CATO CORP 10-K

Item 8. Financial Statements and Supplementary Data: INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) ..................................... 37 Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022 ................................ ........... 40 Consolidated Balance Sheets at February 3, 2024 and January 28, 2023 ............................................. 41 Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022................................ ................................................................ ......................... 42 Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022 ................................................................ ............................ 43 Notes to Consolidated Financial Statements .......................................................................................... 44 Schedule II — Valuation and Qualifying Accounts for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022 ................................................................ ............................ 75 37 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of The Cato Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of The Cato Corporation and its subsidiaries (the “Company”) as of February 3, 2024 and January 28, 2023, and the related consolidated statements of income (loss), of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended February 3, 2024, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of February 3, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 3, 2024 and January 28, 2023, and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting 38 A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets - Store Location Asset Groupings As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated property and equipment, net balance was $64.0 million, of which the store locations were a portion, and consolidated operating lease right-of-use assets, net balance was $154.7 million as of February 3, 2024. The Company invests in leaseholds, right-of-use assets and equipment, primarily in connection with the opening and remodeling of stores, and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its long-lived assets, which primarily relate to fixtures and equipment, leasehold improvements, right-of-use assets net of lease liabilities, and information technology equipment and software. An impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair value when management determines that projected cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s historical operating results and future projected cash flows, which include contribution margin projections. The Company assesses the fair value of each lease by considering market rents and any lease terms that may adjust market rents under certain conditions such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain criteria. An impairment charge for store assets of $1.8 million was recorded during the year ended February 3, 2024. The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets – store location asset groupings is a critical audit matter are (i) the significant judgment by management when determining the fair value measurement of the store location asset groupings, which led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s projected cash flow assumptions related to contribution margin projections. 39 Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s long-lived assets – store location recoverability test and determination of the fair value of the asset group. These procedures also included, among others (i) testing the completeness and accuracy of underlying data used in the projected cash flows and store location asset groupings, (ii) evaluating the reasonableness of management’s assumptions related to contribution margin projections by considering current and historical performance of the store location asset groupings and whether the assumptions were consistent with evidence obtained in other areas of the audit, (iii) evaluating the appropriateness of the projected cash flow model, and (iv) evaluating management’s assessment of the fair value of the leased assets included in the store location asset groupings. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina March 27, 2024 We have served as the Company’s auditor since 2003. 40 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 (Dollars in thousands, except per share data) REVENUES Retail sales $ 700,318 $ 752,370 $ 761,358 Other revenue (principally finance charges, late fees and layaway charges) 7,741 6,890 7,913 Total revenues 708,059 759,260 769,271 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 464,313 509,664 453,065 Selling, general and administrative (exclusive of depreciation shown below) 252,742 242,561 266,954 Depreciation 9,871 11,080 12,356 Interest expense 35 87 72 Interest and other income ( 5,101 ) ( 5,902 ) ( 2,141 ) Costs and expenses, net 721,860 757,490 730,306 Income (loss) before income taxes ( 13,801 ) 1,770 38,965 Income tax expense 10,140 1,741 2,121 Net income (loss) $ ( 23,941 ) $ 29 $ 36,844 Basic earnings (loss) per share $ ( 1.17 ) $ - $ 1.65 Diluted earnings (loss) per share $ ( 1.17 ) $ - $ 1.65 Dividends per share $ 0.68 $ 0.68 $ 0.45 Comprehensive income: Net income (loss) $ ( 23,941 ) $ 29 $ 36,844 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of $ 489 , ($ 287 ), and ($ 433 ) for fiscal 2023, 2022 and 2021, respectively 1,633 ( 958 ) ( 1,435 ) Comprehensive income (loss) $ ( 22,308 ) $ ( 929 ) $ 35,409 See notes to consolidated financial statements. 41 THE CATO CORPORATION CONSOLIDATED BALANCE SHEETS February 3, 2024 January 28, 2023 (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents $ 23,940 $ 20,005 Short-term investments 79,012 108,652 Restricted cash 3,973 3,787 Accounts receivable, net of allowance for customer credit losses of $ 705 at February 3, 2024 and $ 761 at January 28, 2023 29,751 26,497 Merchandise inventories 98,603 112,056 Prepaid expenses and other current assets 7,783 6,676 Total Current Assets 243,062 277,673 Property and equipment – net 64,022 70,382 Deferred income taxes - 9,213 Other assets 25,047 21,596 Right-of-Use assets - net 154,686 174,276 Total Assets $ 486,817 $ 553,140 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 87,821 $ 91,956 Accrued expenses 37,404 41,338 Accrued bonus and benefits 1,675 1,690 Accrued income taxes - 613 Current lease liability 61,108 67,360 Total Current Liabilities 188,008 202,957 Other noncurrent liabilities 14,475 16,183 Lease liability 92,013 107,407 Commitments and contingencies - - 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; 18,802,742 and 18,723,225 shares issued at February 3, 2024 and January 28, 2023, respectively 635 632 Convertible Class B common stock, $ 0.033 par value per share, 15,000,000 shares authorized; 1,763,652 and 1,763,652 shares issued at February 3, 2024 and January 28, 2023, respectively 59 59 Additional paid-in capital 126,953 122,431 Retained earnings 64,279 104,709 Accumulated other comprehensive income 395 ( 1,238 ) Total Stockholders' Equity 192,321 226,593 Total Liabilities and Stockholders’ Equity $ 486,817 $ 553,140 See notes to consolidated financial statements. 