What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-23 compared with 2023-05-25 · 285 added, 244 removed, 153 unchanged (78% of the section changed)

21 unchanged sentences

chain disruptions,

(5) statements

future contingencies.

36 unchanged sentences

developments or volatility affecting the financial services industry or broader financial markets;

factors discussed under “Risk Factors” in Part I, Item 1A of our

annual report on Form 10-K for the fiscal

2023 (“fiscal

supplemented, and

other reports

fiscal year ended

January 28, 2023

(“fiscal 2022”), as amended

or supplemented, and in

other reports we

Securities and

Exchange Commission

forward-looking

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

The Company’s accounting

policies are more

fully described in

“Management’s Discussion and

Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal

“Management’s

Discussion and Analysis of Financial Condition and Results of Operations” in the

Company’s Annual Report

requires management to make estimates and assumptions about future events that affect the amounts reported

with absolute

the determination

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

Condition and

Operations,” the

preparation of

the Company’s

financial statements

in conformity

with generally accepted

accounting principles in

the United States

(“GAAP”) requires management

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.

determination

compensation,

insured health insurance, and uncertain tax

credit losses, and inventory shrinkage.

The Company’s critical accounting policies and

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Three Months Ended

April 29, 2023

April 30, 2022

Six Months Ended

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Total retail sales

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Cost of goods sold (exclusive of depreciation)

Selling, general and administrative (exclusive of depreciation)

Selling, general and administrative (exclusive

of depreciation)

Interest and other income

Income before income taxes

Net income (loss)

THE CATO CORPORATION

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RESULTS OF OPERATIONS

Discussion and

Financial Condition

of Operations

understanding

“Financial Statements” section of this Quarterly Report on Form

10-Q, as well as our 2022

condition and results of operations.

We recommend reading this MD&A in conjunction with our Condensed

Consolidated Financial

Statements and

statements included in

the “Financial

section of this Quarterly Report on

Form 10-Q, as well as our 2022

Annual Report Form 10-K.

Recent Developments

Inflationary Cost Pressure and Rising Interest Rates

inflationary pressures

operating costs,

including higher

wages, operating supplies, and service costs continue to be negatively

impacted by the current inflationary

fuel, food, and

housing, including rent,

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across the economy

are negatively impacting

disposable income,

our customers’

willingness to

purchase discretionary

apparel, jewelry and shoes.

continue raising

interest rates

until inflationary

pressures subside.

These rising interest

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

negatively impact our customers’ willingness

to purchase our products.

price increases

discretionary

jewelry and shoes.

raising interest

inflationary pressures

acceptable levels.

interest rates

first quarter

Increasing costs related

to revolving credit,

auto loans and

mortgages continue to

have a negative

discretionary

continue to be negatively impacted by high interest rates.

believe high prices

and interest rates

impacted the first

half of fiscal

2023 and will

likely continue to

negative impact

behavior and,

of operations

financial condition during the remainder of

Labor Challenges and Wage Inflation

consumer-facing

availability and/or

distribution center

and corporate

We expect these pressures to

continue in fiscal 2023.

Comparison of First Quarter of 2023

Total retail sales for the first quarter

were $190.3 million compared to

last year’s first quarter sales of

closed in the past 12 months, partially offset by sales from stores opened in the past 12

aforementioned

include stores

also included in the same store

sales calculation after they have been open

more than 15 months.

of calculating same

store sales varies

across the retail

our same store

sales calculation

may not be comparable to similarly titled measures reported by other companies.

E-commerce sales were less

by extension,

operations and

condition during the remainder of fiscal 2023.

Comparison of the Three and Six

Months ended July 29, 2023 with

July 30, 2022

Total retail sales

for the second

$181.2 million

compared to last

year’s second

quarter sales

primarily due

in same-store

permanently closed

stores, partially

from new stores.

months ended July

29, 2023, total

retail sales were

$371.5 million compared

last year’s comparable six month sales of $399.9 million, a 7% decrease.

