cato10q3qtr11.htm - Generated by SEC Publisher for SEC Filing

 

 

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 October 29, 2011

 

OR

 

[ ]

 

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 of incorporation or organization)

(I.R.S. Employer 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

 

 

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

X

No

 

 

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

 

No

X

 

As of December 7, 2011, there were 27,415,289 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 October 29, 2011

Table of Contents

 

Page No.

 

PART I – FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

2

 

 

For the Three Months and Nine Months Ended October 29, 2011 and October 30, 2010

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

At October 29, 2011, October 30, 2010 and January 29, 2011

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

For the Nine Months Ended October 29, 2011 and October 30, 2010

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5 – 16

 

 

For the Three Months and Nine Months Ended October 29, 2011 and October 30, 2010

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 – 23

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

 

 

Item 1A.

Risk Factors

25

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

26

 

 

 

 

 

Item 4.

Removed and Reserved

26

 

 

 

 

 

Item 5.

Other Information

26

 

 

 

 

 

Item 6.

Exhibits

26

 

 

 

 

 

Signatures

27

 

 

 

 

 

 

             

 

1

 


 

 

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

Nine Months Ended

October 29, 2011

October 30, 2010

October 29, 2011

October 30, 2010

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Dollars in thousands, except per share data)

REVENUES

Retail sales

$

194,094 

 

$

198,176 

$

699,104 

 

$

689,055 

Other income (principally finance charges, late fees and

layaway charges)

2,591 

 

2,799 

8,047 

 

8,584 

Total revenues

196,685 

 

200,975 

707,151 

 

697,639 

COSTS AND EXPENSES, NET

Cost of goods sold (exclusive of depreciation shown below)

125,818 

 

127,136 

429,379 

 

418,401 

Selling, general and administrative (exclusive of depreciation

shown below)

57,505 

60,565 

179,776 

190,986 

Depreciation

5,321 

 

5,645 

16,096 

 

16,191 

Interest and other income

(861)

 

(1,039)

(2,767)

 

(2,888)

Cost and expenses, net

187,783 

 

192,307 

622,484 

 

622,690 

Income before income taxes

8,902 

 

8,668 

84,667 

 

74,949 

Income tax expense

2,797 

 

2,770 

29,938 

 

27,039 

Net income

$

6,105 

 

$

5,898 

$

54,729 

 

$

47,910 

Basic earnings per share

$

0.21 

$

0.20 

$

1.86 

$

1.62 

Diluted earnings per share

$

0.21 

$

0.20 

$

1.86 

$

1.62 

Dividends per share

$

0.230 

$

0.185 

$

0.645 

$

0.535 

Comprehensive income:

Net income

$

6,105 

$

5,898 

$

54,729 

$

47,910 

Unrealized gain (loss) on available-for-sale securities, net

of deferred income tax benefit

(300)

50 

283 

94 

Comprehensive income

$

5,805 

$

5,948 

$

55,012 

$

48,004 

 

See notes to consolidated financial statements.

2

 


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

October 29, 2011

October 30, 2010

January 29, 2011

(Unaudited)

(Unaudited)

(Unaudited)

(Dollars in thousands)

ASSETS

Current Assets:

Cash and cash equivalents

$

36,510 

$

36,786 

$

48,630 

Short-term investments

205,810 

188,097 

181,395 

Restricted cash and investments

5,325 

2,038 

4,826 

Accounts receivable, net of allowance for doubtful accounts of

$2,567, $3,109 and $2,985 at October 29, 2011, October 30, 2010

and January 29, 2011, respectively

38,026 

38,762 

39,703 

Merchandise inventories

127,247 

128,558 

144,028 

Deferred income taxes

3,512 

7,781 

3,660 

Prepaid expenses

3,566 

2,967 

3,199 

Total Current Assets

419,996 

404,989 

425,441 

Property and equipment – net

109,811 

100,367 

99,773 

Other assets

6,888 

7,495 

7,545 

Total Assets

$

536,695 

$

512,851 

$

532,759 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable

$

82,248 

$

86,602 

$

103,898 

Accrued expenses

41,416 

35,425 

35,318 

Accrued bonus and benefits

9,451 

21,888 

22,841 

Accrued income taxes

16,638 

17,723 

11,861 

Total Current Liabilities

149,753 

161,638 

173,918 

Deferred income taxes

9,541 

7,328 

9,540 

Other noncurrent liabilities (primarily deferred rent)

15,431 

15,777 

15,287 

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 27,419,745 shares, 27,760,464 shares

and 27,758,123 shares at October 29, 2011, October 30, 2010 and

January 29, 2011, respectively

914 

925 

925 

Convertible Class B common stock, $.033 par value per share,

15,000,000 shares authorized; issued 1,743,525 shares at October 29,

2011, October 30, 2010 and January 29, 2011, respectively

58 

58 

58 

Additional paid-in capital

71,075 

67,744 

68,537 

Retained earnings

289,364 

258,754 

264,218 

Accumulated other comprehensive income

559 

627 

276 

Total Stockholders' Equity

361,970 

328,108 

334,014 

Total Liabilities and Stockholders’ Equity

$

536,695 

$

512,851 

$

532,759 

 

See notes to consolidated financial statements.

