Cato Fashion - 10-Q quarterly report FY2023 Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549

FORM

10-Q

☑

QUARTERLY REPORT PURSUANT

TO SECTION

13 OR 15(d)

OF THE SECURITIES

EXCHANGE

ACT OF

1934

For the quarterly period ended

July 29, 2023

☐

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A - Common Stock, par value $.033 per share

CATO

New York Stock Exchange

Indicate

by check

mark

whether

the

registrant

(1)

has

filed

all

reports

required

filed

by Section

15(d)

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

Indicate

check

mark

whether

the

registrant

has

submitted

electronically

every

Interactive

Data

File

required

submitted

pursuant to Rule

405 of Regulation

S-T (§232.405

of this chapter)

during the preceding

12 months (or

for such shorter

period that the

registrant was required to submit such files).

Yes

Indicate by

check mark

whether the

registrant is

a large

accelerated filer,

an accelerated

filer, a

non-accelerated filer,

a smaller

reporting

company,

emerging

growth

company.

See

the

definitions

“large

accelerated

filer,”

“accelerated

filer,”

“smaller

reporting

company,” and “emerging growth

company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

emerging

growth

company,

indicate

check

mark

the

registrant

has

elected

not

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, 2023, there

were

18,825,772

shares of Class A common

stock and

1,763,652

shares of Class B common

stock outstanding.

THE CATO CORPORATION

FORM 10-Q

Quarter Ended July 29, 2023

Table

of Contents

Page No.

PART

I – FINANCIAL INFORMATION

(UNAUDITED)

Item 1.

Financial Statements (Unaudited):

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the Three Months and Six Months Ended

July 29, 2023 and July 30, 2022

Condensed Consolidated Balance Sheets

At July 29, 2023 and January 28, 2023

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended July 29, 2023 and July

30, 2022

Condensed Consolidated Statements of Stockholders’ Equity

6 – 7

For the Six Months Ended July 29, 2023 and July

30, 2022

Notes to Condensed Consolidated Financial Statements

8 – 22

For the Three Months and Six Months Ended

July 29, 2023 and July 30, 2022

Item 2.

Management’s Discussion and Analysis

of Financial Condition and

Results of Operations

23 – 29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART

II – OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signatures

PART

I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF INCOME (LOSS) AND

COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

Three Months Ended

Six Months Ended

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

(Dollars in thousands, except per share data)

REVENUES

Retail sales

181,181

195,006

371,492

399,939

Other revenue (principally finance charges, late fees and

layaway charges)

1,690

1,858

3,429

3,646

Total revenues

182,871

196,864

374,921

403,585

COSTS AND EXPENSES, NET

Cost of goods sold (exclusive of depreciation shown

below)

117,617

131,749

239,704

263,992

Selling, general and administrative (exclusive of

depreciation

shown below)

61,618

60,768

123,552

121,209

Depreciation

2,510

2,811

4,867

5,554

Interest and other income

(1,334)

(1,884)

(2,231)

(2,287)

Costs and expenses, net

180,411

193,444

365,892

388,468

Income before income taxes

2,460

3,420

9,029

15,117

Income tax expense

1,333

5,694

3,475

7,643

Net income (loss)

1,127

(2,274)

5,554

7,474

Basic earnings (loss) per share

0.06

(0.11)

0.27

0.35

Diluted earnings (loss) per share

0.06

(0.11)

0.27

0.35

Comprehensive income:

Net income (loss)

1,127

(2,274)

5,554

7,474

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

deferred income taxes of $

and $

156

for the three and

six months ended July 29, 2023 and $

and $(

343

) for

the three and six months ended July 30, 2022, respectively

167

522

(1,145)

Comprehensive income (loss)

1,294

(2,213)

6,076

6,329

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

July 29, 2023

January 28, 2023

ASSETS

(Dollars in thousands)

Current Assets:

Cash and cash equivalents

55,977

20,005

Short-term investments

77,222

108,652

Restricted cash

3,877

3,787

Accounts receivable, net of allowance for customer credit losses of

763

and $

761

at July 29, 2023 and January 28, 2023, respectively

26,915

26,497

Merchandise inventories

92,718

112,056

Prepaid expenses and other current assets

7,098

6,676

Total Current Assets

263,807

277,673

Property and equipment – net

73,871

70,382

Noncurrent deferred income taxes

9,888

9,213

Other assets

21,770

21,596

Right-of-Use assets – net

138,331

174,276

Total Assets

507,667

553,140

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable

84,867

91,956

Accrued expenses

38,546

41,338

Accrued employee benefits and bonus

997

1,690

Accrued income taxes

3,561

613

Current lease liability

32,431

67,360

Total Current Liabilities

160,402

202,957

Other noncurrent liabilities

16,342

16,183

Lease liability

105,390

107,407

Stockholders' Equity:

Preferred stock, $

100

par value per share,

100,000

authorized, none issued

Class A common stock, $

0.033

par value per share,

50,000,000

shares authorized;

18,825,772

shares and

18,723,225

issued at July 29, 2023 and January 28, 2023, respectively

636

632

Convertible Class B common stock, $

0.033

par value per share,

15,000,000

shares authorized;

1,763,652

shares and

1,763,652

issued at July 29, 2023 and January 28, 2023, respectively

Additional paid-in capital

124,798

122,431

Retained earnings

100,756

104,709

Accumulated other comprehensive income (loss)

(716)

(1,238)

Total Stockholders' Equity

225,533

226,593

Total Liabilities and Stockholders' Equity

507,667

553,140

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF CASH FLOWS

(UNAUDITED)

Six Months Ended

July 29, 2023

July 30, 2022

(Dollars in thousands)

Operating Activities:

Net income

5,554

7,474

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation

4,867

5,554

Provision for customer credit losses

248

145

Purchase premium and premium amortization of investments

(97)

607

Share-based compensation

2,192

2,028

Deferred income taxes

(832)

Loss on disposal of property and equipment

Changes in operating assets and liabilities which provided

(used) cash:

Accounts receivable

(666)

30,837

Merchandise inventories

19,338

8,314

Prepaid and other assets

(667)

(24)

Operating lease right-of-use assets and liabilities

(1,001)

(1,207)

Accrued income taxes

2,948

5,168

Accounts payable, accrued expenses and other liabilities

(10,306)

(42,013)

Net cash provided by operating activities

21,579

16,976

Investing Activities:

Expenditures for property and equipment

(8,470)

(10,384)

Purchase of short-term investments

(14,497)

(28,385)

Sales of short-term investments

46,777

48,917

Net cash provided by investing activities

23,810

10,148

Financing Activities:

Dividends paid

(6,962)

(7,270)

