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 30, 2021
("fiscal 2020") and beyond, including, but not limited to, statements regarding
expected amounts of capital expenditures and store openings, relocations,
remodels and closures and statements regarding the potential impact of the
COVID-19 pandemic and related responses and mitigation efforts on our business,
results of operations and financial condition; 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, wage rates, tax rates, interest rates, home values, consumer net
worth and the availability of credit; changes in laws or regulations affecting
our business including tariffs; uncertainties regarding the impact of any
governmental 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; adverse weather, public
health threats (including the COVID-19 pandemic) 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; 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, 2020 ("fiscal 2019"),
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.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES:
The Company's accounting policies are more fully described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2020.
As disclosed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," 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 allowance for doubtful accounts,
inventory shrinkage, the calculation of potential asset impairment, workers'
compensation, general and auto insurance liabilities, reserves relating to
self-insured health insurance, and uncertain tax positions.
The Company's critical accounting policies and estimates are discussed with the
Audit Committee.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 2, 2020 May 4, 2019
Total retail sales 100.0 % 100.0 %
Other revenue 1.9 1.0
Total revenues 101.9 101.0
Cost of goods sold (exclusive of depreciation) 84.6 59.7
Selling, general and administrative (exclusive of
depreciation) 53.1 28.9
Depreciation 4.1 1.7
Interest and other income (1.9) (0.5)
Income (loss) before income taxes (38.0) 11.2
Net income (loss) (28.8) 9.3
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
COVID-19 Update
The spread of COVID-19 has resulted in state and local orders mandating store
closures to mitigate the spread of the virus. Responses by customers, government
and the private sector have and will likely continue to adversely impact our
business operations for the remainder of 2020 and possibly beyond. The extent to
which the COVID-19 pandemic ultimately impacts the Company's business, financial
condition, results of operations, cash flows, and liquidity may differ from
management's current estimates due to inherent uncertainties regarding the
duration and further spread of the outbreak, its severity, actions taken to
contain the virus or treat its impact, and how quickly and to what extent normal
economic and operating conditions can resume.
Beginning March 19, 2020, the Company temporarily closed all Cato, Its Fashion,
Its Fashion Metro and Versona stores. In addition, the Company suspended its
quarterly dividend, significantly reduced capital expenditures and reduced its
SG&A expense through the reduction of non-payroll expenses, as well as,
furloughing associates and in certain instances eliminating positions primarily
at the corporate office. Beginning on May 1, 2020, the Company began to re-open
stores based on the pertinent state and local orders. There is significant
uncertainty around the duration, breadth and severity of continued business
disruptions related to COVID-19, as well as its impact on the U.S. economy,
consumer willingness to visit malls and shopping centers, and associate staffing
for our stores. At this time, it is uncertain as to the effect of national,
state or local action or legislation that attempts to address the economic
effects of COVID-19 on our customers, suppliers or the Company.
While the Company currently anticipates that our results for the remainder of
2020 will be adversely impacted, the extent to which COVID-19 impacts the
Company's results will depend on future developments, which are highly
uncertain, including new information that may emerge concerning the severity of
COVID-19, potential economic impacts to customers and suppliers, and the actions
taken to contain it or mitigate its impact.
Comparison of First Quarter of 2020 with 2019
Total retail sales for the first quarter were $98.8 million compared to last
year's first quarter sales of $228.1 million. Sales decreased primarily due to
stores temporarily closed in 2020 due to COVID-19. The store closures resulted
in a 56.0% decrease in same-store sales. 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 7.0% of sales for the first quarter of fiscal 2020 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-commerce
purchases and layaway fees), were $100.7 million for the first quarter ended May
2, 2020, compared to $230.4 million for the first quarter ended May 4, 2019. The
Company operated 1,300 stores at May 2, 2020 compared to 1,302 stores at the end
of last fiscal year's first quarter. For the first three months of fiscal 2020,
the Company opened 24 stores and permanently closed five stores. The Company
currently expects to open approximately 80 stores, relocate approximately two
stores and close approximately 39 stores in fiscal 2020.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Credit revenue of $0.8 million represented 0.8% of total revenues in the first
quarter of fiscal 2020, compared to 2019 credit revenue of $0.9 million or 0.4%
of total revenues. Credit revenue is comprised of interest earned on the
Company's private label credit card portfolio and related fee income. Credit
revenue decreased slightly for the most recent comparable period due to lower
finance charge income and lower late fee income from sales using the Company's
proprietary credit card. Related expenses include principally payroll, postage
and other administrative expenses, and totaled $0.5 million in the first quarter
of 2020, compared to last year's first quarter expenses of $0.5 million.
