cato10q3qtr16.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 October 29, 2016

 

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 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).

Yes

X

No

 

 

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

 

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

(Do not check if a smaller reporting company)

 

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 October 29, 2016, there were 25,092,156 shares of Class A common stock and 1,751,576 shares of Class B common stock outstanding.


 
THE CATO CORPORATION

 

FORM 10-Q

 

Quarter Ended October 29, 2016

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 October 29, 2016 and October 31, 2015

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

At October 29, 2016 and January 30, 2016

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

5

 

 

For the Nine Months Ended October 29, 2016 and October 31, 2015

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6 – 18

 

 

For the Three Months and Nine Months Ended October 29, 2016 and October 31, 2015

 

 

 

 

 

 

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

 

 

 

 

 

 

           

 

 

2


 

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

 

October 29, 2016

 

October 31, 2015

 

October 29, 2016

 

October 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

REVENUES

 

 

 

 

 

 

 

 

 

 

 

  Retail sales

$

207,022

 

$

223,311

 

$

729,173

 

$

754,101

  Other revenue (principally finance charges, late fees and

 

 

 

 

 

 

 

 

 

 

 

    layaway charges)

 

2,240

 

 

2,156

 

 

6,949

 

 

6,534

    Total revenues

 

209,262

 

 

225,467

 

 

736,122

 

 

760,635

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES, NET

 

 

 

 

 

 

 

 

 

 

 

  Cost of goods sold (exclusive of depreciation shown below)

 

133,627

 

 

140,263

 

 

446,658

 

 

457,266

  Selling, general and administrative (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

    shown below)

 

67,815

 

 

70,659

 

 

206,441

 

 

206,354

  Depreciation

 

5,734

 

 

6,040

 

 

17,082

 

 

16,968

  Interest and other income

 

(1,288)

 

 

(857)

 

 

(5,593)

 

 

(2,259)

    Cost and expenses, net

 

205,888

 

 

216,105

 

 

664,588

 

 

678,329

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

3,374

 

 

9,362

 

 

71,534

 

 

82,306

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit)/expense

 

(4,886)

 

 

1,043

 

 

11,513

 

 

27,310

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

8,260

 

$

8,319

 

$

60,021

 

$

54,996

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.30

 

$

0.30

 

$

2.17

 

$

1.97

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.30

 

$

0.30

 

$

2.17

 

$

1.97

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

$

0.33

 

$

0.30

 

$

0.96

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

8,260

 

$

8,319

 

$

60,021

 

$

54,996

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

 

 

 

 

 

 

 

 

 

 

 

   deferred income taxes of ($530) and ($160) for the three and

 

 

 

 

 

 

 

 

 

 

 

   nine months ended October 29, 2016 and $125 and ($18) for

 

 

 

 

 

 

 

 

 

 

 

   the three and nine months ended October 31, 2015, respectively

 

(881)

 

 

207

 

 

(269)

 

 

(27)

Comprehensive income

$

7,379

 

$

8,526

 

$

59,752

 

$

54,969

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements (unaudited).

3


 
Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

October 29, 2016

 

January 30, 2016

 

 

 

 

 

 

ASSETS

(Dollars in thousands)

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

32,776

 

$

67,057

Short-term investments

 

210,173

 

 

215,495

Restricted cash and investments

 

4,486

 

 

4,472

Accounts receivable, net of allowance for doubtful accounts of

 

 

 

 

 

     $1,450 and $1,447 at October 29, 2016 and January 30, 2016, respectively

 

33,107

 

 

36,610

Merchandise inventories

 

153,346

 

 

141,101

Prepaid expenses and other current assets

 

8,963

 

 

7,317

      Total Current Assets

 

442,851

 

 

472,052

Property and equipment – net

 

142,008

 

 

138,303

Noncurrent deferred income taxes

 

10,442

 

 

10,280

Other assets

 

22,280

 

 

21,709

      Total Assets

$

617,581

 

$

642,344

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

94,656

 

$

113,154

Accrued expenses

 

55,815

 

 

52,886

Accrued bonus and benefits

 

