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, tariffs and
other
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
n
ew 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.
T
he 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 1, 2025
November 2, 2024
November 1, 2025
November 2, 2024
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
1.1
1.1
1.1
1.0
Total revenues
101.1
101.1
101.1
101.0
Cost of goods sold (exclusive of
depreciation)
68.0
71.2
65.5
66.7
Selling, general and administrative
(exclusive of depreciation)
37.1
40.0
34.2
35.5
Depreciation
1.6
1.9
1.5
1.5
Interest and other income
(1.4)
(1.8)
(1.0)
(2.1)
Income (loss) before income taxes
(4.1)
(10.2)
0.9
(0.5)
N
et income (loss)
(3.4)
(10.4)
1.0
(0.8)
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 third 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
quarter,
most
of
the
countries
from
which
we
source
product,
excluding
China
and
India,
finalized
trade
deals
with
the
U.S.
The
additional
tariffs
range
from
10%
to
20%
for
those
countries.
India’s tariffs
increased to 50% from 10% in
the quarter.
Though China’s tariffs
remained at 30% during
the
quarter,
effective
November
10,
2025
they
were
reduced
to
20%.
These
tariffs
increased
our
inventory
costs
associated
with
products
made
in
China
and
Southeast
Asia
in
the
third
quarter.
We
anticipate
that
our
product
acquisition
costs
for
the
remainder
of
the
fiscal
year
and
into
2026
will
be
negatively impacted by these additional costs.
These cost
increases will
continue to
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 that
are predominately made in China, will be difficult to source in countries with lower
tariffs.
Comparison of the Three and Nine
Months ended November 1, 2025 with November
2, 2024
Total retail sales for the
third quarter were $153.7 million compared to
last year’s third quarter sales
of $144.6
million, a 6%
increase. The
Company’s sales increased
in the third
quarter of fiscal
2025 primarily due
to a
10% increase
in same-store
sales, partially
offset by
stores that
were closed
in the
past 12
months. For
the
nine
months
ended
November
1,
2025,
total
retail
sales
were
$496.8
million
compared
to
last
year’s
comparable nine month sales
of $486.8 million, a
2% increase. The increase
in sales in the
first nine months
of fiscal
2025 was
due primarily
to a
6% increase
in same-store
sales, offset
mainly 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
nine
months
ended
November
1,
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
$155.4
million
and
$502.2
million
for
the
three
and
nine
months
ended
November
1,
2025,
compared
to
$146.2
million
and
$491.9
million
for
the
three
and
nine
months
ended
November
2,
2024,
respectively.
The
Company operated 1,101 stores at November 1, 2025 compared to 1,167 stores at the end of last fiscal year’s
third quarter.
For the first
nine months of
fiscal 2025, the
Company permanently closed
16 stores.
In total,
t
he Company currently expects to close
approximately 50 stores in fiscal 2025.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
Other
revenue,
a
component
of
total
revenues,
was
$1.7
million
and
$5.3
million
for
the
three
and
nine
months ended November 1, 2025, respectively, compared to $1.5 million and $5.0 million for the prior
year’s
comparable three and nine month periods. Included in Other revenue is credit revenue of $0.7 million, which
represented
0.4%
of
total
revenues
in
the
third
quarter
of
fiscal
2025,
relatively
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
third
quarter of
fiscal
2025,
compared to
last
year’s third quarter expense of
$0.4 million.
Cost of
goods sold
was $104.5
million, or
68.0% of
retail sales
and $325.3 million,
or 65.5%
of retail
sales
for the three and
nine months ended November
1, 2025, respectively, compared
to $103.0 million, or
71.2%
of retail sales and $324.6 million, or 66.7% of retail sales for the comparable three and nine month periods of
fiscal 2024.
The overall
decrease in
cost of
goods sold
as a
percent of
retail sales
for the
third quarter
and
first nine
months of
fiscal 2025
versus the
comparable three
and nine
month periods
of fiscal
2024 resulted
primarily from lower
buying, distribution and
occupancy 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 18.0% to $49.2 million for the third quarter of fiscal 2025 and by 5.7% to $171.5 million for the first
nine
months of
fiscal 2025,
compared to
$41.7 million
and $162.3
million for
the prior
year’s comparable
three
and nine months
of fiscal 2024,
respectively.
Gross margin as
presented may not
be comparable to
those of
other entities.