Repurchase of common stock

(2,563)

(9,596)

Proceeds from employee stock purchase plan

198

147

Net cash used in financing activities

(9,327)

(16,719)

Net increase in cash, cash equivalents, and restricted cash

36,062

10,405

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

23,792

23,678

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

59,854

34,083

Non-cash activity:

Accrued other assets and property and equipment

572

751

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

Accumulated

Additional

Other

Total

Common

Paid-in

Retained

Comprehensive

Stockholders'

Stock

Capital

Earnings

Income

Equity

(Dollars in thousands)

Balance — January 28, 2023

691

122,431

104,709

(1,238)

226,593

Comprehensive income:

Net income

4,428

Unrealized net gains on available-for-sale securities, net of

deferred income tax expense of $

107

355

Dividends paid ($

0.17

per share)

(3,455)

Class A common stock sold through employee stock purchase

plan

195

Share-based compensation issuances and exercises

Share-based compensation expense

929

Repurchase and retirement of treasury shares

(8)

(2,259)

(2,267)

Balance — April 29, 2023

683

123,555

103,426

(883)

226,781

Comprehensive income:

Net income

1,127

Unrealized net gains on available-for-sale securities, net of

deferred income tax expense of $

167

Dividends paid ($

0.17

per share)

(3,507)

Class A common stock sold through employee stock purchase

plan

Share-based compensation issuances and exercises

Share-based compensation expense

1,212

1,227

Repurchase and retirement of treasury shares

(1)

(293)

(294)

Balance — July 29, 2023

695

124,798

100,756

(716)

225,533

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

Accumulated

Additional

Other

Total

Common

Paid-in

Retained

Comprehensive

Stockholders'

Stock

Capital

Earnings

Income

Equity

(Dollars in thousands)

Balance — January 29, 2022

728

119,540

134,208

(280)

254,196

Comprehensive income:

Net income

9,748

Unrealized net losses on available-for-sale securities, net of

deferred income tax benefit of $

362

(1,206)

Dividends paid ($

0.17

per share)

(3,638)

Class A common stock sold through employee stock purchase

plan

111

Share-based compensation issuances and exercises

Share-based compensation expense

598

Repurchase and retirement of treasury shares

(20)

(9,142)

(9,162)

Balance — April 30, 2022

708

120,249

131,181

(1,486)

250,652

Comprehensive income:

Net loss

(2,274)

Unrealized net gains on available-for-sale securities, net of

deferred income tax expense of $

Dividends paid ($

0.17

per share)

(3,632)

Class A common stock sold through employee stock purchase

plan

Share-based compensation issuances and exercises

308

321

Share-based compensation expense

1,077

Repurchase and retirement of treasury shares

(1)

(433)

(434)

Balance — July 30, 2022

714

121,696

124,848

(1,425)

245,833

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 1 - GENERAL

The condensed consolidated financial statements

as of July 29,

2023 and for the

twenty-six-week

periods

ended

July

29,

2023

and

July

30,

2022

have

been

prepared

from

the

accounting

records

The

Cato

Corporation and

its wholly-owned

subsidiaries (the

“Company”), and

all amounts

shown are

unaudited.

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial

statements 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

the

Company’s

Annual

Report

Form

10-K

for

the

fiscal

year

ended

January 28, 2023.

Amounts as of January 28, 2023 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.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

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 (Loss) and Comprehensive Income (Loss).

While

the

Company’s

certificate

incorporation

provides

the

right

for

the

Board

Directors

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

the

same

for

Class

and

Class

and

the

EPS

amounts

reported

herein

are

applicable to both Class A and Class

B shares.

Basic

EPS

computed

net

income

less

earnings

allocated

non-vested

equity

awards

divided

the

weighted average

number of

common shares

outstanding for

the period.

Diluted EPS

reflects the

potential

dilution

that

could

occur

from

common

issuable

through

stock

options

and

the

Employee

Stock

Purchase Plan.

Three Months Ended

Six Months Ended

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

(Dollars in thousands)

Numerator

Net earnings (loss)

1,127

(2,274)

5,554

7,474

(Earnings) loss allocated to non-vested equity awards

(54)

132

(292)

(405)

Net earnings (loss) available to common stockholders

1,073

(2,142)

5,262

7,069

Denominator

Basic weighted average common shares outstanding

19,395,484

20,005,315

19,349,266

20,077,258

Diluted weighted average common shares outstanding

19,395,484

20,005,315

19,349,266

20,077,258

Net income (loss) per common share

Basic earnings (loss) per share

0.06

(0.11)

0.27

0.35

Diluted earnings (loss) per share

0.06

(0.11)

0.27

0.35

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:

The

following

table

sets

forth

information

regarding

the

reclassification

out

Accumulated

other

comprehensive income (in thousands) for the

three months ended July 29, 2023:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Securities

Beginning Balance at April 29, 2023

(883)

Other comprehensive income before

reclassification

164

Amounts reclassified from accumulated

other comprehensive income (b)

Net current-period other comprehensive income

167

Ending Balance at July 29, 2023

(716)

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

(b) Includes $

impact of Accumulated other comprehensive income reclassifications into Interest and other

income for net gains on available-for-sale securities. The tax impact of this reclassification was $

The

following

table

sets

forth

information

regarding

the

reclassification

out

Accumulated

other

comprehensive income (in thousands) for the

six months ended July 29, 2023:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Securities

Beginning Balance at January 28, 2023

(1,238)

Other comprehensive income before

reclassification

519

Amounts reclassified from accumulated

other comprehensive income (b)

Net current-period other comprehensive income

522

Ending Balance at July 29, 2023

(716)

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

(b) Includes $

impact of Accumulated other comprehensive income reclassifications into Interest and other

income for net gains on available-for-sale securities. The tax impact of this reclassification was $

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME

(CONTINUED):

The

following

table

sets

forth

information

regarding

the

reclassification

out

Accumulated

other

comprehensive income (in thousands) for the

three months ended July 30, 2022:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Securities

Beginning Balance at April 30, 2022

(1,486)

Other comprehensive income before

reclassifications

Amounts reclassified from accumulated

other comprehensive income (b)

(3)

Net current-period other comprehensive income

Ending Balance at July 30, 2022

(1,425)

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

(b) Includes $

impact of Accumulated other comprehensive income reclassifications into Interest and other

income for net gains on available-for-sale securities. The tax impact of this reclassification was $

The

following

table

sets

forth

information

regarding

the

reclassification

out

Accumulated

other

comprehensive income (in thousands) for the

six months ended July 30, 2022:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Securities

Beginning Balance at January 29, 2022

(280)

Other comprehensive income before

reclassifications

(1,139)

Amounts reclassified from accumulated

other comprehensive income (b)

(6)

Net current-period other comprehensive income

(1,145)

Ending Balance at July 30, 2022

(1,425)

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

(b) Includes $

impact of Accumulated other comprehensive income reclassifications into Interest and other

income for net gains on available-for-sale securities. The tax impact of this reclassification was $

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 4 – FINANCING ARRANGEMENTS:

As of July

29, 2023, the

Company has an

unsecured revolving credit

line, which

provides for borrowings

up to $

35.0

million, less the balance of

any revocable letters of credit related

to purchase commitments, and is

committed

through

May

2027.