42 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 (Dollars in thousands) Operating Activities: Net income (loss) $ ( 23,941 ) $ 29 $ 36,844 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 9,871 11,080 12,356 Provision for customer credit losses 554 280 429 Purchase premium and premium amortization of investments ( 711 ) 537 ( 332 ) Gain on sale of assets held for investment 8 - - Share based compensation 4,170 2,606 4,090 Deferred income taxes 8,724 386 ( 3,194 ) Loss on disposal of property and equipment 84 199 629 Impairment of assets 1,811 884 901 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable ( 608 ) 29,034 ( 3,499 ) Merchandise inventories 13,453 12,851 ( 40,784 ) Prepaid and other assets ( 216 ) 1,543 ( 505 ) Operating lease right-of-use assets and liabilities ( 2,056 ) ( 2,573 ) ( 3,855 ) Accrued income taxes ( 613 ) ( 307 ) ( 1,118 ) Accounts payable, accrued expenses and other liabilities ( 10,053 ) ( 43,179 ) 57,826 Net cash provided by operating activities 477 13,370 59,788 Investing Activities: Expenditures for property and equipment ( 12,532 ) ( 19,433 ) ( 4,105 ) Purchase of short-term investments ( 48,055 ) ( 54,734 ) ( 141,937 ) Sales of short-term investments 80,371 90,190 121,110 Purchase of other assets - - ( 400 ) Sales of other assets ( 8 ) - - Net cash provided by (used in) investing activities 19,776 16,023 ( 25,332 ) Financing Activities: Dividends paid ( 13,954 ) ( 14,369 ) ( 9,972 ) Repurchase of common stock ( 2,562 ) ( 15,216 ) ( 22,033 ) Proceeds from employee stock purchase plan 384 307 204 Net cash used in financing activities ( 16,132 ) ( 29,278 ) ( 31,801 ) Net increase in cash, cash equivalents, and restricted cash 4,121 115 2,655 Cash, cash equivalents, and restricted cash at beginning of period 23,792 23,677 21,022 Cash, cash equivalents, and restricted cash at end of period $ 27,913 $ 23,792 $ 23,677 Non-cash activity: Accrued property and equipment expenditures $ 942 $ 685 $ 657 See notes to consolidated financial statements. 43 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated Additional Other Total Common Paid-In Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — January 30, 2021 $ 762 $ 115,278 $ 129,303 $ 1,155 $ 246,498 Comprehensive income: Net income - - 36,844 - 36,844 Unrealized gains (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 433 ) - - - ( 1,435 ) ( 1,435 ) Dividends paid ($ 0.45 per share) - - ( 9,972 ) - ( 9,972 ) Class A common stock sold through employee stock purchase plan - 239 - - 239 Share-based compensation expense 13 4,023 19 - 4,055 Repurchase and retirement of treasury shares ( 47 ) - ( 21,986 ) - ( 22,033 ) Balance — January 29, 2022 $ 728 $ 119,540 $ 134,208 $ ( 280 ) $ 254,196 Comprehensive income: Net income - - 29 - 29 Unrealized gains (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 287 ) - - - ( 958 ) ( 958 ) Dividends paid ($ 0.68 per share) - - ( 14,369 ) - ( 14,369 ) Class A common stock sold through employee stock purchase plan - 360 - - 360 Share-based compensation expense 4 2,531 17 - 2,552 Repurchase and retirement of treasury shares ( 41 ) - ( 15,176 ) - ( 15,217 ) Balance — January 28, 2023 $ 691 $ 122,431 $ 104,709 $ ( 1,238 ) $ 226,593 Comprehensive income: Net loss - - ( 23,941 ) - ( 23,941 ) Unrealized gains (loss) on available-for-sale securities, net of deferred income tax expense of $ 489 - - - 1,633 1,633 Dividends paid ($ 0.68 per share) - - ( 13,954 ) - ( 13,954 ) Class A common stock sold through employee stock purchase plan 2 445 - - 447 Share-based compensation expense 10 4,077 18 - 4,105 Repurchase and retirement of treasury shares ( 9 ) - ( 2,553 ) - ( 2,562 ) Balance — February 3, 2024 $ 694 $ 126,953 $ 64,279 $ 395 $ 192,321 See notes to consolidated financial statements. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 44 1. Summary of Significant Accounting Policies: Principles of Consolidation: The Consolidated Financial Statements include the accounts of The Cato Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. Description of Business and Fiscal Year: The Company has two reportable segments — the operation of a fashion specialty stores segment (“Retail Segment”) and a credit card segment (“Credit Segment”). The apparel specialty stores operate under the names “Cato,” “Cato Fashions,” “Cato Plus,” “It’s Fashion,” “It’s Fashion Metro,” “Versona ” and “Cache,” including e-commerce websites. The stores are located primarily in strip shopping centers principally in the southeastern United States. The Company’s fiscal year ends on the Saturday nearest January 31 of the subsequent year. Fiscal year 2023 is a 53-week year and 2022 and 2021 are 52 -week years. Use of Estimates: The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s financial statements include the allowance for customer credit losses, inventory shrinkage, the calculation of potential asset impairment, workers’ compensation, general and auto insurance liabilities, reserves relating to self-insured health insurance, uncertain tax positions and valuation allowances on deferred tax assets. Cash and Cash Equivalents: Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Short-Term Investments: Investments with original maturities beyond three months are classified as short-term investments. See Note 3 for the Company’s estimated fair value of, and other information regarding, its short-term investments. The Company’s short-term investments are all classified as available-for-sale. As they are available for current operations, they are classified on the Consolidated Balance Sheets as Current Assets. Available-for-sale securities are carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of Accumulated other comprehensive income. Other than temporary declines in the fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of Interest and other income in the accompanying Consolidated Statements of Income and Comprehensive Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in Interest and other income. Restricted Cash: The Company had $ 4.0 million and $ 3.8 million in escrow at February 3, 2024 and January 28, 2023, respectively, as security and collateral for administration of the Company’s self-insured workers’ compensation and general liability coverage, which is reported as Restricted cash on the Consolidated Balance Sheets. Supplemental Cash Flow Information: Income tax payments, net of refunds received, for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022 were a payment of $ 4,121,000 , a refund of $ 29,206,000 and a payment of $ 13,176,000 , respectively. Inventories: Merchandise inventories are stated at the net realizable value as determined by the weighted-average cost method. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 45 Property and Equipment: Property and equipment are recorded at cost, including land. Maintenance and repairs are expensed to operations as incurred; renewals and betterments are capitalized. Depreciation is determined on the straight-line method over the estimated useful lives of the related assets excluding leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful life or lease term. For leases with renewal periods at the Company’s option, the Company generally uses the original lease term plus reasonably assured renewal option periods (generally one five-year option period) to determine estimated useful lives. Typical estimated useful lives are as follows: ` Estimated Classification Useful Lives Land improvements 10 years Buildings 30 - 40 years Leasehold improvements 5 - 10 years Fixtures and equipment 3 - 10 years Information technology equipment and software 3 - 10 years Aircraft 20 years Impairment of Long-Lived Assets: The Company invests in leaseholds, right-of-use assets and equipment primarily in connection with the opening and remodeling of stores and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its long- lived assets, which primarily relate to Fixtures and equipment, Leasehold improvements, Right-of-use assets net of Lease liabilities and Information technology equipment and software. An impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair value when the Company determines that projected cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s historical operating results and future projected cash flows, which include contribution margin projections. The Company assesses the fair value of each lease by considering market rents and any lease terms that may adjust market rents under certain conditions, such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain criteria. Further, in determining when to close a store, the Company considers real estate development in the area and perceived local market conditions, which can be difficult to predict and may be subject to change. Asset impairment charges of $ 1,811,000 , $ 884,000 and $ 901,000 were incurred in fiscal 2023, fiscal 2022 and fiscal 2021, respectively. Other Assets: Other assets are comprised of long-term assets, primarily insurance contracts related to deferred compensation assets and land held for investment purposes. ` Balance as of February 3, 2024 January 28, 2023 (Dollars in thousands) Other Assets Deferred Compensation Investments $ 8,586 $ 9,274 Land Held for Investment 9,334 9,334 Miscellaneous Investments 2,076 1,923 Asset Held for Sale 4,183 - Other Deposits 604 571 Other 264 494 Total Other Assets $ 25,047 $ 21,596 Leases: The Company leases all of its retail stores. Most lease agreements contain construction allowances and rent escalations. For purposes of recognizing incentives and minimum rental expenses on THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 46 a straight-line basis over the terms of the leases, including renewal periods considered reasonably assured, the Company begins amortization as of the initial possession date which is when the Company enters the space and begins to make improvements in preparation for intended use. 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 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. In addition, a provision is made for estimated rewards cards issued to customers based on their purchases with the Company’s propriety 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. In accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), in fiscal 2023, 2022 and 2021, the Company recognized $ 1,116,000 , $ 256,000 and $ 1,482,000 , respectively, of income on unredeemed gift cards (“gift card breakage”) as a component of Other Revenue on the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). Under Topic 606, the Company recognizes gift card breakage using an expected breakage percentage based on redeemed gift cards. See Note 2 for further information on miscellaneous income. The rewards cards issued by the Company have a 90-day expiration. 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. The Company estimated customer credit losses of $ 578,000 and $ 349,000 for the twelve months ended February 3, 2024 and January 28, 2023, respectively, on sales purchased on the Company’s proprietary credit card of $ 23.5 million and $ 23.3 million for the twelve months ended February 3, 2024 and January 28, 2023, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): ` Balance as of February 3, 2024 January 28, 2023 Proprietary Credit Card Receivables, net $ 10,909 $ 10,553 Gift Card Liability $ 8,143 $ 8,523 Cost of Goods Sold: 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 Company’s buying departments and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Buying, distribution, occupancy and internal transfer costs are treated as period costs and are not capitalized as part of inventory. The direct costs associated with shipping goods to customers are recorded as a component of Cost of goods sold. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 47 Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising expense was approximately $ 6,277,000 , $ 6,868,000 and $ 6,037,000 for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022, respectively. Stock Repurchase Program: For the fiscal year ended February 3, 2024, the Company had 909,653 shares remaining in open authorizations. There is no specified expiration date for the Company’s repurchase program. Share repurchases are recorded in Retained earnings, net of par value. Earnings Per Share: ASC 260 – Earnings Per Share requires dual presentation of basic EPS and diluted 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 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 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 earnings (loss) 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. The following table reflects the basic and diluted EPS calculations for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022: ` Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Numerator (Dollars in thousands) Net earnings (loss) $ ( 23,941 ) $ 29 $ 36,844 (Earnings) loss allocated to non-vested equity awards 1,347 12 ( 1,937 ) Net earnings (loss) available to common