3

 


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

October 29, 2011

October 30, 2010

(Unaudited)

(Unaudited)

(Dollars in thousands)

Operating Activities:

Net income

$

54,729 

$

47,910 

Adjustments to reconcile net income to net cash provided (used)

by operating activities:

Depreciation

16,096 

16,191 

Provision for doubtful accounts

1,263 

2,139 

Share-based compensation

1,948 

1,792 

Excess tax benefits from share-based compensation

(128)

(246)

Loss on disposal of property and equipment

473 

472 

Changes in operating assets and liabilities which provided

(used) cash:

Accounts receivable

414 

(747)

Merchandise inventories

16,781 

1,090 

Prepaid and other assets

289 

249 

Accrued income taxes

4,905 

7,030 

Accounts payable, accrued expenses and other liabilities

(28,798)

(15,455)

Net cash provided by operating activities

67,972 

60,425 

Investing Activities:

Expenditures for property and equipment

(26,608)

(14,263)

Purchases of short-term investments

(105,837)

(140,896)

Sales of short-term investments

81,855 

100,934 

Change in restricted cash and investments

(499)

537 

Net cash used in investing activities

(51,089)

(53,688)

Financing Activities:

Dividends paid

(19,008)

(15,758)

Repurchase of common stock

(10,599)

(5,840)

Proceeds from employee stock purchase plan

444 

410 

Excess tax benefits from share-based compensation

128 

246 

Proceeds from stock options exercised

32 

606 

Net cash used in financing activities

(29,003)

(20,336)

Net decrease in cash and cash equivalents

(12,120)

(13,599)

Cash and cash equivalents at beginning of period

48,630 

50,385 

Cash and cash equivalents at end of period

$

36,510 

$

36,786 

 

See notes to consolidated financial statements.

4

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

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 29, 2011 and October 30, 2010 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 29, 2011.  Amounts as of January 29, 2011, have been derived from the audited balance sheet other than the retrospective application of the change in accounting principle (described below).

 

On November 22, 2011, the Board of Directors maintained the quarterly dividend at $.23 per share.

 

CHANGE IN ACCOUNTING PRINCIPLE:

 

The Company elected to change its method of accounting for inventory to the weighted average cost method from the retail method effective January 30, 2011.  In accordance with ASC 250 “Accounting Changes and Error Corrections,” all periods have been retrospectively adjusted to reflect the period-specific effects of the change to the weighted average cost method.  The Company believes that the weighted average cost method better matches cost of sales with related sales, as well as having an inventory valuation that more closely reflects the acquisition cost of inventory by valuing inventory on a unit basis versus the product department level under the retail method.  The cumulative adjustment as of January 31, 2010, was an increase in inventory of $11,700,000 and an increase in retained earnings of $7,300,000. 

 

Additionally, the Company has changed the classification for certain balance sheet items to conform to the 2011 presentation.  This change in classification has reduced accounts payable and inventory by $1,628,000 as of January 29, 2011 and $618,000 as of October 30, 2010.

 

In addition, the Company has changed the classification of certain prior year income statement items to conform to the 2011 presentation.  The change has no effect on net income; however, it does increase retail sales by $191,000, cost of goods sold by $99,000 and selling, general and administrative expense by $92,000 for the three months ended October 30, 2010.  The change also reduces retail sales by $555,000, cost of goods sold by $240,000 and selling, general and administrative expense by $315,000 for the nine months ended October 30, 2010.

5

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

As a result of this retrospective application of the change in accounting principle and the change in the classification of the Balance Sheet, the following items in the Company's Condensed Consolidated Balance Sheets have been adjusted:

 
 
 

 

 

January 29, 2011

 

(Unaudited)

 

(Dollars in thousands)

 

As Previously Reported

Total Changes

As Adjusted

 

Merchandise inventories

$

132,020 

$

12,008 

$

144,028 

 

Deferred income taxes

5,001 

(1,341)

3,660 

 

Total Current Assets

414,774 

10,667 

425,441 

 

Total Assets

522,092 

10,667 

532,759 

 

Accounts payable

105,526 

(1,628)

103,898 

 

Total Current Liabilities

175,546 

(1,628)

173,918 

 

Deferred income taxes

5,695 

3,845 

9,540 

 

Retained earnings

255,768 

8,450 

264,218 

 

Total Stockholders' Equity

325,564 

8,450 

334,014 

 