The decrease in sales in the first six

due primarily

in same-store

permanently closed

partially offset

sales include

similarly titled measures reported by other

E-commerce sales were less than

5% of total sales for

revenue (principally

finance charges

customer accounts

receivable and layaway fees), were $182.9 million

and $374.9 million for the

three and six months ended July

29, 2023, compared

to $196.9 million

and $403.6 million

for the three

and six months

ended July 30,

respectively.

The Company operated 1,247 stores at July 29, 2023 compared to 1,312 stores at the end

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS

customer accounts

receivable, shipping

customers for

e-commerce purchases

quarter ended April 30, 2022.

Company operated 1,264 stores at April 29,

2023 compared to 1,315 stores

and permanently

closed 41 stores.

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,

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

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,

retail sales in

the first quarter

of fiscal 2022.

The overall decrease

goods sold as

for the first

quarter of 2023

The Company currently expects to close approximately 80

stores in total in fiscal 2023.

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 2023, compared to

last year’s second quarter expense of

$0.4 million.

Other revenue, a component of total revenues, was $1.7 million and $3.4 million for the

three and six months

ended July 29, 2023, respectively, compared

to $1.9 million and $3.6 million

for the prior year’s comparable

charges and late fees associated with

the Company’s proprietary credit card.

64.5% of retail

for the three and six months

ended July 29, 2023, respectively, compared

to $131.7 million, or 67.6% of retail

$264.0 million,

the comparable

second quarter

resulted primarily

buying costs.

Cost of goods sold

includes merchandise costs (net of discounts

and allowances), buying costs,

freight are capitalized as

inventory costs.

Buying and distribution costs

include payroll, payroll-related costs

and operating

distribution center.

include rent,

taxes, insurance,

maintenance, utilities

and maintenance

and distribution

Total gross margin dollars (retail sales

less cost of goods sold exclusive

of depreciation) decreased

$68.2 million for

the first quarter

of fiscal 2023

freight costs

merchandise costs (net of discounts and

allowances), buying costs, distribution costs, occupancy costs,

payroll-related

departments and distribution center.

Occupancy costs include rent, real estate taxes, insurance, common area

maintenance, utilities and

maintenance for stores and

distribution facilities.

margin dollars (retail

depreciation)

compared to $63.3

million in the

first quarter of

Gross margin as presented may not be comparable

to those of other entities.

million and $135.9 million

for the prior year’s

comparable three and six

months of fiscal

Gross margin as presented may not be

comparable to those of other

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.

expenses were

retail sales for

the first quarter of fiscal 2022.

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

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

second quarter and first six months of fiscal 2023, respectively, compared to $60.8 million, or

31.2% of retail

sales for the

first quarter of

decrease in depreciation

was attributable to older stores being

fully depreciated.

primarily attributable

interest rates

short-term investments,

partially offset

decrease in short-term investments.

Income tax expense

was $2.1 million or

sales and $121.2 million, or 30.3% of retail sales for the prior year’s comparable three and

six month periods.

second quarter

primarily due

payroll and insurance expense.

Depreciation expense was $2.5 million, or 1.4% of retail sales and $4.9 million, or 1.3% of

retail sales for the

second quarter

2023, respectively,

$2.8 million,

sales and $5.6

million or 1.4%

of retail sales

for the first quarter

of fiscal 2023,

for the comparable

three and six

month periods of

respectively.

Interest and other income was $1.3 million, or 0.7% of retail sales and $2.2 million, or 0.6% of retail sales for

the three and six

months ended July 29,

2023, respectively, compared to

$1.9 million, or 1.0%

of retail sales

respectively.

The decrease for the second quarter and first six months of fiscal 2023 compared to fiscal 2022

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS

Intangible Low-taxed Income (GILTI), partially offset by the foreign rate differential and offshore claim.

is primarily attributable

to the Company’s

receipt of insurance

proceeds in the

second quarter of

related to hurricane damage in 2021.

