Item 1A. Risk Factors
Item 1A.
Risk Factors:
An investment in our common stock involves numerous types of risks.
You
should carefully consider
the
following
risk
factors,
in
addition
to
the
other
information
contained
in
this
report,
including
the
disclosures
under
“Forward-looking
Information”
above
in
evaluating
our
Company
and
any
potential
investment
in
our
common
stock.
If
any
of
the
following
risks
or
uncertainties
occur
or
persist,
our
business, financial condition and
operating results could
be materially and
adversely affected, the
trading
price
of
our
common
stock
could
decline
and
you
could
lose
all
or
a
part
of
your
investment
in
our
common
stock.
The
risks
and
uncertainties
described
in
this
section
are
not
the
only
ones
facing
us.
Additional risks
and uncertainties
not presently
known to
us or
that we
currently deem
immaterial
may
also materially
and adversely
affect
our business,
operating results,
financial condition
and value
of our
common stock.
Risks Relating to the COVID-19 Pandemic:
The outbreak and persistence of the COVID-19 pandemic has and may continue
to adversely affect our
business, financial condition and results of operations.
The
COVID-19
pandemic
has
adversely
impacted
the
Company's
business,
financial
condition
and
operating results through fiscal 2021 and will likely
continue to do so in fiscal 2022 and
possibly beyond.
Adverse financial impacts
associated with the
outbreak 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.
Though
recent
developments
in
the
U.S.
have
led
to
the
relaxation
of
many
of
the
restrictions
and
mitigation measures
that adversely
affected
the Company’s
operations, store
traffic,
sales
and results
of
operations
since
March
2020,
there
continues
to
be
significant
uncertainty
regarding
the
course
of
COVID-19 and
its continuing
effects on
commercial behavior.
These uncertainties
include the
potential
emergence of additional variants, seasonal weather
changes or other factors that may
lead to a resurgence
of the virus
and a reinstitution
of mandated restrictions, public
health advisories or decreased
willingness
of customers,
suppliers, associates
and other
constituencies on
whom our
business depends
to engage
in
commercial activities.
Other uncertainties
include the
extent
to
which and
pace at
which
governments,
businesses and
individuals may adapt
to COVID-19 as
endemic and
no longer
a meaningful
impediment
or deterrent
to commercial activity.
The resurgence
of the
virus and its
related effects
on the
global and
U.S.
economy,
or
the
lingering
uncertainties
and
time
it
may
take
to
transition
to
wide
acceptance
of
11
COVID-19
as
endemic,
will
likely
continue
to
materially
and
adversely
affect
our
business,
operating
results and financial condition.
While
the
Company
currently
anticipates
that
our
results
for
fiscal
2022
and
possibly
beyond
will
likely be adversely impacted,
whether and the extent
to which COVID-19 impacts the
Company’s results
will
depend
on
the
course
of
future
developments,
which
are
highly
uncertain,
including
potential
sporadic
surges
of
the
virus,
the
extent
and
pace
of
public
acceptance
of
COVID-19
as
endemic,
the
continuing
evolution,
acceptance
and
success
of
baseline
mitigation
measures
such
as
vaccines,
and
possible new information, understanding or innovation
that could alter the course and
duration of current
measures to combat the spread of the virus.
It is also possible
COVID-19 and its continuing effects
may result in longer term
behavioral changes
by customers and others
that could adversely affect
our business, including but
not limited to a
consumer
shift to greater
reliance on online
versus in-person shopping, which
could reduce traffic
to our stores
and
more
broadly
to
the
strip
shopping
centers
and
malls
in
which
most
of
our
stores
are
located
and
disadvantage us relative to
competitors who are better
established in e-commerce sales,
and reductions in
face-to-face work, travel and socializing occasions, which may lead
customers to less frequently desire or
perceive the need to update their wardrobes.
The
far-reaching
impacts
of
COVID-19 may
also
intensify other
risks we
discuss
in
this
report and
other filings we make from time to time with the SEC.
Future
outbreaks of
disease
or
similar
public
health
threats,
or
the
fear
of
such
an
occurrence,
may
also have a material adverse effect on the Company’s business, financial condition and operating results.
Risks Relating to Our Business:
Increased product costs, freight costs, wage increases and operating costs due to
inflation and other factors,
as well as limitations in our ability to offset these cost increases by increasing
the retail
prices of our
products or otherwise,
may adversely affect our business, margins, results of operations and
financial
condition.
The impact
of inflation
on the
labor and
raw materials
used to
make our
products, coupled
with the
higher
cost of
ocean freight
from Asia
resulting from
supply chain
disruption, is
continuing to
increase
the
cost
we
pay
for
our
products.
Tight
labor
markets
are
causing
wages
to
increase
at
the
store,
distribution center
and home office
levels, as
well as
making it
more difficult
to hire
new associates
and
retain existing associates.
The tight labor market
and inflation also are
driving up our operating
costs.
If
we are unable to offset the effects of these increased costs to our business by increasing the retail prices of
our
products,
reducing
other
expenses
or
otherwise,
our
business,
margins,
results
of
operations
and
financial condition may be adversely affected.
Our ability to
raise retail
prices in response
to these
cost increases may
be limited,
in part
due to
our
customers’
unwillingness
to
pay
higher
prices
for
discretionary
items
in
light
of
actual
or
perceived
effects
of
inflation
in
increasing
our
customers’
cost
of
essential
items
and
diminishing
customers’
disposable
income
or
financial
outlook.
