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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 3, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
REGISTRANT: THE CATO CORPORATION
COMMISSION FILE NUMBER O-3747
State of Incorporation: Delaware I.R.S. Employer Identification
Number: 56-0484485
Address of Principal Executive Offices: Registrant's Telephone Number:
704/554-8510
8100 Denmark Road
Charlotte, North Carolina 28273-5975
SECURITIES REGISTERED PURSUANT TO SECURITIES REGISTERED PURSUANT
SECTION 12(b) OF THE ACT: TO SECTION 12(g) OF THE ACT:
NONE CLASS A COMMON STOCK
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, 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. [ X ]
As of March 29, 1996, there were 23,215,897 shares of Class A Common Stock
and 5,264,317 shares of Convertible Class B Common Stock outstanding. The
aggregate market value of the Registrant's Class A Common Stock held by Non-
affiliates of the Registrant as of March 29, 1996 was approximately
$181,502,633 based on the last reported sale price per share on the NASDAQ
National Market System on that date.
Documents incorporated by reference:
Portions of the proxy statement dated April 26, 1996, relating to the 1996
annual meeting of shareholders are incorporated by reference into the
following part of this annual report:
Part III - Items 10, 11, 12 and 13
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
Part I:
Item 1. Business.............................................Pages 2-9
Item 2. Properties...........................................Page 9
Item 3. Legal Proceedings....................................Page 9
Item 4. Results of Votes of Security Holders.................Page 9
Part II:
Item 5. Market for Registrant's
Common Equity and Related
Stockholder Matters..................................Page 10
Item 6. Selected Financial Data..............................Page 11
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations................................Pages 12-15
Item 8. Financial Statements and Supplementary Data..........Page 16
Item 9. Disagreements on Accounting and
Financial Disclosures................................Page 16
Part III:
Item 10. Directors and Executive
Officers.............................................Pages 17-19
Item 11. Executive Compensation...............................Page 20
Item 12. Security Ownership of Certain
Beneficial Owners and Management.....................Page 20
Item 13. Certain Relationships and
Related Transactions.................................Page 20
Part IV:
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K..............................Page 21
Page 2
PART I
Item 1. Business:
General
The Company, founded in 1946, operated 550 women's apparel
specialty stores at February 3, 1996 under the names "Cato,"
"Cato Fashions" and "Cato Plus" in 22 states, principally in non-
metropolitan markets in the South and Southeast. The Company's
merchandising strategy is to provide a wide variety of value-
priced merchandise in misses, junior and large sizes for the
fashion conscious low- to middle-income female customer, aged 18
to 50. Additionally, the Company offers clothing and accessories
for girls ages 4 - 14 in selected locations. With the objective
of offering head-to-toe dressing for its customers, the Company's
stores feature a broad assortment of apparel and accessories,
including casual and dressy sportswear, dresses, careerwear,
coats, hosiery, shoes, costume jewelry, handbags and millinery.
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 specifications. Most stores range
in size from 4,800 to 8,000 square feet and are located primarily
in strip shopping centers anchored by major discount stores. The
Company emphasizes 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 32% of retail sales in fiscal 1995. In
addition to its Cato Stores, the Company operated 121 off-price
family apparel and accessories stores at February 3, 1996 under
the name "It's Fashion!" These stores are managed separately
from the Cato stores with respect to merchandising and store
operations but use the same administration, distribution and
financial systems as the Cato stores.
Business
The Company's objective is to be the leading women's apparel
specialty retailer for fashion conscious low- to middle-income
females 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 women's specialty stores. The key elements of the
Company's business strategy are:
Merchandise Assortment. The Company's stores
offer a wide assortment of apparel and accessory items
in regular and large sizes and emphasize color,
product coordination and selection.
Value Pricing. The Company offers quality
merchandise that is generally priced below comparable
merchandise offered by department stores and higher-
end specialty apparel chains but is generally more
fashionable than merchandise offered by discount
stores.
Page 3
Item 1. Business: (continued)
Strip Shopping Center Locations. The Company
locates its stores principally in strip centers
convenient to our customers anchored by major discount
stores, such as Wal-Mart and Kmart, 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 and a layaway plan to make the purchase
of its merchandise more convenient.
Expansion. The Company plans to open new stores
and relocate or expand existing stores in small to
medium-sized towns and selected metropolitan areas,
principally in the South and Southeast.
Merchandising
Merchandising
The Company offers a broad selection of apparel and
accessories to suit the various lifestyles of the fashion
conscious low - to middle-income female, aged 18 to 50. In
addition, the Company features a value pricing strategy,
product quality and consistent merchandise flow providing color
and product coordination.
The Company's merchandise lines include dressy and casual
sportswear, dresses, careerwear, coats, shoes, lingerie, hosiery,
costume jewelry, handbags and millinery. Clothing and
accessories for girls ages 4 - 14 are offered in selected stores.
Most of the Company's merchandise is sold under its private
labels.
In fiscal 1995, approximately 29% of Cato stores' retail
sales represented merchandise for large size customers. This
merchandise is marketed in its stores under two formats: as a
distinct display area in "Cato" and "Cato Fashions" stores and as
a separate department in the combined "Cato Fashions" and "Cato
Plus" stores.
Page 4
Item 1. Business: (continued)
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 personnel and frequently confer
with key vendors. The Company tests most new fashion-sensitive
items in selected stores to aid it in determining their appeal
before making a substantial purchasing commitment. The Company
also takes aggressive markdowns on slow-selling merchandise and
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
1995, purchases from the Company's largest vendor accounted for
approximately 7% of the Company's total purchases. No other
vendor accounted for more than 4% 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
affect 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 specifications. The Company
purchases most of its merchandise from domestic importers and
vendors, which typically minimizes the time necessary to purchase
and obtain shipments in order to enable 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, any economic, political or
social unrest in that region is not expected to have a material
adverse effect on the Company's ability to obtain adequate
supplies of merchandise.
An important component of the Company's strategy is the
allocation of merchandise to individual stores based on an
analysis of historical and current sales trends by merchandise
category, customer profiles and climatic conditions. A
computerized merchandise control system provides current
information on the sales activity of each merchandise style in
the Company's stores. Point-of-sale terminals in the stores
collect and transmit sales and inventory information to the
Company's central computer, permitting timely response to sales
trends on a store-by-store basis.
All merchandise is shipped directly to the Company's
distribution center in Charlotte, North Carolina where it is
inspected and allocated by the merchandise distribution staff for
shipment to individual stores. The flow of merchandise from
receipt at the distribution center to shipment is controlled by
an on-line computer system. Shipments are made by common
carrier, and each store receives at least one shipment per week.
Page 5
Item 1. Business: (continued)
Advertising
The Company uses direct mail, local newspapers, radio and in-
store promotional advertising as its primary advertising media.
Weekly newspaper advertisements typically promote specific items
or merchandise at promotional prices. The Company uses radio
advertising in selected broadcast areas that include high
concentrations of its stores. The Company's total advertising
expenditures were approximately 2.0% of retail sales in fiscal
1995.
Store Operations
The Company's store operations management team consists of
an executive vice president, nine regional vice presidents and 50
district managers. Regional vice presidents receive a salary
plus a bonus based on achieving targeted goals for sales, payroll
expense, 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 staffed with a manager, two assistant
managers and additional part-time sales associates depending on
the size of the stores and seasonal personnel needs. Store
managers receive a salary and all other store personnel are paid
on an hourly basis. Store managers and assistant managers are
eligible for monthly and semi-annual bonuses based on achieving
targeted goals for their store's sales increases and shrinkage
control.
The Company has training programs at each level of store
operations. New store managers are trained in training stores
managed by experienced personnel 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 manager is
promoted from within or recruited from outside the Company. All
district managers receive at a minimum a one-week orientation
program at the Company's home office.
