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A Message To Our Shareholders
We want to thank you, our shareholders, for your investment
and support.
Cato increased profits in 2018, even as our industry remains
challenged and in transition, with retailers still being overstored,
e-commerce shopping continuing to grow, and customer preferences
still changing. Net income increased 257% to $30.5 million and
earnings per diluted share increased 262% to $1.23. We believe our
business has stabilized and these positive results were due in large
part to the merchandise adjustments made throughout the year,
strong inventory control, and cost-saving initiatives to better align
our cost structure with our current business.
Our balance sheet remains strong with more than $210 million in
cash and short-term investments, and Cato remains debt free.
And this is after the company returned $45.9 million to shareholders
through quarterly dividends of $32.6 million and share repurchases
of $13.3 million. We will continue to provide value to our long-term
shareholders through dividends and opportunistic share repurchases.
For 2019, we are cautiously optimistic as Cato transitions to better
position ourselves through this disruption in the retail industry,
especially women’s apparel, which is putting pressure on profitability.
We remain focused on increasing sales through existing stores
and growing our e-commerce business by continuing to develop
strategies and tools to connect and remain relevant to our customers
and that allow our customer to easily shop when, where, and how
she chooses.
We also remain committed to improving our merchandise by
providing exclusivity through in-house design, and direct sourcing
using our overseas buying offices, providing us better quality, value
and efficiency in our supply chain. We will continue to invest in
technology and infrastructure to drive efficiency as we grow our
business and add new stores.
I want to thank all of our associates for their contributions this
year. Our associates allow us to achieve our commitment to provide
fashion, value, and outstanding service to our customers.
On behalf of the entire Cato team and our Board, we thank you
again for your investment in our company.
John P. D. Cato
Chairman, President &
Chief Executive Officer
18
Financial Highlights
FISCAL YEAR
2018
2017
*
2016
2015
2014
FOR THE YEAR ENDED
Retail sales
Total revenues
$ 821,113
829,664
$ 841,997
$ 947,370
$ 1,001,390
$ 977,867
849,981
956,569
1,011,091
986,914
Comparable store sales increase (decrease)
0 %%
(12)%
(6)
%
0 %
4 %
Income before income taxes
Income tax expense
Net income
Net income as a percentage of retail sales
Cash dividends paid per share
Basic earnings per share
Diluted earnings per share
33,051
2,590
30,461
15,973
7,433
8,540
49,114
1,902
47,212
99,127
32,285
66,842
91,473
30,971
60,502
3.7 %
1.32
1.23
1.23
$
$
$
$
$
$
1.0 %
5.0 %
6.7 %
6.2 %
1.32
$
1.29
$
1.200
$
1.200
.34
.34
$
$
1.72
$
2.39
$
1.72
$
2.39
$
2.15
2.15
Number of stores
Number of stores opened
Number of stores closed
Net increase (decrease) in number of stores
1,311
0
40
(40)
1,351
1,371
1,372
1,346
6
26
(20)
8
9
(1)
31
5
26
33
7
26
AT YEAR END
C ash, cash equivalents and investments
Working capital
Current ratio
Total assets
Total Stockholders’ equity
$ 211,116
229,502
2.6
497,906
316,836
$ 200,605
$ 252,158
$ 287,024
$ 260,610
233,399
271,896
292,615
260,550
2.7
516,076
326,353
2.6
606,324
383,903
2.6
642,344
412,665
2.3
608,278
380,198
*The fiscal year ended February 3, 2018 contained 53 weeks versus 52 weeks for all other fiscal years shown.
Dollars in thousands, except per share data and selected operating data.
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Fashion & Value
Every Day
The Cato Corporation,
headquartered in Charlotte,
N.C., currently operates
three distinct women’s
apparel concepts – Cato, It’s
Fashion and Versona. Each
concept serves a different
customer base, occupies a
unique apparel niche, and
provides consistent growth
opportunities by offering
fashion and accessories at
exceptional values.
1,311
Total Store Count At End Of 2018
Cato
Cato provides high-quality, on-trend
fashion in missy and plus sizes with
great fit at value prices every day. The
concept offers a broad assortment of
exclusive merchandise under its Cato
label, available in stores and online at
catofashions.com.
4,500 average sq. ft. per store
1,047 stores at the end of 2018
It's Fashion
It’s Fashion serves a younger
customer with junior and junior
plus-inspired fashions at low prices.
It’s Fashion Metro is an expanded
version of It’s Fashion, offering
trendy fashions for the entire family
at great values.
3,400 sq. ft. - It’s Fashion
8,000 to 10,000 sq. ft. - It’s Fashion Metro
203 stores at the end of 2018
Versona
Versona is an exclusive women’s
boutique offering unique high-
end apparel and accessories at
exceptional prices. Versona stores
are in high-demand shopping areas
and can also be shopped online at
shopversona.com.
6,000 to 7,000 sq. ft. per store
61 stores at the end of 2018
2
7
1
15
13
20
22
32
4
15
39
45
73
1
5
6
5
12 60
125
87
7
11
45
179
51
78
82
88
116
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Management
Executive Group
John P. D. Cato
Chairman, President and
Chief Executive Officer
Michael T. Greer
Executive Vice President,
Director of Stores
John R. Howe
Executive Vice President,
Chief Financial Officer
Gordon D. Smith
Executive Vice President,
Chief Real Estate and
Store Development Officer
Board of Directors
John P. D. Cato
Chairman, President and
Chief Executive Officer
Thomas E. Meckley 3
Retired Partner
Ernst & Young LLP
Dr. Pamela Davies 1,2
President
Queens University
Bailey W. Patrick 1,2
Managing Partner
MPV Properties, LLC
Thomas B. Henson 1,3
President,
Chief Executive Officer
and Founder
American Spirit Media, LLC
D. Harding Stowe 1,2
Chairman and
Chief Executive Officer
New South Pizza
Edward I. Weisiger, Jr. 1,2
Chairman and
Chief Executive Officer
Carolina Tractor &
Equipment Company
Bryan F. Kennedy, III 1,3
President
North Carolina/
Virginia Division of
South State Bank
1 Member of the Corporate
Governance and
Nominating Committee
2 Member of the
Compensation Committee
3 Member of the
Audit Committee
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31340
The Cato Corporation
Registrant
Delaware
State of Incorporation
8100 Denmark Road
Charlotte, North Carolina 28273-5975
Address of Principal Executive Offices
56-0484485
I.R.S. Employer Identification Number
704/554-8510
Registrant’s Telephone Number
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Class A Common Stock
Preferred Share Purchase Rights
Name of Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 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 No □
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of the Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes No
The aggregate market value of the Registrant’s Class A Common Stock held by non-affiliates of the Registrant as of August 4,
2018, the last business day of the Company’s most recent second quarter, was $557,163,226 based on the last reported sale price per
share on the New York Stock Exchange on that date.
As of February 2, 2019, there were 22,838,149 shares of Class A common stock and 1,763,652 shares of Class B common stock
outstanding.
Accelerated filer
Smaller reporting company
Emerging Growth Company
Portions of the proxy statement relating to the 2019 annual meeting of shareholders are incorporated by reference into the
following part of this annual report:
DOCUMENTS INCORPORATED BY REFERENCE
Part III — Items 10, 11, 12, 13 and 14
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 3A.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART I
Business ..........................................................................................................................
Risk Factors ....................................................................................................................
Unresolved Staff Comments ...........................................................................................
Properties ........................................................................................................................
Legal Proceedings ...........................................................................................................
Executive Officers of the Registrant ...............................................................................
Mine Safety Disclosures .................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ........................................................................................
Selected Financial Data ..................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................................................................
Quantitative and Qualitative Disclosures About Market Risk ........................................
Financial Statements and Supplementary Data ..............................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .......................................................................................................................
Controls and Procedures .................................................................................................
Other Information ...........................................................................................................
PART III
Directors, Executive Officers and Corporate Governance .............................................
Executive Compensation ................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ........................................................................................................
Certain Relationships and Related Transactions, and Director Independence ...............
Principal Accountant Fees and Services .........................................................................
Page
4 – 9
9 – 18
18
18
18
19
19
20 – 22
23
24 – 31
31
32 – 60
61
61
61
61
61
62
62
62
Item 15.
Item 16.
Exhibits and Financial Statement Schedules ..................................................................
Form 10-K Summary ………………………………………………………………….
63 – 67
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PART IV
2
Forward-looking Information
The following information should be read along with the 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-K that reflect
projections or expectations of our future financial or economic performance; (2) statements that are not
historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations,
including those contained in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations”; (4) statements relating to our operations or activities for our fiscal year ending February
1, 2020 (“fiscal 2019”) 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; changes in laws or regulations affecting our business including tariffs; uncertainties regarding the
impact of any governmental responses to the foregoing conditions; competitive factors and pricing
pressures; our ability to predict and respond to rapidly changing fashion trends and consumer demands;
adverse weather or similar conditions that may affect our sales or operations; inventory risks due to shifts
in market demand, including the ability to liquidate excess inventory at anticipated margins; and other
factors discussed under “Risk Factors” in Part I, Item 1A of this annual report on Form 10-K for the fiscal
year ended February 2, 2019 (“fiscal 2018”), 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.
As used herein, the terms “we,” “our,” “us” (or when the context requires otherwise and similar
terms), the “Company” or “Cato” include The Cato Corporation and its subsidiaries, except that when
used with reference to common stock or other securities described herein and in describing the positions
held by management of the Company, such terms include only The Cato Corporation. Our website is
located at www.catofashions.com where we make available, free of charge, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other
reports (including amendments to these reports) filed or furnished pursuant to Section 13(a) or 15(d)
under the Securities Exchange Act of 1934. These reports are available as soon as reasonably practicable
after we electronically file these materials with the SEC. We also post on our website the charters of our
Audit, Compensation and Corporate Governance and Nominating Committees; our Corporate
Governance Guidelines, Code of Business Conduct and Ethics; and any amendments or waivers thereto;
and any other publicly available corporate governance materials contemplated by SEC or New York
Stock Exchange regulations. The information contained on our website, www.catofashions.com, is not,
and should in no way be construed as, a part of this or any other report that we filed with or furnished to
the SEC.
3
Item 1. Business:
General
PART I
The Company, founded in 1946, operated 1,311 fashion specialty stores at February 2, 2019, in 31
states, principally in the southeastern United States, under the names “Cato,” “Cato Fashions,” “Cato
Plus,” “It’s Fashion,” “It’s Fashion Metro” and “Versona.” The Cato concept seeks to offer quality
fashion apparel and accessories at low prices, every day in junior/missy and plus sizes. The Cato
concept’s stores and e-commerce websites feature a broad assortment of apparel and accessories,
including dressy, career, and casual sportswear, dresses, coats, shoes, lingerie, costume jewelry and
handbags. A major portion of the Cato concept’s merchandise is sold under its private label and is
produced by various vendors in accordance with the concept’s specifications. The It’s Fashion and It’s
Fashion Metro concepts offer fashion with a focus on the latest trendy styles for the entire family at low
prices every day. The Versona concept’s stores and e-commerce website offer quality fashion apparel
items, jewelry and accessories at exceptional values every day. The Company’s stores range in size from
2,100 to 19,000 square feet and are located primarily in strip shopping centers anchored by national
discounters or market-dominant grocery stores. The Company emphasizes friendly customer service and
coordinated merchandise presentations in an appealing store environment. The Company offers its own
credit card and layaway plan. Credit and layaway sales under the Company’s plan represented 7% of
retail sales in fiscal 2018. See Note 14 to the Consolidated Financial Statements, “Reportable Segment
Information,” for a discussion of information regarding the Company’s two reportable segments: retail
and credit.
Business
The Company’s primary objective is to be the leading fashion specialty retailer for fashion and value
in its markets. Management believes the Company’s success is dependent upon its ability to differentiate
its stores from department stores, mass merchandise discount stores and competing specialty stores. The
key elements of the Company’s business strategy are:
Merchandise Assortment. The Company’s stores offer a wide assortment of on-trend apparel and
accessory items in primarily junior/missy, plus sizes, mens and kids sizes, infant to boys size 20 and girls
size 16 with an emphasis on color, product coordination and selection. Colors and styles are coordinated
and presented so that outfit selection is easily made.
Value Pricing. The Company offers quality merchandise that is generally priced below comparable
merchandise offered by department stores and mall specialty apparel chains, but is generally more
fashionable than merchandise offered by discount stores. Management believes that the Company has
positioned itself as the every day low price leader in its market segment.
Strip Shopping Center Locations. The Company locates its stores principally in convenient strip
centers anchored by national discounters or market-dominant grocery stores that attract large numbers of
potential customers.
Customer Service. Store managers and sales associates are trained to provide prompt and courteous
service and to assist customers in merchandise selection and wardrobe coordination.
Credit and Layaway Programs. The Company offers its own credit card and a layaway plan to make
the purchase of its merchandise more convenient for its customers.
4
Merchandising
Merchandising
The Company seeks to offer a broad selection of high quality and exceptional value apparel and
accessories to suit the various lifestyles of fashion and value-conscious customers. In addition, the
Company strives to offer on-trend fashion in exciting colors with consistent fit and quality.
The Company’s merchandise lines include dressy, career, and casual sportswear, dresses, coats, shoes,
lingerie, costume jewelry, handbags, men’s wear and lines for kids and infants. The Company primarily
offers exclusive merchandise with fashion and quality comparable to mall specialty stores at low prices,
every day.
The Company believes that the collaboration of its merchandising and design teams with an expanded
in-house product development and direct sourcing function has enhanced merchandise offerings and
delivers quality, exclusive on-trend styles at lower prices. The product development and direct sourcing
operations provide research on emerging fashion and color trends, technical services and direct sourcing
options.
As a part of its merchandising strategy, members of the Company’s merchandising and design staff
frequently attend trade shows to stay abreast of latest trends and styles, visit selected stores to monitor the
merchandise offerings of other retailers, regularly communicate with store operations associates and
frequently confer with key vendors. The Company also takes aggressive markdowns on slow-selling
merchandise and typically does not carry over merchandise to the next season.
Purchasing, Allocation and Distribution
Although the Company purchases merchandise from approximately 531 suppliers, most of its
merchandise is purchased from approximately 100 primary vendors. In fiscal 2018, purchases from the
Company’s largest vendor accounted for approximately 7% of the Company’s total purchases. The
Company is not dependent on its largest vendor or any other vendor for merchandise purchases, and the
loss of any single vendor or group of vendors would not have a material adverse effect on the Company’s
operating results or financial condition. A substantial portion of the Company’s merchandise is sold under
its private labels and is produced by various vendors in accordance with the Company’s strict
specifications. The Company sources a majority of its merchandise directly from manufacturers overseas.
The Company purchases its remaining merchandise from domestic importers and vendors, which
typically minimizes the time necessary to purchase and obtain shipments. The Company opened its own
overseas sourcing operations in the fall of 2014, replacing the Company’s former sourcing agent in 2015.
Although a significant portion of the Company’s merchandise is manufactured overseas, the Company
does not expect that any economic, political or social unrest in any one country would have a material
adverse effect on the Company’s ability to obtain adequate supplies of merchandise. However, the
Company can give no assurance that any changes or disruptions in its merchandise supply chain would
not materially and adversely affect the Company. See “Risk Factors – Risks Relating To Our Business –
Because we source a significant portion of our merchandise directly and indirectly from overseas, we are
subject to risks associated with international operations; changes, disruptions, cost changes or other
problems affecting the Company’s merchandise supply chain could materially and adversely affect the
Company’s business, results of operations and financial condition.”
An important component of the Company’s strategy is the allocation of merchandise to individual
stores based on an analysis of sales trends by merchandise category, customer profiles and climatic
conditions. A merchandise control system provides current information on the sales activity of each
merchandise style in each of the Company’s stores. Point-of-sale terminals in the stores collect and
transmit sales and inventory information to the Company’s central database, permitting timely response to
sales trends on a store-by-store basis.
5
All merchandise is shipped directly to the Company’s distribution center in Charlotte, North Carolina,
where it is inspected and then allocated by the merchandise distribution staff for shipment to individual
stores. The flow of merchandise from receipt at the distribution center to shipment to stores is controlled
by an on-line system. Shipments are made by common carrier, and each store receives at least one
shipment per week. The centralization of the Company’s distribution process also subjects it to risks in
the event of damage to or destruction of its distribution facility or other disruptions affecting the
distribution center or the flow of goods into or out of Charlotte, North Carolina. See “Risk Factors –
Risks Relating To Our Business – A disruption or shutdown of our centralized distribution center or
transportation network could materially and adversely affect our business and results of operations.”
Advertising
The Company uses television, in-store signage, graphics, a Company website, two e-commerce
websites and social media as its primary advertising media. The Company’s total advertising
expenditures were approximately 0.7%, 0.7% and 0.8% of retail sales for fiscal years 2018, 2017 and
2016, respectively.
Store Operations
The Company’s store operations management team consists of one director of stores, five territorial
managers, 16 regional managers and 136 district managers. Regional managers receive a salary plus a
bonus based on achieving targeted goals for sales, payroll and shrinkage control. District managers
receive a salary plus a bonus based on achieving targeted objectives for district sales increases and
shrinkage control. Stores are typically staffed with a manager, two assistant managers and additional part-
time sales associates depending on the size of the store and seasonal personnel needs. Store managers
receive a salary and all other store personnel are paid on an hourly basis. Store managers, assistant
managers and sales associates are eligible for monthly and semi-annual bonuses based on achieving
targeted goals for their store’s sales increases and shrinkage control.
The Company constantly strives to improve its training programs to develop associates. Over 80% of
store and field management are promoted from within, allowing the Company to internally staff its store
base. The Company has training programs at each level of store operations. New store managers are
trained in training stores managed by experienced associates who have achieved superior results in
meeting the Company’s goals for store sales, payroll expense and shrinkage control. The type and extent
of district manager training varies depending on whether the district manager is promoted from within or
recruited from outside the Company.
Store Locations
Most of the Company’s stores are located in the southeastern United States in a variety of markets
ranging from small towns to large metropolitan areas with trade area populations of 20,000 or more.
Stores average approximately 4,500 square feet in size.
All of the Company’s stores are leased. Approximately 97% are located in strip shopping centers and
3% in enclosed shopping malls. The Company typically locates stores in strip shopping centers anchored
by a national discounter, primarily Walmart Supercenters, or market-dominant grocery stores. The
Company’s strip center locations provide ample parking and shopping convenience for its customers.
The Company’s store development activities consist of opening new stores in new and existing
markets, relocating selected existing stores to more desirable locations in the same market area and
closing underperforming stores. The following table sets forth information with respect to the Company’s
development activities since fiscal 2014:
6
Store Development
Fiscal Year
2014………………….……...………….
2015………………….……...………….
2016……………………….……...…….
2017…………....………….……...…….
2018………….………...….……...…….
Number of Stores
Beginning of
Year
Number Number Number of Stores
Opened Closed End of Year
1,320
1,346
1,372
1,371
1,351
33
31
8
6
-
7
5
9
26
40
1,346
1,372
1,371
1,351
1,311
The Company expects to open 12 new stores during fiscal 2019. The Company anticipates closing up
to 51 stores and relocating two stores by year end.
