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 4, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-3747
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THE CATO CORPORATION AND SUBSIDIARIES
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(Exact name of registrant as specified in its charter)
Delaware 56-0484485
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
8100 Denmark Road, Charlotte, North Carolina 28273-5975
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(Address of principal executive offices)
(Zip Code)
(704) 554-8510
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(Registrant's telephone number, including area code)
Not Applicable
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(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 21, 2002, there were 19,460,363 shares of Class A common stock and
5,985,149 shares of Class B common stock outstanding.
THE CATO CORPORATION
FORM 10-Q
MAY 4, 2002
TABLE OF CONTENTS
Page
No.
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PART I - FINANCIAL INFORMATION (UNAUDITED)
Condensed Consolidated Statements of Income 2
For the Three Months Ended May 4, 2002 and May 5, 2001
Condensed Consolidated Balance Sheets 3
At May 4, 2002, May 5, 2001 and February 2, 2002
Condensed Consolidated Statements of Cash Flows 4
For the Three Months Ended May 4, 2002 and May 5, 2001
Notes to Condensed Consolidated Financial Statements 5 - 7
For the Three Months Ended May 4, 2002 and May 5, 2001
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 11
PART II - OTHER INFORMATION 12 - 13
Page 2
PART I FINANCIAL INFORMATION
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
--------------------------------
MAY 4, May 5,
2002 2001
(UNAUDITED) (Unaudited)
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
REVENUES
Retail sales $196,617 $180,347
Other income (principally finance, late, and layaway charges) 5,024 5,383
-------- --------
Total revenues 201,641 185,730
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COSTS AND EXPENSES
Cost of goods sold 124,460 116,391
Selling, general and administrative 45,383 42,228
Depreciation 3,108 2,616
Interest 7 11
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Total expenses 172,958 161,246
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INCOME BEFORE INCOME TAXES 28,683 24,484
Income tax expense 10,383 8,569
-------- --------
NET INCOME $ 18,300 $ 15,915
======== ========
BASIC EARNINGS PER SHARE $ .72 $ .63
======== ========
DILUTED EARNINGS PER SHARE $ .71 $ .61
======== ========
DIVIDENDS PER SHARE $ .135 $ .125
======== ========
See accompanying notes to condensed consolidated financial statements.
Page 3
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 4, May 5, February 2,
2002 2001 2002
(UNAUDITED) (Unaudited)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents $ 68,392 $ 38,622 $ 41,772
Short-term investments 40,071 61,232 42,923
Accounts receivable - net 51,614 46,373 52,293
Merchandise inventories 92,578 93,506 80,407
Deferred income taxes 969 1,746 777
Prepaid expenses 5,587 5,112 5,036
--------- --------- ---------
Total Current Assets 259,211 246,591 223,208
Property and equipment - net 102,903 88,204 100,137
Other assets 9,158 9,115 8,696
--------- --------- ---------
Total $ 371,272 $ 343,910 $ 332,041
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 70,785 $ 76,695 $ 57,495
Accrued expenses 25,146 24,684 25,260
Income taxes 11,083 11,219 820
--------- --------- ---------
Total Current Liabilities 107,014 112,598 83,575
Deferred income taxes 5,177 5,386 5,177
Other noncurrent liabilities 8,365 7,515 8,591
Shareholders' 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 25,135,542
shares, 24,892,623 shares and 25,011,732 shares
at May 4, 2002, May 5, 2001, and February 2, 2002,
respectively 838 829 833
Convertible Class B common stock, $.033 par value per
share, 15,000,000 shares authorized; issued
5,985,149 shares, 5,364,317 shares and 5,812,649
shares at May 4, 2002, May 5, 2001 and February 2,
2002, respectively 199 179 194
Additional paid-in capital 89,444 78,902 86,948
Retained earnings 219,853 188,006 204,961
Accumulated other comprehensive losses (876) (1,193) (567)
Unearned compensation - restricted stock awards (320) (615) (394)
--------- --------- ---------
309,138 266,108 291,975
Less Class A common stock in treasury, at cost (5,675,179
shares at May 4, 2002, 5,021,648 shares at May 5, 2001,
and 5,626,498 shares at February 2, 2002, respectively) (58,422) (47,697) (57,277)
--------- --------- ---------
Total Shareholders' Equity 250,716 218,411 234,698
--------- --------- ---------
Total $ 371,272 $ 343,910 $ 332,041
========= ========= =========
See accompanying notes to condensed consolidated financial statements.
