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
30,
2027
(“fiscal
2026”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and closures, statements
regarding the potential
impact of public
health threats and
related responses and
mitigation efforts, as well as the potential impact of supply chain disruptions, extreme weather conditions,
tariffs
and
other
trade
policies,
inflationary
pressures
and
other
economic
conditions
on
our
business,
results
of
operations
and
financial
condition
and
statements
regarding
new
store
development
strategy;
and
(5)
statements
relating
to
our
future
risks
or
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
threats
and
uncertainties,
war
or
similar
hostilities
and
their
collateral
effects,
levels
of
unemployment,
fuel,
energy
and
food
costs,
inflation,
wage
rates,
tax
rates,
interest
rates,
home
values,
consumer
net
worth
and
the
availability
of
credit;
changes
in
laws,
regulations
or
government
policies
affecting
our
business,
including
but
not
limited to
tariffs
and taxes;
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
open
new stores in attractive locations and
the ability of any such new
stores to grow and perform as
expected;
underperformance or
other
factors
that
may lead
to
a
continuation
or
acceleration
of
store
closures
and
negatively
affect
the
Company’s
profitability,
financial
condition
or
prospects;
adverse
weather,
public
health
threats, acts
of
war or
aggression
or
similar
conditions and
related consequences
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;
adverse
developments
or
volatility
affecting
the
financial
services industry or broader
financial markets; and other
factors discussed under “Risk Factors”
in Part I,
Item
1A
of
the
Company’s
Annual
Report
on
Form
10-K
for
the
fiscal
year
ended
January
31,
2026
(“fiscal 2025”), 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)
22
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The
Company’s
critical
accounting
policies
and
estimates
are
more
fully
described
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations”
in
Part
II,
Item
7
in
the
Company’s Annual Report on
Form 10-K for the
fiscal year ended January
31, 2026. 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 calculation
of potential
asset impairment,
income tax
valuation
allowances,
reserves
relating
to
self-insured
health
insurance,
workers’
compensation,
general
and
auto
insurance
liabilities,
uncertain
tax
positions,
the
allowance
for
customer
credit
losses,
and
inventory
shrinkage.
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)
23
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in
the Company's unaudited Condensed
Consolidated Statements of Income as a
percentage of total retail sales:
Three Months Ended
May 2, 2026
May 3, 2025
Total retail sales
100.0
%
100.0
%
Other revenue
1.0
1.1
Total revenues
101.0
101.1
Cost of goods sold (exclusive of depreciation)
62.8
64.9
Selling, general and administrative (exclusive of depreciation)
31.8
32.8
Depreciation
1.3
1.5
Interest and other income
(0.7)
(0.7)
Income before income taxes
5.8
2.5
Net income
5.5
2.0
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
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
Annual Report
on
Form 10-K for fiscal 2025.
Recent Developments
Tariff Issues
There remains a
significant degree of
uncertainty regarding the
status of U.S.
trade policy and
the types and
amount of tariffs to
which the Company will
be subject.
On February 20, 2026,
the Supreme Court issued
a
ruling
that
struck
down
the
series
of
tariffs
that
had
been
imposed
under
the
International
Economic
Emergency Powers Act (“IEEPA”) beginning in February
2025.
In response, the administration transitioned
under
Section
122
of
the
Trade
Act
of
1974
(the
“Trade
Act”)
to
a
new
10%
baseline
global
tariff
that
is
scheduled to expire in July 2026 unless otherwise extended by Congress.
On May 7, 2026, the U.S. Court of
International
Trade
issued
a
ruling
finding
that
these
Section
122
tariffs
are
unlawful,
but
limited
its
permanent injunction to
the specific plaintiffs
in that case,
and these tariffs
continue to be
collected from all
other
importers,
including
the
Company.
The
administration
has
appealed
this
decision,
and
it
remains
uncertain whether these duties will remain
in effect or possibly be replaced
by other tariffs.
On March 11, 2026, the U.S. Trade
Representative announced investigations under Section 301
of the Trade
Act
into
various
countries,
including
countries
where
much
of
our
products
are
manufactured,
that
could
result
in
the
imposition
of
increased
tariffs.
Beginning
in
May
2026,
the
U.S.
Trade
Representative
held
Section 301
hearings for
certain countries,
including countries
where we
source most
of our
product.
The
extent to which
these hearings will
result in increased
tariffs is currently
unknown.
