Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
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QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period
ended July 29, 2017
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ________________to__________________
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Commission file number
1-31340
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THE CATO CORPORATION
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(Exact name of registrant as
specified in its charter)
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Delaware
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56-0484485
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification
No.)
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8100 Denmark Road, Charlotte, North Carolina 28273-5975
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(Address of principal executive
offices)
(Zip Code)
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(704) 554-8510
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(Registrant's telephone number,
including area code)
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Not Applicable
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(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.
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted
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 and post such
files).
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
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
(Do not check if a smaller reporting 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).
As
of July 29, 2017, there were 23,683,331 shares of Class A common stock and
1,755,601 shares of Class B common stock outstanding.
THE CATO CORPORATION
FORM 10-Q
Quarter Ended July 29, 2017
Table of Contents
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Page No.
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PART I – FINANCIAL INFORMATION (UNAUDITED)
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Item 1.
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Financial Statements (Unaudited):
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Condensed Consolidated
Statements of Income and Comprehensive Income
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3
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For the Three Months and
Six Months Ended July 29, 2017 and July 30, 2016
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Condensed Consolidated
Balance Sheets
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4
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At July 29, 2017 and
January 28, 2017
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Condensed Consolidated
Statements of Cash Flows
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5
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For the Six Months Ended
July 29, 2017 and July 30, 2016
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Notes to Condensed
Consolidated Financial Statements
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6 – 17
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For the Three Months and Six Months Ended July 29, 2017 and July 30,
2016
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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18 – 24
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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25
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Item 4.
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Controls and Procedures
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25
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PART II – OTHER INFORMATION
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Item 1.
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Legal Proceedings
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26
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Item 1A.
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Risk Factors
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26
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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26
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Item 3.
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Defaults Upon Senior Securities
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26
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Item 4.
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Mine Safety Disclosures
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27
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Item 5.
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Other Information
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27
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Item 6.
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Exhibits
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27
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Signatures
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28
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE
INCOME
(UNAUDITED)
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Three Months Ended
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Six Months Ended
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July 29, 2017
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July 30, 2016
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July 29, 2017
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July 30, 2016
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(Dollars in thousands, except per share
data)
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REVENUES
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Retail sales
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$
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205,026
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$
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236,654
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$
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442,681
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$
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522,151
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Other revenue
(principally finance charges, late fees and
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layaway
charges)
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1,935
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2,233
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4,021
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4,709
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Total
revenues
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206,961
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238,887
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446,702
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526,860
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COSTS AND
EXPENSES, NET
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Cost of goods
sold (exclusive of depreciation shown below)
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141,258
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149,059
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287,041
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313,032
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Selling,
general and administrative (exclusive of depreciation
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shown below)
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64,280
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67,555
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128,062
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138,626
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Depreciation
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4,882
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5,672
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9,942
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11,348
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Interest and
other income
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(1,329)
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(1,377)
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(2,272)
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(4,305)
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Cost and
expenses, net
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209,091
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220,909
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422,773
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458,701
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Income/(Loss)
before income taxes
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(2,130)
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17,978
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23,929
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68,159
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Income tax
(benefit)/expense
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(1,249)
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2,091
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2,578
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16,398
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Net
(loss)/income
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$
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(881)
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$
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15,887
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$
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21,351
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$
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51,761
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Basic
earnings/(loss) per share
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$
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(0.03)
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$
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0.57
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$
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0.82
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$
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1.86
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Diluted
earnings/(loss) per share
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$
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(0.03)
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$
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0.57
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$
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0.82
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$
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1.86
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Dividends per
share
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$
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0.33
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$
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0.33
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$
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0.66
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$
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0.63
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Comprehensive
income:
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Net
income/(loss)
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$
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(881)
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$
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15,887
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$
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21,351
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$
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51,761
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Unrealized gain
(loss) on available-for-sale securities, net of
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deferred
income taxes of $114 and $373 for the three and
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six months
ended July 29, 2017 and $276 and $370 for
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the three and
six months ended July 30, 2016, respectively
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192
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459
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625
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612
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Comprehensive
income/(loss)
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$
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(689)
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$
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16,346
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$
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21,976
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$
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52,373
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See notes to condensed consolidated
financial statements (unaudited).
