cato10q2qtr12.htm - Generated by SEC Publisher for SEC Filing

 

 

Table of Contents

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 28, 2012

 

OR

 

[ ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________to__________________

Commission file number 1-31340  

 

THE CATO CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

56-0484485

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

8100 Denmark Road, Charlotte, North Carolina 28273-5975  

(Address of principal executive offices)

(Zip Code)

 

(704) 554-8510

(Registrant's telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

X

No

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

X

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer  þ     Accelerated filer  ¨      Non-accelerated filer  ¨      Smaller reporting company ¨ 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

 

No

X

 

As of July 28, 2012, there were 27,534,595 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.

 


 

 

THE CATO CORPORATION

 

FORM 10-Q

 

Quarter Ended July 28, 2012

Table of Contents

 

Page No.

 

PART I – FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

2

 

 

For the Three Months and Six Months Ended July 28, 2012 and July 30, 2011

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

At July 28, 2012, January 28, 2012 and July 30, 2011

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

For the Six Months Ended July 28, 2012 and July 30, 2011

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5 – 15

 

 

For the Three Months and Six Months Ended July 28, 2012 and July 30, 2011

 

 

 

 

 

 

Item 2.

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

16 – 22

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

 

 

Item 1A.

Risk Factors

24

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

24

 

 

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

 

 

Item 5.

Other Information

25

 

 

 

 

 

Item 6.

Exhibits

25

 

 

 

 

 

Signatures

26 - 30

 

 

 

 

 

 

           

 


 

 

Table of Contents

 

PART I FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

July 28, 2012

 

July 30, 2011

 

July 28, 2012

 

July 30, 2011

 

(Dollars in thousands, except per share data)

REVENUES

 

 

 

 

 

 

 

 

 

 

 

Retail sales

$

231,450 

 

$

234,077 

 

$

504,240 

 

$

505,010 

Other income (principally finance charges, late fees and

 

 

 

 

 

 

 

 

 

 

 

layaway charges)

 

2,613 

 

 

2,729 

 

 

5,167 

 

 

5,456 

Total revenues

 

234,063 

 

 

236,806 

 

 

509,407 

 

 

510,466 

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES, NET

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (exclusive of depreciation shown below)

 

142,459 

 

 

145,156 

 

 

300,291 

 

 

303,561 

Selling, general and administrative (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

shown below)

 

59,220 

 

 

58,955 

 

 

120,575 

 

 

122,271 

Depreciation

 

5,742 

 

 

5,371 

 

 

11,513 

 

 

10,775 

Interest and other income

 

(985)

 

 

(949)

 

 

(1,891)

 

 

(1,906)

Cost and expenses, net

 

206,436 

 

 

208,533 

 

 

430,488 

 

 

434,701 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

27,627 

 

 

28,273 

 

 

78,919 

 

 

75,765 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

10,294 

 

 

10,170 

 

 

29,864 

 

 

27,141 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

17,333 

 

$

18,103 

 

$

49,055 

 

$

48,624 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.59 

 

$

0.61 

 

$

1.68 

 

$

1.65 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.59 

 

$

0.61 

 

$

1.68 

 

$

1.65 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

$

0.250 

 

$

0.230 

 

$

0.480 

 

$

0.415 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

17,333 

 

$

18,103 

 

$

49,055 

 

$

48,624 

Unrealized gain on available-for-sale securities, net

 

 

 

 

 

 

 

 

 

 

 

of deferred income tax benefit

 

13 

 

 

310 

 

 

73 

 

 

584 

Comprehensive income

$

17,346 

 

$

18,413 

 

$

49,128 

 

$

49,208 

 

See notes to condensed consolidated financial statements (unaudited).


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

July 28, 2012

 

January 28, 2012

 

July 30, 2011

 

(Dollars in thousands)

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

66,043 

 

$

34,893 

 

$

77,376 

Short-term investments

 

211,390 

 

 

205,771 

 

 

190,533 

Restricted cash and investments

 

5,311 

 

 

5,325 

 

 

4,801 

Accounts receivable, net of allowance for doubtful accounts of $2,042,

 

 

 

 

 

 

 

 

$2,362 and $2,654 at July 28, 2012, January 28, 2012 and

 

 

 

 

 

 

 

 

July 30, 2011 respectively

 

43,373 

 

 

43,024 

 

 

37,621 

Merchandise inventories

 

107,034 

 

 

130,382 

 

 

117,225 

Deferred income taxes

 

3,535 

 

 

3,579 

 

 

3,338 

Prepaid expenses

 

4,160 

 

 

6,158 

 

 

3,739 

Total Current Assets

 

440,846 

 

 

429,132 

 

 

434,633 

Property and equipment – net

 

125,520 

 

 

115,445 

 

 

104,333 

Other assets

 

7,016 

 

 

6,512 

 

 

9,434 

Total Assets

$

573,382 

 

$

551,089 

 

$

548,400 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

70,573 

 

$

94,073 

 