Total Liabilities and Stockholders’ Equity

$

522,092 

$

10,667 

$

532,759 

 

 

October 30, 2010

(Unaudited)

(Dollars in thousands)

As Previously Reported

Total Changes

As Adjusted

Merchandise inventories

$

120,557 

$

8,001 

$

128,558 

Deferred income taxes

7,727 

54 

7,781 

Total Current Assets

396,934 

8,055 

404,989 

Total Assets

504,796 

8,055 

512,851 

Accounts payable

87,220 

(618)

86,602 

Total Current Liabilities

162,256 

(618)

161,638 

Deferred income taxes

4,087 

3,241 

7,328 

Retained earnings

253,322 

5,432 

258,754 

Total Stockholders' Equity

322,676 

5,432 

328,108 

Total Liabilities and Stockholders’ Equity

$

504,796 

8,055 

$

512,851 

6

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

As a result of this retrospective application of the change in accounting principle and the change in the classification of the Income Statement, the following items in the Company's Condensed Consolidated Statements of Income and Condensed Consolidated Statement of Cash Flows have been adjusted:

Three Months Ended

October 30, 2010

(Unaudited)

(Dollars in thousands, except per share data)

As Previously Reported

Total Changes

As Adjusted

Retail Sales

$

197,985 

$

191 

$

198,176 

Total Revenues

200,784 

191 

200,975 

Cost of goods sold

125,694 

1,442 

127,136 

Selling, general and administrative

60,473 

92 

60,565 

Cost and expenses, net

190,773 

1,534 

192,307 

Income before income taxes

10,011 

(1,343)

8,668 

Income tax expense

3,275 

(505)

2,770 

Net income

$

6,736 

$

(838)

$

5,898 

Basic earnings per share

$

0.23 

$

(0.03)

$

0.20 

Diluted earnings per share

$

0.23 

$

(0.03)

$

0.20 

Nine Months Ended

October 30, 2010

(Unaudited)

(Dollars in thousands, except per share data)

As Previously Reported

Total Changes

As Adjusted

Retail Sales

$

689,610 

$

(555)

$

689,055 

Total Revenues

698,194 

(555)

697,639 

Cost of goods sold

415,588 

2,813 

418,401 

Selling, general and administrative

191,301 

(315)

190,986 

Cost and expenses, net

620,192 

2,498 

622,690 

Income before income taxes

78,002 

(3,053)

74,949 

Income tax expense

28,187 

(1,148)

27,039 

Net income

$

49,815 

$

(1,905)

$

47,910 

Basic earnings per share

$

1.69 

$

(0.07)

$

1.62 

Diluted earnings per share

$

1.69 

$

(0.07)

$

1.62 

 

Nine Months Ended

October 30, 2010

(Unaudited)

(Dollars in thousands)

As Previously Reported

Total Changes

As Adjusted

Cash flow from operating activities:

Net income

$

49,815 

$

(1,905)

$

47,910 

Merchandise inventories

(1,929)

3,019 

1,090 

Accounts payable, accrued expenses

and other liabilities

$

(14,341)

$

(1,114)

$

(15,455)

7

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

NOTE 2 - EARNINGS PER SHARE:

 

ASC 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (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 Statements of Income.  While the Company’s certificate of incorporation provides 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 the 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

Nine Months Ended

October 29, 2011

October 30, 2010

October 29, 2011

October 30, 2010

(Dollars in thousands, except share data and per share data)

Basic earnings per share:

Net earnings

$

6,105 

$

5,898 

$

54,729 

$

47,910 

Earnings allocated to non-vesting equity awards

(95)

(100)

(895)

(803)

Net earnings available to common stockholders

$

6,010 

$

5,798 

$

53,834 

$

47,107 

Basic weighted average common shares outstanding

28,851,509 

28,970,179 

28,936,177 

28,995,380 

Basic earnings per share

$

0.21 

$

0.20 

$

1.86 

$

1.62 

Diluted earnings per share:

Net earnings

$

6,105 

$

5,898 

$

54,729 

$

47,910 

Earnings allocated to non-vesting equity awards

(95)

(100)

(894)

(803)

Net earnings available to common stockholders

$

6,010 

$

5,798 

$

53,835 

$

47,107 

Basic weighted average common shares outstanding

28,851,509 

28,970,179 

28,936,177 

28,995,380 

Dilutive effect of stock options

5,368 

6,908 

6,644 

6,385 

Diluted weighted average common shares outstanding

28,856,877 

28,977,087 

28,942,821 

29,001,765 

Diluted earnings per share

$

0.21 

$

0.20 

$

1.86 

$

1.62 

 

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:

 

Income tax payments, net of refunds received, for the nine months ended October 29, 2011 and October 30, 2010 were $25,045,000 and $21,282,000, respectively.

