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 current
and
potentially
new
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 and negatively affect the Company’s
profitability,
financial
condition,
prospects,
and
ability
to
comply
with
its
debt
covenants;
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 (Loss) as a
percentage of total retail sales:
Three Months Ended
Nine Months Ended
November 2, 2024
October 28, 2023
November 2, 2024
October 28, 2023
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
1.1
1.0
1.0
0.9
Total revenues
101.1
101.0
101.0
100.9
Cost of goods sold (exclusive of depreciation)
71.2
67.5
66.7
65.4
Selling, general and administrative (exclusive
of depreciation)
40.0
39.4
35.5
35.1
Depreciation
1.9
1.6
1.5
1.4
Interest and other income
(1.8)
(1.0)
(2.1)
(0.7)
Loss before income taxes
(10.2)
(6.6)
(0.5)
(0.3)
Net loss
(10.4)
(3.9)
(0.8)
(0.1)
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 three quarters of fiscal 2024, due
to
prolonged and
persistently higher
prices caused
by high
inflation rates,
especially related
to
housing,
groceries
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.
Although
interest
rates
and
inflation
have
decreased,
we
believe
the
pressure
on
our
customers’
disposable
income adversely
impacted
the
first
three quarters
of
fiscal
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
in
Southeast
Asia,
and
traverses
through
the
Panama
Canal
or
the
Suez
Canal.
In
the
first
quarter
of
2024,
the
drought
conditions
experienced
in
the
region
surrounding
the
Panama
Canal
reduced
the
number
of
transits
by
approximately 37% and
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.
These
conditions improved as
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 in the
second quarter and back
to pre-drought
levels in
the third
quarter.
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.
The combination of
these situations
has negatively impacted
the first
nine months
of 2024.
In
addition,
the
third
quarter
was
impacted
by
later
shipments
in
part
due
to
congestion
at
certain
Asian
ports,
the
U.S.
port
strike
on
the
east
coast,
and
civil
unrest
in
some
Asian
countries
that
caused
merchandise to miss
its shipping windows.
Though conditions 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 Nine
Months ended November 2, 2024 with October
28, 2023
Total retail sales for the
third quarter were $144.6 million compared to
last year’s third quarter sales
of $156.7
million, an 8% decrease.
The Company’s sales
decrease in the third quarter
of fiscal 2024 was
primarily due
to
a
3%
decrease
in
same-store
sales
and
stores
closed
in
the
fourth
quarter
of
2023.
For
the
nine
months
ended
November
2,
2024,
total
retail
sales
were
$486.8
million
compared
to
last
year’s
comparable
nine
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
month sales of
$528.2 million, an
8% decrease. The
decrease in sales
in the first
nine 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
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 nine months ended
November 2, 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 $146.2
million and
$491.9 million
for the
three and
nine months ended November 2, 2024, compared to $158.3 million and $533.2
million for the three and nine
months
ended
October
28,
2023,
respectively.
The
Company
operated
1,167
stores
at
November
2,
2024
compared
to
1,245 stores
at
October
28,
2023.
During
the first
nine
months of
fiscal
2024, the
Company
opened one store
and closed
13 stores.
The Company currently
expects to
close approximately
65 stores
in
total in fiscal 2024.
Credit
revenue
of
$0.7
million
represented
0.5%
of
total
revenues
in
the
third
quarter
of
fiscal
2024,
compared to credit revenue of $0.7 million or 0.4% of total revenues in the third quarter of fiscal 2023. 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 third quarter
of fiscal 2024, compared to
last year’s third quarter expense of
$0.4 million.
Other
revenue,
a
component
of
total
revenues,
was
$1.5
million
and
$5.0
million
for
the
three
and
nine
months ended November 2, 2024, respectively, compared to $1.6 million and $5.0 million for the prior year’s
comparable three
and nine
month periods.
The slight
decrease in
Other revenue
for the
three months
ended
November
2,
2024
was
due
to
decreases
in
e-commerce
shipping
revenue
and
finance
charges
associated
with the Company’s proprietary credit
card, partially offset by an increase
in gift card breakage income.
Cost of
goods sold
was $103.0
million, or
71.2% of
retail sales
and $324.6
million, or
66.7% of retail
sales
for the three and
nine months ended November
2, 2024, respectively, compared
to $105.8 million, or
67.5%
of retail sales and $345.5 million, or 65.4% of retail sales for the comparable three and nine month periods of
fiscal 2023.
The overall increase in cost of goods sold as a percent of retail sales for the third
quarter and first
nine
months
of
fiscal
2024
versus
the
comparable
three
and
nine
month
periods
of
fiscal
2023
resulted
primarily from deleveraging of occupancy and buying costs and higher distribution and freight 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
18.1% to $41.7 million for the third quarter
of fiscal 2024 and by
11.1%
to
$162.3
million
for
the
first
nine
months
of
fiscal
2024,
compared
to
$50.9
million
and
$182.6
million for the
prior year’s comparable
three and nine
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 $57.9 million, or 40.0% of retail sales and $172.8 million, or 35.5% of retail sales for the
third
quarter and first nine months of
fiscal 2024, respectively, compared to $61.8
million, or 39.4% of retail sales
and
$185.3
million,
or 35.1%
of retail
sales
for the
prior
year’s
comparable three
and
nine
month periods,
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
respectively.
