Cato Corp: Form 10-Q for the period ended May 2, 2026

CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION:

The following information should be read along with the unaudited Condensed Consolidated Financial

Statements, including the accompanying Notes appearing in this report. Any of the following are

“forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as

amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this

Form 10-Q that reflect projections or expectations of our future financial or economic performance;

(2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and

objectives for future operations, including those contained in “Management’s Discussion and Analysis of

Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for

our fiscal year ending January 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, 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 and taxes; 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,

The Company is subject to market rate risk from exposure to changes in interest rates related to its

financing, investing and cash management activities, but the Company does not believe such exposure is

material.

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 May 2, 2026. Based on this

evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of May 2, 2026,

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.

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 May 2, 2026 that has materially affected, or is

reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

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(“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.

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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.

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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

May 2, 2026

May 3, 2025

Total retail sales

100.0

100.0

Other revenue

1.0

1.1

Total revenues

101.0

101.1

Cost of goods sold (exclusive of depreciation)

62.8

64.9

Selling, general and administrative (exclusive of depreciation)

31.8

32.8

Depreciation

1.3

1.5

Interest and other income

(0.7)

(0.7)

Income before income taxes

5.8

2.5

Net income

5.5

2.0

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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

Tariff Issues

There remains a significant degree of uncertainty regarding the status of U.S. trade policy and the types and

amount of tariffs to which the Company will be subject. On February 20, 2026, the Supreme Court issued a

ruling that struck down the series of tariffs that had been imposed under the International Economic

Emergency Powers Act (“IEEPA”) beginning in February 2025. In response, the administration transitioned

under Section 122 of the Trade Act of 1974 (the “Trade Act”) to a new 10% baseline global tariff that is

scheduled to expire in July 2026 unless otherwise extended by Congress. On May 7, 2026, the U.S. Court of

International Trade issued a ruling finding that these Section 122 tariffs are unlawful, but limited its

permanent injunction to the specific plaintiffs in that case, and these tariffs continue to be collected from all

other importers, including the Company. The administration has appealed this decision, and it remains

uncertain whether these duties will remain in effect or possibly be replaced by other tariffs.

On March 11, 2026, the U.S. Trade Representative announced investigations under Section 301 of the Trade

Act into various countries, including countries where much of our products are manufactured, that could

result in the imposition of increased tariffs. Beginning in May 2026, the U.S. Trade Representative held

Section 301 hearings for certain countries, including countries where we source most of our product. The

extent to which these hearings will result in increased tariffs is currently unknown. Our acquisition costs in

future periods will be negatively impacted to the extent that any tariffs imposed due to Section 301 findings

are greater than the current Section 122 tariffs.

In April 2026, following the Supreme Court’s invalidation of the IEEPA tariffs and the establishment of

procedures for processing tariff refunds, the Company submitted a refund claim and recorded a $5.7 million

reduction in cost of goods sold in the first quarter of fiscal 2026. On May 15, 2026, the Company received a

$2.6 million partial payment for its tariff refund claim. The Company anticipates receiving payment for the

balance of its tariff refund claim by the end of the second quarter of fiscal 2026.

Pricing Pressures

The pressure on our customers’ discretionary income continued in the first quarter of 2026 with increasing

fuel prices. Additionally, the Core Price Index (CPI) rose in April, further pressuring our customers’

discretionary income both now and into the foreseeable future. We believe these additional pricing pressures

will cause our customers to be more cautious with their discretionary spending. In addition, our ability to

pass through costs caused by rising fuel prices and potential increased tariff costs will be limited due in part

to the pressure on our customers’ discretionary spending.

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Comparison of First Quarter of 2026 with 2025

Total retail sales for the first quarter were $169.4 million compared to last year’s first quarter sales of $168.4

million. Sales increased due to a same-store sales increase of 3%, partially offset by stores that were closed

in the past 12 months. Same store sales include stores that have been open more than 15 months. Stores that

have been relocated or expanded are also included in the same store sales calculation after they have been

open more than 15 months. The method of calculating same store sales varies across the retail industry. As a

result, our same store sales calculation may not be comparable to similarly titled measures reported by other

companies. E-commerce sales were less than 4.0% of sales for the first quarter of fiscal 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, shipping charged to customers for e-

commerce purchases and layaway fees), were $171.1 million for the first quarter ended May 2, 2026,

compared to $170.2 million for the first quarter ended May 3, 2025. The Company operated 1,065 stores at

May 2, 2026 compared to 1,109 stores at the end of last fiscal year’s first quarter. For the first three months

of fiscal 2026, the Company opened two stores and closed six stores. The Company currently expects to

open up to 15 new stores and close approximately 35 stores in fiscal 2026.

