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 29, 2022
("fiscal 2021") 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, regulations or
governmental policies affecting our business, including 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 30, 2021 ("fiscal 2020"), 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.
24
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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 30, 2021.
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.
25
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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 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Total retail sales 100.0 % 100.0 % 100.0 % 100.0 %
Other revenue 0.9 1.1 0.9 1.4
Total revenues 100.9 101.1 100.9 101.4
Cost of goods sold
(exclusive of
depreciation) 56.1 79.8 57.4 81.6
Selling, general and
administrative (exclusive
of depreciation) 34.5 26.4 32.2 36.4
Depreciation 1.5 2.1 1.5 2.8
Interest and other income (0.3) (0.6) (0.3) (1.1)
Income (loss) before
income taxes 9.0 (6.6) 10.2 (18.3)
Net income (loss) 6.8 (4.3) 8.3 (13.4)
26
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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 COVID-19 pandemic adversely impacted the Company's business, financial
condition and operating results through fiscal 2020. The first and second
quarters of 2021 saw significant improvements in sales compared to 2020. This
improvement was primarily attributable to government stimulus, increased
customer traffic, states lifting capacity limits as more people were vaccinated,
consumers' increasing comfort level with venturing out to social events and
customers' preparing to return to work. However, the Company's sales were well
below 2019 sales for the comparable period, and there is still a high level of
uncertainty regarding the lingering effects of the pandemic, as well as renewed
concerns over the impact of new, more transmissible variants of the virus,
slowing vaccination rates and related factors that have in some cases slowed and
may continue to slow progress toward the return to pre-pandemic activities and
levels of consumer confidence. The Company faces additional uncertainty from the
continued effects of disruption in the global supply chain and available workers
as it attempts to hire associates as its operating hours continue to expand. The
Company expects that these uncertainties and perhaps others related to the
pandemic will continue to impact the Company in fiscal 2021 and possibly beyond.
The adverse financial impacts associated with the continued effects of, and
uncertainties related to, the COVID-19 pandemic include, but are not limited to,
(i) lower net sales in markets affected by actual or potential adverse changes
in conditions relating to the pandemic, whether due to increases in case counts,
state and local orders, reductions in store traffic and customer demand, labor
shortages, or all of these factors, (ii) lower net sales caused by the delay of
inventory production and fulfillment, (iii) and incremental costs associated
with efforts to mitigate the effects of the outbreak, including increased
freight and logistics costs and other expenses.
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 or its variants, 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.
While the Company currently anticipates a continuation of the adverse impacts of
COVID-19 during 2021 and possibly beyond, the duration and severity of these
effects will depend on the course of future developments, which are highly
uncertain, including the relative speed and success of, as well as public
confidence in, mitigation measures such as the current effort to vaccinate
substantial portions of the U.S. and global population, emerging information
regarding variants of the virus or new viruses and their potential impact on
current mitigation efforts, public attitudes toward continued compliance with
containment and mitigation measures, and possible new information and
understanding that could alter the course and duration of current measures to
combat the spread of the virus.
Comparison of the Three and Six Months ended July 31, 2021 with August 1, 2020
Total retail sales for the second quarter were $206.0 million compared to last
year's second quarter sales of $166.3 million, a 24% increase. The Company's
sales increase in the second quarter of fiscal 2021 is primarily due to a 23%
increase in same-store sales and sales from new stores, partially offset by
permanently closed stores in 2020. The increase in same-store sales is primarily
due to stores being open in this year's second quarter, as opposed to closed
from March 19, 2020 into the second quarter of 2020. For the six months ended
July 31, 2021, total retail sales were $417.2 million compared to last year's
comparable six month sales of $265.1 million, a 57% increase. Sales in the first
six months of fiscal 2021 increased primarily due to a 56% increase in
same-store sales and sales from new stores, partially offset by permanently
closed
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
stores in 2020. Same-store sales for the six months ended July 31, 2021
increased primarily due to stores being open in the first six months of 2021 as
opposed to closed from March 19, 2020 into the second quarter of 2020.
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 31, 2021 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 $207.7 million and $420.8 million for the three and six
months ended July 31, 2021, compared to $168.2 million and $268.9 million for
the three and six months ended August 1, 2020, respectively. The Company
operated 1,325 stores at July 31, 2021 compared to 1,333 stores at the end of
last year's second quarter. During the first six months of fiscal 2021, the
Company closed five stores. The Company currently expects to open fewer than 10
stores and to close approximately 25 stores in fiscal 2021.
Credit revenue of $0.5 million represented 0.2% of total revenues in the second
quarter of fiscal 2021, compared to 2020 credit revenue of $0.6 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 principally include payroll, postage
and other administrative expenses and totaled $0.3 million in the second quarter
of fiscal 2021, compared to last year's second quarter expense of $0.3 million.
Other revenue in total, as included in total revenues, was $1.8 million and $3.6
million for the three and six months ended July 31, 2021, respectively, compared
to $1.9 million and $3.8 million for the prior year's comparable three and six
month periods. The overall decrease in the three and six months ended July 31,
2021 is primarily due to decreases in finance charge income, partially offset by
increases in layaway charges and gift card breakage income.
