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 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 (Dollars in thousands, except per share data) REVENUES Retail sales $ 156,682 $ 174,921 $ 528,174 $ 574,860 Other revenue (principally finance charges, late fees and layaway charges) 1,574 1,705 5,003 5,351 Total revenues 158,256 176,626 533,177 580,211 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 105,832 123,752 345,536 387,744 Selling, general and administrative (exclusive of depreciation shown below) 61,792 61,397 185,344 182,606 Depreciation 2,504 2,864 7,371 8,418 Interest and other income ( 1,523 ) ( 2,278 ) ( 3,754 ) ( 4,565 ) Costs and expenses, net 168,605 185,735 534,497 574,203 Income (loss) before income taxes ( 10,349 ) ( 9,109 ) ( 1,320 ) 6,008 Income tax (benefit) expense ( 4,272 ) ( 4,656 ) ( 797 ) 2,988 Net income (loss) $ ( 6,077 ) $ ( 4,453 ) $ ( 523 ) $ 3,020 Basic earnings (loss) per share $ ( 0.30 ) $ ( 0.21 ) $ ( 0.02 ) $ 0.14 Diluted earnings (loss) per share $ ( 0.30 ) $ ( 0.21 ) $ ( 0.02 ) $ 0.14 Comprehensive income: Net income (loss) $ ( 6,077 ) $ ( 4,453 ) $ ( 523 ) $ 3,020 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of $ 60 and $ 217 for the three and nine months ended October 28, 2023 and ($ 189 ) and ($ 532 ) for the three and nine months ended October 29, 2022, respectively 201 ( 629 ) 723 ( 1,774 ) Comprehensive income (loss) $ ( 5,876 ) $ ( 5,082 ) $ 200 $ 1,246 See notes to condensed consolidated financial statements (unaudited). 4 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) October 28, 2023 January 28, 2023 ASSETS (Dollars in thousands) Current Assets: Cash and cash equivalents $ 25,024 $ 20,005 Short-term investments 93,552 108,652 Restricted cash 3,908 3,787 Accounts receivable, net of allowance for customer credit losses of $ 742 and $ 761 at October 28, 2023 and January 28, 2023, respectively 31,115 26,497 Merchandise inventories 98,872 112,056 Prepaid expenses and other current assets 8,591 6,676 Total Current Assets 261,062 277,673 Property and equipment – net 66,302 70,382 Noncurrent deferred income taxes 10,977 9,213 Other assets 25,444 21,596 Right-of-Use assets – net 123,583 174,276 Total Assets $ 487,368 $ 553,140 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 86,897 $ 91,956 Accrued expenses 42,521 41,338 Accrued employee benefits and bonus 1,387 1,690 Accrued income taxes 1,988 613 Current lease liability 51,431 67,360 Total Current Liabilities 184,224 202,957 Other noncurrent liabilities 14,683 16,183 Lease liability 71,143 107,407 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; 18,821,512 shares and 18,723,225 shares issued at October 28, 2023 and January 28, 2023, respectively 636 632 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 28, 2023 and January 28, 2023, respectively 59 59 Additional paid-in capital 125,949 122,431 Retained earnings 91,189 104,709 Accumulated other comprehensive income (loss) ( 515 ) ( 1,238 ) Total Stockholders' Equity 217,318 226,593 Total Liabilities and Stockholders' Equity $ 487,368 $ 553,140 See notes to condensed consolidated financial statements (unaudited). 5 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended October 28, 2023 October 29, 2022 (Dollars in thousands) Operating Activities: Net income (loss) $ ( 523 ) $ 3,020 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 7,371 8,418 Provision for customer credit losses 397 217 Purchase premium and premium amortization of investments ( 226 ) 606 Share-based compensation 3,189 1,517 Deferred income taxes ( 1,981 ) - Loss on disposal of property and equipment 13 106 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable ( 1,815 ) 29,916 Merchandise inventories 13,184 8,189 Prepaid and other assets ( 1,716 ) 1,704 Operating lease right-of-use assets and liabilities ( 1,499 ) ( 1,895 ) Accrued income taxes 1,375 1,918 Accounts payable, accrued expenses and other liabilities ( 6,099 ) ( 34,418 ) Net cash provided by operating activities 11,670 19,298 Investing Activities: Expenditures for property and equipment ( 10,271 ) ( 14,382 ) Purchase of short-term investments ( 44,595 ) ( 53,765 ) Sales of short-term investments 60,999 68,348 Net cash provided by investing activities 6,133 201 Financing Activities: Dividends paid ( 10,457 ) ( 10,870 ) Repurchase of common stock ( 2,563 ) ( 11,561 ) Proceeds from employee stock purchase plan 357 279 Net cash used in financing activities ( 12,663 ) ( 22,152 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 5,140 ( 2,653 ) Cash, cash equivalents, and restricted cash at beginning of period 23,792 23,678 Cash, cash equivalents, and restricted cash at end of period $ 28,932 $ 21,025 Non-cash activity: Accrued other assets and property and equipment $ 1,100 $ 2,311 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 28, 2023 $ 691 $ 122,431 $ 104,709 $ ( 1,238 ) $ 226,593 Comprehensive income: Net income - - 4,428 - 4,428 Unrealized net gains on available-for-sale securities, net of deferred income tax expense of $ 107 - - - 355 355 Dividends paid ($ 0.17 per share) - - ( 3,455 ) - ( 3,455 ) Class A common stock sold through employee stock purchase plan - 195 - - 195 Share-based compensation issuances and exercises - - 3 - 3 Share-based compensation expense - 929 - - 929 Repurchase and retirement of treasury shares ( 8 ) - ( 2,259 ) - ( 2,267 ) Balance — April 29, 2023 $ 683 $ 123,555 $ 103,426 $ ( 883 ) $ 226,781 Comprehensive income: Net income - - 1,127 - 1,127 Unrealized net gains on available-for-sale securities, net of deferred income tax expense of $ 50 - - - 167 167 Dividends paid ($ 0.17 per share) - - ( 3,507 ) - ( 3,507 ) Class A common stock sold through employee stock purchase plan 1 31 - - 32 Share-based compensation issuances and exercises - - - - - Share-based compensation expense 12 1,212 3 - 1,227 Repurchase and retirement of treasury shares ( 1 ) - ( 293 ) - ( 294 ) Balance — July 29, 2023 $ 695 $ 124,798 $ 100,756 $ ( 716 ) $ 225,533 Comprehensive income: Net loss - - ( 6,077 ) - ( 6,077 ) Unrealized net gains on available-for-sale securities, net of deferred income tax expense of $ 60 - - - 201 201 Dividends paid ($ 0.17 per share) - - ( 3,495 ) - ( 3,495 ) Class A common stock sold through employee stock purchase plan 1 188 - - 189 Share-based compensation issuances and exercises - - - - - Share-based compensation expense ( 1 ) 963 5 - 967 Repurchase and retirement of treasury shares - - - - - Balance — October 28, 2023 $ 695 $ 125,949 $ 91,189 $ ( 515 ) $ 217,318 See notes to condensed consolidated financial statements (unaudited). 7 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 - - 9,748 - 9,748 Unrealized net losses 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 loss - - ( 2,274 ) - ( 2,274 ) Unrealized net gains 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 loss - - ( 4,453 ) - ( 4,453 ) Unrealized net losses 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). THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 8 NOTE 1 - GENERAL : The condensed consolidated financial statements as of October 28, 2023 and for the thirty-nine-week periods ended October 28, 2023 and October 29, 2022 have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown 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 28, 2023. Amounts as of January 28, 2023 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. On November 16, 2023, the Board of Directors maintained the quarterly dividend at $ 0.17 per share. During the third quarter of the current fiscal year, the Company received an estimate for costs to repair its corporate jet, which had sustained damage at the end of the second quarter. The Company determined that the cost of repair is recoverable and recorded a receivable for the estimated repair cost of $ 3.2 million. Management has determined that it is more likely than not that the aircraft will be sold within the next 12 months. The Company reclassified the aircraft as an asset held for sale at its estimated fair value of $ 4.2 million, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets as of October 28, 2023. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 9 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 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 (Dollars in thousands) Numerator Net earnings (loss) $ ( 6,077 ) $ ( 4,453 ) $ ( 523 ) $ 3,020 (Earnings) loss allocated to non-vested equity awards 346 240 49 ( 153 ) Net earnings (loss) available to common stockholders $ ( 5,731 ) $ ( 4,213 ) $ ( 474 ) $ 2,867 Denominator Basic weighted average common shares outstanding 19,421,701 19,934,592 19,373,411 20,029,703 Diluted weighted average common shares outstanding 19,421,701 19,934,592 19,373,411 20,029,703 Net income (loss) per common share Basic earnings (loss) per share $ ( 0.30 ) $ ( 0.21 ) $ ( 0.02 ) $ 0.14 Diluted earnings (loss) per share $ ( 0.30 ) $ ( 0.21 ) $ ( 0.02 ) $ 0.14 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 10 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 28, 2023: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at July 29, 2023 $ ( 716 ) Other comprehensive income before reclassification 185 Amounts reclassified from accumulated other comprehensive income (b) 16 Net current-period other comprehensive income 201 Ending Balance at October 28, 2023 $ ( 515 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 20 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 $ 4 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 28, 2023: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at January 28, 2023 $ ( 1,238 ) Other comprehensive income before reclassification 704 Amounts reclassified from accumulated other comprehensive income (b) 19 Net current-period other comprehensive income 723 Ending Balance at October 28, 2023 $ ( 515 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 24 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 $ 5 . THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 11 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 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 reclassifications ( 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 accumulated other comprehensive income. (b) Includes $ 11 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 $ 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 reclassifications ( 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 accumulated other comprehensive income. (b) Includes $ 18 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 $ 4 . THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 12 NOTE 4 – FINANCING ARRANGEMENTS: As of October 28, 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 October 24, 2023, the Company amended the revolving credit agreement to link the calculation of the Company’s EBITDAR coverage ratio to the amount of the Company’s cash and investments. Though the effect of