Store Locations
Most of the Company's stores are located in the South and
Southeast in small to medium-sized towns, with populations of
10,000 to 50,000 and retail trade areas of 25,000 to 100,000.
Approximately 120 stores, operating under the name "Cato" or
"Cato Fashions," average approximately 4,000 square feet.
Substantially all of the remaining stores are combination "Cato
Fashions" and "Cato Plus" stores, ranging in size from 4,800 to
8,000 square feet. These combination stores have two distinct
signs and selling areas but use a common sales staff and service
desk.
Page 6
Item 1. Business: (continued)
All of the Company's stores are leased. Approximately 90%
are located in strip shopping centers, 2% in downtown locations
and 8% in enclosed shopping malls. Where lease terms are
acceptable and a potential location meets the Company's
demographic and other site-selection criteria, the Company
locates stores in strip shopping centers anchored by major
discount stores, such as Wal-Mart and Kmart stores. The
Company's strip center locations provide ample parking and
shopping convenience for its customers.
The Company's store development activities consist of
opening new stores, expanding certain existing stores and
relocating other 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 for its Cato
stores since fiscal 1991.
Cato Store Development
(Excluding It's Fashion Stores)
Number of Stores
Beginning of Number Number Number of Stores
Fiscal Year Year Opened Closed End of Year
1991...... 472 6 47 431
1992...... 431 33 26 438
1993...... 438 65 13 490
1994...... 490 57 9 538
1995...... 538 19 7 550
The Company intends to open approximately 20 new stores and
to relocate or expand approximately 15 existing stores in fiscal
1996. The Company anticipates that 10 of the 20 new stores to be
opened in fiscal 1996 will be off-price "Its Fashion!" 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 and to close underperforming stores or relocate
them to more desirable locations in their existing markets.
Page 7
Item 1. Business: (continued)
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for
approximately 23% of retail sales in fiscal 1995. The Company's
net bad debt expense in fiscal 1995 was 2.7% of credit sales.
Customers applying for the Company's credit card are
approved for credit if they have a satisfactory credit record and
meet a minimum income test. 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 charges a
finance charge based on the allowable rates in the customer's
state of residence.
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 nine 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. Layaway sales
represented approximately 9% of retail sales in fiscal 1995.
It's Fashion Stores
The Company operated 121 off-price stores at February 3,
1996 in 11 states in the South and Southeast under the name "It's
Fashion!" These stores are smaller than the Cato stores, ranging
in size from 3,000 to 4,000 square feet, and offer limited
selections of first-quality family apparel and accessories at
prices ranging from 20% to 80% off regular retail prices. The
Company's credit and layaway plans are not available in these
stores. Most of the merchandise for these stores is purchased at
close-out prices from manufacturers with excessive inventories
due to overruns or order cancellations. The It's Fashion stores
are managed separately from the Cato stores with respect to
merchandising and store operations but use the same
administrative, distribution and financial systems as the Cato
stores. Sales from It's Fashion stores represented 12% of the
Company's retail sales during fiscal 1995. As part of its
planned expansion program, the Company currently intends to open
approximately 10 new It's Fashion stores in fiscal 1996.
Page 8
Management Information 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 best seller/worst seller 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 stockkeeping unit. 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 local
apparel specialty stores, mass merchandise chains, discount store
chains, and to some degree, with major department stores.
To the extent that the Company opens stores in larger
cities and metropolitan areas, competition is expected to be more
intense in those markets. Many of the Company's competitors have
substantially greater financial, marketing and other resources
than the Company.
Regulation
A variety of laws affect the revolving credit program
offered by the Company. The Federal Consumer Credit Protection
Act (Truth-in Lending) and Regulation Z promulgated thereunder
require written disclosure of information relating to such
financing, including the amount of the annual percentage rate and
the finance charge. 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 discrimination against any credit applicant
based on certain specified grounds. 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 provisions of the Fair Debt Collection Practices Act,
which regulates the manner in which the Company collects payments
on revolving credit accounts. In addition, various state laws
regulate collection practices, require certain disclosures to
credit customers and limit the finance charges, late fees and
other charges which may be imposed by the Company.
Page 9
Employees
As of February 3, 1996, the Company employed approximately
6,600 full-time and part-time employees. The Company also
employs additional part-time employees during the peak retailing
seasons. The Company is not a party to any collective bargaining
agreements and considers that its employee relations are good.
Item 2. Properties:
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.
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.
Substantially all of the leases provide for fixed rentals plus a
percentage of sales in excess of a specified volume.
Item 3. Legal Proceedings:
There are no material pending legal proceedings to which the
registrant or its subsidiaries is a party, or to which any of
their property is subject.
Item 4. Results of Votes of Security Holders:
None.
Page 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters:
Market & Dividend Information
The Company's Class A Common Stock trades in the over-the-
counter market under the NASDAQ National Market System symbol
CACOA. Below is the market range and dividend information for
the four quarters of fiscal 1995 and 1994.
_________________________________________________________________
Price
1995 High Low Dividend
...... ...... ...... ..........
First quarter $ 8 1/4 $ 5 $ .04
Second quarter 8 7/8 7 1/8 .04
Third quarter 8 1/4 5 1/8 .04
Fourth quarter 7 3/4 5 3/4 .04
Price
1994 High Low Dividend
....... ...... ....... ..........
First quarter $ 21 1/2 $ 9 1/2 $ .025
Second quarter 14 3/4 9 1/2 .04
Third quarter 12 1/4 8 1/2 .04
Fourth quarter 9 3/4 5 1/2 .04
_________________________________________________________________
As of March 29, 1996 the approximate number of holders of
the Company's Class A Common stock was 4,500 and there were 16
record holders of the Company's Class B Common Stock.
Page 11
Item 6. Selected Financial Data:
THE CATO CORPORATION
SELECTED FINANCIAL DATA
Fiscal Year Ended
February 3, January 28, January 29, January 30, February 1,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
(In thousands, except per share and selected operating
data)
Statement of
Operations Data:
Retail sales $ 476,638 $ 463,737 $ 407,878 $ 331,262 $ 265,115
Other income 13,357 12,449 12,021 9,494 8,707
Total revenues 489,995 476,186 419,899 340,756 273,822
Cost of goods
sold, including
occupancy,
distribution and
buying 341,144 324,309 275,090 220,663 180,552
Gross margin
percent, including
occupancy,
distribution and
buying 28.4 % 30.1 % 32.6 % 33.4 % 31.9 %
Selling, general
and administrative 122,699 116,144 100,760 85,667 70,523
Depreciation 7,785 6,844 5,465 4,148 4,342
Interest 292 377 250 1,213 3,299
Income before
income taxes 18,075 28,512 38,334 29,065 15,106
Income tax expense 6,055 10,407 13,532 10,597 5,589
Net income $ 12,020 $ 18,105 $ 24,802 $ 18,468 $ 9,517
Earnings per
common and common
equivalent
share(1) $ .42 $ .62 $ .84 $ .71 $ .43
Cash dividends
paid per
share (1) $ .16 $ .145 $ .088 $ .04 $ -
Selected Operating
Data:
Stores open at end
of period 671 646 575 505 487
Average sales per
store $ 721,000 $ 749,000 $ 744,000 $ 663,000 $ 527,000
Average sales per
square foot of
selling space $ 158 $ 172 $ 187 $ 173 $ 142
Comparable store
sales increase
(decrease) (5) % 1 % 8 % 19 % 20 %
Balance Sheet
Data:
Working capital $ 102,169 $ 94,581 $ 91,569 $ 53,862 $ 33,186
Total assets 209,895 201,322 178,603 122,225 94,930
Long-term debt - - - - 24,891
Total
stockholders'
equity $ 149,682 $ 141,508 $ 127,533 $ 78,216 $ 30,479
(1) All per share amounts reflect a three-for-two stock split effected June 28,
1993.
