cato10q3qtr2018.htm - Generated by SEC Publisher for SEC Filing

 

Table of Contents

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 3, 2018

 

OR

 

[  ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________to__________________

Commission file number                1-31340               

 

THE CATO CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

56-0484485

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

8100 Denmark Road, Charlotte, North Carolina 28273-5975

(Address of principal executive offices)

(Zip Code)

 

(704) 554-8510

(Registrant's telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

X

No

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

X

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer  ¨  Accelerated filer  þ  Non-accelerated filer  ¨  Smaller reporting company  ¨  Emerging growth company  ¨

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

 

No

X

 

As of November 3, 2018, there were 22,844,871 shares of Class A common stock and 1,763,652 shares of Class B common stock outstanding.


 
THE CATO CORPORATION

 

FORM 10-Q

 

Quarter Ended November 3, 2018

Table of Contents

 

Page No.

 

PART I – FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

3

 

 

For the Three Months and Nine Months Ended November 3, 2018 and October 28, 2017

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

At November 3, 2018 and February 3, 2018

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

5

 

 

For the Nine Months Ended November 3, 2018 and October 28, 2017

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6 – 18

 

 

For the Three Months and Nine Months Ended November 3, 2018 and October 28, 2017

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19 –25

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

 

 

Item 1A.

Risk Factors

27

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

27

 

 

 

 

 

Item 4.

Mine Safety Disclosures

28

 

 

 

 

 

Item 5.

Other Information

28

 

 

 

 

 

Item 6.

Exhibits

28

 

 

 

 

 

Signatures

29

 

 

 

 

 

 

           

 

 

3


 

Table of Contents

 

PART I FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

November 3, 2018

 

October 28, 2017

 

November 3, 2018

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

REVENUES

 

 

 

 

 

 

 

 

 

 

 

  Retail sales

$

187,892

 

$

188,368

 

$

630,765

 

$

631,049

  Other revenue (principally finance charges, late fees and

 

 

 

 

 

 

 

 

 

 

 

    layaway charges)

 

2,120

 

 

1,905

 

 

6,464

 

 

5,926

    Total revenues

 

190,012

 

 

190,273

 

 

637,229

 

 

636,975

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES, NET

 

 

 

 

 

 

 

 

 

 

 

  Cost of goods sold (exclusive of depreciation shown below)

 

123,014

 

 

124,462

 

 

395,102

 

 

411,503

  Selling, general and administrative (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

    shown below)

 

61,765

 

 

62,100

 

 

196,616

 

 

190,162

  Depreciation

 

4,094

 

 

5,047

 

 

12,470

 

 

14,989

  Interest and other income

 

(1,374)

 

 

(1,200)

 

 

(3,559)

 

 

(3,472)

    Cost and expenses, net

 

187,499

 

 

190,409

 

 

600,629

 

 

613,182

 

 

 

 

 

 

 

 

 

 

 

 

Income/(Loss) before income taxes

 

2,513

 

 

(136)

 

 

36,600

 

 

23,793

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit)/expense

 

(1,287)

 

 

(2,830)

 

 

2,907

 

 

(252)

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

$

3,800

 

$

2,694

 

$

33,693

 

$

24,045

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings/(loss) per share

$

0.16

 

$

0.11

 

$

1.36

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings/(loss) per share

$

0.16

 

$

0.11

 

$

1.36

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

$

0.33

 

$

0.33

 

$

0.99

 

$

0.99

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

$

3,800

 

$

2,694

 

$

33,693

 

$

24,045

Unrealized gain (loss) on available-for-sale securities, net of

 

 

 

 

 

 

 

 

 

 

 

   deferred income taxes of ($117) and ($141) for the three and

 

 

 

 

 

 

 

 

 

 

 

   nine months ended November 3, 2018 and ($101) and $272 for

 

 

 

 

 

 

 

 

 

 

 

   the three and nine months ended October 28, 2017, respectively

 

(373)

 

 

(170)

 

 

(451)

 

 

455

Comprehensive income/(loss)

$

3,427

 

$

2,524

 

$

33,242

 

$

24,500

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements (unaudited).

4


 
Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

November 3, 2018

 

February 3, 2018

 

 

 

 

 

 

ASSETS

(Dollars in thousands)

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

26,668

 

$

78,047

Short-term investments

 

183,241

 

 

118,836

Restricted cash

 

3,662

 

 

3,217

Restricted short-term investments

 

106

 

 

505

Accounts receivable, net of allowance for doubtful accounts of

 

 

 

 

 

     $849 and $1,148 at November 3, 2018 and February 3, 2018, respectively

 

37,016

 

 

28,018

Merchandise inventories

 

113,046

 

 

121,535

Prepaid expenses and other current assets

 

11,195

 

 

22,322

      Total Current Assets

 

374,934

 

 

372,480

Property and equipment – net

 

99,308

 

 

109,368

Noncurrent deferred income taxes

 

11,155

 

 

12,570

Other assets

 

21,496

 

 

21,658

      Total Assets

$

506,893

 

$

516,076

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

72,606

 

$

82,605

Accrued expenses

 

54,395

 

 

52,825

Accrued bonus and benefits

 

10,333

 

 

2,971

Accrued income taxes

 

779

 

 

680

      Total Current Liabilities

 

138,113

 

 

139,081

Other noncurrent liabilities

 

42,580

 

 