Table of
Contents
THE CATO CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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July 29, 2017
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January 28, 2017
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ASSETS
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(Dollars in thousands)
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Current Assets:
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Cash and cash
equivalents
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$
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77,746
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$
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47,234
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Short-term
investments
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159,887
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201,233
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Restricted cash
and investments
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3,703
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3,691
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Accounts
receivable, net of allowance for doubtful accounts of
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$1,141 and
$1,348 at July 29, 2017 and January 28, 2017, respectively
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29,555
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30,336
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Merchandise
inventories
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106,197
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145,682
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Prepaid expenses
and other current assets
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14,451
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15,632
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Total
Current Assets
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391,539
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443,808
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Property and
equipment – net
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122,457
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126,386
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Noncurrent
deferred income taxes
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12,386
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13,773
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Other assets
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22,657
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22,357
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Total
Assets
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$
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549,039
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$
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606,324
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current
Liabilities:
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Accounts payable
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$
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74,544
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$
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105,249
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Accrued expenses
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57,569
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61,313
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Accrued bonus
and benefits
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3,130
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3,068
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Accrued income
taxes
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2,282
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2,282
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Total
Current Liabilities
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137,525
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171,912
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Other noncurrent
liabilities
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48,910
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50,509
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Stockholders'
Equity:
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Preferred stock,
$100 par value per share, 100,000 shares
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authorized,
none issued
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-
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-
|
Class A common
stock, $.033 par value per share, 50,000,000
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shares
authorized; issued 23,683,331 shares and 24,853,129 shares
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at July 29,
2017 and January 28, 2017, respectively
|
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796
|
|
|
837
|
Convertible
Class B common stock, $.033 par value per share,
|
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15,000,000
shares authorized; issued 1,755,601 shares and 1,751,576 shares
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at July 29,
2017 and January 28, 2017, respectively
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58
|
|
|
58
|
Additional
paid-in capital
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97,306
|
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95,207
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Retained
earnings
|
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264,033
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|
288,015
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Accumulated
other comprehensive income/(loss)
|
|
411
|
|
|
(214)
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Total
Stockholders' Equity
|
|
362,604
|
|
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383,903
|
Total
Liabilities and Stockholders' Equity
|
$
|
549,039
|
|
$
|
606,324
|
See notes to condensed consolidated
financial statements (unaudited).
Table of
Contents
THE CATO CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended
|
|
|
July 29, 2017
|
|
July 30, 2016
|
|
|
|
|
|
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(Dollars in thousands)
|
|
|
|
|
|
|
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|
Operating
Activities:
|
|
|
|
|
|
|
Net income
|
$
|
21,351
|
|
$
|
51,761
|
|
Adjustments to
reconcile net income to net cash provided
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
9,942
|
|
|
11,348
|
|
Provision for
doubtful accounts
|
|
258
|
|
|
442
|
|
Purchase
premium and premium amortization of investments
|
|
1,854
|
|
|
(1,255)
|
|
Share-based
compensation
|
|
1,778
|
|
|
1,856
|
|
Excess tax
benefits from share-based compensation
|
|
-
|
|
|
(125)
|
|
Deferred
income taxes
|
|
1,015
|
|
|
-
|
|
Loss on
disposal of property and equipment
|
|
592
|
|
|
974
|
|
Changes in
operating assets and liabilities which provided
|
|
|
|
|
|
|
(used)
cash:
|
|
|
|
|
|
|
Accounts
receivable
|
|
523
|
|
|
2,032
|
|
Merchandise inventories
|
|
39,485
|
|
|
7,086
|
|
Prepaid
and other assets
|
|
892
|
|
|
(1,279)
|
|
Accrued
income taxes
|
|
-
|
|
|
(132)
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
(34,287)
|
|
|
(17,701)
|
|
Net cash
provided by operating activities
|
|
43,403
|
|
|
55,007
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
Expenditures for
property and equipment
|
|
(6,425)
|
|
|
(9,952)
|
|
Purchase of
short-term investments
|
|
(15,770)
|
|
|
(84,806)
|
|
Sales of
short-term investments
|
|
56,461
|
|
|
40,502
|
|
Purchase of
other assets
|
|
(661)
|
|
|
(167)
|
|
Change in
restricted cash and investments
|
|
(13)
|
|
|
(6)
|
|
Net cash
provided/(used) in investing activities
|
|
33,592
|
|
|
(54,429)
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
Dividends paid
|
|
(17,204)
|
|
|
(17,489)
|
|
Repurchase of
common stock
|
|
(29,618)
|
|
|
(7,696)
|
|
Proceeds from
line of credit
|
|
21,000
|
|
|
-
|
|
Payments to line
of credit
|
|
(21,000)
|
|
|
-
|
|
Proceeds from
employee stock purchase plan
|
|
244
|
|
|
244
|
|
Excess tax
benefits from share-based compensation
|
|
-
|
|
|
125
|
|
Proceeds from
stock options exercised
|
|
95
|
|
|
230
|
|
Net cash used in
financing activities
|
|
(46,483)
|
|
|
(24,586)
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash and cash equivalents
|
|
30,512
|
|
|
(24,008)
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
|
47,234
|
|
|
67,057
|
|
Effect of
exchange rate on cash
|
|
-
|
|
|
-
|
|
Cash and cash
equivalents at end of period
|
$
|
77,746
|
|
$
|
43,049
|
|
|
|
|
|
|
|
|
Non-cash
activity:
|
|
|
|
|
|
|
Accrued other assets
and property and equipment
|
$
|
830
|
|
$
|
763
|
|
Accrued treasury
stock
|
|
423
|
|
|
-
|
|
See notes to condensed consolidated
financial statements (unaudited).
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
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 July 29, 2017 and July 30, 2016 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 January 28, 2017.
Amounts as of January 28, 2017 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.
During the first quarter of 2017, the Company changed its
estimates for unrecognized benefits of uncertain tax positions. As a result of
this change in estimate, Income tax expense decreased by $1.5 million, Other
noncurrent liabilities decreased by $2.5 million, and Noncurrent deferred income
taxes decreased by $1.0 million.