stockholders $ ( 22,594 ) $ 41 $ 34,907 Denominator Basic weighted average common shares outstanding 19,389,907 19,930,960 21,113,828 Diluted weighted average common shares outstanding 19,389,907 19,930,960 21,113,828 Net income (loss) per common share Basic earnings (loss) per share $ ( 1.17 ) $ - $ 1.65 Diluted earnings (loss) per share $ ( 1.17 ) $ - $ 1.65 Vendor Allowances: The Company receives certain allowances from vendors primarily related to purchase discounts and markdown and damage allowances. All allowances are reflected in Cost of goods sold as earned when the related products are sold. Cash consideration received from a vendor is presumed to be a reduction of the purchase cost of merchandise and is reflected as a reduction of inventory. The Company does not receive cooperative advertising allowances. Income Taxes: The Company files a consolidated federal income tax return. Income taxes are provided based on the asset and liability method of accounting, whereby deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 48 Company’s assets and liabilities. Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740 – Income Taxes when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances. Potential accrued interest and penalties related to unrecognized tax benefits within operations are recognized as a component of Income before income taxes. The Company assesses the likelihood that deferred tax assets will be able to be realized, and based on that assessment, the Company will determine if a valuation allowance should be recorded. In addition, the Tax Cuts and Jobs Act implemented a new minimum tax on global intangible low- taxed income (“GILTI”). The Company has elected to account for GILTI tax in the period in which it is incurred, which is included as a component of its current year provision for income taxes. Deferred Tax Valuation Allowance: The Company assesses the likelihood that deferred tax assets will be realized in light of the Company’s current financial performance and projected future financial performance. Based on this assessment, the Company then determines if a valuation allowance should be recorded. If the Company concludes that it is more likely than not that the Company will not be able to realize its tax deferred assets, a valuation allowance is recorded for the proportion of the deferred tax asset it determines may not be realized. Store Opening Costs: Costs relating to the opening of new stores or the relocating or expanding of existing stores are expensed as incurred. A portion of construction, design, and site selection costs are capitalized to new, relocated and remodeled stores. Insurance: The Company is self-insured with respect to employee health care, workers’ compensation and general liability. The Company’s self-insurance liabilities are based on the total estimated cost of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. The Company has stop-loss insurance coverage for individual claims in excess of $ 325,000 for employee healthcare, $ 350,000 for workers’ compensation and $ 250,000 for general liability. Fair Value of Financial Instruments: The Company’s carrying values of financial instruments, such as cash and cash equivalents, short-term investments, and restricted cash, approximate their fair values due to their short terms to maturity and/or their variable interest rates. Stock Based Compensation: The Company records compensation expense associated with restricted stock and other forms of equity compensation in accordance with ASC 718 - Compensation – Stock Compensation. Compensation cost associated with stock awards recognized in all years presented includes: 1) amortization related to the remaining unvested portion of all stock awards based on the grant date fair value and 2) adjustments for the effects of actual forfeitures versus initial estimated forfeitures. Subsequent Events: On February 16, 2024, the Company closed on the sale of land held for investment for $ 4.2 million, less commissions. This transaction will be reflected in the Company’s consolidated financial statements in the first quarter of fiscal 2024. Recently Issued Accounting Pronouncements: In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which modifies disclosure requirements THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 49 for all public entities that are required to report segment information. The update will change the reporting of segments by adding significant segment expenses, other segment items, title and position of the chief operating decision maker (“COD”) and how the COD uses the reported measures to make decisions. The update also requires all annual disclosure about a reportable segment’s profit or loss and assets in interim periods. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the guidance is applicable retrospectively to all prior periods presented in the financial statements. The Company is currently in the process of evaluating the potential impact of adoption of this new guidance on its consolidated financial statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which modifies the requirements on income tax disclosures to require disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. This guidance is effective for fiscal years beginning after December 15, 2024 for all public business entities, with early adoption and retrospective application permitted. The Company is currently in the process of evaluating the potential impact of adoption of this new guidance on its consolidated financial statements and related disclosures. 2. Interest and Other Income: The components of Interest and other income are shown below (in thousands): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Dividend income $ ( 78 ) $ ( 47 ) $ ( 76 ) Interest income ( 3,919 ) ( 1,876 ) ( 1,321 ) State recovery grant - ( 1,431 ) - Insurance proceeds - ( 1,683 ) - Miscellaneous income ( 1,079 ) ( 896 ) ( 580 ) Net loss (gain) on investment sales ( 25 ) 31 ( 164 ) Interest and other income $ ( 5,101 ) $ ( 5,902 ) $ ( 2,141 ) In fiscal 2022, the Company received $ 1.4 million from the state of North Carolina’s Business Recovery Program, which provided aid to eligible North Carolina businesses that suffered significant economic damage from the COVID-19 pandemic. Additionally, in fiscal 2022, the Company received $ 1.7 million in property insurance claims, including business interruption, from Hurricanes Ida and Laura in 2021 and 2020. 