CATO CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended Nine Months Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (Dollars in thousands, except per share data) REVENUES Retail sales $ 174,921 $ 170,513 $ 574,860 $ 587,709 Other revenue (principally finance charges, late fees and layaway charges) 1,705 1,700 5,351 5,335 Total revenues 176,626 172,213 580,211 593,044 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 123,752 104,225 387,744 343,487 Selling, general and administrative (exclusive of depreciation shown below) 61,397 62,466 182,606 196,687 Depreciation 2,864 3,173 8,418 9,352 Interest and other income ( 2,278 ) ( 541 ) ( 4,565 ) ( 1,719 ) Costs and expenses, net 185,735 169,323 574,203 547,807 Income (loss) before income taxes ( 9,109 ) 2,890 6,008 45,237 Income tax (benefit) expense ( 4,656 ) ( 5,713 ) 2,988 1,929 Net income (loss) $ ( 4,453 ) $ 8,603 $ 3,020 $ 43,308 Basic earnings (loss) per share $ ( 0.21 ) $ 0.39 $ 0.14 $ 1.93 Diluted earnings (loss) per share $ ( 0.21 ) $ 0.39 $ 0.14 $ 1.93 Comprehensive income: Net income (loss) $ ( 4,453 ) $ 8,603 $ 3,020 $ 43,308 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of ($ 189 ) and ($ 532 ) for the three and nine months ended October 29, 2022 and ($ 150 ) and ($ 235 ) for the three and nine months ended October 30, 2021, respectively ( 629 ) ( 496 ) ( 1,774 ) ( 775 ) Comprehensive income (loss) $ ( 5,082 ) $ 8,107 $ 1,246 $ 42,533 See notes to condensed consolidated financial statements (unaudited). 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) October 29, 2022 January 29, 2022 ASSETS (Dollars in thousands) Current Assets: Cash and cash equivalents $ 17,282 $ 19,759 Short-term investments 128,458 145,998 Restricted cash 3,743 3,919 Accounts receivable, net of allowance for customer credit losses of $ 827 and $ 803 at October 29, 2022 and January 29, 2022, respectively 25,679 55,812 Merchandise inventories 116,718 124,907 Prepaid expenses and other current assets 6,947 5,273 Total Current Assets 298,827 355,668 Property and equipment – net 70,595 63,083 Noncurrent deferred income taxes 9,844 9,313 Other assets 21,103 24,437 Right-of-Use assets – net 140,176 181,265 Total Assets $ 540,545 $ 633,766 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 95,155 $ 109,546 Accrued expenses 47,003 40,373 Accrued employee benefits and bonus 2,709 26,488 Accrued income taxes 2,838 920 Current lease liability 55,723 66,808 Total Current Liabilities 203,428 244,135 Other noncurrent liabilities 16,688 17,914 Lease liability 85,622 117,521 Stockholders' Equity: Preferred stock, $ 100 par value per share, 100,000 shares authorized, none issued - - Class A common stock, $ 0.033 par value per share, 50,000,000 shares authorized; 19,128,675 shares and 19,824,093 shares issued at October 29, 2022 and January 29, 2022, respectively 646 669 Convertible Class B common stock, $ 0.033 par value per share, 15,000,000 shares authorized; 1,763,652 shares and 1,763,652 shares issued at October 29, 2022 and January 29, 2022, respectively 59 59 Additional paid-in capital 121,314 119,540 Retained earnings 114,842 134,208 Accumulated other comprehensive income ( 2,054 ) ( 280 ) Total Stockholders' Equity 234,807 254,196 Total Liabilities and Stockholders' Equity $ 540,545 $ 633,766 See notes to condensed consolidated financial statements (unaudited). 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended October 29, 2022 October 30, 2021 (Dollars in thousands) Operating Activities: Net income $ 3,020 $ 43,308 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 8,418 9,352 Provision for customer credit losses 217 368 Purchase premium and premium amortization of investments 606 ( 952 ) Share-based compensation 1,517 2,999 Loss on disposal of property and equipment 106 392 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 29,916 ( 3,641 ) Merchandise inventories 8,189 ( 6,106 ) Prepaid and other assets 1,704 ( 6,190 ) Operating lease right-of-use assets and liabilities ( 1,895 ) ( 2,892 ) Accrued income taxes 1,918 3,891 Accounts payable, accrued expenses and other liabilities ( 34,418 ) 38,881 Net cash provided by operating activities 19,298 79,410 Investing Activities: Expenditures for property and equipment ( 14,382 ) ( 1,790 ) Purchase of short-term investments ( 53,765 ) ( 131,837 ) Sales of short-term investments 68,348 82,355 Net cash provided by (used in) investing activities 201 ( 51,272 ) Financing Activities: Dividends paid ( 10,870 ) ( 6,276 ) Repurchase of common stock ( 11,561 ) ( 15,152 ) Proceeds from employee stock purchase plan 279 176 Net cash used in financing activities ( 22,152 ) ( 21,252 ) Net increase (decrease) in cash, cash equivalents, and restricted cash ( 2,653 ) 6,886 Cash, cash equivalents, and restricted cash at beginning of period 23,678 21,022 Cash, cash equivalents, and restricted cash at end of period $ 21,025 $ 27,908 Non-cash activity: Accrued other assets and property and equipment $ 2,311 $ 862 See notes to condensed consolidated financial statements (unaudited). 