Item 1A. Risk Factors
Item 1A.
Risk Factors:
An investment in our common stock involves numerous types of risks.
You
should carefully consider
the
following
risk
factors,
in
addition
to
the
other
information
contained
in
this
report,
including
the
disclosures
under
“Forward-looking
Information”
above
in
evaluating
our
Company
and
any
potential
investment
in
our
common
stock.
If
any
of
the
following
risks
or
uncertainties
occur
or
persist,
our
business, financial condition and
operating results could
be materially and
adversely affected, the
trading
price
of
our
common
stock
could
decline
and
you
could
lose
all
or
a
part
of
your
investment
in
our
common
stock.
The
risks
and
uncertainties
described
in
this
section
are
not
the
only
ones
facing
us.
Additional risks
and uncertainties
not presently
known to
us or
that we
currently deem
immaterial
may
also materially
and adversely
affect
our business,
operating results,
financial condition
and value
of our
common stock.
Risks Relating to Our Business:
Continued high interest rates and inflationary conditions have and
may continue to adversely
impact our customers’ discretionary income or willingness to purchase
discretionary items, which
may adversely affect our business, margins, results of operations and financial
condition.
Continued high interest rates have adversely affected our customers’ discretionary income, in part due
to increased
interest costs
associated with
credit accounts
including revolving
credit accounts,
car loans,
mortgage loans and other credit accounts.
In addition, the increased payments due to
higher interest rates
deter our
customers from
purchasing discretionary
items such
as apparel,
shoes and
jewelry.
Continued
inflationary pressures
limit our
customers’ willingness
to purchase
apparel, shoe
or jewelry
products, as
prices associated
with non-discretionary
items, including
food, fuel
and shelter
costs increase
or remain
high,
reducing
our
customers’
discretionary
income.
Any
reduction
in
our
customers’
discretionary
spending on our products could
erode our sales volume and
adversely affect our results
of operations and
financial condition.
Because we source a significant portion of our merchandise directly
and indirectly from overseas,
we are subject to risks associated with changes, disruptions, increased
costs or other problems
affecting the Company’s merchandise supply chain; the risks of conducting international
operations and risks that affect the prevailing social, economic, political, public health
and other
conditions in the areas from which we source merchandise have
and could continue to materially
and adversely affect the Company’s business, results of operations and financial condition.
11
A significant amount of our merchandise is manufactured overseas, principally in Southeast Asia. We
are
subject
to
supply
chain
disruptions
affecting
transit
times
and
costs,
including
issues
related
to
a
sustained drought
in Panama
that is
causing longer
transit times
through the
Panama Canal
and limiting
the number of containers on a vessel due to vessel draft restrictions.
We
also face disruptions from issues
related to
vessels transiting the
Suez Canal and
Red Sea, which
are being forced
to travel
a much
longer
distance around the
Cape of Good
Hope due to
the hostilities in
the Middle East.
These continued issues
have and
may continue to
drive up our
ocean freight costs,
delay merchandise deliveries,
and impact our
ability to access the already limited supply of
ocean container shipping capacity that we require.
We
also
are
subject
to
domestic
supply
chain
disruptions,
including
lack
of
domestic
intermodal
transportation
(trucks
and
drivers),
domestic
port
congestion,
including
increased
dwell
times
for
incoming
container
ships, lack
of container
yard capacity
and lack
of available
drayage from
the ports
and other
conditions
that impact our domestic
supply chain.
These supply chain risks
have and may continue
to result in
both
higher costs to transport our merchandise and delayed merchandise arrivals to our stores, which adversely
affect our ability to sell this merchandise and increase markdowns of it.
We
directly import
some of
this merchandise
and indirectly
import the
remaining merchandise
from
domestic vendors who acquire the merchandise from foreign
sources. Further, our third-party
vendors are
dependent on materials
primarily sourced from China.
As a result,
we are subject
to numerous risks
that
can cause significant delays or interruptions in the supply of our merchandise
or increase our costs.
These
risks
include
political
unrest,
labor
disputes,
terrorism,
war,
public
health
threats,
including
but
not
limited
to
communicable
diseases
(such
as
COVID-19),
financial
or
other
forms
of
instability
or
other
events
resulting in
the
disruption
of
trade
from
countries
affecting
our
supply
chain,
increased
security
requirements for imported
merchandise, or the
imposition of, or
changes in, laws,
regulations or changes
in duties,
quotas, tariffs,
taxes or
governmental policies
regarding or
responses to
these matters
or other
factors
affecting
the
availability
or
cost
of
imports.
In
addition,
geopolitical
tensions,
sanctions,
prohibitions,
additional
tariffs,
compliance
and
reporting
requirements
have
resulted
in
increased
costs
associated
with
merchandise
produced
in
certain
regions.
Any
new
sanctions,
tariffs
and
reporting
requirements enacted in
the future may
further increase our
costs associated with
sourcing products from
those
regions
or
limit
our
ability
to
procure
the
products
we
source,
and
our
ability
to
source
these
products from other regions may be limited or result in increased sourcing
costs.
Our costs are
also affected by currency
fluctuations, and changes in
the value of the
dollar relative to
foreign currencies have impacted and may continue to impact our cost of goods sold. Any of these
factors
can materially
and adversely affect
our business
and results
of operations.
In addition,
increased energy
and transportation
costs have
caused
us significant
cost increases
from time
to
time, and
future adverse
changes
in
these
costs
or
the
disruption
of
the
means
by
which
merchandise
is
transported
to
us
could
cause additional
cost increases
or interruptions
of our
supply chain,
which could
be significant.
Further,
we are subject to
increased costs or potential disruptions
impacting any port or
trade route through which
our products
move, or we
may be
subject to
increased costs
and delays if
forced to route
freight through
different
ports
than
the
ones
through
which
our
products
typically
move.
