Table of Contents
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[X]	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	
For the quarterly period ended October 29, 2011	
 	
OR	
 	
[ ]	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	
For the transition period from ________________to__________________	
Commission file number 1-31340  	
 
THE CATO CORPORATION	
(Exact name of registrant as specified in its charter)	
 	
Delaware	56-0484485	
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)	
 	
8100 Denmark Road, Charlotte, North Carolina 28273-5975  	
(Address of principal executive offices)
(Zip Code)	
 	
(704) 554-8510	
(Registrant's telephone number, including area code)	
 	
Not Applicable	
(Former name, former address and former fiscal year, if changed since last report)	
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes	X	No	 	
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes	X	No	 	
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer  ¨     Accelerated filer  þ      Non-accelerated filer  ¨      Smaller reporting company ¨ 
                                                                                                                                                                    (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes	 	No	X	
 
As of December 7, 2011, there were 27,415,289 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.

 
 
THE CATO CORPORATION
 
FORM 10-Q
 
Quarter Ended October 29, 2011
Table of Contents
 	Page No.	
 	
PART I – FINANCIAL INFORMATION (UNAUDITED)	
 	 	 	 	
 	Item 1.	Financial Statements:	
 	 	 	
 	Condensed Consolidated Statements of Income and Comprehensive Income	2	
 	 	For the Three Months and Nine Months Ended October 29, 2011 and October 30, 2010	 	
 	 	 	 	
 	Condensed Consolidated Balance Sheets	3	
 	 	At October 29, 2011, October 30, 2010 and January 29, 2011	 	
 	 	 	 	
 	Condensed Consolidated Statements of Cash Flows	4	
 	 	For the Nine Months Ended October 29, 2011 and October 30, 2010	 	
 	 	 	 	
 	Notes to Condensed Consolidated Financial Statements	5 – 16	
 	 	For the Three Months and Nine Months Ended October 29, 2011 and October 30, 2010	 	
 	 	 	 	
 	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17 – 23	
 	 	 	 	
 	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24	
 	 	 	
 	Item 4.	Controls and Procedures	24	
 	 	 	 	
PART II – OTHER INFORMATION	 	
 	 	 	 	
 	Item 1.	Legal Proceedings	25	
 	 	 	 	
 	Item 1A.	Risk Factors	25	
 	 	 	 	
 	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25	
 	 	 	 	
 	Item 3.	Defaults Upon Senior Securities	26	
 	 	 	 	
 	Item 4.	Removed and Reserved	26	
 	 	 	 	
 	Item 5.	Other Information	26	
 	 	 	 	
 	Item 6.	Exhibits	26	
 	 	 	 	
 	Signatures	27	

 	 	 	 	 	 	 	
 
1

 
 
Table of Contents
 
PART I FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
THE CATO CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
 
 	Three Months Ended	 	Nine Months Ended	
 	October 29, 2011	 	October 30, 2010	 	October 29, 2011	 	October 30, 2010	
 	(Unaudited)	 	(Unaudited)	 	(Unaudited)	 	(Unaudited)	
 	(Dollars in thousands, except per share data)	
REVENUES	 	 	 	 	 	 	 	 	 	 	 	
Retail sales	$	194,094 	 	$	198,176 	 	$	699,104 	 	$	689,055 	
Other income (principally finance charges, late fees and	 	 	 	 	 	 	 	 	 	 	 	
layaway charges)	 	2,591 	 	 	2,799 	 	 	8,047 	 	 	8,584 	
Total revenues	 	196,685 	 	 	200,975 	 	 	707,151 	 	 	697,639 	
 	 	 	 	 	 	 	 	 	 	 	 	
COSTS AND EXPENSES, NET	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold (exclusive of depreciation shown below)	 	125,818 	 	 	127,136 	 	 	429,379 	 	 	418,401 	
Selling, general and administrative (exclusive of depreciation	 	 	 	 	 	 	 	 	 	 	 	
shown below)	 	57,505 	 	 	60,565 	 	 	179,776 	 	 	190,986 	
Depreciation	 	5,321 	 	 	5,645 	 	 	16,096 	 	 	16,191 	
Interest and other income	 	(861)	 	 	(1,039)	 	 	(2,767)	 	 	(2,888)	
Cost and expenses, net	 	187,783 	 	 	192,307 	 	 	622,484 	 	 	622,690 	
 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	8,902 	 	 	8,668 	 	 	84,667 	 	 	74,949 	
 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	2,797 	 	 	2,770 	 	 	29,938 	 	 	27,039 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net income	$	6,105 	 	$	5,898 	 	$	54,729 	 	$	47,910 	
 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings per share	$	0.21 	 	$	0.20 	 	$	1.86 	 	$	1.62 	
 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	$	0.21 	 	$	0.20 	 	$	1.86 	 	$	1.62 	
 	 	 	 	 	 	 	 	 	 	 	 	
Dividends per share	$	0.230 	 	$	0.185 	 	$	0.645 	 	$	0.535 	
 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	
Net income	$	6,105 	 	$	5,898 	 	$	54,729 	 	$	47,910 	
Unrealized gain (loss) on available-for-sale securities, net	 	 	 	 	 	 	 	 	 	 	 	
of deferred income tax benefit	 	(300)	 	 	50 	 	 	283 	 	 	94 	
Comprehensive income	$	5,805 	 	$	5,948 	 	$	55,012 	 	$	48,004 	
 
See notes to consolidated financial statements.
2

 
 
Table of Contents
THE CATO CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 	 	 	 	 	 	 	 	 	
 	October 29, 2011	 	October 30, 2010	 	January 29, 2011	
 	(Unaudited)	 	(Unaudited)	 	(Unaudited)	
 	(Dollars in thousands)	
ASSETS	 	 	 	 	 	 	 	 	
Current Assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	$	36,510 	 	$	36,786 	 	$	48,630 	
Short-term investments	 	205,810 	 	 	188,097 	 	 	181,395 	
Restricted cash and investments	 	5,325 	 	 	2,038 	 	 	4,826 	
Accounts receivable, net of allowance for doubtful accounts of	 	 	 	 	 	 	 	 	
$2,567, $3,109 and $2,985 at October 29, 2011, October 30, 2010	 	 	 	 	 	 	 	 	
and January 29, 2011, respectively	 	38,026 	 	 	38,762 	 	 	39,703 	
Merchandise inventories	 	127,247 	 	 	128,558 	 	 	144,028 	
Deferred income taxes	 	3,512 	 	 	7,781 	 	 	3,660 	
Prepaid expenses	 	3,566 	 	 	2,967 	 	 	3,199 	
Total Current Assets	 	419,996 	 	 	404,989 	 	 	425,441 	
Property and equipment – net	 	109,811 	 	 	100,367 	 	 	99,773 	
Other assets	 	6,888 	 	 	7,495 	 	 	7,545 	
Total Assets	$	536,695 	 	$	512,851 	 	$	532,759 	
LIABILITIES AND STOCKHOLDERS' EQUITY	 	 	 	 	 	 	 	 	
Current Liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	$	82,248 	 	$	86,602 	 	$	103,898 	
Accrued expenses	 	41,416 	 	 	35,425 	 	 	35,318 	
Accrued bonus and benefits	 	9,451 	 	 	21,888 	 	 	22,841 	
Accrued income taxes	 	16,638 	 	 	17,723 	 	 	11,861 	
Total Current Liabilities	 	149,753 	 	 	161,638 	 	 	173,918 	
Deferred income taxes	 	9,541 	 	 	7,328 	 	 	9,540 	
Other noncurrent liabilities (primarily deferred rent)	 	15,431 	 	 	15,777 	 	 	15,287 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies:	 	- 	 	 	- 	 	 	- 	
 	 	 	 	 	 	 	 	 	
