Item 1. Business
Item 1.
Business:
Background
The
Company,
founded
in
1946,
operated
1,280
fashion
specialty
stores
at
January
28,
2023,
in
32
states,
principally
in
the
southeastern
United
States,
under
the
names
“Cato,”
“Cato
Fashions,”
“Cato
Plus,”
“It’s
Fashion,”
“It’s
Fashion
Metro”
and
“Versona.”
The
Cato
concept
seeks
to
offer
quality
fashion
apparel
and
accessories
at
low
prices
every
day,
in
junior/missy
and
plus
sizes.
The
Cato
concept’s stores and e-commerce website feature a broad assortment of apparel and accessories, including
dressy,
career,
and
casual
sportswear,
dresses,
coats,
shoes,
lingerie,
costume
jewelry
and
handbags.
A
major portion of the Cato concept’s
merchandise is sold under its private label and is produced by various
vendors
in
accordance
with
the
concept’s
specifications.
The
It’s
Fashion
and
It’s
Fashion
Metro
concepts offer fashion with a focus on the latest trendy styles for the entire family at low prices every day.
The
Versona
concept’s
stores
and
e-commerce website
offer
quality fashion
apparel items,
jewelry
and
accessories at
exceptional values
every day.
The
Company’s
stores
range in
size from
2,200 to
19,000
square
feet
and
are
located
primarily
in
strip
shopping
centers
anchored
by
national
discounters
or
market-dominant
grocery
stores.
The
Company
emphasizes
friendly
customer
service
and
coordinated
merchandise
presentations
in
an
appealing
store
environment.
The
Company
offers
its
own
credit
card
and layaway
plan. Credit
and layaway
sales under
the Company’s
plan represented
6% of
retail sales
in
fiscal
2022.
See
Note
13
to
the
Consolidated Financial
Statements, “Reportable
Segment
Information,”
for a discussion of information regarding the Company’s two reportable segments: retail and credit.
The
Company
has
operated
Cato-branded
retail
stores
for
approximately
76
years.
The
Company
originated as a family-owned business and
made its first initial public offering
of stock in 1968.
In 1980,
the Company went private and in 1987 again conducted an initial public
offering.
Business Strategy
The Company’s
primary objective
is to
be the
leading fashion
specialty retailer
for fashion
and value
in its
markets. Management believes the
Company’s success
is dependent upon
its ability to
differentiate
its stores
from department
stores, mass
merchandise discount
stores and
competing specialty
stores. The
key elements of the Company’s business strategy are:
Merchandise
Assortment.
The
Company’s
stores
offer
a
wide
assortment
of
on-trend
apparel
and
accessory items in primarily junior/missy,
plus sizes, men and kids sizes, toddler to
boys size 20 and girls
size 16 with
an emphasis on color,
product coordination and selection.
Colors and styles are
coordinated
and presented so that outfit selection is easily made.
Value
Pricing.
The
Company offers
quality
merchandise that
is
generally priced
below comparable
merchandise
offered
by
department
stores
and
mall
specialty
apparel
chains,
but
is
generally
more
fashionable
than
merchandise
offered
by
discount
stores.
Management
believes
that
the
Company
has
positioned itself as the every day low price leader in its market
segment.
Strip
Shopping
Center
Locations.
The
Company
locates
its
stores
principally
in
convenient
strip
centers anchored by
national discounters or
market-dominant grocery stores
that attract large
numbers of
potential customers.
Customer Service.
Store managers
and sales
associates are
trained
to
provide prompt
and courteous
service and to assist customers in merchandise selection and wardrobe
coordination.
Credit and
Layaway Programs
.
The Company offers
its own credit
card and a
layaway plan to
make
the purchase of its merchandise more convenient for its customers.
6
Merchandising
Merchandising
The
Company
seeks
to
offer
a
broad
selection
of
high
quality
and
exceptional
value
apparel
and
accessories
to
suit
the
various
lifestyles
of
fashion
and
value-conscious
customers.
In
addition,
the
Company strives to offer on-trend fashion in exciting colors with consistent fit and
quality.
The Company’s merchandise lines
include dressy, career,
and casual sportswear, dresses,
coats, shoes,
lingerie, costume
jewelry,
handbags, men’s
wear and
lines for
kids and
infants. The
Company primarily
offers exclusive
merchandise with
fashion and
quality comparable
to mall
specialty stores
at low
prices,
every day.
The Company believes that the collaboration of its merchandising and design teams with an expanded
in-house
product
development
and
direct
sourcing
function
has
enhanced
merchandise
offerings
and
delivers quality,
exclusive on-trend
styles at
lower prices.
The product
development and
direct sourcing
operations provide
research on
emerging fashion
and color
trends, technical
services and
direct sourcing
options.
