The Cato Corporation 10Q 2021 Q1 Quarterly report

UNITED STATES

SECURITIES

AND EXCHANGE

COMMISSION

Washington, D.C.

20549

FORM

10-Q

☑

QUARTERLY REPORT PURSUANT

TO SECTION

13 OR 15(d)

OF THE SECURITIES

EXCHANGE

ACT OF

1934

For the quarterly

period ended

May 1, 2021

☐

TRANSITION

REPORT PURSUANT

TO SECTION

13 OR 15(d)

OF THE SECURITIES

EXCHANGE

ACT OF

1934

For the transition

period from

________________to__________________

Commission

file number

1-31340

THE CATO CORPORATION

(Exact name

of registrant

as specified

in its charter)

Delaware

56-0484485

(State or

other jurisdiction

of incorporation

or organization)

(I.R.S.

Employer

Identification

No.)

8100 Denmark Road

Charlotte

North Carolina

28273-5975

(Address

of principal

executive

offices)

(Zip Code)

(704)

554-8510

(Registrant's

telephone

number, including

area code)

Not Applicable

(Former

name, former

address

and former

fiscal year,

if changed

since last

report)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

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

CATO

New York Stock Exchange

Indicate by

check mark

whether the

registrant (1)

has filed

all reports

required 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

Indicate by check

mark whether

the registrant

has submitted

electronically every

Interactive Data

File required

to be

submitted and

posted pursuant

to Rule

405 of

Regulation S

-T during

the preceding

12 months

(or for

such shorter

period that

the registrant

was

required to submit and post such files).

Yes

Indicate by check mark whether

the registrant is a

large accelerated filer, an accelerated filer, a

non-accelerated

filer, 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

☐

Accelerated filer

☑

Non-accelerated

filer

☐

Smaller reporting

company

☐

Emerging

growth company

☐

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).

☐

As of May 1, 2021, there were

20,829,940

shares of Class A

common stock and

1,763,652

shares of Class B

common

stock outstanding.

THE CATO CORPORATION

FORM 10-Q

Quarter Ended May 1, 2021

Table

of Contents

Page No.

PART

I – FINANCIAL INFORMATION

(UNAUDITED)

Item 1.

Financial Statements (Unaudited):

Condensed

Consolidated

Statements

of Income

(Loss) and

Comprehensive

Income (Loss)

For the Three

Months Ended

May 1, 2021

and May

2, 2020

Condensed

Consolidated

Balance Sheets

At May 1,

2021 and

January 30,

2021

Condensed

Consolidated

Statements

of Cash Flows

For the Three

Months Ended

May 1, 2021

and May

2, 2020

Condensed

Consolidated

Statements

of Stockholders’

Equity

For the Three

Months Ended

May 1, 2021

and May

2, 2020

Notes to Condensed

Consolidated

Financial

Statements

6 - 19

For the Three

Months Ended

May 1, 2021

and May

2, 2020

Item 2.

Management’s Discussion and

Analysis of Financial Condition and Results

of Operations

20 - 26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART

II – OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signatures

PART

I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF INCOME (LOSS) AND

COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

Three Months Ended

May 1, 2021

May 2, 2020

(Dollars in thousands, except per share data)

REVENUES

Retail sales

211,234

98,813

Other revenue (principally finance charges, late fees and

layaway charges)

1,851

1,919

Total revenues

213,085

100,732

COSTS AND EXPENSES, NET

Cost of goods sold (exclusive of depreciation shown below)

123,675

83,597

Selling, general and administrative (exclusive of depreciation

shown below)

63,237

52,511

Depreciation

3,042

4,006

Interest and other income

(663)

(1,851)

Costs and expenses, net

189,291

138,263

Income (loss) before income taxes

23,794

(37,531)

Income tax expense (benefit)

3,081

(9,114)

Net income (loss)

20,713

(28,417)

Basic earnings (loss) per share

0.92

(1.19)

Diluted earnings (loss) per share

0.92

(1.19)

Comprehensive income:

Net income (loss)

20,713

(28,417)

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

of deferred income taxes of ($

) and ($

) for May 1, 2021

(134)

(298)

and May 2, 2020, respectively

Comprehensive income (loss)

20,579

(28,715)

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

May 1, 2021

January 30, 2021

(Dollars in thousands)

ASSETS

Current Assets:

Cash and cash equivalents

22,276

17,510

Short-term investments

160,897

126,416

Restricted cash

3,513

3,512

Restricted short-term investments

405

406

Accounts receivable, net of allowance for customer credit losses of

658

and $

605

at May 1, 2021 and January 30, 2021, respectively

55,140

52,743

Merchandise inventories

84,849

84,123

Prepaid expenses and other current assets

5,978

5,840

Total Current Assets

333,058

290,550

Property and equipment – net

69,925

72,550

Noncurrent deferred income taxes

5,726

5,685

Other assets

23,350

22,850

Right-of-Use assets – net

185,861

199,817

Total Assets

617,920

591,452

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable

82,262

73,769

Accrued expenses

44,682

40,790

Accrued bonus and benefits

14,834

1,916

Accrued income taxes

2,394

2,038

Current lease liability

58,385

63,421

Total Current Liabilities

202,557

181,934

Other noncurrent liabilities

20,327

19,705

Lease liability

133,153

143,315

Stockholders' Equity:

Preferred stock, $

100

par value per share,

100,000

authorized, none issued

Class A common stock, $

0.033

par value per share,

50,000,000

shares authorized;

20,829,940

and

20,839,795

shares issued

at May 1, 2021 and January 30, 2021, respectively

703

Convertible Class B common stock, $

0.033

par value per share,

15,000,000

shares authorized;

1,763,652

and

1,763,652

shares issued at May 1, 2021 and January 30, 2021, respectively

Additional paid-in capital

115,699

115,278

Retained earnings

144,401

129,303

Accumulated other comprehensive income

1,021

1,155

Total Stockholders' Equity

261,883

246,498

Total Liabilities and Stockholders’ Equity

617,920

591,452

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF CASH FLOWS

(UNAUDITED)