Stockholders' Equity:	 	 	 	 	 	 	 	 	
Preferred stock, $100 par value per share, 100,000 shares authorized,	 	 	 	 	 	 	 	 	
none issued	 	- 	 	 	- 	 	 	- 	
Class A common stock, $.033 par value per share, 50,000,000	 	 	 	 	 	 	 	 	
shares authorized; issued 27,419,745 shares, 27,760,464 shares	 	 	 	 	 	 	 	 	
and 27,758,123 shares at October 29, 2011, October 30, 2010 and	 	 	 	 	 	 	 	 	
January 29, 2011, respectively	 	914 	 	 	925 	 	 	925 	
Convertible Class B common stock, $.033 par value per share,	 	 	 	 	 	 	 	 	
15,000,000 shares authorized; issued 1,743,525 shares at October 29,	 	 	 	 	 	 	 	 	
2011, October 30, 2010 and January 29, 2011, respectively	 	58 	 	 	58 	 	 	58 	
Additional paid-in capital	 	71,075 	 	 	67,744 	 	 	68,537 	
Retained earnings	 	289,364 	 	 	258,754 	 	 	264,218 	
Accumulated other comprehensive income	 	559 	 	 	627 	 	 	276 	
Total Stockholders' Equity	 	361,970 	 	 	328,108 	 	 	334,014 	
Total Liabilities and Stockholders’ Equity	$	536,695 	 	$	512,851 	 	$	532,759 	

See notes to consolidated financial statements.
3

 
 
Table of Contents
THE CATO CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 	 	 	 	 	 	 	
 	 	Nine Months Ended	 	
 	October 29, 2011	 	October 30, 2010	 	
 	(Unaudited)	 	(Unaudited)	 	
 	 	(Dollars in thousands)	 	
 	 	 	 	 	 	 	
Operating Activities:	 	 	 	 	 	 	
Net income	$	54,729 	 	$	47,910 	 	
Adjustments to reconcile net income to net cash provided (used)	 	 	 	 	 	 	
by operating activities:	 	 	 	 	 	 	
Depreciation	 	16,096 	 	 	16,191 	 	
Provision for doubtful accounts	 	1,263 	 	 	2,139 	 	
Share-based compensation	 	1,948 	 	 	1,792 	 	
Excess tax benefits from share-based compensation	 	(128)	 	 	(246)	 	
Loss on disposal of property and equipment	 	473 	 	 	472 	 	
Changes in operating assets and liabilities which provided	 	 	 	 	 	 	
(used) cash:	 	 	 	 	 	 	
Accounts receivable	 	414 	 	 	(747)	 	
Merchandise inventories	 	16,781 	 	 	1,090 	 	
Prepaid and other assets	 	289 	 	 	249 	 	
Accrued income taxes	 	4,905 	 	 	7,030 	 	
Accounts payable, accrued expenses and other liabilities	 	(28,798)	 	 	(15,455)	 	
Net cash provided by operating activities	 	67,972 	 	 	60,425 	 	
 	 	 	 	 	 	 	
Investing Activities:	 	 	 	 	 	 	
Expenditures for property and equipment	 	(26,608)	 	 	(14,263)	 	
Purchases of short-term investments	 	(105,837)	 	 	(140,896)	 	
Sales of short-term investments	 	81,855 	 	 	100,934 	 	
Change in restricted cash and investments	 	(499)	 	 	537 	 	
Net cash used in investing activities	 	(51,089)	 	 	(53,688)	 	
 	 	 	 	 	 	 	
Financing Activities:	 	 	 	 	 	 	
Dividends paid	 	(19,008)	 	 	(15,758)	 	
Repurchase of common stock	 	(10,599)	 	 	(5,840)	 	
Proceeds from employee stock purchase plan	 	444 	 	 	410 	 	
Excess tax benefits from share-based compensation	 	128 	 	 	246 	 	
Proceeds from stock options exercised	 	32 	 	 	606 	 	
Net cash used in financing activities	 	(29,003)	 	 	(20,336)	 	
 	 	 	 	 	 	 	
Net decrease in cash and cash equivalents	 	(12,120)	 	 	(13,599)	 	
 	 	 	 	 	 	 	
Cash and cash equivalents at beginning of period	 	48,630 	 	 	50,385 	 	
Cash and cash equivalents at end of period	$	36,510 	 	$	36,786 	 	
 
See notes to consolidated financial statements.
4

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
NOTE 1 - GENERAL: 
 
The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended October 29, 2011 and October 30, 2010 are unaudited.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal, recurring nature unless otherwise noted.  The results of the interim period may not be indicative of the results expected for the entire year.
 
The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011.  Amounts as of January 29, 2011, have been derived from the audited balance sheet other than the retrospective application of the change in accounting principle (described below).
 
On November 22, 2011, the Board of Directors maintained the quarterly dividend at $.23 per share.
 
CHANGE IN ACCOUNTING PRINCIPLE:
 
The Company elected to change its method of accounting for inventory to the weighted average cost method from the retail method effective January 30, 2011.  In accordance with ASC 250 “Accounting Changes and Error Corrections,” all periods have been retrospectively adjusted to reflect the period-specific effects of the change to the weighted average cost method.  The Company believes that the weighted average cost method better matches cost of sales with related sales, as well as having an inventory valuation that more closely reflects the acquisition cost of inventory by valuing inventory on a unit basis versus the product department level under the retail method.  The cumulative adjustment as of January 31, 2010, was an increase in inventory of $11,700,000 and an increase in retained earnings of $7,300,000. 
 
Additionally, the Company has changed the classification for certain balance sheet items to conform to the 2011 presentation.  This change in classification has reduced accounts payable and inventory by $1,628,000 as of January 29, 2011 and $618,000 as of October 30, 2010.
 
In addition, the Company has changed the classification of certain prior year income statement items to conform to the 2011 presentation.  The change has no effect on net income; however, it does increase retail sales by $191,000, cost of goods sold by $99,000 and selling, general and administrative expense by $92,000 for the three months ended October 30, 2010.  The change also reduces retail sales by $555,000, cost of goods sold by $240,000 and selling, general and administrative expense by $315,000 for the nine months ended October 30, 2010.
5

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
As a result of this retrospective application of the change in accounting principle and the change in the classification of the Balance Sheet, the following items in the Company's Condensed Consolidated Balance Sheets have been adjusted:	 	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	January 29, 2011	 	 	 	 	 	 	
 	(Unaudited)	 	 	 	 	 	 	
 	(Dollars in thousands)	 	 	 	 	 	 	
 	As Previously Reported	 	Total Changes	 	As Adjusted	 	 	 	 	 	 	
Merchandise inventories	$	132,020 	 	$	12,008 	 	$	144,028 	 	 	 	 	 	 	
Deferred income taxes	 	5,001 	 	 	(1,341)	 	 	3,660 	 	 	 	 	 	 	
Total Current Assets	 	414,774 	 	 	10,667 	 	 	425,441 	 	 	 	 	 	 	
Total Assets	 	522,092 	 	 	10,667 	 	 	532,759 	 	 	 	 	 	 	
Accounts payable	 	105,526 	 	 	(1,628)	 	 	103,898 	 	 	 	 	 	 	
Total Current Liabilities	 	175,546 	 	 	(1,628)	 	 	173,918 	 	 	 	 	 	 	
Deferred income taxes	 	5,695 	 	 	3,845 	 	 	9,540 	 	 	 	 	 	 	
Retained earnings	 	255,768 	 	 	8,450 	 	 	264,218 	 	 	 	 	 	 	
Total Stockholders' Equity	 	325,564 	 	 	8,450 	 	 	334,014 	 	 	 	 	 	 	
Total Liabilities and Stockholders’ Equity	$	522,092 	 	$	10,667 	 	$	532,759 	 	 	 	 	 	 	