The Company periodically reviews its store base to determine whether any particular store should be
closed based on its sales trends and profitability. The Company intends to continue this review process to
identify underperforming stores.
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for 3.3%, 3.3% and 3.4% of retail sales in
fiscal 2018, 2017 and 2016, respectively. The Company’s net bad debt expense was 3.8%, 3.8% and 3.5%
of credit sales in fiscal 2018, 2017 and 2016, respectively.
Customers applying for the Company’s credit card are approved for credit if they have a satisfactory
credit record and the Company has considered the customer’s ability to make the required minimum
payment. Customers are required to make minimum monthly payments based on their account balances.
If the balance is not paid in full each month, the Company assesses the customer a finance charge. If
payments are not received on time, the customer is assessed a late fee subject to regulatory limits.
Layaway Plan
Under the Company’s layaway plan, merchandise is set aside for customers who agree to make
periodic payments. The Company adds a nonrefundable administrative fee to each layaway sale. If no
payment is made within four weeks, the customer is considered to have defaulted, and the merchandise is
returned to the selling floor and again offered for sale, often at a reduced price. All payments made by
customers who subsequently default on their layaway purchase are returned to the customer upon request,
less the administrative fee and a restocking fee.
The Company defers recognition of layaway sales to the accounting period when the customer picks
up and completely pays for layaway merchandise. Administrative fees are recognized in the period in
which the layaway is initiated. Recognition of restocking fees occurs in the accounting period when the
customer defaults on the layaway purchase. Layaway sales represented approximately 4.0%, 4.0% and
4.4% of retail sales in fiscal 2018, 2017 and 2016, respectively.
Information Technology Systems
The Company’s information technology systems provide daily financial and merchandising
information that is used by management to enhance the timeliness and effectiveness of purchasing and
pricing decisions. Management uses a daily report comparing actual sales with planned sales and a
weekly ranking report to monitor and control purchasing decisions. Weekly reports are also produced
which reflect sales, weeks of supply of inventory and other critical data by product categories, by store
7
and by various levels of responsibility reporting. Purchases are made based on projected sales, but can be
modified to accommodate unexpected increases or decreases in demand for a particular item.
Sales information is projected by merchandise category and, in some cases, is further projected and
actual performance measured by stock keeping unit (SKU). Merchandise allocation models are used to
distribute merchandise to individual stores based upon historical sales trends, climatic differences,
customer demographic differences and targeted inventory turnover rates.
Competition
The women’s retail apparel industry is highly competitive. The Company believes that the principal
competitive factors in its industry include merchandise assortment and presentation, fashion, price, store
location and customer service. The Company competes with retail chains that operate similar women’s
apparel specialty stores. In addition, the Company competes with mass merchandise chains, discount store
chains, major department stores, off-price retailers and internet-based retailers. Although we believe we
compete favorably with respect to the principal competitive factors described above, many of our direct
and indirect competitors are well-established national, regional or local chains, and some have
substantially greater financial, marketing and other resources. The Company expects its stores in larger
cities and metropolitan areas to face more intense competition.
Seasonality
Due to the seasonal nature of the retail business, the Company has historically experienced and
expects to continue to experience seasonal fluctuations in its revenues, operating income and net income.
Results of a period shorter than a full year may not be indicative of results expected for the entire year.
Furthermore, the seasonal nature of our business may affect comparisons between periods. See Note 13
of Notes to the Consolidated Financial Statements for information regarding our quarterly results of
operations for the last two fiscal years.
Regulation
A variety of laws affect the revolving credit card program offered by the Company. The Credit Card
Accountability Responsibility and Disclosure Act of 2009 (“The Act”) amended the Truth in Lending Act
to establish fair and transparent practices relating to the extension of credit under an open end consumer
credit plan. The Act contained provisions addressing matters such as change in terms, notices, limits on
fees, rate increases, payment allocation and account disclosures. The Act requires creditors to provide
consumers with account disclosures that are timely and in a form that is readily understandable. The
Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning
credit information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and
Regulation B promulgated thereunder prohibit lenders from discrimination against any credit applicants,
establish guidelines for gathering and evaluating credit information and require written notification when
credit is denied. Regulation AA, Unfair, Deceptive or Abusive Acts or Practices, establishes consumer
complaint procedures and defines unfair or deceptive practices in extending credit to consumers. The
Federal Trade Commission has adopted or proposed various trade regulation rules dealing with unfair
credit and collection practices and the preservation of consumers’ claims and defenses. The Company is
also subject to the U.S. Patriot Act and the Bank Secrecy Act, which require the Company to monitor
account holders and account transactions, respectively. Additionally, the Gramm-Leach-Bliley Act
requires the Company to disclose to its customers the Company’s privacy policy as it relates to a
customer’s non-public personal information.
The Tax Cuts and Jobs Act (the “Tax Act”) enacted during fiscal 2017 significantly revised U.S.
corporate income tax law by, among other things, reducing the corporate income tax rate to 21%,
imposing a new minimum tax on global intangible low-taxed income (“GILTI”) and implementing a
modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of
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foreign subsidiaries. As of February 2, 2019, the accounting for the income tax effects of the Tax Act has
been completed.
As of February 2, 2019, the Company’s position is that its overseas subsidiaries will not invest
undistributed earnings indefinitely. Future unremitted earnings when distributed are expected to be either
distributions of GILTI-previously taxed income or eligible for a 100% dividends received deduction. The
withholding tax rate on any unremitted earnings is zero and state income taxes on such earnings are
considered immaterial. Therefore, the Company has not provided deferred U.S. income taxes on
approximately $7.1 million of earnings from non-U.S. subsidiaries.
Associates
As of February 2, 2019, the Company employed approximately 10,350 full-time and part-time
associates. The Company also employs additional part-time associates during the peak retailing seasons.
The Company is not a party to any collective bargaining agreements and considers its associate relations
to be good.
Item 1A. Risk Factors:
An investment in our common stock involves numerous types of risks. You should carefully consider
the following risk factors, in addition to the other information contained in this report, including the
disclosures under “Forward-looking Information” above in evaluating our Company and any potential
investment in our common stock. If any of the following risks or uncertainties occur, our business,
financial condition and operating results could be materially and adversely affected, the trading price of
our common stock could decline and you could lose all or a part of your investment in our common stock.
The risks and uncertainties described in this section are not the only ones facing us. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also materially and
adversely affect our business operating results and financial condition.
Risks Relating To Our Business:
If we are unable to anticipate, identify and respond to rapidly changing fashion trends and customer demands
in a timely manner, our business and results of operations could materially suffer.
Customer tastes and fashion trends, particularly for women’s apparel, are volatile, tend to change
rapidly and cannot be predicted with certainty. Our success depends in part upon our ability to
consistently anticipate, design and respond to changing merchandise trends and consumer preferences in a
timely manner. Accordingly, any failure by us to anticipate, identify, design and respond to changing
fashion trends could adversely affect consumer acceptance of our merchandise, which in turn could
adversely affect our business, results of operations and our image with our customers. If we miscalculate
either the market for our merchandise or our customers’ tastes or purchasing habits, we may be required
to sell a significant amount of unsold inventory at below-average markups over cost, or below cost, which
would adversely affect our margins and results of operations.
Fluctuating comparable sales or our inability to effectively manage inventory may negatively impact our gross
margin and our overall results of operations.
Comparable sales are expected to continue to fluctuate in the future. Factors affecting comparable sales
include fashion trends, customer preferences, calendar and holiday shifts, competition, weather and
economic conditions. In addition, merchandise must be ordered well in advance of the applicable selling
season and before trends are confirmed by sales. If we are not able to accurately predict customers’
preferences for our fashion items, we may have too much inventory which may cause excessive
markdowns. If we are unable to accurately predict demand for our merchandise, we may end up with
inventory shortages resulting in missed sales. A decrease in comparable sales or our inability to
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effectively manage inventory may adversely affect our gross margin and results of operations.
Existing and increased competition in the women’s retail apparel industry may negatively impact our business,
results of operations, financial condition and market share.
The women’s retail apparel industry is highly competitive. We compete primarily with discount
stores, mass merchandisers, department stores, off-price retailers, specialty stores and internet-based
retailers, many of which have substantially greater financial, marketing and other resources than we
have. Many of our competitors offer frequent promotions and reduce their selling prices. In some cases
our competitors are expanding into markets in which we have a significant market presence. In addition,
our competitors also compete for the same retail store space. As a result of this competition, we may
experience pricing pressures, increased marketing expenditures, increased costs to open new stores, as
well as loss of market share, which could materially and adversely affect our business, results of
operations and financial condition.
Because we source a significant portion of our merchandise directly and indirectly from overseas, we are
subject to risks associated with international operations; changes, disruptions, cost changes or other problems
affecting the Company’s merchandise supply chain could materially and adversely affect the Company’s
business, results of operations and financial condition.
A significant amount of our merchandise is manufactured overseas, principally in East Asia. We
directly import some of this merchandise and indirectly import the remaining merchandise from domestic
vendors who acquire the merchandise from foreign sources. As a result, political unrest, labor disputes,
terrorism, financial or other forms of instability or other events resulting in the disruption of trade from
countries affecting our supply chain, increased security requirements for imported merchandise, or the
imposition of, or changes in, laws, regulations or changes in duties, quotas, tariffs, taxes or governmental
policies regarding these matters or other factors affecting the availability or cost of imports, could cause
significant delays or interruptions in the supply of our merchandise or increase our costs. Our costs are
also affected by currency fluctuations, and changes in the value of the dollar relative to foreign currencies
may increase our cost of goods sold. Any of these factors could have a material adverse effect on our
business and results of operations. In addition, increased energy and transportation costs have caused us
significant cost increases from time to time, and future adverse changes in these costs or the disruption of
the means by which merchandise is transported to us could cause additional cost increases or interruptions
of our supply chain which could be significant. Further, we are subject to increased costs or potential
disruptions impacting any port or trade route through which our products move. If we are forced to source
merchandise from other countries or other domestic vendors with foreign sources in different countries,
those goods may be more expensive or of a different or inferior quality from the ones we now sell.
Our ability to attract consumers and grow our revenues is dependent on the success of our store location
strategy and our ability to successfully open new stores as planned.
Our sales are dependent in part on the location of our stores in shopping centers where we believe our
consumers and potential consumers shop. In addition, our ability to grow our revenues has been
substantially dependent on our ability to secure space for and open new stores in attractive locations.
Centers where we currently operate existing stores or seek to open new stores may be adversely affected
by, among other things, general economic downturns or those particularly affecting the commercial real
estate industry, the closing of anchor stores, changes in tenant mix and changes in customer shopping
preferences. To take advantage of consumer traffic and the shopping preferences of our consumers, we
need to maintain and acquire stores in desirable locations where competition for suitable store locations is
intense. A decline in customer popularity of the strip shopping centers where we generally locate our
stores or in availability of space in desirable centers and locations, or an increase in the cost of such
desired space, limiting our ability to open new stores, could adversely affect consumer traffic and reduce
our sales and net earnings or increase our operating costs.
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Our ability to open and operate new stores depends on many factors, some of which are beyond our
control. These factors include, but are not limited to, our ability to identify suitable store locations,
negotiate acceptable lease terms, secure necessary governmental permits and approvals and hire and train
appropriate store personnel. In addition, our continued expansion into new regions of the country where
we have not done business before may present new challenges in competition, distribution and
merchandising as we enter these new markets. Our failure to successfully and timely execute our plans for
opening new stores or the failure of these stores to perform up to our expectations could adversely affect
our business, results of operations and financial condition.
The inability of third-party vendors to produce goods on time and to the Company’s specification may
adversely affect the Company’s business, results of operations and financial condition.
Our dependence on third-party vendors to manufacture and supply our merchandise subjects us to
numerous risks that our vendors will fail to perform as we expect. For example, the deterioration in any
of our key vendors’ financial condition, their failure to ship merchandise in a timely manner that meets
our specifications, or other failures to follow our vendor guidelines or comply with applicable laws and
regulations, including compliant labor, environmental practices and product safety, could expose us to
operational, quality, competitive, reputational and legal risks. If we are not able to timely or adequately
replace the merchandise we currently source with merchandise produced elsewhere, or if our vendors fail
to perform as we expect, our business, results of operations and financial condition could be adversely
affected. Activities conducted by us or on our behalf outside the United States further subject us to
numerous U.S. and international regulations and compliance risks, as discussed below under “Our
business operations subject us to legal compliance and litigation risks, as well as regulations and
regulatory enforcement priorities, which could result in increased costs or liabilities, divert our
management’s attention or otherwise adversely affect our business, results of operations and financial
condition.”
The operation of our sourcing offices in Asia may present increased legal and operational risks.
In October 2014, we established our own sourcing offices in Asia. Our experience with legal and
regulatory practices and requirements in Asia is limited. If our sourcing offices are unable to successfully
oversee merchandise production to ensure that product is produced on time and within the Company’s
specifications, our business, brand, reputation, costs, results of operations and financial condition could be
materially and adversely affected. Further, the activities conducted by our sourcing office outside the
United States further subject us to foreign operational risks, as well as U.S. and international regulations
and compliance risks, as discussed elsewhere in this “Risk Factors” section, in particular below under
“Our business operations subject us to legal compliance and litigation risks, as well as regulations and
regulatory enforcement priorities, which could result in increased costs or liabilities, divert our
management’s attention or otherwise adversely affect our business, results of operations and financial
condition.”
Any actual or perceived deterioration in the conditions that drive consumer confidence and spending may
materially and adversely affect consumer demand for our apparel and accessories and our results of
operations.
Consumer spending habits, including spending for our apparel and accessories, are affected by, among
other things, prevailing economic conditions and uncertainties, political conditions and uncertainties
(such as those currently being debated in the U.S. regarding budgetary, spending and tax policies), levels
of employment, fuel, energy and food costs, salaries and wage rates and other sources of income, tax
rates, home values, consumer net worth, the availability of consumer credit, consumer confidence and
consumer perceptions of adverse changes in or trends affecting any of these conditions. Any perception
that these conditions may be worsening or continuing to trend negatively may significantly weaken many
of these drivers of consumer spending habits. Adverse perceptions of these conditions or uncertainties
regarding them also generally cause consumers to defer purchases of discretionary items, such as our
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merchandise, or to purchase cheaper alternatives to our merchandise, all of which may also adversely
affect our net sales and results of operations. In addition, numerous events, whether or not related to
actual economic conditions, such as downturns in the stock markets, acts of war or terrorism, political
unrest or natural disasters, or similar events, may also dampen consumer confidence, and accordingly,
lead to reduced consumer spending. Any of these events could have a material adverse effect on our
business, results of operations and financial condition.
Fluctuations in the price, availability and quality of inventory may result in higher cost of goods, which the
Company may not be able to pass on to its customers.
Vendors are increasingly passing on higher production costs, which may impact our ability to
maintain or grow our margins. The price and availability of raw materials may be impacted by demand,
regulation, weather and crop yields, currency value fluctuations, as well as other factors. Additionally,
manufacturers have and may continue to have increases in other manufacturing costs, such as
transportation, labor and benefit costs. These increases in production costs result in higher merchandise
costs to the Company. Due to the Company’s limited flexibility in price point, the Company may not be
able to pass on those cost increases to the consumer, which could have a material adverse effect on our
results of operations and financial condition.
A failure or disruption relating to our information technology systems could adversely affect our business.
We rely on our existing information technology systems for merchandise operations, including
merchandise planning, replenishment, pricing, ordering, markdowns and product life cycle management.
In addition to merchandise operations, we utilize our information technology systems for our distribution
processes, as well as our financial systems, including accounts payable, general ledger, accounts
receivable, sales, banking, inventory and fixed assets. Despite the precautions we take, our information
systems may be vulnerable to disruption or failure from numerous events, including but not limited to,
natural disasters, severe weather conditions, power outages, technical malfunctions, cyber attacks, acts of
war or terrorism, similar catastrophic events or other causes beyond our control or that we fail to
anticipate. Any disruption or failure in the operation of our information technology systems, our failure to
continue to upgrade or improve such systems, or the cost associated with maintaining, repairing or
improving these systems, could adversely affect our business, results of operations and financial
condition. Modifications and/or upgrades to our current information technology systems may also disrupt
our operations.
A disruption or shutdown of our centralized distribution center or transportation network could materially
and adversely affect our business and results of operations.
The distribution of our products is centralized in one distribution center in Charlotte, North Carolina
and distributed through our network of third-party freight carriers. The merchandise we purchase is
shipped directly to our distribution center, where it is prepared for shipment to the appropriate stores and
subsequently delivered to the stores by our third-party freight carriers. If the distribution center or our
third-party freight carriers were to be shut down or lose significant capacity for any reason, including but
not limited to, any of the causes described under “A failure or disruption relating to our information
technology systems could adversely affect our business,” our operations would likely be seriously
disrupted. Such problems could occur as the result of any loss, destruction or impairment of our ability to
use our distribution center, as well as any broader problem generally affecting the ability to ship goods
into our distribution center or deliver goods to our stores. As a result, we could incur significantly higher
costs and longer lead times associated with distributing our products to our stores during the time it takes
for us to reopen or replace the distribution center and/or our transportation network. Any such occurrence
could adversely affect our business, results of operations and financial condition.
Changes to accounting rules and regulations may adversely affect our reported results of operations and
financial condition.
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In an effort to provide greater comparability of financial reporting in an increasing global environment,
accounting regulatory authorities have been in discussions for many years regarding efforts to either
converge U.S. Generally Accepted Accounting Principles with International Financial Reporting
Standards (“IFRS”), have U.S. companies provide supplemental IFRS-based information or continue to
work toward a single set of globally accepted accounting standards. If implemented, these potential
changes in accounting rules or regulations could significantly impact our future reported results of
operations and financial position. Changes in accounting rules or regulations and varying interpretations
of existing accounting rules and regulations have significantly affected our reported financial statements
and those of other participants in the retail industry in the past and may continue to do so in the future.
For example, changes to lease accounting standards effective for the Company beginning in fiscal
2019 will require lessees to capitalize operating leases in their financial statements. These changes will
have a major impact on the Company as a retailer with numerous leased locations. Such changes will
require us to record a significant amount of lease-related assets and liabilities on, and will materially
affect, our balance sheet and will require us to make other changes to the recording and classification of
lease-related expenses on our statements of income and cash flows. These changes could lead to the
perception by investors that we are highly leveraged and would change the calculation of numerous
financial metrics and measures of our performance and financial condition. These and other future
changes to accounting rules or regulations may adversely affect our reported results of operations and
financial position.
If the Company is unable to successfully integrate new businesses into its existing business, the Company’s
financial condition and results of operations will be adversely affected.
The Company’s long-term business strategy includes opportunistic growth through the development of
new store concepts. This growth may require significant capital expenditures and management attention.
The Company may not realize any of the anticipated benefits of a new business and integration costs may
exceed anticipated amounts. We have incurred substantial financial commitments and fixed costs related
to our retail stores that we will not be able to recover if our stores are not successful and that could
potentially result in impairment charges. If we cannot successfully execute our growth strategies, our
financial condition and results of operations may be adversely impacted.
