UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended January 29, 2011 |
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TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) |
The Cato Corporation
Registrant
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Delaware |
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56-0484485 |
State of Incorporation |
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I.R.S. Employer Identification Number |
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8100 Denmark Road Charlotte, North Carolina 28273-5975 Address of Principal Executive Offices |
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704/554-8510 Registrant’s Telephone Number |
Securities registered pursuant to Section 12(b) of the Act:
Title of Class |
Name of Exchange on Which Registered |
Class A Common Stock |
New York Stock Exchange |
Preferred Share Purchase Rights |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ
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 þ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes □ No □
Indicate by check mark, if disclosure of delinquent filers pursuant to Item 405 of the Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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 Exchange Act Rule 12b-2). Yes ¨ No þ
The aggregate market value of the Registrant’s Class A Common Stock held by non-affiliates of the Registrant as of July 31, 2010, the last business day of the Company’s most recent second quarter, was $639,525,415 based on the last reported sale price per share on the New York Stock Exchange on that date.
As of March 29, 2011, there were 27,649,402 shares of Class A Common Stock and 1,743,525 shares of Convertible Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the 2011 annual meeting of shareholders are incorporated by reference into the following part of this annual report:
Part III — Items 10, 11, 12, 13 and 14
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
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Business................................................................................................................ ............................................................................................................................. ............................................................................................................................. |
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3 – 8 |
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Risk Factors........................................................................................................... |
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8 – 14 |
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Unresolved Staff Comments.................................................................................... |
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14 |
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Properties.............................................................................................................. |
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14 |
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Legal Proceedings.................................................................................................. ............................................................................................................................. ............................................................................................................................. |
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14 |
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Executive Officers of the Registrant........................................................................ |
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15 |
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................................................................................. ............................................................................................................................. |
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16 – 18 |
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Selected Financial Data........................................................................................... ............................................................................................................................. |
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19 |
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Management’s Discussion and
Analysis of Financial Condition and Results |
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20 – 29 |
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Quantitative and Qualitative Disclosures about Market Risk...................................... ............................................................................................................................. |
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29 |
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Financial Statements and Supplementary Data.......................................................... ............................................................................................................................. |
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30 – 58 |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................................................................. ............................................................................................................................. |
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59 |
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Controls and Procedures......................................................................................... ............................................................................................................................. |
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59 |
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Other Information................................................................................................... |
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59 |
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Directors, Executive Officers and Corporate Governance......................................... ............................................................................................................................. ............................................................................................................................. |
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59 – 60 |
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Executive Compensation......................................................................................... |
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60 |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................................................................................................ ............................................................................................................................. |
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60 |
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Certain Relationships and Related Transactions, and Director Independence.............. |
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61 |
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Principal Accountant Fees and Services................................................................... |
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61 |
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Exhibits and Financial Statement Schedules.............................................................. ............................................................................................................................. |
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61 – 70 |
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1
The following information should be read along with the 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 Annual Report on Form 10-K 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 “Business,” “Properties,” “Legal Proceedings,” “Controls and Procedures” and “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. and global credit market; 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 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 this 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.
As used herein, the terms “we,” “our,” “us” (or similar terms), the “Company” or “Cato” include The Cato Corporation and its subsidiaries, except that when used with reference to common stock or other securities described herein and in describing the positions held by management of the Company, such terms include only The Cato Corporation. Our website is located at www.catocorp.com where we make available free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports (including amendments to these reports) filed or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act of 1934. These reports are available as soon as reasonably practicable after we electronically file these materials with the SEC. We also post on our website the charters of our Audit, Compensation and Corporate Governance and Nominating Committees; our Corporate Governance Guidelines, Code of Business Conduct and Ethics; and any amendments or waivers thereto; and any other corporate governance materials contemplated by SEC or New York Stock Exchange regulations.
2
General
The Company, founded in 1946, operated 1,282 fashion specialty stores at January 29, 2011, in 31 states, principally in the southeastern United States, under the names “Cato”, “Cato Fashions”, “Cato Plus”, “It’s Fashion”, and “It’s Fashion Metro”. The Cato division seeks to offer quality fashion apparel and accessories at low prices, every day in junior/missy, plus sizes and girls sizes 7 to 16. The Cato division’s stores feature a broad assortment of apparel and accessories, including dressy, career, and casual sportswear, dresses, coats, shoes, lingerie, costume jewelry and handbags. A major portion of the Cato division’s merchandise is sold under its private label and is produced by various vendors in accordance with the divisions specifications. The It’s Fashion division offers fashion with a focus on the latest trendy styles and nationally recognized urban brands for the entire family at low prices every day. Most stores range in size from 4,000 to 10,000 square feet and are located primarily in strip shopping centers anchored by national discounters or market-dominant grocery stores. In fiscal 2011, the Company plans to introduce the Versona Accessories division. These stores will offer quality fashion jewelry and accessories accented by key apparel items at exceptional values every day. The Company emphasizes friendly customer service and coordinated merchandise presentations in an appealing store environment. The Company offers its own credit card and layaway plan. Credit and layaway sales represented 10% of retail sales in fiscal 2010. See Note 15 to the Consolidated Financial Statements, “Reportable Segment Information” for a discussion of information regarding the Company’s two reportable segments: retail and credit.
Business
The Company’s primary objective is to be the leading fashion specialty retailer for fashion and value in its markets. Management believes the Company’s success is dependent upon its ability to differentiate its stores from department stores, mass merchandise discount stores and competing specialty stores. The key elements of the Company’s business strategy are:
Merchandise Assortment. The Company’s stores offer a wide assortment of on-trend apparel and accessory items in primarily junior/missy, plus sizes, girls sizes 7 to 16, mens and kids sizes newborn to 7 with an emphasis on color, product coordination and selection. Colors and styles are coordinated and presented so that outfit selection is easily made.
Value Pricing. The Company offers quality merchandise that is generally priced below comparable merchandise offered by department stores and mall specialty apparel chains, but is generally more fashionable than merchandise offered by discount stores. Management believes that the Company has positioned itself as the everyday low price leader in its market segment.
Strip Shopping Center Locations. The Company locates its stores principally in convenient strip centers anchored by national discounters or market-dominant grocery stores that attract large numbers of potential customers.
Customer
Service. Store managers and sales associates are trained to provide prompt
and courteous
service and to assist customers in merchandise selection and wardrobe
coordination.
Credit and Layaway Programs. The Company offers its own credit card and a layaway plan to make the purchase of its merchandise more convenient for its customers.
3
Merchandising
Merchandising
The Company seeks to offer a broad selection of high quality and exceptional value apparel and accessories to suit the various lifestyles of fashion and value conscious females. In addition, the Company strives to offer on-trend fashion in exciting colors with consistent fit and quality.
The Company’s merchandise lines include dressy, career, and casual sportswear, dresses, coats, shoes, lingerie, costume jewelry, handbags, mens wear and lines for kids and newborns. The Company primarily offers exclusive merchandise with fashion and quality comparable to mall specialty stores at low prices, every day.
The Company believes that the collaboration of its merchandising team with an expanded in-house product development and direct sourcing function has enhanced merchandise offerings and delivers quality exclusive on-trend styles at lower prices. The product development and direct sourcing operations provide research on emerging fashion and color trends, technical services and direct sourcing options.
As a part of its merchandising strategy, members of the Company’s merchandising staff frequently visit selected stores, monitor the merchandise offerings of other retailers, regularly communicate with store operations associates and frequently confer with key vendors. The Company also takes aggressive markdowns on slow-selling merchandise and typically does not carry over merchandise to the next season.
Purchasing, Allocation and Distribution
Although the Company purchases merchandise from approximately 1,500 suppliers, most of its merchandise is purchased from approximately 100 primary vendors. In fiscal 2010, purchases from the Company’s largest vendor accounted for approximately 3% of the Company’s total purchases. No other vendor accounted for more than 3% of total purchases. The Company is not dependent on its largest vendor or any other vendor for merchandise purchases, and the loss of any single vendor or group of vendors would not have a material adverse effect on the Company’s operating results or financial condition. A substantial portion of the Company’s merchandise is sold under its private labels and is produced by various vendors in accordance with the Company’s strict specifications. The Company purchases most of its merchandise from domestic importers and vendors, which typically minimizes the time necessary to purchase and obtain shipments. This enables the Company to react to merchandise trends in a more timely fashion. Although a significant portion of the Company’s merchandise is manufactured overseas, principally in the Far East, the Company does not expect that any economic, political or social unrest in any one country would have a material adverse effect on the Company’s ability to obtain adequate supplies of merchandise. However, the Company can give no assurance that any changes or disruptions in its merchandise supply chain would not materially and adversely affect the Company. See “Risk Factors – Risks Relating To Our Business – We source a significant portion of our merchandise directly and indirectly from overseas, and changes, disruptions or other problems affecting the Company’s merchandise supply chain could materially and adversely affect the Company’s business, results of operations and financial condition.”
An important component of the Company’s strategy is the allocation of merchandise to individual stores based on an analysis of sales trends by merchandise category, customer profiles and climatic conditions. A merchandise control system provides current information on the sales activity of each merchandise style in each of the Company’s stores. Point-of-sale terminals in the stores collect and transmit sales and inventory information to the Company’s central database, permitting timely response to sales trends on a store-by-store basis.
4
All merchandise is shipped directly to the Company’s distribution center in Charlotte, North Carolina, where it is inspected and then allocated by the merchandise distribution staff for shipment to individual stores. The flow of merchandise from receipt at the distribution center to shipment to stores is controlled by an on-line system. Shipments are made by common carrier, and each store receives at least one shipment per week. The centralization of the Company’s distribution process also subjects it to risks in the event of damage to or destruction of its distribution facility or other disruptions affecting the distribution center or the flow of goods into or out of Charlotte, North Carolina generally. See “Risk Factors – Risks Relating To Our Business – A disruption or shutdown of our centralized distribution center or transportation network could materially and adversely affect our business and results of operations.”
Advertising
The Company uses television, in-store signage, graphics and a Company website as its primary advertising media. The Company’s total advertising expenditures were approximately 0.7%, 0.7% and 0.8% of retail sales for fiscal years 2010, 2009 and 2008, respectively.
Store Operations
The Company’s store operations management team consists of 1 director of stores, 4 territorial managers, 15 regional managers and 141 district managers. Regional managers receive a salary plus a bonus based on achieving targeted goals for sales, payroll, shrinkage control and store profitability. District managers receive a salary plus a bonus based on achieving targeted objectives for district sales increases and shrinkage control. Stores are typically staffed with a manager, two assistant managers and additional part-time sales associates depending on the size of the store and seasonal personnel needs. Store managers receive a salary and all other store personnel are paid on an hourly basis. Store managers, assistant managers and sales associates are eligible for monthly and semi-annual bonuses based on achieving targeted goals for their store’s sales increases and shrinkage control.
The Company constantly strives to improve its training programs to develop associates. Over 80% of store and field management are promoted from within, allowing the Company to internally staff an expanding store base. The Company has training programs at each level of store operations. New store managers are trained in training stores managed by experienced associates who have achieved superior results in meeting the Company’s goals for store sales, payroll expense and shrinkage control. The type and extent of district manager training varies depending on whether the district manager is promoted from within or recruited from outside the Company.
Store Locations
Most of the Company’s stores are located in the southeastern United States in a variety of markets
ranging from small towns to large metropolitan areas with trade area
populations of 20,000 or more. Stores average approximately 4,300 square feet
in size.
All of the Company’s stores are leased. Approximately 96% are located in strip shopping centers and 4% in enclosed shopping malls. The Company locates stores in strip shopping centers anchored by a national discounter, primarily Wal-Mart Supercenters or market-dominant grocery stores. The Company’s strip center locations provide ample parking and shopping convenience for its customers.
5
The Company’s store development activities consist of opening new stores in new and existing markets and relocating selected existing stores to more desirable locations in the same market area. The following table sets forth information with respect to the Company’s development activities since fiscal 2006.
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Store Development |
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Number of Stores |
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Beginning of |
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Number |
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Number |
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Number of Stores |
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Fiscal Year |
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Year |
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Opened |
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Closed |
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End of Year |
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2006 |
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1,244 |
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58 |
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26 |
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1,276 |
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2007 |
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1,276 |
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62 |
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20 |
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1,318 |
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2008 |
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1,318 |
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65 |
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102 |
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1,281 |
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2009 |
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1,281 |
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35 |
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45 |
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1,271 |
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2010 |
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1,271 |
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37 |
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26 |
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1,282 |
In fiscal 2010 the Company relocated 5 stores.
The Company expects to open 54 new stores during fiscal 2011. The expected new store openings include 10 new Cato stores, 34 new It’s Fashion Metro stores (including the conversion of approximately 17 existing It’s Fashion stores) and 10 new Versona Accessories stores. The Company anticipates closing up to 27 stores by year end, including the 17 conversions. In addition, the Company also expects to relocate 6 stores and remodel 10 stores. It’s Fashion Metro has 91 stores open as of fiscal year end January 2011 and is a value-priced fashion format offering the latest styles for the entire family including urban-inspired, nationally recognized brands at everyday low prices. The Versona Accessories stores are new concept stores the Company intends to launch in fiscal 2011 that will offer quality fashion jewelry and accessories accented by key apparel items at exceptional values every day. The Versona Accessories stores will seek to provide an upscale shopping environment comparable to better specialty and department stores.
The Company periodically reviews its store base to determine whether any
particular store should be
closed based on its sales trends and profitability. The Company intends to
continue this review process to identify underperforming stores.
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for 5.2%, 6.4%, and 7.1% of retail sales in fiscal 2010, 2009 and 2008, respectively. The Company’s net bad debt expense was 6.6%, 7.4% and 5.6% of credit sales in fiscal 2010, 2009 and 2008, respectively.
Customers applying for the Company’s credit card are approved for credit if they have a satisfactory credit record and the Company has considered the customer’s ability to make the required minimum payment. Customers are required to make minimum monthly payments based on their account balances. If the balance is not paid in full each month, the Company assesses the customer a finance charge. If payments are not received on time, the customer is assessed a late fee subject to regulatory limits.
6
Layaway Plan
Under the Company’s layaway plan, merchandise is set aside for customers who agree to make periodic payments. The Company adds a nonrefundable administrative fee to each layaway sale. If no payment is made for four weeks, the customer is considered to have defaulted, and the merchandise is returned to the selling floor and again offered for sale, often at a reduced price. All payments made by customers who subsequently default on their layaway purchase are returned to the customer upon request, less the administrative fee and a restocking fee. The Company defers recognition of layaway sales and its related fees to the accounting period when the customer picks up and pays for layaway merchandise. Layaway sales represented approximately 4.7%, 4.7% and 4.0% of retail sales in fiscal 2010, 2009 and 2008, respectively.
Information Technology Systems
The Company’s systems provide daily financial and merchandising information that is used by management to enhance the timeliness and effectiveness of purchasing and pricing decisions. Management uses a daily report comparing actual sales with planned sales and a weekly ranking report to monitor and control purchasing decisions. Weekly reports are also produced which reflect sales, weeks of supply of inventory and other critical data by product categories, by store and by various levels of responsibility reporting. Purchases are made based on projected sales, but can be modified to accommodate unexpected increases or decreases in demand for a particular item.
Sales information is projected by merchandise category and, in some cases, is further projected and actual performance measured by stock keeping unit (SKU). Merchandise allocation models are used to distribute merchandise to individual stores based upon historical sales trends, climatic differences, customer demographic differences and targeted inventory turnover rates.
Competition
The women’s retail apparel industry is highly competitive. The Company believes that the principal competitive factors in its industry include merchandise assortment and presentation, fashion, price, store location and customer service. The Company competes with retail chains that operate similar women’s apparel specialty stores. In addition, the Company competes with mass merchandise chains, discount store chains, major department stores, off-price retailers and internet based retailers. Although we believe we compete favorably with respect to the principal competitive factors described above, many of our direct and indirect competitors are well-established national, regional or local chains, and some have substantially greater financial, marketing and other resources. The Company expects its stores in larger cities and metropolitan areas to face more intense competition.
Seasonality
Due to the seasonal nature of the retail business, the Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenues, operating income and net income. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods. See Note 14 of the Consolidated Financial Statements for information regarding our quarterly results of operations for the last two fiscal years.
Regulation
A variety of laws affect the revolving credit card program offered by the Company. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (“The Act”) amended the Truth in Lending Act to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan. The Act contained provisions addressing matters such as change in terms, notices, limits on fees, rate increases, payment allocation and account disclosures. The Act requires creditors to provide consumers with account disclosures that are timely and in a form that is readily understandable. The Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit lenders from discrimination against any credit applicants, establish guidelines for gathering and evaluating credit information and require written notification when credit is denied. Regulation AA, Unfair or Deceptive Acts or Practices, establishes consumer complaint procedures and defines unfair or deceptive practices in extending credit to consumers. The Federal Trade Commission has adopted or proposed various trade regulation rules dealing with unfair credit and collection practices and the preservation of consumers’ claims and defenses. The Company is also subject to the U.S. Patriot Act and the Bank Secrecy Act, which require the Company to monitor account holders and account transactions, respectively. Additionally, the Gramm-Leach-Bliley Act requires the Company to disclose, initially and annually, to its customers, the Company’s privacy policy as it relates to a customer’s non-public personal information.
