CATO CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended		November 2, 2002


[ ]		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		0-3747

THE CATO CORPORATION AND SUBSIDIARIES

(Exact name of registrant as specified in its charter)


Delaware		56-0484485

(State or other jurisdiction		(I.R.S. Employer
of incorporation)		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)

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 X No

As of November 19, 2002, there were 19,447,557 shares of Class A Common Stock and 6,085,149 shares of Class B Common Stock outstanding.

THE CATO CORPORATION

FORM 10-Q

November 2, 2002

Table of Contents


			Page
			No.

PART I — FINANCIAL INFORMATION (UNAUDITED)

	Condensed Consolidated Statements of Income			2
		For the Three Months and Nine Months Ended November 2, 2002 and November 3, 2001

	Condensed Consolidated Balance Sheets			3
		At November 2, 2002, November 3, 2001 and February 2, 2002

	Condensed Consolidated Statements of Cash Flows			4
		For the Nine Months Ended November 2, 2002 and November 3, 2001

	Notes to Condensed Consolidated Financial Statements			5–8
		For the Three Months and Nine Months Ended November 2, 2002 and November 3, 2001

	Management’s Discussion and Analysis of Financial Condition and Results of Operations			9–12

	Control Procedures			13

PART II — OTHER INFORMATION				14-18

Page 2

PART I FINANCIAL INFORMATION

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


			Three Months Ended				Nine Months Ended

			November 2,		November 3,		November 2,		November 3,
			2002		2001		2002		2001

			(Dollars in thousands, except per share data)
REVENUES
	Retail sales		$	158,217	$	147,619	$	541,734	$	500,410
	Other income (principally finance, late, and layaway charges)			5,158		5,250		15,670		15,591

		Total revenues		163,375		152,869		557,404		516,001


COSTS AND EXPENSES
	Cost of goods sold			110,188		101,743		360,503		336,227
	Selling, general and administrative			40,533		40,593		129,976		122,720
	Depreciation			4,143		2,779		10,505		7,927
	Interest			4		8		17		30

		Total expenses		154,868		145,123		501,001		466,904


INCOME BEFORE INCOME TAXES				8,507		7,746		56,403		49,097

Income tax expense				3,080		2,711		20,418		17,184


NET INCOME			$	5,427	$	5,035	$	35,985	$	31,913


BASIC EARNINGS PER SHARE			$	.21	$	.20	$	1.41	$	1.26


DILUTED EARNINGS PER SHARE			$	.21	$	.20	$	1.39	$	1.23


DIVIDENDS PER SHARE			$	.15	$	.135	$	.435	$	.395

See accompanying notes to condensed consolidated financial statements.

Page 3

THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS


					November 2,			November 3,			February 2,
					2002			2001			2002
					(Unaudited)			(Unaudited)

					(Dollars in thousands)
ASSETS
Current Assets
	Cash and cash equivalents				$	49,528		$	5,710		$	41,772
	Short-term investments					54,627			71,639			42,923
	Accounts receivable — net					52,303			50,593			52,293
	Merchandise inventories					104,775			97,972			80,407
	Deferred income taxes					1,069			1,168			777
	Prepaid expenses					5,020			5,134			5,036

		Total Current Assets				267,322			232,216			223,208
Property and equipment — net						111,351			96,127			100,137
Other assets						9,144			8,693			8,696

				Total	$	387,817		$	337,036		$	332,041


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable				$	77,240		$	68,571		$	57,495
	Accrued expenses					30,584			29,041			25,260
	Income taxes payable					6,011			3,591			820

		Total Current Liabilities				113,835			101,203			83,575
Deferred income taxes						5,177			5,386			5,177
Other noncurrent liabilities						8,412			7,648			8,591
Shareholders’ Equity
	Preferred stock, $100 par value per share, 100,000 shares authorized, none issued					—			—			—
	Class A common stock, $.033 par value per share, 50,000,000 shares authorized; issued 25,188,736 shares, 24,913,749 shares and 25,011,732 shares at November 2, 2002, November 3, 2001, and February 2, 2002, respectively					840			830			833
	Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued and outstanding 6,085,149 shares, 5,573,483 shares and 5,812,649 shares at November 2, 2002, November 3, 2001, and February 2, 2002, respectively					202			186			194
Additional paid-in capital						92,743			80,818			86,948
Retained earnings						229,889			197,177			204,961
Accumulated other comprehensive losses						(1,053	)		(120	)		(567	)
Unearned compensation – restricted stock awards						(2,619	)		(468	)		(394	)

						320,002			278,423			291,975
Less Class A common stock in treasury, at cost (5,741,179 shares at November 2, 2002, 5,542,969 shares at November 3, 2001, and 5,626,498 shares at February 2, 2002)						(59,609	)		(55,624	)		(57,277	)

		Total Shareholders’ Equity				260,393			222,799			234,698

			Total		$	387,817		$	337,036		$	332,041

See accompanying notes to condensed consolidated financial statements.