Page 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
RESULTS OF OPERATIONS
The table below sets forth certain financial data of the
Company expressed as a percentage of retail sales for the periods
indicated:
_________________________________________________________________
Fiscal Year Ended
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
Retail sales 100% 100% 100%
Other income 2.8 2.7 2.9
Total revenues 102.8 102.7 102.9
Cost of goods sold,
including occupancy,
distribution and
buying 71.6 69.9 67.4
Selling, general and
administrative 25.7 25.0 24.7
Depreciation 1.6 1.6 1.3
Selling, general,
administrative
and depreciation 27.3 26.6 26.0
Income before income
taxes 3.8 6.1 9.4
Net income 2.5% 3.9% 6.1%
FISCAL 1995 COMPARED TO FISCAL 1994
Retail sales increased by 3% to $476.6 million in fiscal
1995, which included fifty-three weeks, from $463.7 million in
fiscal 1994, which included fifty-two weeks. Same-store sales
decreased 5% from the prior year on a fifty-two week basis.
Total revenues, comprised of retail sales and other income
(principally finance charges on customer accounts receivable,
interest income and layaway fees), increased by 3% to $490.0
million in fiscal 1995 from $476.2 million in fiscal 1994. The
Company operated 671 stores at February 3, 1996, compared to 646
stores operated at January 28, 1995.
The increase in retail sales in the current year resulted
from the Company's store development activity. In fiscal 1995,
the Company increased its selling square footage approximately 5%
by opening 37 new stores, relocating or expanding 29 stores while
closing 12 existing stores. The decrease in same-store sales in
fiscal 1995 resulted primarily from competitive pressures and a
general price compression in the women's apparel retail sector.
Page 13
Other income in fiscal 1995 increased 7% over fiscal 1994.
The increase resulted primarily from increased earnings on cash
equivalents and short-term investments and from higher finance
charge income partially offset by decreased layaway service
charges.
Cost of goods sold, including occupancy, distribution and
buying, was $341.1 million, or 71.6% of retail sales, in fiscal
1995, compared to $324.3 million, or 69.9% of retail sales, in
fiscal 1994. The increase in cost of goods sold as a percent of
retail sales resulted primarily from higher levels of markdowns
taken in fiscal 1995. Inventory levels throughout the year were
higher than needed for the sales levels achieved, resulting in
markdowns above plan and erosion of merchandise margins. The
extremely competitive and promotional environment prevailing
throughout the woman's apparel retail sector produced a price
compression resulting in a 5% decrease in the average unit
selling price for the year. Total gross margin dollars (retail
sales less cost of goods sold) decreased by 3% to $135.5 million
in fiscal 1995 from $139.4 million in fiscal 1994.
Selling, general and administrative expenses (SG&A) were
$122.7 million in fiscal 1995, compared to $116.1 million in
fiscal 1994, an increase of 6%. As a percent of retail sales,
SG&A was 25.7% compared to 25.0% of retail sales in the prior
year. The overall increase in SG&A resulted primarily from
increased selling-related expenses and by increased
infrastructure expenses brought about by the Company's store
development activities.
Depreciation expense was $7.8 million in fiscal 1995,
compared to $6.8 million in fiscal 1994. The 14% increase in
fiscal 1995 resulted primarily from additions to property and
equipment for the expansion of the Company's distribution
facility and for store development.
FISCAL 1994 COMPARED TO FISCAL 1993
Retail sales increased by 14% to $463.7 million in fiscal
1994 from $407.9 million in fiscal 1993. Same-store sales
increased 1% over fiscal 1993. Total revenues increased 13% to
$476.2 million in fiscal 1994 from $419.9 million in fiscal 1993.
The Company operated 646 stores at January 28, 1995 compared to
575 stores operated at January 29, 1994.
The increase in retail sales in fiscal 1994 resulted
primarily from the Company's store development activities. In
fiscal 1994, the Company increased selling square footage by
approximately 20% by opening 80 new stores, relocating 30 stores,
and expanding 20 stores while closing 9 existing stores.
Other income in fiscal 1994 increased by 4% over fiscal
1993. The increase resulted primarily from higher finance charge
income and by increased earnings on cash equivalents and short-
term investments.
Cost of goods sold, including occupancy, distribution and
buying, was $324.3 million, or 69.9% of retail sales, in fiscal
1994, compared to $275.1 million, or 67.4% of retail sales, in
fiscal 1993. The increase in cost of goods sold as a percent of
retail sales resulted primarily from higher levels of promotional
markdowns taken in fiscal 1994. During fiscal 1994, inventory
levels were consistently higher than were needed for the sales
levels achieved, resulting in
markdowns above plan and a decrease in merchandise margins.
Total gross margin dollars increased by 5% to $139.4 million in
fiscal 1994 from $132.8 million in fiscal 1993.
Page 14
SG&A expenses were $116.1 million in fiscal 1994, compared
to $100.8 million in fiscal 1993, an increase of 15%. As a
percent of retail sales, SG&A was 25.0% compared to 24.7% of
retail sales in the prior year. The overall increase in SG&A
resulted primarily from increased selling-related expenses and
increased infrastructure expenses brought about by the Company's
store development program.
Depreciation expense was $6.8 million in fiscal 1994,
compared to $5.5 million in fiscal 1993. The 25% increase in
fiscal 1994 resulted primarily from additions to property and
equipment from the Company's store development activities.
LIQUIDITY AND CAPITAL RESOURCES
At February 3, 1996, the Company had working capital of
$102.2 million compared to $94.6 million at January 28, 1995.
Cash provided by operating activities was $14.9 million in fiscal
1995, compared to $33.4 million in fiscal 1994. The decrease in
cash provided by operating activities in fiscal 1995 resulted
primarily from higher merchandise inventory levels, increased
accounts receivable balances and by lower net income. At
February 3, 1996, the Company had $47.9 million in cash, cash
equivalents and short-term investments, compared to $46.2 million
at January 28, 1995.
In February 1996, the Company entered into a new unsecured
revolving credit agreement. The facility provides for borrowings
of up to $20 million and an additional letter of credit facility
of $15 million. The revolving credit agreement is committed until
May 1999 and the letter of credit facility is renewable annually.
The credit agreement contains various financial covenants and
limitations, including maintenance of specific financial ratios
and a limitation on capital expenditures of $25 million per year,
or $60 million, during the length of the agreement. The
agreement replaces a revolving credit and term loan agreement
which was committed until May 1998, and provided for borrowings
of up to $35 million and an additional annually renewable letter
of credit facility of $15 million. The Company feels the terms
of the new revolving credit agreement better support the
Company's future working capital needs and the agreement contains
more flexibility as to financial covenant requirements.
In fiscal 1994, the Company entered into an agreement with a
lessor to lease up to $25 million of new store fixtures, point-of-
sales devices and warehouse equipment. In January 1995, the
Company leased $10 million of assets under this agreement and in
fiscal 1995 the Company leased an additional $9.5 million of
qualifying assets. The operating leases are for a term of seven
years but may be cancelled annually upon proper notice to the
lessor. Upon notice of cancellation, the Company would be
obligated to purchase the equipment at a prescribed termination
value from the lessor.
Expenditures for property and equipment totaled $9.4
million, $25.5 million and $17.2 million in fiscal 1995, 1994 and
1993, respectively. The expenditures for fiscal 1995 included,
in addition to store development expenditures, costs relating to
the installation of new point-of-sale terminals in the Company's
stores. The Company is currently planning very modest store
development in fiscal 1996, pending more favorable business
trends. The Company intends to open approximately 20 new stores
and to relocate or expand 15 stores in fiscal 1996. The Company
is currently planning approximately $9.6 million of capital
expenditures for fiscal 1996.
Page 15
The Company believes that its cash, cash equivalents and
short-term investments, together with cash flow from operations
and borrowings available under its revolving credit agreement,
will be adequate to fund the Company's proposed capital
expenditures and other operating requirements.
