CATO CORP - 10-Q Quarterly 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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act).

As of November 18, 2003, there were 20,001,167 shares of Class A common stock and 500,350 shares of Class B common stock outstanding.


		Page
		No.

PART I — FINANCIAL INFORMATION (UNAUDITED)

Condensed Consolidated Statements of Income		2
For the Three Months and Nine Months Ended
November 1, 2003 and November 2, 2002

Condensed Consolidated Balance Sheets		3
At November 1, 2003, November 2, 2002 and February 1, 2003

Condensed Consolidated Statements of Cash Flows		4
For the Nine Months Ended November 1, 2003 and November 2, 2002

Notes to Condensed Consolidated Financial Statements		5–10
For the Three Months and Nine Months Ended
November 1, 2003 and November 2, 2002

Management’s Discussion and Analysis of
Financial Condition and Results of Operations		11–15

Controls and Procedures		16

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		17

Item 2. Changes in Securities and Use of Proceeds		17

Item 3. Defaults upon Senior Securities		17

Item 4. Submission of Matters to a Vote of Security Holders		17

Item 5. Other Information		17

Item 6. Exhibits and Reports on Form 8-K		17

Signatures Page and Certification		18-23


			Three Months Ended						Nine Months Ended

			November 1,			November 2,			November 1,			November 2,
			2003			2002			2003			2002
			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

						(Dollars in thousands, except per share data)

REVENUES
	Retail sales		$	153,171		$	158,217		$	538,693		$	541,734
	Other income (principally finance, late, and layaway charges)			3,958			4,011			11,639			11,700

		Total revenues		157,129			162,228			550,332			553,434

COSTS AND EXPENSES, NET
	Cost of goods sold			108,557			110,188			368,171			360,502
	Selling, general and administrative			42,809			40,533			130,819			129,976
	Depreciation			4,713			4,143			13,726			10,505
	Interest and other income, net			(201	)		(1,143	)		(3,216	)		(3,952	)

		Costs and expenses, net		155,878			153,721			509,500			497,031

INCOME BEFORE INCOME TAXES				1,251			8,507			40,832			56,403
Income tax expense				454			3,080			14,822			20,418

NET INCOME			$	797		$	5,427		$	26,010		$	35,985

BASIC EARNINGS PER SHARE			$	.04		$	.21		$	1.08		$	1.41

DILUTED EARNINGS PER SHARE			$	.04		$	.21		$	1.06		$	1.39

DIVIDENDS PER SHARE			$	.16		$	.15		$	.47		$	.435


					November 1,			November 2,			February 1,
					2003			2002			2003
					(Unaudited)			(Unaudited)

								(Dollars in thousands)
ASSETS
Current Assets
	Cash and cash equivalents				$	17,086		$	49,528		$	32,065
	Short-term investments					40,036			54,627			74,871
	Accounts receivable — net					51,178			52,303			54,116
	Merchandise inventories					101,874			104,775			93,457
	Deferred income taxes					1,631			1,069			1,392
	Prepaid expenses					5,671			5,020			4,990

		Total Current Assets				217,476			267,322			260,891
Property and equipment — net						114,677			111,351			113,307
Other assets						9,578			9,144			9,212

				Total	$	341,731		$	387,817		$	383,410

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable				$	71,947		$	77,240		$	66,620
	Accrued expenses					29,218			30,584			28,776
	Income taxes					5,004			6,011			2,886
	Current portion of long-term debt					6,000			—			—

		Total Current Liabilities				112,169			113,835			98,282
Deferred income taxes						6,310			5,177			6,310
Long term debt						23,000			—			—
Other noncurrent liabilities						10,815			8,412			8,654

Commitments and contingencies

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 25,907,346 shares, 25,188,736 shares and 25,218,678 shares at November 1, 2003, November 2, 2002, and February 1, 2003, respectively					863			840			840
	Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued 5,637,834 shares, 6,085,149 shares and 6,085,149 shares at November 1, 2003, November 2, 2002 and February 1, 2003, respectively					188			203			203
Additional paid-in capital						97,476			92,741			94,947
Retained earnings						250,754			229,889			235,904
Accumulated other comprehensive gains (losses)						(168	)		(1,053	)		253
Unearned compensation – restricted stock awards						(1,764	)		(2,619	)		(2,375	)

						347,349			320,001			329,772
Less Class A and Class B common stock in treasury, at cost (5,906,179 Class A and 5,137,484 Class B shares at November 1, 2003, 5,741,179 Class A and 0 Class B shares at November 2, 2002, and at February 1, 2003, respectively)						(157,912	)		(59,608	)		(59,608	)

		Total Shareholders’ Equity				189,437			260,393			270,164

			Total		$	341,731		$	387,817		$	383,410


				Nine Months Ended

				November 1,			November 2,
				2003			2002
				(Unaudited)			(Unaudited)

				(Dollars in thousands)
OPERATING ACTIVITIES
	Net income			$	26,010		$	35,985
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation			13,726			10,505
		Amortization of investment premiums			4			64
		Compensation expense related to restricted stock awards			611			506
		Loss on disposal of property and equipment			277			406
		Changes in operating assets and liabilities which provided (used) cash:
			Accounts receivable		2,938			(9	)
			Merchandise inventories		(8,417	)		(24,368	)
			Other assets		(1,047	)		(432	)
			Accounts payable and other liabilities		7,690			24,598
			Accrued income taxes		2,118			5,191

