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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      October 30, 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 12b-2 of the Act).

Yes x           No o

As of November 16, 2004, there were 20,264,366 shares of Class A common stock and 460,350 shares of Class B common stock outstanding.

 

 

THE CATO CORPORATION

FORM 10-Q

October 30, 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 and Nine Months Ended October 30, 2004 and November 1, 2003
        
 
        
Condensed Consolidated Balance Sheets
     3  
At October 30, 2004, November 1, 2003 and January 31, 2004
        
 
        
Condensed Consolidated Statements of Cash Flows
     4  
For the Nine Months Ended October 30, 2004 and November 1, 2003
        
 
        
Notes to Condensed Consolidated Financial Statements
     5-8  
For the Three Months and Nine Months Ended October 30, 2004 and November 1, 2003
        
 
        
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     9-17  
 
        
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     17  
 
        
Item 4. Controls and Procedures
     17  
 
        
PART II — OTHER INFORMATION
        
 
        
Item 1. Legal Proceedings
     18  
 
        
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     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
     18  
 
        
Signatures
     19  

 

 

Page 2

PART I FINANCIAL INFORMATION

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                 
    Three Months Ended
   Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
    2004   2003   2004   2003
    (Unaudited)
   (Unaudited)
   (Unaudited)
   (Unaudited)
    (Dollars in thousands, except per share data)
REVENUES
                                
Retail sales
   $ 163,612     $ 153,171     $ 565,873     $ 538,693  
Other income (principally finance, late, and layaway charges)
     3,902       3,958       11,727       11,639  
 
    
 		      
 		      
 		      
 		  
Total revenues
     167,514       157,129       577,600       550,332  
 
    
 		      
 		      
 		      
 		  
 
                                
COSTS AND EXPENSES
                                
Cost of goods sold
     115,481       108,557       383,876       368,171  
Selling, general and administrative
     44,481       42,809       137,692       130,819  
Depreciation
     5,140       4,713       15,210       13,726  
Interest expense
     183       136       512       140  
Interest and other income
     (675 )     (337 )     (1,838 )     (3,356 )
 
    
 		      
 		      
 		      
 		  
Costs and expenses
     164,610       155,878       535,452       509,500  
 
    
 		      
 		      
 		      
 		  
 
                                
INCOME BEFORE INCOME TAXES
     2,904       1,251       42,148       40,832  
 
                                
Income tax expense
     1,054       454       15,300       14,822  
 
    
 		      
 		      
 		      
 		  
 
                                
NET INCOME
   $ 1,850     $ 797     $ 26,848     $ 26,010  
 
    
 		      
 		      
 		      
 		  
 
                                
BASIC EARNINGS PER SHARE
   $ .09     $ .04     $ 1.31     $ 1.08  
 
    
 		      
 		      
 		      
 		  
 
                                
DILUTED EARNINGS PER SHARE
   $ .09     $ .04     $ 1.28     $ 1.06  
 
    
 		      
 		      
 		      
 		  
 
                                
DIVIDENDS PER SHARE
   $ .175     $ .16     $ .51     $ .47  
 
    
 		      
 		      
 		      
 		  

See accompanying notes to condensed consolidated financial statements.

 

 

Page 3

THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

                         
    October 30,   November 1,   January 31,
    2004   2003   2004
    (Unaudited)
   (Unaudited)
    
    (Dollars in thousands)
ASSETS
                        
Current Assets
                        
Cash and cash equivalents
   $ 27,560     $ 17,086     $ 23,857  
Short-term investments
     63,323       40,036       47,545  
Accounts receivable — net
     49,404       51,178       52,714  
Merchandise inventories
     101,807       101,874       97,292  
Deferred income taxes
     259       1,631       284  
Prepaid expenses
     2,416       5,671       5,708  
 
    
 		      
 		      
 		  
Total Current Assets
     244,769       217,476       227,400  
Property and equipment — net
     116,307       114,677       114,367  
Other assets
     10,110       9,578       9,806  
 
    
 		      
 		      
 		  
Total
   $ 371,186     $ 341,731     $ 351,573  
 
    
 		      
 		      
 		  
 
                        
LIABILITIES AND SHAREHOLDERS’ EQUITY
                        
Current Liabilities
                        
Accounts payable
   $ 72,710     $ 71,947     $ 76,387  
Accrued expenses
     35,520       29,218       27,815  
Income taxes
     5,757       5,004       4,290  
Current portion of long-term debt
     6,000       6,000       6,000  
 
    
 		      
 		      
 		  
Total Current Liabilities
     119,987       112,169       114,492  
Deferred income taxes
     10,203       6,310       10,203  
Long-term debt
     17,000       23,000       21,500  
Other noncurrent liabilities
     11,158       10,815       11,267  
 