A security breach that results in unauthorized disclosure of employee, Company or customer information
could adversely affect our costs, reputation and results of operations, and efforts to mitigate these risks may
continue to increase our costs.
The protection of employee, Company and customer data is critical to the Company. Any security
breach, mishandling, human or programming error or other event that results in the misappropriation, loss
or other unauthorized disclosure of employee, Company or customer information, including but not
limited to credit card data or other personally identifiable information, could severely damage the
Company's reputation, expose it to remediation and other costs and the risks of legal proceedings, disrupt
its operations and otherwise adversely affect the Company's business and financial condition. Despite
measures the Company takes to protect confidential information, which are ongoing and may continue to
increase our costs, there is no assurance that such measures will prevent the compromise of such
information. The security of certain of this information also depends on the ability of third-party service
providers, such as those we use to process credit and debit card payments as described below under “We
are subject to payment-related risks,” to properly handle and protect such information. If any such
compromise or unauthorized disclosure of this information were to occur, it could have a material adverse
effect on the Company's reputation, business, operating results, financial condition and cash flows.
We are subject to payment-related risks.
We accept payments using a variety of methods, including third-party credit cards, our own branded
13
credit cards, debit cards, gift cards and physical bank checks. For existing and future payment methods
we offer to our customers, we may become subject to additional regulations and compliance requirements
(including obligations to implement enhanced authentication processes that could result in increased costs
and reduce the ease of use of certain payment methods), as well as fraud. For certain payment methods,
including credit and debit cards, we pay interchange and other fees, which may increase over time, raising
our operating costs and lowering profitability. We rely on third-party service providers for payment
processing services, including the processing of credit and debit cards. In each case, it could disrupt our
business if these third-party service providers become unwilling or unable to provide these services to us.
We are also subject to payment card association operating rules, including data security rules, certification
requirements and rules governing electronic funds transfers, which could change or be reinterpreted to
make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or
if our data security systems are breached or compromised, we may be liable for card-issuing banks’ costs,
subject to fines and higher transaction fees. In addition we may lose our ability to accept credit and debit
card payments from our customers and process electronic funds transfers or facilitate other types of
payments, and our business and operating results could be adversely affected.
The Company’s failure to successfully operate its e-commerce websites or fulfill customer expectations could
adversely impact customer satisfaction, our reputation and our business.
Although the Company's e-commerce platform provides another channel to drive incremental sales,
provide existing customers the on-line shopping experience and introduce the Company to a new
customer base, it also exposes us to numerous risks. We are subject to potential failures in the efficient
and uninterrupted operation of our websites, customer contact center or our distribution center, including
system failures caused by telecommunication system providers, order volumes that exceed our present
system capabilities, electrical outages, mechanical problems and human error. Our e-commerce platform
may also expose us to greater potential for security or data breaches involving the unauthorized disclosure
of customer information, as discussed above under “A security breach that results in unauthorized
disclosure of employee, Company or customer information could adversely affect our costs, reputation
and results of operations, and efforts to mitigate these risks may continue to increase our costs.” We are
also subject to risk related to delays or failures in the performance of third parties, such as shipping
companies, including delays associated with labor strikes or slowdowns or adverse weather conditions. If
the Company does not successfully meet the challenges of operating e-commerce websites or fulfilling
customer expectations, the Company's business and sales could be adversely affected.
Adverse litigation matters may adversely affect our business and our financial condition.
From time to time the Company is involved in litigation and other claims against our business.
Primarily these arise from our normal course of business but are subject to risks and uncertainties, and
could require significant management time. The Company’s periodic evaluation of litigation-related
matters may change our assessment in light of the discovery of facts with respect to legal actions pending
against us, not presently known to us or by determination of judges, juries or other finders of fact. We
may also be subjected to legal matters not yet known to us. Adverse decisions or settlements of disputes
may negatively impact our business, reputation and financial condition.
Failure to attract, train, and retain skilled personnel could adversely affect our business and our financial
condition.
Like most retailers, we experience significant associate turnover rates, particularly among store sales
associates and managers. Because our continued store growth will require the hiring and training of new
associates, we must continually attract, hire and train new store associates to meet our staffing needs. A
significant increase in the turnover rate among our store sales associates and managers would increase our
recruiting and training costs, as well as possibly cause a decrease in our store operating efficiency and
productivity. We compete for qualified store associates, as well as experienced management personnel,
14
with other companies in our industry or other industries, many of whom have greater financial resources
than we do.
In addition, we depend on key management personnel to oversee the operational divisions of the
Company for the support of our existing business and future expansion. The success of executing our
business strategy depends in large part on retaining key management. We compete for key management
personnel with other retailers, and our inability to attract and retain qualified personnel could limit our
ability to continue to grow.
If we are unable to retain our key management and store associates or attract, train, or retain other
skilled personnel in the future, we may not be able to service our customers effectively or execute our
business strategy, which could adversely affect our business, operating results and financial condition.
Our business operations subject us to legal compliance and litigation risks, as well as regulations and
regulatory enforcement priorities, which could result in increased costs or liabilities, divert our
management’s attention or otherwise adversely affect our business, results of operations and financial
condition.
Our operations are subject to federal, state and local laws, rules and regulations, as well as U.S. and
foreign laws and regulations relating to our activities in foreign countries from which we source our
merchandise and operate our sourcing offices. Our business is also subject to regulatory and litigation
risk in all of these jurisdictions, including foreign jurisdictions that may lack well-established or reliable
legal systems for resolving legal disputes. Compliance risks and litigation claims have arisen and may
continue to arise in the ordinary course of our business and include, among other issues, intellectual
property issues, employment issues, commercial disputes, product-oriented matters, tax, customer
relations and personal injury claims. International activities subject us to numerous U.S. and international
regulations, including but not limited to, restrictions on trade, license and permit requirements, import and
export license requirements, privacy and data protection laws, environmental laws, records and
information management regulations, tariffs and taxes and anti-corruption laws, such as the Foreign
Corrupt Practices Act, violations of which by employees or persons acting on the Company’s behalf may
result in significant investigation costs, severe criminal or civil sanctions and reputational harm. These
and other liabilities to which we may be subject could negatively affect our business, operating results
and financial condition. These matters frequently raise complex factual and legal issues, which are subject
to risks and uncertainties and could divert significant management time. The Company may also be
subject to regulatory review and audits, which results may have the potential to materially and adversely
affect our business, results of operations and financial condition. In addition, governing laws, rules and
regulations, and interpretations of existing laws are subject to change from time to time. Compliance and
litigation matters could result in unexpected expenses and liability, as well as have an adverse effect on
our operations and our reputation.
New legislation or regulation and interpretation of existing laws and regulations related to data privacy
could increase our costs of compliance, technology and business operations. The interpretation of existing
or new laws to existing technology and practices can be uncertain and may lead to additional compliance
risk and cost.
If we fail to protect our trademarks and other intellectual property rights or infringe the intellectual property
rights of others, our business, brand image, growth strategy, results of operations and financial condition
could be adversely affected.
We believe that our “Cato”, “It’s Fashion”, “It’s Fashion Metro” and “Versona” trademarks are
integral to our store designs, brand recognition and our ability to successfully build consumer loyalty.
Although we have registered these trademarks with the U.S. Patent and Trademark Office (“PTO”) and
15
have also registered, or applied for registration of, additional trademarks with the PTO that we believe are
important to our business, we cannot assure that these registrations will prevent imitation of our
trademarks, merchandising concepts, store designs or private label merchandise or the infringement of our
other intellectual property rights by others. Infringement of our names, concepts, store designs or
merchandise generally, or particularly in a manner that projects lesser quality or carries a negative
connotation of our image could adversely affect our business, financial condition and results of
operations.
In addition, we cannot assure that others will not try to block the manufacture or sale of our private
label merchandise by claiming that our merchandise violates their trademarks or other proprietary rights.
In the event of such a conflict, we could be subject to lawsuits or other actions, the ultimate resolution of
which we cannot predict; however, such a controversy could adversely affect our business, financial
condition and results of operations.
We may experience market conditions that could adversely impact the valuation and liquidity of, and our
ability to access, our short-term investments and cash and cash equivalents.
Our short-term investments and cash equivalents are primarily comprised of investments in federal,
state, municipal and corporate debt securities. The value of those securities may be impacted by factors
beyond our control, such as changes to credit ratings, rates of default, collateral value, discount rates, and
strength and quality of market credit and liquidity. As federal, state and municipal entities struggle with
declining tax revenues and budget deficits, we cannot be assured of our ability to timely access these
investments if the market for these issues declines. Similarly, the default by issuers could adversely affect
our financial condition, results of operations and ability to execute our business strategy. In addition, we
have significant amounts of cash and cash equivalents at financial institutions that are in excess of the
federally insured limits. An economic downturn or development of adverse conditions affecting the
financial sector and stability of financial institutions could cause us to experience losses on our deposits.
Maintaining and improving our internal control over financial reporting and other requirements necessary
to operate as a public company may strain our resources, and any material failure in these controls may
negatively impact our business, the price of our common stock and market confidence in our reported
financial information.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of
1934, the Sarbanes-Oxley Act of 2002, the rules of the SEC and New York Stock Exchange and certain
aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and
related rule-making that has been and may continue to be implemented over the next several years under
the mandates of the Dodd-Frank Act. The requirements of these rules and regulations have, and may
continue to, increase our compliance costs and place significant strain on our personnel, systems and
resources. To satisfy the SEC’s rules implementing the requirements of Section 404 of the Sarbanes-
Oxley Act of 2002, we must continue to document, test, monitor and enhance our internal control over
financial reporting, which is a costly and time-consuming effort that must be re-evaluated frequently. We
cannot give assurance that our disclosure controls and procedures and our internal control over financial
reporting, as defined by applicable SEC rules, will be adequate in the future. Any failure to maintain the
effectiveness of internal control over financial reporting or to comply with the other various laws and
regulations to which we are and will continue to be subject, or to which we may become subject in the
future, as a public company could have an adverse material impact on our business, our financial
condition and the price of our common stock. In addition, our efforts to comply with these requirements,
particularly with new requirements under the Dodd-Frank Act that have yet to be implemented, could
significantly increase our compliance costs.
Unusual weather, natural disasters or similar events may adversely affect our sales or operations.
16
Extreme changes in weather, natural disasters or similar events can influence customer trends and
shopping habits. For example, heavy rainfall or other extreme weather conditions over a prolonged
period might make it difficult for our customers to travel to our stores and thereby reduce our sales and
profitability. Our business is also susceptible to unseasonable weather conditions. For example, extended
periods of unseasonably warm temperatures during the winter season or cool weather during the summer
season could render a portion of our inventory incompatible with those unseasonable conditions.
Reduced sales from extreme or prolonged unseasonable weather conditions would adversely affect our
business. The occurrence or threat of extreme weather, natural disasters, power outages, terrorist acts,
outbreaks of flu or other communicable diseases or other catastrophic events could reduce customer
traffic in our stores and likewise disrupt our ability to conduct operations, which could materially and
adversely affect us.
Risks Relating To The Market Value Of Our Common Stock:
Our operating results are subject to seasonal and quarterly fluctuations, which could adversely affect the
market price of our common stock.
Our business varies with general seasonal trends that are characteristic of the retail apparel industry.
As a result, our stores typically generate a higher percentage of our annual net sales and profitability in
the first and second quarters of our fiscal year compared to other quarters. Accordingly, our operating
results for any one fiscal period are not necessarily indicative of results to be expected from any future
period, and such seasonal and quarterly fluctuations could adversely affect the market price of our
common stock.
The interests of a principal shareholder may limit the ability of other shareholders to influence the direction
of the Company.
As of March 27, 2019, John P. D. Cato, Chairman, President and Chief Executive Officer, beneficially
controlled approximately 45.7% of the voting power of our common stock. As a result, Mr. Cato may be
able to control or significantly influence substantially all matters requiring approval by the shareholders,
including the election of directors and the approval of mergers and other business combinations or other
significant Company transactions. Mr. Cato may have interests that differ from those of other
shareholders, and may vote in a way with which other shareholders disagree or perceive as adverse to
their interests. In addition, the concentration of voting power held by Mr. Cato could have the effect of
preventing, discouraging or deferring a change in control of the Company, which could depress the
market price of our common stock.
Conditions in the stock market generally, or particularly relating to our industry, Company or common
stock, may materially and adversely affect the market price of our common stock and make its trading price
more volatile.
The trading price of our common stock at times has been, and is likely to continue to be, subject to
significant volatility. A variety of factors may cause the price of the common stock to fluctuate, perhaps
substantially, including, but not limited to, those discussed elsewhere in this report, as well as the
following: low trading volume; general market fluctuations resulting from factors not directly related to
our operations or the inherent value of our common stock; announcements of developments related to our
business; fluctuations in our reported operating results; general conditions or trends affecting or perceived
to affect the fashion and retail industry; conditions or trends affecting or perceived to affect the domestic
or global economy or the domestic or global credit or capital markets; changes in financial estimates or
the scope of coverage given to our Company by securities analysts; negative commentary regarding our
Company and corresponding short-selling market behavior; adverse customer relations developments;
significant changes in our senior management team; and legal proceedings. Over the past several years
the stock market in general, and the market for shares of equity securities of many retailers in particular,
have experienced extreme price fluctuations that have at times been unrelated to the operating
17
performance of those companies. Such fluctuations and market volatility based on these or other factors
may materially and adversely affect the market price of our common stock.
Item 1B. Unresolved Staff Comments:
None.
Item 2. Properties:
The Company’s distribution center and general offices are located in a Company-owned building of
approximately 552,000 square feet located on a 15-acre tract in Charlotte, North Carolina. The
Company’s automated merchandise handling and distribution activities occupy approximately 418,000
square feet of this building and its general offices and corporate training center are located in the
remaining 134,000 square feet. A building of approximately 24,000 square feet located on a 2-acre tract
adjacent to the Company’s existing location is used for receiving and distribution of store and office
operating supplies. The Company also owns approximately 185 acres of land in York County, South
Carolina as a potential new site for our distribution center.
Item 3. Legal Proceedings:
From time to time, claims are asserted against the Company arising out of operations in the ordinary
course of business. The Company currently is not a party to any pending litigation that it believes is
likely to have a material adverse effect on the Company’s financial position, results of operations or cash
flows.
18
Item 3A. Executive Officers of the Registrant:
The executive officers of the Company and their ages as of March 27, 2019 are as follows:
Name
Age
Position
John P. D. Cato............................
John R. Howe ..............................
Michael T. Greer .........................
Gordon Smith ..............................
68 Chairman, President and Chief Executive Officer
56 Executive Vice President, Chief Financial Officer
56 Executive Vice President, Director of Stores
63
Executive Vice President, Chief Real Estate and
Store Development Officer
John P. D. Cato has been employed as an officer of the Company since 1981 and has been a
director of the Company since 1986. Since January 2004, he has served as Chairman, President and Chief
Executive Officer. From May 1999 to January 2004, he served as President, Vice Chairman of the Board
and Chief Executive Officer. From June 1997 to May 1999, he served as President, Vice Chairman of the
Board and Chief Operating Officer. From August 1996 to June 1997, he served as Vice Chairman of the
Board and Chief Operating Officer. From 1989 to 1996, he managed the Company’s off-price concept,
serving as Executive Vice President and as President and General Manager of the It’s Fashion concept
from 1993 to August 1996. Mr. Cato is a former director of Harris Teeter Supermarkets, Inc., formerly
Ruddick Corporation.
John R. Howe has been employed by the Company since 1986. Since September 2008, he has
served as Executive Vice President, Chief Financial Officer. From June 2007 until September 2008, he
served as Senior Vice President, Controller. From 1999 to 2007, he served as Vice President, Assistant
Controller. From 1997 to 1999, he served as Assistant Vice President, Budgets and Planning. From 1995
to 1997, he served as Director, Budgets and Planning. From 1990 to 1995, he served as Assistant Tax
Manager. From 1986 to 1990, Mr. Howe held various positions within the finance area.
Michael T. Greer has been employed by the Company since 1985. Since May 2006, he has
served as Executive Vice President, Director of Stores of the Company. From November 2004 until May
2006, he served as Senior Vice President, Director of Stores of the Company. From February 2004 until
November 2004, he served as Senior Vice President, Director of Stores of the Cato concept. From 2002
to 2003 Mr. Greer served as Vice President, Director of Stores of the It’s Fashion concept. From 1999 to
2001 he served as Territorial Vice President of Stores of the Cato concept and from 1996 to 1999 he
served as Regional Vice President of Stores of the Cato concept. From 1985 to 1995, Mr. Greer held
various store operational positions in the Cato concept.
Gordon Smith has been employed by the Company since 1989. Since July 2011, he has served as
Executive Vice President, Chief Real Estate and Store Development Officer. From February 2008 until
July 2011 Mr. Smith served as Senior Vice President, Real Estate. From October 1989 to February 2008,
Mr. Smith served as Assistant Vice President, Corporate Real Estate.
Item 4. Mine Safety Disclosures:
No matters requiring disclosure.
19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities:
Market & Dividend Information
The Company’s Class A Common Stock trades on the New York Stock Exchange (“NYSE”) under
the symbol CATO.
As of March 27, 2019 the approximate number of record holders of the Company’s Class A Common
Stock was 5,000 and there were 2 record holders of the Company’s Class B Common Stock.
20
Stock Performance Graph
The following graph compares the yearly change in the Company’s cumulative total shareholder
return on the Company’s Common Stock (which includes Class A Stock and Class B Stock) for each of
the Company’s last five fiscal years with (i), the Dow Jones U.S. Retailers, Apparel Index and (ii) the
Russell 2000 Index.
The Cato Corporation Stock Performance Graph
300
250
200
150
100
50
1/31/2014
1/30/2015
1/29/2016
1/27/2017
2/2/2018
2/1/2019
THE CATO CORPORATION
DOW JONES U.S. RETAILERS, APPL INDEX
RUSSELL 2000 INDEX
THE CATO CORPORATION
STOCK PERFOMANCE TABLE
(BASE 100 – IN DOLLARS)
LAST TRADING DAY
OF THE FISCAL YEAR
1/31/2014
1/30/2015
1/29/2016
1/27/2017
2/2/2018
2/1/2019
THE CATO
CORPORATION
100
157
154
101
51
69
DOW JONES U.S.
RETAILERS, APPL
INDEX
100
121
120
118
134
146
RUSSELL 2000
INDEX
100
104
94
126
147
142
The graph assumes an initial investment of $100 on January 31, 2014, the last trading day prior to the
commencement of the Company’s 2014 fiscal year, and that all dividends were reinvested.
21
Issuer Purchases of Equity Securities
The following table summarizes the Company’s purchases of its common stock for the three months
ended February 2, 2019:
Total Number
of Shares
Purchased
Average Price
Paid per Share (1)
Total Number of
Shares Purchased as
Part of Publicly
Maximum Number
(or Approximate Dollar
Value) of Shares that may
Announced Plans or yet be Purchased Under
the Plans or Programs (2)
Programs (2)
- $
-
-
- $
-
-
-
-
-
-
-
-
2,019,002
Period
November 2018
December 2018
January 2019
Total
(1) Prices include trading costs.
