Form 10-Q
Table of Contents

 
 
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 2, 2009
 
   
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 or organization)   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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer ¨   Accelerated filer þ   Non-accelerated filer ¨   Smaller reporting company ¨
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No x
As of May 19, 2009, there were 27,783,568 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.
 
 

 


 

THE CATO CORPORATION
FORM 10-Q
Quarter Ended May 2, 2009
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 EX-31.1
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 EX-32.1
 EX-32.2

 


Table of Contents

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
                 
    Three Months Ended  
    May 2,     May 3,  
    2009     2008  
    (Unaudited)     (Unaudited)  
    (Dollars in thousands,  
    except per share data)  
REVENUES
               
Retail sales
  $ 238,055     $ 225,791  
Other income (principally finance charges, late fees and layaway charges)
    2,972       3,037  
 
           
Total revenues
    241,027       228,828  
 
           
 
               
COSTS AND EXPENSES, NET
               
Cost of goods sold (exclusive of depreciation shown below)
    141,913       141,620  
Selling, general and administrative (exclusive of depreciation shown below)
    64,644       56,317  
Depreciation
    5,544       5,610  
Interest and other income
    (1,060 )     (1,901 )
 
           
 
               
 
    211,041       201,646  
 
           
 
               
Income before income taxes
    29,986       27,182  
 
               
Income tax expense
    11,173       10,329  
 
           
 
               
Net income
  $ 18,813     $ 16,853  
 
           
 
               
Basic earnings per share
  $ 0.64     $ 0.57  
 
           
 
               
Diluted earnings per share
  $ 0.64     $ 0.57  
 
           
 
               
Dividends per share
  $ .165     $ .165  
 
           
 
               
Comprehensive income:
               
Net income
  $ 18,813     $ 16,853  
Unrealized (losses) on available-for-sale securities, net of deferred income tax benefit
    (26 )     (236 )
 
           
 
               
Net comprehensive income
  $ 18,787     $ 16,617  
 
           
See notes to condensed consolidated financial statements.

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THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
                         
    May 2,     May 3,     January 31,  
    2009     2008     2009  
    (Unaudited)     (Unaudited)        
    (Dollars in thousands)  
ASSETS
                       
Current Assets:
                       
Cash and cash equivalents
  $ 42,006     $ 42,091     $ 42,262  
Short-term investments
    115,696       76,101       93,452  
Restricted cash
    9,016       9,037       9,089  
Accounts receivable, net of allowance for doubtful accounts of $3,328, $3,192 and $3,723 at May 2, 2009, May 3, 2008, and January 31, 2009, respectively
    42,518       45,570       44,136  
Merchandise inventories
    114,339       113,227       112,290  
Deferred income taxes
    6,406       6,837       6,403  
Prepaid expenses
    7,530       7,659       7,737  
 
                 
Total Current Assets
    337,511       300,522       315,369  
Property and equipment — net
    114,096       122,936       116,262  
Other assets
    7,228       4,548       3,722  
 
                 
Total Assets
  $ 458,835     $ 428,006     $ 435,353  
 
                 
 
                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current Liabilities:
                       
Accounts payable
  $ 95,644     $ 92,041     $ 102,971  
Accrued expenses
    33,901       29,755       29,946  
Accrued bonus and benefits
    8,888       4,278       6,307  
Accrued income taxes
    22,067       17,900       11,506  
 
                 
Total Current Liabilities
    160,500       143,974       150,730  
Deferred income taxes
    2,528       1,707       2,528  
Other noncurrent liabilities (primarily deferred rent)
    19,325       22,399       20,282  
 
                       
Commitments and contingencies
                --  
 
                       
Stockholders’ 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 36,443,898 shares, 36,258,360 shares and 36,303,922 shares at May 2, 2009, May 3, 2008 and January 31, 2009, respectively
    1,215       1,209       1,210  
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued 1,743,525 shares at May 2, 2009, May 3, 2008 and January 31, 2009
    58       58       58  
Additional paid-in capital
    62,325       59,462       61,608  
Retained earnings
    368,306       352,098       354,333  
Accumulated other comprehensive income
    387       473       413  
 
                 
 
    432,291       413,300       417,622  
 
                       
Less Class A common stock in treasury, at cost (8,660,333 shares, 8,461,615 shares and 8,660,333 shares at May 2, 2009, May 3, 2008 and January 31, 2009, respectively)
    (155,809 )     (153,374 )     (155,809 )
 
                 
Total Stockholders’ Equity
    276,482       259,926       261,813  
 
                 
Total Liabilities and Stockholders’ Equity
  $ 458,835     $ 428,006     $ 435,353  
 
                 
See notes to condensed consolidated financial statements.