The

revolving

credit

agreement

contains

various

financial

covenants

and

limitations,

including

the

maintenance

specific

financial

ratios.

August

2023,

the

Company

amended the revolving credit

agreement to modify

a definition used in

calculating the Company’s

minimum

EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating

the ratio. For

the quarter ended July

29, 2023, after giving

effect to the amendment,

the Company was in

compliance with

the

credit

agreement.

There

were

borrowings

outstanding,

any

outstanding

letters

credit

that

reduced

borrowing

availability,

July

29,

2023.

The

weighted

average

interest

rate

under

the

credit

facility was

zero

at July 29, 2023 due to

borrowings outstanding.

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

The Company

has determined

that it

has

four

operating segments,

as defined

under ASC

280-10 –

Segment

Reporting

, 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

more operating segments may be aggregated into a single reportable segment if aggregation is consistent with

the

objective

and

basic

principles

ASC

280-10,

which

require

the

segments

have

similar

economic

characteristics, products, production processes, clients and

methods of distribution.

The

Company’s

retail

operating

segments

have

similar

economic

characteristics

and

similar

operating,

financial and

competitive risks.

The products

sold in each

retail operating

segment are

similar in

nature, as

they

all

offer

women’s

apparel,

shoes

and

accessories.

Merchandise

inventory

the

Company’s

retail

operating

segments

sourced

from

the

same

countries

and

some

the

same

vendors,

using

similar

production processes.

Merchandise for the Company’s retail operating segments is distributed to retail stores

in a similar manner through

the Company’s single distribution center and is

subsequently sold to customers in

a similar

manner.

The

Company

operates

its

women’s

fashion

specialty

retail

stores

states

July

29,

2023,

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

wholly-owned

subsidiary of the Company.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 5 – REPORTABLE SEGMENT INFORMATION

(CONTINUED):

The following schedule summarizes certain segment

information (in thousands):

Three Months Ended

Six Months Ended

July 29, 2023

Retail

Credit

Total

July 29, 2023

Retail

Credit

Total

Revenues

$182,213

$658

$182,871

Revenues

$373,648

$1,273

$374,921

Depreciation

2,509

2,510

Depreciation

4,866

4,867

Interest and other income

(1,334)

Interest and other income

(2,231)

Income before

income taxes

2,207

253

2,460

Income before

income taxes

8,590

439

9,029

Capital expenditures

2,300

Capital expenditures

8,470

Three Months Ended

Six Months Ended

July 30, 2022

Retail

Credit

Total

July 30, 2022

Retail

Credit

Total

Revenues

$196,314

$550

$196,864

Revenues

$402,523

$1,062

$403,585

Depreciation

2,810

2,811

Depreciation

5,553

5,554

Interest and other income

(1,884)

Interest and other income

(2,287)

Income before

income taxes

3,289

131

3,420

Income before

income taxes

14,903

214

15,117

Capital expenditures

5,944

Capital expenditures

10,384

Retail

Credit

Total

Total assets as of July 29, 2023

$468,923

$38,744

$507,667

Total assets as of January 28, 2023

514,609

38,531

553,140

The

Company

evaluates

segment

performance

based

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, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Payroll

142

132

276

269

Postage

109

210

192

Other expenses

154

187

348

386

Total expenses

405

418

834

847

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 6 – STOCK-BASED COMPENSATION:

July

29,

2023,

the

Company

had

two

long-term

compensation

plans

pursuant

which

stock-based

compensation

was

outstanding

could

granted.

The

2018

Incentive

Compensation

Plan

and

2013

Incentive

Compensation

Plan

are

for

the

granting

various

forms

equity-based

awards,

including

restricted stock and stock options for grant, to officers, directors and key employees. Effective May 24,

2018,

shares for grant were no longer available

under the 2013 Incentive Compensation Plan.

The

following

table

presents

the

number

options

and

restricted

stock

initially

authorized

and

available for grant under each of

the plans as of July 29,

2023:

2013

2018

Plan

Total

Options and/or restricted stock initially authorized

1,500,000

4,725,000

6,225,000

Options and/or restricted stock available for grant:

July 29, 2023

3,095,601

accordance

with

ASC

718

–

Compensation–Stock Compensation

the

fair

value

current

restricted

stock awards

is estimated

on the

date of

grant based

on the

market price

of the

Company’s

stock and

amortized to compensation expense on a straight-line basis over the related vesting periods. As of July 29,

2023 and

January 28,

2023, there

was $

11,597,000

and $

10,543,000

, respectively,

of total

unrecognized

compensation

expense

nonvested

restricted

stock

awards,

which

had

remaining

weighted-

average vesting

period

2.6

years

and

2.1

years,

respectively.

Total

compensation expense

during the

three

and

six

months

ended

July

29,

2023

was

1,230,000

and

2,158,000

respectively,

compared

1,403,000

and

2,006,000

for

the

three

and

six

months

ended

July

30,

2022.

These

amounts

are

classified as a component

of Selling, general and

administrative expenses in the

Condensed Consolidated

Statements of Income (Loss) and Comprehensive Income

(Loss).

