SEC Filing | The Cato Corporation

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 May 1, 1999 --------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT 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 - ------------------------------------------------------------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 8100 Denmark Road, Charlotte, North Carolina 28273-5975 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (704) 554-8510 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 14, 1999, there were 21,227,474 shares of Class A Common Stock and 5,264,317 shares of Class B Common Stock outstanding.

2 THE CATO CORPORATION FORM 10-Q MAY 1, 1999 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

3 Page 2 PART I FINANCIAL INFORMATION THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED -------------------------- MAY 1, May 2, 1999 1998 -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Retail sales $153,383 $136,174 Other income (principally finance and layaway charges) 4,872 4,870 -------- -------- Total revenues 158,255 141,044 -------- -------- COSTS AND EXPENSES Cost of goods sold 100,169 89,179 Selling, general and administrative 34,922 33,090 Depreciation 2,023 1,865 Interest 6 66 -------- -------- Total expenses 137,120 124,200 -------- -------- INCOME BEFORE INCOME TAXES 21,135 16,844 Income taxes 7,397 5,727 -------- -------- NET INCOME $ 13,738 $ 11,117 ======== ======== BASIC EARNINGS PER SHARE $ .52 $ .40 ======== ======== DILUTED EARNINGS PER SHARE $ .51 $ .39 ======== ======== DIVIDENDS PER SHARE $ .055 $ .045 ======== ======== See accompanying notes to consolidated financial statements.

4 Page 3 THE CATO CORPORATION CONSOLIDATED BALANCE SHEETS MAY 1, May 2, January 30, 1999 1998 1999 (UNAUDITED) (Unaudited) ----------- ----------- ---------- (DOLLARS IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 42,861 $ 39,038 $ 44,068 Short-term investments 53,273 43,342 42,141 Accounts receivable - net 44,165 44,212 44,536 Merchandise inventories 75,457 72,968 61,112 Deferred income taxes 3,475 3,001 3,372 Prepaid expenses 2,646 4,034 2,374 -------- -------- -------- Total Current Assets 221,877 206,595 197,603 Property and Equipment - net 56,779 49,821 54,740 Other Assets 6,281 6,176 6,170 -------- -------- -------- Total $284,937 $262,592 $258,513 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 66,895 $ 57,734 $ 52,391 Accrued expenses 17,425 16,672 20,991 Income taxes 7,531 7,751 197 -------- -------- -------- Total Current Liabilities 91,851 82,157 73,579 Deferred Income Taxes 5,801 5,296 5,922 Other Noncurrent Liabilities 7,002 6,503 6,778 Stockholders' Equity: Class A Common Stock, issued 24,101,474 shares, 23,672,371 shares and 24,070,519 shares at May 1, 1999, May 2, 1998 and January 30, 1999, respectively 803 788 802 Convertible Class B Common Stock, issued and outstanding 5,264,317 shares at May 1, 1999, May 2, 1998 and January 30, 1999, respectively 176 176 176 Additional paid-in capital 70,147 65,404 69,878 Retained earnings 132,436 111,368 120,590 -------- -------- -------- 203,562 177,736 191,446 LessClass A Common Stock in treasury, at cost (2,874,000 shares at May 1, 1999, 1,361,500 shares at May 2, 1998, and 2,368,000 shares at January 30, 1999, respectively) 23,279 9,100 19,212 -------- -------- -------- Total Stockholders' Equity 180,283 168,636 172,234 -------- -------- -------- Total $284,937 $262,592 $258,513 ======== ======== ======== See accompanying notes to consolidated financial statements.