Page 4

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


				Nine Months Ended

				November 2,			November 3,
				2002			2001

				(Dollars in thousands)
OPERATING ACTIVITIES

	Net income			$	35,985		$	31,913

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation			10,505			7,927
		Amortization of investment premiums			64			125
		Compensation expense related to restricted stock awards			506			221
		Loss on disposal of property and equipment			406			331
		Changes in operating assets and liabilities which provided (used) cash:
			Accounts receivable		(9	)		(3,621	)
			Merchandise inventories		(24,368	)		(18,811	)
			Other assets		(432	)		272
			Accrued income taxes		5,191			(2,115	)
			Accounts payable and other liabilities		24,598			13,778


	Net cash provided by operating activities				52,446			30,020


INVESTING ACTIVITIES

	Expenditures for property and equipment				(22,125	)		(18,566	)
	Purchases of short-term investments				(25,520	)		(35,181	)
	Sales of short-term investments				13,265			22,092


	Net cash used in investing activities				(34,380	)		(31,655	)


FINANCING ACTIVITIES

	Dividends paid				(11,057	)		(10,011	)
	Purchases of treasury stock				(1,187	)		(11,901	)
	Proceeds from employee stock purchase plan				496			431
	Proceeds from stock options exercised				1,438			3,625


	Net cash used in financing activities				(10,310	)		(17,856	)


	Net increase (decrease) in cash and cash equivalents				7,756			(19,491	)

	Cash and cash equivalents at beginning of period				41,772			25,201


	Cash and cash equivalents at end of period			$	49,528		$	5,710

See accompanying notes to condensed consolidated financial statements.

Page 5

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2002
AND NOVEMBER 3, 2001

NOTE 1 — GENERAL:

The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the Company), and all amounts shown as of November 2, 2002 and November 3, 2001 are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of the interim period may not be indicative of 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 in Form 10-K for the fiscal year ended February 2, 2002.

The Company’s short-term investments are classified as available-for-sale securities, and therefore, are carried at fair value, with unrealized gains and losses, net of income taxes, reported as a component of other comprehensive income within Shareholders’ Equity.

Total comprehensive income for the third quarter and nine months ended November 2, 2002 was $5,275,000 and $35,499,000, respectively. Total comprehensive income for the third quarter and nine months ended November 3, 2001 was $5,752,000 and $32,677,000, respectively. Total comprehensive income is composed of net income and net unrealized gains and losses on available-for-sale securities.

Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method.

In the third quarter of fiscal 2002, the Company repurchased 4,100 shares of Class A common stock for a total of $70,923, or an average market price of $17.30 per share. For the nine months ended November 2, 2002, the Company repurchased 66,000 shares of Class A common stock for a total of $1,186,687, or an average market price of $17.98 per share and accepted 48,681 mature shares of Class A common stock from an officer for payment of an option exercise for $1,144,500, or $23.51 per share, the average fair market value on the date of the exchange. For the nine months ended November 2, 2002, the Company repurchased and accepted a combined total of 114,681 shares of Class A common stock for $2,331,187, or an average market price of $20.33 per share. For the nine months ended November 3, 2001, the Company repurchased 774,750 shares of Class A common stock for a total of $11,729,439, or an average market price of $15.14 per share and accepted 9,071 mature shares of Class A common stock from an officer for payment of an option exercise for $171,669, or $18.93 per share, the average fair market value on the date of the exchange, for a combined total of 783,821 shares of Class A common stock for $11,901,108, or an average market price of $15.18 per share.

In May 2002, the Board of Directors increased the quarterly dividend by 11% from $.135 per share to $.15 per share.

Page 6

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2002
AND NOVEMBER 3, 2001

NOTE 1 – GENERAL (CONTINUED):

The provisions for income taxes are based on the Company’s estimated annual effective tax rate. As allowed by SFAS No. 109, “Accounting for Income Taxes”, deferred income taxes are calculated annually.

Certain reclassifications have been made to the condensed consolidated financial statements for prior periods to conform to the current period presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS:

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company adopted SFAS No. 142 on February 3, 2002, and the adoption of this statement had no impact on the Company’s consolidated results of operations and financial position, as the Company had no indefinite lived intangible assets.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets”. SFAS No. 144 supercedes SFAS No. 121, “Accounting for Impairment of Long-Lived Assets to be Disposed Of” and Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Along with establishing a single accounting model, based on the framework established in SFAS No. 121 for impairment of long-lived assets, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement, but broadens that presentation to include a component of the entity. The Company adopted SFAS No. 144 on February 3, 2002, and the adoption of this statement had no material impact on the Company’s consolidated results of operations and financial position.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement is effective for exit or disposal activities initiated after December 31, 2002. Liabilities for costs associated with an exit activity should be initially measured at fair value, when incurred. This statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination, or a disposal activity covered by SFAS No. 144. The Company does not believe that this statement will have a material impact on its financial position or its results of operations.

Page 7

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2002
AND NOVEMBER 3, 2001

NOTE 3 — EARNINGS PER SHARE:

Earnings per share is calculated by dividing net income by the weighted-average number of Class A and Class B common shares outstanding during the respective periods. The weighted-average shares outstanding is used in the basic earnings per share calculation, while the weighted-average shares and common stock equivalents outstanding is used in the diluted earnings per share calculation.

Three Months Ended

Nine Months Ended