$

86,553 

Accrued expenses

 

43,160 

 

 

37,584 

 

 

36,308 

Accrued bonus and benefits

 

4,708 

 

 

10,192 

 

 

8,906 

Accrued income taxes

 

19,555 

 

 

15,144 

 

 

23,145 

Total Current Liabilities

 

137,996 

 

 

156,993 

 

 

154,912 

Deferred income taxes

 

7,887 

 

 

7,887 

 

 

9,540 

Other noncurrent liabilities (primarily deferred rent)

 

24,231 

 

 

19,530 

 

 

14,190 

 

 

 

 

 

 

 

 

 

Commitments and contingencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock, $100 par value per share, 100,000 shares authorized,

 

 

 

 

 

 

 

 

none issued

 

 

 

 

 

Class A common stock, $.033 par value per share, 50,000,000

 

 

 

 

 

 

 

 

shares authorized; issued 27,530,131 shares, 27,418,884 shares

 

 

 

 

 

 

 

 

and 27,741,091 shares at July 28, 2012, January 28, 2012 and

 

 

 

 

 

 

 

 

July 30, 2011 respectively

 

918 

 

 

914 

 

 

925 

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

 

 

 

 

 

 

 

 

15,000,000 shares authorized; issued 1,743,525 shares at July 28, 2012,

 

 

 

 

 

 

 

 

January 28, 2012 and July 30, 2011

 

58 

 

 

58 

 

 

58 

Additional paid-in capital

 

73,863 

 

 

72,030 

 

 

70,203 

Retained earnings

 

327,420 

 

 

292,741 

 

 

297,713 

Accumulated other comprehensive income

 

1,009 

 

 

936 

 

 

859 

Total Stockholders' Equity

 

403,268 

 

 

366,679 

 

 

369,758 

Total Liabilities and Stockholders’ Equity

$

573,382 

 

$

551,089 

 

$

548,400 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements (unaudited).


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

July 28, 2012

 

July 30, 2011

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

Net income

$

49,055 

 

$

48,624 

 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

 

by operating activities:

 

 

 

 

 

 

Depreciation

 

11,513 

 

 

10,775 

 

Provision for doubtful accounts

 

596 

 

 

882 

 

Share based compensation

 

1,444 

 

 

1,302 

 

Excess tax benefits from share-based compensation

 

(98)

 

 

(89)

 

Loss on disposal of property and equipment

 

610 

 

 

415 

 

Changes in operating assets and liabilities which provided

 

 

 

 

 

 

(used) cash:

 

 

 

 

 

 

Accounts receivable

 

(945)

 

 

1,200 

 

Merchandise inventories

 

23,348 

 

 

26,803 

 

Prepaid and other assets

 

1,489 

 

 

(2,437)

 

Accrued income taxes

 

4,509 

 

 

11,373 

 

Accounts payable, accrued expenses and other liabilities

 

(20,982)

 

 

(31,387)

 

Net cash provided by operating activities

 

70,539 

 

 

67,461 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

Expenditures for property and equipment

 

(19,922)

 

 

(15,751)

 

Purchase of short-term investments

 

(100,289)

 

 

(79,623)

 

Sales of short-term investments

 

94,792 

 

 

71,399 

 

Change in restricted cash and investments

 

14 

 

 

25 

 

Net cash used in investing activities

 

(25,405)

 

 

(23,950)

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

Dividends paid

 

(14,027)

 

 

(12,243)

 

Repurchase of common stock

 

(355)

 

 

(2,897)

 

Proceeds from employee stock purchase plan

 

259 

 

 

254 

 

Excess tax benefits from share-based compensation

 

98 

 

 

89 

 

Proceeds from stock options exercised

 

41 

 

 

32 

 

Net cash used in financing activities

 

(13,984)

 

 

(14,765)

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

31,150 

 

 

28,746 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

34,893 

 

 

48,630 

 

Cash and cash equivalents at end of period

$

66,043 

 

$

77,376 

 

 

See notes to condensed consolidated financial statements (unaudited).


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

NOTE 1 - GENERAL

 

The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the three and six month periods ended July 28, 2012 and July 30, 2011 are unaudited.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal, recurring nature unless otherwise noted.  The results of the interim period may not be indicative of the results expected for the entire year.

 

The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012.  Amounts as of January 28, 2012, have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

 

On August 23, 2012, the Board of Directors maintained the quarterly dividend at $0.25 per share.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

NOTE 2 - EARNINGS PER SHARE:

 

ASC 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“EPS”) on the face of all income statements for all entities with complex capital structures.  The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.  While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice.  Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.

 

Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan.   

