Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION:
The
following
information
should
be
read
along
with
the
unaudited
Condensed
Consolidated
Financial
Statements,
including
the
accompanying
Notes
appearing
in
this
report.
Any
of
the
following
are
“forward-looking”
statements
within
the
meaning
of
Section 27A
of
the
Securities
Act
of
1933,
as
amended,
and
Section 21E
of
the
Securities
Exchange
Act
of
1934,
as
amended:
(1) statements
in
this
Form 10-Q
that
reflect
projections
or
expectations
of
our
future
financial
or
economic
performance;
(2) statements
that
are
not
historical
information;
(3) statements
of
our
beliefs,
intentions,
plans
and
objectives for future operations,
including those contained in
“Management’s Discussion and
Analysis of
Financial Condition and
Results of Operations”;
(4) statements relating to
our operations or
activities for
our
fiscal
year
ending
February
1,
2025
(“fiscal
2024”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and closures, and
statements regarding the
potential impact of
supply chain disruptions,
extreme weather
conditions,
inflationary
pressures
and
other
economic
or
market
conditions
on
our
business,
results
of
operations and financial condition and
statements of plans or
intentions regarding new store development
or
store
closures;
and
(5) statements
relating
to
our
future
contingencies.
When
possible,
we
have
attempted to identify forward-looking statements
by using words such
as “will,” “expects,” “anticipates,”
“approximates,” “believes,” “estimates,” “hopes,” “intends,”
“may,” “plans,”
“could,” “would,” “should”
and
any
variations
or
negative
formations
of
such
words
and
similar
expressions.
We
can
give
no
assurance
that actual
results or
events
will not
differ
materially
from those
expressed or
implied in
any
such
forward-looking
statements.
Forward-looking
statements
included
in
this
report
are
based
on
information available
to us
as of
the filing
date of
this report,
but subject
to known
and unknown
risks,
uncertainties and other factors that could cause actual results
to differ materially from those contemplated
by the forward-looking statements.
Such factors include, but
are not limited to,
the following: any actual
or
perceived
deterioration
in,
or
continuation
of
negative
trends
in,
the
conditions
that
drive
consumer
confidence and
spending, including,
but
not limited
to, prevailing
social, economic,
political
and public
health conditions and
uncertainties, levels of
unemployment, fuel, energy
and food
costs, wage rates,
tax
rates, interest
rates, home
values, consumer
net worth,
the availability
of credit
and inflation;
changes in
laws,
regulations
or
government
policies
affecting
our
business,
including
but
not
limited
to
tariffs;
uncertainties regarding
the impact
of
any governmental
action regarding,
or
responses to,
the
foregoing
conditions;
competitive
factors
and
pricing
pressures;
our
ability
to
predict
and
respond
to
rapidly
changing
fashion
trends
and
consumer
demands;
our
ability
to
successfully
implement
our
new
store
development strategy to
increase new
store openings and
our ability of
any such
new stores
to grow
and
perform as
expected; underperformance
or
other factors
that may
lead
to,
or
affect
the volume
of,
store
closures; adverse
weather,
public health
threats (including
the global
COVID-19 pandemic),
acts of
war
or
aggression
or
similar
conditions
that
may
affect
our
merchandise
supply
chain,
sales
or
operations;
inventory
risks
due
to
shifts
in
market
demand,
including
the
ability
to
liquidate
excess
inventory
at
anticipated
margins;
adverse
developments
or
volatility
affecting
the
financial
services
industry
or
broader
financial
markets;
and
other
factors
discussed
under
“Risk
Factors”
in
Part
I,
Item
1A
of
our
annual
report
on
Form 10-K
for
the
fiscal
year
ended February
3,
2024
(“fiscal
2023”),
as
amended or
supplemented,
and in
other reports
we
file
with
or
furnish
to
the
Securities and
Exchange
Commission
(“SEC”)
from time
to
time.
We
do
not
undertake, and
expressly
decline,
any obligation
to
update
any
such forward-looking information contained
in this report,
whether as a
result of new
information, future
events, or otherwise.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
21
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The
Company’s
critical
accounting
policies
and
estimates
are
more
fully
described
in
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in the
Company’s Annual Report
on
Form
10-K
for
the
fiscal
year
ended
February
3,
2024.
The
preparation
of
the
Company’s
financial
statements
in
conformity
with
generally
accepted
accounting
principles
in
the
United
States
(“GAAP”)
requires management to make estimates and assumptions about future events that affect the amounts reported
in
the
financial
statements
and
accompanying
notes.