	Net cash provided by operating activities				43,910			52,446

INVESTING ACTIVITIES
	Expenditures for property and equipment				(15,373	)		(22,125	)
	Purchases of short-term investments				(11,034	)		(25,520	)
	Sales of short-term investments				45,444			13,265

	Net cash provided (used) in investing activities				19,037			(34,380	)

FINANCING ACTIVITIES
	Dividends paid				(11,159	)		(11,057	)
	Purchases of treasury stock				(98,304	)		(1,187	)
	Proceeds of long term debt				30,000			—
	Payments to settle long term debt				(1,000	)		—
	Proceeds from employee stock purchase plan				491			496
	Proceeds from stock options exercised				2,046			1,438

	Net cash (used) in financing activities				(77,926	)		(10,310	)

	Net increase (decrease) in cash and cash equivalents				(14,979	)		7,756
	Cash and cash equivalents at beginning of period				32,065			41,772

	Cash and cash equivalents at end of period			$	17,086		$	49,528

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 1, 2003
AND NOVEMBER 2, 2002

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 and for the periods ended November 1, 2003 and November 2, 2002 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 on Form 10-K for the fiscal year ended February 1, 2003.

Cash equivalents consist of highly liquid investments with original maturities of three months or less. Investments with original maturities beyond three months are classified as short-term investments. The fair values of short-term investments are based on quoted market prices.

The Company’s short-term investments are classified as available-for-sale. As they are available for current operations, they are classified in the Condensed Consolidated Balance Sheets as current assets. Available-for-sale securities are carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Condensed Consolidated Balance Sheets and a reduction of interest and other income, net in the accompanying Statements of Consolidated Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in other income.

Total comprehensive income for the third quarter and nine months ended November 1, 2003 was $619,000 and $25,589,000, respectively. 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 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.

For the nine months ended November 1, 2003, the Company repurchased 165,000 shares of Class A Common Stock for $2,740,619, or an average market price of $16.61 per share and 5,137,484 of Class B Common Stock for $95,563,454, or an average market price of $18.60 per share.

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 1, 2003
AND NOVEMBER 2, 2002

For the nine months ended November 2, 2002, the Company repurchased and accepted a combined total of 114,681 mature shares of Class A Common Stock for $2,331,187, or an average market price of $20.33 per share. In the third quarter of fiscal 2002, the Company repurchased 4,100 shares of Class A Common Stock for $70,923, or an average market price of $17.30 per share.

In May 2003, the Board of Directors increased the quarterly dividend by 7% from $.15 per share to $.16 per share.

On August 22, 2003, the Company repurchased 5,137,484 shares of Class B Common Stock from a limited partnership and trust affiliated with Wayland H. Cato, Jr., a Company founder and Chairman of the Board and a limited partnership affiliated with Edgar T. Cato, a Company founder and a member of the Board of Directors. Shares were purchased at $18.50 per share (a 10% discount to the closing price the day prior to the announced agreement) for a total cost of $95,043,454. Including related expenses of $520,000 for investment banking and related professional fees, the total cost was $95,563,454 or an average purchase price of $18.60 per share. The repurchase was funded by the Company through a new $30 million five-year term loan facility and approximately $65 million of cash and liquidated short-term investments. Payments on the new term loan are due in monthly installments of $500,000 plus accrued interest. Interest is based on LIBOR. The interest rate at November 1, 2003 was 2.27%.

On August 29, 2003, the Company entered into retirement agreements with Mr. Wayland H. Cato, Jr., a Company founder and Chairman of the Board and Mr. Edgar T. Cato, a Company founder and a member of the Board of Directors. The agreements provided for the retirement of Mr. Wayland Cato and Mr. Edgar Cato from the Company and the Board of Directors effective January 31, 2004. Mr. Wayland Cato will be available to the Company for consulting services following his retirement. In the third quarter of fiscal 2003, the Company recognized an expense of $2.8 million representing the present value of certain payments and benefits under the terms of the agreements. The after-tax charge was $1.8 million or $.08 per diluted share for the third quarter and $.07 per diluted share for the nine months.

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.

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 1, 2003
AND NOVEMBER 2, 2002

On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide for alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting”, to require disclosure in the summary of significant policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per-share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 148’s amendment of the transition and the annual and interim disclosure requirements of SFAS No. 123 are effective for fiscal years ending after December 15, 2002.

The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for stock-based compensation where the option price of the stock approximated the fair market value of the stock on the date of grant. Had compensation expense for the stock options granted been determined consistent with SFAS No. 123, the Company’s net income and basic and diluted earnings per share amounts for the three months ended November 1, 2003 and November 2, 2002 and for the nine months ended November 1, 2003 and November 2, 2002 would approximate the following proforma amounts (dollars in thousands, except per share data):


			Three Months Ended						Nine Months Ended

			November 1,			November 2,			November 1,			November 2,
			2003			2002			2003			2002

	Net income – as reported		$	797		$	5,427		$	26,010		$	35,985

* Pro forma stock-based compensation cost				(130	)		(179	)		(395	)		(571	)

	Net income – pro forma		$	667		$	5,248		$	25,615		$	35,414

	Net income per share as reported:
		Basic earnings per share	$	.04		$	.21		$	1.08		$	1.41
		Diluted earnings per share	$


Delaware		56-0484485

(State or other jurisdiction		(I.R.S. Employer
of incorporation)		Identification No.)


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


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


Commission file number		0-3747