CATO CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended May 3, 2025 May 4, 2024 (Dollars in thousands, except per share data) REVENUES Retail sales $ 168,419 $ 175,272 Other revenue (principally finance charges, late fees and layaway charges) 1,823 1,827 Total revenues 170,242 177,099 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 109,318 112,505 Selling, general and administrative (exclusive of depreciation shown below) 55,325 56,752 Depreciation 2,564 2,040 Interest and other income ( 1,202 ) ( 5,821 ) Costs and expenses, net 166,005 165,476 Income before income taxes 4,237 11,623 Income tax expense 928 649 Net income $ 3,309 $ 10,974 Basic earnings per share $ 0.17 $ 0.54 Diluted earnings per share $ 0.17 $ 0.54 Comprehensive income: Net income $ 3,309 $ 10,974 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of $ 0 for each of the three months 38 ( 748 ) ended May 3, 2025 and May 4, 2024 Comprehensive income $ 3,347 $ 10,226 See notes to condensed consolidated financial statements (unaudited). 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) May 3, 2025 February 1, 2025 (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents $ 31,346 $ 20,279 Short-term investments 48,609 57,423 Restricted cash 2,675 2,799 Accounts receivable, net of allowance for customer credit losses of $ 584 and $ 581 at May 3, 2025 and February 1, 2025, respectively 26,830 24,540 Merchandise inventories 109,430 110,739 Prepaid expenses and other current assets 7,560 7,406 Total Current Assets 226,450 223,186 Property and equipment – net 58,767 60,326 Other assets 19,863 19,979 Right-of-Use assets – net 135,726 148,870 Total Assets $ 440,806 $ 452,361 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 90,876 $ 88,641 Accrued expenses 38,253 41,717 Accrued bonus and benefits 326 326 Accrued income taxes 545 - Current lease liability 52,524 57,555 Total Current Liabilities 182,524 188,239 Other noncurrent liabilities 13,293 13,485 Lease liability 80,072 88,341 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; 17,973,355 and 18,313,929 shares issued at May 3, 2025 and February 1, 2025, respectively 607 619 Convertible Class B common stock, $ 0.033 par value per share, 15,000,000 shares authorized; 1,763,652 shares issued at May 3, 2025 and February 1, 2025 59 59 Additional paid-in capital 129,786 129,530 Retained earnings 34,274 31,935 Accumulated other comprehensive income 191 153 Total Stockholders' Equity 164,917 162,296 Total Liabilities and Stockholders’ Equity $ 440,806 $ 452,361 See notes to condensed consolidated financial statements (unaudited). 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended May 3, 2025 May 4, 2024 (Dollars in thousands) Operating Activities: Net income $ 3,309 $ 10,974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,564 2,040 Provision for customer credit losses 215 171 Purchase premium and premium amortization of investments ( 81 ) ( 136 ) Gain on sale of assets held for investment ( 34 ) ( 4,093 ) Share-based compensation 193 ( 38 ) (Gain) Loss on disposal of property and equipment ( 30 ) 65 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable ( 2,505 ) ( 1,836 ) Merchandise inventories 1,309 ( 2,714 ) Prepaid and other assets ( 38 ) 27 Operating lease right-of-use assets and liabilities ( 156 ) ( 435 ) Accrued income taxes - 518 Accounts payable, accrued expenses and other liabilities ( 878 ) 1,163 Net cash provided by operating activities 3,868 5,706 Investing Activities: Expenditures for property and equipment ( 1,019 ) ( 3,261 ) Purchase of short-term investments ( 2,262 ) ( 8,572 ) Sales of short-term investments 11,195 21,413 Sales of other assets 34 5,034 Net cash provided by investing activities 7,948 14,614 Financing Activities: Dividends paid - ( 3,523 ) Repurchase of common stock ( 935 ) ( 2,237 ) Proceeds from employee stock purchase plan 62 161 Net cash used by financing activities ( 873 ) ( 5,599 ) Net increase in cash, cash equivalents, and restricted cash 10,943 14,721 Cash, cash equivalents, and restricted cash at beginning of period 23,078 27,913 Cash, cash equivalents, and restricted cash at end of period $ 34,021 $ 42,634 Non-cash activity: Accrued other assets and property and equipment expenditures $ 284 $ 491 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 (Loss) Equity (Dollars in thousands, except per share data) Balance — February 1, 2025 $ 678 $ 129,530 $ 31,935 $ 153 $ 162,296 Comprehensive income: Net income - - 3,309 - 3,309 Unrealized net gain on available-for-sale securities, net of deferred income tax benefit of $ 0 - - - 38 38 Class A common stock sold through employee stock purchase plan - 72 - - 72 Share-based compensation issuances and exercises ( 2 ) - - - ( 2 ) Share-based compensation expense - 184 ( 73 ) - 111 Repurchase and retirement of treasury shares ( 10 ) - ( 897 ) - ( 907 ) Balance — May 3, 2025 $ 666 $ 129,786 $ 34,274 $ 191 $ 164,917 Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income (Loss) Equity (Dollars in thousands, except