EDGAR 10-K Filing

Company CIK: 18255
Filing Year: 2021
Filename: 18255_10-K_2021_0000018255-21-000004.json

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ITEM 1. BUSINESS
Item 1.
Business:
Background
The Company,
founded in
1946, operated
1,330 fashion specialty
stores at
January 30,
2021, in
states, principally
in the
southeastern United
States, under
the names
“Cato,” “Cato
Fashions,” “Cato
Plus,” “It’s
Fashion,” “It’s
Fashion Metro”
and “Versona.”
The Cato
concept seeks
to offer
quality
fashion apparel and accessories at low prices every day, in junior/missy and plus sizes.
The Cato
concept’s stores and e-commerce website feature a broad assortment of apparel and accessories, including
dressy, career,
and casual
sportswear, dresses,
coats, shoes,
lingerie, costume jewelry
and handbags.
A
major portion of the Cato concept’s merchandise is sold under
its private label and is produced by various
vendors in accordance with the concept’s specifications.
The It’s Fashion and
It’s Fashion Metro
concepts offer fashion with a focus on the latest trendy styles for the entire family at low prices every day.
The Versona
concept’s stores
and e-commerce website
offer quality
fashion apparel
items, jewelry and
accessories at exceptional
values every day.
The Company’s
stores range in
size from 2,100
to 19,000
square feet
and are
located primarily
in strip
shopping centers
anchored by
national discounters
or
market-dominant grocery
stores.
The Company
emphasizes friendly
customer service
and coordinated
merchandise presentations
in an
appealing store
environment. The
Company offers
its own
credit card
and layaway plan.
Credit and layaway
sales under the
Company’s plan
represented 5% of
retail sales in
fiscal 2020.
See Note 14
to the
Consolidated Financial Statements,
“Reportable Segment Information,”
for a discussion of information regarding the Company’s two reportable segments: retail and credit.
The Company
has operated
Cato-branded retail
stores for
approximately 75
years.
The Company
originated as a family-owned business and made its
first initial public offering of stock
in 1968.
In 1980,
the Company went private and in 1987 again conducted an initial public offering.
Business Strategy
The Company’s
primary objective is
to be the
leading fashion specialty
retailer for fashion
and value
in its markets. Management
believes the Company’s
success is dependent upon
its ability to differentiate
its stores from
department stores, mass
merchandise discount stores
and competing specialty
stores. The
key
elements of the Company’s business strategy are:
Merchandise Assortment.
The Company’s
stores offer
a wide
assortment of
on-trend apparel
and
accessory items in
primarily junior/missy,
plus sizes,
men’s and
kids sizes,
toddler to boys
size 20
and
girls size
16 with
an emphasis
on color,
product coordination
and selection.
Colors and
styles are
coordinated and presented so that outfit selection is easily made.
Value
Pricing.
The Company offers
quality merchandise that
is generally priced
below comparable
merchandise offered by department stores and mall specialty apparel chains,
but is generally more
fashionable than
merchandise offered
by discount
stores. Management
believes that
the Company
has
positioned itself as the every day low price leader in its market
segment.
Strip Shopping
Center Locations.
The Company
locates its
stores principally
in convenient
strip
centers anchored by national
discounters or market-dominant grocery stores
that attract large
numbers of
potential customers.
Customer Service.
Store managers and
sales associates are
trained to provide
prompt and courteous
service and to assist customers in merchandise selection and wardrobe
coordination.
Credit
and Layaway Programs
.
The Company offers
its own credit card
and a layaway plan
to make
the purchase of its merchandise more convenient for its customers.
Merchandising
Merchandising
The Company
seeks to
offer a
broad selection
of high
quality and
exceptional value
apparel and
accessories to suit the
various lifestyles of fashion and value-conscious customers.
In addition, the
Company strives to offer on-trend fashion in exciting colors with consistent fit and
quality.
The Company’s merchandise lines
include dressy, career,
and casual sportswear, dresses, coats,
shoes,
lingerie, costume jewelry,
handbags, men’s
wear and lines
for kids and
infants. The Company
primarily
offers exclusive merchandise
with fashion and
quality comparable to
mall specialty stores
at low prices,
every day.
The Company believes that the collaboration of its merchandising and design teams with an expanded
in-house product
development and
direct sourcing
function has
enhanced merchandise
offerings and
delivers quality,
exclusive on-trend styles
at lower prices.
The product development
and direct sourcing
operations provide research on
emerging fashion and
color trends, technical
services and direct
sourcing
options.
As a part
of its merchandising
strategy, members
of the Company’s
merchandising and design
staff
frequently attend trade shows to stay abreast of latest trends and styles, visit selected stores to monitor the
merchandise offerings
of other
retailers, regularly
communicate with
store operations
associates and
frequently confer
with key
vendors.
The Company
also takes
aggressive markdowns
on slow-
selling
merchandise and typically does not carry over merchandise to the next season.
Purchasing, Allocation and Distribution
Although the Company purchases
merchandise from approximately 540 suppliers,
most of its
merchandise is purchased
from approximately 100
primary vendors. In
fiscal 2020,
purchases from the
Company’s largest
vendor accounted
for approximately
10% of
the Company’s
total purchases.
The
Company is not
dependent on its
largest vendor or
any other vendor
for merchandise purchases,
and the
loss of any single vendor or group of
vendors would not have a material adverse effect on the
Company’s
operating results or financial condition. A substantial portion of the Company’s merchandise is sold under
its private
labels and
is produced
by various
vendors in
accordance with the
Company’s strict
specifications. The Company sources a majority of its merchandise
directly from manufacturers overseas,
primarily in
Southeast Asia
.
These manufacturers
have a
dependence on
materials that
are primarily
sourced from
China. The
Company purchases
its remaining
merchandise from
domestic importers
and
vendors, which typically minimizes the
time necessary to purchase
and obtain shipments; however,
these
vendors are dependent on materials primarily sourced from
China.
The Company opened its
own
overseas sourcing operations in the fall
of 2014, replacing the Company’s
former sourcing agent in 2015.
Although a
significant portion
of the
Company’s merchandise
is manufactu
red overseas,
primarily in
Southeast Asia, the Company
does not expect
that any economic, political,
public health or
social unrest
in any
one country
would have
a material
adverse effect
on the
Company’s ability
to obtain
adequate
supplies of merchandise.
However, the
Company can give no
assurance that any changes
or disruptions
in its
merchandise supply
chain would
not materially
and adversely
affect the
Company.
See “Risk
Factors - Risks
Relating To
Our Business -
Because we source a
significant portion of our
merchandise
directly and indirectly from
overseas, we are subject
to risks associated with
international operations and
risks that affect
the prevailing social,
economic, political, public health
and other conditions in
the areas
from which
we source
merchandise; changes, disru
ptions, cost
changes or
other problems affecting
the
Company’s merchandise
supply chain
could materially
and adversely
affect the
Company’s business,
results of operations and financial condition.”
An important
component of
the Company’s
strategy is
the allocation
of merchandise
to individual
stores based
on an
analysis of
sales trends
by merchandise
category, customer
profiles and
climatic
conditions. A
merchandise control
system provides
current information
on the
sales activity
of each
merchandise style
in each
of the
Company’s stores.
Point-of-sale terminals
in the
stores collect
and
transmit sales and inventory information to the Company’s central database, permitting timely response to
sales trends on a store-by-store basis.
All merchandise is shipped directly to the Company’s distribution center
in Charlotte, North Carolina,
where it is
inspected and then
allocated by the
merchandise distribution staff
for shipment to
individual
stores. The flow of
merchandise from receipt at
the distribution center to
shipment to stores is
controlled
by an
on-line system.
Shipments are
made by
common carrier,
and each
store receives
at least
one
shipment per week.
The centralization of
the Company’s
distribution process also
subjects it to
risks in
the event of damage to or destruction of
its distribution facility or other disruptions affecting the
distribution center
or the
flow of
goods into
or out
of Charlotte,
North Carolina.
See “Risk
Factors -
Risks Relating To
Our Information Te
chnology and Related
Systems - A
disruption or shutdown
of our
centralized distribution center
or transportation network could
materially and adversely
affect our
business and results of operations.”
Advertising
The Company
uses television,
in-store signage,
graphics, a
Company website,
two e-
commerce
websites and
social media
as its
primary advertising
media.
The Company’s
total advertising
expenditures were
approximately 0.8%,
0.7% and
0.7% of
retail sales
for fiscal
years 2020,
2019 and
2018, respectively.
Store Operations
The Company’s store
operations management team consists of
three territorial managers, 12
regional
managers and 110 district managers. Regional
managers receive a salary plus a bonus based
on achieving
targeted goals
for sales,
payroll and
shrinkage control. District
managers receive a
salary plus
a bonus
based on
achieving targeted
objectives for
district sales
increases and
shrinkage control.
Stores are
typically staffed with
a manager, two
assistant managers and additional
part-time sales associates
depending on
the size
of the
store and
seasonal personnel
needs. In general,
store managers
are paid
a
salary or on an hourly
basis as are all other
store personnel. Store managers, assistant managers and
sales
associates are eligible
for monthly and
semi-annual bonuses based
on achieving targeted
goals for their
respective store’s sales increases and shrinkage control.
Store Locations
Most of the
Company’s stores
are located in
the southeastern United
States in a
variety of markets
ranging from
small towns
to large
metropolitan areas
with trade
area popula
tions of
20,000 or
more.
Stores average approximately 4,500 square feet in size.
All of the Company’s
stores are leased. Approximately 93%
are located in strip shopping
centers and
7% in enclosed shopping
malls. The Company typically locates
stores in strip shopping centers
anchored
by a national discounter,
primarily Walmart
Supercenters, or market-dominant grocery stores. The
Company’s strip center locations provide ample parking and shopping convenience for its customers.
The Company’s
store development
activities consist
of opening
new stores
in new
and existing
markets, relocating
selected existing
stores to
more desirable
locations in
the same
market area
and
closing underperforming stores. The following table sets forth information with respect
to the Company’s
development activities since fiscal 2016:
Store Development
Number of Stores
Beginning of
Number
Number
Number of Stores
Fiscal Year
Year
Opened
Closed
End of Year
2016………………….……...………….
1,372
1,371
2017………………….……...………….
1,371
1,351
2018……………………….……...…….
1,351
-
1,311
2019…………....………….……...…….
1,311
1,281
2020………….………...….……...…….
1,281
1,330
The Company periodically reviews
its store base to
determine whether any particular
store should be
closed based on its sales trends
and profitability. The
Company intends to continue this review process
to
identify underperforming stores.
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for 2.7%, 3.3% and 3.3% of
retail sales in
fiscal 2020, 2019 and 2018, respectively. The Company’s net bad debt expense was 3.6%, 3.2% and 3.8%
of credit sales in fiscal 2020, 2019 and 2018, respectively.
Customers applying for the Company’s credit card are approved for credit if
they have a satisfactory
credit record
and the
Company has
considered the
customer’s ability
to make
the required
minimum
payment.
Customers are required to
make minimum monthly payments based
on their account balances.
If the
balance is
not paid
in full
each month,
the Company
assesses the
customer a
finance charge.
If
payments are not received on time, the customer is assessed a late
fee subject to regulatory limits.
Layaway Plan
Under the
Company’s layaway
plan, merchandise
is set
aside for
customers who
agree to
make
periodic payments.
The Company
adds a
nonrefundable administrative
fee to
each layaway
sale. If
no
payment is made within four weeks, the
customer is considered to have defaulted, and the
merchandise is
returned to the
selling floor and
again offered
for sale, often
at a
reduced price. All
payments made by
customers who subsequently default on their layaway purchase are returned to the customer upon request,
less the administrative fee and a restocking fee.
The Company defers recognition of layaway sales to the accounting period when the customer picks
up and
completely pays for
layaway merchandise.
Administrative fees are
recognized in
the period
in
which the layaway is
initiated.
Recognition of restocking fees
occurs in the
accounting period when the
customer defaults
on the
layaway purchase.
Layaway sales
represented approximately 2.8%,
4.1% and
4.0% of retail sales in fiscal 2020, 2019 and 2018, respectively.
Information Technology Systems
The Company’s
information technology
systems provide
daily financial
and merchandising
information that
is used
by management to
enhance the
timeliness and effectiveness
of purchasing and
pricing decisions.
Management uses
a daily
report comparing
actual sales
with planned
sales and
a
weekly ranking
report to
monitor and
control purchasing
decisions. Weekly
reports are
also produced
which reflect sales,
weeks of supply
of inventory and
other critical data
by product categories,
by store
and by various levels of responsibility reporting.
Purchases are made based on projected sales,
but can be
modified to accommodate unexpected increases or decreases in demand
for a particular item.
Sales information is
projected by merchandise
category and, in
some cases, is
further projected and
actual performance
measured by stock
keeping unit
(SKU). Merchandise allocation
models are
used to
distribute merchandise to individual
stores based upon historical
sales trends, climatic differences,
customer demographic differences and targeted inventory turnover rates.
Competition
The women’s
retail apparel industry
is highly competitive.
The Company believes
that the principal
competitive factors in
its industry include
merchandise assortment and
presentation, fashion, price,
store
location and
customer service. The
Company competes with
retail chains
that operate
similar women’s
apparel specialty stores. In addition, the Company competes with mass
merchandise chains, discount store
chains, major department
stores, off-price retailers
and internet-based retailers.
Although we believe
we
compete favorably with
respect to the
principal competitive factors
described above, many
of our direct
and indirect
competitors are
well-established national,
regional or
local chains,
and some
have
substantially greater financial,
marketing and other
resources.
The Company expects
its stores in
larger
cities and metropolitan areas to face more intense competition.
Seasonality
Due to
the seasonal
nature of
the retail
business, the
Company has
historically experienced
and
expects to continue to experience
seasonal fluctuations in its revenues,
operating income and net income.
Results of a
period shorter than
a full year
may not be
indicative of results
expected for the
entire year.
Furthermore, the seasonal nature
of our business
may affect comparisons
between periods.
See Note 13
of Notes
to the
Consolidated Financial
Statements for
information regarding
our quarterly
results of
operations for the last two fiscal years.
Regulation
The Company’s
business and
operations subject
it to
a wide
range of
local, state,
national and
international laws and
regulations in a
variety of areas,
including but not
limited to, trade,
licensing and
permit requirements,
import and
export matters,
privacy and
data protection,
credit regulation,
environmental matters,
recordkeeping and
information management,
tariffs, taxes,
intellectual property
and anti-corruption.
Though compliance with these laws and
regulations has not had a
material effect on
the capital expenditures, results
of operations or competitive
position of the Company
in fiscal 2020,
the
Company faces ongoing
risks related
to its
efforts to
comply with
these laws and
regulations and
risks
related to
noncompliance, as
discussed generally
below throughout
the “Risk
Factors” section
and in
particular under
“Risk Factors - Risks Relating to Accounting and
Legal Matters
- Our business
operations subject
us to
legal compliance
and litigation
risks, as
well as
regulations and
regulatory
enforcement priorities,
which could result
in increased costs
or liabilities, divert our management’s
attention or otherwise adversely affect our business, results of operations and financial condition.”
Human Capital
As of January 30,
2021, the Company employed approximately
7,400 full-time and part-time
associates. The Company also
employs additional part
-time associates during
the peak retailing
seasons.
The Company’s full-time team
associates are engaged in various
executive, operating, and administrative
functions in the
Home Office and
distribution center and
the remainder are
engaged in store
operations.
The Company is not
a party to any
collective bargaining agreements and
considers its associate relations
to be
good. The
Company offers
a broad
range of
Company paid
benefits to
its associates
including
medical and dental
plans, paid vacation,
a 401(k) plan,
Employee Stock Purchase
Plan, Employee Stock
Ownership Plan, disability insurance, associate assistance programs, life insurance
and an associate
discount. The
level of
benefits and
eligibility vary
depending on
the associate’s
full-time or
part-time
status, da
te of
hire, length
of service
and level
of pay.
The Company
promotes diversity,
provides
opportunities for
advancement, and
treats all
of its
associates with
dignity and
respect. The
Company
constantly strives
to improve
its training
programs to
develop associates.
Over 80%
of store
and field
management are
promoted from
within, allowing
the Company
to internally
staff its
store base.
The
Company has training
programs at each
level of store
operations. The Company
also performs ongoing
reviews of its safety protocols,
including extensive efforts undertaken during the
COVID-19 pandemic to
ensure the health and safety of
its associates by performing frequent cleanings, ensuring
social distancing
and providing masks for all of its stores.

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors:
An investment in our common stock involves numerous types of risks.
You
should carefully consider
the following
risk factors,
in addition
to the
other information
contained in
this report,
including the
disclosures under
“Forward-looking Information”
above in
evaluating our
Company and
any potential
investment in
our common
stock.
If
any of
the following
risks or
uncertainties occur
or persist,
our
business, financial condition and ope
rating results could be
materially and adversely affected,
the trading
price of
our common
stock could
decline and
you could
lose all
or a
part of
your investment
in our
common stock.
The risks
and uncertainties
described in
this section
are not
the only
ones facing
us.
Additional risks and
uncertainties not presently
known to us
or that we
currently deem immaterial
may
also materially and adversely affect our business operating results and financial condition.
Risks Relating to the COVID-19 Pandemic:
The outbreak and persistence of the COVID-19 pandemic
has and will adversely affect our business,
financial condition and results of operations.
The COVID
-19 pandemic
has adversely
impacted the
Company's business,
financial condition
and
operating results
through fiscal
2020, and
we expect
that it
will continue
to do
so in
fiscal 2021
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
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 COVID
-19 pandemic
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,
It’s Fashion,
It’s Fashion
Metro and
Versona
stores on
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
were re-opened,
but our stores
have been and continue
to operate at reduced
hours.
Periodic
increases
in infection
rates in
communities
where our
stores are
located
may prompt
further
governmental
measures
or public
health guidance
to reduce
public activity
and gatherings
in order
to mitigate
the spread of the virus,
and may also continue
to adversely
affect consumer
confidence.
There continues to
be significant uncertainty
regarding the breadth
,
severity and duration
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 its
impact on
appropriate associate
staffing levels
for our
stores. The
status and
effects of
national, state
or local
action, initiatives,
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 also remain fluid.
While the Company currently
anticipates that our
results for fiscal
2021 and possibly beyond
will be
adversely impacted,
the extent
to which
COVID-19 impacts the
Company’s results
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.
It is also possible
the COVID-19 pandemic may
result in longer term
behavioral changes by
customers and
others that
could adversely
affect our
business, including
but not
limited to
a consumer
shift to greater reliance
on online versus in-person shopping,
which could reduce traffic
to our stores and
more broadly
to the
strip shopping
centers and
malls in
which most
of our
stores are
located and
disadvantage us relative to competitors
who are better established in
e-commerce sales, and reductions in
face-to-face work, travel and socializing occasions, which may lead customers to less
frequently desire or
perceive the need to update their wardrobes.