Page 4
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
---------------------------------
MAY 4, May 5,
2002 2001
(UNAUDITED) (Unaudited)
----------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 18,300 $ 15,915
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 3,108 2,616
Amortization of investment premiums 29 45
Compensation expense related to restricted stock awards 74 73
Loss on disposal of property and equipment 187 57
Changes in operating assets and liabilities which
provided (used) cash:
Accounts receivable 679 599
Merchandise inventories (12,171) (14,345)
Other assets (1,013) (128)
Accrued income taxes 10,263 5,513
Accounts payable and other liabilities 12,758 16,834
-------- --------
Net cash provided by operating activities 32,214 27,179
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INVESTING ACTIVITIES
Expenditures for property and equipment (6,061) (5,058)
Purchases of short-term investments (645) (5,971)
Sales of short-term investments 3,159 2,296
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Net cash used in investing activities (3,547) (8,733)
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FINANCING ACTIVITIES
Dividends paid (3,408) (3,184)
Purchases of treasury stock -- (3,975)
Proceeds from employee stock purchase plan 247 199
Proceeds from stock options exercised 1,114 1,935
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Net cash used in financing activities (2,047) (5,025)
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Net increase in cash and cash equivalents 26,620 13,421
Cash and cash equivalents at beginning of period 41,772 25,201
-------- --------
Cash and cash equivalents at end of period $ 68,392 $ 38,622
======== ========
See accompanying notes to condensed consolidated financial statements.
Page 5
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 4, 2002 AND MAY 5, 2001
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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 as of and for the periods ended May 4, 2002 and
May 5, 2001 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 interim financial statements should be read in conjunction with the
financial statements and notes thereto, included in the Company's Annual Report
on Form 10-K for the fiscal year ended February 2, 2002.
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 4, 2002 and May 5, 2001
was $17,991,000 and $15,606,000, respectively. Total comprehensive income is
composed of net income and net unrealized gains and 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 the first quarter of fiscal 2002, the Company accepted 48,681 mature shares
of Class A common stock in an option transaction for $1,145,000, or an average
price of $23.52 per share. In the first quarter of fiscal 2001, the Company
repurchased 262,500 shares of Class A common stock for $3,974,000, or an
average price of $15.14 per share.
In May 2002, the Board of Directors increased the quarterly dividend by 11%
from $.135 per share to $.15 per share.
The provisions for income taxes are based on the Company's estimated annual
effective tax rate.
Page 6
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 4, 2002 AND MAY 5, 2001
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NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". SFAS 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them.
The Company adopted SFAS No. 142 on February 3, 2002, and the adoption of this
statement had no impact on the Company's consolidated results of operations and
financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets to be Disposed Of" and
Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Along with establishing a single accounting model, based on the framework
established in SFAS No. 121 for impairment of long-lived assets, this standard
retains the basic provisions of APB No. 30 for the presentation of discontinued
operations in the income statement, but broadens that presentation to include a
component of the entity. The Company adopted SFAS No. 144 on February 3, 2002,
and the adoption of this statement had no material impact on the Company's
consolidated results of operations and financial position.
NOTE 3 - 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 shares outstanding is used in the basic earnings
per share calculation, while the weighted-average shares and equivalents
outstanding is used in the diluted earnings per share calculation.
THREE MONTHS ENDED
--------------------------------
MAY 4, May 5,
2002 2001
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Weighted-average shares outstanding 25,279,022 25,286,456
Dilutive effect of stock options 589,567 634,217
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Weighted-average shares and
equivalents outstanding 25,868,589 25,920,673
========== ==========
Page 7
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 4, 2002 AND MAY 5, 2001
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NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax payments, net of refunds received, for the three months ended May 4,
2002 and May 5, 2001 were $119,000 and $3,481,000, respectively.
NOTE 5 - FINANCING ARRANGEMENTS:
At May 4, 2002, the Company had an unsecured revolving credit agreement which
provides for borrowings of up to $35 million. The revolving credit agreement is
committed until July 2003. The credit agreement contains various financial
covenants and limitations, including the maintenance of specific financial
ratios with which the Company was in compliance. There were no borrowings
outstanding during the three months ended May 4, 2002 or the fiscal year ended
February 2, 2002.
NOTE 6 - REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The following
schedule summarizes certain segment information (in thousands):
THREE MONTHS ENDED
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MAY 4, May 5,
2002 2001
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Revenues:
Retail $198,314 $182,384
Credit 3,327 3,346
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Total $201,641 $185,730
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Income before income taxes:
Retail $ 27,435 $ 23,574
Credit 1,248 910
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Total $ 28,683 $ 24,484
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Page 8
THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
Company's Condensed Consolidated Statements of Income as a percentage of total
retail sales:
THREE MONTHS ENDED
-----------------------
MAY 4, May 5,
2002 2001
------ ------
Total retail sales 100.0% 100.0%
Total revenues 102.6 103.0
Cost of goods sold 63.3 64.5
Selling, general and administrative 23.1 23.4
Income before income taxes 14.6 13.6
Net income 9.3 8.8
COMPARISON OF FIRST QUARTER OF 2002 WITH 2001.
Total retail sales for the first quarter were $196.6 million, an increase of 9%
over sales of $180.3 million for the first quarter last year. Same-store sales
increased 2% 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 949 stores at May 4, 2002 compared to 872 stores
at the end of last year's first quarter.
Other income for the first quarter of 2002 decreased 7%, over the prior year's
comparable periods. The decrease in the current year resulted primarily from
decreased late charge fee income on the Company's customer accounts receivable
and decreased earnings from interest income from investments.
Cost of goods sold were 63.3% of total retail sales for the current year's
first quarter, compared to 64.5% for last year's first three months. The
decrease in cost of goods sold as a percent of retail sales resulted from
strong sell-through of regular priced goods, improved purchasing programs and
tightly managed inventory in the first quarter.