8

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of October 29, 2011, the Company had an unsecured revolving credit agreement of $35.0 million.  The revolving credit agreement is committed until August 2013.  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 October 29, 2011.  There were no borrowings outstanding under this credit facility during the nine months ended October 29, 2011 or October 30, 2010.  Interest on any borrowings is based on LIBOR, which was 0.25% at October 29, 2011.

 

At October 29, 2011 and October 30, 2010 the Company had approximately $4.2 million and $5.7 million, 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 fashion specialty retail stores in 31 states at October 29, 2011, 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

Nine Months Ended

October 29, 2011

Retail

Credit

Total

October 29, 2011

Retail

Credit

Total

Revenues

$

194,769 

$

1,916 

$

196,685 

Revenues

$

701,361 

$

5,790 

$

707,151 

Depreciation

5,302 

19 

5,321 

Depreciation

16,069 

27 

16,096 

Interest and other income

(861)

(861)

Interest and other income

(2,767)

(2,767)

Income before taxes

8,100 

802 

8,902 

Income before taxes

82,284 

2,383 

84,667 

Total assets

462,588 

74,107 

536,695 

Total assets

462,588 

74,107 

536,695 

Capital expenditures

10,857 

10,857 

Capital expenditures

26,522 

86 

26,608 

Three Months Ended

Nine Months Ended

October 30, 2010

Retail

Credit

Total

October 30, 2010

Retail

Credit

Total

Revenues

$

198,878 

$

2,097 

$

200,975 

Revenues

$

691,200 

$

6,439 

$

697,639 

Depreciation

5,641 

5,645 

Depreciation

16,176 

15 

16,191 

Interest and other income

(1,039)

(1,039)

Interest and other income

(2,888)

(2,888)

Income before taxes

7,880 

788 

8,668 

Income before taxes

72,690 

2,259 

74,949 

Total assets

438,983 

73,868 

512,851 

Total assets

438,983 

73,868 

512,851 

Capital expenditures

5,397 

5,397 

Capital expenditures

14,263 

14,263 

 

The Company evaluates segment 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 AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

 

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

Nine Months Ended

October 29, 2011

October 30, 2010

October 29, 2011

October 30, 2010

Bad debt expense

$

381 

$

640 

$

1,263 

$

2,139 

Payroll

233 

242 

722 

716 

Postage

186 

195 

574 

620 

Other expenses

295 

228 

821 

690 

Total expenses

$

1,095 

$

1,305 

$

3,380 

$

4,165 

 

NOTE 6 – STOCK BASED COMPENSATION:

 

As of October 29, 2011, 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 29, 2011

18,627 

627,872 

646,499 

October 29, 2011

19,677 

538,725 

558,402 

 

In accordance with ASC 718, 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 October 29, 2011 and October 30, 2010, there was $6,665,000 and $6,705,000 of total unrecognized compensation cost related to nonvested restricted stock awards, which have a remaining weighted average vesting period of 2.5 years and 2.6 years, respectively. The total fair value of the shares recognized as compensation expense during the third quarter and nine months ended October 29, 2011 was $613,000 and $1,870,000, respectively compared to $545,000 and $1,771,000 for the third quarter and nine months ended October 30, 2010, respectively.  These expenses are classified as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

 

NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

 

The following summary shows the changes in the shares of restricted stock outstanding during the nine months ended October 29, 2011:

 

Weighted Average

Number of

Grant Date Fair

Shares

Value Per Share

Restricted stock awards at January 29, 2011

509,456 

$

20.32 

Granted

102,449 

25.41 

Vested

(125,403)

20.51 

Forfeited or expired

(18,877)

21.26 

Restricted stock awards at October 29, 2011

467,625 

$

21.44 

 

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 nine months ended October 29, 2011 and October 30, 2010, the Company sold 21,810 and 22,745 shares to employees at an average discount of $3.59 and $3.19 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 $78,000 and $72,000 for the nine months ended October 29, 2011 and October 30, 2010, respectively.  These expenses are classified as a component of selling, general and administrative expenses.

 

The following is a summary of the changes in stock options outstanding during the nine months ended October 29, 2011:

Weighted

Weighted

Average

Average

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Shares

Price

Term

Value(a)

Options outstanding at January 29, 2011

21,675 

$

13.86 

2.78 years

$

228,434 

Granted

-

Forfeited or expired

1,050 

12.00 

Exercised

3,450 

13.47 

Outstanding at October 29, 2011

17,175 

$

14.05 

2.49 years

$

182,514 

Vested and exercisable at October 29, 2011

17,175 

$

14.05 

2.49 years

$

182,514 

 

 

                     

 

(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.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

 

NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

 

No options were granted in the first nine months of fiscal 2011 or fiscal 2010. 