per share data) Balance — February 3, 2024 $ 694 $ 126,953 $ 64,279 $ 395 $ 192,321 Comprehensive income: Net income - - 10,974 - 10,974 Unrealized net loss on available-for-sale securities, net of deferred income tax benefit 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 See notes to condensed consolidated financial statements (unaudited). THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6 NOTE 1 - GENERAL : The condensed consolidated financial statements as of May 3, 2025 and for the three months ended May 3, 2025 and May 4, 2024 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 1, 2025. Amounts as of February 1, 2025 have been derived from the audited annual financial statements, 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 May 4, 2024. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7 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 May 3, 2025 May 4, 2024 (Dollars in thousands, except per share data) Numerator Net earnings $ 3,309 $ 10,974 Earnings allocated to non-vested equity awards ( 192 ) ( 557 ) Net earnings available to common stockholders $ 3,117 $ 10,417 Denominator Basic weighted average common shares outstanding 18,684,837 19,356,789 Diluted weighted average common shares outstanding 18,684,837 19,356,789 Net income per common share Basic earnings per share $ 0.17 $ 0.54 Diluted earnings per share $ 0.17 $ 0.54 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8 NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME: The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (loss) (in thousands) for the three months ended May 3, 2025: Changes in Accumulated Other Comprehensive Income (Loss) (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at February 1, 2025 $ 153 Other comprehensive income (loss) before reclassification 72 Amounts reclassified from accumulated other comprehensive income (b) ( 34 ) Net current-period other comprehensive income (loss) 38 Ending Balance at May 3, 2025 $ 191 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. (b) Includes $ 34 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 $ 0 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (loss) (in thousands) for the three months ended May 4, 2024: Changes in Accumulated Other Comprehensive Income (Loss) (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at February 3, 2024 $ 395 Other comprehensive income (loss) before reclassification ( 1,434 ) Amounts reclassified from accumulated other comprehensive income (b) 686 Net current-period other comprehensive income (loss) ( 748 ) Ending Balance at May 4, 2024 $ ( 353 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to accumulated other comprehensive income. + (b) Includes $ 892 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was $ 206 . THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9 NOTE 4 – FINANCING ARRANGEMENTS: On March 13, 2025, the Company, as borrower, and certain other domestic subsidiaries, as borrowers and guarantors, entered into a Credit Agreement (the “ABL Credit Agreement”) and related loan documents, by and among the Company, certain other of the Company’s domestic subsidiaries, and Wells Fargo Bank, National Association, as the lender (the “Lender”), to establish an asset-based revolving credit facility (the “ABL Facility”) in an amount up to $ 35.0 million. The proceeds from the ABL Facility may be used to provide funding for ongoing working capital and general corporate purposes. The ABL Credit Agreement is committed through May 2027 and is secured primarily by inventory and third-party credit card receivables. There were no borrowings outstanding and the availability under the facility was $ 30.0 million before giving effect to a $ 3.0 million outstanding letter of credit that reduced borrowing availability to $ 27.0 million as of May 3, 2025. The weighted average interest rate under the credit facility was zero at May 3, 2025 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 distributed to customers in a similar manner. The Company operates its women’s fashion specialty retail stores in 31 states as of May 3, 2025, 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 a wholly-owned subsidiary of the Company. The Company does not allocate certain corporate expenses to the Credit segment. The Company’s President and Chief Executive Officer is the Company’s chief operating decision maker (“CODM”). The structure described above reflects the manner in which the CODM regularly assesses information for decision-making purposes, including the allocation of resources. The Company also provides corporate services, including finance, information technology, and corporate administration, to its segments which are fully allocated to the retail segment. Interest and other income from assets held for investment and sale are not included in assessing the segments’ performance and therefore not allocated to either segment. The CODM manages and evaluates the segments’ operating performance based on segment sales, expenses, and profit or loss from operations before income taxes as presented in the Company’s annual budget and forecasting process, as well as monthly analyses of budget-to-actual and prior year variances. Segment THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10 expenses and other items primarily include cost of goods sold, selling, general and administrative expenses, depreciation and interest and other income. Assessment and approval of all capital expenditures are determined to be in support of and based on the needs of the retail segment; however, the CODM does not evaluate performance or allocate resources based on segment asset balances and, therefore, total segment assets are not presented in the tables below. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 1 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2025. The Company evaluates performance based on profit or loss from operations before income taxes. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11 NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED): The following schedule summarizes certain segment information (in thousands): Three Months Ended May 3, 2025 Retail Credit Total Revenues $ 169,577 $ 665 $ 170,242 Cost of goods sold 109,318 - 109,318 Selling, general, and administrative (a) 39,159 387 39,546 Corporate overhead 15,779 - 15,779 Depreciation 2,564 - 2,564 Interest and other income ( 105 ) ( 303 ) ( 408 ) Income (loss) before income taxes $ 2,862 $ 581 $ 3,443 Corporate interest and other income ( 794 ) Income (loss) before income taxes $ 4,237 Capital expenditures $ 1,019 $ - $ 1,019 Three Months Ended May 4, 2024 Retail Credit Total Revenues $ 176,430 $ 669 $ 177,099 Cost of goods sold 112,505 - 112,505 Selling, general, and administrative (a) 40,968 408 41,376 Corporate overhead 15,376 - 15,376 Depreciation 2,040 - 2,040 Interest and other income ( 90 ) ( 235 ) ( 325 ) Income (loss) before income taxes $ 5,630 $ 497 $ 6,127 Corporate interest and other income ( 5,496 ) Income (loss) before income taxes $ 11,623 Capital expenditures $ 3,261 $ - $ 3,261 (a) Selling, general, and administrative expense include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12 NOTE 6 – SHARE-BASED COMPENSATION: As of May 3, 2025, the Company had the 2018 Incentive Compensation Plan 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 May 3, 2025: 2018 Plan Options and/or restricted stock initially authorized 4,725,000 Options and/or restricted stock available for grant 2,865,875 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 May 3, 2025 and February 1, 2025, there was $ 6,298,000 and $ 7,276,000 , respectively, of total unrecognized compensation expense related to unvested restricted stock awards, which had a remaining weighted- average vesting period of 2.1 years and 1.9 years, respectively. The total compensation expense during the three months ended May 3, 2025 was $ 109,000 compared to a benefit of $ 66,000 for the three months ended May 4, 2024. This compensation activity 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 three months ended May 3, 2025: Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at February 1, 2025 1,215,181 $ 8.98 Granted - - Vested ( 225,924 ) 12.89 Forfeited or expired ( 68,274 ) 8.33 Restricted stock awards at May 3, 2025 920,983 $ 8.07 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13 NOTE 6 – SHARE-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 three months ended May 3, 2025 and May 4, 2024, the Company sold 21,736 and 33,317 shares to employees at an average discount of $ 0.50 and $ 0.86 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 $ 11,000 and $ 29,000 for the three months ended May 3, 2025 and May 4, 2024, respectively. These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income. 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 May 3, 2025 and February 1, 2025: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable May 3, 2025 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 697 $ - $ 697 $ - Corporate Bonds 45,601 - 45,601 - U.S. Treasury/Agencies Notes and Bonds 2,267 - 2,267 - Cash Surrender Value of Life Insurance 9,184 - - 9,184 Asset-backed Securities (ABS) 44 - 44 - Total Assets $ 57,793 $ - $ 48,609 $ 9,184 Liabilities: Deferred Compensation $ ( 8,236 ) $ - $ - $ ( 8,236 ) Total Liabilities $ ( 8,236 ) $ - $ - $ ( 8,236 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 14 NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED): Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable February 1, 2025 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 1,244 $ - $ 1,244 $ - Corporate Bonds 51,326 - 51,326 - U.S. Treasury/Agencies Notes and Bonds 4,624 - 4,624 - Cash Surrender Value of Life Insurance 9,301 - - 9,301 Asset-backed Securities (ABS) 229 - 229 - Total Assets $ 66,724 $ - $ 57,423 $ 9,301 Liabilities: Deferred Compensation $ ( 8,548 ) $ - $ - $ ( 8,548 ) Total Liabilities $ ( 8,548 ) $ - $ - $ ( 8,548 ) The Company’s investment portfolio was primarily