Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The
following
information
should
be
read
along
with
the
unaudited
Condensed
Consolidated
Financial
Statements,
including
the
accompanying
Notes
appearing
in
this
report.
Any
of
the
following
are
“forward-looking”
statements
within
the
meaning
of
Section 27A
of
the
Securities
Act
of
1933,
as
amended,
and
Section 21E
of
the
Securities
Exchange
Act
of
1934,
as
amended:
(1) statements
in
this
Form 10-Q
that
reflect
projections
or
expectations
of
our
future
financial
or
economic
performance;
(2) statements
that
are
not
historical
information;
(3) statements
of
our
beliefs,
intentions,
plans
and
objectives for future operations,
including those contained in
“Management’s Discussion and
Analysis of
Financial Condition
and Results of
Operations”; (4) statements relating
to our
operations or activities
for
our
fiscal
year
ending
January
28,
2023
(“fiscal
2022”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and
closures
and
statements
regarding
the
potential
impact
of
the
COVID-19
pandemic
and
related
responses
and
mitigation
efforts
on
our
business,
results
of
operations
and
financial
condition;
and
(5) statements relating
to our future contingencies. When possible, we have attempted to identify forward-
looking statements
by using
words
such
as
“will,” “expects,”
“anticipates,” “approximates,”
“believes,”
“estimates,”
“hopes,”
“intends,”
“may,”
“plans,”
“could,”
“would,”
“should”
and
any
variations
or
negative formations
of such
words and
similar expressions.
We
can give
no assurance
that actual
results
or
events
will
not
differ
materially
from
those
expressed
or
implied
in
any
such
forward-looking
statements. Forward-looking statements included in this report are based on information available to us as
of the
filing date
of this
report, but
subject to
known and
unknown risks,
uncertainties and
other factors
that
could
cause
actual
results
to
differ
materially
from
those
contemplated
by
the
forward-looking
statements.
Such
factors
include,
but
are
not
limited
to,
the
following:
any
actual
or
perceived
deterioration in the conditions that drive consumer confidence and spending, including, but not limited to,
prevailing
social,
economic,
political
and
public
health
conditions
and
uncertainties,
levels
of
unemployment, fuel,
energy and
food costs,
wage rates,
tax rates,
interest rates,
home values,
consumer
net
worth,
the
availability of
credit
and
inflation;
changes in
laws,
regulations and
government policies
affecting
our
business,
including
but
not
limited
to
tariffs;
uncertainties
regarding
the
impact
of
any
governmental action regarding, or
responses to, the
foregoing conditions; competitive factors
and pricing
pressures; our
ability to
predict and
respond to
rapidly changing
fashion trends
and consumer
demands;
our ability to
successfully implement our
new store development
strategy to increase
new store openings
and our
ability of
any such
new stores
to grow
and perform
as expected;
adverse weather,
public health
threats (including the COVID-19 pandemic)
or similar conditions that
may affect our
sales or operations;
inventory
risks
due
to
shifts
in
market
demand,
including
the
ability
to
liquidate
excess
inventory
at
anticipated
margins;
and
other
factors
discussed
under
“Risk
Factors”
in
Part
I,
Item
1A
of
our
annual
report
on
Form
10-K
for
the
fiscal
year
ended
January
29,
2022
(“fiscal
2021”),
as
amended
or
supplemented,
and in
other reports
we
file
with
or
furnish
to
the
Securities and
Exchange
Commission
(“SEC”)
from time
to
time.
We
do
not
undertake, and
expressly
decline,
any obligation
to
update
any
such forward-looking information contained
in this report,
whether as a
result of new
information, future
events, or otherwise.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
20
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company’s accounting
policies are more
fully described
in “Management’s Discussion
and Analysis of
Financial
Condition
and Results
of Operations”
in the Company’s
Annual
Report
on Form
10-K for
the fiscal
year
ended
January
29,
2022.
As
disclosed
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition and Results of Operations,”
the preparation of the Company’s financial
statements in conformity
with generally
accepted accounting
principles
in the United States (“GAAP”)
requires management
to make
estimates
and assumptions
about future
events
that affect
the amounts
reported
in the financial
statements
and
accompanying
notes. Future
events and
their effects
cannot be
determined
with absolute
certainty. Therefore,
the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from
those
estimates, and
such
differences may
be
material to
the
financial statements.
The
most
significant
accounting
estimates
inherent
in the preparation
of the Company’s
financial
statements
include
the allowance
for
customer
credit
losses,
inventory
shrinkage, the
calculation of
potential
asset
impairment, workers’
compensation, general and auto insurance liabilities, reserves relating to self-insured health insurance, and
uncertain
tax positions.