Cost of goods sold was $115.6 million, or 56.1% of retail sales and $239.3
million, or 57.3% of retail sales for the three and six months ended July 31,
2021, respectively, compared to $132.7 million, or 79.8% of retail sales and
$216.3 million, or 81.6% of retail sales for the comparable three and six month
periods of fiscal 2020. The overall decrease in cost of goods sold as a percent
of retail sales for the second quarter of fiscal 2021 resulted primarily from
the leveraging of occupancy, buying and distribution costs due to more
normalized sales and higher sales of regular priced 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 169.9% to $90.4 million for the second quarter of fiscal 2021 and
increased by 265.3% to $177.9 million for the first six months of fiscal 2021,
compared to $33.5 million and $48.7 million for the prior year's comparable
three and six months of fiscal 2020. 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
$71.0 million, or 34.5% of retail sales and $134.2 million, or 32.2% of retail
sales for the second quarter and first six months of fiscal 2021, respectively,
compared to $44.0 million, or 26.4% of retail
28
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
sales and $96.5 million, or 36.4% of retail sales for the prior year's
comparable three and six month periods. The overall increase in SG&A expense for
the second quarter is primarily due to increased employee benefit/bonus expense
and store operating expenses as operating hours have increased substantially
compared to the prior year's phased store reopening following the extended store
closure due to COVID-19. For the first six months of fiscal 2021, the overall
increase in SG&A expense was primarily attributable to increased employee
benefit/bonus expense and store operating expenses as operating hours have
increased substantially compared to the prior year's phased store reopening
following the extended store closure due to COVID-19, partially offset by a $5.3
million non-cash impairment charge in 2020.
Depreciation expense was $3.1 million, or 1.5% of retail sales and $6.2 million,
or 1.5% of retail sales for the second quarter and first six months of fiscal
2021, respectively, compared to $3.5 million, or 2.1% of retail sales and $7.5
million or 2.8% of retail sales for the comparable three and six month periods
of fiscal 2020, respectively. The decrease in depreciation expense is
attributable to lower net fixed assets primarily due to $13.7 million of
impairment charges in 2020.
Interest and other income was $0.5 million, or 0.3% of retail sales and $1.2
million, or 0.3% of retail sales for the three and six months ended July 31,
2021, respectively, compared to $1.0 million, or 0.6% of retail sales and $2.8
million, or 1.1% of retail sales for the comparable three and six month periods
of fiscal 2020, respectively. The decrease for the first six months of fiscal
2021 compared to 2020 is primarily attributable to lower interest rates and
smaller gains from the sale of investments, partially offset by an increase in
short-term investments.
Income tax expense was $4.6 million and $7.6 million for the second quarter and
first six months of fiscal 2021, respectively, compared to an income tax benefit
of $3.9 million and $13.0 million for the comparable three and six month periods
of fiscal 2020, respectively. For the first six months of fiscal 2021, the
Company's effective tax rate was 18.0% (Expense) compared to 26.7% (Benefit) for
the first six months of 2020. The change in the 2021 year-to-date effective tax
rate was primarily due to higher pre-tax earnings and ability to realize foreign
tax credits, partially offset by increases in state income taxes in the first
quarter of fiscal 2021.
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 2021 and the
next 12 months.
Cash provided by operating activities during the first six months of fiscal 2021
was $82.0 million as compared to $48.2 million used in the first six months of
fiscal 2020. Cash provided by operating activities for the first six months of
fiscal 2021 was primarily generated by earnings adjusted for depreciation and
changes in working capital. The increase in cash provided of $130.2 million for
the first six months of fiscal 2021 as compared to the first six months of
fiscal 2020 was primarily due to a net income versus a net loss and an increase
in accounts payable and accrued liabilities, partially offset by a decrease in
store impairment charges.
At July 31, 2021, the Company had working capital of $148.2 million compared to
$108.6 million at January 30, 2021. The increase in working capital is primarily
attributable to higher short-term investments, partially offset by higher
accrued employee benefits and bonus.
29
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At July 31, 2021 and January 30, 2021, the Company had an unsecured revolving
credit agreement, which provides for borrowings of up to $35.0 million, less the
value of revocable letters of credit relating to purchase commitments. The
revolving credit agreement is committed until May 2023. 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
31, 2021. There were no borrowings outstanding under the credit facility, nor
outstanding letters of credit that reduced borrowing availability, as of July
31, 2021 and January 30, 2021.
Expenditures for property and equipment totaled $1.1 million in the first six
months of fiscal 2021, compared to $9.8 million in last fiscal year's first six
months. For the full fiscal 2021 year, the Company expects to invest
approximately $4.1 million for capital expenditures.
Net cash used by investing activities totaled $64.9 million in the first six
months of fiscal 2021 compared to $91.0 million provided by investing activities
in the comparable period of 2020. The increase in net cash used in 2021 is
primarily due to a decrease in the sale of short-term investments and an
increase in the purchase of short-term investments, partially offset by a
decrease in capital expenditures.
Net cash used in financing activities totaled $8.8 million in the first six
months of fiscal 2021 compared to $17.6 million used in the comparable period of
fiscal 2020. The decrease was primarily due to less dividends paid and stock
repurchases.
As of July 31, 2021, the Company had 1,380,779 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 31, 2021 and January 30, 2021.
The state, municipal and corporate bonds have contractual maturities which range
from one day to five years. The U.S. Treasury Notes have contractual maturities
which range from two months to two years. These securities are classified as
available-for-sale and are recorded as Short-term investments, Restricted cash
and Restricted short-term investments 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 July 31, 2021, the Company had $0.8 million of corporate
equities and deferred compensation plan assets of $11.7 million. At January 30,
2021, the Company had $0.7 million of corporate equities and deferred
compensation plan assets of $11.3 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:
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
See Note 8, Recent Accounting Pronouncements.
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THE CATO CORPORATION
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