In August 2017, the Company repurchased 247,100 shares of its
Class A common stock for $3,561,926.
On August 24, 2017, the Board of Directors maintained the
quarterly dividend at $0.33 per share.
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
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
|
|
|
Six Months Ended
|
|
|
|
|
July 29, 2017
|
|
|
July 30, 2016
|
|
|
July 29, 2017
|
|
|
July 30, 2016
|
|
|
(Dollars in thousands)
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings/(loss)
|
|
$
|
(881)
|
|
$
|
15,887
|
|
$
|
21,351
|
|
$
|
51,761
|
|
Earnings(loss)
allocated to non-vested equity awards
|
|
|
28
|
|
|
(312)
|
|
|
(466)
|
|
|
(1,048)
|
|
Net
earnings/(loss) available to common stockholders
|
|
$
|
(853)
|
|
$
|
15,575
|
|
$
|
20,885
|
|
$
|
50,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average
common shares outstanding
|
|
|
25,177,180
|
|
|
27,203,160
|
|
|
25,456,579
|
|
|
27,191,066
|
|
Dilutive effect
of stock options
|
|
|
-
|
|
|
2,051
|
|
|
-
|
|
|
1,974
|
|
Diluted weighted
average common shares outstanding
|
|
|
25,177,180
|
|
|
27,205,211
|
|
|
25,456,579
|
|
|
27,193,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per share
|
|
$
|
(0.03)
|
|
$
|
0.57
|
|
$
|
0.82
|
|
$
|
1.86
|
|
Diluted
earnings/(loss) per share
|
|
$
|
(0.03)
|
|
$
|
0.57
|
|
$
|
0.82
|
|
$
|
1.86
|
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
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 July 29, 2017:
|
|
Changes in Accumulated Other
|
|
|
|
Comprehensive Income (a)
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
and (Losses) on
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
Beginning Balance at April 29,
2017
|
|
$
|
219
|
|
|
|
|
Other comprehensive income
before
|
|
|
|
|
|
|
|
reclassification
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from
accumulated
|
|
|
|
|
|
|
|
other comprehensive income
(b)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other
comprehensive income
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at July 29, 2017
|
|
$
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) All amounts are net-of-tax.
Amounts in parentheses indicate a debit/reduction to other comprehensive
income.
|
|
(b) Includes $10 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
$4.
|
The following table
sets forth information regarding the reclassification out of Accumulated other
comprehensive income/(loss) (in thousands) for the six months ended July 29,
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
|
|
|
|
|
|
|
|
reclassification
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from
accumulated
|
|
|
|
|
|
|
|
other comprehensive income
(b)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other
comprehensive income
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at July 29, 2017
|
|
$
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) All amounts are net-of-tax.
Amounts in parentheses indicate a debit/reduction to other comprehensive
income.
|
|
(b) Includes $5 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
$2.
|
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
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 July 30, 2016:
|
|
Changes in Accumulated Other
|
|
|
|
Comprehensive Income (a)
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
and (Losses) on
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
Beginning Balance at April 30,
2016
|
|
$
|
953
|
|
|
|
|
Other comprehensive income
before
|
|
|
|
|
|
|
|
reclassifications
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from
accumulated
|
|
|
|
|
|
|
|
other comprehensive income
(b)
|
|
|
(51)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other
comprehensive income
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at July 30, 2016
|
|
$
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) All amounts are net-of-tax.
Amounts in parentheses indicate a debit/reduction to other comprehensive
income.
|
|
(b) Includes ($81) 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
($30).
|
The following table
sets forth information regarding the reclassification out of Accumulated other
comprehensive income (in thousands) for the six months ended July 30, 2016:
|
|
Changes in Accumulated Other
|
|
|
|
Comprehensive Income (a)
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
and (Losses) on
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
Beginning Balance at January 30,
2016
|
|
$
|
800
|
|
|
|
|
Other comprehensive income
before
|
|
|
|
|
|
|
|
reclassifications
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from
accumulated
|
|
|
|
|
|
|
|
other comprehensive income
(b)
|
|
|
(52)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other
comprehensive income
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at July 30, 2016
|
|
$
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) All amounts are net-of-tax.
Amounts in parentheses indicate a debit/reduction to other comprehensive
income.
|
|
(b) Includes ($83) 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
($31).
|
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
NOTE 4 – FINANCING ARRANGEMENTS:
As
of July 29, 2017, 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 2020.
The credit agreement contains various financial covenants and limitations, including
the maintenance of specific financial ratios with which the Company was in compliance
as of July 29, 2017. There were no borrowings outstanding under this credit
facility during the periods ended July 29, 2017 or January 28, 2017. The
weighted average interest rate under the credit facility was zero at July 29,
2017 due to no borrowings outstanding.
At
July 29, 2017 and January 28, 2017, 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 July
29, 2017, 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.