 

The total intrinsic value of options exercised during the third quarter and nine months ended October 29, 2011 was zero and $41,000, respectively.

 

During the second quarter of 2010, the Company completed amortizing its nonvested options.  In accordance with ASC 718, the Company adjusted its related forfeiture assumption and recognized a reduction in share based compensation expense of $0 and $52,000 for the third quarter and nine month period ended October 30, 2010.  There was no stock option compensation expense for the third quarter and nine month period ended October 29, 2011.

  

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.

 

 

NOTE 7 – INCOME TAXES:

 

For the quarter ended October 29, 2011, the Company’s effective tax rate was 31.4% compared to 32.0% for the prior year quarter ended October 30, 2010.  The current year quarter was impacted by the reduction of a reserve for certain unrecognized tax benefits from the closing of a state income tax audit.  The effective income tax rate for the first nine months of fiscal 2011 was 35.4% compared to 36.1% for the first nine months of fiscal 2010.  During the next 12 months, various taxing authorities’ statutes of limitations are expected to expire which could result in a potential reduction of unrecognized tax benefits.  In addition, certain tax examinations may close, the ultimate resolution of which could materially affect the effective tax rate.  As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period.  It is reasonably possible such changes could be significant when compared to our total unrecognized tax benefits, but the amount of change is not currently estimable.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

NOTE 8 – FAIR VALUE MEASUREMENTS:

 

 

The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of October 29, 2011 and January 29, 2011.

 

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

October 29,

Assets

Inputs

Inputs

Description

2011 

Level 1

Level 2

Level 3

State/Municipal Bonds

$

146,936 

$

$

146,936 

$

Corporate Bonds

29,670 

29,670 

Auction Rate Securities (ARS)

3,450 

3,450 

Variable Rate Demand Notes (VRDN)

30,439 

30,439 

US Treasury Notes

1,421 

1,421 

Privately Managed Funds

1,910 

1,910 

Corporate Equities

481 

481 

Certificates of Deposit

100 

100 

Total

$

214,407 

$

32,441 

$

176,606 

$

5,360 

 

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

January 29,

Assets

Inputs

Inputs

Description

2011

Level 1

Level 2

Level 3

State/Municipal Bonds

$

129,678 

$

$

129,678 

$

Corporate Bonds

34,288 

34,288 

Auction Rate Securities (ARS)

3,450 

3,450 

Variable Rate Demand Notes (VRDN)

19,308 

19,308 

Privately Managed Funds

1,925 

1,925 

Corporate Equities

480 

480 

Total

$

189,129 

$

19,788 

$

163,966 

$

5,375 

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

 

NOTE 8 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at both October 29, 2011 and January 29, 2011.  The underlying securities have contractual maturities which generally range from 278 days to 29 years.  Although the Company’s investments in VRDN’s have underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments.  These securities are classified as available-for-sale and are recorded as short-term investments on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in accumulated other comprehensive income.

 

Additionally, at October 29, 2011 and January 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

 

Level 1 category securities are measured at fair value using quoted active market prices.  Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments.  Their fair value is principally based on market values determined by management with assistance of a third party pricing service. 

 

The Company’s failed ARS is measured at fair value using Level 3 inputs at each reporting period.  Due to the fact that there is no active market for this particular ARS, its fair value was determined through the use of a discounted cash flow analysis. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also considered the financial condition and near-term prospects of the issuer, the probability that the Company will be unable to collect all amounts due according to the contractual terms of the security and whether the security has been downgraded by a rating agency.  The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.

 

The Company has two privately managed funds.  The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice.  As a result, the Company has classified the investments as Level 3.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

 

NOTE 8 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

The following tables summarize the change in the fair value of the Company’s financial assets measured using Level 3 inputs during the first nine months of fiscal 2011 and fiscal 2010 ($ in thousands):

 

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

Available-For-Sale

Debt Securities

Other Investments

ARS

Private Equity

Total

Beginning Balance at January 29, 2011

$

3,450 

$

1,925 

$

5,375 

Total gains or (losses)

Included in earnings (or changes in net assets)

(15)

(15)

Ending Balance at October 29, 2011

$

3,450 

$

1,910 

$

5,360 

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

Available-For-Sale

Debt Securities

Other Investments

ARS

Private Equity

Total

Beginning Balance at January 30, 2010

$

3,450 

$

1,940 

$

5,390 

Total gains or (losses)

Included in earnings (or changes in net assets)

13 

13 

Ending Balance at October 30, 2010

$

3,450 

$

1,953 

$

5,403 

15

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED

OCTOBER 29, 2011 AND OCTOBER 30, 2010

 

 

 

NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS:

 

In January 2011, the Company adopted accounting guidance regarding changes to disclosure requirements for fair value measurements. For fair value measurements using significant unobservable inputs (Level 3), the guidance requires a reporting entity to present separate information about gross purchases, sales, issuances and settlements. The adoption of this guidance did not have a significant impact on the consolidated financial statement disclosures.

