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)
24
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company’s accounting
policies 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.
As
disclosed
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition and
Results of
Operations,” 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
calculation
of
potential
asset
impairment,
reserves
relating
to
self-insured
health
insurance,
workers’
compensation,
general
and
auto
insurance
liabilities,
uncertain
tax
positions,
the
allowance
for
customer
credit losses, and inventory shrinkage.
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)
25
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
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
0.9
1.0
0.9
0.9
Total revenues
100.9
101.0
100.9
100.9
Cost of goods sold (exclusive of depreciation)
64.9
67.6
64.5
66.0
Selling, general and administrative (exclusive
of depreciation)
34.0
31.2
33.3
30.3
Depreciation
1.4
1.4
1.3
1.4
Interest and other income
(0.7)
(1.0)
(0.6)
(0.6)
Income before income taxes
1.4
1.8
2.4
3.8
Net income (loss)
0.6
(1.2)
1.5
1.9
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
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
Annual Report Form 10-K.
Recent Developments
Inflationary Cost Pressure and Rising Interest Rates
Despite some
reduction in
inflationary pressures
from last
year,
Cato’s
operating costs,
including higher
wages, operating supplies, and service costs continue to be negatively
impacted by the current inflationary
environment.
In
addition,
our
customers’
disposable
income
is
impacted
by
increased
costs
related
to
fuel, food, and
housing, including rent,
as well as
other consumable products
across the economy
which,
in
part,
negatively
impact
our
customers’
willingness
to
purchase
discretionary
items
such
as
apparel,
jewelry and shoes.
In
response
to
inflationary
pressures,
the
Federal
Reserve
began
raising
and
is
committed
to
continue
raising interest
rates until
inflationary pressures
subside to
acceptable levels.
These rising
interest rates
have
adversely
affected
the
availability
and
cost
of
credit
for
both
businesses
and
our
customers.
Increasing costs related
to revolving credit,
auto loans and
mortgages continue to
have a negative
impact
on
our
customers’
discretionary
income.
Our
customers’
willingness
to
purchase
our
products
may
continue to be negatively impacted by high interest rates.
We
believe high prices
and interest rates
impacted the first
half 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.
Comparison of the Three and Six
Months ended July 29, 2023 with
July 30, 2022
Total retail sales
for the second
quarter were
$181.2 million
compared to last
year’s second
quarter sales
of
$195.0
million,
a
7%
decrease.
The
Company’s
sales
decrease
in
the
second
quarter
of
fiscal
2023
is
primarily due
to a
5% decrease
in same-store
sales and
permanently closed
stores, partially
offset by
sales
from new stores.
For the six
months ended July
29, 2023, total
retail sales were
$371.5 million compared
to
last year’s comparable six month sales of $399.9 million, a 7% decrease. The decrease in sales in the first six
months of
fiscal 2023
was also
due primarily
to a
5% decrease
in same-store
sales and
permanently closed
stores,
partially offset
by sales
from
new
stores. 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% of total sales for
the
six
months
ended
July
29,
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
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,
2022,
respectively. The Company operated 1,247 stores at July 29, 2023 compared to 1,312 stores at the end
of last
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
year’s
second
quarter.
During
the
first
six
months
of
fiscal
2023,
the
Company
opened
eight
stores
and
closed 41 stores.
The Company currently expects to close approximately 80
stores in total in fiscal 2023.
Credit
revenue
of
$0.7
million
represented
0.4%
of
total
revenues
in
the
second
quarter
of
fiscal
2023,
compared to
2022 credit
revenue of
$0.6 million
or 0.3%
of total
revenues. Credit
revenue is
comprised of
interest earned on the Company’s private label credit card portfolio and related fee income.
Related expenses
principally include payroll,
postage and other
administrative expenses and
totaled $0.4 million
in the second
quarter of fiscal 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
three
and
six
month
periods.
The
decrease
in
Other
revenue
for
both
the
three
and
six
months
is
due
to
a
decrease
in
gift
card
breakage
and
e-commerce
shipping
revenue
partially
offset
by
increases
in
finance
charges and late fees associated with
the Company’s proprietary credit card.
Cost of
goods sold
was $117.6
million, or
64.9% of
retail sales
and $239.7
million, or
64.5% of retail
sales
for the three and six months
ended July 29, 2023, respectively, compared
to $131.7 million, or 67.6% of retail
sales and
$264.0 million,
or 66.0%
of retail
sales for
the comparable
three and
six month
periods of
fiscal
2022.
