e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 1, 2009
OR
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o |
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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 1-31340 |
THE CATO CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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56-0484485 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
8100
Denmark Road, Charlotte, North Carolina 28273-5975
(Address of principal executive offices)
(Zip Code)
(704) 554-8510
(Registrants 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 þ No o
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
o No o
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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
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No þ
As of August 18, 2009, there were 27,809,350 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 August 1, 2009
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
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Three Months Ended |
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Six Months Ended |
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August 1, |
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August 2, |
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August 1, |
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August 2, |
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2009 |
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2008 |
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2009 |
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2008 |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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(Dollars in thousands, except per share data) |
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REVENUES |
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Retail sales |
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$ |
225,369 |
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$ |
230,957 |
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$ |
463,423 |
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$ |
456,748 |
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Other income (principally finance charges, late fees and
layaway charges) |
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2,897 |
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2,911 |
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5,870 |
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5,948 |
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Total revenues |
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228,266 |
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233,868 |
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469,293 |
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462,696 |
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COSTS AND EXPENSES, NET |
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Cost of goods sold (exclusive of depreciation shown below) |
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143,459 |
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148,020 |
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285,372 |
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289,640 |
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Selling, general and administrative (exclusive of depreciation
shown below) |
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56,480 |
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63,580 |
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121,124 |
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119,896 |
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Depreciation |
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5,482 |
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5,657 |
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11,026 |
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11,267 |
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Interest and other income |
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(861 |
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(1,709 |
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(1,921 |
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(3,609 |
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204,560 |
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215,548 |
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415,601 |
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417,194 |
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Income before income taxes |
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23,706 |
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18,320 |
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53,692 |
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45,502 |
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Income tax expense |
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7,048 |
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6,229 |
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18,220 |
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16,558 |
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Net income |
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$ |
16,658 |
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$ |
12,091 |
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$ |
35,472 |
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$ |
28,944 |
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Basic earnings per share |
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$ |
0.57 |
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$ |
0.41 |
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$ |
1.21 |
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$ |
0.98 |
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Diluted earnings per share |
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$ |
0.56 |
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$ |
0.41 |
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$ |
1.20 |
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$ |
0.98 |
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Dividends per share |
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$ |
0.165 |
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$ |
0.165 |
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$ |
0.33 |
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$ |
0.33 |
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Comprehensive income: |
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Net income |
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$ |
16,658 |
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$ |
12,091 |
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$ |
35,472 |
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$ |
28,944 |
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Unrealized gains (losses) on available-for-sale securities, net
of deferred income tax expense |
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56 |
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(84 |
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30 |
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(320 |
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Net comprehensive income |
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$ |
16,714 |
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$ |
12,007 |
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$ |
35,502 |
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$ |
28,624 |
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See notes to condensed consolidated financial statements.