3,262

 

 

12,034

Accrued income taxes

 

226

 

 

1,363

      Total Current Liabilities

 

153,959

 

 

179,437

Other noncurrent liabilities (primarily deferred rent)

 

51,900

 

 

50,242

 

 

 

 

 

 

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 25,092,156 shares and 26,129,692 shares

 

 

 

 

 

   at October 29, 2016 and January 30, 2016, respectively

 

843

 

 

877

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

 

 

 

 

 

   15,000,000 shares authorized; issued 1,751,576 shares and 1,743,525 shares

 

 

 

 

 

   at October 29, 2016 and January 30, 2016, respectively

 

59

 

 

58

Additional paid-in capital

 

94,255

 

 

90,336

Retained earnings

 

316,034

 

 

320,594

Accumulated other comprehensive income 

 

531

 

 

800

         Total Stockholders' Equity

 

411,722

 

 

412,665

         Total Liabilities and Stockholders' Equity

$

617,581

 

$

642,344

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements (unaudited).

4


 
Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Nine Months Ended

 

 

October 29, 2016

 

October 31, 2015

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

Net income

$

60,021

 

$

54,996

 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

 

       by operating activities:

 

 

 

 

 

 

   Depreciation

 

17,082

 

 

16,968

 

   Provision for doubtful accounts

 

658

 

 

717

 

   Purchase premium and premium amortization of investments

 

(426)

 

 

(4,453)

 

   Share-based compensation

 

3,044

 

 

3,074

 

   Excess tax benefits from share-based compensation

 

(194)

 

 

(192)

 

   Deferred income taxes

 

-

 

 

(1,204)

 

   Loss on disposal and write-offs of property and equipment

 

1,495

 

 

353

 

   Changes in operating assets and liabilities which provided

 

 

 

 

 

 

       (used) cash:

 

 

 

 

 

 

        Accounts receivable

 

2,845

 

 

2,101

 

        Merchandise inventories

 

(12,245)

 

 

1,448

 

        Prepaid and other assets

 

(2,986)

 

 

(126)

 

        Accrued income taxes

 

(943)

 

 

(2,780)

 

        Accounts payable, accrued expenses and other liabilities

 

(22,097)

 

 

(13,157)

 

Net cash provided by operating activities

 

46,254

 

 

57,745

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

Purchase of property and equipment 

 

(24,043)

 

 

(22,432)

 

Purchase of short-term investments

 

(101,461)

 

 

(101,726)

 

Sales of short-term investments

 

107,131

 

 

51,693

 

Purchase of Other Assets

 

(261)

 

 

(5,402)

 

Sales of Other Assets

 

-

 

 

298

 

Change in restricted cash and investments

 

(12)

 

 

6

 

Net cash used in investing activities

 

(18,646)

 

 

(77,563)

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

Dividends paid

 

(26,527)

 

 

(25,202)

 

Repurchase of common stock

 

(36,252)

 

 

(6,148)

 

Proceeds from line of credit

 

21,000

 

 

-

 

Payments to line of credit

 

(21,000)

 

 

-

 

Proceeds from employee stock purchase plan

 

466

 

 

455

 

Excess tax benefits from share-based compensation

 

194

 

 

192

 

Proceeds from stock options exercised

 

230

 

 

-

 

Net cash used in financing activities

 

(61,889)

 

 

(30,703)

 

 

 

 

 

 

 

 

Net (decrease) in cash and cash equivalents

 

(34,281)

 

 

(50,521)

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

67,057

 

 

93,946

 

Effect of exchange rate on cash

 

-

 

 

-

 

Cash and cash equivalents at end of period

$

32,776

 

$

43,425

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

Accrued other assets and plant and equipment

$

(439)

 

$

(665)

 

Accrued treasury stock

 

1,852

 

 

-

 

 

See notes to condensed consolidated financial statements (unaudited).