The far-reaching impacts of the COVID-19 pandemic may also intensify other risks we discuss in
this
report and other filings we make from time to time with the SEC.
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.
Risks Relating to Our Business:
Unusual weather, natural disasters,
public health threats or similar events may adversely affect
our sales or
operations.
Extreme changes
in weather,
natural disasters,
public health
threats or
similar events
can influence
customer trends and
shopping habits.
For example, heavy
rainfall or other
extreme weather conditions
,
including but
not limited
to winter
weather over
a prolonged
period, might
make it
difficult for
our
customers to
travel to
our stores
and thereby
reduce our
sales and
profitability.
Our business
is also
susceptible to
unseasonable weather conditions.
For example, extended
periods of
unseasonably warm
temperatures during the
winter season or
cool weather during
the summer season
could render a
portion
of our
inventory incompatible
with those
unseasonable conditions.
Reduced sales
from extreme
or
prolonged unseasonable
weather conditions
would adversely
affect our
business.
The occurrence
or
threat of
extreme weather,
natural disasters,
power outages,
terrorist acts,
outbreaks of
flu or
other
communicable diseases
(such as
the global
COVID-19 pandemic)
or other
catastrophic events
could
reduce customer traffic
in our stores
and likewise disrupt
our ability to
conduct operations, which
could
materially and adversely affect us.
Because we source a significant portion of our merchandise directly
and indirectly from overseas, we are
subject to risks associated with international operations and
risks that affect the prevailing social, economic,
political, public health and other conditions in the areas from
which we source merchandise; changes,
disruptions, cost changes or other problems affecting
the Company’s merchandise
supply chain could
materially and adversely affect the Company’s
business, results of operations and financial condition.
A significant amount of our
merchandise is manufactured overseas, principally in Southeast
Asia. We
directly import some of this merchandise and indirectly import
the remaining merchandise from domestic
vendors who acquire
the merchandise from
foreign sources. Further,
our third-party vendors
are
dependent on
materials primarily
sourced from
China.
As a
result, political
unrest, labor
disputes,
terrorism, public health
threats, including but
not limited
to communicable diseases
(such as
the global
COVID-19 pandemic), financial or other forms of
instability or other events resulting in
the disruption of
trade from
countries affecting
our supply
chain, increased
security requirements
for imported
merchandise, or
the imposition of,
or changes in,
laws, regulations or
changes in duties,
quotas, tariffs,
taxes or governmental policies regarding these matters or other
factors affecting the availability or cost of
imports, could cause
significant delays or
interruptions in the
supply of our
merchandise or increase
our
costs. We
are also
subject to
supply chain
disruptions affecting
ocean freight,
including lack
of ocean
container ship
capacity, lack
of equipment
such as
containers, port
congestion and
other conditions
impacting ocean
freight.
We also
are subject
to domestic
supply chain
disruptions,
including lack
of
domestic intermodal
transportation (trucks
and drivers),
domestic port
congestion and
other conditions
that ma
y
impact domestic
supply chain.
These supply
chain risks
may result
in both
higher costs
to
transport our merchandise and delayed merchandise arrivals to our stores, which may adversely affect our
ability to
sell this
merchandise and
increase markdowns
of it.
Our costs
are also
affected by
currency
fluctuations, and changes in the
value of the dollar relative
to foreign currencies may increase our
cost of
goods sold.
Any of
these factors
could have
a material
adverse effect
on our
business and
results of
operations.
In addition, increased energy and transportation
costs have caused us significant
cost
increases from time
to time, and
future adverse changes in
these costs or
the disruption of
the means by
which merchandise
is transported
to us
could cause
additional cost
increases or
interruptions of
our
supply chain which could be significant. Further, we are subject to increased costs or potential disruptions
impacting any port
or trade
route through which
our products
move or we
may be
subject to
increased
costs and
delays if
forced to
route freight
through different
ports than
the ones
through which
our
products typically move.
If we are
forced to source
merchandise from other
countries or other
domestic
vendors with foreign sources
in different countries, those
goods may be more
expensive or of a
different
or inferior quality from the ones we now sell.
The inability of third-party vendors to produce goods on
time and to the Company’s
specification may
adversely affect the Company’s
business, results of operations and financial condition.
Our dependence
on third-
party vendors
to manufacture
and supply
our merchandise
subjects us
to
numerous risks that our
vendors will fail to
perform as we expect.
For example, the deterioration
in any
of our key
vendors’ financial condition,
their failure to
ship merchandise in
a timely manner
that meets
our specifications, or
other failures to
follow our vendor
guidelines or comply
with applicable laws
and
regulations, including
compliant labor,
environmental practices
and product
safety, could
expose us
to
operational, quality,
competitive, reputational and
legal risks.
If we are
not able to
timely or adequately
replace the merchandise we currently source
with merchandise produced elsewhere, or if our
vendors fail
to perform as
we expect,
our business,
results of
operations and financial
condition could
be adversely
affected.
Activities conducted
by us
or on
our behalf
outside the
United States
further subject
us to
numerous U.S. and international regulations and compliance risks, as discussed
below under “Risk
Factors - Risks
Relating to Accounting
and Legal Matters
- Our business
operations subject us
to legal
compliance and litigation risks,
as well as regulations
and regulatory enforcement priorities,
which could
result in increased costs or liabilities, divert our
management’s attention or otherwise adversely affect
our
business, results of operations and financial condition.”
Our ability to attract consumers and grow our revenues is dependent
on the success of our store location
strategy and our ability to successfully open new stores as planned.
Our sales are dependent
in part on
the location of our
stores in shopping centers
and malls where we
believe our consumers
and potential consumers
shop.
In addition, our
ability to grow
our revenues has
been substantially dependent on our ability to secure space for and open new stores in attractive locations.
Shopping centers and malls where we currently operate existing stores
or seek to open new stores may be
adversely affected by, among other
things, general economic downturns or those particularly affecting the
commercial real
estate industry,
the closing
of anchor
stores, changes
in tenant
mix and
changes in
customer shopping preferences, including but not limited to an increase in preference for online versus in-
person shopping.
To take
advantage of consumer traffic
and the shopping preferences of
our consumers,
we need to maintain and acquire stores in desirable locations where competition
for suitable store
locations is
intense. A
decline in customer
popularity of the
strip shopping centers
where we generally
locate our stores or in
availability of space in desirable centers
and locations, or an increase in
the cost of
such desired
space, could
limit our
ability to
open new
stores, adversely
affect consumer
traffic and
reduce our sales and net earnings or increase our operating costs.
Our ability to
open and operate
new stores depends
on many factors,
some of which
are beyond our
control.
These factors
include, but
are not
limited to,
our ability
to identify
suitable store
locations,
negotiate acceptable lease terms, secure necessary governmental
permits and approvals and hire and
train
appropriate store personnel.
In addition, our continued
expansion into new regions
of the country where
we have
not done
business before
may present
new challenges
in competition, distribution
and
merchandising as we enter these new markets. Our failure to successfully and timely
execute our plans for
opening new stores or
the failure of these
stores to perform up
to our expectations could
adversely affect
our business, results of operations and financial condition.
If we are unable to anticipate, identify and respond to
rapidly changing fashion trends and customer
demands in a timely manner,
our business and results of operations could materially
suffer.
Customer tastes
and fashion
trends, particularly
for women’s
apparel, are
volatile, tend
to change
rapidly and cannot be predicted
with certainty.
Our success depends in part
upon our ability to
consistently anticipate, design and respond to changing merchandise trends and consumer preferences in a
timely manner.
Accordingly, any
failure by
us to
anticipate, identify,
design and
respond to
changing
fashion trends
could adversely
affect c
onsumer acceptance
of our
merchandise, which
in turn
could
adversely affect our business, results of
operations and our image with our customers.
If we miscalculate
either the market
for our merchandise
or our customers’ tastes
or purchasing habits, we
may
be required
to sell a significant amount of unsold inventory at below-average markups over cost, or below cost, which
would adversely affect our margins and results of operations.
Fluctuating comparable sales or our inability to effectively
manage inventory may negatively impact our
gross margin and our overall results of operations.
Comparable sales
are expected
to continue
to fluctuate
in the
future. Factors
affecting comparable
sales include
fashion trends,
customer preferences,
calendar and
holiday shifts,
competition, weather,
actual or
potential public
health threats
and economic
conditions. In
addition, merchandise
must be
ordered well in
advance of the
applicable selling season
and before trends
are confirmed by
sales. If we
are not
able to accurately
predict customers’ preferences
for our
fashion items, we
may have too
much
inventory, which may
cause excessive markdowns. If we
are unable to accurately predict
demand for our
merchandise, we may
end up with
inventory shortages,
resulting in missed
sales. A decrease
in
comparable sales or
our inability to
effectively manage inventory
may adversely affect
our gross margin
and results of operations.
Existing and increased competition in the women’s
retail apparel industry may negatively impact our
business, results of operations, financial condition and market
share.
The women’s
retail apparel
industry is
highly competitive.
We compete
primarily with
discount
stores, mass
merchandisers, department
stores, off
-price retailers,
specialty stores
and internet-
based
retailers, many of which have substantially greater financial, marketing and other resources than
we have.
Many of
our competitors offer
frequent promotions and
reduce their
selling prices.
In some cases,
our
competitors are expanding into markets
in which we have a
significant market presence.
In addition, our
competitors also compete
for the
same retail store space. As a result of this
competition, we may
experience pricing
pressures, increased
marketing expenditures,
increased costs
to open
new stores,
as
well as loss of market share, which could materially and adversely affect
our business, results of
operations and financial condition.
The operation of our sourcing offices in Asia may
present increased legal and operational risks.
In October
2014, we
established our
own sourcing
offices in
Asia. Our
experience with
legal and
regulatory practices and requirements in Asia is
limited. If our sourcing offices are
unable to successfully
oversee merchandise
production to
ensure that
product is
produced on
time and
within the
Company’s
specifications, our business, brand, reputation, costs, results of operations
and
financial condition could be
materially and
adversely affected.
Further, the
activities conducted
by our
sourcing offices
outside the
United States
subject us
to foreign
operational risks,
as well
as U.S.
and international
regulations and
compliance risks, as
discussed elsewhere in
this “Risk Factors”
section, in particular
below under “Risk
Factors - Risks
Relating to Accounting
and Legal Matters
- Our business
operations subject us
to legal
compliance and litigation risks,
as well as regulations
and regulatory enforcement priorities,
which could
result in increased costs or liabilities, divert our
management’s attention or otherwise adversely affect
our
business, results of operations and financial condition.”
Any actual or perceived deterioration in the conditions that drive
consumer confidence and spending may
materially and adversely affect consumer demand
for our apparel and accessories and our results of
operations.
Consumer spending habits, including spending for our apparel and accessories, are affected by, among
other things, prevailing social, economic, political and
public health conditions and uncertainties (such as
matters under debate in the U.S. from time to time regarding budgetary,
spending and tax policies and the
impact of the
global COVID-19 pandemic),
levels of employment,
fuel, energy and
food costs, salaries
and wage rates
and other sources of
income, tax rates, home
values, consumer net worth,
the availability
of consumer
credit, consumer
confidence and
consumer perceptions
of adverse
changes in
or trends
affecting any of
these conditions.
Any perception that these
conditions may be worsening
or continuing
to trend negatively may significantly weaken many of these drivers of consumer spending habits. Adverse
perceptions of these
conditions or uncertainties
regarding them also
generally cause consumers
to defer
purchases of
discretionary items,
such as
our merchandise,
or to
purchase cheaper
alternatives to
our
merchandise, all of
which may also
adversely affect our
net sales and
results of operations.
In addition,
numerous events, whether
or not
related to actual
economic conditions, such
as downturns in
the stock
markets, acts
of war
or terrorism,
political unrest
or natural
disasters, outbreaks
of disease
or similar
events, may
also dampen
consumer confidence,
and accordingly,
lead to
reduced consumer
spending.
Any of
these events
could have
a material
adverse effect
on our
business, results
of operations
and
financial condition.
Fluctuations in the price, availability and quality of
inventory may result in higher cost of goods, which the
Company may not be able to pass on to its customers.
Vendors
are increasingly passing on higher
production costs, which may impact
our ability to
maintain or grow
our margins. The
price and availability
of raw materials
may be impacted
by demand,
regulation, weather and
crop yields, currency
value fluctuations, as
well as other
factors.
Additionally,
manufacturers have
and may
continue to
have increases
in other
manufacturing costs,
such as
transportation, labor and
benefit costs. These
increases in production
costs result in
higher merchandise
costs to the
Company. Due to
the Company’s
limited flexibility in price
point, the Company may
not be
able to pass
on those cost
increases to the
consumer, which
could have a
material adverse effect
on our
results of operations and financial condition.
If the Company is unable to successfully integrate new businesses into
its existing business, the Company’s
financial condition and results of operations will be adversely
affected.
The Company’s
long-term business strategy
includes opportunistic growth
through the development
of new store
concepts. This growth may
require significant capital expenditures
and management
attention. The Company may not
realize any of the anticipated
benefits of a new business
and integration
costs may
exceed anticipated
amounts. We
have incurred
substantial financial
commitments and
fixed
costs related to our retail stores that we will not be
able to recover if our stores are not successful and that
could potentially result
in impairment charges.
If we cannot
successfully execute our
growth strategies,
our financial condition and results of operations may be adversely impacted.
Failure to attract, train, and retain skilled personnel could adversely
affect our business and our financial
condition.
Like most retailers, we
experience significant associate turnover
rates, particularly among store
sales
associates and managers.
Because our continued store growth
will require the hiring and
training of new
associates, we must
continually attract, hire
and train new
store associates to
meet our staffing
needs. A
significant increase in the turnover rate among our store sales associates and managers would increase our
recruiting and
training costs, as
well as
possibly cause a
decrease in
our store
operating efficiency
and
productivity.
We compete
for qualified store
associates,
as well as
experienced management personnel,
with other companies in
our industry or other
industries, many of whom
have greater financial resources
than we do.
In addition,
we depend
on key
management personnel
to oversee
the operational
divisions of
the
Company for
the support
of our
existing business
and future
expansion. The
success of
executing our
business strategy depends
in large part
on retaining key
management. We
compete for key
management
personnel with
other retailers, and
our inability to
attract and
retain qualified personnel
could limit
our
ability to continue to grow.
If we
are unable
to retain
our key management
and store
associates or
attract, train,
or retain
other
skilled personnel
in the
future, we
may not be
able to service
our customers effectively
or execute
our
business strategy, which could adversely affect our business, operating results and financial condition.
Risks Relating to Our Information Technology and Related Systems:
A failure or disruption relating to our information technology
systems could adversely affect our business.
We rely
on our existing information technology systems for merchandise operations,
including
merchandise planning, replenishment, pricing,
ordering, markdowns and
product life cycle
management.
In addition to merchandise operations,
we utilize our information technology systems
for our distribution
processes, as well
as our financial
systems, including accounts
payable, general ledger,
accounts
receivable, sales, banking,
inventory and fixed
assets.
Despite the precautions
we take, our
information
systems are or may be vulnerable to disruption or failure
from numerous events, including but not limited
to, natural disasters, severe weather conditions, power outages, technical malfunctions, cyber-attacks, acts
of war
or terrorism,
similar catastrophic
events or
other causes
beyond our
control
or that
we fail
to
anticipate. Any disruption or failure in the operation of our information technology systems, our failure to
continue to
upgrade or
improve such
systems, or
the cost
associated with
maintaining, repairing
or
improving these systems,
could adversely affect
our business, results
of operations and
financial
condition. Modifications and/or upgrades to our current
information technology systems may also disrupt
our operations.
A disruption or shutdown of our centralized distribution center or
transportation network could materially
and adversely affect our business and results of
operations.
The distribution of
our products is
centralized in one
distribution center in
Charlotte, North Carolina
and distributed
through our
network of
third-party freight
carriers.
The merchandise
we purchase
is
shipped directly to our
distribution center, where it
is prepared for shipment to
the appropriate stores and
subsequently delivered to
the stores
by our
third-party freight carriers.
If the distribution
center or
our
third-party freight carriers were to be
shut down or lose significant capacity
for any reason, including but
not limited to, any of the causes described above under “A failure or disruption relating
to our information
technology systems could adversely affect
our business,” our operations would likely
be seriously
disrupted.
Such problems could occur as the result of any loss, destruction or impairment of our ability to
use our
distribution center,
as well
as any broader
problem generally affecting
the ability to
ship goods
into our distribution center or deliver goods to
our stores.
As a result, we could incur significantly higher
costs and longer lead times associated
with distributing our products to our
stores during the time it
takes
for us to reopen or replace the
distribution center and/or our transportation network. Any such occurrence
could adversely affect our business, results of operations and financial condition.
A security breach that results in unauthorized access to or disclosure
of employee, Company or customer
information could adversely affect our costs, reputation
and results of operations, and efforts to mitigate
these risks may continue to increase our costs.
The protection
of employee,
Company and
customer data
is critical
to the
Company. Any
security
breach, mishandling, human or programming error or other event that results in the misappropriation, loss
or other
unauthorized disclosure
of employee,
Company or
customer information,
including but
not
limited to credit card data or
other personally identifiable information, could severely damage the
Company's reputation, expose it to remediation
and other costs and the
risks
of legal proceedings, disrupt
its operations and otherwise adversely affect
the Company's business and financial
condition. The
security of certain of this
information also depends on the
ability of third-party service providers,
such as
those we
use to
process credit
and debit
card payments
as described
below under
“We are
subject to
payment-related risks,”
to properly
handle and
protect such
information. Our
information systems
and
those of our third-party service
providers are subject to ongoing
and persistent cybersecurity threats from
those seeking unauthorized access
through means which are
continually evolving and may be
difficult to
anticipate or detect for long periods
of time.
Despite measures the Company takes to
protect confidential
information against unauthorized
access or disclosure,
which are ongoing
and may continue
to increase
our costs, there
is no assurance
that such measures
will prevent the
compromise of such
information. If
any such compromise
or unauthorized access
to or disclosure
of this information
were to occur,
it could
have a material
adverse effect on
the Company's reputation,
business, operating results,
financial
condition and cash flows.
We are subject to payment
-related risks.
We accept
payments using a
variety of methods,
including third-party credit
cards, our own
branded
credit cards,
debit cards,
gift cards
and physical
and electronic
bank checks.
For existing
and future
payment methods
we offer
to our
customers, we
may become
subject to
additional regulations
and
compliance requirements
(including obligations
to implement
enhanced authentication
processes that
could result in
increased costs and
reduce the ease
of use of
certain payment methods),
as well as
fraud.
For certain payment methods,
including credit and debi
t
cards, we pay interchange and
other fees, which
may increase
over time,
raising our
operating costs
and lowering
profitability. We
rely on
third-party
service providers for
payment processing services,
including the processing
of credit and
debit cards. In
each case, it could
disrupt our business if
these third-party service providers
become unwilling or unable
to provide these services to us. We
are also subject to payment card association operating rules, including
data security rules, certification
requirements and rules governing electronic
funds transfers, which could
change or be
reinterpreted to make
it difficult or
impossible for us
to comply.