Three Months Ended

May 1, 2021

May 2, 2020

(Dollars in thousands)

Operating Activities:

Net income (loss)

20,713

(28,417)

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

Depreciation

3,042

4,006

Provision for customer credit losses

113

Purchase premium and premium amortization of investments

(1,121)

(18)

Share-based compensation

306

650

Deferred income taxes

(1)

313

Loss on disposal of property and equipment

Impairment of store assets

5,270

Changes in operating assets and liabilities which provided (used) cash:

Accounts receivable

(2,510)

(4,402)

Merchandise inventories

(726)

(7,402)

Prepaid and other assets

(493)

(255)

Operating lease right-of-use assets and liabilities

(1,242)

(1,027)

Accrued income taxes

356

(13)

Accounts payable, accrued expenses and other liabilities

26,005

(40,134)

Net cash provided (used) by operating activities

44,500

(71,335)

Investing Activities:

Expenditures for property and equipment

(554)

(5,311)

Purchase of short-term investments

(62,075)

(8,275)

Sales of short-term investments

28,397

90,435

Sales of other assets

Net cash provided (used) by investing activities

(34,232)

76,943

Financing Activities:

Dividends paid

(7,990)

Repurchase of common stock

(5,629)

(9,875)

Proceeds from line of credit

34,000

Payments on line of credit

(4,000)

Proceeds from employee stock purchase plan

128

250

Net cash provided (used) by financing activities

(5,501)

12,385

Net increase (decrease) in cash, cash equivalents, and restricted cash

4,767

17,993

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

21,022

14,401

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

25,789

32,394

Non-cash activity:

Accrued other assets and property and equipment

263

1,936

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

Convertible

Accumulated

Class A

Class B

Additional

Other

Total

Common

Paid-in

Retained

Comprehensive

Stockholders'

Stock

Capital

Earnings

Income

Equity

(Dollars in thousands)

Balance — January 30, 2021

703

115,278

129,303

1,155

246,498

Comprehensive income:

Net income (loss)

20,713

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

income tax benefit of ($

)

(134)

Dividends paid ($0.00 per share)

Class A common stock sold through employee stock purchase

plan —

19,248

150

151

Class B common stock sold through stock option plans —

0 shares

Class A common stock issued through restricted stock grant plans —

396,558

271

284

Repurchase and retirement of treasury shares –

425,661

(14)

(5,615)

(5,629)

Balance — May 1, 2021

703

115,699

144,401

1,021

261,883

Convertible

Accumulated

Class A

Class B

Additional

Other

Total

Common

Paid-in

Retained

Comprehensive

Stockholders'

Stock

Capital

Earnings

Income

Equity

(Dollars in thousands)

Balance — February 1, 2020

761

110,813

203,458

1,423

316,514

Comprehensive income:

Net income (loss)

(28,417)

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

income tax benefit of ($

)

(298)

Dividends paid ($

0.33

per share)

(7,990)

Class A common stock sold through employee stock purchase

plan —

26,957

293

294

Class B common stock sold through stock option plans —

0 shares

Class A common stock issued through restricted stock grant plans —

307,354

587

605

Repurchase and retirement of treasury shares –

618,056

(22)

(9,034)

(9,056)

Balance — May 2, 2020

750

111,693

158,025

1,125

271,652

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

NOTE 1 -

GENERAL

The condensed

consolidated financial

statements as

of May

1, 2021

and for

the thirteen-

week periods

ended May

1, 2021

and May

2, 2020

have been

prepared from

the accounting

records of

The Cato

Corporation and its

wholly-owned subsidiaries (the

“Company”), and all

amounts shown are

unaudited.

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

statements have been

included.

All such adjustments

are of a

normal, recurring nature

unless otherwise

noted.

The results of the interim period may not be indicative of the results expected for

the entire year.

The interim financial statements should

be read in conjunction with

the consolidated financial statements

and notes

thereto, included

in the

Company’s Annual

Report on

Form 10-

for the

fiscal year

ended

January 30, 2021.

Amounts as of January 30, 2021 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 May 20, 2021, the Board of Directors declared the quarterly dividend at $0.11 per share.

COVID-19

Update

The COVID-19 pandemic adversely

impacted the Company's business,

financial condition and operating

results through fiscal 2020.

The first quarter of

2021 saw significant improvements in

sales compared to

2020.

This improvement was

primarily attributable to

government stimulus, increased

customer traffic,

states continuing

to lift

capacity limits

as more

people are

vaccinated, consumers’

increasing comfort

level with

venturing out

to social

events

and

customers’ preparing

to return

to work.

However, the

Company’s sales

were well below 2019

sales for the

comparable period, and there

is still a

high level of

uncertainty regarding the

lingering effects of

the COVID-19 pandemic

and the

continued impact on

the

Company’s customers’

buying habits.

The Company

faces

additional uncertainty

from the

continued

effects of disruption in the global supply chain and available workers as it attempts

to hire associates as its

operating hours

continue to

expand. The

Company expects

that these

uncertainties and

perhaps others

related to the

pandemic will continue

to impact the

Company in fiscal

2021 and possibly

beyond.

The

adverse financial impacts associated with the continued

effects of, and uncertainties related to, the

COVID-19 pandemic include, but

are not limited

to, (i) lower net

sales in markets affected

by the actual

or potential

outbreak, whether

due to

state and

local orders,

reductions in

store traffic

and customer

demand, labor

shortages, or

all of

these factors,

(ii) lower

net sales

caused by

the delay

of inventory

production and fulfillment,

(iii) and

incremental costs associated

with efforts

to mitigate the

effects of

the outbreak, including increased freight and logistics costs and other

expenses.

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 or its

variants, 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.

