NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new accounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new accounting rules will be effective for the Company in the first quarter of 2021. The Company is currently in the process of evaluating the impact of adoption of the new accounting rules on the Company’s financial position, results of operations, cash flows and disclosures.
NOTE 9 – INCOME TAXES:
The Company had an effective tax rate for the first six months of 2020 of 26.7% (Benefit) compared to 16.3% (Expense) for the first six months of 2019. The increase in the effective tax rate for the first six months 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 Company assessed the likelihood that deferred tax assets related to state net operating loss carryforwards will be realized 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 against the existing deferred tax assets.
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 judgment 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.
NOTE 10 – COMMITMENTS AND CONTINGENCIES:
The Company is, from time to time, involved in routine litigation incidental to the conduct of its business, including litigation regarding the merchandise that it sells, litigation regarding intellectual property, litigation instituted by persons injured upon premises under its control, litigation with respect to various employment matters, including alleged discrimination and wage and hour litigation, and litigation with present or former employees.
Although such litigation is routine and incidental to the conduct of the Company’s business, as with any business of its size with a significant number of employees and significant merchandise sales, such
litigation could result in large monetary awards. Based on information currently available, management does not believe that any reasonably possible losses arising from current pending litigation will have a material adverse effect on the Company’s condensed consolidated financial statements. However, given the inherent uncertainties involved in such matters, an adverse outcome in one or more such matters could materially and adversely affect the Company’s financial condition, results of operations and cash flows in any particular reporting period. The Company accrues for these matters when the liability is deemed probable and reasonably estimable.
NOTE 11 – REVENUE RECOGNITION:
The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales are recorded as deferred revenue until the customer takes possession or forfeits the merchandise. Gift cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales volumes and the Company’s experience; actual returns have not varied materially from historical amounts. A provision is made for estimated write-offs associated with sales made with the Company’s proprietary credit card. Amounts related to shipping and handling billed to customers in a sales transaction are classified as Other revenue and the costs related to shipping product to customers (billed and accrued) are classified as Cost of goods sold.
The Company offers its own proprietary credit card to customers. All credit activity is performed by the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. The Company estimated uncollectible amounts of $,185000 and $,455000 for the six months ended August 1, 2020 and August 3, 2019, respectively, on sales purchased on the Company’s proprietary credit card of $6.9 million and $13.8 million for the six months ended August 1, 2020 and August 3, 2019, respectively.
The following table provides information about receivables and contract liabilities from contracts with customers (in thousands):
|
Balance as of
|
|
|
August 1, 2020
|
|
|
February 1, 2020
|
|
|
|
|
|
|
Proprietary Credit Card Receivables, net
|
$
|
10,763
|
|
$
|
15,241
|
Gift Card Liability
|
$
|
6,401
|
|
$
|
7,658
|
NOTE 12 – LEASES:
The Company determines whether an arrangement is a lease at inception. The Company has operating leases for stores, offices and equipment. Its leases have remaining lease terms of one year to 10 years, some of which include options to extend the lease term for up to five years, and some of which include options to terminate the lease within one year. The Company considers these options in determining the
|
|
THE CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2020 AND AUGUST 3, 2019
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
August 1, 2020
|
|
August 3, 2019
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
31,445
|
|
$
|
25,418
|
Non-cash activity:
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
$
|
31,484
|
|
$
|
602
|
Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows:
|
As of
|
|
August 1, 2020
|
|
August 3, 2019
|
|
|
|
|
Weighted-average remaining lease term
|
2.9 years
|
|
2.6 years
|
Weighted-average discount rate
|
4.29%
|
|
4.65%
|
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands):
Fiscal Year
|
|
|
|
|
|
2020 (a)
|
$
|
31,069
|
2021
|
|
59,114
|
2022
|
|
43,325
|
2023
|
|
31,978
|
2024
|
|
20,611
|
Thereafter
|
|
49,366
|
Total lease payments
|
|
235,463
|
Less: Imputed interest
|
|
25,077
|
Present value of lease liabilities
|
$
|
210,386
|
|
|
|
(a) Excluding the 6 months ended August 1, 2020.
|
THE CATO CORPORATION
|
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 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, 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 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.
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.