50,642

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

Preferred stock, $100 par value per share, 100,000 shares

 

 

 

 

 

   authorized, none issued

 

-

 

 

-

Class A common stock, $.033 par value per share, 50,000,000

 

 

 

 

 

   shares authorized; issued 22,844,871 shares and 23,045,039 shares

 

 

 

 

 

   at November 3, 2018 and February 3, 2018, respectively

 

767

 

 

774

Convertible Class B common stock, $.033 par value per share,

 

 

 

 

 

   15,000,000 shares authorized; issued 1,763,652 shares and 1,755,601 shares

 

 

 

 

 

   at November 3, 2018 and February 3, 2018, respectively

 

59

 

 

58

Additional paid-in capital

 

104,300

 

 

99,948

Retained earnings

 

221,846

 

 

225,894

Accumulated other comprehensive income/(loss)

 

(772)

 

 

(321)

         Total Stockholders' Equity

 

326,200

 

 

326,353

         Total Liabilities and Stockholders' Equity

$

506,893

 

$

516,076

 

See notes to condensed consolidated financial statements (unaudited).

5


 
Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Nine Months Ended

 

 

November 3, 2018

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

Net income

$

33,693

 

$

24,045

 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

 

       by operating activities:

 

 

 

 

 

 

   Depreciation

 

12,470

 

 

14,989

 

   Provision for doubtful accounts

 

301

 

 

466

 

   Purchase premium and premium amortization of investments

 

420

 

 

2,747

 

   Share-based compensation

 

3,697

 

 

3,002

 

   Deferred income taxes

 

1,556

 

 

1,015

 

   Loss on disposal of property and equipment

 

530

 

 

611

 

   Changes in operating assets and liabilities which provided

 

 

 

 

 

 

       (used) cash:

 

 

 

 

 

 

        Accounts receivable

 

(9,288)

 

 

(497)

 

        Merchandise inventories

 

8,489

 

 

17,919

 

        Prepaid and other assets

 

11,115

 

 

(1,232)

 

        Accrued income taxes

 

99

 

 

-

 

        Accounts payable, accrued expenses and other liabilities

 

(8,855)

 

 

(24,752)

 

Net cash provided by operating activities

 

54,227

 

 

38,313

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

Expenditures for property and equipment 

 

(3,224)

 

 

(8,762)

 

Purchase of short-term investments

 

(122,819)

 

 

(15,771)

 

Sales of short-term investments

 

58,113

 

 

79,764

 

Purchase of other assets

 

(143)

 

 

(657)

 

Sales of other assets

 

4

 

 

6

 

Net cash (used)/provided in investing activities

 

(68,069)

 

 

54,580

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

Dividends paid

 

(24,455)

 

 

(25,466)

 

Repurchase of common stock

 

(13,344)

 

 

(35,708)

 

Proceeds from line of credit

 

-

 

 

21,000

 

Payments to line of credit

 

-

 

 

(21,000)

 

Proceeds from employee stock purchase plan

 

518

 

 

443

 

Proceeds from stock options exercised

 

189

 

 

95

 

Net cash used in financing activities

 

(37,092)

 

 

(60,636)

 

 

 

 

 

 

 

 

Net increase/(decrease) in cash, cash equivalents, and restricted cash

 

(50,934)

 

 

32,257

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at beginning of period

 

81,264

 

 

49,618

 

Effect of exchange rate on cash

 

-

 

 

-

 

Cash, cash equivalents, and restricted cash at end of period

$

30,330

 

$

81,875

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

Accrued other assets and property and equipment

$

360

 

$

1,012

 

Accrued treasury stock

 

-

 

 

195

 

 

See notes to condensed consolidated financial statements (unaudited).

6


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 1 - GENERAL:

 

The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended November 3, 2018 and October 28, 2017 are unaudited.  In the opinion of management, all adjustments considered necessary for a fair statement have been included.  All such adjustments are of a normal, recurring nature unless otherwise noted.  The results of the interim period may not be indicative of the results expected for the entire year.

 

The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018.  Amounts as of February 3, 2018 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

 

On November 20, 2018, the Board of Directors maintained the quarterly dividend at $0.33 per share and increased, by 2 million shares, the authorization to purchase shares under the Company’s share repurchase program.

 

Recently Adopted Accounting Policies

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” that supersedes most current revenue recognition guidance and modifies the accounting treatment for certain costs associated with revenue generation. The core principle of the revised revenue recognition standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services, and provides several steps to apply to achieve that principle. In addition, the new guidance enhances disclosure requirements to include more information about specific revenue contracts entered into by the entity. Effective at the beginning of fiscal 2018 the Company adopted this new standard. 

 

The Company has elected the modified retrospective approach to transition to Topic 606.  As required by this expedient, the Company assessed its open contracts with customers at February 3, 2018 to determine the cumulative effect of initially applying this standard.  The Company concluded that the cumulative effect of initially applying this standard is not material.  In addition, the Company assessed the financial line items impacted by adopting this standard compared to the previous revenue guidance.  The Company concluded that any differences in financial statement line items are not material. Please refer to Note 11, Revenue Recognition, for incremental disclosures related to this adoption.

 

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)." This standard requires that restricted cash and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The Company adopted the provisions of ASU 2016-18 in the first quarter of 2018 using the retrospective transition method.  The new guidance did not have a material impact on the financial statements.