 	 	 	 	 	 	 	 	 	
 	October 30, 2010	
 	(Unaudited)	
 	(Dollars in thousands)	
 	As Previously Reported	 	Total Changes	 	As Adjusted	
Merchandise inventories	$	120,557 	 	$	8,001 	 	$	128,558 	
Deferred income taxes	 	7,727 	 	 	54 	 	 	7,781 	
Total Current Assets	 	396,934 	 	 	8,055 	 	 	404,989 	
Total Assets	 	504,796 	 	 	8,055 	 	 	512,851 	
Accounts payable	 	87,220 	 	 	(618)	 	 	86,602 	
Total Current Liabilities	 	162,256 	 	 	(618)	 	 	161,638 	
Deferred income taxes	 	4,087 	 	 	3,241 	 	 	7,328 	
Retained earnings	 	253,322 	 	 	5,432 	 	 	258,754 	
Total Stockholders' Equity	 	322,676 	 	 	5,432 	 	 	328,108 	
Total Liabilities and Stockholders’ Equity	$	504,796 	 	 	8,055 	 	$	512,851 	
6

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
 	 	 	 	 	 	 	 	 	 	 	
As a result of this retrospective application of the change in accounting principle and the change in the classification of the Income Statement, the following items in the Company's Condensed Consolidated Statements of Income and Condensed Consolidated Statement of Cash Flows have been adjusted:	
 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended	 	 	
 	October 30, 2010	 	 	
 	(Unaudited)	 	 	
 	(Dollars in thousands, except per share data)	 	 	
 	As Previously Reported	 	Total Changes	 	As Adjusted	 	 	
Retail Sales	$	197,985 	 	$	191 	 	$	198,176 	 	 	
Total Revenues	 	200,784 	 	 	191 	 	 	200,975 	 	 	
Cost of goods sold	 	125,694 	 	 	1,442 	 	 	127,136 	 	 	
Selling, general and administrative	 	60,473 	 	 	92 	 	 	60,565 	 	 	
Cost and expenses, net	 	190,773 	 	 	1,534 	 	 	192,307 	 	 	
Income before income taxes	 	10,011 	 	 	(1,343)	 	 	8,668 	 	 	
Income tax expense	 	3,275 	 	 	(505)	 	 	2,770 	 	 	
Net income	$	6,736 	 	$	(838)	 	$	5,898 	 	 	
Basic earnings per share	$	0.23 	 	$	(0.03)	 	$	0.20 	 	 	
Diluted earnings per share	$	0.23 	 	$	(0.03)	 	$	0.20 	 	 	

 	Nine Months Ended	 	 	
 	October 30, 2010	 	 	
 	(Unaudited)	 	 	
 	(Dollars in thousands, except per share data)	 	 	
 	As Previously Reported	 	Total Changes	 	As Adjusted	 	 	
Retail Sales	$	689,610 	 	$	(555)	 	$	689,055 	 	 	
Total Revenues	 	698,194 	 	 	(555)	 	 	697,639 	 	 	
Cost of goods sold	 	415,588 	 	 	2,813 	 	 	418,401 	 	 	
Selling, general and administrative	 	191,301 	 	 	(315)	 	 	190,986 	 	 	
Cost and expenses, net	 	620,192 	 	 	2,498 	 	 	622,690 	 	 	
Income before income taxes	 	78,002 	 	 	(3,053)	 	 	74,949 	 	 	
Income tax expense	 	28,187 	 	 	(1,148)	 	 	27,039 	 	 	
Net income	$	49,815 	 	$	(1,905)	 	$	47,910 	 	 	
Basic earnings per share	$	1.69 	 	$	(0.07)	 	$	1.62 	 	 	
Diluted earnings per share	$	1.69 	 	$	(0.07)	 	$	1.62 	 	 	
 
 	Nine Months Ended	
 	October 30, 2010	
 	(Unaudited)	
 	(Dollars in thousands)	
 	As Previously Reported	 	Total Changes	 	As Adjusted	
Cash flow from operating activities:	 	 	 	 	 	 	 	 	
Net income	$	49,815 	 	$	(1,905)	 	$	47,910 	
Merchandise inventories	 	(1,929)	 	 	3,019 	 	 	1,090 	
Accounts payable, accrued expenses	 	 	 	 	 	 	 	 	
and other liabilities	$	(14,341)	 	$	(1,114)	 	$	(15,455)	
7

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
NOTE 2 - EARNINGS PER SHARE:
 
ASC 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (EPS) on the face of all income statements for all entities with complex capital structures.  The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income.  While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice.  Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.
 
Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan.   
 
 	 	 	Three Months Ended	 	 	Nine Months Ended	
 	 	October 29, 2011	 	October 30, 2010	 	October 29, 2011	 	October 30, 2010	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	(Dollars in thousands, except share data and per share data)	
Basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings	 	$	6,105 	 	$	5,898 	 	$	54,729 	 	$	47,910 	
Earnings allocated to non-vesting equity awards	 	 	(95)	 	 	(100)	 	 	(895)	 	 	(803)	
Net earnings available to common stockholders	 	$	6,010 	 	$	5,798 	 	$	53,834 	 	$	47,107 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic weighted average common shares outstanding	 	 	28,851,509 	 	 	28,970,179 	 	 	28,936,177 	 	 	28,995,380 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings per share	 	$	0.21 	 	$	0.20 	 	$	1.86 	 	$	1.62 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings	 	$	6,105 	 	$	5,898 	 	$	54,729 	 	$	47,910 	
Earnings allocated to non-vesting equity awards	 	 	(95)	 	 	(100)	 	 	(894)	 	 	(803)	
Net earnings available to common stockholders	 	$	6,010 	 	$	5,798 	 	$	53,835 	 	$	47,107 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic weighted average common shares outstanding	 	 	28,851,509 	 	 	28,970,179 	 	 	28,936,177 	 	 	28,995,380 	
Dilutive effect of stock options	 	 	5,368 	 	 	6,908 	 	 	6,644 	 	 	6,385 	
Diluted weighted average common shares outstanding	 	 	28,856,877 	 	 	28,977,087 	 	 	28,942,821 	 	 	29,001,765 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	 	$	0.21 	 	$	0.20 	 	$	1.86 	 	$	1.62 	
 
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
 
Income tax payments, net of refunds received, for the nine months ended October 29, 2011 and October 30, 2010 were $25,045,000 and $21,282,000, respectively.
8

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
NOTE 4 – FINANCING ARRANGEMENTS:
 
As of October 29, 2011, the Company had an unsecured revolving credit agreement of $35.0 million.  The revolving credit agreement is committed until August 2013.  The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of October 29, 2011.  There were no borrowings outstanding under this credit facility during the nine months ended October 29, 2011 or October 30, 2010.  Interest on any borrowings is based on LIBOR, which was 0.25% at October 29, 2011.
 
