1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
-------------------------------------------------
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 0-3747
-----------------------------
THE CATO CORPORATION AND SUBSIDIARIES
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-0484485
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
8100 Denmark Road, Charlotte, North Carolina 28273-5975
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(Address of principal executive offices) (Zip Code)
(704) 554-8510
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(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
--- ---
As of November 17, 1998, there were 22,191,738 shares of Class A Common Stock
and 5,264,317 shares of Class B Common Stock outstanding.
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THE CATO CORPORATION
FORM 10-Q
OCTOBER 31, 1998
TABLE OF CONTENTS
Page
No.
---
PART I - FINANCIAL INFORMATION (UNAUDITED)
Consolidated Statements of Income 2
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II - OTHER INFORMATION 10-11
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Page 2
PART I FINANCIAL INFORMATION
THE CATO CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
OCTOBER 31, November 1, OCTOBER 31, November 1,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Retail sales $ 113,834 $ 109,886 $ 382,581 $ 354,038
Other income (principally finance and layaway charges) 4,766 3,857 14,239 11,656
------------- ------------- ------------- -------------
Total revenues 118,600 113,743 396,820 365,694
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of goods sold, including occupancy,
distribution and buying 81,364 80,028 264,407 249,038
Selling, general and administrative 30,977 29,747 96,477 91,428
Depreciation 1,883 1,873 5,657 5,781
Interest 54 66 185 197
------------- ------------- ------------- -------------
Total expenses 114,278 111,714 366,726 346,444
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 4,322 2,029 30,094 19,250
Income taxes 1,513 639 10,533 6,064
------------- ------------- ------------- -------------
NET INCOME $ 2,809 $ 1,390 $ 19,561 $ 13,186
============= ============= ============= =============
BASIC EARNINGS PER SHARE $ .10 $ .05 $ .71 $ .47
============= ============= ============= =============
DILUTED EARNINGS PER SHARE $ .10 $ .05 $ .69 $ .46
============= ============= ============= =============
DIVIDENDS PER SHARE $ .05 $ .04 $ .14 $ .12
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
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THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, November 1, January 31,
1998 1997 1998
(UNAUDITED) (Unaudited)
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents $ 36,785 $ 18,189 $ 41,644
Short-term investments 39,875 33,774 27,843
Accounts receivable - net 43,148 47,453 47,186
Merchandise inventories 87,327 89,365 64,226
Deferred income taxes 2,905 2,014 2,958
Prepaid expenses 2,140 1,833 1,686
------------- ------------- -------------
Total Current Assets 212,180 192,628 185,543
Property and Equipment - net 52,073 50,229 49,801
Other Assets 6,150 5,554 6,093
------------- ------------- -------------
Total $ 270,403 $ 248,411 $ 241,437
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 63,984 $ 58,317 $ 52,931
Accrued expenses 20,494 17,475 17,244
Income taxes 2,322 4,225 2,041
------------- ------------- -------------
Total Current Liabilities 86,800 80,017 72,216
Deferred Income Taxes 5,417 3,851 5,296
Other Noncurrent Liabilities 6,452 6,671 6,409
Stockholders' Equity:
Class A Common Stock, issued 23,979,238 shares,
23,439,466 shares and 23,502,647 shares at
October 31, 1998, November 1, 1997 and
January 31, 1998, respectively 799 781 783
Convertible Class B Common Stock, issued and
outstanding 5,264,317 shares at October 31, 1998,
November 1, 1997 and January 31, 1998, respectively 176 176 176
Preferred Stock, none - - -
Additional paid-in capital 67,817 63,677 64,187
Retained earnings 117,609 98,449 101,537
------------- ------------- -------------
186,401 163,083 166,683
Less Class A Common Stock in treasury,
at cost (1,822,500 shares at October 31, 1998,
851,500 shares at November 1, 1997, and 1,371,500
shares at January 31, 1998, respectively) 14,667 5,211 9,167
------------- ------------- -------------
Total Stockholders' Equity 171,734 157,872 157,516
------------- ------------- -------------
Total $ 270,403 $ 248,411 $ 241,437
============= ============= =============
See accompanying notes to consolidated financial statements.
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THE CATO CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
----------------------------------------
OCTOBER 31, November 1,
1998 1997
----------------------------------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 19,561 $ 13,186
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,657 5,781
Amortization of investment premiums 83 75
Loss on disposal of property and equipment 638 -
Changes in operating assets and liabilities which
provided (used) cash:
Accounts receivable 4,038 (4,261)
Merchandise inventories (23,101) (25,397)
Other assets (511) 244
Accrued income taxes 281 2,646
Accounts payable and other liabilities 14,475 22,179
------------- -------------
Net cash provided by operating activities 21,121 14,453
------------- -------------
INVESTING ACTIVITIES
Expenditures for property and equipment (8,567) (5,303)
Purchases of short-term investments (22,032) (5,866)
Sales of short-term investments 10,431 5,529
------------- -------------
Net cash used in investing activities (20,168) (5,640)
------------- -------------
FINANCING ACTIVITIES
Dividends paid (3,829) (3,393)
Purchase of treasury stock (5,567) (4,232)
Proceeds from employee stock purchase plan 331 229
Proceeds from stock options exercised 3,253 179
------------- -------------
Net cash used in financing activities (5,812) (7,217)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,859) 1,596
Cash and Cash Equivalents at Beginning of Period 41,644 16,593
------------- -------------
Cash and Cash Equivalents at End of Period $ 36,785 $ 18,189
============= =============
See accompanying notes to consolidated financial statements.
