What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-22 compared with 2022-08-25 · 70 added, 70 removed, 102 unchanged (58% of the section changed)

40 unchanged sentences

Three Months Ended

Six Months Ended

July 30, 2022

July 31, 2021

July 30, 2022

July 31, 2021

Nine Months Ended

October 29, 2022

October 30, 2021

October 29, 2022

October 30, 2021

Total retail sales

4 unchanged sentences

Interest and other income

Income before income taxes

Income (loss) before income taxes

Net income (loss)

10 unchanged sentences

The Company expects that these uncertainties and perhaps others related to the pandemic will continue to impact the Company in fiscal 2022.

Inflationary Cost Pressure

Inflationary Cost Pressure and Rising Interest Rates

The COVID-19 pandemic and resulting supply chain disruptions, as well as certain geo-political matters, have resulted in significant price increases associated with the acquisition, shipping, transportation and distribution costs for the merchandise we purchase for sale to our customers.

In addition to the price increases relating to our merchandise, costs for fuel, food, and housing, including rent, as well as other consumables across the economy, are increasingly impacting our customers’ disposable income.

We believe that these price increases have had, and will likely continue to have, a negative impact on consumer behavior and, by extension, our results of operations and financial condition during fiscal 2022.

In response to the inflationary pressures, the Federal Reserve began raising interest rates and is committed to continue raising interest rates until the inflationary pressures subside.

These rising interest rates have adversely affected the availability and cost of credit for businesses and our customers.

We believe that these price increases and rising interest rates have had, and will likely continue to have, a negative impact on consumer behavior and, by extension, our results of operations and financial condition during fiscal 2022

Supply Chain Disruptions

3 unchanged sentences

Any untimely delivery of merchandise could have a negative impact on our ability to serve our customers with the specific merchandise they want in the quantities they wish to purchase in a timely manner, thereby potentially resulting in lost sales or increased markdowns to move through excess fashion and seasonal inventories that were delivered late.

We continue to monitor the situation closely and are in contact with our supply chain partners and key suppliers to constantly assess delivery delays.

However, we are unable to predict the specific effects these factors will have on our fiscal 2022 results of operations.

Labor Challenges and Wage Inflation

We continue to monitor the situation closely and are in contact with our supply chain partners and key suppliers to constantly assess

THE CATO CORPORATION

1 unchanged sentence

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

delivery delays.

However, we are unable to predict the specific effects these factors will have on our fiscal 2022 results of operations.

Labor Challenges and Wage Inflation

The COVID-19 pandemic and the resulting factors above have also created challenges related to the availability of sufficient labor from time to time, and have caused a significant increase in the competition for labor among consumer facing companies.

1 unchanged sentence

We expect these pressures to continue throughout fiscal 2022.

Comparison of the Three and Six Months ended July 30, 2022 with July 31, 2021

Total retail sales for the second quarter were $195.0 million compared to last year’s second quarter sales of $206.0 million, a 5% decrease.

The Company’s sales decrease in the second quarter of fiscal 2022 is primarily due to a 5% decrease in same-store sales.

The decrease in same-store sales is primarily attributable to fewer sales transactions.

For the six months ended July 30, 2022, total retail sales were $399.9 million compared to last year’s comparable six month sales of $417.2 million, a 4% decrease.

Sales in the first six months of fiscal 2022 decreased primarily due to a 4% decrease in same-store sales.

Same-store sales for the six months ended July 30, 2022 decreased primarily due to fewer sales transactions, coupled with a lower average retail sales per transaction .

Comparison of the Three and Nine Months ended October 29, 2022 with October 30, 2021

Total retail sales for the third quarter were $174.9 million compared to last year’s third quarter sales of $170.5 million, a 3% increase.

The Company’s sales increase in the third quarter of fiscal 2022 is primarily due to a 3% increase in same-store sales and sales from new stores, partially offset by permanently closed stores.

For the nine months ended October 29, 2022, total retail sales were $574.9 million compared to last year’s comparable nine month sales of $587.7 million, a 2% decrease.

Sales in the first nine months of fiscal 2022 decreased primarily due to a 2% decrease in same-store sales, partially offset by sales from new stores.

Same-store sales include stores that have been open more than 15 months.

2 unchanged sentences

As a result, our same-store sales calculation may not be comparable to similarly titled measures reported by other companies.

E-commerce sales were less than 5% of total sales for the six months ended July 30, 2022 and are included in the same-store sales calculation.