Moreover,
the
persistence
or
worsening
of
inflationary
conditions could also
lead our customers
to reduce their
amount of current
discretionary spending on our
products even in the
absence of price increases,
which could erode our
sales volume and adversely
affect
our results of operations and financial condition.
Unusual weather, natural disasters, public
health threats or similar events may adversely affect
our sales or
operations.
12
Extreme
changes
in
weather,
natural
disasters,
public
health
threats
or
similar
events
can
influence
customer trends
and shopping
habits.
For example,
heavy rainfall
or other
extreme weather
conditions,
including
but
not
limited
to
winter
weather
over
a
prolonged
period,
might
make
it
difficult
for
our
customers
to
travel
to
our
stores
and
thereby
reduce
our
sales
and
profitability.
Our
business
is
also
susceptible
to
unseasonable weather
conditions.
For example,
extended
periods
of
unseasonably warm
temperatures during
the winter
season or
cool weather
during the
summer season
could render
a portion
of
our
inventory
incompatible
with
those
unseasonable
conditions.
Reduced
sales
from
extreme
or
prolonged
unseasonable
weather
conditions
would
adversely
affect
our
business.
The
occurrence
or
threat
of
extreme
weather,
natural
disasters,
power
outages,
terrorist
acts,
outbreaks
of
flu
or
other
communicable diseases (such as COVID-19) or other catastrophic events could reduce customer
traffic in
our
stores
and
likewise
disrupt
our
ability
to
conduct
operations,
which
could
materially
and
adversely
affect us.
Because we source a significant portion of our merchandise directly and indirectly from
overseas, we are
subject to risks associated with international operations and risks that affect
the prevailing social, economic,
political, public health and other conditions in the areas from which we source merchandise;
changes,
disruptions, increased costs
or other problems affecting the Company’s
merchandise supply chain could
materially and adversely affect the Company’s
business, results of operations and financial condition.
A significant amount of
our merchandise is manufactured
overseas, principally in Southeast
Asia. We
directly import some of this merchandise and
indirectly import the remaining merchandise from domestic
vendors
who
acquire
the
merchandise
from
foreign
sources.
Further,
our
third-party
vendors
are
dependent
on
materials
primarily
sourced
from
China.
As
a
result,
political
unrest,
labor
disputes,
terrorism,
war,
public
health
threats,
including
but
not
limited
to
communicable
diseases
(such
as
COVID-19), financial or other forms of instability or other events resulting in the disruption of trade from
countries
affecting
our
supply
chain,
increased
security
requirements
for
imported
merchandise,
or
the
imposition of, or changes
in, laws, regulations or
changes in duties, quotas, tariffs,
taxes or governmental
policies regarding
these matters
or other
factors affecting
the availability
or cost
of imports,
could cause
significant
delays
or
interruptions
in
the
supply
of
our
merchandise
or
increase
our
costs.
We
are
also
subject
to
supply
chain
disruptions
affecting
ocean
freight,
including
lack
of
overall
ocean
container
shipping capacity versus
the current demand
for container shipping
capacity,
lack of our
ability to access
the
ocean
container
capacity
that
we
require,
lack
of
equipment
such
as
containers,
port
congestion,
including increased
dwell times
for ocean
container ships,
and other
conditions impacting
ocean freight.
We
also
are
subject
to
domestic
supply
chain
disruptions,
including
lack
of
domestic
intermodal
transportation
(trucks
and
drivers),
domestic
port
congestion,
including
increased
dwell
times
for
incoming container ships, lack of container yard capacity and lack of available drayage from the ports and
other conditions that may impact
our domestic supply chain.
These supply chain risks may
result in both
higher
costs
to
transport
our
merchandise
and
delayed
merchandise
arrivals
to
our
stores,
which
may
adversely
affect
our
ability
to
sell
this
merchandise
and
increase
markdowns
of
it.
Our
costs
are
also
affected by currency fluctuations, and changes in the value of the dollar relative to foreign currencies may
increase our cost of goods
sold. Any of these factors
could have a material adverse effect
on our business
and
results
of
operations.
In
addition,
increased
energy
and
transportation
costs
have
caused
us
significant cost increases from time to time,
and future adverse changes in these
costs or the disruption of
the means by which merchandise is transported to us could cause additional cost increases
or interruptions
of
our
supply
chain,
which
could
be
significant.
Further,
we
are
subject
to
increased
costs
or
potential
disruptions impacting any
port or trade
route through which
our products move,
or we may
be subject
to
increased costs
and delays
if forced
to route
freight through
different ports
than the
ones through
which
our
products
typically
move.
If
we
are
forced
to
source
merchandise
from
other
countries
or
other
domestic vendors with foreign
sources in different
countries, those goods
may be more expensive
or of a
different or inferior quality from the ones we now sell.
The inability of third-party vendors to produce goods on time and to the Company’s
specification may
adversely affect the Company’s
business, results of operations and financial condition.
13
Our
dependence
on
third-party
vendors
to
manufacture
and
supply
our
merchandise
subjects
us
to
numerous risks that
our vendors will
fail to perform
as we expect.
For example, the
deterioration in any
of
our key
vendors’ financial
condition, their
failure to
ship merchandise
in a
timely manner
that meets
our specifications,
or other
failures to
follow our
vendor guidelines
or comply
with applicable
laws and
regulations,
including
compliant
labor,
environmental
practices
and
product
safety,
could
expose
us
to
operational, quality,
competitive, reputational and
legal risks.