As a
part of
its merchandising
strategy,
members of
the Company’s
merchandising and
design staff
visit selected
stores to
monitor the
merchandise offerings
of other
retailers, regularly
communicate with
store operations
associates and frequently
confer with
key vendors.
The Company
also takes
aggressive
markdowns
on
slow-selling
merchandise
and
typically
does
not
carry
over
merchandise
to
the
next
season.
Purchasing, Allocation and Distribution
Although
the
Company
purchases
merchandise
from
approximately
580
suppliers,
most
of
its
merchandise is
purchased from
approximately 100
primary vendors.
In
fiscal
2022,
purchases from
the
Company’s
largest
vendor
accounted
for
approximately
16%
of
the
Company’s
total
purchases.
The
Company is
not dependent
on its
largest vendor
or any
other vendor
for merchandise
purchases, and
the
loss of any single vendor or group of
vendors would not have a material adverse effect on
the Company’s
operating results or financial condition. A substantial portion of the Company’s merchandise is sold under
its
private
labels
and
is
produced
by
various
vendors
in
accordance
with
the
Company’s
strict
specifications. The Company sources a majority of its
merchandise directly from manufacturers overseas,
primarily in
Southeast Asia.
These manufacturers
are dependent
on materials
that are
primarily sourced
from
China. The
Company purchases
its
remaining merchandise
from
domestic importers
and
vendors,
which typically
minimizes the
time necessary to
purchase and
obtain shipments; however,
these vendors
are
dependent
on
materials
primarily
sourced
from
China.
The
Company
opened
its
own
overseas
sourcing operations in the fall of 2014, replacing the Company’s former sourcing agent in 2015. Although
a
significant
portion
of
the
Company’s
merchandise
is
manufactured
overseas,
primarily
in
Southeast
Asia, the Company does
not expect that any
economic, political, public health or
social unrest in any
one
country
would
have
a
material
adverse
effect
on
the
Company’s
ability
to
obtain
adequate
supplies
of
merchandise.
However,
the
Company
can
give
no
assurance
that
any
changes
or
disruptions
in
its
merchandise supply
chain would
not materially
and adversely
affect the
Company.
See “Risk
Factors –
Risks
Relating To
Our
Business –
Because
we
source a
significant
portion of
our
merchandise directly
and indirectly from overseas, we are subject to risks associated with international operations and risks that
affect
the
prevailing
social,
economic,
political,
public
health
and
other
conditions
in
the
areas
from
which
we
source
merchandise;
changes,
disruptions,
cost
changes
or
other
problems
affecting
the
Company’s
merchandise
supply
chain
have
and
could
continue
to
materially
and
adversely
affect
the
Company’s business, results of operations and financial condition.”
An
important
component
of
the
Company’s
strategy
is
the
allocation
of
merchandise
to
individual
stores
based
on
an
analysis
of
sales
trends
by
merchandise
category,
customer
profiles
and
climatic
conditions.
A
merchandise
control
system
provides
current
information
on
the
sales
activity
of
each
7
merchandise
style
in
each
of
the
Company’s
stores.
Point-of-sale
terminals
in
the
stores
collect
and
transmit sales and inventory information to the Company’s central database, permitting timely response to
sales trends on a store-by-store basis.
All merchandise is shipped directly to the Company’s distribution
center in Charlotte, North Carolina,
where it
is inspected
and then
allocated by
the merchandise
distribution staff
for shipment
to individual
stores. The flow
of merchandise from
receipt at
the distribution center
to shipment to
stores is controlled
by
an
online
system.
Shipments
are
made
by
common
carrier,
and
each
store
receives
at
least
one
shipment per
week.
The centralization
of the
Company’s
distribution process
also subjects
it to
risks in
the
event
of
damage
to
or
destruction
of
its
distribution
facility
or
other
disruptions
affecting
the
distribution
center
or
the
flow
of
goods
into
or
out
of
Charlotte,
North
Carolina.
See
“Risk
Factors
–
Risks Relating
To
Our Information
Technology
and Related
Systems –
A disruption
or shutdown
of our
centralized
distribution
center
or
transportation
network
could
materially
and
adversely
affect
our
business and results of operations.”
Advertising
The
Company
uses
television,
in-store
signage,
graphics,
a
Company
website,
two
e-commerce
websites
and
social
media
as
its
primary
advertising
media.
The
Company’s
total
advertising
expenditures
were
approximately
1.0%,
0.9%
and
0.8%
of
retail
sales
for
fiscal
years
2022,
2021
and
2020, respectively.
Store Operations
The Company’s
store operations
management team
consists of
four territorial
managers, 11
regional
managers and 109 district managers. Regional managers receive
a salary plus a bonus based
on achieving
targeted goals
for sales
and payroll.