7
Associates
As of January 29, 2011, the Company employed approximately 9,600 full-time and part-time associates. The Company also employs additional part-time associates during the peak retailing seasons. The Company is not a party to any collective bargaining agreements and considers its associate relations to be good.
An investment in our common stock involves numerous types of risks. You should carefully consider the following risk factors, in addition to the other information contained in this report, including the disclosures under “Forward-Looking Information” above in evaluating our Company and any potential investment in our common stock. If any of the following risks or uncertainties occur, our business, financial condition and operating results could be materially and adversely affected, the trading price of our common stock could decline and you could lose all or a part of your investment in our common stock. The risks and uncertainties described in this section are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially and adversely affect our business operating results and financial condition.
Risks Relating To Our Business:
If we are unable to anticipate, identify and respond to rapidly changing fashion trends and customer demands in a timely manner, our business and results of operations could materially suffer.
Customer tastes and fashion trends, particularly for women’s apparel, are volatile and tend to change rapidly. Our success depends in part upon our ability to anticipate and respond to changing merchandise trends and consumer preferences in a timely manner. Accordingly, any failure by us to anticipate, identify and respond to changing fashion trends could adversely affect consumer acceptance of our merchandise, which in turn could adversely affect our business and our image with our customers. If we miscalculate either the market for our merchandise or our customers’ tastes or purchasing habits, we may be required to sell a significant amount of unsold inventory at below average markups over cost, or below cost, which would adversely affect our margins and results of operations.
8
Existing and increased competition in the women’s retail apparel industry may negatively impact our business, results of operations, financial condition and market share.
The women’s retail apparel industry is highly competitive. We compete primarily with discount stores, mass merchandisers, department stores, off-price retailers, specialty stores, and internet-based retailers, many of which have substantially greater financial, marketing and other resources than we have. Many of our competitors offer frequent promotions and reduce their selling prices. In some cases our competitors are expanding into markets in which we have a significant market presence. As a result of this competition, including close-out sales and going-out-of-business sales by other women’s apparel retailers, we may experience pricing pressures, increased marketing expenditures, as well as a loss of market share, which could materially and adversely affect our business, results of operations and financial condition.
Unusual weather, natural disasters or similar events may adversely affect our sales or operations.
Extreme changes in weather patterns or natural disasters can influence customer trends and shopping habits. For example, heavy rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions would adversely affect our business. Extreme weather patterns, natural disasters, power outages, terrorist acts or other catastrophic events could reduce customer traffic in our stores and likewise disrupt our ability to conduct operations, which could materially and adversely affect us.
We source a significant portion of our merchandise directly and indirectly from overseas, and changes, disruptions or other problems affecting the Company’s merchandise supply chain could materially and adversely affect the Company’s business, results of operations and financial condition.
A significant amount of our merchandise is manufactured overseas, principally in the Far East. We directly import some of this merchandise and indirectly import the remaining merchandise from domestic vendors who acquire the merchandise from foreign sources. As a result, political instability or other events resulting in the disruption of trade from other countries, increased security requirements for imported merchandise, or the imposition of additional regulations relating to or duties on imports, could cause significant delays or interruptions in the supply of our merchandise or increase our costs. Either of these could have a material adverse effect on our business. In addition, increased energy and transportation costs have caused us significant cost increases, and continued increases in these costs or the disruption of the means by which merchandise is transported to us could cause us additional cost increases or interruptions of our supply chain which could be significant. If we are forced to source merchandise from other countries or other domestic vendors with foreign sources in different countries, those goods may be more expensive or of a different or inferior quality from the ones we now sell. Furthermore, the deterioration in any of our key vendors’ financial condition, their failure to perform as we expect, the failure to follow our vendor guidelines or comply with applicable laws and regulations could expose us to operational, competitive and legal risks. If we were not able to timely or adequately replace the merchandise we currently source with merchandise produced elsewhere, or if our vendors fail to perform as we expect, our business, results of operations and financial condition could be adversely affected.
9
Fluctuations in the price, availability and quality of inventory may result in higher cost of goods which the Company may not be able to pass on to the customers.
Vendors are increasingly passing on higher production costs which may impact our ability to maintain or grow our margins. The price and availability of raw materials, specifically cotton, may be impacted by demand, regulation, weather and crop yields as well as other factors. Additionally, manufacturers are experiencing increases in other manufacturing costs such as transportation, labor and benefit costs. These increases in production costs result in higher merchandise costs to the Company. Due to the Company’s limited flexibility in price point, the Company may not be able to pass on those cost increases to the consumer which could have a material adverse effect on our results of operations and financial condition.
Our costs are affected by foreign currency fluctuations.
Because we purchase a significant portion of our inventory from foreign suppliers, our cost of these goods is affected by the fluctuation of the local currencies where these goods are produced against the dollar. Accordingly, changes in the value of the dollar relative to foreign currencies may increase our cost of goods sold and, if we are unable to pass such cost increases on to our customers, decrease our gross margins and ultimately our earnings. Accordingly, foreign currency fluctuations may have a material adverse effect on our business, financial condition and results of operations.
A continuation or worsening of adverse conditions in the general economic environment or outlook and its related impact on consumer confidence and spending may materially and adversely affect consumer demand for our apparel and accessories and our results of operations.
Consumer spending habits, including spending for our apparel and accessories, are affected by, among other things, prevailing economic conditions, levels of employment, fuel and energy costs, salaries and wage rates and other sources of income, tax rates, home values, consumer net worth, the availability of consumer credit, consumer confidence or consumer perceptions of economic conditions or trends. Any perception that adverse conditions in the general economy or credit markets are continuing or worsening may significantly weaken many of these drivers of consumer spending habits. Adverse economic conditions or uncertainties also generally cause consumers to defer purchases of discretionary items, such as our merchandise or by purchasing cheaper alternatives to our merchandise, all of which may also adversely affect our net sales and results of operations. In addition, numerous events, whether or not related to actual economic conditions, such as downturns in the stock markets, acts of war or terrorism, political unrest or natural disasters, or similar events, may also dampen consumer confidence, and accordingly, lead to reduced consumer spending. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
The failure, disruption or security breach relating to our information technology systems could adversely affect our business.
We rely on our existing information technology systems for merchandise operations, including merchandise planning, replenishment, pricing, ordering, markdowns and product life cycle management. In addition to merchandise operations, we utilize our information technology systems for our distribution processes, as well as our financial systems, including accounts payable, general ledger, accounts receivable, sales, banking, inventory and fixed assets. Any disruption in the operation of our information technology systems, or our failure to continue to upgrade or improve such systems could adversely affect our business. In addition, any security breach or other problem that results in the unauthorized disclosure of confidential customer information, such as personally identifiable information and payment information, could adversely affect our standing with customers and expose us to the risk of litigation and liability. Any such occurrences could result in reputational damage or loss of business or goodwill and could adversely affect our business, results of operations and financial condition.
10
A disruption or shutdown of our centralized distribution center or transportation network could materially and adversely affect our business and results of operations.
The distribution of our products is centralized in one distribution center in Charlotte, North Carolina and distributed through our network of third party freight carriers. The merchandise we purchase is shipped directly to our distribution center where it is prepared for shipment to the appropriate stores and subsequently delivered to the stores by our third party freight carriers. If the distribution center or our third party freight carriers were to be shutdown or lose significant capacity for any reason, our operations would likely be seriously disrupted. Such problems could occur as the result of any loss, destruction or impairment of our ability to use our distribution center, as well as any broader problem generally affecting the ability to ship goods into our distribution center or deliver goods to our stores. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores during the time it takes for us to reopen or replace the distribution center and/or our transportation network. Any such occurrence could adversely affect our business, results of operations and financial condition.
Our ability to attract consumers and grow our revenues is dependant on the success of our store location strategy and our ability to successfully open new stores as planned.
Our sales are dependent in part on the location of our stores in shopping centers where we believe our consumers and potential consumers shop. In addition, our ability to grow our revenues has been substantially dependent on our ability to secure space for and open new stores in attractive locations. Centers where we currently operate existing stores or seek to open new stores may be adversely affected by, among other things, general economic downturns or those particularly affecting the commercial real estate industry, the closing of anchor stores, changes in tenant mix and changes in customer shopping preferences. To take advantage of consumer traffic and the shopping preferences of our consumers, we need to maintain and acquire stores in desirable locations where competition for suitable store locations is intense. A decline in the popularity of these shopping centers among our target consumers, or in availability or cost of space in these centers could adversely affect consumer traffic and reduce our sales and net earnings or increase our operating costs.
Our ability to open and operate new stores depends on many factors, some of which are beyond our control. These factors include, but are not limited to, our ability to identify suitable store locations, negotiate acceptable lease terms, and hire and train appropriate store personnel. In addition, our continued expansion into new regions of the country where we have not done business before may present new challenges in competition, distribution and merchandising as we enter these new markets. Our failure to successfully and timely execute our plans for opening new stores or the failure of these stores to perform up to our expectations, could adversely affect our business, results of operations and financial condition.
Failure to attract, train, and retain skilled personnel could adversely affect our business and our financial condition.
Like most retailers, we experience significant associate turnover rates, particularly among store sales associates and managers. Our continued store growth will require the hiring and training of new associates. We must continually attract, hire and train new store associates to meet our staffing needs. A significant increase in the turnover rate among our store sales associates and managers would increase our recruiting and training costs, as well as possibly cause a decrease in our store operating efficiency and productivity. We compete for qualified store associates, as well as experienced management personnel with other companies in our industry or other industries, many of whom have greater financial resources than we do.
11
In addition, we depend on key management personnel to oversee the operational divisions of the Company for the support of our existing business and future expansion. The success of executing our business strategy depends in large part on retaining key management. We compete for key management personnel with other retailers, and our inability to attract and retain qualified personnel could limit our ability to continue to grow.
If we are unable to retain our key management and store associates or attract, train, or retain other skilled personnel in the future, we may not be able to service our customers effectively or execute our business strategy, which could adversely affect our business, results, and financial condition.
Our business operations subject us to legal compliance and litigation risks that could result in increased costs or liabilities, divert our management’s attention or otherwise adversely affect our business.
Our operations are subject to federal, state and local laws, rules and regulations and litigation risk. Compliance risks and litigation claims have or may arise in the ordinary course of our business and may include, among other issues, employment issues, commercial disputes, intellectual property issues, product-oriented matters, tax, customer relations and personal injury claims. These matters frequently raise complex factual and legal issues, which are subject to risks and uncertainties and could divert significant management time. In addition, governing laws, rules and regulations, and interpretations of existing laws are subject to change from time to time. Compliance and litigation matters could result in unexpected expenses and liability, as well as have an adverse affect on our operations and our reputation.
If we fail to protect our trademarks and other intellectual property rights or infringe the intellectual property rights of others, our business, brand image, growth strategy, results of operations and financial condition could be adversely affected.
We believe that our “Cato”, “It’s Fashion” and “It’s Fashion Metro” trademarks are integral to our store designs and our ability to successfully build consumer loyalty. We have registered these trademarks with the U.S. Patent and Trademark Office (“PTO”) and have also registered, or applied for registration of, additional trademarks with the PTO that we believe are important to our business. We cannot assure that these registrations will prevent imitation of our trademarks, merchandising concepts, store designs or private label merchandise or the infringement of our other intellectual property rights by others. Infringement of our names, concepts, store designs or merchandise in a manner that projects lesser quality or carries a negative connotation of our image could adversely affect our business, financial condition and results of operations.
In addition, we cannot assure that others will not try to block the manufacture or sale of our private label merchandise by claiming that our merchandise violates their trademarks or other proprietary rights. In the event of such a conflict, we could be subject to lawsuits or other actions, the ultimate resolution of which we cannot predict; however, such a controversy could adversely effect our business, financial condition and results of operations.
We may experience market conditions that could adversely impact the valuation and liquidity of, and our ability to access, our short-term investments and cash and cash equivalents.
Our short-term investments and cash equivalents are primarily comprised of investments in federal, state, municipal and corporate debt securities. The value of those securities may be impacted by factors beyond our control, such as changes to credit ratings, rates of default, collateral value, discount rates, and strength and quality of market credit and liquidity. As federal, state and municipal entities struggle with declining tax revenues and budget deficits, we cannot be assured of our ability to timely access these investments if the market for these issues declines. Similarly, the default by issuers could adversely affect our financial condition, results of operations and ability to execute our business strategy. In addition, we have significant amounts of cash and cash equivalents at financial institutions that are in excess of the federally insured limits. An economic downturn or development of adverse conditions affecting the financial sector and stability of financial institutions could cause us to experience losses on our deposits.
12
Maintaining and improving our internal control over financial reporting and other requirements necessary to operate as a public company may strain our resources and any material failure in these controls may negatively impact our business, the price of our common stock and market confidence in our reported financial information.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the rules of the Securities and Exchange Commission and New York Stock Exchange and certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and related rulemaking that has been and will continue to be implemented over the next several years under the mandates of the Dodd-Frank Act. The requirements of these rules and regulations have, and may continue to, increase our compliance costs and place undue strain on our personnel, systems and resources. To satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we must continue to document, test, monitor and enhance our internal control over financial reporting, which is a costly and time-consuming effort that must be re-evaluated frequently. We cannot give assurance that our disclosure controls and procedures and our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act will be adequate in the future. Any failure to maintain the effectiveness of internal control over financial reporting or to comply with the other various laws and regulations to which we are currently subject and will continue to be subject as a public company could have an adverse material impact on our business, our financial condition and the price of our common stock. In addition, our efforts to comply with these requirements, particularly with new requirements under the Dodd-Frank Act that have yet to be implemented, could significantly increase our compliance costs.
Risks Relating To Our Common Stock:
Our operating results are subject to seasonal and quarterly fluctuations, which could adversely affect the market price of our common stock.
Our business varies with general seasonal trends that are characteristic of the retail apparel industry. As a result, our stores typically generate a higher percentage of our annual net sales and profitability in the first and second quarters of our fiscal year compared to other quarters. Accordingly, our operating results for any one fiscal period are not necessarily indicative of results to be expected from any future period, and such seasonal and quarterly fluctuations could adversely affect the market price of our common stock.
The interests of a principal shareholder may limit the ability of other shareholders to influence the direction of the Company.
As of March 29, 2011, John P. D. Cato, Chairman, President and Chief Executive Officer, beneficially controlled approximately 39% of the voting power of our common stock. As a result, Mr. Cato may be able to control or significantly influence substantially all matters requiring approval by the shareholders, including the election of directors and the approval of mergers and other business combinations. Mr. Cato may have interests that differ from those of other shareholders, and may vote in a way with which other shareholders disagree or perceive as adverse to their interests. In addition, the concentration of voting power held by Mr. Cato could have the effect of preventing, discouraging or deferring a change in control of the Company, which could depress the market price of our common stock.
13
Conditions in the stock market, generally or particularly relating to our Company or common stock, may materially and adversely affect the market price of our common stock and make its trading price more volatile.
The trading price of our common stock at times has been, and is likely to continue to be, subject to significant volatility. A variety of factors may cause the price of the common stock to fluctuate, perhaps substantially, including, but not limited to: low trading volume; general market fluctuations resulting from factors not directly related to our operations or the inherent value of our common stock; announcements of developments related to our business; fluctuations in our reported operating results; general conditions in the fashion and retail industry; conditions in the domestic or global economy or the domestic or global credit or capital markets; changes in financial estimates or the scope of coverage given to our Company by securities analysts; negative commentary regarding our Company and corresponding short-selling market behavior; adverse customer relations developments; significant changes in our senior management team; and legal proceedings. Over the past several years the stock market in general, and the market for shares of equity securities of many retailers in particular, have experienced extreme price fluctuations that have at times been unrelated to the operating performance of those companies. Such fluctuations and market volatility based on these or other factors may materially and adversely affect the market price of our common stock.
Item 1B. Unresolved Staff Comments:
None.
The Company’s distribution center and general offices are located in a Company-owned building of approximately 492,000 square feet located on a 15-acre tract in Charlotte, North Carolina. The Company’s automated merchandise handling and distribution activities occupy approximately 418,000 square feet of this building and its general offices and corporate training center are located in the remaining 74,000 square feet. A building of approximately 24,000 square feet located on a 2-acre tract adjacent to the Company’s existing location is used for receiving and staging shipments prior to processing.
Substantially all of the Company’s retail stores are leased from unaffiliated
parties. Most of the leases
have an initial term of five years, with two to three five-year renewal
options. Many of the leases provide for fixed rentals plus a percentage of
sales in excess of a specified volume.
From time to time, claims are
asserted against the Company arising out of operations in the ordinary
course of business. The Company currently is not a party to any pending
litigation that it believes is likely to have a material adverse effect on the
Company’s financial position, results of operations or cash flows.