The following

summary shows the

changes in the

shares of unvested

restricted stock

outstanding during

the

six months ended July

29, 2023:

Weighted Average

Number of

Grant Date Fair

Value

Per Share

Restricted stock awards at January 28, 2023

1,059,433

13.10

Granted

407,808

8.30

Vested

(217,238)

13.97

Forfeited or expired

(74,338)

12.28

Restricted stock awards at July 29, 2023

1,175,665

11.33

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED):

The

Company’s

Employee

Stock

Purchase

Plan

allows

eligible

full-time

employees

purchase

limited

number of

of the

Company’s

Class

Common Stock

during each

semi-annual offering

period

% discount through payroll

deductions. During the six

months ended July 29,

2023 and July 30,

2022, the

Company sold

26,127

and

12,196

shares to employees

at an

average discount of

1.31

and $

2.12

per share,

respectively, under

the Employee

Stock Purchase

Plan. The

compensation expense

recognized for

the

discount given under the Employee

Stock Purchase Plan was approximately

34,000

and $

26,000

for the six

months ended July 29, 2023 and July 30, 2022, 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, 2023 and

January 28, 2023:

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

July 29, 2023

Assets

Inputs

Description

Level 1

Level 2

Level 3

Assets:

State/Municipal Bonds

19,367

Corporate Bonds

30,026

U.S. Treasury/Agencies Notes and Bonds

21,073

Cash Surrender Value of Life Insurance

9,524

Asset-backed Securities (ABS)

6,108

Corporate Equities

852

Commercial Paper

648

Total Assets

87,598

852

77,222

9,524

Liabilities:

Deferred Compensation

(8,724)

Total Liabilities

(8,724)

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

January 28, 2023

Assets

Inputs

Description

Level 1

Level 2

Level 3

Assets:

State/Municipal Bonds

23,102

Corporate Bonds

47,901

U.S. Treasury/Agencies Notes and Bonds

27,250

Cash Surrender Value of Life Insurance

9,274

Asset-backed Securities (ABS)

9,373

Corporate Equities

923

Commercial Paper

1,026

Total Assets

118,849

923

108,652

9,274

Liabilities:

Deferred Compensation

(8,903)

Total Liabilities

(8,903)

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, 2023

and

January

28,

2023.

The

state,

municipal

and

corporate

bonds

have

contractual

maturities

which

range

from

one day

2.6

years. The U.S. Treasury Notes have contractual

maturities which range from

two days

2.6

years.

These

securities

are

classified

available-for-sale

and

are

recorded

Short-term

investments,

Restricted cash and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets

are

carried

fair

value

with

unrealized

gains

and

losses

reported

net

taxes

Accumulated

other

comprehensive income. The asset-backed

securities are bonds comprised

of auto loans and

bank credit cards

that carry

AAA ratings.

The auto

loan asset-backed

securities are

backed by

static pools

of auto

loans that

were originated and serviced by captive auto finance units, banks or finance companies.

The bank credit card

asset-backed securities are backed by revolving pools of credit card receivables generated by account holders

of cards from American Express, Citibank, JPMorgan

Chase, Capital One and Discover.

Additionally,

July

29,

2023,

the

Company

had

0.9

million

corporate

equities

and

deferred

compensation plan assets

of $

9.5

million.

At January 28,

2023, the Company

had $

0.9

million of corporate

equities and deferred compensation plan assets of $

9.3

million.

All of these assets are recorded within

Other

assets in the Condensed Consolidated Balance

Sheets.

Level 1 securities are measured at fair value using quoted active market prices.

Level 2 investment securities

include

corporate

bonds,

municipal

bonds

and

asset-backed

securities

for

which

quoted

prices

may

not

available on active exchanges for identical

instruments.

Their fair value is principally based on market values

determined

management

with

assistance

third-party

pricing

service.

Since

quoted

prices

active

markets

for

identical

assets

are

not

available,

these

prices

are

determined

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

liability

associated

with

the

life

insurance

policies

represents

deferred

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

compensation obligation,

the value

of which

is tracked

via underlying

insurance funds’

net asset

values, as

recorded

Other

noncurrent

liabilities

the

Condensed

Consolidated

Balance

Sheet.

These

funds

are

designed to mirror mutual funds and money

market funds that are observable and

actively traded.

The

following

tables

summarize

the

change

fair

value

the

Company’s

financial

assets

and

liabilities

measured using Level

3 inputs for

the six months

ended July 29,

2023 and the

year ended January

28, 2023

(in thousands):

Fair Value

Measurements Using

Significant Unobservable

Asset Inputs (Level 3)

Cash Surrender Value

Beginning Balance at January 28, 2023

9,274

Redemptions

Additions

Total gains or (losses):

Included in interest and other income (or

changes in net assets)

250

Included in other comprehensive income

Ending Balance at July 29, 2023

9,524

Fair Value

Measurements Using

Significant Unobservable

Liability Inputs (Level 3)

Deferred Compensation

Beginning Balance at January 28, 2023

(8,903)

Redemptions

646

Additions

(162)

Total (gains) or losses:

Included in interest and other income (or

changes in net assets)

(305)

Included in other comprehensive income

Ending Balance at July 29, 2023

(8,724)

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

Fair Value

Measurements Using

Significant Unobservable

Asset Inputs (Level 3)

Cash Surrender Value

Beginning Balance at January 29, 2022

11,472

Redemptions

(1,718)

Additions

Total gains or (losses):

Included in interest and other income (or

changes in net assets)

(480)

Included in other comprehensive income

Ending Balance at January 28, 2023

9,274

Fair Value

Measurements Using

Significant Unobservable

Liability Inputs (Level 3)

Deferred Compensation

Beginning Balance at January 29, 2022

(10,020)

Redemptions

1,142

Additions

(379)

Total (gains) or losses:

Included in interest and other income (or

changes in net assets)

354

Included in other comprehensive income

Ending Balance at January 28, 2023

(8,903)

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:

The Company has reviewed recent accounting pronouncements and

believe none will have a material

impact on the Company’s financial statements.

NOTE 9 – INCOME TAXES:

The Company had

an effective

tax rate for

the first six

months of 2023

38.5

% compared to

50.6

% for

the first six months of 2022. The change in the effective tax rate for the first six months of 2023 compared

to the

prior year

was primarily

due to

a decrease

in Global

Intangible Low-taxed

Income (GILTI),

state

income taxes, non-deductible officer’s compensation, and increases in foreign tax credits and employment

credits, partially offset by the foreign rate differential.

NOTE 10 – COMMITMENTS AND CONTINGENCIES:

The Company is, from time to time, involved in routine litigation incidental to the conduct of its business,

including

litigation

regarding

the

merchandise

that

sells,

litigation

regarding

intellectual

property,

litigation instituted

by persons

injured upon

premises under

its control,

litigation with

respect to

various

employment

matters,

including

alleged

discrimination and

wage

and

hour

litigation,

and

litigation

with

present or former employees.

Although such

litigation is

routine and

incidental to

the conduct

of the

Company’s business,

as with

any

business

its

size

with

significant

number

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

material adverse

effect

on the

Company’s

condensed consolidated

financial statements.

However,

given

the

inherent uncertainties

involved in

such

matters, an

adverse outcome

one or

more of

such

matters

could

materially and

adversely affect

the

Company’s

financial condition,

results of

operations and

cash

flows

any

particular

reporting

period.

The

Company

accrues

for

these

matters

when

the

liability

deemed probable and reasonably estimable.

NOTE 11 – REVENUE RECOGNITION:

The

Company

recognizes

sales

the

point

purchase

when

the

customer

takes

possession

the

merchandise

and

pays

for

the

purchase,

generally

with

cash

credit.