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 28, 2012

 

July 30, 2011

 

July 28, 2012

 

July 30, 2011

 

 

 

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

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

17,333 

 

$

18,103 

 

$

49,055 

 

$

48,624 

 

Earnings allocated to non-vesting equity awards

 

 

(267)

 

 

(292)

 

 

(764)

 

 

(811)

 

Net earnings available to common stockholders

 

$

17,066 

 

$

17,811 

 

$

48,291 

 

$

47,813 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

28,813,766 

 

 

29,010,209 

 

 

28,759,821 

 

 

28,978,512 

 

Dilutive effect of stock options

 

 

4,285 

 

 

5,932 

 

 

4,231 

 

 

5,635 

 

Diluted weighted average common shares outstanding

 

 

28,818,051 

 

 

29,016,141 

 

 

28,764,052 

 

 

28,984,147 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.59 

 

$

0.61 

 

$

1.68 

 

$

1.65 

 

Diluted earnings per share

 

$

0.59 

 

$

0.61 

 

$

1.68 

 

$

1.65 

 

 

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:

 

Income tax payments, net of refunds received, for the six months ended July 28, 2012 and July 30, 2011 were $25,470,000 and $15,780,000, respectively.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of July 28, 2012, the Company had an unsecured revolving credit agreement to borrow $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 July 28, 2012.  There were no borrowings outstanding under this credit facility during the periods ended July 28, 2012, January 28, 2012 or July 30, 2011.  Interest on any borrowings is based on One Month LIBOR, which was 0.246% at July 28, 2012.

 

At July 28, 2012, January 28, 2012 and July 30, 2011, the Company had approximately $5.8 million, $2.3 million and $5.7 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

 

The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona Accessories and Credit.  As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit.  The Company has aggregated its retail operating segments based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of the Statement, if the segments have similar economic characteristics, similar product, similar production processes, similar clients and similar methods of distribution. 

 

The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks.  They are similar in nature of product, as they all offer women’s apparel, shoes and accessories.  Merchandise inventory of the Company’s operating segments is sourced from the same countries and some of the same vendors, using similar production processes.  Clients of the Company’s operating segments have similar characteristics.  Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner, through its retail stores.

                          

The Company operates its women’s fashion specialty retail stores in 31 states as of July 28, 2012, 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.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

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

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

July 28, 2012

 

 

Retail

 

 

Credit

 

 

Total

 

July 28, 2012

 

 

Retail

 

 

Credit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

232,230 

 

$

1,833 

 

$

234,063 

 

Revenues

 

$

505,772 

 

$

3,635 

 

$

509,407 

Depreciation

 

 

5,729 

 

 

13 

 

 

5,742 

 

Depreciation

 

 

11,487 

 

 

26 

 

 

11,513 

Interest and other income

 

 

(985)

 

 

 

 

(985)

 

Interest and other income

 

 

(1,891)

 

 

 

 

(1,891)

Income before taxes

 

 

26,747 

 

 

880 

 

 

27,627 

 

Income before taxes

 

 

77,281 

 

 

1,638 

 

 

78,919 

Total assets

 

 

495,526 

 

 

77,856 

 

 

573,382 

 

Total assets

 

 

495,526 

 

 

77,856 

 

 

573,382 

Capital expenditures

 

 

10,569 

 

 

 

 

10,569 

 

Capital expenditures

 

 

19,922 

 

 

 

 

19,922 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

July 30, 2011

 

 

Retail

 

 

Credit

 

 

Total

 

July 30, 2011

 

 

Retail

 

 

Credit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

234,885 

 

$

1,921 

 

$

236,806 

 

Revenues

 

$

506,592 

 

$

3,874 

 

$

510,466 

Depreciation

 

 

5,367 

 

 

 

 

5,371 

 

Depreciation

 

 

10,767 

 

 

 

 

10,775 

Interest and other income

 

 

(949)

 

 

 

 

(949)

 

Interest and other income

 

 

(1,906)

 

 

 

 

(1,906)

Income before taxes

 

 

27,330 

 

 

943 

 

 

28,273 

 

Income before taxes

 

 

74,183 

 

 

1,582 

 

 

75,765 

Total assets

 

 

471,320 

 

 

77,080 

 

 

548,400 

 

Total assets

 

 

471,320 

 

 

77,080 

 

 

548,400 

Capital expenditures

 

 

11,319 

 

 

41 

 

 

11,360 

 

Capital expenditures

 

 

15,665 

 

 

86 

 

 

15,751 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company evaluates segment performance based on income before taxes.  The Company does not allocate certain corporate expenses or income taxes to the credit segment.

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

July 28, 2012

 

 

July 30, 2011

 

 

July 28, 2012

 

 

July 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

Bad debt expense

$

293 

 

$

352 

 

$

596 

 

$

882 

Payroll

 

224 

 

 

247 

 

 

445 

 

 

489 

Postage

 

192 

 

 

187 

 

 

385 

 

 

388 

Other expenses

 

231 

 

 

188 

 

 

545 

 

 

525 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

$

940 

 

$

974 

 

$

1,971 

 

$

2,284 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

NOTE 6 – STOCK BASED COMPENSATION:

 

As of July 28, 2012, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan is for the granting of options to officers and key employees and the 2004 Amended and Restated Incentive Compensation Plan is for the granting of various forms of equity-based awards, including restricted stock and stock options to officers and key employees.  