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THE CATO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1998 AND
NOVEMBER 1, 1997
- - -------------------------------------------------------------------------------
NOTE 1 - GENERAL:
The consolidated financial statements have been prepared from the accounting
records of The Cato Corporation (the Company) and all amounts shown at October
31, 1998 and November 1, 1997 are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of the interim
period may not be indicative of the entire year.
The Company's short-term investments are classified as available-for-sale
securities, and therefore, are carried at fair value, with unrealized gains and
losses, net of income taxes, reported as an adjustment to retained earnings.
In the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
Total comprehensive income for the third quarter and nine months ended October
31, 1998 was $3,033,000 and $19,894,000 respectively. Total comprehensive income
for the third quarter and nine months ended November 1, 1997 was $1,390,000 and
$13,186,000, respectively. Total comprehensive income is composed of net income
and unrealized gains or losses on available-for-sale securities.
Inventories are stated at the lower of cost (first-in, first-out) or market,
determined by the retail inventory method.
In April 1998, the Company transferred 10,000 shares of Class A Common Stock
from treasury stock to its Employee Stock Ownership Plan as the contribution for
the fiscal year ended January 31, 1998. In July 1998, the Company repurchased
161,500 shares of Class A Common Stock for $2,310,000, or an average price of
$14.30 per share. In the third quarter of fiscal 1998, the Company repurchased
an additional 299,500 shares of Class A Common Stock for $3,257,000, or an
average price of $10.87 per share.
The provisions for income taxes are based on the Company's estimated annual
effective tax rate.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131") was effective in the
first quarter of fiscal 1998. Management is currently evaluating the effects of
SFAS 131, if any, on the Company's financial reporting disclosures for the year
ended January 30, 1999.
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THE CATO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1998 AND
NOVEMBER 1, 1997
- - -------------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE:
Earnings per share is calculated by dividing net income by the weighted-average
number of Class A and Class B common shares outstanding during the respective
periods. The weighted-average number of shares used in the basic and diluted
earnings per share computations are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
OCTOBER 31, November 1, OCTOBER 31, November 1,
1998 1997 1998 1997
--------------- -------------- --------------- --------------
Weighted-average shares outstanding 27,433,823 27,879,686 27,546,942 28,224,032
Dilutive effect of stock options 508,592 251,370 729,375 112,176
---------- ---------- ---------- ----------
Weighted-average shares and
equivalents outstanding 27,942,415 28,131,056 28,276,317 28,336,208
========== ========== ========== ==========
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the nine months ended October 31, 1998 and November 1, 1997
was $121,000 and $194,000, respectively. Income tax payments, net of refunds
received, for the nine months ended October 31, 1998 and November 1, 1997 were
$10,308,000 and $2,869,000, respectively.
NOTE 4 - FINANCING ARRANGEMENTS:
In May 1998, the Company's unsecured revolving credit agreement was amended to
add the $15 million letter of credit facility to the $20 million revolving
credit facility. The entire $35 million unsecured credit facility was extended
to May 31, 2001 with no change in financial covenants or maintenance of specific
financial ratios. There were no borrowings outstanding under the agreement at
October 31, 1998 or November 1, 1997.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
Company's Unaudited Consolidated Statements of Income as percentages of total
retail sales:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
OCTOBER 31, November 1, OCTOBER 31, November 1,
1998 1997 1998 1997
-------------- -------------- -------------- -------------
Total retail sales 100.0% 100.0% 100.0% 100.0%
Total revenues 104.2 103.5 103.7 103.3
Cost of goods sold, including occupancy,
distribution and buying 71.5 72.8 69.1 70.3
Selling, general and administrative 27.2 27.0 25.2 25.9
Income before income taxes 3.8 1.9 7.9 5.4
Net income 2.5 1.3 5.1 3.7
COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS OF 1998 WITH 1997.
OPERATING RESULTS
Total retail sales for the third quarter were $113.8 million compared to last
year's third quarter sales of $109.9 million, a 4% increase. Same-store sales
increased 1% in this year's third quarter. For the nine months ended October 31,
1998, total retail sales were $382.6 million compared to last year's first nine
months sales of $354.0 million, an 8% increase, and same-store sales increased
5% for the comparable nine month period. The increase in retail sales for the
first nine months of 1998 resulted from the Company's continued everyday low
pricing strategy, improved merchandise content, and an increase in store
development activity. The Company operated 723 stores at October 31, 1998
compared to 688 stores at the end of last year's third quarter.