5


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

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 October 29, 2016 and October 31, 2015 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 30, 2016.  Amounts as of January 30, 2016 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 2016, the Company determined that there was an error in the classification of unrecognized tax benefits for uncertain tax positions as current liabilities in Accrued income taxes that resulted in a revision to the prior year end balance sheet as of January 30, 2016. The Condensed Consolidated Balance Sheet as of January 30, 2016 has been revised to correct the presentation of the amounts, which resulted in a decrease to Accrued income taxes and a corresponding increase to Other noncurrent liabilities of $13.6 million, which primarily consists of deferred rent and deferred compensation liabilities. There was no impact to the statement of income and comprehensive income and no impact to total net cash provided by operating activities or used in investing and financing activities in the statement of cash flows. The Company concluded that the revision was immaterial to prior period financial statements.

 

During the first quarter of 2016, the Company changed its estimate for recognizing gift card breakage income. The Company changed the dormancy period to 24 months of inactivity from 60 months of inactivity to more closely align with recent Company experience, industry practice and tax treatment. As a result, the Company recognized $2.4 million of additional breakage income (recorded in Interest and other income in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income) for gift cards that were dormant from January 30, 2011 through February 1, 2014.

 

On November 17, 2016, 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 its share repurchase program.

5


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

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

 

 

 

 

October 29, 2016

 

 

October 31, 2015

 

 

October 29, 2016

 

 

October 31, 2015

 

 

(Dollars in thousands)

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

8,260

 

$

8,319

 

$

60,021

 

$

54,996

 

Earnings allocated to non-vested equity awards

 

 

(170)

 

 

(175)

 

 

(1,223)

 

 

(1,145)

 

Net earnings available to common stockholders

 

$

8,090

 

$

8,144

 

$

58,798

 

$

53,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

26,738,809

 

 

27,368,931

 

 

27,039,343

 

 

27,396,760

 

Dilutive effect of stock options

 

 

1,436

 

 

5,234

 

 

1,807

 

 

5,703

 

Diluted weighted average common shares outstanding

 

 

26,740,245

 

 

27,374,165

 

 

27,041,150

 

 

27,402,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share (Class A and B Shares)

 

$

0.30

 

$

0.30

 

$

2.17

 

$

1.97

 

Diluted earnings per share (Class A and B Shares)

 

$

0.30

 

$

0.30

 

$

2.17

 

$

1.97

6


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

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 October 29, 2016:

 

 

 

Changes in Accumulated Other

 

 

 

Comprehensive Income (a)

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

and (Losses) on

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

Securities

 

 

 

 

Beginning Balance at July 30, 2016

 

$

1,412

 

 

 

 

   Other comprehensive income before

 

 

 

 

 

 

 

   reclassifications

 

 

(765)

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

(116)

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

(881)

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at October 29, 2016

 

$

531

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.

 

(b) Includes ($185) 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 ($69).

 

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 29, 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

 

 

(101)

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

(168)

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

(269)

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at October 29, 2016

 

$

531

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.

 

(b) Includes ($269) 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 ($101).

7


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

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 31, 2015:

 

 

 

Changes in Accumulated Other

 

 

 

Comprehensive Income (a)

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

and (Losses) on

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

Securities

 

 

 

 

Beginning Balance at August 1, 2015

 

$

552

 

 

 

 

   Other comprehensive income before

 

 

 

 

 

 

 

   reclassifications

 

 

227

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

(20)

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

207

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at October 31, 2015

 

$

759

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.

 

(b) Includes ($32) 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 ($12).

 

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended October 31, 2015:

 

 

 

Changes in Accumulated Other

 

 

 

Comprehensive Income (a)

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

and (Losses) on

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

Securities

 

 

 

 

Beginning Balance at January 31, 2015

 

$

786

 

 

 

 

   Other comprehensive income before

 

 

 

 

 

 

 

   reclassifications

 

 

(154)

 

 

 

 

 

 

 

 

 

 

 

 

   Amounts reclassified from accumulated

 

 

 

 

 

 

 

   other comprehensive income (b)

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

(27)

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at October 31, 2015

 

$

759

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.

 

(b) Includes $203 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 $76.