Commitments and contingencies
     —       —       —  
 
    
 		      
 		      
 		  
Total Liabilities
     158,348       152,294       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 26,170,545 shares, 25,907,346 shares and 26,015,868 shares at October 30, 2004, November 1, 2003 and January 31, 2004, respectively
     872       863       867  
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued 5,597,834 shares, 5,637,834 shares and 5,607,834 shares at October 30, 2004, November 1, 2003 and January 31, 2004, respectively
     187       188       187  
Additional paid-in capital
     101,509       97,476       99,676  
Retained earnings
     269,161       250,754       252,828  
Accumulated other comprehensive gains (losses)
     102       (168 )     58  
Unearned compensation — restricted stock awards
     (1,081 )     (1,764 )     (1,593 )
 
    
 		      
 		      
 		  
 
     370,750       347,349       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 October 30, 2004, November 1, 2003 and January 31, 2004, respectively)
     (157,912 )     (157,912 )     (157,912 )
 
    
 		      
 		      
 		  
Total Shareholders’ Equity
     212,838       189,437       194,111  
 
    
 		      
 		      
 		  
Total
   $ 371,186     $ 341,731     $ 351,573  
 
    
 		      
 		      
 		  

See accompanying notes to condensed consolidated financial statements.

 

 

Page 4

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                 
    Nine Months Ended
    October 30,   November 1,
    2004   2003
    (Unaudited)
   (Unaudited)
    (Dollars in thousands)
OPERATING ACTIVITIES
                
 
                
Net income
   $ 26,848     $ 26,010  
 
                
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation
     15,210       13,726  
Amortization of investment premiums
     —       4  
Compensation expense related to restricted stock awards
     512       611  
Loss on disposal of property and equipment
     1,598       277  
Changes in operating assets and liabilities which provided (used) cash:
                
Accounts receivable
     3,310       2,938  
Merchandise inventories
     (4,515 )     (8,417 )
Other assets
     2,988       (1,047 )
Accounts payable and other liabilities
     3,815       7,690  
Accrued income taxes
     1,467       2,118  
 
    
 		      
 		  
Net cash provided by operating activities
     51,233       43,910  
 
    
 		      
 		  
 
                
INVESTING ACTIVITIES
                
 
                
Expenditures for property and equipment
     (18,619 )     (15,373 )
Purchases of short-term investments
     (52,469 )     (11,034 )
Sales of short-term investments
     36,735       45,444  
 
    
 		      
 		  
Net cash (used) provided by investing activities
     (34,353 )     19,037  
 
    
 		      
 		  
 
                
FINANCING ACTIVITIES
                
 
                
Dividends paid
     (10,516 )     (11,159 )
Purchases of treasury stock
     —       (98,304 )
Proceeds of long-term debt
     —       30,000  
Principal payments on long-term debt
     (4,500 )     (1,000 )
Proceeds from employee stock purchase plan
     479       491  
Proceeds from stock options exercised
     1,360       2,046  
 
    
 		      
 		  
 
                
Net cash used in financing activities
     (13,177 )     (77,926 )
 
    
 		      
 		  
 
                
Net increase (decrease) in cash and cash equivalents
     3,703       (14,979 )
 
                
Cash and cash equivalents at beginning of period
     23,857       32,065  
 
    
 		      
 		  
 
                
Cash and cash equivalents at end of period
   $ 27,560     $ 17,086  
 
    
 		      
 		  

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 OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)

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 October 30, 2004 and November 1, 2003 are unaudited. In the opinion of management, all 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 third quarter and nine months ended October 30, 2004 was $1,821,000 and $26,892,000, respectively. 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 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.

 

 

Page 6

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)

NOTE 1 — GENERAL (CONTINUED):

The provisions for income taxes are based on the Company’s estimated annual effective tax rate.

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 and other convertible securities. Unvested restricted stock is included in the computation of diluted EPS using the treasury stock method. There was an insignificant number of shares withheld from the computation of diluted EPS due to potential anti-dilutive effects for the nine months ended October 30, 2004 and November 1, 2003.

                                 
    Three Months Ended
   Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
    2004
   2003
   2004
   2003
Weighted-average shares outstanding
     20,609,123       21,499,411       20,554,929       24,138,935  
Dilutive effect of stock options
     358,213       424,722       363,053       409,442  
 
    
 		      
 		      
 		      
 		  
Weighted-average shares and common stock equivalents (stock options) outstanding
     20,967,336       21,924,133       20,917,982       24,548,377  
 
    
 		      
 		      
 		      
 		  

NOTE 3 — SUPPLEMENTAL CASH FLOW INFORMATION:

Income tax payments, net of refunds received, for the nine months ended October 30, 2004 and November 1, 2003 were $12,221,300 and $12,561,650, respectively.