District managers
receive a
salary plus
a bonus
based on
achieving
targeted
objectives for
district sales
increases. Stores
are typically
staffed
with a
manager,
two assistant
managers
and
additional
part-time
sales
associates
depending
on
the
size
of
the
store
and
seasonal
personnel needs.
In general,
store managers
are paid
a salary
or on
an hourly
basis as
are all
other store
personnel.
Store
managers,
assistant
managers
and
sales
associates
are
eligible
for
monthly
and
semi-
annual bonuses based on achieving targeted goals for their respective store’s sales increases.
Store Locations
Most
of
the
Company’s
stores
are
located
in
the
southeastern
United
States in
a
variety of
markets
ranging
from
small
towns
to
large
metropolitan
areas
with
trade
area
populations
of
20,000
or
more.
Stores average approximately 4,500 square feet in size.
All of the
Company’s stores
are leased. Approximately 92% are
located in strip shopping
centers and
8% in enclosed
shopping malls. The
Company typically locates stores
in strip shopping
centers anchored
by
a
national
discounter,
primarily
Walmart
Supercenters,
or
market-dominant
grocery
stores.
The
Company’s strip center locations provide ample parking and shopping convenience for its customers.
The
Company’s
store
development
activities
consist
of
opening
new
stores
in
new
and
existing
markets,
relocating
selected
existing
stores
to
more
desirable
locations
in
the
same
market
area
and
closing underperforming stores. The following table sets forth information
with respect to the Company’s
development activities since fiscal 2018:
8
Store Development
Number of Stores
Beginning of
Number
Number
Number of Stores
Fiscal Year
Year
Opened
Closed
End of Year
2018………………….……...………….
1,351
-
40
1,311
2019………………….……...………….
1,311
5
35
1,281
2020……………………….……...…….
1,281
76
27
1,330
2021…………....………….……...…….
1,330
6
25
1,311
2022………….………...….……...…….
1,311
19
50
1,280
The Company periodically
reviews its store
base to determine
whether any particular
store should be
closed based on its sales
trends and profitability.
The Company intends to continue this
review process to
identify underperforming stores.
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for 3.1%, 2.5% and 2.7% of retail
sales in
fiscal 2022, 2021 and 2020, respectively. The Company’s net bad debt expense was 2.0%, 3.0% and 3.6%
of credit sales in fiscal 2022, 2021 and 2020, respectively.
Customers applying for the Company’s credit card are approved for credit if
they have a satisfactory
credit
record
and
the
Company
has
considered
the
customer’s
ability
to
make
the
required
minimum
payment.
Customers are required
to make minimum
monthly payments based
on their account
balances.
If
the
balance
is
not
paid
in
full
each
month,
the
Company
assesses
the
customer
a
finance
charge.
If
payments are not received on time, the customer is assessed a late
fee subject to regulatory limits.
The
Company
introduced
its
loyalty
program
in
October
2021.
The
loyalty
program
credits
the
customer points based on their purchases of
merchandise using the Company’s proprietary
credit card.
A
point is earned for every dollar spent on merchandise purchases.
A
$5.00 rewards card is earned for every
250
points
accumulated
by
the
customer.
The
rewards
card
expires
90
days
after
the
rewards
card
is
issued.
The fiscal 2022 loyalty program impact is immaterial to the fiscal 2022 financial statements.
The
loyalty
program
is
accounted
for
in
accordance
with
ASU
2014-09,
Revenue
from
Contracts
with
Customers (Topic 606)
.
Layaway Plan
Under
the
Company’s
layaway
plan,
merchandise
is
set
aside
for
customers
who
agree
to
make
periodic
payments.
The
Company adds
a
nonrefundable
administrative
fee
to
each
layaway
sale.
If
no
payment is made within four weeks,
the customer is considered to have
defaulted, and the merchandise is
returned
to
the
selling floor
and again
offered
for
sale, often
at
a reduced
price. All
payments made
by
customers who subsequently default on their layaway purchase are returned to the customer upon request,
less the administrative fee and a restocking fee.
The Company defers recognition of layaway sales to the accounting period when the customer picks
up
and
completely pays
for
layaway
merchandise.
Administrative fees
are
recognized
in
the
period
in
which the
layaway is
initiated.
Recognition of
restocking fees occurs
in the
accounting period
when the
customer
defaults
on
the
layaway
purchase.
Layaway
sales
represented
approximately
2.7%,
2.7%
and
2.8% of retail sales in fiscal 2022, 2021 and 2020, respectively.
Information Technology Systems
The
Company’s
information
technology
systems
provide
daily
financial
and
merchandising
9
information
that
is
used
by
management to
enhance
the
timeliness
and
effectiveness
of
purchasing and
pricing
decisions.