the amendment reduced the minimum EBITDAR coverage ratio for the quarter ended October 28, 2023 and is expected to do so going forward, the Company was in compliance with the amended credit agreement for the quarter ended October 28, 2023 and also would have been in compliance without giving effect to the amendment. There were no borrowings outstanding, no r any outstanding letters of credit that reduced borrowing availability, as of October 28, 2023. The weighted average interest rate under the credit facility was zero at October 28, 2023 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 – Segment Reporting , 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. The products sold in each retail operating segment are similar in nature, as they all offer women’s apparel, shoes and accessories. Merchandise inventory of 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 retail operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently sold to customers in a similar manner. The Company operates its women’s fashion specialty retail stores in 31 states as of October 28, 2023, 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. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 13 NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED): The following schedule summarizes certain segment information (in thousands): Three Months Ended Nine Months Ended October 28, 2023 Retail Credit Total October 28, 2023 Retail Credit Total Revenues $ 157,595 $ 661 $ 158,256 Revenues $ 531,243 $ 1,934 $ 533,177 Depreciation 2,504 - 2,504 Depreciation 7,370 1 7,371 Interest and other income ( 1,523 ) - ( 1,523 ) Interest and other income ( 3,754 ) - ( 3,754 ) Income (loss) before income taxes ( 10,604 ) 255 ( 10,349 ) Income (loss) before income taxes ( 2,014 ) 694 ( 1,320 ) Capital expenditures 1,801 - 1,801 Capital expenditures 10,271 - 10,271 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 before income taxes 5,623 385 6,008 Capital expenditures 3,998 - 3,998 Capital expenditures 14,382 - 14,382 Retail Credit Total Total assets as of October 28, 2023 $ 450,420 $ 36,948 $ 487,368 Total assets as of January 28, 2023 514,609 38,531 553,140 The Company evaluates segment performance based on income before income 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 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Payroll $ 135 $ 120 $ 411 $ 389 Postage 111 107 321 299 Other expenses 160 172 507 557 Total expenses $ 406 $ 399 $ 1,239 $ 1,245 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 14 NOTE 6 – STOCK-BASED COMPENSATION: As of October 28, 2023, 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 28, 2023: 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 28, 2023 - 3,124,274 3,124,274 In accordance with ASC 718 – Compensation–Stock Compensation , 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 28, 2023 and January 28, 2023, there was $ 10,488,000 and $ 10,543,000 , 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 2.1 years, respectively. Total compensation expense during the three and nine months ended October 28, 2023 was $ 967,000 and $ 3,126,000 , respectively, compared to total compensation benefit of $ 535,000 and total compensation expense of $ 1,471,000 for the three and nine months ended October 29, 2022, respectively. 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 number of shares of unvested restricted stock outstanding during the nine months ended October 28, 2023: Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at January 28, 2023 1,059,433 $ 13.10 Granted 414,502 8.29 Vested ( 217,238 ) 13.97 Forfeited or expired ( 109,705 ) 11.94 Restricted stock awards at October 28, 2023 1,146,992 $ 11.31 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 15 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 28, 2023 and October 29, 2022, the Company sold 50,540 and 28,504 shares to employees at an average discount of $ 1.23 and $ 1.73 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 $ 62,000 and $ 49,000 for the nine months ended October 28, 2023 and October 29, 2022, 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 28, 2023 and January 28, 2023: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable October 28, 2023 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 15,700 $ - $ 15,700 $ - Corporate Bonds 47,759 - 47,759 - U.S. Treasury/Agencies Notes and Bonds 25,625 - 25,625 - Cash Surrender Value of Life Insurance 9,038 - - 9,038 Asset-backed Securities (ABS) 4,468 - 4,468 - Corporate Equities 788 788 - - Commercial Paper - - - - Total Assets $ 103,378 $ 788 $ 93,552 $ 9,038 Liabilities: Deferred Compensation $ ( 8,311 ) $ - $ - $ ( 8,311 ) Total Liabilities $ ( 8,311 ) $ - $ - $ ( 8,311 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 16 Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable January 28, 2023 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 23,102 $ - $ 23,102 $ - Corporate Bonds 47,901 - 47,901 - U.S. Treasury/Agencies Notes and Bonds 27,250 - 27,250 - Cash Surrender Value of Life Insurance 9,274 - - 9,274 Asset-backed Securities (ABS) 9,373 - 9,373 - Corporate Equities 923 923 - - Commercial Paper 1,026 - 1,026 - Total Assets $ 118,849 $ 923 $ 108,652 $ 9,274 Liabilities: Deferred Compensation $ ( 8,903 ) $ - $ - $ ( 8,903 ) Total Liabilities $ ( 8,903 ) $ - $ - $ ( 8,903 ) 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 28, 2023 and January 28, 2023. The state, municipal