3. Short-Term Investments: At February 3, 2024, the Company’s investment portfolio was primarily invested in corporate and governmental debt securities held in managed accounts. These securities are classified as available-for- sale as they are highly liquid and are recorded on the Consolidated Balance Sheets at estimated fair value, with unrealized gains and temporary losses reported net of taxes in Accumulated other comprehensive income. The table below reflects gross accumulated unrealized gains (losses) in short-term investments at February 3, 2024 and January 28, 2023 (in thousands): THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 50 ` February 3, 2024 January 28, 2023 Debt securities Debt securities issued by the U.S issued by the U.S Government, its various Government, its various States, municipalities Corporate States, municipalities Corporate and agencies debt and agencies debt of each securities Total of each securities Total Cost basis $ 30,989 $ 48,320 $ 79,309 $ 51,372 $ 59,541 $ 110,913 Unrealized gains - 38 38 - - - Unrealized (loss) ( 335 ) - ( 335 ) ( 1,020 ) ( 1,241 ) ( 2,261 ) Estimated fair value $ 30,654 $ 48,358 $ 79,012 $ 50,352 $ 58,300 $ 108,652 Accumulated other comprehensive income on the Consolidated Balance Sheets reflects the accumulated unrealized gains and losses in short-term investments in addition to unrealized gains and losses from equity investments and restricted cash investments. The table below reflects gross accumulated unrealized gains and losses in these investments at February 3, 2024 and January 28, 2023 (in thousands): ` February 3, 2024 January 28, 2023 Deferred Unrealized Deferred Unrealized Unrealized Tax Benefit/ Net Gain/ Unrealized Tax Benefit/ Net Gain/ Security Type Gain/(Loss) (Expense) (Loss) Gain/(Loss) (Expense) (Loss) Short-Term Investments $ ( 297 ) $ 68 $ ( 229 ) $ ( 2,261 ) $ 521 $ ( 1,740 ) Equity Investments 811 ( 187 ) 624 652 ( 150 ) 502 Total $ 514 $ ( 119 ) $ 395 $ ( 1,609 ) $ 371 $ ( 1,238 ) THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 51 4. Fair Value Measurements: The following tables set forth information regarding the Company’s financial assets that are measured at fair value as of February 3, 2024 and January 28, 2023 (in thousands): ` Prices in Active Significant Markets for Other Significant Identical Observable Unobservable February 3, 2024 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 12,540 $ - $ 12,540 $ - Corporate Bonds 45,400 - 45,400 - U.S. Treasury/Agencies Notes and Bonds 18,114 - 18,114 - Cash Surrender Value of Life Insurance 8,586 - - 8,586 Asset-backed Securities (ABS) 2,958 - 2,958 - Corporate Equities 1,084 1,084 - - Total Assets $ 88,682 $ 1,084 $ 79,012 $ 8,586 Liabilities: Deferred Compensation $ ( 8,654 ) $ - $ - $ ( 8,654 ) Total Liabilities $ ( 8,654 ) $ - $ - $ ( 8,654 ) 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 taxable governmental debt securities held in managed accounts with underlying ratings of A or better at February 3, 2024. The state, municipal and corporate bonds and asset-backed securities have contractual maturities which range from seven days to 3.1 years. The U.S. Treasury Notes have contractual maturities which range from four days to 2.0 years. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash, and Other assets on the accompanying 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 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 52 receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase, Capital One, and Discover. Additionally, at February 3, 2024 and January 28, 2023, the Company had $ 1.1 and $ 0.9 million, respectively, of corporate equities, which are recorded within Other assets in the accompanying Consolidated Balance Sheets. Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate and municipal bonds 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 the 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 primarily 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 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 Consolidated Balance Sheets. These funds are designed to mirror the return of existing 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 years ended February 3, 2024 and January 28, 2023 (in thousands): THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 53 ` Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 28, 2023 $ 9,274 Redemptions ( 1,168 ) Total gains or (losses) Included in interest and other income (or changes in net assets) 480 Ending Balance at February 3, 2024 $ 8,586 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 28, 2023 $ ( 8,903 ) Redemptions 1,119 Additions ( 292 ) Total (gains) or losses Included in interest and other income (or changes in net assets) ( 578 ) Ending Balance at February 3, 2024 $ ( 8,654 ) Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 29, 2022 $ 11,472 Redemptions ( 1,718 ) Total gains or (losses) Included in interest and other income (or changes in net assets) ( 480 ) 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 Ending Balance at January 28, 2023 $ ( 8,903 ) THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 54 5. Accounts Receivable: Accounts receivable consist of the following (in thousands): February 3, 2024 January 28, 2023 Customer accounts — principally deferred payment accounts $ 11,614 $ 11,313 Income tax receivable 6,285 6,442 Miscellaneous receivables 7,171 3,991 Bank card receivables 5,386 5,512 Total 30,456 27,258 Less allowance for customer credit losses 705 761 Accounts receivable — net $ 29,751 $ 26,497 Finance charge and late charge revenue on customer deferred payment accounts totaled $ 2,640,000 , $ 2,243,000 and $ 2,066,000 for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022, respectively, and charges against the allowance for customer credit losses were approximately $ 554,000 , $ 280,000 and $ 429,000 for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022, respectively. Expenses relating to the allowance for customer credit losses are classified as a component of Selling, general and administrative expense in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). Current year Miscellaneous receivables includes $ 3.2 million for the estimated cost to repair the Company’s corporate jet, which had sustained damage at the end of the second quarter. 6. Property and Equipment: Property and equipment consist of the following (in thousands): February 3, 2024 January 28, 2023 Land and improvements $ 13,755 $ 13,595 Buildings 35,756 35,537 Leasehold improvements 74,782 77,609 Fixtures and equipment 155,357 174,640 Information technology equipment and software 39,904 38,202 Construction in progress 18,034 12,989 Total 337,588 352,572 Less accumulated depreciation 273,566 282,190 Property and equipment — net $ 64,022 $ 70,382 Construction in progress primarily represents costs related to new store development, distribution center improvements and investments in new technology. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 55 7. Accrued Expenses: Accrued expenses consist of the following (in thousands): February 3, 2024 January 28, 2023 Accrued employment and related items $ 4,736 $ 7,377 Property and other taxes 13,544 16,546 Accrued self-insurance 9,500 7,968 Fixed assets 942 685 Other 8,682 8,762 Total $ 37,404 $ 41,338 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 56 8. Financing Arrangements: As of February 3, 2024, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $ 35.0 million, less the balance of any revocable letters of credit related to purchase commitments, and is committed through May 2027. The revolving credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios. On August 9, 2023, the Company amended the revolving credit agreement to modify a definition used in calculating the Company’s minimum EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating the ratio through February 3, 2024. On October 24, 2023, the Company further amended the revolving credit agreement to flex the Company’s minimum EBITDAR coverage ratio based upon the amount of the Company’s cash and investments. The Company was in compliance with the amended revolving credit agreement as of February 3, 2024. There were no borrowings outstanding, no r any outstanding letters of credit that reduced borrowing availability, under this credit facility as of the fiscal year ended February 3, 2024 or the fiscal year ended January 28, 2023. The weighted average interest rate under the credit facility was zero at February 3, 2024 due to no borrowings outstanding. The Company had no outstanding revocable letters of credit relating to purchase commitments at February 3, 2024 or at January 28, 2023. 9. Stockholders’ Equity: The holders of Class A Common Stock are entitled to one vote per share , whereas the holders of Class B Common Stock are entitled to ten votes per share . Each share of Class B Common Stock may be converted at any time into one share of Class A Common Stock . Subject to the rights of the holders of any shares of Preferred Stock that may be outstanding at the time, in the event of liquidation, dissolution or winding up of the Company, holders of Class A Common Stock are entitled to receive a preferential distribution of $ 1.00 per share of the net assets of the Company. Cash dividends on the Class B Common Stock cannot be paid unless cash dividends of at least an equal amount are paid on the Class A Common Stock. The Company’s certificate of incorporation provides that shares of Class B Common Stock may be transferred only to certain “Permitted Transferees” consisting generally of the lineal descendants of holders of Class B Common Stock, trusts for their benefit, corporations and partnerships controlled by them and the Company’s employee benefit plans. Any transfer of Class B Common Stock in violation of these restrictions, including a transfer to the Company, results in the automatic conversion of the transferred shares of Class B Common Stock held by the transferee into an equal number of shares of Class A Common Stock. 10. Employee Benefit Plans: The Company has a defined contribution retirement savings plan (“401(k) plan”) which covers all associates who meet minimum age and service requirements. The 401(k) plan allows participants to contribute up to 75 % of their annual compensation up to the maximum elective deferral, designated by the Internal Revenue Service. The Company is obligated to make a minimum contribution to cover plan administrative expenses. Further Company contributions are at the discretion of the Board of Directors. The Company’s contributions for the years ended February 3, 2024, January 28, 2023 and January 29, 2022 were approximately $ 1,099,000 , $ 1,184,000 and $ 1,210,000 , respectively. The Company has a trusteed, non-contributory Employee Stock Ownership Plan (“ESOP”), which covers substantially all associates who meet minimum age and service requirements. The amount of the THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 57 Company’s discretionary contribution to the ESOP is determined by the Compensation Committee of the Board of Directors and can be made in Company Class A Common stock or cash. Due to a net operating loss in fiscal 2023, the Committee did not approve a contribution to the ESOP for the year ended February 3, 2024. The Company’s contributions were $ 32,510 and $ 29,430,000 for the years ended January 28, 2023 and January 29, 2022, respectively. The Company is primarily self-insured for healthcare. These costs are significant primarily due to the large number of the Company’s retail locations and associates. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims. Management reviews current and historical claims data in developing its estimates. If the underlying facts and circumstances of the claims change or the historical trend is not indicative of future trends, then the Company may be required to record additional expense or a reduction to expense which could be material to the Company’s reported results of operations in the period recorded. The Company funds healthcare contributions to a third-party provider. 11. 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 one year to 10 years , some of which include options to extend the lease term for up to five years , and some of which 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): ` Fiscal Year Ended February 3, 2024 January 28, 2023 Operating lease cost (a) $ 70,363 $ 71,513 Variable lease cost (b) $ 2,646 $ 3,127 (a) Includes right-of-use asset amortization of ($ 1.3 ) million and ($ 1.7 ) million for the twelve months ended February 3, 2024 and January 28, 2023, respectively. (b) Primarily relates to monthly percentage rent for stores not presented on the balance sheet. Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows (in thousands): Operating cash flow information: Fiscal Year Ended February 3, 2024 January 28, 2023 Cash paid for amounts included in the measurement of lease liabilities $ 65,872 $ 67,194 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations, net of rent violations $ 44,284 $ 57,628 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 58 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: ` As of February 3, 2024 January 28, 2023 Weighted-average remaining lease term 2.3 years 2.5 years Weighted-average discount rate 4.58 % 3.13 % Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2024 $ 66,868 2025 45,125 2026 29,070 2027 16,517 2028 7,716 Thereafter 690 Total lease payments 165,986 Less: Imputed interest 12,865 Present value of lease liabilities $ 153,121 12. Income Taxes: Unrecognized tax benefits for uncertain tax positions, primarily recorded in Other noncurrent liabilities, are established in accordance with ASC 740 when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances. As of February 3, 2024, the Company had gross unrecognized tax benefits totaling approximately $ 3.9 million, of which approximately $ 5.0 million (inclusive of interest) would affect the effective tax rate if recognized. The Company had approximately $ 1.8 million, $ 2.0 million and $ 2.0 million of interest and penalties accrued related to uncertain tax positions as of February 3, 2024, January 28, 2023 and January 29, 2022, respectively. The Company recognizes interest and penalties related to the resolution of uncertain tax positions as a component of income tax expense. The Company recognized $ 393,000 , $ 517,000 and $ 452,000 of interest and penalties in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended February 3, 2024, January 28, 2023 and January 29, 2022, respectively. The Company is no longer subject to U.S. federal income tax examinations for years before 2020. In state and local tax jurisdictions, the Company has limited exposure before 2013. During the next 12 months, various state and local taxing authorities’ statutes of limitations will expire and certain state examinations may close, which could result in a potential reduction of unrecognized tax benefits for which a range cannot be determined. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands): THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 59 ` February 3, 2024 January 28, 2023 January 29, 2022 Fiscal Year Ended Balances, beginning $ 4,886 $ 5,286 $ 5,946 Additions for tax positions of the current year 76 431 1,312 Additions for tax positions of prior years - 137 680 Reduction for tax positions of prior years for: Lapses of applicable statutes of limitations ( 1,065 ) ( 968 ) ( 2,652 ) Balances, ending $ 3,897 $ 4,886 $ 5,286 The provision for income taxes consists of the following (in thousands): ` February 3, 2024 January 28, 2023 January 29, 2022 Fiscal Year Ended Current income taxes: Federal $ ( 148 ) $ ( 817 ) $ 2,532 State ( 334 ) ( 231 ) 802 Foreign 1,898 2,403 1,984 Total 1,416 1,355 5,318 Deferred income taxes: Federal 6,613 200 ( 2,558 ) State 2,093 186 ( 639 ) Foreign 18 - - Total 8,724 386 ( 3,197 ) Total income tax expense $ 10,140 $ 1,741 $ 2,121 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 60 Significant components of the Company’s deferred tax assets and liabilities as of February 3, 2024 and January 28, 2023 are as follows (in thousands): ` February 3, 2024 January 28, 2023 Deferred tax assets: Allowance for customer credit losses $ 150 $ 162 Inventory valuation 1,076 1,042 Non-deductible accrued liabilities 1,367 1,435 Other taxes 862 875 Federal benefit of uncertain tax positions 712 851 Equity compensation expense 2,975 2,892 Federal tax credits 379 - Net operating losses 7,854 5,567 Charitable contribution carryover 265 216 State tax credits - 340 Lease liabilities 34,810 40,090 Property and equipment 3,885 3,400 Amortization 1,401 - Other 2,150 2,822 Total deferred tax assets before valuation allowance 57,886 59,692 Valuation allowance ( 17,998 ) ( 5,058 ) Total deferred tax assets after valuation allowance 39,888 54,634 Deferred tax liabilities: Right-of-Use assets 39,721 44,732 Accrued self-insurance reserves 167 689 Total deferred tax liabilities 39,888 45,421 Net deferred tax assets $ - $ 9,213 The changes in the valuation allowance are presented below: February 3, 2024 January 28, 2023 Valuation Allowance Beginning Balance $ ( 5,058 ) $ ( 4,473 ) Net Valuation Allowance (Additions) / Reductions ( 12,940 ) ( 585 ) Valuation Allowance Ending Balance $ ( 17,998 ) $ ( 5,058 ) The Company had $ 0.3 million of state tax credits to offset future state income tax expense, which expired during fiscal 2023. The Company had previously recorded a valuation allowance of $ 0.3 million. As of February 3, 2024, the Company had $ 6.8 million of net deferred tax assets attributable to state net operating loss carryforwards and $ 0.3 million of other deferred tax assets affecting state income tax. The Company assessed the likelihood that deferred tax assets related to state net operating loss carryforwards and other deferred tax assets affecting state income tax will be realized. Based on this assessment, the Company concluded that it is more likely than not the Company will not be able to realize $ 6.8 million and $ 0.3 million of the net operating losses and other deferred assets, respectively, and accordingly, has recorded a valuation allowance for the same amount. As of February 3, 2024, the Company had $ 11.0 million of net deferred tax assets attributable to U.S. federal net operating loss carryforwards, other credit carryforwards and all other deferred tax assets net of THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 61 deferred tax liabilities. The Company assessed the likelihood that deferred tax assets related to net operating loss carryforwards, credit carryforwards and all other remaining deferred tax assets net of deferred tax liabilities will be realized. Based on this assessment, the Company concluded that it is more likely than not the Company will not be able to realize $ 1.1 million of net operating loss carryforwards, $ 0.4 million of credit carryforwards and $ 9.5 million of remaining deferred tax assets net of deferred tax liabilities. The net change in the valuation allowance of $ 12.9 million for the year ended February 3, 2024 is due to recording a valuation allowance of $ 11.0 million against net deferred tax assets attributable to U.S. federal net operating loss carryforwards, other credit carryforwards and all other deferred tax assets net of deferred tax liabilities and increases in state net operating losses and state tax credits. The net change in the valuation allowance for the year ended January 28, 2023 is due to state net operating losses and state tax credits. As of February 3, 2024, the Company’s position is that its overseas subsidiaries will not invest undistributed earnings indefinitely. Future unremitted earnings when distributed are expected to be either distributions of GILTI-previously taxed income or eligible for a 100 % dividends received deduction. The withholding tax rate on any unremitted earnings is zero and state income taxes on such earnings are considered immaterial. Therefore, the Company has not provided deferred U.S. income taxes on approximately $ 27.4 million of cumulative earnings from non-U.S. subsidiaries. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 62 The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows: ` February 3, 2024 January 28, 2023 January 29, 2022 Fiscal Year Ended Federal income tax rate 21.0 % 21.0 % 21.0 % State income taxes 4.5 ( 36.4 ) 2.7 CARES ACT - Carryback differential - - ( 5.8 ) Global intangible low-taxed income ( 33.4 ) 333.0 6.7 Foreign tax credit 0.3 ( 11.2 ) ( 4.3 ) Foreign rate differential 7.8 ( 74.4 ) ( 2.8 ) Offshore claim 15.2 ( 141.2 ) ( 5.5 ) Limitation on officer compensation ( 3.1 ) 27.2 1.9 Work opportunity credit 1.5 ( 63.7 ) ( 1.8 ) Addback on wage related credits ( 0.3 ) 13.4 0.4 Tax exempt interest 0.5 ( 14.4 ) - Insurance - ( 8.1 ) ( 1.0 ) Charitable contribution of inventory ( 0.6 ) - ( 1.1 ) Uncertain tax positions 7.4 ( 18.7 ) ( 3.5 ) Deferred rate change - 1.1 0.1 Valuation allowance ( 96.0 ) 70.9 ( 2.1 ) Other 1.7 ( 0.1 ) 0.5 Effective income tax rate ( 73.5 ) % 98.4 % 5.4 % The largest driver for the difference between the Company’s effective income tax rate for the year ended February 3, 2024 and the U.S. federal income tax rate is the valuation allowance (discussed above) recorded against the Company’s net deferred tax assets attributable to U.S. federal net operating loss carryforwards, other credit carryforwards and all other deferred tax assets net of deferred tax liabilities. 13. 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, Verso na 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 have similar economic characteristics, products, production processes, customers 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 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 CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 63 The following schedule summarizes certain segment information (in thousands): ` Fiscal 2023 Retail Credit Total Revenues $ 705,419 $ 2,640 $ 708,059 Depreciation 9,869 2 9,871 Interest and other income 5,101 - 5,101 Income (loss) before taxes ( 14,746 ) 945 ( 13,801 ) Capital expenditures 12,532 - 12,532 Fiscal 2022 Retail Credit Total Revenues $ 757,017 $ 2,243 $ 759,260 Depreciation 11,078 2 11,080 Interest and other income 5,902 - 5,902 Income before taxes 1,179 591 1,770 Capital expenditures 19,433 - 19,433 Fiscal 2021 Retail Credit Total Revenues $ 767,205 $ 2,066 $ 769,271 Depreciation 12,354 2 12,356 Interest and other income 2,141 - 2,141 Income before taxes 38,340 625 38,965 Capital expenditures 4,101 4 4,105 Retail Credit Total Total assets as of February 3, 2024 $ 448,488 $ 38,329 $ 486,817 Total assets as of January 28, 2023 514,609 38,531 553,140 The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 1. The Company evaluates performance based on profit or loss from operations before income taxes. The Company does not allocate certain corporate expenses 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): Fiscal Year Ended ` February 3, 2024 January 28, 2023 January 29, 2022 Payroll $ 578 $ 527 $ 501 Postage 452 406 342 Other expenses 662 717 595 Total expenses $ 1,692 $ 1,650 $ 1,438 14. Stock Based Compensation: As of February 3, 2024, the Company had the 2018 Incentive Compensation Plan for the granting of various forms of equity-based awards, including restricted stock and stock options for grant, to officers, directors and key employees. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 64 The following table presents the number of options and shares of restricted stock initially authorized and available for grant under this plan as of February 3, 2024: ` 2018 Plan Options and/or restricted stock initially authorized 4,725,000 Options and/or restricted stock available for grant: January 28, 2023 3,461,061 February 3, 2024 3,147,393 In accordance with ASC 718, the fair value of 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 a five-year vesting period. As of February 3, 2024, there was $ 9,334,000 of total unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.1 years. The total grant date fair value of the shares recognized as compensation expense during the twelve months ended February 3, 2024, January 28, 2023 and January 29, 2022 was $ 4,105,000 , $ 2,556,000 and $ 4,055,000 , respectively. The increase in total compensation expense for fiscal 2023 is due to a true-up in fiscal 2022 that resulted from forfeitures driven by the retirement of several senior members of management. The expenses are classified as a component of Selling, general and administrative expenses in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). The following summary shows the changes in the shares of unvested restricted stock outstanding during the years ended February 3, 2024, January 28, 2023 and January 29, 2022: ` Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at January 30, 2021 1,023,956 $ 15.33 Granted 407,910 13.49 Vested ( 176,575 ) 22.22 Forfeited or expired ( 59,003 ) 13.95 Restricted stock awards at January 29, 2022 1,196,288 $ 13.76 Granted 319,441 13.70 Vested ( 231,638 ) 16.99 Forfeited or expired ( 224,658 ) 13.43 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 ( 132,824 ) 11.73 Restricted stock awards at February 3, 2024 1,123,873 $ 11.32 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 twelve month period ended February 3, 2024, the Company sold 54,889 shares to employees at an average discount of $ 1.22 per share under the Employee Stock Purchase Plan. The compensation expense recognized for the 15 % discount given under the Employee Stock Purchase Plan was approximately $ 67,000 , $ 54,000 and $ 36,000 for fiscal years THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 65 2023, 2022 and 2021, respectively. These expenses are classified as a component of Selling, general and administrative expenses. 15. 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 our 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 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. 16. Accumulated Other Comprehensive Income: The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the year ended February 3, 2024: ` 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 (loss) before reclassification 1,614 Amounts reclassified from accumulated other comprehensive income (b) 19 Net current-period other comprehensive income (loss) 1,633 Ending Balance at February 3, 2024 $ 395 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 25 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 $ 6 . Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 66 The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the year ended January 28, 2023: 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 (loss) before reclassification ( 982 ) Amounts reclassified from accumulated other comprehensive income (b) 24 Net current-period other comprehensive income (loss) ( 958 ) Ending Balance at January 28, 2023 $ ( 1,238 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 31 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 $ 7 . Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. 67 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None.