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
|
|
|
August 1, 2020
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
August 3, 2019
|
|
Total retail sales
|
100.0
|
%
|
100.0
|
%
|
|
100.0
|
%
|
100.0
|
%
|
Other revenue
|
1.1
|
|
1.1
|
|
|
1.4
|
|
1.0
|
|
Total revenues
|
101.1
|
|
101.1
|
|
|
101.4
|
|
101.0
|
|
Cost of goods sold (exclusive of depreciation)
|
79.8
|
|
62.0
|
|
|
81.6
|
|
60.8
|
|
Selling, general and administrative (exclusive of depreciation)
|
26.4
|
|
31.4
|
|
|
36.4
|
|
30.1
|
|
Depreciation
|
2.1
|
|
1.8
|
|
|
2.8
|
|
1.8
|
|
Interest and other income
|
(0.6)
|
|
(0.8)
|
|
|
(1.1)
|
|
(0.6)
|
|
Income/(loss) before income taxes
|
(6.6)
|
|
6.7
|
|
|
(18.3)
|
|
9.0
|
|
Net income/(loss)
|
(4.3)
|
|
5.6
|
|
|
(13.4)
|
|
7.6
|
|
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 and other measures 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 fiscal 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 furloughed associates and in certain instances eliminated positions primarily at its corporate office. Beginning on May 1, 2020, the Company began to re-open stores based on the pertinent state and local orders. As of June 15, 2020, all stores have re-opened. 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, the possible effects of national, state or local action, legislation, guidelines or programs that attempt to mitigate the spread of COVID-19 or address its economic effects on our customers, suppliers or the Company are also uncertain.
While the Company currently anticipates that our results for the remainder of fiscal 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 possible new information and understanding about the severity of COVID-19, related potential economic impacts to customers and suppliers, and the effect of actions taken to contain it or mitigate its impact.
Comparison of the Three and Six Months ended August 1, 2020 with August 3, 2019
Total retail sales for the second quarter were $166.3 million compared to last year’s second quarter sales of $210.4 million, a 21.0% decrease. The Company’s sales decrease in the second quarter of fiscal 2020 is primarily due to a 22% decrease in same-store sales, partially offset by new store openings. Sales in the second quarter were negatively impacted by the phased store re-openings, reduced operating hours compared to 2019 and high amounts of markdowns. For the six months ended August 1, 2020, total retail sales were $265.1 million compared to last year’s comparable six month sales of $438.4 million. Sales in the first six months of fiscal 2020 decreased 40% primarily due to a 39% decrease in same-store sales, partially offset by new store openings. Sales for the six months ended August 1, 2020 were negatively impacted primarily by store closures in the first quarter and phased re-opening of stores, reduced store hours and high amounts of markdowns in the second quarter. 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 6% of sales for the six months ended August 1, 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 and layaway fees),
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
|
|
were $168.2 million and $268.9 million for the three and six months ended August 1, 2020, compared to $212.6 million and $442.9 million for the three and six months ended August 3, 2019, respectively. The Company operated 1,333 stores at August 1, 2020 compared to 1,299 stores at the end of last year’s second quarter. During the first six months of fiscal 2020, the Company closed eight stores. In total, the Company currently expects to open 76 stores, which had leases prior to the COVID-19 pandemic, and close approximately 40 stores in fiscal 2020.
Credit revenue of $0.6 million represented 0.4% of total revenues in the second 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. Related expenses principally include payroll, postage and other administrative expenses and totaled $0.3 million in the second quarter of fiscal 2020, compared to last year’s second quarter expense of $0.4 million.
Other revenue in total, as included in total revenues, was $1.9 million and $3.8 million for the three and six months ended August 1, 2020, respectively, compared to $2.2 million and $4.5 million for the prior year’s comparable three and six month periods. The overall decrease in the three and six months ended August 1, 2020 is primarily due to decreases in finance and layaway charges, partially offset by increases in e-commerce shipping revenues.
Cost of goods sold was $132.7 million, or 79.8% of retail sales and $216.3 million, or 81.6% of retail sales for the three and six months ended August 1, 2020, respectively, compared to $130.4 million, or 62.0% of retail sales and $266.5 million, or 60.8% of retail sales for the comparable three and six month periods of fiscal 2019. The overall increase in cost of goods sold as a percent of retail sales for the second quarter of fiscal 2020 resulted primarily from an increase in cost of goods sold primarily due to more markdown sales and deleveraging of occupancy and distribution costs, partially offset by a decrease in buying 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 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 58.1% to $33.5 million for the second quarter of fiscal 2020 and decreased by 71.7% to $48.7 million for the first six months of fiscal 2020, compared to $80.0 million and $172.0 million for the prior year’s comparable three and six months 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 were $44.0 million, or 26.4% of retail sales and $96.5 million, or 36.4% of retail sales for the second quarter and first six months of fiscal 2020, respectively, compared to $66.1 million, or 31.4% of retail sales and $132.1 million, or 30.1% of retail sales for the prior year’s comparable three and six month periods. The decrease in SG&A expense for the second quarter is primarily attributable to lower store expenses due to the phased store re-opening, reduced store operating hours, lower corporate expenses and elimination of incentive compensation. For the first six months of fiscal 2020 the decrease in SG&A expense was primarily attributable to lower store expenses due to stores being closed, phased store re-opening in the second quarter, reduced store operating hours, lower corporate expenses and elimination of incentive compensation, partially offset by higher store impairment charges.
