FORWARD-LOOKING INFORMATION:
The
following
information
should
be
read
along
with
the
unaudited
Condensed
Consolidated
Financial
Statements,
including
the
accompanying
Notes
appearing
in
this
report.
Any
of
the
following
are
“forward-looking”
statements
within
the
meaning
of
Section
27A
of
the
Securities
Act
of
1933,
as
amended,
and
Section
21E
of
the
Securities
Exchange Act
of
1934,
as
amended:
(1)
statements
in
this
Form 10-Q
that
reflect projections
or expectations
of our
future financial
or
economic performance;
(2)
statements
that
are
not
historical
information;
(3)
statements
of
our
beliefs,
intentions,
plans
and
objectives for future operations,
including those contained in
“Management’s Discussion and
Analysis of
Financial Condition and
Results of Operations”;
(4) statements relating
to our
operations or activities
for
our
fiscal
year
ending
January
30,
2027
(“fiscal
2026”)
and
beyond,
including,
but
not
limited
to,
statements regarding expected
amounts of
capital expenditures and
store openings, relocations,
remodels
and closures, statements
regarding the potential
impact of public
health threats and
related responses and
mitigation efforts, as well as the potential impact of supply chain disruptions, extreme weather conditions,
tariffs
and
other
trade
policies,
inflationary
pressures
and
other
economic
conditions
on
our
business,
results
of
operations
and
financial
condition
and
statements
regarding
new
store
development
strategy;
and
(5)
statements
relating
to
our
future
risks
or
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,
prevailing
social,
economic,
political
and
public
health
threats
and
uncertainties,
war
or
similar
hostilities
and
their
collateral
effects,
levels
of
unemployment,
fuel,
energy
and
food
costs,
inflation,
wage
rates,
tax
rates,
tariff
rates,
interest
rates,
home
values,
consumer
net
worth
and
the
availability
of
credit;
changes
in
laws,
regulations
or
government
policies
affecting
our
business,
including but not
limited to
tariffs, taxes
and customs enforcement;
uncertainties regarding the
impact of
any
governmental
action
regarding,
or
responses
to,
the
foregoing
conditions;
competitive
factors
and
pricing
pressures;
our
ability
to
predict
and
respond
to
rapidly
changing
fashion
trends
and
consumer
demands;
our
ability
to
successfully
open
new
stores
in
attractive
locations
and
the
ability
of
any
such
new
stores
to
grow
and
perform
as
expected;
underperformance
or
other
factors
that
may
lead
to
a
continuation or acceleration
of store
closures and negatively
affect the
Company’s profitability,
financial
condition
or
prospects;
adverse
weather,
public
health
threats,
acts
of
war
or
aggression
or
similar
conditions and
related consequences 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;
adverse
developments or volatility affecting the financial services industry or broader financial markets; and
other
factors discussed under “Risk Factors” in Part I, Item 1A of the Company’s
Annual Report on Form 10-K
for
the
fiscal
year
ended
January
31,
2026
(“fiscal
2025”),
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.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
25
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The
Company’s
critical
accounting
policies
and
estimates
are
more
fully
described
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations”
in
Part
II,
Item
7
in
the
Company’s Annual Report on
Form 10-K for the
fiscal year ended January
31, 2026. 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 calculation
of potential
asset impairment,
income tax
valuation
allowances,
reserves
relating
to
self-insured
health
insurance,
workers’
compensation,
general
and
auto
insurance
liabilities,
uncertain
tax
positions,
the
allowance
for
customer
credit
losses,
and
inventory
shrinkage.
The Company’s critical accounting policies and
estimates are discussed with the Audit Committee.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
26
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in
the Company's unaudited Condensed
Consolidated Statements of Income as a
percentage of total retail sales:
Three Months Ended
Six Months Ended
August 1, 2026
August 2, 2025
August 1, 2026
August 2, 2025
Total retail sales
100.0
%
100.0
%
100.0
%
100.0
%
Other revenue
1.0
1.1
1.0
1.1
Total revenues
101.0
101.1
101.0
101.1
Cost of goods sold (exclusive of
depreciation)
67.2
63.8
65.0
64.4
Selling, general and administrative
(exclusive of depreciation)
33.0
32.8
32.4
32.8
Depreciation
1.4
1.4
1.3
1.5
Interest and other income
(1.4)
(0.8)
(1.1)
(0.8)
Income before income taxes
0.8
3.7
3.3
3.1
Net income
0.7
3.9
3.1
3.0
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
27
RESULTS OF OPERATIONS
(CONTINUED):
Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
(“MD&A”)
is
intended
to
provide
information
to
assist
readers
in
better
understanding
and
evaluating
our
financial
condition and results of
operations. We recommend reading
this MD&A in conjunction
with our Condensed
Consolidated Financial
Statements and
the Notes
to those
statements included in
the “Financial
Statements”
section of this Quarterly Report on
Form 10-Q, as well as our Annual Report
on Form 10-K for fiscal 2025.