14
Item 3A. Executive Officers of the Registrant:
The executive officers of the Company and their ages as of March 29, 2011 are as follows:
Name |
Age |
|
Position |
||
|
|
|
|
||
John P. D. Cato........................ |
|
60 |
|
|
Chairman, President and Chief Executive Officer |
Michael T. Greer....................... |
|
48 |
|
|
Executive Vice President, Director of Stores |
John R. Howe........................... |
|
48 |
|
|
Executive Vice President, Chief Financial Officer |
Howard A. Severson................. |
|
63 |
|
|
Executive Vice President, Chief Real Estate and Store Development Officer |
Sally Almason........................... |
|
57 |
|
|
Executive Vice President, General Merchandising Manager – Cato Division |
John P. D. Cato has been employed as an officer of the Company since 1981 and has been a director of the Company since 1986. Since January 2004, he has served as Chairman, President and Chief Executive Officer. From May 1999 to January 2004, he served as President, Vice Chairman of the Board and Chief Executive Officer. From June 1997 to May 1999, he served as President, Vice Chairman of the Board and Chief Operating Officer. From August 1996 to June 1997, he served as Vice Chairman of the Board and Chief Operating Officer. From 1989 to 1996, he managed the Company’s off-price division, serving as Executive Vice President and as President and General Manager of the It’s Fashion! Division from 1993 to August 1996. Mr. John Cato is currently a director of Ruddick Corporation.
Michael T. Greer has been employed by the Company since 1985. Since May 2006, he has served as Executive Vice President, Director of Stores of the Company. From November 2004 until May 2006, he served as Senior Vice President, Director of Stores of the Company. From February 2004 until November 2004, he served as Senior Vice President, Director of Stores of the Cato Division. From 2002 to 2003 Mr. Greer served as Vice President, Director of Stores of the It’s Fashion! Division. From 1999 to 2001 he served as Territorial Vice President of Stores of the Cato Division and from 1996 to 1999 he served as Regional Vice President of Stores of the Cato Division. From 1985 to 1995, Mr. Greer held various store operational positions in the Cato Division.
John R. Howe has been employed by the Company since 1986. Since September 2008, he has served as Executive Vice President, Chief Financial Officer. From June 2007 until September 2008, he served as Senior Vice President, Controller. From 1999 to 2007, he served as Vice President, Assistant Controller. From 1997 to 1999, he served as Assistant Vice President, Budgets and Planning. From 1995 to 1997, he served as Director, Budgets and Planning. From 1995 to 1997, he served as Assistant Tax Manager. From 1986 to 1995, Mr. Howe held various positions within the finance area.
Howard A. Severson has been employed by the Company since 1985. Since January 1993, he has served as Executive Vice President, Chief Real Estate and Store Development Officer. From 1993 to 2001 Mr. Severson also served as a director. From August 1989 through January 1993, Mr. Severson served as Senior Vice President — Chief Real Estate Officer.
Sally Almason has been employed by the Company since 1995. Since November 2010, she has served as Executive Vice President, Merchandising Cato and Versona Divisions. From 2009 to 2010, she has served as Executive Vice President, General Merchandise Manager for the Cato Division. From 2004 to 2009, she served as Senior Vice President, General Merchandise Manager for the Cato Division. From 1995 to 2004, she served as Vice President, Divisional Merchandise Manager for the Cato Division.
15
|
|
Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of |
Market & Dividend Information
The Company’s Class A Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol CATO. Below is the market range and dividend information for the four quarters of fiscal 2010 and 2009.
|
|
|
|
Price |
|
|
|
|
|
|
||||
|
2010 |
|
|
High |
|
Low |
|
Dividend |
|
|
|
|||
|
First quarter |
|
|
$ |
25.11 |
|
$ |
18.70 |
|
$ |
.165 |
|
|
|
|
Second quarter |
|
|
|
25.21 |
|
|
21.49 |
|
|
.185 |
|
|
|
|
Third quarter |
|
|
|
28.47 |
|
|
22.27 |
|
|
.185 |
|
|
|
|
Fourth quarter |
|
|
|
29.60 |
|
|
24.23 |
|
|
.185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price |
|
|
|
|
|
|
||||
|
2009 |
|
|
High |
|
Low |
|
Dividend |
|
|
|
|||
|
First quarter |
|
|
$ |
19.61 |
|
$ |
13.13 |
|
$ |
.165 |
|
|
|
|
Second quarter |
|
|
|
20.84 |
|
|
15.32 |
|
|
.165 |
|
|
|
|
Third quarter |
|
|
|
22.86 |
|
|
16.46 |
|
|
.165 |
|
|
|
|
Fourth quarter |
|
|
|
21.84 |
|
|
18.67 |
|
|
.165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 29, 2011 the approximate number of record holders of the Company's Class A Common |
|||||||||||||
Stock was 5,000 and there were 2 record holders of the Company's Class B Common Stock. |
|
16
Stock Performance Graph
The following graph compares the yearly change in the Company’s cumulative total shareholder return on the Company’s Common Stock (which includes Class A Stock and Class B Stock) for each of the Company’s last five fiscal years with (i), the Dow Jones U.S. Retailers, Apparel Index and (ii) the Russell 2000 Index.
THE CATO CORPORATION
STOCK PERFOMANCE TABLE
(BASE 100 – IN DOLLARS)
LAST TRADING DAY OF THE FISCAL YEAR |
THE CATO CORPORATION |
DOW JONES U.S. RETAILERS, APPL INDEX |
RUSSELL 2000 INDEX |
1/27/2006 |
100 |
100 |
100 |
2/2/2007 |
108 |
121 |
112 |
2/1/2008 |
82 |
95 |
102 |
1/30/2009 |
68 |
50 |
63 |
1/29/2010 |
109 |
95 |
87 |
1/28/2011 |
133 |
118 |
113 |
The graph assumes an initial investment of $100 on January 27, 2006, the last trading day prior to the commencement of the Company’s 2006 fiscal year, and that all dividends were reinvested.
17
Issuer Purchases of Equity Securities
The following table summarizes the Company’s purchases of its common stock for the three months ended January 29, 2011:
|
|
|
|
|
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 |
|
Paid per Share (1) |
|
Programs (2) |
|
the Plans or Programs (2) |
November 2010 |
857 |
|
$ 27.02 |
|
857 |
|
|
December 2010 |
- |
|
- |
|
- |
|
|
January 2011 |
- |
|
- |
|
- |
|
|
Total |
857 |
|
$ 27.02 |
|
857 |
|
442,942 |
(1) Prices include trading costs.
(2) On January 30, 2010, the Company’s share repurchase program had 695,942 shares remaining in open authorizations. At fiscal year ending January 29, 2011, the Company had 442,942 shares remaining in open authorizations. There is no specified expiration date for the Company’s repurchase program.
(3) In March 2011, subsequent to year-end, the Company repurchased 110,000 shares for approximately $2.6 million or an average market price per share of $23.48.
18
Item 6. Selected Financial Data:
Certain selected financial
data for the five fiscal years ended January 29, 2011 have been derived
from the Company’s audited financial statements. The financial statements and
Independent Registered Public Accounting Firm’s integrated audit reports for
the three most recent fiscal years are contained elsewhere in this report. All
data set forth below are qualified by reference to, and should be read in
conjunction with, the Company’s Consolidated Financial Statements (including
the Notes thereto) and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing elsewhere in this annual report.
Fiscal Year (1) |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|||||
|
|
|
(Dollars in thousands, except per share data and selected operating data) |
||||||||||||
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail sales |
|
$ |
913,922 |
|
$ |
872,132 |
|
$ |
845,676 |
|
$ |
834,341 |
|
$ |
862,813 |
Other income |
|
|
11,606 |
|
|
11,863 |
|
|
12,042 |
|
|
12,096 |
|
|
13,072 |
Total revenues |
|
|
925,528 |
|
|
883,995 |
|
|
857,718 |
|
|
846,437 |
|
|
875,885 |
Cost of goods sold (exclusive of depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shown below) |
|
|
565,710 |
|
|
552,016 |
|
|
562,056 |
|
|
572,309 |
|
|
572,712 |
Selling, general and administrative (exclusive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of depreciation shown below) |
|
|
251,121 |
|
|
245,483 |
|
|
227,645 |
|
|
210,892 |
|
|
212,157 |
Selling, general and administrative percent of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retail sales |
|
|
27.5% |
|
|
28.2% |
|
|
26.9% |
|
|
25.3% |
|
|
24.6% |
Depreciation |
|
|
21,822 |
|
|
21,829 |
|
|
22,572 |
|
|
22,212 |
|
|
20,941 |
Interest expense |
|
|
37 |
|
|
66 |
|
|
53 |
|
|
9 |
|
|
41 |
Interest and other income |
|
|
(3,971) |
|
|
(4,313) |
|
|
(7,218) |
|
|
(8,218) |
|
|
(9,597) |
Income before income taxes |
|
|
90,809 |
|
|
68,914 |
|
|
52,610 |
|
|
49,233 |
|
|
79,631 |
Income tax expense |
|
|
33,070 |
|
|
23,149 |
|
|
18,976 |
|
|
16,914 |
|
|
28,181 |
Net income |
|
$ |
57,739 |
|
$ |
45,765 |
|
$ |
33,634 |
|
$ |
32,319 |
|
$ |
51,450 |
Basic earnings per share (2) |
|
$ |
1.96 |
|
$ |
1.55 |
|
$ |
1.14 |
|
$ |
1.02 |
|
$ |
1.64 |
Diluted earnings per share (2) |
|
$ |
1.96 |
|
$ |
1.55 |
|
$ |
1.14 |
|
$ |
1.02 |
|
$ |
1.61 |
Cash dividends paid per share |
|
$ |
0.720 |
|
$ |
0.660 |
|
$ |
0.660 |
|
$ |
0.645 |
|
$ |
0.580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED OPERATING DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of year |
|
|
1,282 |
|
|
1,271 |
|
|
1,281 |
|
|
1,318 |
|
|
1,276 |
Average sales per store (3) |
|
$ |
716,000 |
|
$ |
678,000 |
|
$ |
640,000 |
|
$ |
640,000 |
|
$ |
685,000 |
Average sales per square foot of selling space |
|
$ |
168 |
|
$ |
165 |
|
$ |
162 |
|
$ |
165 |
|
$ |
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments and restricted cash |
|
$ |
234,851 |
|
$ |
200,915 |
|
$ |
144,803 |
|
$ |
114,578 |
|
$ |
123,542 |
Working capital |
|
|
239,228 |
|
|
202,299 |
|
|
164,639 |
|
|
144,114 |
|
|
176,464 |
Total assets |
|
|
522,092 |
|
|
480,990 |
|
|
435,353 |
|
|
420,792 |
|
|
432,322 |
Total stockholders’ equity |
|
|
325,564 |
|
|
291,312 |
|
|
261,813 |
|
|
247,370 |
|
|
276,793 |
___________ |
|
|
|
|
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(1) The fiscal year 2006 contained 53 weeks versus 52 weeks for all other years shown. |
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(2) Per share amounts for 2008 and earlier periods have been retroactively restated for the adoption of guidance related to participating dividends on unvested restricted stock awards. See Note 1 to the Consolidated Financial Statements. |
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(3) Calculated using actual sales volume for stores open for the full year and an estimated annual sales volume for new stores opened during the year. |
19
Management's Discussion and Analysis of Financial Condition and Results of Operations: |
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Results of Operations |
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The table below sets forth certain financial data of the Company expressed as a percentage of retail sales for the years indicated: |
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Fiscal Year Ended |
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January 29, 2011 |
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January 30, 2010 |
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January 31, 2009 |
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Retail sales |
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100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
|||
Other income |
|
1.3 |
|
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1.4 |
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1.4 |
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Total revenues |
|
101.3 |
|
|
101.4 |
|
|
101.4 |
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|||
Cost of goods sold |
|
61.9 |
|
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63.3 |
|
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66.5 |
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|||
Selling, general and administrative |
|
27.5 |
|
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28.2 |
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26.9 |
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|||
Depreciation |
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2.4 |
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2.5 |
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2.7 |
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Interest and other income |
|
(0.4) |
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(0.5) |
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(0.9) |
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Income before income taxes |
|
9.9 |
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7.9 |
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6.2 |
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Net income |
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6.3 |
% |
|
5.2 |
% |
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4.0 |
% |
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Fiscal 2010 Compared to Fiscal 2009
Retail sales increased by 4.8% to $913.9 million in fiscal 2010 compared to $872.1 million in fiscal 2009. The increase in retail sales in fiscal 2010 was largely attributable to sales from store development and same store sales improvement. Same store sales increased 3% from fiscal 2009. Same store sales includes stores that have been open more than 15 months. Stores that have been relocated or expanded are also included in the same store sales calculation after they have been open more than 15 months. The method of calculating same store sales varies across the retail industry. As a result, our same store sales calculation may not be comparable to similarly titled measures reported by other companies. Total revenues, comprised of retail sales and other income (principally finance charges and late fees on customer accounts receivable and layaway fees), increased by 4.7% to $925.5 million in fiscal 2010 compared to $884.0 million in fiscal 2009. The Company operated 1,282 stores at January 29, 2011 compared to 1,271 stores operated at January 30, 2010.
In fiscal 2010, the Company opened 37 new stores, relocated five stores and closed 26 stores.
Other income in total, as included in total revenues in fiscal 2010, decreased slightly to $11.6 million from $11.9 million in fiscal 2009. The decrease resulted primarily from lower credit revenue and finance charges, partially offset by an increase in layaway charges.
Credit revenue of $8.5 million represented .9% of total revenue in fiscal 2010, a decrease compared to 2009 credit revenue of $9.4 million or 1.1% of total revenue. The slight decrease in credit revenue was primarily due to reductions in finance and late charge income as a result of lower accounts receivable balances and regulatory changes. 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 $5.4 million in fiscal 2010 compared to $6.6 million in fiscal 2009. The decrease in these expenses was principally due to a reduction in postage expense and bad debt expense of $906,000. See Note 15 of the Consolidated Financial Statements for a schedule of credit-related expenses. Total segment credit income before taxes increased $.2 million from $2.9 million in 2009 to $3.1 million in 2010 due to a decrease in related operating expenses. Total credit income of $3.1 million in 2010 represented 3.4% of total income before taxes of $90.8 million compared to total credit income of $2.9 million in 2009 which represented 4.2% of 2009 total income before taxes.
Cost of goods sold was $565.7 million, or 61.9% of retail sales, in fiscal 2010 compared to $552.0 million, or 63.3% of retail sales, in fiscal 2009. The decrease in cost of goods sold as a percent of retail sales resulted primarily from lower procurement costs and reduced markdowns. 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 8.8% to $348.2 million in fiscal 2010 from $320.1 million in fiscal 2009. Gross margin as presented may not be comparable to that of other companies.
20
Selling, general and administrative expenses (SG&A), which primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts were $251.1 million in fiscal 2010 compared to $245.5 million in fiscal 2009, an increase of 2.3%. As a percent of retail sales, SG&A was 27.5% compared to 28.2% in the prior year. The overall dollar increase in SG&A resulted primarily from an increase in salary expenses driven by store development and workers’ compensation expense, partially offset by a reduction in store closing costs.
Depreciation expense was $21.8 million in both fiscal 2010 and fiscal 2009. Depreciation expense was flat from period to period because the Company’s store count and related investments in store development, as well as its information technology investments were both relatively stable.
Interest and other income was $4.0 million in fiscal 2010 compared to $4.3 million in fiscal 2009. The decrease was due to lower interest income due to reduced interest rates. See Note 2 to the Consolidated Financial Statements for further details.
Income tax expense was $33.1 million, or 3.6% of retail sales in fiscal 2010 compared to $23.1 million, or 2.7% of retail sales in fiscal 2009. The increase resulted from higher pre-tax income in conjunction with an increase in the effective tax rate. The effective tax rate was 36.4% in fiscal 2010 compared to 33.6% in fiscal 2009 primarily as a result of the favorable resolution of various state income tax matters in the prior year.
Fiscal 2009 Compared to Fiscal 2008
Retail sales increased by 3.1% to $872.1 million in fiscal 2009 compared to $845.7 million in fiscal 2008 which was primarily attributable to an increase in comparable store sales and sales from store development. Comparable store sales increased 1% in fiscal 2009. Total revenues, comprised of retail sales and other income (principally finance charges and late fees on customer accounts receivable and layaway fees), increased by 3.1% to $884.0 million in fiscal 2009 compared to $857.7 million in fiscal 2008. The Company operated 1,271 stores at January 30, 2010 compared to 1,281 stores operated at January 31, 2009.
In fiscal 2009, the Company opened 35 new stores, relocated one store and closed 45 stores.
Other income in total, as included in total revenues in fiscal 2009, decreased slightly to $11.9 million from $12.0 million in fiscal 2008. The decrease resulted primarily from lower credit revenue and finance charges offset by an increase in layaway service charges.
Credit segment revenue of $9.4 million represented 1.1% of total revenue in fiscal 2009 compared to 2008 credit revenue of $10.1 million or 1.2% of total revenue. The decrease in credit revenue was primarily due to reductions in finance and late charge income as a result of lower accounts receivable balances. 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 $6.6 million in fiscal 2009 compared to $7.0 million in fiscal 2008. The decrease in these expenses was principally due to a decrease in late fee reserves of $0.5 million. See Note 15 of the Consolidated Financial Statements for a schedule of credit related expenses. Total segment credit income before taxes decreased $0.2 million from $3.1 million in 2008 to $2.9 million in 2009 due to decreased finance charge income offset by a decrease in bad debt expense. Total credit income of $2.9 million in 2009 represented 4.2% of total income before taxes of $68.9 million compared to total credit income of $3.1 million in 2008 which represented 5.9% of 2008 total income before taxes.