If
we
are
forced
to
source
merchandise from
other countries
or other
domestic vendors
with foreign
sources in
different
countries,
those goods may be more expensive or of a different or inferior quality from the ones we
now sell.
The operation of our sourcing offices in Asia presents increased operational and
legal risks.
In October
2014, we
established our
own sourcing
offices in
Asia. If
our sourcing
offices are
unable
to successfully oversee merchandise production to ensure
that product is produced on time and
within the
Company’s
specifications,
our
business,
brand,
reputation,
costs,
results
of
operations
and
financial
condition could be materially and adversely affected.
In addition, the current business environment, including geopolitical issues, make operating in
certain
Asian
markets
challenging.
To
the
extent
we
explore
other
countries
to
source
our
product
or
explore
12
increasing
the
amount
of
product
sourced
from
current
countries,
we
may
be
subject
to
additional
increased
legal
and
operational risks
associated
with
doing
business
in
new
countries
or
increasing our
business in other countries.
Further,
the
activities
conducted
by
our
sourcing
offices
outside
the
United
States
subject
us
to
foreign operational risks,
as well as
U.S. and international regulations
and compliance risks, as
discussed
elsewhere
in
this
“Risk
Factors”
section,
in
particular
below
under
“Risk
Factors
–
Risks
Relating
to
Accounting
and
Legal
Matters
-
Our
business
operations
subject
us
to
legal
compliance
and
litigation
risks, as well as regulations and regulatory enforcement priorities, which could result in increased costs or
liabilities,
divert
our
management’s
attention
or
otherwise
adversely
affect
our
business,
results
of
operations and financial condition.”
Any actual or perceived deterioration in the conditions that drive
consumer confidence and
spending have and may continue to materially and adversely affect consumer demand
for our
apparel and accessories and our results of operations.
Consumer spending habits, including spending for our apparel
and accessories, are affected by, among
other things, prevailing social, economic,
political and public health conditions
and uncertainties (such as
matters under debate in the U.S. from time to
time regarding budgetary, spending and
tax policies), levels
of
employment,
fuel,
inflation,
interest
rates,
energy
and
food
costs,
salaries
and
wage
rates
and
other
sources
of
income,
tax
rates,
home
values,
consumer
net
worth,
the
availability
of
consumer
credit,
-
consumer
confidence
and
consumer
perceptions
of
adverse
changes
in
or
trends
affecting
any
of
these
conditions.
Any perception that these conditions may be worsening or continuing to trend negatively may
significantly
weaken
many
of
these
drivers
of
consumer spending
habits.
Adverse
perceptions
of
these
conditions
or
uncertainties
regarding
them
also
generally
cause
consumers
to
defer
purchases
of
discretionary items, such
as our
merchandise, or
to purchase
cheaper alternatives to
our merchandise,
all
of which may also
adversely affect our
net sales and
results of operations.
In addition, numerous events,
whether or not related to
actual economic conditions, such as downturns
in the stock markets, acts
of war
or terrorism, political unrest
or natural disasters, outbreaks of
disease or similar events,
may also dampen
consumer confidence,
and accordingly,
lead
to
reduced consumer
spending.
Any of
these
events could
have a material adverse effect on our business, results of operations and financial
condition.
Increased product costs, freight costs, wage increases and operating
costs due to inflation and
other factors, as well as limitations in our ability to offset these cost increases by increasing
the
retail prices of our products or otherwise, have and may continue to adversely
affect our business,
margins, results of operations and financial condition.
Tight
labor markets
have caused
wages to
increase
at the
store, distribution
center and
home office
levels, as well
as making it
more difficult to
hire new associates
and retain existing associates.
The tight
labor
market
and
continued
inflation
also
are
driving
up
our
operating
costs.
In
addition,
inflationary
pressures on labor and raw materials
used to make our products may continue
to increase the cost we
pay
for
our
products.
If
we
are
unable
to
offset
the
effects
of
these
increased
costs
to
our
business
by
increasing the
retail prices
of our
products, reducing other
expenses or
otherwise, our business,
margins,
results of operations and financial condition may be adversely affected.
Our
ability
to
raise
retail
prices
in
response
to
these
cost
increases
is
limited,
in
part
due
to
our
customers’
unwillingness
to
pay
higher
prices
for
discretionary
items
in
light
of
actual
or
perceived
effects
of
inflation
in
increasing
our
customers’
cost
of
essential
items
and
diminishing
customers’
disposable income, sentiment or financial outlook.
Moreover, the persistence or worsening of inflationary
conditions
and
high
interest
rates
could
also
lead
our
customers
to
reduce
their
amount
of
current
discretionary
spending
on
our
products
even
in
the
absence
of
price
increases,
which
could
erode
our
sales volume and adversely affect our results of operations and financial condition.
13
Adverse
developments
affecting
the
financial
services
industry
or
events
or
concerns
involving
liquidity,
defaults
or
non-performance
by
financial
institutions
or
transactional
counterparties
could adversely affect our business, financial condition or results of operations.
Actual
events
involving limited
liquidity,
defaults,
non-performance or
other
adverse
developments
that affect
financial institutions,
transactional counterparties
or other
companies in
the financial
services
industry
or
the
financial
services
industry
generally,
or
concerns
or
rumors
about
any
events
of
these
kinds
or
other
similar
risks,
have
in
the
past
and
may
in
the
future
lead
to
sporadic
or
market-wide
liquidity problems that
could adversely affect
us.
If any of
our transactional counterparties,
such as
our
merchandise vendors
and their
factors, our
landlords, our
payment processors
including credit
card, gift
card and checks, our transportation vendors and other vendors that provide services and supplies to us, are
unable to
access funds
or lending
arrangements with
such
a financial
institution, such
parties’ ability
to
pay their obligations could be adversely affected.
