CATO CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 (Dollars in thousands, except per share data) REVENUES Retail sales $ 166,934 $ 181,181 $ 342,206 $ 371,492 Other revenue (principally finance charges, late fees and layaway charges) 1,694 1,690 3,521 3,429 Total revenues 168,628 182,871 345,727 374,921 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 109,122 117,617 221,627 239,704 Selling, general and administrative (exclusive of depreciation shown below) 58,181 61,618 114,933 123,552 Depreciation 2,329 2,510 4,369 4,867 Interest and other income ( 1,742 ) ( 1,334 ) ( 7,563 ) ( 2,231 ) Costs and expenses, net 167,890 180,411 333,366 365,892 Income before income taxes 738 2,460 12,361 9,029 Income tax expense 643 1,333 1,292 3,475 Net income $ 95 $ 1,127 $ 11,069 $ 5,554 Basic earnings per share $ 0.01 $ 0.06 $ 0.54 $ 0.27 Diluted earnings per share $ 0.01 $ 0.06 $ 0.54 $ 0.27 Comprehensive income: Net income $ 95 $ 1,127 $ 11,069 $ 5,554 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of $ 50 and $ 156 for the three and six months ended July 29, 2023, respectively 676 167 ( 72 ) 522 Comprehensive income $ 771 $ 1,294 $ 10,997 $ 6,076 See notes to condensed consolidated financial statements (unaudited). 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) August 3, 2024 February 3, 2024 ASSETS (Dollars in thousands) Current Assets: Cash and cash equivalents $ 30,764 $ 23,940 Short-term investments 73,902 79,012 Restricted cash 3,562 3,973 Accounts receivable, net of allowance for customer credit losses of $ 674 and $ 705 at August 3, 2024 and February 3, 2024, respectively 29,772 29,751 Merchandise inventories 95,972 98,603 Prepaid expenses and other current assets 9,506 7,783 Total Current Assets 243,478 243,062 Property and equipment – net 63,975 64,022 Other assets 22,340 25,047 Right-of-Use assets – net 125,779 154,686 Total Assets $ 455,572 $ 486,817 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 84,623 $ 87,821 Accrued expenses 36,207 37,404 Accrued employee benefits and bonus 1,022 1,675 Accrued income taxes 646 - Current lease liability 51,091 61,108 Total Current Liabilities 173,589 188,008 Other noncurrent liabilities 14,573 14,475 Lease liability 72,348 92,013 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; 18,804,629 shares and 18,802,742 shares issued at August 3, 2024 and February 3, 2024, respectively 635 635 Convertible Class B common stock, $ 0.033 par value per share, 15,000,000 shares authorized; 1,763,652 shares shares issued at August 3, 2024 and February 3, 2024 59 59 Additional paid-in capital 127,951 126,953 Retained earnings 66,094 64,279 Accumulated other comprehensive income 323 395 Total Stockholders' Equity 195,062 192,321 Total Liabilities and Stockholders' Equity $ 455,572 $ 486,817 See notes to condensed consolidated financial statements (unaudited). 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended August 3, 2024 July 29, 2023 (Dollars in thousands) Operating Activities: Net income $ 11,069 $ 5,554 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,369 4,867 Provision for customer credit losses 338 248 Purchase premium and discount accretion of investments ( 577 ) ( 97 ) Gain on sale of assets held for investment ( 4,223 ) - Share-based compensation 840 2,192 Deferred income taxes - ( 832 ) Loss on disposal of property and equipment 96 1 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 1,041 ( 666 ) Merchandise inventories 2,631 19,338 Prepaid and other assets ( 1,891 ) ( 667 ) Operating lease right-of-use assets and liabilities ( 775 ) ( 1,001 ) Accrued income taxes 646 2,948 Accounts payable, accrued expenses and other liabilities ( 4,728 ) ( 10,306 ) Net cash provided by operating activities 8,836 21,579 Investing Activities: Expenditures for property and equipment ( 4,799 ) ( 8,470 ) Purchase of short-term investments ( 31,396 ) ( 14,497 ) Sales of short-term investments 37,703 46,777 Sales of other assets 5,165 - Net cash provided by investing activities 6,673 23,810 Financing Activities: Dividends paid ( 7,050 ) ( 6,962 ) Repurchase of common stock ( 2,237 ) ( 2,563 ) Proceeds from employee stock purchase plan 191 198 Net cash used in financing activities ( 9,096 ) ( 9,327 ) Net increase in cash, cash equivalents, and restricted cash 6,413 36,062 Cash, cash equivalents, and restricted cash at beginning of period 27,913 23,792 Cash, cash equivalents, and restricted cash at end of period $ 34,326 $ 59,854 Non-cash activity: Accrued other assets and property and equipment expenditures $ 721 $ 572 See notes to condensed consolidated financial statements (unaudited). 