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
February
3,
2024
(“fiscal
2023”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and
closures
and
statements
regarding
the
potential
impact
of
the
COVID-19
pandemic
and
related
responses and
mitigation efforts,
as well
as the
potential impact
of supply
chain disruptions,
inflationary
pressures
and
other
economic
or
market
conditions
on
our
business,
results
of
operations
and
financial
condition
and
statements
regarding
new
store
development
strategy;
and
(5) statements
relating
to
our
future contingencies. When
possible, we
have attempted to
identify forward-looking statements
by using
words
such
as
“will,”
“expects,”
“anticipates,”
“approximates,”
“believes,”
“estimates,”
“hopes,”
“intends,” “may,”
“plans,” “could,” “would,”
“should” and any
variations or negative
formations of such
words
and
similar
expressions.
We
can
give
no
assurance
that
actual
results
or
events
will
not
differ
materially
from
those
expressed
or
implied
in
any
such
forward-looking
statements.
Forward-looking
statements
included
in
this
report
are
based
on
information
available
to
us
as
of
the
filing
date
of
this
report,
but
subject
to
known
and
unknown
risks,
uncertainties and
other
factors
that
could
cause
actual
results
to
differ
materially
from
those
contemplated
by
the
forward-looking
statements.
Such
factors
include, but
are not
limited to,
the following:
any actual
or perceived
deterioration in
the conditions
that
drive
consumer
confidence
and
spending,
including,
but
not
limited
to,
prevailing
social,
economic,
political
and
public
health conditions
and
uncertainties, levels
of
unemployment, fuel,
energy
and
food
costs, wage rates, tax
rates, interest rates, home
values, consumer net worth,
the availability of
credit and
inflation;
changes
in
laws,
regulations
or
government
policies
affecting
our
business,
including
but
not
limited to
tariffs;
uncertainties regarding
the impact
of any
governmental action
regarding, or
responses
to, the
foregoing conditions; competitive factors
and pricing
pressures; our ability
to predict
and respond
to rapidly changing fashion trends
and consumer demands; our ability to
successfully implement our new
store development strategy to increase new
store openings and our ability
of any such new stores
to grow
and
perform
as
expected;
adverse
weather,
public
health
threats
(including
the
global
COVID-19
pandemic)
or
similar
conditions that
may affect
our
sales
or
operations; inventory
risks
due
to
shifts
in
market
demand,
including
the
ability
to
liquidate
excess
inventory
at
anticipated
margins;
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 our
annual report on Form 10-K for the fiscal
year ended
January 28,
2023 (“fiscal
2022”), as
amended or
supplemented, and
in
other reports
we file
with
or
furnish
to
the
Securities
and
Exchange
Commission
(“SEC”)
from
time
to
time.
We
do
not
undertake,
and
expressly
decline,
any
obligation
to
update
any
such
forward-looking
information
contained in this report, whether as a result of new information, future
events, or otherwise.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
20
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The
Company’s
critical
accounting
policies
and
estimates
are
more
fully
described
in
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in the
Company’s Annual Report
on
Form
10-K
for
the
fiscal
year
ended
January
28,
2023.
The
preparation
of
the
Company’s
financial
statements
in
conformity
with
generally
accepted
accounting
principles
in
the
United
States
(“GAAP”)
requires management to make estimates and assumptions about future events that affect the amounts reported
in
the
financial
statements
and
accompanying
notes.
Future
events
and
their
effects
cannot
be
determined
with absolute
certainty. Therefore,
the determination
of estimates
requires the
exercise of
judgment. Actual
results
inevitably
will
differ
from
those
estimates,
and
such
differences
may
be
material
to
the
financial
statements. The most significant accounting estimates
inherent in the preparation of the
Company’s financial
statements include the
allowance for customer
credit losses, inventory
shrinkage, the calculation
of potential
asset
impairment,
workers’
compensation,
general
and
auto
insurance
liabilities,
reserves
relating
to
self-
insured health insurance, and uncertain tax
positions.