While the Company currently anticipates a continuation of the adverse impacts

of COVID-19 during 2021

and possibly

beyond, the

duration and

severity of

these effects

will depend

on the

course of

future

developments, which are

highly uncertain, including

the relative speed

and success of,

as well as

public

confidence in, mitigation measures

such as the current

effort to vaccinate substantial

portions of the U.S.

and global

population, emerging

information regarding

variants of

the virus

or new

viruses and

their

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

potential impact on

current mitigation efforts,

public attitudes toward

continued compliance with

containment and

mitigation measures, and

possible new information

and understanding that

could alter

the course and duration of current measures to combat the spread of the virus.

Recently

Adopted

Accounting

Policies

In December 2019,

the FASB

issued ASU 2019-

12,

Income Taxes

(Topic 740):

Simplifying the

Accounting for Income Taxes

. The new accounting

rules reduce complexity by

removing specific

exceptions to

general principles

related to

intraperiod tax

allocations, ownership

changes in

foreign

investments, and

interim period

income tax

accounting for

year-to-date losses

that exceed

anticipated

losses. The new

accounting

rules also simplify

accounting for franchise

taxes that are

partially based on

income, transactions

with a

government that

result in

a step

up in

the tax

basis of

goodwill, separate

financial statements of legal entities that are not subject

to tax, and enacted changes in tax laws

in interim

periods. The

Company adopted this

accounting standards update

on the

first day

of the

first quarter

2021 with no material impact on its Condensed Consolidated Financial

Statements.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

NOTE 2 -

EARNINGS

PER SHARE:

Accounting

Standard

Codification

(“ASC”)

260 –

Earnings

Per Share

requires

dual presentation

of basic

and

diluted

Earnings

Per Share

(“EPS”)

on the face of all

income statements

for all entities

with complex

capital

structures.

The Company

has presented

one basic

EPS and

one diluted

EPS amount

for all common

shares in

the accompanying

Condensed

Consolidated

Statements

of Income

(Loss) and

Comprehensive

Income

(Loss).

While the Company’s certificate 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.

Three Months Ended

May 1, 2021

May 2, 2020

(Dollars in thousands)

Numerator

Net earnings (loss)

20,713

(28,417)

Earnings (loss) allocated to non-vested equity awards

(942)

1,135

Net earnings (loss) available to common stockholders

19,771

(27,282)

Denominator

Basic weighted average common shares outstanding

21,489,162

22,959,887

Diluted weighted average common shares outstanding

21,489,162

22,959,887

Net income (loss) per common share

Basic earnings (loss) per share

0.92

(1.19)

Diluted earnings (loss) per share

0.92

(1.19)

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

NOTE 3 –

ACCUMULATED

OTHER COMPREHENSIVE

INCOME:

The following table sets

forth information

regarding

the reclassification

out of A

ccumulated

other

comprehensive

income

(in thousands)

for the

three months

ended May

1, 2021:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Securities

Beginning Balance at January 30, 2021

1,155

Other comprehensive income (loss) before

reclassification

(173)

Amounts reclassified from accumulated

other comprehensive income (b)

Net current-period other comprehensive income (loss)

(134)

Ending Balance at May 1, 2021

1,021

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

(b) Includes $

impact of accumulated other comprehensive income reclassifications into Interest and other

income for

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

The following table sets

forth information

regarding

the reclassification

out of A

ccumulated

other

comprehensive

income

(in thousands)

for the

three months

ended May

2, 2020:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Securities

Beginning Balance at February 1, 2020

1,423

Other comprehensive income (loss) before

reclassification

(802)

Amounts reclassified from accumulated

other comprehensive income (b)

504

Net current-period other comprehensive income (loss)

(298)

Ending Balance at May 2, 2020

1,125

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

(b) Includes $

655

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 $

151

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

NOTE 4 – FINANCING ARRANGEMENTS:

As of May

1, 2021, the Company had

an unsecured revolving credit agreement

allowing

the Company to

borrow $

35.0

million

less the balance

of any letters

of credit as

discussed

below. On

June 2, 2020,

the

Company

signed an amendment extending the revolving credit agreement through May 2023.

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 May 1, 2021.

There were no borrowings

outstanding

under this credit

facility

as of May 1, 2021 or January 30, 2021.

The weighted

average

interest

rate under

the credit

facility

was zero

at May 1,

2021 due

to no borrowings

outstanding.

At May 1, 2021

and January

30, 2021,

the Company

had no outstanding

letters

of credit

relating

to purchase

commitments.

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

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

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 to 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

nature of product, as they

all offer women’s apparel,

shoes and accessories.

Merchandise

inventory

for 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 operating segments is distributed to

retail stores in a

similar

manner

through

the Company’s

single distribution

center and

is subsequently

distributed

to clients

in a similar

manner.

The Company

operates its

women’s fashion

specialty retail

stores in

32 states

as of

May 1,

2021,

principally in the

southeastern United States. The Company offers its own credit card to its customers

and

all credit

authorizations,

payment

processing

and collection

efforts are

performed

by a separate

subsidiary

the Company.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

NOTE 5 – REPORTABLE

SEGMENT INFORMATION (CONTINUED):

The following

schedule

summarizes

certain

segment information

(in thousands):

Three Months Ended

May 1, 2021

Retail

Credit

Total

Revenues

$212,547

$538

$213,085

Depreciation

3,042

Interest and other income

(663)

Income (loss) before taxes

23,540

254

23,794

Capital expenditures

554

Three Months Ended

May 2, 2020

Retail

Credit

Total

Revenues

$99,890

$842

$100,732

Depreciation

4,006

Interest and other income

(1,851)

Income (loss) before taxes

(37,923)

392

(37,531)

Capital expenditures

5,311

Retail

Credit

Total

Total assets as of May 1, 2021

$575,335

$42,585

$617,920

Total assets as of January 30, 2021

549,349

42,103

591,452

The Company evaluates

segment

performance

based on

income

before taxes.