Our acquisition costs
in
future periods will
be negatively impacted
to the extent
that any tariffs
imposed due to
Section 301 findings
are greater than the current
Section 122 tariffs.
In
April
2026,
following
the
Supreme
Court’s
invalidation
of
the
IEEPA
tariffs
and
the
establishment
of
procedures for processing
tariff refunds, the
Company submitted a
refund claim and
recorded a $5.7
million
reduction in cost of goods sold in the first quarter of fiscal 2026.
On May 15, 2026, the Company received a
$2.6 million
partial payment
for its
tariff refund
claim. The
Company anticipates
receiving payment
for the
balance of its tariff refund claim
by the end of the second
quarter of fiscal 2026.
Pricing
Pressures
The pressure
on our
customers’ discretionary
income continued
in the
first quarter
of 2026
with increasing
fuel
prices.
Additionally,
the
Core
Price
Index
(CPI)
rose
in
April,
further
pressuring
our
customers’
discretionary income both now and into the foreseeable future.
We believe these additional pricing pressures
will cause
our
customers to
be
more
cautious
with their
discretionary
spending.
In addition,
our ability
to
pass through costs
caused by rising
fuel prices and
potential increased tariff
costs will be
limited due in
part
to the pressure on our customers’ discretionary spending.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
Comparison of First Quarter of 2026
with 2025
Total retail sales for the first quarter
were $169.4 million compared to
last year’s first quarter sales of
$168.4
million.
Sales increased due
to a same-store
sales increase of
3%, partially offset
by stores that
were closed
in the past 12 months.
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 4.0%
of sales for the first quarter of
fiscal 2026 and are included
in the
same-store sales
calculation.
Total revenues,
comprised of
retail sales
and other
revenue (principally
finance
charges
and
late
fees
on
customer
accounts
receivable,
shipping
charged
to
customers
for
e-
commerce
purchases
and
layaway
fees),
were
$171.1
million
for
the
first
quarter
ended
May
2,
2026,
compared to $170.2
million for
the first
quarter ended May
3, 2025. The
Company operated
1,065 stores
at
May 2, 2026 compared
to 1,109 stores at
the end of last fiscal
year’s first quarter.
For the first three
months
of
fiscal
2026,
the
Company
opened
two
stores
and
closed
six
stores.
The
Company
currently
expects
to
open up to 15 new stores
and close approximately 35 stores in
fiscal 2026.
Other revenue, a component of
total revenues, was $1.7 million for the first
quarter of fiscal 2026, compared
to $1.8
million for
the prior
year’s comparable
first quarter.
Included in
Other revenue
is credit
revenue of
$0.7 million
which represented
0.4% of
total revenues
in the
first quarter
of fiscal
2026, flat
both in
dollars
and percentage compared
to 2025.
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
2026, flat to
the first quarter
of
2025.
Cost of goods
sold was $106.3
million, or 62.8%
of retail sales for
the first quarter of
fiscal 2026, compared
to $109.3
million, or
64.9% of
retail sales
in the
first quarter
of fiscal
2025.
The decrease
in cost
of goods
sold as
a percent
of sales
was due
in part
to a
pre-tax tariff
refund claim
of $5.7
million and
lower freight
costs,
partially
offset
by
increased
sales
of
marked
down
goods.
Cost
of
goods
sold
includes
merchandise
costs
(net
of
discounts
and
allowances),
buying
costs,
distribution
costs,
occupancy
costs,
freight
and
inventory shrinkage.
Net merchandise costs and
in-bound freight are capitalized
as inventory costs.
Buying
and
distribution
costs
include
payroll,
payroll-related
costs
and
operating
expenses
for
the
buying
departments and distribution center.
Occupancy costs include rent, real estate taxes, insurance, common area
maintenance, utilities and maintenance for stores
and distribution facilities.
Total gross margin dollars (retail
sales less cost of goods sold exclusive of depreciation) increased by 6.8% to $63.1 million for the first quarter
of fiscal
2026 compared
to $59.1
million in the
first quarter
of fiscal
2025.
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
$53.9 million,
or 31.8%
of retail
sales for
the first
quarter of
fiscal 2026,
compared to
$55.3
million,
or
32.8%
of
retail
sales
in
the
first
quarter
of
fiscal
2025.