Depreciation expense was $3.5 million, or 2.1% of retail sales and $7.5 million, or 2.8% of retail sales for the second quarter and first six months of fiscal 2020, respectively, compared to $3.8 million, or 1.8% of retail
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
|
|
sales and $7.7 million or 1.8% of retail sales for the comparable three and six month periods of fiscal 2019, respectively.
Interest and other income was $1.0 million, or 0.6% of retail sales and $2.8 million, or 1.1% of retail sales for the three and six months ended August 1, 2020, respectively, compared to $1.7 million, or 0.8% of retail sales and $2.8 million, or 0.6% of retail sales for the comparable three and six month periods of fiscal 2019, respectively. The decrease for the first six months of fiscal 2020 compared to 2019 is primarily attributable to a decrease in short-term investments and lower interest rates.
Income tax benefit was $3.9 million and $13.0 million for the second quarter and first six months of fiscal 2020, respectively, compared to income tax expense of $2.1 million and $6.5 million for the comparable three and six month periods of fiscal 2019, respectively. For the first six months of 2020, the Company’s effective tax rate was 26.7% (Benefit). The increase in the 2020 year-to-date 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 increase in the reserves for uncertain tax positions specific to state income taxes in the first quarter of 2020.
The Company assessed the likelihood that deferred tax assets related to state net operating loss carryforwards will be realized 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 against the existing deferred tax assets.
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 judgment 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 six months of fiscal 2020 was $48.2 million as compared to $45.2 million provided in the first six months of fiscal 2019. In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at August 1, 2020 and 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 six months of fiscal 2020 was primarily attributable to net losses adjusted for depreciation and changes in working capital. The decrease in cash provided of $93.4 million for the first six months of fiscal 2020 as compared to the first six months of fiscal 2019 was primarily due to a net loss versus net income, an increase in accounts receivable primarily related to income taxes and an increase in prepaid expenses, partially offset by store impairment charges.
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
|
|
At August 1, 2020, the Company had working capital of $126.6 million compared to $163.5 million at February 1, 2020. The decrease in working capital is primarily due to reduction in short-term assets and lower inventories, partially offset by lower accounts payable and accrued liabilities.
At August 1, 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 value of revocable letters of credit discussed below. 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 August 1, 2020. There were no borrowings outstanding under the credit facility as of August 1, 2020 and February 1, 2020.
Expenditures for property and equipment totaled $9.8 million in the first six months of fiscal 2020, compared to $2.2 million in last fiscal year’s first six months. The expenditures for the first six months of fiscal 2020 were primarily for additional investments in stores, distribution center and information technology. For the full fiscal 2020 year, the Company expects to invest approximately $13.0 million for capital expenditures.
Net cash provided by investing activities totaled $91.0 million in the first six months of fiscal 2020 compared to $23.4 million used in investing activities in the comparable period of 2019. The increase in net cash provided in 2020 is primarily attributable to the increase in net sales of short-term investments, partially offset by expenditures for property and equipment.
Net cash used in financing activities totaled $17.6 million in the first six months of fiscal 2020 compared to $18.8 million used in the comparable period of fiscal 2019. The decrease was primarily due to lower dividend payments, partially offset by higher share repurchase amounts.
As of August 1, 2020, the Company had 728,466 shares remaining in open authorizations under its share repurchase program. The Company temporarily suspended dividends in the first quarter of 2020.
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 August 1, 2020 and February 1, 2020. The state, municipal and corporate bonds have contractual maturities which range from six days to 7 years. The U.S. Treasury Notes and Certificates of Deposit have contractual maturities which range from one month to 2 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 August 1, 2020, the Company had $0.6 million of corporate equities and deferred compensation plan assets of $10.5 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.
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
|
|
See Note 7, Fair Value Measurements.
RECENT ACCOUNTING PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements.
THE CATO CORPORATION
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
|
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.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of August 1, 2020. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of August 1, 2020, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended August 1, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
THE CATO CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
Not Applicable
ITEM 1A. RISK FACTORS:
In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended February 1, 2020, as supplemented by the risk factor set forth below. These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.
The Company has updated the following risk factor related to COVID-19:
The outbreak of COVID-19 has and will adversely affect our business, financial condition and results of operations.