6


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 2 - EARNINGS PER SHARE:

 

Accounting Standard Codification (“ASC”) 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“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 Condensed Consolidated Statements of Income and Comprehensive Income.  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 the 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 potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan.   

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

 

(Dollars in thousands)

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings/(loss)

 

$

3,800

 

$

2,694

 

$

33,693

 

$

24,045

 

Earnings/(loss) allocated to non-vested equity awards

 

 

(107)

 

 

(56)

 

 

(951)

 

 

(531)

 

Net earnings/(loss) available to common stockholders

 

$

3,693

 

$

2,638

 

$

32,742

 

$

23,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

23,820,477

 

 

24,537,974

 

 

24,051,185

 

 

25,150,377

 

Diluted weighted average common shares outstanding

 

 

23,820,477

 

 

24,537,974

 

 

24,051,185

 

 

25,150,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings/(loss) per share

 

$

0.16

 

$

0.11

 

$

1.36

 

$

0.93

 

Diluted earnings/(loss) per share

 

$

0.16

 

$

0.11

 

$

1.36

 

$

0.93

7


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:

 

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended November 3, 2018:

 

 

 

Changes in Accumulated Other

 

 

 

Comprehensive Income (a)

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

and (Losses) on

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

Securities

 

 

 

 

Beginning Balance at August 4, 2018

 

$

(399)

 

 

 

 

   Other comprehensive income before

 

 

 

 

 

 

 

   reclassification

 

 

(373)

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

(373)

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at November 3, 2018

 

$

(772)

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.

 

(b) Includes $0 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 $0.

 

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended November 3, 2018:

 

 

 

Changes in Accumulated Other

 

 

 

Comprehensive Income (a)

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

and (Losses) on

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

Securities

 

 

 

 

Beginning Balance at February 3, 2018

 

$

(321)

 

 

 

 

   Other comprehensive income before

 

 

 

 

 

 

 

   reclassification

 

 

(504)

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

(451)

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at November 3, 2018

 

$

(772)

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.

 

(b) Includes $70 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 $17.

8


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED):

 

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended October 28, 2017:

 

 

 

Changes in Accumulated Other

 

 

 

Comprehensive Income (a)

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

and (Losses) on

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

Securities

 

 

 

 

Beginning Balance at July 29, 2017

 

$

411

 

 

 

 

   Other comprehensive income before

 

 

 

 

 

 

 

   reclassifications

 

 

(144)

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

(26)

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

(170)

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at October 28, 2017

 

$

241

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.

 

(b) Includes ($41) 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 ($15).

 

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 28, 2017:

 

 

 

Changes in Accumulated Other

 

 

 

Comprehensive Income (a)

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

and (Losses) on

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

Securities

 

 

 

 

Beginning Balance at January 28, 2017

 

$

(214)

 

 

 

 

   Other comprehensive income before

 

 

 

 

 

 

 

   reclassifications

 

 

478

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

(23)

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

455

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at October 28, 2017

 

$

241

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income.

 

(b) Includes ($36) 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 ($13).

9


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of November 3, 2018, the Company had an unsecured revolving credit agreement to borrow $35.0 million less the balance of any revocable letters of credit as discussed below.  The revolving credit agreement is committed until August 2019.  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 November 3, 2018.  There were no borrowings outstanding under this credit facility during the periods ended November 3, 2018 or February 3, 2018.  The weighted average interest rate under the credit facility was zero at November 3, 2018 due to no borrowings outstanding.

 

At November 3, 2018 and February 3, 2018, the Company had no outstanding revocable letters of credit relating to purchase commitments.

 

 

NOTE 5 – 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 to 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 nature of product, as they all offer women’s apparel, shoes and accessories.  Merchandise inventory for 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 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 operates its women’s fashion specialty retail stores in 33 states as of November 3, 2018, principally in the southeastern United States. 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.

 

10


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

The following schedule summarizes certain segment information (in thousands):

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

November 3, 2018

Retail

Credit

Total

 

November 3, 2018

Retail

Credit

Total

 

 

 

 

 

 

 

 

 

Revenues

$189,055

$957

$190,012

 

Revenues

$634,360

$2,869

$637,229

Depreciation

4,088

6

4,094

 

Depreciation

12,452

18

12,470

Interest and other income

(1,374)

-

(1,374)

 

Interest and other income

(3,559)

-

(3,559)

Income/(Loss) before

   income taxes

2,140

373

2,513

 

Income/(Loss) before

   income taxes

35,159

1,441

36,600

Capital expenditures

1,345

-

1,345

 

Capital expenditures

3,224

-

3,224

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

October 28, 2017

Retail

Credit

Total

 

October 28, 2017

Retail

Credit

Total

 

 

 

 

 

 

 

 

 

Revenues

$189,263

$1,010

$190,273

 

Revenues

$633,816

$3,159

$636,975

Depreciation

5,039

8

5,047

 

Depreciation

14,958

31

14,989

Interest and other income

(1,200)

-

(1,200)

 

Interest and other income

(3,472)

-

(3,472)

Income/(Loss) before

   income taxes

(313)

177

(136)

 

Income/(Loss) before

   income taxes

22,872

921

23,793

Capital expenditures

2,337

-

2,337

 

Capital expenditures

8,762

-

8,762

 

 

 

 

 

 

 

 

 

 

Retail

Credit

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets as of November 3, 2018

$437,711

$69,182

$506,893

 

