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
following
information
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
January
31,
2026
(“fiscal
2025”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and closures, statements
regarding the potential
impact of the
COVID-19 or other
pandemics and related
responses
and
mitigation
efforts,
as
well
as
the
potential
impact
of
supply
chain
disruptions,
extreme
weather conditions,
trade policies,
inflationary pressures and
other economic
conditions on
our business,
results
of
operations
and
financial
condition
and
statements
regarding
new
store
development
strategy;
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 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,
inflation,
wage
rates,
tax
rates,
tariffs,
interest
rates,
home
values,
consumer
net
worth
and
the
availability
of
credit;
changes
in
laws,
regulations
or
government
policies affecting
our business,
including but
not limited
to tariffs
and taxes;
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
successfully implement our new store
development strategy to increase
new
store
openings
and
our
ability
of
any
such
new
stores
to
grow
and
perform
as
expected;
underperformance or
other
factors
that
may lead
to
a
continuation or
acceleration
of
store
closures
and
negatively affect
the Company’s
profitability,
financial condition
and prospects;
adverse weather,
public
health
threats
(including
the
COVID-19
or
other
pandemics),
acts
of
war
or
aggression
or
similar
conditions
that
may
affect
our
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
1,
2025
(“fiscal
2024”),
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)
21
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
Part
II,
Item
7
in
the
Company’s Annual Report on
Form 10-K for the
fiscal year ended February
1, 2025. 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)
22
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
May 3, 2025
May 4, 2024
Total retail sales
100.0
%
100.0
%
Other revenue
1.1
1.0
Total revenues
101.1
101.0
Cost of goods sold (exclusive of depreciation)
64.9
64.2
Selling, general and administrative (exclusive of depreciation)
32.8
32.4
Depreciation
1.5
1.2
Interest and other income
(0.7)
(3.3)
Income before income taxes
2.5
6.6
Net income
2.0
6.3
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
23
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 2024
Annual Report
on Form 10-K.
Recent Developments
Tariff Pressures
A
significant
quantity
of
our
products
are
made
in
China
and
Southeast
Asia.
The
products
from
these
countries
are
subject
to
the
newly
implemented
reciprocal
tariffs,
as
well
as
an
additional
Section
301
ad
valorem tariff on Chinese products.
In the quarter, only products from China were subject to the
Section 301
ad
valorem
tariffs.
These
tariffs
increased
our
costs
associated
with
receipted
products
made
in
these
countries in the latter half of
the first quarter and will continue
to do so in the
second quarter.
These
cost increases
will
negatively impact
our results
of operations
and financial
condition
unless
we
are
able to successfully mitigate their effects by increasing retail pricing without losing sales and/or sharing these
costs with
our vendors.
Certain product
categories such as
shoes and
handbags will
be difficult
to source
in
countries with lower tariffs.
Additionally, our supply
chain may be impacted
in the second quarter
as the flow of
Chinese products to the
United States
was reduced
due to
the high
reciprocal tariffs
that were
only recently
decreased in
mid-May.
Potential supply chain
issues such as
products delivered late
due to port
congestion, longer transit
times and
dwell times at port, and container availability may impact the costs we pay for
ocean freight or the timeliness
of
our
product
deliveries,
any
of
which
may
negatively
impact
our
results
of
operations
and
financial
condition.
Pricing
Pressures
The pressure on our customers’ discretionary income continued into fiscal 2025.
As the cost of tariffs begins
to
impact
retail
pricing,
our
customers
may
become
more
cautious
with
their
discretionary
spending.
The
customers’
caution
in
regard
to
their
discretionary
spending
will
put
additional
pressure
on
our
ability
to
mitigate the cost increases caused by
tariffs.
Comparison of First Quarter of 2025
with 2024
Total retail sales for the first quarter
were $168.4 million compared to
last year’s first quarter sales of
$175.3
million.
Sales
decreased
primarily
due
to
stores
that
were
closed
in
the
past
12
months.
Same-store
sales
were flat
for the
quarter. 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 5.0%
of sales for the first quarter of
fiscal 2025 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,
shipping
charged
to
customers
for
e-
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
24
commerce
purchases
and
layaway
fees),
were
$170.2
million
for
the
first
quarter
ended
May
3,
2025,
compared to $177.1
million for
the first
quarter ended May
4, 2024. The
Company operated
1,109 stores
at
May 3, 2025 compared
to 1,171 stores at
the end of last fiscal
year’s first quarter.
For the first three
months
of
fiscal
2025,
the
Company
permanently
closed
eight
stores.
The
Company
currently
expects
to
close
approximately 50 stores in fiscal 2025.
Other revenue, a component of
total revenues, was $1.8 million for the first
quarter of fiscal 2025, compared
to $1.8
million for
the prior
year’s comparable
first quarter.
Included in
Other revenue
is credit
revenue of
$0.7 million
which represented
0.4% of
total revenues
in the
first quarter
of fiscal
2025, flat
both in
dollars
and percentage compared
to 2024.