5 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — January 29, 2022 $ 728 $ 119,540 $ 134,208 $ ( 280 ) $ 254,196 Comprehensive income: Net income (loss) - - 9,748 - 9,748 Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 362 ) - - - ( 1,206 ) ( 1,206 ) Dividends paid ($ 0.17 per share) - - ( 3,638 ) - ( 3,638 ) Class A common stock sold through employee stock purchase plan - 111 - - 111 Share-based compensation issuances and exercises - - 5 - 5 Share-based compensation expense - 598 - - 598 Repurchase and retirement of treasury shares ( 20 ) - ( 9,142 ) - ( 9,162 ) Balance — April 30, 2022 $ 708 $ 120,249 $ 131,181 $ ( 1,486 ) $ 250,652 Comprehensive income: Net income (loss) - - ( 2,274 ) - ( 2,274 ) Unrealized gain (loss) on available-for-sale securities, net of deferred income tax expense of $ 18 - - - 61 61 Dividends paid ($ 0.17 per share) - - ( 3,632 ) - ( 3,632 ) Class A common stock sold through employee stock purchase plan - 62 - - 62 Share-based compensation issuances and exercises 7 308 6 - 321 Share-based compensation expense - 1,077 - - 1,077 Repurchase and retirement of treasury shares ( 1 ) - ( 433 ) - ( 434 ) Balance — July 30, 2022 $ 714 $ 121,696 $ 124,848 $ ( 1,425 ) $ 245,833 Comprehensive income: Net income (loss) - - ( 4,453 ) - ( 4,453 ) Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 189 ) - - - ( 629 ) ( 629 ) Dividends paid ($ 0.17 per share) - - ( 3,600 ) - ( 3,600 ) Class A common stock sold through employee stock purchase plan 1 154 - - 155 Share-based compensation issuances and exercises - ( 308 ) - - ( 308 ) Share-based compensation expense ( 3 ) ( 228 ) 5 - ( 226 ) Repurchase and retirement of treasury shares ( 7 ) - ( 1,958 ) - ( 1,965 ) Balance — October 29, 2022 $ 705 $ 121,314 $ 114,842 $ ( 2,054 ) $ 234,807 See notes to condensed consolidated financial statements (unaudited). 6 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — January 30, 2021 $ 762 $ 115,278 $ 129,303 $ 1,155 $ 246,498 Comprehensive income: Net income (loss) - - 20,713 - 20,713 Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 40 ) - - - ( 134 ) ( 134 ) Dividends paid ($ - per share) - - - - - Class A common stock sold through employee stock purchase plan 1 150 - - 151 Share-based compensation issuances and exercises 13 ( 12 ) - - 1 Share-based compensation expense - 283 - - 283 Repurchase and retirement of treasury shares ( 14 ) - ( 5,615 ) - ( 5,629 ) Balance — May 1, 2021 $ 762 $ 115,699 $ 144,401 $ 1,021 $ 261,883 Comprehensive income: Net income (loss) - - 13,992 - 13,992 Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 44 ) - - - ( 145 ) ( 145 ) Dividends paid ($ 0.11 per share) - - ( 2,488 ) - ( 2,488 ) Class A common stock sold through employee stock purchase plan - 23 - - 23 Share-based compensation issuances and exercises - 509 5 - 514 Share-based compensation expense - 1,081 - - 1,081 Repurchase and retirement of treasury shares ( 2 ) - ( 1,046 ) - ( 1,048 ) Balance — July 31, 2021 $ 760 $ 117,312 $ 154,864 $ 876 $ 273,812 Comprehensive income: Net income (loss) - - 8,603 - 8,603 Unrealized gain (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 150 ) - - - ( 496 ) ( 496 ) Dividends paid ($ 0.17 per share) - - ( 3,788 ) - ( 3,788 ) Class A common stock sold through employee stock purchase plan - 34 - - 34 Share-based compensation issuances and exercises - 1,081 8 - 1,089 Share-based compensation expense - - - - - Repurchase and retirement of treasury shares ( 18 ) - ( 8,458 ) - ( 8,476 ) Balance — October 30, 2021 $ 742 $ 118,427 $ 151,229 $ 380 $ 270,778 See notes to condensed consolidated financial statements (unaudited). NOTE 1 - GENERAL : The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended October 29, 2022 and October 30, 2021 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for the entire year. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022. Amounts as of January 29, 2022 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The Company received $ 33 million of its income tax receivable in the second quarter of the current fiscal year. The Company anticipates that the remaining balance, which is included in Accounts receivable in the accompanying Condensed Consolidated Balance Sheets, will be received by the end of the fourth quarter of fiscal 2022. During the third quarter of the current fiscal year, the Company received $ 1.4 million from the state of North Carolina’s Business Recovery Program, which provides aid to eligible North Carolina businesses that suffered significant economic damage from the COVID-19 pandemic. The full amount received is recorded in Interest and other income in the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). On November 17, 2022, the Board of Directors maintained the quarterly dividend at $ 0.17 per share. Recently Adopted Accounting Policies In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance . This update provides for increased transparency of government assistance, including the disclosure of the types of assistance an entity receives, an entity’s method of accounting for government assistance and the effect of the assistance on an entity’s financial statements. This standard is effective for annual periods beginning after December 15, 2021. The Company adopted this standard on a prospective basis on January 30, 2022. 