The Company does

not

allocate

certain

corporate

expenses

or income

taxes to

the credit

segment.

The following

schedule

summarizes

the direct

expenses

of the credit segment

which are reflected

in Selling,

general

and administrative

expenses

(in thousands):

Three Months Ended

May 1, 2021

May 2, 2020

Payroll

117

152

Postage

111

Other expenses

187

Total expenses

284

450

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

NOTE 6 – STOCK BASED COMPENSATION:

As of May

1, 2021,

the Company had two

long-term

compensation

plans pursuant to which

stock-based

compensation

was outstanding or

could be

granted.

The 2018

Incentive

Compensation

Plan and

2013

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,

shares for

grant were

no longer

available

under the

2013 Incentive

Compensation

Plan.

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 May

1, 2021:

2013

2018

Plan

Total

Options and/or restricted stock initially authorized

1,500,000

4,725,000

6,225,000

Options and/or restricted stock available for grant:

May 1, 2021

3,564,915

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

the related

vesting periods. As

of May 1,

2021 and January

30, 2021, there

was

14,763,000

and $

10,550,000

, respectively,

of total unrecognized compensation

expense related to

nonvested restricted stock

awards, which had

a remaining weighted-average

vesting period of

3.0

years

and

2.1

years, respectively. The

total compensation expense during

the three months

ended May 1, 2021

was $

283,000

compared to

606,000

for the

three months

ended May

2, 2020.

These expenses

are

classified as a component of

Selling, general and administrative expenses in

the Condensed Consolidated

Statements of Income (Loss).

The following

summary

shows the changes

in the shares of unvested

restricted

stock outstanding

during

the

three months ended May 1,

2021:

Weighted

Average

Number of

Grant Date Fair

Value

Per Share

Restricted stock awards at January 30, 2021

1,023,956

15.33

Granted

406,994

13.48

Vested

(175,673)

22.21

Forfeited or expired

(10,436)

13.67

Restricted stock awards at May 1, 2021

1,244,841

13.77

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

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 three

months

ended May

1, 2021 and

May 2, 2020,

the

Company

sold

19,248

and

26,957

shares to employees

at an average discount

of $

1.17

and $

1.64

per share,

respectively,

under the Employee Stock Purchase

Plan. The compensation

expense recognized

for the 15%

discount

given under the Employee Stock Purchase

Plan was approximately $

23,000

and $

44,000

for the

three months ended

May 1,

2021 and

May 2,

2020, respectively.

These expenses ar

classified

as a

component

of S

elling,

general

and administrative

expenses

in the Condensed Consolidated Statements o

Income

(Loss).

NOTE 7 –

FAIR VALUE MEASUREMENTS:

The following tables

set forth information regarding

the Company’s financial assets and liabilities that are

measured

at fair

value (in

thousands)

as of May

1, 2021

and January

30, 2021:

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

May 1, 2021

Assets

Inputs

Description

Level 1

Level 2

Level 3

Assets:

State/Municipal Bonds

24,490

Corporate Bonds

90,093

U.S. Treasury/Agencies Notes and Bonds

29,120

Cash Surrender Value of Life Insurance

11,585

Asset-backed Securities (ABS)

15,778

Corporate Equities

846

Commercial Paper

1,821

Total Assets

173,733

846

161,302

11,585

Liabilities:

Deferred Compensation

(10,271)

Total Liabilities

(10,271)

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

January 30,

2021

Assets

Inputs

Description

Level 1

Level 2

Level 3

Assets:

State/Municipal Bonds

23,254

Corporate Bonds

67,566

U.S. Treasury/Agencies Notes and Bonds

17,869

Cash Surrender Value of Life Insurance

11,263

Asset-backed Securities (ABS)

16,064

Corporate Equities

703

Commercial Paper

2,069

Total Assets

138,788

703

126,822

11,263

Liabilities:

Deferred Compensation

(10,316)

Total Liabilities

(10,316)

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 May 1, 2021

and January 30, 2021.

The state, municipal and corporate bonds have con

tractual

maturities

which range

from

four days

4.5

years.

The U.S. Treasury

Notes have

contractual

maturities

which range

from

days

2.5

years. These

securities

are classified

as available-for-sale

and are recorded

as Short-term

investments,

Restricted

cash, Restricted

short-term

investments

and Other assets

on the accompanying

Condensed

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 May 1,

2021, the

Company

had $

0.8

million

of corporate

equities

and deferred

compensation

plan assets of $

11.6

million.

At January 30, 2021, the Company

had $

0.7

million

of corporate

equities

and

deferred

compensation

plan assets

of $

11.3

million.

All of these

assets are

recorded

within Other

assets in

the

Condensed

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

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

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

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

compensation

obligation,

the value of which is tracked via underlying insurance funds’

net asset values, as

recorded

in Other

noncurrent

liabilities

in the

Condensed

Consolidated

Balance

Sheet.

These funds are

designed

to mirror

mutual

funds and

money

market

funds that

are observable

and actively

traded.