 

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans:

 

 

1987 

 

2004 

 

 

 

Plan

 

Plan

 

Total

Options and/or restricted stock initially authorized

5,850,000 

 

1,350,000 

 

7,200,000 

Options and/or restricted stock available for grant:

 

 

January 28, 2012

20,127 

 

542,309 

 

562,436 

July 28, 2012

20,127 

 

433,916 

 

454,043 

 

In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of July 28, 2012, January 28, 2012 and July 30, 2011, there was $7.7 million, $ 6.0 million  and $7.3 million of total unrecognized compensation expense related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 2.8 years, 2.2 years and 2.7 years, respectively. The total fair value of the shares recognized as compensation expense during the second quarter and six months ended July 28, 2012 was $794,000 and $1,398,000, respectively compared to $790,000 and $1,257,000, respectively for the second quarter and six months ended July 30, 2011.  These expenses are classified as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

 

The following summary shows the changes in the shares of restricted stock outstanding during the six months ended July 28, 2012:

 

 

 

 

 

Weighted Average

 

Number of

 

 

Grant Date Fair

 

Shares

 

 

Value Per Share

Restricted stock awards at January 28, 2012

461,341 

 

$

21.44 

Granted

110,397 

 

 

28.23 

Vested

(111,281)

 

 

18.84 

Forfeited or expired

(7,770)

 

 

23.39 

Restricted stock awards at July 28, 2012

452,687 

 

$

23.70 

 

The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the six months ended July 28, 2012 and July 30, 2011, the Company sold 11,687 and 12,006 shares to employees at an average discount of $3.92 and $3.74 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15%

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

 

discount given under the Employee Stock Purchase Plan was approximately $46,000 and $45,000 for the six months ended July 28, 2012 and July 30, 2011, respectively.  These expenses are classified as a component of selling, general and administrative expenses.

 

No options were granted in the first six months of fiscal 2012 or fiscal 2011. 

 

The total intrinsic value of options exercised during the second quarter and six months ended July 28, 2012 was $28,000 and $50,000, respectively compared to $41,000 and $41,000, respectively, for the three and six months ended July 30, 2011.

 

There was no stock option expense for the three or six months ended July 28, 2012 or July 30, 2011.

 

Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

NOTE 7 – 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 July 28, 2012, January 28, 2012 and July 30, 2011.

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Significant

 

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

 

July 28,

 

 

Assets

 

 

Inputs

 

 

Inputs

Description

 

 

2012

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

State/Municipal Bonds

 

$

176,206 

 

$

 

$

176,206 

 

$

Corporate Bonds

 

 

18,884 

 

 

 

 

18,884 

 

 

Auction Rate Securities (ARS)

 

 

3,450 

 

 

 

 

 

 

3,450 

Variable Rate Demand Notes (VRDN)

 

 

16,865 

 

 

16,865 

 

 

 

 

US Treasury Notes

 

 

3,162 

 

 

3,162 

 

 

 

 

Privately Managed Funds

 

 

871 

 

 

 

 

 

 

871 

Corporate Equities

 

 

439 

 

 

439 

 

 

 

 

Certificates of Deposit

 

 

101 

 

 

101 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

219,978 

 

$

20,567 

 

$

195,090 

 

$

4,321 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Significant

 

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

 

January 28,

 

 

Assets

 

 

Inputs

 

 

Inputs

Description

 

 

2012

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

State/Municipal Bonds

 

$

152,650 

 

$

 

$

152,650 

 

$

Corporate Bonds

 

 

27,732 

 

 

 

 

27,732 

 

 

Auction Rate Securities (ARS)

 

 

3,450 

 

 

 

 

 

 

3,450 

Variable Rate Demand Notes (VRDN)

 

 

26,472 

 

 

26,472 

 

 

 

 

U.S. Treasury Notes

 

 

3,174 

 

 

3,174 

 

 

 

 

Privately Managed Funds

 

 

1,604 

 

 

 

 

 

 

1,604 

Corporate Equities

 

 

443 

 

 

443 

 

 

 

 

Certificates of Deposit

 

 

100 

 

 

100 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

215,625 

 

$

30,189 

 

$

180,382 

 

$

5,054 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Significant

 

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

 

July 30,

 

 

Assets

 

 

Inputs

 

 

Inputs

Description

 

 

2011 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

State/Municipal Bonds

 

$

142,938 

 

$

 

$

142,938 

 

$

Corporate Bonds

 

 

28,119 

 

 

 

 

28,119 

 

 

Auction Rate Securities (ARS)

 

 

3,450 

 

 

 

 

 

 

3,450 

Variable Rate Demand Notes (VRDN)

 

 

20,817 

 

 

20,817 

 

 

 

 

US Treasury Notes

 

 

2,679 

 

 

2,679 

 

 

 

 

Privately Managed Funds

 

 

1,909 

 

 

 

 

 

 

1,909 

Corporate Equities

 

 

473 

 

 

473 

 

 

 

 

Certificates of Deposit

 

 

100 

 

 

100 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

200,485 

 

$

24,069 

 

$

171,057 

 

$

5,359 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 July 28, 2012, January 28, 2012 and July 30, 2011.  The underlying securities have contractual maturities which range from 3 days to 28 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, Restricted investments and Other assets on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.