Recent Developments
Pricing Pressures
Our
second
quarter
results
were
negatively
impacted
by
the
continued
pressure
on
our
customers’
discretionary income.
Higher fuel prices,
persistent inflation
and ongoing
elevated interest rates
continue to
exert downward
pressure on
our customers’
discretionary income,
which we
believe will
continue to
make
our customers
more cautious
with their
discretionary spending
into the
foreseeable future.
In addition,
our
ability to
pass through
cost increases
caused by
rising fuel
prices, potential
increased tariffs
or other
factors
will be limited due in part
to the pressure on our
customers’ discretionary spending.
Tariff
Pressures
On
July
24,
2026,
the
Office
of
the
U.S.
Trade
Representative (“USTR”)
imposed
tariffs
ranging
from
10%
to
12.5%
under
Section
301
of
the
Trade
Act
of
1974
on
various
countries,
including
countries
where a
significant portion
of our
products are
manufactured, following investigation
of these
countries’
efforts
to
prohibit
the
import
of
products
made
with
forced
labor.
The
USTR
is
conducting additional
investigations
regarding
excess
capacity,
which
could
also
result
in
increased
tariffs.
Although
it
currently
appears
that
the
production
of
garments,
shoes
and
handbags
are
not
being
targeted
by
these
additional investigations, that may change in the future.
Increased Customs Enforcement
On June 3, 2026, President Trump issued an executive order “Strengthening Customs Enforcement.”
The
executive order instructs
the Department of
Homeland Security and
U.S. Customs and
Border Protection
to
overhaul import
regulations, target
foreign
importers
of
record
and
raise
bonding
minimums, among
other
items.
As
a
result
of
this
executive
order,
containers
that
we
import
directly
and
containers
imported by
our suppliers
are being
subjected to
additional U.S.
Customs review
and inspections,
which
in some
cases are
resulting in
delays in
our receipt
of these
containers. These delays,
depending on
their
timing and duration,
could cause us
to take additional
markdowns due to
the seasonality of
our products.
These additional inspections and potential new regulations may
also cause additional compliance costs.
Comparison of the Three and Six
Months ended August 1, 2026
with August 2, 2025
Total retail sales
for the second
quarter were
$163.9 million
compared to last
year’s second
quarter sales
of
$174.7 million, a 6% decrease. The Company’s sales decreased in the second quarter of fiscal 2026 primarily
due to a
3.7% decrease in
same-store sales, as
well as stores
that were closed
in the past
12 months. For
the
six months
ended August
1, 2026,
total retail
sales were
$333.3 million
compared to
last year’s
comparable
six month sales of $343.1 million,
a 2.9%
decrease. The decrease in
sales in the first six months
of fiscal 2026
was due
primarily to
flat same-store
sales and
the impact
of store
closures.
Same-store sales
include stores
that have been open
more than 15 months.
Stores that have been
relocated or expanded are
also included in
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
28
the same-store sales
calculation after they
have been open
more than 15
months.
The method of
calculating
same-store
sales
varies across
the
retail industry.
As
a
result,
our
same-store
sales
calculation
may
not
be
comparable to similarly titled measures reported by other companies. E-commerce sales were less than 5% of
total
sales
for
the
six
months
ended
August
1,
2026
and
are
included
in
the
same-store
sales
calculation.
Total
revenues,
comprised
of
retail
sales
and
other
revenue
(principally
finance
charges
and
late
fees
on
customer accounts receivable and layaway fees), were $165.5 million and $336.6 million for the three
and six
months ended
August 1,
2026, compared
to $176.5
million and
$346.8 million
for the three
and six
months
ended
August
2,
2025,
respectively.
The
Company
operated
1,057
stores
at
August
1,
2026
compared
to
1,101
stores
at
the
end
of
last
fiscal
year’s
second
quarter.
For
the
first
six
months
of
fiscal
2026,
the
Company opened two new stores and closed 14 stores. The Company currently expects to open up to 10 new
stores and close approximately 50 stores
in fiscal 2026.
Other revenue, a component of total revenues, was $1.6 million and $3.3 million for the
three and six months
ended
August
1,
2026,
respectively,
compared
to
$1.9
million
and
$3.7
million
for
the
prior
year’s
comparable three
and six
month periods.