Sales

from

purchases

made

with

Cato

credit,

gift

cards

and

layaway

sales

from

stores

are

also

recorded

when

the

customer

takes

possession of

the merchandise. E-commerce

sales are

recorded when the

risk of

loss is

transferred to the

customer. Gift cards

are recorded as deferred revenue until they are

redeemed or forfeited. Layaway sales

are recorded as deferred

revenue until the customer

takes possession of, or

forfeits, the merchandise. Gift

cards do not have

expiration dates. A provision is

made for estimated merchandise returns

based on sales

volumes

and

the

Company’s

experience;

actual

returns

have

not

varied

materially

from

historical

amounts.

provision

made

for

estimated

write-offs

associated

with

sales

made

with

the

Company’s

proprietary

credit

card.

Amounts

shipping

and

handling

billed

customers

sales

transaction are

classified as

Other revenue

and the

costs related

to shipping

product to

customers (billed

and accrued) are classified as Cost of goods sold.

The Company

offers its

own proprietary

credit card

to customers.

All credit

activity is

performed by

the

Company’s wholly-owned

subsidiaries.

None

of the credit

card receivables are

secured. During the

three

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

and

six

months

ended

July

29,

2023,

the

Company

estimated

customer

credit

losses

151,000

and

272,000

, respectively,

compared to

87,000

and $

173,000

for the

three and

six months

ended July

30,

2022,

respectively.

Sales

purchased

the

Company’s

proprietary

credit

card

for

the

three

and

six

months ended July

29, 2023 were

5.9

million and $

11.7

million, respectively,

compared to $

5.8

million

and $

11.5

million for the three and six months ended July 30, 2022,

respectively.

The

following

table

provides

information

about

receivables

and

contract

liabilities

from

contracts

with

customers (in thousands):

Balance as of

July 29, 2023

January 28, 2023

Proprietary Credit Card Receivables, net

10,737

10,553

Gift Card Liability

6,924

8,523

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

NOTE 12 – LEASES:

The

Company determines

whether

arrangement is

lease

inception.

The

Company

has

operating

leases for

stores, offices,

warehouse space

and equipment.

Its leases have

remaining lease terms

of up

years based on

the estimated likelihood

of renewal. Some

include options to

extend the lease

term for

up to

five years

, and some include options to terminate the lease

within one year

. The Company considers

these

options in

determining the

lease

term

used

establish

its

right-of-use

assets

and

lease

liabilities.

The

Company’s

lease

agreements

not

contain

any

material

residual

value

guarantees

material

restrictive covenants.

most

the

Company’s

leases

not

provide

implicit

rate,

the

Company

uses

its

estimated

incremental

borrowing

rate

based

the

information

available

commencement

date

the

lease

determining the present value of lease payments.

The components of lease cost are shown below (in thousands):

Three Months Ended

July 29, 2023

July 30, 2022

Operating lease cost (a)

17,597

17,847

Variable

lease cost (b)

504

578

(a) Includes right-of-use asset amortization of ($

0.3

) million and ($

0.5

) million for the three months ended July 29, 2023 and July 30,

2022, respectively.

(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.

Six Months Ended

July 29, 2023

July 30, 2022

Operating lease cost (a)

35,675

35,602

Variable

lease cost (b)

1,098

1,346

(a) Includes right-of-use asset amortization of ($

0.6

) million and ($

0.9

) million for the six months ended July 29, 2023 and July 30,

2022, respectively.

(b) Primarily related to monthly percentage rent for stores not presented on the condensed consolidated balance sheets.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS AND

SIX MONTHS ENDED JULY 29, 2023 AND JULY

30, 2022

Supplemental cash flow

information and non-cash

activity related to

the Company’s

operating leases are

as follows (in thousands):

Operating cash flow information:

Three Months Ended

July 29, 2023

July 30, 2022

Cash paid for amounts included in the measurement of lease liabilities

16,679

17,038

Non-cash activity:

Right-of-use assets obtained in exchange for lease obligations

999

2,534

Six Months Ended

July 29, 2023

July 30, 2022

Cash paid for amounts included in the measurement of lease liabilities

34,024

33,874

Non-cash activity:

Right-of-use assets obtained in exchange for lease obligations

2,903

6,049

Weighted-average

remaining

lease

term

and

discount

rate

for

the

Company’s

operating

leases

are

follows:

As of

July 29, 2023

July 30, 2022

Weighted-average remaining lease term

2.0

years

2.2

years

Weighted-average discount rate

3.26%

2.89%

Maturities

lease

liabilities

fiscal

year

for

the

Company’s

operating

leases

are

follows

(in

thousands):

Fiscal Year

2023 (a)

33,897

2024

49,250

2025

32,219

2026

19,094

2027

8,991

Thereafter

1,748

Total lease payments

145,199

Less: Imputed interest

7,378

Present value of lease liabilities

137,821

(a) Excluding the six months ended July 29, 2023

THE CATO CORPORATION

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION:

The

following

information

should

read

along

with

the

unaudited

Condensed

Consolidated

Financial

Statements,

including

the

accompanying

Notes

appearing

this

report.

Any

the

following

are

“forward-looking”

statements

within

the

meaning

Section 27A

the

Securities

Act

1933,

amended,

and

Section 21E

the

Securities

Exchange

Act

1934,

amended:

(1) statements

this

Form 10-Q

that

reflect

projections

expectations

our

future

financial

economic

performance;

(2) statements

that

are

not

historical

information;

(3) statements

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

2024

(“fiscal

2023”)

and

beyond,

including,

but

not

limited

to,

statements regarding expected

amounts of

capital expenditures and

store openings, relocations,

remodels

and

closures

and

statements

regarding

the

potential

impact

the

COVID-19

pandemic

and

responses and

mitigation efforts,

as well

as the

potential impact

of supply

chain disruptions,

inflationary

pressures

and

other

economic

market

conditions

our

business,

results

operations

and

financial

condition

and

statements

regarding

new

store

development

strategy;

and

(5)

statements

relating

our

future contingencies. When

possible, we

have attempted to

identify forward-looking statements

by using

words

such

“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.

can

give

assurance

that

actual

results

events

will

not

differ

materially

from

those

expressed

implied

any

such

forward-looking

statements.

Forward-looking

statements

included

this

report

are

based

information

available

the

filing

date

this

report,

but

subject

known

and

unknown

risks,

uncertainties and

other

factors

that

could

cause

actual

results

differ

materially

from

those

contemplated

the

forward-looking

statements.

