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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 August 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to__________________
Commission file number 0-3747
THE CATO CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-0484485
- - --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
8100 Denmark Road, Charlotte, North Carolina 28273-5975
- - --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(704) 554-8510
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 17, 1998, there were 22,228,040 shares of Class A Common Stock and
5,264,317 shares of Class B Common Stock outstanding.
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THE CATO CORPORATION
FORM 10-Q
August 1, 1998
Table of Contents
Page
No.
----
PART I - FINANCIAL INFORMATION (UNAUDITED)
Consolidated Statements of Income 2
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II - OTHER INFORMATION 10-11
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PART I FINANCIAL INFORMATION
THE CATO CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ----------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES
Retail sales $132,573 $120,901 $268,747 $244,152
Other income (principally finance and layaway charges) 4,603 3,550 9,473 7,799
-------- -------- -------- --------
Total revenues 137,176 124,451 278,220 251,951
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of goods sold, including occupancy,
distribution and buying 93,864 85,954 183,043 169,010
Selling, general and administrative 32,410 30,949 65,500 61,681
Depreciation 1,909 1,967 3,774 3,908
Interest 65 68 131 131
-------- -------- -------- --------
Total expenses 128,248 118,938 252,448 234,730
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 8,928 5,513 25,772 17,221
Income taxes 3,293 1,737 9,020 5,425
-------- -------- -------- --------
NET INCOME $ 5,635 $ 3,776 $ 16,752 $ 11,796
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ .20 $ .13 $ .61 $ .42
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ .20 $ .13 $ .59 $ .41
======== ======== ======== ========
DIVIDENDS PER SHARE $ .045 $ .04 $ .09 $ .08
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 1, August 2, January 31,
1998 1997 1998
(Unaudited) (Unaudited)
----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 54,403 $ 24,068 $ 41,644
Short-term investments 38,167 34,739 27,843
Accounts receivable - net 41,902 44,689 47,186
Merchandise inventories 63,063 69,401 64,226
Deferred income taxes 2,905 2,014 2,958
Prepaid expenses 2,023 4,026 1,686
-------- -------- --------
Total Current Assets 202,463 178,937 185,543
Property and Equipment - net 49,748 50,470 49,801
Other Assets 6,177 5,456 6,093
-------- -------- --------
Total $258,388 $234,863 $241,437
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 51,813 $ 45,471 $ 52,931
Accrued expenses 18,537 16,729 17,244
Income taxes 3,956 4,616 2,041
-------- -------- --------
Total Current Liabilities 74,306 66,816 72,216
Deferred Income Taxes 5,296 3,851 5,296
Other Noncurrent Liabilities 6,187 6,471 6,409
Stockholders' Equity:
Class A Common Stock, issued 23,891,040
shares, 23,395,612 shares and 23,502,647
shares at August 1, 1998, August 2, 1997 and
January 31, 1998, respectively 796 779 783
Convertible Class B Common Stock, issued and
outstanding 5,264,317 shares at August 1, 1998,
August 2, 1997 and January 31, 1998, respectively 176 176 176
Preferred Stock, none -- -- --
Additional paid-in capital 67,092 63,391 64,187
Retained earnings 115,946 98,180 101,537
-------- -------- --------
184,010 162,526 166,683
Less Class A Common Stock in treasury, at
cost (1,523,000 shares at August 1, 1998,
800,000 shares at August 2, 1997, and
1,371,500 shares at January 31, 1998) 11,411 4,801 9,167
-------- -------- --------
Total Stockholders' Equity 172,599 157,725 157,516
-------- -------- --------
Total $258,388 $234,863 $241,437
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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THE CATO CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
August 1, August 2,
1998 1997
-----------------------------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,752 $ 11,796
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,774 3,908
Amortization of investment premiums 50 51
Loss on disposal of property and equipment 580 --
Changes in operating assets and liabilities which
provided (used) cash:
Accounts receivable 5,284 (1,497)
Merchandise inventories 1,163 (5,433)
Other assets (421) (1,851)
Accrued income taxes 1,915 3,037
Accounts payable and other liabilities 82 8,073
-------- --------
Net cash provided by operating activities 29,179 18,084
-------- --------
INVESTING ACTIVITIES
Expenditures for property and equipment (4,301) (3,357)
Purchases of short-term investments (19,479) (5,103)
Sales of short-term investments 9,273 3,825
-------- --------
Net cash used in investing activities (14,507) (4,635)
-------- --------
FINANCING ACTIVITIES
Dividends paid (2,459) (2,272)
Purchase of treasury stock (2,310) (3,822)
Proceeds from employee stock purchase plan 183 114
Proceeds from stock options exercised 2,673 6
-------- --------
Net cash used in financing activities (1,913) (5,974)
-------- --------
Net Increase in Cash and Cash Equivalents 12,759 7,475
Cash and Cash Equivalents at Beginning of Year 41,644 16,593
-------- --------
Cash and Cash Equivalents at End of Period $ 54,403 $ 24,068
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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THE CATO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED AUGUST 1, 1998 AND AUGUST 2, 1997
- - --------------------------------------------------------------------------------
NOTE 1 - GENERAL:
The consolidated financial statements have been prepared from the accounting
records of The Cato Corporation (the Company) and all amounts shown at August 1,
1998 and August 2, 1997 are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of the interim
period may not be indicative of the entire year.
