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
information
contained
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations”
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 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
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)
23
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)
24
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
Six Months Ended
August 3, 2024
July 29, 2023
August 3, 2024
July 29, 2023
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
1.0
0.9
1.0
0.9
Total revenues
101.0
100.9
101.0
100.9
Cost of goods sold (exclusive of depreciation)
65.4
64.9
64.8
64.5
Selling, general and administrative (exclusive
of depreciation)
34.9
34.0
33.6
33.3
Depreciation
1.4
1.4
1.3
1.3
Interest and other income
(1.0)
(0.7)
(2.2)
(0.6)
Income before income taxes
0.4
1.4
3.6
2.4
Net income
0.1
0.6
3.2
1.5
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
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
half
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 the
pressure on
our
customers’ disposable
income adversely
impacted the
first half
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
increased
the
daily
transits
and
the
permissible
draft
of
vessels,
raising
the
number
of
transits
to
95%
of
pre-drought
operations.
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 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
quarter were
$166.9 million
compared to last
year’s second
quarter sales
of
$181.2
million,
an
8%
decrease.
The
Company’s
sales
decrease
in
the
second
quarter
of
fiscal
2024
was
primarily due
to a
2% decrease
in same-store
sales and
store closures.
For the
six months
ended August
3,
2024,
total
retail
sales
were
$342.2
million
compared
to
last
year’s
comparable
six
month
sales
of
$371.5
million, an
8% decrease.
The decrease
in sales
in the
first six
months of
fiscal 2024
was due
primarily to
a
4% decrease in same-store sales and store closures. 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
same-store
sales
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
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% of total sales for
the six
months ended
August 3,
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
and
layaway
fees),
were
$168.6
million
and
$345.7
million
for
the
three
and
six
months
ended
August 3, 2024,
compared to $182.9
million and $374.9
million for the
three and six
months ended July
29,
2023, respectively. The
Company operated
1,166 stores
at August
3, 2024
compared to 1,247
stores at
July
29, 2023.
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.
Credit
revenue
of
$0.7
million
represented
0.4%
of
total
revenues
in
the
second
quarter
of
fiscal
2024,
compared to
2023 credit
revenue of
$0.7 million
or 0.4%
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
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
ended
August
3,
2024,
respectively,
compared
to
$1.7
million
and
$3.4
million
for
the
prior
year’s
comparable three and six month periods. The slight increase in Other revenue for
the first six months was due
to increases
in gift
card breakage
income and
finance charges
and late
fees associated
with the
Company’s
proprietary credit card, partially offset by a
decrease in e-commerce shipping revenue.
Cost of
goods sold
was $109.1
million, or
65.4% of
retail sales
and $221.6
million, or
64.8% of retail
sales
for the
three and
six months
ended August
3, 2024,
respectively, compared
to $117.6
million, or
64.9% of
retail
sales and
$239.7
million,
or 64.5%
of retail
sales
for the
comparable three
and six
month
periods of
fiscal 2023.
The overall increase
in cost of
goods sold as
a percent of
retail sales for
the second quarter
and
first
six
months
of
fiscal
2024
versus
the
comparable
three
and
six
month
periods
of
fiscal
2023
resulted
primarily from
deleveraging of
occupancy and
buying costs
and higher
distribution costs,
partially offset
by
higher
selling
margins.
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
9.1% to $57.8
million for the
second quarter
of fiscal
2024 and
by 8.5% to
$120.6 million
for
the
first
six
months
of
fiscal
2024,
compared
to
$63.6
million
and
$131.8
million
for
the
prior
year’s
comparable
three
and
six
months
of
fiscal
2023,
respectively.
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,
bank
and
credit
card
processing
fees.
SG&A
expenses
were
$58.2
million,
or
34.9%
of
retail
sales
and
$114.9
million,
or
33.6%
of
retail
sales
for
the
second quarter and first six months of fiscal 2024, respectively, compared to $61.6 million, or
34.0% of retail
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
2024 was
primarily
due
to
lower
payroll,
advertising
and
equity
compensation
expenses,
partially
offset
by
higher
insurance expense and expenses
related to the startup of
our DC automation
project which will continue
into
the third quarter.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
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
and first
six months
of fiscal
2024, respectively,
compared to
$2.5 million,
or 1.4%
of retail
sales and $4.9
million or 1.3%
of retail sales
for the comparable
three and six
month periods of
fiscal 2023,
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
and
$2.2
million,
or
0.6%
of
retail
sales
for
the
comparable
three
and
six
month
periods
of
fiscal
2023,
respectively.
The increase for the second quarter of fiscal 2024 compared to fiscal 2023 was
primarily due to
higher
interest
earned
on
the
Company’s
investments.
The
increase
for
the
first
six
months
of
fiscal
2024
compared to
fiscal 2023
was primarily
due to
a $3.2
million net
gain on
sale of
land held
for investment
in
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,
compared to
a tax
expense of
$1.3 million
and $3.5
million for
the comparable
three
and six month
periods of
fiscal 2023,
respectively.
The effective
income tax
rate for
the first
six months
of fiscal 2024
was 10.5% compared to
38.5% for the
first six months of
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.
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 during the first six months of fiscal 2024 was $8.8 million as compared
to $21.6
million provided
in the
first six
months of
fiscal 2023.
The decrease
in cash
provided by
operating
activities of $12.8 million
for the first six
months of fiscal 2024
as compared to the
first six months of
fiscal
2023 was
primarily attributable
to the
relative change
in inventory
from year-end
to the
second quarter
for
both years
and a
decrease to
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
the second
quarter for both years.
At August 3, 2024, the Company had working capital of $69.9 million compared to
$55.1 million at February
3, 2024.
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.
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, 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
(CONTINUED)
28
credit facility was zero at August 3, 2024
due to no outstanding borrowings.
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
was
primarily
due
to
finishing
projects
related
to
investments
in
the
distribution
center
and
information
technology.
For
the
full
fiscal
2024
year,
the
Company
expects
to
invest
approximately
$7.0
million
for
capital expenditures.
Net cash provided by
investing activities totaled $6.7
million in the first six
months of fiscal 2024
compared
to $23.8
million net
cash provided
in the comparable
period of
2023.
The decrease in
net cash
provided by
investing activities
in 2024
was primarily
due to
higher purchases
of short-term
investments, partially
offset
by lower sales of short-term investments,
lower capital expenditures and sale
of other assets.
Net cash
used in
financing activities
totaled $9.1
million in
the first
six months
of fiscal
2024 compared
to
$9.3
million
used
in
the
comparable
period
of
fiscal
2023.
The
decrease
in
net
cash
used
in
financing
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
per share.
As
of
August
3,
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 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.
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
29
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
based
on
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.