Selling, general and administrative (SG&A) expenses were $45.4 million, or
23.1% of retail sales, for this year's first quarter compared to $42.2 million,
or 23.4% of retail sales, in last year's first quarter. SG&A expenses as a
percentage of retail sales declined 30 basis points. The overall increase in
SG&A expenses resulted primarily from increased selling-related expenses and
increased infrastructure expenses attributable to the Company's store
development activities.
Page 9
THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles 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 judgement. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements. The most significant accounting estimates inherent in the
preparation of the Company's financial statements include the allowance for
doubtful accounts receivable, reserves relating to workers' compensation,
general and auto insurance liabilities and reserves for inventory markdowns.
Historically, actual results have not significantly deviated from those
determined using the estimates described above.
LIQUIDITY AND CAPITAL RESOURCES
At May 4, 2002, the Company had working capital of $152.2 million, compared to
$134.0 million at May 5, 2001 and $139.6 million at February 2, 2002. Cash
provided by operating activities was $32.2 million for the three months ended
May 4, 2002, compared to $27.2 million for last year's comparable three month
period. The increase in net cash provided by operating activities resulted
primarily from an increase in net income, accrued income taxes and a smaller
increase in inventories than in the prior year offset by the change in other
assets and accounts payable and other liabilities. At May 4, 2002, the Company
had cash, cash equivalents, and short-term investments of $108.5 million,
compared to $99.9 million at May 5, 2001 and $84.7 million at February 2, 2002.
Net cash used in investing activities totaled $3.5 million for the first three
months of 2002 compared to $8.7 million for the comparable period of 2001. Cash
was used to fund capital expenditures for new, relocated and remodeled stores
and for investments in new technology for an enterprise-wide information system
for merchandising, distribution and finance. The decrease in cash used was
primarily related to a decrease in the purchase of short-term investments in
fiscal 2002 as compared to fiscal 2001.
Expenditures for property and equipment totaled $6.1 million for the three
months ended May 4, 2002, compared to $5.1 million of expenditures in last
year's first three months. The Company expects total capital expenditures to be
approximately $29 million for the current fiscal year. The Company intends to
open approximately 90 new stores, close 10 stores and to relocate 20 stores
during the current fiscal year. For the three months ended May 4, 2002, the
Company had opened 12 new stores and relocated 7 stores.
Page 10
THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used in financing activities totaled $2.0 million for the first three
months of 2002 compared to $5.0 million for the comparable period of 2001. The
decrease was due primarily to a reduction in its share buyback program and an
increase in stock options exercised, which were partially offset by an increase
in dividends paid in fiscal 2002 as compared to fiscal 2001.
At May 4, 2002, the Company had an unsecured revolving credit agreement which
provides for borrowings of up to $35 million. The revolving credit agreement is
committed until July 2003. The credit agreement contains various financial
covenants and limitations, including the maintenance of specific financial
ratios with which the Company was in compliance. There were no borrowings
outstanding during the three months ended May 4, 2002, or the fiscal year ended
February 2, 2002.
In May 2002, the Board of Directors increased the quarterly dividend by 11%
from $.135 per share to $.15 per share.
The Company does not use derivative financial instruments. At May 4, 2002, May
5, 2001, and February 2, 2002, the Company's investment portfolio was primarily
invested in governmental debt securities with maturities of up to 36 months.
These securities are classified as available-for-sale, and are recorded on the
balance sheet at fair value with unrealized gains and losses reported as
accumulated other comprehensive losses.
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 during fiscal
2002.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". SFAS 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them.
The Company adopted SFAS No. 142 on February 3, 2002, and the adoption of this
statement had no impact on the Company's consolidated results of operations and
financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets to be Disposed Of" and
Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Along with establishing a single accounting model, based on the framework
established in SFAS No. 121 for impairment of long-lived assets, this standard
retains the basic provisions of APB
Page 11
THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
No. 30 for the presentation of discontinued operations in the income statement,
but broadens that presentation to include a component of the entity. The
Company adopted SFAS No. 144 on February 3, 2002, and the adoption of this
statement had no material impact on the Company's consolidated results of
operations and financial position.
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.
Page 12
PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company has begun the process of listing its Class A common stock
on the New York Stock Exchange. The Company's stock begins trading on the New
York Stock Exchange on Thursday, June 13, 2002 under the symbol "CTR". As of
June 13, 2002, the Company's shares will no longer trade on Nasdaq.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) None
(B) No Reports on Form 8-K were filed during the quarter ended
May 4, 2002.
Page 13
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 11, 2002 /s/ John P. Derham Cato
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Date John P. Derham Cato
President, Vice Chairman of the Board
and Chief Executive Officer
June 11, 2002 /s/ Michael O. Moore
- ---------------------- -------------------------------------
Date Michael O. Moore
Executive Vice President
Chief Financial Officer and Secretary
June 11, 2002 /s/ Robert M. Sandler
- ---------------------- -------------------------------------
Date Robert M. Sandler
Senior Vice President
Controller