21
Cost of goods sold was $552.0 million, or 63.3% of retail sales, in fiscal 2009 compared to $562.1 million, or 66.5% of retail sales, in fiscal 2008. The decrease in cost of goods sold as a percent of retail sales resulted primarily from lower occupancy costs, freight charges and markdowns. The decrease in markdowns was primarily attributable to inventory management and higher sell throughs of regular priced merchandise. Total gross margin dollars (retail sales less cost of goods sold) increased by 12.9% to $320.1 million in fiscal 2009 from $283.6 million in fiscal 2008. Gross margin as presented may not be comparable to that of other companies.
Selling, general and administrative expenses (SG&A), which primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts were $245.5 million in fiscal 2009 compared to $227.6 million in fiscal 2008, an increase of 7.9%. As a percent of retail sales, SG&A was 28.2% compared to 26.9% in the prior year. The overall dollar increase in SG&A resulted primarily from an increase in incentive based compensation expenses, payroll and legal reserves partially offset by a reduction in workers’ compensation expense and the costs associated with the closure of underperforming stores from fiscal 2008.
Depreciation expense was $21.8 million in fiscal 2009 compared to $22.6 million in fiscal 2008. Depreciation expense was flat from period to period because the Company’s store count and related investments in store development, as well as its information technology investments were both relatively stable.
Interest and other income was $4.3 million in fiscal 2009 compared to $7.2 million in fiscal 2008. The decrease was due to lower interest income due to reduced interest rates. See Note 2 to the Consolidated Financial Statements for details.
Income tax expense was $23.1 million or 2.7% of retail sales in fiscal 2009 compared to $19.0 million or 2.2% of retail sales in fiscal 2008. The increase resulted from higher pre-tax income, partially offset by a decrease in the effective tax rate. The effective tax rate was 33.6% in fiscal 2009 and 36.1% in fiscal 2008 due to non-recurring settlements of various state audits resulting in reversals of certain income tax reserves for uncertain tax positions.
Off-Balance Sheet Arrangements
Other than operating leases in the ordinary course of business, the Company is not a party to any off-balance sheet arrangements.
Critical Accounting Policies
The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. 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 in the United States (GAAP) 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, shrinkage, uncertain tax positions, and calculation of potential asset impairment.
22
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable and records an allowance for doubtful accounts based on estimates of actual write-offs and the accounts receivable aging. The allowance is reviewed for adequacy and adjusted, as necessary, on a quarterly basis. The Company also provides for estimated uncollectible late fees charged based on historical write-offs. The Company’s financial results can be significantly impacted by changes in bad debt write-off experience and the aging of the accounts receivable portfolio.
Merchandise Inventories
The Company’s inventory is valued using the retail method of accounting and is stated at the lower of cost (first-in, first-out method) or market. Under the retail inventory method, the valuation of inventory at cost and resulting gross margin are calculated by applying an average cost to retail ratio to the retail value of inventory. The retail inventory method is an averaging method that has been widely used in the retail industry. Inherent in the retail method are certain significant estimates, including initial merchandise markup, markdowns and shrinkage, which can significantly impact the ending inventory valuation at cost and the resulting gross margins. Physical inventories are conducted throughout the year to calculate actual shrinkage and inventory on hand. Estimates based on actual shrinkage results are used to estimate inventory shrinkage, which is accrued for the period between the last physical inventory and the financial reporting date. The Company regularly reviews its inventory levels to identify slow moving merchandise and uses markdowns to clear slow moving inventory. The general economic environment for retail apparel sales could result in an increase in the level of markdowns, which would result in lower inventory values and increases to cost of goods sold as a percentage of net sales in future periods. Management makes estimates regarding markdowns based on inventory levels on hand and customer demand, which may impact inventory valuations. Markdown exposure with respect to inventories on hand is limited due to the fact that seasonal merchandise is not carried forward. Historically, actual results have not significantly deviated from those determined using the estimates described above.
Effective with the first quarter of 2011, the Company has elected to change its inventory valuation method from the retail method to the weighted-average cost method.
Lease Accounting
The Company recognizes rent expense on a straight-line basis over the lease term as defined in ASC 840 - Leases. Our lease agreements generally provide for scheduled rent increases during the lease term or rent holidays, including rental payments commencing at a date other than the date of initial occupancy. We include any rent escalation and rent holidays in our straight-line rent expense. In addition, we record landlord allowances for normal tenant improvements as deferred rent, which is included in other noncurrent liabilities in the consolidated balance sheets. This deferred rent is amortized over the lease term as a reduction of rent expense. Also, leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the related lease term. See Note 1 to the Consolidated Financial Statements for further information on the Company’s accounting for its leases.
Impairment of Long-Lived Assets
The Company primarily invests in property and equipment in connection with the opening and remodeling of stores and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its assets, recording an impairment charge, if necessary, when the Company decides to close the store or otherwise determines that future estimated undiscounted cash flows associated with those assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s historical operating results and cash flows, estimated future sales growth, real estate development in the area and perceived local market conditions that can be difficult to predict and may be subject to change. In addition, the Company regularly evaluates its computer-related and other long-lived assets and may accelerate depreciation over the revised useful life if the asset is expected to be replaced or has limited future value. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period.
23
Insurance Liabilities
The Company is primarily self-insured for health care, workers’ compensation and general liability costs. These costs are significant primarily due to the large number of the Company’s retail locations and associates. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. The Company also uses information provided by outside actuaries with respect to workers’ compensation and general liability claims. If the underlying facts and circumstances of the claims change or the historical experience upon which insurance provisions are recorded is not indicative of future trends, then the Company may be required to make adjustments to the provision for insurance costs that could be material to the Company’s reported financial condition and results of operations. Historically, actual results have not significantly deviated from estimates.
Uncertain Tax Positions
The Company records liabilities for uncertain tax positions principally related to state income taxes as of the balance sheet date. These liabilities reflect the Company’s best estimate of its ultimate income tax liability based on the tax codes, regulations, and pronouncements of the jurisdictions in which we do business. Estimating our ultimate tax liability involves significant judgments regarding the application of complex tax regulations across many jurisdictions. Despite the Company’s belief that the estimates and judgments are reasonable, differences between the estimated and actual tax liabilities can and do exist from time to time. These differences may arise from settlements of tax audits, expiration of the statute of limitations, or the evolution and application of the various jurisdictional tax codes and regulations. Any differences will be recorded in the period in which they become known and could have a material effect on the results of operations in the period the adjustment is recorded.
Revenue Recognition
While the Company’s recognition of revenue is predominantly derived from routine retail transactions and does not involve significant judgment, revenue recognition represents an important accounting policy of the Company. As discussed in Note 1 to the Consolidated Financial Statements, the Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales are also recorded when the customer takes possession of the merchandise. Gift cards and layaway sales are recorded as deferred revenue until they are redeemed or forfeited. Gift cards do not have expiration dates. A provision is made for estimated product returns based on sales volumes and the Company’s experience; actual returns have not varied materially from amounts provided historically.
24
The Company recognizes income on unredeemed gift cards (“gift card breakage”) as a component of other income. Gift card breakage is determined after 60 months when the likelihood of the remaining balances being redeemed is remote based on our historical redemption data and there is no legal obligation to remit the remaining balances to relevant jurisdictions. Gift card breakage income is recognized on a quarterly basis and is not expected to be material.
Credit revenue on the Company’s private label credit card portfolio is recognized as earned under the interest method. Late fees are recognized as earned, less provisions for estimated uncollectible fees.
Liquidity, Capital Resources and Market Risk
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during fiscal 2010 was $79.5 million as compared to $84.7 million in fiscal 2009. These amounts have enabled the Company to fund its regular operating needs, capital expenditure program and cash dividend payments. In addition, the Company maintains $35.0 million of unsecured revolving credit facilities for short-term financing of seasonal cash needs, none of which was outstanding at January 29, 2011.
Cash provided by operating activities for these periods was primarily generated by earnings adjusted for depreciation, deferred taxes, and changes in working capital. The decrease of $5.2 million for fiscal 2010 over fiscal 2009 is primarily due to an increase in merchandise inventories offset by an increase in accounts payable, accrued expenses, net income and deferred income taxes.
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 proposed capital expenditures, dividends and other operating requirements for fiscal 2011 and for the foreseeable future.
At January 29, 2011, the Company had working capital of $239.2 million compared to $202.3 million at January 30, 2010. Additionally, the Company had $2.4 million and $2.3 million invested in privately managed investment funds and other miscellaneous equities for fiscal years 2010 and 2009, respectively, which are reported under Other assets in the Consolidated Balance Sheets.
At January 29, 2011, the Company had an unsecured revolving credit agreement, which provided 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 January 29, 2011. There were no borrowings outstanding under this credit facility during the fiscal year ended January 29, 2011 or the fiscal year ended January 30, 2010.
The Company had approximately $7.2 million and $8.2 million at January 29, 2011 and January 30, 2010, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
Expenditures for property and equipment totaled $19.6 million, $10.0 million and $19.4 million in fiscal 2010, 2009 and 2008, respectively. The expenditures for fiscal 2010 were primarily for store development and investments in new technology. In fiscal 2011, the Company is planning to invest approximately $32.3 million in capital expenditures. This includes expenditures to open 10 new Cato stores, 34 new It’s Fashion Metro stores including the conversion of up to 17 It’s Fashion stores to It’s Fashion Metro stores, 10 new Versona Accessories stores and the relocation of six Cato stores. In addition, the Company plans to remodel 10 stores and has planned for additional investments in technology to be implemented over the next 12 months.
25
Net cash used in investing activities totaled $55.7 million for fiscal 2010 compared to $58.1 million used for the comparable period of 2009. The decrease was due primarily to the change in short-term investments and partially offset by an increase in expenditures for property and equipment.
On May 27, 2010, the Board of Directors increased the quarterly dividend by 12% from $.165 per share to $.185 per share, or an annualized rate of $.74 per share.
The Company does not use derivative financial instruments.
The following tables set forth information regarding the Company’s financial assets that are measured at fair value ($ in thousands) as of January 29, 2011 and January 30, 2010.
|
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Quoted |
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|
|
|
|
|
|
|
|
Prices in |
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|
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
||
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|||
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|||
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|||
|
|
January 29, |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
||
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|||
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|||
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|||
|
|
January 30, |
|
|
|
|
|
|
|
|
|
|
Description |
|
2010 |
|
Level 1 |
|
Level 2(A) |
|
Level 3 |
||||
|
|
|
|
|
|
|
||||||
State/Municipal Bonds |
|
$ |
76,056 |
|
$ |
|
|
$ |
76,056 |
|
$ |
|
Corporate Bonds |
|
|
8,989 |
|
|
|
|
|
8,989 |
|
|
|
Auction Rate Securities (ARS) |
|
|
3,450 |
|
|
|
|
|
|
|
|
3,450 |
Variable Rate Demand Notes (VRDN) |
|
|
65,382 |
|
|
65,382 |
|
|
|
|
|
|
Privately Managed Funds |
|
|
1,940 |
|
|
|
|
|
|
|
|
1,940 |
Corporate Equities |
|
|
407 |
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,224 |
|
$ |
65,789 |
|
$ |
85,045 |
|
$ |
5,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) The state/municipal bonds were reclassed to Level 2 upon further interpretation. |
|
|
|
26
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 January 29, 2011 and January 30, 2010. The underlying securities have contractual maturities which generally range from 3 days to 30 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 in the accompanying Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in accumulated other comprehensive income.
Additionally, at 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 Consolidated Balance Sheets. At January 30, 2010, the Company had $1.9 million of privately managed funds, $0.4 million of corporate equities, and a single ARS of $3.5 million, all of which are recorded within Other assets in the 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. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors.
The Company’s failed ARS is measured at fair value using Level 3 inputs. Because 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’s privately managed funds consist of two types of 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.
27
The following tables summarize the change in the fair value of the Company’s financial assets measured using Level 3 inputs during fiscal 2010 and fiscal 2009 ($ in thousands):
|
|
Fair Value Measurements Using Significant |
|||||||
|
|
Unobservable Inputs (Level 3) |
|||||||
|
|
Available-For-Sale |
|
Other |
|
|
|
||
|
|
Debt Securities |
|
Investments |
|
|
|
||
|
|
ARS |
|
Private Equity |
|
Total |
|||
Beginning Balance at January 30, 2010 |
|
$ |
3,450 |
|
$ |
1,940 |
|
$ |
5,390 |
Transfers into Level 3 |
|
|
|
|
|
|
|
|
|
Total gains or (losses) |
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets) |
|
|
- |
|
|
(15) |
|
|
(15) |
Included in other comprehensive income |
|
|
- |
|
|
- |
|
|
- |
Ending Balance at January 29, 2011 |
|
$ |
3,450 |
|
$ |
1,925 |
|
$ |
5,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|||||||
|
|
Unobservable Inputs (Level 3) |
|||||||
|
|
Available-For-Sale |
|
Other |
|
|
|
||
|
|
Debt Securities |
|
Investments |
|
|
|
||
|
|
ARS |
|
Private Equity |
|
Total |
|||
Beginning Balance at January 31, 2009 |
|
$ |
- |
|
$ |
1,955 |
|
$ |
1,955 |
Transfers into Level 3 |
|
|
3,450 |
|
|
- |
|
|
3,450 |
Total gains or (losses) |
|
|
- |
|
|
- |
|
|
- |
Included in earnings (or changes in net assets) |
|
|
- |
|
|
(15) |
|
|
(15) |
Included in other comprehensive income |
|
|
- |
|
|
- |
|
|
- |
Ending Balance at January 30, 2010 |
|
$ |
3,450 |
|
$ |
1,940 |
|
$ |
5,390 |
The following table shows the Company's obligations and commitments as of January 29, 2011, to make future payments under noncalcellable contractual obligations (in thousands): |
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due During One Year Fiscal Period Ending |
||||||||||||||||||
Contractual Obligations |
|
Total |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
Thereafter |
|||||||
Merchandise letters of credit |
|
$ |
7,179 |
|
$ |
7,179 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
Operating leases |
|
|
143,315 |
|
|
56,943 |
|
|
40,041 |
|
|
25,664 |
|
|
12,792 |
|
|
7,395 |
|
|
480 |
Total Contractual Obligations |
|
$ |
150,494 |
|
$ |
64,122 |
|
$ |
40,041 |
|
$ |
25,664 |
|
$ |
12,792 |
|
$ |
7,395 |
|
$ |
480 |
____________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In addition to the amounts shown in the table above, $8.3 million of unrecognized tax benefits have been recorded as liabilities in accordance with ASC 740 and we are uncertain if or when such amounts may be settled. See Note 13, Income Taxes, of the Consolidated Financial Statements for additional information.
Recent Accounting Pronouncements
Effective July 1, 2009, the FASB’s Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States. The historical GAAP hierarchy was eliminated, and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company’s accounting policies were not affected by the conversion to ASC.
28
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU was effective for the Company on January 31, 2010, and did not have a material impact on the Company’s disclosures.
The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management.
29
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
|
|
Page |
||
|
|
|
||
Report of Independent Registered Public Accounting Firm........................................................................... |
|
|
31 |
|
|
|
|
|
|
Consolidated Statements of Income and
Comprehensive Income for the fiscal years ended |
|
|
32 |
|
|
|
|
|
|
Consolidated Balance Sheets at January 29, 2011 and January 30, 2010 ...................................................... |
|
|
33 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009........................................................................................................................................ |
|
|
34 |
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009.......................................................................................................... |
|
|
35 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements..................................................................................................... |
|
|
36 |
|
|
|
|
|
|
Schedule II — Valuation and
Qualifying Accounts for the fiscal years ended January 29, 2011, |
|
|
S-2 |
|
30
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
The Cato Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Cato Corporation and its subsidiaries at January 29, 2011 and January 30, 2010, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 29, 2011
31
THE CATO CORPORATION
COMPREHENSIVE INCOME |
||||||||
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|||||||
|
January 29, |
|
January 30, |
|
January 31, |
|||
|
2011 |
|
2010 |
|
2009 |
|||
|
(Dollars in thousands, except per share data) |
|||||||
REVENUES |
|
|
|
|
|
|
|
|
Retail sales |
$ |
913,922 |
|
$ |
872,132 |
|
$ |
845,676 |
Other income (principally finance charges, late fees and layaway |
|
|
|
|
|
|
|
|
charges) |
|
11,606 |
|
|
11,863 |
|
|
12,042 |
Total revenues |
|
925,528 |
|
|
883,995 |
|
|
857,718 |
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES, NET |
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation shown below) |
|
565,710 |
|
|
552,016 |
|
|
562,056 |
Selling, general and administrative (exclusive of depreciation shown |
|
|
|
|
|
|
|
|
below) |
|
251,121 |
|
|
245,483 |
|
|
227,645 |
Depreciation |
|
21,822 |
|
|
21,829 |
|
|
22,572 |
Interest expense |
|
37 |
|
|
66 |
|
|
53 |
Interest and other income |
|
(3,971) |
|
|
(4,313) |
|
|
(7,218) |
|
|
834,719 |
|
|
815,081 |
|
|
805,108 |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
90,809 |
|
|
68,914 |
|
|
52,610 |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
33,070 |
|
|
23,149 |
|
|
18,976 |
|
|
|
|
|
|
|
|
|
Net income |
$ |
57,739 |
|
$ |
45,765 |
|
$ |
33,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
$ |
1.96 |
|
$ |
1.55 |
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
$ |
1.96 |
|
$ |
1.55 |
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
Dividends per share |
$ |
0.720 |
|
$ |
0.660 |
|
$ |
0.660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
Net income |
$ |
57,739 |
|
$ |
45,765 |
|
$ |
33,634 |
Unrealized gains (losses) on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
deferred income tax liability or benefit |
|
(258) |
|
|
121 |
|
|
(296) |
|
|
|
|
|
|
|
|
|
Comprehensive income |
$ |
57,481 |
|
$ |
45,886 |
|
$ |
33,338 |
See notes to consolidated financial statements.