Page 16
Item 8. Financial Statements and Supplementary Data:
The response to this Item is submitted in a separate section
of this report.
Item 9. Disagreements on Accounting and Financial Disclosures:
None.
Page 17
PART III
Item 10. Directors and Executive Officers:
The directors and executive officers of the Company and
their ages as of March 31, 1996 are as follows:
Name Age Position
Wayland H. Cato, Jr. * ++ 73 Chairman of the
Board of Directors and
Chief Executive Officer
Edgar T. Cato 71 Vice Chairman of
the Board of Directors
Linda McFarland Jenkins 48 President and
Chief Operating Officer and
Director
John P. Derham Cato 45 Executive Vice
President, President and
General Manager - It's
Fashion! Division and
Director
Alan E. Wiley 49 Executive Vice
President, Secretary, Chief
Financial and
Administrative Officer and
Director
Howard A. Severson 48 Executive Vice
President, Assistant
Secretary, Chief Real
Estate and Store
Development Officer and
Director
Clarice Cato Goodyear * + + 49 Executive Vice
President and Assistant
Secretary and Director
David Kempert 46 Executive Vice
President - Chief Store
Operations Officer
Diane V. Missel 47 Executive Vice President -
General Merchandise Manager
Patrick J. McIntyre 51 Senior Vice
President - Chief
Information Officer
Stephen R. Clark 53 Senior Vice
President - Human Resources
and Assistant Secretary
Thomas E. Cato 41 Vice President -
Divisional Merchandise
Manager, Accessories and
Shoes and Director
Robert W. Bradshaw, Jr. * + 62 Director
George S. Currin * + 59 Director
Paul Fulton * + 62 Director
Grant L. Hamrick * + 57 Director
Robert L. Kirby * + 65 Director
James H. Shaw * + 67 Director
A.F. (Pete) Sloan * + 66 Director
* Members of Compensation Committee
+ Members of Audit and Stock Option Committees
++ Member of Audit Committee
Page 18
Wayland H. Cato, Jr. is Chairman of the Board of Directors
and has been a director of the Company since 1946. Since 1960,
he has served as the Company's Chief Executive Officer.
Edgar T. Cato is the Vice Chairman of the Board of Directors
and has been a director of the Company since 1946. Mr. Edgar T.
Cato is the brother of Mr. Wayland H. Cato, Jr.
Linda McFarland Jenkins joined the Company in June 1990.
She currently serves as President and Chief Operating Officer and
has been a director since 1991. Prior to joining the Company,
she was Senior Vice President - General Merchandise Manager of
J.B. Ivey & Company, a Charlotte, North Carolina based regional
department store chain, where she was employed for 11 years.
John P. Derham Cato has been employed as an officer of the
Company since 1981 and has served as a director since 1986. He
currently serves as Executive Vice President, President and
General Manager - It's Fashion! Division. Mr. John Cato is a son
of Mr. Wayland H. Cato, Jr.
Alan E. Wiley joined the Company in July 1992. He currently
serves as Executive Vice President, Secretary, Chief Financial
and Administrative Officer and has been a director since 1994.
From 1981 through 1990 he held senior administrative and
financial positions with British American Tobacco, U.S. in
various companies of their specialty retail division. From 1990
until joining the Company, he was President and majority
stockholder of Gibbs-Louis, Inc., an Orlando, Florida based
women's specialty store chain. In May 1992, Gibbs-Louis, Inc.
filed a petition pursuant to the U.S. Bankruptcy Code and was
liquidated in June 1992.
Howard A. Severson has been an officer of the Company since
1985. He currently serves as Executive Vice President, Assistant
Secretary, Chief Real Estate and Store Development Officer and
has been a director since March 1995. Prior to joining the
Company, Mr. Severson served for five years as the Director of
Real Estate for Minnesota Fabric Company, a Charlotte based
retail fabric store chain.
Clarice Cato Goodyear has been employed by the Company since
1975 and has served as a director and officer of the Company
since 1979. She currently serves as Executive Vice President and
Assistant Secretary. Ms. Goodyear is a daughter of
Mr. Wayland H. Cato, Jr.
David Kempert joined the Company as Executive Vice
President - Chief Store Operations Officer in August 1989. From
1982 until 1989, he was employed by The Gap Stores, an apparel
specialty chain, where his most recent position was Zone Vice
President of the Northeast Region.
Diane V. Missel has been an officer of the Company since
1995. She currently serves as Executive Vice President - General
Merchandise Manager. From 1993 until 1995 she was employed by
Motherhood Maternity as Senior Vice President and General
Merchandise Manager. From 1986 until 1993, she worked in her
latest position as the President of both Ups 'N Downs and Capezio
- - - both divisions of U.S. Shoe.
Patrick J. McIntyre has been an officer of the Company since
1988. He currently serves as Senior Vice President - Chief
Information Officer. He was previously employed for seven years
as Vice President of Management Information Services at The
Higbee Company, a Cleveland, Ohio based regional department store chain.
Page 19
Stephen R. Clark has been an officer of the Company since
1994. He currently serves as Senior Vice President, Human
Resources. From 1990 until 1994, he was employed by Gantos, a
women's specialty apparel retailer, as Vice President, Human
Resources.
Thomas E. Cato has been employed by the Company since 1977,
has served as an officer since 1986 and has been a director since
1993. He currently serves as Vice President, Divisional
Merchandise Manager - Accessories and Shoes. Mr. Thomas Cato is
a son of Mr. Wayland H. Cato, Jr.
Robert W. Bradshaw, Jr. has been a director of the Company
since 1994. Since 1961, he has been engaged in the private
practice of law with Robinson, Bradshaw & Hinson, P.A. and as a
shareholder, officer and director of the firm. The law firm
serves as General Counsel to the Company.
George S. Currin has been a director of the Company since
1973. From 1978 to 1989, Mr. Currin was the President and Chief
Executive Officer and a director of Southeastern Savings Bank,
Inc. Since 1989, he has served as Chairman and Managing Director
of Fourth Stockton Company and Chairman of Currin - Patterson
Properties LLC.
Paul Fulton has been a director of the Company since 1994.
From July 1988 to December 1993, Mr. Fulton served as President
of Sara Lee Corporation. Since January 1994, Mr. Fulton has
served as Dean of the Kenan-Flagler Business School of the
University of North Carolina at Chapel Hill. Mr. Fulton is
currently a director of Sonoco Products, NationsBank Corporation,
Bassett Furniture Industries, Inc., and Winston Hotels, Inc.
Grant L. Hamrick has been a director of the Company since
1994. From 1961 to 1985, Mr. Hamrick was employed by the public
accounting firm Price Waterhouse and served as Managing Partner
of the Charlotte, North Carolina office. Since 1989, Mr. Hamrick
has served as Senior Vice President and Chief Financial Officer
for American City Business Journals, Inc.
Robert L. Kirby has been a director of the Company since
1992. Mr. Kirby served as Executive Vice President of
NationsBank of North Carolina from 1983 to 1988 and as President
and as director of NationsBank of Florida from 1988 until his
retirement in 1990.
James H. Shaw has been a director of the Company since 1989.
Mr. Shaw was Chairman of Consolidated Ivey's, a regional
department store chain, from 1988 until his retirement in 1989,
Chairman and Chief Executive Officer of J.B. Ivey & Company from
1986 to 1988 and Chairman and Chief Executive Officer of Ivey's
Carolinas from 1983 to 1986.
A.F. (Pete) Sloan has been a director of the Company since
1994. Mr. Sloan was Chairman of the Board of Lance, Inc. where
he was employed from 1955 until his retirement in 1990. Mr.
Sloan is currently a director of Lance, Inc., Bassett Furniture
Industries, Inc., PCA International, Inc., and Richfood, Inc.