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Table of Contents

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    Three Months Ended  
    May 2,     May 3,  
    2009     2008  
    (Unaudited)     (Unaudited)  
    (Dollars in thousands)  
OPERATING ACTIVITIES
               
 
               
Net income
  $ 18,813     $ 16,853  
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    5,544       5,610  
Provision for doubtful accounts
    924       767  
Share-based compensation
    426       515  
Excess tax benefits from share-based compensation
    (26 )     (13 )
Loss on disposal of property and equipment
    149       290  
Changes in operating assets and liabilities which provided (used) cash:
               
Accounts receivable
    694       (1,055 )
Merchandise inventories
    (2,049 )     5,452  
Prepaid and other assets
    (3,299 )     100  
Accrued income taxes
    10,587       9,985  
Accounts payable, accrued expenses and other liabilities
    (1,740 )     (15,213 )
 
           
Net cash provided by operating activities
    30,023       23,291  
 
           
 
               
INVESTING ACTIVITIES
               
Expenditures for property and equipment
    (3,533 )     (5,647 )
Purchases of short-term investments
    (36,590 )     (45,536 )
Sales of short-term investments
    14,316       53,075  
Change in restricted cash
    73        
 
           
Net cash provided by (used in) investing activities
    (25,734 )     1,892  
 
           
 
               
FINANCING ACTIVITIES
               
Change in cash overdrafts included in accounts payable
          (100 )
Dividends paid
    (4,849 )     (4,849 )
Proceeds from employee stock purchase plan
    178       213  
Excess tax benefits from share-based compensation
    26       13  
Proceeds from stock options exercised
    100       48  
 
           
Net cash used in financing activities
    (4,545 )     (4,675 )
 
           
 
Net increase (decrease) in cash and cash equivalents
    (256 )     20,508  
Cash and cash equivalents at beginning of period
    42,262       21,583  
 
           
 
Cash and cash equivalents at end of period
  $ 42,006     $ 42,091  
 
           
See notes to condensed consolidated financial statements.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
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 2, 2009 and May 3, 2008 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for 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, 2009.
The year-end condensed consolidated balance sheet data presented for fiscal year ended January 31, 2009 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
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.
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 and Comprehensive 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.
Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method.
On May 20, 2009, the Board of Directors maintained the quarterly dividend at $.165 per share or an annualized rate of $.66 per share.
Prior year basic and diluted weighted shares and earnings per share have been adjusted based on FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. The impact to diluted and basic earnings per share for the prior year quarter due to the adoption of this FSP was $0.01.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
NOTE 2 — EARNINGS PER SHARE:
FASB No. 128, Earnings Per Share, requires dual presentation of basic EPS and diluted EPS on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statement of Income. While the Company’s articles of incorporation provide the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.
Basic EPS is computed as net income less earnings allocated to non-vested equity awards 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 the Employee Stock Purchase Plan.
                 
    Three Months Ended  
    May 2,     May 3,  
    2009     2008  
    (Dollars in thousands, except per share data)  
Basic earnings per share:
               
Net earnings
  $ 18,813     $ 16,853  
Earnings allocated to non-vested equity awards
    (271 )     (168 )
 
           
Net earnings available to common stockholders
  $ 18,542     $ 16,685  
 
           
 
               
Basic weighted-average common shares outstanding
    28,954,367       29,095,913  
 
           
 
               
Basic earnings per share
  $ 0.64     $ 0.57  
 
           
 
               
Diluted earnings per share:
               
Net earnings
  $ 18,813     $ 16,853  
Earnings allocated to non-vested equity awards
    (271 )     (168 )
 