If we fail
to comply with
these rules
or requirements,
or if
our data
security systems
are breached
or com
promised, we
may be
liable for card-issuing banks’
costs, subject to fines
and higher transaction fees.
In addition, we may
lose
our ability
to accept
credit and
debit card
payments from
our customers
and process
electronic funds
transfers or facilitate
other types of
payments, and our
business and operating
results could be
adversely
affected.
The Company’s
failure to successfully operate its e-commerce websites or fulfill customer
expectations could
adversely impact customer satisfaction, our reputation and
our business.
Although the
Company's e-commerce platform
provides another
channel to
drive incremental
sales,
provide existing customers the on-
line shopping experience and
introduce the Company to a
new
customer base, it
also exposes us
to numerous risks.
We are
subject to potential
failures in the
efficient
and uninterrupted operation of
our websites, customer contact
center or our distribution
center, including
system failures
caused by
telecommunication system
providers, order
volumes that
exceed our
present
system capabilities, electrical outages, mechanical problems
and human error.
Our e-commerce platform
may also expose us to
greater potential for security or
data breaches involving the unauthorized access
to
or disclosure of customer information, as discussed
above under “A
security breach that
results in
unauthorized disclosure of employee, Company or customer information could
adversely affect our costs,
reputation and
results of
operations, and
efforts to
mitigate these
risks may
continue to
increase our
costs.” We
are also subject to risk related
to delays or failures in the
performance of third parties, such as
shipping companies,
including delays
associated with
labor strikes
or slowdowns
or adverse
weather
conditions. If the
Company does not successfully
meet the challenges of
operating e-commerce websites
or fulfilling customer expectations, the Company's business and sales could be
adversely affected.
Risks Relating to Accounting and Legal Matters:
Changes to accounting rules and regulations may
adversely affect our reported results of operations
and
financial condition.
In an
effort to
provide greater
comparability of
financial reporting
in an
increasing global
environment, accounting regulatory authorities have
been in discussions for many
years regarding efforts
to either converge U.S. Generally
Accepted Accounting Principles with International Financial Reporting
Standards (“IFRS”), have
U.S. companies provide
supplemental IFRS-based information
or continue to
work toward
a single
set of
globally accepted
accounting standards.
If implemented,
these potential
changes in accounting rules or regulations could
significantly impact our future reported
results of
operations and financial position.
Changes in accounting rules
or regulations and varying interpretations
of existing accounting
rules and regulations
have significantly affected
our reported financial
statements
and those of other participants in the retail industry in the past and may
continue to do so in the future.
For example,
changes to
lease accounting
standards effective
for the
Company beginning
in fiscal
2019 required
the Company
to capitalize
operating leases
in its
financial statements.
These changes
required us
to record
a significant
amount of
lease-related assets
and liabilities
on our
balance sheet,
resulting in an
increase of 40%
to each of
our total assets
and total liabilities
on our balance
sheet, and
required us
to make
other changes
to the
recording and
classification of
lease-related expenses
on our
statements of income and cash flows. These changes
could lead to the perception by investors
that we are
highly leveraged
and also
change the
calculation of
numerous financial
metrics and
measures of
our
performance and
financial condition.
These and
future changes
to accounting
rules or
regulations may
adversely affect
our reported
results of
operations and
financial position
or perceptions
of our
performance and financial condition.
Adverse litigation matters may adversely affect
our business and our financial condition.
From time
to time
the Company
is involved
in litigation
and other
claims against
our business.
Primarily these
arise from our
normal course of
business but
are subject
to risks
and uncertainties,
and
could require
significant management time. The Company’s periodic evaluation of litigation-
related
matters may change our assessment in light of
the discovery of facts with respect to legal
actions pending
against us,
not presently known
to us
or by determination
of judges, juries
or other finders
of fact.
We
may also be
subjected to legal matters
not yet known to
us. Adverse decisions or
settlements of disputes
may negatively impact our business, reputation and financial condition.
Our business operations subject us to legal compliance
and litigation risks, as well as regulations and
regulatory enforcement priorities, which could result in increased
costs or liabilities, divert our
management’s
attention or otherwise adversely affect our business, results
of operations and financial
condition.
Our operations are
subject to federal,
state and local
laws, rules and
regulations, as well
as U.S. and
foreign laws
and regulations
relating to
our activities
in foreign
countries from
which we
source our
merchandise and operate
our sourcing offices.
Our business
is also
subject to regulatory
and litigation
risk in all
of these jurisdictions, including
foreign jurisdictions that
may lack well-established or
reliable
legal systems
for resolving
legal disputes.
Compliance risks
and litigation
claims have
arisen and
may
continue to
arise in
the ordinary
course of
our business
and include,
among other
issues, intellectual
property issues,
employment issues,
commercial disputes,
product-oriented matters, tax,
customer
relations and personal injury claims. International activities
subject us to numerous U.S. and international
regulations, including but not limited to, restrictions on trade, license and permit requirements, import and
export license
requirements, privacy
and data
protection laws,
environmental laws,
records and
information management
regulations, tariffs
and taxes
and anti-
corruption laws,
such as
the Foreign
Corrupt Practices Act, violations of
which by employees or persons acting
on the Company’s behalf
may
result in significant
investigation costs, severe
criminal or civil
sanctions and reputational
harm.
These
and other
liabilities to
which we may
be subject
could negatively affect
our business,
operating results
and financial condition. These matters frequently raise complex factual and legal issues, which are subject
to risks
and uncertainties
and could
divert significant
management time.
The Company
may also
be
subject to regulatory review
and audits, which results
may have the
potential to materially and
adversely
affect our
business, results of
operations and financial
condition. In addition,
governing laws, rules
and
regulations, and interpretations of existing laws are subject to change
from time to time.
Compliance and
litigation matters could
result in unexpected
expenses and liability,
as well as
have an adverse
effect on
our operations and our reputation.
New legislation or regulation and interpretation of existing laws and regulations related to data privacy
could increase our costs of compliance, technology and business operations. The interpretation of existing
or new laws to
existing technology and practices can be
uncertain and may lead to
additional compliance
risk and cost.
If we fail to protect
our trademarks and other
intellectual property rights or infringe
the intellectual property
rights of
others, our
business, brand
image, growth
strategy, results
of operations
and financial
condition
could be adversely affected.
We believe
that our
“Cato”, “It’s
Fashion”, “It’s
Fashion Metro”
and “Versona”
trademarks are
integral to
our store
designs, brand
recognition and
our ability
to successfully
build consumer
loyalty.
Although we have
registered these trademarks
with the U.S.
Patent and Trademark
Office (“PTO”)
and
have also registered, or applied for registration
of, additional trademarks with the PTO that we believe are
important to our
business, we cannot
give assurance that these
registrations will prevent
imitation of our
trademarks, merchandising concepts, store designs or private label merchandise or the infringement
of our
other intellectual property rights by
others. Infringement of our names,
concepts, store designs or
merchandise generally,
or particularly
in a
manner that
projects lesser
quality or
carries a
negative
connotation of our
image could adversely
affect our
business, financial condition
and results of
operations.
In addition, we
cannot give assurance that
others will not
try to block
the manufacture or
sale of our
private label merchandise by
claiming that our merchandise violates
their trademarks or other proprietary
rights. In
the event
of such
a conflict,
we could
be subject
to lawsuits
or other
actions, the
ultimate
resolution of which
we cannot predict;
however, such a
controversy could adversely affect
our business,
financial condition and results of operations.
Maintaining and improving our internal control over financial
reporting and other requirements necessary
to operate as a public company may strain our resources, and
any material failure in these controls may
negatively impact our business, the price of our common
stock and market confidence in our reported
financial information.
As a public
company, we
are subject to
the reporting requirements
of the Securities
Exchange Act of
1934, the Sarbanes
-Oxley Act of
2002, the rules
of the SEC
and New York
Stock Exchange and
certain
aspects of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and
related rule-making that has
been and may continue
to be implemented over
the next several years
under
the mandates of the Dodd-Frank Act. The requirements of
these rules and regulations have increased, and
may continue to increase,
our compliance costs and place significant strain on our pe
rsonnel, systems and
resources. To
satisfy the
SEC’s rules
implementing the
requirements of
Section 404
of the
Sarbanes-
Oxley Act of
2002, we must
continue to document,
test, monitor and
enhance our internal
control over
financial reporting, which is a
costly and time-consuming effort that
must be re-evaluated frequently.
We
cannot give assurance
that our disclosure
controls and procedures
and our internal
control over financial
reporting, as defined by
applicable SEC rules, will
be adequate in the
future. Any failure
to maintain the
effectiveness of
internal control
over financial
reporting or
to comply
with the
other various
laws and
regulations to which
we are and
will continue to
be subject, or
to which we
may become subject
in the
future, as a public company
could have an adverse material impact
on our business, our financial
condition and the
price of our
common stock. In
addition, our efforts
to comply with
these existing and
new requirements could significantly increase our compliance costs.
Risks Relating to Our Investments and Liquidity:
We may experience
market conditions or other events that could adversely
impact the valuation and liquidity
of, and our ability to access, our short-term investments, cash and
cash equivalents and our revolving line of
credit.
Our short
-term investments
and cash
equivalents are
primarily comprised of
investments in
federal,
state, municipal and
corporate debt securities.
The value of
those securities may
be adversely impacted
by factors relating to these securities, similar
securities or the broader credit markets in general.
Many of
these factors are beyond
our control, and include
but are not
limited to changes
to credit ratings, rates
of
default, collateral value,
discount rates, and
strength and quality
of market credit
and liquidity,
potential
disruptions in the capital markets
and changes in the underlying economic,
financial and other conditions
that drive these factors.
As federal, state and
municipal entities struggle with declining
tax revenues and
budget deficits, we
cannot be assured
of our ability
to timely access
these investments if
the market for
these issues declines.
Similarly, the
default by issuers of
the debt securities we
hold or similar securities
could impair the liquidity of
our investments.
The development or persistence of
any of these conditions
could adversely
affect our
financial condition,
results of
operations and
ability to
execute our
business
strategy. In
addition, we
have significant amounts
of cash
and cash
equivalents at
financial institutions
that are
in excess
of the
federally insured
limits.
An economic
downturn or
development of
adverse
conditions affecting the financial sector and stability
of financial institutions could cause us to
experience
losses on our deposits.
Our ability to
access credit markets
and our revolving
line of credit,
either generally or
on favorable
market terms, may be impacted
by the factors discussed in
the preceding paragraph, as
well as continued
compliance with covenants under our
revolving credit agreement.
The development or persistence of
any
of these adverse
factors or failure to
comply with covenants on
which our borrowing is
conditioned may
adversely affect
our financial
condition, results
of operation
s
and our
ability to
execute our
business
strategy.
Risks Relating to the Market Value of Our Common Stock:
Our operating results are subject to seasonal and quarterly
fluctuations, which could adversely affect the
market price of our common stock.
Our business varies
with general seasonal
trends that are
characteristic of the
retail apparel industry.
As a result,
our stores typically
generate a higher
percentage of our
annual net sales
and profitability in
the first
and second quarters
of our
fiscal year
compared to other
quarters.
Accordingly, our
operating
results for any
one fiscal period
are not necessarily
indicative of
results to be
expected from any
future
period, and
such seasonal
and quarterly
fluctuations could
adversely affect
the marke
t
price of
our
common stock.
The interests of a principal shareholder may limit the ability of
other shareholders to influence the direction
of the Company and otherwise affect our corporate
governance.
As of March 29, 2021, John P. D. Cato, Chairman, President and Chief Executive Officer, beneficially
controlled approximately 48.1% of the voting power of
our common stock.
As a result, Mr.
Cato may be
able to control
or significantly influence
substantially
all matters requiring
approval by the
shareholders,
including the election
of directors and
the approval of
mergers and other
business combinations or other
significant Company
transactions. Mr.
Cato may
have interests
that differ
from those
of other
shareholders, and
may vote
in a
way with
which other
shareholders disagree
or perceive
as adverse
to
their interests.
In addition, the
concentration of voting power
held by Mr.
Cato could have
the effect of
preventing, discouraging
or deferring
a change
in c
ontrol of
the Company,
which could
depress the
market price of our common stock. In the future, if Mr. Cato acquires beneficial control of more than 50%
of the voting power of
our common stock (including as
a result of continued Company stock
repurchases
from time
to time
under our
stock repurchase
program that
would reduce
our outstanding
shares), we
would qualify for
exemption as a
“controlled company” from
compliance with certain
New York
Stock
Exchange corporate governance rules, including the
requirements that we have a
majority of independent
directors on
our Board,
an independent
compensation committee
and an
independent corporate
governance and
nominating committee.
If we
became eligible
and elected
to utilize
these “controlled
company” exceptions, our other shareholders could lose
the benefit of these corporate governance
requirements and the market value of our common stock could be adversely
affected.
Conditions in the stock market generally,
or particularly relating to our industry, Company
or common
stock, may materially and adversely affect the market
price of our common stock and make its trading price
more volatile.
The trading price
of our common
stock at times
has been, and
is likely to
continue to be,
subject to
significant volatility.
A variety of factors
may cause the price of
our common stock to
fluctuate, perhaps
substantially, including,
but not
limited to,
those discussed
elsewhere in
this report,
as well
as the
following: low trading
volume; general market
fluctuations resulting from
factors not directly
related to
our operations or the inherent value of our
common stock; announcements of developments related to our
business; fluctuations in our reported operating results; general conditions or trends affecting or perceived
to affect the
fashion and retail industry;
conditions or trends affecting
or perceived to affect
the domestic
or global economy
or the domestic
or global credit
or capital markets;
changes in financial
estimates or
the scope of
coverage given to
our Company by
securities analysts; n
egative commentary regarding
our
Company and
corresponding short
-selling market
behavior; adverse
customer relations
developments;
significant changes in
our senior management
team; and legal
proceedings.
Over the past
several years
the stock market in
general, and the market
for shares of equity
securities of many retailers
in particular,
have experienced
extreme price
fluctuations that
have at
times been
unrelated to
the operating
performance of those companies.
Such fluctuations and market
volatility based on these
or other factors
may materially and adversely affect the market price of our common stock.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments:
None.

---

ITEM 2. PROPERTIES
Item 2.
Properties:
The Company’s
distribution center and
general offices are
located in a
Company-owned building of
approximately 552,000
square feet located
on a
15-acre tract
in Charlotte, North
Carolina. The
Company’s automated
merchandise handling
and distribution
activities occupy
approximately 418,000
square feet
of this
building and
its general
offices and
corporate training
center are
located in
the
remaining 134,000 square
feet. A building
of approximately 24,000
square feet located
on a 2-
acre tract
adjacent to
the Company’s
existing location
is used
for receiving
and distribution
of store
and office
operating supplies.
The Company
also owns
approximately 185 acres
of land
in
York
County, South
Carolina as a potential new site for our distribution center.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings
:
From time to
time, claims are
asserted against the
Company arising out
of operations in
the ordinary
course of
business.
The Company
currently is
not a
party to
any pending
litigation that
it believes
is
likely to have a
material adverse effect on the
Company’s financial position, results
of operations or cash
flows. See Note 16, “Commitments and Contingencies,” for more information.
Item 3A.
Executive Officers of the Registrant:
The executive officers of the Company and their ages as of March 29, 2021 are
as follows:
Name
Age
Position
John P.
D. Cato............................
Chairman, President and Chief Executive Officer
John R. Howe ..............................
Executive Vice President, Chief Financial Officer
Gordon Smith ..............................
Executive Vice President, Chief Real Estate and
Store Development Officer
John P.
D. Cato
has been
employed as
an officer
of the
Company since
1981 and
has been
a
director of the Company since 1986. Since January 2004, he
has served as Chairman, President and Chief
Executive Officer. From
May 1999 to January 2004,
he served as President, Vice
Chairman of the Board
and Chief Executive Officer.
From June 1997 to May 1999, he
served as President, Vice Chairman of
the
Board and Chief Operating
Officer. From
August 1996 to June
1997, he served as
Vice Chairman
of the
Board and Chief
Operating Officer.
From 1989 to
1996, he managed
the Company’s
off-price concept,
serving as
Executive Vice
President and
as President
and General
Manager of
the It’s
Fashion concept
from 1993 to
August 1996. Mr.
Cato is a
former director of
Harris Teeter
Supermarkets, Inc., formerly
Ruddick Corporation.
John R.
Howe
has been employed
by the
Company since 1986.
Since September 2008,
he has
served as Executive
Vice President,
Chief Financial Officer.
From June 2007
until September 2008,
he
served as Senior
Vice President,
Controller.
From 1999 to
2007, he served
as Vice
President, Assistant
Controller.
From 1997 to 1999, he served as Assistant Vice President, Budgets and Planning.
From 1995
to 1997,
he served as
Director, Budgets
and Planning.
From 1990 to
1995, he served
as Assistant Tax
Manager.
From 1986 to 1990, Mr. Howe held various positions within the finance area.
Gordon Smith
has been employed by the Company since
1989. Since July 2011, he
has served as
Executive Vice
President, Chief Real
Estate and Store
Development Officer.
From February 2008
until
July 2011 Mr.
Smith served as Senior Vice
President, Real Estate. From October
1989 to February 2008,
Mr. Smith served as Assistant Vice President, Corporate Real Estate.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures:
No matters requiring disclosure.
PART
II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for Registrant’s
Common Equity, Related Stockholder Matters
and Issuer Purchases of
Equity Securities:
Market & Dividend Information
The Company’s
Class A Common Stock
trades on the
New York
Stock Exchange (“NYSE”)
under
the symbol CATO.
As of March 29, 2021, the approximate number of record holders of the Company’s Class A Common
Stock was 5,000 and there were 2 record holders of the Company’s Class B Common Stock.
Stock Performance Graph
The following
graph compares
the yearly
change in
the Company’s
cumulative total
shareholder
return on the
Company’s Common Stock
(which includes Class
A Stock and
Class B Stock)
for each of
the Company’s
last five
fiscal years
with (i)
the Dow
Jones U.S.
Retailers, Apparel
Index and
(ii) the
Russell 2000 Index.
THE CATO
CORPORATION
STOCK PERFOMANCE TABLE
(BASE 100 - IN DOLLARS)
LAST TRADING DAY
OF THE FISCAL YEAR
THE CATO
CORPORATION
DOW JONES U.S.
RETAILERS,
APPL
INDEX
RUSSELL 2000
INDEX
1/29/2016
1/27/2017
2/2/2018
2/1/2019
1/31/2020
1/29/2021
The graph assumes an initial investment of $100 on January 29, 2016,
the last trading day prior to the
commencement of the Company’s 2016 fiscal year, and that all dividends were reinvested.