Such

factors

include, but

are not

limited to,

the following:

any actual

or perceived

deterioration in

the conditions

that

drive

consumer

confidence

and

spending,

including,

but

not

limited

to,

prevailing

social,

economic,

political

and

public

health conditions

and

uncertainties, levels

unemployment, fuel,

energy

and

food

costs, wage rates, tax

rates, interest rates, home

values, consumer net worth,

the availability of

credit and

inflation;

changes

laws,

regulations

government

policies

affecting

our

business,

including

but

not

limited to

tariffs;

uncertainties regarding

the impact

of any

governmental action

regarding, or

responses

to, the

foregoing conditions; competitive factors

and pricing

pressures; our ability

to predict

and respond

to rapidly changing fashion trends

and consumer demands; our ability to

successfully implement our new

store development strategy to increase new

store openings and our ability

of any such new stores

to grow

and

perform

expected;

adverse

weather,

public

health

threats

(including

the

global

COVID-19

pandemic)

similar

conditions that

may affect

our

sales

operations; inventory

risks

due

shifts

market

demand,

including

the

ability

liquidate

excess

inventory

anticipated

margins;

adverse

developments or volatility affecting the financial services industry or broader financial markets; and

other

factors

discussed

under

“Risk

Factors”

Part

Item

our

Annual

Report

Form

10-K

for

the

fiscal year ended

January 28, 2023

(“fiscal 2022”), as amended

or supplemented, and in

other reports we

file with

or furnish

to the

Securities and

Exchange Commission

(“SEC”) from

time to

time.

do not

undertake,

and

expressly

decline,

any

obligation

update

any

such

forward-looking

information

contained in this report, whether as a result of new information, future

events, or otherwise.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

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,

2023.

disclosed

“Management’s

Discussion

and

Analysis

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

estimates

requires

the

exercise

judgment.

Actual

results

inevitably

will

differ

from

those

estimates,

and

such

differences

may

material

the

financial

statements.

The

most

significant

accounting

estimates

inherent

the

preparation

the

Company’s

financial

statements

include

the

calculation

potential

asset

impairment,

reserves

relating

self-insured

health

insurance,

workers’

compensation,

general

and

auto

insurance

liabilities,

uncertain

tax

positions,

the

allowance

for

customer

credit losses, and inventory shrinkage.

The Company’s critical accounting policies and

estimates are discussed with the Audit Committee.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

RESULTS OF OPERATIONS:

The following table sets forth, for the periods indicated, certain items in

the Company's unaudited Condensed

Consolidated Statements of Income as a

percentage of total retail sales:

Three Months Ended

Six Months Ended

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Total retail sales

100.0

Other revenue

0.9

1.0

0.9

Total revenues

100.9

101.0

100.9

Cost of goods sold (exclusive of depreciation)

64.9

67.6

64.5

66.0

Selling, general and administrative (exclusive

of depreciation)

34.0

31.2

33.3

30.3

Depreciation

1.4

1.3

1.4

Interest and other income

(0.7)

(1.0)

(0.6)

Income before income taxes

1.4

1.8

2.4

3.8

Net income (loss)

0.6

(1.2)

1.5

1.9

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

RESULTS OF OPERATIONS

(CONTINUED):

Management’s

Discussion

and

Analysis

Financial

Condition

and

Results

Operations

(“MD&A”)

intended

provide

information

assist

readers

better

understanding

and

evaluating

our

financial

condition and results of operations.

We recommend reading this MD&A in conjunction with our Condensed

Consolidated Financial

Statements and

the Notes

to those

statements included in

the “Financial

Statements”

section of this Quarterly Report on

Form 10-Q, as well as our 2022

Annual Report Form 10-K.

Recent Developments

Inflationary Cost Pressure and Rising Interest Rates

Despite some

reduction in

inflationary pressures

from last

year,

Cato’s

operating costs,

including higher

wages, operating supplies, and service costs continue to be negatively

impacted by the current inflationary

environment.

addition,

our

customers’

disposable

income

impacted

increased

costs

fuel, food, and

housing, including rent,

as well as

other consumable products

across the economy

which,

part,

negatively

impact

our

customers’

willingness

purchase

discretionary

items

such

apparel,

jewelry and shoes.

response

inflationary

pressures,

the

Federal

Reserve

began

raising

and

committed

continue

raising interest

rates until

inflationary pressures

subside to

acceptable levels.

These rising

interest rates

have

adversely

affected

the

availability

and

cost

credit

for

both

businesses

and

our

customers.

Increasing costs related

to revolving credit,

auto loans and

mortgages continue to

have a negative

impact

our

customers’

discretionary

income.

Our

customers’

willingness

purchase

our

products

may

continue to be negatively impacted by high interest rates.

believe high prices

and interest rates

impacted the first

half of fiscal

2023 and will

likely continue to

have a

negative impact

on consumer

behavior and,

by extension,

our results

operations and

financial

condition during the remainder of fiscal 2023.

Comparison of the Three and Six

Months ended July 29, 2023 with

July 30, 2022

Total retail sales

for the second

quarter were

$181.2 million

compared to last

year’s second

quarter sales

$195.0

million,

decrease.

The

Company’s

sales

decrease

the

second

quarter

fiscal

2023

primarily due

to a

5% decrease

in same-store

sales and

permanently closed

stores, partially

offset by

sales

from new stores.

For the six

months ended July

29, 2023, total

retail sales were

$371.5 million compared

last year’s comparable six month sales of $399.9 million, a 7% decrease. The decrease in sales in the first six

months of

fiscal 2023

was also

due primarily

to a

5% decrease

in same-store

sales and

permanently closed

stores,

partially offset

by sales

from

new

stores. Same-store

sales include

stores that

have

been open

than

months.

Stores

that

have

been

relocated

expanded

are

also

included

the

same-store

sales

calculation

after

they

have

been

open

than

months.

The

method

calculating

same-store

sales

varies

across

the

retail

industry.

result,

our

same-store

sales

calculation

may

not

comparable

similarly titled measures reported by other

companies. E-commerce sales were less than

5% of total sales for

the

six

months

ended

July

29,

2023

and

are

included

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 $182.9 million

and $374.9 million for the

three and six months ended July

29, 2023, compared

to $196.9 million

and $403.6 million

for the three

and six months

ended July 30,

2022,

respectively. The Company operated 1,247 stores at July 29, 2023 compared to 1,312 stores at the end

of last

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

year’s

second

quarter.

During

the

first

six

months

fiscal

2023,

the

Company

opened

eight

stores

and

closed 41 stores.

The Company currently expects to close approximately 80

stores in total in fiscal 2023.

