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 28, 2023
("fiscal 2022") 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, the availability of credit and inflation; changes in laws, regulations
and government policies affecting our business, including, but not limited to,
tariffs; uncertainties regarding the impact of any governmental actions
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; 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 January 29, 2022 ("fiscal 2021"),
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 AND ESTIMATES:
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 January 29, 2022.
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 customer credit losses,
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 Six Months Ended
July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Total retail sales 100.0 % 100.0 % 100.0 % 100.0 %
Other revenue 1.0 0.9 0.9 0.9
Total revenues 101.0 100.9 100.9 100.9
Cost of goods sold
(exclusive of
depreciation) 67.6 56.1 66.0 57.4
Selling, general and
administrative (exclusive
of depreciation) 31.2 34.5 30.3 32.2
Depreciation 1.4 1.5 1.4 1.5
Interest and other income (1.0) (0.3) (0.6) (0.3)
Income before income
taxes 1.8 9.0 3.8 10.2
Net income (loss) (1.2) 6.8 1.9 8.3
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
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 2021 Form 10-K.
Recent Developments
COVID-19 Update
There is still significant uncertainty regarding the lingering effects of the
COVID-19 pandemic on our business, financial condition, results of operations,
cash flows, and liquidity. In particular, the Company is subject to the
continued effects of disruption in the global supply chain, including as a
result of government responses to COVID-19 surges in the foreign countries where
our merchandise is produced, inflation and its impact on our cost of products,
transportation, wage rates and other operating costs, as well as, the impact on
our customers' disposable incomes, and the availability of workers at our
stores, distribution center and corporate office. The Company expects that these
uncertainties and perhaps others related to the pandemic will continue to impact
the Company in fiscal 2022.
Inflationary Cost Pressure
The COVID-19 pandemic and resulting supply chain disruptions, as well as certain
geo-political matters, have resulted in significant price increases associated
with the acquisition, shipping, transportation and distribution costs for the
merchandise we purchase for sale to our customers. In addition to the price
increases relating to our merchandise, costs for fuel, food, and housing,
including rent, as well as other consumables across the economy, are
increasingly impacting our customers' disposable income. We believe that these
price increases have had, and will likely continue to have, a negative impact on
consumer behavior and, by extension, our results of operations and financial
condition during fiscal 2022.
Supply Chain Disruptions
We source a significant portion of our merchandise assortment from third parties
who manufacture their products in countries that have experienced widespread
issues with the pandemic, thereby significantly impacting the global supply
chain for merchandise inventories. Disruptions in the global transportation
network remain prevalent, particularly in key ports or shipping lanes that are
used for the transportation of our merchandise. These issues are resulting in
shipping delays and increased shipping costs throughout the retail industry,
including us. Any untimely delivery of merchandise could have a negative impact
on our ability to serve our customers with the specific merchandise they want in
the quantities they wish to purchase in a timely manner, thereby potentially
resulting in lost sales or increased markdowns to move through excess fashion
and seasonal inventories that were delivered late. We continue to monitor the
situation closely and are in contact with our supply chain partners and key
suppliers to constantly assess delivery delays. However, we are unable to
predict the specific effects these factors will have on our fiscal 2022 results
of operations.
Labor Challenges and Wage Inflation
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The COVID-19 pandemic and the resulting factors above have also created
challenges related to the availability of sufficient labor from time to time,
and have caused a significant increase in the competition for labor among
consumer facing companies. This competition for labor has driven significant
increases in wages in order to compete for sufficient labor availability and/or
to prevent the loss of existing workforce in our stores, distribution center and
corporate office. We expect these pressures to continue throughout fiscal 2022.
Comparison of the Three and Six Months ended July 30, 2022 with July 31, 2021
Total retail sales for the second quarter were $195.0 million compared to last
year's second quarter sales of $206.0 million, a 5% decrease. The Company's
sales decrease in the second quarter of fiscal 2022 is primarily due to a 5%
decrease in same-store sales. The decrease in same-store sales is primarily
attributable to fewer sales transactions. For the six months ended July 30,
2022, total retail sales were $399.9 million compared to last year's comparable
six month sales of $417.2 million, a 4% decrease. Sales in the first six months
of fiscal 2022 decreased primarily due to a 4% decrease in same-store sales.
Same-store sales for the six months ended July 30, 2022 decreased primarily due
to fewer sales transactions, coupled with a lower average retail sales per
transaction. 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 July 30, 2022 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 $196.9 million and $403.6 million for the
three and six months ended July 30, 2022, respectively, compared to $207.7
million and $420.8 million for the three and six months ended July 31, 2021,
respectively. The Company operated 1,312 stores at July 30, 2022 compared to
1,325 stores at the end of last year's second quarter. During the first six
months of fiscal 2022, the Company opened eight stores and closed seven stores.
The Company currently expects to open approximately 25 stores and to close
approximately 40 stores in fiscal 2022.
Credit revenue of $0.6 million represented 0.3% of total revenues in the second
quarter of fiscal 2022, compared to 2021 credit revenue of $0.5 million or 0.2%
of total revenues. 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 2022, compared to last
year's second quarter expense of $0.3 million.
Other revenue, a component of total revenues, was $1.9 million and $3.6 million
for the three and six months ended July 30, 2022, respectively, compared to $1.8
million and $3.6 million for the prior year's comparable three and six month
periods. The overall increase in the three and six months ended July 30, 2022 is
primarily due to increases in layaway charges partially offset by decreases in
gift card breakage income.