Future
events
and
their
effects
cannot
be
determined
with absolute
certainty. Therefore,
the determination
of estimates
requires the
exercise of
judgment. Actual
results
inevitably
will
differ
from
those
estimates,
and
such
differences
may
be
material
to
the
financial
statements. The most significant accounting estimates
inherent in the preparation of the
Company’s financial
statements include
the calculation
of potential
asset impairment,
income tax
valuation allowances,
reserves
relating
to
self-insured
health
insurance,
workers’
compensation,
general
and
auto
insurance
liabilities,
uncertain tax positions, the allowance for
customer credit losses, and inventory shrinkage.
The Company’s critical accounting policies and
estimates are discussed with the Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
22
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in
the Company's unaudited Condensed
Consolidated Statements of Income as a
percentage of total retail sales:
Three Months Ended
May 4, 2024
April 29, 2023
Total retail sales
100.0
%
100.0
%
Other revenue
1.0
0.9
Total revenues
101.0
100.9
Cost of goods sold (exclusive of depreciation)
64.2
64.2
Selling, general and administrative (exclusive of depreciation)
32.4
32.5
Depreciation
1.2
1.2
Interest and other income
(3.3)
(0.5)
Income before income taxes
6.6
3.5
Net income
6.3
2.3
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
23
RESULTS OF OPERATIONS
(CONTINUED):
Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
(“MD&A”) is
intended
to
provide
information
to
assist
readers
in
better
understanding
and
evaluating
our
financial
condition
and
results
of
operations.
We
recommend
reading
this
MD&A
in
conjunction
with
our
Condensed
Consolidated
Financial
Statements
and
the
Notes
to
those
statements
included
in
the
“Financial Statements” section of this Quarterly Report on Form 10-Q, as well as our 2023
Annual Report
on Form 10-K.
Recent Developments
Inflationary Cost Pressure and High Interest Rates
The
pressure
on
our
customers’
disposable
income
continued
in
the
first
quarter
of
fiscal
2024,
due
to
prolonged and persistently high
inflation rates, especially related
to housing and
fuel, as well as
high interest
rates.
These high
interest rates
have adversely
affected the
availability and cost
of credit for
our customers,
including
revolving
credit
and
auto
loans,
and
continue
to
negatively
impact
our
customers’
disposable
income.
Our
customers’
willingness to
purchase
our
products
may
continue
to
be
negatively impacted
by
these inflationary pressures and high interest
rates.
We believe
continued inflation and
high interest
rates negatively
impacted the first
quarter of
2024 and
will
likely continue
to have
a negative
impact on
consumer behavior and,
by extension, our
results of operations
and financial condition during the remainder of
fiscal 2024.
Merchandise Supply Chain
A significant amount of our merchandise is
manufactured overseas, principally Southeast Asia,
and traverses
through the
Panama
Canal or
the
Suez
Canal.
The regional
drought conditions
experienced
in the
region
surrounding the
Panama Canal
reduced the
number of
transits by
approximately 37%
and has
also reduced
the
permissible
draft
of
vessels
transiting
the
Panama
Canal,
which
reduced
the
volume
and
number
of
containers carried by container
ships and increased our
costs in the first quarter.
During the second quarter,
the Panama
Canal authority
plans to increase
the daily
transits by
33% and
increase the
permissible draft
of
vessels depending on weather
conditions. The hostilities affecting
the region surrounding
the Suez Canal are
causing container
ships to
travel longer
distances around
the Cape
of Good
Hope, which
is increasing
lead
times for merchandise and our costs
to ship these goods as well as
decreasing the pool of containers available.
Both
of
these
situations
have
negatively
impacted
2024.
Though
conditions
in
the
Panama
Canal
could
incrementally improve
if weather
conditions allow
the easing
of existing
restrictions, we
believe the
totality
of these
conditions will
likely continue
to have
a negative
impact on
our results
of operations
and financial
condition for the foreseeable future.
Comparison of First Quarter of 2024
with 2023
Total retail sales for the first quarter
were $175.3 million compared to
last year’s first quarter sales of
$190.3
million.
Sales
decreased
primarily
due
to
a
decrease
in
same-store
sales
and
sales
from
stores
that
were
closed in the past 12 months, partially offset by sales from stores opened in the past 12
months. The decrease
in
same-store
sales
is
primarily
from
fewer
transactions
due
to
the
aforementioned
pressures
on
our
customers’ disposable income, as well
as lower average sales per transaction. Same
store sales include stores
that have been open
more than 15 months.
Stores that have been
relocated or expanded are
also included in
the same store
sales calculation after
they have been
open more than
15 months.
The method of
calculating
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
same store
sales
varies
across the
retail industry.
As a
result, our
same
store sales
calculation
may
not
be
comparable to similarly titled measures reported by
other companies. E-commerce sales were
less than 5.0%
of
sales
for
the
first
quarter
of
fiscal
2024
and
are
included
in
the
same-store
sales
calculation.