The following tables summarize the change in

fair value of the

Company’s financial

assets and liabilities

measured

using Level

3 inputs

as of May

1, 2021

and January

30, 2021

(dollars

in thousands):

Fair Value

Measurements Using

Significant Unobservable

Asset Inputs (Level 3)

Cash Surrender Value

Beginning Balance at January 30, 2021

11,263

Redemptions

Additions

Total gains or (losses)

Included in interest and other income (or changes in net assets)

322

Included in other comprehensive income

Ending Balance at May 1, 2021

11,585

Fair Value

Measurements Using

Significant Unobservable

Liability Inputs (Level 3)

Deferred Compensation

Beginning Balance at January 30, 2021

(10,316)

Redemptions

547

Additions

(145)

Total (gains) or losses

Included in interest and other income (or changes in net assets)

(357)

Included in other comprehensive income

Ending Balance at May 1, 2021

(10,271)

Fair Value

Measurements Using

Significant Unobservable

Asset Inputs (Level 3)

Cash Surrender Value

Beginning Balance at February 1, 2020

10,517

Redemptions

Additions

Total gains or (losses)

Included in interest and other income (or changes in net assets)

746

Included in other comprehensive income

Ending Balance at January 30, 2021

11,263

Fair Value

Measurements Using

Significant Unobservable

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

Liability Inputs (Level 3)

Deferred Compensation

Beginning Balance at February 1, 2020

(10,391)

Redemptions

1,714

Additions

(652)

Total (gains) or losses

Included in interest and other income (or changes in net assets)

(987)

Included in other comprehensive income

Ending Balance at January 30, 2021

(10,316)

The presentation in the table above has been revised to reflect current year presentation.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:

In March 2020

the FASB

issued ASU 2020-

04,

Reference Rate

Reform (Topic

848): Facilitation of

the

Effects of Referenc

Rate Reform on Financial Reporting

. In January 2021,

the FASB clarified

the scope

of that guidance

with the issuance of

ASU 2021-01, “Reference Rate

Reform: Scope.” The new

accounting rules provide

optional expedients and

exceptions for

applying GAAP to

contracts and

other

transactions affected by reference

rate reform. The amendments

in this standard can

be adopted any time

before the

fourth quarter of

2022. The Company

is currently in

the process of

evaluating the

impact of

adoption of

the new

rules on

the Company’s

financial condition,

results of

operations, cash

flows and

disclosures.

NOTE 9 – INCOME TAXES:

The Company had

an effective tax

rate for the

first quarter of

2021 of

12.9

% (Expense) compared

to an

effective tax

rate of

24.3

% (Benefit) for

the first quarter

of 2020. The

decrease in the

2021 first quarter

tax rate

was primarily due

to higher

pre-tax earnings and

ability to realize

foreign tax credits,

offset by

increases in

state income

taxes and

an upward

adjustment in

the reserves

for uncertain

tax positions

specific to

state income

taxes in

the first

quarter of

2020. Further,

the Coronavirus

Aid, Relief

and

Economic Security

Act (“

CARES”) allows

the Company

to carryback

losses five

years; therefore,

the

Company has recorded $33.0

million of estimated refunds

calculated through the first

quarter of 2021 in

Accounts receivable in the Condensed Consolidated Balance Sheets.

NOTE 10 – COMMITMENTS AND CONTINGENCIES:

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

including litigation

regarding the

merchandise that

it sells,

litigation regarding

intellectual property,

litigation instituted by

persons injured upon

premises under its

control, litigation with

respect to various

employment matters, including

alleged discrimination and

wage and

hour litigation, and

litigation with

present or former employees.

Although such litigation

is routine and

incidental to the conduct

of the Company’s

business, as with

any

business of

its 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 its condensed

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 opera

tions and

cash flows

in any

particular reporting period. The Company accrues for

these matters when the liability is deemed probable

and reasonably estimable.

NOTE 11 – REVENUE RECOGNITION:

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

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

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.

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 customer credit losses of $

131,000

and $

69,000

for the periods ended May 1,

2021 and May 2,

2020, respectively, on

sales purchased by the Company’s

proprietary credit card of $

4.4

million and $

2.6

million for the periods ended May 1, 2021 and May 2, 2020, respectively.

The following

table provides

information about

receivables and

contract liabilities

from contracts

with

customers (in thousands):

Balance as of

May 1, 2021

January 30, 2021

Proprietary Credit Card Receivables, net

9,094

9,606

Gift Card Liability

6,832

8,155

NOTE 12 – LEASES:

The Company

determines whether

an arrangement

is a

lease at

inception. The

Company has

operating

leases for

stores, offices

and equipment. Its

leases have remaining

lease terms of

one year

to 10

years,

some of which

include options to

extend the lease

term for up

to five years,

and some of

which

include

options to terminate

the lease within

one year.

The Company considers

these options in

determining the

lease term used

to establish its

right-of-use assets and

lease liabilities. The

Company’s lease

agreements

do not contain any material residual value guarantees or material restrictive

covenants.

As most

of the

Company’s leases

do not

provide an

implicit rate,

it uses

its estimated

incremental

borrowing rate based on

the information available at

commencement date of the

lease in determining the

present value of lease payments.

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

Three Months Ended

May 1, 2021

May 2, 2020

Operating lease cost (a)

16,726

16,993

Variable

lease cost (b)

793

(a) Includes right-of-use asset amortization of ($1.2) million and

($1.7) million for the three months ended

May 1, 2021 and May 2, 2020, respectively.

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

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 1, 2021 AND MAY

2, 2020

Supplemental cash flow information

and non-cash activity related

to the Company’s

operating leases are

as follows (in thousands):

Operating cash flow information:

Three Months Ended

May 1, 2021

May 2, 2020

Cash paid for amounts included in the measurement of lease liabilities

15,947

15,499

Non-cash activity:

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

734

28,197

Weighted-average remaining

lease term

and discount

rate for

the Company’s

operating leases

are as

follows:

As of

May 1, 2021

May 2, 2020

Weighted-average remaining lease term

2.7 years

3.2 years

Weighted-average discount rate

3.73%

4.36%

As of May 1, 2021,

the maturities of lease liabilities by fiscal year for the Company’s operating leases

are

as follows (in thousands):

Fiscal Year

2021 (a)

51,803

2022

48,971

2023

36,102

2024

22,731

2025

13,915

Thereafter

36,870

Total lease payments

210,392

Less: Imputed interest

18,854

Present value of lease liabilities

191,538

(a) Excluding the 3 months ended May 1, 2021.