8


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of October 29, 2016, 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 2018.  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 October 29, 2016.  There were no borrowings outstanding under this credit facility at October 29, 2016 or January 30, 2016.  The weighted average interest rate under the credit facility was 1.4% at October 29, 2016.

 

At October 29, 2016 and January 30, 2016, 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 October 29, 2016, 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.

 

9


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

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

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

October 29, 2016

Retail

Credit

Total

 

October 29, 2016

Retail

Credit

Total

 

 

 

 

 

 

 

 

 

Revenues

$208,060

$1,202

$209,262

 

Revenues

$732,408

$3,714

$736,122

Depreciation

5,722

12

5,734

 

Depreciation

17,045

37

17,082

Interest and other income

(1,288)

-

(1,288)

 

Interest and other income

(5,593)

-

(5,593)

Income before taxes

3,010

364

3,374

 

Income before taxes

70,330

1,204

71,534

Capital expenditures

14,091

-

14,091

 

Capital expenditures

24,043

-

24,043

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

October 31, 2015

Retail

Credit

Total

 

October 31, 2015

Retail

Credit

Total

 

 

 

 

 

 

 

 

 

Revenues

$224,179

$1,288

$225,467

 

Revenues

$756,591

$4,044

$760,635

Depreciation

6,028

12

6,040

 

Depreciation

16,931

37

16,968

Interest and other income

(857)

-

(857)

 

Interest and other income

(2,259)

-

(2,259)

Income before taxes

8,917

445

9,362

 

Income before taxes

80,914

1,392

82,306

Capital expenditures

11,030

-

11,030

 

Capital expenditures

22,432

-

22,432

 

 

 

 

 

 

 

 

 

 

Retail

Credit

Total

 

 

 

 

 

Total assets as of October 29, 2016

$564,873

$52,708

$617,581

 

 

 

 

 

Total assets as of January 30, 2016

540,941

101,403

642,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

October 29, 2016

 

 

October 31, 2015

 

 

October 29, 2016

 

 

October 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Bad debt expense

$

216

 

$

219

 

$

658

 

$

717

Payroll

 

214

 

 

219

 

 

650

 

 

648

Postage

 

153

 

 

149

 

 

488

 

 

540

Other expenses

 

255

 

 

244

 

 

714

 

 

710

Total expenses

$

838

 

$

831

 

$

2,510

 

$

2,615

10


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

 

NOTE 6 – STOCK-BASED COMPENSATION:

 

As of October 29, 2016, 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 October 29, 2016, 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 October 29, 2016:

 

 

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:

 

 

 

 

 

 

 

      October 29, 2016

-

 

-

 

1,028,346

 

1,028,346

 

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 October 29, 2016 and January 30, 2016, there was $13,967,000 and $12,214,000, respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 2.7 years and 2.6 years, respectively. The total fair value of the shares recognized as compensation expense during the three and nine months ended October 29, 2016 was $1,145,000 and $2,948,000, respectively, compared to $1,040,000 and $2,981,000, respectively, for the three and nine months ended October 31, 2015. 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 nine months ended October 29, 2016:

 

 

 

 

 

Weighted Average

 

Number of

 

 

Grant Date Fair

 

Shares

 

 

Value Per Share

Restricted stock awards at January 30, 2016

576,676

 

$

29.71

Granted

148,591

 

 

36.83

Vested

(103,808)

 

 

25.19

Forfeited or expired

(55,229)

 

 

31.47

Restricted stock awards at October 29, 2016

566,230

 

$

32.23

11


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

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 October 29, 2016 and October 31, 2015, the Company sold 16,071 and 15,245 shares to employees at an average discount of $5.12 and $5.27 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 $82,000 and $80,000 for the nine months ended October 29, 2016 and October 31, 2015, 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 October 29, 2016 and January 30, 2016:

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

October 29, 2016

 

Assets

 

Inputs

 

Inputs

Description

 

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

    State/Municipal Bonds

 

$

181,324

 

$

-

 

$

181,324

 

$

-

    Corporate Bonds

 

 

25,610

 

 

-

 

 

25,610

 

 