If we
are not
able to
timely or
adequately
replace the merchandise we currently
source with merchandise produced elsewhere,
or if our vendors fail
to
perform as
we
expect,
our
business, results
of
operations
and
financial
condition
could
be
adversely
affected.
Activities
conducted
by
us
or
on
our
behalf
outside
the
United
States
further
subject
us
to
numerous
U.S.
and
international
regulations
and
compliance
risks,
as
discussed
below
under
“Risk
Factors –
Risks Relating
to Accounting
and Legal
Matters -
Our business
operations subject
us to
legal
compliance and litigation
risks, as well
as regulations and
regulatory enforcement priorities, which
could
result in increased costs or liabilities,
divert our management’s attention
or otherwise adversely affect our
business, results of operations and financial condition.”
Our ability to attract consumers and grow our revenues is dependent on the success of our store location
strategy and our ability to successfully open new stores as planned.
Our sales are
dependent in part
on the location
of our stores
in shopping centers
and malls where
we
believe our
consumers and
potential consumers
shop.
In addition,
our ability
to grow
our
revenues has
been substantially dependent on our ability to secure space for and open new stores in attractive locations.
Shopping centers and malls where we currently
operate existing stores or seek to open
new stores may be
adversely affected by, among other
things, general economic downturns or those particularly affecting the
commercial
real
estate
industry,
the
closing
of
anchor
stores,
changes
in
tenant
mix
and
changes
in
customer shopping preferences, including but not limited to an increase in preference for online versus in-
person shopping.
To
take advantage of
consumer traffic and
the shopping preferences of
our consumers,
we
need
to
maintain
and
acquire
stores
in
desirable
locations
where
competition
for
suitable
store
locations
is
intense.
A
decline
in
customer
popularity of
the
strip
shopping
centers
where we
generally
locate our stores or
in availability of space
in desirable centers and locations,
or an increase in
the cost of
such
desired
space,
could
limit
our
ability
to
open
new
stores,
adversely
affect
consumer
traffic
and
reduce our sales and net earnings or increase our operating costs.
Our ability
to open
and operate
new stores
depends on
many factors,
some of
which are
beyond our
control.
These
factors
include,
but
are
not
limited
to,
our
ability
to
identify
suitable
store
locations,
negotiate acceptable lease terms, secure
necessary governmental permits and approvals and
hire and train
appropriate store personnel.
In addition, our
continued expansion into
new regions of
the country
where
we
have
not
done
business
before
may
present
new
challenges
in
competition,
distribution
and
merchandising as we enter these new markets. Our failure to successfully and timely
execute our plans for
opening new stores
or the failure
of these stores
to perform up
to our expectations
could adversely affect
our business, results of operations and financial condition.
If we are unable to anticipate, identify and respond to rapidly changing fashion trends and
customer
demands in a timely manner, our business
and results of operations could materially suffer.
Customer
tastes
and
fashion
trends,
particularly
for
women’s
apparel,
are
volatile,
tend
to
change
rapidly
and
cannot
be
predicted
with
certainty.
Our
success
depends
in
part
upon
our
ability
to
consistently anticipate, design and respond to changing merchandise trends and consumer preferences in a
timely
manner.
Accordingly,
any
failure
by
us
to
anticipate,
identify,
design
and
respond
to
changing
fashion
trends
could
adversely
affect
consumer
acceptance
of
our
merchandise,
which
in
turn
could
adversely affect our business, results
of operations and our image with
our customers.
If we miscalculate
either the
market for
our merchandise
or our
customers’ tastes or
purchasing habits, we
may be required
to sell a significant amount of unsold inventory at below-average markups over cost, or below cost, which
would adversely affect our margins and results of operations.
14
Fluctuating comparable sales or our inability to effectively
manage inventory may negatively impact our
gross margin and our overall results of operations.
Comparable
sales
are
expected
to
continue
to
fluctuate
in
the
future.
Factors
affecting
comparable
sales
include
fashion
trends,
customer
preferences,
calendar
and
holiday
shifts,
competition,
weather,
supply
chain
issues,
actual
or
potential
public
health
threats
and
economic
conditions.
In
addition,
merchandise
must
be
ordered
well
in
advance
of
the
applicable
selling
season
and
before
trends
are
confirmed by sales.
If we are
not able to
accurately predict customers’
preferences for our
fashion items,
we may have too
much inventory, which
may cause excessive markdowns. If we
are unable to accurately
predict demand
for our
merchandise, we may
end up
with inventory shortages,
resulting in
missed sales.
A decrease in
comparable sales or
our inability to
effectively manage inventory may
adversely affect our
gross margin and results of operations.
Existing and increased competition in the women’s
retail apparel industry may negatively impact our
business, results of operations, financial condition and market share.
The
women’s
retail
apparel
industry
is
highly
competitive.
We
compete
primarily
with
discount
stores,
mass
merchandisers,
department
stores,
off-price
retailers,
specialty
stores
and
internet-based
retailers, many of which have substantially greater financial, marketing and
other resources than we have.
Many
of
our
competitors offer
frequent
promotions and
reduce
their
selling prices.
In some
cases,
our
competitors are expanding into
markets in which we
have a significant market
presence.
In addition, our
competitors
also
compete
for
the
same
retail
store
space.