 

In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income.  The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements.  In November 2011, the FASB proposed to defer the requirement to present reclassifications of other comprehensive income on the face of the income statement.  The provisions of this new guidance are effective for the Company the first quarter of 2012.  The adoption of this guidance is not expected to have any effect on operating results or financial position.

 

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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 2011 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings (including the launch of the new Versona Accessories store concept), relocations, remodels 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., global credit and sovereign debt markets; uncertainties regarding the impact of any governmental responses to the foregoing adverse conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel and accessory 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 29, 2011 (“fiscal 2010”), 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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Table of Contents

 

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 for the fiscal year ended January 29, 2011. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States 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, workers’ compensation, general and auto insurance liabilities, group health insurance, litigation, calculation of asset impairment, store closings, inventory shrinkage and uncertain tax positions.

 

The Company’s critical accounting policies and estimates are discussed with the Audit Committee on a quarterly basis.

 

CHANGE IN ACCOUNTING PRINCIPLE:

 

The Company elected to change its method of accounting for inventory to the weighted average cost method from the retail method effective January 30, 2011.  In accordance with ASC 250 “Accounting Changes and Error Corrections,” all periods have been retrospectively adjusted to reflect the period specific effects of the change to the weighted average cost method.  The Company believes that the weighted average cost method better matches cost of sales with related sales, as well as having an inventory valuation that more closely reflects the acquisition cost of inventory by valuing inventory on a unit basis versus the product department level under the retail method.  The cumulative adjustment as of January 31, 2010, was an increase in inventory of $11,700,000 and an increase in retained earnings of $7,300,000. 

 

Additionally, the Company has changed the classification for certain balance sheet items to conform to the 2011 presentation.  This change in classification has reduced accounts payable and inventory by $1,628,000 as of January 29, 2011 and $618,000 as of October 30, 2010.

 

In addition, the Company has changed the classification of certain prior year income statement items to conform to the 2011 presentation.  The change has no effect on net income; however, it does increase retail sales by $191,000 and cost of goods sold by $99,000 and selling, general and administrative expense by $92,000 for the three months ended October 30, 2010.  The change also reduces retail sales by $555,000, cost of goods sold by $240,000 and selling, general and administrative expense by $315,000 for the nine months ended October 30, 2010.

 

See Note 1 to the Condensed Consolidated Financial Statements for details regarding the effects of the change in accounting principle and revised classifications on prior periods.

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Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

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.  The prior year has been restated for the conversion to the cost method of accounting for inventory.

 

Three Months Ended

Nine Months Ended

October 29, 2011

October 30, 2010

October 29, 2011

October 30, 2010

Total retail sales

100.0 

%

100.0 

%

100.0 

%

100.0 

%

Other income

1.3 

1.4 

1.1 

1.3 

Total revenues

101.3 

101.4 

101.1 

101.3 

Cost of goods sold

64.8 

64.2 

61.4 

60.7 

Selling, general and administrative

29.6 

30.6 

25.7 

27.7 

Depreciation

2.7 

2.9 

2.3 

2.4 

Interest and other income

(0.4)

(0.5)

(0.4)

(0.4)

Income before income taxes

4.6 

4.4 

12.1 

10.9 

Net income

3.1 

3.0 

7.8 

7.0 

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Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

RESULTS OF OPERATIONS – (CONTINUED):

 

Comparison of Third Quarter and First Nine Months of 2011 with 2010.

 

Total retail sales for the third quarter were $194.1 million compared to last year’s third quarter sales of $198.2 million, a 2.0% decrease.  Same-store sales decreased 3.0% in the third quarter of fiscal 2011 due to difficult economic conditions and resulting uncertainty affecting our customers.  For the nine months ended October 29, 2011, total retail sales were $699.1 million compared to last year’s comparable nine month sales of $689.1 million, and same-store sales decreased 1.0% for the comparable nine month period.  Total revenues, comprised of retail sales and other income (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $196.7 million and $707.2 million for the third quarter and nine months ended October 29, 2011, respectively, compared to $201.0 million and $697.6 million for the third quarter and nine months ended October 30, 2010, respectively. The Company operated 1,292 stores at October 29, 2011 compared to 1,281 stores at the end of last year’s third quarter.  For the first nine months of 2011, the Company opened 23 new stores, relocated three stores and closed 13 stores.  The Company currently expects to open approximately 38 stores, relocate four stores and close approximately 29 stores in fiscal 2011.

