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Item 2. Management’s Discussion and Analysis

2024-08-29 compared with 2024-05-30 · 305 added, 247 removed, 176 unchanged (76% of the section changed)

2 unchanged sentences

FORWARD-LOOKING INFORMATION:

“Management’s

“forward-looking”

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operations and financial condition and

statements of plans or

intentions regarding new store development

(5) statements

statements of plans or intentions

regarding new store development

contingencies.

5 unchanged sentences

“could,” “would,” “should”

materially from

forward-looking

24 unchanged sentences

responses to,

development strategy to

store openings and

our ability of

underperformance

other factors

public health

threats (including

COVID-19 pandemic),

ended February

changing fashion trends and consumer demands;

our ability to increase new store openings and the 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, acts of war or aggression

similar conditions

merchandise supply

due to shifts

in market demand, including

the ability to

liquidate excess inventory at

anticipated margins;

adverse developments

or volatility

affecting the

financial services

financial markets;

factors discussed under

“Risk Factors” in

supplemented,

other reports

Securities and

undertake, and

any obligation

such forward-looking information contained

in this report,

result of new

information, future

events, or otherwise.

Exchange Commission

forward-looking

information contained in this report, whether as a result of new information,

future events, or otherwise.

THE CATO CORPORATION

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Three Months Ended

April 29, 2023

Six Months Ended

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Total retail sales

2 unchanged sentences

Cost of goods sold (exclusive of depreciation)

Selling, general and administrative (exclusive of depreciation)

Selling, general and administrative (exclusive

of depreciation)

Interest and other income

4 unchanged sentences

RESULTS OF OPERATIONS

Discussion and

Financial Condition

of Operations

understanding

“Financial Statements” section of this Quarterly Report on Form 10-Q, as well as our 2023

Annual Report

on Form 10-K.

condition and results of

We recommend reading

this MD&A in conjunction

with our Condensed

Consolidated Financial

Statements and

statements included in

the “Financial

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

prolonged and persistently high

inflation rates, especially related

to housing and

fuel, as well as

high interest

interest rates.

have adversely

availability and cost

of credit for

interest rates

have adversely affected

the availability and

credit for our

customers, including

revolving credit

negatively impact

disposable income.

Our customers’

willingness to

negatively impacted

these inflationary pressures and high interest

continued inflation and

high interest

rates negatively

impacted the first

likely continue

consumer behavior and,

by extension, our

results of operations

and financial condition during the remainder of

be negatively

impacted by these inflationary pressures and high interest rates.

customers’ disposable

income adversely

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

drought conditions

surrounding the

approximately 37%

containers carried by container

ships and increased our

costs in the first quarter.

During the second quarter,

Canal authority

plans to increase

permissible draft

vessels depending on weather

The hostilities affecting

the region surrounding

the Suez Canal are

causing container

travel longer

distances around

is increasing

times for merchandise and our costs

to ship these goods as well as

decreasing the pool of containers available.

incrementally improve

conditions allow

restrictions, we

conditions will

likely continue

of operations

and financial

condition for the foreseeable future.

Comparison of First Quarter of 2024

Total retail sales for the first quarter

were $175.3 million compared to

last year’s first quarter sales of

closed in the past 12 months, partially offset by sales from stores opened in the past 12

aforementioned

customers’ disposable income, as well

as lower average sales per transaction.

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

The method of

traverses through the

Panama Canal or

drought conditions experienced

surrounding the Panama

Canal reduced

by approximately

also reduced the

permissible draft of

vessels transiting the

Panama Canal, which reduced

the volume and

containers carried

increased our

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

as decreasing the pool of

containers available.

Both of these situations have negatively

impacted the first

six months of 2024.

Though conditions in the Panama Canal have incrementally improved, 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 the Three and Six

Months ended August 3, 2024

with July 29, 2023

Total retail sales

for the second

$166.9 million

compared to last

year’s second

quarter sales

primarily due

in same-store

store closures.

4% decrease in same-store sales and store closures.

Same-store sales include stores that have been open more

THE CATO CORPORATION

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CONDITION AND RESULTS OF OPERATIONS

retail industry.

comparable to similarly titled measures reported by

other companies.

E-commerce sales were

less than 5.0%

revenues, comprised

of retail sales

and other revenue

(principally finance

charges and late

$177.1 million for the first quarter ended May 4, 2024, compared to $192.1 million for the first

quarter ended

operated 1,171

stores at May

similarly titled measures reported by other

E-commerce sales were less than

5% of total sales for

same-store sales

Total revenues,

revenue (principally

finance charges

customer accounts

August 3, 2024,

compared to $182.9

stores at the

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,

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

million and $374.9

million for the

comparable first

The slight increase

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

merchandise costs (net of discounts and

allowances), buying costs, distribution costs, occupancy costs,

payroll-related

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

depreciation)

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.

expenses were

three and six

months ended July

2023, respectively.

Company operated

compared to 1,247

During the first six months of fiscal 2024, the Company closed 12 stores.

The Company currently

expects to close approximately 65 stores

in total in fiscal 2024.

interest earned on the Company’s private label credit card portfolio and related fee income.

Related expenses

principally include payroll,

postage and other

administrative expenses and

totaled $0.4 million

in the second

quarter of fiscal 2024, compared to

last year’s second quarter expense of

$0.4 million.

Other revenue, a component of total revenues, was $1.7 million and $3.5 million for the

three and six months

respectively,

comparable three and six month periods.

The slight increase in Other revenue for

the first six months was due

card breakage

finance charges

fees associated

proprietary credit card, partially offset by a

decrease in e-commerce shipping revenue.