The Company’s critical accounting policies and
estimates are discussed with the Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
21
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in
the Company's unaudited Condensed
Consolidated Statements of Income as a
percentage of total retail sales:
Three Months Ended
April 29, 2023
April 30, 2022
Total retail sales
100.0
%
100.0
%
Other revenue
0.9
0.9
Total revenues
100.9
100.9
Cost of goods sold (exclusive of depreciation)
64.2
64.5
Selling, general and administrative (exclusive of depreciation)
32.5
29.5
Depreciation
1.2
1.3
Interest and other income
(0.5)
(0.2)
Income before income taxes
3.5
5.7
Net income
2.3
4.8
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
22
RESULTS OF OPERATIONS
(CONTINUED):
Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
(“MD&A”) is
intended
to
provide
information
to
assist
readers
in
better
understanding
and
evaluating
our
financial
condition
and
results
of
operations.
We
recommend
reading
this
MD&A
in
conjunction
with
our
Condensed
Consolidated
Financial
Statements
and
the
Notes
to
those
statements
included
in
the
“Financial Statements” section of this Quarterly Report on Form
10-Q, as well as our 2022
Form 10-K.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
The
current
inflationary
environment
continues
to
negatively
impact
the
Company’s
operating
costs,
including
higher
wages,
operating
supplies
and
services.
In
addition,
increased
costs
for
fuel,
food,
and
housing, including rent,
as well as
other consumable products
across the economy,
are negatively impacting
our
customers’
disposable income,
and
our customers’
willingness to
purchase discretionary
items
such as
apparel, jewelry and shoes.
In
response
to
inflationary
pressures,
the
Federal
Reserve
began
raising
interest
rates
and
is
committed
to
continue raising
interest rates
until inflationary
pressures subside.
These rising interest
rates have
adversely
affected
the
availability
and
cost
of
credit
for
both
businesses
and
our
customers.
In
addition,
the
rising
interest rates are increasing the costs
related to revolving credit, auto loans and
mortgages, which continue to
negatively impact
our customers’
discretionary income.
Additionally,
rising interest
rates
may
continue to
negatively impact our customers’ willingness
to purchase our products.
We believe
price increases
and rising
interest rates
impacted the
first quarter
of fiscal
2023 and
will likely
continue
to have
a negative
impact
on
consumer
behavior and,
by
extension,
our
results
of operations
and
financial condition during the remainder of
fiscal 2023.
Labor Challenges and Wage Inflation
The
tight
labor
market
has
increased
competition
for
labor
among
consumer-facing
companies.
This
competition
for
labor
has
driven
significant
increases
in
wages
in
order
to
compete
for
sufficient
labor
availability and/or
to
prevent
the loss
of existing
workforce in
our stores,
distribution center
and corporate
office. We expect these pressures to
continue in fiscal 2023.
Comparison of First Quarter of 2023
with 2022
Total retail sales for the first quarter
were $190.3 million compared to
last year’s first quarter sales of
$204.9
million.
Sales
decreased
primarily
due
to
a
decrease
in
same-store
sales
and
sales
from
stores
that
were
closed in the past 12 months, partially offset by sales from stores opened in the past 12
months. The decrease
in
same-store
sales
is
primarily
from
fewer
transactions
due
to
the
aforementioned
pressures
on
our
customers’
disposable
income,
partially
offset
by
higher
average
sales
per
transaction.
Same
store
sales
include stores
that have
been open
more than
15 months.
Stores that
have been
relocated or
expanded are
also included in the same store
sales calculation after they have been open
more than 15 months.
The method
of calculating same
store sales varies
across the retail
industry.
As a result,
our same store
sales calculation
may not be comparable to similarly titled measures reported by other companies. E-commerce sales were less
than
5.1%
of
sales
for
the
first
quarter
of
fiscal
2023
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
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
23
customer accounts
receivable, shipping
charged to
customers for
e-commerce purchases
and layaway
fees),
were
$192.1
million
for
the
first
quarter
ended
April
29,
2023,
compared
to
$206.7
million
for
the
first
quarter ended April 30, 2022. The
Company operated 1,264 stores at April 29,
2023 compared to 1,315 stores
at the
end of
last fiscal
year’s first
quarter.