Total revenues, comprised of retail sales and other revenue (principally finance charges and late fees on customer accounts receivable and layaway fees), were $196.9 million and $403.6 million for the three and six months ended July 30, 2022, respectively, compared to $207.7 million and $420.8 million for the three and six months ended July 31, 2021, respectively.

The Company operated 1,312 stores at July 30, 2022 compared to 1,325 stores at the end of last year’s second quarter.

During the first six months of fiscal 2022, the Company opened eight stores and closed seven stores.

The Company currently expects to open approximately 25 stores and to close approximately 40 stores in fiscal 2022.

Credit revenue of $0.6 million represented 0.3% of total revenues in the second quarter of fiscal 2022, compared to 2021 credit revenue of $0.5 million or 0.2% of total revenues.

E-commerce sales were less than 5% of total sales for the nine months ended October 29, 2022 and are included in the same-store sales calculation.

Total revenues, comprised of retail sales and other revenue (principally finance charges and late fees on customer accounts receivable and layaway fees), were $176.6 million and $580.2 million for the three and nine months ended October 29, 2022, compared to $172.2 million and $593.0 million for the three and nine months ended October 30, 2021, respectively.

The Company operated 1,317 stores at October 29, 2022 compared to 1,324 stores at the end of last year’s third quarter.

During the first nine months of fiscal 2022, the Company opened 15 stores and closed nine stores.

The Company currently expects to open approximately 15 stores and to close approximately 40 stores in total in fiscal 2022.

Credit revenue of $0.6 million represented 0.3% of total revenues in the third 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 principally include payroll, postage and other administrative expenses and totaled $0.4 million in the second quarter of fiscal 2022, compared to last year’s second quarter expense of $0.3 million.

Other revenue, a component of total revenues, was $1.9 million and $3.6 million for the three and six months ended July 30, 2022, respectively, compared to $1.8 million and $3.6 million for the prior year’s comparable three and six month periods.

The overall increase in the three and six months ended July 30, 2022 is primarily due to increases in layaway charges partially offset by decreases in gift card breakage income.

Cost of goods sold was $131.7 million, or 67.6% of retail sales and $264.0 million, or 66.0% of retail sales for the three and six months ended July 30, 2022, respectively, compared to $115.6 million, or 56.1% of retail sales and $239.3 million, or 57.4% of retail sales for the comparable three and six month periods of fiscal 2021.

The overall increase in cost of goods sold as a percent of retail sales for the second quarter of fiscal 2022 resulted primarily from higher sales of marked down goods and increases in freight, distribution and occupancy costs .

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

Related expenses principally include payroll, postage and other administrative expenses and totaled $0.4 million in the third quarter of fiscal 2022, compared to last year’s third quarter expense of $0.5 million.

Other revenue, a component of total revenues, was $1.7 million and $5.4 million for the three and nine months ended October 29, 2022, respectively, compared to $1.7 million and $5.3 million for the prior year’s comparable three and nine month periods.

Cost of goods sold was $123.8 million, or 70.7% of retail sales and $387.7 million, or 67.5% of retail sales for the three and nine months ended October 29, 2022, respectively, compared to $104.2 million, or 61.1% of retail sales and $343.5 million, or 58.4% of retail sales for the comparable three and nine month periods of fiscal 2021.

The overall increase in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2022 resulted primarily from higher sales of marked down goods and increases in freight and distribution costs .

Cost of goods sold includes merchandise costs (net of discounts and allowances), buying costs,

THE CATO CORPORATION

1 unchanged sentence

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

costs and operating expenses for the buying departments and distribution center.

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 30.0% to $63.3 million for the second quarter of fiscal 2022 and decreased by 23.6% to $135.9 million for the first six months of fiscal 2022, compared to $90.4 million and $177.9 million for the prior year’s comparable three and six months of fiscal 2021.

Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) decreased by 22.8% to $51.2 million for the third quarter of fiscal 2022 and decreased by 23.4% to $187.1 million for the first nine months of fiscal 2022, compared to $66.3 million and $244.2 million for the prior year’s comparable three and nine months 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, bank and credit card processing fees.

SG&A expenses were $60.8 million, or 31.2% of retail sales and $121.2 million, or 30.3% of retail sales for the second quarter and first six months of fiscal 2022, respectively, compared to $71.0 million, or 34.5% of retail sales and $134.2 million, or 32.2% of retail sales for the prior year’s comparable three and six month periods.