Cost of goods sold was $131.7 million, or 67.6% of retail sales and $264.0
million, or 66.0% of retail sales for the three and six months ended July 30,
2022, respectively, compared to $115.6 million, or 56.1% of retail sales and
$239.3 million, or 57.4% of retail sales for the comparable three and six month
periods of fiscal 2021. The overall increase in cost of goods sold as a percent
of retail sales for the second quarter of fiscal 2022 resulted primarily from
higher sales of marked down goods and increases in freight, distribution and
occupancy 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
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 30.0% to $63.3 million for the second quarter of
fiscal 2022 and decreased by 23.6% to $135.9 million for the first six months of
fiscal 2022, compared to $90.4 million and $177.9 million for the prior year's
comparable three and six months of fiscal 2021. 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 were
$60.8 million, or 31.2% of retail sales and $121.2 million, or 30.3% of retail
sales for the second quarter and first six months of fiscal 2022, respectively,
compared to $71.0 million, or 34.5% of retail sales and $134.2 million, or 32.2%
of retail sales for the prior year's comparable three and six month periods. The
overall decrease in SG&A expense for the second quarter and first six months of
fiscal 2022 is primarily due to lower incentive compensation expense, partially
offset by increased payroll expense, which is a reflection of normalized store
operations and higher wages.
Depreciation expense was $2.8 million, or 1.4% of retail sales and $5.6 million,
or 1.4% of retail sales for the second quarter and first six months of fiscal
2022, respectively, compared to $3.1 million, or 1.5% of retail sales and $6.2
million or 1.5% of retail sales for the comparable three and six month periods
of fiscal 2021, respectively.
Interest and other income was $1.9 million, or 1.0% of retail sales and $2.3
million, or 0.6% of retail sales for the three and six months ended July 30,
2022, respectively, compared to $0.5 million, or 0.3% of retail sales and $1.2
million, or 0.3% of retail sales for the comparable three and six month periods
of fiscal 2021, respectively. The increase for the second quarter and first six
months of fiscal 2022 compared to fiscal 2021 is primarily attributable to
insurance proceeds related to hurricanes in 2021.
Income tax expense was $5.7 million and $7.6 million for the second quarter and
first six months of fiscal 2022, respectively, compared to an income tax expense
of $4.6 million and $7.6 million for the comparable three and six month periods
of fiscal 2021, respectively. For the first six months of fiscal 2022, the
Company's effective tax rate was 50.6% compared to 18.0% for the first six
months of 2021. The change in the 2022 year-to-date effective tax rate was
primarily due to an increase in Global Intangible Low-taxed Income (GILTI),
state income taxes and non-deductible officer's compensation, offset by the
foreign rate differential and foreign tax credits, as a percentage on lower
pre-tax earnings.
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 borrowings available under its
revolving credit agreement, will be adequate to fund the Company's regular
operating requirements and expected capital expenditures for fiscal 2022 and the
next 12 months.
Cash provided by operating activities during the first six months of fiscal 2022
was $17.0 million as compared to $82.0 million in the first six months of fiscal
2021. Cash provided by operating activities for the first six months of fiscal
2022 was primarily generated by earnings adjusted for depreciation and changes
in working capital. The decrease in cash provided of $65.0 million for the first
six months of fiscal 2022 as compared to the first six months of fiscal 2021 was
primarily due to lower net income and decreases in
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
accounts payable and accrued liabilities primarily related to incentive
compensation, partially offset by a decrease in accounts receivable.
At July 30, 2022, the Company had working capital of $106.2 million compared to
$111.5 million at January 29, 2022. The decrease in working capital is primarily
attributable to a decrease in short-term investments and accounts receivable,
partially offset by a decrease in accrued bonus and benefits.
As of July 30, 2022, the Company had an unsecured revolving credit agreement,
which provided for borrowings of up to $35.0 million, less the balance of any
revocable letters of credit related to purchase commitments, and was committed
through May 2027. 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 July 30, 2022. There were no borrowings
outstanding, nor any outstanding letters of credit that reduced borrowing
availability, as of July 30, 2022 or January 29, 2022. The weighted average
interest rate under the credit facility was zero at July 30, 2022 due to no
borrowings outstanding.
Expenditures for property and equipment totaled $10.4 million in the first six
months of fiscal 2022, compared to $1.1 million in last fiscal year's first six
months. The increase in expenditures for property and equipment was primarily
due to costs associated with opening eight new stores and capital investments in
information technology and the distribution center. For the full fiscal 2022
year, the Company expects to invest approximately $20.5 million for capital
expenditures.
Net cash provided by investing activities totaled $10.1 million in the first six
months of fiscal 2022 compared to $64.9 million used in investing activities in
the comparable period of 2021. The increase in net cash provided in 2022 is
primarily due to a net decrease in the purchase of short-term investments,
partially offset by an increase in capital expenditures.
Net cash used in financing activities totaled $16.7 million in the first six
months of fiscal 2022 compared to $8.8 million used in the comparable period of
fiscal 2021. The increase in net cash used in fiscal 2022 is primarily due to
higher dividends paid and stock repurchases.
On August 25, 2022, the Board of Directors declared the quarterly dividend at
$0.17 per share.
As of July 30, 2022, the Company had 808,427 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 July 30, 2022 and January 29, 2022.
The state, municipal and corporate bonds have contractual maturities which range
from one day to 4.5 years. The U.S. Treasury Notes have contractual maturities
which range from one day to 2.1 years. These securities are classified as
available-for-sale and are recorded as Short-term investments, Restricted cash
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
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 July 30, 2022, the Company had $0.7 million of corporate
equities and deferred compensation plan assets of $11.0 million. At January 29,
2022, the Company had $0.8 million of corporate equities and deferred
compensation plan assets of $11.5 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 