32
THE CATO CORPORATION
|
|
|
January 29, |
|
January 30, |
||
|
|
|
2011 |
|
2010 |
||
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
||||
ASSETS |
|||||||
Current Assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
$ |
48,630 |
|
$ |
50,385 |
|
|
Short-term investments |
|
181,395 |
|
|
147,955 |
|
|
Restricted cash and short-term investments |
|
4,826 |
|
|
2,575 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $2,985 at |
|
|
|
|
|
|
|
|
January 29, 2011 and $3,274 at January 30, 2010 |
|
39,703 |
|
|
40,154 |
|
Merchandise inventories |
|
132,020 |
|
|
118,628 |
|
|
Deferred income taxes |
|
5,001 |
|
|
7,812 |
|
|
Prepaid expenses |
|
3,199 |
|
|
3,258 |
|
|
Total Current Assets |
|
414,774 |
|
|
370,767 |
|
Property and equipment - net |
|
99,773 |
|
|
102,769 |
||
Other assets |
|
7,545 |
|
|
7,454 |
||
|
|
Total Assets |
$ |
522,092 |
|
$ |
480,990 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current Liabilities: |
|
|
|
|
|
||
|
Accounts payable |
$ |
105,526 |
|
$ |
103,627 |
|
|
Accrued expenses |
|
35,318 |
|
|
31,615 |
|
|
Accrued bonus and benefits |
|
22,841 |
|
|
22,286 |
|
|
Accrued income taxes |
|
11,861 |
|
|
10,940 |
|
|
Total Current Liabilities |
|
175,546 |
|
|
168,468 |
|
Deferred income taxes |
|
5,695 |
|
|
4,087 |
||
Other noncurrent liabilities (primarily deferred rent) |
|
15,287 |
|
|
17,123 |
||
|
|
|
|
|
|
|
|
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; |
|
|
|
|
|
|
|
|
27,758,123 and 27,842,587 shares issued at January 29, 2011 and |
|
|
|
|
|
|
|
January 30, 2010, respectively |
|
925 |
|
|
928 |
|
Convertible Class B common stock, $.33 par value per share, 15,000,000 shares |
|
|
|
|
|
|
|
|
authorized; 1,743,525 shares issued at January 29, 2011 and January 30, 2010 |
|
58 |
|
|
58 |
|
Additional paid-in capital |
|
68,537 |
|
|
64,706 |
|
|
Retained earnings |
|
255,768 |
|
|
225,086 |
|
|
Accumulated other comprehensive income |
|
276 |
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity |
|
325,564 |
|
|
291,312 |
|
|
Total Liabilities and Stockholders' Equity |
$ |
522,092 |
|
$ |
480,990 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
33
THE CATO CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
|
January 31, |
|||
|
|
2011 |
|
2010 |
|
2009 |
|||
|
|
(Dollars in thousands) |
|||||||
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
57,739 |
|
$ |
45,765 |
|
$ |
33,634 |
Adjustments to reconcile net income to net cash provided by operating |
|
|
|
|
|
|
|
|
|
activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
21,822 |
|
|
21,829 |
|
|
22,572 |
Provision for doubtful accounts |
|
|
2,827 |
|
|
3,643 |
|
|
3,825 |
Share-based compensation |
|
|
2,341 |
|
|
2,063 |
|
|
2,208 |
Excess tax benefits from share-based compensation |
|
|
(468) |
|
|
(201) |
|
|
(66) |
Deferred income taxes |
|
|
4,531 |
|
|
113 |
|
|
1,175 |
Loss on disposal of property and equipment |
|
|
733 |
|
|
1,624 |
|
|
3,799 |
Changes in operating assets and liabilities which provided (used) cash: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,376) |
|
|
339 |
|
|
(2,679) |
Merchandise inventories |
|
|
(13,392) |
|
|
(6,338) |
|
|
6,389 |
Prepaid and other assets |
|
|
10 |
|
|
1,072 |
|
|
848 |
Accrued income taxes |
|
|
1,389 |
|
|
(365) |
|
|
3,644 |
Accounts payable, accrued expenses and other liabilities |
|
|
4,320 |
|
|
15,145 |
|
|
(3,782) |
Net cash provided by operating activities |
|
|
79,476 |
|
|
84,689 |
|
|
71,567 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment |
|
|
(19,559) |
|
|
(9,960) |
|
|
(19,443) |
Purchases of short-term investments |
|
|
(144,630) |
|
|
(162,957) |
|
|
(169,979) |
Sales of short-term investments |
|
|
110,778 |
|
|
108,287 |
|
|
160,136 |
Change in restricted cash and short-term investments |
|
|
(2,251) |
|
|
6,514 |
|
|
- |
Net cash used in investing activities |
|
|
(55,662) |
|
|
(58,116) |
|
|
(29,286) |
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Change in cash overdrafts included in accounts payable |
|
|
- |
|
|
- |
|
|
(500) |
Dividends paid |
|
|
(21,216) |
|
|
(19,481) |
|
|
(19,389) |
Repurchase of stock |
|
|
(5,863) |
|
|
(49) |
|
|
(2,435) |
Proceeds from employee stock purchase plan |
|
|
436 |
|
|
412 |
|
|
432 |
Excess tax benefits from share-based compensation |
|
|
468 |
|
|
201 |
|
|
66 |
Proceeds from stock options exercised |
|
|
606 |
|
|
467 |
|
|
224 |
Net cash used in financing activities |
|
|
(25,569) |
|
|
(18,450) |
|
|
(21,602) |
Net increase (decrease) in cash and cash equivalents |
|
|
(1,755) |
|
|
8,123 |
|
|
20,679 |
Cash and cash equivalents at beginning of year |
|
|
50,385 |
|
|
42,262 |
|
|
21,583 |
Cash and cash equivalents at end of year |
|
$ |
$48,630 |
|
$ |
$50,385 |
|
$ |
$42,262 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
34
THE CATO CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
||
|
Class A |
|
Class B |
|
Additional |
|
|
|
|
Other |
|
|
|
|
Total |
|||||
|
Common |
|
Common |
|
Pain-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
Stockholders' |
|||||||
|
Stock |
|
Stock |
|
Capital |
|
Earnings |
|
Income |
|
Stock |
|
Equity |
|||||||
|
(Dollars in thousands) |
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — February 2, 2008 |
$ |
1,204 |
|
$ |
58 |
|
$ |
58,685 |
|
$ |
340,088 |
|
$ |
709 |
|
$ |
(153,374) |
|
$ |
247,370 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
33,364 |
|
|
|
|
|
|
|
|
33,634 |
Unrealized losses on available-for-sale securities, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred income tax benefit of ($138) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(296) |
|
|
|
|
|
(296) |
Dividends paid ($.66 per share) |
|
|
|
|
|
|
|
|
|
|
(19,389) |
|
|
|
|
|
|
|
|
(19,389) |
Class A common stock sold through employee stock purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan — 32,830 shares |
|
1 |
|
|
|
|
|
505 |
|
|
|
|
|
|
|
|
|
|
|
506 |
Class A common stock sold through stock option plans — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,875 shares |
|
1 |
|
|
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
315 |
Class A common stock issued through restricted stock grant plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,953 shares |
|
4 |
|
|
|
|
|
2,038 |
|
|
|
|
|
|
|
|
|
|
|
2,042 |
Windfall tax benefit from equity compensation plans |
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
66 |
Repurchase of treasury shares – 198,718 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,435) |
|
|
(2,435) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — January 31, 2009 |
|
1,210 |
|
|
58 |
|
|
61,608 |
|
|
354,333 |
|
|
413 |
|
|
(155,809) |
|
|
261,813 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
45,765 |
|
|
|
|
|
|
|
|
45,765 |
Unrealized gains on available-for-sale securities, net of deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax liability of $37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
|
|
121 |
Dividends paid ($.66 per share) |
|
|
|
|
|
|
|
|
|
|
(19,481) |
|
|
|
|
|
|
|
|
(19,481) |
Class A common stock sold through employee stock purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan — 27,051 shares |
|
1 |
|
|
|
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
484 |
Class A common stock sold through stock option plans — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,600 shares |
|
2 |
|
|
|
|
|
535 |
|
|
|
|
|
|
|
|
|
|
|
537 |
Class A common stock issued through restricted stock grant plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,916 shares |
|
4 |
|
|
|
|
|
1,879 |
|
|
38 |
|
|
|
|
|
|
|
|
1,921 |
Windfall tax benefit from equity compensation plans |
|
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
201 |
Repurchase of treasury shares – 2,569 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49) |
|
|
(49) |
Retirement of treasury shares – 8,662,902 shares |
|
(289) |
|
|
|
|
|
|
|
|
(155,569) |
|
|
|
|
|
155,858 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — January 30, 2010 |
|
928 |
|
|
58 |
|
|
64,706 |
|
|
225,086 |
|
|
534 |
|
|
- |
|
|
291,312 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
57,739 |
|
|
|
|
|
|
|
|
57,739 |
Unrealized losses on available-for-sale securities, net of deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax benefit of ($112) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(258) |
|
|
|
|
|
(258) |
Dividends paid ($.72 per share) |
|
|
|
|
|
|
|
|
|
|
(21,216) |
|
|
|
|
|
|
|
|
(21,216) |
Class A common stock sold through employee stock purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan — 23,849 shares |
|
1 |
|
|
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
513 |
Class A common stock sold through stock option plans — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,675 shares |
|
1 |
|
|
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
740 |
Class A common stock issued through restricted stock grant plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,291 shares |
|
4 |
|
|
|
|
|
2,299 |
|
|
13 |
|
|
|
|
|
|
|
|
2,316 |
Windfall tax benefit from equity compensation plans |
|
|
|
|
|
|
|
281 |
|
|
|
|
|
|
|
|
|
|
|
281 |
Repurchase of treasury shares – 260,277 shares |
|
(9) |
|
|
|
|
|
|
|
|
(5,854) |
|
|
|
|
|
|
|
|
(5,863) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — January 29, 2011 |
$ |
925 |
|
$ |
58 |
|
$ |
68,537 |
|
$ |
255,768 |
|
$ |
276 |
|
$ |
- |
|
$ |
325,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Principles of Consolidation: The consolidated financial statements include the accounts of The Cato Corporation and its wholly-owned subsidiaries (“the Company”). All significant intercompany accounts and transactions have been eliminated.
Description of Business and Fiscal Year: The Company has two reportable segments — the operation of a fashion specialty stores segment (Retail Segment) and a credit card segment (Credit Segment). The apparel specialty stores operate under the names “Cato,” “Cato Fashions,” “Cato Plus,” “It’s Fashion” and “It’s Fashion Metro” and are located primarily in strip shopping centers principally in the southeastern United States. The Company’s fiscal year ends on the Saturday nearest January 31.
Use of Estimates: The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s financial statements include the allowance for doubtful accounts receivable, reserves relating to self-insured health insurance, workers’ compensation liabilities, general and auto insurance liabilities, reserves for inventory markdowns, inventory shrinkage, uncertain tax positions, and the calculation of asset impairment.
Cash and Cash Equivalents and Short-Term Investments: 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. See Note 4 for the Company’s fair value measurements.
The Company’s short-term investments are all classified as available-for-sale. As they are available for current operations, they are classified on the 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 the fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of Interest and other income in the accompanying Consolidated Statements of Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in Interest and other income.
In addition, the Company has $4.8 million in escrow at January 29, 2011 as security and collateral for administration of the Company’s self-insured workers’ compensation and general liability coverage which is reported as Restricted cash and short-term investments on the Consolidated Balance Sheets.
Concentration of Credit Risk: Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash equivalents and accounts receivable. The Company places its cash equivalents with high credit qualified institutions and, by practice, limits the amount of credit exposure to any one institution. Concentrations of credit risks with respect to accounts receivable are limited due to the dispersion across different geographies of the Company’s customer base.
36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Supplemental Cash Flow Information: Income tax payments, net of refunds received, for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009 were approximately $27,615,000, $23,753,000 and $13,368,000, respectively.
Inventories: Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as determined by the retail method. Effective with the first quarter of 2011, the Company has elected to change its inventory valuation method from the retail method to the weighted-average cost method.
Property and Equipment: Property and equipment are recorded at cost. Maintenance and repairs are expensed to operations as incurred; renewals and betterments are capitalized. Depreciation is determined on the straight-line method over the estimated useful lives of the related assets excluding leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful life or lease term. For leases with renewal periods at the Company’s option, the Company generally uses the original lease term plus reasonably assured renewal option periods (generally one five year option period) to determine estimated useful lives. Typical estimated useful lives are as follows:
|
|
|
Estimated |
Classification |
|
|
Useful Lives |
|
|
|
|
Land improvements |
|
|
10 years |
Buildings |
|
|
30 – 40 years |
Leasehold improvements |
|
|
5 – 10 years |
Fixtures and equipment |
|
|
3 – 10 years |
Information Technology equipment and software |
|
|
3 – 10 years |
Impairment of Long-Lived Assets
The Company primarily invests in property and equipment in connection with the opening and remodeling of stores and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its assets, recording an impairment charge, if necessary, when the Company decides to close the store or otherwise determines that future estimated undiscounted cash flows associated with those assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s historical operating results and cash flows, estimated future sales growth, real estate development in the area and perceived local market conditions that can be difficult to predict and may be subject to change. Store asset impairment charges incurred in fiscal 2010, 2009 and 2008 were $351,000, $689,000 and $498,000, respectively. In addition, the Company regularly evaluates its computer-related and other long-lived assets and may accelerate depreciation over the revised useful life if the asset is expected to be replaced or has limited future value. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period.
Leases
The Company determines the classification of leases consistent with ASC 840 - Leases. The Company leases all of its retail stores. Most lease agreements contain construction allowances and rent escalations. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, including renewal periods considered reasonably assured, the Company begins amortization as of the initial possession date which is when the Company enters the space and begins to make improvements in preparation for intended use.
37
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For construction allowances, the Company records a deferred rent liability in “Other noncurrent liabilities” on the Consolidated Balance Sheets and amortizes the deferred rent over the term of the respective lease as a reduction to “Cost of goods sold” on the Consolidated Statements of Income.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases.
Revenue Recognition
The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales are also recorded when the customer takes possession of the merchandise. Gift cards and layaway sales are recorded as deferred revenue until they are redeemed or forfeited. Gift cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales volumes and the Company’s experience; actual returns have not varied materially from amounts provided historically.
In fiscal 2010, 2009 and 2008, the Company recognized $391,000, $302,000 and $287,000, respectively, of income on unredeemed gift cards (“gift card breakage”) as a component of Other income on the Consolidated Statements of Income and Comprehensive Income. Gift card breakage is determined after 60 months when the likelihood of the remaining balances being redeemed is remote based on our historical redemption data and there is no legal obligation to remit the remaining balances to relevant jurisdictions.
Credit revenue on the Company’s private label credit card portfolio is recognized as earned under the interest method. Late fees are recognized as earned, less provisions for estimated uncollectible fees.
Cost of Goods Sold: 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 our buying departments and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Buying, distribution, occupancy and internal transfer costs are treated as period costs and are not capitalized as part of inventory.
Credit Sales: The Company offers its own credit card to customers. All credit activity is performed by the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. Finance income is recognized as earned under the interest method and late charges are recognized in the month in which they are assessed, net of provisions for estimated uncollectible amounts. The Company evaluates the collectability of accounts receivable and records an allowance for doubtful accounts based on the aging of accounts and estimates of actual write-offs.
38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising expense was approximately $6,663,000, $6,406,000 and $6,460,000 for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively.
Stock Repurchase Program: In September 2009, the Company retired all of its shares of treasury stock. The excess of the purchase price over par value of common stock of approximately $155.6 million was charged to retained earnings upon retirement of the treasury stock. Prior to this retirement, the Company repurchased 2,569 shares at a cost of $48,811 for fiscal 2009 and 198,718 shares for approximately $2.4 million for fiscal 2008. For fiscal 2010, the Company purchased and retired 260,000 shares at a cost of $5.9 million with 442,942 shares remaining in open authorizations. In March 2011, subsequent to year-end, the company purchased and retired 110,000 shares for approximately $2.6 million or an average market price per share of $23.48.
Earnings Per Share: ASC 260 - 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 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 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.