 

Additionally, at July 28, 2012, the Company had $0.9 million of privately managed funds, $0.4 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction.  At January 28, 2012, the Company had $1.6 million of privately managed funds, $0.4 million of corporate equities and a single ARS of $3.5 million.  At July 30, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single ARS of $3.5 million.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

 

 

 

 

 

 

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

 

NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

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 recorded at par value which approximates 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.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

 

NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

The following tables summarize the change in the fair value of the Company’s financial assets measured using Level 3 inputs during the first six months of fiscal 2012 and fiscal 2011 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using Significant

 

 

Unobservable Inputs (Level 3)

 

Available-For-Sale

 

 

 

 

 

 

 

Debt Securities

 

Other Investments

 

 

 

 

ARS

 

 

Private Equity

 

Total

Beginning Balance at January 28, 2012

$

3,450 

 

 

$

1,604 

 

$

5,054 

Redemptions

 

 

 

 

(722)

 

 

(722)

Total gains or (losses)

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

 

 

(11)

 

 

(11)

Included in other comprehensive income

 

 

 

 

 

 

Ending Balance at July 28, 2012

$

3,450 

 

 

$

871 

 

$

4,321 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using Significant

 

 

Unobservable Inputs (Level 3)

 

Available-For-Sale

 

 

 

 

 

 

 

Debt Securities

 

Other Investments

 

 

 

 

ARS

 

 

Private Equity

 

Total

Beginning Balance at January 29, 2011

$

3,450 

 

 

$

1,925 

 

$

5,375 

Total gains or (losses)

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

 

 

(16)

 

 

(16)

Ending Balance at July 30, 2011

$

3,450 

 

 

$

1,909 

 

$

5,359 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 28, 2012 AND JULY 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

 

 

 

 

 

 

 

 

 

Quantitative information regarding the significant unobservable inputs related to the ARS as of July 28, 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

 

$3,450

 

Net present value

 

Total Term

 

10.4 Years

 

 

 

 

of cash flows

 

Yield

 

0.28%

 

 

 

 

 

 

Comparative bond discount rate

 

0.20%

 

 

 

 

 

 

 

 

 

 

 

Significant increases or decreases in certain inputs could result in a lower fair value measurement. For example, a decrease in the yield, or an increase to the comparative bond discount rate could result in a lower fair value.

 
 
 

 

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:

 

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

 

In January 2012, the Company adopted accounting guidance that amends the existing requirements for fair value measurement and disclosure.  The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy.  It also requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.  It also clarified and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in stockholders’ equity.  The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.


 

 

 

Table of Contents

 

THE CATO CORPORATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

 

FORWARD-LOOKING INFORMATION:

 

The following information should be read along with the unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-Q that reflect projections or expectations of our future financial or economic performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations, including those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2012 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 markets and sovereign debt markets; uncertainties regarding the impact of any governmental responses to the foregoing adverse conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel and accessory buying patterns; changes and uncertainties in factors that affect consumer confidence; adverse weather conditions; inventory risks due to shifts in market demand; and other factors discussed under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended January 28, 2012 (“fiscal 2011”), as amended or supplemented, and in other reports we file with or furnish to the Securities and Exchange Commission (“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.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

CRITICAL ACCOUNTING POLICIES:

 

The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012. 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 related to self-insurance health insurance, workers’ compensation, general and auto insurance liabilities, calculation of potential asset impairment, inventory shrinkage and uncertain tax positions.

 

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


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

RESULTS OF OPERATIONS:

 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

July 28, 2012

 

July 30, 2011

 

July 28, 2012

 

July 30, 2011

Total retail sales

100.0 

%

 

100.0 

%

 

100.0 

%

 

100.0 

%

Other income

1.1 

 

 

1.2 

 

 

1.0 

 

 

1.1 

 

Total revenues

101.1 

 

 

101.2 

 

 

101.0 

 

 

101.1 

 

Cost of goods sold (exclusive of depreciation)

61.6 

 

 

62.0 

 

 

59.6 

 

 

60.1 

 

Selling, general and administrative (exclusive of depreciation)

25.6 

 

 

25.2 

 

 

23.9 

 

 

24.2 

 

Depreciation

2.5 

 

 

2.3 

 

 

2.3 

 

 

2.1 

 

Interest and other income

(0.4)

 

 

(0.4)

 

 

(0.4)

 

 

(0.4)

 

Income before income taxes

11.9 

 

 

12.1 

 

 

15.6 

 

 

15.0 

 

Net income

7.5 

 

 

7.7 

 

 

9.7 

 

 