Issuer Purchases of Equity Securities
The following table summarizes the Company’s purchases of its common stock for the three months
ended January 30, 2021:
Total Number of
Maximum Number
Shares Purchased as
(or Approximate Dollar
Total Number
Part of Publicly
Value) of Shares that may
of Shares
Average Price
Announced Plans or
yet be Purchased Under
Period
Purchased
Paid per Share (1)
Programs (2)
the Plans or Programs (2)
November 2020
320,707
$
7.09
320,707
December 2020
-
-
-
January 2021
-
-
-
Total
320,707
$
7.09
320,707
1,871,149
(1)
Prices include
trading
costs.
(2)
During the fourth quarter ended January 30,
2021, the Company repurchased and retired 320,707
shares under this program for
approximately
$2,274,611
or an average market
price of $7.09 per
share. On
November
19, 2020,
the Board
of Directors
authorized
an increase
in the Company’s
share
repurchase
program
of 1.5
million
shares.
As of
the fourth quarter
ended January 30,
2021, the
Company
had 1,871,149 shares remaining
in open authorizations.
There is no specified expiration
date for
the Company’s
repurchase
program.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Selected Financial Data
:
Certain selected
financial data
for the
five fiscal
years ended
January 30,
2021 have
been derived
from the Company’s
audited financial statements.
The financial statements
and Independent Registered
Public Accounting Firm’s integrated audit reports for the
most recent fiscal years are contained elsewhere
in this
report. All
data set
forth below
are qualified by
reference to,
and should
be read
in conjunction
with, the
Company’s Consolidated
Financial Statements
(including the
Notes thereto)
and
“Management’s Discussion
and Analysis
of Financial
Condition and
Results of
Operations” appearing
elsewhere in this annual report.
Fiscal Year (1)
(Dollars in thousands, except per share data and selected operating data)
STATEMENT
OF OPERATIONS DATA:
Retail sales
$567,516
$816,184
$821,113
$841,997
$947,370
Other revenue
7,595
9,151
8,551
7,984
9,199
Total revenues
575,111
825,335
829,664
849,981
956,569
Cost of goods sold (exclusive of depreciation
shown below)
433,187
508,906
522,535
553,058
601,985
Selling, general and administrative (exclusive
of depreciation shown below)
206,492
263,773
262,510
266,304
289,619
Selling, general and administrative percent of
retail sales
36.4%
32.3%
32.0%
31.6%
30.6%
Depreciation
$14,681
$15,485
$16,463
$19,643
$22,716
Interest expense
Interest and other income
6,630
6,065
4,991
5,111
7,041
Income (loss) before income taxes
(72,806)
43,207
33,051
15,973
49,114
Income
tax expense (benefit)
(25,323)
7,310
2,590
7,433
1,902
Net income (loss)
(47,483)
35,897
30,461
8,540
47,212
Basic earnings (loss) per share
(2.01)
1.46
1.23
0.34
1.72
Diluted earnings (loss) per share
(2.01)
1.46
1.23
0.34
1.72
Cash dividends paid per share
0.33
1.32
1.32
1.32
1.29
SELECTED OPERATING DATA:
Stores open at end of year
1,330
1,281
1,311
1,351
1,371
Average sales per store (2)
$370,420
$575,000
$596,000
$604,880
$681,000
Average sales per square foot of selling space
BALANCE SHEET DATA (at
period end):
Cash, cash equivalents, short-term
investments and restricted cash
$147,438
$214,788
$207,920
$200,100
$252,158
Working capital (3)(4)
108,616
163,495
229,502
233,399
271,896
Total assets (4)
591,452
684,976
497,906
516,076
606,324
Total stockholders’ equity
246,498
316,514
316,836
326,353
383,903
___________
(1) The fiscal year 2017 contained 53 weeks versus 52 weeks for all other years shown.
(2) Calculated using actual sales volume for stores open for the full year and an estimated annual sales volume for new
stores opened
during the year.
(3) Calculated using Total Current Assets offset by Total Current Liabilities.
(4) In 2019, we adopted ASC 842, which required us to recognize lease assets and lease liabilities for most leases. Years before 2019
have not been adjusted for this new accounting standard.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
The following information should
be read in
conjunction with the Consolidated
Financial Statements,
including the accompanying Notes appearing in Part
II, Item 8 of this
report on Form 10-K.
This section
of the Form
10-K
generally discusses fiscal 2020
and fiscal 2019
and year-to-year comparisons between
fiscal 2020
and fiscal
2019.
Discussions of
fiscal 2018
items and
year-to-year comparisons
between
fiscal 2019
and fiscal
2018 that
are not
included in
this Form
10-K
can be
found in
“Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations”
in Part
II, Item
7 of
the
Company’s Annual Report on Form 10-K
for the fiscal year ended February 1, 2020.
COVID-19 Update
The COVID
-19 pandemic
has adversely
impacted the
Company's business,
financial condition
and
operating results
through fiscal
2020, and
we expect
that it
will continue
to do
so in
fiscal 2021
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 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.
Responses to
the pandemic
by customers,
government and
the private
sector have
and will
likely
continue to
adversely impact
our business
operations.
In the
first quarter
of fiscal
2020, the
pandemic
resulted in state and local orders mandating store closures and other measures to mitigate
the spread of the
virus.
Though the Company’s stores
were reopened in the second quarter of fiscal 2020,
they continue to
operate at
reduced hours.
Periodic increases
in infection
rates in
communities where
our stores
are
located may prompt
further governmental
measures or
public health
guidance to
reduce public
activity
and gatherings
in order
to mitigate
the spread
of the
virus, and
may also
continue to
adversely affect
consumer confidence.
There continues to
be significant uncertainty
regarding the breadth,
severity and
duration 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 its impact
on appropriate
associate staffing levels for our stores.
The Company’s
pre-pandemic liquidity
position has
enabled it
to offset
the downturn
in operating
cash flows
since the
onset of
the pandemic
by liquidating
short-term investments
and drawing
and
repaying under
its revolving
credit facility.
The Company
has also
implemented various
cost-cutting
measures to
conserve cash,
such as
suspending dividend
payments, reducing
non-committed capital
expenditures (only half of planned new stores were opened during 2020)
and reducing corporate field and
store overhead.
The Company is grateful for
the efforts
of its
associates in helping to address the
considerable
challenges created by
the pandemic.
In recognition of
these efforts and
to aid with
retention, on March
24, 2021 the
Compensation Committee approved a
discretionary bonus of
$1.6 million ($1.3
million net
of taxes) to key associates as discussed in more detail in “Other Information”
in Part II, Item 9B.
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.
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.
Results of Operations
The table below sets forth certain financial data of the Company expressed
as a percentage of retail sales for the
years indicated:
Fiscal Year Ended
January 30,
February 1,
February 2,
Retail sales …………………………………………………………..
100.0
%
100.0
%
100.0
%
Other revenue…………………………………………………………
1.3
1.1
1.0
Total revenues ……………………………………………………….
101.3
101.1
101.0
Cost of goods sold …………………………………………………..
76.3
62.4
63.6
Selling, general and administrative………………………………….
36.4
32.3
32.0
Depreciation …………………………………………………………
2.6
1.9
2.0
Interest and other income ……………………………………………
1.2
0.7
0.6
Income (loss) before income taxes ……………………………
(12.8)
5.3
4.0
Net income (loss) ……………………………………………………
(8.4)
%
4.4
%
3.7
%
Fiscal 2020 Compared to Fiscal 2019
Retail sales decreased by 30.5% to $567.5 million
in fiscal 2020 compared to $816.2 million in fiscal 2019.
The decrease in
retail sales in
fiscal 2020 was
primarily due to
a 32% decrease
in same-store sales,
partially
offset by sales
from new store
openings. Same-store sales
includes 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.
In fiscal 2020
and fiscal 2019,
e-commerce sales were
less than
5% of
total sales
and same
-store sales.
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.
Total revenues, comprised of retail sales and
other revenue (principally
finance
charges and late
fees on customer
accounts receivable, gift card
breakage,
shipping charges for
e-commerce
purchases
and layaway fees),
decreased by 30.3% to
$575.1 million in fiscal 2020
compared to $825.3 million
in fiscal 2019.
The Company operated 1,330
stores at January 30,
2021 compared to 1,281
stores operated at
February 1, 2020.
In fiscal 2020, the Company opened 76 new stores
and closed 27 stores.
Other revenue
in total
decreased to
$7.6 million
in fiscal
2020 from
$9.2 million
in fiscal
2019.
The
decrease resulted primarily due to
decreases in finance and
layaway charges, partially offset
by an increase in
e-commerce shipping revenues.
Credit revenue of
$2.7 million represented
0.5% of total
revenue in fiscal
2020,
a $0.9 million
decrease
compared to
fiscal 2019
credit revenue
of $3.6
million or
0.4% of
total revenue.
The decrease
in credit
revenue was
primarily due
to reductions
in finance
and late
charge income
as a
result of
lower accounts
receivable balances.
Credit revenue is comprised of interest earned on the Company’s private label credit card
portfolio and
related fee
income. Related
expenses include
principally payroll,
postage and
other
administrative expenses and totaled
$1.5 million in
fiscal 2020 compared
to $1.8 million
in fiscal 2019.
See
Note 14
of Notes to
Consolidated Financial Statements for
a schedule of
credit-related expenses. Total
credit
segment income before taxes
decreased $0.6 million to
$1.2 million in fiscal
2020 from $1.8 million
in fiscal
2019.
Cost of goods sold was $433.2 million, or 76.3% of retail sales, in fiscal 2020
compared to $508.9 million,
or 62.4%
of retail sales
,
in fiscal 2019.
The increase in
cost of
goods sold
as a
percentage of sales
resulted
primarily
from an increase
in markdown sales due
to liquidating spring and
summer
merchandise,
goods
marked out
of stock,
and deleveraging
occupancy,
distribution
and 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
expenses 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 and excluding
depreciation) decreased by 56.3% to
$134.3 million in fiscal 2020
from $307.3
million in
fiscal 2019.
Gross margin
as presented
may not
be comparable
to that
of other
companies.
Selling,
general and
administrative expenses
(“SG&A”), which
primarily include
corporate and
store
payroll, related payroll
taxes and
benefits, insurance,
supplies, advertising, bank
and credit
card processing
fees were $206.7 million
in fiscal 2020 compared
to $263.8 million in
fiscal 2019, a decrease
of 21.7%.
As a
percent of retail sales,
SG&A was 36.4% compared
to 32.3% in the
prior year. The
dollar 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 the
elimination
of
incentive
compensation,
resulting
from the failure
to meet targets
under the Company’s
annual incentive
compensation
plan, partially
offset by
higher store
impairment
charges.
Depreciation expense was $14.7
million in fiscal 2020
compared to $15.5 million
in fiscal 2019.
Depreciation expense decreased
from fiscal 2019
due to
fully depreciated older
stores and
previous
impairments of leasehold
improvements and fixtures,
partially offset
by store
development and
information
technology expenditures.
Interest and other income increased to
$6.6 million in fiscal 2020
compared to $6.1 million in fiscal
2019.
The increase is primarily due to a gain
on the sale of land held
for investment, partially offset by a decrease in
short-term investments.
Income tax
benefit was
$25.3 million,
or 4.5%
of retail
sales in
fiscal 2020
compared to
income tax
expense of $7.3 million, or 0.9% of retail sales in
fiscal 2019. The income tax benefit was primarily due to the
federal net
operating loss
carryback provisions
of the
Coronavirus Aid,
Relief and
Economic Security Act
(“CARES Act”) and
release of reserve
s
for uncertain tax
positions due to
expiration of statute
of limitations,
partially offset by
valuation allowances against
state net operating
tax losses, less
income tax credits
and an
upward adjustment in the reserves
for uncertain tax positions specifi
c
to state income taxes
in the first quarter
of 2020.
The effective
tax rate
was 34.8%
(Benefit) in
fiscal 2020
compared to
16.9% (Expense)
in fiscal
2019. See Note 12 to the Consolidated Financial
Statements, “Income Taxes,” for further details.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Compa
ny’s accounting
policies are
more fully
described in
Note 1
to Consolidated
Financial
Statements. As disclosed in
Note 1 of
Notes to Consolidated Financial Statements,
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.
Allowance for Customer Credit Losses
The Company evaluates
the collectability of
customer accounts receivable
and records an
allowance
for customer credit
losses based on
the accounts receivable aging
and estimates of
actual write-offs. The
allowance is reviewed
for adequacy and
adjusted, as necessary,
on a quarterly
basis. The Company
also
provides for
estimated uncollectible
late fees
charged based
on historical
write-offs. The
Company’s
financial results can
be impacted by
changes in customer
loss write-off
experience and the
aging of the
accounts receivable portfolio.
Merchandise Inventories
The Company’s
inventory is valued
using the weighted
-average cost method
and is stated
at the net
realizable value. Physical inventories are
conducted throughout the year to calculate
actual shrinkage and
inventory on hand.
Estimates based on actual
shrinkage results are
used to estimate
inventory shrinkage,
which is accrued
for the period
between the last
physical inventory and the
financial reporting date.
The
Company regularly
reviews its
inventory levels
to identify
slow moving
merchandise and
uses
markdowns to clear slow moving inventory.
Lease Accounting
In 2016,
the Financial
Accounting Standards
Board (“FASB”)
issued Accounting
Standard
Codification (“ASC”) 842
-
Leases
, with
amendments issued in
2018. The guidance
requires lessees to
recognize most
leases on
the balance
sheet but
does not
change the
manner in
which expenses
are
recorded in
the income
statement. For
lessors, the
guidance modifies
the classification
criteria and
the
accounting for sales-type and direct financing leases.
As of February 3, 2019, the Company adopted ASC 842 utilizing the modified retrospective
approach.
The modified
retrospective approach
the Company
selected provides
a method
of transition
allowing
recognition of existing
leases as o
f
the beginning of
the period of
adoption (i.e., February
3, 2019), and
which does not require the adjustment of comparative periods. See Note
11 for further information.
The Company elected the transition
package of practical expedients that
is permitted by the
standard.
The package of practical expedients allows the
Company to not reassess previous accounting conclusions
regarding whether existing arrangements are or contain leases, the classification
of existing leases, and the
treatment of
initial direct
costs. The
Company did
not elect
the hindsight
transition practical
expedient
allowed for by the
new standard, which allows entities
to use hindsight when determining
lease term and
impairment of right-of-use assets.
Impairment of Long-Lived Assets
The Company invests
in leaseholds, right-
of use
assets and
equipment primarily in
connection with
the opening and remodeling of stores
and in computer software and hardware. The Company periodically
reviews its store locations
and estimates the recoverability
of its long-lived assets,
which primarily relate
to Fixtures
and equipment,
Leasehold improvements,
Right-of-use assets
net of
Lease liabilities
and
Information technology equipment
and software.
An impairment
charge is
recorded for
the amount
by
which the carrying
value exceeds the
estimated fair value
when the Company
determines that projected
cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. This
determination is
based on
a number
of factors,
including the
store’s historical
operating results
and
projected cash flows, which
include future sales growth
rates, margin rates
and expense projections. The
Company assesses the fair
value of each
lease by considering market
rents and any
lease terms that
may
adjust market rents
under certain conditions,
such as the
loss of
an anchor tenant
or a leased
space in a
shopping center not
meeting certain criteria. Further,
in determining when to
close a store,
the Company
considers real
estate development
in the
area and
perceived local
market conditions,
which can
be
difficult to predict and may be subject to change.
Insurance Liabilities
The Company
is primarily
self-insured for
healthcare, workers’
compensation and
general liability
costs. These costs are significant primarily
due to the large number
of the Company’s retail
locations and
associates. The Company’s
self-insurance liabilities are based
on the total estimated
costs of claims filed
and estimates
of claims
incurred but
not reported,
less amounts
paid against
such claims,
and are
not
discounted. Management
reviews current
and historical
claims data
in developing
its estimates.
The
Company also uses information provided by outside actuaries
with respect to healthcare, workers’
compensation and general liability claims. If the
underlying facts and circumstances of the claims
change
or the
historical experience
upon which
insurance provisions
are recorded
is not
indicative of
future
trends, then the
Company may be required
to make adjustments
to the provision
for insurance costs
that
could be
material to the
Company’s reported
financial condition and
results of operations.
Historically,
actual results have not significantly deviated from estimates.
Uncertain Tax Positions
The Company records
liabilities for uncertain
tax positions primarily
related to state
income taxes as
of the balance sheet date.
These liabilities reflect the Company’s
best estimate of its ultimate
income tax
liability based
on the
tax codes,
regulations, and
pronouncements of
the jurisdictions
in which
we do
business.
Estimating our ultimate tax liability involves significant judgments regarding the application of
complex tax reg
ulations across many
jurisdictions.
Despite the Company’s
belief that the
estimates and
judgments are
reasonable, differences
between the
estimated and
actual tax
liabilities can
and do
exist
from time to time.
These differences may arise from settlements of
tax audits, expiration of the statute of
limitations, or the
evolution and application of
the various jurisdictional
tax codes and
regulations.
Any
differences will be
recorded in the
period in which
they become known and
could have a
material effect
on the results of operations in the period the adjustment is recorded.
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 capital expenditures
for fiscal 2021
and for the
foreseeable future.
In order to preserve liquidity during
the COVID-19 pandemic and in
light of the uncertainties as
to its
duration and
economic impact,
the Company
suspended its
quarterly dividend,
significantly reduced
planned capital
expenditures and
decreased its
store hours,
reduced non
-payroll e
xpenses, as
well as,
furloughed associates and in
certain instances eliminated positions
primarily at the corporate
office.
The
Company’s pre
-pandemic liquidity position has
enabled it to offset
the downturn in operating
cash flows
since the onset of the pandemic by liquidating short-term investments and
drawing and repaying under its
revolving credit facility.
The Company will
continue to focus
on preserving liquidity
while minimizing
capital expenditures
in 2021.
Additionally, the
Company’s $35.0
million revolving
facility allows
the
Company flexibility in
managing its short-
term investments, as
was the case
in the first
quarter of 2020
when the credit markets seized during the early phases of the COVID-19
pandemic.
Cash used by
operating activities during
fiscal 2020 was
$30.7 million as
compared to $53.4
million
provided in fiscal 2019
and $60.2 provided in
fiscal 2018. Cash used
by operating activities during
was primarily attributable
to a net
loss adjusted for
depreciation, share-based compensation, impairment
and changes in working
capital. The decrease o
f
$84.1 million for fiscal
2020 compared to fiscal
2019 is
primarily
due to a
net operating
loss versus
net operating
income,
an increase
in accounts
receivable
primarily
related
to income
taxes and
an increase
in prepaid
expenses,
partially
offset by
lower merchandise
inventories
and store
impairment
charges.
At January 30, 2021, the Company had working capital
of $108.6 million compared to $163.5 million
and $229.5
million at
February 1,
2020 and
February 2,
2019, respectively.
The decrease in
working
capital
is primarily due
to reduction in
short-term
investments
and lower inventories, partially
offset by
higher accounts
receivables
and lower
accrued
liabilities.
