UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| ||
For the quarterly period ended | ||
OR | ||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________to__________________ | ||
Commission file number |
(Exact name of registrant as specified in its charter) | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
(Address of principal executive offices) (Zip Code) | |
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(Registrant's telephone number, including area code) | |
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Not Applicable | |
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
X | No |
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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).
X | No |
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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 Rule 12b-2 of the Exchange Act).
Yes |
| X |
As of October 31, 2020, there were
THE CATO CORPORATION
FORM 10-Q
Quarter Ended October 31, 2020
Table of Contents
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PART I – FINANCIAL INFORMATION (UNAUDITED) | |||||
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| Item 1. | Financial Statements (Unaudited): | |||
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| Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) | 3 | |||
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| For the Three Months and Nine Months Ended October 31, 2020 and November 2, 2019 |
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| Condensed Consolidated Balance Sheets | 4 | |||
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| At October 31, 2020 and February 1, 2020 |
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| Condensed Consolidated Statements of Cash Flows | 5 | |||
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| For the Nine Months Ended October 31, 2020 and November 2, 2019 |
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| Condensed Consolidated Statements of Stockholders’ Equity | 6 – 7 | |||
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| For the Nine Months Ended October 31, 2020 and November 2, 2019 |
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| Notes to Condensed Consolidated Financial Statements | 8 – 23 | |||
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| For the Three Months and Nine Months Ended October 31, 2020 and November 2, 2019 |
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 – 31 | ||
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 32 | ||
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| Item 4. | Controls and Procedures | 32 | ||
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PART II – OTHER INFORMATION |
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| Item 1. | Legal Proceedings | 33 | ||
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| Item 1A. | Risk Factors | 33 | ||
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 34 | ||
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| Item 3. | Defaults Upon Senior Securities | 34 | ||
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| Item 4. | Mine Safety Disclosures | 35 | ||
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| Item 5. | Other Information | 35 | ||
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| Item 6. | Exhibits | 35 | ||
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| Signatures | 36 |
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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| Three Months Ended |
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| November 2, 2019 |
| October 31, 2020 |
| November 2, 2019 | ||||
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REVENUES |
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Retail sales | $ |
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Other revenue (principally finance charges, late fees and |
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layaway charges) |
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Total revenues |
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COSTS AND EXPENSES, NET |
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Cost of goods sold (exclusive of depreciation shown below) |
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Selling, general and administrative (exclusive of depreciation |
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shown below) |
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Depreciation |
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Interest and other income |
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Cost and expenses, net |
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Income (loss) before income taxes |
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Income tax expense (benefit) |
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Net income (loss) | $ | ( |
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Basic earnings (loss) per share | $ | ( |
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Diluted earnings (loss) per share | $ | ( |
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Comprehensive income: |
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Net income (loss) | $ | ( |
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Unrealized gain (loss) on available-for-sale securities, net of |
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deferred income taxes of ($ |
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nine months ended October 31, 2020 and ($ |
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the three and nine months ended November 2, 2019, respectively |
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Comprehensive income (loss) | $ | ( |
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See notes to condensed consolidated financial statements (unaudited).
3
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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| October 31, 2020 |
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ASSETS | (Dollars in thousands) | ||||
Current Assets: |
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Cash and cash equivalents | $ |
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Short-term investments |
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Restricted cash |
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Restricted short-term investments |
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Accounts receivable, net of allowance for doubtful accounts of |
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$ |
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Merchandise inventories |
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Prepaid expenses and other current assets |
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Total Current Assets |
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Property and equipment – net |
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Noncurrent deferred income taxes |
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Other assets |
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Right-of-Use assets – net |
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Total Assets | $ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities: |
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Accounts payable | $ |
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Accrued expenses |
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Accrued bonus and benefits |
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Accrued income taxes |
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Current lease liability |
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Total Current Liabilities |
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Other noncurrent liabilities |
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Lease liability |
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Stockholders' Equity: |
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Preferred stock, $ |
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authorized, none issued |
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Class A common stock, $ |
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shares authorized; |
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issued at October 31, 2020 and February 1, 2020, respectively |
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Convertible Class B common stock, $ |
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issued at October 31, 2020 and February 1, 2020, respectively |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
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Total Stockholders' Equity |
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Total Liabilities and Stockholders' Equity | $ |
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See notes to condensed consolidated financial statements (unaudited).