The overall
decrease in
cost of
goods sold
as a
percent of
retail sales
for the
second quarter
and first
half of
fiscal 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)
increased
by
0.5%
to
$63.6
million
for
the
second
quarter
of
fiscal
2023
and
decreased
by
3.0%
to
$131.8
million
for
the
first
six
months
of
fiscal
2023,
compared to $63.3
million and $135.9 million
for the prior year’s
comparable three and six
months 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,
bank
and
credit
card
processing
fees.
SG&A
expenses
were
$61.6
million,
or
34.0%
of
retail
sales
and
$123.6
million,
or
33.3%
of
retail
sales
for
the
second quarter and first six months of fiscal 2023, respectively, compared to $60.8 million, or
31.2% of retail
sales and $121.2 million, or 30.3% of retail sales for the prior year’s comparable three and
six month periods.
The increase
in SG&A
for the
second quarter
and first
six months
of fiscal
2023 is
primarily due
to higher
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
and first
six months
of fiscal
2023, respectively,
compared to
$2.8 million,
or 1.4%
of retail
sales and $5.6
million or 1.4%
of retail sales
for the comparable
three and six
month periods of
fiscal 2022,
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
and
$2.3
million,
or
0.6%
of
retail
sales
for
the
comparable
three
and
six
month
periods
of
fiscal
2022,
respectively.
The decrease for the second quarter and first six months of fiscal 2023 compared to fiscal 2022
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
28
is primarily attributable
to the Company’s
receipt of insurance
proceeds in the
second quarter of
fiscal 2022
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
2023,
respectively,
compared
to
$5.7
million
and
$7.6
million
for
the
comparable
three
and
six month
periods of
fiscal 2022,
respectively.
For the
first six
months of
fiscal 2023,
the Company’s
effective tax
rate was
38.5% compared to
50.6% for
the first
six months
of fiscal 2022.
The change
in the
2023 year-
to-date effective tax rate was primarily due to a decrease in Global Intangible Low-taxed Income
(GILTI),
state
income
taxes,
non-deductible
officer’s
compensation,
and
increases
in
foreign
tax
credits
and
employment credits, partially offset by the foreign rate differential.
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
during
the
first
six
months
of
fiscal
2023
was
$21.6
million
as
compared
to
$17.0
million
provided
in
the
first
six
months
of
fiscal
2022.
Cash
provided
by
operating
activities for the first six months of fiscal 2023 was primarily generated by earnings adjusted for
depreciation
and changes in working capital. The increase in cash provided of $4.6 million
for the first six months of fiscal
2023 as compared
to the
first six
months of
fiscal 2022
was primarily
due to
a smaller
decrease in
accounts
payable
and
accrued
liabilities
from
the
fiscal
year
end
and
lower
inventory,
partially
offset
by
higher
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
28, 2023.
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.
As of July
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,
and is
committed
through
May
2027.
The
revolving
credit
agreement
contains
various
financial
covenants
and
limitations,
including
the
maintenance
of
specific
financial
ratios.
On
August
9,
2023,
the
Company
amended the revolving credit
agreement to modify
a definition used in
calculating the Company’s
minimum
EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating
the ratio. For
the quarter ended July
29, 2023, after giving
effect to the amendment,
the Company was in
compliance with
the
credit
agreement.
There
were
no
borrowings
outstanding,
nor
any
outstanding
letters
of
credit
that
reduced
borrowing
availability,
as
of
July
29,
2023.
The
weighted
average
interest
rate
under
the
credit
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. The
decrease in expenditures for property and equipment
was
primarily
due
to
finishing
projects
related
to
investments
in
the
distribution
center
and
information
technology.
For
the
full
fiscal
2023
year,
the
Company
expects
to
invest
approximately
$17.0
million
for
capital expenditures.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
29
Net cash provided by investing activities totaled $23.8 million in the first six months of fiscal 2023
compared
to $10.1
million net
cash provided
in the
comparable period
of 2022.
The increase
in net
cash provided
in
2023 was primarily due
to a net decrease
in the purchase of
short-term investments and a
decrease in capital
expenditures.
Net cash
used in
financing activities
totaled $9.3
million in
the first
six months
of fiscal
2023 compared
to
$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.
As
of
July
29,
2023,
the
Company
had
909,653
shares
remaining
in
open
authorizations
under
its
share
repurchase program.
The Company does not use
derivative financial instruments.
The Company’s
investment portfolio
was primarily
invested in
corporate bonds and
tax-exempt and taxable
governmental debt securities held in managed accounts
with underlying ratings of A or better
at July 29, 2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
have
contractual
maturities
which
range
from one day to 2.6 years. The U.S.
Treasury Notes have contractual maturities which range from two
days to
2.6
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
July
29,
2023,
the
Company
had
$0.9
million
of
corporate
equities
and
deferred
compensation plan assets
of $9.5 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
30
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
based
on
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.