At January 30, 2021,
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
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 January 30, 2021. There were no borrowings outstanding
under this credit facility
as of the fiscal year ended January 30, 2021 or the fiscal year ended February
1, 2020.
The Company
had no
outstanding revocable
letters of
credit relating
to purchase
commitments at
January 30, 2021, February 1, 2020 and February 2, 2019.
Expenditures for property and equipment totaled $14.0 million, $8.3 million and $4.4
million in fiscal
2020, 2019 and 2018, respectively.
The expenditures for fiscal 2020 were
primarily for additional
investments
in 76 new stores,
distribution
center
and information
technology.
In fiscal 2021, the
Company
is planning to invest approximately $3.0 million in capital expenditures.
Net cash
provided by
investing activities
totaled $64.5
million for
fiscal 2020
compared to
$22.6
million used for fiscal
2019 and $71.1 million used
in fiscal 2018.
In fiscal 2020, the
cash provided was
primarily attributable
to the increase in net sales of short-term investments,
partially
offset by expenditures
for property
and equipment.
Net cash used by financing activities totaled $27.2 million in fiscal 2020 compared to net cash used of
$41.6 million for
fiscal 2019 and
$45.2 million for
fiscal 2018. The
decrease
was primarily
due to lower
dividend
payments,
partially
offset by
higher share
repurchase
amounts.
The Company does not use derivative financial instruments.
See Note
4, “Fair
Value
Measurements,” for
information regarding the
Company’s financial
assets
that are measured at fair value.
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
January 30, 2021.
The state, municipal
and corporate bonds and
asset-backed securities have contractual
maturities which range
from two days
to 7.5 years.
The U.S. Treasury
Notes and Certificates
of Deposit
have contractual maturities
which range from
three months to
2.5 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
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
January 30,
2021, the
Company had
$0.7 million
of corporate
equities, which
are
recorded within Other assets in the Consolidated Balance
Sheets.
At February 1, 2020, the Company had
$0.7 million
of corporate
equities, which are
recorded within
Other assets
in the
Consolidated Balance
Sheets.
Level 1
category
securities
are measured at
fair value using
quoted
active
market prices.
Level 2
investment
securities
include
corporate
and municipal
bonds for
which quoted
prices
may not
be available
on
active exchanges
for identical
instruments.
Their fair
value is
principally
based on
market values
determined
by management with assistance of a third-party pricing service.
Since quoted prices in active markets for
identical
assets
are not available,
these prices
are determined
by the pricing
service
using observable
market
information
such as quotes from less active markets
and/or quoted
prices
of securities
with similar
characteristics,
among other
factors.
Deferred compensation plan
assets consist
primarily of life
insurance policies.
These life
insurance
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on such
factors as
the fair
value of
the underlying
assets and
discounted cash
flow and
are therefore
classified within Level 3 of the valuation hierarchy.
The Level 3 liability associated with the life
insurance policies
represents a
deferred compensat
ion obligation,
the value
of which
is tracked
via
underlying insurance
funds’
net asset
values, as
recorded in
Other noncurrent
liabilities in
the
Consolidated Balance Sheets.
These funds are designed
to mirror the return
of existing mutual funds
and
money market funds that are observable and actively traded.
The following table shows the Company's obligations and commitments
as of January 30, 2021,
to make future payments under noncancellable contractual obligations
(in thousands):
Payments Due During One Year Fiscal Period Ending
Contractual Obligations
(1)
Total
Thereafter
Operating leases
$
227,525
$
70,007
$
48,639
$
35,717
$
22,542
$
13,815
$
36,805
Total Contractual Obligations
$
227,525
$
70,007
$
48,639
$
35,717
$
22,542
$
13,815
$
36,805
____________
(1) In addition to the amounts shown in the table above, $5.9 million of unrecognized tax benefits have been recorded
as liabilities in accordance
with ASC 740 and we are uncertain if or when such amounts may
be settled.
See Note 12, Income Taxes, of the Consolidated Financial
Statements for additional information.
Recent Accounting Pronouncements
See Note 1, Summary of Significant
Accounting Policies, Recently Adopted Accounting Policies and
Recently Issued Accounting Pronouncements.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm
................................................................
..
Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) for the fiscal
years ended January 30, 2021, February 1, 2020 and February 2,
2019 ...........................................
Consolidated Balance Sheets at January 30, 2021 and
February 1, 2020
.............................................
Consolidated Statements of Cash Flows for the fiscal years ended
January 30, 2021, February 1, 2020
and February 2, 2019................................
................................................................
.........................
Consolidated Statements of Stockholders’ Equity for the fiscal years
ended January 30, 2021,
February 1, 2020 and February 2, 2019 ................................
............................................................
Notes to Consolidated Financial Statements ................................................................
..........................
Schedule II - Valuation
and Qualifying Accounts for the fiscal years ended January 30,
2021,
February 1, 2020 and February 2, 2019 ................................
............................................................
Report of Independent Registered Public Accounting
Firm
To the Board
of Directors and Stockholders of The Cato Corporation
Opinions on the Financial Statements and Internal Control over
Financial Reporting
We have audited
the accompanying consolidated balance sheets of
The Cato Corporation and its subsidiaries (the
“Company”) as
of January 30,
2021 and
February 1, 2020
and the related
consolidated statements of
income (loss) and
comprehensive income
(loss), of
stockholders’ equity and
of cash
flows for
each of
the three years
in the
period ended
January 30, 2021,
including the related
notes and financial
statement schedule listed
in the accompanying index
(collectively referred to
as the “consolidated
financial statements”). We
also have audited
the Company’s internal
control
over financial reporting
as of January
30, 2021, based
on criteria established
in Internal Control
- Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the
consolidated financial statements
referred to above present
fairly, in all
material respects, the financial
position of the
Company as of January
30, 2021 and
February 1, 2020,
and the results of
its operations and its
cash flows
for each
of the
three years
in the
period ended
January 30,
2021 in
conformity with
accounting principles
generally
accepted in the United
States of America. Also in
our opinion, the Company maintained,
in all material respects,
effective
internal control
over financial
reporting as
of January
30, 2021,
based on
criteria established
in Internal
Control -
Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed
in Note
1 to
the consolidated
financial statements,
the Company
changed the
manner in
which it
accounts for leases as of February 3, 2019.
Basis for Opinions
The Company's management
is responsible for
these consolidated financial
statements, for maintaining
effective internal
control over
financial reporting,
and for
its assessment
of the
effectiveness of
internal control
over financial
reporting,
included in
Management’s Report
on Internal Control
Over Financial Reporting
appearing under
Item 9A. Our
responsibility is to
express opinions
on the
Company’s consolidated
financial statements
and on the
Company's internal
control over financial reporting
based on our audits.
We are
a public accounting
firm registered with the
Public Company
Accounting Oversight Board (United States)
(PCAOB) and are required to be
independent with respect to the Company
in
accordance with the
U.S. federal securities
laws and the
applicable rules and
regulations of
the Securities and
Exchange
Commission and the PCAOB.
We conducted
our audits
in accordance
with the
standards of
the PCAOB.
Those standards
require that
we plan
and
perform the audits
to obtain reasonable
assurance about whether the
consolidated financial statements
are free of material
misstatement, whether due to error or fraud,
and whether effective internal control over financial
reporting was maintained
in all material respects.
Our audits of the consolidated financial
statements included performing procedures to assess
the risks of material
misstatement of
the consolidated
financial statements,
whether due
to error
or fraud,
and performing
procedures that
respond to those risks. Such procedures
included examining, on a test basis,
evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and
significant estimates
made by
management, as
well as
evaluating the
overall presentation
of the
consolidated financial
statements. Our audit
of internal control
over financial reporting
included obtaining an
understanding of internal
control
over financial
reporting, assessing
the risk
that a
material weakness
exists, and
testing and
evaluating the
design and
operating effectiveness
of internal
control based
on the
assessed risk.
Our audits
also included
performing such
other
procedures as we considered
necessary in the circumstances. We
believe that our audits
provide a reasonable basis
for our
opinions.
Definition and Limitations of Internal Control over Financial
Reporting
A company’s internal
control over financial reporting
is a process designed
to provide reasonable assurance
regarding the
reliability of
financial reporting
and the
preparation of
financial statements
for external
purposes in
accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and
procedures that
(i) pertain
to the
maintenance of
records that,
in reasonable
detail, accurately
and fairly
reflect the
transactions and dispositions of
the assets of the
company; (ii) provide reasonable
assurance that transactions are
recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and
that receipts and expenditures
of the company are
being made only in
accordance with authorizations of
management and
directors of the
company;
and (iii) provide reasonable
assurance regarding prevention
or timely detection of
unauthorized
acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not
prevent or detect misstatements. Also,
projections of any evaluation of effectiveness
to future periods are subject to
the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial
statements that was
communicated or required
to be communicated to
the audit committee and
that (i) relates
to accounts
or disclosures
that are
material to
the consolidated
financial statements
and (ii)
involved our
especially challenging,
subjective, or complex
judgments. The communication
of critical audit
matters does not
alter in any
way our opinion
on
the consolidated financial statements,
taken as a whole,
and we are not,
by communicating the critical
audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets - Store
Location Asset Groupings
As described in Notes 1 and 6 to the consolidated financial
statements, the Company’s consolidated
property and
equipment, net
balance was $72.6
million, of which
the store locations
were a portion,
and consolidated operating
lease
right-of-use assets, net
balance was $199.8
million as of
January 30, 2021.
The Company invests
in leaseholds, right-of-
use assets
and equipment, primarily
in connection
with the opening
and remodeling of
stores, and in
computer software
and hardware.
The Company
periodically reviews
its store
locations and
estimates the
recoverability of
its long-lived
assets, which primarily relate
to fixtures and
equipment, leasehold improvements,
right-of-use assets net
of lease
liabilities, and
information technology
equipment and
software. An
impairment charge
is recorded
for the
amount by
which the carrying value exceeds the estimated fair
value when
management determines that projected cash flows
associated with those long-lived assets will not be sufficient
to recover the carrying value. This determination is based on a
number of
factors, including the
store’s historical
operating results
and projected cash
flows, which include
future sales
growth rates,
margin rates,
and expense
projections. The
Company assesses
the fair
value of
each lease
by considering
market rents and any lease terms that
may adjust market rents under certain conditions
such as the loss of an anchor
tenant
or a leased space
in a shopping center
not meeting certain criteria.
An impairment charge for
store assets of $11.4
million
was recorded during the year ended January 30, 2021.
The principal
considerations for
our determination
that performing
procedures relating
to the
impairment of
long-lived
assets -
store location
asset groupings
is a
critical audit
matter are
(i) the
significant judgment
by management
when
determining the
fair value
measurement of
the store location
asset groupings,
which led
to (ii) a
high degree
of auditor
judgment, subjectivity, and effort
in performing procedures and evaluating management’s
projected cash flow assumptions
related to future sales growth rates, margin rates, and expense projections.
Addressing the
matter involved
performing procedures
and evaluating
audit evidence
in connection
with forming
our
overall opinion
on the consolidated
financial statements.
These procedures included
testing the effectiveness
of controls
relating to
management’s long-
lived assets
- store location
recoverability test and
determination of
the fair value
of the
asset group.
These procedures also
included, among
others (i) testing
the completeness
and accuracy of
underlying data
used in
the projected
cash flows and
store location
asset groupings,
(ii) evaluating the
reasonableness of
management’s
assumptions related to future sales
growth rates, margin rates, and expense projections
by considering current and
historical performance
of the
store location
asset groupings
and whether
the assumptions were
consistent with
evidence
obtained in
other areas
of the
audit, (iii)
evaluating the
appropriateness of
the projected
cash flow
model, and
(iv)
evaluating management’s assessment of
the fair value of the leased assets included in the store location asset groupings.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 29, 2021
We have served as the
Company’s auditor since
2003.
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
Fiscal Year Ended
January 30, 2021
February 1, 2020
February 2, 2019
(Dollars in thousands, except per share data)
REVENUES
Retail sales
$
567,516
$
816,184
$
821,113
Other revenue (principally finance charges,
late fees and layaway charges)
7,595
9,151
8,551
Total revenues
575,111
825,335
829,664
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of
depreciation shown below)
433,187
508,906
522,535
Selling, general and administrative (exclusive
of depreciation shown below)
206,492
263,773
262,510
Depreciation
14,681
15,485
16,463
Interest expense
Interest and other income
(6,630)
(6,065)
(4,991)
Cost and expenses, net
647,917
782,128
796,613
Income (loss) before income taxes
(72,806)
43,207
33,051
Income tax expense (benefit)
(25,323)
7,310
2,590
Net income (loss)
$
(47,483)
$
35,897
$
30,461
Basic earnings (loss) per share
$
(2.01)
$
1.46
$
1.23
Diluted earnings (loss) per share
$
(2.01)
$
1.46
$
1.23
Dividends per share
$
0.33
$
1.32
$
1.32
Comprehensive income:
Net income (loss)
$
(47,483)
$
35,897
$
30,461
Unrealized gain (loss) on available-for-sale
securities, net of deferred income taxes of
($
), $
, and $
for fiscal 2020, 2019
and 2018, respectively
(268)
1,500
Comprehensive income (loss)
$
(47,751)
$
37,397
$
30,705
See notes to consolidated financial statements.
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
January 30, 2021
February 1, 2020
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
17,510
$
11,824
Short-term investments
126,416
200,387
Restricted cash
3,512
2,577
Restricted short-term investments
1,319
Accounts receivable, net of allowance for customer credit losses of $
at
January 30, 2021 and $
at February 1, 2020
52,743
26,088
Merchandise inventories
84,123
115,365
Prepaid expenses and other current assets
5,840
5,237
Total Current Assets
290,550
362,797
Property and equipment - net
72,550
88,667
Deferred income taxes
5,685
8,636
Other assets
22,850
24,073
Right-of-Use assets - net
199,817
200,803
Total Assets
$
591,452
$
684,976
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
73,769
$
68,438
Accrued expenses
40,790
47,099
Accrued bonus and benefits
1,916
18,913
Accrued income taxes
2,038
1,703
Current lease liability
63,421
63,149
Total Current Liabilities
181,934
199,302
Other noncurrent liabilities
19,705
21,976
Lease liability
143,315
147,184
Commitments and contingencies
-
-
Stockholders' Equity:
Preferred stock, $
par value per share,
100,000
shares authorized,
none issued
-
-
Class A common stock, $
0.033
par value per share,
50,000,000
shares authorized;
20,839,795
and
22,535,779
shares issued at
January 30, 2021 and February 1, 2020, respectively
Convertible Class B common stock, $
0.033
par value per share,
15,000,000
shares authorized;
1,763,652
and
1,763,652
shares issued at
January 30, 2021 and February 1, 2020, respectively
Additional paid-in capital
115,278
110,813
Retained earnings
129,303
203,458
Accumulated other comprehensive income
1,155
1,423
Total Stockholders' Equity
246,498
316,514
Total Liabilities and Stockholders’ Equity
$
591,452
$
684,976
See notes to consolidated financial statements.
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Fiscal Year Ended
January 30, 2021
February 1, 2020
February 2, 2019
(Dollars in thousands)
Operating Activities:
Net income (loss)
$
(47,483)
$
35,897
$
30,461
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation
14,681
15,485
16,463
Provision for customer credit losses
Purchase premium and premium amortization of investments
(691)
(694)
Gain on sale of assets held for investment
(2,298)
-
-
Share based compensation
4,092
4,669
4,939
Deferred income taxes
3,030
2,120
1,285
Loss on disposal of property and equipment
1,089
Impairment of assets
13,702
1,548
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable
(26,935)
1,525
(579)
Merchandise inventories
31,242
4,220
1,950
Prepaid and other assets
(1,596)
5,072
10,384
Operating lease right-of-use assets and liabilities
(2,611)
(9,803)
-
Accrued income taxes
1,703
(680)
Accounts payable, accrued expenses and other liabilities
(16,945)
(8,629)
(7,662)
Net cash provided by (used in) operating activities
(30,710)
53,396
60,244
Investing Activities:
Expenditures for property and equipment
(13,956)
(8,306)
(4,354)
Purchase of short-term investments
(74,041)
(218,345)
(157,515)
Sales of short-term investments
149,298
205,375
91,023
Purchase of other assets
-
(1,353)
(298)
Sales of other assets
3,205
(4)
Net cash provided by (used in) investing activities
64,506
(22,633)
(71,137)
Financing Activities:
Dividends paid
(7,912)
(32,592)
(32,577)
Repurchase of common stock
(19,654)
(9,605)
(13,344)
Proceeds from line of credit
34,000
-
-
Payments to line of credit
(34,000)
-
-
Proceeds from employee stock purchase plan
Proceeds from stock options exercised
-
-
Net cash used in financing activities
(27,175)
(41,571)
(45,162)
Net increase (decrease) in cash, cash equivalents, and restricted cash
6,621
(10,808)
(56,055)
Cash, cash equivalents, and restricted cash at beginning of period
14,401
25,209
81,264
Cash, cash equivalents, and restricted cash at end of period
$
21,022
$
14,401
$
25,209
Non-cash activity:
Accrued plant and equipment
$
$
2,828
$
Accrued treasury stock
-
-
See notes to consolidated financial statements.
THE CATO CORPORATION
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
Convertible
Accumulated
Class A
Class B
Additional
Other
Total
Common
Common
Paid-in
Retained
Comprehensive
Stockholders'
Stock
Stock
Capital
Earnings
Income
Equity
(Dollars in thousands)
Balance - February 3, 2018
$
$
$
99,948
$
225,894
$
(321)
$
326,353
Comprehensive income:
Net income (loss)
-
-
-
30,461
-
30,461
Unrealized gains (loss) on available-for-sale securities, net of
deferred income tax liability of $
-
-
-
-
Dividends paid ($
1.32
per share)
-
-
-
(32,577)
-
(32,577)
Class A common stock sold through employee stock purchase
plan -
44,770
shares
-
-
-
Class B common stock sold through stock option plans -
8,051
shares
-
-
-
Class A common stock issued through restricted stock grant plans -
341,744
shares
-
4,769
-
4,834
Repurchase and retirement of treasury shares -
593,404
shares
(20)
-
-
(13,325)
-
(13,345)
Balance - February 2, 2019
$
$
$
105,580
$
210,507
$
(77)
$
316,836
Comprehensive income:
Net income (loss)
-
-
-
35,897
-
35,897
Unrealized gains (loss) on available-for-sale securities, net of
deferred income tax liability of $
-
-
-
-
1,500
1,500
Dividends paid ($
1.32
per share)
-
-
-
(32,592)
-
(32,592)
Class A common stock sold through employee stock purchase
plan -
48,626
shares
-
-
-
Class B common stock sold through stock option plans -
0 shares
-
-
-
-
-
-
Class A common stock issued through restricted stock grant plans -
321,484
shares
-
4,498
-
4,560
Repurchase and retirement of treasury shares -
622,480
shares
(21)
-
-
(10,402)
-
(10,423)
Balance - February 1, 2020
$
$
$
110,813
$
203,458
$
1,423
$
316,514
Comprehensive income:
Net income (loss)
-
-
-
(47,483)
-
(47,483)
Unrealized gains (loss) on available-for-sale securities, net of
deferred income tax benefit of ($
)
-
-
-
-
(268)
(268)
Dividends paid ($
0.33
per share)
-
-
-
(7,912)
-
(7,912)
Class A common stock sold through employee stock purchase
plan -
48,191
shares
-
-
-
Class B common stock sold through stock option plans -
0 shares
-
-
-
-
-
-
Class A common stock issued through restricted stock grant plans -
231,194
shares
-
4,006
-
4,022
Repurchase and retirement of treasury shares -
1,975,373
shares
(67)
-
-
(18,768)
-
(18,835)
Balance - January 30, 2021
$
$
$
115,278
$
129,303
$
1,155
$
246,498
See notes to consolidated financial statements.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies:
Principles of Consolidation:
The Consolidated Financial Statements include the accounts of The Cato
Corporation and its
wholly-owned subsidiaries (the
“Company”). All significant
intercompany accounts
and transactions have been eliminated.