invested in corporate bonds and taxable governmental debt securities held in managed accounts with underlying ratings of A or better at May 3, 2025 and February 1, 2025. The state, municipal and corporate bonds and asset-backed securities have contractual maturities which range from 10 days to 2.9 years. The U.S. Treasury/Agencies notes and bonds have contractual maturities which range from 3 months to 1.0 year. Additionally, at May 3, 2025, the Company had deferred compensation plan assets of $ 9.2 million. At February 1, 2025, the Company had deferred compensation plan assets of $ 9.3 million. These assets are recorded within Other assets in the Condensed Consolidated Balance Sheets. Level 2 investment securities include corporate 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 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 three months ended May 3, 2025 and the year ended February 1, 2025 (dollars in thousands): THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 15 NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED): Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at February 1, 2025 $ 9,301 Redemptions - Additions - Total gains or (losses): Included in interest and other income (or changes in net assets) ( 117 ) Ending Balance at May 3, 2025 $ 9,184 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at February 1, 2025 $ ( 8,548 ) Redemptions 266 Additions ( 38 ) Total (gains) or losses: Included in interest and other income (or changes in net assets) 84 Ending Balance at May 3, 2025 $ ( 8,236 ) 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) 715 Ending Balance at February 1, 2025 $ 9,301 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at February 3, 2024 $ ( 8,654 ) Redemptions 1,175 Additions ( 220 ) Total (gains) or losses: Included in interest and other income (or changes in net assets) ( 849 ) Ending Balance at February 1, 2025 $ ( 8,548 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 16 NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS: 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. In November 2024, the FASB issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,” which requires public entities to disclose, on an annual and interim basis, disaggregated information in the footnotes about specified information related to certain costs and expenses. This guidance is effective for annual periods beginning after December 15, 2026 and for interim periods within fiscal years beginning after December 15, 2027, with early adoption 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 quarter of 2025 of 21.9 % compared to an effective tax rate of 5.6 % for the first quarter of 2024. Income tax expense for the quarter increased to $ 0.9 million in 2025 from $ 0.6 million in 2024. The increase in tax expense was primarily due to increases in foreign and state income taxes. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 17 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 its 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 its 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. 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. No ne of the credit card receivables are secured. The Company estimated customer credit losses of $ 215,000 and $ 171,000 for the periods ended May 3, 2025 and May 4, 2024, respectively, on sales purchased by the Company’s proprietary credit card of $ 5.4 million and $ 5.7 million for the periods ended May 3, 2025 and May 4, 2024, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): Balance as of May 3, 2025 February 1, 2025 Proprietary Credit Card Receivables, net $ 10,756 $ 10,848 Gift Card Liability $ 6,191 $ 7,541 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 18 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 one year to 10 years , some of which include options to extend the lease term for up to five years , and some of which 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 May 3, 2025 May 4, 2024 Operating lease cost $ 16,588 $ 17,002 Variable lease cost (a) $ 438 $ 497 (a) Primarily relates to monthly percentage rent for stores not presented on the balance sheet. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 19 NOTE 12 – LEASES (CONTINUED): 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 May 3, 2025 May 4, 2024 Cash paid for amounts included in the measurement of lease liabilities $ 14,534 $ 15,607 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations, net of rent violations $ 1,206 $ 444 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: As of May 3, 2025 May 4, 2024 Weighted-average remaining lease term 2.1 Years 2.1 Years Weighted-average discount rate 5.90 % 4.65 % As of May 3, 2025, the maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2025 (a) $ 49,952 2026 43,045 2027 27,948 2028 16,845 2029 8,066 Thereafter 575 Total lease payments 146,431 Less: Imputed interest 13,835 Present value of lease liabilities $ 132,596 (a) Excluding the 3 months ended May 3, 2025. 20 THE CATO CORPORATION