The Company’s
critical
accounting
policies
and estimates
are discussed
with the
Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
21
RESULTS OF OPERATIONS:
The following
table sets
forth, for
the periods
indicated,
certain
items in
the Company's
unaudited
Condensed
Consolidated
Statements
of Income
as a percentage
of total
retail
sales:
Three Months Ended
April 30, 2022
May 1, 2021
Total retail sales
100.0
%
100.0
%
Other revenue
0.9
0.9
Total revenues
100.9
100.9
Cost of goods sold (exclusive of depreciation)
64.5
58.5
Selling, general and administrative (exclusive of depreciation)
29.5
29.9
Depreciation
1.3
1.4
Interest and other income
(0.2)
(0.3)
Income before income taxes
5.7
11.3
Net income
4.8
9.8
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
22
RESULTS OF OPERATIONS
(CONTINUED):
Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
(“MD&A”) is
intended
to
provide
information
to
assist
readers
in
better
understanding
and
evaluating
our
financial
condition
and
results
of
operations.
We
recommend
reading
this
MD&A
in
conjunction
with
our
Condensed
Consolidated
Financial
Statements
and
the
Notes
to
those
statements
included
in
the
“Financial Statements” section of this Quarterly Report on Form
10-Q, as well as our 2021 Form 10-K.
COVID-19
Update
There
is
still
significant
uncertainty
regarding
the
lingering
effects
of
the
COVID-19 pandemic
on
our
business, financial condition, results
of operations, cash flows,
and liquidity.
These uncertainties include
the
impact
of
new
or
potential
variants
of
the
virus
that
are
more
transmissible
or
severe,
stagnant
vaccination rates
and related
factors that
may continue
to
fuel
periodic surges
of
the
virus or
otherwise
impede
progress
toward
the
return
to
pre-pandemic
activities
and
levels
of
consumer
confidence
and
commercial
activity.
The
Company
also
faces
uncertainty
from
the
impacts
of
COVID-19
and
the
governmental
responses
to
COVID-19 surges,
including
lockdowns,
in
the
foreign
countries
where
our
merchandise is produced.
The Company is also subject to the continued effects of disruption in the global
supply
chain,
inflation
and
its
impact
on
our
cost
of
products,
transportation,
wage
rates
and
other
operating
costs,
as
well
as,
the
impact
on
our
customers’
disposable
incomes,
and
the
availability
of
workers.
The Company
expects that
these uncertainties
and perhaps
others related
to the
pandemic will
continue
to
impact
the
Company
in
fiscal
2022.
The
adverse
financial
impacts
associated
with
these
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.
While the Company currently anticipates a continuation of the
uncertainties listed above and the potential
adverse impacts
of COVID-19
during fiscal
2022, the
duration and
severity of
these effects
will depend
on
the
course of
future developments,
which are
highly uncertain.
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.
Comparison
of First Quarter
of 2022
with 2021
Total retail sales
for the first
quarter were
$204.9 million
compared
to last year’s
first quarter
sales of $211.2
million.
Sales
decreased primarily
due
to
a
decrease in
same-store sales,
partially offset
by
sales
from
noncomparable stores. The decrease in
same-store sales was
primarily due to
cooler, wetter
weather, late
merchandise
shipments
due
to
supply
chain
disruptions
and
inflationary
pressure
on
our
customers’
disposable income. Same store sales include stores that have been open more than
15 months.
Stores that
have been relocated or expanded are also included in
the same store sales calculation after they have been
open more
than 15
months.
The method
of calculating
same store
sales varies
across the
retail industry.
As a
result, our same
store sales calculation
may not be comparable
to similarly
titled measures
reported
by other
companies.
E-commerce
sales were
less than
5.0% of
sales
for the
first quarter
of fiscal
2022 and
are included
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
23
in the same-store sales calculation.
Total revenues, comprised of retail sales
and other revenue (principally
finance
charges
and
late
fees
on
customer
accounts
receivable,
shipping
charged
to
customers
for
e-
commerce purchases and
layaway fees),
were
$206.7 million
for
the
first
quarter ended
April 30,
2022,
compared to $213.1 million
for the first quarter ended
May 1, 2021. The Company operated
1,315 stores at
April 30,
2022 compared
to 1,325
stores
at the end
of last
fiscal year’s
first quarter.
For the
first three
months
of fiscal 2022, the Company opened
five stores and permanently
closed one store.
The Company currently
expects
to close
approximately
25 stores
in fiscal
2022.