The decrease in SG&A
expenses for the third
quarter and first nine
months of fiscal 2024
was
primarily due to lower payroll,
advertising and insurance expenses, partially
offset by expenses related to the
startup of our distribution center automation project.
Depreciation expense was $2.7 million, or 1.9% of retail sales and $7.1 million, or 1.5% of
retail sales for the
third quarter
and first
nine months
of fiscal
2024, respectively,
compared to
$2.5 million,
or 1.6%
of retail
sales and $7.4 million or 1.4%
of retail sales for the comparable three
and nine month periods of fiscal
2023,
respectively.
Interest and other
income was $2.6
million, or 1.8%
of retail sales
and $10.2 million,
or 2.1% of
retail sales
for the
three and
nine months
ended November
2, 2024,
respectively, compared to
$1.5 million,
or 1.0%
of
retail sales and $3.8 million,
or 0.7% of retail sales for the
comparable three and nine month periods
of fiscal
2023, respectively.
The increase
for the
third quarter
of fiscal
2024 compared
to fiscal
2023 was
primarily
due
to
a
gain
on
the
disposal
of
the
Company’s
corporate
aircraft
and
higher
interest
earned
on
the
Company’s investments.
The increase
for the
first nine
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,
gain
on
the
disposal
of
the
Company’s corporate aircraft and higher interest
earned on the Company’s investments.
Income tax expense was
$0.3 million and $1.6 million
for the third quarter
and first nine months of fiscal
2024, respectively,
compared to
a tax
benefit of
$4.3 million
and $0.8
million for
the comparable
three
and
nine
month
periods
of
fiscal
2023,
respectively.
The
effective
income
tax
rate
for
the
first
nine
months
of
fiscal
2024
was
(67.5%)
compared
to
60.4%
for
the
first
nine
months
of
fiscal
2023.
The
increase in tax expense in
2024 is primarily due to
the valuation allowance against net
deferred tax assets
attributable to
U.S. federal
net operating
loss carryforwards
recorded in
the fourth
quarter of
2023 and
a
smaller release of reserves for uncertain tax positions.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company
believes that
its cash,
cash equivalents
and short-term
investments, together
with cash
flows
from operations, will be adequate to fund the Company’s regular operating requirements and expected capital
expenditures for the next 12
months.
Cash used in operating activities during the first nine months of fiscal 2024 was $13.3 million as compared
to
$11.7
million
provided
in
the
first
nine
months
of
fiscal
2023.
The
increase
in
cash
used
by
operating
activities
of
$25.0
million
for the
first
nine
months of
fiscal
2024
as
compared to
the
first nine
months of
fiscal 2023 was primarily attributable to the
relative change in inventory from year-end to
the third quarter for
both
years
and
a
subtraction
of
net
income
for
non-operating
gains
on
sale
of
assets
held
for
investment,
partially offset by the relative change
of accounts payable from year-end to
the third quarter for both years.
At
November
2,
2024,
the
Company
had
working
capital
of
$60.7
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
inventory,
partially
offset
by
a
decrease
in
short-term
investments,
cash
and
accounts receivable.
At November 2,
2024, the Company had
a 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
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
28
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.
On
November 1, 2024, the Company
amended the revolving credit agreement
to lower the minimum EBITDAR
coverage
ratio
and
the
corresponding
minimum
cash
and
investments
used
to
determine
the
EBITDAR
coverage ratio in exchange
for a secured position
in any future borrowings.
For the quarter ended
November
2, 2024,
after giving
effect to
the amendments,
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 November 2, 2024.
The weighted average interest rate under
the credit facility was zero at
November 2, 2024 due to
no outstanding borrowings.
Expenditures
for
property
and
equipment
totaled
$6.5
million
in
the
first
nine
months
of
fiscal
2024,
compared to
$10.3 million
in last
fiscal year’s
first nine
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
$21.5
million
in
the
first
nine
months
of
fiscal
2024
compared
to
$6.1
million
net
cash
provided
in
the
comparable
period
of
2023.
The
increase
in
net
cash
provided
by
investing
activities
in
2024
was
primarily
due
to
the
sale
of
other
assets,
lower
purchases
of
short-term investments,
and lower capital
expenditure spending,
partially offset
by lower sales
of short-term
investments.
Net cash used in financing activities totaled $12.6 million in the first nine months of fiscal
2024 compared to
$12.7 million used in the comparable period of fiscal 2023.
The slight decrease in net cash used in financing
activities in fiscal 2024 was primarily
due to lower stock repurchases, partially offset
by dividends paid.
As of November
2, 2024, the Company
had 442,831 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
U.S. Treasury/Agencies
notes and
bonds held
in managed
accounts with
underlying ratings
of A
or better
at November
2, 2024
and
February 3, 2024.
The state, municipal and corporate bonds have contractual maturities which range from 13
days to 2.9 years. The U.S. Treasury/Agencies notes and bonds have contractual maturities which range from
3
days
to
2.7
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.
At February
3,
2024, the
Company
had $1.1
million
of corporate
equities and
deferred
compensation
plan
assets of
$8.6 million.
At November
2, 2024,
the Company
had deferred
compensation plan
assets of
$9.1
million.
During the nine
months ended November
2, 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.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
29
RECENT ACCOUNTING PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
30
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.