-

    U.S. Treasury Notes

 

 

1,205

 

 

1,205

 

 

-

 

 

-

    Cash Surrender Value of Life Insurance

 

 

7,752

 

 

-

 

 

-

 

 

7,752

    Asset-backed Securities (ABS)

 

 

3,239

 

 

-

 

 

3,239

 

 

-

    Corporate Equities

 

 

672

 

 

672

 

 

-

 

 

-

    Certificates of Deposit

 

 

100

 

 

100

 

 

-

 

 

-

Total Assets

 

$

219,902

 

$

1,977

 

$

210,173

 

$

7,752

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

    Deferred Compensation

 

 

(7,243)

 

 

-

 

 

-

 

 

(7,243)

Total Liabilities

 

$

(7,243)

 

$

-

 

$

-

 

$

(7,243)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

January 30, 2016

 

Assets

 

Inputs

 

Inputs

Description

 

 

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

    State/Municipal Bonds

 

$

193,500

 

$

-

 

$

193,500

 

$

-

    Corporate Bonds

 

 

10,941

 

 

-

 

 

10,941

 

 

-

    U.S. Treasury Notes

 

 

1,203

 

 

1,203

 

 

-

 

 

-

    Cash Surrender Value of Life Insurance

 

 

6,409

 

 

-

 

 

-

 

 

6,409

    Asset-backed Securities (ABS)

 

 

11,054

 

 

-

 

 

11,054

 

 

-

    Corporate Equities

 

 

578

 

 

578

 

 

-

 

 

-

    Certificates of Deposit

 

 

100

 

 

100

 

 

-

 

 

-

Total Assets

 

$

223,785

 

$

1,881

 

$

215,495

 

$

6,409

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

    Deferred Compensation

 

 

(6,187)

 

 

-

 

 

-

 

 

(6,187)

Total Liabilities

 

$

(6,187)

 

$

-

 

$

-

 

$

(6,187)

12


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

 

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 October 29, 2016 and January 30, 2016.  The state, municipal and corporate bonds have contractual maturities which range from three days to  26.8 years. The U.S. Treasury Notes and Certificates of Deposit have contractual maturities which range from four months to  1.4 years. 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 October 29, 2016, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $7.8 million.  At January 30, 2016, the Company had $0.6 million of corporate equities and deferred compensation plan assets of $6.4 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.

13


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

 

The following tables summarize the change in fair value of the Company’s financial assets and liabilities measured using Level 3 inputs as of October 29, 2016 and January 30, 2016 (in thousands):

 

 

Fair Value Measurements Using Significant

 

Unobservable Asset Inputs (Level 3)

 

 

 

 

 

Cash

 

 

 

 

Other Investments

 

 

 Surrender

 

 

 

 

Private Equity

 

 

Value

 

Total

Beginning Balance at January 30, 2016

$

-

 

$

6,409

 

$

6,409

Redemptions

 

-

 

 

-

 

 

-

Additions

 

-

 

 

1,059

 

 

1,059

Total gains or (losses)

 

 

 

 

 

 

 

 

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

 

-

 

 

284

 

 

284

      Included in other comprehensive income

 

-

 

 

-

 

 

-

Ending Balance at October 29, 2016

$

-

 

$

7,752

 

$

7,752

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using Significant

 

 

 

 

Unobservable Liability Inputs (Level 3)

 

 

 

 

Deferred

 

 

 

 

 

 

 

Compensation

 

 

Total

 

 

 

Beginning Balance at January 30, 2016

$

(6,187)

 

$

(6,187)

 

 

 

  Additions

 

(592)

 

 

(592)

 

 

 

  Total (gains) or losses

 

 

 

 

 

 

 

 

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

 

(464)

 

 

(464)

 

 

 

      Included in other comprehensive income

 

-

 

 

-

 

 

 

Ending Balance at October 29, 2016

$

(7,243)

 

$

(7,243)

 

 

 

 

14


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

 

Fair Value Measurements Using Significant

 

Unobservable Asset Inputs (Level 3)

 

 

 

 

 

Cash

 

 