For the
first three
months of
fiscal 2023,
the Company
opened
four stores
and permanently
closed 20 stores.
The Company
currently anticipates closing
approximately 80
stores in fiscal 2023.
Credit revenue of $0.6 million represented 0.3% of total revenues in the first quarter of fiscal 2023,
compared
to
2022
credit
revenue
of
$0.5
million
or
0.2%
of
total
revenues.
Credit
revenue
is
comprised
of
interest
earned on the Company’s private label credit card portfolio and related fee income.
Related expenses include
principally payroll, postage and
other administrative expenses, and
totaled $0.4 million in
the first quarter of
2023, compared to last year’s
first quarter expenses of $0.4 million.
Other revenue, a component of
total revenues, was $1.7 million for the first
quarter of fiscal 2023, compared
to
$1.8
million
for
the
prior
year’s
comparable
first
quarter.
The
slight
decrease
was
due
to
lower
e-
commerce shipping revenue, partially offset by higher finance
charges and layaway fees.
Cost of goods
sold was $122.1
million, or 64.2%
of retail sales for
the first quarter of
fiscal 2023, compared
to $132.2 million,
or 64.5% of
retail sales in
the first quarter
of fiscal 2022.
The overall decrease
in cost of
goods sold as
a percent of
retail sales
for the first
quarter of 2023
resulted primarily
from both
lower ocean
freight
costs
and
outbound
freight
costs
to
our
stores,
partially
offset
by
deleveraging
of
occupancy
and
buying 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 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 6.1% to
$68.2 million for
the first quarter
of fiscal 2023
compared to $72.7
million in the
first quarter of
fiscal 2022.
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
32.5% of
retail sales for
the first
quarter of
fiscal 2023,
compared to
29.5% of
retail sales
in
the first quarter of fiscal 2022. The
increase in SG&A as a
percent of retail sales was due
primarily to higher
operating costs, driven in part by higher wages as a result of the tight labor market and expenses
related to the
closure of 20 stores in
the quarter, partially offset by lower insurance
expense.
Depreciation expense was $2.4 million, or 1.2% of retail sales for the first quarter of fiscal 2023, compared to
$2.7 million, or
1.3% of retail
sales for the
first quarter of
fiscal 2022. The
decrease in depreciation
expense
was attributable to older stores being
fully depreciated.
Interest
and
other
income
was
$0.9
million,
or
0.5%
of
retail
sales
for
the
first
quarter
of
fiscal
2023,
compared
to
$0.4
million,
or
0.2%
of
retail
sales
for
the
first
quarter
of
fiscal
2022.
The
increase
was
primarily attributable
to an
increase in
interest rates
earned on
short-term investments,
partially offset
by a
decrease in short-term investments.
Income tax expense
was $2.1 million or
1.1% of retail sales
for the first quarter
of fiscal 2023,
compared
to
income
tax
expense
of
$1.9
million,
or
1.0%
of
retail
sales
for
the
first
quarter
of
fiscal
2022.
The
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
effective
income tax
rate for
the first
quarter of
fiscal 2023
was 32.6%
compared to
16.7% for
the first
quarter
of
2022.
The
increase
in
the
2023
first
quarter
tax
rate
was
primarily
due
to
higher
Global
Intangible Low-taxed Income (GILTI), partially offset by the foreign rate differential and offshore claim.
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 2023 and the
next 12
months.
Cash
provided
by
operating
activities
for
the
first
three
months
of
fiscal
2023
was
primarily
generated
by
earnings adjusted
for
depreciation and
changes in
working
capital. The
increase in
cash
provided
of
$10.7
million
for
the
first
three
months
of
fiscal
2023
as
compared
to
the
first
three
months
of
fiscal
2022
was
primarily due
to a
decrease in
inventory and
a smaller
decrease in
accounts payable,
accrued expenses
and
other liabilities compared to year-end,
partially offset by lower net income.