(2) On November 20, 2018, the Board of Directors increased, by 2,000,000 million shares, the
authorization to purchase shares. During the fourth quarter ended February 2, 2019, the Company did
not purchase shares under this program. As of the fourth quarter ended February 2, 2019, the
Company had 2,019,002 shares remaining in open authorizations. There is no specified expiration
date for the Company’s repurchase program.
22
Item 6. Selected Financial Data:
Certain selected financial data for the five fiscal years ended February 2, 2019 have been derived
from the Company’s audited financial statements. The financial statements and Independent Registered
Public Accounting Firm’s integrated audit reports for the most recent fiscal years are contained elsewhere
in this report. All data set forth below are qualified by reference to, and should be read in conjunction
with,
thereto) and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing
elsewhere in this annual report.
the Company’s Consolidated Financial Statements (including
the Notes
Fiscal Year (1)
2018
2017
2016
2015
2014
STATEMENT OF OPERATIONS DATA:
Retail sales
Other revenue
Total revenues
Cost of goods sold (exclusive of depreciation
shown below)
Selling, general and administrative (exclusive
of depreciation shown below)
Selling, general and administrative percent of
retail sales
Depreciation
Interest expense
Interest and other income
Income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends paid per share
SELECTED OPERATING DATA:
Stores open at end of year
Average sales per store (2)
Average sales per square foot of selling space
BALANCE SHEET DATA (at period end):
Cash, cash equivalents, short-term
investments and restricted cash
Working capital (3)
Total assets
Total stockholders’ equity
___________
(Dollars in thousands, except per share data and selected operating data)
$821,113
8,551
829,664
$841,997
7,984
849,981
$947,370
9,199
956,569
$1,001,390
9,701
1,011,091
$977,867
9,047
986,914
522,535
553,058
601,985
616,480
600,569
262,510
266,304
289,619
275,713
276,234
32.0%
$16,463
96
4,991
33,051
2,590
30,461
1.23
1.23
1.32
31.6%
$19,643
114
5,111
15,973
7,433
8,540
0.34
0.34
1.32
30.7%
$22,716
176
7,041
49,114
1,902
47,212
1.72
1.72
1.29
27.5%
$22,963
264
3,456
99,127
32,285
66,842
2.39
2.39
1.20
28.2%
$22,026
57
3,445
91,473
30,971
60,502
2.15
2.15
1.20
1,311
$596,000
133
1,351
$604,880
135
1,371
$681,000
151
1,372
$729,000
162
1,346
$730,000
162
$207,920
229,502
497,906
316,836
$200,100
233,399
516,076
326,353
$252,158
271,896
606,324
383,903
$287,024
292,615
642,344
412,665
$260,610
260,550
608,278
380,198
(1) The fiscal year 2017 contained 53 weeks versus 52 weeks for all other years shown.
(2) Calculated using actual sales volume for stores open for the full year and an estimated annual sales volume for new stores opened
during the year.
(3) Calculated using Total Current Assets offset by Total Current Liabilities.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:
Results of Operations
The table below sets forth certain financial data of the Company expressed as a percentage of retail sales for the
years indicated:
Fiscal Year Ended
Retail sales …………………………………………………………..
Other revenue…………………………………………………………
Total revenues ……………………………………………………….
Cost of goods sold …………………………………………………..
Selling, general and administrative………………………………….
Depreciation …………………………………………………………
Interest and other income ……………………………………………
Income before income taxes …………………………………………
Net income …………………………………………………………..
Fiscal 2018 Compared to Fiscal 2017
February 2,
2019
February 3,
2018
January 28,
2017
100.0 %
1.0
101.0
63.6
32.0
2.0
0.6
4.0
3.7 %
100.0 %
0.9
100.9
65.7
31.6
2.3
0.6
1.9
1.0 %
100.0 %
1.0
101.0
63.5
30.7
2.4
0.8
5.2
5.0 %
Retail sales decreased by 2.5% to $821.1 million in fiscal 2018 compared to $842.0 million in fiscal 2017.
The decrease in retail sales in fiscal 2018 was largely attributable to flat same-store sales, non-comparable
store sales and an additional week of sales in 2017. Fiscal 2018 had 52 weeks versus 53 weeks in fiscal 2017.
Same-store sales includes stores that have been open more than 15 months. Stores that have been relocated or
expanded are also included in the same-store sales calculation after they have been open more than 15 months.
In fiscal 2018 and fiscal 2017, e-commerce sales were less than 3% of total sales and same-store sales. The
method of calculating same-store sales varies across the retail industry. As a result, our same-store sales
calculation may not be comparable to similarly titled measures reported by other companies. Total revenues,
comprised of retail sales and other revenue (principally finance charges and late fees on customer accounts
receivable, gift card breakage and layaway fees), decreased by 2.4% to $829.7 million in fiscal 2018 compared
to $850.0 million in fiscal 2017. The Company operated 1,311 stores at February 2, 2019 compared to 1,351
stores operated at February 3, 2018.
In fiscal 2018, the Company relocated one store and closed 40 stores.
Other revenue in total increased to $8.6 million in fiscal 2018 from $8.0 million in fiscal 2017. The
increase resulted primarily from increased shipping charges for e-commerce purchases and gift card breakage
being classified in other revenue due to the adoption of Topic 606, partially offset by lower finance charges
and lower layaway charges.
Credit revenue of $3.8 million represented 0.5% of total revenue in fiscal 2018, a $0.4 million decrease
compared to fiscal 2017 credit revenue of $4.2 million or 0.5% of total revenue. The decrease in credit
revenue was primarily due to reductions in finance and late charge income as a result of lower accounts
receivable balances. Credit revenue is comprised of interest earned on the Company’s private label credit card
portfolio and related fee income. Related expenses include principally bad debt expense, payroll, postage and
other administrative expenses and totaled $1.9 million in fiscal 2018 compared to $3.0 million in fiscal 2017.
See Note 14 of Notes to Consolidated Financial Statements for a schedule of credit-related expenses. Total
credit segment income before taxes increased $0.7 million to $1.9 million in fiscal 2018 from $1.2 million in
fiscal 2017 due to bad debt expense being included in retail sales in fiscal 2018, in accordance with Topic 606,
partially offset by lower credit revenue. Total credit income of $1.9 million in fiscal 2018 represented 5.7% of
total income before taxes of $33.1 million compared to total credit income of $1.2 million in fiscal 2017,
which represented 7.5% of fiscal 2017 total income before taxes of $16.0 million.
Cost of goods sold was $522.5 million, or 63.6% of retail sales, in fiscal 2018 compared to $553.1 million,
24
or 65.7% of retail sales, in fiscal 2017. The decrease in cost of goods sold as a percentage of sales resulted
primarily from increased sales of regular priced product and decreased buying costs. Cost of goods sold includes
merchandise costs, net of discounts and allowances, buying costs, distribution costs, occupancy costs, freight
and inventory shrinkage. Net merchandise costs and in-bound freight are capitalized as inventory costs. Buying
and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments
and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities and maintenance for stores and distribution facilities. Total gross margin dollars (retail
sales less cost of goods sold and excluding depreciation) increased by 3.3% to $298.6 million in fiscal 2018
from $288.9 million in fiscal 2017. Gross margin as presented may not be comparable to that of other
companies.
Selling, general and administrative expenses (“SG&A”), which primarily include corporate and store
payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing
fees and bad debts were $262.6 million in fiscal 2018 compared to $266.4 million in fiscal 2017, a decrease of
1.4%. As a percent of retail sales, SG&A was 32.0% compared to 31.6% in the prior year. The increase in
SG&A as a percent of sales resulted primarily from an increase in incentive bonuses, partially offset by lower
impairment expenses, professional fees and litigation.
Asset impairment charges decreased to $1,548,000 in fiscal 2018 compared to $7,698,000 in fiscal 2017
due to fewer stores being impaired in 2018 and a lower average impairment per store. The impairment charges
are related to lower estimated future cash flows resulting from significantly lower sales and income. See Note
1 to the Consolidated Financial Statements for further discussion.
Depreciation expense was $16.5 million in fiscal 2018 compared to $19.6 million in fiscal 2017.
Depreciation expense decreased from fiscal 2017 due to older stores and previous impairments of leasehold
improvements and fixtures, partially offset by store development and information technology expenditures.
Interest and other income decreased slightly to $5.0 million in fiscal 2018 compared to $5.1 million in
fiscal 2017. The decrease is primarily attributable to classifying gift card breakage in Other Revenue in 2018
due to the adoption of Topic 606.
Income tax expense was $2.6 million, or 0.3% of retail sales in fiscal 2018 compared to $7.4 million, or
0.9% of retail sales in fiscal 2017. The dollar decrease resulted primarily from one-time tax expenses in 2017
resulting from the 2017 Tax Cut and Jobs Act (the “Tax Act”) for the deemed repatriation tax and reduction of
the net deferred tax assets to reflect the reduction of the U.S. statutory rate, partially offset by higher pre-tax
income. The SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of
U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or
analyzed (including computations) in reasonable detail to complete the accounting for certain income tax
effects of the Tax Act. We recognized the provisional tax impacts related to deemed repatriated earnings and
revaluation of our deferred tax assets, and included those amounts in our Consolidated Financial Statements
for the year ended February 3, 2018. As of February 2, 2019, the accounting for income tax effects of the Tax
Act has been completed. The effective tax rate was 7.8% in fiscal 2018 compared to 46.5% in fiscal 2017. See
Note 12 to the Consolidated Financial Statements, “Income Taxes,” for further details.
Fiscal 2017 Compared to Fiscal 2016
Retail sales decreased by 11.1% to $842.0 million in fiscal 2017 compared to $947.4 million in fiscal 2016.
The decrease in retail sales in fiscal 2017 was largely attributable to a same-store sales decrease of 12%,
partially offset by a small increase in non-comparable store sales and an additional week of sales in 2017.
Fiscal 2017 had 53 weeks versus 52 weeks in fiscal 2016. Same-store sales includes stores that have been
open more than 15 months. Stores that have been relocated or expanded are also included in the same-store
sales calculation after they have been open more than 15 months. In fiscal 2017 and fiscal 2016, e-commerce
sales were less than 2% of total sales and same-store sales. The method of calculating same-store sales varies
across the retail industry. As a result, our same-store sales calculation may not be comparable to similarly titled
measures reported by other companies. Total revenues, comprised of retail sales and other revenue
(principally finance charges and late fees on customer accounts receivable, layaway fees and shipping charged
25
to customers for e-commerce purchases), decreased by 11.1% to $850.0 million in fiscal 2017 compared to
$956.6 million in fiscal 2016. The Company operated 1,351 stores at February 3, 2018 compared to 1,371
stores operated at January 28, 2017.
In fiscal 2017, the Company opened six new stores, relocated three stores and closed 26 stores.
Other revenue in total decreased to $8.0 million in fiscal 2017 from $9.2 million in fiscal 2016. The
decrease resulted primarily from lower finance charges and lower layaway charges, partially offset by
increased shipping charges for e-commerce purchases.
Credit revenue of $4.2 million represented 0.5% of total revenue in fiscal 2017, a decrease compared to
fiscal 2016 credit revenue of $4.9 million or 0.5% of total revenue. The decrease in credit revenue was
primarily due to reductions in finance and late charge income as a result of lower accounts receivable balances.
Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related
fee income. Related expenses include principally bad debt expense, payroll, postage and other administrative
expenses and totaled $3.0 million in fiscal 2017 compared to $3.2 million in fiscal 2016. See Note 14 of Notes
to Consolidated Financial Statements for a schedule of credit-related expenses. Total credit segment income
before taxes decreased $0.5 million from $1.7 million in fiscal 2016 to $1.2 million in fiscal 2017 due to lower
credit revenue. Total credit income of $1.2 million in fiscal 2017 represented 7.5% of total income before taxes
of $16.0 million compared to total credit income of $1.7 million in fiscal 2016, which represented 3.5% of
fiscal 2016 total income before taxes of $49.1 million.
Cost of goods sold was $553.1 million, or 65.7% of retail sales, in fiscal 2017 compared to $602.0 million,
or 63.5% of retail sales, in fiscal 2016. The increase in cost of goods sold as a percentage of sales resulted
primarily from increased sales of marked down product and increases in buying and occupancy costs. Cost of
goods sold includes merchandise costs, net of discounts and allowances, buying costs, distribution costs,
occupancy costs, freight and inventory shrinkage. Net merchandise costs and in-bound freight are capitalized
as inventory costs. Buying and distribution costs include payroll, payroll-related costs and operating expenses
for the buying departments and distribution center. Occupancy expenses include rent, real estate taxes,
insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Total
gross margin dollars (retail sales less cost of goods sold and excluding depreciation) decreased by 16.3% to
$288.9 million in fiscal 2017 from $345.4 million in fiscal 2016. Gross margin as presented may not be
comparable to that of other companies.
Selling, general and administrative expenses (“SG&A”), which primarily include corporate and store
payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing
fees and bad debts were $266.4 million in fiscal 2017 compared to $289.8 million in fiscal 2016, a decrease of
8.1%. As a percent of retail sales, SG&A was 31.6% compared to 30.6% in the prior year. The increase in
SG&A as a percent of sales resulted primarily from an increase in salaries, closed store expenses and health
insurance, partially offset by lower impairment expenses, professional fees and litigation.
Asset impairment charges decreased to $7,698,000 in fiscal 2017 compared to $13,561,000 in fiscal 2016
due to a lower average impairment per store. However, there were more stores impaired in fiscal 2017
compared to fiscal 2016. The impairment charges are related to lower estimated future cash flows resulting
from significantly lower sales and income. See Note 1 to the Consolidated Financial Statements for further
discussion.
Depreciation expense was $19.6 million in fiscal 2017 compared to $22.7 million in fiscal 2016.
Depreciation expense decreased from fiscal 2016 due to older stores and previous impairments of leasehold
improvements and fixtures, partially offset by store development and information technology.
Interest and other income decreased to $5.1 million in fiscal 2017 compared to $7.0 million in fiscal 2016.
The decrease is primarily attributable to a change in estimate related to the recognition of unredeemed gift card
breakage income in 2016.
Income tax expense was $7.4 million, or 0.9% of retail sales in fiscal 2017 compared to $1.9 million, or
26
0.2% of retail sales in fiscal 2016. The dollar increase resulted primarily from one-time tax expenses resulting
from the Tax Act for the deemed repatriation tax and reduction of the net deferred tax assets to reflect the
reduction of the U.S. statutory rate offset by significantly lower pre-tax income and favorable adjustments
from foreign and domestic tax initiatives. We have estimated the impact of the Tax Act incorporating
assumptions made based upon our current interpretation of the Tax Act. The SEC Staff issued SAB 118 to
address the application of U.S. GAAP in situations when a registrant does not have the necessary information
available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for
certain income tax effect of the Tax Act. We have recognized the provisional tax impacts related to deemed
repatriated earnings and revaluation of our deferred tax assets, and included those amounts in our consolidated
financial statements for the year ended February 3, 2018. The actual impact of the Tax Act may differ from our
estimates due to, among other things, further refinement of our calculations, changes in interpretations and
assumptions we have made, guidance that may be issued and actions we may take as a result of the Tax Act.
We expect the accounting to be completed within the measurement period, as allowed under SAB 118. The
effective tax rate was 46.5% in fiscal 2017 compared to 3.9% in fiscal 2016. See Note 12 to the Consolidated
Financial Statements, “Income Taxes,” for further details.
Off-Balance Sheet Arrangements
Other than operating leases in the ordinary course of business, the Company is not a party to any off-
balance sheet arrangements.
Critical Accounting Policies
The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial
Statements. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of the
Company’s financial statements in conformity with generally accepted accounting principles in the
United States (“GAAP”) requires management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements. The most significant accounting estimates
inherent in the preparation of the Company’s financial statements include the allowance for doubtful
accounts, inventory shrinkage, the calculation of potential asset impairment, workers’ compensation,
general and auto insurance liabilities, reserves relating to self-insured health insurance, and uncertain tax
positions.
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable and records an allowance for doubtful
accounts based on the accounts receivable aging and estimates of actual write-offs. The allowance is
reviewed for adequacy and adjusted, as necessary, on a quarterly basis. The Company also provides for
estimated uncollectible late fees charged based on historical write-offs. The Company’s financial results
can be impacted by changes in bad debt write-off experience and the aging of the accounts receivable
portfolio.
Merchandise Inventories
The Company’s inventory is valued using the weighted-average cost method and is stated at the net
realizable value. Physical inventories are conducted throughout the year to calculate actual shrinkage and
inventory on hand. Estimates based on actual shrinkage results are used to estimate inventory shrinkage,
which is accrued for the period between the last physical inventory and the financial reporting date. The
Company regularly reviews its inventory levels to identify slow moving merchandise and uses
27
markdowns to clear slow moving inventory.
Lease Accounting
The Company recognizes rent expense on a straight-line basis over the lease term as defined in ASC
840 - Leases. Our lease agreements generally provide for scheduled rent increases during the lease term
or rent holidays, including rental payments commencing at a date other than the date of initial occupancy.
We include any rent escalation and rent holidays in our straight-line rent expense. In addition, we record
landlord allowances for normal tenant improvements as deferred rent, which is included in other
noncurrent liabilities in the consolidated balance sheets. This deferred rent is amortized over the lease
term as a reduction of rent expense. Also, leasehold improvements are amortized using the straight-line
method over the shorter of their estimated useful lives or the related lease term. See Note 1 to the
Consolidated Financial Statements for further information on the Company’s accounting for its leases.
Impairment of Long-Lived Assets
The Company invests in leaseholds and equipment primarily in connection with the opening and
remodeling of stores and in computer software and hardware. The Company periodically reviews its store
locations and estimates the recoverability of its long-lived assets, which primarily relate to Fixtures and
equipment, Leasehold improvements, and Information technology equipment and software. An
impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair
value when the Company determines that projected cash flows associated with those long-lived assets will
not be sufficient to recover the carrying value. This determination is based on a number of factors,
including the store’s historical operating results and projected cash flows, which include future sales
growth projections. Further, in determining when to close a store, the Company considers real estate
development in the area and perceived local market conditions, which can be difficult to predict and may
be subject to change. In addition, the Company regularly evaluates its other long-lived assets and may
accelerate depreciation over the revised useful life if the asset is expected to be replaced or has limited
future value. When assets are retired or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in
income for that period.
Insurance Liabilities
The Company is primarily self-insured for healthcare, workers’ compensation and general liability
costs. These costs are significant primarily due to the large number of the Company’s retail locations and
associates. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed
and estimates of claims incurred but not reported, less amounts paid against such claims, and are not
discounted. Management reviews current and historical claims data in developing its estimates. The
Company also uses information provided by outside actuaries with respect to healthcare, workers’
compensation and general liability claims. If the underlying facts and circumstances of the claims change
or the historical experience upon which insurance provisions are recorded is not indicative of future
trends, then the Company may be required to make adjustments to the provision for insurance costs that
could be material to the Company’s reported financial condition and results of operations. Historically,
actual results have not significantly deviated from estimates.
