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 May 1, 2004

OR

o		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		(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 o

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

Yes x No o

As of May 18, 2004, there were 20,143,778 shares of Class A common stock and 470,350 shares of Class B common stock outstanding.

THE CATO CORPORATION

FORM 10-Q

May 1, 2004

Table of Contents


			Page
			No.

PART I — FINANCIAL INFORMATION (UNAUDITED)

	Item 1. Financial Statements:

	Condensed Consolidated Statements of Income			2
		For the Three Months Ended May 1, 2004 and May 3, 2003

	Condensed Consolidated Balance Sheets			3
		At May 1, 2004, May 3, 2003 and January 31, 2004

	Condensed Consolidated Statements of Cash Flows			4
		For the Three Months Ended May 1, 2004 and May 3, 2003

	Notes to Condensed Consolidated Financial Statements			5–8
		For the Three Months Ended May 1, 2004 and May 3, 2003

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9–16

	Item 3. Quantitative and Qualitative Disclosures About Market Risk			16

	Item 4. Controls and Procedures			17

PART II — OTHER INFORMATION

	Item 1. Legal Proceedings			18

	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			18

	Item 3. Defaults upon Senior Securities			18

	Item 4. Submission of Matters to a Vote of Security Holders			18

	Item 5. Other Information			18

	Item 6. Exhibits and Reports on Form 8-K			18

	Signatures			19

Page 2

PART I FINANCIAL INFORMATION

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME


			Three Months Ended

			May 1,			May 3,
			2004			2003
			(Unaudited)			(Unaudited)

			(Dollars in thousands, except per share data)
REVENUES
	Retail sales		$	205,193		$	197,304
	Other income (principally finance, late, and layaway charges)			4,008			3,906

		Total revenues		209,201			201,210


COSTS AND EXPENSES, NET
	Cost of goods sold			132,344			126,998
	Selling, general and administrative			45,823			43,444
	Depreciation			4,979			4,451
	Interest expense			162			3
	Interest and other income			(506	)		(1,130	)

		Costs and expenses, net		182,802			173,766


INCOME BEFORE INCOME TAXES				26,399			27,444

Income tax expense				9,583			9,962


NET INCOME			$	16,816		$	17,482


BASIC EARNINGS PER SHARE			$	.82		$	.69


DILUTED EARNINGS PER SHARE			$	.81		$	.68


DIVIDENDS PER SHARE			$	.16		$	.15

See accompanying notes to condensed consolidated financial statements.

Page 3

THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS


					May 1,			May 3,			January 31,
					2004			2003			2004
					(Unaudited)			(Unaudited)

					(Dollars in thousands)
ASSETS
Current Assets
	Cash and cash equivalents				$	23,167		$	43,986		$	23,857
	Short-term investments					67,155			75,069			47,545
	Accounts receivable — net					51,427			53,340			52,714
	Merchandise inventories					99,855			102,306			97,292
	Deferred income taxes					179			1,326			284
	Prepaid expenses					6,299			5,787			5,708

		Total Current Assets				248,082			281,814			227,400
Property and equipment — net						116,400			113,156			114,367
Other assets						10,189			9,604			9,806

				Total	$	374,671		$	404,574		$	351,573

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable				$	76,534		$	71,491		$	76,387
	Accrued expenses					28,161			23,600			27,815
	Income taxes					13,713			12,572			4,290
	Current portion of long-term debt					6,000			—			6,000

		Total Current Liabilities				124,408			107,663			114,492
Deferred income taxes						10,203			6,310			10,203
Long-term debt						20,000			—			21,500
Other noncurrent liabilities						11,583			8,672			11,267

Commitments and contingencies

		Total Liabilities				166,194			122,645			157,462

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 26,049,957 shares, 25,258,428 shares and 26,015,868 shares at May 1, 2004, May 3, 2003 and January 31, 2004, respectively					868			842			867
	Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued 5,607,834 shares, 6,085,149 shares and 5,607,834 shares at May 1, 2004, May 3, 2003 and January 31, 2004, respectively					187			203			187
Additional paid-in capital						100,133			95,428			99,676
Retained earnings						266,380			249,568			252,828
Accumulated other comprehensive gains						243			367			58
Unearned compensation – restricted stock awards						(1,422	)		(2,130	)		(1,593	)

						366,389			344,278			352,023
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 May 1, 2004, 5,906,179 Class A and –0– Class B shares at May 3, 2003 and 5,906,179 Class A and 5,137,484 Class B shares at January 31, 2004, respectively)						(157,912	)		(62,349	)		(157,912	)

		Total Shareholders’ Equity				208,477			281,929			194,111

			Total		$	374,671		$	404,574		$	351,573

See accompanying notes to condensed consolidated financial statements.

Page 4

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


				Three Months Ended

				May 1,			May 3,
				2004			2003
				(Unaudited)			(Unaudited)

				(Dollars in thousands)
OPERATING ACTIVITIES
	Net income			$	16,816		$	17,482

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation			4,979			4,451
		Amortization of investment premiums			—			3
		Compensation expense related to restricted stock awards			171			245
		Loss on disposal of property and equipment			14			102
		Changes in operating assets and liabilities which provided (used) cash:
			Accounts receivable		1,287			776
			Merchandise inventories		(2,564	)		(8,849	)
			Other assets		(974	)		(1,189	)
			Accounts payable and other liabilities		872			(221	)
			Accrued income taxes		9,423			9,686


	Net cash provided by operating activities				30,024			22,486

INVESTING ACTIVITIES
	Expenditures for property and equipment				(6,983	)		(4,402	)
	Purchases of short-term investments				(19,425	)		(2,347	)
	Sales of short-term investments				—			2,260


	Net cash (used) in investing activities				(26,408	)		(4,489	)

FINANCING ACTIVITIES
	Dividends paid				(3,264	)		(3,817	)
	Purchases of treasury stock				—			(2,741	)
	Payments to settle long-term debt				(1,500	)		—
	Proceeds from employee stock purchase plan				209			245
	Proceeds from stock options exercised				249			237


	Net cash (used) in financing activities				(4,306	)		(6,076	)


	Net increase (decrease) in cash and cash equivalents				(690	)		11,921

	Cash and cash equivalents at beginning of period				23,857			32,065


	Cash and cash equivalents at end of period			$	23,167		$	43,986

See accompanying notes to condensed consolidated financial statements.

Page 5

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND MAY 3, 2003

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 and for the periods ended May 1, 2004 and May 3, 2003 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 January 31, 2004.

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 in the accompanying Condensed Consolidated Statements of 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 interest and other income.

Total comprehensive income for the quarters ended May 1, 2004 and May 3, 2003 was $17,001,000 and $17,596,000, 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 May 2004, the Board of Directors increased the quarterly dividend by 9% from $.16 per share to $.175 per share.

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.

Page 6

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND MAY 3, 2003

NOTE 1 — GENERAL (CONTINUED):

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

NOTE 2 — EARNINGS PER SHARE:

FASB No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements for all entities with complex capital structures. Basic EPS is computed as net income 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, warrants and other convertible securities. Unvested restricted stock is included in the computation of diluted EPS using the treasury stock method. The weighted-average number of shares used in the basic earnings per share computations was 20,499,605 and 25,439,385 for the three months ended May 1, 2004 and May 3, 2003, respectively. The weighted-average number of shares representing the dilutive effect of stock options was 20,845,867 and 25,796,506 for the three months ended May 1, 2004 and May 3, 2003, respectively. There was an immaterial number of shares withheld in the computation of diluted EPS due to potential anti-dilutive effects for