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):
The following schedule summarizes certain
segment information (in thousands):
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
July 29, 2017
|
Retail
|
Credit
|
Total
|
|
July 29, 2017
|
Retail
|
Credit
|
Total
|
|
|
|
|
|
|
|
|
|
Revenues
|
$205,911
|
$1,050
|
$206,961
|
|
Revenues
|
$444,553
|
$2,149
|
$446,702
|
Depreciation
|
4,871
|
11
|
4,882
|
|
Depreciation
|
9,919
|
23
|
9,942
|
Interest and other income
|
(1,329)
|
-
|
(1,329)
|
|
Interest and other income
|
(2,272)
|
-
|
(2,272)
|
Income/(Loss) before
income taxes
|
(2,433)
|
303
|
(2,130)
|
|
Income/(Loss) before
income taxes
|
23,185
|
744
|
23,929
|
Capital expenditures
|
2,980
|
-
|
2,980
|
|
Capital expenditures
|
6,425
|
-
|
6,425
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
July 30, 2016
|
Retail
|
Credit
|
Total
|
|
July 30, 2016
|
Retail
|
Credit
|
Total
|
|
|
|
|
|
|
|
|
|
Revenues
|
$237,645
|
$1,242
|
$238,887
|
|
Revenues
|
$524,348
|
$2,512
|
$526,860
|
Depreciation
|
5,660
|
12
|
5,672
|
|
Depreciation
|
11,323
|
25
|
11,348
|
Interest and other income
|
(1,377)
|
-
|
(1,377)
|
|
Interest and other income
|
(4,305)
|
-
|
(4,305)
|
Income/(Loss) before
income taxes
|
17,481
|
497
|
17,978
|
|
Income/(Loss) before
income taxes
|
67,319
|
840
|
68,159
|
Capital expenditures
|
3,922
|
-
|
3,922
|
|
Capital expenditures
|
9,952
|
-
|
9,952
|
|
|
|
|
|
|
|
|
|
|
Retail
|
Credit
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of July 29, 2017
|
$492,342
|
$56,697
|
$549,039
|
|
|
|
|
|
Total assets as of January 28, 2017
|
554,716
|
51,608
|
606,324
|
|
|
|
|
|
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
|
|
Six Months Ended
|
|
|
July 29, 2017
|
|
|
July 30, 2016
|
|
|
July 29, 2017
|
|
|
July 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
$
|
204
|
|
$
|
196
|
|
$
|
258
|
|
$
|
442
|
Payroll
|
|
223
|
|
|
205
|
|
|
444
|
|
|
436
|
Postage
|
|
136
|
|
|
155
|
|
|
273
|
|
|
335
|
Other expenses
|
|
173
|
|
|
177
|
|
|
407
|
|
|
434
|
Total expenses
|
$
|
736
|
|
$
|
733
|
|
$
|
1,382
|
|
$
|
1,647
|
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
NOTE 6 – STOCK-BASED COMPENSATION:
As
of July 29, 2017, the Company had three 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 July 29, 2017, there were no available
stock options for grant. The 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 23, 2013, shares for
grant were no longer available under the 2004 Amended and Restated Incentive
Compensation Plan.
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 July
29, 2017:
|
1987
|
|
2004
|
|
2013
|
|
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Total
|
Options and/or restricted stock
initially authorized
|
5,850,000
|
|
1,350,000
|
|
1,500,000
|
|
8,700,000
|
Options and/or restricted stock
available for grant:
|
|
|
|
|
|
|
|
July 29, 2017
|
-
|
|
-
|
|
845,052
|
|
845,052
|
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 July
29, 2017 and January 28, 2017, there was $14,383,000 and $12,685,000,
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 2.5 years, respectively. The total fair value of the shares
recognized as compensation expense during the three and six months ended July
29, 2017 was $1,318,000 and $1,726,000, respectively, compared to $1,449,000
and $1,802,000, respectively, for the three and six months ended July 30, 2016.
These expenses are classified as a component of Selling, general and
administrative expenses in the Condensed Consolidated Statements of Income.
The following
summary shows the changes in the shares of unvested restricted stock
outstanding during the
six
months ended
July 29, 2017:
|
|
|
|
Weighted Average
|
|
Number of
|
|
|
Grant Date Fair
|
|
Shares
|
|
|
Value Per Share
|
Restricted
stock awards at January 28, 2017
|
561,323
|
|
$
|
32.22
|
Granted
|
191,919
|
|
|
22.44
|
Vested
|
(125,761)
|
|
|
26.40
|
Forfeited or
expired
|
(18,595)
|
|
|
32.41
|
Restricted
stock awards at July 29, 2017
|
608,886
|
|
$
|
30.33
|
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
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 six months ended July 29, 2017 and July 30, 2016, the Company sold
13,619 and 8,143 shares to employees at an average discount of $3.17 and $5.29 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 $43,000 for the six months ended July 29, 2017 and July
30, 2016, 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 July 29, 2017 and January
28, 2017:
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
Significant
|
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
July 29, 2017
|
|
Assets
|
|
Inputs
|
|
Inputs
|
Description
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal
Bonds
|
|
$
|
134,967
|
|
$
|
-
|
|
$
|
134,967
|
|
$
|
-
|
Corporate
Bonds
|
|
|
23,950
|
|
|
-
|
|
|
23,950
|
|
|
-
|
U.S.