           
Net earnings available to common stockholders
  $ 18,542     $ 16,685  
 
           
 
               
Basic weighted-average common shares outstanding
    28,954,367       29,095,913  
Dilutive effect of stock options
    17,085       17,310  
 
           
Diluted weighted avg. shares outstanding
    28,971,452       29,113,223  
 
           
 
               
Diluted earnings per share
  $ 0.64     $ 0.57  
 
           
NOTE 3 — SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax payments, net of refunds received, for the three months ended May 2, 2009 and May 3, 2008 were $136,000 and $339,000, respectively.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
NOTE 4 — FINANCING ARRANGEMENTS:
As of May 2, 2009, the Company had an unsecured revolving credit agreement of $35 million. Net of the Company’s standby letter of credit for payments to the current general liability and worker’s compensation insurance processor, the revolving credit agreement provided for borrowings of up to $34.3 million. The revolving credit agreement is committed until August 2010. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of May 2, 2009. There were no borrowings outstanding under this credit facility during the first three months ended May 2, 2009 or May 3, 2008, or the fiscal year ended January 31, 2009. Interest on any borrowings is based on LIBOR which was 0.41% at May 2, 2009.
At May 2, 2009 and May 3, 2008, the Company had approximately $4,045,000 and $4,968,000, 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 31 states at May 2, 2009, principally in the southeastern United States. The Company offers its own credit card to its customers and all related 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                  
May 2, 2009   Retail     Credit     Total  
Revenues
  $ 238,608     $ 2,419     $ 241,027  
Depreciation
    5,544             5,544  
Interest and other income
    (1,060 )           (1,060 )
Income before taxes
    29,370       616       29,986  
Total assets
    384,459       74,376       458,835  
Capital expenditures
    3,533             3,533  
                         
Three Months Ended                  
May 3, 2008   Retail     Credit     Total  
Revenues
  $ 226,310     $ 2,518     $ 228,828  
Depreciation
    5,600       10       5,610  
Interest and other income
    (1,901 )           (1,901 )
Income before taxes
    26,319       863       27,182  
Total assets
    357,696       70,310       428,006  
Capital expenditures
    5,647             5,647  
The Company evaluates performance based on income before taxes. The Company does not allocate certain corporate expenses or income taxes to the credit segment.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
NOTE 5 — REPORTABLE SEGMENT INFORMATION (CONTINUED):
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  
    May 2,     May 3,  
    2009     2008  
Bad debt expense
  $ 924     $ 767  
Payroll
    249       253  
Postage
    245       273  
Other expenses
    375       352  
 
           
 
               
Total expenses
  $ 1,793     $ 1,645  
 
           
NOTE 6 — STOCK BASED COMPENSATION:
As of May 2, 2009, the Company had three long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan authorized 5,850,000 shares for the granting of options to officers and key employees. The 1999 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan authorized 1,500,000 and 1,350,000 shares, respectively, for the granting of various forms of equity-based awards, including restricted stock and stock options to officers and key employees. The 1999 Plan has expired as to the ability to grant new awards.
The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans:
                                 
    1987     1999     2004        
    Plan     Plan     Plan     Total  
Options and/or restricted stock initially authorized
    5,850,000       1,500,000       1,350,000       8,700,000  
Options and/or restricted stock available for grant:
                               
January 31, 2009
    18,627             868,078       886,705  
May 2, 2009
    18,627             749,490       768,117  
Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
NOTE 6 — STOCK BASED COMPENSATION (CONTINUED):
The following is a summary of the changes in stock options outstanding during the three months ended May 2, 2009:
                                 
                    Weighted        
            Weighted     Average        
            Average     Remaining     Aggregate  
            Exercise     Contractual     Intrinsic  
    Shares     Price     Term     Value (a)  
Options outstanding at January 31, 2009
    107,950     $ 12.72     4.07 years   $ 124,527  
Granted
                       
Forfeited or expired
                       
Exercised
    9,275                          
 
                             
Outstanding at May 2, 2009
    98,675     $ 12.90     3.92 years   $ 346,618  
Vested and exercisable at May 2, 2009
    87,425     $ 12.61     3.56 years   $ 332,333  
 