The recent outbreak of COVID-19 has adversely impacted the Company's business, financial condition and operating results through the first six months of fiscal 2020, and we expect that it will continue to do so throughout the remainder of fiscal 2020 and possibly beyond. Adverse financial impacts associated with the outbreak include, but are not limited to, (i) lower net sales in markets affected by the actual or potential outbreak, whether due to state and local orders to close stores, reductions in store traffic and customer demand, labor shortages, or all, (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 spread of COVID-19 has caused state and local governments to issue orders mandating store closures and other measures to mitigate the spread of the virus. In addition public health officials have issued precautions and guidance intended to reduce the spread of the virus, including particular cautions about congregating in large groups or heavily populated areas, such as malls and shopping centers. We temporarily closed all Cato, Its Fashion, Its Fashion Metro and Versona stores March 19, 2020. Beginning on May 1, 2020, we began to re-open stores based on the pertinent state and local orders. As of June 15, 2020, all stores have re-opened. There is significant uncertainty around the breadth and severity of business disruptions related to COVID-19, as well as its impact on the global and U.S. economy, consumer willingness to visit malls and shopping centers, and appropriate associate staffing levels for our stores. At this time, the possible effects of national, state or local action, legislation, guidelines or programs that attempt to mitigate the spread of COVID-19 or address its economic effects on our customers, suppliers or the Company are also uncertain.
While the Company currently anticipates that our results for the remainder of fiscal 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 possible new information and understanding about the severity of COVID-19, related potential economic impacts to customers and suppliers and the effect of actions taken to contain it or mitigate its impact.
Future outbreaks of disease or similar public health threats, or the fear of such an occurrence, may also have a material adverse effect on the Company’s business, financial condition and operating results.
THE CATO CORPORATION
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
The following table summarizes the Company’s purchases of its common stock for the three months ended August 1, 2020:
ISSUER PURCHASES OF EQUITY SECURITIES
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Total Number of
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Maximum Number
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Shares Purchased as
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(or Approximate Dollar
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Total Number
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Average
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Part of Publicly
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Value) of Shares that may
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Fiscal
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of Shares
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Price Paid
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Announced Plans or
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Yet be Purchased Under
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Period
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Purchased
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per Share (1)
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Programs (2)
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The Plans or Programs (2)
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May 2020
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-
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$
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-
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-
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June 2020
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-
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-
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-
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July 2020
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-
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-
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-
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Total
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-
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$
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-
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-
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728,466
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(1)
Prices include trading costs.
(2)
As of May 2, 2020, the Company’s share repurchase program had 728,466 shares remaining in open authorizations. During the second quarter ended August 1, 2020, the Company did not repurchase or retire any shares under this program. As of August 1, 2020, the Company had 728,466 shares remaining in open authorizations. There is no specified expiration date for the Company’s repurchase program. On August 27, 2020, the Board of Directors authorized an increase in the Company’s share repurchase program of 1 million shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
Not Applicable
THE CATO CORPORATION
PART II OTHER INFORMATION
ITEM 4. MINE SAFETY DISCLOSURES:
Not Applicable
ITEM 5. OTHER INFORMATION:
Not Applicable
ITEM 6. EXHIBITS:
Exhibit No.
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Item
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3.1
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Registrant’s Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Form 10-Q of the Registrant for the quarter ended May 2, 2020.
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3.2
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Registrant’s Amended and Restated By-Laws, incorporated by reference to Exhibit 3.2 to Form 10-Q of the Registrant for the quarter ended May 2, 2020.
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10.11
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Ninth Amendment effective as of May 29, 2020, of Credit Agreement, dated as of August 22, 2003, among the Registrant, the guarantors party thereto and Branch Banking and Trust Company, as Agent, incorporated by reference to Exhibit 10.11 to Form 10-Q of the Registrant for the quarter ended May 2, 2020
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31.1*
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Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
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31.2*
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Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
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32.1*
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Section 1350 Certification of Principal Executive Officer.
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32.2*
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Section 1350 Certification of Principal Financial Officer.
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101.1*
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The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Six Months Ended August 1, 2020 and August 3, 2019; (ii) Condensed Consolidated Balance Sheets at August 1, 2020 and February 1, 2020; (iii) Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 1, 2020 and August 3, 2019; (iv) Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended August 1, 2020 and August 3, 2019; and (v) Notes to Condensed Consolidated Financial Statements.
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104.1
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Cover Page Interactive Data File (Formatted in Inline XBRL and contained in the Interactive Data Files submitted as Exhibit 101.1*)
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* Submitted electronically herewith.
THE CATO CORPORATION
PART II OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE CATO CORPORATION
August 27, 2020
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/s/ John P. D. Cato
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Date
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John P. D. Cato
Chairman, President and
Chief Executive Officer
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August 27, 2020
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/s/ John R. Howe
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Date
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John R. Howe
Executive Vice President
Chief Financial Officer
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