At October 29, 2011 and October 30, 2010 the Company had approximately $4.2 million and $5.7 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments. 
 
NOTE 5 – REPORTABLE SEGMENT INFORMATION:
 
The Company has two reportable segments: retail and credit. The Company operated its fashion specialty retail stores in 31 states at October 29, 2011, principally in the southeastern United States. The Company offers its own credit card to its customers and all related credit authorizations, payment processing, and collection efforts are performed by a separate subsidiary of the Company.
 
The following schedule summarizes certain segment information (in thousands):
 
Three Months Ended	 	 	 	 	 	 	 	 	 	 	Nine Months Ended	 	 	 	 	 	 	 	 	 	
October 29, 2011	 	 	Retail	 	 	Credit	 	 	Total	 	October 29, 2011	 	 	Retail	 	 	Credit	 	 	Total	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	194,769 	 	$	1,916 	 	$	196,685 	 	Revenues	 	$	701,361 	 	$	5,790 	 	$	707,151 	
Depreciation	 	 	5,302 	 	 	19 	 	 	5,321 	 	Depreciation	 	 	16,069 	 	 	27 	 	 	16,096 	
Interest and other income	 	 	(861)	 	 	- 	 	 	(861)	 	Interest and other income	 	 	(2,767)	 	 	- 	 	 	(2,767)	
Income before taxes	 	 	8,100 	 	 	802 	 	 	8,902 	 	Income before taxes	 	 	82,284 	 	 	2,383 	 	 	84,667 	
Total assets	 	 	462,588 	 	 	74,107 	 	 	536,695 	 	Total assets	 	 	462,588 	 	 	74,107 	 	 	536,695 	
Capital expenditures	 	 	10,857 	 	 	- 	 	 	10,857 	 	Capital expenditures	 	 	26,522 	 	 	86 	 	 	26,608 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended	 	 	 	 	 	 	 	 	 	 	Nine Months Ended	 	 	 	 	 	 	 	 	 	
October 30, 2010	 	 	Retail	 	 	Credit	 	 	Total	 	October 30, 2010	 	 	Retail	 	 	Credit	 	 	Total	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	198,878 	 	$	2,097 	 	$	200,975 	 	Revenues	 	$	691,200 	 	$	6,439 	 	$	697,639 	
Depreciation	 	 	5,641 	 	 	4 	 	 	5,645 	 	Depreciation	 	 	16,176 	 	 	15 	 	 	16,191 	
Interest and other income	 	 	(1,039)	 	 	- 	 	 	(1,039)	 	Interest and other income	 	 	(2,888)	 	 	- 	 	 	(2,888)	
Income before taxes	 	 	7,880 	 	 	788 	 	 	8,668 	 	Income before taxes	 	 	72,690 	 	 	2,259 	 	 	74,949 	
Total assets	 	 	438,983 	 	 	73,868 	 	 	512,851 	 	Total assets	 	 	438,983 	 	 	73,868 	 	 	512,851 	
Capital expenditures	 	 	5,397 	 	 	- 	 	 	5,397 	 	Capital expenditures	 	 	14,263 	 	 	- 	 	 	14,263 	
 
The Company evaluates segment performance based on income before taxes.  The Company does not allocate certain corporate expenses or income taxes to the credit segment.
9

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
 
NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):
 
The following schedule summarizes the direct expenses of the credit segment which are reflected in selling, general and administrative expenses (in thousands):
 
 	 	Three Months Ended	 	 	Nine Months Ended	
 	 	October 29, 2011	 	 	October 30, 2010	 	 	October 29, 2011	 	 	October 30, 2010	
 	 	 	 	 	 	 	 	 	 	 	 	
Bad debt expense	$	381 	 	$	640 	 	$	1,263 	 	$	2,139 	
Payroll	 	233 	 	 	242 	 	 	722 	 	 	716 	
Postage	 	186 	 	 	195 	 	 	574 	 	 	620 	
Other expenses	 	295 	 	 	228 	 	 	821 	 	 	690 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	$	1,095 	 	$	1,305 	 	$	3,380 	 	$	4,165 	
 
NOTE 6 – STOCK BASED COMPENSATION:
 
As of October 29, 2011, the Company had three long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan authorized 5,850,000 shares for the granting of options to officers and key employees. The 1999 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan authorized 1,500,000 and 1,350,000 shares, respectively, for the granting of various forms of equity-based awards, including restricted stock and stock options to officers and key employees.  The 1999 Plan has expired as to the ability to grant new awards.
 
The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans:
 
 	1987 	 	1999 	 	2004 	 	 	
 	Plan	 	Plan	 	Plan	 	Total	
Options and/or restricted stock initially authorized	5,850,000 	 	1,500,000 	 	1,350,000 	 	8,700,000 	
Options and/or restricted stock available for grant:	 	 	 	 	 	 	 	
January 29, 2011	18,627 	 	- 	 	627,872 	 	646,499 	
October 29, 2011	19,677 	 	- 	 	538,725 	 	558,402 	
 
In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of October 29, 2011 and October 30, 2010, there was $6,665,000 and $6,705,000 of total unrecognized compensation cost related to nonvested restricted stock awards, which have a remaining weighted average vesting period of 2.5 years and 2.6 years, respectively. The total fair value of the shares recognized as compensation expense during the third quarter and nine months ended October 29, 2011 was $613,000 and $1,870,000, respectively compared to $545,000 and $1,771,000 for the third quarter and nine months ended October 30, 2010, respectively.  These expenses are classified as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income.
10

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
 
NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):
 
The following summary shows the changes in the shares of restricted stock outstanding during the nine months ended October 29, 2011:
 
 	 	 	 	Weighted Average	
 	Number of	 	 	Grant Date Fair	
 	Shares	 	 	Value Per Share	
Restricted stock awards at January 29, 2011	509,456 	 	$	20.32 	
Granted	102,449 	 	 	25.41 	
Vested	(125,403)	 	 	20.51 	
Forfeited or expired	(18,877)	 	 	21.26 	
Restricted stock awards at October 29, 2011	467,625 	 	$	21.44 	
 
The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the nine months ended October 29, 2011 and October 30, 2010, the Company sold 21,810 and 22,745 shares to employees at an average discount of $3.59 and $3.19 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $78,000 and $72,000 for the nine months ended October 29, 2011 and October 30, 2010, respectively.  These expenses are classified as a component of selling, general and administrative expenses.
 
The following is a summary of the changes in stock options outstanding during the nine months ended October 29, 2011:
 	 	 	 	 	 	Weighted	 	 	 	
 	 	 	 	Weighted	 	Average	 	 	 	
 	 	 	 	Average	 	Remaining	 	 	Aggregate	
 	 	 	 	Exercise	 	Contractual	 	 	Intrinsic	
 	Shares	 	 	Price	 	Term	 	 	Value(a)	
Options outstanding at January 29, 2011	21,675 	 	$	13.86 	 	2.78 years	 	$	228,434 	
Granted	-	 	 	 	 	 	 	 	 	
Forfeited or expired	1,050 	 	 	12.00 	 	 	 	 	 	
Exercised	3,450 	 	 	13.47 	 	 	 	 	 	
Outstanding at October 29, 2011	17,175 	 	$	14.05 	 	2.49 years	 	$	182,514 	
Vested and exercisable at October 29, 2011	17,175 	 	$	14.05 	 	2.49 years	 	$	182,514 	

 
(a)    The intrinsic value of a stock option is the amount by which the market value of the underlying stock        exceeds the exercise price of the option.
11

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
 
NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):
 
No options were granted in the first nine months of fiscal 2011 or fiscal 2010. 
 