(a)  
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
No options were granted in fiscal 2008 or the first quarter of fiscal 2009.
As of May 2, 2009, there was approximately $38,876 of total unrecognized compensation cost related to nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of 0.34 years. The total intrinsic value of options exercised during the first quarter ended May 2, 2009 was approximately $72,646.
The Company recognized share-based compensation expense for nonvested options of $40,000 and $23,000 for the first quarter ended May 2, 2009 and May 3, 2008, respectively. These expenses are classified as a component of selling, general and administrative expenses.
SFAS No. 123R requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. For the three months ended May 2, 2009 and May 3, 2008, the Company reported $26,000 and $13,000 of excess tax benefits as a financing cash inflow in addition to $279,000 and $261,000 in cash proceeds received from the exercise of stock options and Employee Stock Purchase Plan purchases, respectively.
The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the three months ended May 2, 2009 and May 3, 2008, the Company sold 12,113 shares and 16,628 shares to employees at an average discount of $2.60 and $2.13 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $31,000 and $35,000 for the three months ended May 2, 2009 and May 3, 2008, respectively.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
NOTE 6 — STOCK BASED COMPENSATION (CONTINUED):
In accordance with SFAS No. 123R, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of May 2, 2009 and May 3, 2008, there was $4,703,272 and $6,721,625 of total unrecognized compensation cost related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 2.7 years and 3.7 years, respectively. The total fair value of the shares recognized as compensation expense during the first quarter ended May 2, 2009 and May 3, 2008 was $329,000 and $438,000, respectively.
The following summary shows the changes in the shares of restricted stock outstanding during the three months ended May 2, 2009:
                 
            Weighted Average  
    Number of     Grant Date Fair  
    Shares     Value Per Share  
Restricted stock awards at January 31, 2009
    439,921     $ 20.46  
Granted
    157,525       18.90  
Vested
    (55,247 )     22.89  
Forfeited or expired
    (38,937 )     20.43  
 
             
Restricted stock awards at May 2, 2009
    503,262     $ 19.76  
NOTE 7 — INCOME TAXES:
For the quarter ended May 2, 2009, the Company’s effective tax rate was 37.3%. During the next 12 months, various state and local taxing authorities’ statutes of limitations will expire and certain state examinations may close which could result in a potential reduction of unrecognized tax benefits of up to $2.0 million.
NOTE 8 — FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. Applicable provisions of SFAS 157 were adopted by the Company effective February 3, 2008. In February 2008, the FASB issued FASB Staff Position 157-2, Effective date of FASB Statement No. 157, which delayed for one year the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company’s adoption of FASB Staff Position 157-2 was immaterial.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
NOTE 8 — FAIR VALUE MEASUREMENTS (CONTINUED):
The following table sets forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of May 2, 2009:
                                 
    Fair Value Measurements at Reporting Date Using  
Description   Total     (Level 1)     (Level 2)     (Level 3)  
Assets:
                               
Short term investments
    115,696       115,696              
Other Assets
    5,699       322       5,377        
The following table sets forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of January 31, 2009:
                                 
    Fair Value Measurements at Reporting Date Using  
Description   Total     (Level 1)     (Level 2)     (Level 3)  
Assets:
                               
Short term investments
    93,452       90,002       3,450        
Other Assets
    2,258       303       1,955        
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes and governmental debt securities held in managed funds. These securities are classified as available-for-sale as they are highly liquid and are recorded on the balance sheet at estimated fair value, with unrealized gains and temporary losses reported net of taxes as accumulated other comprehensive income. Additionally, as of May 2, 2009, the Company had $1.9 million invested in privately managed investment funds and $0.3 million of other miscellaneous equities which are reported within other noncurrent assets in the Consolidated Balance Sheets.
As of May 2, 2009, the Company held $75.6 million in variable rate demand notes (“VRDN”) and auction rate securities (“ARS”) issued by tax exempt municipal authorities and agencies and rated A or better. The underlying securities have contractual maturities which generally range from six to thirty-one years. The VRDN and ARS are recorded at estimated fair value and classified as available-for-sale. Of the $75.6 million in VRDN and ARS, a single ARS of $3.5 million failed its last auction as of May 2, 2009. Due to the continuing failure of the remaining ARS at auction and because the issuer has yet to call the security, the Company has classified the failed ARS as a long-term investment in Other Assets.