Treasury Notes
|
|
|
804
|
|
|
804
|
|
|
-
|
|
|
-
|
Cash
Surrender Value of Life Insurance
|
|
|
8,247
|
|
|
-
|
|
|
-
|
|
|
8,247
|
Asset-backed
Securities (ABS)
|
|
|
969
|
|
|
-
|
|
|
969
|
|
|
-
|
Corporate
Equities
|
|
|
657
|
|
|
657
|
|
|
-
|
|
|
-
|
Certificates
of Deposit
|
|
|
100
|
|
|
100
|
|
|
-
|
|
|
-
|
Total Assets
|
|
$
|
169,694
|
|
$
|
1,561
|
|
$
|
159,886
|
|
$
|
8,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Compensation
|
|
|
(8,336)
|
|
|
-
|
|
|
-
|
|
|
(8,336)
|
Total
Liabilities
|
|
$
|
(8,336)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(8,336)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
Significant
|
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
January 28, 2017
|
|
Assets
|
|
Inputs
|
|
Inputs
|
Description
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal Bonds
|
|
$
|
172,953
|
|
$
|
-
|
|
$
|
172,953
|
|
$
|
-
|
Corporate
Bonds
|
|
|
25,329
|
|
|
-
|
|
|
25,329
|
|
|
-
|
U.S.
Treasury Notes
|
|
|
1,206
|
|
|
1,206
|
|
|
-
|
|
|
-
|
Cash
Surrender Value of Life Insurance
|
|
|
7,973
|
|
|
-
|
|
|
-
|
|
|
7,973
|
Asset-backed
Securities (ABS)
|
|
|
2,951
|
|
|
-
|
|
|
2,951
|
|
|
-
|
Corporate
Equities
|
|
|
722
|
|
|
722
|
|
|
-
|
|
|
-
|
Certificates
of Deposit
|
|
|
100
|
|
|
100
|
|
|
-
|
|
|
-
|
Total Assets
|
|
$
|
211,234
|
|
$
|
2,028
|
|
$
|
201,233
|
|
$
|
7,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Compensation
|
|
|
(7,649)
|
|
|
-
|
|
|
-
|
|
|
(7,649)
|
Total
Liabilities
|
|
$
|
(7,649)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(7,649)
|
The Company’s
investment portfolio was primarily invested in corporate bonds and tax-exempt
and taxable governmental debt securities held in managed accounts with
underlying ratings of A or better at July 29, 2017 and January 28, 2017. The
state, municipal and corporate bonds have contractual maturities which range
from three days to 30.0 years. The U.S. Treasury Notes and Certificates of
Deposit have contractual maturities which range from two months to eight
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.
Additionally, at
July 29, 2017, the Company had $0.7 million of corporate equities and deferred
compensation plan assets of $8.2 million. At January 28, 2017, the Company had
$0.7 million of corporate equities and deferred compensation plan assets of
$8.0 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 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 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.
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
The following tables
summarize the change in fair value of the Company’s financial assets and
liabilities measured using Level 3 inputs as of July 29, 2017 and January 28,
2017 (in thousands):
|
Fair Value
|
|
Measurements Using
|
|
Significant Unobservable
|
|
Asset Inputs (Level 3)
|
|
Cash Surrender Value
|
Beginning Balance at January 28, 2017
|
$
|
7,973
|
Redemptions
|
|
-
|
Additions
|
|
-
|
Total gains or (losses)
|
|
|
Included in interest and other income (or changes in
net assets)
|
|
274
|
Included in other comprehensive income
|
|
-
|
Ending Balance at July 29, 2017
|
$
|
8,247
|
|
|
|
|
Fair Value
|
|
Measurements Using
|
|
Significant Unobservable
|
|
Liability Inputs (Level
3)
|
|
Deferred Compensation
|
Beginning Balance at January 28, 2017
|
$
|
(7,649)
|
Additions
|
|
(313)
|
Total (gains) or losses
|
|
|
Included in interest and other income (or changes in
net assets)
|
|
(374)
|
Included in other comprehensive income
|
|
-
|
Ending Balance at July 29, 2017
|
$
|
(8,336)
|
|
Fair Value
|
|
Measurements Using
|
|
Significant Unobservable
|
|
|
Asset Inputs (Level 3)
|
|
|
Cash Surrender Value
|
|
Beginning Balance at January 30, 2016
|
$
|
6,409
|
|
Redemptions
|
|
-
|
|
Additions
|
|
1,028
|
|
Total gains or (losses)
|
|
|
|
Included in interest and other income (or changes in
net assets)
|
|
399
|
|
Included in other comprehensive income
|
|
-
|
|
Ending Balance at July 30, 2016
|
$
|
7,836
|
|
|
|
|
|
|
Fair Value
|
|
|
Measurements Using
|
|
|
Significant Unobservable
|
|
|
Liability Inputs (Level
3)
|
|
|
Deferred Compensation
|
|
Beginning Balance at January 30, 2016
|
$
|
(6,187)
|
|
Additions
|
|
(1,018)
|
|
Total (gains) or losses
|
|
|
|
Included in interest and other income (or changes in
net assets)
|
|
(518)
|
|
Included in other comprehensive income
|
|
-
|
|
Ending Balance at July 30, 2016
|
$
|
(7,723)
|
|
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
NOTE 8 – RECENT
ACCOUNTING PRONOUNCEMENTS:
Recently Adopted Accounting Policies
In July 2015, the Financial Accounting Standards Board
issued an accounting standards update that will simplify the measurement of
inventory for companies. The standard differentiates the valuation methods used
to measure inventory based on the type of inventory method utilized by a
company. Companies using the first-in, first-out method and the average cost
method will measure inventory at the net realizable value method to measure
inventory. Companies using the last-in, first-out method and the retail method
will use the lower of cost or market to measure inventory. The standard was
effective for the Company’s first quarter of its 2017 fiscal year. In the first
quarter of 2017, the Company adopted this new guidance and it did not have a
material impact on the financial statements.