The overall decrease in SG&A expense for the second quarter and first six months of fiscal 2022 is primarily due to lower incentive compensation expense, partially offset by increased payroll expense, which is a reflection of normalized store operations and higher wages.

Depreciation expense was $2.8 million, or 1.4% of retail sales and $5.6 million, or 1.4% of retail sales for the second quarter and first six months of fiscal 2022, respectively, compared to $3.1 million, or 1.5% of retail sales and $6.2 million or 1.5% of retail sales for the comparable three and six month periods of fiscal 2021, respectively.

Interest and other income was $1.9 million, or 1.0% of retail sales and $2.3 million, or 0.6% of retail sales for the three and six months ended July 30, 2022, respectively, compared to $0.5 million, or 0.3% of retail sales and $1.2 million, or 0.3% of retail sales for the comparable three and six month periods of fiscal 2021, respectively.

The increase for the second quarter and first six months of fiscal 2022 compared to fiscal 2021 is primarily attributable to insurance proceeds related to hurricanes in 2021.

Income tax expense was $5.7 million and $7.6 million for the second quarter and first six months of fiscal 2022, respectively, compared to an income tax expense of $4.6 million and $7.6 million for the comparable three and six month periods of fiscal 2021, respectively.

For the first six months of fiscal 2022, the Company’s effective tax rate was 50.6% compared to 18.0% for the first six months of 2021.

The change in the 2022 year-to-date effective tax rate was primarily due to an increase in Global Intangible Low-taxed Income (GILTI), state income taxes and non-deductible officer’s compensation, offset by the foreign rate differential and foreign tax credits, as a percentage on lower pre-tax earnings.

SG&A expenses were $61.4 million, or 35.1% of retail sales and $182.6 million, or 31.8% of retail sales for the third quarter and first nine months of fiscal 2022, respectively, compared to $62.5 million, or 36.6% of retail sales and $196.7 million, or 33.5% of retail sales for the prior year’s comparable three and nine month periods.

The overall decrease in SG&A expense for the third quarter and first nine months of fiscal 2022 is primarily due to lower incentive compensation expense, partially offset by increased payroll expense, which is a reflection of normalized store operations and higher wages.

Depreciation expense was $2.9 million, or 1.6% of retail sales and $8.4 million, or 1.5% of retail sales for the third quarter and first nine months of fiscal 2022, respectively, compared to $3.2 million, or 1.9% of retail sales and $9.4 million or 1.6% of retail sales for the comparable three and nine month periods of fiscal 2021, respectively.

Interest and other income was $2.3 million, or 1.3% of retail sales and $4.6 million, or 0.8% of retail sales for the three and nine months ended October 29, 2022, respectively, compared to $0.5 million, or 0.3% of retail sales and $1.7 million, or 0.3% of retail sales for the comparable three and nine month periods of fiscal 2021, respectively.

The increase for the third quarter and first nine months of fiscal 2022 compared to fiscal 2021 is primarily attributable to receiving a Business Recovery Grant from the state of North Carolina.

Income tax benefit was $4.7 million for the third quarter and $3.0 million expense for the first nine months of fiscal 2022, respectively, compared to an income tax benefit of $5.7 million and $1.9 million expense for the comparable three and nine month periods of fiscal 2021, respectively.

For the first nine months of fiscal 2022, the Company’s effective tax rate was 49.7% compared to 4.3% for the first nine months of fiscal 2021.

The change in the 2022 year-to-date effective tax rate was primarily due to an increase in Global Intangible Low-taxed Income (GILTI), state income taxes and non-deductible officer’s compensation, offset by the foreign rate differential, foreign tax credits and release of reserves for uncertain tax positions, as a percentage on lower pre-tax earnings.

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 provided by operating activities during the first six months of fiscal 2022 was $17.0 million as compared to $82.0 million in the first six months of fiscal 2021.

Cash provided by operating activities for the first six months of fiscal 2022 was primarily generated by earnings adjusted for depreciation and changes in working capital.

The decrease in cash provided of $65.0 million for the first six months of fiscal 2022 as compared to the first six months of fiscal 2021 was primarily due to lower net income and decreases in

Cash provided by operating activities during the first nine months of fiscal 2022 was $19.3 million as compared to $79.4 million provided in the first nine months of fiscal 2021.

Cash provided by operating

THE CATO CORPORATION

1 unchanged sentence

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

accounts payable and accrued liabilities primarily related to incentive compensation, partially offset by a decrease in accounts receivable.