The total intrinsic value of options exercised during the third quarter and nine months ended October 29, 2011 was zero and $41,000, respectively.
 
During the second quarter of 2010, the Company completed amortizing its nonvested options.  In accordance with ASC 718, the Company adjusted its related forfeiture assumption and recognized a reduction in share based compensation expense of $0 and $52,000 for the third quarter and nine month period ended October 30, 2010.  There was no stock option compensation expense for the third quarter and nine month period ended October 29, 2011.
  
Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.

NOTE 7 – INCOME TAXES:
 
For the quarter ended October 29, 2011, the Company’s effective tax rate was 31.4% compared to 32.0% for the prior year quarter ended October 30, 2010.  The current year quarter was impacted by the reduction of a reserve for certain unrecognized tax benefits from the closing of a state income tax audit.  The effective income tax rate for the first nine months of fiscal 2011 was 35.4% compared to 36.1% for the first nine months of fiscal 2010.  During the next 12 months, various taxing authorities’ statutes of limitations are expected to expire which could result in a potential reduction of unrecognized tax benefits.  In addition, certain tax examinations may close, the ultimate resolution of which could materially affect the effective tax rate.  As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period.  It is reasonably possible such changes could be significant when compared to our total unrecognized tax benefits, but the amount of change is not currently estimable.
12

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
NOTE 8 – FAIR VALUE MEASUREMENTS:

The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of October 29, 2011 and January 29, 2011.
 
 	 	 	 	 	 	Quoted	 	 	 	 	 	 	
 	 	 	 	 	 	Prices in	 	 	 	 	 	 	
 	 	 	 	 	 	Active	 	 	Significant	 	 	 	
 	 	 	 	 	 	Markets for	 	 	Other	 	 	Significant	
 	 	 	 	 	 	Identical	 	 	Observable	 	 	Unobservable	
 	 	 	October 29,	 	 	Assets	 	 	Inputs	 	 	Inputs	
Description	 	 	2011 	 	 	Level 1	 	 	Level 2	 	 	Level 3	
 	 	 	 	 	 	 	 	 	 	 	 	 	
State/Municipal Bonds	 	$	146,936 	 	$	- 	 	$	146,936 	 	$	- 	
Corporate Bonds	 	 	29,670 	 	 	- 	 	 	29,670 	 	 	- 	
Auction Rate Securities (ARS)	 	 	3,450 	 	 	- 	 	 	- 	 	 	3,450 	
Variable Rate Demand Notes (VRDN)	 	 	30,439 	 	 	30,439 	 	 	- 	 	 	- 	
US Treasury Notes	 	 	1,421 	 	 	1,421 	 	 	- 	 	 	- 	
Privately Managed Funds	 	 	1,910 	 	 	- 	 	 	- 	 	 	1,910 	
Corporate Equities	 	 	481 	 	 	481 	 	 	- 	 	 	- 	
Certificates of Deposit	 	 	100 	 	 	100 	 	 	- 	 	 	- 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	214,407 	 	$	32,441 	 	$	176,606 	 	$	5,360 	
 
 	 	 	 	 	 	Quoted	 	 	 	 	 	 	
 	 	 	 	 	 	Prices in	 	 	 	 	 	 	
 	 	 	 	 	 	Active	 	 	Significant	 	 	 	
 	 	 	 	 	 	Markets for	 	 	Other	 	 	Significant	
 	 	 	 	 	 	Identical	 	 	Observable	 	 	Unobservable	
 	 	 	January 29,	 	 	Assets	 	 	Inputs	 	 	Inputs	
Description	 	 	2011	 	 	Level 1	 	 	Level 2	 	 	Level 3	
 	 	 	 	 	 	 	 	 	 	 	 	 	
State/Municipal Bonds	 	$	129,678 	 	$	- 	 	$	129,678 	 	$	- 	
Corporate Bonds	 	 	34,288 	 	 	- 	 	 	34,288 	 	 	- 	
Auction Rate Securities (ARS)	 	 	3,450 	 	 	- 	 	 	- 	 	 	3,450 	
Variable Rate Demand Notes (VRDN)	 	 	19,308 	 	 	19,308 	 	 	- 	 	 	- 	
Privately Managed Funds	 	 	1,925 	 	 	- 	 	 	- 	 	 	1,925 	
Corporate Equities	 	 	480 	 	 	480 	 	 	- 	 	 	- 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	189,129 	 	$	19,788 	 	$	163,966 	 	$	5,375 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
13

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
 
NOTE 8 – FAIR VALUE MEASUREMENTS (CONTINUED):
 
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at both October 29, 2011 and January 29, 2011.  The underlying securities have contractual maturities which generally range from 278 days to 29 years.  Although the Company’s investments in VRDN’s have underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments.  These securities are classified as available-for-sale and are recorded as short-term investments on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in accumulated other comprehensive income.
 
Additionally, at October 29, 2011 and January 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.
 
Level 1 category securities are measured at fair value using quoted active market prices.  Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments.  Their fair value is principally based on market values determined by management with assistance of a third party pricing service. 
 
The Company’s failed ARS is measured at fair value using Level 3 inputs at each reporting period.  Due to the fact that there is no active market for this particular ARS, its fair value was determined through the use of a discounted cash flow analysis. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also considered the financial condition and near-term prospects of the issuer, the probability that the Company will be unable to collect all amounts due according to the contractual terms of the security and whether the security has been downgraded by a rating agency.  The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.
 
The Company has two privately managed funds.  The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice.  As a result, the Company has classified the investments as Level 3.
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Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
 
NOTE 8 – FAIR VALUE MEASUREMENTS (CONTINUED):
 
The following tables summarize the change in the fair value of the Company’s financial assets measured using Level 3 inputs during the first nine months of fiscal 2011 and fiscal 2010 ($ in thousands):

 	 	Fair Value Measurements Using Significant	
 	 	Unobservable Inputs (Level 3)	
 	Available-For-Sale	 	 	 	 	 	 	
 	Debt Securities	 	Other Investments	 	 	 	
 	ARS	 	 	Private Equity	 	Total	
Beginning Balance at January 29, 2011	$	3,450 	 	 	$	1,925 	 	$	5,375 	
Total gains or (losses)	 	 	 	 	 	 	 	 	 	
Included in earnings (or changes in net assets)	 	- 	 	 	 	(15)	 	 	(15)	
Ending Balance at October 29, 2011	$	3,450 	 	 	$	1,910 	 	$	5,360 	

 	 	 	 	 	 	 	 	 	 	
 	 	Fair Value Measurements Using Significant	
 	 	Unobservable Inputs (Level 3)	
 	Available-For-Sale	 	 	 	 	 	 	
 	Debt Securities	 	Other Investments	 	 	 	
 	ARS	 	 	Private Equity	 	Total	
Beginning Balance at January 30, 2010	$	3,450 	 	 	$	1,940 	 	$	5,390 	
Total gains or (losses)	 	 	 	 	 	 	 	 	 	
Included in earnings (or changes in net assets)	 	- 	 	 	 	13 	 	 	13 	
Ending Balance at October 30, 2010	$	3,450 	 	 	$	1,953 	 	$	5,403 	
15

 
Table of Contents	
 	
THE CATO CORPORATION	
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 29, 2011 AND OCTOBER 30, 2010	

 
NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS:
 
In January 2011, the Company adopted accounting guidance regarding changes to disclosure requirements for fair value measurements. For fair value measurements using significant unobservable inputs (Level 3), the guidance requires a reporting entity to present separate information about gross purchases, sales, issuances and settlements. The adoption of this guidance did not have a significant impact on the consolidated financial statement disclosures.
 