THE CATO CORPORATION

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

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,

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 be

liefs, 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

29, 2022 (“fiscal 2021”) and beyond, including,

but not limited

to,

statements regarding expected

amounts of capital

expenditures and store

openings, relocations, remodels

and closures

and statements

regarding the

potential impact

of the

COVID-19 pandemic

and related

responses and mitigation efforts

on our business, results of operations and financial

condition; 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,

prevailing social,

economic, political

and public

health conditions

and uncertainties,

levels of

unemployment, fuel, energy

and food costs,

wage rates, tax

rates, interest rates,

home values, consumer

net worth and

the availability of

credit; changes in

laws or regulations

affecting our

business, including

but not

limited to

tariffs;

uncertainties regarding

the impact

of any

governmental action

regarding, or

responses to,

the foregoing

conditions; competitive

factors and

pricing pressures;

our ability

to predict

and respond to rapidly changing fashion trends and consumer demands; our ability to successfully

implement our new store development strategy to increase new store openings and our ability of

any such

new stores to

grow and perform

as expected; adverse weather, public health threats (including

the

COVID-19 pandemic) 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 our annual report on Form 10-

for the

fiscal year ended January 30,

2021 (“fiscal 2020”), 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)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

The Company’s accounting

policies

are more fully

described

in “Management’s

Discussion

and Analysis

Financial

Condition

and Results

of Operations”

in the Company’s

Annual

Report

on Form

10-K

for the

fiscal

year ended January

30, 2021.

As disclosed

in “Management’s

Discussion

and Analysis

of Financial

Condition

and Results of Operations,”

the preparation

of the Company’s financial statements

in conformity

with generally

accepted

accounting

principles

in the United States

(“GAAP”)

requires

management

to make

estimates

and assumptions

about future

events that

affect the

amounts

reported

in the financial

statements

and

accompanying

notes. Future

events and

their effects

cannot be

determined

with absolute

certainty. Therefore,

the determination

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 customer credit

losses,

inventory

shrinkage,

the ca

lculation

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.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

RESULTS OF OPERATIONS:

The following

table sets

forth, for

the periods

indicated,

certain items

in the Company's

unaudited

Condensed

Consolidated

Statements

of Income

as a percentage

of total

retail sales:

Three Months Ended

May 1, 2021

May 2, 2020

Total retail sales

100.0

Other revenue

0.9

1.9

Total revenues

100.9

101.9

Cost of goods sold (exclusive of depreciation)

58.5

84.6

Selling, general and administrative (exclusive of depreciation)

29.9

53.1

Depreciation

1.4

4.1

Interest and other income

(0.3)

(1.9)

Income (loss) before income taxes

11.3

(38.0)

Net income (loss)

9.8

(28.8)

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

RESULTS OF OPERATIONS

(CONTINUED):

COVID-19

Update

The COVID-19 pandemic adversely

impacted the Company's business,

financial condition and operating

results through fiscal 2020.

The first quarter of

2021 saw significant improvements in

sales compared to

2020.

This improvement was

primarily attributable to

government stimulus, increased

customer traffic,

states continuing

to lift

capacity limits

as more

people are

vaccinated, consumers’

increasing comfort

level with

venturing out

to social

events

and

customers’ preparing

to return

to work.

However, the

Company’s sales

were well below 2019

sales for the

comparable period, and there

is still a

high level of

uncertainty regarding the

lingering effects of

the COVID-19 pandemic

and the

continued impact on

the

Company’s customers’

buying habits.

The Company

faces additional

uncertainty from

the continued

effects of disruption in the global supply chain and available workers as it attempts

to hire associates as its

operating hours

continue to

expand. The

Company expects

that these

uncertainties and

perhaps others

related to the

pandemic will continue

to impact the

Company in fiscal

2021 and possibly

beyond.

The

adverse financial impacts associated with the continued

effects of, and uncertainties related to, the

COVID-19 pandemic include, but

are not limited

to, (i) lower net

sales in markets affected

by the actual

or potential

outbreak, whether

due to

state and

local orders,

reductions in

store traffic

and customer

demand, labor

shortages, or

all of

these factors,

(ii) lower

net sales

caused by

the delay

of inventory

production and fulfillment,

(iii) and

incremental costs associated

with efforts

to mitigate the

effects of

the outbreak, including increased freight and logistics costs and other

expenses.

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 or its

variants, 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.

While the Company currently anticipates a continuation of the adverse impacts

of COVID-19 during 2021

and possibly

beyond, the

duration and

severity of

these effects

will depend

on the

course of

future

developments, which are

highly uncertain, including

the relative speed

and success of,

as well as

public

confidence in, mitigation measures

such as the current

effort to vaccinate substantial

portions of the U.S.

and global

population, emerging

information regarding

variants of

the virus

or new

viruses and

their

potential impact on

current mitigation efforts,

public attitudes toward

continued compliance with

containment and

mitigation measures, and

possible new information

and understanding that

could alter

the course and duration of current measures to combat the spread of the virus.

Comparison

of First Quarter

of 2021

with 2020

Total retail sales for the first

quarter

were $211.2 million

compared

to last year’s first

quarter

sales of $98.8

million.

Sales increased

primarily

due to an increase

in same-store

sales and

sales from

new stores,

partially

offset by permanently closed stores in

2020. The 111.0%

increase

in same-store sales is primarily due

stores being closed from

March 19, 2020

through

the end of

the first quarter of

2020. 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 5.0% of sales for

the first quarter of fiscal 2021

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

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

customer

accounts

receivable,

shipping

charged to customers

for e-commerce

purchases

and layaway fees),

were $213.1

million

for the first

quarter

ended May

1, 2021, compared

to $100.7

million

for the first

quarter

ended May

2, 2020. The

Company

operated

1,325 stores

at May 1, 2021

compared

to 1,300 stores

at the end

of last fiscal

year’s first

quarter.

For the first

three months

of fiscal 2021,

the Company

permanently

closed

five stores.

The Company

currently

expects

to close

approximately

25 stores

in fiscal

2021.