Credit

revenue

$0.7

million

represented

0.4%

total

revenues

the

second

quarter

fiscal

2023,

compared to

2022 credit

revenue of

$0.6 million

or 0.3%

of total

revenues. Credit

revenue is

comprised of

interest earned on the Company’s private label credit card portfolio and related fee income.

Related expenses

principally include payroll,

postage and other

administrative expenses and

totaled $0.4 million

in the second

quarter of fiscal 2023, compared to

last year’s second quarter expense of

$0.4 million.

Other revenue, a component of total revenues, was $1.7 million and $3.4 million for the

three and six months

ended July 29, 2023, respectively, compared

to $1.9 million and $3.6 million

for the prior year’s comparable

three

and

six

month

periods.

The

decrease

Other

revenue

for

both

the

three

and

six

months

due

decrease

gift

card

breakage

and

e-commerce

shipping

revenue

partially

offset

increases

finance

charges and late fees associated with

the Company’s proprietary credit card.

Cost of

goods sold

was $117.6

million, or

64.9% of

retail sales

and $239.7

million, or

64.5% of retail

sales

for the three and six months

ended July 29, 2023, respectively, compared

to $131.7 million, or 67.6% of retail

sales and

$264.0 million,

or 66.0%

of retail

sales for

the comparable

three and

six month

periods of

fiscal

2022.

The overall

decrease in

cost of

goods sold

as a

percent of

retail sales

for the

second quarter

and first

half of

fiscal 2023

resulted primarily

from both

lower ocean

freight costs

and outbound

freight costs

to our

stores,

partially

offset

deleveraging

occupancy

and

buying

costs.

Cost

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

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

goods

sold

exclusive

depreciation)

increased

0.5%

$63.6

million

for

the

second

quarter

fiscal

2023

and

decreased

3.0%

$131.8

million

for

the

first

six

months

fiscal

2023,

compared to $63.3

million and $135.9 million

for the prior year’s

comparable three and six

months of fiscal

2022.

Gross margin as presented may not be

comparable to those of other

entities.

Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related

payroll

taxes

and

benefits,

insurance,

supplies,

advertising,

bank

and

credit

card

processing

fees.

SG&A

expenses

were

$61.6

million,

34.0%

retail

sales

and

$123.6

million,

33.3%

retail

sales

for

the

second quarter and first six months of fiscal 2023, respectively, compared to $60.8 million, or

31.2% of retail

sales and $121.2 million, or 30.3% of retail sales for the prior year’s comparable three and

six month periods.

The increase

in SG&A

for the

second quarter

and first

six months

of fiscal

2023 is

primarily due

to higher

payroll and insurance expense.

Depreciation expense was $2.5 million, or 1.4% of retail sales and $4.9 million, or 1.3% of

retail sales for the

second quarter

and first

six months

of fiscal

2023, respectively,

compared to

$2.8 million,

or 1.4%

of retail

sales and $5.6

million or 1.4%

of retail sales

for the comparable

three and six

month periods of

fiscal 2022,

respectively.

Interest and other income was $1.3 million, or 0.7% of retail sales and $2.2 million, or 0.6% of retail sales for

the three and six

months ended July 29,

2023, respectively, compared to

$1.9 million, or 1.0%

of retail sales

and

$2.3

million,

0.6%

retail

sales

for

the

comparable

three

and

six

month

periods

fiscal

2022,

respectively.

The decrease for the second quarter and first six months of fiscal 2023 compared to fiscal 2022

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

is primarily attributable

to the Company’s

receipt of insurance

proceeds in the

second quarter of

fiscal 2022

related to hurricane damage in 2021.

Income tax expense was $1.3 million and $3.5 million for the second quarter and first six months of fiscal

2023,

respectively,

compared

$5.7

million

and

$7.6

million

for

the

comparable

three

and

six month

periods of

fiscal 2022,

respectively.

For the

first six

months of

fiscal 2023,

the Company’s

effective tax

rate was

38.5% compared to

50.6% for

the first

six months

of fiscal 2022.

The change

in the

2023 year-

to-date effective tax rate was primarily due to a decrease in Global Intangible Low-taxed Income

(GILTI),

state

income

taxes,

non-deductible

officer’s

compensation,

and

increases

foreign

tax

credits

and

employment credits, partially offset by the foreign rate differential.

LIQUIDITY, CAPITAL

RESOURCES

AND MARKET

RISK:

The Company

believes that

its cash,

cash equivalents

and short-term

investments, together

with cash

flows

from operations

and borrowings available

under its revolving

credit agreement,

will be

adequate to fund

the

Company’s regular operating requirements

and expected capital expenditures

for fiscal 2023 and the

next 12

months.

Cash

provided

operating

activities

during

the

first

six

months

fiscal

2023

was

$21.6

million

compared

$17.0

million

provided

the

first

six

months

fiscal

2022.

Cash

provided

operating

activities for the first six months of fiscal 2023 was primarily generated by earnings adjusted for

depreciation

and changes in working capital. The increase in cash provided of $4.6 million

for the first six months of fiscal

2023 as compared

to the

first six

months of

fiscal 2022

was primarily

due to

a smaller

decrease in

accounts

payable

and

accrued

liabilities

from

the

fiscal

year

end

and

lower

inventory,

partially

offset

higher

accounts receivable and lower net income.

At July 29, 2023,

the Company had

working capital of $103.4

million compared to $74.7

million at January

28, 2023.

The increase in working capital is

primarily attributable to a decrease in

current lease liability and

an increase in cash, partially offset

by a decrease in inventory

and short-term investments.

As of July

29, 2023, the

Company has an

unsecured revolving credit

line, which provides

for borrowings of

up to $35.0 million, less

the balance of any revocable letters

of credit related to purchase commitments,

and is

committed

through

May

2027.

The

revolving

credit

agreement

contains

various

financial

covenants

and

limitations,

including

the

maintenance

specific

financial

ratios.

August

2023,

the

Company

amended the revolving credit

agreement to modify

a definition used in

calculating the Company’s

minimum

EBITDAR coverage ratio to add back certain income tax receivables for purposes of calculating

the ratio. For

the quarter ended July

29, 2023, after giving

effect to the amendment,

the Company was in

compliance with

the

credit

agreement.

There

were

borrowings

outstanding,

nor

any

outstanding

letters

credit

that

reduced

borrowing

availability,

July

29,

2023.

The

weighted

average

interest

rate

under

the

credit

facility was zero at July 29, 2023

due to no borrowings outstanding.

Expenditures for property and equipment totaled $8.5 million in the first six months of fiscal 2023, compared

to $10.4 million in last

fiscal year’s first six months. The

decrease in expenditures for property and equipment

was

primarily

due

finishing

projects

investments

the

distribution

center

and

information

technology.