 

 

 

 

Total assets as of February 3, 2018

469,652

46,424

516,076

 

 

 

 

 

 

The Company evaluates segment performance based on income before taxes.  The Company does not allocate certain corporate expenses or income taxes 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):

 

 

Three Months Ended

 

Nine Months Ended

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Bad debt expense

$

-

 

$

208

 

$

-

 

$

466

Payroll

 

179

 

 

210

 

 

571

 

 

654

Postage

 

128

 

 

133

 

 

379

 

 

406

Other expenses

 

271

 

 

274

 

 

460

 

 

681

Total expenses

$

578

 

$

825

 

$

1,410

 

$

2,207

11


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

 

NOTE 6 – STOCK-BASED COMPENSATION:

 

As of November 3, 2018, the Company had four long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan is for the granting of options to officers and key employees.  As of November 3, 2018, there were no available stock options for grant. The 2018 Incentive Compensation Plan, 2013 Incentive Compensation Plan and 2004 Amended and Restated 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 and May 23, 2013, shares for grant were no longer available under the 2013 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan, respectively.

 

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 November 3, 2018:

 

 

1987

 

2004

 

2013

 

2018

 

 

 

Plan

 

Plan

 

Plan

 

Plan

 

Total

Options and/or restricted stock initially authorized

5,850,000

 

1,350,000

 

1,500,000

 

4,725,000

 

13,425,000

Options and/or restricted stock available for grant:

 

 

 

 

 

 

 

 

 

      November 3, 2018

-

 

-

 

-

 

4,503,140

 

4,503,140

 

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 the related vesting periods. As of November 3, 2018 and February 3, 2018, there was  $13,373,000 and $11,727,000, respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 2.4 years and 2.0 years, respectively. The total fair value of the shares recognized as compensation expense during the three and nine months ended November 3, 2018 was $1,233,000 and $3,601,000, respectively, compared to $1,185,000 and $2,911,000, respectively, for the three and nine months ended October 28, 2017. These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income.

 

The following summary shows the changes in the shares of unvested restricted stock outstanding during the nine months ended November 3, 2018:

 

 

 

 

 

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

(27,033)

 

 

25.73

Restricted stock awards at November 3, 2018

782,862

 

$

24.17

12


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED):

 

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 nine months ended November 3, 2018 and October 28, 2017, the Company sold 40,477 and 31,466 shares to employees at an average discount of $2.26 and $2.50 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $91,000 and $79,000 for the nine months ended November 3, 2018 and October 28, 2017, respectively. These expenses are classified as a component of Selling, general and administrative expenses.

 

NOTE 7 – FAIR VALUE MEASUREMENTS:

 

The following tables set forth information regarding the Company’s financial assets and liabilities that are measured at fair value (in thousands) as of November 3, 2018 and February 3, 2018:

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

November 3, 2018

 

Assets

 

Inputs

 

Inputs

Description

 

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

    State/Municipal Bonds

 

$

59,495

 

$

-

 

$

59,495

 

$

-

    Corporate Bonds

 

 

90,428

 

 

-

 

 

90,428

 

 

-

    U.S. Treasury Notes

 

 

5,958

 

 

5,958

 

 

-

 

 

-

    Cash Surrender Value of Life Insurance

 

 

8,918

 

 

-

 

 

-

 

 

8,918

    Asset-backed Securities (ABS)

 

 

24,031

 

 

-

 

 

24,031

 

 

-

    Corporate Equities

 

 

708

 

 

708

 

 

-

 

 

-

    Certificates of Deposit

 

 

507

 

 

507

 

 

-

 

 

-

Total Assets

 

$

190,045

 

$

7,173

 

$

173,954

 

$

8,918

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

    Deferred Compensation

 

 

(8,866)

 

 

-

 

 

-

 

 

(8,866)

Total Liabilities

 

$

(8,866)

 

$

-

 

$

-

 

$

(8,866)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

February 3, 2018

 

Assets

 

Inputs

 

Inputs

Description

 

 

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

    State/Municipal Bonds

 

$

95,983

 

$

-

 

$

95,983

 

$

-

    Corporate Bonds

 

 

22,535

 

 

-

 

 

22,535

 

 

-

    U.S. Treasury Notes

 

 

404

 

 

404

 

 

-

 

 

-

    Cash Surrender Value of Life Insurance

 

 

8,900

 

 

-

 

 

-

 

 

8,900

    Asset-backed Securities (ABS)

 

 

318

 

 

-

 

 

318

 

 

-

    Corporate Equities

 

 

798

 

 

798

 

 

-

 

 

-

    Certificates of Deposit

 

 

100

 

 

100

 

 

-

 

 

-

Total Assets

 

$

129,038

 

$

1,302

 

$

118,836

 

$

8,900

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

    Deferred Compensation

 

 

(8,951)

 

 

-

 

 

-

 

 

(8,951)

Total Liabilities

 

$

(8,951)

 

$

-

 

$

-

 

$

(8,951)

13


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

 

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 November 3, 2018 and February 3, 2018.  The state, municipal and corporate bonds have contractual maturities which range from 12 days to  29.0 years. The U.S. Treasury Notes and Certificates of Deposit have contractual maturities of five months. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and investments and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income. The asset-backed securities are bonds comprised of auto loans and bank credit cards that carry AAA ratings. The auto loan asset-backed securities are backed by static pools of auto loans that were originated and serviced by captive auto finance units, banks or finance companies.  The bank credit card asset-backed securities are backed by revolving pools of credit card receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase, Capital One, and Discover.