The decrease
in Other
revenue was
due to
lower layaway
income
and e-commerce shipping revenue
for the three and
six months ended August
1, 2026 compared to
the three
and six
months ended
August 2,
2025.
Included in
Other revenue
is credit
revenue of
$0.7 million,
which
represented
0.4%
of
total
revenues
in
the
second
quarter
of
fiscal
2026,
relatively
flat
both
in
dollars
and
percentage compared to fiscal 2025.
Credit revenue is comprised of interest earned on the Company’s private
label credit card
portfolio and related
fee income.
Related expenses principally
include payroll, postage
and
other administrative expenses
and totaled $0.4
million in the
second quarter of
fiscal 2026, compared
to last
year’s second quarter expense of $0.4 million.
Cost of
goods sold
was $110.2
million, or
67.2% of
retail sales
and $216.5
million, or
65.0% of retail
sales
for the
three and
six months
ended August
1, 2026,
respectively, compared
to $111.5
million, or
63.8% of
retail
sales and
$220.8
million,
or 64.4%
of retail
sales
for the
comparable three
and six
month
periods of
fiscal 2025.
The overall increase
in cost of
goods sold as
a percent of
retail sales for
the second quarter
and
first
six
months
of
fiscal
2026
versus
the
comparable
three
and
six
month
periods
of
fiscal
2025
resulted
primarily from increased
sales of marked
down goods and
deleveraging of our
occupancy costs. In
addition,
for the
six months
ended August
1, 2026,
cost of
goods sold
benefited from
an IEEPA
tariff refund,
which
reduced cost of
goods sold by $5.7
million, or 1.7%
of retail sales. Cost
of goods sold
includes merchandise
costs
(net
of
discounts
and
allowances),
buying
costs,
distribution
costs,
occupancy
costs,
freight
and
inventory shrinkage.
Net merchandise costs and
in-bound freight are capitalized
as inventory costs.
Buying
and
distribution
costs
include
payroll,
payroll-related
costs
and
operating
expenses
for
the
buying
departments and distribution center.
Occupancy costs include rent, real estate taxes, insurance, common area
maintenance, utilities and
maintenance for stores and
distribution facilities. Total gross
margin dollars (retail
sales less
cost of
goods sold
exclusive of
depreciation) decreased
by 15.0%
to $53.7
million for
the second
quarter
of
fiscal
2026
and
by
4.5%
to
$116.8
million
for
the
first
six
months
of
fiscal
2026,
compared
to
$63.2
million
and
$122.3
million
for
the
prior
year’s
comparable
three
and
six
months
of
fiscal
2025,
respectively.
Gross margin as presented may not be
comparable to those of other entities.
Selling, general and administrative (“SG&A”) expenses primarily include corporate and store payroll, related
payroll taxes and
benefits, insurance, supplies,
advertising, and bank
and credit card
processing fees. SG&A
expenses
were
$54.0
million,
or
33.0%
of
retail
sales
and
$108.0
million,
or
32.4%
of
retail
sales
for
the
second quarter and first six months of fiscal 2026, respectively, compared to $57.4 million, or
32.8% of retail
sales, and $112.7 million, or 32.8% of
retail sales for the prior year’s
comparable three and six month periods,
respectively.
The decrease in SG&A expenses for the
second quarter and first six months of fiscal
2026 was
primarily due to lower payroll costs and
equipment costs partially offset by
litigation and professional fees.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
29
Depreciation expense was $2.2 million, or 1.4% of retail sales and $4.5 million, or 1.3% of
retail sales for the
second quarter
and first
six months
of fiscal
2026, respectively,
compared to
$2.5 million,
or 1.4%
of retail
sales and $5.1 million,
or 1.5% of retail
sales for the comparable three
and six month periods
of fiscal 2025,
respectively.
Interest and other income was $2.3 million, or 1.4% of retail sales and $3.5 million, or 1.1% of retail sales for
the three and six months ended August
1, 2026, respectively, compared to $1.4 million,
or 0.8% of retail sales
and
$2.6
million,
or
0.8%
of
retail
sales
for
the
comparable
three
and
six
month
periods
of
fiscal
2025,
respectively. The increase for
the three and
six months ended
August 1, 2026
compared to the
three and six
months ended August 2, 2025 was primarily
due to interest income received as
part of the Company’s IEEPA
tariff refund and interest on
an IRS refund.
Income
tax
expense
was
$0.1
million
and
an
expense
of
$0.7
million
for
the
second
quarter
and
first
six
months
of
fiscal
2026,
respectively,
compared
to
an
income
tax
benefit
of
$0.3
million
and
income
tax
expense of $0.6 million
for the comparable three
months and six
months of fiscal
2025.