5 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — February 3, 2024 $ 694 $ 126,953 $ 64,279 $ 395 $ 192,321 Comprehensive income: Net income - - 10,974 - 10,974 Unrealized net losses on available-for-sale securities, net of deferred income tax expense of $0 - - - ( 748 ) ( 748 ) Dividends paid ($ 0.17 per share) - - ( 3,523 ) - ( 3,523 ) Class A common stock sold through employee stock purchase plan 1 189 - - 190 Share-based compensation issuances and exercises 13 - 5 - 18 Share-based compensation expense - ( 84 ) - - ( 84 ) Repurchase and retirement of treasury shares ( 14 ) - ( 2,223 ) - ( 2,237 ) Balance — May 4, 2024 $ 694 $ 127,058 $ 69,512 $ ( 353 ) $ 196,911 Comprehensive income: Net income - - 95 - 95 Unrealized net gains on available-for-sale securities, net of deferred income tax expense of $0 - - - 676 676 Dividends paid ($ 0.17 per share) - - ( 3,527 ) - ( 3,527 ) Class A common stock sold through employee stock purchase plan - 35 - - 35 Share-based compensation issuances and exercises - - - - - Share-based compensation expense - 858 14 - 872 Repurchase and retirement of treasury shares - - - - - Balance — August 3, 2024 $ 694 $ 127,951 $ 66,094 $ 323 $ 195,062 See notes to condensed consolidated financial statements (unaudited). 6 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — January 28, 2023 $ 691 $ 122,431 $ 104,709 $ ( 1,238 ) $ 226,593 Comprehensive income: Net income - - 4,428 - 4,428 Unrealized net gains on available-for-sale securities, net of deferred income tax expense of $ 107 - - - 355 355 Dividends paid ($ 0.17 per share) - - ( 3,455 ) - ( 3,455 ) Class A common stock sold through employee stock purchase plan - 195 - - 195 Share-based compensation issuances and exercises - - 3 - 3 Share-based compensation expense - 929 - - 929 Repurchase and retirement of treasury shares ( 8 ) - ( 2,259 ) - ( 2,267 ) Balance — April 29, 2023 $ 683 $ 123,555 $ 103,426 $ ( 883 ) $ 226,781 Comprehensive income: Net income - - 1,127 - 1,127 Unrealized net gains on available-for-sale securities, net of deferred income tax expense of $ 50 - - - 167 167 Dividends paid ($ 0.17 per share) - - ( 3,507 ) - ( 3,507 ) Class A common stock sold through employee stock purchase plan 1 31 - - 32 Share-based compensation issuances and exercises - - - - - Share-based compensation expense 12 1,212 3 - 1,227 Repurchase and retirement of treasury shares ( 1 ) - ( 293 ) - ( 294 ) Balance — July 29, 2023 $ 695 $ 124,798 $ 100,756 $ ( 716 ) $ 225,533 See notes to condensed consolidated financial statements (unaudited). THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 7 NOTE 1 - GENERAL : The condensed consolidated financial statements as of August 3, 2024 and for the twenty-six-week periods ended August 3, 2024 and July 29, 2023 have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown are unaudited. In the opinion of management, all adjustments considered necessary for a fair statement of the financial statements have been included. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for the entire year. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2024. Amounts as of February 3, 2024 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America. On February 16, 2024, the Company closed on the sale of land held for investment. The sale resulted in a net gain of $ 3.2 million and is included in Interest and other income in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income for the period ended August 3, 2024. Subsequent to the second quarter of the current fiscal year, the Company received $ 8.6 million from the insurance claim settlement and sale of its corporate jet. On August 29, 2024, the Board of Directors maintained the quarterly dividend at $ 0.17 per share. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 8 NOTE 2 - EARNINGS PER SHARE: Accounting Standard Codification (“ASC”) 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“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 Condensed Consolidated Statements of Income and Comprehensive Income. 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 the 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 income 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. Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 (Dollars in thousands) Numerator Net earnings $ 95 $ 1,127 $ 11,069 $ 5,554 Earnings (loss) allocated to non-vested equity awards 9 ( 54 ) ( 583 ) ( 292 ) Net earnings available to common stockholders $ 104 $ 1,073 $ 10,486 $ 5,262 Denominator Basic weighted average common shares outstanding 19,297,484 19,395,484 19,327,137 19,349,266 Diluted weighted average common shares outstanding 19,297,484 19,395,484 19,327,137 19,349,266 Net income per common share Basic earnings per share $ 0.01 $ 0.06 $ 0.54 $ 0.27 Diluted earnings per share $ 0.01 $ 0.06 $ 0.54 $ 0.27 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 9 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME: The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended August 3, 2024: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at May 4, 2024 $ ( 353 ) Other comprehensive income before reclassification 776 Gains reclassified from accumulated other comprehensive income (b) 100 Net current-period other comprehensive income 676 Ending Balance at August 3, 2024 $ 323 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 130 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net realized gains on available-for-sale securities. The tax impact of this reclassification was $ 30 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the six months ended August 3, 2024: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at February 3, 2024 $ 395 Other comprehensive income before reclassification 714 Gains reclassified from accumulated other comprehensive income (b) 786 Net current-period other comprehensive loss ( 72 ) Ending Balance at August 3, 2024 $ 323 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 1,022 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net realized gains on available-for-sale securities. The tax impact of this reclassification was $ 236 . THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 10 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED): The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended July 29, 2023: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at April 29, 2023 $ ( 883 ) Other comprehensive income before reclassifications 164 Gains reclassified from accumulated other comprehensive income (b) 3 Net current-period other comprehensive income 167 Ending Balance at July 29, 2023 $ ( 716 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 4 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net realized gains on available-for-sale securities. The tax impact of this reclassification was $ 1 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the six months ended July 29, 2023: 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 before reclassifications 519 Gains reclassified from accumulated other comprehensive income (b) 3 Net current-period other comprehensive income 522 Ending Balance at July 29, 2023 $ ( 716 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 4 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net realized gains on available-for-sale securities. The tax impact of this reclassification was $ 1 . THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 11 NOTE 4 – FINANCING ARRANGEMENTS: At August 3, 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 August 3, 2024, after giving effect to the amendment, the Company was in compliance with the credit agreement. There were no borrowings outstanding, no r any outstanding letters of credit that reduced borrowing availability, as of August 3, 2024. The weighted average interest rate under the credit facility was zero at August 3, 2024 due to no outstanding borrowings. NOTE 5 – REPORTABLE SEGMENT INFORMATION: The Company has determined that it has four operating segments, as defined under ASC 280 – Segment Reporting , including Cato, It’s Fashion, Versona 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 to have similar economic characteristics, products, production processes, clients 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 operates its women’s fashion specialty retail stores in 31 states as of August 3, 2024, principally in the southeastern United States. The Company offers its own credit card to its customers and all credit authorizations, payment processing and collection efforts are performed by separate wholly- owned subsidiaries of the Company. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 12 NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED): The following schedule summarizes certain segment information (in thousands): Three Months Ended Six Months Ended August 3, 2024 Retail Credit Total August 3, 2024 Retail Credit Total Revenues $ 167,954 $ 674 $ 168,628 Revenues $ 344,384 $ 1,343 $ 345,727 Depreciation 2,328 1 2,329 Depreciation 4,368 1 4,369 Interest and other income ( 1,742 ) - ( 1,742 ) Interest and other income ( 7,563 ) - ( 7,563 ) Income before income taxes 485 253 738 Income before income taxes 11,859 502 12,361 Capital expenditures 1,536 - 1,536 Capital expenditures 4,799 - 4,799 Three Months Ended Six Months Ended July 29, 2023 Retail Credit Total July 29, 2023 Retail Credit Total Revenues $ 182,213 $ 658 $ 182,871 Revenues $ 373,648 $ 1,273 $ 374,921 Depreciation 2,509 1 2,510 Depreciation 4,866 1 4,867 Interest and other income ( 1,334 ) - ( 1,334 ) Interest and other income ( 2,231 ) - ( 2,231 ) Income before income taxes 2,207 253 2,460 Income before income taxes 8,590 439 9,029 Capital expenditures 2,300 - 2,300 Capital expenditures 8,470 - 8,470 Retail Credit Total Total