and corporate bonds have contractual maturities which range from four day s to 3.1 years. The U.S. Treasury Notes have contractual maturities which range from 79 days to 2.3 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 October 28, 2023, the Company had $ 0.8 million of corporate equities and deferred compensation plan assets of $ 9.0 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. Level 1 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 fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3 of the THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 17 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 for the nine months ended October 28, 2023 and the year ended January 28, 2023 (in thousands): Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 28, 2023 $ 9,274 Redemptions - Additions - Total gains or (losses): Included in interest and other income (or changes in net assets) ( 236 ) Included in other comprehensive income - Ending Balance at October 28, 2023 $ 9,038 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 28, 2023 $ ( 8,903 ) Redemptions 662 Additions ( 231 ) Total (gains) or losses: Included in interest and other income (or changes in net assets) 161 Included in other comprehensive income - Ending Balance at October 28, 2023 $ ( 8,311 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 18 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) ( 480 ) Included in other comprehensive income - Ending Balance at January 28, 2023 $ 9,274 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 29, 2022 $ ( 10,020 ) Redemptions 1,142 Additions ( 379 ) Total (gains) or losses: Included in interest and other income (or changes in net assets) 354 Included in other comprehensive income - Ending Balance at January 28, 2023 $ ( 8,903 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 19 NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS: The Company has reviewed recent accounting pronouncements and believe none will have a material impact on the Company’s financial statements. NOTE 9 – INCOME TAXES: The Company had an effective tax rate for the first nine months of 2023 of 60.4 % compared to 49.7 % for the first nine months of 2022. The change in the effective tax rate for the first nine months was primarily due to increases in foreign rate differential and the release of reserves for uncertain tax positions, offset by decreases in Global Intangible Low-taxed Income (GILTI), state income taxes, non-deductible officer’s compensation, and foreign tax credits, as percentages on a pre-tax loss. 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 the Company’s 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 of 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 CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 20 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 and nine months ended October 28, 2023, the Company estimated customer credit losses of $ 149,000 and $ 421,000 , respectively, compared to $ 89,000 and $ 261,000 for the three and nine months ended October 29, 2022, respectively. Sales purchased on the Company’s proprietary credit card for the three and nine months ended October 28, 2023 were $ 5.7 million and $ 17.4 million, respectively, compared to $ 5.9 million and $ 17.4 million for the three and nine months ended October 29, 2022, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): Balance as of October 28, 2023 January 28, 2023 Proprietary Credit Card Receivables, net $ 11,066 $ 10,553 Gift Card Liability $ 6,622 $ 8,523 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 21 NOTE 12 – LEASES: The Company determines whether an arrangement is a lease at inception. The Company has operating leases for stores, offices, warehouse space 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): Three Months Ended October 28, 2023 October 29, 2022 Operating lease cost (a) $ 17,498 $ 17,919 Variable lease cost (b) $ 544 $ 707 (a) Includes right-of-use asset amortization of ($ 0.3 ) million and ($ 0.4 ) million for the three months ended October 28, 2023 and October 29, 2022, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. Nine Months Ended October 28, 2023 October 29, 2022 Operating lease cost (a) $ 53,174 $ 53,521 Variable lease cost (b) $ 1,642 $ 2,053 (a) Includes right-of-use asset amortization of ($ 0.9 ) million and ($ 1.3 ) million for the nine months ended October 28, 2023 and October 29, 2022, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022 22 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 28, 2023 October 29, 2022 Cash paid for amounts included in the measurement of lease liabilities $ 16,671 $ 17,264 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ ( 1,468 ) $ 2,107 Nine Months Ended October 28, 2023 October 29, 2022 Cash paid for amounts included in the measurement of lease liabilities $ 50,696 $ 51,138 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 1,435 $ 8,156 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: As of October 28, 2023 October 29, 2022 Weighted-average remaining lease term 1.8 years 2.0 years Weighted-average discount rate 3.30 % 2.84 % Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2023 (a) $ 16,144 2024 49,756 2025 32,711 2026 19,525 2027 9,165 Thereafter 1,836 Total lease payments 129,137 Less: Imputed interest 6,563 Present value of lease liabilities $ 122,574 (a) Excluding the nine months ended October 28, 2023 23 THE CATO CORPORATION