39
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
|
|
Fiscal Year Ended |
|||||||
|
|
January 29, |
|
January 30, |
|
January 31, |
|||
|
|
2011 |
|
2010 |
|
2009 |
|||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
57,739 |
|
$ |
45,765 |
|
$ |
33,634 |
Earnings allocated to non-vested equity awards |
|
|
(970) |
|
|
(654) |
|
|
(425) |
Net earnings available to common stockholders |
|
$ |
56,769 |
|
$ |
45,111 |
|
$ |
33,209 |
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
28,985,627 |
|
|
29,036,549 |
|
|
29,065,594 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.96 |
|
$ |
1.55 |
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
57,739 |
|
$ |
45,765 |
|
$ |
33,634 |
Earnings allocated to non-vested equity awards |
|
|
(970) |
|
|
(654) |
|
|
(425) |
Net earnings available to common stockholders |
|
$ |
56,769 |
|
$ |
45,111 |
|
$ |
33,209 |
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
28,985,627 |
|
|
29,036,549 |
|
|
29,065,594 |
Dilutive effect of stock options and restricted stock |
|
|
6,692 |
|
|
18,203 |
|
|
13,095 |
Diluted weighted average common shares outstanding |
|
|
28,992,319 |
|
|
29,054,752 |
|
|
29,078,689 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.96 |
|
$ |
1.55 |
|
$ |
1.14 |
Vendor Allowances: The Company receives certain allowances from vendors primarily related to purchase discounts and markdown and damage allowances. All allowances are reflected in cost of goods sold as earned when the related products are sold. Cash consideration received from a vendor is presumed to be a reduction of the purchase cost of merchandise and is reflected as a reduction of inventory. The Company does not receive cooperative advertising allowances.
Income Taxes: The Company files a consolidated federal income tax return. Income taxes are provided based on the asset and liability method of accounting, whereby deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities.
Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740 when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances.
Store
Opening and Closing Costs: Costs relating to the opening of new stores or
the relocating or
expanding of existing stores are expensed as incurred. A portion of
construction, design, and site selection costs are capitalized to new,
relocated and remodeled stores.
Closed
Store Lease Obligations: At the time stores are closed, provisions are made
for the rentals
required to be paid over the remaining lease terms on a discounted cash flow
basis, reduced by any expected sublease rentals.
40
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Insurance: The Company is self-insured with respect to employee health care, workers’ compensation and general liability. The Company’s self-insurance liabilities are based on the total estimated cost of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. The Company has stop-loss insurance coverage for individual claims in excess of $300,000 for employee healthcare, $350,000 for worker’s compensation and $250,000 for general liability.
Until December 31, 2008, employee health claims were funded through a VEBA trust to which the Company made periodic contributions. Contributions to the VEBA trust were $10,070,000 in fiscal 2008. After December 31, 2008 the VEBA trust was dissolved and since then the Company has directly funded a disbursement account maintained by a third party provider. Contributions to the third party provider account in fiscal 2010 and 2009 were $14,968,000 and $13,898,000, respectively. The health care liability (a component of Accrued expenses on the Consolidated Balance Sheets) was $1,488,000 and $1,584,000, at January 29, 2011 and January 30, 2010, respectively.
The Company paid workers’ compensation and general liability claims of $4,069,000, $3,049,000 and $3,388,000 in fiscal years 2010, 2009 and 2008, respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $6,607,000, $4,003,000 and $4,959,000 in fiscal 2010, 2009 and 2008, respectively. Accrued workers’ compensation and general liabilities (a component of Accrued expenses on the Consolidated Balance Sheets) were $6,519,000 and $4,921,000 at January 29, 2011 and January 30, 2010, respectively. At January 29, 2011 and January 30, 2010, the Company had $0 and $1,700,000, respectively, of standby letters of credit for the benefit of its current workers’ compensation and general liability insurance carrier relating to claims incurred during 2010 and 2009.
Fair Value of Financial Instruments: The Company’s carrying values of financial instruments, such as cash and cash equivalents, approximate their fair values due to their short terms to maturity and/or their variable interest rates.
Stock Based Compensation: The Company records compensation expense associated with restricted stock and other forms of equity compensation in accordance with ASC 718 - Compensation – Stock Compensation. Compensation cost associated with stock awards recognized in all years presented includes: 1) amortization related to the remaining unvested portion of all stock awards based on the grant date fair value and 2) adjustments for the effects of actual forfeitures versus initial estimated forfeitures.
Recent Accounting Pronouncements
Effective July 1, 2009, the FASB’s Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States. The historical GAAP hierarchy was eliminated, and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company’s accounting policies were not affected by the conversion to ASC.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU was effective for the Company on January 31, 2010, and did not have a material impact on the Company’s disclosures.
41
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Interest and Other Income: |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
The components of Interest and other income are shown below (in thousands): |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
|
January 31, |
|||
|
|
|
2011 |
|
2010 |
|
2009 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income |
|
$ |
(15) |
|
$ |
(15) |
|
$ |
(10) |
|
Interest income |
|
|
(1,544) |
|
|
(1,426) |
|
|
(4,617) |
|
Visa/Mastercard claims settlement |
|
|
(26) |
|
|
(414) |
|
|
- |
|
Miscellaneous income |
|
|
(2,308) |
|
|
(2,445) |
|
|
(2,709) |
|
(Gain)/loss on investment sales |
|
|
(78) |
|
|
(13) |
|
|
118 |
|
Interest and other income |
|
$ |
(3,971) |
|
$ |
(4,313) |
|
$ |
(7,218) |
3. Short-Term Investments:
At January 29, 2011, the Company’s investment portfolio was primarily invested in 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 Consolidated Balance Sheets at estimated fair value, with unrealized gains and temporary losses reported net of taxes in accumulated other comprehensive income.
The table below reflects gross accumulated unrealized gains (losses) in short-term investments at January 29, 2011 and January 30, 2010.
|
|
|
January 29, 2011 |
|
|
January 30, 2010 |
||||||||||||
|
|
|
|
|
Unrealized |
|
Estimated |
|
|
|
|
Unrealized |
|
Estimated |
||||
Security Type: |
Cost |
|
Gain/(Loss) |
|
Fair Value |
|
Cost |
|
Gain/(Loss) |
|
Fair Value |
|||||||
Debt securities issued by various |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
states of the United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the states: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With unrealized gain |
$ |
79,461 |
|
$ |
309 |
|
$ |
79,770 |
|
$ |
130,519 |
|
$ |
525 |
|
$ |
131,044 |
|
With unrealized (loss) |
|
67,822 |
|
|
(484) |
|
|
67,338 |
|
|
8,098 |
|
|
(48) |
|
|
8,050 |
Corporate debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With unrealized gain |
|
29,996 |
|
|
274 |
|
|
30,270 |
|
|
7,964 |
|
|
35 |
|
|
7,999 |
|
With unrealized loss |
|
4,027 |
|
|
(10) |
|
|
4,017 |
|
|
863 |
|
|
(1) |
|
|
862 |
Total |
$ |
181,306 |
|
$ |
89 |
|
$ |
181,395 |
|
$ |
147,444 |
|
$ |
511 |
|
$ |
147,955 |
Additionally, the Company had $2.4 million and $2.3 million invested in privately managed investment funds and other miscellaneous equities at January 29, 2011 and January 30, 2010, respectively, which are reported within other noncurrent assets in the Consolidated Balance Sheets.
Accumulated other comprehensive income on the Consolidated Balance Sheets reflects the accumulated unrealized net gains in short-term investments in addition to unrealized gains from equity and restricted cash investments. At January 29, 2011, an unrealized gain from equity investments of $344,000 and a deferred tax benefit of $158,000 was recorded. At January 30, 2010, an unrealized gain from equity investments of $292,000 and a deferred tax benefit of $270,000 was recorded.
42
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As disclosed in Note 2, the Company had realized gains of $78,000 in fiscal 2010, realized gains of $13,000 in fiscal 2009 and realized losses of $118,000 in fiscal 2008 relating to sales of debt and equity securities.
43
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. 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 January 29, 2011 and January 30, 2010.
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|||
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|||
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|||
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|||
|
|
January 29, |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|||
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|||
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|||
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|||
|
|
January 30, |
|
|
|
|
|
|
|
|
|
|
Description |
|
2010 |
|
Level 1 |
|
Level 2(A) |
|
Level 3 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal Bonds |
|
$ |
76,056 |
|
$ |
|
|
$ |
76,056 |
|
|
|
Corporate Bonds |
|
|
8,989 |
|
|
|
|
|
8,989 |
|
|
|
Auction Rate Securities (ARS) |
|
|
3,450 |
|
|
|
|
|
|
|
|
3,450 |
Variable Rate Demand Notes (VRDN) |
|
|
65,382 |
|
|
65,382 |
|
|
|
|
|
|
Privately Managed Funds |
|
|
1,940 |
|
|
|
|
|
|
|
|
1,940 |
Corporate Equities |
|
|
407 |
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,224 |
|
$ |
65,789 |
|
$ |
85,045 |
|
$ |
5,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) The state/municipal bonds were reclassed to Level 2 upon further interpretation. |
|
|
|
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 January 29, 2011 and January 30, 2010. The underlying securities have contractual maturities which generally range from 3 days to 30 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 Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in accumulated other comprehensive income.
44
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, at 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 Consolidated Balance Sheets. At January 30, 2010, the Company had $1.9 million of privately managed funds, $0.4 million of corporate equities, and a single ARS of $3.5 million, all of which are recorded within Other assets in the 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. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors.
The Company’s failed ARS is measured at fair value using Level 3 inputs at each reporting period. Because 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’s privately managed funds consist of two types of 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.
45
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize the change in the fair value of the Company’s financial assets measured using Level 3 inputs during fiscal 2010 and fiscal 2009 ($ in thousands).
|
|
Fair Value Measurements Using Significant |
|||||||
|
|
Unobservable Inputs (Level 3) |
|||||||
|
Available-For-Sale |
|
Other |
|
|
|
|||
|
Debt Securities |
|
Investments |
|
|
|
|||
|
ARS |
|
Private Equity |
|
Total |
||||
Beginning Balance at January 30, 2010 |
$ |
3,450 |
|
$ |
1,940 |
|
$ |
5,390 |
|
Transfers into Level 3 |
|
- |
|
|
- |
|
|
- |
|
Total gains or (losses) |
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets) |
|
- |
|
|
(15) |
|
|
(15) |
|
Included in other comprehensive income |
|
- |
|
|
- |
|
|
- |
|
Ending Balance at January 29, 2011 |
$ |
3,450 |
|
$ |
1,925 |
|
$ |
5,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|||||||
|
|
Unobservable Inputs (Level 3) |
|||||||
|
Available-For-Sale |
|
Other |
|
|
|
|||
|
Debt Securities |
|
Investments |
|
|
|
|||
|
ARS |
|
Private Equity |
|
Total |
||||
Beginning Balance at January 31, 2009 |
$ |
- |
|
$ |
1,955 |
|
$ |
1,955 |
|
Transfers into Level 3 |
|
3,450 |
|
|
- |
|
|
3,450 |
|
Total gains or (losses) |
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets) |
|
- |
|
|
(15) |
|
|
(15) |
|
Included in other comprehensive income |
|
- |
|
|
- |
|
|
- |
|
Ending Balance at January 30, 2010 |
$ |
3,450 |
|
$ |
1,940 |
|
$ |
5,390 |
5. |
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable consist of the following (in thousands): |
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
||
|
|
|
2011 |
|
2010 |
||
|
Customer accounts — principally deferred payment accounts |
|
$ |
35,385 |
|
$ |
38,047 |
|
Miscellaneous trade receivables |
|
|
7,303 |
|
|
5,381 |
|
|
|
|
|
|
|
|
|
Total |
|
|
42,688 |
|
|
43,428 |
|
Less allowance for doubtful accounts |
|
|
2,985 |
|
|
3,274 |
|
|
|
|
|
|
|
|
|
Accounts receivable — net |
|
$ |
39,703 |
|
$ |
40,154 |
Finance charge and late charge revenue on customer deferred payment accounts totaled $8,515,000, $9,405,000 and $10,073,000 for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively, and charges against the allowance for doubtful accounts were approximately $2,827,000, $3,643,000 and $3,825,000 for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively. Expenses relating to the allowance for doubtful accounts are classified as a component of selling, general and administrative expense in the accompanying Consolidated Statements of Income and Comprehensive Income.
46
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. |
Property and Equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment consist of the following (in thousands): |
|
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
|
||
|
|
|
2011 |
|
2010 |
|
||
|
Land and improvements |
|
$ |
4,023 |
|
$ |
3,694 |
|
|
Buildings |
|
|
19,831 |
|
|
19,121 |
|
|
Leasehold improvements |
|
|
61,729 |
|
|
57,960 |
|
|
Fixtures and equipment |
|
|
173,259 |
|
|
166,490 |
|
|
Information technology equipment and software |
|
|
52,851 |
|
|
51,309 |
|
|
Construction in progress |
|
|
1,631 |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
313,324 |
|
|
298,951 |
|
|
Less accumulated depreciation |
|
|
213,551 |
|
|
196,182 |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment — net |
|
$ |
99,773 |
|
$ |
102,769 |
|
|
|
|
|
|
|
|
|
|
|
Construction in progress primarily represents costs related to new store development and investments in new technology. |
|
7. |
Accrued Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses consist of the following (in thousands): |
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
||
|
|
|
2011 |
|
2010 |
||
|
Accrued payroll and related items |
|
$ |
7,138 |
|
$ |
4,854 |
|
Property and other taxes |
|
|
12,063 |
|
|
12,275 |
|
Accrued insurance |
|
|
8,047 |
|
|
6,556 |
|
Other |
|
|
8,070 |
|
|
7,930 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,318 |
|
$ |
31,615 |
8. Financing Arrangements:
At January 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 January 29, 2011. There were no borrowings outstanding under this facility during the fiscal years ended January 29, 2011 or January 30, 2010. Interest is based on LIBOR, which was 0.26% on January 29, 2011.
The Company had approximately $7.2 million and $8.2 million at January 29, 2011 and January 30, 2010, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
9. Stockholders’ Equity:
The holders of Class A Common Stock are entitled to one vote per share, whereas the holders of Class B Common Stock are entitled to ten votes per share. Each share of Class B Common Stock may be converted at any time into one share of Class A Common Stock. Subject to the rights of the holders of any shares of Preferred Stock that may be outstanding at the time, in the event of liquidation, dissolution or winding up of the Company, holders of Class A Common Stock are entitled to receive a preferential distribution of $1.00 per share of the net assets of the Company. Cash dividends on the Class B Common Stock cannot be paid unless cash dividends of at least an equal amount are paid on the Class A Common Stock.
47
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s certificate of incorporation provides that shares of Class B Common Stock may be transferred only to certain “Permitted Transferees” consisting generally of the lineal descendants of holders of Class B Stock, trusts for their benefit, corporations and partnerships controlled by them and the Company’s employee benefit plans. Any transfer of Class B Common Stock in violation of these restrictions, including a transfer to the Company, results in the automatic conversion of the transferred shares of Class B Common Stock held by the transferee into an equal number of shares of Class A Common Stock.
On May 27, 2010 the Board of Directors increased the quarterly dividend by 12% from $.165 per share to $.185 per share, or an annualized rate of $.74 per share.
10. Employee Benefit Plans:
The Company has a defined contribution retirement savings plan (“401(k) plan”) which covers all associates who meet minimum age and service requirements. The 401(k) plan allows participants to contribute up to 60% of their annual compensation up to the maximum elective deferral, designated by the IRS. The Company is obligated to make a minimum contribution to cover plan administrative expenses. Further Company contributions are at the discretion of the Board of Directors. The Company’s contributions for the years ended January 29, 2011, January 30, 2010 and January 31, 2009 were approximately $1,181,000, $1,677,000 and $1,586,000, respectively.
The Company has a trusteed, non-contributory Employee Stock Ownership Plan (ESOP), which covers substantially all associates who meet minimum age and service requirements. The amount of the Company’s discretionary contribution to the ESOP is determined annually by the Compensation Committee of the Board of Directors and can be made in Company Class A Common stock or cash. The Company has chosen to contribute cash and the plan purchases stock on the open market consistent with prior years. In March 2011, the Company approved a contribution of approximately $12,583,000. The Company’s contributions for the year ended January 30, 2010 was $11,765,000. No contribution was made for the year ended January 31, 2009.
The Company is primarily self-insured for health care. These costs are significant primarily due to the large number of the Company’s retail locations and associates. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims. Management reviews current and historical claims data in developing its estimates. If the underlying facts and circumstances of the claims change or the historical trend is not indicative of future trends, then the Company may be required to record additional expense or a reduction to expense which could be material to the Company’s reported financial condition and results of operations. The Company has stop-loss insurance coverage for individual claims in excess of $300,000. Employee health claims were funded through a VEBA trust to which the Company made periodic contributions until December 2008, after which the Company has funded health care contributions to a third party provider.
48
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Leases:
The Company has operating lease arrangements for store facilities and equipment. Facility leases generally are at a fixed rate for periods of five years with renewal options. For leases with landlord capital improvement funding, the funded amount is recorded as a deferred liability and amortized over the term of the lease as a reduction to rent expense on the Consolidated Statements of Income. Equipment leases are generally for one to three year periods.