In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income.  The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements.  In November 2011, the FASB proposed to defer the requirement to present reclassifications of other comprehensive income on the face of the income statement.  The provisions of this new guidance are effective for the Company the first quarter of 2012.  The adoption of this guidance is not expected to have any effect on operating results or financial position.
 
16

 
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THE CATO CORPORATION	
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL	
CONDITION AND RESULTS OF OPERATIONS	

 
 
FORWARD-LOOKING INFORMATION:
 
     The following information should be read along with the Unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-Q that reflect projections or expectations of our future financial or economic performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations, including those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2011 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings (including the launch of the new Versona Accessories store concept), relocations, remodels and closures; and (5) statements relating to our future contingencies. When possible, we have attempted to identify forward-looking statements by using words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and variations of such words and similar expressions. We can give no assurance that actual results or events will not differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements included in this report are based on information available to us as of the filing date of this report, but subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements.  Such factors include, but are not limited to, the following:  general economic conditions, including, but not limited to, the continuation or worsening of (i) the current adverse or recessionary conditions affecting the U.S. and global economies and consumer spending and (ii) the adverse conditions in the U.S., global credit and sovereign debt markets; uncertainties regarding the impact of any governmental responses to the foregoing adverse conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel and accessory buying patterns; adverse weather conditions; inventory risks due to shifts in market demand; and other factors discussed under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended January 29, 2011 (“fiscal 2010”), as amended or supplemented, and in other reports we file with or furnish to the SEC from time to time.  We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise.
17

 
Table of Contents
 
THE CATO CORPORATION	
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL	
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)	

 
CRITICAL ACCOUNTING POLICIES:
 
The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts receivable, workers’ compensation, general and auto insurance liabilities, group health insurance, litigation, calculation of asset impairment, store closings, inventory shrinkage and uncertain tax positions.
 
The Company’s critical accounting policies and estimates are discussed with the Audit Committee on a quarterly basis.
 
CHANGE IN ACCOUNTING PRINCIPLE:
 
The Company elected to change its method of accounting for inventory to the weighted average cost method from the retail method effective January 30, 2011.  In accordance with ASC 250 “Accounting Changes and Error Corrections,” all periods have been retrospectively adjusted to reflect the period specific effects of the change to the weighted average cost method.  The Company believes that the weighted average cost method better matches cost of sales with related sales, as well as having an inventory valuation that more closely reflects the acquisition cost of inventory by valuing inventory on a unit basis versus the product department level under the retail method.  The cumulative adjustment as of January 31, 2010, was an increase in inventory of $11,700,000 and an increase in retained earnings of $7,300,000. 
 
Additionally, the Company has changed the classification for certain balance sheet items to conform to the 2011 presentation.  This change in classification has reduced accounts payable and inventory by $1,628,000 as of January 29, 2011 and $618,000 as of October 30, 2010.
 
In addition, the Company has changed the classification of certain prior year income statement items to conform to the 2011 presentation.  The change has no effect on net income; however, it does increase retail sales by $191,000 and cost of goods sold by $99,000 and selling, general and administrative expense by $92,000 for the three months ended October 30, 2010.  The change also reduces retail sales by $555,000, cost of goods sold by $240,000 and selling, general and administrative expense by $315,000 for the nine months ended October 30, 2010.
 
See Note 1 to the Condensed Consolidated Financial Statements for details regarding the effects of the change in accounting principle and revised classifications on prior periods.
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Table of Contents
 
THE CATO CORPORATION	
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL	
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)	

 
 
RESULTS OF OPERATIONS:
 
The following table sets forth, for the periods indicated, certain items in the Company's unaudited Condensed Consolidated Statements of Income as a percentage of total retail sales.  The prior year has been restated for the conversion to the cost method of accounting for inventory.
 
 	Three Months Ended	 	 	Nine Months Ended	 	
 	October 29, 2011	 	October 30, 2010	 	October 29, 2011	 	October 30, 2010	
Total retail sales	100.0 	%	 	100.0 	%	 	100.0 	%	 	100.0 	%	
Other income	1.3 	 	 	1.4 	 	 	1.1 	 	 	1.3 	 	
Total revenues	101.3 	 	 	101.4 	 	 	101.1 	 	 	101.3 	 	
Cost of goods sold	64.8 	 	 	64.2 	 	 	61.4 	 	 	60.7 	 	
Selling, general and administrative	29.6 	 	 	30.6 	 	 	25.7 	 	 	27.7 	 	
Depreciation	2.7 	 	 	2.9 	 	 	2.3 	 	 	2.4 	 	
Interest and other income	(0.4)	 	 	(0.5)	 	 	(0.4)	 	 	(0.4)	 	
Income before income taxes	4.6 	 	 	4.4 	 	 	12.1 	 	 	10.9 	 	
Net income	3.1 	 	 	3.0 	 	 	7.8 	 	 	7.0 	 	
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Table of Contents
 
THE CATO CORPORATION	
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL	
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)	

 
 
RESULTS OF OPERATIONS – (CONTINUED):
 
Comparison of Third Quarter and First Nine Months of 2011 with 2010.
 
Total retail sales for the third quarter were $194.1 million compared to last year’s third quarter sales of $198.2 million, a 2.0% decrease.  Same-store sales decreased 3.0% in the third quarter of fiscal 2011 due to difficult economic conditions and resulting uncertainty affecting our customers.  For the nine months ended October 29, 2011, total retail sales were $699.1 million compared to last year’s comparable nine month sales of $689.1 million, and same-store sales decreased 1.0% for the comparable nine month period.  Total revenues, comprised of retail sales and other income (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $196.7 million and $707.2 million for the third quarter and nine months ended October 29, 2011, respectively, compared to $201.0 million and $697.6 million for the third quarter and nine months ended October 30, 2010, respectively. The Company operated 1,292 stores at October 29, 2011 compared to 1,281 stores at the end of last year’s third quarter.  For the first nine months of 2011, the Company opened 23 new stores, relocated three stores and closed 13 stores.  The Company currently expects to open approximately 38 stores, relocate four stores and close approximately 29 stores in fiscal 2011.
 
Credit revenue of $1.9 million represented 1.0% of total revenues in the third quarter of fiscal 2011, compared to $2.1 million or 1.0% of total revenues in the third quarter of fiscal 2010.  Credit revenue decreased for the most recent comparable period due to lower finance charge income resulting from decreased sales under the Company’s proprietary credit card. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income.  Related expenses include principally bad debt expense, payroll, postage and other administrative expenses and totaled $1.1 million in the third quarter of 2011, compared to last year’s third quarter expenses of $1.3 million.  The decrease was primarily due to lower bad debt expense slightly offset by increased administrative expenses compared to the third quarter of 2010.
 