Uncertain Tax Positions
The Company records liabilities for uncertain tax positions principally related to state income taxes as
of the balance sheet date. These liabilities reflect the Company’s best estimate of its ultimate income tax
liability based on the tax codes, regulations, and pronouncements of the jurisdictions in which we do
business. Estimating our ultimate tax liability involves significant judgments regarding the application of
complex tax regulations across many jurisdictions. Despite the Company’s belief that the estimates and
28
judgments are reasonable, differences between the estimated and actual tax liabilities can and do exist
from time to time. These differences may arise from settlements of tax audits, expiration of the statute of
limitations, or the evolution and application of the various jurisdictional tax codes and regulations. Any
differences will be recorded in the period in which they become known and could have a material effect
on the results of operations in the period the adjustment is recorded.
Revenue Recognition
On February 3, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers
(Topic 606)” (“Topic 606”) using the modified retrospective method applied to contracts which were
pending as of February 3, 2018. Financial results included in the Company’s Consolidated Statement of
Income for the twelve months ended February 2, 2019 are presented under Topic 606, while prior year
amounts have not been restated and continue to be reported in accordance with ASC 605, “Revenue
Recognition” (“Topic 605”). As a result of adopting Topic 606, the Company did not adjust opening
retained earnings.
The Company recognizes sales at the point of purchase when the customer takes possession of the
merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with
Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes
possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the
customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales
are recorded as deferred revenue until the customer takes possession or forfeits the merchandise. Gift
cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales
volumes and the Company’s experience; actual returns have not varied materially from historical
amounts. A provision is made for estimated write-offs associated with sales made with the Company’s
proprietary credit card. Amounts related to shipping and handling billed to customers in a sales
transaction are classified as Other revenue and the costs related to shipping product to customers (billed
and accrued) are classified as Cost of goods sold.
In accordance with Topic 606, in fiscal 2018, the Company recognized $591,000 of income on
unredeemed gift cards (“gift card breakage”) as a component of Other Revenue on the Consolidated
Statements of Income and Comprehensive Income. Under Topic 606, the Company recognizes gift card
breakage using an expected breakage percentage based on redeemed gift cards. In fiscal 2017 and 2016,
the Company recognized $1,380,000 and $3,434,000, respectively, of gift card breakage as a component
of Other income on the Consolidated Statements of Income and Comprehensive Income. See Note 2 for
further information on miscellaneous income. During the first quarter of 2016, the Company changed its
estimate for recognizing gift card breakage, changing the dormancy period to 24 months of inactivity
from 60 months of inactivity.
The Company offers its own proprietary credit card to customers. All credit activity is performed by
the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. The
Company estimated uncollectible amounts of $897,000 and $890,000 for the twelve months ended
February 2, 2019 and February 3, 2018, respectively, on the Company’s proprietary credit card sales of
$27.4 million and $27.5 million for the twelve months ended February 2, 2019 and February 3, 2018,
respectively.
Liquidity, Capital Resources and Market Risk
The Company has consistently maintained a strong liquidity position. Cash provided by operating
activities during fiscal 2018 was $60.2 million as compared to $36.0 million in fiscal 2017. These
amounts have enabled the Company to fund its regular operating needs, capital expenditure program, cash
dividend payments and selective repurchases of the Company’s common stock.
Cash provided by operating activities for these periods was primarily generated by earnings adjusted
29
for depreciation, share-based compensation and changes in working capital. The increase of $24.2 million
for fiscal 2018 compared to fiscal 2017 is primarily due to an increase in net income and a decrease in
prepaid assets, partially offset by a decrease in other noncurrent liabilities.
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 proposed capital expenditures, dividends and other operating requirements for fiscal
2019 and for the foreseeable future.
At February 2, 2019, the Company had working capital of $229.5 million compared to $233.4 million
and $271.9 million at February 3, 2018 and January 28, 2017, respectively.
At February 2, 2019, the Company had an unsecured revolving credit agreement, which provided for
borrowings of up to $35.0 million less the balance of any revocable letters of credit discussed below. The
revolving credit agreement is committed until August 2019. The credit agreement contains various
financial covenants and limitations, including the maintenance of specific financial ratios with which the
Company was in compliance as of February 2, 2019. There were no borrowings outstanding under this
credit facility as of the fiscal year ended February 2, 2019 or the fiscal year ended February 3, 2018.
The Company had no outstanding revocable letters of credit relating to purchase commitments at
February 2, 2019, February 3, 2018 and January 28, 2017.
Expenditures for property and equipment totaled $4.4 million, $11.1 million and $27.3 million in
fiscal 2018, 2017 and 2016, respectively. The expenditures for fiscal 2018 were primarily for investments
in new technology, automobile and home office improvements. In fiscal 2019, the Company is planning
to invest approximately $13.3 million in capital expenditures.
Net cash used in investing activities totaled $71.1 million for fiscal 2018 compared to net cash
provided by investing activities of $67.7 million for fiscal 2017 and $15.4 million used in fiscal 2016. In
fiscal 2018, the cash used was due primarily to the purchase of short-term investments, partially offset by
the sale of short-term investments.
Net cash used by financing activities totaled $45.2 million compared to net cash used of $72.0 million
for fiscal 2017 and $77.3 million for fiscal 2016. The decrease in cash used by financing activities was
primarily due to a decrease in share repurchases and dividends paid.
On February 28, 2019, the Board of Directors maintained the quarterly dividend at $0.33 per share,
which was paid on March 26, 2019. As of March 27, 2019, the Company repurchased 126,891 shares for
$1,695,000, primarily to offset dilution from its equity compensation plans.
The Company does not use derivative financial instruments.
See Note 4, “Fair Value Measurements,” for information regarding the Company’s financial assets
that are measured at fair value.
The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and
taxable governmental debt securities held in managed accounts with underlying ratings of A or better at
February 2, 2019. The state, municipal and corporate bonds and asset-backed securities have contractual
maturities which range from 1 month to 28.4 years. The U.S. Treasury Notes and Certificates of Deposit
have contractual maturities of 1 month. These securities are classified as available-for-sale and are recorded
as Short-term investments, Restricted cash and short-term investments and Other assets on the accompanying
Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported
net of taxes in Accumulated other comprehensive income. The asset-backed securities are bonds comprised
30
of auto loans and bank credit cards that carry AAA ratings. The auto loan asset-backed securities are backed
by static pools of auto loans that were originated and serviced by captive auto finance units, banks or finance
companies. The bank credit card asset-backed securities are backed by revolving pools of credit card
receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase,
Capital One, and Discover.
Additionally, at February 2, 2019, the Company had $0.7 million of corporate equities, which are
recorded within Other assets in the Consolidated Balance Sheets. At February 3, 2018, the Company had
$0.8 million of corporate equities, which are recorded within Other assets in the Consolidated Balance
Sheets.
Level 1 category securities are measured at fair value using quoted active market prices. Level 2
investment securities include corporate and municipal bonds for which quoted prices may not be available on
active exchanges for identical instruments. Their fair value is principally based on market values determined
by management with assistance of a third-party pricing service. Since quoted prices in active markets for
identical assets are not available, these prices are determined by the pricing service using observable market
information such as quotes from less active markets and/or quoted prices of securities with similar
characteristics, among other factors.
Deferred compensation plan assets consist primarily of life insurance policies. These life insurance
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on such factors as the fair value of the underlying assets and discounted cash flow and are therefore
classified within Level 3 of the valuation hierarchy. The Level 3 liability associated with the life
insurance policies represents a deferred compensation obligation, the value of which is tracked via
underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the
Consolidated Balance Sheets. These funds are designed to mirror the return of existing mutual funds and
money market funds that are observable and actively traded.
The following table shows the Company's obligations and commitments as of February 2, 2019,
to make future payments under noncancellable contractual obligations (in thousands):
Contractual Obligations (1)
Operating leases
Total Contractual Obligations
____________
Total
$ 193,611 $
$ 193,611 $
Payments Due During One Year Fiscal Period Ending
2023
2019
2022
2021
2020
69,601 $ 51,943 $ 35,196 $ 21,242 $ 12,986 $
69,601 $ 51,943 $ 35,196 $ 21,242 $ 12,986 $
Thereafter
2,643
2,643
(1) In addition to the amounts shown in the table above, $8.5 million of unrecognized tax benefits have been recorded as liabilities in accordance
with ASC 740 and we are uncertain if or when such amounts may be settled. See Note 12, Income Taxes, of the Consolidated Financial
Statements for additional information.
Recent Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies, Recently Adopted Accounting Policies and
Recent Accounting Pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
The Company is subject to market rate risk from exposure to changes in interest rates based on its
financing, investing and cash management activities, but the Company does not believe such exposure is
material.
31
Item 8. Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm ..................................................................
33
Consolidated Statements of Income and Comprehensive Income for the fiscal years ended
February 2, 2019, February 3, 2018 and January 28, 2017 ...............................................................
Consolidated Balance Sheets at February 2, 2019 and February 3, 2018 .............................................
35
36
Consolidated Statements of Cash Flows for the fiscal years ended February 2, 2019, February 3, 2018
and January 28, 2017.........................................................................................................................
37
Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 2, 2019,
February 3, 2018 and January 28, 2017 ............................................................................................
Notes to Consolidated Financial Statements ..........................................................................................
Schedule II — Valuation and Qualifying Accounts for the fiscal years ended February 2, 2019,
February 3, 2018 and January 28, 2017 ............................................................................................
38
39
67
32
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of The Cato Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Cato Corporation and its subsidiaries (the
“Company”) as of February 2, 2019 and February 3, 2018, and the related consolidated statements of income and
comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended
February 2, 2019, including the related notes and financial statement schedule in the accompanying index
(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal
control over financial reporting as of February 2, 2019, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of February 2, 2019 and February 3, 2018, and the results of its operations and
its cash flows for each of the three years in the period ended February 2, 2019 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of February 2, 2019, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting
was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
33
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 27, 2019
We have served as the Company’s auditor since 2003.
34
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
February 2, 2019
Fiscal Year Ended
February 3, 2018
January 28, 2017
REVENUES
Retail sales
Other revenue (principally finance charges,
late fees and layaway charges)
Total revenues
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of
depreciation shown below)
Selling, general and administrative (exclusive
of depreciation shown below)
Depreciation
Interest expense
Interest and other income
Cost and expenses, net
(Dollars in thousands, except per share data)
$
821,113 $
841,997 $
8,551
829,664
7,984
849,981
522,535
553,058
262,510
16,463
96
(4,991)
796,613
266,304
19,643
114
(5,111)
834,008
Income before income taxes
33,051
15,973
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Dividends per share
Comprehensive income:
Net income
Unrealized gain (loss) on available-for-sale
securities, net of deferred income taxes of
$77, $28, and ($608) for fiscal 2018, 2017
and 2016, respectively
Comprehensive income
$
$
$
$
$
$
2,590
7,433
30,461 $
8,540 $
1.23 $
1.23 $
1.32 $
0.34 $
0.34 $
1.32 $
30,461 $
8,540 $
47,212
244
30,705 $
(107)
8,433 $
(1,014)
46,198
947,370
9,199
956,569
601,985
289,619
22,716
176
(7,041)
907,455
49,114
1,902
47,212
1.72
1.72
1.29
See notes to consolidated financial statements.
35
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
February 2, 2019
February 3, 2018
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
Short-term investments
Restricted cash
Restricted short-term investments
Accounts receivable, net of allowance for doubtful accounts of $842 at
February 2, 2019 and $1,148 at February 3, 2018
Merchandise inventories
Prepaid expenses and other current assets
Total Current Assets
Property and equipment – net
Deferred income taxes
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Accrued bonus and benefits
Accrued income taxes
Total Current Liabilities
Other noncurrent liabilities
Commitments and contingencies
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; 22,838,149 and 23,045,039 shares issued at
February 2, 2019 and February 3, 2018, respectively
Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; 1,763,652 and 1,755,601 shares at
February 2, 2019 and February 3, 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total Stockholders' Equity
Total Liabilities and Stockholders’ Equity
$
$
$
$
24,603 $
182,711
606
3,196
28,137
119,585
11,750
370,588
94,304
11,209
21,805
497,906 $
84,282 $
45,658
11,146
-
141,086
39,984
-
-
78,047
118,836
3,217
505
28,018
121,535
22,322
372,480
109,368
12,570
21,658
516,076
82,605
52,825
2,971
680
139,081
50,642
-
-
767
774
59
105,580
210,507
(77)
316,836
497,906 $
58
99,948
225,894
(321)
326,353
516,076
See notes to consolidated financial statements.
36
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation
Provision for doubtful accounts
Purchase premium and premium amortization of investments
Share based compensation
Excess tax benefits from share-based compensation
Deferred income taxes
Loss on disposal of property and equipment
Impairment of assets
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable
Merchandise inventories
Prepaid and other assets
Accrued income taxes
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
Investing Activities:
Expenditures for property and equipment
Purchase of short-term investments
Sales of short-term investments
Purchase of other assets
Sales of other assets
Net cash provided by (used in) investing activities
Financing Activities:
Dividends paid
Repurchase of common stock
Proceeds from line of credit
Payments to line of credit
Proceeds from employee stock purchase plan
Excess tax benefits from share-based compensation
Proceeds from stock options exercised
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Non-cash activity:
Accrued plant and equipment
Accrued treasury stock
Year Ended
February 2, 2019 February 3, 2018
January 28, 2017
(Dollars in thousands)
$
30,461 $
8,540 $
47,212
16,463
470
576
4,939
-
1,285
1,089
1,548
(579)
1,950
10,384
(680)
(7,662)
60,244
(4,354)
(157,515)
91,023
(298)
7
(71,137)
(32,577)
(13,344)
-
-
570
-
189
(45,162)
(56,055)
19,643
690
3,834
4,196
-
1,176
2,127
7,698
1,780
24,147
(7,459)
(1,602)
(28,780)
35,990
(11,096)
(15,770)
95,203
(657)
6
67,686
(33,731)
(38,878)
21,000
(21,000)
484
-
95
(72,030)
31,646
81,264
25,209 $
49,618
81,264 $
22,716
832
783
4,199
40
(2,884)
2,060
13,561
5,442
(4,581)
(9,877)
879
(8,254)
72,128
(27,297)
(113,031)
125,186
(290)
-
(15,432)
(35,432)
(42,564)
29,500
(29,500)
501
(40)
230
(77,305)
(20,609)
70,227
49,618
326 $
-
634 $
-
1,099
1,853
$
$
See notes to consolidated financial statements.
37
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Class A
Class B
Common Common
Stock
Stock
Additional
Accumulated
Other
Total
Paid-in
Capital
Retained
Earnings
Comprehensive Stockholders'
Income
Equity
(Dollars in thousands)
Balance — January 30, 2016
Comprehensive income:
Net income
Unrealized losses on available-for-sale securities, net of deferred
income tax benefit of ($608)
Dividends paid ($1.29 per share)
Class A common stock sold through employee stock purchase
plan — 17,455 shares
Class A common stock sold through stock option plans —
8,051 shares
Class A common stock issued through restricted stock grant plans
96,465 shares
Windfall tax benefit from equity compensation plans
Repurchase and retirement of treasury shares – 1,320,182 shares
Balance — January 28, 2017
Comprehensive income:
Net income
Unrealized gains on available-for-sale securities, net of deferred
income tax liability of $28
Dividends paid ($1.32 per share)
Class A common stock sold through employee stock purchase
plan — 34,238 shares
Class A common stock sold through stock option plans —
4,025 shares
Class A common stock issued through restricted stock grant plans
169,907 shares
Windfall tax benefit from equity compensation plans
Repurchase and retirement of treasury shares – 2,082,535 shares
Balance — February 3, 2018
Comprehensive income:
Net income
Unrealized gains on available-for-sale securities, net of deferred
income tax liability of $77
Dividends paid ($1.32 per share)
Class A common stock sold through employee stock purchase
plan — 44,770 shares
Class B common stock sold through stock option plans —
8,051 shares
Class A common stock issued through restricted stock grant plans
341,744 shares
Repurchase and retirement of treasury shares – 593,404 shares
$
877 $
58 $
90,336 $
320,594 $
800 $
412,665
-
-
-
1
-
3
-
(44)
-
-
-
-
-
-
-
-
-
-
-
590
248
4,073
(40)
-
47,212
-
(35,432)
-
-
15
-
(44,374)
-
47,212
(1,014)
-
(1,014)
(35,432)
-
-
-
-
-
591
248
4,091
(40)
(44,418)
$
837 $
58 $
95,207 $
288,015 $
(214) $
383,903
-
-
-
1
-
6
-
(70)
-
-
-
-
-
-
-
-
-
-
-
569
112
4,060
-
-
8,540
-
(33,731)
-
-
27
-
(36,957)
-
8,540
(107)
-
(107)
(33,731)
-
-
-
-
-
570
112
4,093
-
(37,027)
$
774 $
58 $
99,948 $
225,894 $
(321) $
326,353
-
-
-
2
-
11
(20)
-
-
-
-
1
-
-
-
-
-
669
194
4,769
-
30,461
-
(32,577)
-
-
54
(13,325)
-
30,461
244
-
244
(32,577)
-
-
-
-
671
195
4,834
(13,345)
Balance — February 2, 2019
$
767 $
59 $ 105,580 $
210,507 $
(77) $
316,836
See notes to consolidated financial statements.
38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Principles of Consolidation: The Consolidated Financial Statements include the accounts of The Cato
Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts
and transactions have been eliminated.
Description of Business and Fiscal Year: The Company has two reportable segments — the
operation of a fashion specialty stores segment (“Retail Segment”) and a credit card segment (“Credit
Segment”). The apparel specialty stores operate under the names “Cato,” “Cato Fashions,” “Cato Plus,”
“It’s Fashion,” “It’s Fashion Metro” and “Versona,” including e-commerce websites. The stores are
located primarily in strip shopping centers principally in the southeastern United States. The Company’s
fiscal year ends on the Saturday nearest January 31 of the subsequent year.
Use of Estimates: The preparation of the Company’s financial statements in conformity with
accounting principles generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant accounting estimates reflected in the Company’s financial statements include the allowance
for doubtful accounts, inventory shrinkage, the calculation of potential asset impairment, workers’
compensation, general and auto insurance liabilities, reserves relating to self-insured health insurance, and
uncertain tax positions.
Cash and Cash Equivalents: Cash and cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Short-Term Investments: Investments with original maturities beyond three months are classified
as short-term investments. See Note 3 for the Company’s estimated fair value of, and other information
regarding, its short-term investments. The Company’s short-term investments are all classified as
available-for-sale. As they are available for current operations, they are classified on the Consolidated
Balance Sheets as Current Assets. Available-for-sale securities are carried at fair value, with unrealized
gains and temporary losses, net of income taxes, reported as a component of Accumulated other
comprehensive income. Other than temporary declines in the fair value of investments are recorded as a
reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a
reduction of Interest and other income in the accompanying Consolidated Statements of Income and
Comprehensive Income. The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized
gains and losses are included in Interest and other income.