Selling, general and administrative (“SG&A”) expenses 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 $57.0 million, or 37.1% of retail sales and $169.7 million, or 34.2% of retail sales
for the third
quarter and first nine months of fiscal 2025, respectively, compared to $57.9 million, or 40.0% of retail sales,
and
$172.8 million,
or 35.5%
of retail
sales
for the
prior
year’s
comparable three
and
nine month
periods,
respectively.
The decrease in SG&A
expenses for the third
quarter and first nine
months of fiscal 2025
was
primarily due to lower corporate and
field payroll expense, as well as
lower insurance costs.
Depreciation expense was $2.4 million, or 1.6% of retail sales and $7.5 million, or
1.5% of retail sales for the
third quarter
and first
nine months
of fiscal
2025, respectively,
compared to
$2.7 million,
or 1.9%
of retail
sales and $7.1 million, or 1.5% of retail sales for the comparable three and nine month periods of fiscal 2024,
respectively.
Interest and other income was $2.2 million, or 1.4% of retail sales and $4.8 million, or 1.0% of retail sales
for
the three and nine months ended November 1, 2025, respectively, compared to $2.6 million, or 1.8% of retail
sales
and
$10.2
million,
or
2.1%
of
retail
sales
for
the
comparable
three
and
nine
month
periods
of
fiscal
2024,
respectively.
The
decrease
for
the
first
nine
months
of
fiscal
2025
compared
to
fiscal
2024
was
primarily due to a net gain on the sale of land held for
investment and the sale of equity securities recorded in
the first quarter of 2024, as well as a net gain on the disposal of the Company’s corporate aircraft recorded in
the third quarter of 2024.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
Income tax
benefit was
$1.2 million
and $0.5
million for the
third quarter
and first
nine months of fiscal
2025, respectively, compared to tax expense of $0.3 million and $1.6 million for the comparable three and
nine month periods of fiscal 2024,
respectively.
The effective income tax
rate for the
first nine months of
fiscal
2025 was
(11.9%)
compared to
(67.5%)
for
the
first
nine months
of
fiscal
2024.
The income
tax
benefit
in
fiscal
2025
is
primarily
due
to
a
reduction
in
foreign
income
taxes
and
a
larger
release
of
reserves
related
to
expired
statute
of
limitations
for
uncertain
tax
positions
compared
to
the
prior
year.
On
July
4,
2025,
the
One
Big
Beautiful
Bill
Act
(the
“OBBBA”)
was
signed
into
law.
The
Company
considered the
impact of
the
OBBBA in
the second
quarter
of fiscal
2025.
The changes
do not
have a
material impact on the Company’s effective tax rate.
The Company continues to monitor impacts moving
forward.
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
12
months
from
the
issuance
of
these
financial statements.
Cash
provided
by
operating
activities
during
the
first
nine
months
of
fiscal
2025
was
$3.2
million
as
compared
to
$13.3
million
used
in
the
first
nine
months
of
fiscal
2024.
The
increase
in
cash
provided
by
operating
activities
of
$16.5
million
for
the
first
nine
months
of
fiscal
2025
as
compared
to
the
first
nine
months of
fiscal 2024
was primarily
attributable to
net income
for the
current fiscal
year compared
to a
net
loss for the prior fiscal year, the relative change in inventory from year-end to the third 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 third quarter for both
years.
At
November
1,
2025,
the
Company
had
working
capital
of
$58.3
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
November
1,
2025.
The
weighted average
interest rate
under the
credit
facility was zero at November 1, 2025
due to no outstanding borrowings.
Expenditures
for
property
and
equipment
totaled
$2.9
million
in
the
first
nine
months
of
fiscal
2025,
compared to $6.5 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
i
nformation technology
during fiscal
2024, as
well as
no new
store openings
in the
first nine
months of
the
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
28
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 was negligible for the first nine months
of fiscal 2025 compared to $21.5
million net cash provided
in the comparable
period of 2024.
The decrease in net
cash provided by 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
nine months of
fiscal 2025 compared
to
$12.6
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 November
1, 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
November
1,
2025
and
February
1,
2025.
The
state,
municipal
and
corporate
bonds
and
asset-backed
securities
have
contractual
maturities which
range from
1.1 months
to 2.9
years. The
U.S. Treasury/Agencies
notes and
bonds have
a
contractual maturity of up to 3.5
months.
Additionally, at November 1, 2025, the
Company had deferred compensation plan assets
of $9.8 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
1
0-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.