7 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 8 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 2 - EARNINGS PER SHARE: Accounting Standard Codification (“ASC”) 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“EPS”) on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares. Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan. Three Months Ended Nine Months Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (Dollars in thousands) Numerator Net earnings (loss) $ ( 4,453 ) $ 8,603 $ 3,020 $ 43,308 (Earnings) loss allocated to non-vested equity awards 240 ( 464 ) ( 153 ) ( 2,239 ) Net earnings (loss) available to common stockholders $ ( 4,213 ) $ 8,139 $ 2,867 $ 41,069 Denominator Basic weighted average common shares outstanding 19,934,592 21,030,099 20,029,703 21,295,693 Diluted weighted average common shares outstanding 19,934,592 21,030,099 20,029,703 21,295,693 Net income (loss) per common share Basic earnings (loss) per share $ ( 0.21 ) $ 0.39 $ 0.14 $ 1.93 Diluted earnings (loss) per share $ ( 0.21 ) $ 0.39 $ 0.14 $ 1.93 9 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME: The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended October 29, 2022: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at July 30, 2022 $ ( 1,425 ) Other comprehensive income before reclassification ( 637 ) Amounts reclassified from accumulated other comprehensive income (b) 8 Net current-period other comprehensive income ( 629 ) Ending Balance at October 29, 2022 $ ( 2,054 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes an $ 11 gain impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was an expense of $ 3 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 29, 2022: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at January 29, 2022 $ ( 280 ) Other comprehensive income before reclassification ( 1,788 ) Amounts reclassified from accumulated other comprehensive income (b) 14 Net current-period other comprehensive income ( 1,774 ) Ending Balance at October 29, 2022 $ ( 2,054 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes an $ 18 gain impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was an expense of $ 4 . 10 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED): The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended October 30, 2021: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at July 31, 2021 $ 876 Other comprehensive income before reclassifications ( 567 ) Amounts reclassified from accumulated other comprehensive income (b) 71 Net current-period other comprehensive income ( 496 ) Ending Balance at October 30, 2021 $ 380 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes a $ 92 gain impact of Accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was an expense of $ 21 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 30, 2021: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at January 30, 2021 $ 1,155 Other comprehensive income before reclassifications ( 911 ) Amounts reclassified from accumulated other comprehensive income (b) 136 Net current-period other comprehensive income ( 775 ) Ending Balance at October 30, 2021 $ 380 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income. (b) Includes a $ 177 gain impact of Accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was an expense of $ 41 . 11 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 4 – FINANCING ARRANGEMENTS: 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, no r 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. NOTE 5 – REPORTABLE SEGMENT INFORMATION: The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona and Credit. As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit. The Company has aggregated its three retail operating segments, including e-commerce, based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of ASC 280-10, which require the segments to have similar economic characteristics, products, production processes, clients and methods of distribution. The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks. They are similar in nature of product, as they all offer women’s apparel, shoes and accessories. Merchandise inventory for the Company’s retail operating segments is sourced from the same countries and some of the same vendors, using similar production processes. Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner. The Company operates its women’s fashion specialty retail stores in 32 states as of October 29, 2022, principally in the southeastern United States . The Company offers its own credit card to its customers and all credit authorizations, payment processing and collection efforts are performed by a wholly-owned subsidiary of the Company. 12 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED): The following schedule summarizes certain segment information (in thousands): Three Months Ended Nine Months Ended October 29, 2022 Retail Credit Total October 29, 2022 Retail Credit Total Revenues $ 176,057 $ 569 $ 176,626 Revenues $ 578,580 $ 1,631 $ 580,211 Depreciation 2,864 - 2,864 Depreciation 8,417 1 8,418 Interest and other income ( 2,278 ) - ( 2,278 ) Interest and other income ( 4,565 ) - ( 4,565 ) Income (Loss) before income taxes ( 9,280 ) 171 ( 9,109 ) Income (Loss) before income taxes 5,623 385 6,008 Capital expenditures 3,998 - 3,998 Capital expenditures 14,382 - 14,382 Three Months Ended Nine Months Ended October 30, 2021 Retail Credit Total October 30, 2021 Retail Credit Total Revenues $ 171,708 $ 505 $ 172,213 Revenues $ 591,497 $ 1,547 $ 593,044 Depreciation 3,172 1 3,173 Depreciation 9,351 1 9,352 Interest and other income ( 541 ) - ( 541 ) Interest and other income ( 1,719 ) - ( 1,719 ) Income (Loss) before income taxes 2,863 27 2,890 Income (Loss) before income taxes 44,769 468 45,237 Capital expenditures 665 - 665 Capital expenditures 1,790 - 1,790 Retail Credit Total Total assets as of October 29, 2022 $ 502,307 $ 38,238 $ 540,545 Total assets as of January 29, 2022 595,487 38,279 633,766 The Company evaluates segment performance based on income before taxes. The Company does not allocate certain corporate expenses or income taxes to the credit segment. The following schedule summarizes the direct expenses of the credit segment, which are reflected in Selling, general and administrative expenses (in thousands): Three Months Ended Nine Months Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Payroll $ 120 $ 80 $ 389 $ 362 Postage 107 59 299 252 Other expenses 172 338 557 464 Total expenses $ 399 $ 477 $ 1,245 $ 1,078 13 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 6 – STOCK-BASED COMPENSATION: As of October 29, 2022, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The 2018 Incentive Compensation Plan and 2013 Incentive Compensation Plan are for the granting of various forms of equity-based awards, including restricted stock and stock options for grant, to officers, directors and key employees. Effective May 24, 2018, shares for grant were no longer available under the 2013 Incentive Compensation Plan. The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of October 29, 2022: 2013 2018 Plan Plan Total Options and/or restricted stock initially authorized 1,500,000 4,725,000 6,225,000 Options and/or restricted stock available for grant: October 29, 2022 - 3,455,547 3,455,547 In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of October 29, 2022 and January 29, 2022, there was $ 11,786,000 and $ 11,096,000 , respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 2.4 years and 2.3 years, respectively. Total compensation benefit during the three months ended October 29, 2022 was $ 535,000 and total compensation expense during the nine months ended October 29, 2022 was $ 1,471,000 , compared to an expense of $ 1,088,000 and $ 2,968,000 , respectively, for the three and nine months ended October 30, 2021. The total compensation benefit during the three months ended October 29, 2022 is the result of forfeitures driven by the retirement of several senior members of management. These amounts are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). The following summary shows the changes in the shares of unvested restricted stock outstanding during the nine months ended October 29, 2022: Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at January 29, 2022 1,196,288 $ 13.76 Granted 319,441 13.70 Vested ( 231,638 ) 16.99 Forfeited or expired ( 219,144 ) 13.44 Restricted stock awards at October 29, 2022 1,064,947 $ 13.10 14 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED): The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15 % discount through payroll deductions. During the nine months ended October 29, 2022 and October 30, 2021, the Company sold 28,504 and 22,541 shares to employees at an average discount of $ 1.73 and $ 1.38 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15 % discount given under the Employee Stock Purchase Plan was approximately $ 49,000 and $ 