Credit revenue
of $0.5
million
represented
0.2% of
total revenues
in the first
quarter
of fiscal
2022, compared
to 2021
credit revenue of
$0.5 million or
0.3% of
total revenues.
Credit revenue is
comprised of interest
earned on
the Company’s
private
label credit
card portfolio
and related
fee income.
Related
expenses
include
principally
payroll,
postage and other
administrative
expenses,
and totaled $0.4
million in
the first quarter
of
2022, compared
to last
year’s
first quarter
expenses
of $0.3
million.
Other revenue,
a component
of total revenues,
was $1.8 million
for the first
quarter
of fiscal 2022,
compared
to
$1.9
million for
the
prior
year’s
comparable first
quarter.
The
slight
decrease was
due
to
lower
e-
commerce
shipping
revenue
and finance
charges,
slightly
offset by
higher
layaway
fees.
Cost of goods sold
was $132.2 million,
or 64.5% of retail
sales for the first
quarter of fiscal
2022, compared
to $123.7 million, or 58.5% of retail
sales in the first quarter of fiscal 2021.
The overall increase
in cost of
goods sold
as a percent
of retail
sales for
first quarter
of 2022 resulted
primarily
from higher
markdown
sales
and an increase
in freight costs
due to higher fuel
prices.
Cost of goods sold
includes
merchandise
costs (net
of
discounts
and
allowances),
buying
costs,
distribution costs,
occupancy
costs,
freight
and
inventory
shrinkage.
Net
merchandise costs
and
in-bound freight
are
capitalized as
inventory costs.
Buying
and
distribution costs include payroll, payroll-related
costs and
operating expenses for the
buying departments
and
distribution
center.
Occupancy
costs
include
rent,
real
estate
taxes,
insurance,
common
area
maintenance,
utilities
and maintenance
for stores
and distribution
facilities.
Total gross margin
dollars
(retail
sales less
cost of
goods sold
exclusive of
depreciation) decreased by 17.0% to
$72.7 million for
the first
quarter
of fiscal
2022 compared
to $87.6
million
in the first
quarter
of fiscal
2021.
Gross margin
as presented
may not
be comparable
to those
of other
entities.
Selling,
general
and administrative
expenses
(“SG&A”)
primarily
include
corporate
and store
payroll,
related
payroll taxes
and benefits,
insurance,
supplies,
advertising,
and bank and
credit card
processing
fees.
SG&A
expenses were 29.5% of retail
sales for the first quarter of fiscal 2022, compared
to 29.9% of retail sales in
the first quarter
of fiscal 2021.
SG&A as a percent
of retail sales
decreased
primarily
due to lower
incentive
compensation, partially
offset by increased payroll costs reflecting more normalized operations.
Depreciation
expense
was $2.7
million,
or 1.3%
of retail
sales for
the first
quarter
of fiscal
2022, compared
to
$3.0 million,
or 1.4% of retail sales
for the first quarter
of fiscal 2021. The decrease
in depreciation
expense
was attributable
to older
stores
being
fully depreciated.
Interest and
other
income
was
$0.4
million, or
0.2%
of
retail
sales
for
the
first
quarter of
fiscal
2022,
compared to
$0.7
million, or
0.3%
of
retail sales
for
the
first quarter
of
fiscal 2021.
The
decrease was
primarily
attributable
to a decrease
in short-term
investments.
Income tax expense
was $1.9 million or
1.0% of retail sales
for the first quarter
of fiscal 2022, compared
to
an
income
tax
expense
of
$3.1
million,
or
1.5%
of
retail
sales
for
the
first
quarter
of
fiscal
2021.
Income tax
expense
for
the
first
quarter
of
fiscal
2022
decreased
primarily
as
a
result
of
lower
pre-tax
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
earnings.
The effective income
tax rate for
the first quarter
of fiscal 2022
was 16.7%
compared to 12.9%
for
the
first
quarter of
2021. The
increase in
the
2022
first
quarter tax
rate was
primarily due
to
higher
Global Intangible Low-taxed Income (GILTI), partially offset by the ability to realize foreign tax credits.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company believes that its cash, cash equivalents and short-term
investments,
together with cash flows
from operations
and borrowings
available under
its revolving credit
agreement,
will be adequate to fund the
Company’s regular
operating
requirements
and expected
capital expenditures
for fiscal 2022
and the next 12
months.
Cash used
by operating
activities
for the
first three
months
of fiscal
2022 was
primarily
generated
by earnings
adjusted
for depreciation
and changes
in working capital.