If this occurred we could be
adversely impacted by not
receiving
the
product
we
ordered
or
the
payments
generated
by
our
sales,
by
not
being
able
to
receive
products to our distribution center or
our stores in a timely
manner or at all, or
by not being able to
retain
services from
third parties
that we
require.
These impacts
may adversely
affect our
financial condition,
results
of
operations
and
our
ability
to
execute
our
business
strategy.
Furthermore,
these
adverse
developments affecting the financial services or related perceptions may negatively
impact our customers’
discretionary income or
our customers’
willingness to purchase
apparel, shoes or
jewelry products.
Any
reduction
in
our
customers’
discretionary
spending
on
our
products
could
erode
our
sales
volume
and
adversely affect our results of operations and financial condition.
Extreme weather, natural disasters, impacts of climate change, public health threats or similar
events have and may continue to adversely affect our sales or operations from time
to time.
Extreme
changes
in
weather,
natural
disasters,
physical
impacts
of
climate
change,
public
health
threats or similar
events can influence
customer trends and
shopping habits.
For example, heavy rainfall
or other extreme weather conditions, including but
not limited to winter weather over a
prolonged period,
might
make
it
difficult
for
our
customers
to
travel
to
our
stores
and
thereby
reduce
our
sales
and
profitability.
Our business is also susceptible to unseasonable weather conditions.
For example, extended
periods of unseasonably
warm temperatures during the
winter season or
cool weather during
the summer
season can
render a
portion of
our inventory incompatible
with those unseasonable
conditions.
Reduced
sales
from extreme
or
prolonged unseasonable
weather
conditions
would
adversely affect
our
business.
The occurrence or
threat of extreme
weather, natural
disasters, power outages, terrorist
acts, outbreaks of
flu
or
other
communicable
diseases
(such
as
COVID-19)
or
other
catastrophic
events
could
reduce
customer
traffic
in
our
stores
and
likewise
disrupt
our
ability
to
conduct
operations,
which
would
materially and adversely affect us.
The
long-term
impacts
of
global
climate
change
are
expected
to
be
unpredictable
and
widespread.
The
potential
impacts
of
climate
change
present
a
variety
of
potential
risks.
The
physical
effects
of
climate
change
such
as
extreme
weather
and
drought
could
adversely
affect
our
results
of
operations,
including disrupting our
supply chain, the
costs of our
products and negatively
impacting our workforce.
In
addition,
the
potential
impacts
of
climate
change
present
transition
risks
including
regulatory
and
reputational
risks.
The
potential
cost
of
compliance
with
any
future
regulations
may
substantially
increase our
costs. For
example, the
use of
certain commodities
in the
manufacture of
our products
and
energy
we
use
in
our
operations
may
face
increased
regulation
due
to
climate
change
or
other
environmental concerns, which could
increase our costs.
Furthermore, any failure of
or perceived failure
by us
to comply
with any
potential future
climate change
regulatory requirements
including stakeholder
expectations regarding the environment, could adversely affect our reputation and
results of operations.
Our ability to attract consumers and grow our revenues is dependent
on the success of our store
location strategy and our ability to successfully open new stores as planned.
14
Our sales are
dependent in part
on the location
of our stores in
shopping centers and malls
where we
believe our
consumers and
potential consumers
shop.
In addition,
our ability
to grow
our
revenues has
been substantially dependent on our ability to secure space for and open new stores in attractive locations.
Shopping centers
and malls
where we
currently operate
existing stores
or seek
to
open new
stores have
been and
may continue
to be
adversely affected
by,
among other
things, general
economic downturns
or
those
particularly affecting
the
commercial real
estate industry,
the
closing of
anchor
stores, changes
in
tenant
mix
and
changes
in
customer
shopping
preferences,
including
but
not
limited
to
an
increase
in
preference for online versus in-person shopping.
To take
advantage of consumer traffic and the
shopping
preferences
of
our
consumers,
we
need
to
maintain
and
acquire
stores
in
desirable
locations
where
competition for suitable
store locations is
intense. A decline
in customer popularity
of the
strip shopping
centers where we
generally locate our
stores or in
availability of space in
desirable centers and
locations,
or an increase in the cost of such desired space, has limited and could further limit our ability to open new
stores,
adversely
affecting
consumer
traffic
and
reducing
our
sales
and
net
earnings
or
increasing
our
operating costs.
Our ability
to open
and operate
new stores
depends on
many factors,
some of
which are
beyond our
control.
These
factors
include,
but
are
not
limited
to,
our
ability
to
identify
suitable
store
locations,
negotiate acceptable lease terms, secure
necessary governmental permits and approvals and
hire and train
appropriate store personnel.
In addition, our
continued expansion into
new regions of
the country
where
we
have
not
done
business
before
may
present
new
challenges
in
competition,
distribution
and
merchandising as we enter these new markets. Our failure to successfully and timely
execute our plans for
opening new stores
or the failure
of these stores
to perform up
to our expectations
could adversely affect
our business, results of operations and financial condition.
If we are unable to anticipate, identify and respond to rapidly changing
fashion trends and
customer demands in a timely manner, our business and results of operations could materially
suffer.
Customer
tastes
and
fashion
trends,
particularly
for
women’s
apparel,
are
volatile,
tend
to
change
rapidly
and
cannot
be
predicted
with
certainty.
Our
success
depends
in
part
upon
our
ability
to
consistently anticipate, design and respond to changing merchandise trends and consumer preferences in a
timely
manner.
Accordingly,
any
failure
by
us
to
anticipate,
identify,
design
and
respond
to
changing
fashion
trends
could
adversely
affect
consumer
acceptance
of
our
merchandise,
which
in
turn
could
adversely affect our business, results
of operations and our image with our
customers.