 

 

Page 7

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)

NOTE 4 — FINANCING ARRANGEMENTS:

The Company has an unsecured revolving credit agreement which provides for borrowings of up to $35 million. This revolving credit agreement was entered into on August 22, 2003 and is committed until August 2006. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios. There were no borrowings outstanding during the nine months ended October 30, 2004 or the fiscal year ended January 31, 2004. Interest is based on LIBOR, which was 2.00% on October 30, 2004.

On August 22, 2003, the Company entered into a new unsecured $30 million five-year term loan facility, the proceeds of which were used to purchase Class B Common Stock from the Company’s founders. The amounts outstanding under the loan totaled $23.0 million as of October 30, 2004. Payments are due in monthly installments of $500,000 plus accrued interest. Interest is based on LIBOR, which was 2.00% on October 30, 2004.

The Company had approximately $2,957,000 and $6,708,000 at October 30, 2004 and November 1, 2003, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

NOTE 5 — REPORTABLE SEGMENT INFORMATION:

The Company has two reportable segments: retail and credit. The Company operated its women’s fashion specialty retail stores in 29 states at October 30, 2004, principally in the southeastern United States. The Company offers its own credit card to its customers and all credit authorizations, payment processing, and collection efforts are performed by a separate subsidiary of the Company.

The following schedule summarizes certain segment information (in thousands):

                                                     
Three Months Ended                           Nine Months Ended            
October 30, 2004
   Retail
   Credit
   Total
   October 30, 2004
   Retail
   Credit
   Total
 
                                                    
Revenues
  $ 163,953     $ 3,561     $ 167,514     Revenues   $ 567,004     $ 10,596     $ 577,600  
Depreciation
    5,120       20       5,140     Depreciation     15,151       59       15,210  
Interest and other income
    (675 )     —       (675 )   Interest and other income     (1,838 )     —       (1,838 )
Income before taxes
    1,400       1,504       2,904     Income before taxes     38,224       3,924       42,148  
Total assets
    306,365       64,821       371,186     Total assets     306,365       64,821       371,186  
Capital expenditures
    6,804       50       6,854     Capital expenditures     18,484       135       18,619  
 
                                                    
Three Months Ended                           Nine Months Ended            
November 1, 2003
   Retail
   Credit
   Total
   November 1, 2003
   Retail
   Credit
   Total
 
                                                    
Revenues
  $ 153,510     $ 3,619     $ 157,129     Revenues   $ 539,523     $ 10,809     $ 550,332  
Depreciation
    4,693       20       4,713     Depreciation     13,667       59       13,726  
Interest and other income
    (337 )     —       (337 )   Interest and other income     (3,356 )     —       (3,356 )
Income (loss) before taxes
    (143 )     1,394       1,251     Income before taxes     37,399       3,433       40,832  
Total assets
    281,424       60,307       341,731     Total assets     281,424       60,307       341,731  
Capital expenditures
    6,290       3       6,293     Capital expenditures     15,370       3       15,373  

 

 

Page 8

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)

NOTE 5 — REPORTABLE SEGMENT INFORMATION (CONTINUED):

The Company evaluates performance based on profit or loss from operations before income taxes. The Company does not allocate certain corporate expenses or income taxes to the segments.

The following schedule summarizes the direct expenses of the credit segment which are reflected in selling, general and administrative expenses (in thousands):

                                 
    Three Months Ended
   Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
    2004
   2003
   2004
   2003
Bad debt expense
   $ 1,208     $ 1,366     $ 3,877     $ 4,538  
Payroll
     287       281       859       829  
Postage
     250       265       826       873  
Other expenses
     292       293       1,051       1,077  
 
    
 		      
 		      
 		      
 		  
 
                                
Total expenses
   $ 2,037     $ 2,205     $ 6,613     $ 7,317  
 
    
 		      
 		      
 		      
 		  

 

 

Page 9

THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS:

The following table sets forth, for the periods indicated, certain items in the Company’s unaudited Condensed Consolidated Statements of Income as a percentage of total retail sales:

                                 
    Three Months Ended
   Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
    2004
   2003
   2004
   2003
Total retail sales
     100.0 %     100.0 %     100.0 %     100.0 %
Total revenues
     102.4       102.6       102.0       102.2  
Cost of goods sold
     70.6       70.9       67.8       68.3  
Selling, general and administrative
     27.2       27.9       24.3       24.3  
Depreciation
     3.1       3.1       2.7       2.6  
Interest expense
     0.1       0.1       0.1       0.0  
Interest and other income
     (0.4 )     (0.2 )     (0.3 )     (0.6 )
Income before income taxes
     1.8       0.8       7.4       7.6  
Net income
     1.1       0.5