Total
revenues, comprised
of retail sales
and other revenue
(principally finance
charges and late
fees on
customer
accounts
receivable,
shipping
charged
to
customers
for
e-commerce
purchases
and
layaway
fees),
were
$177.1 million for the first quarter ended May 4, 2024, compared to $192.1 million for the first
quarter ended
April 29,
2023. The Company
operated 1,171
stores at May
4, 2024
compared to 1,264
stores at the
end of
last
fiscal
year’s
first
quarter.
For
the
first
three
months
of
fiscal
2024,
the
Company
permanently
closed
seven stores.
The Company currently anticipates closing approximately 75
stores in fiscal 2024.
Credit revenue of $0.7 million represented 0.4% of total revenues in the first quarter of fiscal 2024,
compared
to
2023
credit
revenue
of
$0.6
million
or
0.3%
of
total
revenues.
Credit
revenue
is
comprised
of
interest
earned on the Company’s private label credit card portfolio and related fee income.
Related expenses include
principally payroll, postage and
other administrative expenses, and
totaled $0.4 million in
the first quarter of
2024, compared to last year’s
first quarter expenses of $0.4 million.
Other revenue, a component of
total revenues, was $1.8 million for the first
quarter of fiscal 2024, compared
to $1.7
million for the
prior year’s
comparable first
quarter.
The slight increase
was due
to higher
gift card
breakage income and late charges, partially
offset by lower e-commerce shipping revenue
and layaway fees.
Cost of goods
sold was $112.5
million, or 64.2%
of retail sales for
the first quarter of
fiscal 2024, compared
to
$122.1
million,
or
64.2%
of
retail
sales
in
the
first
quarter
of
fiscal
2023.
Cost
of
goods
sold
includes
merchandise costs (net of discounts and
allowances), buying costs, distribution costs, occupancy costs,
freight
and
inventory
shrinkage.
Net
merchandise
costs
and
in-bound
freight
are
capitalized
as
inventory
costs.
Buying
and
distribution
costs
include
payroll,
payroll-related
costs
and
operating
expenses
for
the
buying
departments and distribution center.
Occupancy costs include rent, real estate taxes, insurance, common area
maintenance, utilities and maintenance for stores
and distribution facilities.
Total gross margin dollars (retail
sales
less
cost
of
goods
sold
exclusive
of
depreciation)
decreased
by
8.0%
to
$62.8
million
for
the
first
quarter of fiscal 2024 compared to $68.2 million in the first quarter of fiscal 2023.
Gross margin as presented
may not be comparable to
those of other entities.
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related
payroll taxes and benefits, insurance, supplies, advertising,
and bank and credit card processing fees.
SG&A
expenses were
32.4% of
retail sales for
the first
quarter of
fiscal 2024,
compared to
32.5% of
retail sales
in
the first quarter of fiscal 2023. SG&A expense is lower in the first quarter of fiscal 2024 compared
to the first
quarter of fiscal
2023 primarily due
to lower equity
compensation, advertising and
store expenses, including
payroll, partially offset by an increase
in insurance expense.
Depreciation expense was $2.0 million, or 1.2% of retail sales for the first quarter of fiscal 2024, compared to
$2.4 million, or
1.2% of retail
sales for the
first quarter of
fiscal 2023. The
decrease in depreciation
expense
was attributable to older stores being
fully depreciated.
Interest
and
other
income
was
$5.8
million,
or
3.3%
of
retail
sales
for
the
first
quarter
of
fiscal
2024,
compared
to
$0.9
million,
or
0.5%
of
retail
sales
for
the
first
quarter
of
fiscal
2023.
The
increase
was
primarily due to a $3.2 million net
gain on sale of land held for
investment.
Income tax expense was 0.6 million or 0.4% of retail sales for the first quarter of fiscal 2024, compared to
income tax expense of 2.1 million, or 1.1% of retail sales
for the first quarter of fiscal 2023. The effective
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
income tax
rate for
the first
quarter of
fiscal 2024
was 5.6%
compared to
32.6%
for
the first
quarter of
2023.
The
decrease
in
tax
expense
is
primarily
due
to
the
valuation
allowance against
net
deferred
tax
assets
attributable
to
U.S.
federal
net
operating
loss
carryforwards
and
the
impact
of
the
foreign
rate
differential and lower state income taxes.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company
believes that
its cash,
cash equivalents
and short-term
investments, together
with cash
flows
from operations
and borrowings available
under its revolving
credit agreement,
will be
adequate to fund
the
Company’s regular operating requirements and expected
capital expenditures for the next
12 months.
