Executive Summary

Q2 FY2026 delivered a clean inflection: total revenues rose to $176.5M (+4.7% YoY) with gross margin up 160 bps to 36.2% and diluted EPS at $0.35, driven by a 9% same‑store sales increase and lower distribution/buying costs .
SG&A leverage was notable: SG&A fell 210 bps to 32.8% of sales on lower payroll and insurance costs, partially offset by higher advertising and corporate costs .
Management flagged tariff headwinds for 2H FY2026; product acquisition costs are rising (especially shoes/handbags sourced from China), prompting potential pricing actions and/or vendor cost sharing to preserve margins .
Store optimization continues: 8 closures in Q2; 1,101 stores at quarter-end versus 1,166 last year, with approximately 50 closures expected in FY2026 and capex guided to ~$5.9M for FY2026 .
No S&P Global Wall Street consensus was available for Q2 FY2026 EPS or revenue comparisons; traders should focus on the improving same‑store trajectory vs. tariff risk as the key near-term stock catalysts . Values retrieved from S&P Global.*

What Went Well and What Went Wrong

What Went Well

Same‑store sales increased 9% in Q2, driving total sales growth to $174.7M; John Cato noted “our sales trend continued to improve during the second quarter,” referencing easier compares from prior-year supply chain disruptions .
Gross margin expanded to 36.2% from 34.6%, with lower distribution and buying costs offsetting lower merchandise margins; SG&A as a percent of sales improved to 32.8% from 34.9% .
Cash generation improved YTD: operating cash flow reached $15.6M (vs. $8.8M prior year), aided by inventory reductions; working capital increased to $50.5M .

What Went Wrong

Merchandise margin pressure persisted, reflecting increased sales of marked-down goods; income before taxes remains modest at $6.5M, underscoring sensitivity to gross margin mix .
Tariffs are a material 2H headwind; reciprocal tariffs increasing up to ~19–20% outside China and Section 301 tariffs on China raise product costs, particularly hard-to-resource categories (shoes/handbags) .
Store base contraction continues (1,101 stores vs. 1,166 prior year), and e-commerce remains <5% of total, which limits omni-channel leverage in a cautious discretionary environment .

Financial Results

Metric	Q4 FY2025 (oldest)	Q1 FY2026	Q2 FY2026 (newest)
Total Revenues ($USD Millions)	$157.9	$170.2	$176.5
Retail Sales ($USD Millions)	$155.3	$168.4	$174.7
Other Revenue ($USD Millions)	$2.6	$1.8	$1.9
Gross Margin (%)	28.0%	35.1%	36.2%
SG&A (% of Sales)	37.8%	32.8%	32.8%
Depreciation ($USD Millions)	$2.7	$2.6	$2.5
Income Before Income Taxes ($USD Millions)	$(13.7)	$4.24	$6.54
Net Income ($USD Millions)	$(14.1)	$3.31	$6.83
Diluted EPS ($)	$(0.74)	$0.17	$0.35
Same‑Store Sales (%)	(Q4 not disclosed)	Flat	+9%

Segment breakdown (segment revenues and income before taxes):

Segment	Q2 FY2025 Revenues ($M)	Q2 FY2025 Segment IBT ($M)	Q2 FY2026 Revenues ($M)	Q2 FY2026 Segment IBT ($M)
Retail	$167.954	$(1.164)	$175.856	$4.996
Credit	$0.674	$0.541	$0.653	$0.527
Total (Segments)	$168.628	$(0.623)	$176.509	$5.523
Corporate Interest & Other	—	$(1.361)	—	$(1.016)
Income Before Taxes	—	$0.738	—	$6.539

Key KPIs:

KPI	Q1 FY2026	Q2 FY2026
Store Count (period-end)	1,109	1,101
Same‑Store Sales YoY	Flat	+9%
Credit Revenue ($M)	—	$0.7 (0.4% of total revenues)
Proprietary Credit Card Sales ($M)	—	$5.7
E-commerce Mix of Sales	—	<5% of total sales (six months)
ABL Revolver Availability ($M)	—	$27.0 (after $3.0 LC)
Operating Cash Flow YTD ($M)	—	$15.6
Working Capital ($M)	—	$50.5

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Capital Expenditures	FY2026	~$5.9M (full-year expectation)	~$5.9M (reaffirmed)	Maintained
Store Closures	FY2026	“Close up to 50 underperforming stores”	“Expect to close approximately 50 stores”	Maintained
New Store Openings	FY2026	“Open up to 15 new stores”	Not reiterated in Q2; focus on closures	Maintained/Not updated
Dividends	FY2026	Dividend suspended in late FY2025; no payments in FY2026 to date	Dividend payments eliminated in FY2026 (to date)	Maintained
Taxes	FY2026	No specific rate guidance; YTD effective tax rate 5.9%	No change; OBBBA impact immaterial to ETR	Maintained
Tariffs/Margins	2H FY2026	Cautious re proposed tariffs	Explicitly expect higher product costs; mitigation via pricing/vendor sharing	Raised risk disclosure

Earnings Call Themes & Trends

Note: No Q2 FY2026 earnings call transcript was available; themes reflect management disclosures across Q4 FY2025, Q1 FY2026, and Q2 FY2026 documents.