 

Credit revenue of $1.9 million represented 1.0% of total revenues in the third quarter of fiscal 2011, compared to $2.1 million or 1.0% of total revenues in the third quarter of fiscal 2010.  Credit revenue decreased for the most recent comparable period due to lower finance charge income resulting from decreased 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 $1.1 million in the third quarter of 2011, compared to last year’s third quarter expenses of $1.3 million.  The decrease was primarily due to lower bad debt expense slightly offset by increased administrative expenses compared to the third quarter of 2010.

 

Other income in total, as included in total revenues, was $2.6 million and $8.0 million for the third quarter and first nine months of fiscal 2011, compared to $2.8 million and $8.6 million for the prior year’s comparable third quarter and first nine months. The slight overall year-to-date decrease resulted primarily from lower finance charges and late fees.

 

Cost of goods sold was $125.8 million, or 64.8% of retail sales and $429.4 million or 61.4% of retail sales for the third quarter and first nine months of fiscal 2011, compared to $127.1 million, or 64.2% of retail sales and $418.4 million or 60.7% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The overall increase in cost of goods sold as a percent of retail sales for the third quarter was due to higher occupancy costs related to store development partially offset by a decrease in comparable store sales. For the first nine months of 2011, the increase resulted primarily from lower 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 exclusive of depreciation) decreased by 3.8% to $68.3 million for the third quarter of fiscal 2011 and decreased by 0.4% to $269.7 million for the first nine months of fiscal 2011 compared to $71.0 million and $270.7 million for the prior year’s comparable three and nine month periods, respectively.  Gross margin as presented may not be comparable to those of other entities.

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Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

RESULTS OF OPERATIONS – (CONTINUED):

 

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 $57.5 million, or 29.6% of retail sales and $179.8 million, or 25.7% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $60.6 million, or 30.6% of retail sales and $191.0 million, or 27.7% of retail sales for the prior year’s comparable three and nine month periods, respectively.  SG&A expenses as a percentage of retail sales decreased 100 basis points for the third quarter of fiscal 2011 as compared to the prior year primarily as a result of lower accrued incentive compensation costs.  For the first nine months of fiscal 2011, SG&A expenses decreased 200 basis points as compared to the prior year.  The overall dollar decrease for the first nine months of fiscal 2011 was primarily attributable to decreased accrued incentive based compensation and insurance costs partially offset by an increase in payroll costs.

 

Depreciation expense was $5.3 million, or 2.7% of retail sales and $16.1 million, or 2.3% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $5.6 million, or 2.9% of retail sales and $16.2 million, or 2.4% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The slight dollar decrease in depreciation expense was due to a reduction in store development and  information technology investments.

 

Interest and other income was $0.9 million, or 0.4% of retail sales and $2.8 million, or 0.4% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $1.0 million, or 0.5% of retail sales and $2.9 million, or 0.4% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The slight dollar decrease for the first nine months of fiscal 2011 was primarily due to lower miscellaneous income partially offset by higher interest income due to an increase in cash and short-term investments.

 

Income tax expense was $2.8 million or 1.4% of retail sales and $29.9 million, or 4.3% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $2.8 million, or 1.4% of retail sales and $27.0 million, or 3.9% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The dollar increase in the first nine months of fiscal 2011 resulted from higher pre-tax income partially offset by a slightly lower effective tax rate.  The effective income tax rate for the third quarter of fiscal 2011 was 31.4% compared to 32.0% for the third quarter of 2010.  The current year quarter was impacted by the reduction of a reserve for unrecognized tax benefits from the closing of a state income tax audit.  The effective income tax rate for the first nine months of fiscal 2011 was 35.4% compared to 36.1% for the nine months of fiscal 2010. 

   

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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:

 

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first nine months of fiscal 2011 was $68.0 million as compared to $60.4 million in the first nine months of fiscal 2010. 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 a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at October 29, 2011.

 

Cash provided by operating activities for the first nine months of fiscal 2011 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $7.6 million for the first nine months of fiscal 2011 as compared to the first nine months of fiscal 2010 was primarily due to an increase in net income and changes in inventories partially offset by a decrease in accounts payable and incentive compensation.

 

The Company believes that its cash, cash equivalents and short-term investments, together with cash flows from operations will be adequate to fund the Company’s regular operating requirements, expected capital expenditures, dividends and share repurchases for fiscal 2011 and for the next twelve months.

 

At October 29, 2011, the Company had working capital of $270.2 million compared to $243.4 million at October 30, 2010.  Additionally, the Company had $2.4 million invested in privately managed investment funds and other miscellaneous equities and a single auction rate security of $3.5 million at October 29, 2011, which are included in Other assets on the Condensed Consolidated Balance Sheets.

 

At October 29, 2011, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million.  The revolving credit agreement is committed until August 2013. 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 October 29, 2011.  There were no borrowings outstanding under the credit facility during the third quarter ended October 29, 2011.