Other revenue, a component of total revenues, was $1.7 million for the first quarter of fiscal 2026, compared

to $1.8 million for the prior year’s comparable first quarter. Included in Other revenue is credit revenue of

$0.7 million which represented 0.4% of total revenues in the first quarter of fiscal 2026, flat both in dollars

and percentage compared to 2025. Credit revenue is comprised of interest earned on the Company’s private

label credit card portfolio and related fee income. Related expenses include principally payroll, postage and

other administrative expenses, and totaled $0.4 million in the first quarter of 2026, flat to the first quarter of

Cost of goods sold was $106.3 million, or 62.8% of retail sales for the first quarter of fiscal 2026, compared

to $109.3 million, or 64.9% of retail sales in the first quarter of fiscal 2025. The decrease in cost of goods

sold as a percent of sales was due in part to a pre-tax tariff refund claim of $5.7 million and lower freight

costs, partially offset by increased sales of marked down goods. 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) increased by 6.8% to $63.1 million for the first quarter

of fiscal 2026 compared to $59.1 million in the first quarter of fiscal 2025. Gross margin as presented may

not be comparable to those of other entities.

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

payroll taxes and benefits, insurance, supplies, advertising, and bank and credit card processing fees. SG&A

expenses were $53.9 million, or 31.8% of retail sales for the first quarter of fiscal 2026, compared to $55.3

million, or 32.8% of retail sales in the first quarter of fiscal 2025. SG&A expense was lower in the first

quarter of fiscal 2026 compared to the first quarter of fiscal 2025 primarily due to lower corporate payroll

expense, insurance costs and equipment maintenance, partially offset by increases in incentive compensation

expense.

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Depreciation expense was $2.2 million, or 1.3% of retail sales for the first quarter of fiscal 2026, compared to

$2.6 million, or 1.5% of retail sales for the first quarter of fiscal 2025. The decrease in depreciation expense

was due to fully depreciated older stores.

Interest and other income was $1.2 million, or 0.7% of retail sales for the first quarter of fiscal 2026,

compared to $1.2 million, or 0.7% of retail sales for the first quarter of fiscal 2025.

Income tax expense was $0.5 million or 0.3% of retail sales for the first quarter of fiscal 2026, compared

to income tax expense of $0.9 million, or 0.6% of retail sales for the first quarter of fiscal 2025. The

effective income tax rate for the first quarter of fiscal 2026 was 5.3% compared to 21.9% for the first

quarter of fiscal 2025. The decrease in tax expense was primarily due to lower foreign income taxes.

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 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 for the first three months of fiscal 2026 was primarily generated by

earnings adjusted for depreciation and changes in working capital. The increase in cash provided of $4.2

million for the first three months of fiscal 2026 as compared to the first three months of fiscal 2025 was

primarily attributable to higher net income and the relative change in accounts payable from year-end to the

first quarter for both years, partially offset by an increase in accounts receivable and the relative change in

inventory from year-end to the first quarter for both years.

At May 2, 2026, the Company had working capital of $49.0 million compared to $37.4 million at January 31,

2026. The increase was primarily attributable to an increase in cash, inventory and accounts receivable,

partially offset by higher accounts payable.

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 May 2, 2026 and January 31, 2026. The weighted average interest rate under the credit

facility was zero at May 2, 2026 and January 31, 2026 due to no outstanding borrowings.

Expenditures for property and equipment totaled $1.1 million in the first three months of fiscal 2026,

compared to $1.0 million in last fiscal year’s first three months. For the full fiscal 2026 year, the Company

expects to invest approximately $7.4 million in capital expenditures.

Net cash provided by investing activities totaled $0.8 million in the first three months of fiscal 2026

compared to $7.9 million provided in the comparable period of fiscal 2025. The decrease was primarily due

to an increase in purchases of short-term investments, partially offset by a decrease in the sales of short-term

investments.

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Net cash used in financing activities totaled $0.2 million in the first three months of fiscal 2026 compared to

$0.9

m

illion used in the comparable period of fiscal 2025. The decrease was primarily due to lower stock

repurchases.

The Company purchased 107,823 shares in the first quarter of 2026. As of May 2, 2026, the Company had

572,917 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 May 2, 2026 and January 31, 2026. The corporate bonds have

contractual maturities which range from 13 days to 2.9 years.

Additionally, at May 2, 2026, the Company had deferred compensation plan assets of $9.8 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.

RECENT ACCOUNTING PRONOUNCEMENTS:

See Note 8, Recent Accounting Pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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