Other revenue, a component of total revenues, was $1.9 million for the first
quarter of fiscal 2020, compared to $2.3 million for the prior year's comparable
first quarter. The decrease of $0.4 million is primarily related to lower
layaway fees in the quarter due to stores temporarily closed from COVID-19.
Cost of goods sold was $83.6 million, or 84.6% of retail sales for the first
quarter of fiscal 2020, compared to $136.1 million, or 59.7% of retail sales in
the first quarter of fiscal 2019. The overall increase in cost of goods sold as
a percent of retail sales for first quarter of 2020 resulted primarily from
deleveraging of occupancy, buying and distribution costs due to lower sales from
temporary store closures and higher sales of goods marked down. 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 83.5% to $15.2 million for the first quarter of fiscal 2020
compared to $92.0 million in the first quarter of fiscal 2019. Gross margin as
presented may not be comparable to those of other entities.
Selling, general and administrative expenses ("SG&A") primarily include
corporate and store payroll, related payroll taxes and benefits, insurance,
supplies, advertising, bank and credit card processing fees. SG&A expenses
decreased 20.4% to $52.5 million, or 53.1% of retail sales for the first quarter
of fiscal 2020, compared to $66.0 million, or 28.9% of retail sales in the first
quarter of fiscal 2019. SG&A as a percent of retail sales increased primarily
due to the effects of deleveraging of costs due to temporary store closures and
store impairment charges, partially offset by reduced incentive compensation.
Depreciation expense was $4.0 million, or 4.1% of retail sales for the first
quarter of fiscal 2020, compared to $3.8 million, or 1.7% of retail sales for
the first quarter of fiscal 2019.
Interest and other income was $1.9 million, or 1.9% of retail sales for the
first quarter of fiscal 2020, compared to $1.1 million, or 0.5% of retail sales
for the first quarter of fiscal 2019. The increase is primarily attributable to
gains from the sale of investments.
Income tax benefit was $9.1 million or 9.2% of retail sales for the first
quarter of fiscal 2020, compared to income tax expense of $4.3 million, or 1.9%
of retail sales for the first quarter of fiscal 2019. The 2020 quarter decrease
in income tax expense resulted from a higher effective tax rate on a pre-tax
loss. The effective income tax rate for the first quarter of fiscal 2020 was
24.3% compared to 16.9% for the first quarter of 2019. The increase in the 2020
first quarter tax rate was primarily due to the federal net operating loss
carryback provisions of the Coronavirus Aid, Relief and Economic Security Act
(CARES Act), offset by valuation allowances against state income net operating
losses, and an upward adjustment in the reserves for uncertain tax positions
specific to state income taxes in the first quarter of 2020. The
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Company assessed the ability to realize these state net operating losses in
light of the adverse impact on the Company's financial statements and operations
due to COVID-19. Based on this assessment, the Company concluded that it is more
likely than not that the Company will not be able to realize the state net
operating losses and, accordingly, has recorded a valuation allowance for these
items including the value of its state net operating loss deferred tax assets as
of February 1, 2020.
The estimated annual effective tax rate for the current fiscal year is impacted
by the ability to carryback federal net operating losses due to the CARES Act,
partially offset by changes in management's judgement regarding the ability to
realize deferred tax assets, primarily state income net operating losses
generated in the current fiscal year. The Company has factored the realizability
of these deferred tax assets generated as a result of projected current year
losses into its estimated annual effective rate for the current year. To the
extent that actual results and/or events differ from the predicted results, the
Company may continue to see effects on the estimated annual effective tax rate.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
Cash used by operating activities during the first three months of fiscal 2020
was $71.3 million as compared to $14.7 million provided in the first three
months of fiscal 2019. The Company maintains a $35.0 million unsecured revolving
credit facility for short-term financing of seasonal cash needs. There were
$30.0 million in outstanding borrowings on this facility at May 2, 2020 and no
outstanding borrowings at February 1, 2020.