Page 20
Item 11. Executive Compensation:
Incorporated by reference to Registrant's proxy statement
for 1996 annual stockholders' meeting.
Item 12. Security Ownership of Certain Beneficial Owners and
Management:
Incorporated by reference to Registrant's proxy statement
for 1996 annual stockholders' meeting.
Item 13. Certain Relationships and Related Transactions:
Incorporated by reference to Registrant's proxy statement
for 1996 annual stockholders' meeting.
Page 21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1.& 2. LIST OF FINANCIAL STATEMENTS AND SCHEDULE
The response to this portion of Item 14 is submitted as a
separate section of this report.
(a) 3. LIST OF EXHIBITS
See Exhibit Index at page 46 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
February 3, 1996.
Page 22
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A), (1) AND (2), (C) AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED FEBRUARY 3, 1996
THE CATO CORPORATION
CHARLOTTE, NORTH CAROLINA
Page 23
ITEM 14(A) 1. AND 2. LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
THE CATO CORPORATION
The following consolidated financial statements of The Cato
Corporation are included in Item 8:
Reports of Independent
Auditors..............................................Pages 24-25
Consolidated Statements of
Income................................................Page 26
Consolidated Balance Sheets...........................Page 27
Consolidated Statements of Cash Flows.................Page 28
Consolidated Statements of Stockholders'Equity........Page 29
Notes to Consolidated Financial Statements..........Pages 30 - 44
The following consolidated financial statement schedule of the
Cato Corporation is included in Item 14 (d):
SCHEDULE II-Valuation and qualifying accounts..............Page 45
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
Page 24
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF THE CATO CORPORATION
We have audited the accompanying consolidated balance sheet of
The Cato Corporation (the Company) as of February 3, 1996, and
the related consolidated statements of income, stockholders'
equity, and cash flows for the fiscal year then ended. Our audit
also included the financial statement schedule listed in the
Index at Item 14(a) as it relates to the fiscal year ended
February 3, 1996. These financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audit. The financial statements and financial statement
schedule of the Company for the years ended January 28, 1995 and
January 29, 1994 were audited by other auditors whose report
dated March 10, 1995 expressed an unqualified opinion on those
statements and schedule.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the February 3, 1996 consolidated financial
statements present fairly, in all material respects, the
financial position of the Company at February 3, 1996, and the
results of its operations and its cash flows for the fiscal year
then ended in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 15, 1996
Page 25
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
THE CATO CORPORATION
We have audited the accompanying consolidated balance sheet of
The Cato Corporation as of January 28, 1995 and the related
consolidated statements of income, stockholders' equity, and cash
flows for each of the two years in the period ended January 28,
1995. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of The Cato Corporation at January 28, 1995
and the consolidated results of its operations and its cash flows
for each of the two years in the period ended January 28, 1995 in
conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information
set forth therein.
ERNST & YOUNG LLP
Charlotte, North Carolina
March 10, 1995
Page 26
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
February 3, January 28, January 29,
1996 1995 1994
---------- ----------- ----------
(In thousands, except per share data)
Revenues
Retail sales $ 476,638 $ 463,737 $ 407,878
Other income (principally
finance and layaway charges) 13,357 12,449 12,021
--------- -------- ---------
Total revenues 489,995 476,186 419,899
Costs and Expenses
Cost of goods sold, including
occupancy, distribution
and buying 341,144 324,309 275,090
Selling, general and
administrative 122,699 116,144 100,760
Depreciation 7,785 6,844 5,465
Interest 292 377 250
-------- -------- ---------
Total operating expenses 471,920 447,674 381,565
-------- -------- ---------
Income Before Income Taxes 18,075 28,512 38,334
Income tax expense 6,055 10,407 13,532
------- ------- --------
Net Income $ 12,020 $ 18,105 $ 24,802
========= ======== =========
Earnings Per Common and Common
Equivalent Share $ .42 $ .62 $ .84
========= ======== =========
Dividends Per Share $ .16 $ .145 $ .088
========= ======== =========
See notes to consolidated financial statements.
Page 27
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
February 3, January 28,
1996 1995
------------ ----------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 26,183 $ 23,963
Short-term investments 21,711 22,263
Accounts receivable, net of allowance for
doubtful accounts of $3,401,000 at 39,792 37,926
February 3, 1996 and January 28, 1995
Merchandise inventories 58,440 54,674
Deferred income taxes 1,825 2,053
Prepaid expenses 2,486 2,602
----------- ---------
Total Current Assets 150,437 143,481
Property and Equipment 54,364 53,146
Other Assets 5,094 4,695
----------- ---------
Total Assets $ 209,895 $ 201,322
=========== =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 36,482 $ 36,159
Accrued expenses 10,458 11,832
Income taxes 1,328 909
--------- ---------
Total Current Liabilities 48,268 48,900
Deferred Income Taxes 4,491 4,192
Other Noncurrent Liabilities 7,454 6,722
Stockholders' Equity:
Class A Common Stock, $.033 par value per
share, 50,000,000 shares authorized;
23,204,647 shares issued at February 3, 1996
and 23,132,327 shares issued and
outstanding at January 28, 1995 773 770
Convertible Class B Common Stock, $.033 par
value per share, 15,000,000 shares
authorized; 5,264,317 shares issued and
outstanding at February 3, 1996 and
January 28, 1995 176 176
Preferred Stock, $100 par value per share,
100,000 shares authorized, none issued - -
Additional paid-in capital 62,665 62,278
Retained earnings 86,291 78,284
--------- -------
149,905 141,508
Less Class A Common Stock in treasury, at cost
(40,000 shares at February 3, 1996) 223 -
--------- -------
Total Stockholders' Equity 149,682 141,508
Total Liabilities and Stockholders' Equity $ 209,895 $ 201,322
========= ==========
See notes to consolidated financial statements.
Page 28
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF
CASH FLOWS
Fiscal Year Ended
------------------------------------
February 3, January 28, January 29,
1996 1995 1994
----------- ----------- -----------
(In thousands)
Operating Activities
Net income $ 12,020 $ 18,105 $ 24,802
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 7,785 6,844 5,465
Amortization of investment
premiums 280 235 720
Deferred income taxes 216 575 1,161
Loss on disposal of property and
equipment - 352 -
Changes in operating assets and
liabilities:
Increase in accounts receivable (1,866) (1,112) (9,077)
(Increase) decrease in
merchandise inventories (3,766) 1,140 (22,072)
Increase in other assets (283) (1,040) (1,294)
Increase (decrease) in
accrued income taxes 419 909 (1,198)
Increase in accounts payable
and other liabilities 93 7,386 7,995
------- ------- -------
Net cash provided by operating
activities 14,898 33,394 6,502
------- ------- -------
Investing Activities
Expenditures for property and
equipment (9,415) (25,484) (17,214)
Proceeds from sale of property and
equipment - 378 -
Purchases of short-term
investments (10,442) (11,882) (34,081)
Sales of short-term investments 11,566 9,145 16,577
-------- -------- --------
Net cash used in investing
activities (8,291) (27,843) (34,718)
-------- -------- --------
Financing Activities
Dividends paid (4,554) (4,115) (2,499)
Purchase of treasury stock (223) - -
Proceeds from employee stock
purchase plan 381 435 -
Proceeds from stock options
exercised 9 91 1,459
Proceeds from sale of common stock - - 24,262
Income tax benefit from stock
options exercised - - 1,293
Repayments of life insurance
policy loans - - (203)
-------- -------- ---------
Net cash provided by (used in)
financing activities (4,387) (3,589) 24,312
-------- ------- ---------
Net Increase (Decrease) in Cash
and Cash Equivalents 2,220 1,962 (3,904)
Cash and Cash Equivalents at
Beginning of Year 23,963 22,001 25,905
------- ------- -------
Cash and Cash Equivalents at End
of Year $ 26,183 $ 23,963 $ 22,001
========= ========= =========
See notes to consolidated financial statements.