 

At October 29, 2011 and October 30, 2010, the Company had approximately $4.2 million and $5.7 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

 

Expenditures for property and equipment totaled $26.6 million in the first nine months of fiscal 2011, compared to $14.3 million in last year’s first nine months.  The expenditures for the first nine months of 2011 were primarily for the development of 23 new stores, additional investments in new technology and the distribution center and home office expansion.  For the full fiscal 2011 year, the Company expects to invest approximately $32.0 million for capital expenditures.  This includes anticipated expenditures to open 38 new stores and relocate four stores, upgrades to merchandise systems, and home office and distribution center expansion.

 

Net cash used in investing activities totaled $51.1 million in the first nine months of fiscal 2011 compared to $53.7 million used in the comparable period of 2010.  The decrease was due primarily to the decrease in purchases of short-term investments.

 

On November 22, 2011, the Board of Directors maintained the quarterly dividend at $.23 per share.

 

 

 

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Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):

 

As of July 30, 2011, the Company had 320,564 shares remaining in the share repurchase program.  On August 25, 2011, the Board of Directors authorized an increase in the Company’s share repurchase program of two million shares.  During the third quarter ended October 29, 2011, the Company repurchased and retired 330,400 shares for approximately $7.7 million or an average market price of $23.31.  As of October 29, 2011, the Company had 1,990,164 shares remaining in open authorizations.  There is no specified expiration date for the Company’s repurchase program.  For the nine months ended October 29, 2011, the Company repurchased 452,778 shares at an average cost of $23.41 per share

 

The Company does not use derivative financial instruments.

 

The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at both October 29, 2011 and January 29, 2011.  The underlying securities have contractual maturities which generally range from 278 days to 29 years.  Although the Company’s investments in VRDN’s have underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments.  These securities are classified as available-for-sale and are recorded as short-term investments on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in accumulated other comprehensive income.

 

Additionally, at October 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction.  See Note 8 – Fair Value Measurements for further information regarding the failed ARS.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

 

Information regarding new accounting pronouncements is provided in Note 9 to the Company’s Condensed Consolidated Financial Statements.

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Table of Contents

 

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 October 29, 2011.  Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of October 29, 2011, 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 provide reasonable assurance 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 October 29, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting except for the change in accounting principle to the weighted average cost method from the retail method for inventory accounting.

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Table of Contents

 

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 29, 2011.  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

 

            The following table summarizes the Company’s purchases of its common stock for the three months ended October 29, 2011:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

Total Number of

Maximum Number

Shares Purchased as

(or Approximate Dollar

Total Number

Part of Publicly

Value) of Shares that may

of Shares

Average Price

Announced Plans or

Yet be Purchased Under

Period

Purchased (1)

Paid per Share

Programs (2)

the Plans or Prgrams (2)

August 2011

30,700 

$

23.37 

30,700 

September 2011

279,700 

23.37 

279,700 

October 2011

20,000 

22.37 

20,000 

Total

330,400 

$

23.31 

330,400 

1,990,164 

 

(1)                Prices include trading costs.

(2)                As of July 30, 2011, the Company’s share repurchase program had 320,564 shares remaining in open authorizations.  On August 25, 2011, the Board of Directors authorized an increase in the Company’s share repurchase program of two million shares.  During the third quarter ending October 29, 2011, the Company repurchased and retired 330,400 shares under this program for approximately $7,702,251 or an average market price of $23.31.  As of the third quarter ending October 29, 2011, the Company had 1,990,164 shares remaining in open authorizations.  There is no specified expiration date for the Company’s repurchase program.

 

 

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Table of Contents

 

PART II   OTHER INFORMATION

 

THE CATO CORPORATION

 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

              Not Applicable

 

ITEM 4.  REMOVED AND RESERVED

 

      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.

 

 

 

18.1*

 

Letter regarding change in accounting principle from PricewaterhouseCoopers, LLP dated December 7, 2011, to the Board of Directors of The Cato Corporation regarding the preferability of change in accounting principle from the Retail Method to the Cost Method.

 

 

 

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 Principal Executive Officer.

 

 

 

32.2*

 

Section 1350 Certification of Principal Financial Officer.

 

 

 

101.1

 

The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2011, formatted in XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Nine Months ended October 29, 2011 and October 30, 2010; (ii) Condensed Consolidated Balance Sheets at October 29, 2011, October 30, 2010 and January 29, 2011; (iii) Condensed Consolidated Statements of Cash Flows for the Nine Months ended October 29, 2011 and October 30, 2010; and (iv) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.

 

                      * Submitted electronically herewith.         

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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

 

 

December 7, 2011

 

/s/ John P. D. Cato

Date

 

John P. D. Cato

Chairman, President and

Chief Executive Officer

 

 

 

 

December 7, 2011

 

/s/ John R. Howe

Date

 

John R. Howe

Executive Vice President

Chief Financial Officer

 

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