5 Page 4 THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED ----------------------- MAY 1, May 2, 1999 1998 -------- -------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 13,738 $ 11,117 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,023 1,865 Amortization of investment premiums 44 22 Loss on disposal of property and equipment 141 342 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 371 2,974 Merchandise inventories (14,345) (8,742) Other assets (383) (2,431) Accrued income taxes 7,334 5,710 Accounts payable and other liabilities 11,693 4,455 -------- -------- Net cash provided by operating activities 20,616 15,312 -------- -------- INVESTING ACTIVITIES Expenditures for property and equipment (4,203) (2,227) Purchases of short-term investments (14,903) (16,234) Sales of short-term investments 3,088 600 -------- -------- Net cash used in investing activities (16,018) (17,861) -------- -------- FINANCING ACTIVITIES Dividends paid (1,477) (1,216) Purchases of treasury stock (4,577) -- Proceeds from employee stock purchase plan 237 177 Proceeds from stock options exercised 12 982 -------- -------- Net cash used in financing activities (5,805) (57) -------- -------- Net Decrease in Cash and Cash Equivalents (1,207) (2,606) Cash and Cash Equivalents at Beginning of Period 44,068 41,644 -------- -------- Cash and Cash Equivalents at End of Period $ 42,861 $ 39,038 ======== ======== See accompanying notes to consolidated financial statements.

6 Page 5 THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS ENDED MAY 1, 1999 AND MAY 2, 1998 - ------------------------------------------------------------------------------- NOTE 1 - GENERAL: The consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the Company) and all amounts shown at May 1, 1999 and May 2, 1998 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 a component of other comprehensive income. Total comprehensive income for the quarters ended May 1, 1999 and May 2, 1998 was $13,323,000 and $11,047,000, respectively. Total comprehensive income is composed of net income and unrealized losses on available-for-sale securities. Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method. In March 1999, the Company transferred 63,000 shares of Class A Common Stock from treasury stock to its Employee Stock Ownership Plan as the contribution for the fiscal year ended January 30, 1999. In the first quarter of fiscal 1999, the Company repurchased 569,000 shares of Class A Common Stock for $4,577,000, or an average price of $8.04 per share. The provisions for income taxes are based on the Company's estimated annual effective tax rate. 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 earnings per share computations was 26,659,565 shares and 27,499,658 shares for the three months ended May 1, 1999 and May 2, 1998, respectively. The weighted-average number of shares representing the dilutive effect of stock options was 248,834 and 702,228 for the three months ended May 1, 1999 and May 2, 1998, respectively. The weighted-average number of shares used in the diluted earnings per share computations was 26,908,399 and 28,201,886 for the three months ended May 1, 1999 and May 2, 1998, respectively.

7 Page 6 THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS ENDED MAY 1, 1999 AND MAY 2, 1998 - ------------------------------------------------------------------------------- NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the three months ended May 1, 1999 and May 2, 1998 was $3,000 and $35,000, respectively. Income tax payments, net of refunds received, for the three months ended May 1, 1999 and May 2, 1998 were $181,000 and $646,000, respectively. NOTE 4 - FINANCING ARRANGEMENTS: At May 1, 1999, the Company had an unsecured revolving credit agreement which provides for borrowings of up to $35 million. The revolving credit agreement is committed until May 2001. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios. The Company was in compliance with all financial covenants and ratios and there were no borrowings outstanding under the agreement at May 1, 1999 or May 2, 1998. NOTE 5 - REPORTABLE SEGMENT INFORMATION: The Company has two reportable segments: retail and credit. The following schedule summarizes certain segment information (in thousands): Three Months Ended May 1, 1999 Retail Credit Total - ---------------------------------------------------------------------- Revenues $155,396 $2,859 $158,255 Income before taxes 20,239 896 21,135 Three Months Ended May 2, 1998 - ---------------------------------------------------------------------- Revenues $138,280 $2,764 $141,044 Income before taxes 16,065 779 16,844