4
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| Nine Months Ended |
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| November 2, 2019 |
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Operating Activities: |
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Net income (loss) | $ | ( |
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Adjustments to reconcile net income (loss) to net cash provided (used) |
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by operating activities: |
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Depreciation |
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Provision for doubtful accounts |
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Purchase premium and premium amortization of investments |
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Share-based compensation |
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Deferred income taxes |
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Loss on disposal of property and equipment |
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Impairment of store assets |
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Changes in operating assets and liabilities which provided |
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(used) cash: |
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Accounts receivable |
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Merchandise inventories |
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Prepaid and other assets |
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Operating lease right-of-use assets and liabilities |
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Accrued income taxes |
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Accounts payable, accrued expenses and other liabilities |
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Net cash provided (used) by operating activities |
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Investing Activities: |
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Expenditures for property and equipment |
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Purchase of short-term investments |
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Sales of short-term investments |
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Purchase of other assets |
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Sales of other assets |
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Net cash provided (used) in investing activities |
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Financing Activities: |
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Dividends paid |
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Repurchase of common stock |
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Proceeds from line of credit |
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Payments on line of credit |
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Proceeds from employee stock purchase plan |
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Net cash provided (used) in financing activities |
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Net increase (decrease) in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period | $ |
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Non-cash activity: |
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Accrued other assets and property and equipment | $ |
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Accrued treasury stock |
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See notes to condensed consolidated financial statements (unaudited).
5
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
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| Class A | Class B | Additional |
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| Other | Total | |||||
| Common | Common | Paid-in | Retained | Comprehensive | Stockholders' | ||||||
| Stock | Stock | Capital | Earnings | Income | Equity | ||||||
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Balance — February 1, 2020 | $ | $ | $ | $ | $ | $ | ||||||
Comprehensive income: |
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Net income |
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Unrealized gain (loss) on available-for-sale securities, net of |
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deferred income tax benefit of ($ |
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Dividends paid ($ |
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Class A common stock sold through employee stock purchase |
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plan — |
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Class B common stock sold through stock option plans — |
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0 shares |
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Class A common stock issued through restricted stock grant plans — |
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Repurchase and retirement of treasury shares – |
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Balance — May 2, 2020 | $ | $ | $ | $ | $ | $ | ||||||
Comprehensive income: |
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Net income |
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Unrealized gain (loss) on available-for-sale securities, net of |
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deferred income tax liability of $ |
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Dividends paid ($0 per share) |
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Class A common stock sold through employee stock purchase |
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plan — 0 shares |
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Class B common stock sold through stock option plans — |
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0 shares |
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Class A common stock issued through restricted stock grant plans — |
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Repurchase and retirement of treasury shares – 0 shares |
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Balance — August 1, 2020 | $ | $ | $ | $ | $ | $ | ||||||
Comprehensive income: |
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Net income |
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Unrealized gain (loss) on available-for-sale securities, net of |
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deferred income tax benefit of ($ |
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Dividends paid ($0 per share) |
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Class A common stock sold through employee stock purchase |
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plan — |
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Class B common stock sold through stock option plans — |
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0 shares |
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Class A common stock issued through restricted stock grant plans — |
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Repurchase and retirement of treasury shares – |
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Balance — October 31, 2020 | $ | $ | $ | $ | $ | $ |
See notes to condensed consolidated financial statements (unaudited).
6
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
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| Class A | Class B | Additional |
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| Other | Total | |||||
| Common | Common | Paid-in | Retained | Comprehensive | Stockholders' | ||||||
| Stock | Stock | Capital | Earnings | Income | Equity | ||||||
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Balance — February 2, 2019 | $ | $ | $ | $ | $ | ( | $ | |||||
Comprehensive income: |
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Net income |
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Unrealized gain (loss) on available-for-sale securities, net of |
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deferred income tax liability of $ |
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Dividends paid ($ |
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Class A common stock sold through employee stock purchase |
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plan — |
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Class B common stock sold through stock option plans — |
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0 shares |
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Class A common stock issued through restricted stock grant plans — |
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Repurchase and retirement of treasury shares – |
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Balance — May 4, 2019 | $ | $ | $ | $ | $ | $ | ||||||
Comprehensive income: |
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Net income |
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Unrealized gain (loss) on available-for-sale securities, net of |
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deferred income tax liability of $ |
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Dividends paid ($ |
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Class A common stock sold through employee stock purchase |
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plan — |
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Class B common stock sold through stock option plans — |
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0 shares |
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Class A common stock issued through restricted stock grant plans — |
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shares |
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Repurchase and retirement of treasury shares – 0 shares |
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Balance — August 3, 2019 | $ | $ | $ | $ | $ | $ | ||||||
Comprehensive income: |
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Unrealized gain (loss) on available-for-sale securities, net of |
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deferred income tax benifit of ($ |
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Dividends paid ($ |
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Class A common stock sold through employee stock purchase |
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plan — |
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Class B common stock sold through stock option plans — |
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0 shares |
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Class A common stock issued through restricted stock grant plans — |
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shares |
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Repurchase and retirement of treasury shares – |
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Balance — November 2, 2019 | $ | $ | $ | $ | $ | $ |
See notes to condensed consolidated financial statements (unaudited).