The minimum rental commitments under non-cancelable operating leases are (in thousands):
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
$ |
56,943 |
|
|
|
|
|
|
2012 |
|
40,041 |
|
|
|
|
|
|
2013 |
|
25,664 |
|
|
|
|
|
|
2014 |
|
12,792 |
|
|
|
|
|
|
2015 |
|
7,395 |
|
|
|
|
|
|
Thereafter |
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
$ |
143,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule shows the composition of total rental expense for all leases (in thousands): |
||||||||
|
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
|
January 31, |
|||
Fiscal Year Ended |
2011 |
|
2010 |
|
2009 |
|||
|
|
|
|
|
|
|
|
|
Minimum rentals |
$ |
53,680 |
|
$ |
51,978 |
|
$ |
52,762 |
Contingent rent |
|
30 |
|
|
25 |
|
|
28 |
|
|
|
|
|
|
|
|
|
Total rental expense |
$ |
53,710 |
|
$ |
52,003 |
|
$ |
52,790 |
12. Related Party Transactions:
The Company leases certain stores from entities in which Mr. George S. Currin, a former director of the Company, has a controlling or non-controlling ownership interest. Mr. Currin retired from the Board of Directors prior to the May 27, 2010 annual meeting. Rent expense and related charges totaling $144,000, $432,000 and $432,000 were paid to entities controlled by Mr. Currin or his family in fiscal 2010, 2009 and 2008, respectively, under these leases. Rent expense and related charges totaling $366,000, $1,101,000 and $1,081,000 were paid to entities in which Mr. Currin or his family had a non-controlling ownership interest in fiscal 2010, 2009 and 2008, respectively, under these leases.
13. Income Taxes:
Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740 when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances. As of January 29, 2011, the Company had gross unrecognized tax benefits totaling approximately $8.3 million, of which approximately $5.7 million would affect the effective tax rate if recognized. The Company had approximately $5.0 million, $4.9 million and $5.9 million of interest and penalties accrued related to uncertain tax positions as of January 29, 2011, January 30, 2010 and January 31, 2009, respectively. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company recognized $760,000, $390,000 and $1.1 million of interest and penalties in the Consolidated Statement of Income and Comprehensive Income for the years ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively. The Company is no longer subject to U.S. federal income tax examinations for years before 2007. In state and local tax jurisdictions, the Company has limited exposure before 2004.
49
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
|
January 29, |
|
January 30, |
|
January 31, |
|||
Fiscal Year Ended |
|
2011 |
|
2010 |
|
2009 |
|||
Balances, beginning |
|
$ |
10,331 |
|
$ |
9,522 |
|
$ |
9,180 |
Additions for tax positions of the current year |
|
|
1,124 |
|
|
3,901 |
|
|
1,394 |
Additions for tax positions prior years |
|
|
114 |
|
|
- |
|
|
35 |
Reduction for tax positions of prior years for: |
|
|
|
|
|
|
|
|
|
Changes in judgment |
|
|
(2,779) |
|
|
(200) |
|
|
- |
Settlements during the period |
|
|
(122) |
|
|
(2,561) |
|
|
(571) |
Lapses of applicable statue of limitations |
|
|
(325) |
|
|
(331) |
|
|
(516) |
Balance, ending |
|
$ |
8,343 |
|
$ |
10,331 |
|
$ |
9,522 |
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of the following (in thousands): |
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
|
January 31, |
|||
Fiscal Year Ended |
|
2011 |
|
2010 |
|
2009 |
|||
Current income taxes: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
24,916 |
|
$ |
20,603 |
|
$ |
15,895 |
State |
|
|
3,166 |
|
|
2,667 |
|
|
1,768 |
Total |
|
|
28,082 |
|
|
23,270 |
|
|
17,663 |
Deferred income taxes: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
4,457 |
|
|
(133) |
|
|
1,173 |
State |
|
|
531 |
|
|
12 |
|
|
140 |
Total |
|
|
4,988 |
|
|
(121) |
|
|
1,313 |
Total income tax expense |
|
$ |
33,070 |
|
$ |
23,149 |
|
$ |
18,976 |
50
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company's deferred tax assets and liabilities as of January 29, 2011 and January 30, 2010 are as follows (in thousands): |
|||||||||||||
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
|
||
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
||
|
|
Allowance for doubtful accounts |
|
|
|
|
$ |
1,122 |
|
$ |
1,231 |
|
|
|
|
Inventory valuation |
|
|
|
|
|
2,355 |
|
|
1,984 |
|
|
|
|
Capital loss carryforward |
|
|
|
|
|
41 |
|
|
- |
|
|
|
|
Deferred lease liability |
|
|
|
|
|
5,915 |
|
|
6,547 |
|
|
|
|
Non-deductible accrued liabilities |
|
|
|
|
|
1,939 |
|
|
1,661 |
|
|
|
|
Other taxes |
|
|
|
|
|
799 |
|
|
1,465 |
|
|
|
|
Federal benefit of uncertain tax positions |
|
|
|
|
|
4,045 |
|
|
3,531 |
|
|
|
|
Equity compensation expense |
|
|
|
|
|
1,931 |
|
|
1,795 |
|
|
|
|
Accrued bonus |
|
|
|
|
|
- |
|
|
2,760 |
|
|
|
|
Other |
|
|
|
|
|
1,575 |
|
|
1,766 |
|
|
|
|
|
Total deferred tax assets |
|
|
|
|
|
19,722 |
|
|
22,740 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
||
|
|
Property and equipment |
|
|
|
|
|
17,071 |
|
|
15,764 |
|
|
|
|
Unrealized gains on short-term investments |
|
|
|
|
|
158 |
|
|
270 |
|
|
|
|
Health care expense |
|
|
|
|
|
1,151 |
|
|
1,091 |
|
|
|
|
Other |
|
|
|
|
|
2,036 |
|
|
1,890 |
|
|
|
|
|
Total deferred tax liabilities |
|
|
|
|
|
20,416 |
|
|
19,015 |
|
|
Net deferred tax liabilities (assets) |
|
|
|
|
$ |
694 |
|
$ |
(3,725) |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the Company's effective income tax rate with the statutory rate is as follows: |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, |
|
January 30, |
|
January 31, |
|||
|
Fiscal Year Ended |
|
|
2011 |
|
2010 |
|
2009 |
|||||
|
Federal income tax rate |
|
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
||
|
State income taxes |
|
|
2.7 |
|
|
0.3 |
|
|
5.7 |
|
||
|
Tax credits |
|
|
(1.4) |
|
|
(2.2) |
|
|
(2.5) |
|
||
|
Tax exempt interest |
|
|
(0.4) |
|
|
(0.7) |
|
|
(2.6) |
|
||
|
Effects of permanent differences |
|
|
0.4 |
|
|
0.6 |
|
|
0.5 |
|
||
|
Other |
|
|
0.1 |
|
|
0.6 |
|
|
- |
|
||
|
Effective income tax rate |
|
|
36.4 |
% |
|
33.6 |
% |
|
36.1 |
% |
51
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. |
Quarterly Financial Data (Unaudited): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summarized quarterly financial results are as follows (in thousands, except per share data): |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 |
|
First |
|
Second |
|
Third |
|
Fourth |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail sales |
|
$ |
259,760 |
|
$ |
231,865 |
|
$ |
197,985 |
|
$ |
224,312 |
|
Total revenues |
|
|
262,683 |
|
|
234,727 |
|
|
200,784 |
|
|
227,334 |
|
Cost of goods sold (exclusive of depreciation) |
|
|
146,854 |
|
|
143,039 |
|
|
125,694 |
|
|
150,123 |
|
Income before income taxes |
|
|
42,891 |
|
|
25,100 |
|
|
10,011 |
|
|
12,807 |
|
Net income |
|
|
27,060 |
|
|
16,019 |
|
|
6,736 |
|
|
7,924 |
|
Basic earnings per share |
|
$ |
0.92 |
|
$ |
0.54 |
|
$ |
0.23 |
|
$ |
0.27 |
|
Diluted earnings per share |
|
$ |
0.92 |
|
$ |
0.54 |
|
$ |
0.23 |
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
First |
|
Second |
|
Third |
|
Fourth |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail sales |
|
$ |
238,055 |
|
$ |
225,368 |
|
$ |
190,966 |
|
$ |
217,743 |
|
Total revenues |
|
|
241,027 |
|
|
228,266 |
|
|
193,820 |
|
|
220,882 |
|
Cost of goods sold (exclusive of depreciation) |
|
|
141,913 |
|
|
143,459 |
|
|
124,545 |
|
|
142,099 |
|
Income before income taxes |
|
|
29,986 |
|
|
23,706 |
|
|
4,272 |
|
|
10,950 |
|
Net income |
|
|
18,813 |
|
|
16,658 |
|
|
2,983 |
|
|
7,311 |
|
Basic earnings per share |
|
$ |
0.64 |
|
$ |
0.57 |
|
$ |
0.10 |
|
$ |
0.25 |
|
Diluted earnings per share |
|
$ |
0.64 |
|
$ |
0.56 |
|
$ |
0.10 |
|
$ |
0.25 |
15. Reportable Segment Information:
The Company has two reportable segments: retail and credit. The Company operates its women’s fashion specialty retail stores in 31 states, principally in the southeastern United States. The Company offers its own credit card to its customers and all credit authorizations, payment processing, and collection efforts are performed by a separate subsidiary of the Company.
52
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following schedule summarizes certain segment information (in thousands):
Fiscal 2010 |
|
Retail |
|
Credit |
|
Total |
|||
Revenues |
|
$ |
916,993 |
|
$ |
8,535 |
|
$ |
925,528 |
Depreciation |
|
|
21,801 |
|
|
21 |
|
|
21,822 |
Interest and other income |
|
|
(3,971) |
|
|
- |
|
|
(3,971) |
Income before taxes |
|
|
87,740 |
|
|
3,069 |
|
|
90,809 |
Total assets |
|
|
446,515 |
|
|
75,577 |
|
|
522,092 |
Capital expenditures |
|
|
19,560 |
|
|
- |
|
|
19,560 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
874,555 |
|
$ |
9,440 |
|
$ |
883,995 |
Depreciation |
|
|
21,799 |
|
|
30 |
|
|
21,829 |
Interest and other income |
|
|
(4,313) |
|
|
- |
|
|
(4,313) |
Income before taxes |
|
|
66,064 |
|
|
2,850 |
|
|
68,914 |
Total assets |
|
|
408,842 |
|
|
72,148 |
|
|
480,990 |
Capital expenditures |
|
|
9,957 |
|
|
3 |
|
|
9,960 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
847,606 |
|
$ |
10,112 |
|
$ |
857,718 |
Depreciation |
|
|
22,531 |
|
|
41 |
|
|
22,572 |
Interest and other income |
|
|
(7,218) |
|
|
- |
|
|
(7,218) |
Income before taxes |
|
|
49,499 |
|
|
3,111 |
|
|
52,610 |
Total assets |
|
|
361,697 |
|
|
73,656 |
|
|
435,353 |
Capital expenditures |
|
|
19,443 |
|
|
- |
|
|
19,443 |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. The Company evaluates performance based on profit or loss from operations before income taxes. The Company does not allocate certain corporate expenses to the credit segment.
The following schedule summarizes the credit segment and related direct expenses which are reflected in selling, general and administrative expenses (in thousands):
|
January 29, |
|
January 30, |
|
January 31, |
|||
|
2011 |
|
2010 |
|
2009 |
|||
Bad debt expense |
$ |
2,827 |
|
$ |
3,643 |
|
$ |
3,844 |
Payroll |
|
954 |
|
|
969 |
|
|
1,000 |
Postage |
|
811 |
|
|
901 |
|
|
979 |
Other expenses |
|
853 |
|
|
1,047 |
|
|
1,137 |
|
|
|
|
|
|
|
|
|
Total expenses |
$ |
5,445 |
|
$ |
6,560 |
|
$ |
6,960 |
16. Stock Based Compensation:
The Company recognizes share-based compensation expense over the vesting period, net of estimated forfeitures. During the twelve month periods ended January 29, 2011, January 30, 2010 and January 31, 2009, the Company recognized share-based compensation expense of $2,341,000, $2,063,000 and $2,208,000, respectively, which is classified as a component of selling, general and administrative expense.
53
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In accordance with U.S. GAAP, 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 January 29, 2011, there was $6,069,000 of total unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.4 years. Restricted stock compensation expense during the twelve months ended January 29, 2011, January 30, 2010 and January 31, 2009 was $2,316,000, $1,921,000 and $1,991,000, respectively. These amounts are classified as a component of selling, general and administrative expenses.
During the twelve months ended January 29, 2011, the Company sold 23,849 shares to associates at an average discount of $3.23 per share under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $77,000, $73,000 and $74,000 for fiscal years 2010, 2009 and 2008, respectively.
During the year, the Company completed amortizing its nonvested options. In accordance with ASC 718, the Company adjusted its related forfeiture assumptions. As a result, the Company recognized a reduction in share-based compensation expense of $52,000 for the year ended January 29, 2011, compared to an expense of $69,000 and $91,000 for the twelve months ended January 30, 2010 and January 31, 2009, respectively. These amounts are classified as a component of selling, general and administrative expenses.
In April 2004, the Board of Directors adopted the 2004 Incentive Compensation Plan, of which 1,350,000 shares are issuable. As of January 29, 2011, 722,128 shares had been granted from this Plan.
In May 2003, the shareholders approved the 2003 Employee Stock Purchase Plan with 250,000 Class A shares of Common Stock authorized. Under the terms of the Plan, substantially all associates may purchase Class A Common Stock through payroll deductions. The Class A Common Stock is purchased at the lower of 85% of market value on the first or last business day of a six-month payment period. Additionally, each April 15, associates are given the opportunity to make a lump sum purchase of up to $10,000 of Class A Common Stock at 85% of market value. The number of shares purchased by participants through the plan were 23,849 shares, 27,051 shares and 32,830 shares for the years ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively.
The Company adopted in 1987 an Incentive Compensation Plan and a Non-Qualified Stock Option Plan for key associates of the Company. Total shares issuable under the plans are 5,850,000, of which 1,237,500 shares were issuable under the Incentive Compensation Plan and 4,612,500 shares are issuable under the Non-Qualified Stock Option Plan. The purchase price of the shares under an option must be at least 100 percent of the fair market value of Class A Common Stock at the date of the grant. Options granted under these plans vest over a 5-year period and expire 10 years after the date of the grant unless otherwise expressly authorized by the Board of Directors. As of January 29, 2011, 5,831,373 shares had been granted under the plans.
In August 1999, the Board of Directors adopted the 1999 Incentive Compensation Plan, of which 1,500,000 shares are issuable. The ability to grant awards under the 1999 Plan expired on July 31, 2004.
54
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the number of options and shares of restricted stock initially authorized and available to grant under each of the plans as of January 29, 2011:
|
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 30, 2010 |
18,627 |
|
─ |
|
737,162 |
|
755,789 |
January 29, 2011 |
18,627 |
|
─ |
|
627,872 |
|
646,499 |
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.
