Item 1A.
Risk Factors:
An investment in our common stock involves numerous types of risks.
You
should carefully consider
the following
risk factors,
in addition
to the
other information
contained in
this report,
including the
disclosures under
“Forward-looking Information”
above in
evaluating our
Company and
any potential
investment in
our common
stock.
If
any of
the following
risks or
uncertainties occur
or persist,
our
business, financial condition and ope
rating results could be
materially and adversely affected,
the trading
price of
our common
stock could
decline and
you could
lose all
or a
part of
your investment
in our
common stock.
The risks
and uncertainties
described in
this section
are not
the only
ones facing
us.
Additional risks and
uncertainties not presently
known to us
or that we
currently deem immaterial
may
also materially and adversely affect our business operating results and financial condition.
Risks Relating to the COVID-19 Pandemic:
The outbreak and persistence of the COVID-19 pandemic
has and will adversely affect our business,
financial condition and results of operations.
The COVID
-19 pandemic
has adversely
impacted the
Company's business,
financial condition
and
operating results
through fiscal
2020, and
we expect
that it
will continue
to do
so in
fiscal 2021
and
possibly beyond. Adverse
financial impacts associated
with the outbreak
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 to
close stores,
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 COVID
-19 pandemic
has caused
state and
local governments
to issue
orders mandating
store
closures and other
measures to mitigate
the spread of
the virus. In
addition, public health
officials have
issued precautions and
guidance intended to
reduce the spread
of the virus,
including particular cautions
about congregating in
large groups
or heavily populated
areas, such as
malls and shopping
centers. We
temporarily closed
all Cato,
It’s Fashion,
It’s Fashion
Metro and
Versona
stores on
March 19,
2020.
Beginning on May 1, 2020, we began to re-open stores based on the pertinent state and local orders. As of
June 15, 2020,
all stores
were re-opened,
but our stores
have been and continue
to operate at reduced
hours.
Periodic
increases
in infection
rates in
communities
where our
stores are
located
may prompt
further
governmental
measures
or public
health guidance
to reduce
public activity
and gatherings
in order
to mitigate
the spread of the virus,
and may also continue
to adversely
affect consumer
confidence.
There continues to
be significant uncertainty
regarding the breadth
,
severity and duration
of business disruptions
related to
COVID-19, as well as its impact on the global and U.S. economy, consumer willingness to visit malls and
shopping centers,
and its
impact on
appropriate associate
staffing levels
for our
stores. The
status and
effects of
national, state
or local
action, initiatives,
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 also remain fluid.
While the Company currently
anticipates that our
results for fiscal
2021 and possibly beyond
will be
adversely impacted,
the extent
to which
COVID-19 impacts the
Company’s results
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
11
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.
It is also possible
the COVID-19 pandemic may
result in longer term
behavioral changes by
customers and
others that
could adversely
affect our
business, including
but not
limited to
a consumer
shift to greater reliance
on online versus in-person shopping,
which could reduce traffic
to our stores and
more broadly
to the
strip shopping
centers and
malls in
which most
of our
stores are
located and
disadvantage us relative to competitors
who are better established in
e-commerce sales, and reductions in
face-to-face work, travel and socializing occasions, which may lead customers to less
frequently desire or
perceive the need to update their wardrobes.
The far-reaching impacts of the COVID-19 pandemic may also intensify other risks we discuss in
this
report and other filings we make from time to time with the SEC.
Future outbreaks of
disease or
similar public
health threats,
or the
fear of
such an
occurrence, may
also have a material adverse effect on the Company’s business, financial condition and operating results.
Risks Relating to Our Business:
Unusual weather, natural disasters,
public health threats or similar events may adversely affect
our sales or
operations.
Extreme changes
in weather,
natural disasters,
public health
threats or
similar events
can influence
customer trends and
shopping habits.
For example, heavy
rainfall or other
extreme weather conditions
,
including but
not limited
to winter
weather over
a prolonged
period, might
make it
difficult for
our
customers to
travel to
our stores
and thereby
reduce our
sales and
profitability.
Our business
is also
susceptible to
unseasonable weather conditions.