 

Additionally, at November 3, 2018, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $8.9 million.  At February 3, 2018, the Company had $0.8 million of corporate equities and deferred compensation plan assets of $8.9 million.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

 

Level 1 category securities are measured at fair value using quoted active market prices.  Level 2 investment securities include corporate bonds, municipal bonds and asset-backed securities 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 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. These funds are designed to mirror existing mutual funds and money market funds that are observable and actively traded. Cash surrender values are provided by third parties and reviewed for reasonableness by the Company.

14


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

 

The following tables summarize the change in fair value of the Company’s financial assets and liabilities measured using Level 3 inputs as of November 3, 2018 and February 3, 2018 (in thousands):

 

 

Fair Value

 

Measurements Using

 

Significant Unobservable

 

Asset Inputs (Level 3)

 

Cash Surrender Value

Beginning Balance at February 3, 2018

$

8,900

Additions

 

429

Total gains or (losses)

 

 

      Included in interest and other income (or changes in net assets)

 

(411)

      Included in other comprehensive income

 

-

Ending Balance at November 3, 2018

$

8,918

 

 

 

 

Fair Value

 

Measurements Using

 

Significant Unobservable

 

Liability Inputs (Level 3)

 

Deferred Compensation

Beginning Balance at February 3, 2018

$

(8,951)

  Additions

 

(136)

  Total (gains) or losses

 

 

      Included in interest and other income (or changes in net assets)

 

221

      Included in other comprehensive income

 

-

Ending Balance at November 3, 2018

$

(8,866)

 

15


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

 

Fair Value

 

Measurements Using

 

Significant Unobservable

 

 

Asset Inputs (Level 3)

 

 

Cash Surrender Value

 

Beginning Balance at January 28, 2017

$

7,973

 

Additions

 

307

 

Total gains or (losses)

 

 

 

      Included in interest and other income (or changes in net assets)

 

620

 

      Included in other comprehensive income

 

-

 

Ending Balance at February 3, 2018

$

8,900

 

 

 

 

 

 

Fair Value

 

 

Measurements Using

 

 

Significant Unobservable

 

 

Liability Inputs (Level 3)

 

 

Deferred Compensation

 

Beginning Balance at January 28, 2017

$

(7,649)

 

  Additions

 

(443)

 

  Total (gains) or losses

 

 

 

      Included in interest and other income (or changes in net assets)

 

(859)

 

      Included in other comprehensive income

 

-

 

Ending Balance at February 3, 2018

$

(8,951)

 

16


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:

 

In November 2015, the Financial Accounting Standards Board issued an effective date for ASU 2016-02, “Leases (Topic 842),” a new leasing standard that will require substantially all leases to be recorded on the balance sheet. The standard is effective for the Company’s first quarter of its 2019 fiscal year; early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is assessing what impacts this new standard will have on its Consolidated Financial Statements and expects assets and liabilities to increase. We will continue evaluating the practical expedients as they are issued.  However, the adoption of this standard will result in the recognition of a lease liability and related right-of-use asset and will materially impact our balance sheet.

 

NOTE 9 – INCOME TAXES:

 

The Company had an effective tax rate for the first nine months of 2018 of 7.9% compared to a tax benefit for the first nine months of 2017. The increase in the effective tax rate for the first nine months is attributable to higher pre-tax earnings and a higher proportion of income being generated from jurisdictions with higher tax rates, partially offset by ongoing savings from tax initiatives. The tax benefit for the three months ended November 3, 2018 was due to favorable discrete items, partially offset by taxes from jurisdictions with lower tax rates.  Our estimated annual effective tax rate for the current year includes the impact of the new tax on Global Intangible Low Taxed Income (“GILTI”).  We continue evaluating the accounting policy election for deferred taxes under GILTI.

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES:

 

The Company is, from time to time, involved in routine matters including litigation incidental to the conduct of our business.  These matters may include merchandise that we sell, intellectual property, personal injuries upon premises under our control, various employment matters, including alleged discrimination, wage and hour matters, including present or former employees. During the quarter, the Company favorably settled certain litigation matters which is reflected in Selling, general and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income. The Company has approximately $7.2 million in accrued expenses at November 3, 2018 for these matters.

 

Although such matters are 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 condensed consolidated financial statements. However, given the inherent uncertainties involved in such matters, an adverse outcome in one or more such matters could materially and adversely affect the Company’s financial condition, results of operations and cash flows in any particular reporting period. We accrue for these matters when the liability is deemed probable and reasonably estimable.         

 

NOTE 11 – REVENUE RECOGNITION:

 

On February 3, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”) using the modified retrospective method applied to contracts which were pending as of February 3, 2018. Financial results included in the Company’s Condensed Consolidated Statement of Income for the nine months ended November 3, 2018 are presented under Topic 606, while prior year amounts have not been restated and continue to be reported in accordance with ASC 605, “Revenue Recognition” (“Topic 605”).  As a result of adopting Topic 606, the Company did not adjust opening retained earnings.