Other income for the third quarter and first nine months of 1998 increased 24%
and 22%, respectively, over the prior year's comparable periods. The increase in
the current year resulted primarily from increased finance and late charge
income on the Company's customer accounts receivable and increased earnings from
cash equivalents and short-term investments.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
OPERATING RESULTS - CONTINUED
Cost of goods sold, including occupancy, distribution and buying expenses were
71.5% and 69.1% of total retail sales for the third quarter and first nine
months of 1998, compared to 72.8% and 70.3% for last year's comparable three and
nine month periods, respectively. The decrease in cost of goods sold as a
percent of retail sales resulted primarily from much improved merchandise
offerings, more timely and aggressive markdowns and tighter merchandise planning
and control.
Selling, general and administrative (SG&A) expenses were $31.0 million and $96.5
million for the third quarter and first nine months of this year, compared to
$29.7 million and $91.4 million for last year's comparable three and nine month
periods, respectively. SG&A expense for the third quarter experienced a slight
increase of 20 basis points over last year due to one-time expenses related to
store development activities during the quarter.
SG&A expense for the nine months improved 70 basis points over the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had working capital of $125.4 million, compared
to $112.6 million at November 1, 1997 and $113.3 million at January 31, 1998.
Cash provided from operating activities was $21.1 million for the nine months
ended October 31, 1998, compared to $14.5 million for last year's comparable
nine month period. The Company had no borrowings under its revolving credit
agreement at October 31, 1998 or November 1, 1997. At October 31, 1998, the
Company had cash, cash equivalents, and short-term investments of $76.7 million,
compared to $52.0 million at November 1, 1997 and $69.5 million at January 31,
1998.
In May 1998, the Company's unsecured revolving credit agreement was amended to
add the $15 million letter of credit facility to the $20 million revolving
credit facility. The entire $35 million unsecured credit facility was extended
to May 31, 2001 with no change in financial covenants or maintenance of specific
financial ratios. There were no borrowings outstanding under the agreement at
October 31, 1998 or November 1, 1997.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
Expenditures for property and equipment totaled $8.6 million for the nine months
ended October 31, 1998, compared to $5.3 million in the first nine months of
1997. The Company expects total capital expenditures to be approximately $13
million for the current fiscal year. The Company intends to open approximately
14 new stores, close approximately 6 stores, and relocate approximately 5 stores
during the fourth quarter of fiscal 1998. For the nine months ended October 31,
1998, the Company had opened 38 new stores, relocated 13 stores, and closed 8
stores.
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.
The Company developed a two phase approach to address the Year 2000 issue. Phase
1 was an analysis to identify and fix all internally developed programs. Phase 2
is the identification and correction to all programs purchased from external
sources. The Company has completed Phase 1, and Phase 2 is scheduled to be
substantially complete by the end of its first fiscal quarter of 1999 with
continued testing of compliance throughout 1999. The Company expects to spend
approximately $525,000 in 1998 and 1999 on hardware, software and consulting to
ensure proper processing of transactions relating to the Year 2000 and beyond.
The Company has initiated formal communications with its third-party suppliers
and vendors to determine the extent to which the Company is vulnerable to those
third-parties' failure to remediate their own Year 2000 issue. Although lack of
compliance for Year 2000 issues by third-party suppliers and vendors could have
an adverse affect on the Company's business, results of operations and financial
condition, the Company expects its Year 2000 compliance efforts to significantly
reduce the risk of business interruption and the level of uncertainty the Year
2000 issue may have on its computer systems. A contingency plan has not been
established, but a plan will be considered upon the completion of Phase 2.
Form 10-Q includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical facts included in the Form 10-Q and located
elsewhere herein regarding the Company's financial position and business
strategy may constitute forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.
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PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not Applicable
ITEM 4. RESULT OF VOTES OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) None
(B) No Reports on Form 8-K were filed during the quarter ended
October 31, 1998.
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PART II OTHER INFORMATION (CONTINUED)
THE CATO CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CATO CORPORATION
December 9, 1998 /s/ Wayland H. Cato, Jr.
---------------- ---------------------------
Date Wayland H. Cato, Jr.
Chairman of the Board of
Directors and Chief Executive Officer
December 9, 1998 /s/ Michael O. Moore
---------------- ---------------------------
Date Michael O. Moore
Executive Vice President
Chief Financial Officer and Secretary
5
1,000
9-MOS
JAN-30-1999
OCT-31-1998
36,785
39,875
47,808
4,660
87,327
212,180
103,276
51,203
270,403
86,800
0
0
0
975
170,759
270,403
382,581
396,820
264,407
264,407
0
2,662
185
30,094
10,533
19,561
0
0
0
19,561
0.71
0.69