8 Page 7 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 a percentage of total retail sales: THREE MONTHS ENDED ------------------ MAY 1, May 2, 1999 1998 ------ ----- Total retail sales 100.0% 100.0% Total revenues 103.2 103.6 Cost of goods sold 65.3 65.5 Selling, general and administrative 22.8 24.3 Income before income taxes 13.8 12.4 Net income 9.0 8.2 COMPARISON OF FIRST QUARTER OF 1999 WITH 1998. OPERATING RESULTS Total retail sales for the first quarter were $153.4 million compared to last year's first quarter sales of $136.2 million, a 13% increase. Same-store sales increased 7% in this year's first quarter. The increase in retail sales for the first quarter resulted from the Company's continued everyday low price strategy, improved merchandise offerings, and an increase in store development activity. The Company operated 753 stores at May 1, 1999 compared to 697 stores at the end of last year's first quarter. Cost of goods sold were 65.3% of total retail sales for the current year's first quarter, compared to 65.5% for last year's first three months. The decrease in cost of goods sold as a percent of retail sales resulted by maintaining timely and aggressive markdowns on slow moving merchandise, eliminating unprofitable promotions and improving inventory flow.

9 Page 8 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- OPERATING RESULTS - CONTINUED Selling, general and administrative (SG&A) expenses were $34.9 million, or 22.8% of retail sales, for this year's first quarter compared to $33.1 million, or 24.3% of retail sales, in last year's first quarter. Expenses remained well controlled and were under planned levels. LIQUIDITY AND CAPITAL RESOURCES At May 1, 1999, the Company had working capital of $130.0 million, compared to $124.4 million at May 2, 1998 and $124.0 million at January 30, 1999. Cash provided by operating activities was $20.6 million for the three months ended May 1, 1999, compared to $15.3 million for last year's comparable three month period. The Company had no borrowings under its revolving credit agreement at May 1, 1999 or May 2, 1998. At May 1, 1999, the Company had cash, cash equivalents, and short-term investments of $96.1 million, compared to $82.4 million at May 2, 1998 and $86.2 million at January 30, 1999. At May 1, 1999, the Company had an unsecured revolving credit agreement which provides for borrowings of up to $35 million. The revolving credit agreement is committed until May 2001. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios. The Company was in compliance with all financial covenants and ratios and there were no borrowings outstanding under the agreement at May 1, 1999 or May 2, 1998. Expenditures for property and equipment totaled $4.2 million for the three months ended May 1, 1999, compared to $2.2 million of expenditures in last year's first three months. The Company expects total capital expenditures to be approximately $24 million for the current fiscal year. The Company intends to open approximately 75 new stores, close 10 stores and to relocate 24 stores during the current fiscal year. For the three months ended May 1, 1999, the Company had opened 21 new stores, relocated 6 stores, and closed none. In May 1999, the Board of Directors increased the quarterly dividend by 36% from $.055 per share to $.075 per share. 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.

10 Page 9 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- The Company developed a two phase approach to address the Year 2000 issue, which involves the exposure to risks in its information technology (IT) systems, as well as potential risks in other non-IT systems with embedded technology. 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 the second 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 effect 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 will be established 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.

11 Page 10 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) 27 Financial Data Schedule (for SEC use only) (B) No Reports on Form 8-K were filed during the quarter ended May 1, 1999.

12 Page 11 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 June 10, 1999 /s/ Wayland H. Cato, Jr. - -------------------------------- ------------------------------------ Date Wayland H. Cato, Jr. Chairman of the Board June 10, 1999 /s/ John P. Derham Cato - -------------------------------- ------------------------------------ Date John P. Derham Cato Vice Chairman of the Board President and Chief Executive Officer June 10, 1999 /s/ Michael O. Moore - -------------------------------- ------------------------------------ Date Michael O. Moore Executive Vice President Chief Financial Officer and Secretary

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-31-1999 MAY-01-1999 42,861 53,273 49,326 5,161 75,457 221,877 110,741 53,962 284,937 91,851 0 0 0 979 179,304 284,937 153,383 158,255 100,169 100,169 0 1,035 6 21,135 7,397 13,738 0 0 0 13,738 0.52 0.51