customers (billed and accrued) are classified as Cost of goods sold. The Company offers its own proprietary credit card to customers. All credit activity is performed by the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. During the three and nine months ended October 30, 2021, the Company estimated customer credit losses of $, 134000 and $, 409000 , respectively, compared to $ 125,000 and $ 311,000 for the three and nine months ended October 31, 2020, respectively. Sales purchased on the Company’s proprietary credit card for the three and nine months ended October 30, 2021 were $ 4.4 million and $ 13.6 million, respectively, compared to $ 4.2 million and $ 11.1 million for the three and nine months ended October 31, 2020, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): Balance as of October 30, 2021 January 30, 2021 Proprietary Credit Card Receivables, net $ 8,710 $ 9,606 Gift Card Liability $ 6,024 $ 8,155 21 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 NOTE 12 – LEASES: The Company determines whether an arrangement is a lease at inception. The Company has operating leases for stores, offices and equipment. Its leases have remaining lease terms of up to 10 years based on the estimated likelihood of renewal. Some include options to extend the lease term for up to five years, and some include options to terminate the lease within one year. The Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of lease payments. The components of lease cost are shown below (in thousands): Three Months Ended October 30, 2021 October 31, 2020 Operating lease cost (a) $ 17,509 $ 17,665 Variable lease cost (b) $ 660 $ 480 (a) Includes right-of-use asset amortization of ($0.4) million and ($0.8) million for the three months ended October 30, 2021 and October 31, 2020, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. Nine Months Ended October 30, 2021 October 31, 2020 Operating lease cost (a) $ 51,569 $ 52,522 Variable lease cost (b) $ 2,153 $ 999 (a) Includes right-of-use asset amortization of ($2.1) million and ($3.5) million for the nine months ended October 30, 2021 and October 31, 2020, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. 22 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows (in thousands): Operating cash flow information: Three Months Ended October 30, 2021 October 31, 2020 Cash paid for amounts included in the measurement of lease liabilities $ 16,485 $ 16,109 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 1,705 $ ( 1,825 ) Nine Months Ended October 30, 2021 October 31, 2020 Cash paid for amounts included in the measurement of lease liabilities $ 48,158 $ 47,554 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ ( 23,718 ) $ 29,659 During the second quarter of 2021, the Company reassessed its initial accounting term for approximately 80 stores for the likelihood of renewal. After evaluation, the Company now believes it is no longer probable that these stores will be renewed for a second lease term. The remeasurement resulted in a $25.8 million reduction of the Company’s Right-of-Use assets on the Condensed Consolidated Balance Sheets. Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: As of October 30, 2021 October 31, 2020 Weighted-average remaining lease term 2.0 years 2.7 years Weighted-average discount rate 3.42 % 4.14 % Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): 23 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2021 AND OCTOBER 31, 2020 Fiscal Year 2021 (a) $ 16,110 2022 49,333 2023 36,478 2024 22,788 2025 12,456 Thereafter 5,543 Total lease payments 142,708 Less: Imputed interest 7,839 Present value of lease liabilities $ 134,869 (a) Excluding the 9 months ended October 30, 2021. 24 THE CATO CORPORATION