Topic	Previous Mentions (Q4 FY2025)	Previous Mentions (Q1 FY2026)	Current Period (Q2 FY2026)	Trend
Supply Chain/DC Automation	“Improved vs. difficult Q3; working through DC automation conversion issues”	—	Lower buying/distribution costs aided gross margin	Improving
Tariffs/Macro	Tariff uncertainty flagged for 2025	“Cautious” re proposed tariffs and discretionary spending	Reciprocal and Section 301 tariffs increasing product costs; pricing/vendor cost sharing contemplated	Worsening risk
Pricing/Merchandise Margins	Increased markdowns pressured margins in Q4	Higher sales of marked down goods hurt Q1 merchandise contribution	Lower merchandise margins offset by buying/distribution savings	Mixed
Store Footprint	FY2025 plan: open up to 15, close up to 50	8 closures in Q1; 1,109 stores	8 closures in Q2; 1,101 stores; ~50 closures expected in FY2026	Ongoing optimization
Cost Discipline	Eliminated ~40 corporate positions; expect distribution/freight savings	SG&A down YoY; payroll/insurance savings	SG&A leverage continues; payroll/insurance down; advertising/corporate up	Improving
Liquidity	—	—	ABL availability $27.0M; OCFi $15.6M; working capital $50.5M	Stable

Management Commentary

“Our sales trend continued to improve during the second quarter. We attribute this improvement in part due to 2024 sales being impacted by supply chain disruptions.” — John Cato, Chairman, President & CEO .
“We will continue to tightly manage our expenses as we anticipate the back half of 2025 to be challenging due to the continued uncertainty regarding tariffs and the potential negative impact on our product acquisition costs.” — John Cato .
“As we look ahead to 2025, we remain cautious… pressures related to newly implemented tariffs and the uncertainty of potential additional tariffs.” — John Cato (Q4 FY2025) .
“Our results reflect our customers’ cautious approach to discretionary spending… the potential impact of the proposed tariffs has us cautious about the remainder of the year.” — John Cato (Q1 FY2026) .

Q&A Highlights

No Q2 FY2026 earnings call transcript was found; Q&A highlights are unavailable. The most relevant clarifications are in MD&A regarding tariff mechanics (reciprocal rates rising outside China; Section 301 on China) and margin mitigation avenues (pricing/vendor cost sharing) .

Estimates Context

S&P Global consensus estimates for Q2 FY2026 EPS and revenue were unavailable at the time of retrieval; therefore, no beat/miss analysis vs. Street can be provided. Values retrieved from S&P Global.*

Where estimates may need to adjust:

Near-term models should reflect higher product acquisition costs from tariffs (19–20% reciprocal rates ex‑China; Section 301 in China), with specific pressure in shoes/handbags and potential pricing actions to protect merchandise margins .
SG&A run-rate appears structurally lower (payroll/insurance) vs. last year; advertising and corporate costs partially offset, but overall opex trajectory supportive of margin resilience .
Same‑store momentum (+9% in Q2) argues for more constructive 2H traffic assumptions but caution is warranted given tariff-induced pricing pressures .

Key Takeaways for Investors

The quarter shows operational progress: same‑store +9%, gross margin +160 bps, SG&A leverage, and EPS to $0.35; this supports near‑term multiple stabilization provided margins can withstand tariff pressures .
Tariffs are the swing factor in 2H: expect margin headwinds unless pricing/vendor cost sharing can offset; category exposure (shoes/handbags) is most acute .
Cost control remains a pillar: payroll/insurance savings and store optimization drive SG&A leverage; watch advertising/corporate costs as growth investments .
Cash/liquidity improved: OCFi $15.6M YTD, working capital $50.5M, ABL availability $27.0M; balance sheet flexibility is intact to navigate tariffs and inventory needs .
Store footprint rationalization continues (approx. 50 closures FY2026), with capex guided to ~$5.9M; expect continued focus on profitable locations and merchandising improvements .
No Street consensus available; trade the narrative: positive comp/margin momentum vs. tariff headwinds — monitor category pricing actions and vendor negotiations as key catalysts .
Non‑GAAP: Company did not present non‑GAAP adjustments this quarter; analysis anchored to GAAP disclosures in PR and 10‑Q .

Citations:

CATO CORP (CATO)·Q2 2026 Earnings Summary