Credit revenue

of $0.5

million

represented

0.3% of

total revenues

in the first

quarter

of fiscal

2021, compared

to 2020 credit revenue of

$0.8 million or 0.8% of

total revenues.

Credit revenue is comprised of interest

earned on

the Company’s

private

label credit

card portfolio

and related

fee income.

Credit revenue

decreased

slightly

for the most

recent comparable

period due

to lower

finance

charge income

and lower

late fee

income

from sales

using the

Company’s proprietary

credit

card. Related

expenses

include

principally

payroll,

postage

and other administrative expenses, and totaled $0.3

million

in the first

quarter

of 2021, compared to

last

year’s first

quarter

expenses

of $0.5

million.

Other revenue,

a component

of total revenues,

was $1.9 million

for the first

quarter

of fiscal

2021, compared

to $1.9

million

for the

prior year’s

comparable

first quarter.

Cost of goods

sold was $123.7

million,

or 58.5% of retail

sales for the

first quarter

of fiscal 2021,

compared

to $83.6 million,

or 84.6% of retail sales in the first quarter of fiscal 2020.

The overall

decrease

in cost of

goods sold as

a percent of

retail sales for first

quarter

of 2021 resulted primarily from

the leveraging of

occupancy, buying and distribution

costs due to normalized sales and higher sales of regular priced 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 475.4%

to $87.6

million

for the

first quarter

of fiscal

2021 compared

to $15.2

million

in the first

quarter

fiscal 2020.

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,

payroll

taxes and benefits, insurance, supplies, advertising, bank and

credit

card processing fees.

SG&A

expenses

were 29.9% of retail sales

for the first quarter

of fiscal 2021, compared

to 53.1% of retail sales in

the first quarter of

fiscal 2020. SG&A as

a p

ercent of retail sales

decreased

primarily

due to

leveraging

expenses as a

result of normalized

sales and a

decrease in impairment

charges, partially offset

by higher

incentive compensation.

Depreciation

expense

was $3.0

million,

or 1.4%

of retail

sales for

the first

quarter

of fiscal

2021, compared

$4.0 million,

or 4.1%

of retail

sales for

the first

quarter

of fiscal

2020. The

decrease

in depreciation

expense

attributable

to lower

net fixed

assets

primarily

due to $13.7

million

of impairment

charges in

2020.

Interest

and other income

was $0.7

million,

or 0.3%

of retail sales

for the

first quarter of

fiscal 2

021,

compared

to $1.9 million,

or 1.9% of

retail sales

for the first

quarter

of fiscal

2020.

The decrease

is primarily

attributable

to lower interest

rates and smaller

gains from the

sale of investments,

partially

offset by an

increase

in short-term

investing.

Income tax expense was $3.1

million or 1.5% of retail

sales for the first

quarter of fiscal 2021, compared

to an income tax benefit of $9.1 million, or 9.2% of

retail sales for the first quarter of fiscal 2020. Income

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

tax expense for

the first quarter

of fiscal 2021

increased primarily as

a result of

higher pre-tax earnings.

The effective income tax rate for the first quarter of fiscal

2021 was 12.9%

(Expense) compared to 24.3%

(Benefit) for the first quarter

of 2020. The decrease in the

2021 first quarter tax rate was

primarily due to

higher pre-tax earnings

and the ability

to realize foreign

tax credits, partial

ly offset by

increases in state

income taxes in the first quarter of 2020.

LIQUIDITY, CAPITAL

RESOURCES

AND MARKET

RISK:

The Company believes

that its cash, cash equivalents

and short-term

investments,

together

with cash flows

from operations

and borrowings

available

under its revolving

credit

agreement,

will be adequate

to fund the

Company’s regular

operating

requirements

and expected

capital

expenditures

for fiscal

2021 and the

next 12

months.

Cash provided by operating activities for the first

three months of fiscal 2021 was

primarily

generated

earnings

adjusted

for depreciation

and changes in working

capital.

The increase

in cash provided of $115.8

million

for the first three

months of fiscal 2021

as compared to the

first three months of

fiscal 2020 was

primarily

due to net income versus a net loss

a decrease in inventory, and an

increase

in accounts payable

and accrued

liabilities,

partially

offset by

a decrease

in store

impairment

charges.

At May 1, 2021,

the Company

had working

capital

of $130.5

million

compared

to $108.6

million

at January

30, 2021.

This increase

is primarily attributable

to higher short-term

investments,

partially

offset

by higher

accrued

incentive

compensation.

At May 1, 2021 and January 30,

2021, the Company had an unsecured

revolving credit agreement, which

provides for borrow

ings of up

to $35.0 million

less the balance

of letters of

credit discussed below.

The

revolving credit

agreement is

committed through

May 2023.

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 May 1, 2021.

There were no borrowings outstanding

under the credit

facility as of May 1, 2021 or January 30, 2021.

At May 1, 2021

and January

30, 2021,

the Company

had no outstanding

letters

of credit

relating

to purchase

commitments.

Expenditures

for pro

perty and

equipment

totaled

$0.6 million in

the first

three months of

fiscal 2021,

compared

to $5.3 million

in last year’s

first three

months.

For the full

fiscal 2021

year, the Company

expects

to invest

approximately

$3.1 million

in capital

expenditures.

Net cash

used by

investing

activities

totaled

$34.2 million

in the first

three months

of fiscal

2021 compared

$76.9 million provided

in the comparable period of fiscal 2020,

primarily

due to a

decrease

in the sale of

short-term

investments

and an

increase

in the

purchase

of short

-term investments,

partially

offset by

decrease

in capital

expenditures.

Net cash used

by financing

activities

totaled

$5.5 million

in the first

three months

of fiscal

2021 compared

$12.4 million

provided

in the comparable

period

of fiscal

2020, primarily

due to a decrease

in proceeds

from

the line of

credit,

partially

offset by no

dividends

paid in the

first quarter of fiscal 2021

and fewer stock

repurchases.