As
a
result
of
this
competition,
we
may
experience
pricing
pressures,
increased
marketing
expenditures,
increased
costs
to
open
new
stores,
as
well
as
loss
of
market
share,
which
could
materially
and
adversely
affect
our
business,
results
of
operations and financial condition.
The operation of our sourcing offices in Asia may present increased legal
and operational risks.
In
October
2014,
we
established
our
own
sourcing
offices
in
Asia.
Our
experience
with
legal
and
regulatory practices and requirements in Asia
is limited. If our sourcing offices
are unable to successfully
oversee
merchandise
production
to
ensure
that
product
is
produced
on
time
and
within
the
Company’s
specifications, our business, brand, reputation, costs, results of operations
and financial condition could be
materially
and
adversely
affected.
Further,
the
activities
conducted
by
our
sourcing
offices
outside
the
United
States
subject
us
to
foreign
operational
risks,
as
well
as
U.S.
and
international
regulations
and
compliance risks,
as discussed
elsewhere in
this “Risk
Factors” section,
in particular
below under
“Risk
Factors –
Risks Relating
to Accounting
and Legal
Matters -
Our business
operations subject
us to
legal
compliance and litigation
risks, as well
as regulations and
regulatory enforcement priorities, which
could
result in increased costs or liabilities,
divert our management’s attention
or otherwise adversely affect our
business, results of operations and financial condition.”
Any actual or perceived deterioration in the conditions that drive consumer confidence
and spending may
materially and adversely affect consumer demand for our apparel
and accessories and our results of
operations.
Consumer spending habits, including spending for our apparel and accessories, are affected by, among
other things, prevailing social, economic,
political and public health
conditions and uncertainties (such as
matters under debate in the U.S. from time to time
regarding budgetary, spending and tax policies and
the
impact
of
COVID-19), levels
of
employment, fuel,
energy
and
food
costs,
salaries
and
wage
rates
and
other sources of
income, tax rates,
home values, consumer net
worth, the availability
of consumer credit,
inflation, consumer confidence and consumer perceptions of adverse changes in or trends affecting any of
these
conditions.
Any
perception
that
these
conditions
may
be
worsening
or
continuing
to
trend
negatively
may
significantly
weaken
many
of
these
drivers
of
consumer
spending
habits.
Adverse
perceptions of
these conditions
or
uncertainties regarding
them also
generally cause
consumers to
defer
purchases
of
discretionary
items,
such
as
our
merchandise,
or
to
purchase
cheaper
alternatives
to
our
merchandise, all
of which
may also
adversely affect
our net
sales and
results of
operations.
In addition,
15
numerous events,
whether or
not
related to
actual
economic conditions,
such
as downturns
in
the
stock
markets,
acts
of
war
or
terrorism,
political
unrest
or
natural
disasters,
outbreaks
of
disease
or
similar
events,
may
also
dampen
consumer
confidence,
and
accordingly,
lead
to
reduced
consumer
spending.
Any
of
these
events
could
have
a
material
adverse
effect
on
our
business,
results
of
operations
and
financial condition.
Fluctuations in the price, availability and quality of inventory may result in higher
cost of goods, which the
Company may not be able to pass on to its customers.
Vendors
are
increasingly
passing
on
higher
production
costs,
including
the
costs
to
ship
product,
which may impact our ability to maintain or grow our margins. The price and availability of raw materials
may be
impacted by
demand, regulation,
weather and
crop yields,
currency value
fluctuations, inflation,
as
well as
other factors.
Additionally,
manufacturers have
and may
continue to
have increases
in
other
manufacturing costs,
such as
transportation, labor
and benefit
costs. These
increases in
production costs
result
in
higher
merchandise
costs
to
the
Company.
Due
to
the
Company’s
limited
flexibility
in
price
point, the Company
may not be
able to pass
on those cost
increases to the
consumer, which could
have a
material adverse effect on our margins, results of operations and financial condition.
If the Company is unable to successfully integrate new businesses into its existing business,
the Company’s
financial condition and results of operations will be adversely affected.
The Company’s
long-term business
strategy includes
opportunistic growth
through the
development
of
new
store
concepts.
This
growth
may
require
significant
capital
expenditures
and
management
attention. The Company may not
realize any of the
anticipated benefits of a
new business and integration
costs
may
exceed
anticipated
amounts.
We
have
incurred
substantial
financial
commitments
and
fixed
costs related to our retail stores that we
will not be able to recover if our stores
are not successful and that
could
potentially result
in
impairment charges.
If we
cannot
successfully execute
our
growth
strategies,
our financial condition and results of operations may be adversely
impacted.
Failure to attract, train, and retain skilled personnel could adversely affect
our business and our financial
condition.
Like most
retailers, we
experience significant
associate turnover rates,
particularly among store
sales
associates and
managers.
Moreover,
attracting and
retaining skilled
personnel has
become increasingly
challenging in
the tight
labor market
that has
persisted since
the onset
of the
COVID-19 pandemic.
To
offset this
turnover as
well as
support new
store growth,
we must
continually attract,
hire and
train new
store
associates
to
meet
our
staffing
needs.
A
significant
increase
in
the
turnover
rate
among
our
store
sales associates and managers would increase our recruiting and training costs, as well as possibly cause a
decrease in our store operating
efficiency and productivity.
We
compete for qualified store associates, as
well
as
experienced
management
personnel,
with
other
companies
in
our
industry
or
other
industries,
many of whom have greater financial resources than we do.