Description of Business and Fiscal
Year:
The Company has two
reportable segments - the
operation of
a fashion
specialty stores
segment (“Retail
Segment”) and
a credit
card segment
(“Credit
Segment”). The apparel
specialty stores operate
under the names
“Cato,” “Cato Fashions,”
“Cato Plus,”
“It’s Fashion,”
“It’s Fashion
Metro” and
“Versona,” including
e-commerce websites.
The stores
are
located primarily in
strip shopping centers
principally in the
southeastern United States. The
Company’s
fiscal year ends on the Saturday nearest January 31 of the subsequent year.
Use of Estimates:
The preparation of
the Company’s
financial statements in
conformity with
accounting principles
generally accepted in
the United States
(“GAAP”) requires management
to make
estimates and
assumptions that
affect the
reported amounts
of assets
and liabilities
and disclosure
of
contingent assets
and liabilities
at the
date of
the financial
statements and
the reported
amounts of
revenues and
expenses during
the reporting
period. Actual
results could
differ from
those estimates.
Significant accounting estimates
reflected in
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.
Cash and
Cash Equivalents:
Cash and
cash equivalents
consist of
highly liquid investments
with
original maturities of three months or less.
Short-Term Investments:
Investments with original
maturities beyond three
months are classified
as short-term investments.
See Note 3
for the Company’s
estimated fair value
of, and other
information
regarding, its short-
term investments.
The Company’s
short-term investments are
all classified as
available-for-sale. As
they are
available for
current operations,
they are
classified on
the Consolidated
Balance Sheets as
Current Assets. Available
-for-sale securities are
carried at fair
value, with
unrealized
gains and temporary losses,
net of income taxes,
reported as a component
of Accumulated other
comprehensive income. Other
than temporary declines in
the fair value
of investments are
recorded as a
reduction in the cost
of the investments in the
accompanying Consolidated Balance Sheets and a
reduction of
Interest and
other income
in the
accompanying Consolidated
Statements of
Income and
Comprehensive Income. The cost of
debt securities is adjusted for
amortization of premiums and
accretion of
discounts to
maturity. The
amortization of
premiums, accretion
of discounts
and realized
gains and losses are included in Interest and other income.
Restricted Cash and Restricted Short-term Investments:
The Company had $
3.9
million and $
3.9
million in escrow
at January 30,
2021 and February
1, 2020, respectively,
as security and
collateral for
administration of
the Company’s
self-insured workers’
compensation and
general liability
coverage,
which is reported
as Restricted cash
and Restricted short-
term investments on
the Consolidated Balance
Sheets.
Supplemental Cash Flow
Information:
Income tax payments, net
of refunds received, for
the fiscal
years ended January
30, 2021, February
1, 2020 and
February 2, 2019
were a payment
of $
6,825,000
, a
payment of $
4,681,000
and a refund of $
407,000
, respectively.
Inventories:
Merchandise inventories
are stated
at the
net realizable
value as
determined by
the
weighted-average cost method.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
Property and Equipment:
Property and equipment are recorded at
cost, including land.
Maintenance
and repairs are expensed to operations as incurred; renewals and betterments
are capitalized. Depreciation
is determined on
the straight-line method
over the estimated
useful lives of
the related
assets excluding
leasehold improvements.
Leasehold improvements are amortized over the shorter
of the estimated useful
life or lease term.
For leases with renewal periods at the
Company’s option, the Company generally
uses
the original
lease term
plus reasonably
assured renewal
option periods
(generally one
five-year option
period) to determine estimated useful lives.
Typical estimated useful lives are as follows:
`
Estimated
Classification
Useful Lives
Land improvements
10 years
Buildings
30-40 years
Leasehold improvements
5-10 years
Fixtures and equipment
3-10 years
Information technology equipment and software
3-10 years
Aircraft
20 years
Impairment of
Long-Lived Assets:
The Company
invests in
leaseholds, right-
of-use assets
and
equipment primarily in
connection with the
opening and remodeling
of stores and
in computer software
and
hardware. The Company
periodically reviews its
store locations and
estimates the recoverability
of its long-
lived assets, which
primarily relate to
Fixtures and equipment,
Leasehold improvements, Right-of
-use assets
net of Lease liabilities and Information
technology equipment and software. An impairment charge
is
recorded for
the amount
by which
the carrying
value exceeds
the estimated
fair value
when the
Company
determines that projected
cash flows associated
with those long-
lived assets will
not be sufficient
to recover
the carrying
value. This
determination is
based on
a number
of factors,
including the
store’s historical
operating results and
future projected cash
flows, which include
future sales growth
rates, margin
rates and
expense projections. The Company
assesses the fair
value of each lease
by considering market rents
and any
lease terms that
may adjust market
rents under certain
conditions, such as
the loss
of an anchor
tenant or
a
leased space in
a shopping center
not meeting certain
criteria. Further,
in determining when
to close a
store,
the Company considers real
estate development in the area
and perceived local market conditions,
which can
be difficult to predict
and may be subject to
change. Asset impairment charges of
$
13,702,000
, $
146,000
and
$
1,548,000
were incurred in fiscal 2020, fiscal 2019 and fiscal 2018, respectively.
The 2020 asset impairment
charges included $11.4
million of store asset impairments and
$2.3 million worth of fixtures planned
for new
stores.
Other Assets:
Other assets are comprised of
long-term assets, primarily insurance contracts related
to
deferred compensation assets and land held for investment purposes.
`
Fiscal Year
Ended
January 30,
February 1,
(Dollars in thousands)
Other Assets
Deferred Compensation Investments
$
11,264
$
10,517
Miscellaneous Investments
1,264
1,301
Other Deposits
1,555
Land Held for Investment
9,334
10,234
Other
Total
Other Assets
$
22,850
$
24,073
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
Leases:
In 2016,
the Financial
Accounting Standards
Board (“FASB”)
issued Accounting
Standard
Codification (“ASC”) 842
-
Leases
, with
amendments issued in
2018. The guidance
requires lessees to
recognize most
leases on
the balance
sheet but
does not
change the
manner in
which expenses
are
recorded in
the income
statement. For
lessors, the
guidance modifies
the classification
criteria an
d
the
accounting for sales-type and direct financing leases.
The Company utilized a comprehensive approach to
assess the impact of this guidance
on its financial
statements and related
disclosures, including the increase
in the assets
and liabilities on
its balance sheet
and the
impact on
its current
lease portfolio
from a
lessee perspective.
The Company
completed its
comprehensive review
of its
lease portfolio,
which includes
mostly store
leases impacted
by the
new
guidance. The Company reviewed its internal controls over leases and, as a result, the Company enhanced
these controls;
however, these
changes are
not considered
material. In
addition, the
Company
implemented a new software
platform, and corresponding controls, for
administering its leases and
facilitating compliance with the new guidance.
The Company elected the
transition package of
practical expedients that is
permitted by the
standard.
The package of practical expedients allows the
Company to not reassess previous accounting conclusions
regarding whether existing arrangements are or contain leases, the classification
of existing leases, and the
treatment of
initial direct
costs. The
Company did
not elect
the hindsight
transition practical
expedient
allowed for by the
new standard, which allows entities
to use hindsight when determini
ng lease term and
impairment of right-of-use assets.
The Company adopted ASC 842 utilizing
the modified retrospective approach as of
February 3, 2019.
The modified
retrospective approach
the Company
selected provides
a method
of transition
allowing
recognition of existing
leases as of
the beginning of
the period of
adoption (i.e., February
3, 2019), and
which does not require the adjustment of comparative periods. See Note
11 for further information.
The Company determined the classification of leases consistent
with ASC 840 -
Leases
for fiscal year
2018.
The Company leases all of its retail stores.
Most lease agreements contain construction allowances
and rent escalations.
For purposes of recognizing incentives
and minimum rental expenses on
a straight-
line basis
over the
terms of
the leases,
including renewal
periods considered
reasonably assured,
the
Company begins
amortization as
of the
initial possession
date which
is when
the Company
enters the
space and begins to make improvements in preparation for intended use.
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.
In accordance with ASU 2014-09,
Revenue from Contracts with Customers (Topic
606)
(“Topic 606”),
in fiscal 2020, 2019
and 2018, the Company
recognized $
891,000
, $
921,000
and $
591,000
, respectively,
of income
on unredeemed
gift cards
(“gift card
breakage”) as
a component
of Other
Revenue on
the
Consolidated Statements
of Income
(Loss) and
Comprehensive Income
(Loss).
Under Topic
606, the
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
Company recognizes gift
card breakage using
an expected
breakage percentage based
on redeemed gift
cards. See Note 2 for further information on miscellaneous income.
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
customer credit
losses of
$
435,000
and $
700,000
for the
twelve months
ended
January 30, 2021
and February 1,
2020, respectively,
on sales purchased
on the Company’s
proprietary
credit card
of $
15.2
million and
$
26.6
million for
the twelve
months ended
January 30,
2021 and
February 1, 2020, respectively.
The following table provides information about receivables and
contract liabilities from contracts with
customers (in thousands):
`
Balance as of
January 30, 2021
February 1, 2020
Proprietary Credit Card Receivables, net
$
9,606
$
15,241
Gift Card Liability
$
8,155
$
7,658
Cost of Goods Sold:
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
our buying
departments and
distribution center.
Occupancy expenses
include rent,
real estate
taxes, insurance,
common area
maintenance, utilities
and
maintenance for
stores and
distribution facilities.
Buying, distribution,
occupancy and
internal transfer
costs are treated
as period costs
and are not
capitalized as part
of inventory.
The direct costs
associated
with shipping goods to customers are recorded as a component of Cost of
goods sold.
Advertising:
Advertising costs
are expensed
in the
period in
which they
are incurred.
Advertising
expense was approximately $
4,385,000
, $
5,600,000
and $
5,546,000
for the fiscal years ended January 30,
2021, February 1, 2020 and February 2, 2019, respectively.
Stock Repurchase Program:
For the fiscal year
ended January 30, 2021, the
Company had
1,871,149
shares remaining in
open authorizations. There
is no specified
expiration date for
the
Company’s repurchase
program. Share repurchases
are recorded in
Retained earnings, net
of par
value.
Through March 29,
2021, the Company
repurchased 83,256 shares
for $971,866, to
offset dilution from
its equity compensation plan.
Earnings Per
Share:
ASC 260
-
Earnings Per
Share
requires dual
presentation of
basic EPS
and
diluted EPS
on the
face of
all income
statements for
all entities
with complex
capital structures.
The
Company has
presented one
basic EPS
and one
diluted EPS
amount for
all common
shares in
the
accompanying Consolidated Statements of Income (Loss)
and Comprehensive Income (Loss).
While the
Company’s certificate of
incorporation provides the right
for the Board
of Directors to declare
dividends
on Class A
shares without declaration
of commensurate dividends
on Class B
shares, the Company
has
historically paid the same dividends to both
Class A and Class B shareholders
and the Board of Directors
has resolved to continue
this practice.
Accordingly, the Company’s
allocation of income for
purposes of
EPS computation is
the same for
Class A and
Class B shares
and the EPS
amounts reported herein
are
applicable to both Class A and Class B shares.
Basic EPS is
computed as net
income less earnings
allocated to non-
vested equity awards
divided by
the weighted
average number
of common
shares outstanding
for the
period.
Diluted EPS
reflects the
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
potential dilution that could occur
from common shares issuable through stock options
and the Employee
Stock Purchase Plan.
The following table
reflects the basic
and diluted EPS
calculations for the
fiscal years ended
January
30, 2021, February 1, 2020 and February 2, 2019:
`
Fiscal Year Ended
January 30, 2021
February 1, 2020
February 2, 2019
Numerator
(Dollars in thousands)
Net earnings (loss)
$
(47,483)
$
35,897
$
30,461
(Earnings) loss allocated to non-vested equity awards
2,096
(1,280)
(862)
Net earnings (loss) available to common stockholders
$
(45,387)
$
34,617
$
29,599
Denominator
Basic weighted average common shares outstanding
22,536,090
23,738,443
23,995,170
Diluted weighted average common shares outstanding
22,536,090
23,738,443
23,995,170
Net income (loss) per common share
Basic earnings (loss) per share
$
(2.01)
$
1.46
$
1.23
Diluted earnings (loss) per share
$
(2.01)
$
1.46
$
1.23
Vendor Allowances:
The Company
receives certain
allowances from
vendors primarily
related to
purchase discounts and markdown and
damage allowances. All allowances are reflected
in Cost of goods
sold as earned when the related products are sold.
Cash consideration received from a vendor is
presumed to
be a
reduction of
the purchase
cost of
merchandise and
is reflected
as a
reduction of
inventory.
The Company does not receive cooperative advertising allowances.
Income Taxes:
The Company
files a
consolidated federal
income tax
return.
Income taxes
are
provided based
on the
asset and
liability method
of accounting,
whereby deferred
income taxes
are
provided for temporary differences
between the financial reporting basis
and the tax basis
of the
Company’s assets and liabilities.
Unrecognized tax benefits
for uncertain
tax positions are
established in
accordance with ASC
740 -
Income Taxes
when, despite the
fact that the
tax return positions
are supportable, the
Company believes
these positions may be
challenged and the results
are uncertain.
The Company adjusts these
liabilities in
light of
changing facts
and circumstances.
Potential accrued
interest and
penalties related
to
unrecognized tax
benefits within
operations are
recognized as
a component
of Income
before income
taxes.
The Company assesses the likelihood
that deferred tax assets will
be able to be
realized, and based on
that assessment, the Company will determine if a valuation allowance should
be recorded.
In addition, the
Tax Cuts
and Jobs
Act implemented a
new minimum tax
on global intangible
low-
taxed income (“GILTI”).
The Company has elected
to account for
GILTI tax
in the period
in which it
is
incurred, which is included as a component of its current year provision for
income taxes.
Store Opening
Costs:
Costs relating to
the opening of new stores
or the relocating or
expanding of
existing stores
are expensed
as incurred.
A portion
of construction,
design, and
site
selection costs are capitalized to new, relocated and remodeled stores.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
Insurance:
The Company is self-insured with respect to employee health care, workers’ compensation
and general
liability. The
Company’s self
-insurance liabilities
are based
on the
total estimated
cost of
claims filed and estimates of claims
incurred but not reported, less amounts paid
against such claims, and
are not discounted.
Management reviews current
and historical claims
data in developing
its estimates.
The Company has stop-loss insurance coverage
for individual claims in excess of
$
325,000
for employee
healthcare, $
350,000
for workers’ compensation and $
250,000
for general liability.
Fair Value
of Financial Instruments:
The Company’s carrying
values of financial instruments, such
as cash
and cash equivalents,
short-term investments, restricted
cash and
short-term investments,
approximate their fair values due to their short terms to maturity and/or their
variable interest rates.
Stock Based Compensation:
The Company records
compensation expense associated with
restricted
stock and
other forms
of equity
compensation in
accordance with
ASC 718
-
Compensation -
Stock
Compensation.
Compensation cost associated with stock awards recognized in all years presented
includes: 1) amortization related to the
remaining unvested portion of all
stock awards based on the
grant
date fair value and 2) adjustments for the effects of actual forfeitures versus initial estimated forfeitures.
Recently Adopted Accounting Policies
In June
2016, the
FASB issued
ASU 2016-
13,
Financial Instruments
- Credit
Losses (Topic
326):
Measurement of
Credit Losses
on Financial
Instruments
, which
requires companies
to measure
and
recognize expected
credit losses
for financial
assets held
at amortized
costs based
on expected
losses
rather than incurred losses.
The new accounting rules
were effective for
the Company in the
first quarter
of 2020 and had a minimal impact on the financial statements.
Recently Issued 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 adop
tion of the new
accounting rules on
the Company’s financial position, results of operations, cash flows and disclosures.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
2.
Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
January 30, 2021
February 1, 2020
February 2, 2019
Dividend income
$
(5)
$
(42)
$
(34)
Interest income
(2,697)
(4,954)
(3,893)
Miscellaneous income
(627)
(709)
(1,109)
Net loss (gain) on investment sales
(3,301)
(360)
Interest and other income
$
(6,630)
$
(6,065)
$
(4,991)
During 2020, the Company recorded a gain on the sale of land held
for investment of $2.3 million
within Interest and other income on the Consolidated Statements of Income
(Loss) and Comprehensive
Income (Loss).
3.
Short-Term Investments:
At January
30, 2021,
the Company’s
investment portfolio
was primarily
invested in
corporate and
governmental debt securities
held in managed
accounts.
These securities are
classified as available-
for-
sale as they are highly liquid and are recorded on the Consolidated Balance Sheets at estimated fair value,
with unrealized
gains and
temporary losses
reported net
of taxes
in Accumulated
other comprehensive
income.
The table
below reflects
gross accumulated
unrealized gains
(losses) in
short-term investments
at
January 30, 2021 and February 1, 2020 (in thousands):
`
January 30, 2021
February 1, 2020
Debt securities
Debt securities
issued by the U.S
issued by the U.S
Government, its various
Government, its various
States, municipalities
Corporate
States, municipalities
Corporate
and agencies
debt
and agencies
debt
of each
securities
Total
of each
securities
Total
Cost basis
$
40,701
$
85,045
$
125,746
$
73,116
$
127,096
$
200,212
Unrealized gains
1,076
1,086
1,394
Unrealized (loss)
-
-
-
-
-
-
Estimated fair value
$
41,123
$
85,699
$
126,822
$
73,424
$
128,182
$
201,606
Accumulated other
comprehensive income
on the
Consolidated Balance
Sheets reflects
the
accumulated unrealized net
gains in
short-term investments in
addition to
unrealized gains
from equity
investments and restricted cash investments.