Other income in total, as included in total revenues, was $2.6 million and $8.0 million for the third quarter and first nine months of fiscal 2011, compared to $2.8 million and $8.6 million for the prior year’s comparable third quarter and first nine months. The slight overall year-to-date decrease resulted primarily from lower finance charges and late fees.
 
Cost of goods sold was $125.8 million, or 64.8% of retail sales and $429.4 million or 61.4% of retail sales for the third quarter and first nine months of fiscal 2011, compared to $127.1 million, or 64.2% of retail sales and $418.4 million or 60.7% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The overall increase in cost of goods sold as a percent of retail sales for the third quarter was due to higher occupancy costs related to store development partially offset by a decrease in comparable store sales. For the first nine months of 2011, the increase resulted primarily from lower sell-throughs of regular priced merchandise.  Cost of goods sold includes merchandise costs (net of discounts and allowances), buying costs, distribution costs, occupancy costs, freight and inventory shrinkage.  Net merchandise costs and in-bound freight are capitalized as inventory costs.  Buying and distribution costs include payroll, payroll-related costs and operating expenses for the buying departments and distribution center.  Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities.  Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) decreased by 3.8% to $68.3 million for the third quarter of fiscal 2011 and decreased by 0.4% to $269.7 million for the first nine months of fiscal 2011 compared to $71.0 million and $270.7 million for the prior year’s comparable three and nine month periods, respectively.  Gross margin as presented may not be comparable to those of other entities.
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Table of Contents
 
THE CATO CORPORATION	
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL	
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)	

 
 
RESULTS OF OPERATIONS – (CONTINUED):
 
Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts.  SG&A expenses were $57.5 million, or 29.6% of retail sales and $179.8 million, or 25.7% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $60.6 million, or 30.6% of retail sales and $191.0 million, or 27.7% of retail sales for the prior year’s comparable three and nine month periods, respectively.  SG&A expenses as a percentage of retail sales decreased 100 basis points for the third quarter of fiscal 2011 as compared to the prior year primarily as a result of lower accrued incentive compensation costs.  For the first nine months of fiscal 2011, SG&A expenses decreased 200 basis points as compared to the prior year.  The overall dollar decrease for the first nine months of fiscal 2011 was primarily attributable to decreased accrued incentive based compensation and insurance costs partially offset by an increase in payroll costs.
 
Depreciation expense was $5.3 million, or 2.7% of retail sales and $16.1 million, or 2.3% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $5.6 million, or 2.9% of retail sales and $16.2 million, or 2.4% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The slight dollar decrease in depreciation expense was due to a reduction in store development and  information technology investments.
 
Interest and other income was $0.9 million, or 0.4% of retail sales and $2.8 million, or 0.4% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $1.0 million, or 0.5% of retail sales and $2.9 million, or 0.4% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The slight dollar decrease for the first nine months of fiscal 2011 was primarily due to lower miscellaneous income partially offset by higher interest income due to an increase in cash and short-term investments.
 
Income tax expense was $2.8 million or 1.4% of retail sales and $29.9 million, or 4.3% of retail sales for the third quarter and first nine months of fiscal 2011, respectively, compared to $2.8 million, or 1.4% of retail sales and $27.0 million, or 3.9% of retail sales for the prior year’s comparable three and nine month periods, respectively.  The dollar increase in the first nine months of fiscal 2011 resulted from higher pre-tax income partially offset by a slightly lower effective tax rate.  The effective income tax rate for the third quarter of fiscal 2011 was 31.4% compared to 32.0% for the third quarter of 2010.  The current year quarter was impacted by the reduction of a reserve for unrecognized tax benefits from the closing of a state income tax audit.  The effective income tax rate for the first nine months of fiscal 2011 was 35.4% compared to 36.1% for the nine months of fiscal 2010. 
   
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Table of Contents
 
THE CATO CORPORATION	
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL	
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)	

 
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
 
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first nine months of fiscal 2011 was $68.0 million as compared to $60.4 million in the first nine months of fiscal 2010. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments, and share repurchases.  In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at October 29, 2011.
 
Cash provided by operating activities for the first nine months of fiscal 2011 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $7.6 million for the first nine months of fiscal 2011 as compared to the first nine months of fiscal 2010 was primarily due to an increase in net income and changes in inventories partially offset by a decrease in accounts payable and incentive compensation.
 
The Company believes that its cash, cash equivalents and short-term investments, together with cash flows from operations will be adequate to fund the Company’s regular operating requirements, expected capital expenditures, dividends and share repurchases for fiscal 2011 and for the next twelve months.
 
At October 29, 2011, the Company had working capital of $270.2 million compared to $243.4 million at October 30, 2010.  Additionally, the Company had $2.4 million invested in privately managed investment funds and other miscellaneous equities and a single auction rate security of $3.5 million at October 29, 2011, which are included in Other assets on the Condensed Consolidated Balance Sheets.
 
At October 29, 2011, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million.  The revolving credit agreement is committed until August 2013. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of October 29, 2011.  There were no borrowings outstanding under the credit facility during the third quarter ended October 29, 2011.
 
At October 29, 2011 and October 30, 2010, the Company had approximately $4.2 million and $5.7 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
 
Expenditures for property and equipment totaled $26.6 million in the first nine months of fiscal 2011, compared to $14.3 million in last year’s first nine months.  The expenditures for the first nine months of 2011 were primarily for the development of 23 new stores, additional investments in new technology and the distribution center and home office expansion.  For the full fiscal 2011 year, the Company expects to invest approximately $32.0 million for capital expenditures.  This includes anticipated expenditures to open 38 new stores and relocate four stores, upgrades to merchandise systems, and home office and distribution center expansion.
 
Net cash used in investing activities totaled $51.1 million in the first nine months of fiscal 2011 compared to $53.7 million used in the comparable period of 2010.  The decrease was due primarily to the decrease in purchases of short-term investments.
 
On November 22, 2011, the Board of Directors maintained the quarterly dividend at $.23 per share.

 
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Table of Contents
 
THE CATO CORPORATION	
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL	
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)	

 
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
 
As of July 30, 2011, the Company had 320,564 shares remaining in the share repurchase program.  On August 25, 2011, the Board of Directors authorized an increase in the Company’s share repurchase program of two million shares.  During the third quarter ended October 29, 2011, the Company repurchased and retired 330,400 shares for approximately $7.7 million or an average market price of $23.31.  As of October 29, 2011, the Company had 1,990,164 shares remaining in open authorizations.  There is no specified expiration date for the Company’s repurchase program.  For the nine months ended October 29, 2011, the Company repurchased 452,778 shares at an average cost of $23.41 per share
 
The Company does not use derivative financial instruments.
 
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at both October 29, 2011 and January 29, 2011.  The underlying securities have contractual maturities which generally range from 278 days to 29 years.  Although the Company’s investments in VRDN’s have underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments.  These securities are classified as available-for-sale and are recorded as short-term investments on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in accumulated other comprehensive income.
 
Additionally, at October 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction.  See Note 8 – Fair Value Measurements for further information regarding the failed ARS.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.
 
Information regarding new accounting pronouncements is provided in Note 9 to the Company’s Condensed Consolidated Financial Statements.
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Table of Contents
 
THE CATO CORPORATION	
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	

 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
 
The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.
 