Restricted Cash and Short-term Investments: The Company had $3.8 million and $3.7 million in
escrow at February 2, 2019 and February 3, 2018, respectively, as security and collateral for
administration of the Company’s self-insured workers’ compensation and general liability coverage,
which is reported as Restricted cash and Restricted short-term investments on the Consolidated Balance
Sheets.
Supplemental Cash Flow Information: Income tax payments, net of refunds received, for the fiscal
years ended February 2, 2019, February 3, 2018 and January 28, 2017 were a refund of $407,000, and
payments of $4,356,000 and $14,118,000, respectively.
Inventories: Merchandise inventories are stated at the net realizable value as determined by the
weighted-average cost method.
39
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and Equipment: Property and equipment are recorded at cost, including land. Maintenance
and repairs are expensed to operations as incurred; renewals and betterments are capitalized. Depreciation
is determined on the straight-line method over the estimated useful lives of the related assets excluding
leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful
life or lease term. For leases with renewal periods at the Company’s option, the Company generally uses
the original lease term plus reasonably assured renewal option periods (generally one five-year option
period) to determine estimated useful lives. Typical estimated useful lives are as follows:
Classification
Land improvements
Buildings
Leasehold improvements
Fixtures and equipment
Information technology equipment and software
Aircraft
Impairment of Long-Lived Assets
Estimated
Useful Lives
10 years
30-40 years
5-10 years
3-10 years
3-10 years
20 years
The Company invests in leaseholds and equipment primarily in connection with the opening and
remodeling of stores and in computer software and hardware. The Company periodically reviews its store
locations and estimates the recoverability of its long-lived assets, which primarily relate to Fixtures and
equipment, Leasehold improvements, and Information technology equipment and software. An
impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair
value when the Company determines that projected cash flows associated with those long-lived assets will
not be sufficient to recover the carrying value. This determination is based on a number of factors,
including the store’s historical operating results and projected cash flows, which include future sales
growth projections. Further, in determining when to close a store, the Company considers real estate
development in the area and perceived local market conditions, which can be difficult to predict and may
be subject to change. Asset impairment charges of $1,548,000, $7,698,000 and $13,561,000 were
incurred in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. In addition, the Company regularly
evaluates its other long-lived assets and may accelerate depreciation over the revised useful life if the
asset is expected to be replaced or has limited future value. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any
resulting gain or loss is reflected in income for that period.
Other Assets
Other assets are comprised of long-term assets, primarily insurance contracts related to deferred
compensation assets and land held for investment purposes.
40
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal Year Ended
February 3,
February 2,
2018
2019
(Dollars in thousands)
$
$
9,093
1,277
520
526
9,923
466
21,805
$
$
8,899
1,392
525
699
9,677
466
21,658
Other Assets
Deferred Compensation Investments
Miscellaneous Investments
Other Deposits
Investment In Partnership
Land Held for Investment
Other
Total Other Assets
Leases
The Company determines the classification of leases consistent with ASC 840 - Leases. The
Company leases all of its retail stores. Most lease agreements contain construction allowances and rent
escalations. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis
over the terms of the leases, including renewal periods considered reasonably assured, the Company
begins amortization as of the initial possession date which is when the Company enters the space and
begins to make improvements in preparation for intended use.
For deferred landlord allowances (construction allowances), the Company records a deferred rent
liability in Other noncurrent liabilities on the Consolidated Balance Sheets and amortizes the deferred rent
over the term of the respective lease as a reduction to Cost of goods sold on the Consolidated Statements
of Income and Comprehensive Income.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a
date other than the date of initial occupancy, the Company records minimum rental expenses on a
straight-line basis over the terms of the leases. Deferred landlord allowance and deferred step rent of
$19,334,000 are recorded in Other noncurrent liabilities at the end of February 2, 2019.
Revenue Recognition
In the First quarter of 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with
Customers (Topic 606)” (“Topic 606”) using the modified retrospective method applied to contracts
which were pending as of February 3, 2018. Financial results included in the Company’s Consolidated
Statement of Income for the twelve months ended February 2, 2019 are presented under Topic 606, while
prior year amounts have not been restated and continue to be reported in accordance with ASC 605,
“Revenue Recognition” (“Topic 605”). As a result of adopting Topic 606, the Company did not adjust
opening retained earnings.
The Company recognizes sales at the point of purchase when the customer takes possession of the
merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with
Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes
possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the
customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales
are recorded as deferred revenue until the customer takes possession or forfeits the merchandise. Gift
cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales
volumes and the Company’s experience; actual returns have not varied materially from historical
amounts. A provision is made for estimated write-offs associated with sales made with the Company’s
proprietary credit card. Amounts related to shipping and handling billed to customers in a sales
41
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
transaction are classified as Other revenue and the costs related to shipping product to customers (billed
and accrued) are classified as Cost of goods sold.
In accordance with Topic 606, in fiscal 2018, the Company recognized $591,000 of income on
unredeemed gift cards (“gift card breakage”) as a component of Other Revenue on the Consolidated
Statements of Income and Comprehensive Income. Under Topic 606, the Company recognizes gift card
breakage using an expected breakage percentage based on redeemed gift cards. In fiscal 2017 and 2016,
the Company recognized $1,380,000 and $3,434,000, respectively, of gift card breakage as a component
of Other income on the Consolidated Statements of Income and Comprehensive Income. See Note 2 for
further information on miscellaneous income. During the first quarter of 2016, the Company changed its
estimate for recognizing gift card breakage income, changing the dormancy period to 24 months of
inactivity from 60 months of inactivity.
The Company offers its own proprietary credit card to customers. All credit activity is performed by
the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. The
Company estimated uncollectible amounts of $897,000 and $890,000 for the twelve months ended
February 2, 2019 and February 3, 2018, respectively, on sales purchased on the Company’s proprietary
credit card of $27.4 million and $27.5 million for the twelve months ended February 2, 2019 and
February 3, 2018, respectively.
The following table provides information about receivables and contract liabilities from contracts with
customers (in thousands):
Proprietary Credit Card Receivables, net
Gift Card Liability
$
$
15,980
7,721
$
$
16,857
7,565
February 2, 2019
February 3, 2018
Balance as of
Cost of Goods Sold: Cost of goods sold includes merchandise costs, net of discounts and allowances,
buying costs, distribution costs, occupancy costs, freight, and inventory shrinkage. Net merchandise costs
and in-bound freight are capitalized as inventory costs. Buying and distribution costs include payroll,
payroll-related costs and operating expenses for our buying departments and distribution center.
Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and
maintenance for stores and distribution facilities. Buying, distribution, occupancy and internal transfer
costs are treated as period costs and are not capitalized as part of inventory. The direct costs associated
with shipping goods to customers are recorded as a component of Cost of goods sold.
Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising
expense was approximately $5,546,000, $5,558,000 and $6,868,000 for the fiscal years ended February 2,
2019, February 3, 2018 and January 28, 2017, respectively.
Stock Repurchase Program: For fiscal year ending February 2, 2019, the Company had 2,019,002
shares remaining in open authorizations. There is no specified expiration date for the Company’s
repurchase program. Share repurchases are recorded in Retained earnings, net of par value. As of March
27, 2019, the Company repurchased 126,891 shares for $1,695,000, primarily to offset dilution from its
equity compensation plans.
Earnings Per Share: ASC 260 - Earnings Per Share, requires dual presentation of basic EPS and
diluted EPS on the face of all income statements for all entities with complex capital structures. The
42
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company has presented one basic EPS and one diluted EPS amount for all common shares in the
accompanying 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 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.
The following table reflects the basic and diluted EPS calculations for the fiscal years ended February
2, 2019, February 3, 2018 and January 28, 2017:
Numerator
Net earnings
Earnings allocated to non-vested equity awards
Net earnings available to common stockholders
Denominator
Basic weighted average common shares outstanding
Dilutive effect of stock options and restricted stock
Diluted weighted average common shares outstanding
Net income per common share
Basic earnings per share
Diluted earnings per share
$
$
$
$
Fiscal Year Ended
February 2, 2019
February 3, 2018
(Dollars in thousands)
January 28, 2017
30,461 $
(862)
29,599 $
8,540 $
(172)
8,368 $
47,212
(956)
46,256
23,995,170
-
23,995,170
24,906,203
-
24,906,203
26,839,885
1,634
26,841,519
1.23 $
1.23 $
0.34 $
0.34 $
1.72
1.72
Vendor Allowances: The Company receives certain allowances from vendors primarily related to
purchase discounts and markdown and damage allowances. All allowances are reflected in Cost of goods
sold as earned when the related products are sold. Cash consideration received from a vendor is
presumed to be a reduction of the purchase cost of merchandise and is reflected as a reduction of
inventory. The Company does not receive cooperative advertising allowances.
Income Taxes: The Company files a consolidated federal income tax return. Income taxes are
provided based on the asset and liability method of accounting, whereby deferred income taxes are
provided for temporary differences between the financial reporting basis and the tax basis of the
Company’s assets and liabilities.
Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740
when, despite the fact that the tax return positions are supportable, the Company believes these positions
may be challenged and the results are uncertain. The Company adjusts these liabilities in light of
changing facts and circumstances. Potential accrued interest and penalties related to unrecognized tax
benefits within operations are recognized as a component of Income before income taxes.
43
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Tax Cuts and Jobs Act (the “Tax Act”) enacted during fiscal 2017 significantly revised U.S.
corporate income tax law by, among other things, reducing the corporate income tax rate to 21% and
implementing a modified territorial tax system that includes a one-time transition tax on deemed
repatriated earnings of foreign subsidiaries. The Company has finalized the impact of the enacted law
during the measurement period allowed by SEC Staff Accounting Bulletin (“SAB 118”).
In addition, the Tax Act implemented a new minimum tax on global intangible low-taxed income
(“GILTI”). The Company has elected to account for GILTI tax in the period in which it is incurred, which
is included as a component of its current year provision for income taxes.
Store Opening Costs: Costs relating to the opening of new stores or the relocating or
expanding of existing stores are expensed as incurred. A portion of construction, design, and site
selection costs are capitalized to new, relocated and remodeled stores.
Closed Store Lease Obligations: At the time stores are closed, provisions are made for the rentals
required to be paid over the remaining lease terms on a discounted cash flow basis, reduced by any
expected sublease rentals.
Insurance: The Company is self-insured with respect to employee health care, workers’ compensation
and general liability. The Company’s self-insurance liabilities are based on the total estimated cost of
claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and
are not discounted. Management reviews current and historical claims data in developing its estimates.
The Company has stop-loss insurance coverage for individual claims in excess of $325,000 for employee
healthcare, $350,000 for workers’ compensation and $250,000 for general liability.
Fair Value of Financial Instruments: The Company’s carrying values of financial instruments, such
as cash and cash equivalents, short-term investments, restricted cash and short-term investments,
approximate their fair values due to their short terms to maturity and/or their variable interest rates.
Stock Based Compensation: The Company records compensation expense associated with restricted
stock and other forms of equity compensation in accordance with ASC 718 - Compensation – Stock
Compensation. Compensation cost associated with stock awards recognized in all years presented
includes: 1) amortization related to the remaining unvested portion of all stock awards based on the grant
date fair value and 2) adjustments for the effects of actual forfeitures versus initial estimated forfeitures.
Recently Adopted Accounting Policies
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue
from Contracts with Customers (Topic 606),” that supersedes most current revenue recognition guidance
and modifies the accounting treatment for certain costs associated with revenue generation. The core
principle of the revised revenue recognition standard is that an entity should recognize revenue to depict
the transfer of goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those good or services, and provides several steps to apply to
achieve that principle. In addition, the new guidance enhances disclosure requirements to include more
information about specific revenue contracts entered into by the entity. Effective at the beginning of fiscal
2018 the Company adopted this new standard.
The Company has elected the modified retrospective approach to transition to Topic 606. As required
by this expedient, the Company assessed its open contracts with customers at February 3, 2018 to
determine the cumulative effect of initially applying this standard. The Company concluded that the
cumulative effect of initially applying this standard is not material. In addition, the Company assessed the
44
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
financial line items impacted by adopting this standard compared to the previous revenue guidance. The
Company concluded that any differences in financial statement line items are not material. Please refer to
Note 1, Summary of Significant Accounting Policies, for disclosures related to this adoption.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted
Cash (a consensus of the FASB Emerging Issues Task Force)." This standard requires that restricted cash
and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning-
of-period and end-of-period total amounts shown in the statement of cash flows. The Company adopted
the provisions of ASU 2016-18 in the first quarter of 2018 using the retrospective transition method. The
new guidance did not have a material impact on the financial statements.
Recently Issued Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board issued an effective date for ASU 2016-
02, “Leases (Topic 842),” a new leasing standard that will require substantially all leases to be recorded
on the balance sheet. The standard is effective for the Company’s first quarter of its 2019 fiscal year;
early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is
assessing what impacts this new standard will have on its Consolidated Financial Statements and expects
assets and liabilities to increase. We will continue evaluating the practical expedients as they are issued.
However, the adoption of this standard will result in the recognition of a lease liability and related right-
of-use asset and will materially impact our balance sheet.
2. Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
February 2, 2019 February 3, 2018 January 28, 2017
Dividend income
Interest income
Miscellaneous income
Net loss (gain) on investment sales
Interest and other income
$
$
(34) $
(3,893)
(1,109)
45
(4,991) $
(22) $
(2,433)
(2,616)
(40)
(5,111) $
(21)
(2,308)
(4,439)
(273)
(7,041)
3. Short-Term Investments:
At February 2, 2019, the Company’s investment portfolio was primarily invested in governmental
debt securities held in managed accounts. These securities are classified as available-for-sale as they are
highly liquid and are recorded on the Consolidated Balance Sheets at estimated fair value, with unrealized
gains and temporary losses reported net of taxes in Accumulated other comprehensive income.
The table below reflects gross accumulated unrealized gains (losses) in short-term investments at
February 2, 2019 and February 3, 2018 (in thousands):
45
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
February 2, 2019
February 3, 2018
Debt securities
issued by the U.S.
Government, its various
States, municipalities
and agencies
of each
Corporate
debt
securities
]
Cost basis
Unrealized gains
Unrealized (loss)
Estimated fair value $
71,953 $ 114,372 $
-
(371)
-
(147)
71,582 $ 114,225 $
Debt securities
issued by the U.S.
Government, its various
States, municipalities
Corporate
Total
186,325 $
-
(518)
185,807 $
and agencies
of each
debt
securities
96,701 $
-
(718)
95,983 $
23,079 $
-
(226)
22,853 $
Total
119,780
-
(944)
118,836
Accumulated other comprehensive income on the Consolidated Balance Sheets reflects the
accumulated unrealized net gains in short-term investments in addition to unrealized gains from equity
investments and restricted cash investments. The table below reflects gross accumulated unrealized gains
in these investments at February 2, 2019 and February 3, 2018 (in thousands):
February 2, 2019
February 3, 2018
Security Type
Short-Term Investments $
Equity Investments
Total
$
Unrealized
Gain/(Loss)
Deferred
Tax
Benefit
Unrealized
Net Gain/
(Loss)
Unrealized
Gain/(Loss)
Deferred
Tax
Benefit
Unrealized
Net Gain/
(Loss)
(518) $
417
(101) $
121 $
(97)
24 $
(397) $
320
(77) $
(945) $
524
(421) $
225 $
(125)
100 $
(720)
399
(321)
4. Fair Value Measurements:
The following tables set forth information regarding the Company’s financial assets that are measured
at fair value as of February 2, 2019 and February 3, 2018 (in thousands):
46
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Description
Assets:
February 2, 2019
Prices in
Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
State/Municipal Bonds
Corporate Bonds
U.S. Treasury/Agencies Notes and Bonds
Cash Surrender Value of Life Insurance
Asset-backed Securities (ABS)
Corporate Equities
Certificates of Deposit
Total Assets
$
54,346 $
90,891
17,236
9,093
23,334
690
101
$
195,691 $
- $
-
-
-
-
690
101
791 $
54,346 $
90,891
17,236
-
23,334
-
-
185,807 $
-
-
-
9,093
-
-
-
9,093
Liabilities:
Deferred Compensation
Total Liabilities
Description
Assets:
$
(8,908)
(8,908) $
-
- $
-
- $
(8,908)
(8,908)
Prices in
Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
February 3, 2018
$
State/Municipal Bonds
Corporate Bonds
U.S. Treasury/Agencies Notes and Bonds
Cash Surrender Value of Life Insurance
Asset-backed Securities (ABS)
Corporate Equities
Certificates of Deposit
95,983 $
22,535
404
8,900
318
798
100
Total Assets
$
129,038 $
- $
-
404
-
-
798
100
1,302 $
95,983 $
22,535
-
-
318
-
-
118,836 $
-
-
-
8,900
-
-
-
8,900
Liabilities:
Deferred Compensation
Total Liabilities
$
(8,951)
(8,951) $
-
- $
-
- $
(8,951)
(8,951)
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
February 2, 2019. The state, municipal and corporate bonds and asset-backed securities have contractual
maturities which range from 1 month to 28.4 years. The U.S. Treasury Notes and Certificates of Deposit
have contractual maturities of 1 month. These securities are classified as available-for-sale and are recorded
as Short-term investments, Restricted cash and short-term investments and Other assets on the accompanying
Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported
net of taxes in Accumulated other comprehensive income. The asset-backed securities are bonds comprised
of auto loans and bank credit cards that carry AAA ratings. The auto loan asset-backed securities are backed
by static pools of auto loans that were originated and serviced by captive auto finance units, banks or finance
companies. The bank credit card asset-backed securities are backed by revolving pools of credit card
receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase,
Capital One, and Discover.
Additionally, at February 2, 2019, the Company had $0.7 million of corporate equities, which are
recorded within Other assets in the Consolidated Balance Sheets. At February 3, 2018, the Company had
$0.8 million of corporate equities, which are recorded within Other assets in the Consolidated Balance
47
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sheets.
Level 1 category securities are measured at fair value using quoted active market prices. Level 2
investment securities include corporate and municipal bonds for which quoted prices may not be available on
active exchanges for identical instruments. Their fair value is principally based on market values determined
by management with assistance of a third-party pricing service. Since quoted prices in active markets for
identical assets are not available, these prices are determined by the pricing service using observable market
information such as quotes from less active markets and/or quoted prices of securities with similar
characteristics, among other factors.
Deferred compensation plan assets consist primarily of life insurance policies. These life insurance
policies are valued based on the cash surrender value of the insurance contract, which is determined based
on such factors as the fair value of the underlying assets and discounted cash flow and are therefore
classified within Level 3 of the valuation hierarchy. The Level 3 liability associated with the life
insurance policies represents a deferred compensation obligation, the value of which is tracked via
underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the
Consolidated Balance Sheets. These funds are designed to mirror the return of existing mutual funds and
money market funds that are observable and actively traded.