The table below reflects gross accumulated unrealized gains
in these investments at January 30, 2021 and February 1, 2020 (in thousands):
`
January 30, 2021
February 1, 2020
Deferred
Unrealized
Deferred
Unrealized
Unrealized
Tax Benefit/
Net Gain/
Unrealized
Tax Benefit/
Net Gain/
Security Type
Gain/(Loss)
(Expense)
(Loss)
Gain/(Loss)
(Expense)
(Loss)
Short-Term Investments
$
1,076
$
(250)
$
$
1,394
$
(323)
$
1,071
Equity Investments
(100)
(106)
Total
$
1,505
$
(350)
$
1,155
$
1,852
$
(429)
$
1,423
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
4.
Fair Value Measurements:
The following tables set forth information regarding the Company’s financial
assets that are measured
at fair value as of January 30, 2021 and February 1, 2020 (in thousands):
`
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
January 30, 2021
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
23,254
$
-
$
23,254
$
-
Corporate Bonds
67,566
-
67,566
-
U.S. Treasury/Agencies Notes and Bonds
17,869
-
17,869
-
Cash Surrender Value of Life Insurance
11,263
-
-
11,263
Asset-backed Securities (ABS)
16,064
-
16,064
-
Corporate Equities
-
-
Commercial Paper
2,069
-
2,069
-
Total Assets
$
138,788
$
$
126,822
$
11,263
Liabilities:
Deferred Compensation
(10,316)
-
-
(10,316)
Total Liabilities
$
(10,316)
$
-
$
-
$
(10,316)
Prices in
Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
February 1, 2020
Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
State/Municipal Bonds
$
36,014
$
-
$
36,014
$
-
Corporate Bonds
90,798
-
90,798
-
U.S. Treasury/Agencies Notes and Bonds
37,410
-
37,410
-
Cash Surrender Value of Life Insurance
10,517
-
-
10,517
Asset-backed Securities (ABS)
37,384
-
37,384
-
Corporate Equities
-
-
Certificates of Deposit
-
-
Total Assets
$
212,955
$
$
201,606
$
10,517
Liabilities:
Deferred Compensation
(10,391)
-
-
(10,391)
Total Liabilities
$
(10,391)
$
-
$
-
$
(10,391)
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
January 30, 2021.
The state, municipal
and corporate bonds and
asset-backed securities have contractual
maturities which range
from
two days to
7.5 years. The
U.S. Treasury Notes
and Certificates of
Deposit
have contractual maturities
which range from
three months to
2.5 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
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
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
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
January 30,
2021, the
Company had
$0.7 million
of corporate
equities, which
are
recorded within Other assets in the Consolidated Balance
Sheets.
At February 1, 2020, the Company had
$0.7 million
of corporate
equities, which are
recorded within
Other assets
in the
Consolidated Balance
Sheets.
Level 1
category
securities
are measured at
fair value using
quoted
active
market prices.
Level 2
investment
securities
include
corporate
and municipal
bonds for
which quoted
prices
may not
be available
on
active exchanges
for identical
instruments.
Their fair
value is
principally
based on
market values
determined
by management with assistance of a third-party pricing service.
Since quoted prices in active markets for
identical
assets
are not available,
these prices
are determined
by the pricing
service
using observable
market
information
such as quotes from less active markets
and/or quoted
prices
of securities
with similar
characteristics,
among other
factors.
Deferred compensation
plan assets
consist primarily
of life
insurance policies.
These life
insurance
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on such
factors as
the fair
value of
the underlying
assets and
discounted cash
flow and
are therefore
classified within Level 3 of the valuation hierarchy.
The Level 3 liability associated with the life
insurance policies
represents a
deferred compensation
obligation, the
value of
which is
tracked via
underlying insurance
funds’ net
asset values,
as recorded
in Other
noncurrent liabilities
in the
Consolidated Balance Sheets. These
funds are designed to
mirror the return of
existing mutual funds and
money market funds that are observable and actively traded.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
The following
tables
summarize
the change
in fair value
of the Company’s
financial
assets
and liabilities
measured
using Level
3 inputs
as of January
30, 2021
and
February 1, 2020
(in thousands):
`
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at February 1, 2020
$
10,517
Total gains or (losses)
Included in interest and other income (or
changes in net assets)
Ending Balance at January 30, 2021
$
11,263
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at February 1, 2020
$
(10,391)
Additions
1,062
Total (gains) or losses
Included in interest and other income (or
changes in net assets)
(987)
Ending Balance at January 30, 2021
$
(10,316)
Fair Value
Measurements Using
Significant Unobservable
Asset Inputs (Level 3)
Cash
Surrender Value
Beginning Balance at February 2, 2019
$
9,093
Additions
Total gains or (losses)
Included in interest and other income (or
changes in net assets)
Ending Balance at February 1, 2020
$
10,517
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at February 2, 2019
$
(8,908)
Additions
(554)
Total (gains) or losses
Included in interest and other income (or
changes in net assets)
(929)
Ending Balance at February 1, 2020
$
(10,391)
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
5.
Accounts Receivable:
Accounts receivable consist of the following (in thousands):
January 30, 2021
February 1, 2020
Customer accounts - principally deferred payment accounts
$
10,210
$
15,966
Income tax receivable
33,898
Miscellaneous receivables
4,596
4,338
Bank card receivables
4,644
5,930
Total
53,348
26,814
Less allowance for customer credit losses
Accounts receivable - net
$
52,743
$
26,088
Finance charge and
late charge revenue
on customer deferred
payment accounts totaled
$
2,658,000
,
$
3,605,000
and $
3,814,000
for the fiscal
years ended January 30, 2021, February 1, 2020
and February 2,
2019, respectively,
and charges
against the
allowance for
customer credit
losses were
approximately
$
306,000
, $
524,000
and $
470,000
for the
fiscal years
ended January
30, 2021,
February 1,
2020 and
February 2, 2019,
respectively. Expenses
relating to the
allowance for customer credit
losses are
classified as
a component
of Selling,
general and
administrative expense
in the
accompanying
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss).
6.
Property and Equipment:
Property and equipment consist of the following (in thousands):
January 30, 2021
February 1, 2020
Land and improvements
$
13,595
$
13,548
Buildings
35,335
35,814
Leasehold improvements
80,874
89,349
Fixtures and equipment
198,513
205,789
Information technology equipment and software
35,303
59,202
Construction in progress
-
2,334
Total
363,620
406,036
Less accumulated depreciation
291,070
317,369
Property and equipment - net
$
72,550
$
88,667
Construction in progress primarily represents costs related to new store
development and
investments in new technology.
7.
Accrued Expenses:
Accrued expenses consist of the following (in thousands):
January 30,
February 1,
Accrued employment and related items
$
6,122
$
7,756
Property and other taxes
16,574
18,515
Accrued self-insurance
10,994
10,551
Fixed assets
2,828
Other
6,757
7,449
Total
$
40,790
$
47,099
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
8.
Financing Arrangements:
As of January
30, 2021, the
Company
had an unsecured revolving credit
agreement
to borrow $
35.0
million
less the
balance
of any
revocable
credits
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
January
30, 2021.
There were no borrowings outstanding
under this credit facility
as of January 30, 2021,
February
1, 2020 or February 2,
2019.
At January 30, 2021, the
weighted
average
interest
rate under the
credit facility
was zero
due to
no borrowings
outstanding
at the end
of the year.
At January
30, 2021,
February
1, 2020
and February
2, 2019,
the Company
had no outstanding
revocable
letters
of credit
relating
to purchase
commitments.
9.
Stockholders’ Equity:
The holders
of Class
A Common
Stock are
entitled to
one vote
per share,
whereas the
holders of
Class B Common Stock are entitled to
ten votes per share. Each
share of Class B Common Stock may
be
converted at any time into one share of Class A Common Stock. Subject to the rights of the holders
of any
shares of Preferred
Stock that may
be outstanding at
the time, in
the event of
liquidation, dissolution or
winding up
of the
Company, holders
of Class
A Common
Stock are
entitled to
receive a
preferential
distribution of $1.00 per share of
the net assets of the
Company. Cash dividends
on the Class B Common
Stock cannot be paid
unless cash dividends of
at least an equal
amount are paid on
the Class A Common
Stock.
The Company’s
certificate of
incorporation provides that
shares of
Class B Common Stock
may be
transferred only
to certain
“Permitted Transferees”
consisting generally
of the
lineal descendants
of
holders of
Class B Common
Stock, trusts
for their
benefit, corporations
and partnerships
controlled by
them and the Company’s
employee benefit plans. Any transfer
of Class B Common Stock in
violation of
these restrictions, including a transfer to
the Company, results
in the automatic conversion of the
transferred shares
of Class
B Common
Stock held
by the
transferee into
an equal
number of
shares of
Class A Common Stock.
10.
Employee Benefit Plans:
The Company
has a
defined contribution
retirement savings
plan (“401(k)
plan”) which
covers all
associates who
meet minimum
age and
service requirements.
The 401(k)
plan allows
participants to
contribute up to
% of
their annual
compensation up to
the maximum elective
deferral, designated by
the IRS. The Company is obligated to
make a minimum contribution to cover plan administrative
expenses. Further Company contributions are
at the discretion of the
Board of Directors. The Company’s
contributions for the years ended January 30, 2021, February 1, 2020 and February 2, 2019 were
approximately $
, $
1,499,000
and $
1,442,000
, respectively.
The Company
has a
trusteed, non
-contributory Employee
Stock Ownership
Plan (“ESOP”),
which
covers substantially all associates
who meet minimum age
and service requirements.
The amount of
the
Company’s discretionary
contribution to
the ESOP
is determined
annually by the
Compensation
Committee of
the Board
of Directors
and can
be made
in Company
Class A
Common stock
or cash.
During fiscal 2020,
the Company contributed
cash and the
plan purchased stock
on the open
market for
the ESOP award earned for fiscal 2019. Due to a net
operating loss in fiscal 2020,
the Committee did not
approve a
contribution to
the ESOP
for the
year ended January
30, 2021.
The Company’s
contribution
was $
7,198,000
and $
1,229,000
for the years ended February 1, 2020 and February 2, 2019, respectively.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
The Company is primarily self-insured for healthcare.
These costs are significant primarily due to the
large number of
the Company’s
retail locations and
associates. The Company’s
self-insurance liabilities
are based on
the total estimated
costs of
claims filed and
estimates of claims
incurred but not
reported,
less amounts
paid against such claims.
Management reviews current and historical claims data in
developing its estimates.
If the underlying
facts and circumstances
of the claims
change or the
historical
trend is not indicative of future trends, then the Company may be required to record additional
expense or
a reduction to expense which could
be material to the Company’s
reported financial condition and results
of operations. The Company funds healthcare contributions to a third-party
provider.
11.
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
lease term used
to establish its
right-of-use assets and
lease liabilities. The
Company’s lease
agreements
do not contain any material residual value guarantees or material restrictive
covenants.
As most
of the
Company’s leases
do not
provide an
implicit rate,
the Company
uses its
estimated
incremental borrowing
rate based
on the
information available
at commencement
date of
the lease
in
determining the present value of lease payments.
The components of lease cost are shown below (in thousands):
`
Twelve Months Ended
January 30, 2021
February 1, 2020
Operating lease cost (a)
$
69,601
$
59,987
Variable
lease cost (b)
$
1,555
$
2,088
ASC 840 prepaid rent expense (c)
$
-
$
6,093
(a) Includes right-of-use asset amortization of ($
4.6
) million and ($
4.9
) million for the twelve months
ended January 30, 2021 and February 1, 2020, respectively.
(b) Primarily related to monthly percentage rent for stores not presented on the balance sheet.
(c) Related to ASC 840 rent expense due to prepaid rent on the balance sheet as of February 3, 2019.
Supplemental cash flow
information and non-cash
activity related to
the Company’s
operating leases
are as follows (in thousands):
Operating cash flow information:
Twelve Months Ended
January 30, 2021
February 1, 2020
Cash paid for amounts included in the measurement of lease liabilities
$
62,559
$
55,544
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations, net of rent violations
$
58,978
$
63,847
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
Weighted-average remaining
lease term and
discount rate for
the Company’s
operating leases are
as
follows:
`
As of
January 30, 2021
February 1, 2020
Weighted-average remaining lease term
2.9
years
3.2
years
Weighted-average discount rate
4.06%
4.47%
Maturities of
lease liabilities
by fiscal
year for
the Company’s
operating leases
are as
follows (in
thousands):
Fiscal Year
$
70,007
48,639
35,717
22,542
13,815
Thereafter
36,805
Total lease payments
227,525
Less: Imputed interest
20,789
Present value of lease liabilities
$
206,736
12.
Income Taxes:
Unrecognized tax
benefits for
uncertain tax
positions, primarily recorded
in Other
noncurrent
liabilities, are established in accordance with
ASC 740 when, despite the fact
that the tax return positions
are supportable,
the Company believes
these positions may
be challenged
and the results
are uncertain.
The Company adjusts
these liabilities
in light
of changing facts
and circumstances.
As of
January 30,
2021, the
Company had
gross unrecognized
tax benefits
totaling approximately $5.9
million, of
which
approximately $
7.7
million (inclusive of
interest) would
affect the
effective tax
rate if
recognized. The
Company had approximately $
2.8
million, $
3.3
million and $
3.2
million of interest and penalties accrued
related to
uncertain tax
positions as
of January
30, 2021,
February 1,
2020 and
February 2,
2019,
respectively.
The Company
recognizes interest
and penalties
related to
the resolution
of uncertain
tax
positions as
a component
of income
tax expense.
The Company
recognized $
424,000
, $
574,000
and
$
1,023,000
of interest and penalties in the Consolidated Statements of Income (Loss)
and Comprehensive
Income (Loss) for the years ended January 30, 2021, February 1, 2020 and
February 2, 2019, respectively.
The Company
is no
longer subject
to U.S.
federal income tax
examinations for y
ears before
2017.
In
state and
local tax
jurisdictions, the
Company has
limited exposure
before 2010.
During the
next 12
months, various
state and
local taxing
authorities’ statutes
of limitations
will expire
and certain
state
examinations may
close, which
could result
in a
potential reduction
of unrecognized
tax benefits
for
which a range cannot be determined.
A reconciliation of
the beginning and
ending amount of
gross unrecognized tax benefits
is as follows
(in thousands):
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
`
January 30,
February 1,
February 2,
Fiscal Year
Ended
Balances, beginning
$
7,942
$
8,485
$
9,531
Additions for tax positions of the current year
Reduction for tax positions of prior years for:
Settlements during the period
(419)
Lapses of applicable statutes of limitations
(2,896)
(920)
(1,047)
Balances, ending
$
5,946
$
7,942
$
8,485
The provision
for income
taxes consists
of the following
(in thousands):
`
January 30,
February 1,
February 2,
Fiscal Year
Ended
Current income taxes:
Federal
$
(31,927)
$
3,321
$
State
1,842
(359)
Foreign
1,731
1,763
1,371
Total
(28,354)
5,180
1,293
Deferred income taxes:
Federal
1,905
2,064
State
1,129
1,556
(767)
Foreign
(3)
-
-
Total
3,031
2,130
1,297
Total income tax expense
(benefit)
$
(25,323)
$
7,310
$
2,590
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
Significant
components
of the Company’s deferred tax assets and
liabilities
as of January 30, 2021
and
February
1, 2020
are as follows
(in thousands):
`
January 30,
February 1,
Deferred tax assets:
Allowance for customer credit losses
$
$
Inventory valuation
1,004
1,105
Non-deductible accrued liabilities
1,613
1,286
Other taxes
1,184
1,126
Federal benefit of uncertain tax positions
1,001
1,065
Equity compensation expense
4,097
4,322
Net operating losses
4,531
1,574
Charitable contribution carryover
State tax credits
1,115
1,160
Lease liabilities
47,428
44,170
Other
2,204
1,324
Total deferred
tax assets before valuation allowance
64,702
58,062
Valuation
allowance
(5,256)
(1,124)
Total deferred
tax assets after valuation allowance
59,446
56,938
Deferred tax liabilities:
Property and equipment
1,480
Accrued self-insurance reserves
Right-of-Use assets
51,350
46,724
Other
Total deferred
tax liabilities
53,761
48,302
Net deferred tax assets
$
5,685
$
8,636
As of January
30, 2021,
the Company
had $1.1
million
of state
tax credits
to offset
future
state income
tax
expense,
which are
set to expire
by fiscal
2023.
Based on
the available
evidence,
the Company
has recorded
a valuation
allowance
of $1.1
million.
As of January 30,
2021, the Company had $4.5
million
of state net operating loss
carryforwards.
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 the Company
will not be able to realize net operating
losses and,
accordingly,
has recorded
a valuation allowance
of $4.2
million
for the
portion
it expects
to not be
realized.
As of February 1, 2020, the Company’s position
is that its overseas subsidiaries
will not invest
undistributed
earnings
indefinitely.
Future unremitted
earnings
when distributed
are expected to be
either
distributions
of GILTI-previously
taxed income or eligible for a
100% dividends
received
deduction.
The
withholding
tax rate
on any
unremitted
earnings
is zero
and state
income taxes on
such earnings are
considered
immaterial.
Therefore,
the Company has not
provided
deferred
U.S. income taxes on
approximately
$22.5 million
of earnings
from non-U.S.
subsidiaries.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
The reconciliation
of the
Company’s effective
income tax
rate with
the statutory
rate is
as follows:
`
January 30,
February 1,
February 2,
Fiscal Year
Ended
Federal income tax rate
21.0
%
21.0
%
21.0
%
State income taxes
4.0
1.7
1.1
CARES ACT - Carryback differential
18.3
-
-
Global intangible low-taxed income
(5.3)
5.9
6.2
Foreign tax credit
-
(3.7)
(4.0)
Foreign rate differential
1.2
(2.5)
(2.6)
Offshore claim
2.5
(5.2)
(5.7)
Work opportunity credit
0.2
(3.2)
(3.4)
Addback on wage related credits
-
0.7
0.7
Tax exempt interest
-
(0.2)
(2.4)
Charitable contribution of inventory
(0.2)
-
-
Uncertain tax positions
3.3
(1.0)
(1.5)
Deferred rate change
(0.1)
-
(2.0)
Valuation
allowance
(5.7)
2.6
-
Other
(4.4)
0.8
0.4
Effective income tax rate (1)
34.8
%
16.9
%
7.8
%
(1) The income tax rate for year ended January 30, 2021
represents an income tax benefit, while the
rate for the years ended February 1, 2020 and February 2, 2019
represent income tax expenses.
The annual effective
tax rate for
the current fiscal year
is impacted by the
ability to carryback federal
net operating losses due to the
Coronavirus Aid, Relief and Economic Security
Act (“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 in future periods.
Further, the CARES Act allows the Company to
carryback losses to 2015; therefore, the Company has
recorded $32.6
million of
estimated refunds
calculated through the
fourth quarter
of 2020
in Accounts
receivable in the Consolidated Balance Sheets.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
13.