ITEM 4. CONTROLS AND PROCEDURES: 
 
We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of October 29, 2011.  Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of October 29, 2011, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
 
No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended October 29, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting except for the change in accounting principle to the weighted average cost method from the retail method for inventory accounting.
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Table of Contents
 
PART II   OTHER INFORMATION
 
THE CATO CORPORATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
            Not Applicable
 
ITEM 1A. RISK FACTORS
 
            In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended January 29, 2011.  These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
            The following table summarizes the Company’s purchases of its common stock for the three months ended October 29, 2011:
 
ISSUER PURCHASES OF EQUITY SECURITIES

 	 	 	 	 	 	 	Total Number of	 	Maximum Number	
 	 	 	 	 	 	 	Shares Purchased as	 	(or Approximate Dollar	
 	 	Total Number	 	 	 	 	Part of Publicly	 	Value) of Shares that may	
 	 	of Shares	 	Average Price	 	Announced Plans or	 	Yet be Purchased Under	
Period	 	Purchased (1)	 	Paid per Share	 	Programs (2)	 	the Plans or Prgrams (2)	
August 2011	 	30,700 	 	$	23.37 	 	30,700 	 	 	
September 2011	 	279,700 	 	 	23.37 	 	279,700 	 	 	
October 2011	 	20,000 	 	 	22.37 	 	20,000 	 	 	
Total	 	330,400 	 	$	23.31 	 	330,400 	 	1,990,164 	
 
(1)                Prices include trading costs.
(2)                As of July 30, 2011, the Company’s share repurchase program had 320,564 shares remaining in open authorizations.  On August 25, 2011, the Board of Directors authorized an increase in the Company’s share repurchase program of two million shares.  During the third quarter ending October 29, 2011, the Company repurchased and retired 330,400 shares under this program for approximately $7,702,251 or an average market price of $23.31.  As of the third quarter ending October 29, 2011, the Company had 1,990,164 shares remaining in open authorizations.  There is no specified expiration date for the Company’s repurchase program.

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Table of Contents
 
PART II   OTHER INFORMATION
 
THE CATO CORPORATION
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
              Not Applicable
 
ITEM 4.  REMOVED AND RESERVED
 
      Not Applicable
 
ITEM 5.  OTHER INFORMATION
 
      Not Applicable
 
ITEM 6.  EXHIBITS
 
Exhibit No.	 	Item	
 	 	 	
3.1	 	Registrant’s Restated Certificate of Incorporation dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283).	
 	 	 	
3.2	 	Registrant’s By Laws incorporated by reference to Exhibit 99.2 to Form
8-K of the Registrant Filed December 10, 2007.	
 	 	 	
4.1	 	Rights Agreement dated December 18, 2003, incorporated by reference to Exhibit 4.1 to Form 8-A12G of the Registrant filed December 22, 2003 and as amended in Form 8-A12B/A filed January 6, 2004.	
 	 	 	
18.1*	 	Letter regarding change in accounting principle from PricewaterhouseCoopers, LLP dated December 7, 2011, to the Board of Directors of The Cato Corporation regarding the preferability of change in accounting principle from the Retail Method to the Cost Method.	
 	 	 	
31.1*	 	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.	
 	 	 	
31.2*	 	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.	
 	 	 	
32.1*	 	Section 1350 Certification of Principal Executive Officer.	
 	 	 	
32.2*	 	Section 1350 Certification of Principal Financial Officer.	
 	 	 	
101.1	 	The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2011, formatted in XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Nine Months ended October 29, 2011 and October 30, 2010; (ii) Condensed Consolidated Balance Sheets at October 29, 2011, October 30, 2010 and January 29, 2011; (iii) Condensed Consolidated Statements of Cash Flows for the Nine Months ended October 29, 2011 and October 30, 2010; and (iv) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.	
 
                      * Submitted electronically herewith.         
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PART II   OTHER INFORMATION
 
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 7, 2011	 	/s/ John P. D. Cato	
Date	 	John P. D. Cato
Chairman, President and
Chief Executive Officer	

December 7, 2011	 	/s/ John R. Howe	
Date	 	John R. Howe
Executive Vice President
Chief Financial Officer	
 
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December 7, 2011                                                                                            EXHIBIT 18.1

Board of Directors
The Cato Corporation
8100 Denmark Road
Charlotte, North Carolina 28273
 
Dear Directors:
 
We are providing this letter to you for inclusion as an exhibit to your Form 10-Q filing pursuant to Item 601 of Regulation S-K.
 
We have been provided a copy of the Company’s Quarterly Report on Form 10-Q for the period ended October 29, 2011.  Note 1 therein describes a change in accounting principle for inventory.  It should be understood that the preferability of one acceptable method of accounting over another for inventory has not been addressed in any authoritative accounting literature, and in expressing our concurrence below we have relied on management’s determination that this change in accounting principle is preferable.  Based on our reading of management’s stated reasons and justification for this change in accounting principle in the Form 10-Q, and our discussions with management as to their judgment about the relevant business planning factors relating to the change, we concur with management that such change represents, in the Company’s circumstances, the adoption of a preferable accounting principle in conformity with Accounting Standards Codification 250, Accounting Changes and Error Corrections . 
 
We have not audited any financial statements of the Company as of any date or for any period subsequent to January 29, 2011.  Accordingly, our comments are subject to change upon completion of an audit of the financial statements covering the period of the accounting change.
 
Very truly yours,

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
 
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EXHIBIT 31.1
 
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
      I, John P. D. Cato, certify that:
 	 	
1. 	I have reviewed this report on Form 10-Q of The Cato Corporation (the “registrant”);	
 	 	
2. 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;	
 	 	
3. 	Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	
4. 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:	
 	 	 	
 	a) 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;	
 	 	
 	b) 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	
 	c) 	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and	
 	 	
 	d) 	Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
5. 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	 	
 	 	 	
 	a) 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and	 	
 	 	 	
 	b) 	Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.	 	
 
Date: December 7, 2011
 
/s/ John P. D. Cato	
John P. D. Cato
Chairman, President and
Chief Executive Officer	
 
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EXHIBIT 31.2
 
PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, John R. Howe, certify that:
 	 	
1. 	I have reviewed this report on Form 10-Q of The Cato Corporation (the “registrant”);	
 	 	
2. 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;	
 	 	
3. 	Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	
4. 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:	
 	 	 	
 	a) 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;	
 	 	
 	b) 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	
 	c) 	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and	
 	 	
 	d) 	Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
5. 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	 	
 	 	 	
 	a) 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and	 	
 	 	 	
 	b) 	Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.	 	
 
Date: December 7, 2011
 
/s/ John R. Howe	
John R. Howe
Executive Vice President
Chief Financial Officer	
 
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EXHIBIT 32.1

CERTIFICATION OF PERIODIC REPORT
 
I, John P. D. Cato, Chairman, President and Chief Executive Officer of The Cato Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of this Certification:
 
1.  the Form 10-Q of the Company for the quarter ended October 29, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.    the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: December 7, 2011
 	 	
 	/s/ John P. D. Cato	
 	John P. D. Cato	
 	Chairman, President and	
 	Chief Executive Officer	

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EXHIBIT 32.2

CERTIFICATION OF PERIODIC REPORT
 
I, John R. Howe, Executive Vice President, Chief Financial Officer of The Cato Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of this Certification:
 
1.    the Form 10-Q of the Company for the quarter ended October 29, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.  the information contained in the Report fairly presents, in all material respects, the financial condition and
     results of operations of the Company.
Dated: December 7, 2011
 	 	
 	/s/ John R. Howe	
 	John R. Howe	
 	Executive Vice President	
 	Chief Financial Officer	
 
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