In
addition,
we
depend
on
key
management
personnel
to
oversee
the
operational
divisions
of
the
Company
for
the
support
of
our
existing
business
and
future
expansion.
The
success
of
executing
our
business strategy
depends in
large part
on retaining
key management.
We
compete for
key management
personnel
with
other
retailers, and
our
inability
to
attract
and
retain
qualified personnel
could
limit
our
ability to continue to grow.
If
we
are
unable
to
retain
our
key
management
and
store
associates
or
attract,
train,
or
retain
other
skilled
personnel in
the
future,
we
may not
be
able
to
service
our
customers
effectively
or
execute
our
business strategy, which could adversely affect our business, operating results and financial condition.
16
The currently
competitive environment
for
hiring new
associates and
retaining existing
associates is
causing
wages
to
increase,
which
could
adversely
affect
our
business,
margins,
operating
results
and
financial condition if we cannot offset these cost increases.
Risks Relating to Our Information Technology and Related Systems:
A failure or disruption relating to our information technology systems could
adversely affect our business.
We
rely
on
our
existing
information
technology
systems
for
merchandise
operations,
including
merchandise planning,
replenishment, pricing, ordering,
markdowns and
product life
cycle management.
In addition to
merchandise operations, we utilize
our information technology systems for
our distribution
processes,
as
well
as
our
financial
systems,
including
accounts
payable,
general
ledger,
accounts
receivable, sales,
banking, inventory
and fixed
assets.
Despite the
precautions we
take, our
information
systems are or may be vulnerable to disruption
or failure from numerous events, including but not limited
to, natural disasters, severe weather conditions, power outages, technical malfunctions, cyber-attacks, acts
of
war
or
terrorism,
similar
catastrophic
events
or
other
causes
beyond
our
control
or
that
we
fail
to
anticipate. Any disruption or failure in the operation of our information technology systems, our failure to
continue
to
upgrade
or
improve
such
systems,
or
the
cost
associated
with
maintaining,
repairing
or
improving
these
systems,
could
adversely
affect
our
business,
results
of
operations
and
financial
condition. Modifications and/or upgrades to
our current information technology systems may also
disrupt
our operations.
A disruption or shutdown of our centralized distribution center or transportation network
could materially
and adversely affect our business and results of operations.
The distribution
of our
products is
centralized in
one distribution
center in
Charlotte, North
Carolina
and
distributed
through
our
network
of
third-party
freight
carriers.
The
merchandise
we
purchase
is
shipped directly to
our distribution center,
where it is
prepared for shipment
to the appropriate
stores and
subsequently delivered
to
the
stores
by our
third-party freight
carriers.
If the
distribution
center or
our
third-party freight carriers were
to be shut down
or lose significant capacity
for any reason, including but
not limited to, any of the causes described above under “A failure or disruption
relating to our information
technology
systems
could
adversely
affect
our
business,”
our
operations
would
likely
be
seriously
disrupted.
Such problems could occur as the result of any loss, destruction or impairment of our ability to
use
our
distribution center,
as
well
as
any broader
problem generally
affecting
the ability
to
ship
goods
into our distribution center or deliver goods
to our stores.
As a result, we could incur significantly higher
costs and longer lead
times associated with distributing our
products to our stores during
the time it takes
for us to reopen or
replace the distribution center and/or our transportation network. Any such
occurrence
could adversely affect our business, results of operations and financial condition.
A security breach that results in unauthorized access to or disclosure of employee,
Company or customer
information could adversely affect our costs, reputation and
results of operations, and efforts to mitigate
these risks may continue to increase our costs.
The
protection
of
employee,
Company and
customer
data
is
critical
to
the
Company.
Any
security
breach, mishandling, human or programming error or other event that results in the misappropriation, loss
or
other
unauthorized
disclosure
of
employee,
Company
or
customer
information,
including
but
not
limited
to
credit
card
data
or
other
personally
identifiable
information,
could
severely
damage
the
Company's reputation, expose it to
remediation and other costs
and the risks of legal
proceedings, disrupt
its
operations
and
otherwise
adversely
affect
the
Company's
business
and
financial
condition.
The
security of certain of
this information also depends on
the ability of third-party
service providers, such as
those
we
use
to
process
credit
and
debit
card
payments
as
described
below
under
“We
are
subject
to
payment-related
risks,”
to
properly
handle
and
protect
such
information.
Our
information
systems
and
those of our
third-party service providers are
subject to ongoing and
persistent cybersecurity threats from
those seeking unauthorized
access through means
which are
continually evolving and
may be difficult
to
17
anticipate or detect for long periods
of time.
Despite measures the Company takes
to protect confidential
information against
unauthorized access
or
disclosure, which
are ongoing
and
may continue
to
increase
our costs,
there is
no assurance
that such
measures will
prevent the
compromise of
such information.
If
any such
compromise or
unauthorized access
to or
disclosure of
this information
were to
occur,
it could
have
a
material
adverse
effect
on
the
Company's
reputation,
business,
operating
results,
financial
condition and cash flows.
We are subject to payment
-related risks.
We
accept payments
using a
variety of
methods, including
third-party credit
cards, our
own branded
credit
card,
debit
cards,
gift
cards
and
physical
and
electronic
bank
checks.