Quarterly Financial Data (Unaudited):
Summarized quarterly financial results are as follows (in thousands, except
per share data):
`
Fiscal 2020
First
Second
Third
Fourth
Total revenues
$
100,732
$
168,170
$
150,791
$
155,418
Gross profit (exclusive of depreciation)
17,135
35,434
41,387
47,968
Net income (loss)
(28,417)
(7,170)
(3,622)
(8,274)
Basic earnings (loss) per share
$
(1.19)
$
(0.30)
$
(0.15)
$
(0.37)
Diluted earnings (loss) per share
$
(1.19)
$
(0.30)
$
(0.15)
$
(0.37)
Fiscal 2019
First
Second
Third
Fourth
Total revenues
$
230,351
$
212,581
$
191,523
$
190,880
Gross profit (exclusive of depreciation)
94,268
82,209
72,899
67,053
Net income (loss)
21,255
11,866
5,985
(3,209)
Basic earnings (loss) per share
$
0.87
$
0.48
$
0.24
$
(0.13)
Diluted earnings (loss) per share
$
0.87
$
0.48
$
0.24
$
(0.13)
14.
Reportable Segment Information:
The Company has
determined
that it
has four
operating
segments,
as defined
under ASC
280-10,
including
Cato, It’s
Fashion,
Versona and
Credit.
As outlined in
ASC 280
-10, the
Company
has two
reportable
segments:
Retail
and Credit.
The Company has aggregated its
three retail operating segments,
including
e-commerce,
based on the aggregation criteria outlined
in ASC 280-10, which states that two
or
more operating
segments
may be aggregated
into a single
reportable
segment
if aggregation
is consistent
with
the objective and
basic principles of
ASC 280
-10, which
require
the segments have
similar
economic
characteristics,
products,
production
processes,
clients
and methods
of distribution.
The Company’s retail operating segments have similar economic characteristics
and similar operating,
financial
and competitive risks.
They are similar
in terms of
product
offered,
as they all
offer women’s
apparel,
shoes and
accessories.
Merchandise
inventory
of the
Company’s retail operating segments
is
sourced
from the
same countries
and some
of the
same vendors,
using similar
production
processes.
Merchandise
for the Company’s retail operating segments
is distributed
to retail stores in a similar manner
through
the Company’s
single distribution center and
is subsequently distributed to
clients
in a
similar
manner.
The Company
offers its own credit
card to its customers
and all credit authorizations,
payment
processing,
and collection
efforts are
performed
by a separate
subsidiary
of the Company.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
The following
schedule
summarizes
certain
segment
information
(in thousands):
`
Fiscal 2020
Retail
Credit
Total
Revenues
$
572,453
$
2,658
$
575,111
Depreciation
14,680
14,681
Interest and other income
6,630
-
6,630
Income (loss) before taxes
(73,972)
1,166
(72,806)
Capital expenditures
13,955
13,956
Fiscal 2019
Retail
Credit
Total
Revenues
$
821,730
$
3,605
$
825,335
Depreciation
15,484
15,485
Interest and other income
6,065
-
6,065
Income (loss) before taxes
41,386
1,821
43,207
Capital expenditures
8,287
8,306
Fiscal 2018
Retail
Credit
Total
Revenues
$
825,850
$
3,814
$
829,664
Depreciation
16,441
16,463
Interest and other income
4,991
-
4,991
Income (loss) before taxes
31,149
1,902
33,051
Capital expenditures
4,315
4,354
Retail
Credit
Total
Total assets as of January
30, 2021
$
549,349
$
42,103
$
591,452
Total assets as of February 1,
636,503
48,473
684,976
The accounting
policies
of the segments are the same as those described
in the Summary of Significant
Accounting
Policies
in Note 1. The Company
evaluates
performance
based on profit
or loss from
operations
before income
taxes. The
Company
does not
allocate
certain
corporate
expenses
to the credit
segment.
The following schedule summarizes the
direct
expenses
of the credit
segment
which are reflected in
Selling,
general
and administrative
expenses
(in thousands):
`
January 30, 2021
February 1, 2020
February 2, 2019
Payroll
Postage
Other expenses
Total expenses
$
1,491
$
1,783
$
1,890
15.
Stock Based Compensation:
As of January 30,
2021, the Company had two long-term
compensation
plans pursuant
to which stock-
based compensation was outstanding. The
2018 Incentive Compensation Plan and
2013 Incentive
Compensation
Plan are for the granting of various forms of equity-based awards,
including
restricted
stock
and stock
options
for grant,
to officers,
directors
and key
employees.
Effective
May 24,
2018, shares
for grant
were no
longer available
under the
2013 Incentive
Compensation
Plan.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
The following table presents the number of options and shares of restricted stock
initially authorized
and available for grant under each of the plans as of January 30, 2021:
`
Plan
Plan
Total
Options and/or restricted stock initially authorized
1,500,000
4,725,000
6,225,000
Options and/or restricted stock available for grant:
February 1, 2020
-
4,192,667
January 30, 2021
-
3,961,473
3,961,473
In accordance with ASC 718, the fair
value of current restricted stock awards is
estimated on the date
of grant based on the market price of the Company’s stock and is amortized to compensation expense on a
straight-line basis over a five-year vesting period.
As of January 30, 2021, there
was $
10,550,000
of total
unrecognized compensation expense related
to unvested restricted stock
awards, which is
expected to be
recognized over a remaining weighted-average vesting period of
2.1
years.
The total grant date fair value
of the
shares recognized
as compensation
expense during
the twelve
months ended
January 30,
2021,
February 1, 2020
and February 2,
2019 was $
4,023,000
, $
4,559,000
and $
4,833,000
, respectively.
The
expenses are
classified as
a component
of Selling,
general and
administrative expenses
in the
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss).
The following
summary
shows the changes
in the shares
of unvested
restricted
stock outstanding
during
the years
ended January
30, 2021,
February
1, 2020
and February
2, 2019:
`
Weighted Average
Number of
Grant Date Fair
Shares
Value Per
Share
Restricted stock awards at February 3, 2018
595,179
$
30.33
Granted
354,385
16.20
Vested
(139,669)
29.87
Forfeited or expired
(38,044)
24.34
Restricted stock awards at February 2, 2019
771,851
$
24.22
Granted
361,170
14.89
Vested
(129,108)
34.44
Forfeited or expired
(61,351)
19.61
Restricted stock awards at February 1, 2020
942,562
$
19.55
Granted
335,317
11.11
Vested
(129,682)
34.01
Forfeited or expired
(124,241)
16.37
Restricted stock awards at January 30, 2021
1,023,956
$
15.33
The Company’s
Employee Stock
Purchase Plan
allows eligible
full-time employees
to purchase
a
limited number
of shares
of the
Company’s Class
A Common
Stock during
each semi-
annual offering
period at a
15% discount through payroll
deductions. During the twelve
month period ended January
30,
2021, the Company sold
48,191
shares to employees at
an average discount of
$
1.43
per share under the
Employee Stock Purchase Plan. The
compensation expense recognized for the
15% discount given under
the Employee Stock
Purchase Plan was
approximately $
69,000
, $
111,000
and $
101,000
for fiscal years
2020, 2019 and 2018, respectively.
These expenses are classified as a
component of Selling, general and
administrative expenses.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
16.
Commitments and Contingencies:
The Company
is, from
time to
time, involved
in routine
litigation incidental to
the conduct
of our
business, including
litigation regarding
the merchandise
that we
sell, litigation
regarding intellectual
property, litigation
instituted by persons
injured upon premises
under our 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
our business, as with any
business
of our
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 our 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.
17.
Accumulated Other Comprehensive Income:
The following table
sets
forth information regarding
the reclassification out of
Accumulated
other
comprehensive
income
(in thousands)
as of January
30, 2021:
`
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for
-Sale
Securities
Beginning Balance at February 1, 2020
$
1,423
Other comprehensive income (loss) before
reclassification
(1,038)
Amounts reclassified from accumulated
other comprehensive income (b)
Net current-period other comprehensive income
(loss)
(268)
Ending Balance at January 30, 2021
$
1,155
(a) All amounts are net-of-tax. Amounts in parentheses indicate
a debit/reduction to other comprehensive
income (“OCI”).
(b) Includes
$1,003
impact of accumulated other comprehensive income reclassifications into Interest
and
other income for net gains on available-for-sale securities.
The tax impact of this reclassification was $
.
Amounts in parentheses indicate a debit/reduction to OCI.
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)
The following table sets forth information regarding the reclassification out
of Accumulated other
comprehensive income (in thousands) as of February 1, 2020:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for
-Sale
Securities
Beginning Balance at February 2, 2019
$
(77)
Other comprehensive income (loss) before
reclassification
1,224
Amounts reclassified from accumulated
other comprehensive income (b)
Net current-period other comprehensive income (loss)
1,500
Ending Balance at February 1, 2020
$
1,423
(a) All amounts are net-of-tax. Amounts in parentheses indicate
a debit/reduction to OCI.
(b) Includes $
impact of accumulated other comprehensive income reclassifications into
Interest and other
income for net gains on available-for-sale securities.
The tax impact of this reclassification was $
. Amounts in
parentheses indicate a debit/reduction to OCI.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure:
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures:
Conclusion Regarding the Effectiveness of Disclosure 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 January
30, 2021.
Based on this evaluation,
our Principal Executive Officer
and Principal Financial Officer
concluded that,
as of
January 30, 2021,
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.
Management’s Report on Internal Control Over Financial Reporting
Management is
responsible for
establishing and
maintaining adequate internal
control over
financial
reporting, as defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of
our management, including
our Principal
Executive Officer
and Principal
Financial Officer,
we carried
out an
evaluation of the
effectiveness of
our internal
control over
financial reporting as
of January 30,
2021 based on the
Internal Control -
Integrated Framework
(2013)
issued by the Committee
of
Sponsoring Organizations
of the
Treadway Commission
(“COSO”).
Based on
this evaluation,
management concluded that
our internal control
over financial reporting
was effective as
of January 30,
2021.
PricewaterhouseCoopers LLP, an
independent registered public accounting firm, has audited the
effectiveness of our internal control
over financial reporting as of January 30,
2021, as stated in its
report
which is included herein.
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 January
30, 2021
that has
materially affected,
or is
reasonably likely
to materially
affect, the
Company’s internal
control over
financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information:
On March 24, 2021,
the Compensation Committee of the
Company approved a discretionary bonus to
all associates eligible under the Company’s
2018 Incentive Compensation Plan, including the Company’s
named executive officers.
The Committee granted
the discretionary bonus
to help retain
key associates
and in recognition
of their hard
work throughout the
unprecedented events of fiscal
2020.
The
discretionary bonus will
equal 20% of
the bonus target
previously established unde
r
the 2018 Incentive
Compensation Plan for eligible associates and the named executive officers.
The amount of the bonus for
the named executive officers is shown below:
Name
Title
Discretionary Bonus
John P.
D. Cato
Chairman, President and Chief Executive Officer
$391,839
John R Howe
Executive Vice President, Chief
Financial Officer
$69,783
Gordon D. Smith
Executive Vice President, Chief
Real Estate and Store
Development Officer
$54,921
PART
III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers and Corporate Governance:
Information contained
under the
captions “Election
of Directors,”
“Meetings and
Committees” and
“Corporate Governance Matters”
in the
Registrant’s Proxy
Statement for
its 2021
annual stockholders’
meeting (the
“2021 Proxy
Statement”) is
incorporated by
reference in
response to
this Item
10. The
information in
response to
this Item
10 regarding
executive officers
of the
Company is
contained in
Item 3A, Part I hereof under the caption “Executive Officers of the Registrant.”

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation:
Information contained under the captions “2020 Executive Compensation,” “Fiscal Year 2020 Director
Compensation,”
“Corporate Governance
Matters-Compensation Committee
Interlocks and
Insider
Participation” in
the Comp
any’s 2021
Proxy Statement is
incorporated by reference
in response
to this
Item.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters:
Equity Compensation Plan Information
The following
table provides
information about
stock options
outstanding and
shares available
for
future awards under all of the Company’s equity compensation plans. The information is as of January
30,
2021.
(a)
Number of Securities to
be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
(1)
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(1)
(c)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a)) (2)
Plan Category
Equity compensation plans approved
by security holders
-
-
3,979,491
Equity compensation plans not
approved by security holders
-
-
-
Total
-
-
3,979,491
(1)
There are no outstanding stocking options, warrants or stock appreciation
rights.
(2)
Includes the following:
Under the Company’s
stock incentive plan,
referred to as
the 2018
Incentive Compensation
Plan, 3,961,473
shares are
available for
grant. Under
this plan,
non-
qualified stock options may be granted to key associates.
Under the
2013 Employee
Stock Purchase
Plan, 18,018
shares are
available. Eligible
associates
may participate in the purchase of designated shares of the Company’s
common stock. The
purchase price of this stock is equal to 85% of the lower of the
closing price at the beginning or the
end of each semi-annual stock purchase period.
Information contained under “Security Ownership of Certain Beneficial
Owners and Management”
in the 2021 Proxy Statement is incorporated by reference in response to
this Item.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and Director Independence:
Information contained
under the
caption “Certain
Relationships and
Related Person
Transactions,”
“Corporate Governance
Matters-Director Independence”
and “Meetings
and Committees”
in the
Proxy Statement is incorporated by reference in response to this Item.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accountant Fees and Services:
Information contained under
the captions “Ratification
of Independent Registered
Public Accounting
Firm-Audit Fees” and
“-Policy on Audit
Committee Pre-Approval of
Audit and Permissible
Non-Audit
Service by the
Independent Registered Public
Accounting Firm”
in the 2021
Proxy Statement is
incorporated by reference in response to this Item.
PART
IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits and Financial Statement Schedules:
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Page
Report of Independent Registered Public Accounting Firm
....................................................................
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss) for the fiscal
years ended January 30, 2021, February 1, 2020 and February 2, 2019
................................................
Consolidated Balance Sheets at January 30, 2021 and February 1, 2020
.................................................
Consolidated Statements of Cash Flows for the fiscal years ended January
30, 2021, February 1, 2020
and February 2, 2019 ................................................................................................................................
Consolidated Statements of Stockholders’ Equity for the fiscal years ended
January 30, 2021,
February 1, 2020 and February 2, 2019 ....................................................................................................
Notes to Consolidated Financial Statements .............................................................................................
(2) Financial Statement Schedule: The following report and financial
statement schedule is filed
herewith:
Schedule II - Valuation and Qualifying Accounts .................................................................................
All other
schedules are
omitted as
the required
information is
inapplicable or
the information
is
presented in the Consolidated Financial Statements or related Notes thereto.
(3) Index to Exhibits: The following exhibits
listed in the Index below
are filed with this report
or, as
noted, incorporated by reference herein.
The Company will supply copies of the following exhibits to any
shareholder upon receipt of a written request addressed to the Corporate Secretary, The
Cato Corporation,
8100 Denmark Road,
Charlotte, NC 28273
and the payment
of $.50 per
page to help
defray the costs
of
handling, copying
and postage.
In most
cases, documents
incorporated by
reference to
exhibits to
our
registration statements, reports or proxy
statements filed by the Company
with the Securities and
Exchange Commission are
available to the
public over the
Internet from the
SEC’s web
site at
http://www.sec.gov.
Exhibit
Number
Description of Exhibit
3.1
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.
3.2
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.
4.1
Description of the Registrant's Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934, incorporated by reference to Exhibit 4.1 to Form 10-K of
the Registrant for the year ended February 1, 2020.
10.2*
2013 Employee Stock Purchase Plan, incorporated by reference to Exhibit 4.1 to Form S-8
of the Registrant filed May 31, 2013 (SEC file No. 333-188990).
10.3*
2013 Incentive Compensation Plan, incorporated by reference to Exhibit 4.1 to Form S-8
of the Registrant filed May 31, 2013 (SEC file No. 333-188993).
10.4*
2018 Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 to Form S -8
of the Registrant filed June 1, 2018 (SEC file No. 333-225350).
10.5*
Form of
Agreement
, dated as of August 29, 2003, between the Registrant and Wayland H.
Cato, Jr., incorporated by reference
to
Exhibit 99(c) to
Form
8-K of the Registrant filed on
July 22, 2003.
10.6*
Form of Agreement, dated as of August 29, 2003, between the Registrant and Edgar T.
Cato, incorporated by reference to Exhibit 99(d) to Form 8 -K of the Registrant filed on
July 22, 2003.
10.7*
Retirement Agreement between Registrant and Wayland H. Cato, Jr. dated August 29,
2003 incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for quarter
ended August 2, 2003.
10.8*
Retirement Agreement between Registrant and Edgar T. Cato dated August 29, 2003,
incorporated by reference to Exhibit 10.2 to Form 10-Q of the Registrant for the quarter
ended August 2, 2003.
10.9*
Letter Agreement between the Registrant and John R. Howe dated as of August 28, 2008,
incorporated by Reference to Exhibit 99.1 to Form 8-K of the Registrant filed September 3,
2008.
10.10*
Deferred Compensation Plan effective July 28, 2011, incorporated by reference to Exhibit
10.1 to Form 8-K of the Registrant filed on July 19, 2011.
10.11
Credit Agreement, dated as of August 22, 2003, among the Registrant, the guarantors party
thereto, the banks party thereto and Branch Banking and Trust Company, as Agent, as
amended through and including the Eighth Amendment dated May 24, 2019, incorporated
by reference to Exhibit 10.11 to Form 10-K of the Registrant for the ye ar ended February
1, 2020.
10.12
Ninth Amendment dated June 2, 2020, of Credit Agreement, dated as of August 22, 2003,
among the Registrant the guarantors party thereto, the banks 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.
21.1**
Subsidiaries
of Registrant
.
23.1**
Consent of Independent Registered Public Accounting Firm.
31.1**
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2**
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
32.1**
Section 1350 Certification of Chief Executive Officer.
32.2**
Section 1350 Certification of Chief Financial Officer.
101.1**
The following materials from Registrant’s Annual Report on
form 10-K
for the fiscal year
ended January 30, 2021, formatted in Inline XBRL:
(i) Consolidated Statements of Income
(Loss) and Comprehensive Income (Loss) for the fiscal years ended January
30, 2021,
February 1, 2020 and February 2, 2019;
(ii) Consolidated Balance Sheets at January 30, 2021
and February 1, 2020; (iii) Consolidated Statements of Cash Flows for the
fiscal years ended
January 30, 2021, February 1, 2020 and February 2, 2019;
(iv) Consolidated Statements of
Stockholders’ Equity for the fiscal years ended January 30, 2021, February
1, 2020 and
February 2, 2019; and (v) Notes to Consolidated Financial Statements.
104.1
Cover Page Interactive Data File (Formatted in Inline XBRL and contained
in the Interactive
Data Files submitted as Exhibit 101.1**).
* Management contract or compensatory plan required to be filed under Item 15 of this report and Item 601
of Regulation S-K.
** Filed or submitted electronically herewith.