 

 

Other Investments

 

 

 Surrender

 

 

 

 

Private Equity

 

 

Value

 

Total

Beginning Balance at January 31, 2015

$

306

 

$

4,558

 

$

4,865

Redemptions

 

(270)

 

 

-

 

 

(270)

Additions

 

-

 

 

2,071

 

 

2,071

Total gains or (losses)

 

 

 

 

 

 

 

 

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

 

92

 

 

(220)

 

 

(128)

      Included in other comprehensive income

 

(128)

 

 

-

 

 

(128)

Ending Balance at January 30, 2016

$

-

 

$

6,409

 

$

6,409

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using Significant

 

 

 

 

Unobservable Liability Inputs (Level 3)

 

 

 

 

Deferred

 

 

 

 

 

 

 

Compensation

 

 

Total

 

 

 

Beginning Balance at January 31, 2015

$

(4,272)

 

$

(4,272)

 

 

 

  Additions

 

(2,092)

 

 

(2,092)

 

 

 

  Total (gains) or losses

 

 

 

 

 

 

 

 

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

 

-

 

 

-

 

 

 

      Included in other comprehensive income

 

177

 

 

177

 

 

 

Ending Balance at January 30, 2016

$

(6,187)

 

$

(6,187)

 

 

 

15


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:

 

Recently Adopted Accounting Policies

 

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-09. This new accounting guidance requires entities to record the differences between income tax stock expense and book tax expense as a component of income tax expense in the income statement. The standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. In the second quarter of 2016, we early adopted this new guidance. The impact on the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended October 29, 2016 was $594,000.

 

In November 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-17. This new accounting guidance requires entities to present deferred tax assets and deferred tax liabilities, along with any related valuation allowance, as noncurrent in a balance sheet. The standard is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We have early adopted this new guidance prospectively beginning with the Condensed Consolidated Balance Sheet at January 30, 2016, which is included in the Company’s Annual Report on Form 10-K. Prior periods were not retrospectively adjusted.

 

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 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 is effective for the Company’s first quarter of its 2017 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; early adoption is permitted as of the original effective date. The Company is assessing what impacts this new standard will have on its Consolidated Financial Statements.

16


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND  NINE MONTHS ENDED OCTOBER 29, 2016 AND OCTOBER 31, 2015

 

 

 



NOTE 9 – INCOME TAXES:

 

The Company had a tax benefit for the third quarter of 2016 compared to an effective rate of 11.1% for the third quarter of 2015. The tax benefit for the quarter was primarily due to a $6.0 million benefit related to continuing foreign and domestic tax initiatives, which also includes the impact of Protecting Americans from Tax Hikes (PATH Act) and the early adoption of Share Based Accounting Improvements (ASU 2016-09) during the second quarter of 2016. The decrease in the effective tax rate is also due to the change in relative proportions of net earnings attributable to various discrete items to total pre-tax earnings between the periods.



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.

 

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.

17


 
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 January 28, 2017 (“fiscal 2016”) 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 rapidly to 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 30, 2016 (“fiscal 2015”), 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.

19


 

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 30, 2016. 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 related to self-insured health insurance, and uncertain tax positions.

 

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

20


 

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

 

 

Nine Months Ended

 

 

October 29, 2016

 

October 31, 2015

 

 

October 29, 2016

 

October 31, 2015

 

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)

64.5

 

62.8

 

 

61.3

 

60.6

 

Selling, general and administrative (exclusive of depreciation)

32.8

 

31.6

 

 

28.3

 

27.4

 

Depreciation

2.8

 

2.7

 

 

2.3

 

2.3

 

Interest and other income

(0.6)

 

(0.4)

 

 

(0.8)

 

(0.3)

 

Income before income taxes

1.6

 

4.2

 

 

9.8

 

10.9

 

Net income

4.0

 

3.7

 

 

8.2

 

7.3

 

21


 

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 Nine Months ended October 29, 2016 with October 31, 2015

 