The increase in tax
expense is due to the non-recurring prior year favorable adjustment to the federal net operating loss
carryback
claim as a result of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), partially
offset by
lower foreign and state income taxes.
During the
second quarter of
fiscal 2026,
the Company
received a $5.6
million payment for
the outstanding
balance of its income tax
refund receivable due from the IRS.
LIQUIDITY, CAPITAL
RESOURCES
AND MARKET
RISK:
The Company
believes that
its cash,
cash equivalents
and short-term
investments, together
with cash
flows
from operations
and availability
under its
asset-backed revolving
line of
credit, will
be adequate to
fund the
Company’s regular operating requirements and expected capital
expenditures for the next 12 months
from the
issuance of this quarterly report
on Form 10-Q.
Cash
provided
by
operating
activities
during
the
first
six
months
of
fiscal
2026
was
$22.5
million
as
compared to $15.6
million provided in
the first six
months of
fiscal 2025. The
increase in
cash provided
by
operating activities of $6.9
million for the first
six months of fiscal
2026 as compared to
the first six months
of fiscal 2025 was primarily attributable
to a decrease in accounts receivable
in 2026 and the relative
change
of accounts payable from year-end to the second quarter for both years, partially offset by the relative change
in inventories from year-end to the second quarter for both years.
The decrease in accounts receivable is due
in large part to receiving the
remaining IRS refund pertaining to the 2020
tax year.
On August 1, 2026, the Company had working capital of $55.0 million compared
to $37.4 million at January
31,
2026.
The
increase
in
working
capital
was
primarily
attributable
to
an
increase
in
cash
and
cash
equivalents
and
decreases
in
accrued
expenses
and
current
lease
liability,
partially
offset
by
a
decrease
in
inventories and an increase in accounts
payables.
The ABL Credit Agreement (“ABL Facility”) of up to
$35.0 million is committed through March
2028 and is
secured primarily
by inventory
and third-party
credit card
receivables. The
proceeds from
the ABL
Facility
may be used
to provide funding
for ongoing working
capital and general
corporate purposes. There
were no
borrowings outstanding and the availability under the facility was $30.0 million before giving effect to a
$3.0
million outstanding letter
of credit that reduced
borrowing availability to $27.0
million as of
August 1, 2026
and January 31, 2026.
The weighted average interest rate under the credit facility was zero at August 1, 2026
and January 31, 2026 due
to no outstanding borrowings.
THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
30
Expenditures for property and equipment totaled $2.4 million in the first six months of fiscal 2026, compared
to
$2.4
million
in
last
fiscal
year’s
first
six
months.
The
Company
expects
to
invest
approximately
$7.4
million for capital expenditures for
the full fiscal 2026 year.
Net cash used in investing activities was $3.9 million for the first six
months of fiscal 2026 compared to $0.9
million net cash used in the
comparable period of 2025.
The increase in net cash used
by investing activities
in 2026 was primarily
due to an increase
in the purchase of
short-term investments, partially
offset by lower
sales of short-term investments and proceeds
from life insurance policies.
Net cash
used in
financing activities
totaled $0.3
million in
the first
six months
of fiscal
2026 compared
to
$0.9
million
used
in
the
comparable
period
of
fiscal
2025.
The
decrease
in
net
cash
used
in
financing
activities in fiscal 2026 was primarily
due to lower stock repurchases.
The
Company
purchased
39,147
shares
in
the
second
quarter
of
fiscal
2026.
As
of
August
1,
2026,
the
Company had 533,770 shares remaining
in open authorizations under its share
repurchase program.
The Company does not use
derivative financial instruments.
The
Company’s investment
portfolio
was
primarily invested
in corporate
bonds
held in
managed accounts
with underlying
ratings of
A or
better at
August 1,
2026.
The corporate
bonds have
contractual maturities
which range from two days to 2.7 years.
Additionally, at
August 1,
2026, the
Company had
deferred compensation
plan assets
of $10.0
million.
At
January
31,
2026,
the
Company
had
deferred
compensation
plan
assets
of
$9.7
million.
These
assets
are
recorded
within
Other
assets
in
the
Condensed
Consolidated
Balance
Sheets.
See
Note
7,
Fair
Value
Measurements, in the “Financial Statements” section of
this Quarterly Report on Form 10-Q.
RECENT ACCOUNTING PRONOUNCEMENTS:
See Note 8, Recent Accounting Pronouncements, in the “Financial Statements”
section of this Quarterly
Report on Form 10-Q.
THE CATO CORPORATION
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
31