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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 2, 2009 AND MAY 3, 2008
 
NOTE 8 — FAIR VALUE MEASUREMENTS (CONTINUED):
The Company classified the failed ARS security as a Level 2 item under SFAS 157 since it was not trading within ARS auctions and there is not an actively quoted market price for this security. Additionally, the Company valued the failed ARS investment at par using a number of market based inputs to estimate the fair value, including: (i) the underlying credit quality of the issuer and insurer and the probability of default of the issue; (ii) the Company’s experience and observations with ARS investments that were similar in many material aspects such as credit quality, yield, coupon or term to the remaining failed security; (iii) the present value of future principal and interest payments discounted at rates reflecting current market conditions, reflecting the Company’s determination that the effects on the ARS’ estimated fair value of the increased interest being paid by the non-auctioning bond, as offset by a liquidity/risk value reduction, would render the fair value materially the same as the carrying value (par); (iv) the timing of expected future cash flows; and (v) the likelihood of repurchase at par for the security.
NOTE 9 — RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share Based Payment Transactions Are Participating Securities. EITF 03-6-1 requires that unvested share-based payments that contain nonforfeitable rights to dividends are participating securities and they shall be included in the computation of EPS pursuant to the two class method. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The impact to diluted and basic earnings per share for the prior year quarter due to the adoption of this FSP was $0.01.
In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions that are not orderly. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. The Company is in the process of evaluating the impact of FSP 157-4, but does not expect it to have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”). FASP 115-2 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. FSP 115-2 is effective for interim and annual periods ending after June 15, 2009. The Company is in the process of evaluating the impact of FSP 115-2, but does not expect it to have a material impact on the Company’s consolidated financial statements.

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THE CATO CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
FORWARD LOOKING INFORMATION:
The following information should be read along with the Unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-Q that reflect projections or expectations of our future financial or economic performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations, including those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2009 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodelings and closures; and (5) statements relating to our future contingencies. When possible, we have attempted to identify forward-looking statements by using words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and variations of such words and similar expressions. We can give no assurance that actual results or events will not differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements included in this report are based on information available to us as of the filing date of this report, but subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements. Such factors include, but are not limited to, the following: general economic conditions including, but not limited to, the continuation or worsening of (i) the current adverse or recessionary conditions affecting the U.S. and global economies and consumer spending and (ii) the adverse conditions in the U.S. and global credit markets; uncertainties regarding the impact of any governmental responses to the foregoing adverse economic and credit market conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel buying patterns; adverse weather conditions; inventory risks due to shifts in market demand; and other factors discussed under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended January 31, 2009 (fiscal 2008), as amended or supplemented, and in other reports we file with or furnish to the SEC from time to time. We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise.

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THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
CRITICAL ACCOUNTING POLICIES:
The Company’s accounting policies are more fully described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts receivable, reserves relating to workers’ compensation, general and auto insurance liabilities, reserves for inventory markdowns, calculation of asset impairment, shrinkage accrual and reserves for uncertain tax positions.
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in the Company’s unaudited Condensed Consolidated Statements of Income and Comprehensive Income as a percentage of total retail sales:
                 
    Three Months Ended  
    May 2,     May 3,  
    2009     2008  
Total retail sales
    100.0 %     100.0 %
Other income
    1.3       1.3  
Total revenues
    101.3       101.3  
Cost of goods sold
    59.6       62.7  
Selling, general and administrative
    27.2       24.9  
Depreciation
    2.3       2.5  
Interest and other income
    (0.4 )     (0.8 )
Income before income taxes
    12.6       12.1  
Net income
    7.9       7.5  
Comparison of First Quarter of 2009 with 2008
Total retail sales for the first quarter were $238.1 million compared to last year’s first quarter sales of $225.8 million, a 5.4% increase. Same-store sales increased 3.0% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Total revenues, comprised of retail sales and other income (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $241.0 million for the first quarter ended May 2, 2009 compared to $228.8