31,000 for the nine months ended October 29, 2022 and October 30, 2021, respectively. These expenses are classified as a component of Selling, general and administrative expenses. NOTE 7 – FAIR VALUE MEASUREMENTS: The following tables set forth information regarding the Company’s financial assets and liabilities that are measured at fair value (in thousands) as of October 29, 2022 and January 29, 2022: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable October 29, 2022 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 25,021 $ - $ 25,021 $ - Corporate Bonds 55,645 - 55,645 - U.S. Treasury/Agencies Notes and Bonds 35,900 - 35,900 - Cash Surrender Value of Life Insurance 8,842 - - 8,842 Asset-backed Securities (ABS) 10,882 - 10,882 - Corporate Equities 863 863 - - Commercial Paper 1,011 - 1,011 - Total Assets $ 138,164 $ 863 $ 128,459 $ 8,842 Liabilities: Deferred Compensation ( 8,930 ) - - ( 8,930 ) Total Liabilities $ ( 8,930 ) $ - $ - $ ( 8,930 ) 15 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable January 29, 2022 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 30,451 $ - $ 30,451 $ - Corporate Bonds 76,909 - 76,909 - U.S. Treasury/Agencies Notes and Bonds 19,715 - 19,715 - Cash Surrender Value of Life Insurance 11,472 - - 11,472 Asset-backed Securities (ABS) 18,556 - 18,556 - Corporate Equities 818 818 - - Commercial Paper 367 - 367 - Total Assets $ 158,288 $ 818 $ 145,998 $ 11,472 Liabilities: Deferred Compensation ( 10,020 ) - - ( 10,020 ) Total Liabilities $ ( 10,020 ) $ - $ - $ ( 10,020 ) The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and taxable governmental debt securities held in managed accounts with underlying ratings of A or better at October 29, 2022 and January 29, 2022. The state, municipal and corporate bonds have contractual maturities which range from four days to 4.1 years. The U.S. 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 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. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets. Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate bonds, municipal bonds and asset-backed securities for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third-party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors. Deferred compensation plan assets consist of life insurance policies. These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the 16 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3 of the valuation hierarchy. The Level 3 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet. These funds are designed to mirror mutual funds and money market funds that are observable and actively traded. The following tables summarize the change in fair value of the Company’s financial assets and liabilities measured using Level 3 inputs as of October 29, 2022 and January 29, 2022 (in thousands): Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 29, 2022 $ 11,472 Redemptions ( 1,718 ) Additions - Total gains or (losses): Included in interest and other income (or changes in net assets) ( 912 ) Included in other comprehensive income - Ending Balance at October 29, 2022 $ 8,842 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 29, 2022 $ ( 10,020 ) Redemptions 571 Additions ( 300 ) Total (gains) or losses: Included in interest and other income (or changes in net assets) 819 Included in other comprehensive income - Ending Balance at October 29, 2022 $ ( 8,930 ) 17 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 30, 2021 $ 11,263 Additions - Total gains or (losses): Included in interest and other income (or changes in net assets) 209 Included in other comprehensive income - Ending Balance at January 29, 2022 $ 11,472 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 30, 2021 $ ( 10,316 ) Redemptions 1,010 Additions ( 304 ) Total (gains) or losses: Included in interest and other income (or changes in net assets) ( 410 ) Included in other comprehensive income - Ending Balance at January 29, 2022 $ ( 10,020 ) 18 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS: None. NOTE 9 – INCOME TAXES: The Company had an effective tax rate for the first nine months of 2022 of 49.7 % compared to 4.3 % for the first nine months of 2021. The change in the effective tax rate for the first nine months 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. NOTE 10 – COMMITMENTS AND CONTINGENCIES: The Company is, from time to time, involved in routine litigation incidental to the conduct of its business, including litigation regarding the merchandise that it sells, litigation regarding intellectual property, litigation instituted by persons injured upon premises under its control, litigation with respect to various employment matters, including alleged discrimination and wage and hour litigation, and litigation with present or former employees. Although