17


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED NOVEMBER 3, 2018 AND OCTOBER 28, 2017

 

 

 

 

The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales are recorded as deferred revenue until the customer takes possession or forfeits the merchandise. Gift cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales volumes and the Company’s experience; actual returns have not varied materially from historical amounts. A provision is made for estimated write-offs associated with sales made with the Company’s proprietary credit card.  Amounts related to shipping and handling billed to customers in a sales transaction are classified as Other revenue and the costs related to shipping product to customers (billed and accrued) are classified as Cost of goods sold.

 

The Company offers its own proprietary credit card to customers. All credit activity is performed by the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured.  The Company estimated uncollectible amounts of $681,000 and $666,000 for the nine months ended November 3, 2018 and October 28, 2017, respectively, on sales purchased on the Company’s proprietary credit card of $20.8 million and $20.1 million for the nine months ended November 3, 2018 and October 28, 2017, respectively.

 

The following table provides information about receivables and contract liabilities from contracts with customers (in thousands):

 

 

 

Balance as of

 

 

November 3, 2018

 

 

February 3, 2018

 

 

 

 

 

 

Proprietary Credit Card Receivables, net

$

 16,380

 

$

 16,857

Gift Card Liability

$

 4,798

 

$

 7,565

18


 
Table of Contents

 

THE CATO CORPORATION

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

 

FORWARD-LOOKING INFORMATION:

 

The following information should be read along with the unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-Q that reflect projections or expectations of our future financial or economic performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations, including those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for our fiscal year ending February 2, 2019 (“fiscal 2018”) and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodels and closures; and (5) statements relating to our future contingencies. When possible, we have attempted to identify forward-looking statements by using words such as “will,” “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “could,” “would,” “should” and any variations or negative formations of such words and similar expressions. We can give no assurance that actual results or events will not differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements included in this report are based on information available to us as of the filing date of this report, but subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements.  Such factors include, but are not limited to, the following:  any actual or perceived deterioration in the conditions that drive consumer confidence and spending, including, but not limited to, levels of unemployment, fuel, energy and food costs, wage rates, tax rates, interest rates, home values, consumer net worth and the availability of credit; changes in laws or regulations affecting our business including tariffs; uncertainties regarding the impact of any governmental responses to the foregoing conditions; competitive factors and pricing pressures; our ability to predict and respond to rapidly changing fashion trends and consumer demands; adverse weather or similar conditions that may affect our sales or operations; inventory risks due to shifts in market demand, including the ability to liquidate excess inventory at anticipated margins; and other factors discussed under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended February 3, 2018 (“fiscal 2017”), as amended or supplemented, and in other reports we file with or furnish to the Securities and Exchange Commission (“SEC”) from time to time.  We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise. 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

CRITICAL ACCOUNTING POLICIES:

 

The Company’s accounting policies are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018. As disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts, inventory shrinkage, the calculation of potential asset impairment, workers’ compensation, general and auto insurance liabilities, reserves relating to self-insured health insurance, and uncertain tax positions.

 

The Company’s critical accounting policies and estimates are discussed with the Audit Committee.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

RESULTS OF OPERATIONS:

 

The following table sets forth, for the periods indicated, certain items in the Company's unaudited Condensed Consolidated Statements of Income as a percentage of total retail sales:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 3, 2018

 

October 28, 2017

 

 

November 3, 2018

 

October 28, 2017

 

Total retail sales

100.0

%

100.0

%

 

100.0

%

100.0

%

Other revenue

1.1

 

1.0

 

 

1.0

 

0.9

 

Total revenues

101.1

 

101.0

 

 

101.0

 

100.9

 

Cost of goods sold (exclusive of depreciation)

65.5

 

66.1

 

 

62.6

 

65.2

 

Selling, general and administrative (exclusive of depreciation)

32.9

 

33.0

 

 

31.2

 

30.1

 

Depreciation

2.2

 

2.7

 

 

2.0

 

2.4

 

Interest and other income

(0.7)

 

(0.6)

 

 

(0.6)

 

(0.6)

 

Income/(loss) before income taxes

1.3

 

(0.1)

 

 

5.8

 

3.8

 

Net income/(loss)

2.0

 

1.4

 

 

5.3

 

3.8

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

RESULTS OF OPERATIONS (CONTINUED):

 

Comparison of the Three and Nine Months ended November 3, 2018 with October 28, 2017

 

Total retail sales for the third quarter were $187.9 million compared to last year’s third quarter sales of $188.4 million, a 0.3% decrease. The Company’s slight sales decrease in the third quarter of fiscal 2018 is primarily due to closed stores and the impact of the shift in weeks for the quarter partially offset by a 1% increase in same-store sales. For the nine months ended November 3, 2018, total retail sales were $630.8 million compared to last year’s comparable nine month sales of $631.0 million. Sales in the first nine months of fiscal 2018 decreased slightly primarily due to the impact of the shift in weeks for the nine months ended November 3, 2018 and October 28, 2017, partially offset by a 1% increase in same-store sales. Same-store sales include stores that have been open more than 15 months.  Stores that have been relocated or expanded are also included in the same-store sales calculation after they have been open more than 15 months.  The method of calculating same-store sales varies across the retail industry.  As a result, our same-store sales calculation may not be comparable to similarly titled measures reported by other companies. E-commerce sales were less than 2.5% of sales for the nine months ended November 3, 2018 and are included in the same-store sales calculation.  Total revenues, comprised of retail sales and other revenue (principally finance charges and late fees on customer accounts receivable, gift card breakage and layaway fees), were $190.0 million and $637.2 million for the three and nine months ended November 3, 2018, compared to $190.3 million and $637.0 million for the three and nine months ended October 28, 2017, respectively. The Company operated 1,350 stores at November 3, 2018 compared to 1,370 stores at the end of last year’s third quarter.  For the first nine months of fiscal 2018, the Company relocated one store and closed one store.  In total, the Company currently expects to relocate one store and close 35 stores in fiscal 2018.