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THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
RESULTS OF OPERATIONS — (CONTINUED):
million for the first quarter ended May 3, 2008. The Company operated 1,285 stores at May 2, 2009 compared to 1,326 stores at the end of last year’s first quarter. In the first quarter of fiscal 2009, the Company opened 8 stores and closed 4 stores. The Company expects to open approximately 46 stores, relocate 2 stores and close approximately 39 stores in fiscal 2009.
Credit revenue of $2.4 million represented 1.0% of total revenues in the first quarter of fiscal 2009, compared to 2008 credit revenue of $2.5 million or 1.1% of total revenues. The slight reduction in actual credit revenue was due to lower finance charge and late fee income from lower sales under the Company’s proprietary credit card. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income. Related expenses include principally bad debt expense, payroll, postage and other administrative expenses and totaled $1.8 million in the first quarter of 2009 compared to last year’s first quarter expenses of $1.6 million. The increase in costs was principally due to an increase in bad debt expense.
Other income in total, as included in total revenues, was flat at $3.0 million for the first quarter of fiscal 2009 and the prior year’s comparable first quarter. Finance charges and late fee income remained lower and were offset by an increase in layaway charges.
Cost of goods sold was $141.9 million, or 59.6% of retail sales for the first quarter of fiscal 2009, compared to $141.6 million, or 62.7% of retail sales in the first quarter of fiscal 2008. The overall decrease in cost of goods sold as a percent of retail sales for the first quarter of fiscal 2009 resulted primarily from lower markdowns and lower occupancy costs. The decrease in markdowns was primarily attributable to tight inventory management and higher sell-throughs of regular priced merchandise. Cost of goods sold includes merchandise costs, net of discounts and allowances, buying costs, distribution costs, occupancy costs, freight and inventory shrinkage. Net merchandise costs and in-bound freight are capitalized as inventory costs. Buying and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Total gross margin dollars (retail sales less cost of goods sold) increased by 14.1% to $96.1 million for the first quarter of fiscal 2009 compared to $84.2 million in the first quarter of fiscal 2008. Gross margin as presented may not be comparable to those of other entities.
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts. SG&A expenses were $64.6 million, or 27.2% of retail sales for the first quarter of fiscal 2009, compared to $56.3 million, or 24.9% of retail sales in the first quarter of fiscal 2008. SG&A expenses as a percentage of retail sales increased 230 basis points

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THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
RESULTS OF OPERATIONS — (CONTINUED):
for the first quarter of fiscal 2009 as compared to the prior year primarily because of an increase in incentive based compensation expenses, legal reserves and closed store expenses. The overall dollar increase in SG&A expenses for the first quarter of fiscal 2009 resulted primarily from increased incentive based compensation expenses, payroll and legal reserve expenses.
Depreciation expense was $5.5 million, or 2.3% of retail sales for the first quarter of fiscal 2009, compared to $5.6 million, or 2.5% of retail sales in the first quarter of fiscal 2008.
Interest and other income decreased to $1.1 million, or 0.4% of retail sales for the first quarter of fiscal 2009, compared to $1.9 million, or 0.8% of retail sales for the first quarter of fiscal 2008 primarily due to lower interest rates.
Income tax expense was $11.2 million or 4.7% of retail sales for the first quarter of fiscal 2009, compared to $10.3 million, or 4.6% of retail sales for the first quarter of fiscal 2008. The first quarter increase resulted from higher pre-tax income offset by a lower effective tax rate. The effective income tax rate for the first quarter of fiscal 2009 was 37.3% compared to 38.0% for the first quarter of fiscal 2008.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first three months of fiscal 2009 was $30.0 million as compared to $23.3 million in the first three months of fiscal 2008. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and share repurchases. In addition, the Company maintains $35 million of unsecured revolving credit facilities for short-term financing of seasonal cash needs. There were no outstanding borrowings on these facilities at May 2, 2009.
Cash provided by operating activities for the first three months of fiscal 2009 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $6.7 million for the first three months of fiscal 2009 as compared to the first three months of fiscal 2008 was primarily due to an increase in net income, accounts payable, accrued expenses and other liabilities, partially offset by higher inventory.
The Company believes that its cash, cash equivalents and short-term investments, together with cash flows from operations and borrowings available under its revolving credit agreement, will be adequate to fund the Company’s dividends, share repurchases, other operating requirements and expected capital expenditures for fiscal 2009 and for the foreseeable future.