For
existing
and
future
payment
methods
we
offer
to
our
customers,
we
may
become
subject
to
additional
regulations
and
compliance
requirements
(including
obligations
to
implement
enhanced
authentication
processes
that
could result
in increased
costs and
reduce the
ease of
use of
certain payment
methods), as
well as
fraud
risk. For
certain payment
methods, including
credit
and debit
cards, we
pay interchange
and other
fees,
which
may increase
over
time, raising
our
operating costs
and
lowering profitability.
We
rely on
third-
party
service
providers
for
payment
processing
services,
including
the
processing
of
credit
and
debit
cards. In
each case,
it could
disrupt our
business if
these third-party
service providers
become unwilling
or unable to provide these services to
us. We
are also subject to payment card association operating rules,
including
data
security
rules,
certification
requirements
and
rules
governing
electronic
funds
transfers,
which could
change or
be reinterpreted
to make
it difficult
or impossible
for us
to comply.
If we
fail
to
comply with these rules or requirements, or if our data security systems are breached or compromised, we
may be
liable for
card-issuing banks’
costs, subject
to fines
and higher
transaction fees.
In addition,
we
may lose
our ability
to accept
credit and
debit card
payments from
our customers
and process
electronic
funds
transfers
or
facilitate
other
types
of
payments,
and
our
business
and
operating
results
could
be
adversely affected.
The Company’s
failure to successfully operate its e-commerce websites or fulfill customer expectations
could
adversely impact customer satisfaction, our reputation and our business.
Although
the
Company's e-commerce
platform
provides
another
channel
to
drive
incremental
sales,
provide
existing
customers
the
on-line
shopping
experience
and
introduce
the
Company
to
a
new
customer base,
it also
exposes us
to numerous
risks. We
are subject
to potential
failures in
the efficient
and uninterrupted operation
of our
websites, customer contact center
or our distribution
center, including
system
failures
caused
by
telecommunication
system
providers,
order
volumes
that
exceed
our
present
system capabilities, electrical outages,
mechanical problems and human error.
Our e-commerce platform
may also expose us
to greater potential for
security or data
breaches involving the unauthorized access
to
or
disclosure
of
customer
information,
as
discussed
above
under
“A
security
breach
that
results
in
unauthorized
access
to
or
disclosure
of
employee,
Company
or
customer
information
could
adversely
affect
our costs,
reputation and
results of
operations, and
efforts to
mitigate these
risks may
continue to
increase
our
costs.” We
are also
subject to
risk related
to
delays or
failures in
the
performance of
third
parties,
such
as
shipping
companies,
including
delays
associated
with
labor
strikes
or
slowdowns
or
adverse
weather
conditions.
If
the
Company
does
not
successfully
meet
the
challenges
of
operating
e-
commerce
websites
or
fulfilling
customer
expectations,
the
Company's
business
and
sales
could
be
adversely affected.
Risks Relating to Accounting and Legal Matters:
Changes to accounting rules and regulations may adversely affect
our reported results of operations and
financial condition.
In
an
effort
to
provide
greater
comparability
of
financial
reporting
in
an
increasing
global
environment, accounting regulatory authorities
have been in
discussions for many years
regarding efforts
to either converge U.S.
Generally Accepted Accounting Principles with International Financial
Reporting
18
Standards (“IFRS”),
have U.S.
companies
provide supplemental
IFRS-based information
or
continue to
work
toward
a
single
set
of
globally
accepted
accounting
standards.
If
implemented,
these
potential
changes
in
accounting
rules
or
regulations
could
significantly
impact
our
future
reported
results
of
operations and financial
position.
Changes in accounting
rules or
regulations and varying interpretations
of existing
accounting rules
and regulations
have significantly
affected our
reported financial
statements
and those
of other
participants in
the retail
industry in
the past
and may
continue to
do so
in the
future.
Future changes to
accounting rules or
regulations may adversely
affect our
reported results of
operations
and financial position or perceptions of our performance and financial
condition.
Adverse litigation matters may adversely affect our business and
our financial condition.
From
time
to
time
the
Company
is
involved
in
litigation
and
other
claims
against
our
business.
Primarily these
arise from
our
normal
course
of
business
but
are
subject to
risks and
uncertainties, and
could
require
significant
management
time.
The
Company’s
periodic
evaluation
of
litigation-related
matters may change our assessment in light
of the discovery of facts with respect to
legal actions pending
against
us, not
presently known
to
us
or
by determination
of
judges, juries
or
other finders
of
fact.
We
may also
be subjected
to legal
matters not
yet known to
us. Adverse
decisions or settlements
of disputes
may negatively impact our business, reputation and financial condition.
Our business operations subject us to legal compliance and litigation risks, as well as regulations
and
regulatory enforcement priorities, which could result in increased costs or liabilities,
divert our
management’s
attention or otherwise adversely affect our business, results of operations
and financial
condition.
Our operations
are subject
to federal,
state and
local laws,
rules and
regulations, as
well as
U.S. and
foreign
laws
and
regulations
relating
to
our
activities
in
foreign
countries
from
which
we
source
our
merchandise
and
operate our
sourcing
offices.
Our
business is
also
subject
to
regulatory and
litigation
risk in
all of
these jurisdictions, including
foreign jurisdictions
that may
lack well-established
or reliable
legal
systems
for
resolving
legal
disputes.