 

Credit revenue of $1.0 million represented 0.5% of total revenues in the third quarter of fiscal 2018, compared to 2017 credit revenue of $1.0 million or 0.5% of total revenues.  Credit revenue decreased slightly for the most recent comparable period due to lower finance charge income under the Company’s proprietary credit card. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income.  Related expenses principally include bad debt expense, payroll, postage and other administrative expenses and totaled $0.6 million in the third quarter of fiscal 2018, compared to last year’s third quarter expense of $0.8 million.

 

Other revenue in total, as included in total revenues, was $2.1 million and $6.5 million for the three and nine months ended November 3, 2018, compared to $1.9 million and $5.9 million for the prior year’s comparable three and nine month periods. The overall increase in the three and nine months ended November 3, 2018 is primarily due to including gift card breakage income as prescribed in Topic 606.

 

Cost of goods sold was $123.0 million, or 65.5% of retail sales and $395.1 million or 62.6% of retail sales for the three and nine months ended November 3, 2018, compared to $124.5 million, or 66.1% of retail sales and $411.5 million, or 65.2% of retail sales for the comparable three and nine month periods of fiscal 2017.  The overall decrease in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2018 resulted primarily from higher sales of regular priced goods. In addition, occupancy, purchasing and sourcing costs as a percent of retail sales decreased. Cost of goods sold includes merchandise costs (net of discounts and allowances), buying costs, distribution costs, occupancy costs, freight and inventory shrinkage.  Net merchandise costs and in-bound freight are capitalized as inventory costs.  Buying and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments and distribution center.  Occupancy costs include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) increased by 1.6% to $64.9 million for the third quarter of fiscal 2018 and increased by 7.4% to $235.7 million for the first nine months of fiscal 2018 compared to $63.9 million and $219.5 million for the prior year’s comparable three and nine months of fiscal 2017.  Gross margin as presented may not be comparable to those of other entities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts.  SG&A expenses were $61.8 million, or 32.9% of retail sales and $196.6 million, or 31.2% of retail sales for the third quarter and first nine months of fiscal 2018, respectively, compared to $62.1 million, or 33.0% of retail sales and $190.2 million, or 30.1% of retail sales for the prior year’s comparable three and nine month periods.  The slight decrease in SG&A expense for the third quarter was primarily attributable to a reduction in litigation expense, partially  offset by an increase in incentive compensation. The increase in SG&A for the first nine months of fiscal 2018 was primarily attributable to higher incentive compensation and insurance costs, partially offset by favorable litigation settlements.

 

Depreciation expense was $4.1 million, or 2.2% of retail sales and $12.5 million, or 2.0% of retail sales for the third quarter and first nine months of fiscal 2018, respectively, compared to $5.0 million, or 2.7% of retail sales and $15.0 million or 2.4% of retail sales for the comparable three and nine month periods of fiscal 2017, respectively. 

 

Interest and other income was $1.4 million, or 0.7% of retail sales and $3.6 million, or 0.6% of retail sales for the three and nine months ended November 3, 2018, respectively, compared to $1.2 million, or 0.6% of retail sales and $3.5 million, or 0.6% of retail sales for the comparable three and nine month periods of fiscal 2017, respectively.  The increase for the first nine months of fiscal 2018 compared to 2017 is primarily attributable to an increase in short-term investments, partially offset by gift card breakage income being included in fiscal 2017.

 

Income tax benefit was $1.3 million and income tax expense was $2.9 million for the third quarter and first nine months of fiscal 2018, respectively, compared to an income tax benefit of $2.8 million and $0.3 million for the comparable three and nine month periods of fiscal 2017, respectively. For the first nine months of 2018, the Company’s effective tax rate was 7.9%. The increase in the effective tax rate for the first nine months is attributable to higher pre-tax earnings and a higher proportion of income being generated from jurisdictions with higher tax rates, partially offset by ongoing savings from tax initiatives. Our estimated annual effective tax rate for the current year includes the impact of the new tax on Global Intangible Low Taxed Income (“GILTI”).  We continue evaluating the accounting policy election for deferred taxes under GILTI.

 

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:

 

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first nine months of fiscal 2018 was $54.2 million as compared to $38.3 million in the first nine months of fiscal 2017. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and share repurchases.  In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at November 3, 2018 and February 3, 2018.

 

Cash provided by operating activities for the first nine months of fiscal 2018 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $15.9 million for the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017 was primarily due to an increase in net income and a decrease in prepaid and other assets, partially offset by an increase in accounts receivable.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

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, expected capital expenditures, dividends and share repurchases for fiscal 2018 and the next 12 months.

 

At November 3, 2018, the Company had working capital of $236.8 million compared to $233.4 million at February 3, 2018.

 

At November 3, 2018 and February 3, 2018, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million, less the value of revocable letters of credit discussed below.  The revolving credit agreement is committed until August 2019. 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 November 3, 2018. There were no borrowings outstanding under the credit facility as of November 3, 2018 and February 3, 2018.