For

the

full

fiscal

2023

year,

the

Company

expects

invest

approximately

$17.0

million

for

capital expenditures.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

Net cash provided by investing activities totaled $23.8 million in the first six months of fiscal 2023

compared

to $10.1

million net

cash provided

in the

comparable period

of 2022.

The increase

in net

cash provided

2023 was primarily due

to a net decrease

in the purchase of

short-term investments and a

decrease in capital

expenditures.

Net cash

used in

financing activities

totaled $9.3

million in

the first

six months

of fiscal

2023 compared

$16.7 million used in the comparable period of fiscal 2022.

The decrease in net cash used in fiscal 2023 was

primarily due to lower stock repurchases and

lower dividends.

July

29,

2023,

the

Company

had

909,653

remaining

open

authorizations

under

its

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, 2023

and

January

28,

2023.

The

state,

municipal

and

corporate

bonds

have

contractual

maturities

which

range

from one day to 2.6 years. The U.S.

Treasury Notes have contractual maturities which range from two

days to

2.6

years.

These

securities

are

classified as

available-for-sale and

are

recorded as

Short-term

investments,

Restricted cash and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets

are

carried

fair

value

with

unrealized

gains

and

losses

reported

net

taxes

Accumulated

other

comprehensive income. The asset-backed

securities are bonds comprised

of auto loans and

bank credit cards

that carry

AAA ratings.

The auto

loan asset-backed

securities are

backed by

static pools

of auto

loans that

were originated and serviced by captive auto finance units, banks or finance companies.

The bank credit card

asset-backed securities are backed by revolving pools of credit card receivables generated by account holders

of cards from American Express, Citibank, JPMorgan

Chase, Capital One and Discover.

Additionally,

July

29,

2023,

the

Company

had

$0.9

million

corporate

equities

and

deferred

compensation plan assets

of $9.5 million.

At January 28,

2023, the Company

had $0.9 million

of corporate

equities and deferred compensation plan assets of $9.3

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.

THE CATO CORPORATION

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK:

The

Company

subject

market

rate

risk

from

exposure

changes

interest

rates

based

its

financing, investing and

cash management activities,

but the Company

does not

believe such exposure

material.

ITEM 4. CONTROLS AND PROCEDURES:

We carried out an evaluation, with the

participation of our Principal Executive Officer and

Principal Financial

Officer,

the

effectiveness

our

disclosure

controls

and

procedures

July

29,

2023.

Based

this

evaluation,

our

Principal

Executive

Officer

and

Principal

Financial

Officer

concluded

that,

July

29,

2023, our

disclosure controls

and

procedures,

as defined

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

file

submit

under

the

Exchange

Act

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, 2023 that has

materially affected, or is

reasonably likely to materially affect, the

Company’s internal control over financial

reporting.

THE CATO CORPORATION

PART II OTHER

INFORMATION

ITEM 1.

LEGAL PROCEEDINGS:

Not Applicable.

ITEM 1A.

RISK FACTORS:

In addition to the other information

in this report, you should carefully

consider the factors discussed in

Part I,

“Item

1A.

Risk

Factors”

our

Annual

Report

Form

10-K

for

our

fiscal

year

ended

January

28,

2023.

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

immaterial

may

also

materially

adversely

affect

our

business,

financial

condition

results

operations.

THE CATO CORPORATION

PART II OTHER

INFORMATION

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES

AND USE OF PROCEEDS:

The following table summarizes the Company’s purchases of its common stock for the three months

ended July 29, 2023:

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 2023

34,726

8.30

34,726

June 2023

July 2023

Total

34,726

8.30

34,726

909,653

(1)

Prices include trading costs.

(2)

As of April

29, 2023, the Company’s

share repurchase program had

944,379 shares remaining in

open

authorizations. During

the

second

quarter

ended July

29,

2023, the

Company repurchased

and

retired 34,726

shares under

this

program for

approximately $288,226

an average

market

price

$8.30

per

share.

July

29,

2023,

the

Company

had

909,653

remaining

open authorizations. There is no specified expiration date for the Company’s repurchase program.

ITEM 3.

DEFAULTS

UPON SENIOR SECURITIES:

Not Applicable.

THE CATO CORPORATION

PART II OTHER

INFORMATION

ITEM 4.

MINE SAFETY DISCLOSURES:

Not Applicable.

ITEM 5.

OTHER INFORMATION:

During the three

months ended July

29, 2023, none

of the

Company’s directors

or officers

(as defined in

Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted or

terminated a “Rule 10b5-1

trading arrangement” or a “non-Rule 10b5-1

trading arrangement” (as such terms are

defined in Item 408

of Regulation S-K).

ITEM 6.

EXHIBITS:

Exhibit No.

Item

3.1

Registrant’s Amended and Restated Certificate of Incorporation, incorporated by

reference to Exhibit 3.1 to Form 10-Q of the Registrant for the quarter ended May

2, 2020.

3.2

Registrant’s Amended and Restated By-Laws, incorporated by reference to Exhibit

3.2 to Form 10-Q of the Registrant for the quarter ended May 2, 2020.

10.1*

Second Amendment, dated as of August 9, 2023, to Credit Agreement, dated as

of May 19 2022, among the Registrant, the party hereto, the banks party thereto

and Wells Fargo Bank, National Association.

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,

2023,

formatted

Inline

XBRL:

(i)

Condensed

Consolidated Statements

of Income

(Loss) and

Comprehensive Income

(Loss) for

the

Three

Months

and

Six

Months

Ended

July

29,

2023

and

July

30,

2022;

(ii)

Condensed

Consolidated

Balance

Sheets

July

29,

2023

and

January

28,

2023;

(iii) Condensed Consolidated Statements of

Cash Flows for the Six

Months Ended

July

29,

2023

and

July

30,

2022;

(iv)

Condensed

Consolidated

Statements

Stockholders’ Equity

for the

Six Months

Ended July

29, 2023

and July

30, 2022;

and (v) Notes to Condensed Consolidated Financial Statements.

104.1

Cover Page

Interactive Data

File

(Formatted in

Inline

XBRL

and

contained

the Interactive Data Files submitted as Exhibit 101.1*)

* Submitted electronically herewith.

THE CATO CORPORATION

PART II OTHER

INFORMATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the

Registrant has duly caused this

report to be signed on its behalf by the undersigned thereunto duly

authorized.

THE CATO

CORPORATION

August 23, 2023

/s/ John P.

D. Cato

Date

John P.

D. Cato

Chairman, President and

Chief Executive Officer

August 23, 2023

/s/ Charles D. Knight

Date

Charles D. Knight

Executive Vice President

Chief Financial Officer

Cato Fashion - 10-Q quarterly report FY2023 Q2

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