Compliance
risks
and
litigation
claims
have
arisen
and
may
continue
to
arise
in
the
ordinary
course
of
our
business
and
include,
among
other
issues,
intellectual
property
issues,
employment
issues,
commercial
disputes,
product-oriented
matters,
tax,
customer
relations and personal injury claims. International
activities subject us to numerous U.S.
and international
regulations, including but not limited to, restrictions on trade, license and permit requirements, import and
export
license
requirements,
privacy
and
data
protection
laws,
environmental
laws,
records
and
information
management
regulations,
tariffs
and
taxes
and
anti-corruption
laws,
such
as
the
Foreign
Corrupt Practices Act, violations
of which by employees
or persons acting on
the Company’s
behalf may
result in
significant investigation
costs, severe
criminal or
civil sanctions
and reputational
harm.
These
and
other
liabilities
to
which we
may
be
subject
could
negatively
affect
our
business, operating
results
and financial condition. These matters frequently raise complex factual and legal issues, which are subject
to
risks
and
uncertainties
and
could
divert
significant
management
time.
The
Company
may
also
be
subject to
regulatory review and
audits, which results
may have the
potential to materially
and adversely
affect
our
business, results
of
operations and
financial condition.
In addition,
governing laws,
rules and
regulations, and interpretations of existing laws are subject to
change from time to time.
Compliance and
litigation matters
could result
in unexpected
expenses and
liability,
as well
as have
an adverse
effect on
our operations and our reputation.
New
legislation
or
regulation
and
interpretation
of
existing
laws
and
regulations,
including
those
related to
data privacy,
could increase
our costs
of compliance,
technology and
business operations.
The
interpretation of existing or
new laws to
existing technology and practices
can be uncertain and
may lead
to additional compliance risk and cost.
If we fail to
protect our trademarks and
other intellectual property
rights or infringe the
intellectual property
rights
of
others,
our
business,
brand
image,
growth
strategy,
results
of
operations
and
financial
condition
could be adversely affected.
19
We
believe
that
our
“Cato”,
“It’s
Fashion”,
“It’s
Fashion
Metro”
and
“Versona”
trademarks
are
integral
to
our
store
designs,
brand
recognition
and
our
ability
to
successfully
build
consumer
loyalty.
Although we
have registered
these trademarks
with the
U.S. Patent
and Trademark
Office
(“PTO”) and
have also registered, or applied for registration of, additional trademarks with the PTO that we believe are
important to
our business,
we cannot
give assurance that
these registrations will
prevent imitation
of our
trademarks, merchandising concepts, store designs or private label merchandise or
the infringement of our
other
intellectual
property
rights
by
others.
Infringement
of
our
names,
concepts,
store
designs
or
merchandise
generally,
or
particularly
in
a
manner
that
projects
lesser
quality
or
carries
a
negative
connotation
of
our
image
could
adversely
affect
our
business,
financial
condition
and
results
of
operations.
In addition,
we cannot
give assurance
that others will
not try
to block
the manufacture
or sale
of our
private label merchandise by claiming
that our merchandise violates
their trademarks or other
proprietary
rights.
In
the
event
of
such
a
conflict,
we
could
be
subject
to
lawsuits
or
other
actions,
the
ultimate
resolution of
which we
cannot predict;
however,
such a
controversy could
adversely affect
our business,
financial condition and results of operations.
Maintaining and improving our internal control over financial reporting and
other requirements necessary
to operate as a public company may strain our resources, and any material failure
in these controls may
negatively impact our business, the price of our common stock and market
confidence in our reported
financial information.
As a
public company,
we are
subject to
the reporting
requirements of
the Securities
Exchange Act
of
1934, the
Sarbanes-Oxley Act
of 2002,
the rules
of the
SEC and
New York
Stock Exchange
and certain
aspects of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and
related rule-making that
has been and
may continue to
be implemented over
the next several
years under
the mandates of the Dodd-Frank Act. The
requirements of these rules and regulations have increased, and
may continue to increase, our compliance costs and
place significant strain on our personnel, systems and
resources.
To
satisfy
the
SEC’s
rules
implementing
the
requirements
of
Section
404
of
the
Sarbanes-
Oxley Act
of
2002, we
must continue
to
document, test,
monitor and
enhance our
internal control
over
financial reporting, which is
a costly and time-consuming effort
that must be re-evaluated
frequently. We
cannot give
assurance that
our disclosure
controls and
procedures and
our internal
control over
financial
reporting, as
defined by applicable
SEC rules,
will be adequate
in the future.
Any failure
to maintain the
effectiveness
of
internal
control
over
financial
reporting
or
to
comply
with
the
other
various
laws
and
regulations to
which we
are and
will continue
to be
subject, or
to
which we
may become
subject in
the
future,
as
a
public
company
could
have
an
adverse
material
impact
on
our
business,
our
financial
condition and
the price
of our
common stock.
In addition,
our efforts
to comply
with these
existing and
new requirements could significantly increase our compliance costs.
Risks Relating to Our Investments and Liquidity:
We may experience market
conditions or other events that could adversely impact the valuation and liquidity
of, and our ability to access, our short-term investments, cash and cash equivalents and
our revolving line of
credit.
Our
short-term investments
and
cash
equivalents
are
primarily
comprised
of
investments
in
federal,
state, municipal
and corporate
debt securities.
The value
of those
securities may
be adversely
impacted
by factors relating to these securities,
similar securities or the broader credit
markets in general.
Many of
these factors
are beyond our
control, and include
but are
not limited to
changes to
credit ratings, rates
of
default, collateral
value, discount
rates, and
strength and
quality of
market credit
and liquidity,
potential
disruptions in the capital
markets and changes in the
underlying economic, financial and other
conditions
that drive these
factors.