The following tables summarize the change in fair value of the Company’s financial assets and liabilities
measured using Level 3 inputs as of February 2, 2019 and February 3, 2018 (in thousands):
Beginning Balance at February 3, 2018
Additions
Total gains or (losses)
Included in interest and other income (or
changes in net assets)
Included in other comprehensive income
Ending Balance at February 2, 2019
$
$
Fair Value Measurements Using Significant
Unobservable Asset Inputs (Level 3)
Other
Investments
Private Equity
Cash
Surrender Value
Total
- $
-
-
-
- $
8,900 $
596
8,900
596
(403)
-
9,093 $
(403)
-
9,093
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at February 3, 2018
Additions
Total (gains) or losses
Included in interest and other income (or
changes in net assets)
Ending Balance at February 2, 2019
$
$
(8,951)
(105)
148
(8,908)
48
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Beginning Balance at January 28, 2017
Additions
Total gains or (losses)
Included in interest and other income (or
changes in net assets)
Included in other comprehensive income
Ending Balance at February 3, 2018
$
$
Fair Value Measurements Using Significant
Unobservable Asset Inputs (Level 3)
Other
Investments
Private Equity
Cash
Surrender Value
Total
- $
-
-
-
- $
7,973 $
307
7,973
307
620
-
8,900 $
620
-
8,900
Fair Value
Measurements Using
Significant Unobservable
Liability Inputs (Level 3)
Deferred
Compensation
Beginning Balance at January 28, 2017
Additions
Total (gains) or losses
Included in interest and other income (or
changes in net assets)
Ending Balance at February 3, 2018
$
$
(7,649)
(443)
(859)
(8,951)
5. Accounts Receivable:
Accounts receivable consist of the following (in thousands):
February 2, 2019
Customer accounts — principally deferred payment accounts
Miscellaneous receivables
Bank card receivables
Total
Less allowance for doubtful accounts
Accounts receivable — net
$
$
February 3, 2018
18,004
5,343
5,819
29,166
1,148
28,018
16,821 $
6,099
6,059
28,979
842
28,137 $
Finance charge and late charge revenue on customer deferred payment accounts totaled $3,814,000,
$4,222,000 and $4,906,000 for the fiscal years ended February 2, 2019, February 3, 2018 and January 28,
2017, respectively, and charges against the allowance for doubtful accounts were approximately
$470,000, $690,000 and $832,000 for the fiscal years ended February 2, 2019, February 3, 2018 and
January 28, 2017, respectively. Expenses relating to the allowance for doubtful accounts are classified as
a component of Selling, general and administrative expense in the accompanying Consolidated
Statements of Income and Comprehensive Income.
49
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Property and Equipment:
Property and equipment consist of the following (in thousands):
February 2, 2019
February 3, 2018
Land and improvements
Buildings
Leasehold improvements
Fixtures and equipment
Information technology equipment and software
Construction in progress
Total
Less accumulated depreciation
Property and equipment — net
$
$
13,552
35,773
90,827
212,012
58,473
-
410,637
316,333
94,304
$
$
13,550
35,461
93,620
217,873
58,458
64
419,026
309,658
109,368
Construction in progress primarily represents costs related to new store development and
investments in new technology.
7. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
Accrued employment and related items
Property and other taxes
Accrued self-insurance
Fixed assets
Other
Total
8. Financing Arrangements:
February 2,
2019
February 3,
2018
$
$
9,252
17,981
10,980
326
7,119
45,658
$
$
13,472
17,515
11,637
634
9,567
52,825
As of February 2, 2019, the Company had an unsecured revolving credit agreement to borrow $35.0
million less the balance of any revocable credits discussed below. The revolving credit agreement is
committed until August 2019. The credit agreement contains various financial covenants and limitations,
including the maintenance of specific financial ratios with which the Company was in compliance as of
February 2, 2019. There were no borrowings outstanding under this credit facility as of February 2, 2019,
February 3, 2018 or January 28, 2017. At February 2, 2019, the weighted average interest rate under the
credit facility was zero due to no borrowings outstanding at the end of the year.
At February 2, 2019, February 3, 2018 and January 28, 2017, the Company had no outstanding revocable
letters of credit relating to purchase commitments.
9. Stockholders’ Equity:
The holders of Class A Common Stock are entitled to one vote per share, whereas the holders of
Class B Common Stock are entitled to ten votes per share. Each share of Class B Common Stock may be
converted at any time into one share of Class A Common Stock. Subject to the rights of the holders of any
shares of Preferred Stock that may be outstanding at the time, in the event of liquidation, dissolution or
winding up of the Company, holders of Class A Common Stock are entitled to receive a preferential
distribution of $1.00 per share of the net assets of the Company. Cash dividends on the Class B Common
50
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock cannot be paid unless cash dividends of at least an equal amount are paid on the Class A Common
Stock.
The Company’s certificate of incorporation provides that shares of Class B Common Stock may be
transferred only to certain “Permitted Transferees” consisting generally of the lineal descendants of
holders of Class B Common Stock, trusts for their benefit, corporations and partnerships controlled by
them and the Company’s employee benefit plans. Any transfer of Class B Common Stock in violation of
these restrictions, including a transfer to the Company, results in the automatic conversion of the
transferred shares of Class B Common Stock held by the transferee into an equal number of shares of
Class A Common Stock.
On March 26, 2019, the Company paid a quarterly dividend of $0.33 per share.
10. Employee Benefit Plans:
The Company has a defined contribution retirement savings plan (“401(k) plan”) which covers all
associates who meet minimum age and service requirements. The 401(k) plan allows participants to
contribute up to 75% of their annual compensation up to the maximum elective deferral, designated by
the IRS. The Company is obligated to make a minimum contribution to cover plan administrative
expenses. Further Company contributions are at the discretion of the Board of Directors. The Company’s
contributions for the years ended February 2, 2019, February 3, 2018 and January 28, 2017 were
approximately $1,442,000, $1,207,000 and $1,234,000, respectively.
The Company has a trusteed, non-contributory Employee Stock Ownership Plan (“ESOP”), which
covers substantially all associates who meet minimum age and service requirements. The amount of the
Company’s discretionary contribution to the ESOP is determined annually by the Compensation
Committee of the Board of Directors and can be made in Company Class A Common stock or cash. The
Company has chosen to contribute cash and the plan purchases stock on the open market consistent with
prior years. The Committee approved a contribution of approximately $1,229,000 for the year ended
February 2, 2019. The Company’s contribution was $1,026,000 and $689,000 for the years ended
February 3, 2018 and January 28, 2017, respectively.
The Company is primarily self-insured for healthcare. These costs are significant primarily due to the
large number of the Company’s retail locations and associates. The Company’s self-insurance liabilities
are based on the total estimated costs of claims filed and estimates of claims incurred but not reported,
less amounts paid against such claims. Management reviews current and historical claims data in
developing its estimates. If the underlying facts and circumstances of the claims change or the historical
trend is not indicative of future trends, then the Company may be required to record additional expense or
a reduction to expense which could be material to the Company’s reported financial condition and results
of operations. The Company funds healthcare contributions to a third-party provider.
11. Leases:
The Company has operating lease arrangements for store facilities and equipment. Facility leases
generally are at a fixed rate for periods of five years with renewal options. For leases with landlord capital
improvement funding, the funded amount is recorded as a deferred liability and amortized over the term
of the lease as a reduction to rent expense on the Consolidated Statements of Income and Comprehensive
Income. Equipment leases are generally for one- to three-year periods.
The minimum rental commitments under non-cancelable operating leases are (in thousands):
51
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal Year
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
69,601
51,943
35,196
21,242
12,986
2,643
$ 193,611
The following schedule shows the composition of total rental expense for all leases (in thousands):
Fiscal Year Ended
Minimum rentals
Contingent rent
Total rental expense
12. Income Taxes:
February 2,
2019
February 3,
2018
January 28,
2017
$
$
69,871 $
70,971 $
1
-
69,872 $
70,971 $
70,681
3
70,684
Unrecognized tax benefits for uncertain tax positions, primarily recorded in Other noncurrent
liabilities, are established in accordance with ASC 740 when, despite the fact that the tax return positions
are supportable, the Company believes these positions may be challenged and the results are uncertain.
The Company adjusts these liabilities in light of changing facts and circumstances. As of February 2,
2019, the Company had gross unrecognized tax benefits totaling approximately $8.5 million, of which
approximately $10.6 million (inclusive of interest) would affect the effective tax rate if recognized. The
Company had approximately $3.2 million, $2.8 million and $4.1 million of interest and penalties accrued
related to uncertain tax positions as of February 2, 2019, February 3, 2018 and January 28, 2017,
respectively. The Company recognizes interest and penalties related to the resolution of uncertain tax
positions as a component of income tax expense. The Company recognized $1,023,000, $986,000 and
$716,000 of interest and penalties in the Consolidated Statements of Income and Comprehensive Income
for the years ended February 2, 2019, February 3, 2018 and January 28, 2017, respectively. The
Company is no longer subject to U.S. federal income tax examinations for years before 2015. In state and
local tax jurisdictions, the Company has limited exposure before 2008. During the next 12 months,
various state and local taxing authorities’ statutes of limitations will expire and certain state examinations
may close, which could result in a potential reduction of unrecognized tax benefits for which a range
cannot be determined.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows
(in thousands):
52
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal Year Ended
Balances, beginning
Additions for tax positions of the current year
Reduction for tax positions of prior years for:
Changes in judgment
Settlements during the period
Lapses of applicable statutes of limitations
Balances, ending
February 2,
2019
February 3,
2018
January 28,
2017
$
9,531 $
420
10,668 $
2,537
9,560
2,618
-
(419)
(1,047)
8,485 $
(1,209)
(390)
(2,075)
9,531 $
-
(328)
(1,182)
10,668
$
The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended
Current income taxes:
Federal
State
Foreign
Total
Deferred income taxes:
Federal
State
Foreign
Total
Total income tax expense
February 2,
2019
February 3,
2018
January 28,
2017
$
$
281 $
(359)
1,371
1,293
2,064
(767)
-
1,297
2,590 $
1,726 $
1,401
1,952
5,079
3,816
(1,462)
-
2,354
7,433 $
(411)
873
2,053
2,515
45
(644)
(14)
(613)
1,902
Significant components of the Company’s deferred tax assets and liabilities as of February 2, 2019 and
February 3, 2018 are as follows (in thousands):
53
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax assets:
Allowance for doubtful accounts
Inventory valuation
Non-deductible accrued liabilities
Other taxes
Federal benefit of uncertain tax positions
Equity compensation expense
Net Operating Losses
Charitable contribution carryover
State Tax Credits
Other
Total deferred tax assets
Deferred tax liabilities
Property and equipment
Deferred lease liability
Accrued self-insurance reserves
Other
Total deferred tax liabilities
Net deferred tax assets
February 2,
2019
February 3,
2018
$
$
180
1,604
1,589
1,133
1,111
4,242
1,484
1,568
1,150
1,242
15,303
1,529
1,977
481
107
4,094
11,209
$
$
198
1,758
3,248
1,152
1,268
4,321
851
2,041
789
1,188
16,814
1,859
1,191
1,043
151
4,244
12,570
As of February 2, 2019, the Company’s position is that its overseas subsidiaries will not invest
undistributed earnings indefinitely. Future unremitted earnings when distributed are expected to be either
distributions of GILTI-previously taxed income or eligible for a 100% dividends received deduction. The
withholding tax rate on any unremitted earnings is zero and state income taxes on such earnings are
considered immaterial. Therefore, the Company has not provided deferred U.S. income taxes on
approximately $7.1 million of earnings from non-U.S. subsidiaries.
The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows:
Fiscal Year Ended
Federal income tax rate
State income taxes
Global Intangible Low-taxed
Income
Foreign Tax Credit
Foreign rate differential
Offshore Claim
Deemed Repatriation
Work Opportunity Credit
Addback on Wage Related Credits
Tax exempt interest
Charitable contribution of inventory
Uncertain tax positions
Deferred rate change
Other
Effective income tax rate
February 2,
2019
February 3,
2018
January 28,
2017
33.7 %
(4.7)
-
-
(28.8)
(15.6)
38.6
(6.0)
2.0
(4.4)
(1.0)
(4.4)
39.2
(2.1)
46.5 %
35.0 %
(0.2)
-
-
(9.3)
(4.1)
-
(3.4)
1.2
(1.6)
(13.1)
2.4
-
(3.0)
3.9 %
21.0 %
1.1
6.2
(4.0)
(2.6)
(5.7)
-
(3.4)
0.7
(2.4)
-
(1.5)
(2.0)
0.4
7.8 %
54
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Tax Act enacted in fiscal 2017 significantly revised U.S. corporate income tax law by, among
other things, reducing the corporate income tax rate to 21% and implementing a modified territorial tax
system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. In
response to the Tax Act, the SEC issued SAB 118, which allows issuers to recognize provisional
estimates of the impact of the Tax Act in their financial statements and adjust in the period in which the
estimate becomes finalized, or in circumstances where estimates cannot be made, to disclose and
recognize within a one-year measurement period. As of February 2, 2019, the accounting for the income
tax effects of the Tax Act has been completed.
Implementation of the Tax Act during 2017 resulted in an approximate $6.2 million charge for the
revaluation of the Company’s net domestic deferred tax assets and a one-time provisional transition tax
charge of approximately $6.1 million, of which $5.7 million was recorded in non-current liabilities in
fiscal 2017. As of February 2, 2019, the Company has finalized these amounts. The finalization of the
revaluation of the Company’s net domestic deferred tax assets resulted in a $.5 million benefit included as
a component of its current year provision for income taxes and the non-current liability associated with
the one-time transition tax charge was extinguished in 2018.
13. Quarterly Financial Data (Unaudited):
Summarized quarterly financial results are as follows (in thousands, except per share data):
Fiscal 2018
Total revenues
Gross profit (exclusive of depreciation)
Net income (loss)
Basic earnings per share
Diluted earnings per share
Fiscal 2017
Total revenues
Gross profit (exclusive of depreciation)
Net income (loss)
Basic earnings per share
Diluted earnings per share
14. Reportable Segment Information:
Second Third Fourth
First
$ 238,300 $ 208,917 $ 190,012 $ 192,435
65,002
(3,232)
(0.13)
(0.13)
66,998
3,800
0.16 $
0.16 $
79,116
6,482
96,013
23,411
0.26 $
0.26 $
0.94 $
0.94 $
$
$
Fourth
First
Second Third
$ 239,741 $ 206,961 $ 190,273 $ 213,006
65,811
71,451
2,694 (15,506)
(0.62)
0.11 $
(0.62)
0.11 $
65,703
(881)
(0.03) $
(0.03) $
93,958
22,233
0.85 $
0.85 $
$
$
The Company has determined that it has four operating segments, as defined under ASC 280-10,
including Cato, It’s Fashion, Versona and Credit. As outlined in ASC 280-10, the Company has two
reportable segments: Retail and Credit. The Company has aggregated its three retail operating segments,
including e-commerce, based on the aggregation criteria outlined in ASC 280-10, which states that two or
more operating segments may be aggregated into a single reportable segment if aggregation is consistent with
the objective and basic principles of ASC 280-10, which require the segments have similar economic
characteristics, products, production processes, clients and methods of distribution.
The Company’s retail operating segments have similar economic characteristics and similar operating,
financial and competitive risks. They are similar in terms of product offered, as they all offer women’s
apparel, shoes and accessories. Merchandise inventory of the Company’s retail operating segments is
sourced from the same countries and some of the same vendors, using similar production processes.
Merchandise for the Company’s retail operating segments is distributed to retail stores in a similar manner
55
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
through the Company’s single distribution center and is subsequently distributed to clients in a similar
manner.
The Company offers its own credit card to its customers and all credit authorizations, payment
processing, and collection efforts are performed by a separate subsidiary of the Company.
The following schedule summarizes certain segment information (in thousands):
Fiscal 2018
Retail
Credit
Total
Revenues
Depreciation
Interest and other income
Income before taxes
Capital expenditures
Fiscal 2017
Revenues
Depreciation
Interest and other income
Income before taxes
Capital expenditures
Fiscal 2016
Revenues
Depreciation
Interest and other income
Income before taxes
Capital expenditures
$
$
$
825,850 $
16,441
4,991
31,149
4,315
3,814 $
22
-
1,902
39
829,664
16,463
4,991
33,051
4,354
Retail
Credit
Total
845,759 $
19,604
5,111
14,762
11,047
4,222 $
39
-
1,211
49
849,981
19,643
5,111
15,973
11,096
Retail
Credit
Total
951,663 $
22,667
7,041
47,447
27,248
4,906 $
49
-
1,667
49
956,569
22,716
7,041
49,114
27,297
Retail
Credit
Total
Total assets as of February 2, 2019
Total assets as of February 3, 2018
$
454,143 $
469,652
43,763 $
46,424
497,906
516,076
The accounting policies of the segments are the same as those described in the Summary of Significant
Accounting Policies in Note 1. The Company evaluates performance based on profit or loss from operations
before income taxes. The Company does not allocate certain corporate expenses to the credit segment.
The following schedule summarizes the direct expenses of the credit segment which are reflected in
Selling, general and administrative expenses (in thousands):
February 2, 2019
February 3, 2018
January 28, 2017
Bad debt expense
Payroll
Postage
Other expenses
Total expenses
$
$
- $
749
506
635
1,890 $
832
865
635
858
3,190
690 $
861
546
875
2,972 $
56
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Stock Based Compensation:
As of February 2, 2019, the Company had four long-term compensation plans pursuant to which stock-
based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option
Plan is for the granting of options to officers and key employees. As of February 2, 2019, there were no
available stock options for grant. The 2018 Incentive Compensation Plan, 2013 Incentive Compensation Plan
and 2004 Amended and Restated Incentive Compensation Plan are for the granting of various forms of
equity-based awards, including restricted stock and stock options for grant, to officers, directors and key
employees. Effective May 24, 2018 and May 23, 2013, shares for grant were no longer available under the
2013 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan,
respectively.
The following table presents the number of options and shares of restricted stock initially authorized
and available for grant under each of the plans as of February 2, 2019:
Options and/or restricted stock initially authorized
Options and/or restricted stock available for grant:
February 3, 2018
February 2, 2019
1987
Plan
2013
Plan
5,850,000 1,350,000 1,500,000 4,725,000 13,425,000
2018
Plan
2004
Plan
Total
-
-
- 856,473
-
856,473
-
- 4,514,151 4,514,151
In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date
of grant based on the market price of the Company’s stock and is amortized to compensation expense on a
straight-line basis over a five-year vesting period. As of February 2, 2019, there was $11,989,000 of total
unrecognized compensation expense related to unvested restricted stock awards, which is expected to be
recognized over a remaining weighted-average vesting period of 2.2 years. The total grant date fair value
of the shares recognized as compensation expense during the twelve months ended February 2, 2019,
February 3, 2018 and January 28, 2017 was $4,833,000, $4,093,000 and $4,091,000, respectively. The
expenses are classified as a component of Selling, general and administrative expenses in the
Consolidated Statements of Income and Comprehensive Income.