The Company's short-term investments are classified as available for sale
securities, and therefore, are carried at fair value, with unrealized gains and
losses, net of income taxes, reported as an adjustment to retained earnings.
In the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
Total comprehensive income for the second quarter and six months ended August 1,
1998 was $5,814,000 and $16,861,000 respectively. Total comprehensive income for
the second quarter and six months ended August 2, 1997 was $3,776,000 and
$11,796,000, respectively. Total comprehensive income is composed of net income
and unrealized losses on available-for-sale securities.
Inventories are stated at the lower of cost (first-in, first-out) or market,
determined by the retail inventory method.
In April 1998, the Company transferred 10,000 shares of Class A Common Stock
from treasury stock to its Employee Stock Ownership Plan as the contribution for
the fiscal year ended January 31, 1998. In July 1998, the Company repurchased
161,500 shares of Class A Common Stock for $2,310,000, or an average price of
$14.30 per share. In August 1998, the Company repurchased an additional 230,000
shares of Class A Common Stock for $2,648,000, or an average price of $11.51 per
share.
The provisions for income taxes are based on the Company's estimated annual
effective tax rate.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131") was effective in the
first quarter of fiscal 1998. Management is currently evaluating the effects of
SFAS 131, if any, on the Company's financial reporting disclosures for the year
ended January 30, 1999.
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THE CATO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED AUGUST 1, 1998 AND AUGUST 2, 1997
- - --------------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE:
Earnings per share is calculated by dividing net income by the weighted-average
number of Class A and Class B common shares outstanding during the respective
periods. The weighted-average number of shares used in the basic and diluted
earnings per share computations are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ------------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding 27,707,347 28,328,646 27,603,502 28,396,205
Dilutive effect of stock options 869,504 44,983 820,046 42,579
---------- ---------- ---------- ----------
Weighted-average shares and
equivalents outstanding 28,576,851 28,373,629 28,423,548 28,438,784
========== ========== ========== ==========
</TABLE>
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the six months ended August 1, 1998 and August 2, 1997 was
$81,000 and $83,000, respectively. Income tax payments, net of refunds received,
for the six months ended August 1, 1998 and August 2, 1997 were $7,193,000 and
$2,359,000, respectively.
NOTE 4 - FINANCING ARRANGEMENTS:
In May 1998, the Company's unsecured revolving credit agreement was amended to
add the $15 million letter of credit facility to the $20 million revolving
credit facility. The entire $35 million dollar unsecured credit facility was
extended to May 31, 2001 with no change in financial covenants or maintenance of
specific financial ratios. There were no borrowings outstanding under the
agreement at August 1, 1998 or August 2, 1997.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
Company's Unaudited Consolidated Statements of Income as percentages of total
retail sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ------------------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Total retail sales 100.0% 100.0% 100.0% 100.0%
Total revenues 103.5 102.9 103.5 103.2
Cost of goods sold, including occupancy,
distribution and buying 70.8 71.1 68.1 69.2
Selling, general and administrative 24.4 25.6 24.4 25.3
Income before income taxes 6.8 4.5 9.6 7.0
Net income 4.3 3.1 6.2 4.8
</TABLE>
Comparison of Second Quarter and First Six Months of 1998 with 1997.
OPERATING RESULTS
Total retail sales for the second quarter were $132.6 million compared to last
year's second quarter sales of $120.9 million, a 10% increase. Same-store sales
increased 7% in this year's second quarter. For the six months ended August 1,
1998, total retail sales were $268.7 million compared to last year's first six
months sales of $244.2 million, a 10% increase, and same-store sales increased
7% for the comparable six month period. The increase in retail sales for the
first six months of 1998 resulted from the Company's continued everyday low
pricing strategy, improved merchandise content, and an increase in store
development activity. The Company operated 701 stores at August 1, 1998 compared
to 677 stores at the end of last year's second quarter.
Other income for the second quarter and first six months of 1998 increased 30%
and 21%, respectively, over the prior year's comparable periods. The increase in
the current year resulted primarily from increased finance and late charge
income on the Company's customer accounts receivable and increased earnings from
cash equivalents and short-term investments.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
OPERATING RESULTS - CONTINUED
Cost of goods sold, including occupancy, distribution and buying expenses were
70.8% and 68.1% of total retail sales for the second quarter and first six
months of 1998, respectively, compared to 71.1% and 69.2% for last year's
comparable three and six month periods. The decrease in cost of goods sold as a
percent of retail sales resulted primarily from much improved merchandise
offerings, more timely and aggressive markdowns and tighter merchandise planning
and control.