As federal, state
and municipal entities
struggle with declining
tax revenues and
budget deficits,
we cannot
be assured
of our
ability to
timely access
these investments
if the
market for
20
these issues declines.
Similarly,
the default by
issuers of the
debt securities we
hold or similar
securities
could impair the liquidity
of our investments.
The development or persistence
of any of these
conditions
could
adversely
affect
our
financial
condition,
results
of
operations
and
ability
to
execute
our
business
strategy.
In
addition,
we
have significant
amounts
of
cash
and
cash
equivalents at
financial
institutions
that
are
in
excess
of
the
federally
insured
limits.
An
economic
downturn
or
development
of
adverse
conditions affecting the financial sector
and stability of financial institutions could cause
us to experience
losses on our deposits.
Our ability
to access
credit markets
and our
revolving line
of credit,
either generally
or on
favorable
market terms, may be
impacted by the
factors discussed in
the preceding paragraph, as
well as continued
compliance with covenants under
our revolving credit agreement. The
development or persistence of
any
of these
adverse factors or
failure to
comply with covenants
on which our
borrowing is conditioned
may
adversely
affect
our
financial
condition,
results
of
operations
and
our
ability
to
execute
our
business
strategy.
Risks Relating to the Market Value of Our Common Stock:
Our operating results are subject to seasonal and quarterly fluctuations, which could
adversely affect the
market price of our common stock.
Our business
varies with
general seasonal
trends that
are characteristic
of the
retail apparel
industry.
As a
result, our
stores typically
generate a
higher percentage
of our
annual net
sales and
profitability in
the
first
and second
quarters of
our
fiscal
year
compared to
other
quarters.
Accordingly,
our
operating
results for
any one
fiscal period
are not
necessarily indicative
of results
to
be expected
from any
future
period,
and
such
seasonal
and
quarterly
fluctuations
could
adversely
affect
the
market
price
of
our
common stock.
The interests of our principal shareholder may limit the ability of other shareholders to
influence the
direction of the Company and otherwise affect our corporate governance
and the market price of our
common stock.
As of March 23, 2022, John P. D. Cato, Chairman, President and Chief Executive Officer, beneficially
owned approximately 49.8%
of the combined
voting power of
our common stock.
As a result,
Mr.
Cato
has the ability to substantially influence or determine the outcome of all matters requiring approval by the
shareholders,
including
the
election
of
directors
and
the
approval
of
mergers
and
other
business
combinations
or
other
significant
Company
transactions.
Mr.
Cato
may
have
interests
that
differ
from
those of other shareholders, and
may vote in a
way with which other shareholders disagree
or perceive as
adverse to their interests.
The concentration of voting power held by Mr.
Cato could discourage potential
investors from acquiring our
common stock and could
also have the effect
of preventing, discouraging or
deferring a change in control of the Company or other fundamental transaction,
all of which could depress
the market price of our common stock.
In addition, Mr.
Cato has the ability to control the
management of
the
Company
as
a
result
of
his
position
as
Chief
Executive
Officer.
If
Mr.
Cato
acquires
beneficial
ownership of more than 50% of the combined voting power of our common stock (including as a result of
continued Company stock
repurchases from time
to time under
our stock repurchase
program that would
reduce
our
outstanding
shares),
we
would
qualify
for
exemption
as
a
“controlled
company”
from
compliance
with
certain
New
York
Stock
Exchange
corporate
governance
rules,
including
the
requirements
that
we
have
a
majority
of
independent
directors
on
our
Board,
an
independent
compensation
committee
and
an
independent
corporate
governance
and
nominating
committee.
If
we
became
eligible
and
elected
to
utilize
these
“controlled
company”
exceptions,
our
other
shareholders
could lose
the benefit
of these
corporate governance
requirements and
the market
value of
our common
stock could be adversely affected.
Conditions in the stock market generally, or particularly
relating to our industry, Company or common
stock, may materially and adversely affect the market
price of our common stock and make its trading price
21
more volatile.
The trading
price of
our common
stock at
times has
been, and
is likely
to continue
to be,
subject to
significant volatility.
A variety of
factors may cause
the price of
our common stock to
fluctuate, perhaps
substantially,
including,
but
not
limited
to,
those
discussed
elsewhere
in
this
report,
as
well
as
the
following: low
trading volume;
general market
fluctuations resulting
from factors
not directly
related to
our operations or the inherent value of
our common stock; announcements of developments related to our
business; fluctuations in our reported operating results; general conditions or trends affecting or perceived
to affect
the fashion and
retail industry; conditions or
trends affecting or
perceived to affect
the domestic
or global
economy or
the domestic
or global
credit or
capital markets;
changes in
financial estimates
or
the scope
of coverage
given to
our Company
by securities
analysts; negative
commentary regarding
our
Company
and
corresponding
short-selling
market
behavior;
adverse
customer
relations
developments;
significant changes
in our
senior management
team; and
legal proceedings.
Over the
past several
years
the stock
market in
general, and the
market for shares
of equity
securities of many
retailers in
particular,
have
experienced
extreme
price
fluctuations
that
have
at
times
been
unrelated
to
the
operating
performance of
those companies.
Such fluctuations
and market
volatility based
on these
or other
factors
may materially and adversely affect the market price of our common stock.
Item 1B.
Unresolved Staff Comments:
None.
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.