SG&A
expense
was
lower
in
the
first
quarter of
fiscal 2026
compared to
the first
quarter of
fiscal 2025
primarily due
to lower
corporate payroll
expense, insurance costs and
equipment maintenance, partially offset
by increases in incentive compensation
expense.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
Depreciation expense was $2.2 million, or 1.3% of retail sales for the first quarter of fiscal 2026, compared to
$2.6 million, or
1.5% of retail
sales for the
first quarter of
fiscal 2025. The
decrease in depreciation
expense
was due to fully depreciated older
stores.
Interest
and
other
income
was
$1.2
million,
or
0.7%
of
retail
sales
for
the
first
quarter
of
fiscal
2026,
compared to $1.2 million, or 0.7% of
retail sales for the first
quarter of fiscal 2025.
Income tax expense
was $0.5 million or
0.3% of retail sales
for the first quarter
of fiscal 2026, compared
to
income
tax
expense
of
$0.9
million,
or
0.6%
of
retail
sales
for
the
first
quarter
of
fiscal
2025.
The
effective
income
tax
rate
for
the
first
quarter
of
fiscal
2026
was
5.3%
compared
to
21.9%
for
the
first
quarter of fiscal 2025. The decrease in tax expense was primarily due to lower
foreign income taxes.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company
believes that
its cash,
cash equivalents
and short-term
investments, together
with cash
flows
from operations and its asset-backed revolving line of credit, will be adequate to fund the Company’s
regular
operating
requirements
and expected
capital expenditures
for the
next
12
months
from the
issuance of
this
quarterly report on Form 10-Q.
Cash
provided
by
operating
activities
for
the
first
three
months
of
fiscal
2026
was
primarily
generated
by
earnings
adjusted
for
depreciation
and
changes
in
working
capital.
The
increase
in
cash
provided
of
$4.2
million
for
the
first
three
months
of
fiscal
2026
as
compared
to
the
first
three
months
of
fiscal
2025
was
primarily attributable to
higher net income
and the relative
change in accounts
payable from year-end
to the
first quarter
for both
years, partially
offset by
an increase
in accounts
receivable and
the relative
change in
inventory from year-end to the first
quarter for both years.
At May 2, 2026, the Company had working capital of $49.0 million compared to $37.4 million at January 31,
2026.
The
increase
was
primarily
attributable
to
an
increase
in
cash,
inventory
and
accounts
receivable,
partially offset by higher accounts payable.
The ABL
Credit Agreement
(“ABL Facility”)
of up
to
$35.0 million
is committed
through March
2028
and is secured primarily by inventory and
third-party credit card receivables. The proceeds from the
ABL
Facility
may
be
used
to
provide
funding
for
ongoing
working
capital
and
general
corporate
purposes.
There
were
no
borrowings
outstanding
and
the
availability
under
the
facility
was
$30.0
million
before
giving
effect
to
a
$3.0
million
outstanding
letter
of
credit
that
reduced
borrowing
availability
to
$27.0
million
as
of
May
2,
2026
and
January
31,
2026.
The
weighted
average
interest
rate
under
the
credit
facility was zero at May 2, 2026 and January 31, 2026 due to no outstanding
borrowings.
Expenditures
for
property
and
equipment
totaled
$1.1
million
in
the
first
three
months
of
fiscal
2026,
compared to $1.0
million in last
fiscal year’s first
three months.
For the full
fiscal 2026 year,
the Company
expects to invest approximately $7.4 million in
capital expenditures.
Net
cash
provided
by
investing
activities
totaled
$0.8
million
in
the
first
three
months
of
fiscal
2026
compared to $7.9
million provided in
the comparable period
of fiscal 2025.
The decrease was
primarily due
to an increase in purchases of short-term
investments, partially offset by a
decrease in the sales of
short-term
investments.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
Net cash used in
financing activities totaled $0.2
million in the first
three months of fiscal
2026 compared to
$0.9
m
illion used in the comparable period of fiscal 2025. The decrease
was primarily
due to
lower stock
repurchases.
The Company purchased
107,823 shares in
the first quarter
of 2026.
As of May
2, 2026, the
Company had
572,917 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
held in
managed accounts
with
underlying
ratings
of
A
or
better
at
May
2,
2026
and
January
31,
2026.
The
corporate
bonds
have
contractual maturities which range from 13 days
to 2.9 years.
Additionally,
at
May
2,
2026,
the
Company
had
deferred
compensation
plan
assets
of
$9.8
million.
At
January
31,
2026,
the
Company
had
deferred
compensation
plan
assets
of
$9.7
million.
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
28
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
related
to
its
financing, investing and
cash management activities,
but the Company
does not
believe such exposure
is
material.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.