such litigation is routine and incidental to the conduct of the Company’s business, as with any business of its size with a significant number of employees and significant merchandise sales, such litigation could result in large monetary awards. Based on information currently available, management does not believe that any reasonably possible losses arising from current pending litigation will have a material adverse effect on the Company’s condensed consolidated financial statements. However, given the inherent uncertainties involved in such matters, an adverse outcome in one or more such matters could materially and adversely affect the Company’s financial condition, results of operations and cash flows in any particular reporting period. The Company accrues for these matters when the liability is deemed probable and reasonably estimable. NOTE 11 – REVENUE RECOGNITION: The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales are recorded as deferred revenue until the customer takes possession of, or forfeits, the merchandise. Gift cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales volumes and the Company’s experience; actual returns have not varied materially from historical amounts. A provision is made for estimated write-offs associated with sales made with the Company’s proprietary credit card. Amounts related to shipping and handling billed to customers in a sales transaction are classified as Other revenue and the costs related to shipping product to customers (billed and accrued) are classified as Cost of goods sold. The Company offers its own proprietary credit card to customers. All credit activity is performed by the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. During the three 19 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 and nine months ended October 29, 2022, the Company estimated customer credit losses of $, 89000 and $, 261000 , respectively, compared to $ 134,000 and $ 409,000 for the three and nine months ended October 30, 2021, respectively. Sales purchased on the Company’s proprietary credit card for the three and nine months ended October 29, 2022 were $ 5.9 million and $ 17.4 million, respectively, compared to $ 4.4 million and $ 13.6 million for the three and nine months ended October 30, 2021, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): Balance as of October 29, 2022 January 29, 2022 Proprietary Credit Card Receivables, net $ 10,286 $ 8,998 Gift Card Liability $ 5,560 $ 8,308 NOTE 12 – LEASES: The Company determines whether an arrangement is a lease at inception. The Company has operating leases for stores, offices and equipment. Its leases have remaining lease terms of up to 10 years based on the estimated likelihood of renewal. Some include options to extend the lease term for up to five years , and some include options to terminate the lease within one year . The Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of lease payments. The components of lease cost are shown below (in thousands): 20 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 Three Months Ended October 29, 2022 October 30, 2021 Operating lease cost (a) $ 17,919 $ 17,509 Variable lease cost (b) $ 707 $ 660 (a) Includes right-of-use asset amortization of ($ 0.4 ) million and ($ 0.4 ) million for the three months ended October 29, 2022 and October 30, 2021, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. Nine Months Ended October 29, 2022 October 30, 2021 Operating lease cost (a) $ 53,521 $ 51,569 Variable lease cost (b) $ 2,053 $ 2,153 (a) Includes right-of-use asset amortization of ($ 1.3 ) million and ($ 2.1 ) million for the nine months ended October 29, 2022 and October 30, 2021, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. 21 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021 Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows (in thousands): Operating cash flow information: Three Months Ended October 29, 2022 October 30, 2021 Cash paid for amounts included in the measurement of lease liabilities $ 17,264 $ 16,485 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 2,107 $ 1,705 Nine Months Ended October 29, 2022 October 30, 2021 Cash paid for amounts included in the measurement of lease liabilities $ 51,138 $ 48,158 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 8,156 $ 23,718 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: As of October 29, 2022 October 30, 2021 Weighted-average remaining lease term 2.0 years 2.0 years Weighted-average discount rate 2.84 % 3.42 % Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2022 (a) $ 16,940 2023 54,623 2024 38,184 2025 22,878 2026 11,426 Thereafter 3,733 Total lease payments 147,784 Less: Imputed interest 6,439 Present value of lease liabilities $ 141,345 (a) Excluding the nine months ended October 29, 2022 22 THE CATO CORPORATION