assets as of August 3, 2024 $ 417,112 $ 38,460 $ 455,572 Total assets as of February 3, 2024 448,488 38,329 486,817 The Company evaluates segment performance based on income before income taxes. The Company does not allocate certain corporate expenses or income taxes 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): Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Payroll $ 161 $ 142 $ 314 $ 276 Postage 115 109 217 210 Other expenses 144 154 309 348 Total expenses $ 420 $ 405 $ 840 $ 834 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 13 NOTE 6 – STOCK-BASED COMPENSATION: As of August 3, 2024, the Company’s 2018 Incentive Compensation Plan allows 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 following table presents the number of options and shares of restricted stock initially authorized and available for grant under this plan as of August 3, 2024: 2018 Plan Options and/or restricted stock initially authorized 4,725,000 Options and/or restricted stock available for grant 2,753,001 In accordance with ASC 718 – Compensation–Stock Compensation , the fair value of current 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 the related vesting periods. As of August 3, 2024 and February 3, 2024, there was $ 9,148,000 and $ 9,334,000 , respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted- average vesting period of 2.4 years and 2.1 years, respectively. The total compensation expense during the three and six months ended August 3, 2024 was $ 872,000 and $ 806,000 , respectively, compared to a total compensation expense of $ 1,230,000 and $ 2,158,000 for the three and six months ended July 29, 2023, respectively. This compensation expense is classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income . The following summary shows the changes in the number of shares of unvested restricted stock outstanding during the six months ended August 3, 2024: Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at February 3, 2024 1,123,873 $ 11.32 Granted 386,900 4.80 Vested ( 232,696 ) 13.22 Forfeited or expired ( 18,296 ) 9.17 Restricted stock awards at August 3, 2024 1,259,781 $ 8.98 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 14 NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED): 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 six months ended August 3, 2024 and July 29, 2023, the Company sold 38,910 and 26,127 shares to employees at an average discount of $ 0.87 and $ 1.31 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15 % discount given under the Employee Stock Purchase Plan was approximately $ 34,000 for each of the six months ended August 3, 2024 and July 29, 2023. This compensation expense is classified as a component of Selling, general and administrative expenses. NOTE 7 – FAIR VALUE MEASUREMENTS: The following tables set forth information regarding the Company’s financial assets and liabilities that are measured at fair value (in thousands) as of August 3, 2024 and February 3, 2024: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable August 3, 2024 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 3,943 $ - $ 3,943 $ - Corporate Bonds 50,558 - 50,558 - U.S. Treasury/Agencies Notes and Bonds 18,430 - 18,430 - Cash Surrender Value of Life Insurance 8,886 - - 8,886 Asset-backed Securities (ABS) 971 - 971 - Total Assets $ 82,788 $ - $ 73,902 $ 8,886 Liabilities: Deferred Compensation $ ( 8,604 ) $ - $ - $ ( 8,604 ) Total Liabilities $ ( 8,604 ) $ - $ - $ ( 8,604 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 15 Quoted 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 ) 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 August 3, 2024 and February 3, 2024. The state, municipal and corporate bonds and asset-backed securities have contractual maturities which range from six days to 2.9 years. The U.S. Treasury/Agencies Notes and Bonds have contractual maturities which range from 14 days to 3.0 years. These securities are classified as available-for-sale and are recorded as Short-term investments and Other assets on the respective 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. At February 3, 2024, the Company had $ 1.1 million of corporate equities and deferred compensation plan assets of $ 8.6 million. At August 3, 2024, the Company had deferred compensation plan assets of $ 8.9 million. During the six months ended August 3, 2024, the Company sold its corporate equities. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets. Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate, state 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 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 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 16 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 Condensed Consolidated Balance Sheet. These funds are designed to mirror 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 six months ended August 3, 2024 and the year ended February 3, 2024 (in thousands): Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at February 3, 2024 $ 8,586 Redemptions - Additions - Total gains or (losses): Included in interest and other income (or changes in net assets) 300 Ending Balance at August 3, 2024 $ 8,886 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at February 3, 2024 $ ( 8,654 ) Redemptions 543 Additions ( 121 ) Total (gains) or losses: Included in interest and other income (or changes in net assets) ( 372 ) Ending Balance at August 3, 2024 $ ( 8,604 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 17 Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 28, 2023 $ 9,274 Redemptions ( 1,168 ) Additions - 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 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 18 NOTE 8 – RECENT 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 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 (“CODM”) and how the CODM 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. NOTE 9 – INCOME TAXES: The Company had an effective tax rate for the first six months of 2024 of 10.5 % compared to 38.5 % for the first six months of 2023. Income tax expense for the first six months decreased to $ 1.3 million in fiscal 2024 from $ 3.5 million in fiscal 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. NOTE 10 – 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 the Company’s 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 condensed 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. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 19 NOTE 11 – 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. Gift cards do not have expiration dates. Layaway transactions are recorded as deferred revenue until the customer takes possession or forfeits the merchandise. 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. 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. 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. During the three and six months ended August 3, 2024, the Company estimated customer credit losses of $ 166,000 and $ 338,000 , respectively, compared to $ 151,000 and $ 272,000 for the three and six months ended July 29, 2023, respectively. Sales purchased on the Company’s proprietary credit card for the three and six months ended August 3, 2024 were $ 5.6 million and $ 11.3 million, respectively, compared to $ 5.9 million and $ 11.7 million for the three and six months ended July 29, 2023, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): Balance as of August 3, 2024 February 3, 2024 Proprietary Credit Card Receivables, net $ 10,788 $ 10,909 Gift Card Liability $ 6,534 $ 8,143 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 20 NOTE 12 – 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 up to 10 years based on the estimated likelihood of renewal. Some include options to extend the lease term for up to five years , and some 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): Three Months Ended August 3, 2024 July 29, 2023 Operating lease cost (a) $ 16,808 $ 17,597 Variable lease cost (b) $ 463 $ 504 (a) Includes right-of-use asset amortization of ($ 0.2 ) million and ($ 0.3 ) million for the three months ended August 3, 2024 and July 29, 2023, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. Six Months Ended August 3, 2024 July 29, 2023 Operating lease cost (a) $ 33,810 $ 35,675 Variable lease cost (b) $ 960 $ 1,098 (a) Includes right-of-use asset amortization of ($ 0.4 ) million and ($ 0.6 ) million for the six months ended August 3, 2024 and July 29, 2023, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2024 AND JULY 29, 2023 21 Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows (in thousands): Operating cash flow information: Three Months Ended August 3, 2024 July 29, 2023 Cash paid for amounts included in the measurement of lease liabilities $ 15,481 $ 16,679 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 913 $ 999 Six Months Ended August 3, 2024 July 29, 2023 Cash paid for amounts included in the measurement of lease liabilities $ 31,088 $ 34,024 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 1,357 $ 2,903 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: As of August 3, 2024 July 29, 2023 Weighted-average remaining lease term 1.8 years 2.0 years Weighted-average discount rate 4.74 % 3.26 % Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2024 (a) $ 32,232 2025 45,606 2026 29,710 2027 16,962 2028 8,034 Thereafter 892 Total lease payments 133,436 Less: Imputed interest 9,997 Present value of lease liabilities $ 123,439 (a) Excluding the six months ended August 3, 2024 22 THE CATO CORPORATION