If we miscalculate
either the
market for
our merchandise
or our
customers’ tastes or
purchasing habits, we
may be required
to sell a significant amount of inventory at below-average markups over
cost, or below cost, which would
adversely affect our margins and results of operations.
The inability of third-party vendors to produce goods on time and to
the Company’s specification
may adversely affect the Company’s business, results of operations and financial condition.
Our
dependence
on
third-party
vendors
to
manufacture
and
supply
our
merchandise
subjects
us
to
numerous risks that
our vendors will
fail to perform
as we expect.
For example, the
deterioration in any
of
our key
vendors’ financial
condition, their
failure to
ship merchandise
in a
timely manner
that meets
our specifications,
or other
failures to
follow our
vendor guidelines
or comply
with applicable
laws and
regulations,
including
compliant
labor,
environmental
practices
and
product
safety,
could
expose
us
to
operational, quality,
competitive, reputational and
legal risks.
If we
are not
able to
timely or
adequately
replace the merchandise we currently
source with merchandise produced elsewhere,
or if our vendors fail
to
perform as
we
expect,
our
business, results
of
operations
and
financial
condition
could
be
adversely
affected.
Activities
conducted
by
us
or
on
our
behalf
outside
the
United
States
further
subject
us
to
numerous
U.S.
and
international
regulations
and
compliance
risks,
as
discussed
below
under
“Risk
Factors –
Risks Relating
to Accounting
and Legal
Matters -
Our business
operations subject
us to
legal
compliance and litigation
risks, as well
as regulations and
regulatory enforcement priorities, which
could
15
result in increased costs or liabilities,
divert our management’s attention
or otherwise adversely affect our
business, results of operations and financial condition.”
Existing and increased competition in the women’s retail apparel industry may negatively impact
our business, results of operations, financial condition and
market share.
The
women’s
retail
apparel
industry
is
highly
competitive.
We
compete
primarily
with
discount
stores,
mass
merchandisers,
department
stores,
off-price
retailers,
specialty
stores
and
internet-based
retailers, many of which have substantially greater financial, marketing and other resources
than we have.
Many
of
our
competitors offer
frequent
promotions and
reduce
their
selling prices.
In some
cases,
our
competitors are expanding into
markets in which we
have a significant market
presence.
In addition, our
competitors
also
compete
for
the
same
retail
store
space.
As
a
result
of
this
competition,
we
may
experience
pricing
pressures,
increased
marketing
expenditures,
increased
costs
to
open
new
stores,
as
well
as
loss
of
market
share,
which
could
materially
and
adversely
affect
our
business,
results
of
operations and financial condition.
Our inability to effectively manage inventory has impacted and may continue
to negatively impact
our gross margin and our overall results of operations.
Factors
affecting
sales
include
fashion
trends,
customer
preferences,
calendar
and
holiday
shifts,
competition,
weather,
supply
chain
issues,
actual
or
potential
public
health
threats
and
economic
conditions, including
but not
limited to
continued high
interest rates
and persistent
inflation. In
addition,
merchandise
must
be
ordered
well
in
advance
of
the
applicable
selling
season
and
before
trends
are
confirmed by sales.
If we are
not able to
accurately predict customers’
preferences for our
fashion items,
we may have too
much inventory, which
may cause excessive markdowns. If we
are unable to accurately
predict demand
for our
merchandise, we may
end up
with inventory shortages,
resulting in
missed sales.
Our
inability
to
effectively
manage
inventory
may
adversely
affect
our
gross
margin
and
results
of
operations.
Failure to attract, train, and retain skilled personnel could adversely affect our business
and our
financial condition.
Like most
retailers, we
experience significant
associate turnover rates,
particularly among store
sales
associates and
managers.
Moreover,
attracting and
retaining skilled
personnel has
become increasingly
challenging in
the tight
labor market
that has
persisted since
the onset
of the
COVID-19 pandemic.
To
offset this
turnover as
well as
support new
store growth,
we must
continually attract,
hire and
train new
store
associates
to
meet
our
staffing
needs.
A
significant
increase
in
the
turnover
rate
among
our
store
sales associates and managers would increase our recruiting and training costs, as well as possibly cause a
decrease in our store
operating efficiency and productivity.
We
compete for qualified store associates, as
well
as
experienced
management
personnel,
with
other
companies
in
our
industry
or
other
industries,
many of whom have greater financial resources than we do.
In
addition,
we
depend
on
key
management
personnel
to
oversee
the
operational
divisions
of
the
Company
for
the
support
of
our
existing
business
and
future
expansion.
The
success
of
executing
our
business strategy
depends in
large part
on retaining
key management.
We
compete for
key management
personnel
with
other
retailers, and
our
inability
to
attract
and
retain
qualified personnel
could
limit
our
ability to continue to grow.
If
we
are
unable
to
retain
our
key
management
and
store
associates
or
attract,
train,
or
retain
other
skilled
personnel in
the
future,
we
may not
be
able
to
service
our
customers effectively
or
execute
our
business strategy, which could adversely affect our business, operating results and financial condition.
16
The currently
competitive environment
for
hiring new
associates and
retaining existing
associates is
causing
wages
to
increase,
which
has
affected
and
could
continue
to
adversely
affect
our
business,
margins, operating results and financial condition if we cannot offset these cost increases.
Fluctuations in the price, availability and quality of inventory have and
may continue to result in
higher cost of goods, which the Company may not be able to pass on
to its customers.
The price and availability of raw
materials may be impacted by demand, regulation,
weather and crop
yields, currency
value fluctuations,
inflation, as
well as
other factors.
Additionally,
manufacturers have
and may continue to have increases in other manufacturing costs, such as transportation, labor and benefit
costs. These increases in production costs may result in higher merchandise costs to the Company.
Due to
the
Company’s
limited
flexibility
in
price
point,
the
Company
may
not
be
able
to
pass
on
those
cost
increases
to
the
consumer,
which
could
have
a
material
adverse
effect
on
our
margins,
results
of
operations and financial condition.
If the Company is unable to successfully integrate new businesses into
its existing business, the
Company’s financial condition and results of operations will be adversely affected.
The Company’s
long-term business
strategy includes
opportunistic growth
through the
development
of
new
store
concepts.
This
growth
may
require
significant
capital
expenditures
and
management
attention. The Company may not
realize any of the
anticipated benefits of a
new business and integration
costs
may
exceed
anticipated
amounts.
We
have
incurred
substantial
financial
commitments
and
fixed
costs related to our retail stores that we
will not be able to recover if our stores
are not successful and that
have
resulted
in
and
could
result
in
future
impairment
charges.
If
we
cannot
successfully
execute
our
growth strategies, our financial condition and results of operations may
be adversely impacted.
Risks Relating to Our Information Technology, Related Systems and Cybersecurity:
A
failure or disruption relating to our information technology systems could
adversely affect our
business.
We
rely
on
our
existing
information
technology
systems
for
merchandise
operations,
including
merchandise planning,
replenishment, pricing, ordering,
markdowns and
product life
cycle management.
In addition to
merchandise operations, we utilize
our information technology systems for
our distribution
processes,
as
well
as
our
financial
systems,
including
accounts
payable,
general
ledger,
accounts
receivable, sales,
banking, inventory
and fixed
assets.
Despite the
precautions we
take, our
information
systems are or may be vulnerable to disruption
or failure from numerous events, including but not limited
to, natural disasters,
severe weather conditions,
power outages, technical malfunctions,
cyberattacks, acts
of
war
or
terrorism,
similar
catastrophic
events
or
other
causes
beyond
our
control
or
that
we
fail
to
anticipate. Any disruption or failure in the operation of our information technology systems, our failure to
continue
to
upgrade
or
improve
such
systems,
or
the
cost
associated
with
maintaining,
repairing
or
improving
these
systems,
could
adversely
affect
our
business,
results
of
operations
and
financial
condition. Modifications and/or upgrades to
our current information technology systems may also
disrupt
our operations.
A security breach that results in unauthorized access to or disclosure of
employee, Company or
customer information or a ransomware attack could adversely affect our costs,
reputation and
results of operations, and efforts to mitigate these risks may continue to
increase our costs.
The
protection
of
employee,
Company and
customer
data
is
critical
to
the
Company.
Any
security
breach, mishandling, human or programming error or other event that results in the misappropriation, loss
or
other
unauthorized
disclosure
of
employee,
Company
or
customer
information,
including
but
not
limited
to
credit
card
data
or
other
personally
identifiable
information,
could
severely
damage
the
17
Company's reputation, expose it to
remediation and other costs
and the risks of legal
proceedings, disrupt
its
operations
and
otherwise
adversely
affect
the
Company's
business
and
financial
condition.
The
security of certain of
this information also depends on
the ability of third-party
service providers, such as
those
we
use
to
process
credit
and
debit
card
payments
as
described
below
under
“We
are
subject
to
payment-related
risks,”
to
properly
handle
and
protect
such
information.
Our
information
systems
and
those of our
third-party service providers are
subject to ongoing and
persistent cybersecurity threats from
those seeking unauthorized
access through means
which are
continually evolving and
may be difficult
to
anticipate or detect for long periods
of time.
Despite measures the Company takes
to protect confidential
information against
unauthorized access
or disclosure, which
measures are
ongoing and
may continue
to
increase
our
costs,
there
is
no
assurance
that
such
measures
will
prevent
the
compromise
of
such
information. If
our measures
are unsuccessful
due to
cyberattacks or
otherwise, it
could have
a material
adverse
effect
on
the
Company's
reputation,
business,
operating
results,
financial
condition
and
cash
flows.
In addition, the
Company may be
subject to ransomware
attacks, which if
successful could result
in
disruptions
to
the
Company’s
operations
and
expose
it
to
remediation
and
other
costs,
risks
of
legal
proceedings,
damage the
Company’s
reputation
and
otherwise adversely
affect
the
Company's business
and financial condition.
A disruption or shutdown of our centralized distribution center
or transportation network could
materially and adversely affect our business and results of operations.
The distribution
of our
products is
centralized in
one distribution
center in
Charlotte, North
Carolina
and
distributed
through
our
network
of
third-party
freight
carriers.
The
merchandise
we
purchase
is
shipped directly to
our distribution center,
where it is
prepared for shipment
to the appropriate
stores and
subsequently delivered
to
the
stores
by our
third-party freight
carriers.
If the
distribution
center or
our
third-party freight carriers were
to be shut down
or lose significant capacity
for any reason, including but
not limited to, any of the causes described above under “A failure or disruption
relating to our information
technology
systems
could
adversely
affect
our
business,”
our
operations
would
likely
be
seriously
disrupted.
Such problems could occur as the result of any loss, destruction or impairment of our ability to
use
our
distribution center,
as
well
as
any broader
problem generally
affecting
the ability
to
ship
goods
into our distribution center or deliver goods
to our stores.
As a result, we could incur significantly higher
costs and longer lead
times associated with distributing our
products to our stores
during the time it
takes
for us to reopen or
replace the distribution center and/or our transportation network. Any such
occurrence
could adversely affect our business, results of operations and financial condition.
The Company’s failure to successfully operate its e-commerce websites or fulfill customer
expectations could adversely impact customer satisfaction, our reputation
and our business.
Although
the
Company's e-commerce
platform provides
another channel
to
drive
incremental
sales,
provide existing customers the online shopping experience and introduce the Company to a new customer
base,
it
also
exposes
us
to
numerous
risks.
We
are
subject
to
potential
failures
in
the
efficient
and
uninterrupted
operation
of
our
websites,
customer
contact
center
or
our
distribution
center,
including
system
failures
caused
by
telecommunication
system
providers,
order
volumes
that
exceed
our
present
system capabilities, electrical outages,
mechanical problems and human error.
Our e-commerce platform
may also expose us
to greater potential for
security or data
breaches involving the unauthorized access
to
or
disclosure
of
customer
information,
as
discussed
above
under
“A
security
breach
that
results
in
unauthorized
access
to
or
disclosure
of
employee,
Company
or
customer
information
or
a
ransomware
attack could
adversely affect
our costs,
reputation and
results of
operations, and
efforts to
mitigate these
risks may
continue to
increase our
costs.” We
are also
subject to
risk related
to delays
or failures
in the
performance of third parties, such as shipping companies, including
delays associated with labor strikes or
slowdowns or
adverse weather
conditions. If
the Company
does not
successfully meet
the challenges
of
operating
e-commerce
websites
or
fulfilling
customer
expectations,
the
Company's
business
and
sales
could be adversely affected.
18
We are subject to payment-related risks.
We
accept payments
using a
variety of
methods, including
third-party credit
cards, our
own branded
credit
card,
debit
cards,
gift
cards
and
physical
and
electronic
bank
checks.
For
existing
and
future
payment methods we offer to our customers, we are subject to fraud risk and
to additional regulations and
compliance
requirements
(including
obligations
to
implement
enhanced
authentication
processes
that
could
result
in
increased
costs
and
reduce
the
ease
of
use
of
certain
payment
methods).
For
certain
payment
methods,
including
credit
and
debit
cards,
we
pay
interchange
and
other
fees,
which
have
increased
from
time
to
time
and
may
continue
to
increase
over
time,
raising
our
operating
costs
and
lowering profitability. We
rely on third-party service providers for payment processing
services, including
the
processing
of
credit
and
debit
cards.
In
each
case,
it
could
disrupt
our
business if
these
third-party
service
providers
become
unwilling
or
unable
to
provide
these
services
to
us.
We
are
also
subject
to
payment
card
association
operating
rules,
including
data
security
rules,
certification
requirements
and
rules governing
electronic funds
transfers, which
could change
or be
reinterpreted to
make it
difficult or
impossible for us
to comply.
If we fail
to comply with
these rules or
requirements, or if
our data security
systems are breached or compromised, we may be liable for card-issuing
banks’ costs, subject to fines and
higher transaction fees. In addition, we may lose our ability to accept credit and debit card payments from
our
customers
and
process
electronic
funds
transfers
or
facilitate
other
types
of
payments,
and
our
business and operating results could be adversely affected.
Risks Relating to Accounting and Legal Matters:
Continued scrutiny and changing
expectations surrounding environmental, social and governance
(“ESG”)
matters
from
investors,
customers,
government
regulators
and
other
stakeholders
may
impose additional reporting requirements, additional costs and compliance
risks.
Public companies from
across all
industries are facing
increasing scrutiny from
investors, customers,
government regulators and other stakeholders concerning ESG matters.
In the U.S., there are various new
rules
or
proposals
for
new
or
enhanced
disclosure
requirements
regarding
climate
emissions,
sustainability,
workforce
diversity
and
other
human
capital
resources
metrics,
among
other
topics.
Complying
with
these
complex
reporting
obligations or
expectations
may
increase
our
costs
associated
with compliance, disclosure and reporting.
Furthermore, evolving ESG laws, regulations and stakeholder
expectations may
result in
uncertain and
potentially burdensome
reporting requirements
as stakeholders,
agencies and government authorities adjust
their expectations or change laws
and regulations, such as the
new rules regarding climate emissions reporting and
auditing requirements.
Failure to comply with all
of
the
new
rules
and
regulations
and
proposed
regulatory requirements
in
a
timely
manner
may
adversely
affect our reputation, business and financial performance.
Changes to accounting rules and regulations may adversely affect our reported
results of
operations and financial condition.
U.S.
Generally
Accepted
Accounting
Principles
and
SEC
accounting,
disclosures
and
reporting
changes are
common and have
become more frequent
and significant
in the
past several years.
Changes
in
accounting
rules,
disclosures
or
regulations
and
varying
interpretations
of
existing
accounting
rules,
disclosures and regulations have significantly affected our reported financial statements and those of other
participants in
the retail
industry in
the past
and may
continue to
do so
in
the future.
Future changes
to
accounting
rules,
disclosures
or
regulations may
adversely
affect
our
reported
results
of
operations and
financial position or perceptions of our performance and financial condition.
If
we
fail
to
protect
our
trademarks
and
other
intellectual
property
rights
or
infringe
the
intellectual
property
rights
of
others,
our
business,
brand
image,
growth
strategy,
results
of
operations and financial condition could be adversely affected.
19
We
believe
that
our
“Cato”,
“It’s
Fashion”,
“It’s
Fashion
Metro”,
“Versona”,
“Cache”
and
“Body
Central”
trademarks
are
integral
to
our
store
designs,
brand
recognition
and
our
ability
to
successfully
build
consumer
loyalty.
Although
we
have
registered
these
trademarks
with
the
U.S.
Patent
and
Trademark Office
(“PTO”) and
have also
registered, or
applied for
registration of,
additional trademarks
with
the
PTO
that
we
believe
are
important
to
our
business,
we
cannot
give
assurance
that
these
registrations
will
prevent
imitation
of
our
trademarks,
merchandising
concepts,
store
designs
or
private
label merchandise or
the infringement of
our other intellectual
property rights by
others. Infringement of
our
names,
concepts,
store
designs
or
merchandise
generally,
or
particularly
in
a
manner
that
projects
lesser quality or carries a negative connotation of
our image could adversely affect our business, financial
condition and results of operations.