Income tax expense was $1.3 million and $3.5 million for the second quarter and first six months of fiscal

respectively,

respectively.

the Company’s

effective tax

38.5% compared to

of fiscal 2022.

to-date effective tax rate was primarily due to a decrease in Global Intangible Low-taxed Income

non-deductible

compensation,

employment credits, partially offset by the foreign rate differential.

LIQUIDITY, CAPITAL

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for fiscal 2023 and the

earnings adjusted

depreciation and

primarily due

inventory and

accounts payable,

accrued expenses

other liabilities compared to year-end,

partially offset by lower net income.

2023, the Company

had working capital

of $87.9 million

compared to $74.7

activities for the first six months of fiscal 2023 was primarily generated by earnings adjusted for

and changes in working capital.

The increase in cash provided of $4.6 million

for the first six months of fiscal

2023 as compared

was primarily

accounts receivable and lower net income.

At July 29, 2023,

the Company had

working capital of $103.4

million compared to $74.7

million at January

liability and accounts payable partially offset by

lower merchandise inventory.

borrowings of

$35.0 million

any revocable

credit related

covenants and limitations, including the maintenance of specific financial

ratios with which the Company

reduced borrowing availability,

average interest

rate under the credit facility was zero at April 29, 2023 due to no outstanding

invest approximately $22.1 million in capital

expenditures, including distribution center automation projects.

compared to $19.6 million provided in the comparable period of fiscal 2022.

The decrease is primarily due

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.

authorizations

repurchase program.

The increase in working capital is

primarily attributable to a decrease in

current lease liability and

an increase in cash, partially offset

by a decrease in inventory

and short-term investments.

29, 2023, the

Company has an

unsecured revolving credit

line, which provides

for borrowings of

up to $35.0 million, less

the balance of any revocable letters

of credit related to purchase commitments,

amended the revolving credit

agreement to modify

a definition used in

calculating the Company’s

EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating

the quarter ended July

29, 2023, after giving

effect to the amendment,

the Company was in

compliance with

availability,

facility was zero at July 29, 2023

due to no borrowings outstanding.

Expenditures for property and equipment totaled $8.5 million in the first six months of fiscal 2023, compared

to $10.4 million in last

fiscal year’s first six months.

decrease in expenditures for property and equipment

approximately

capital expenditures.

THE CATO CORPORATION

1 unchanged sentence

CONDITION AND RESULTS OF OPERATIONS

Net cash provided by investing activities totaled $23.8 million in the first six months of fiscal 2023

cash provided

comparable period

cash provided

2023 was primarily due

to a net decrease

in the purchase of

short-term investments and a

decrease in capital

expenditures.

financing activities

2023 compared

$16.7 million used in the comparable period of fiscal 2022.

The decrease in net cash used in fiscal 2023 was

primarily due to lower stock repurchases and

lower dividends.

authorizations

repurchase program.

The Company does not use

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tax-exempt and taxable

debt securities

managed accounts

with underlying

contractual maturities

Treasury Notes

and Certificates

Deposit have contractual maturities

which range from

one day to 2.8

These securities are

governmental debt securities held in managed accounts

with underlying ratings of A or better

at July 29, 2023

from one day to 2.6 years.

Treasury Notes have contractual maturities which range from two

classified as

available-for-sale

accompanying Condensed Consolidated Balance Sheets.

These assets are carried at fair value with unrealized

comprehensive

asset-backed securities are

of auto loans

originated and

auto finance units,

finance companies.

asset-backed securities

Citibank, JPMorgan Chase, Capital One, and

available-for-sale and

Restricted cash and Other assets on the accompanying Condensed Consolidated Balance Sheets.

comprehensive income.

The asset-backed

securities are bonds comprised

of auto loans and

bank credit cards

loan asset-backed

securities are

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,

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had $0.9 million

equities and deferred compensation

plan assets of $9.3

assets are recorded within

equities and deferred compensation plan assets of $9.3

All of these assets are recorded within

assets in the Condensed Consolidated Balance

See Note 7, Fair Value

Measurements.

See Note 7, Fair Value Measurements.

RECENT ACCOUNTING PRONOUNCEMENTS:

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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