2
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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August 1, |
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August 2, |
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January 31, |
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2009 |
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2008 |
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2009 |
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(Unaudited) |
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(Unaudited) |
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(Dollars in thousands, except per share data) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
28,888 |
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$ |
45,371 |
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$ |
42,262 |
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Short-term investments |
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145,427 |
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98,875 |
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93,452 |
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Restricted cash |
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9,057 |
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9,077 |
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9,089 |
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Accounts receivable, net of allowance for doubtful accounts of
$3,301, $3,195 and $3,723 at August 1, 2009, August 2, 2008 and
January 31, 2009, respectively |
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41,798 |
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44,026 |
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44,136 |
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Merchandise inventories |
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93,807 |
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96,864 |
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112,290 |
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Deferred income taxes |
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6,408 |
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6,904 |
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6,403 |
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Prepaid expenses |
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7,875 |
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7,880 |
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7,737 |
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Total Current Assets |
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333,260 |
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308,997 |
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315,369 |
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Property and
equipment net |
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111,001 |
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119,952 |
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116,262 |
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Other assets |
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7,324 |
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4,482 |
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3,722 |
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Total Assets |
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$ |
451,585 |
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$ |
433,431 |
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$ |
435,353 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
76,923 |
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$ |
83,899 |
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$ |
102,971 |
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Accrued expenses |
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32,648 |
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34,052 |
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29,946 |
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Accrued bonus and benefits |
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10,742 |
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6,830 |
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6,307 |
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Accrued income taxes |
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20,817 |
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18,433 |
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11,506 |
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Total Current Liabilities |
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141,130 |
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143,214 |
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150,730 |
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Deferred income taxes |
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2,528 |
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1,707 |
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2,528 |
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Other noncurrent liabilities (primarily deferred rent) |
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18,639 |
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20,758 |
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20,282 |
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Commitments and contingencies |
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Stockholders Equity: |
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Preferred stock, $100 par value per share, 100,000 shares authorized,
none issued |
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Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 36,471,549 shares, 36,281,440 shares,
and 36,303,922 shares at August 1, 2009, August 2, 2008 and
January 31, 2009, respectively |
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1,216 |
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1,209 |
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1,210 |
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Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 1,743,525 shares
at August 1, 2009, August 2, 2008 and January 31, 2009 |
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58 |
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58 |
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58 |
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Additional paid-in capital |
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63,328 |
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60,147 |
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61,608 |
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Retained earnings |
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380,101 |
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359,323 |
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354,333 |
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Accumulated other comprehensive income |
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443 |
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389 |
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413 |
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445,146 |
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421,126 |
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417,622 |
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Less Class A common stock in treasury, at cost (8,662,902 shares,
8,461,615 shares and 8,660,333 shares at August 1, 2009,
August 2, 2008 and January 31, 2009, respectively) |
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(155,858 |
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(153,374 |
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(155,809 |
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Total Stockholders Equity |
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289,288 |
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267,752 |
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261,813 |
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Total Liabilities and Stockholders Equity |
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$ |
451,585 |
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$ |
433,431 |
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$ |
435,353 |
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See notes to condensed consolidated financial statements.
3
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended |
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August 1, |
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August 2, |
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2009 |
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2008 |
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(Unaudited) |
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(Unaudited) |
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(Dollars in thousands) |
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OPERATING ACTIVITIES |
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Net income |
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$ |
35,472 |
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$ |
28,944 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation |
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11,026 |
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11,267 |
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Provision for doubtful accounts |
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1,752 |
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1,462 |
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Share-based compensation |
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1,230 |
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1,064 |
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Excess tax benefits from share-based compensation |
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(72 |
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(41 |
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Loss on disposal of property and equipment |
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393 |
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2,510 |
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Changes in operating assets and liabilities which provided
(used) cash: |
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Accounts receivable |
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586 |
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(206 |
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Merchandise inventories |
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18,483 |
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21,815 |
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Prepaid and other assets |
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(3,740 |
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(55 |
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Accrued income taxes |
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9,383 |
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10,546 |
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Accounts payable, accrued expenses and other liabilities |
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(20,548 |
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(18,246 |
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Net cash provided by operating activities |
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53,965 |
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59,060 |
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INVESTING ACTIVITIES |
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Expenditures for property and equipment |
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(6,170 |
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(10,540 |
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Purchases of short-term investments |
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(96,292 |
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(99,820 |
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Sales of short-term investments |
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44,347 |
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84,395 |
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Change in restricted cash |
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32 |
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Net cash (used in) investing activities |
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(58,083 |
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(25,965 |
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FINANCING ACTIVITIES |
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Dividends paid |
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(9,723 |
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(9,710 |
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Purchase of treasury stock |
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(49 |
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Proceeds from employee stock purchase plan |
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200 |
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233 |
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Excess tax benefits from share-based compensation |
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72 |
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41 |
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Proceeds from stock options exercised |
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244 |
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129 |
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Net cash used in financing activities |
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(9,256 |
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(9,307 |
) |
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Net increase (decrease) in cash and cash equivalents |
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(13,374 |
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23,788 |
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Cash and cash equivalents at beginning of period |
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42,262 |
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21,583 |
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Cash and cash equivalents at end of period |
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$ |
28,888 |
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$ |
45,371 |
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|
See notes to condensed consolidated financial statements.