In addition,
we cannot
give assurance
that others will
not try
to block
the manufacture
or sale
of our
private label merchandise by claiming
that our merchandise violates
their trademarks or other
proprietary
rights.
In
the
event
of
such
a
conflict,
we
could
be
subject
to
lawsuits
or
other
actions,
the
ultimate
resolution of
which we
cannot predict;
however,
such a
controversy could
adversely affect
our business,
financial condition and results of operations.
Our business operations subject us to legal compliance and litigation risks, as
well as regulations
and regulatory enforcement priorities, which could result in increased
costs or liabilities, divert our
management’s attention or otherwise adversely affect our business, results of operations and
financial condition.
Our operations
are subject
to federal,
state and
local laws,
rules and
regulations, as
well as
U.S. and
foreign
laws
and
regulations
relating
to
our
activities
in
foreign
countries
from
which
we
source
our
merchandise
and
operate our
sourcing offices.
Our
business is
also
subject
to
regulatory and
litigation
risk in
all of
these jurisdictions, including
foreign jurisdictions
that may
lack well-established
or reliable
legal
systems
for
resolving
legal
disputes.
Compliance
risks
and
litigation
claims
have
arisen
and
may
continue
to
arise
in
the
ordinary
course
of
our
business
and
include,
among
other
issues,
intellectual
property
issues,
employment
issues,
commercial
disputes,
product-oriented
matters,
tax,
customer
relations and personal injury claims. International
activities subject us to numerous U.S.
and international
regulations, including but not limited to, restrictions on trade, license and permit requirements, import and
export
license
requirements,
privacy
and
data
protection
laws,
environmental
laws,
records
and
information
management
regulations,
tariffs
and
taxes
and
anti-corruption
laws,
such
as
the
Foreign
Corrupt Practices Act, violations
of which by employees
or persons acting on
the Company’s
behalf may
result in
significant investigation
costs, severe
criminal or
civil sanctions
and reputational
harm.
These
and
other
liabilities
to
which we
may
be
subject
could
negatively
affect
our
business,
operating
results
and financial condition. These matters frequently raise complex factual and legal issues, which are subject
to
risks
and
uncertainties
and
could
divert
significant
management
time.
The
Company
may
also
be
subject
to
regulatory
review
and
audits,
the
results
of
which
could
materially
and
adversely
affect
our
business, results of
operations and financial condition.
In addition, governing laws,
rules and regulations,
and interpretations
of existing
laws
are subject
to
change from
time to
time.
Compliance and
litigation
matters
could
result
in
unexpected
expenses
and
liability,
as
well
as
have
an
adverse
effect
on
our
operations and our reputation.
New
legislation
or
regulation
and
interpretation
of
existing
laws
and
regulations,
including
those
related
to
data
privacy,
climate
change
or
ESG
matters
could
increase
our
costs
of
compliance,
technology and business operations. The interpretation of existing or new laws
to existing technology and
business practices can be uncertain and may lead to additional compliance
risk and cost.
Adverse litigation matters may adversely affect our business and our financial
condition.
From
time
to
time
the
Company
is
involved
in
litigation
and
other
claims
against
our
business.
Primarily these arise in the
normal course of business but are
subject to risks and uncertainties, and
could
20
require
significant
management
time.
The
Company’s
periodic
evaluation
of
litigation-related
matters
may change our assessment in
light of the discovery of
facts with respect to legal
actions pending against
us, not
presently known to
us or
by determination of
judges, juries
or other
finders of
fact. We
may also
be
subjected
to
legal
matters
not
yet
known
to
us.
Adverse
decisions
or
settlements
of
disputes
may
negatively impact our business, reputation and financial condition.
Maintaining and improving our internal control over financial reporting
and other requirements
necessary to operate as a public company may strain our resources, and
any material failure in
these controls may negatively impact our business, the price of our common
stock and market
confidence in our reported financial information.
As a public
company, we
are subject to
the reporting requirements
of the Securities
Exchange Act of
1934, the
Sarbanes-Oxley Act
of 2002,
the rules
of the
SEC and
New York
Stock Exchange
and certain
aspects of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and
related rule-making that
has been and
may continue to
be implemented over
the next several
years under
the mandates of the Dodd-Frank Act. The
requirements of these rules and regulations have increased, and
may continue to increase, our compliance costs and
place significant strain on our personnel, systems and
resources.
To
satisfy
the
SEC’s
rules
implementing
the
requirements
of
Section
404
of
the
Sarbanes-
Oxley Act
of
2002, we
must continue
to
document, test,
monitor and
enhance our
internal control
over
financial reporting, which is
a costly and time-consuming effort
that must be re-evaluated
frequently. We
cannot give
assurance that
our disclosure
controls and
procedures and
our internal
control over
financial
reporting, as
defined by applicable
SEC rules,
will be adequate
in the future.
Any failure
to maintain the
effectiveness
of
internal
control
over
financial
reporting
or
to
comply
with
the
other
various
laws
and
regulations to
which we
are and
will continue
to be
subject, or
to
which we
may become
subject in
the
future,
as
a
public
company
could
have
an
adverse
material
impact
on
our
business,
our
financial
condition and
the price
of our
common stock.
In addition,
our efforts
to comply
with these
existing and
new requirements could significantly increase our compliance costs.
Risks Relating to Our Investments and Liquidity:
We may experience market conditions or other events that could adversely impact the valuation
and liquidity of, and our ability to access, our short-term investments,
cash and cash equivalents
and our revolving line of credit.
Our
short-term investments
and
cash
equivalents are
primarily
comprised of
investments in
federal,
state, municipal
and corporate
debt securities.
The value
of those
securities may
be adversely
impacted
by factors relating to these securities,
similar securities or the broader credit
markets in general.