Cash
provided
by
operating
activities
for
the
first
three
months
of
fiscal
2024
was
primarily
generated
by
earnings
adjusted
for
depreciation
and
changes
in
working
capital.
The
decrease
in
cash
provided
of
$4.2
million
for
the
first
three
months
of
fiscal
2024
as
compared
to
the
first
three
months
of
fiscal
2023
was
primarily attributable to the relative change
in inventory from year-end to the
first quarter for both years and
a
decrease to first quarter 2024 net
income for non-operating gain on sale of
assets held for investment.
At May 4, 2024, the Company had working capital of $65.8 million compared to $55.1 million at February 3,
2024.
The increase is
primarily attributable to
an increase in
cash and cash
equivalents, inventory, accounts
receivable and lower current lease liability,
partially offset by lower short-term
investments.
At
May
4,
2024,
the
Company
had
an
unsecured
revolving
credit
agreement,
which
provides
for
borrowings of
up to
$35.0 million
less the
balance of
any revocable
letters of
credit related
to purchase
commitments,
and
is
committed
through
May
2027.
The
credit
agreement
contains
various
financial
covenants and
limitations, including
the maintenance
of specific
financial ratios.
On April
25, 2024,
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 included
in
the calculation of
the ratio. For
the quarter ended
May 4, 2024,
after giving effect
to the
amendment, the
Company was
in compliance
with the
credit agreement.
There were
no borrowings
outstanding, nor
any
outstanding
letters
of
credit
that
reduced
borrowing
availability,
as
of
May
4,
2024.
The
weighted
average interest rate under the credit facility was zero at May 4, 2024
due to no outstanding borrowings.
Expenditures
for
property
and
equipment
totaled
$3.3
million
in
the
first
three
months
of
fiscal
2024,
compared
to
$6.2
million
in
last
year’s
first
three
months.
The
decrease
in
expenditures
for
property
and
equipment
was
primarily
due
to
lower
capital
investments
in
information
technology
and
the
distribution
center, as well
as no new
store openings in
the first quarter
of fiscal 2024.
For the full
fiscal 2024 year,
the
Company expects
to invest
approximately $9.0
million in
capital expenditures,
including distribution
center
automation projects.
Net
cash
provided
by
investing
activities
totaled
$14.6
million
in
the
first
three
months
of
fiscal
2024
compared to $15.3 million provided in the comparable period of fiscal 2023. The decrease is primarily due
to
an increase in purchases of short-term investments and a decrease in sales of short-term investments, partially
offset by the sale of other
assets and a decrease in capital expenditures.
Net cash
used in
financing activities
totaled $5.6
million in
the first
three months
of fiscal
2024 and
fiscal
2023.
On May 23, 2024, the Board of
Directors maintained the quarterly dividend at
0.17 per share.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
As
of
May
4,
2024,
the
Company
had
478,238
shares
remaining
in
open
authorizations
under
its
share
repurchase program.
The Company does not use
derivative financial instruments.
The Company’s
investment portfolio
was primarily
invested in
corporate bonds and
tax-exempt and taxable
governmental debt securities held in managed accounts with underlying ratings of A or better at May 4, 2024
and February 3, 2024.
The state, municipal and corporate bonds and asset-backed securities have contractual
maturities
which
range
from
seven
days
to
3.0
years.
The
U.S.
Treasury/Agencies
Notes
and
Bonds
have
contractual maturities which range from 2 months
to 1.8 years. These securities
are classified as available-for-
sale
and
are
recorded
as
Short-term
investments
and
Other
assets
on
the
accompanying
Condensed
Consolidated Balance Sheets. These
assets are carried
at fair value
with unrealized gains and
losses reported
net of
taxes in
Accumulated other
comprehensive income.
The asset-backed
securities are
bonds comprised
of auto loans and
bank credit cards that
carry AAA ratings. The
auto loan asset-backed securities
are backed
by static pools of auto loans that were originated and serviced
by captive auto finance units, banks or finance
companies.
The
bank
credit
card
asset-backed
securities
are
backed
by
revolving
pools
of
credit
card
receivables
generated
by
account
holders
of
cards
from
American
Express,
Citibank,
JPMorgan
Chase,
Capital One, and Discover.
Additionally, at May 4, 2024, the Company had $0.1 million of
corporate equities and deferred compensation
plan assets
of $8.7
million.
At February
3, 2024,
the Company
had $1.1
million of
corporate equities
and
deferred compensation plan assets
of $8.6 million. All
of these assets are recorded
within Other assets in
the
Condensed Consolidated Balance Sheets. See Note 7, Fair
Value Measurements.
RECENT ACCOUNTING PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
27
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
related
to
its
financing, investing and
cash management activities,
but the Company
does not
believe such exposure
is
material.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.