9.6 

 


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

RESULTS OF OPERATIONS (CONTINUED):

 

Comparison of Second Quarter and First Six Months of 2012 with 2011

 

Total retail sales for the second quarter were $231.5 million compared to last year’s second quarter sales of $234.1 million, a 1.0% decrease.  Same-store sales decreased 4.0% in the second quarter of fiscal 2012.  For the six months ended July 28, 2012, total retail sales were $504.2 million compared to last year’s comparable six month sales of $505.0 million, and same store sales decreased 3.0% for the comparable six month period. The Company believes the second quarter and first six month period of fiscal 2012 were both adversely impacted by continuing customer uncertainty regarding the country’s economic and political situation.  Total revenues, comprised of retail sales and other income (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $234.1 million and $509.4 million for the second quarter and six months ended July 28, 2012, compared to $236.8 million and $510.5 million for the second quarter and six months ended July 30, 2011, respectively. The Company operated 1,295 stores at July 28, 2012 compared to 1,285 stores at the end of last year’s second quarter.  For the first six months of fiscal  2012, the Company opened 12 new stores, relocated five stores and closed five stores.  The Company currently expects to open approximately 38 stores, relocate 10 stores and close approximately 14 stores in fiscal 2012.

 

Credit revenue of $1.8 million represented 0.8% of total revenues in the second quarter of fiscal 2012, compared to 2011 credit revenue of $1.9 million or 0.8% of total revenues.  Credit revenue dollars decreased slightly for the most recent comparable period due to lower finance charge income and lower late fee income from sales under the Company’s proprietary credit card. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income.  Related expenses include principally bad debt expense, payroll, postage and other administrative expenses and totaled $0.9 million in the second quarter of 2012, compared to last year’s second quarter expenses of $1.0 million.  The slight decrease was primarily due to lower bad debt and payroll expenses compared to the second quarter of 2011.

 

Other income in total, as included in total revenues, was $2.6 million and $5.2 million for the second quarter and first six months of fiscal 2012, compared to $2.7 million and $5.5 million for the prior year’s comparable second quarter and first six months. The slight overall year-to-date decrease resulted primarily from lower finance, late fee and layaway charges.

 

Cost of goods sold was $142.5 million, or 61.6% of retail sales and $300.3 million or 59.6% of retail sales for the second quarter and first six months of fiscal 2012, compared to $145.2 million, or 62.0% of retail sales and $303.6 million or 60.1% of retail sales for the prior year’s comparable three and six month periods of fiscal 2011.  The overall decrease in cost of goods sold as a percent of retail sales for the second quarter and first six months of fiscal 2012 resulted primarily from lower freight costs and an increase in vendor allowances partially offset by an increase in occupancy costs due to store rent expense.  Cost of goods sold includes merchandise costs (net of discounts and allowances), buying costs, distribution costs, occupancy costs, freight and inventory shrinkage.  Net merchandise costs and in-bound freight are capitalized as inventory costs.  Buying and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments and distribution center.  Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities.  Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) increased by 0.1% to $89.0 million for the second quarter of fiscal 2012 and increased by 1.2% to $203.9 million for the first six months of fiscal 2012 compared to $88.9 million and $201.4 million for the prior year’s comparable three and six months of fiscal 2011.  Gross margin as presented may not be comparable to those of other entities.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

RESULTS OF OPERATIONS (CONTINUED):

 

Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts.  SG&A expenses were $59.2 million, or 25.6% of retail sales and $120.6 million, or 23.9% of retail sales for the second quarter and first six months of fiscal 2012, respectively, compared to $59.0 million, or 25.2% of retail sales and $122.3 million, or 24.2% of retail sales for the prior year’s comparable three and six month periods, respectively.  SG&A expenses as a percentage of retail sales increased 40 basis points for the second quarter of fiscal 2012 as compared to the prior year.  The second quarter SG&A increase was primarily attributable to higher payroll costs and professional fees partially offset by lower group health insurance and workers’ compensation costs.  For the first six months of fiscal 2012, SG&A expenses decreased 30 basis points as compared to the prior year.  The overall dollar decrease for the first six months of fiscal 2012 was primarily attributable to decreased incentive-based compensation expense, partially offset by higher group health insurance costs and payroll expense.

 

Depreciation expense was $5.7 million, or 2.5% of retail sales and $11.5 million, or 2.3% or retail sales for the second quarter and first six months of fiscal 2012, respectively, compared to $5.4 million, or 2.3% of retail sales and $10.8 million or 2.1% of retail sales for the prior year’s comparable three and six month periods of fiscal 2011, respectively.  The slight dollar increase in depreciation expense was due to store development and information technology investments.

 

Interest and other income was $1.0 million, or 0.4% of retail sales and $1.9 million, or 0.4% of retail sales for the second quarter and first six months of fiscal 2012, respectively, compared to $0.9 million, or 0.4% of retail sales and $1.9 million, or 0.4% of retail sales for the prior year’s comparable three and six month periods of fiscal 2011.  The slight quarterly dollar increase was due to higher sales tax vendor income, as well as, label income in the second fiscal quarter of 2012.