Many of
these factors
are beyond our
control, and include
but are
not limited to
changes to credit
ratings, rates of
default, collateral
value, discount
rates, and
strength and
quality of
market credit
and liquidity,
potential
disruptions in the capital
markets and changes in the
underlying economic, financial and other
conditions
that drive these
factors.
As federal, state
and municipal entities
struggle with declining
tax revenues and
budget deficits,
we cannot
be
assured of
our ability
to timely
access these
investments if
the market
for
these issues declines.
Similarly,
the default by
issuers of the
debt securities we
hold or similar
securities
could impair
the
value or
liquidity of
our investments.
The development
or persistence
of
any of
these
conditions could
adversely affect
our financial
condition, results
of operations
and ability
to execute
our
business
strategy.
In
addition,
we
have
significant
amounts
of
cash
and
cash
equivalents
at
financial
institutions that
are in
excess of
the federally
insured limits.
An economic
downturn or
development of
adverse
conditions
affecting
the
financial
sector
and
stability
of
financial
institutions
could
cause
us
to
experience losses on our deposits.
Our ability
to access
credit markets
and our
revolving line
of credit,
either generally
or on
favorable
market terms, may be
impacted by the
factors discussed in
the preceding paragraph, as
well as continued
compliance with covenants under
our revolving credit agreement. The
development or persistence of
any
21
of these
adverse factors or
failure to
comply with covenants
on which our
borrowing is conditioned
may
adversely affect
our financial
condition, results
of operations
and our
ability to
access our
revolving line
of credit and to execute our business strategy.
Risks Relating to the Market Value of Our Common Stock:
The interests of our principal shareholder may limit the ability of other
shareholders to influence
the direction of the Company and otherwise affect our corporate governance and
the market price
of our common stock.
As of March 27, 2024, John P. D. Cato, Chairman, President and Chief Executive Officer, beneficially
owned approximately 51.9%
of the combined
voting power of
our common stock.
As a result,
Mr.
Cato
has the ability to substantially influence or determine the outcome of all matters requiring approval by the
shareholders,
including
the
election
of
directors
and
the
approval
of
mergers
and
other
business
combinations
or
other
significant
Company
transactions.
Mr.
Cato
may
have
interests
that
differ
from
those of other shareholders, and
may vote in a
way with which other shareholders disagree
or perceive as
adverse to their interests.
The concentration of voting power held by Mr.
Cato could discourage potential
investors from acquiring our
common stock and could
also have the effect
of preventing, discouraging or
deferring a change in control of the Company or other fundamental transaction,
all of which could depress
the market price of our common stock.
In addition, Mr.
Cato has the ability to control the
management of
the
Company
as
a
result
of
his
position
as
Chief
Executive
Officer.
We
qualify
for
exemption
as
a
“controlled
company”
from
compliance
with
certain
New
York
Stock
Exchange
corporate
governance
rules,
including
the
requirements
that
we
have
a
majority
of
independent
directors
on
our
Board,
an
independent
compensation
committee
and
an
independent
corporate
governance
and
nominating
committee.
If we
elected to
utilize these
“controlled company” exceptions,
our other shareholders
could
lose the
benefit of
these corporate
governance requirements
and the
market value
of
our common
stock
could be adversely affected.
There can be no assurance that we will choose to declare or be able
to declare cash dividends in
the future.
The declaration and payment of any dividend is subject to the approval of our Board of Directors.
Our
Board of
Directors regularly
evaluates
our ability
to
pay a
dividend based
on many
factors,
such as
but
not
limited
to,
applicable
legal
requirements,
the
financial
position
of
the
Company,
contractual
restrictions
and
our
capital
allocation strategy.
There
can
be
no
assurance
that a
cash
dividend
will
be
declared in the future in any particular amount, or at all.
Our operating results are subject to seasonal and quarterly fluctuations,
which could adversely
affect the market price of our common stock.
Our business
varies with
general seasonal
trends that
are characteristic
of the
retail apparel
industry.
As a
result, our
stores typically
generate a
higher percentage
of our
annual net
sales and
profitability in
the
first
and second
quarters of
our
fiscal
year
compared to
other
quarters.
Accordingly,
our
operating
results for
any one
fiscal period
are not
necessarily indicative
of results
to
be expected
from any
future
period,
and
such
seasonal
and
quarterly
fluctuations
could
adversely
affect
the
market
price
of
our
common stock.
Conditions in the stock market generally, or particularly relating to our industry, Company or
common stock, may materially and adversely affect the market price of our common
stock and
make its trading price more volatile.
The trading
price of
our common
stock at
times has
been, and
is likely
to continue
to be,
subject to
significant volatility.
A variety of
factors may cause
the price of
our common stock to
fluctuate, perhaps
22
substantially,
including,
but
not
limited
to,
those
discussed
elsewhere
in
this
report,
as
well
as
the
following: low
trading volume;
general market
fluctuations resulting
from factors
not directly
related to
our operations or the inherent value of
our common stock; announcements of developments related to our
business; fluctuations in our reported operating results; general conditions or trends affecting or perceived
to affect
the fashion and
retail industry; conditions or
trends affecting or
perceived to affect
the domestic
or global
economy or
the domestic
or global
credit or
capital markets;
changes in
financial estimates
or
the scope
of coverage
given to
our Company
by securities
analysts; negative
commentary regarding
our
Company
and
corresponding
short-selling
market
behavior;
adverse
customer
relations
developments;
significant changes
in our
senior management
team; and
legal proceedings.
Over the
past several
years
the stock
market in
general, and the
market for shares
of equity
securities of many
retailers in
particular,
have
experienced
extreme
price
fluctuations
that
have
at
times
been
unrelated
to
the
operating
performance of
those companies.
Such fluctuations
and market
volatility based
on these
or other
factors
may materially and adversely affect the market price of our common stock.