The following summary shows the changes in shares of restricted stock outstanding during the three fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009:
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Number of |
|
|
Grant Date Fair |
|
|
|
|
|
Shares |
|
|
Value Per Share |
Restricted stock awards at February 2, 2008 |
|
|
|
|
301,967 |
|
|
22.56 |
Granted |
|
|
|
|
156,795 |
|
|
16.88 |
Vested |
|
|
|
|
─ |
|
|
─ |
Forfeited |
|
|
|
|
(18,841) |
|
|
22.55 |
Restricted stock awards at January 31, 2009 |
|
|
|
|
439,921 |
|
|
20.46 |
Granted |
|
|
|
|
158,225 |
|
|
18.91 |
Vested |
|
|
|
|
(61,781) |
|
|
22.34 |
Forfeited |
|
|
|
|
(39,937) |
|
|
20.35 |
Restricted stock awards at January 30, 2010 |
|
|
|
|
496,428 |
|
|
19.74 |
Granted |
|
|
|
|
119,120 |
|
|
24.54 |
Vested |
|
|
|
|
(88,901) |
|
|
22.79 |
Forfeited |
|
|
|
|
(17,191) |
|
|
20.05 |
Restricted stock awards at January 29, 2011 |
|
|
|
|
509,456 |
|
|
20.32 |
55
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Option plan activity for the three fiscal years ended January 29, 2011 is set forth below: |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Range of |
|
|
Average |
|
|
Options |
|
|
Option Prices |
|
|
Price |
Outstanding options, |
|
|
|
|
|
|
|
|
February 2, 2008 |
|
139,075 |
|
|
$6.39 - 21.75 |
|
|
$12.41 |
Granted |
|
─ |
|
|
─ |
|
|
─ |
Exercised |
|
(23,875) |
|
|
8.19 - 13.97 |
|
|
9.36 |
Forfeited or expired |
|
(7,250) |
|
|
8.71 - 21.72 |
|
|
17.78 |
|
|
|
|
|
|
|
|
|
Outstanding options, |
|
|
|
|
|
|
|
|
January 31, 2009 |
|
107,950 |
|
|
6.39 - 19.99 |
|
|
12.72 |
Granted |
|
─ |
|
|
─ |
|
|
─ |
Exercised |
|
(43,600) |
|
|
6.39 - 15.08 |
|
|
10.71 |
Forfeited or expired |
|
─ |
|
|
─ |
|
|
─ |
|
|
|
|
|
|
|
|
|
Outstanding options, |
|
|
|
|
|
|
|
|
January 30, 2010 |
|
64,350 |
|
|
11.10 - 19.99 |
|
|
14.08 |
Granted |
|
─ |
|
|
─ |
|
|
─ |
Exercised |
|
(42,675) |
|
|
11.33 - 19.99 |
|
|
14.19 |
Forfeited or expired |
|
─ |
|
|
─ |
|
|
─ |
|
|
|
|
|
|
|
|
|
Outstanding options, |
|
|
|
|
|
|
|
|
January 29, 2011 |
|
21,675 |
|
|
$11.10 - 18.96 |
|
|
$13.86 |
56
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of changes in stock options outstanding during the twelve months ended January 29, 2011:
|
|
|
|
|
Weighted Average |
|
Aggregate |
|
|
|
Weighted Average |
|
Remaining Contractual |
|
Intrinsic |
|
Shares |
|
Exercise Price |
|
Term |
|
Value(a) |
Options outstanding at January 30, 2010 |
64,350 |
|
$14.08 |
|
4.02 years |
|
$398,312 |
Granted |
─ |
|
─ |
|
─ |
|
─ |
Forfeited or expired |
─ |
|
|
|
|
|
|
Exercised |
42,675 |
|
|
|
|
|
|
Outstanding at January 29, 2011 |
21,675 |
|
$13.86 |
|
2.78 years |
|
$228,434 |
Vested and exercisable at January 29, 2011 |
21,675 |
|
$13.86 |
|
2.78 years |
|
$228,434 |
_______________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|||||||
|
|
|
|
|
|
|
|
The following tables summarize stock option information at January 29, 2011: |
|
|
|
|
|
|
Options Outstanding and Exercisable |
|
||||
|
|
|
|
Weighted Average |
|
Weighted |
|
Range of |
|
|
|
Remaining |
|
Average |
|
Exercise Prices |
|
Options |
|
Contractual Life |
|
Exercise Price |
|
$11.10 - $14.17 |
|
18,375 |
|
2.54 years |
|
$13.01 |
|
15.08 - 18.96 |
|
3,300 |
|
4.14 years |
|
18.61 |
|
$11.10 - $18.96 |
|
21,675 |
|
2.78 years |
|
$13.86 |
|
Outstanding options at January 29, 2011 covered 21,675 shares of Class A Common Stock and no shares of Class B Common Stock. Outstanding options at January 30, 2010 covered 64,350 shares of Class A Common Stock and no shares of Class B Common Stock.
No options were granted in fiscal 2010 and no options were granted in fiscal 2009 or 2008. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.
17. Commitments and Contingencies:
Workers’ compensation and general liability claims are settled through a claims administrator and are limited by stop-loss insurance coverage for individual claims in excess of $350,000 and $250,000, respectively. The Company paid claims of $4,069,000, $3,049,000 and $3,388,000 in fiscal 2010, 2009 and 2008, respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $6,607,000, $4,003,000 and $4,959,000 in fiscal 2010, 2009 and 2008, respectively. Accrued workers’ compensation and general liabilities were $6,519,000 and $4,921,000 at January 29, 2011 and January 30, 2010, respectively. See Note 8 for a discussion of letters of credit related to purchase commitments and Note 11 for lease commitments.
The Company does not have any guarantees with third parties.
In addition, the Company has $4.8 million in escrow at January 29, 2011 as security and collateral for administration of the Company’s self-insured workers’ compensation and general liability coverage which is reported as Restricted cash and short-term investments on the Consolidated Balance Sheets.
57
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is a defendant in legal proceedings considered to be in the normal course of business the resolution of which, individually or collectively, are not expected to have a material effect on the Company’s results of operations, cash flows or financial position.
58
None.
Conclusion Regarding the Effectiveness of Disclosure 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 January 29, 2011. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of January 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 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.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of January 29, 2011 based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of January 29, 2011.
PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of January 29, 2011, as stated in its report which is included herein.
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 January 29, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
Information contained under the captions “Election of Directors,” “Meetings and Committees,” “Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for its 2011 annual stockholders’ meeting (the “2011 Proxy Statement”) is incorporated by reference in response to this Item 10. The information in response to this Item 10 regarding executive officers of the Company is contained in Item 3A, Part I hereof under the caption “Executive Officers of the Registrant.”
59
Information contained under the captions “2010 Executive Compensation”, “Director Compensation”, “Corporate Governance Matters-Compensation Committee Interlocks and Insider Participation” in the Company’s 2011 Proxy Statement is incorporated by reference in response to this Item.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder |
Equity Compensation Plan Information
The following table provides information about stock options outstanding and shares available for future awards under all of Cato’s equity compensation plans. The information is as of January 29, 2011.
|
|
|
|
|
(a) |
|
(b) |
|
(c) |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
Remaining Available for |
|
|
|
|
|
|
|
|
|
Future Issuance Under |
|
|
|
|
|
Number of Securities to be |
|
Weighted-Average |
|
Equity Compensation |
|
|
|
|
|
Issued upon Exercise of |
|
Exercise Price of |
|
Plans (Excluding |
|
|
|
|
|
Outstanding Options, |
|
Outstanding Options, |
|
Securities Reflected in |
Plan Category |
|
|
|
Warrants and Rights(1) |
|
Warrants and Rights(1) |
|
Column (a)) (2) |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved |
|
21,675 |
|
$13.86 |
|
816,680 |
|||
by security holders |
|
|
|
|
|
|
|||
Equity compensation plans not |
|
|
|
|
|
|
|||
approved by security holders |
|
─ |
|
─ |
|
─ |
|||
Total |
|
|
|
|
21,675 |
|
$13.86 |
|
816,680 |
|
|
|
|
|
|
|
|
|
|
(1) |
This column contains information regarding employee stock options only; there are no outstanding warrants or stock appreciation rights. |
|
|
(2) |
Includes the following: |
|
|
|
627,872 shares available for grant under the
Company’s stock incentive plan, referred to as the 2004 |
|
|
|
170,181 shares available under the 2003 Employee
Stock Purchase Plan. Eligible associates may |
|
|
|
Information contained under “Security Ownership of Certain Beneficial Owners and Management” in the 2011 Proxy Statement is incorporated by reference in response to this Item. |
60
Information contained under the caption “Certain Relationships and Related Person Transactions”, “Corporate Governance Matters-Director Independence” and “Meetings and Committees” in the 2011 Proxy Statement is incorporated by reference in response to this Item.
Information contained under the captions “Ratification of Independent Registered Public Accounting Firm-Audit Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Service by the Independent Registered Public Accounting Firm" in the 2011 Proxy Statement is incorporated by reference in response to this item.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
|
|
|
|
|
|
|
|
Page |
|||
|
|
|
|||
Report of Independent Registered Public Accounting Firm ............................................................... |
|
31 |
|
||
|
|
|
|
||
Consolidated
Statements of Income and Comprehensive Income for the fiscal years ended |
|
32 |
|
||
|
|
|
|
||
Consolidated Balance Sheets at January 29, 2011 and January 30, 2010............................................. |
|
33 |
|
||
|
|
|
|
||
Consolidated
Statements of Cash Flows for the fiscal years ended January 29, 2011, January
30, 2010, |
|
34 |
|
||
|
|
|
|
||
Consolidated
Statements of Stockholders’ Equity for the fiscal years ended January 29,
2011, |
|
35 |
|
||
|
|
|
|
||
Notes to Consolidated Financial Statements...................................................................................... |
|
36 |
|
||
|
|
|
|
||
(2) Financial Statement Schedule: The following report and financial statement schedule is filed herewith: |
|
|
|
||
|
|
|
|
||
Schedule II — Valuation and Qualifying Accounts........................................................................... |
|
S-2 |
|
||
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related Notes thereto.
(3) Index to Exhibits: The following exhibits are filed with this report or, as noted, incorporated by reference herein. The Company will supply copies of the following exhibits to any shareholder upon receipt of a written request addressed to the Corporate Secretary, The Cato Corporation, 8100 Denmark Road, Charlotte, NC 28273 and the payment of $.50 per page to help defray the costs of handling, copying and postage. In most cases, documents incorporated by reference to exhibits to our registration statements, reports or proxy statements filed by the Company with the Securities and Exchange Commission are available to the public over the Internet from the SEC’s web site at http://www.sec.gov. You may also read and copy any such document at the SEC’s public reference room located at Room 1580, 100 F. Street, N.E., Washington, D.C. 20549 under the Company’s SEC file number (1–31340).
61
|
|
|
|
|
||
Exhibit |
|
|
||||
Number |
|
Description of Exhibit |
||||
|
|
|
||||
|
3.1 |
|
|
Registrant’s Restated Certificate of Incorporation of the Registrant 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 4.2 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333–96283).
|
||
|
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 on January 6, 2004.
|
||
|
10.2* |
|
|
1999 Incentive Compensation Plan dated August 26, 1999, incorporated by reference to Exhibit 4.3 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333–96283).
|
||
|
10.3* |
|
|
2004 Incentive Compensation Plan, amended and restated as of May 22, 2008, incorporated by reference to Appendix A to Definitive Proxy Statement on Schedule 14A filed April 11, 2008.
|
||
|
10.4* |
|
|
Form of Agreement, dated as of August 29, 2003, between the Registrant and Wayland H. Cato, Jr., incorporated by reference to Exhibit 99(c) to Form 8-K of the Registrant filed on July 22, 2003.
|
||
|
10.5* |
|
|
Form of Agreement, dated as of August 29, 2003, between the Registrant and Edgar T. Cato, incorporated by reference to Exhibit 99(d) to Form 8-K of the Registrant filed on July 22, 2003.
|
||
|
10.6* |
|
|
Retirement Agreement between Registrant and Wayland H. Cato, Jr. dated August 29, 2003 incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for quarter ended August 2, 2003.
|
||
|
10.7* |
|
|
Retirement Agreement between Registrant and Edgar T. Cato dated August 29, 2003, incorporated by reference to Exhibit 10.2 to Form 10-Q of the Registrant for the quarter ended August 2, 2003.
|
||
|
10.9* |
|
|
Letter Agreement between the Registrant and John R. Howe dated as of August 28, 2008, incorporated by Reference to Exhibit 99.1 to Form 8-K of the Registrant filed September 3, 2008.
|
||
|
21 |
|
|
Subsidiaries of Registrant.
|
||
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm.
|
||
|
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.
|
||
62
* Management contract or compensatory plan required to be filed under Item 15 of this report and Item 601 of Regulation S-K.
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
||||
Designation |
|
|
|
|
|||||||||
of Exhibit |
|
|
|
Page |
|||||||||
|
|
|
|
|
|||||||||
|
21 |
|
|
Subsidiaries of the Registrant........................................................................... |
|
|
65 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm............................... |
|
|
66 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer................. |
|
|
67 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.................. |
|
|
68 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||
|
32.1 |
|
|
Section 1350 Certification of Chief Executive Officer........................................ |
|
|
69 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||
|
32.2 |
|
|
Section 1350 Certification of Chief Financial Officer.......................................... |
|
|
70 |
|
|||||
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cato has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Cato Corporation
|
By |
/s/ JOHN P. D. CATO |
|
By |
/s/ JOHN R. HOWE |
|
|
John P. D. Cato Chairman, President and Chief Executive Officer |
|
|
John R. Howe Executive Vice President Chief Financial Officer |
|
By |
/s/ JEFFREY R. SHOCK |
|
|
|
|
|
Jeffrey R. Shock Senior Vice President Controller |
|
|
|
|
|
|
|
|
|
Date: March 29, 2011
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the date indicated:
|
|
|
|
|
/s/ JOHN P. D. CATO
John P. D. Cato (President and Chief Executive Officer (Principal Executive Officer) and Director)
|
|
/s/ BAILEY W. PATRICK
Bailey W. Patrick (Director)
|
|
|
|
|
|
/s/ JOHN R. HOWE
John R. Howe (Executive Vice President Chief Financial Officer (Principal Financial Officer)) |
|
/s/ GRANT L. HAMRICK
Grant L. Hamrick (Director)
|
|
|
|
|
|
/s/ JEFFREY R. SHOCK
Jeffrey R. Shock (Senior Vice President Controller (Principal Accounting Officer))
|
|
/s/ BRYAN F. KENNEDY III
Bryan F. Kennedy III (Director)
|
|
/s/ THOMAS E. MECKLEY
Thomas E. Meckley (Director) |
|
/s/ D. HARDING STOWE
D. Harding Stowe (Director)
|
|
/s/ EDWARD I. WEISIGER, JR
Edward I. Weisiger, Jr. (Director) |
|
|
64
|
|
|
|
|
|
|
|
|
Schedule II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
for |
|
|
|
|
|
|
|
|
|
Doubtful |
|
|
|
Self Insurance |
|
|
Inventory |
|
|
Accounts(a) |
|
|
|
Reserves(b) |
|
|
Reserves(c) |
Balance at February 2, 2008 |
$ |
3,263 |
|
|
$ |
4,127 |
|
$ |
3,826 |
Additions charged to costs and expenses |
|
3,825 |
|
|
|
4,959 |
|
|
747 |
Additions (reductions) charged to other accounts |
|
933 |
(d) |
|
|
(809) |
|
|
- |
Deductions |
|
(4,298) |
(e) |
|
|
(3,388) |
|
|
(1,142) |
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2009 |
|
3,723 |
|
|
|
4,889 |
|
|
3,431 |
Additions charged to costs and expenses |
|
3,643 |
|
|
|
4,003 |
|
|
225 |
Additions (reductions) charged to other accounts |
|
846 |
(d) |
|
|
(922) |
|
|
- |
Deductions |
|
(4,938) |
(e) |
|
|
(3,049) |
|
|
(782) |
|
|
|
|
|
|
|
|
|
|
Balance at January 30, 2010 |
|
3,274 |
|
|
|
4,921 |
|
|
2,874 |
Additions charged to costs and expenses |
|
2,827 |
|
|
|
6,607 |
|
|
481 |
Additions (reductions) charged to other accounts |
|
646 |
(d) |
|
|
(940) |
|
|
- |
Deductions |
|
(3,762) |
(e) |
|
|
(4,069) |
|
|
(295) |
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2011 |
$ |
2,985 |
|
|
$ |
6,519 |
|
$ |
3,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Deducted from trade accounts receivable. |
|
|
|
|
|
|
|
|
|
(b) Reserve for Workers' Compensation and General Liability. |
|
|
|
|
|
|
|
||
(c) Reserves for inventory shortage and markdowns. |
|
|
|
|
|
|
|
|
|
(d) Recoveries of amounts previously written off. |
|
|
|
|
|
|
|
|
|
(e) Uncollectible accounts written off. |
|
|
|
|
|
|
|
|
|
65
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
|
|
|
|
|
|
|
State of |
|
Name under which |
Name of Subsidiary |
|
Incorporation/Organization |
|
Subsidiary does Business |
|
|
|
|
|
CHW LLC
|
|
Delaware |
|
CHW LLC |
Providence Insurance
Company,
|
|
A Bermudian Company |
|
Providence Insurance Company, Limited |
CatoSouth LLC
|
|
North Carolina |
|
CatoSouth LLC |
Cato of Texas L.P.
|
|
Texas |
|
Cato of Texas L.P. |
Cato Southwest, Inc.
|
|
Delaware |
|
Cato Southwest, Inc. |
CaDel LLC
|
|
Delaware |
|
CaDel LLC |
CatoWest LLC
|
|
Nevada |
|
CatoWest LLC |
Cedar Hill National Bank
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A Nationally Chartered Bank |
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Cedar Hill National Bank |
catocorp.com, LLC |
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Delaware |
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catocorp.com, LLC |
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S‑8 (Numbers 333-119300, 333-119299, 333-96283, 33-41314, 33-41315, 33-69844, and 333-96285) of The Cato Corporation of our report dated March 29, 2011 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 29, 2011
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EXHIBIT 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John P. D. Cato, certify that:
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1. |
I have reviewed this Annual Report on Form 10-K of The Cato Corporation (the “registrant”); |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the
registrant’s internal control over financial reporting that |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: March 29, 2011
/s/ John P. D. Cato |
John P. D. Cato Chairman, President and Chief Executive Officer |
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EXHIBIT 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Howe, certify that:
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1. |
I have reviewed this Annual Report on Form 10-K of The Cato Corporation (the “registrant”); |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: March 29, 2011
/s/ John R. Howe |
John R. Howe Executive Vice President Chief Financial Officer |
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EXHIBIT 32.1
CERTIFICATION OF PERIODIC REPORT
I, John P. D. Cato, Chairman, President and Chief Executive Officer of The Cato Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended January 29, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 29, 2011
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/s/ John P. D. Cato |
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John P. D. Cato |
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Chairman, President and |
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Chief Executive Officer |
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69
EXHIBIT 32.2
CERTIFICATION OF PERIODIC REPORT
I, John R. Howe, Executive Vice President, Chief Financial Officer of The Cato Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended January 29, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 29, 2011
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/s/ John R. Howe |
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John R. Howe |
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Executive Vice President |
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Chief Financial Officer |
70