Recent Accounting Pronouncements
In November
2015, the Financial Accounting Standards Board issued an effective date for 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.
In May
2014, the Financial Accounting Standards Board issued an accounting standards
update that will supersede most current revenue recognition guidance and modify
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 goods 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. The standard
is effective for the Company’s first quarter of its 2018 fiscal year, and early
adoption is permitted. This standard will primarily impact our gift card and
credit card sales transactions whereby estimated gift card breakage and
estimated credit card bad debts will be recognized at the time the initial revenue
is recorded. Based on its assessment to date, the Company intends to apply the
standard retroactively in accordance with ASU 606-10-65-1. The Company is
continuing to assess the impact of this new standard on its consolidated
financial statements.
NOTE 9 –
INCOME TAXES:
The Company had a $1.2 million tax benefit for the quarter
ended July 29, 2017 compared to a $2.1 million expense for the quarter ended
July 30, 2016. For the first six months of 2017, the Company’s effective tax
rate was 10.8% compared to 24.1% for the first six months of 2016. The decrease
in the effective tax rate is attributable to lower earnings, a higher
proportion of income being generated from jurisdictions with lower tax rates,
ongoing savings from tax initiatives, and a change in estimate for uncertain
tax positions. See Note 1, General.
Table of Contents
|
|
THE
CATO CORPORATION
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FOR
THE THREE MONTHS AND
SIX MONTHS ENDED
JULY 29, 2017 AND JULY 30, 2016
|
|
|
NOTE 10 – 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. The Company has approximately
$10.1 million in accrued litigation expense at July 29, 2017.
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 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.
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 3, 2018
(“fiscal 2017”) 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, home values,
consumer net worth and the availability of credit; 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 January
28, 2017 (“fiscal 2016”), 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.
Table of Contents
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
|
|
|
CRITICAL ACCOUNTING POLICIES:
The Company’s
accounting policies are more fully described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in the Company’s
Annual Report on Form 10-K for the fiscal year ended January 28, 2017. 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.
Table of Contents
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
|
|
|
RESULTS OF
OPERATIONS:
The following table
sets forth, for the periods indicated, certain items in the Company's unaudited
Condensed Consolidated Statements of Income as a percentage of total retail
sales:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
July 29, 2017
|
|
July 30, 2016
|
|
|
July 29, 2017
|
|
July 30, 2016
|
|
Total retail
sales
|
100.0
|
%
|
100.0
|
%
|
|
100.0
|
%
|
100.0
|
%
|
Other revenue
|
0.9
|
|
0.9
|
|
|
0.9
|
|
0.9
|
|
Total revenues
|
100.9
|
|
100.9
|
|
|
100.9
|
|
100.9
|
|
Cost of goods
sold (exclusive of depreciation)
|
68.9
|
|
63.0
|
|
|
64.8
|
|
60.0
|
|
Selling, general
and administrative (exclusive of depreciation)
|
31.4
|
|
28.5
|
|
|
28.9
|
|
26.5
|
|
Depreciation
|
2.4
|
|
2.4
|
|
|
2.2
|
|
2.2
|
|
Interest and
other income
|
(0.6)
|
|
(0.6)
|
|
|
(0.5)
|
|
(0.8)
|
|
Income before
income taxes
|
1.0
|
|
7.6
|
|
|
5.4
|
|
13.1
|
|
Net
(loss)/income
|
0.4
|
|
6.7
|
|
|
4.8
|
|
9.9
|
|
Table of Contents
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
|
|
|
RESULTS OF OPERATIONS (CONTINUED):
Comparison of the
Three
and
Six Months ended July 29, 2017 with July 30, 2016
Total retail sales for the second quarter
were $205.0 million compared to last year’s second quarter sales of $236.7 million,
a 13.4% decrease. The Company’s second quarter of fiscal 2017 sales decreased
primarily due to a 13.9% decrease in same-store sales, partially offset by
sales from non-comparable stores. For the six months ended July 29, 2017, total
retail sales were $442.7 million compared to last year’s comparable six month
sales of $522.2 million. Sales in the first six months of fiscal 2017 decreased
primarily due to a 15.5% decrease in same-store sales, partially offset by
sales from non-comparable stores. 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% of sales for the six months ended July 29, 2017 and are
included in the same-store sales calculation. Total revenues, comprised of
retail sales and other revenue (principally finance charges and late fees on
customer accounts receivable and layaway fees), were $207.0 million and $446.7
million for the three and six months ended July 29, 2017, compared to $238.9
million and $526.9 million for the three and six months ended July 30, 2016,
respectively. The Company operated 1,374 stores at July 29, 2017 compared to
1,373 stores at the end of last year’s second quarter. For the first six
months of fiscal 2017, the Company opened five new stores, relocated two stores
and closed two stores. In total, the Company currently expects to open
approximately six stores, relocate three stores and close 24 stores in fiscal
2017.
