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
Nine Months Ended
October 28, 2023
October 29, 2022
October 28, 2023
October 29, 2022
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
1.0
1.0
0.9
0.9
Total revenues
101.0
101.0
100.9
100.9
Cost of goods sold (exclusive of depreciation)
67.5
70.7
65.4
67.5
Selling, general and administrative (exclusive
of depreciation)
39.4
35.1
35.1
31.8
Depreciation
1.6
1.6
1.4
1.5
Interest and other income
(1.0)
(1.3)
(0.7)
(0.8)
Income (loss) before income taxes
(6.6)
(5.2)
(0.3)
1.0
Net income (loss)
(3.9)
(2.5)
(0.1)
0.5
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 on Form 10-K.
Recent Developments
Inflationary Cost Pressure and High Interest Rates
Despite
some
reduction
in
inflationary
pressures
from last
year,
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, housing, including rent,
and other
consumable products relative
to flattening wage
rates, which
negatively impact our
customers’
willingness to purchase discretionary items such as apparel,
jewelry and shoes.
In response,
the Federal
Reserve began
raising, and
is committed
to continue
raising, interest
rates until
inflationary pressures subside to
acceptable levels.
Though the Federal
Reserve has paused
raising rates,
it has
indicated it is
committed to reducing
inflation to its
targeted levels.
These high 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 negatively
impact our
customers’
discretionary
income.
Our
customers’
willingness
to
purchase
our
products
may
continue
to
be
negatively impacted by these inflationary pressures and high interest
rates.
We
believe high
prices and
interest rates
negatively impacted
the first
three quarters
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 Nine
Months ended October 28, 2023 with
October 29, 2022
Total retail sales for the
third quarter were $156.7 million compared to
last year’s third quarter sales
of $174.9
million, a 10% decrease.
The Company’s sales
decrease in the third quarter
of fiscal 2023 was
primarily due
to an 8% decrease in same-store sales and closed stores, partially offset
by sales from new stores. For the nine
months ended
October 28,
2023,
total
retail sales
were
$528.2
million compared
to last
year’s
comparable
nine month
sales of
$574.9 million,
an 8%
decrease. The
decrease in
sales in
the first
nine months
of fiscal
2023 was due primarily to
a 6% decrease in same-store
sales and 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
nine
months
ended
October
28,
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
$158.3
million
and
$533.2
million
for
the
three
and
nine
months
ended
October
28,
2023,
compared
to
$176.6
million
and
$580.2
million
for
the
three
and
nine
months
ended
October
29,
2022,
respectively.
The
Company operated
1,245 stores
at October
28, 2023
compared to
1,317 stores
at the end
of last
year’s third
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
quarter.
During the
first nine
months of
fiscal 2023,
the Company
opened nine stores
and closed
44 stores.
The Company currently expects to close
approximately 110 stores in total in
fiscal 2023.
Credit
revenue
of
$0.7
million
represented
0.4%
of
total
revenues
in
the
third
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 third
quarter of fiscal 2023, compared to
last year’s third quarter expense of
$0.4 million.
Other
revenue,
a
component
of
total
revenues,
was
$1.6
million
and
$5.0
million
for
the
three
and
nine
months ended October 28,
2023, respectively, compared to
$1.7 million and $5.4
million for the prior
year’s
comparable three and
nine month periods. The
decrease in Other revenue
for both the three
and nine months
was due to
decreases 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 $105.8
million, or
67.5% of
retail sales
and $345.5
million, or
65.4% of retail
sales
for the three and nine months ended October 28, 2023, respectively, compared to $123.8 million, or 70.7% of
retail sales
and $387.7
million, or
67.5% of
retail sales
for the
comparable three
and nine
month periods
of
fiscal 2022.
The overall
decrease in
cost of
goods sold
as a
percent of
retail sales
for the
third quarter
and
first
nine
months
of
fiscal
2023
resulted
primarily
from
lower
ocean
freight
costs
and
increased
sales
of
regular
priced
goods,
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 0.6% to
$50.9 million for
the
third
quarter
of
fiscal
2023
and
by
2.4%
to
$182.6
million
for
the
first
nine
months
of
fiscal
2023,
compared to $51.2 million and $187.1 million for the prior year’s comparable three and nine
months of fiscal
2022, respectively.
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 $61.8 million, or 39.4% of retail sales and $185.3 million, or 35.1% of retail sales for the
third
quarter and first nine months of
fiscal 2023, respectively, compared to $61.4
million, or 35.1% of retail sales
and
$182.6
million,
or 31.8%
of retail
sales
for the
prior
year’s
comparable three
and
nine
month periods,
respectively.
The increase in
SG&A for the
third quarter and
first nine months
of fiscal 2023
was primarily
due to higher payroll and insurance
expense.
Depreciation expense was $2.5 million, or 1.6% of retail sales and $7.4 million, or 1.4% of
retail sales for the
third quarter
and first
nine months
of fiscal
2023, respectively,
compared to
$2.9 million,
or 1.6%
of retail
sales and $8.4 million or 1.5%
of retail sales for the comparable three
and nine month periods of fiscal
2022,
respectively.
Interest and other income was $1.5 million, or 1.0% of retail sales and $3.8 million, or 0.7% of retail sales for
the three and
nine months ended October
28, 2023, respectively, compared
to $2.3 million, or
1.3% of retail
sales and $4.6 million, or 0.8% of retail sales for the comparable three and nine month periods of fiscal
2022,
respectively.
The decrease for the
third quarter and first
nine 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
was
primarily
attributable
to the
Company’s
receipt
of
a
Business
Recovery
Grant from
the state
of
North
Carolina in 2022, partially offset by higher
amounts earned on investments due to
higher interest rates.
Income tax
benefit was
$4.3 million
and $0.8
million for the
third quarter
and first
nine months of fiscal
2023,
respectively,
compared to
a
tax
benefit
of
$4.7 million
and
a
tax
expense
of
$3.0
million
for
the
comparable three
and nine month
periods of
fiscal 2022,
respectively.
For the
first nine
months of
fiscal
2023, the
Company’s effective
tax rate
was 60.4% compared
to 49.7%
for the first
nine months of
fiscal
2022.
The change in the 2023 year-to-date effective tax rate 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.
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
nine
months
of
fiscal
2023
was
$11.7
million
as
compared to $19.3 million provided
in the first nine months of fiscal
2022. The decrease in cash provided
of
$7.6 million for
the first nine
months of fiscal
2023 as compared
to the first
nine months of
fiscal 2022 was
primarily due to a net loss in 2023 compared to net income in 2022,
and higher accounts receivable, partially
offset by lower accounts payable and
accrued liabilities.
At
October
28,
2023,
the
Company
had
working
capital
of
$76.8
million
compared
to
$74.7
million
at
January 28,
2023.
The increase
in working
capital was
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 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,
nor
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.
Expenditures
for
property
and
equipment
totaled
$10.3
million
in
the
first
nine
months
of
fiscal
2023,
compared to
$14.4 million
in last
fiscal year’s
first nine
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
$12.0
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 $6.1 million in the first nine months of fiscal 2023 compared
to
$0.2
million net
cash
provided in
the comparable
period
of
2022.
The
increase
in net
cash provided
in
2023 was primarily due to a
decrease in capital expenditures.
Net cash used in financing activities totaled $12.7 million in the first nine months of fiscal
2023 compared to
$22.2 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.
On November 16, 2023, the Board
of Directors maintained the quarterly dividend at
$0.17 per share.
As of
October 28,
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
October 28,
2023
and
January
28,
2023.
The
state,
municipal
and
corporate
bonds
have
contractual
maturities
which
range from four days 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.
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.