The decrease
in cash provided
of $45.3 million
for
the first
three months
of fiscal
2022 as compared
to the first
three months
of fiscal
2021 was primarily
due to
lower net income
and a decrease
in accounts
payable and
accrued liabilities
from fiscal
2021 year end
versus
an increase
from 2020
year end,
partially
offset by
a decrease
in prepaid
and other
assets.
At
April
30,
2022,
the
Company had
working capital
of
$107.8
million compared
to
$111.5
million at
January 29, 2022.
This decrease is primarily
attributable
to lower short-term
investments,
partially offset
by
lower accrued
incentive
compensation.
At
April
30,
2022,
the
Company
had
an
unsecured
revolving
credit
agreement,
which
provided
for
borrowings of up to $35.0 million less the balance of letters
of credit discussed below and was committed
through
May
2022.
In
May
2022,
the
Company
signed
a
new
unsecured
revolving
credit
agreement,
which replaces
the prior
credit agreement,
provides up
to $35.0
million in
committed availability
and is
committed
through
May
2027.
The
prior
credit
agreement
contained
various
financial
covenants
and
limitations,
including
the
maintenance
of
specific
financial
ratios
with
which
the
Company
was
in
compliance as of April 30, 2022.
The new credit agreement also contains various financial covenants and
limitations, including the maintenance of specific financial ratios.
There were no outstanding borrowings
under the prior credit facility as of April 30, 2022 or January 29, 2022.
At
April
30,
2022
and
January
29,
2022,
the
Company
had
no
outstanding letters
of
credit
relating to
purchase
commitments.
Expenditures for
property
and
equipment totaled
$4.4
million
in
the
first
three
months
of
fiscal
2022,
compared to $0.6
million in
last year’s
first three
months.
The increase in
expenditures for property and
equipment was primarily due
to
costs associated with
opening five
new stores
and capital
investments in
information technology
and the
distribution center.
For the
full fiscal 2022
year, the
Company expects to
invest
approximately
$22.6
million
in capital
expenditures,
including
distribution
center
automation
projects.
Net
cash
provided by
investing activities
totaled
$19.6
million in
the
first
three
months
of
fiscal
2022
compared
to $34.2 million
used in the comparable
period of fiscal
2021, primarily
due to lower purchases
of
short-term
investments,
partially
offset by
an increase
in capital
expenditures.
Net cash used by financing
activities
totaled $12.7 million
in the first three months
of fiscal 2022 compared
to $5.5
million
used in
the comparable
period
of fiscal
2021, primarily
due to
an increase
in share
repurchases
and dividends
paid.
On May
19, 2022,
the Board
of Directors
declared
the quarterly
dividend
at $0.17
per share.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
As
of
April 30,
2022, the
Company had
840,119 shares
remaining in
open authorizations under its
share
repurchase
program.
The Company
does not
use derivative
financial
instruments.
The Company’s investment
portfolio was primarily
invested in corporate
bonds and tax-exempt
and taxable
governmental debt securities
held in
managed accounts with underlying ratings of A or
better at April
30,
2022 and
January 29,
2022.
The state,
municipal and corporate bonds
have contractual maturities which
range from one day to 4.6 years. The U.S. Treasury Notes have contractual
maturities which
range from 46
days
to
2.4
years.
These
securities
are
classified
as
available-for-sale and
are
recorded
as
Short-term
investments,
Restricted
cash and
Other assets
on the accompanying
Condensed
Consolidated
Balance
Sheets.
These assets are carried at fair value with unrealized
gains and losses reported net of taxes in Accumulated
other comprehensive
income. The
asset-backed
securities
are bonds comprised
of auto loans and bank
credit
cards that carry AAA ratings.
The auto loan asset-backed
securities
are backed by static pools of auto loans
that were
originated
and serviced
by captive
auto finance
units, banks
or finance
companies.
The bank
credit
card asset-backed securities
are backed by
revolving pools of credit card receivables generated by account
holders
of cards
from American
Express,
Citibank,
JPMorgan
Chase,
Capital
One, and
Discover.
Additionally,
at
April
30,
2022,
the
Company
had
$0.8
million
of
corporate
equities
and
deferred
compensation
plan assets
of $11.0 million.
At January
29, 2022, the
Company
had $0.8 million
of corporate
equities
and deferred
compensation
plan assets
of $11.5 million.
All of these
assets
are recorded
within Other
assets
in the
Condensed
Consolidated
Balance
Sheets.
See Note
7, Fair
Value Measurements.
RECENT
ACCOUNTING
PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
26
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
based
on
its
financing, investing and
cash management activities,
but the Company
does not
believe such exposure
is
material.
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