Credit revenue of $1.1 million represented
0.5% of total revenues in the second quarter of fiscal 2017, compared to 2016
credit revenue of $1.2 million or 0.5% of total revenues. Credit revenue
decreased 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 $0.7 million in
the second quarter of fiscal 2017, compared to last year’s second quarter
expense of $0.7 million.
Other revenue in total, as included in total
revenues, was $1.9 million and $4.0 million for the three and six months ended
July 29, 2017, compared to $2.2 million and $4.7 million for the prior year’s
comparable three and six month periods. The overall decrease in the three and
six months ended July 29, 2017 resulted primarily from lower layaway charges
and credit revenue.
Cost of goods sold was $141.3 million, or
68.9% of retail sales and $287.0 million or 64.8% of retail sales for the three
and six months ended July 29, 2017, compared to $149.1 million, or 63.0% of
retail sales and $313.0 million, or 59.9% of retail sales for the comparable
three and six month periods of fiscal 2016. The overall increase in cost of
goods sold as a percent of retail sales for the second quarter of fiscal 2017
resulted primarily from lower sales of regular priced goods and higher sales of
markdown goods. In addition, occupancy, purchasing and sourcing costs as a
percent of retail sales increased due to much lower retail sales. Cost of goods
sold includes merchandise costs (net of discounts and allowances), buying
costs, distribution costs, occupancy costs, freight and inventory shrinkage.
Net merchandise costs and in-bound freight are capitalized as inventory costs.
Buying and distribution costs include payroll, payroll-related costs and
operating expenses for the buying departments and distribution center.
Occupancy costs include rent, real estate taxes, insurance, common area
maintenance, utilities and maintenance for stores and distribution facilities.
Total gross margin dollars (retail sales less cost of goods sold exclusive of
depreciation) decreased
by 27.2% to $63.8 million for
the second quarter of fiscal 2017 and decreased by 25.6% to $155.6 million for
the first six months of fiscal 2017 compared to $87.6 million and $209.1
million for the prior year’s comparable three and six months of fiscal 2016.
Gross margin as presented may not be comparable to those of other entities.
Table of Contents
THE CATO CORPORATION
|
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
$64.3 million, or 31.4% of retail sales and $128.1 million, or 28.9% of retail
sales for the second quarter and first six months of fiscal 2017, respectively,
compared to $67.6 million, or 28.5% of retail sales and $138.6 million, or
26.5% of retail sales for the prior year’s comparable three and six month
periods. The decrease in SG&A expense for the second quarter and for the
first six months of fiscal 2017 was primarily attributable to lower litigation
costs and store expenses, partially offset by higher insurance costs.
Depreciation expense
was $4.9 million, or 2.4% of retail sales and $9.9 million, or 2.2% of retail
sales for the second quarter and first six months of fiscal 2017, respectively,
compared to $5.7 million, or 2.4% of retail sales and $11.3 million or 2.2% of
retail sales for the comparable three and six month periods of fiscal 2016,
respectively.
Interest and other income was $1.3 million,
or 0.6% of retail sales and $2.3 million, or 0.5% of retail sales for the three
and six months ended July 29, 2017, respectively, compared to $1.4 million, or
0.6% of retail sales and $4.3 million, or 0.8% of retail sales for the
comparable three and six month periods of fiscal 2016, respectively. The
decrease for the first six months of fiscal 2017 compared to 2016 is primarily
attributable to lower gift card breakage income as fiscal 2016 included the
effect of the Company’s change in the recognition of unredeemed gift card
breakage income.
Income tax benefit was $1.2 million and income tax expense
of $2.6 million for the
second
quarter and first
six
months of
fiscal 2017, respectively, compared to $2.1 million and $16.4 million for the
comparable three and
six
month
periods of fiscal 2016, respectively. For the first six months of 2017, the
Company’s effective tax rate was 10.8% compared to 24.1% for the first six
months of 2016. The decrease in the effective tax rate is attributable to lower
earnings, a higher proportion of income being generated from jurisdictions with
lower tax rates, ongoing savings from tax initiatives, and a change in estimate
for uncertain tax positions. See Note 1, General.
LIQUIDITY, CAPITAL
RESOURCES AND MARKET RISK:
The Company has
consistently maintained a strong liquidity position. Cash provided by operating
activities during the first six months of fiscal 2017 was $43.4 million as
compared to $55.0 million in the first six months of fiscal 2016. 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 July 29, 2017 and January 28, 2017.
Cash provided by
operating activities for the first six months of fiscal 2017 was primarily
generated by earnings adjusted for depreciation and changes in working capital.
The decrease of $11.6 million for the first six months of fiscal 2017 as
compared to the first six months of fiscal 2016 was primarily due to a decrease
in
net income and accounts payable, accrued expenses
and other liabilities, partially offset by a decrease in merchandise
inventories.