On May 20,

2021, the

Board of

Directors

declared

the quarterly

dividend

at $0.11 per

share.

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

As of May

1, 2021, the

Company

had 1,445,488 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 and tax-exempt

and taxable

governmental

debt securities

held in managed

accounts

with underlying

ratings

of A or better

at May 1, 2021

and January 30, 2021.

The state, municipal and corporate bonds have contractual maturities which range

from four days

to 4.5 years.

The U.S. Treasury

Notes have

contractual

maturities

which range

from 14 days

to 2.5 years.

These securities

are classified

as available-for-sale

and are recorded

as Short-term

investments,

Restricted

cash, Restricted

short-term

investments

and Other assets

on the accompanying

Condensed

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 May 1,

2021,

the Company

had $0.8

million

of corporate

equities

and deferred

compensation

plan assets of $11.6 million.

At January 30, 2021, the Company

had $0.7 million

of corporate

equities

and

deferred

compensation

plan assets

of $11.3 million.

All

of these

assets are

recorded

within Other

assets in

the

Condensed

Consolidated

Balance

Sheets.

See Note

7, Fair

Value Measurements.

RECENT

ACCOUNTING

PRONOUNCEMENTS:

See Note 8, Recent Accounting Pronouncements.

THE CATO CORPORATION

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK:

The Company

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.

ITEM 4. 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 proc

edures as of

May 1, 2021

Based on this

evaluation,

our Principal

Executive

Officer and

Principal

Financial

Officer concluded

that, as

of May 1,

2021,

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

1, 2021 that

has materially

affected,

or is

reasonably

likely to materially

affect, the Company’s

internal

control

over financial

reporting.

THE CATO CORPORATION

PART

II OTHER

INFORMATION

ITEM 1.

LEGAL PROCEEDINGS:

Not Applicable

ITEM 1A.

RISK FACTORS:

In addition

to the other

information

in this

report,

you should

carefully

consider

the factors

discussed

in Part

“Item 1A. Risk Factors” in our

Annual

Report

on Form 10-K

for our fiscal year ended January 30,

2021.

These risks could materially

affect our business,

financial

condition

or future results;

however, they are not

the only

risks we

face.

Additional

risks and

uncertainties

not currently

known to

us or that

we currently

deem

to be immaterial

may also materially

adversely

affect our business,

financial

condition

or results of

operations.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES

AND USE OF PROCEEDS:

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

ended May 1, 2021:

ISSUER

PURCHASES

OF EQUITY

SECURITIES

Total Number of

Maximum Number

Shares Purchased as

(or Approximate Dollar

Total Number

Average

Part of Publicly

Value)

of Shares that may

of Shares

Price Paid

Announced Plans or

Yet be Purchased

Under

Period

Purchased

per Share (1)

Programs (2)

The Plans or Programs (2)

February 2021

March 2021

122,119

11.77

122,119

April 2021

303,542

13.81

303,542

Total

425,661

13.22

425,661

1,445,488

(1)

Prices include trading costs.

(2)

As of January

30, 2021, the

Company’s share

repurchase program had

1,871,149 shares

remaining in

open authorizations.

During the

first quarter

ended May

1, 2021,

the Company

repurchased and

retired 425,661 shares

under this

program for approximately

$5,629,130 or

average market price of $13.22 per share.

As of May 1, 2021, the Company had 1,445,488 shares

remaining in

open authorizations.

There is

no specified

expiration date

for the

Company’s

repurchase program.

ITEM 3.

DEFAULTS

UPON SENIOR SECURITIES:

Not Applicable

THE CATO CORPORATION

PART

II OTHER

INFORMATION

ITEM 4.

MINE SAFETY DISCLOSURES:

Not Applicable

ITEM 5.

OTHER INFORMATION:

Not Applicable

ITEM 6.

EXHIBITS:

Exhibit

No.

Item

3.1

Registrant’s Amended and Restated Certificate of Incorporation,

incorporated by reference to Exhibit 3.1 to Form 10-Q of the Registrant

for the quarter ended May 2, 2020.

3.2

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

reference to Exhibit 3.2 to Form 10-Q of the Registrant for the quarter

ended May 2, 2020.

31.1*

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

31.2*

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

32.1*

Section 1350 Certification of Principal Executive Officer.

32.2*

Section 1350 Certification of Principal Financial Officer.

101.1*

The following materials from Registrant’s Quarterly Report on Form

10-Q

for the

fiscal quarter ended

May 1,

2021, formatted in

Inline

XBRL:

(i) Condensed

Consolidated

Statements

of Income

(Loss) and

Comprehensive

Income

(Loss)

for the Three

Months

ended May 1,

2021 and

May 2, 2020;

(ii) Condensed

Consolidated

Balance

Sheets at

May 1,

2021 and

January

30,

2021;

(iii) Condensed Consolidated

Statements

of Cash Flows for the

Three Months Ended May 1, 2021

and May 2,

2020;

(iv) Condensed Consolidated

Statements

Stockholders’

Equity for the

Three Months Ended May

1, 2021 and

May 2, 2020; and

(v) Notes

to Condensed

Consolidated

Financial

Statements.

104.1

Cover Page

Interactive Data

File (Formatted

in Inline

XBRL and

contained in the Interactive Data Files submitted as Exhibit 101.1*)

* Submitted electronically herewith.

THE CATO CORPORATION

PART

II OTHER

INFORMATION

SIGNATURES

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

has duly caused this

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

authorized.

THE CATO

CORPORATION

May 27, 2021

/s/ John P.

D. Cato

Date

John P.

D. Cato

Chairman, President and

Chief Executive Officer

May 27, 2021

/s/ John R. Howe

Date

John R. Howe

Executive Vice President

Chief Financial Officer

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The Cato Corporation (CATO) 10-Q2021 Q1 Quarterly report

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