 

Income tax expense was $10.3 million or 4.4% of retail sales and $29.9 million, or 5.9% of retail sales for the second quarter and first six months of fiscal 2012, respectively, compared to $10.2 million, or 4.3% of retail sales and $27.1 million, or 5.4% of retail sales for the prior year’s comparable three and six month periods of fiscal 2011, respectively. The second quarter and six month increases resulted from a higher effective tax rate.  The effective income tax rate for the second quarter of fiscal 2012 was 37.3% compared to 36.0% for the second quarter of 2011.  The effective tax rate for the first six months of fiscal 2012 was 37.8% compared to 35.8% for the first six months of fiscal 2011.  The current year quarter and the first half of fiscal 2012 were also impacted by the elimination of the benefit of the Work Opportunity Tax Credit which, as of July 28, 2012, had not been renewed for 2012 by Congress.    

 

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:

 

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first six months of fiscal 2012 was $70.5 million as compared to $67.5 million in the first six months of fiscal 2011. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments, and share repurchases.  In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at July 28, 2012, January 28, 2012 and July 30, 2011.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):

 

Cash provided by operating activities for the first six months of fiscal 2012 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $3.0 million for the first six months of fiscal 2012 as compared to the first six months of fiscal 2011 was primarily due to a slight increase in net income, a reduction in inventories partially offset by a decrease in accounts payable and accrued expenses.

 

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 regular operating requirements, expected capital expenditures, dividends and share repurchases for fiscal 2012 and for the foreseeable future.

 

At July 28, 2012, the Company had working capital of $302.9 million compared to $272.1 million at January 28, 2012 and $279.7 million at July 30, 2011.  Additionally, the Company had $1.3 million, $2.0 million and $2.4 million invested in privately managed investment funds and other miscellaneous equities and a single auction rate security of $3.5 million at July 28, 2012, January 28, 2012 and July 30, 2011, respectively, which are included in Other assets on the Condensed Consolidated Balance Sheets.

 

At July 28, 2012, January 28, 2012 and July 30, 2011, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million.  The revolving credit agreement is committed until August 2013. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of July 28, 2012 and January 28, 2012.  There were no borrowings outstanding under the credit facility as of July 28, 2012, January 28, 2012 and July 30, 2011.

 

At July 28, 2012, January 28, 2012 and July 30, 2011, the Company had approximately $5.8 million, $2.3 million and $5.7 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

 

Expenditures for property and equipment totaled $19.9 million in the first six months of fiscal 2012, compared to $15.8 million in last year’s first six months.  The expenditures for the first six months of 2012 were primarily for the development of 12 new stores,  additional investments in new technology and home office expansion.  For the full fiscal 2012 year, the Company expects to invest approximately $36.5 million for capital expenditures.  This includes expenditures to open 38 new stores and relocate 10 stores, upgrades to merchandise systems and home office and distribution center expansion.

 

Net cash used in investing activities totaled $25.4 million in the first six months of fiscal 2012 compared to $24.0 million used in the comparable period of 2011.  The increase was due primarily to the increase in purchases of short-term investments and capital expenditures.

 

On August 23, 2012, the Board of Directors maintained the quarterly dividend at $0.25 per share.

 

As of July 28, 2012, the Company had 1,976,704 shares remaining in open authorizations under its share repurchase program. 


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):

 

The Company does not use derivative financial instruments.

 

The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at July 28, 2012, January 28, 2012 and July 30, 2011.  The underlying securities have contractual maturities which generally range from 3 days to 28 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, Restricted investments and Other assets on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.

 

Additionally, at July 28, 2012, the Company had $0.9 million of privately managed funds, $0.4 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction.  At January 28, 2012, the Company had $1.6 million of privately managed funds, $0.4 million of corporate equities and a single ARS of $3.5 million.  At July 30, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single ARS of $3.5 million.  See Note 7 – Fair Value Measurements for further information regarding the failed ARS.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

 

Information regarding new accounting pronouncements is provided in Note 8 to the Company’s Condensed Consolidated Financial Statements.


 

Table of Contents

 

THE CATO CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

 

The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of July 28, 2012.  Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of July 28, 2012, 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 SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:

 

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended July 28, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


 

Table of Contents

 

PART II   OTHER INFORMATION

 

THE CATO CORPORATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

            Not Applicable

 

ITEM 1A. RISK FACTORS

 

            In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended January 28, 2012.  These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

      The following table summarizes the Company’s purchases of its common stock for the three months ended July 28, 2012:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number

 

 

 

 

 

 

 

Shares Purchased as

 

(or Approximate Dollar

 

 

Total Number

 

 

Average

 

Part of Publicly

 

Value) of Shares that may

 

 

of Shares

 

 

Price Paid

 

Announced Plans or

 

Yet be Purchased Under

Period

 

Purchased

 

 

per Share (1)

 

Programs (2)

 

The Plans or Programs (2)

May 2012

 

12,186 

 

$

28.23 

 

12,186 

 

 

June 2012

 

 

 

 

 

 

July 2012

 

215 

 

 

28.88 

 

215 

 

 

Total

 

12,401 

 

$

28.24 

 

12,401 

 

1,976,704 

 

(1)    Prices include trading costs.