The following summary shows the changes in the shares of unvested restricted stock outstanding during
the years ended February 2, 2019, February 3, 2018 and January 28, 2017:
57
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock awards at January 30, 2016
Granted
Vested
Forfeited or expired
Restricted stock awards at January 28, 2017
Granted
Vested
Forfeited or expired
Restricted stock awards at February 3, 2018
Granted
Vested
Forfeited or expired
Number of
Shares
Weighted Average
Grant Date Fair
Value Per Share
576,676 $
148,591
(103,808)
(60,136)
561,323 $
191,919
(125,761)
(32,302)
595,179 $
354,385
(139,669)
(38,044)
29.71
36.83
25.19
31.68
32.22
22.44
26.40
31.52
30.33
16.20
29.87
24.34
Restricted stock awards at February 2, 2019
771,851 $
24.22
The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a
limited number of shares of the Company’s Class A Common Stock during each semi-annual offering
period at a 15% discount through payroll deductions. During the twelve month period ended February 2,
2019, the Company sold 44,770 shares to employees at an average discount of $2.25 per share under the
Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under
the Employee Stock Purchase Plan was approximately $101,000, $86,000 and $88,000 for fiscal years
2018, 2017 and 2016, respectively. These expenses are classified as a component of Selling, general and
administrative expenses.
The following is a summary of changes in stock options outstanding during the year ended February
2, 2019:
Options outstanding at February 3, 2018
Granted
Forfeited or expired
Exercised
Outstanding at February 2, 2019
Vested and exercisable at February 2, 2019
8,051 $
-
-
(8,051)
- $
- $
Weighted
Average
Exercise
Shares
Price
23.56
-
Weighted
Average
Remaining
Contractual
Term
5.25 years
Aggregate
Intrinsic
Value (a)
$
-
-
-
-
0 years
0 years
$
$
-
-
(a) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise
price of the option.
No options were granted in fiscal 2018, fiscal 2017 and fiscal 2016. The Company utilizes the Black–
Scholes method to estimate the fair value of share based payments.
The total intrinsic value of options exercised during the years ended February 2, 2019, February 3,
2018 and January 28, 2017 were $5,000, $0 and $109,000, respectively.
58
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The stock option expense was $4,000, $17,000 and $17,000 for the twelve months ended February 2,
2019, February 3, 2018 and January 28, 2017, respectively.
16. Commitments and Contingencies:
The Company is, from time to time, involved in routine litigation incidental to the conduct of our
business, including litigation regarding the merchandise that we sell, litigation regarding intellectual
property, litigation instituted by persons injured upon premises under our control, litigation with respect
to various employment matters, including alleged discrimination and wage and hour litigation, and
litigation with present or former employees. During the third quarter of 2018, the Company favorably
settled certain litigation matters, which are reflected in Selling, general and administrative expenses in the
Consolidated Statements of Income and Comprehensive Income.
Although such litigation is routine and incidental to the conduct of our business, as with any business
of our size with a significant number of employees and significant merchandise sales, such litigation
could result in large monetary awards. Based on information currently available, management does not
believe that any reasonably possible losses arising from current pending litigation will have a material
adverse effect on our Consolidated Financial Statements. However, given the inherent uncertainties
involved in such matters, an adverse outcome in one or more such matters could materially and adversely
affect the Company’s financial condition, results of operations and cash flows in any particular reporting
period. The Company accrues for these matters when the liability is deemed probable and reasonably
estimable.
17. Accumulated Other Comprehensive Income:
The following table sets forth information regarding the reclassification out of Accumulated other
comprehensive income (in thousands) as of February 2, 2019:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at February 3, 2018
$
Other comprehensive income/(loss) before
reclassification
Amounts reclassified from accumulated
other comprehensive income (b)
Net current-period other comprehensive
income/(loss)
Ending Balance at February 2, 2019
$
(321)
278
(34)
244
(77)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive
income (“OCI”).
(b) Includes $45 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 $11.
Amounts in parentheses indicate a debit/reduction to OCI.
59
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth information regarding the reclassification out of Accumulated other
comprehensive income (in thousands) as of February 3, 2018:
Changes in Accumulated Other
Comprehensive Income (a)
Unrealized Gains
and (Losses) on
Available-for-Sale
Securities
Beginning Balance at January 28, 2017
$
Other comprehensive income/(loss) before
reclassification
Amounts reclassified from accumulated
other comprehensive income (b)
Net current-period other comprehensive income/(loss)
Ending Balance at February 3, 2018
$
(214)
(135)
28
(107)
(321)
(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to OCI.
(b) Includes ($36) impact of accumulated other comprehensive income reclassifications into Interest and other
income for net gains on available-for-sale securities. The tax impact of this reclassification was ($9). Amounts in
parentheses indicate a debit/reduction to OCI.
60
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
None.
Item 9A. Controls and Procedures:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, with the participation of our Principal Executive Officer and Principal
Financial Officer, of the effectiveness of our disclosure controls and procedures as of February 2, 2019.
Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that,
as of February 2, 2019, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the
Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are
required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our Principal Executive
Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of
our management, including our Principal Executive Officer and Principal Financial Officer, we carried
out an evaluation of the effectiveness of our internal control over financial reporting as of February 2,
2019 based on the Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of February 2,
2019.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the
effectiveness of our internal control over financial reporting as of February 2, 2019, as stated in its report
which is included herein.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended February 2, 2019 that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item 9B. Other Information:
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance:
Information contained under the captions “Election of Directors,” “Meetings and Committees,”
“Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the
Registrant’s Proxy Statement for its 2019 annual stockholders’ meeting (the “2019 Proxy Statement”) is
incorporated by reference in response to this Item 10. The information in response to this Item 10
regarding executive officers of the Company is contained in Item 3A, Part I hereof under the caption
“Executive Officers of the Registrant.”
Item 11. Executive Compensation:
61
Information contained under the captions “2018 Executive Compensation,” “Fiscal Year 2018 Director
Compensation,” “Corporate Governance Matters-Compensation Committee Interlocks and Insider
Participation” in the Company’s 2019 Proxy Statement is incorporated by reference in response to this
Item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters:
Equity Compensation Plan Information
The following table provides information about stock options outstanding and shares available for
future awards under all of Cato’s equity compensation plans. The information is as of February 2, 2019.
(a)
Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants and Rights (1)
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights (1)
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a)) (2)
-
-
-
-
-
-
4,628,986
-
4,628,986
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
(1) This column contains information regarding employee stock options only; there are no outstanding
warrants or stock appreciation rights.
(2) Includes the following:
the Company’s
Under
2018
Incentive Compensation Plan, 4,514,151 shares are available for grant. Under this plan, non-
qualified stock options may be granted to key associates.
incentive
referred
stock
plan,
the
as
to
Under the 2013 Employee Stock Purchase Plan, 114,835 shares are available. Eligible associates
may participate in the purchase of designated shares of the Company’s common stock. The
purchase price of this stock is equal to 85% of the lower of the closing price at the beginning or the
end of each semi-annual stock purchase period.
Information contained under “Security Ownership of Certain Beneficial Owners and Management”
in the 2019 Proxy Statement is incorporated by reference in response to this Item.
Item 13. Certain Relationships and Related Transactions, and Director Independence:
Information contained under the caption “Certain Relationships and Related Person Transactions,”
“Corporate Governance Matters-Director Independence” and “Meetings and Committees” in the 2019
Proxy Statement is incorporated by reference in response to this Item.
Item 14. Principal Accountant Fees and Services:
Information contained under the captions “Ratification of Independent Registered Public Accounting
Firm-Audit Fees” and “-Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Service by the Independent Registered Public Accounting Firm” in the 2019 Proxy Statement is
incorporated by reference in response to this item.
62
PART IV
Item 15. Exhibits and Financial Statement Schedules:
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Page
Report of Independent Registered Public Accounting Firm ....................................................................
33
Consolidated Statements of Income and Comprehensive Income for the fiscal years ended
February 2, 2019, February 3, 2018 and January 28, 2017 ....................................................................
Consolidated Balance Sheets at February 2, 2019 and February 3, 2018 .................................................
Consolidated Statements of Cash Flows for the fiscal years ended February 2, 2019, February 3, 2018
and January 28, 2017 ................................................................................................................................
Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 2, 2019,
February 3, 2018 and January 28, 2017 ....................................................................................................
Notes to Consolidated Financial Statements .............................................................................................
(2) Financial Statement Schedule: The following report and financial statement schedule is filed
35
36
37
38
39
herewith:
Schedule II — Valuation and Qualifying Accounts .................................................................................
67
All other schedules are omitted as the required information is inapplicable or the information is
presented in the Consolidated Financial Statements or related Notes thereto.
(3) Index to Exhibits: The following exhibits listed in the Index below are filed with this report or, as
noted, incorporated by reference herein. The Company will supply copies of the following exhibits to any
shareholder upon receipt of a written request addressed to the Corporate Secretary, The Cato Corporation,
8100 Denmark Road, Charlotte, NC 28273 and the payment of $.50 per page to help defray the costs of
handling, copying and postage. In most cases, documents incorporated by reference to exhibits to our
registration statements, reports or proxy statements filed by the Company with the Securities and
Exchange Commission are available to the public over the Internet from the SEC’s web site at
http://www.sec.gov.
63
Exhibit
Number
Description of Exhibit
3.1
3.2
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
Registrant’s Restated Certificate of Incorporation of the Registrant dated March 6, 1987,
incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed February 7,
2000 (SEC File No. 333–96283).
Registrant’s By Laws incorporated by reference to Exhibit 99.2 to Form 8-K of the
Registrant filed December 10, 2007.
2004 Incentive Compensation Plan, amended and restated as of May 22, 2008,
incorporated by reference to Appendix A to Definitive Proxy Statement on Schedule 14A
filed April 11, 2008.
2013 Incentive Compensation Plan, incorporated by reference to Exhibit 4.1 to Form S-8
of the Registrant filed May 31, 2013 (SEC file No. 333-188993).
2018 Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 to Form S-8
of the Registrant filed June 1, 2018 (SEC file No. 333-225350).
Form of Agreement, dated as of August 29, 2003, between the Registrant and Wayland H.
Cato, Jr., incorporated by reference to Exhibit 99(c) to Form 8-K of the Registrant filed on
July 22, 2003.
Form of Agreement, dated as of August 29, 2003, between the Registrant and Edgar T.
Cato, incorporated by reference to Exhibit 99(d) to Form 8-K of the Registrant filed on
July 22, 2003.
Retirement Agreement between Registrant and Wayland H. Cato, Jr. dated August 29,
2003 incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for quarter
ended August 2, 2003.
Retirement Agreement between Registrant and Edgar T. Cato dated August 29, 2003,
incorporated by reference to Exhibit 10.2 to Form 10-Q of the Registrant for the quarter
ended August 2, 2003.
Letter Agreement between the Registrant and John R. Howe dated as of August 28, 2008,
incorporated by Reference to Exhibit 99.1 to Form 8-K of the Registrant filed September 3,
2008.
10.11*
Deferred Compensation Plan effective July 28, 2011, incorporated by reference to Exhibit
10.1 to Form 8-K of the Registrant filed on July 19, 2011.
21.1**
Subsidiaries of Registrant.
23.1**
31.1**
31.2**
32.1**
32.2**
Consent of Independent Registered Public Accounting Firm.
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
101.1**
The following materials from Registrant’s Annual Report on form 10-K for the fiscal years
ended February 2, 2019, formatted in XBRL: (i) Consolidated Statements of Income and
Comprehensive Income for the fiscal years ended February 2, 2019, February 3, 2018 and
January 28, 2017; (ii) Consolidated Balance Sheets at February 2, 2019 and February 3, 2018;
64
(iii) Consolidated Statements of Cash Flows for the fiscal years ended February 2, 2019,
February 3, 2018 and January 28, 2017; (iv) Consolidated Statements of Stockholders’ Equity
for the fiscal years ended February 2, 2019, February 3, 2018 and January 28, 2017; and
(v) Notes to Consolidated Financial Statements.
* Management contract or compensatory plan required to be filed under Item 15 of this report and Item 601
of Regulation S-K.
** Filed or submitted electronically herewith.
Item 16. Form 10-K Summary:
None.
65
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cato has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
The Cato Corporation
By
/s/ JOHN R. HOWE
John R. Howe
Executive Vice President
Chief Financial Officer
By
/s/ JOHN P. D. CATO
John P. D. Cato
Chairman, President and
Chief Executive Officer
By
/s/ JEFFREY R. SHOCK
Jeffrey R. Shock
Senior Vice President
Controller
Date: March 27, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
March 27, 2019 by the following persons on behalf of the Registrant and in the capacities indicated:
/s/ JOHN P. D. CATO
/s/ BAILEY W. PATRICK
John P. D. Cato
(President and Chief Executive Officer
(Principal Executive Officer) and Director)
Bailey W. Patrick
(Director)
/s/ JOHN R. HOWE
/s/ THOMAS B. HENSON
John R. Howe
(Executive Vice President
Chief Financial Officer (Principal Financial Officer))
Thomas B. Henson
(Director)
/s/ JEFFREY R. SHOCK
/s/ BRYAN F. KENNEDY III
Jeffrey R. Shock
(Senior Vice President
Controller (Principal Accounting Officer))
Bryan F. Kennedy III
(Director)
/s/ THOMAS E. MECKLEY
/s/ D. HARDING STOWE
Thomas E. Meckley
(Director)
D. Harding Stowe
(Director)
/s/ EDWARD I. WEISIGER, JR
/s/ PAMELA L. DAVIES
Edward I. Weisiger, Jr.
(Director)
Pamela L. Davies
(Director)
66
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Schedule II
Balance at January 30, 2016
Additions charged to costs and expenses
Additions (reductions) charged to other accounts
Deductions
Balance at January 28, 2017
Additions charged to costs and expenses
Additions (reductions) charged to other accounts
Deductions
Balance at February 3, 2018
Additions charged to costs and expenses
Additions (reductions) charged to other accounts
Deductions
Balance at February 2, 2019
Allowance
for
Doubtful
Accounts(a)
$
1,447
1,002
Self Insurance
Reserves(b)
$
300 (c)
(1,401) (d)
$
1,348
851
304 (c)
(1,355) (d)
$
1,148
897
210 (c)
(1,413) (d)
12,759
15,866
(105)
(15,532)
12,988
17,303
220
(18,888)
11,623
17,932
214
(18,803)
842
$
10,966
$
$
$
(a) Deducted from trade accounts receivable.
(b) Reserve for Workers' Compensation, General Liability and Healthcare.
(c) Recoveries of amounts previously written off.
(d) Uncollectible accounts written off.
67
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
Incorporation/Organization
State of
Name under which
Subsidiary does Business
CHW LLC
Delaware
CHW LLC
Providence Insurance Company,
Limited
A Bermudian Company
Providence Insurance Company,
Limited
CatoSouth LLC
Cato of Texas L.P.
Cato Southwest, Inc.
CaDel LLC
CatoWest LLC
North Carolina
CatoSouth LLC
Texas
Delaware
Delaware
Nevada
Cato of Texas L.P.
Cato Southwest, Inc.
CaDel LLC
CatoWest LLC
Cedar Hill National Bank
A Nationally Chartered Bank
catocorp.com, LLC
Delaware
Cedar Hill National Bank
catocorp.com, LLC
Cato Land Development, LLC
South Carolina
Cato Land Development, LLC
Cato WO LLC
North Carolina
Cato WO LLC
Cato Overseas Limited
A Hong Kong Company
Cato Overseas Limited
Cato Overseas Services Limited
A Hong Kong Company
Cato Overseas Services Limited
Shanghai Cato Overseas Business
Consultancy Company, Limited
A China Company
Cato Shanghai Company, Limited
Cato Employee Services
Management, LLC
Texas
Cato Employee Services
Management, LLC
Cato Employee Services L.P.
Texas
Cato Employee Services L.P.
Fort Mill Land Development
North Carolina
Fort Mill Land Development
Cato of Florida, LLC
Cato of Georgia, LLC
Cato of Tennessee, LLC
Cato of Virginia, LLC
Florida
Georgia
Tennessee
Virginia
Cato of Florida, LLC
Cato of Georgia, LLC
Cato of Tennessee, LLC
Cato of Virginia, LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.
333-225350, 333-188993, 333-188990, 333-176511) of The Cato Corporation of our report dated March
27, 2019 relating to the financial statements, financial statement schedule and the effectiveness of internal
control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 27, 2019
EXHIBIT 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John P. D. Cato, certify that:
1. I have reviewed this Annual Report on Form 10-K of The Cato Corporation (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 27, 2019
/s/ John P. D. Cato
John P. D. Cato
Chairman, President and
Chief Executive Officer
EXHIBIT 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Howe, certify that:
1. I have reviewed this Annual Report on Form 10-K of The Cato Corporation (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 27, 2019
/s/ John R. Howe
John R. Howe
Executive Vice President
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF PERIODIC REPORT
I, John P. D. Cato, Chairman, President and Chief Executive Officer of The Cato Corporation, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of
this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended February 2, 2019 (the
“Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: March 27, 2019
/s/ John P. D. Cato
John P. D. Cato
Chairman, President and
Chief Executive Officer
CERTIFICATION OF PERIODIC REPORT
EXHIBIT 32.2
I, John R. Howe, Executive Vice President, Chief Financial Officer of The Cato Corporation, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of
this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended February 2, 2019 (the
“Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: March 27, 2019
/s/ John R. Howe
John R. Howe
Executive Vice President
Chief Financial Officer
Corporate Information
A copy of the Company’s Annual
Report to the Securities and
Exchange Commission (Form
10-K) for the fiscal year ended
February 2, 2019 is available to
shareholders without charge upon
written request to:
Mr. John R. Howe
Executive Vice President,
Chief Financial Officer
The Cato Corporation
P.O. Box 34216
Charlotte, North Carolina 28234
Independent Auditor
PricewaterhouseCoopers LLP
Charlotte, North Carolina 28202
Corporate Counsel
Robinson, Bradshaw & Hinson, P.A.
Charlotte, North Carolina 28246
Transfer Agent and Registrar
American Stock Transfer
Securities Transfer Department,
CMG-5
Charlotte, North Carolina 28288
Annual Meeting Notice
The Annual Meeting of
Shareholders
Thursday, May 23, 2019
11:00 a.m.
Corporate Office
8100 Denmark Road
Charlotte, North Carolina
28273-5975
Corporate Headquarters
The Cato Corporation
8100 Denmark Road
Charlotte, North Carolina
28273-5975
704-554-8510
Mailing Address
P.O. Box 34216
Charlotte, North Carolina 28234
Market and Dividend Information
The Company’s Class A Common Stock
trades on the New York Stock Exchange
(“NYSE”) under the symbol CATO.
Below is the market range and dividend
information for the four quarters of fiscal
2018 and 2017.
price
2018
high
low dividend
First quarter
Second quarter 26.46
25.20
Third quarter
21.12
Fourth quarter
$ 16.80 $ 10.90
15.78
17.97
13.53
$ .33
.33
.33
.33
price
2017
high
low dividend
First quarter
Second quarter 23.08
17.13
Third quarter
17.04
Fourth quarter
$ 26.45 $ 19.73
16.01
12.79
11.41
$ .33
.33
.33
.33
As of March 27, 2019 the approximate
number of record holders of the
Company’s Class A Common Stock was
5,000 and there were 2 record holders of
the Company’s Class B Common Stock.
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8100 Denmark Road
Charlotte, NC 28273-5975
catofashions.com