Page 29
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK
-------- -------- -------- -------- --------
(In thousands)
Balance - January
30, 1993 $ 608 $ 176 $ 41,715 $ 42,532 $ 6,815
Net income 24,802
Dividends paid
($.088 per share) (2,499)
Sale of Class A
Common Stock -
1,012,500 shares 34 24,228
Class A Common Stock
sold through
stock option
plans - 178,550
shares 6 1,193
Treasury shares sold
through stock
options plans -
23,300 shares 249 (11)
Retirement of
treasury stock -
5,778,970 shares (192) (6,612) (6,804)
Three-for-two stock
split - 9,395,385
shares of Class A
Common Stock 313 (313)
Income tax benefit
from stock options
exercised 1,293
Shares converted
from Class B Common
Stock to Class A
Common Stock
- 18,000 shares - -
-------- ------- -------- ------- -------
Balance - January
29, 1994 769 176 61,753 64,835 -
Net income 18,105
Dividends paid
($.145 per share) (4,115)
Class A Common Stock
sold through employee
stock purchase
plan - 41,769 shares 1 434
Class A Common Stock
sold through stock
option plans - 12,350
shares - 91
Unrealized losses on
available for sale
securities, net
of deferred income
tax benefit
of $311,000 (541)
-------- ------- -------- ------- ------
Balance - January
28, 1995 770 176 62,278 78,284 -
Net income 12,020
Dividends paid
($.16 per share) (4,554)
Class A Common Stock
sold through employee
stock purchase
plan - 68,720 shares 3 378
Class A Common Stock
sold through stock
option plans
- 3,600 shares - 9
Purchase of treasury
shares - 40,000 shares 223
Unrealized gains on
available for sale
securities, net
of deferred income
taxes of $311,000 541
------- ------- -------- -------- --------
Balance - February
3, 1996 $ 773 $ 176 $ 62,665 $ 86,291 $ 223
======= ======= ======== ======== ========
See notes to consolidated financial statements.
Page 30
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 Company and its wholly-
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Description of Business and Fiscal Year - The Company has
principally one segment of business - operation of women's
apparel specialty stores. The Company's stores operate under the
names Cato, Cato Fashions, Cato Plus and It's Fashion! and are
located primarily in strip shopping centers in non-metropolitan
markets in the South and Southeastern United States. The
Company's fiscal year ends on the Saturday nearest January 31.
The fiscal year ended February 3, 1996 included fifty-three weeks
and the fiscal years ending January 28, 1995 and January 29, 1994
included fifty-two weeks.
Use of Estimates - The preparation of the Company's
financial statements in conformity with generally accepted
accounting principles 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.
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. The fair value of short-term investments are based
on quoted market prices.
The Company's short-term investments held at February 3,
1996 and January 28, 1995 are classified as available-for-sale.
Available for sale securities are carried at fair value, with
unrealized gains and losses, net of income taxes, reported as an
adjustment to retained earnings. The amortized 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 other income.
Accounts Receivable - Accounts receivable include customer
trade accounts, customer layaway receivables and miscellaneous
trade receivables. Customer receivables related to layaway sales
are reflected net of a reserve for unrealized profit. Net
layaway receivables totaled approximately $2,679,000 and
$2,019,000 at February 3, 1996 and January 28, 1995,
respectively.
Supplemental Cash Flow Information - Interest paid during
the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994 was $375,000, $202,000 and $271,000,
respectively. Income tax payments, net of refunds received, for
the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994 were $5,577,000, $8,495,000 and $12,828,000,
respectively.
Inventories - Merchandise inventories are stated at the
lower of cost (first-in, first-out method) or market as
determined by the retail method.
Page 31
Property and Equipment - Property and equipment are recorded
at cost. Maintenance and repairs are charged to operations as
incurred; renewals and betterments are capitalized. Depreciation
of property and equipment is provided on the straight-line method
over the estimated useful lives of the related assets.
Retail Sales - Revenues from retail sales (including layaway
transactions) are recognized at the time of the sale, net of
returns, and exclude sales taxes.
Advertising - Advertising costs are expensed in the period
in which they are incurred. Advertising expense was $8,803,000,
$9,046,000 and $7,350,000 for the fiscal years ended February 3,
1996, January 28, 1995 and January 29, 1994, respectively.
Earnings Per Common and Common Equivalent Share - Earnings
per share have been computed based on the weighted average number
of Class A and Class B common shares and common stock equivalents
outstanding during the respective periods. Common stock
equivalents represent the dilutive effect of the assumed exercise
of outstanding stock options. The number of shares used in the
earnings per common and common equivalent share computations were
28,597,323, 29,113,091 and 29,655,394 for the fiscal years ended
February 3, 1996, January 28, 1995 and January 29, 1994,
respectively. All per share amounts reflect a three-for-two stock
split effected June 28, 1993.
Income Taxes - The Company and its subsidiaries file a
consolidated federal income tax return. Income taxes are
provided based on the 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.
Store Opening Costs - Costs relating to the opening of new
stores or the relocating or expanding of existing stores are
expensed as incurred.
Closed Store Lease Obligations - At the time stores are
closed, provision is made for the rentals required to be paid
over the remaining lease terms. Rentals due the Company under
non-cancelable subleases are offset against the related
obligations in the year the sublease is signed. There is no
offset for assumed sublease revenues.
Reclassifications - Certain reclassifications have been made
to the consolidated financial statements for prior fiscal years
to conform with classifications used as of February 3, 1996.
Page 32
2. Short-Term Investments:
Short-term investments at February 3, 1996 include the following:
Unrealized Estimated
Security Type Cost Gains (Losses) Fair Value
- - -------------- ---- ----- -------- ----------
(In thousands)
Obligations of states
and political subdivisions $ 17,285 $ 86 $ (5) $ 17,366
Corporate debt securities 2,000 - (44) 1,956
--------- ------- -------- ----------
Subtotal 19,285 86 (49) 19,322
Equity securities 2,426 - (37) 2,389
--------- ------- -------- ----------
Total $ 21,711 $ 86 $ (86) $ 21,711
========= ======= ======== ==========
Short-term investments at January 28, 1995 include the following:
Unrealized Estimated
Security Type Cost (Losses) Fair Value
- - ------------- ------ ---------- ----------
(In thousands)
Obligations of states
and political subdivisions $ 16,567 $ (120) $ 16,447
Corporate debt securities 2,000 (160) 1,840
--------- ---------- --------
Subtotal 18,567 (280) 18,287
Equity securities 4,548 (572) 3,976
--------- --------- --------
Total $ 23,115 $ (852) $ 22,263
========= ========= ========
The unrealized losses at January 28, 1995 of $541,000, net of an income
tax benefit of $311,000, is included in stockholders' equity as an adjustment
to retained earnings.
Page 33
The amortized cost and estimated fair value of debt and
marketable equity securities at February 3, 1996, by contractual
maturity, are shown below:
Estimated
Security Type Cost Fair Value
- - ------------- ------- ----------
(In thousands)
Due in one year or less $ 13,607 $ 13,647
Due in one year
through three years 5,678 5,675
--------- ----------
Subtotal 19,285 19,322
Equity securities 2,426 2,389
--------- ----------
Total $ 21,711 $ 21,711
========= ==========
Page 34
3. Accounts Receivable:
Accounts receivable consist of the following:
February 3, January 28,
1996 1995
----------- -----------
(In thousands)
Customer accounts-
principally deferred
payment accounts $ 41,331 $ 38,291
Miscellaneous trade
receivables 1,862 3,036
-------- --------
Total 43,193 41,327
Less allowance for
doubtful accounts 3,401 3,401
-------- --------
Accounts receivable - net $ 39,792 $ 37,926
======== ========
Finance charge and late charge revenue on customer deferred
payment accounts were $6,535,000 $6,324,000 and $5,539,000 for
the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994, respectively, and the provision for doubtful
accounts was $2,918,000, $2,888,000 and $1,352,000, for the fiscal
years ended February 3, 1996, January 28, 1995 and January 29,
1994, respectively. The provision for doubtful accounts is
classified as a component of selling, general and administrative
expenses.