Credit revenue is comprised
of interest earned on
the Company’s private
label credit card
portfolio and related
fee income.
Related expenses include
principally payroll, postage
and
other administrative
expenses, and
totaled $0.4
million in
the first
quarter of
2025, compared
to last
year’s
first quarter expenses of $0.4 million.
Cost of goods
sold was $109.3
million, or 64.9%
of retail sales for
the first quarter of
fiscal 2025, compared
to $112.5
million, or
64.2% of
retail sales
in the
first quarter
of fiscal
2024.
The increase
in cost
of goods
sold as a
percent of sales
was due to increased
sales of marked down
goods, partially offset by
lower buying
and freight
costs. 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
5.8%
to
$59.1
million
for
the
first
quarter
of
fiscal
2025
compared
to
$62.8
million in the first quarter of fiscal 2024.
Gross margin as presented may not be comparable to those of other
entities.
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related
payroll taxes and benefits, insurance, supplies, advertising,
and bank and credit card processing fees.
SG&A
expenses were
$55.3 million,
or 32.8%
of retail
sales for
the first
quarter of
fiscal 2025,
compared to
$56.8
million,
or
32.4%
of
retail
sales
in
the
first
quarter
of
fiscal
2024.
SG&A
expense
was
lower
in
the
first
quarter of fiscal
2025 compared to
the first quarter
of fiscal 2024
primarily due to
lower corporate and
field
payroll
expense,
as
well
as
lower
insurance
costs
and
store
expenses,
partially
offset
by
increases
in
equipment maintenance.
Depreciation expense was $2.6 million, or 1.5% of retail sales for the first quarter of fiscal 2025, compared to
$2.0 million,
or 1.2% of
retail sales
for the first
quarter of
fiscal 2024.
The increase in
depreciation expense
was due to the distribution center
automation implementation at the end
of the second quarter of 2024.
Interest
and
other
income
was
$1.2
million,
or
0.7%
of
retail
sales
for
the
first
quarter
of
fiscal
2025,
compared
to
$5.8
million,
or
3.3%
of
retail
sales
for
the
first
quarter
of
fiscal
2024.
The
decrease
was
primarily
due
to
a
$3.2
million
net
gain
on
the
sale
of
land
held
for
investment
and
the
sale
of
equity
securities recorded in the first quarter
of 2024.
Income tax expense
was $0.9 million or
0.6% of retail sales
for the first quarter
of fiscal 2025, compared
to
income
tax
expense
of
$0.6
million,
or
0.4%
of
retail
sales
for
the
first
quarter
of
fiscal
2024.
The
effective
income
tax
rate
for
the
first
quarter
of
fiscal
2025
was
21.9%
compared
to
5.6%
for
the
first
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
quarter of
2024. The
increase in
tax expense
was primarily
due to
increases in
foreign and
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 its
new asset-backed
revolving line
of credit,
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
for
the
first
three
months
of
fiscal
2025
was
primarily generated
by
earnings
adjusted
for
depreciation
and
changes
in
working
capital.
The
decrease
in
cash
provided
of
$1.8
million
for
the
first
three
months
of
fiscal
2025
as
compared
to
the
first
three
months
of
fiscal
2024
was
primarily attributable to
lower net income,
partially offset by
the relative change
in inventory from
year-end
to the first
quarter for both
years and non-operating
gain on the
sale of assets
held for investment
in the first
quarter of fiscal 2024.
At May 3, 2025, the Company had working capital of $43.9 million compared to $34.9 million at February 1,
2025.
The increase was primarily attributable to an increase in cash and lower current lease
liability, partially
offset by lower short-term investments and higher
accounts payable.
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.
Expenditures
for
property
and
equipment
totaled
$1.0
million
in
the
first
three
months
of
fiscal
2025,
compared
to
$3.3
million
in
last
year’s
first
three
months.
The
decrease
in
expenditures
for
property
and
equipment
was
primarily
due
to
lower
capital
investments
in
information
technology
and
the
distribution
center, as well
as no new
store openings in
the first quarter
of fiscal 2025.
For the full
fiscal 2025 year,
the
Company expects
to invest
approximately $7.3
million in
capital expenditures,
including distribution
center
automation projects.
Net
cash
provided
by
investing
activities
totaled
$7.9
million
in
the
first
three
months
of
fiscal
2025
compared to $14.6 million provided in the comparable period of fiscal 2024. The decrease
was primarily due
to
a
decrease
in
the
sales
of
short-term
investments
and
other
assets,
partially
offset
by
lower
capital
expenditures.
Net cash used in
financing activities totaled $0.9
million in the first
three months of fiscal
2025 compared to
$5.6
m
illion used in the comparable
period of fiscal
2024. The decrease was
primarily due to
no dividends
paid and reduced stock repurchases.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
As
of
May
3,
2025,
the
Company
had
703,419
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
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.
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
27
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK:
The
Company
is
subject
to
market
rate
risk
from
exposure
to
changes
in
interest
rates
related
to
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.