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THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
At May 2, 2009, the Company had working capital of $177.0 million compared to $156.5 million at May 3, 2008. Additionally, the Company had $2.3 million invested in privately managed investment funds at May 2, 2009, which are included in other assets on the Condensed Consolidated Balance Sheets.
At May 2, 2009, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $34.3 million. The revolving credit agreement is committed until August 2010. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of May 2, 2009. There were no borrowings outstanding under these credit facilities during the first quarter ended May 2, 2009 or the fiscal year ended January 31, 2009.
At May 2, 2009 and May 3, 2008, the Company had approximately $4.0 million and $5.0 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments. In addition, the Company has a standby letter of credit for payments to the current general liability and workers’ compensation insurance processor.
Expenditures for property and equipment totaled $3.5 million in the first quarter of fiscal 2009, compared to $5.6 million in last year’s first fiscal quarter. The expenditures for the first three months of 2009 were primarily for the development of 8 new stores and additional investments in new technology. In fiscal 2009, the Company is planning to invest approximately $16.8 million for capital expenditures. This includes expenditures to open 46 new stores and relocate 2 stores.
Net cash used for investing activities totaled $25.7 million in the first quarter of fiscal 2009 compared to $1.9 million provided in the comparable period of 2008. The decrease was due primarily to decreased sales of short-term investments.
On May 20, 2009, the Board of Directors maintained the quarterly dividend at $.165 per share or an annualized rate of $.66 per share.
The Company’s Board of Director’s authorized an increase in the Company’s share repurchase program of 2,000,000 and 500,000 on August 30, 2007 and February 26, 2009, respectively. There is no specified expiration on any of these repurchase authorizations. At May 2, 2009, 695,942 shares remain available for repurchase in open authorizations. No shares were repurchased in the first three months of fiscal 2009.
The Company does not use derivative financial instruments.

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THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
At May 2, 2009, the Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes and governmental securities held in managed funds. These securities are classified as available-for-sale as they are highly liquid and are recorded on the balance sheet at fair value, with unrealized gains and temporary losses reported net of taxes as accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of investments in the accompanying Condensed Consolidated Balance Sheets.

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THE CATO CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of May 2, 2009. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of May 2, 2009, our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended May 2, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
     Not Applicable
ITEM 1A. RISK FACTORS
     In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended January 31, 2009. These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Not Applicable
ITEM 5. OTHER INFORMATION
     Not Applicable
ITEM 6. EXHIBITS
     
Exhibit No.   Item
 
   
3.1
 
Registrant’s Restated Certificate of Incorporation dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283).
 
   
3.2
 
Registrant’s By Laws, incorporated by reference to Exhibit 99.2 to Form 8-K of the Registrant filed December 10, 2007.
 
   
4.1
 
Rights Agreement dated December 18, 2003, incorporated by reference to Exhibit 4.1 to Form 8-A12G of the Registrant filed December 22, 2003 and as amended in Form 8-A12B/A filed January 6, 2004.

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PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 6. EXHIBITS (CONTINUED)
     
 
   
31.1
  Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
 
   
31.2
  Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
 
   
32.1
  Section 1350 Certification of Chief Executive Officer.
 
   
32.2
  Section 1350 Certification of Chief Financial Officer.

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PART II OTHER INFORMATION
THE CATO CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
       
 
  THE CATO CORPORATION  
 
     
June 10, 2009
  /s/ John P. D. Cato  
 
     
Date
  John P. D. Cato
Chairman, President and
Chief Executive Officer
 
 
     
June 10, 2009
  /s/ John R. Howe  
 
     
Date
  John R. Howe
Executive Vice President
Chief Financial Officer
 

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