At July 30, 2022, the Company had working capital of $106.2 million compared to $111.5 million at January 29, 2022.

The decrease in working capital is primarily attributable to a decrease in short-term investments and accounts receivable, partially offset by a decrease in accrued bonus and benefits.

As of July 30, 2022, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $35.0 million, less the balance of any revocable letters of credit related to purchase commitments, and was committed through May 2027.

The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of July 30, 2022.

There were no borrowings outstanding, nor any outstanding letters of credit that reduced borrowing availability, as of July 30, 2022 or January 29, 2022.

The weighted average interest rate under the credit facility was zero at July 30, 2022 due to no borrowings outstanding.

Expenditures for property and equipment totaled $10.4 million in the first six months of fiscal 2022, compared to $1.1 million in last fiscal year’s first six months.

The increase in expenditures for property and equipment was primarily due to costs associated with opening eight new stores and capital investments in information technology and the distribution center.

activities for the first nine months of fiscal 2022 was primarily generated by earnings adjusted for depreciation and changes in working capital.

The decrease in cash provided of $60.1 million for the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021 was primarily due to lower net income and decreases in accounts payable and accrued liabilities primarily related to incentive compensation, partially offset by decreases in accounts receivable and prepaid and other assets.

At October 29, 2022, the Company had working capital of $95.4 million compared to $111.5 million at January 29, 2022.

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

As of October 29, 2022, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $35.0 million, less the balance of any revocable letters of credit related to purchase commitments, and was committed through May 2027.

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 29, 2022.

There were no borrowings outstanding, nor any outstanding letters of credit that reduced borrowing availability, as of October 29, 2022 or January 29, 2022.

The weighted average interest rate under the credit facility was zero at October 29, 2022 due to no borrowings outstanding.

Expenditures for property and equipment totaled $14.4 million in the first nine months of fiscal 2022, compared to $1.8 million in last fiscal year’s first nine months.

The increase in expenditures for property and equipment was primarily due to capital investments in the distribution center and information technology, as well as costs associated with opening 15 new stores.

For the full fiscal 2022 year, the Company expects to invest approximately $20.0 million for capital expenditures.

Net cash provided by investing activities totaled $10.1 million in the first six months of fiscal 2022 compared to $64.9 million used in investing activities in the comparable period of 2021.

Net cash provided by investing activities totaled $0.2 million in the first nine months of fiscal 2022 compared to $51.3 million used in investing activities in the comparable period of 2021.

The increase in net cash provided in 2022 is primarily due to a net decrease in the purchase of short-term investments, partially offset by an increase in capital expenditures.

Net cash used in financing activities totaled $16.7 million in the first six months of fiscal 2022 compared to $8.8 million used in the comparable period of fiscal 2021.

The increase in net cash used in fiscal 2022 is primarily due to higher dividends paid and stock repurchases.

On August 25, 2022, the Board of Directors declared the quarterly dividend at $0.17 per share.

As of July 30, 2022, the Company had 808,427 shares remaining in open authorizations under its share repurchase program.

Net cash used in financing activities totaled $22.2 million in the first nine months of fiscal 2022 compared to $21.3 million used in the comparable period of fiscal 2021.

The increase in net cash used in fiscal 2022 is primarily due to higher dividends paid, partially offset by lower stock repurchases.

On November 17, 2022, the Board of Directors maintained the quarterly dividend at $0.17 per share.

As of October 29, 2022, the Company had 601,195 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 July 30, 2022 and January 29, 2022.

The state, municipal and corporate bonds have contractual maturities which range from one day to 4.5 years.

Treasury Notes have contractual maturities which range from one day to 2.1 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

The state, municipal and corporate bonds have contractual maturities which range from four days to 4.1 years.

Treasury Notes have contractual maturities which range from two days to 1.9 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

THE CATO CORPORATION

1 unchanged sentence

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

asset-backed securities are backed by revolving pools of credit card receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase, Capital One and Discover.

Additionally, at July 30, 2022, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $11.0 million.

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 29, 2022, the Company had $0.9 million of corporate equities and deferred compensation plan assets of $8.8 million.

At January 29, 2022, the Company had $0.8 million of corporate equities and deferred compensation plan assets of $11.5 million.

2 unchanged sentences

RECENT ACCOUNTING PRONOUNCEMENTS:

See Note 8, Recent Accounting Pronouncements.

See Note 1, General, and Note 8, Recent Accounting Pronouncements.

THE CATO CORPORATION

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis