<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 1999
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT 1934
For the transition period from ________________to__________________
Commission file number 0-3747
----------
THE CATO CORPORATION AND SUBSIDIARIES
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-0484485
- ------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
8100 Denmark Road, Charlotte, North Carolina 28273-5975
-------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(704) 554-8510
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 14, 1999, there were 21,227,474 shares of Class A Common Stock and
5,264,317 shares of Class B Common Stock outstanding.
<PAGE> 2
THE CATO CORPORATION
FORM 10-Q
MAY 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
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
</TABLE>
<PAGE> 3
Page 2
PART I FINANCIAL INFORMATION
THE CATO CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MAY 1, May 2,
1999 1998
-------- --------
<S> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Retail sales $153,383 $136,174
Other income (principally finance and layaway charges) 4,872 4,870
-------- --------
Total revenues 158,255 141,044
-------- --------
COSTS AND EXPENSES
Cost of goods sold 100,169 89,179
Selling, general and administrative 34,922 33,090
Depreciation 2,023 1,865
Interest 6 66
-------- --------
Total expenses 137,120 124,200
-------- --------
INCOME BEFORE INCOME TAXES 21,135 16,844
Income taxes 7,397 5,727
-------- --------
NET INCOME $ 13,738 $ 11,117
======== ========
BASIC EARNINGS PER SHARE $ .52 $ .40
======== ========
DILUTED EARNINGS PER SHARE $ .51 $ .39
======== ========
DIVIDENDS PER SHARE $ .055 $ .045
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
Page 3
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 1, May 2, January 30,
1999 1998 1999
(UNAUDITED) (Unaudited)
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 42,861 $ 39,038 $ 44,068
Short-term investments 53,273 43,342 42,141
Accounts receivable - net 44,165 44,212 44,536
Merchandise inventories 75,457 72,968 61,112
Deferred income taxes 3,475 3,001 3,372
Prepaid expenses 2,646 4,034 2,374
-------- -------- --------
Total Current Assets 221,877 206,595 197,603
Property and Equipment - net 56,779 49,821 54,740
Other Assets 6,281 6,176 6,170
-------- -------- --------
Total $284,937 $262,592 $258,513
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 66,895 $ 57,734 $ 52,391
Accrued expenses 17,425 16,672 20,991
Income taxes 7,531 7,751 197
-------- -------- --------
Total Current Liabilities 91,851 82,157 73,579
Deferred Income Taxes 5,801 5,296 5,922
Other Noncurrent Liabilities 7,002 6,503 6,778
Stockholders' Equity:
Class A Common Stock, issued 24,101,474 shares, 23,672,371 shares and
24,070,519 shares at May 1, 1999, May 2, 1998 and January 30, 1999,
respectively 803 788 802
Convertible Class B Common Stock, issued and
outstanding 5,264,317 shares at May 1, 1999,
May 2, 1998 and January 30, 1999, respectively 176 176 176
Additional paid-in capital 70,147 65,404 69,878
Retained earnings 132,436 111,368 120,590
-------- -------- --------
203,562 177,736 191,446
LessClass A Common Stock in treasury, at cost (2,874,000 shares at May 1, 1999,
1,361,500 shares at May 2, 1998, and 2,368,000 shares
at January 30, 1999, respectively) 23,279 9,100 19,212
-------- -------- --------
Total Stockholders' Equity 180,283 168,636 172,234
-------- -------- --------
Total $284,937 $262,592 $258,513
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
Page 4
THE CATO CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MAY 1, May 2,
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,738 $ 11,117
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 2,023 1,865
Amortization of investment premiums 44 22
Loss on disposal of property and equipment 141 342
Changes in operating assets and liabilities which provided (used) cash:
Accounts receivable 371 2,974
Merchandise inventories (14,345) (8,742)
Other assets (383) (2,431)
Accrued income taxes 7,334 5,710
Accounts payable and other liabilities 11,693 4,455
-------- --------
Net cash provided by operating activities 20,616 15,312
-------- --------
INVESTING ACTIVITIES
Expenditures for property and equipment (4,203) (2,227)
Purchases of short-term investments (14,903) (16,234)
Sales of short-term investments 3,088 600
-------- --------
Net cash used in investing activities (16,018) (17,861)
-------- --------
FINANCING ACTIVITIES
Dividends paid (1,477) (1,216)
Purchases of treasury stock (4,577) --
Proceeds from employee stock purchase plan 237 177
Proceeds from stock options exercised 12 982
-------- --------
Net cash used in financing activities (5,805) (57)
-------- --------
Net Decrease in Cash and Cash Equivalents (1,207) (2,606)
Cash and Cash Equivalents at Beginning of Period 44,068 41,644
-------- --------
Cash and Cash Equivalents at End of Period $ 42,861 $ 39,038
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
Page 5
THE CATO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MAY 1, 1999 AND MAY 2, 1998
- -------------------------------------------------------------------------------
NOTE 1 - GENERAL:
The consolidated financial statements have been prepared from the accounting
records of The Cato Corporation and its wholly-owned subsidiaries (the Company)
and all amounts shown at May 1, 1999 and May 2, 1998 are unaudited. In the
opinion of management, all adjustments (consisting solely of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of the interim period may not be indicative of the entire year.
The Company's short-term investments are classified as available-for-sale
securities, and therefore, are carried at fair value, with unrealized gains and
losses, net of income taxes, reported as a component of other comprehensive
income.
Total comprehensive income for the quarters ended May 1, 1999 and May 2, 1998
was $13,323,000 and $11,047,000, respectively. Total comprehensive income is
composed of net income and unrealized losses on available-for-sale securities.
Merchandise inventories are stated at the lower of cost (first-in, first-out
method) or market as determined by the retail inventory method.
In March 1999, the Company transferred 63,000 shares of Class A Common Stock
from treasury stock to its Employee Stock Ownership Plan as the contribution for
the fiscal year ended January 30, 1999. In the first quarter of fiscal 1999, the
Company repurchased 569,000 shares of Class A Common Stock for $4,577,000, or an
average price of $8.04 per share.
The provisions for income taxes are based on the Company's estimated annual
effective tax rate.
NOTE 2 - EARNINGS PER SHARE:
Earnings per share is calculated by dividing net income by the weighted-average
number of Class A and Class B common shares outstanding during the respective
periods. The weighted-average number of shares used in the basic earnings per
share computations was 26,659,565 shares and 27,499,658 shares for the three
months ended May 1, 1999 and May 2, 1998, respectively. The weighted-average
number of shares representing the dilutive effect of stock options was 248,834
and 702,228 for the three months ended May 1, 1999 and May 2, 1998,
respectively. The weighted-average number of shares used in the diluted earnings
per share computations was 26,908,399 and 28,201,886 for the three months ended
May 1, 1999 and May 2, 1998, respectively.
<PAGE> 7
Page 6
THE CATO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MAY 1, 1999 AND MAY 2, 1998
- -------------------------------------------------------------------------------
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the three months ended May 1, 1999 and May 2, 1998 was
$3,000 and $35,000, respectively. Income tax payments, net of refunds received,
for the three months ended May 1, 1999 and May 2, 1998 were $181,000 and
$646,000, respectively.
NOTE 4 - FINANCING ARRANGEMENTS:
At May 1, 1999, the Company had an unsecured revolving credit agreement which
provides for borrowings of up to $35 million. The revolving credit agreement is
committed until May 2001. The credit agreement contains various financial
covenants and limitations, including the maintenance of specific financial
ratios. The Company was in compliance with all financial covenants and ratios
and there were no borrowings outstanding under the agreement at May 1, 1999 or
May 2, 1998.
NOTE 5 - REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The following
schedule summarizes certain segment information (in thousands):
<TABLE>
<CAPTION>
Three Months Ended May 1, 1999 Retail Credit Total
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $155,396 $2,859 $158,255
Income before taxes 20,239 896 21,135
<CAPTION>
Three Months Ended May 2, 1998
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $138,280 $2,764 $141,044
Income before taxes 16,065 779 16,844
</TABLE>
<PAGE> 8
Page 7
THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
Company's Unaudited Consolidated Statements of Income as a percentage of total
retail sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MAY 1, May 2,
1999 1998
------ -----
<S> <C> <C>
Total retail sales 100.0% 100.0%
Total revenues 103.2 103.6
Cost of goods sold 65.3 65.5
Selling, general and administrative 22.8 24.3
Income before income taxes 13.8 12.4
Net income 9.0 8.2
</TABLE>
COMPARISON OF FIRST QUARTER OF 1999 WITH 1998.
OPERATING RESULTS
Total retail sales for the first quarter were $153.4 million compared to last
year's first quarter sales of $136.2 million, a 13% increase. Same-store sales
increased 7% in this year's first quarter. The increase in retail sales for the
first quarter resulted from the Company's continued everyday low price strategy,
improved merchandise offerings, and an increase in store development activity.
The Company operated 753 stores at May 1, 1999 compared to 697 stores at the end
of last year's first quarter.
Cost of goods sold were 65.3% of total retail sales for the current year's first
quarter, compared to 65.5% for last year's first three months. The decrease in
cost of goods sold as a percent of retail sales resulted by maintaining timely
and aggressive markdowns on slow moving merchandise, eliminating unprofitable
promotions and improving inventory flow.
<PAGE> 9
Page 8
THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
OPERATING RESULTS - CONTINUED
Selling, general and administrative (SG&A) expenses were $34.9 million, or 22.8%
of retail sales, for this year's first quarter compared to $33.1 million, or
24.3% of retail sales, in last year's first quarter. Expenses remained well
controlled and were under planned levels.
LIQUIDITY AND CAPITAL RESOURCES
At May 1, 1999, the Company had working capital of $130.0 million, compared to
$124.4 million at May 2, 1998 and $124.0 million at January 30, 1999. Cash
provided by operating activities was $20.6 million for the three months ended
May 1, 1999, compared to $15.3 million for last year's comparable three month
period. The Company had no borrowings under its revolving credit agreement at
May 1, 1999 or May 2, 1998. At May 1, 1999, the Company had cash, cash
equivalents, and short-term investments of $96.1 million, compared to $82.4
million at May 2, 1998 and $86.2 million at January 30, 1999.
At May 1, 1999, the Company had an unsecured revolving credit agreement which
provides for borrowings of up to $35 million. The revolving credit agreement is
committed until May 2001. The credit agreement contains various financial
covenants and limitations, including the maintenance of specific financial
ratios. The Company was in compliance with all financial covenants and ratios
and there were no borrowings outstanding under the agreement at May 1, 1999 or
May 2, 1998.
Expenditures for property and equipment totaled $4.2 million for the three
months ended May 1, 1999, compared to $2.2 million of expenditures in last
year's first three months. The Company expects total capital expenditures to be
approximately $24 million for the current fiscal year. The Company intends to
open approximately 75 new stores, close 10 stores and to relocate 24 stores
during the current fiscal year. For the three months ended May 1, 1999, the
Company had opened 21 new stores, relocated 6 stores, and closed none.
In May 1999, the Board of Directors increased the quarterly dividend by 36% from
$.055 per share to $.075 per share.
The Company believes that its cash, cash equivalents and short-term investments,
together with cash flow from operations and borrowings available under its
revolving credit agreement, will be adequate to fund the Company's proposed
capital expenditures and other operating requirements.
<PAGE> 10
Page 9
THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
The Company developed a two phase approach to address the Year 2000 issue, which
involves the exposure to risks in its information technology (IT) systems, as
well as potential risks in other non-IT systems with embedded technology. Phase
1 was an analysis to identify and fix all internally developed programs. Phase 2
is the identification and correction to all programs purchased from external
sources. The Company has completed Phase 1, and Phase 2 is scheduled to be
substantially complete by the end of the second fiscal quarter of 1999 with
continued testing of compliance throughout 1999. The Company expects to spend
approximately $525,000 in 1998 and 1999 on hardware, software and consulting to
ensure proper processing of transactions relating to the Year 2000 and beyond.
The Company has initiated formal communications with its third-party suppliers
and vendors to determine the extent to which the Company is vulnerable to those
third-parties' failure to remediate their own Year 2000 issue. Although lack of
compliance for Year 2000 issues by third-party suppliers and vendors could have
an adverse effect on the Company's business, results of operations and financial
condition, the Company expects its Year 2000 compliance efforts to significantly
reduce the risk of business interruption and the level of uncertainty the Year
2000 issue may have on its computer systems. A contingency plan will be
established upon the completion of Phase 2.
Form 10-Q includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical facts included in the Form 10-Q and located
elsewhere herein regarding the Company's financial position and business
strategy may constitute forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.
<PAGE> 11
Page 10
PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not Applicable
ITEM 4. RESULT OF VOTES OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) 27 Financial Data Schedule (for SEC use only)
(B) No Reports on Form 8-K were filed during the quarter ended May 1,
1999.
<PAGE> 12
Page 11
PART II OTHER INFORMATION (CONTINUED)
THE CATO CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CATO CORPORATION
June 10, 1999 /s/ Wayland H. Cato, Jr.
- -------------------------------- ------------------------------------
Date Wayland H. Cato, Jr.
Chairman of the Board
June 10, 1999 /s/ John P. Derham Cato
- -------------------------------- ------------------------------------
Date John P. Derham Cato
Vice Chairman of the Board
President and Chief Executive Officer
June 10, 1999 /s/ Michael O. Moore
- -------------------------------- ------------------------------------
Date Michael O. Moore
Executive Vice President
Chief Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND INCOME STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 42,861
<SECURITIES> 53,273
<RECEIVABLES> 49,326
<ALLOWANCES> 5,161
<INVENTORY> 75,457
<CURRENT-ASSETS> 221,877
<PP&E> 110,741
<DEPRECIATION> 53,962
<TOTAL-ASSETS> 284,937
<CURRENT-LIABILITIES> 91,851
<BONDS> 0
0
0
<COMMON> 979
<OTHER-SE> 179,304
<TOTAL-LIABILITY-AND-EQUITY> 284,937
<SALES> 153,383
<TOTAL-REVENUES> 158,255
<CGS> 100,169
<TOTAL-COSTS> 100,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,035
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 21,135
<INCOME-TAX> 7,397
<INCOME-CONTINUING> 13,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,738
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.51
</TABLE>