Total retail sales for the third quarter were $207.0 million compared to last year’s third quarter sales of $223.3 million, a 7.3% decrease. Sales decreased primarily due to an 8.0% decrease in same-store sales, partially offset by sales from non-comparable stores. For the nine months ended October 29, 2016, total retail sales were $729.2 million compared to last year’s comparable nine month sales of $754.1 million. Sales in the first nine months of fiscal 2016 decreased primarily due to a 4.0% 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 nine months ended October 29, 2016 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 $209.3 million and $736.1 million for the three and nine months ended October 29, 2016, compared to $225.5 million and $760.6 million for the three and nine months ended October 31, 2015, respectively. The Company operated 1,372 stores at October 29, 2016 compared to 1,370 stores at the end of last year’s third quarter.  For the first nine months of fiscal 2016, the Company opened three new stores, relocated four stores and closed three stores.  In total, the Company currently expects to open approximately nine stores, relocate six stores and close 15 stores in fiscal 2016.

 

Credit revenue, a component of Other revenue, of $1.2 million represented 0.6% of total revenues in the third quarter of fiscal 2016, compared to 2015 credit revenue of $1.3 million or 0.6% 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 $0.8 million in the third quarter of fiscal 2016, compared to last year’s third quarter expense of $0.8 million.

 

Other revenue was $2.2 million and $6.9 million for the three and nine months ended October 29, 2016, compared to $2.2 million and $6.5 million for the prior year’s comparable three and nine month periods. The overall increase for the nine months ended October 29, 2016 resulted primarily from e-commerce shipping revenue, partially offset by lower finance charges.

 

Cost of goods sold was $133.6 million, or 64.5% of retail sales and $446.7 million or 61.3% of retail sales for the three and nine months ended October 29, 2016, compared to $140.3 million, or 62.8% of retail sales and $457.3 million, or 60.6% of retail sales for the comparable three and nine month periods of fiscal 2015.  The overall increase in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2016 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 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 11.6% to $73.4 million for the third quarter of fiscal 2016 and decreased by 4.8% to $282.5 million for the first nine months of fiscal 2016 compared to $83.0 million and $296.8 million for the prior year’s comparable three and nine months of fiscal 2015.  Gross margin as presented may not be comparable to those of other entities.

22


 

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 $67.8 million, or 32.8% of retail sales and $206.4 million, or 28.3% of retail sales for the third quarter and first nine months of fiscal 2016, respectively, compared to $70.7 million, or 31.6% of retail sales and $206.4 million, or 27.4% of retail sales for the prior year’s comparable three and nine month periods.  The decrease in SG&A expense for the third quarter was primarily attributable to lower incentive-based compensation expense partially offset by higher corporate expenses and advertising. Total SG&A expenses for the first nine months of fiscal 2016 were flat compared to the first nine months of fiscal 2015.

 

Depreciation expense was $5.7 million, or 2.8% of retail sales and $17.1 million, or 2.3% of retail sales for the third quarter and first nine months of fiscal 2016, respectively, compared to $6.0 million, or 2.7% of retail sales and $17.0 million, or 2.3% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2015, respectively. 

 

Interest and other income was $1.3 million, or 0.6% of retail sales and $5.6 million, or 0.8% of retail sales for the three and nine months ended October 29, 2016, respectively, compared to $0.9 million, or 0.4% of retail sales and $2.3 million, or 0.3% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2015, respectively.  The increase was primarily attributable to a change in the recognition of unredeemed gift card breakage income, as described in Note 1.

 

Income tax benefit was $4.9 million, or 2.4% of retail sales and the income tax expense was $11.5 million, or 1.6% of retail sales for the third quarter and first nine months of fiscal 2016, respectively, compared to an income tax expense of $1.0 million, or 0.5% of retail sales and $27.3 million, or 3.6% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2015, respectively. The Company had a tax benefit for the third quarter of 2016 compared to an effective rate of 11.1% for the third quarter of 2015. The tax benefit for the quarter was primarily due to a $6.0 million benefit related to continuing foreign and domestic tax initiatives, which also includes the impact of Protecting Americans from Tax Hikes (PATH Act) and the early adoption of