Table of Contents
THE CATO CORPORATION
|
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 2017 and the next 12 months.
At July 29, 2017,
the Company had working capital of $254.0 million compared to $271.9 million at
January 28, 2017.
At July 29, 2017 and January 28, 2017, 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 2020. The credit agreement contains various financial covenants and
limitations, including the maintenance of specific financial ratios with which
the Company was in compliance as of July 29, 2017. There were no borrowings
outstanding under the credit facility as of July 29, 2017 and January 28, 2017.
At July 29, 2017 and January 28, 2017, the
Company had no outstanding revocable letters of credit relating to purchase
commitments.
Expenditures for property
and equipment totaled $6.4 million in the first six months of fiscal 2017,
compared to $10.0 million in last fiscal year’s first six months. The
expenditures for the first six months of fiscal 2017 were primarily for the
development of five new stores and additional investments in new technology. For
the full fiscal 2017 year, the Company expects to invest approximately $13.2
million for capital expenditures to open approximately six new stores, relocate
approximately three stores and upgrade merchandise systems.
Net cash provided by
investing activities totaled $33.6 million in the first six months of fiscal 2017
compared to net cash of $54.4 million used in the comparable period of 2016. Net
cash provided in 2017 is primarily attributable to higher sales of short-term
investments, partially offset by a decrease in the purchase of short-term
investments and lower capital expenditures.
Net cash used in
financing activities totaled $46.5 million in the first six months of fiscal 2017
compared to $24.6 million used in the comparable period of fiscal 2016. The
increase was primarily due to larger share repurchases.
On August 24, 2017,
the Board of Directors maintained the quarterly dividend at $0.33 per share.
As of July 29, 2017, the Company had
1,257,606 shares remaining in open authorizations under its share repurchase
program.
The Company does not use derivative
financial instruments.
The Company’s
investment portfolio was primarily invested in corporate bonds and tax-exempt
and taxable governmental debt securities held in managed accounts with
underlying ratings of A or better at July 29, 2017 and January 28, 2017. The
state, municipal and corporate bonds have contractual maturities which range
from three days to 30.0 years. The U.S. Treasury Notes and Certificates of
Deposit have contractual maturities which range from two months to eight
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.
Table of Contents
THE CATO CORPORATION
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
|
CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
|
|
|
Additionally, at
July 29, 2017, the Company had $0.7 million of corporate equities and deferred
compensation plan assets of $8.2 million. At January 28, 2017, the Company had
$0.7 million of corporate equities and deferred compensation plan assets of
$8.0 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.
Table of Contents
THE CATO CORPORATION
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
|
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The
Company is subject to market rate risk from exposure to changes in interest
rates based on its financing, investing and cash management activities, but the
Company does not believe such exposure is material.
ITEM 4. CONTROLS AND
PROCEDURES
:
We carried out an
evaluation, with the participation of our Principal Executive Officer and
Principal Financial Officer, of the effectiveness of our disclosure controls
and procedures as of July 29, 2017. Based on this evaluation, our Principal
Executive Officer and Principal Financial Officer concluded that, as of July
29, 2017, 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 July 29,
2017 that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
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 January 28, 2017. 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 July 29, 2017:
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)
|
May 2017
|
|
120,035
|
|
$
|
22.28
|
|
120,035
|
|
|
June 2017
|
|
-
|
|
|
-
|
|
-
|
|
|
July 2017
|
|
401,000
|
|
|
16.64
|
|
401,000
|
|
|
Total
|
|
521,035
|
|
$
|
17.94
|
|
521,035
|
|
1,257,606
|
(1)
Prices include trading
costs.
(2)
As of April 29, 2017,
the Company’s share repurchase program had 1,778,641 shares remaining in open
authorizations. During the second quarter ending July 29, 2017, the Company
repurchased and retired 521,035 shares under this program for approximately
$9,346,469 or an average market price of $17.94 per share. As of the second
quarter ended July 29, 2017, the Company had 1,257,606 shares remaining in open
authorizations. There is no specified expiration date for the Company’s
repurchase program.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES:
Not Applicable
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.
|
|
|
|
4.1
|
|
Rights Agreement dated
December 18, 2003, incorporated by reference to Exhibit 4.1 to Form 8-A12G of
the Registrant filed December 22, 2003 and as amended in Form 8-A12B/A filed
January 6, 2004.
|
|
|
|
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 July 29, 2017, formatted in
XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months and Six Months Ended July 29, 2017 and July 30,
2016; (ii) Condensed Consolidated Balance Sheets at July 29, 2017 and
January 28, 2017; (iii) Condensed Consolidated Statements of Cash Flows for
the Six Months Ended July 29, 2017 and July 30, 2016; and (iv) Notes to
Condensed Consolidated Financial Statements.
|
*
Submitted electronically herewith.
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
THE
CATO CORPORATION
August 25, 2017
|
|
/s/ John P. D. Cato
|
Date
|
|
John P. D. Cato
Chairman, President and
Chief Executive Officer
|
|
|
|
August 25, 2017
|
|
/s/ John R. Howe
|
Date
|
|
John R. Howe
Executive Vice President
Chief Financial Officer
|
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