7
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THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 2020 AND NOVEMBER 2, 2019 |
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NOTE 1 - GENERAL:
The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended October 31, 2020 and November 2, 2019 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for the entire year.
The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020. Amounts as of February 1, 2020 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.
On August 27, 2020, the Board of Directors authorized an increase in the Company’s share repurchase program of 1 million shares.
Subsequent to October 31, 2020, the Company repurchased 320,707 shares for $2,274,610.
Additionally, on November 19, 2020, the Board of Directors authorized an increase in the Company’s share repurchase program of 1.5 million shares.
COVID-19 Update
The COVID-19 pandemic has created, and may continue to create, challenges and uncertainties for our business. In the first quarter of fiscal 2020, the pandemic resulted in state and local orders mandating store closures and other measures to mitigate the spread of the virus. Recently reported increases in infection rates in many areas and the onset of cooler weather raise the possibility of increased or renewed governmental measures or public health guidance to reduce public activity and gatherings in order to mitigate the spread of the virus, as well as continued adverse effect on consumer confidence. Responses by customers, government and the private sector have and will likely continue to adversely impact our business operations for the remainder of fiscal 2020 and possibly beyond. The extent to which the COVID-19 pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Beginning March 19, 2020, the Company temporarily closed all Cato, It’s Fashion, It’s Fashion Metro and Versona stores. In addition, the Company suspended its quarterly dividend, significantly reduced capital expenditures and reduced its SG&A expense through the reduction of non-payroll expenses, as well as furloughed associates and in certain instances eliminated positions primarily at its corporate office. Beginning on May 1, 2020, the Company began to re-open stores based on the pertinent state and local orders. As of June 15, 2020, all stores have re-opened. Although all stores have re-opened, stores are operating at reduced hours and stores may be temporarily closed or subject to further operating restrictions in compliance with local regulations or in response to public health guidance due to COIVD-19. There is significant uncertainty around the duration, breadth and severity of continued business disruptions related to
8
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THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 2020 AND NOVEMBER 2, 2019 |
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COVID-19, as well as its impact on the U.S. economy, consumer willingness to visit malls and shopping centers, and associate staffing for our stores. At this time, the possible effects of national, state or local action, legislation, guidelines or programs that attempt to mitigate the spread of COVID-19 or address its economic effects on our customers, suppliers or the Company are also uncertain.
While the Company currently anticipates that our results for the remainder of fiscal 2020 will be adversely impacted, the extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain, including possible new information and understanding about the severity of COVID-19, related potential economic impacts to customers and suppliers, and the effect of actions taken to contain it or mitigate its impact.
Accounting Policies - Impairment of Long-Lived Assets:
The Company invests in leaseholds, right-of use assets 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, Right-of-use assets net of Lease liabilities 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 rates, margin rates and expense projections. The Company assesses the fair value of each lease by considering market rents and any lease terms that may adjust market rents under certain conditions, such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain criteria. 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. As a result of store closures during the first quarter of 2020, the Company determined a triggering event occurred, which resulted in an impairment analysis being performed. An asset impairment charge of $
Recently Adopted Accounting Policies
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure and recognize expected credit losses for financial assets held at amortized costs based on expected losses rather than incurred losses. The new accounting rules were effective for the Company in the first quarter of 2020 and had a minimal impact on the financial statements.
9
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THE CATO CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 2020 AND NOVEMBER 2, 2019 |
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NOTE 2 - EARNINGS PER SHARE:
Accounting Standard Codification (“ASC”) 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“EPS”) on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.
Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan.
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