The Company believes that its cash, cash equivalents and short-term investments,
together with cash flows from operations and borrowings available under its
revolving credit agreement, will be adequate to fund the Company's regular
operating requirements and expected capital expenditures for fiscal 2020 and the
next 12 months.
Cash used by operating activities for the first three months of fiscal 2020 was
primarily attributable to net losses adjusted for depreciation and changes in
working capital. The decrease in cash provided of $86.0 million for the first
three months of fiscal 2020 as compared to the first three months of fiscal 2019
was primarily due to a net loss versus net income, an increase in inventory, a
decrease in accounts payable and accrued liabilities, partially offset by store
impairment charges.
At May 2, 2020, the Company had working capital of $126.6 million compared to
$163.5 million at February 1, 2020. This decrease is primarily attributable to
lower short-term investments, partially offset by higher inventory amounts.
At May 2, 2020 and February 1, 2020, the Company had an unsecured revolving
credit agreement, which provides for borrowings of up to $35.0 million less the
balance of letters of credit discussed below. The credit agreement contains
various financial covenants and limitations, including the maintenance of
specific financial ratios with which the Company was in compliance as of May 2,
2020. There were $30.0 million in outstanding borrowings under the credit
facility as of May 2, 2020 and no outstanding borrowings at February 1, 2020. As
of May 2, 2020, the $30.0 million of outstanding borrowings is recorded in
Accounts payable in the Condensed Consolidated Balance Sheets.
On June 2, 2020, the Company signed an amendment extending the revolving credit
agreement through May 2023. This new amendment, among other items, temporarily
lowers the liquidity amount the Company is required to maintain. In addition, a
fixed charge ratio covenant is applicable beginning in the fourth quarter
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
of 2021. As of June 4, 2020, the company had paid down $7.0 million of its
outstanding line of credit, reducing the outstanding borrowings to $23.0
million.
At May 2, 2020 and February 1, 2020, the Company had no outstanding letters of
credit relating to purchase commitments.
Expenditures for property and equipment totaled $5.3 million in the first three
months of fiscal 2020, compared to $1.0 million in last year's first three
months. The expenditures for the first three months of 2020 were primarily for
investments in new stores. For the full fiscal 2020 year, the Company expects to
invest approximately $13 million for capital expenditures.
Net cash provided by investing activities totaled $76.9 million in the first
three months of fiscal 2020 compared to $7.9 million in the comparable period of
fiscal 2019, primarily due to an increase in the sale of short-term investments,
partially offset by short-term investments purchased and capital expenditures.
Net cash provided by financing activities totaled $12.4 million in the first
three months of fiscal 2020 compared to $10.7 million used in the comparable
period of fiscal 2019, primarily due to proceeds from the line of credit
partially offset by an increase in share repurchases and payments on the line of
credit.
As of May 2, 2020, the Company had 728,466 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
tax-exempt and taxable governmental debt securities held in managed accounts
with underlying ratings of A or better at May 2, 2020 and February 1, 2020. The
state, municipal and corporate bonds have contractual maturities which range
from two days to seven years. The U.S. Treasury Notes and Certificates of
Deposit have contractual maturities which range from one month to two years.
These securities are classified as available-for-sale and are recorded as
Short-term investments, Restricted cash, Restricted short-term investments and
Other assets on the accompanying Condensed Consolidated Balance Sheets. These
assets are carried at fair value with unrealized gains and losses reported net
of taxes in Accumulated other comprehensive income. The asset-backed securities
are bonds comprised of auto loans and bank credit cards that carry AAA ratings.
The auto loan asset-backed securities are backed by static pools of auto loans
that were originated and serviced by captive auto finance units, banks or
finance companies. The bank credit card asset-backed securities are backed by
revolving pools of credit card receivables generated by account holders of cards
from American Express, Citibank, JPMorgan Chase, Capital One, and Discover.
Additionally, at May 2, 2020, the Company had $0.6 million of corporate equities
and deferred compensation plan assets of $9.7 million. At February 1, 2020, the
Company had $0.7 million of corporate equities and deferred compensation plan
assets of $10.5 million. All of 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.
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THE CATO CORPORATION
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THE CATO CORPORATION 