Page 35
4. Property and Equipment:
Property and equipment consist of the following:
February 3, January 28,
1996 1995
----------- -----------
(In thousands)
Land and improvements $ 1,853 $ 763
Buildings 15,481 6,751
Leasehold improvements 16,182 12,811
Fixtures and equipment 57,096 49,897
Construction in progress 2,449 14,352
--------- -----------
Total 93,061 84,574
Less accumulated
depreciation 38,697 31,428
--------- -----------
Property and equipment - net $ 54,364 $ 53,146
========= ===========
Page 36
5. Accrued Expenses:
Accrued expenses consist of the following:
February 3, January 28,
1996 1995
----------- -----------
(In thousands)
Accrued bonus and retirement
savings plan contributions $ 1,742 $ 1,787
Accrued payroll and related items 2,819 4,472
Closed stores 687 486
Property taxes 1,207 1,018
Contingent rent 604 735
Advertising 253 267
Accrued credit expenses 384 306
Accrued data processing expenses 234 280
Accrued heath care plan contributions 428 285
Other 2,100 2,196
---------- ---------
Total accrued expenses $ 10,458 $ 11,832
========== =========
Page 37
6. Financing Arrangements:
In February 1996, the Company entered into a new unsecured
revolving credit agreement which provides for borrowings of up to
$20 million and an additional letter of credit facility of $15
million. The revolving credit agreement is committed until May
1999 and the letter of credit facility is renewable annually. The
revolving credit agreement contains various financial covenants,
including the maintenance of specific financial ratios. The
agreement replaces an unsecured revolving credit and term loan
agreement, which was committed until May 1998, and provided $35
million of available borrowings and a $15 million letter of credit
facility. There were no borrowings outstanding under the prior
agreement at February 3, 1996 or January 28, 1995.
The Company had approximately $6,137,000 and $8,607,000 at
February 3, 1996 and January 28, 1995, respectively, of
outstanding irrevocable letters of credit relating to purchase
commitments. Upon satisfaction of the terms of the letters of
credit, the Company is obligated to pay the issuing bank the
dollar amount of the commitment.
Page 38
7. 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.
The Company's charter 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.
In June 1993, the Company effected a three-for-two stock
split in the form of a stock dividend. The split resulted in the
issuance of 9,395,385 shares of Class A Common Stock to Class A
and B shareholders. All references in the financial statements to
average numbers of shares outstanding and related prices, per
share amounts and stock option plan data reflect the split.
In October 1993, the Company registered 250,000 shares of
Class A Common Stock available for issuance under an Employee
Stock Purchase Plan (the "Plan"). Under the terms of the Plan,
substantially all employees may purchase Class A Common Stock
through payroll deductions of up to 10% of their salary. 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, employees are given the
opportunity to make a lump sum purchase of up to $10,000 worth of
Class A Common Stock at 85% of market value. The number of shares
purchased by participants through the plan were 68,720 shares and
41,769 shares for the years ended February 3, 1996 and January 28,
1995, respectively.
In 1987, the Company adopted an Incentive Stock Option Plan
and a Non-Qualified Stock Option Plan for key employees of the
Company. In 1991, the Board of Directors of the Company amended
the 1987 option plans increasing the number of shares reserved
under the plans from 2,100,000 shares to 3,150,000 shares. In
1994, the Board of Directors increased the number of shares
issuable under the plans to 3,900,000 shares of which 825,000
shares are issuable under the Incentive Stock Option Plan and
3,075,000 shares are issuable under the Non-Qualified Stock Option
Plan. The purchase price of the shares under option must be at
least 100 percent of the fair market value of Class A Common Stock
at the date of the grant and must be exercisable not later than 10
years after the date of the grant unless otherwise expressly
authorized by the Board of Directors.
Page 39
Option plan activity for the three fiscal years ended
February 3, 1996 is set forth below:
Number of Price Per
Shares Share
--------- ---------------
Outstanding options,
January 30, 1993 2,501,550 $ 1.33 - 13.17
Granted 226,750 17.50 - 23.06
Exercised (224,750) 1.50 - 13.17
Cancelled (50,700) 1.50 - 19.17
----------
Outstanding options,
January 29, 1994 2,452,850 1.33 - 23.06
Granted 584,500 6.75 - 17.13
Exercised (12,350) 3.25 - 8.00
Cancelled (32,700) 3.25 - 20.67
-----------
Outstanding options,
January 28, 1995 2,992,300 1.33 - 23.00
Granted 883,250 6.19 - 8.13
Exercised (3,600) 1.33 - 8.00
Cancelled (854,150) 6.19 - 23.00
------------
Outstanding options,
February 3, 1996 3,017,800 $ 1.42 - $8.42
============ ===============
Exercisable at
February 3, 1996 1,881,950 $ 1.42 - $8.42
============ ===============
Outstanding options at February 3, 1996 covered 927,918
shares of Class B Common Stock and 2,089,882 shares of Class A
Common Stock. Outstanding options at January 28, 1995 covered
927,918 shares of Class B Common Stock and 2,064,382 shares of
Class A Common Stock. Options available to be granted under the
option plans were 358,600 shares at February 3, 1996 and 387,700
shares at January 28, 1995.
Page 40
8. Employee Benefit Plans:
The Company has a defined contribution retirement savings
plan (401(k)) which covers all employees who meet minimum age and
service requirements. The 401(k) plan allows participants to
contribute up to 16% of their annual compensation. The Company is
obligated to make a minimum contribution and further Company
contributions, at the discretion of the Board of Directors, are
based on a formula of percentages of pre-tax profits. The
Company's contributions for the years ended February 3, 1996,
January 28, 1995 and January 29, 1994 were approximately
$961,000, $1,278,000 and $2,272,000, respectively. The Company
has an Employee Stock Ownership Plan (ESOP), which covers
substantially all employees who meet minimum age and service
requirements. The Board of Directors determines contributions to
the ESOP. No contributions were made to the ESOP for the years
ended February 3, 1996, January 28, 1995 and January 29, 1994,
respectively.
Page 41
9. Leases:
The Company has operating lease arrangements for store
facilities and equipment. Facility leases generally are for
periods of five years with renewal options, and most provide for
additional contingent rentals based on a percentage of store sales
in excess of stipulated amounts. Equipment leases are generally
for three-to seven-year periods. During the years ended February
3, 1996 and January 28, 1995, the Company entered into an
agreement with a lessor to lease $9.5 and $10 million,
respectively, of store fixtures, point-of-sale devices and
warehouse equipment. These leases, which are being accounted for
as operating leases, are for terms of seven years but may be
cancelled annually upon proper notice to the lessor. Upon notice
of cancellation, the Company would be obligated to purchase the
equipment at a prescribed termination value from the lessor. If
the Company cancelled the leases on their next anniversary dates,
the purchase price for the equipment would be approximately
$16,941,000.