Management
uses
a
daily
report
comparing
actual
sales
with
planned
sales
and
a
weekly
ranking
report
to
monitor
and
control
purchasing
decisions.
Weekly
reports
are
also
produced
which reflect
sales, weeks
of
supply of
inventory and
other critical
data by
product categories,
by store
and by various levels of
responsibility reporting. Purchases are made based
on projected sales, but can
be
modified to accommodate unexpected increases or decreases in demand
for a particular item.
Sales information
is projected
by merchandise
category and,
in
some cases,
is
further projected
and
actual
performance measured
by
stock
keeping
unit
(SKU).
Merchandise
allocation
models
are
used
to
distribute
merchandise
to
individual
stores
based
upon
historical
sales
trends,
climatic
differences,
customer demographic differences and targeted inventory turnover rates.
Competition
The women’s
retail apparel
industry is
highly competitive.
The Company
believes that
the principal
competitive factors
in its
industry include
merchandise assortment
and presentation,
fashion, price,
store
location
and
customer
service. The
Company competes
with
retail
chains that
operate similar
women’s
apparel specialty stores. In addition, the Company competes with
mass merchandise chains, discount store
chains, major
department stores, off
-price retailers
and internet-based
retailers.
Although we
believe we
compete favorably
with respect
to the
principal competitive
factors described
above, many
of our
direct
and
indirect
competitors
are
well-established
national,
regional
or
local
chains,
and
some
have
substantially greater
financial, marketing
and other
resources.
The Company
expects its
stores in
larger
cities and metropolitan areas to face more intense competition.
Seasonality
Due
to
the
seasonal
nature
of
the
retail
business,
the
Company
has
historically
experienced
and
expects to continue to
experience seasonal fluctuations in its
revenues, operating income and net
income.
Our stores
typically generate a
higher percentage of
our annual
net sales
and profitability in
the first
and
second quarters of
our fiscal year compared to
other quarters.
Results of a
period shorter than a
full year
may
not
be
indicative
of
results
expected
for
the
entire
year.
Furthermore,
the
seasonal
nature
of
our
business may affect comparisons between periods.
Regulation
The
Company’s
business
and
operations
subject
it
to
a
wide
range
of
local,
state,
national
and
international laws
and regulations
in a
variety of
areas, including
but not
limited to,
trade, licensing
and
permit
requirements,
import
and
export
matters,
privacy
and
data
protection,
credit
regulation,
environmental
matters,
recordkeeping
and
information
management,
tariffs,
taxes,
intellectual
property
and anti-corruption.
Though compliance with these laws
and regulations has not
had a material effect
on
the capital
expenditures, results of
operations or competitive
position of the
Company in
fiscal 2022, the
Company faces
ongoing
risks
related
to
its
efforts
to
comply with
these
laws
and
regulations
and
risks
related
to
noncompliance,
as
discussed
generally
below
throughout
the
“Risk
Factors”
section
and
in
particular
under
“Risk
Factors
–
Risks
Relating
to
Accounting
and
Legal
Matters
–
Our
business
operations
subject
us
to
legal
compliance
and
litigation
risks,
as
well
as
regulations
and
regulatory
enforcement
priorities,
which
could
result
in
increased
costs
or
liabilities,
divert
our
management’s
attention or otherwise adversely affect our business, results of operations and financial
condition.”
Human Capital
As
of
January
28,
2023,
the
Company
employed
approximately
7,600
full-time
and
part-time
associates. The
Company also
employs additional
part-time associates
during the
peak retailing
seasons.
The Company’s
full-time team associates are
engaged
in various executive, operating,
and administrative
functions in
the Home
Office
and distribution
center and
the remainder
are engaged
in store
operations.
The Company is
not a party
to any
collective bargaining agreements
and considers its
associate relations
10
to
be
good.
The
Company
offers
a
broad
range
of
Company-paid
benefits
to
its
associates
including
medical and
dental plans,
paid vacation,
a 401(k)
plan, Employee
Stock Purchase
Plan, Employee
Stock
Ownership
Plan,
disability
insurance,
associate
assistance
programs,
life
insurance
and
an
associate
discount.
The
level
of
benefits
and
eligibility
vary
depending
on
the
associate’s
full-time
or
part-time
status, date
of hire,
length of
service and
level of
pay.
The Company
endeavors to
promote diversity,
to
provide
opportunities
for
advancement,
and
to
treat
all
of
its
associates
with
dignity
and
respect.
The
Company constantly
strives
to
improve
its
training
programs
to
develop
associates.
Over
80%
of
store
and field
management are promoted from
within, allowing the
Company to internally
staff its
store base.
The
Company
has
training
programs
at
each
level
of
store
operations.
The
Company
also
performs
ongoing
reviews
of
its
safety
protocols,
including
measures
to
promote
the
health
and
safety
of
its
associates.
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.