 

At November 3, 2018 and February 3, 2018, the Company had no outstanding revocable letters of credit relating to purchase commitments.

 

Expenditures for property and equipment totaled $3.2 million in the first nine months of fiscal 2018, compared to $8.8 million in last fiscal year’s first nine months.  The expenditures for the first nine months of fiscal 2018 were primarily for additional investments in existing stores and information technology. For the full fiscal 2018 year, the Company expects to invest approximately $5.0 million for capital expenditures.

 

Net cash used by investing activities totaled $68.1 million in the first nine months of fiscal 2018 compared to net cash of $54.6 million provided by investing activities in the comparable period of 2017.  Net cash used in 2018 is primarily attributable to higher net purchases of short term investments, partially offset by lower capital expenditures.

 

Net cash used in financing activities totaled $37.1 million in the first nine months of fiscal 2018 compared to $60.6 million used in the comparable period of fiscal 2017.  The decrease was primarily due to lower share repurchase amounts.

 

As of November 3, 2018, the Company had 19,002 shares remaining in open authorizations under its share repurchase program. 

 

On November 20, 2018, the Board of Directors maintained the quarterly dividend at $0.33 per share and increased, by 2 million shares, the authorization to purchase shares under the Company’s shares repurchase program. 

 

The Company does not use derivative financial instruments.

 

The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and taxable governmental debt securities held in managed accounts with underlying ratings of A or better at November 3, 2018 and February 3, 2018.  The state, municipal and corporate bonds have contractual maturities which range from 12 days to 29.0 years. The U.S. Treasury Notes and Certificates of Deposit have contractual maturities of five months. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and investments and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income. The asset-backed securities are bonds comprised of auto loans and bank credit cards that carry AAA ratings. The auto loan asset-backed securities are backed by static pools of auto loans that were originated and serviced by captive auto finance units, banks or finance companies.  The bank credit card asset-backed securities are backed by revolving pools of credit card receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase, Capital One, and Discover.

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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

Additionally, at November 3, 2018, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $8.9 million.  At February 3, 2018, the Company had $0.8 million of corporate equities and deferred compensation plan assets of $8.9 million.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

 

See Note 7, Fair Value Measurements.

 

RECENT ACCOUNTING PRONOUNCEMENTS:

 

See Note 8, Recent Accounting Pronouncements.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

 

The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.

 

ITEM 4. CONTROLS AND PROCEDURES:

 

We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of November 3, 2018.  Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of November 3, 2018, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:

 

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended November 3, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS:

 

            Not Applicable

 

ITEM 1A.  RISK FACTORS:

 

            In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended February 3, 2018.  These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:

 

      The following table summarizes the Company’s purchases of its common stock for the three months ended November 3, 2018:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number

 

 

 

 

 

 

 

Shares Purchased as

 

(or Approximate Dollar

 

 

Total Number

 

 

Average

 

Part of Publicly

 

Value) of Shares that may

Fiscal

 

of Shares

 

 

Price Paid

 

Announced Plans or

 

Yet be Purchased Under

Period

 

Purchased

 

 

per Share (1)

 

Programs (2)

 

The Plans or Programs (2)

August 2018

 

79,300

 

$

24.40

 

79,300

 

 

September 2018

 

-

 

 

-

 

-

 

 

October 2018

 

-

 

 

-

 

-

 

 

Total

 

79,300

 

$

24.40

 

79,300

 

19,002

 

(1)   Prices include trading costs.

 

(2)   As of August 4, 2018, the Company’s share repurchase program had 98,302 shares remaining in open authorizations. During the third quarter ending November 3, 2018, the Company repurchased and retired 79,300 shares under this program for approximately $1,934,872 or an average market price of $24.40 per share. As of the third quarter ended November 3, 2018, the Company had 19,002 shares remaining in open authorizations. On November 20, 2018, the Board of Directors increased, by 2 million shares, the authorization to purchase shares under the Company’s share repurchase program. There is no specified expiration date for the Company’s repurchase program.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES:

 

      Not Applicable

 

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PART II OTHER INFORMATION

ITEM 4.  MINE SAFETY DISCLOSURES:

 

      Not Applicable

 

ITEM 5.  OTHER INFORMATION:

 

      Not Applicable

 

ITEM 6.  EXHIBITS:

 

Exhibit No.

 

Item

 

 

 

   3.1

 

Registrant’s Restated Certificate of Incorporation dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283).

 

 

 

   3.2

 

 

Registrant’s By Laws, incorporated by reference to Exhibit 99.2 to Form
8-K of the Registrant Filed December 10, 2007.

 

 

 

 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 Principal Executive Officer.

 

 

 

 32.2*

 

Section 1350 Certification of Principal Financial Officer.

 

 

 

101.1*

 

The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 3, 2018, formatted in XBRL:  (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Nine Months Ended November 3, 2018 and October 28, 2017;  (ii) Condensed Consolidated Balance Sheets at November 3, 2018 and February 3, 2018;  (iii) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 3, 2018 and October 28, 2017; and (iv) Notes to Condensed Consolidated Financial Statements.

 

                      * Submitted electronically herewith.      

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PART II OTHER INFORMATION

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

                                                                                    THE CATO CORPORATION

 

 

November 30, 2018

 

/s/ John P. D. Cato

Date

 

John P. D. Cato

Chairman, President and

Chief Executive Officer