64.8% of retail

respectively, compared

comparable three

The overall increase

goods sold as

retail sales for

the first quarter of fiscal 2023.

SG&A expense is lower in the first quarter of fiscal 2024 compared

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

the second quarter

primarily from

deleveraging of

occupancy and

distribution costs,

partially offset

buying costs, distribution costs, occupancy costs, freight and inventory shrinkage.

Net merchandise costs and

in-bound freight

and distribution

costs include

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)

9.1% to $57.8

million for the

second quarter

$120.6 million

respectively.

comparable to those of other entities.

Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related

second quarter and first six months of fiscal 2024, respectively, compared to $61.6 million, or

34.0% of retail

sales for the

first quarter of

decrease in depreciation

was attributable to older stores being

fully depreciated.

primarily due to a $3.2 million net

gain on sale of land held for

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

sales and $123.6 million, or 33.3% of retail sales for the prior year’s comparable three and

six month periods,

respectively.

The decrease in SG&A expenses for the

second quarter and first six months of fiscal

insurance expense and expenses

related to the startup of

our DC automation

project which will continue

the third quarter.

THE CATO CORPORATION

1 unchanged sentence

CONDITION AND RESULTS OF OPERATIONS

allowance against

Depreciation expense was $2.3 million, or 1.4% of retail sales and $4.4 million, or 1.3% of

retail sales for the

second quarter

2024, respectively,

$2.5 million,

sales and $4.9

million or 1.3%

of retail sales

for the comparable

three and six

month periods of

respectively.

Interest and other income was $1.7 million, or 1.0% of retail sales and $7.6 million, or 2.2% of retail sales for

the three and six months ended August

3, 2024, respectively, compared to $1.3 million,

or 0.7% of retail sales

respectively.

The increase for the second quarter of fiscal 2024 compared to fiscal 2023 was

primarily due to

was primarily

for investment

addition to higher interest earned

on the Company’s investments.

Income tax expense was $0.6 million and $1.3 million for the second quarter and first six months of fiscal

2024, respectively,

the comparable

and six month

respectively.

The effective

of fiscal 2024

was 10.5% compared to

38.5% for the

first six months of

The decrease in

carryforwards

differential and lower state income taxes.

income taxes.

LIQUIDITY, CAPITAL

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capital expenditures for the next

primarily attributable to the relative change

in inventory from year-end to the

first quarter for both years and

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,

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

borrowings of

$35.0 million

any revocable

credit related

covenants and

limitations, including

the maintenance

financial ratios.

minimum EBITDAR

coverage ratio

receivables included

the calculation of

the quarter ended

after giving effect

Cash provided by operating activities during the first six months of fiscal 2024 was $8.8 million as compared

million provided

activities of $12.8 million

for the first six

months of fiscal 2024

as compared to the

first six months of

primarily attributable

relative change

from year-end

second quarter

2024 net income

for non-operating

gains on sale

of assets held

for investment,

partially offset by higher net income and the relative change of accounts payable from year-end to

quarter for both years.

At August 3, 2024, the Company had working capital of $69.9 million compared to

$55.1 million at February

The increase in working capital was primarily attributable to a decrease in current lease liability and

an increase in cash, partially offset

by a decrease in inventory

and short-term investments.

Company amended the

revolving credit agreement to

modify a definition used

in calculating the

minimum EBITDAR coverage ratio to add back certain income tax receivables included in the calculation of

quarter ended

giving effect

amendment, the

in compliance

compliance with the

credit agreement.

no borrowings

outstanding, nor

availability,

average interest rate under the credit facility was zero at May 4, 2024

were no borrowings

outstanding, nor any

outstanding letters of

credit that reduced borrowing availability, as of August 3, 2024.

The weighted average interest rate under the

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

credit facility was zero at August 3, 2024

due to no outstanding borrowings.

center, as well

store openings in

the first quarter

of fiscal 2024.

fiscal 2024 year,

Company expects

Expenditures for property and equipment totaled $4.8 million in the first six months of fiscal 2024, compared

to $8.5 million in last fiscal

year’s first six months.

The decrease in

expenditures for property and equipment

approximately

capital expenditures.

including distribution

automation projects.

compared to $15.3 million provided in the comparable period of fiscal 2023.

The decrease is primarily due

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 provided by

investing activities totaled $6.7

million in the first six

months of fiscal 2024

cash provided

in the comparable

The decrease in

investing activities

was primarily

higher purchases

of short-term

investments, partially

by lower sales of short-term investments,

lower capital expenditures and sale

of other assets.

financing activities

On May 23, 2024, the Board of

2024 compared

activities in fiscal 2024 was primarily

due to lower stock repurchases.

On August 29, 2024, the Board of

Directors maintained the quarterly dividend at $0.17

0.17 per share.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

authorizations

7 unchanged sentences

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

Treasury/Agencies

contractual maturities which range from 2 months

to 1.8 years.

These securities

are classified as available-for-

governmental debt

securities held

accounts with

underlying ratings

contractual maturities which range from

six days to 2.9 years.

Treasury/Agencies Notes and

available-for-sale and are

Short-term investments

the respective

Consolidated Balance Sheets.

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Capital One, and Discover.

Additionally, at May 4, 2024, the Company had $0.1 million of

corporate equities and deferred compensation

deferred compensation

During the six months ended August

3, 2024, the Company sold its

corporate equities.

deferred compensation plan assets

of $8.6 million.

of these assets are recorded

within Other assets in

Condensed Consolidated Balance Sheets.

See Note 7, Fair

Value Measurements.

11 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis