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
Form
10-Q.
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;
(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
public
health
threats
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
threats 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)
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
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)
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 2, 2025
August 3, 2024
August 2, 2025
August 3, 2024
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
1.1
1.0
1.1
1.0
Total revenues
101.1
101.0
101.1
101.0
Cost of goods sold (exclusive of
depreciation)
63.8
65.4
64.4
64.8
Selling, general and administrative
(exclusive of depreciation)
32.8
34.9
32.8
33.6
Depreciation
1.4
1.4
1.5
1.3
Interest and other income
(0.8)
(1.0)
(0.8)
(2.2)
Income before income taxes
3.7
0.4
3.1
3.6
Net income
3.9
0.1
3.0
3.2
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 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
second
quarter,
products
from
China
were
subject
to
the
Section
301 ad
valorem tariffs
and
products sourced
from all
other countries
were
subject to
reciprocal
tariffs.
During
the
second
quarter,
these
tariffs
increased
our
costs
associated
with
receipted
products
made
in
China and
Southeast Asia.
Excluding China,
reciprocal tariffs
will
be
increasing
up
to
100%,
resulting in
rates of
19% to
20%, depending
on the
country.
We
anticipate that
our product
acquisition
costs in
the back
half of
the third
quarter and
the remainder
of the
fiscal year
will be
impacted by
these
additional costs.
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,
which
are
predominately made in China, will be difficult to source in countries with lower tariffs.
Pricing Pressures
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 the Three and Six
Months ended August 2, 2025
with August 3, 2024
Total retail sales
for the second
quarter were
$174.7 million
compared to last
year’s second
quarter sales
of
$166.9 million, a 5% increase. The
Company’s sales increased in the second
quarter of fiscal 2025 primarily
due to a 9% increase in same-store sales, partially offset by stores that were closed in
the past 12 months. For
the
six
months
ended
August
2,
2025,
total
retail
sales
were
$343.1
million
compared
to
last
year’s
comparable six month sales of $342.2 million,
a 0.3% increase. The increase in sales
in the first six months of
fiscal
2025
was
due
primarily
to
a
4%
increase
in
same-store
sales,
mainly
offset
by
the
impact
of
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 six months ended August 2,
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 and
layaway fees),
were $176.5
million and
$346.8 million
for the
three and
six months
ended August
2, 2025,
compared to
$168.6 million
and $345.7
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
million for the three and six months ended August 3, 2024, respectively. The Company operated 1,101 stores
at August
2, 2025
compared to
1,166 stores
at the
end of
last fiscal
year’s second
quarter.
For the
first six
months of fiscal 2025,
the Company permanently closed
16 stores.
The Company currently expects
to close
approximately 50 stores in fiscal 2025.
Other revenue, a component of total revenues, was $1.9 million and $3.7 million for the
three and six months
ended
August
2,
2025,
respectively,
compared
to
$1.7
million
and
$3.5
million
for
the
prior
year’s
comparable three
and six
month periods.
Included in
Other revenue is
credit revenue of
$0.7 million,
which
represented 0.4%
of total
revenues in
the second
quarter of
fiscal 2025,
flat both
in dollars
and percentage
compared to fiscal 2024.
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 2025,
compared to last year’s
second quarter expense of $0.4 million.
Cost of
goods sold
was $111.5
million, or
63.8% of
retail sales
and $220.8
million, or
64.4% of retail
sales
for the
three and
six months
ended August
2, 2025,
respectively, compared
to $109.1
million, or
65.4% of
retail
sales and
$221.6
million,
or 64.8%
of retail
sales
for the
comparable three
and six
month
periods of
fiscal 2024.
The overall decrease in
cost of goods sold
as a percent of
retail sales for the
second quarter and
first
six
months
of
fiscal
2025
versus
the
comparable
three
and
six
month
periods
of
fiscal
2024
resulted
primarily from lower buying and distribution costs, partially offset by increased sales of marked down goods.
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)
increased
by 9.3% to $63.2 million for
the second quarter of fiscal 2025 and
by 1.4% to $122.3 million for
the first six
months of
fiscal 2025,
compared to
$57.8 million
and $120.6
million for
the prior
year’s comparable
three
and six
months of
fiscal 2024,
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, and bank
and credit card
processing fees. SG&A
expenses
were
$57.4
million,
or
32.8%
of
retail
sales
and
$112.7
million,
or
32.8%
of
retail
sales
for
the
second quarter and first six months of fiscal 2025, respectively, compared to $58.2 million, or
34.9% of retail
sales and $114.9 million, or 33.6% 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
2025 was
primarily
due
to
lower
corporate
and
field
payroll
expense,
as
well
as
lower
insurance,
partially
offset
by
increases in advertising and general corporate
costs.
Depreciation expense was $2.5 million, or 1.4% of retail sales and $5.1 million, or 1.5% of
retail sales for the
second quarter
and first
six months
of fiscal
2025, respectively,
compared to
$2.3 million,
or 1.4%
of retail
sales and $4.4
million or 1.3%
of retail sales
for the comparable
three and six
month periods of
fiscal 2024,
respectively.
Interest and other income was $1.4 million, or 0.8% of retail sales and $2.6 million, or 0.8% of retail sales for
the three and six months ended August
2, 2025, respectively, compared to $1.7 million,
or 1.0% of retail sales
and
$7.6
million,
or
2.2%
of
retail
sales
for
the
comparable
three
and
six
month
periods
of
fiscal
2024,
respectively. The decrease
for the first
six months of
fiscal 2025 compared
to fiscal 2024
was primarily due
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
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
benefit
was $0.3
million and
an expense
of
$0.6 million
for the
second quarter
and first
six
months of
fiscal 2025,
respectively,
compared to
a tax
expense of
$0.6 million
and $1.3
million for
the
comparable three and six month periods of fiscal 2024, respectively.
The effective income tax rate
for the
first six
months of
fiscal 2025
was 5.9%
compared to
10.5% for
the first
six months
of fiscal
2024. The
decrease
in
tax
expense in
2025
is
primarily due
to
reductions in
foreign income
taxes
and
a
favorable
adjustment to the federal net operating loss carryback claim as
a result of the Coronavirus Aid, Relief and
Economic
Security
Act
(CARES Act),
partially
offset
by
an
increase
in
state
income
taxes.
On
July
4,
2025, the One Big
Beautiful Bill Act (the
“OBBBA”) was signed into
law. The
Company has considered
the impact
of the
OBBBA in
the second
quarter of
fiscal 2025
and concluded the
changes do
not have
a
material impact on the Company’s effective tax rate.
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 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
during
the
first
six
months
of
fiscal
2025
was
$15.6
million
as
compared to
$8.8 million
provided in
the first
six months
of fiscal
2024. The
increase in
cash provided
by
operating activities of $6.8
million for the first
six months of fiscal
2025 as compared to
the first six months
of
fiscal
2024
was
primarily
attributable
to
the
relative
change
in
inventory
from
year-end
to
the
second
quarter for
both years
and a
non-operating gain
on sale
of assets
held for
investment in
the first
quarter of
fiscal 2024, partially offset by the relative change
of accounts payable from year-end to the second quarter
for
both years.
At August 2, 2025, the Company had working capital of $50.5 million compared to
$34.9 million at February
1,
2025.
The
increase
in
working
capital
was
primarily
attributable
to
an
increase
in
cash
and
cash
equivalents and decreases in accrued expenses, current lease liability and accounts payable, partially offset by
a decrease in inventories.
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 August 2, 2025.
The weighted average interest rate under the credit facility
was zero at August 2, 2025 due
to no outstanding borrowings.
Expenditures for property and equipment totaled $2.4 million in the first six months of fiscal 2025, compared
to $4.8 million in last fiscal
year’s first six months. The decrease in
expenditures for property and equipment
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
28
was
primarily
due
to
finishing
projects
related
to
investments
in
the
distribution
center
and
information
technology, as
well as
no new
store openings
in the
first
six months
of the
current fiscal
year. For
the full
fiscal 2025 year, the Company expects
to invest approximately $5.9 million for capital
expenditures.
Net cash
used in
investing activities
totaled $0.9
million in
the first
six months
of fiscal
2025 compared
to
$6.7 million net cash
provided in the comparable
period of 2024.
The increase in net
cash used in investing
activities
in
2025
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
six months
of fiscal
2025 compared
to
$9.1
million
used
in
the
comparable
period
of
fiscal
2024.
The
decrease
in
net
cash
used
in
financing
activities in fiscal
2025 was
primarily due
to the elimination
of dividend
payments in
fiscal 2025
and lower
stock repurchases.
As
of
August
2,
2025,
the
Company
had
680,740
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
August
2,
2025
and
February
1,
2025.
The
state,
municipal
and
corporate
bonds
and
asset-backed
securities
have
contractual
maturities
which
range
from
13
days
to
2.9
years.
The
U.S.
Treasury/Agencies
notes
and
bonds
have
a
contractual maturity of up to 7 months.
Additionally,
at
August
2, 2025,
the
Company
had
deferred
compensation plan
assets
of
$9.5
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, included in Part 1, Item 1 Financial Statements (Unaudited) in this Quarterly Report on Form
10-Q.
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, included in Part 1, Item
1 Financial Statements
(Unaudited) in this Quarterly Report on Form 10-Q.
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.