At April 29,
2023, the Company
had working capital
of $87.9 million
compared to $74.7
million at January
28,
2023.
The
increase
is
primarily
attributable
to
an
increase
in
accounts
receivable,
lower
current
lease
liability and accounts payable partially offset by
lower merchandise inventory.
At
April
29,
2023,
the
Company
had
an
unsecured
revolving
credit
agreement,
which
provides
for
borrowings of
up to
$35.0 million
less the
balance of
any revocable
letters of
credit related
to purchase
commitments,
and
is
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
April
29,
2023.
There
were
no
borrowings
outstanding,
nor
any
outstanding
letters of
credit that
reduced borrowing availability,
as of
April 29,
2023.
The weighted
average interest
rate under the credit facility was zero at April 29, 2023 due to no outstanding
borrowings.
Expenditures
for
property
and
equipment
totaled
$6.2
million
in
the
first
three
months
of
fiscal
2023,
compared
to
$4.4
million
in
last
year’s
first
three
months.
The
increase
in
expenditures
for
property
and
equipment
was
primarily
due
to
costs
associated
with
opening
four
new
stores
and
capital
investments
in
information
technology
and
the
distribution
center.
For
the
full
fiscal
2023
year,
the
Company
expects
to
invest approximately $22.1 million in capital
expenditures, including distribution center automation projects.
Net
cash
provided
by
investing
activities
totaled
$15.3
million
in
the
first
three
months
of
fiscal
2023
compared to $19.6 million provided in the comparable period of fiscal 2022. The decrease is primarily due
to
higher purchases of short-term
investments and an increase
in capital expenditures, partially
offset by higher
sales of short-term investments.
Net cash used in
financing activities totaled $5.6
million in the first
three months of fiscal
2023 compared to
$12.7 million used
in the comparable
period of fiscal
2022, primarily due
to a decrease
in share repurchases
and dividends paid.
On May 18, 2023, the Board of
Directors maintained the quarterly dividend at
0.17 per share.
As
of
April
29,
2023,
the
Company
had
944,379
shares
remaining
in
open
authorizations
under
its
share
repurchase program.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
The Company does not use
derivative financial instruments.
The Company’s
investment portfolio
was primarily
invested in
corporate bonds and
tax-exempt and taxable
governmental
debt securities
held in
managed accounts
with underlying
ratings
of
A
or better
at
April 29,
2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
and
asset-backed
securities
have
contractual maturities
which range
from two
days to
3.6 years.
The U.S.
Treasury Notes
and Certificates
of
Deposit have contractual maturities
which range from
one day to 2.8
years. These securities are
classified as
available-for-sale
and
are
recorded
as
Short-term
investments,
Restricted
cash
and
Other
assets
on
the
accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized
gains
and
losses
reported
net
of
taxes
in
Accumulated
other
comprehensive
income.
The
asset-backed
securities
are
bonds
comprised
of
auto
loans
and
bank
credit
cards
that
carry
AAA
ratings.
The
auto
loan
asset-backed securities are
backed by
static pools
of auto loans
that were
originated and
serviced by
captive
auto finance units,
banks or
finance companies.
The bank
credit card
asset-backed securities
are backed
by
revolving
pools
of
credit
card
receivables
generated
by
account
holders
of
cards
from
American
Express,
Citibank, JPMorgan Chase, Capital One, and
Discover.
Additionally,
at
April
29,
2023,
the
Company
had
$0.8
million
of
corporate
equities
and
deferred
compensation plan assets
of $9.3 million.
At January 28,
2023, the Company
had $0.9 million
of corporate
equities and deferred compensation
plan assets of $9.3
million. All of these
assets are recorded within
Other
assets in the Condensed Consolidated Balance
Sheets. See Note 7, Fair Value
Measurements.
RECENT ACCOUNTING PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
26
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
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.