For example, extended
periods of
unseasonably warm
temperatures during the
winter season or
cool weather during
the summer season
could render a
portion
of our
inventory incompatible
with those
unseasonable conditions.
Reduced sales
from extreme
or
prolonged unseasonable
weather conditions
would adversely
affect our
business.
The occurrence
or
threat of
extreme weather,
natural disasters,
power outages,
terrorist acts,
outbreaks of
flu or
other
communicable diseases
(such as
the global
COVID-19 pandemic)
or other
catastrophic events
could
reduce customer traffic
in our stores
and likewise disrupt
our ability to
conduct operations, which
could
materially and adversely affect us.
Because we source a significant portion of our merchandise directly
and indirectly from overseas, we are
subject to risks associated with international operations and
risks that affect the prevailing social, economic,
political, public health and other conditions in the areas from
which we source merchandise; changes,
disruptions, cost changes or other problems affecting
the Company’s merchandise
supply chain could
materially and adversely affect the Company’s
business, results of operations and financial condition.
A significant amount of our
merchandise is manufactured overseas, principally in Southeast
Asia. We
directly import some of this merchandise and indirectly import
the remaining merchandise from domestic
vendors who acquire
the merchandise from
foreign sources. Further,
our third-party vendors
are
dependent on
materials primarily
sourced from
China.
As a
result, political
unrest, labor
disputes,
terrorism, public health
threats, including but
not limited
to communicable diseases
(such as
the global
COVID-19 pandemic), financial or other forms of
instability or other events resulting in
the disruption of
trade from
countries affecting
our supply
chain, increased
security requirements
for imported
merchandise, or
the imposition of,
or changes in,
laws, regulations or
changes in duties,
quotas, tariffs,
taxes or governmental policies regarding these matters or other
factors affecting the availability or cost of
imports, could cause
significant delays or
interruptions in the
supply of our
merchandise or increase
our
costs. We
are also
subject to
supply chain
disruptions affecting
ocean freight,
including lack
of ocean
12
container ship
capacity, lack
of equipment
such as
containers, port
congestion and
other conditions
impacting ocean
freight.
We also
are subject
to domestic
supply chain
disruptions,
including lack
of
domestic intermodal
transportation (trucks
and drivers),
domestic port
congestion and
other conditions
that ma
y
impact domestic
supply chain.
These supply
chain risks
may result
in both
higher costs
to
transport our merchandise and delayed merchandise arrivals to our stores, which may adversely affect our
ability to
sell this
merchandise and
increase markdowns
of it.
Our costs
are also
affected by
currency
fluctuations, and changes in the
value of the dollar relative
to foreign currencies may increase our
cost of
goods sold.
Any of
these factors
could have
a material
adverse effect
on our
business and
results of
operations.
In addition, increased energy and transportation
costs have caused us significant
cost
increases from time
to time, and
future adverse changes in
these costs or
the disruption of
the means by
which merchandise
is transported
to us
could cause
additional cost
increases or
interruptions of
our
supply chain which could be significant. Further, we are subject to increased costs or potential disruptions
impacting any port
or trade
route through which
our products
move or we
may be
subject to
increased
costs and
delays if
forced to
route freight
through different
ports than
the ones
through which
our
products typically move.
If we are
forced to source
merchandise from other
countries or other
domestic
vendors with foreign sources
in different countries, those
goods may be more
expensive or of a
different
or inferior quality from the ones we now sell.
The inability of third-party vendors to produce goods on
time and to the Company’s
specification may
adversely affect the Company’s
business, results of operations and financial condition.
Our dependence
on third-
party vendors
to manufacture
and supply
our merchandise
subjects us
to
numerous risks that our
vendors will fail to
perform as we expect.
For example, the deterioration
in any
of our key
vendors’ financial condition,
their failure to
ship merchandise in
a timely manner
that meets
our specifications, or
other failures to
follow our vendor
guidelines or comply
with applicable laws
and
regulations, including
compliant labor,
environmental practices
and product
safety, could
expose us
to
operational, quality,
competitive, reputational and
legal risks.
If we are
not able to
timely or adequately
replace the merchandise we currently source
with merchandise produced elsewhere, or if our
vendors fail
to perform as
we expect,
our business,
results of
operations and financial
condition could
be adversely