Selling, general and administrative (SG&A) expenses were $32.4 million and $65.5
million for the second quarter and first six months of this year, respectively,
compared to $30.9 million and $61.7 million for last year's comparable three and
six month periods, respectively. Expenses remained well controlled and were
under planned levels.
LIQUIDITY AND CAPITAL RESOURCES
At August 1, 1998, the Company had working capital of $128.2 million, compared
to $112.1 million at August 2, 1997 and $113.3 million at January 31, 1998. Cash
provided from operating activities was $29.2 million for the six months ended
August 1, 1998, compared to $18.1 million for last year's comparable six month
period. The Company had no borrowings under its revolving credit agreement at
August 1, 1998 or August 2, 1997. At August 1, 1998, the Company had cash, cash
equivalents, and short-term investments of $92.6 million, compared to $58.8
million at August 2, 1997 and $69.5 million at January 31, 1998.
In May 1998, the Company's unsecured revolving credit agreement was amended to
add the $15 million letter of credit facility to the $20 million revolving
credit facility. The entire $35 million dollar unsecured credit facility was
extended to May 31, 2001 with no change in financial covenants or maintenance of
specific financial ratios. There were no borrowings outstanding under the
agreement at August 1, 1998 or August 2, 1997.
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THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
Expenditures for property and equipment totaled $4.3 million for the six months
ended August 1, 1998, compared to $3.4 million in the first six months of 1997.
The Company expects total capital expenditures to be approximately $13 million
for the current fiscal year. The Company intends to open approximately 34 new
stores, close 9 stores, and relocate 9 stores during the second half of fiscal
1998. For the six months ended August 1, 1998, the Company had opened 16 new
stores, relocated 8 stores, and closed 8 stores.
The Company believes that its cash, cash equivalents and short-term investments,
together with cash flow from operations and borrowings available under its
revolving credit agreement, will be adequate to fund the Company's proposed
capital expenditures and other operating requirements.
The Company is in the process of addressing the Year 2000 issue. The Company
expects to be substantially complete with the project by December 1998, and the
total cost is not anticipated to be material to the Company's financial position
or results of operations in any given year. Conclusions regarding the cost of
the project and the expected completion date are based on management's best
estimates.
Form 10-Q includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical facts included in the Form 10-Q and located
elsewhere herein regarding the Company's financial position and business
strategy may constitute forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.
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PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not Applicable
ITEM 4. RESULT OF VOTES OF SECURITY HOLDERS
Following are the results of the matters voted upon at the Company's
Annual Meeting which was held on May 21, 1998.
Election of Directors:
Mr. Thomas E. Cato - For 71,794,038 ; Abstaining 552,154
Mr. George S. Currin - For 71,793,888 ; Abstaining 552,304
Mr. A.F. (Pete) Sloan - For 71,794,038 ; Abstaining 552,154
Amendment to The Cato Corporation 1993 Employee Stock Purchase Plan
For 71,880,536 ; Abstaining 454,658 ; Against 10,989
Ratification of Deloitte & Touche LLP as Independent Auditors
For 72,336,749 ; Abstaining 3,702 ; Against 5,742
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) None
(B) No Reports on Form 8-K were filed during the quarter ended
August 1, 1998.
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PART II OTHER INFORMATION (CONTINUED)
THE CATO CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CATO CORPORATION
September 10, 1998 /s/ Wayland H. Cato, Jr.
- - ------------------------------ --------------------------------------
Date Wayland H. Cato, Jr.
Chairman of the Board of
Directors and Chief Executive Officer
September 10, 1998 /s/ Michael O. Moore
- - ------------------------------ --------------------------------------
Date Michael O. Moore
Executive Vice President
Chief Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 54,403
<SECURITIES> 38,167
<RECEIVABLES> 46,562
<ALLOWANCES> 4,660
<INVENTORY> 63,063
<CURRENT-ASSETS> 202,463
<PP&E> 99,431
<DEPRECIATION> 49,683
<TOTAL-ASSETS> 258,388
<CURRENT-LIABILITIES> 74,306
<BONDS> 0
0
0
<COMMON> 972
<OTHER-SE> 171,627
<TOTAL-LIABILITY-AND-EQUITY> 258,388
<SALES> 268,747
<TOTAL-REVENUES> 278,220
<CGS> 183,043
<TOTAL-COSTS> 183,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,138
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 25,772
<INCOME-TAX> 9,020
<INCOME-CONTINUING> 16,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,752
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.59
</TABLE>