The minimum commitments relating to future payments under non-
cancelable operating leases are (in thousands):
Fiscal Year
-----------
1996 $ 28,450
1997 21,956
1998 16,101
1999 11,289
2000 7,038
2001 and thereafter 13,924
-------
Total minimum lease payments $ 98,758
The following schedule shows the composition of total rental
expense for all leases:
Fiscal Year Ended
---------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
----------- ----------- -----------
(In thousands)
Minimum rentals $ 28,666 $ 24,817 $ 20,180
Contingent rent 363 658 872
-------- -------- --------
Total rental expense $ 29,029 $ 25,475 $ 21,052
======== ======== ========
Page 42
10. Income Taxes:
The provisions for income taxes consist of the following:
Fiscal Year Ended
-----------------------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
------------ ----------- -----------
(In thousands)
Current income taxes:
Federal $ 4,976 $ 9,681 $ 10,488
State 863 151 590
------- ------- --------
Total 5,839 9,832 11,078
------- ------- --------
Deferred income taxes:
Federal 861 518 1,061
State (645) 57 100
------- ------- --------
Total 216 575 1,161
------- ------- --------
Allocation of tax
benefit to capital
for stock options
exercised - - 1,293
Total income tax -------- -------- --------
expense $ 6,055 $ 10,407 $ 13,532
======== ======== ========
The components of the provision for deferred income taxes are
as follows:
Fiscal Year Ended
----------------------------------
February January January
3, 28, 29,
1996 1995 1994
-------- ------- -------
(In thousands)
Depreciation $ 1,244 $ 901 $ 74
Provision for doubtful
accounts (34) (86) 206
Restructuring expenses 30 18 418
Inventory valuation (274) (50) (41)
Self-insurance reserve - (12) 113
Change in tax rate - - 13
Other (750) (196) 378
-------- ------- --------
Total $ 216 $ 575 $ 1,161
======== ======== ========
Page 43
Significant components of the Company's deferred tax assets
and liabilities as of February 3, 1996 and January 28, 1995 are as
follows:
February 3, January 28,
1996 1995
----------- -----------
(In thousands)
Deferred tax assets:
Bad debt reserve $ 1,362 $ 1,329
Inventory valuation 709 435
Unrealized losses on short-
term investments - 311
Reserves 507 992
-------- ---------
Total deferred tax assets 2,578 3,067
-------- ---------
Deferred tax liabilities:
Tax over book depreciation 5,425 4,607
Other, net (181) 599
-------- ---------
Total deferred tax liabilities 5,244 5,206
-------- ---------
Net deferred tax liabilities $ 2,666 $ 2,139
======== =========
The reconciliation of the Company's effective income tax rate
with the statutory rate is as follows:
Fiscal Year Ended
-------------------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
----------- ----------- -----------
Federal income
tax rate 35.0% 35.0% 35.0%
State income taxes 2.8 0.5 1.3
Other (4.3) 1.0 (1.0)
----------- ------------ -----------
Effective income
tax rate 33.5% 36.5% 35.3%
=========== ============= ===========
Page 44
11. Quarterly Financial Data (Unaudited):
Summarized quarterly financial results are as follows (in
thousands, except per share data):
First Second Third Fourth
Fiscal 1995 Qtr Qtr Qtr Qtr
- - ----------- ------- -------- -------- --------
Retail Sales $ 114,461 $ 114,739 $ 105,825 $ 141,613
Total revenues 117,850 109,331 145,059 117,755
Cost of goods sold,
including occupancy,
distribution and
buying 75,276 82,256 80,097 103,515
Net income (loss) 7,498 2,963 (1,492) 3,051
Earnings (loss) per
common and
common equivalent
share $ .26 $ .10 $ (.05) $ .11
Fiscal 1994
- - ------------
Retail Sales $ 110,105 $ 110,196 $ 109,111 $ 134,325
Total revenues 113,131 113,263 112,212 137,580
Cost of goods sold,
including occupancy,
distribution and
buying 70,781 77,020 77,505 99,003
Net income 8,210 4,325 2,799 2,771
Earnings per common
and common
equivalent share $ .28 $ .15 $ .10 $ .10
Page 45
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
----------------------------------
Allowance Reserve
for for
Doubtful Rental
Accounts Commitments
(a) (b)
----------- -----------
(In thousands)
Balance at January 30, 1993 $ 3,750 $ 167
Additions charged to costs and expenses 1,352 268
Additions (Deductions) charged to
other accounts 605 (d) 269 (e)
Deductions (2,545)(c) (414)
------------ -----------
Balance at January 29, 1994 3,162 290
Additions charged to costs and
expenses 2,888 825
Additions (Deductions) charged to
other accounts 843 (d) -
Deductions (3,492) (c) (700)
------------- -----------
Balance at January 28, 1995 3,401 415
Additions charged to costs and
expenses 2,918 1,199
Additions (Deductions) charged to
other accounts 758 (d) -
Deductions (3,676) (c) ( 955)
------------ ----------
Balance at February 3, 1996 $ 3,401 $ 659
============ ==========
(a) Deducted from trade accounts receivable.
(b) Provision for the difference between costs and revenues from
noncancelable subleases over the
lease terms of closed stores.
(c) Uncollectible accounts written off.
(d) Recoveries of amounts previously written off.
(e) Transferred from restructuring reserve.
Page 46
EXHIBIT INDEX
Designation of
Exhibit Page
- - -------------- ---------
22 Subsidiaries of the Registrant 47
23 Consents of Independent Auditors 48 - 49
Page 47
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Name of State of Name under which
Subsidiary Incorporation Subsidiary does Business
- - ---------- ------------- -----------------------
C.H.W. Corporation Delaware C.H.W. Corporation
Providence Insurance Company A Bermudian Company Providence Insurance
Limited Company Limited
Page 48
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-41314) pertaining to The Cato
Corporation Employee Incentive Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-41315) pertaining to The
Cato Corporation Non-qualified Stock Option Plan, and in the
Registration Statement (Form S-8 No. 33-69844) pertaining to The
Cato Corporation Employee Stock Purchase Plan, of our report
dated March 15, 1996, with respect to the consolidation financial
statements and financial statement schedule of The Cato
Corporation included in the Annual Report on Form 10-K for the
year ended February 3, 1996.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 25, 1996
Page 49
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-41314) pertaining to the Cato
Corporation Employee Incentive Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-41315) pertaining to the
Cato Corporation Non-Qualified Stock Option Plan, and in the
Registration Statement (Form S-8 No. 33-69844) pertaining to the
Cato Corporation Employee Stock Purchase Plan, of our report
dated March 10, 1995, with respect to the consolidated financial
statements and schedule of the Cato Corporation included in the
Annual Report (Form 10-K) for the year ended February 3, 1996.
ERNST & YOUNG LLP
Charlotte, North Carolina
April 25, 1996
Page 50
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/ Wayland H. Cato, Jr. By /s/ Robert M. Sandler
----------------------------- -------------------------
Wayland H. Cato, Jr. Robert M. Sandler
Chairman of the Board of Senior Vice President -
Directors and Controller
Chief Executive Officer
By /s/ Alan E. Wiley
-----------------------------
Alan E. Wiley
Executive Vice President- Secretary,
Chief Financial and Administrative
Officer
Date: April 25, 1996
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/ Wayland H. Cato, Jr. /s/ Robert W. Bradshaw, Jr.
------------------------ ----------------------------
Wayland H. Cato, Jr. Robert W. Bradshaw, Jr.
(Director) (Director)
/s/ Edgar T. Cato /s/ George S. Currin
----------------------- -----------------------------
Edgar T. Cato George S. Currin
(Director) (Director)
/s/ Linda McFarland Jenkins /s/ Paul Fulton
------------------------ -----------------------------
Linda McFarland Jenkins Paul Fulton
(Director) (Director)
/s/ John P. Derham Cato /s/ Grant L. Hamrick
------------------------ ------------------------------
John P. Derham Cato Grant L. Hamrick
(Director) (Director)
/s/ Alan E. Wiley /s/ Robert L. Kirby
------------------------ -------------------------------
Alan E. Wiley Robert L. Kirby
(Director) (Director)
/s/ Howard A. Severson
------------------------ -------------------------------
Howard A. Severson James H. Shaw
(Director) (Director)
/s/ A.F. (Pete) Sloan
------------------------ -------------------------------
Clarice Cato Goodyear A.F. (Pete) Sloan
(Director) (Director)
/s/ Thomas E. Cato
-------------------------
Thomas E. Cato
(Director)