 

(2)    As of April 28, 2012, the Company’s share repurchase program had 1,989,105 shares remaining in open authorizations.  During the second quarter ending July 28, 2012, the Company repurchased and retired 12,401 shares under this program for approximately $350,220 or an average market price of $28.24 per share.  As of the second quarter ending July 28, 2012, the Company had 1,976,704 shares remaining in open authorizations.  There is no specified expiration date for the Company’s repurchase program.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

      Not Applicable


 

Table of Contents

 

PART II   OTHER INFORMATION

 

THE CATO CORPORATION

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

      Not Applicable

 

ITEM 5.  OTHER INFORMATION

 

      Not Applicable

 

ITEM 6.  EXHIBITS

 

Exhibit No.

 

Item

 

 

 

3.1

 

Registrant’s Restated Certificate of Incorporation dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283).

 

 

 

3.2

 

Registrant’s By Laws incorporated by reference to Exhibit 99.2 to Form
8-K of the Registrant Filed December 10, 2007.

 

 

 

4.1

 

Rights Agreement dated December 18, 2003, incorporated by reference to Exhibit 4.1 to Form 8-A12G of the Registrant filed December 22, 2003 and as amended in Form 8-A12B/A filed January 6, 2004.

 

 

 

 

 

31.1*

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

 

 

 

31.2*

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

 

 

 

32.1*

 

Section 1350 Certification of Principal Executive Officer.

 

 

 

32.2*

 

Section 1350 Certification of Principal Financial Officer.

 

 

 

101.1*

 

The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 28, 2012, formatted in XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Six Months ended July 28, 2012 and July 30, 2011; (ii) Condensed Consolidated Balance Sheets at July 28, 2012; July 30, 2011 and January 28, 2012; (iii) Condensed Consolidated Statements of Cash Flows for the Six Months ended July 28, 2012 and July 30, 2011; and (iv) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.

 

                      * Submitted electronically herewith.         


 

Table of Contents

 

PART II   OTHER INFORMATION

 

THE CATO CORPORATION

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

                                                                                    THE CATO CORPORATION

 

 

September 5, 2012

 

/s/ John P. D. Cato

Date

 

John P. D. Cato

Chairman, President and

Chief Executive Officer

 

 

 

 

September 5, 2012

 

/s/ John R. Howe

Date

 

John R. Howe

Executive Vice President

Chief Financial Officer

 

exhbit311.htm - Generated by SEC Publisher for SEC Filing

 

 

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:

 

 

1. 

I have reviewed this report on Form 10-Q of The Cato Corporation (the “registrant”);

 

 

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;

 

 

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;

 

 

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:

 

 

 

 

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;

 

 

 

b) 

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;

 

 

 

 

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

 

 

 

d) 

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

 

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 the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

 

a) 

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

 

 

 

 

 

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.

 

 

Date: September 5, 2012

 

/s/ John P. D. Cato

John P. D. Cato

Chairman, President and

Chief Executive Officer

 

exhbit312.htm - Generated by SEC Publisher for SEC Filing

 

 

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:

 

 

1. 

I have reviewed this report on Form 10-Q of The Cato Corporation (the “registrant”);

 

 

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;

 

 

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;

 

 

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:

 

 

 

 

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;

 

 

 

b) 

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;

 

 

 

 

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

 

 

 

d) 

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

 

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 the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

 

a) 

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

 

 

 

 

 

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.

 

 

Date: September 5, 2012

 

/s/ John R. Howe

John R. Howe

Executive Vice President

Chief Financial Officer

 

exhbit321.htm - Generated by SEC Publisher for SEC Filing

 

 

EXHIBIT 32.1

 

 

CERTIFICATION OF PERIODIC REPORT

 

I, John P. D. Cato, Chairman, President and Chief Executive Officer of The Cato Corporation (the “Company”), 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 Form 10-Q of the Company for the quarter ended July 28, 2012 (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: September 5, 2012

 

 

 

/s/ John P. D. Cato

 

John P. D. Cato

 

Chairman, President and

 

Chief Executive Officer

 

 

exhbit322.htm - Generated by SEC Publisher for SEC Filing

 

 

EXHIBIT 32.2

 

 

CERTIFICATION OF PERIODIC REPORT

 

I, John R. Howe, Executive Vice President, Chief Financial Officer of The Cato Corporation (the “Company”), 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 Form 10-Q of the Company for the quarter ended July 28, 2012 (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: September 5, 2012

 

 

 

/s/ John R. Howe

 

John R. Howe

 

Executive Vice President

 

Chief Financial Officer