4
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND AUGUST 2, 2008
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 August 1, 2009 and August 2,
2008 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 Companys Annual Report on Form 10-K for the fiscal
year ended January 31, 2009.
The year-end condensed consolidated balance sheet data presented for fiscal year ended January 31,
2009 was derived from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States of
America.
Cash equivalents consist of highly liquid investments with original maturities of three months or
less. Investments with original maturities beyond three months are classified as short-term
investments. The fair values of short-term investments are based on
quoted market prices.
Short-term
investments are classified as available-for-sale. As they are available for current
operations, they are classified in the Condensed Consolidated Balance
Sheets as current assets.
Available-for-sale securities are carried at fair value, with unrealized gains and temporary
losses, net of income taxes, reported as a component of accumulated
other comprehensive income.
Other than temporary declines in fair value of investments are recorded as a reduction in the cost
of the investments in the accompanying Condensed Consolidated Balance Sheets and a reduction of
Interest and other income in the accompanying Condensed Consolidated Statements of Income and
Comprehensive Income. The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. The amortization of premiums, accretion of discounts and
realized gains and losses are included in Interest and other income.
Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as
determined by the retail inventory method.
On
August 27, 2009, the Board of Directors maintained the quarterly dividend at $.165 per share or
an annualized rate of $.66 per share.
Prior year basic and diluted weighted shares and earnings per share have been adjusted based on
Financial Accounting Standards Board (FSAB) issued FASB Staff
Position (FSP) No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities. The impact to basic earnings per share for the prior year quarter and prior year to
date due to the adoption of this FSP was $0.01. The impact to diluted
earnings per share was $0.01
for the prior year to date. There was no impact to diluted earnings per share for the prior year
quarter.
5
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND AUGUST 2, 2008
NOTE
2 EARNINGS PER SHARE:
SFAS No. 128, Earnings Per Share, requires dual presentation of basic EPS and diluted 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 Companys articles of incorporation provide
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 Companys allocation of income for purposes of 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 |
|
Six Months Ended |
|
|
August 1, |
|
August 2, |
|
August 1, |
|
August 2, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(Dollars in thousands, except per share data) |
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
16,658 |
|
|
$ |
12,091 |
|
|
$ |
35,472 |
|
|
$ |
28,944 |
|
Earnings allocated to non-vested equity awards
|
|
|
(244 |
) |
|
|
(167 |
) |
|
|
(516 |
) |
|
|
(346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$ |
16,414 |
|
|
$ |
11,924 |
|
|
$ |
34,956 |
|
|
$ |
28,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
29,039,565 |
|
|
|
29,113,017 |
|
|
|
28,997,030 |
|
|
|
29,104,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
0.57 |
|
|
$ |
0.41 |
|
|
$ |
1.21 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
16,658 |
|
|
$ |
12,091 |
|
|
$ |
35,472 |
|
|
$ |
28,944 |
|
Earnings allocated to non-vested equity awards
|
|
|
(244 |
) |
|
|
(167 |
) |
|
|
(516 |
) |
|
|
(346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$ |
16,414 |
|
|
$ |
11,924 |
|
|
$ |
34,956 |
|
|
$ |
28,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
29,039,565 |
|
|
|
29,113,017 |
|
|
|
28,997,030 |
|
|
|
29,104,465 |
|
Dilutive effect of stock options
|
|
|
21,964 |
|
|
|
17,142 |
|
|
|
18,393 |
|
|
|
15,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted avg. shares outstanding
|
|
|
29,061,529 |
|
|
|
29,130,159 |
|
|
|
29,015,423 |
|
|
|
29,120,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
0.56 |
|
|
$ |
0.41 |
|
|
$ |
1.20 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND AUGUST 2, 2008
NOTE
3 SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax payments, net of refunds received, for the six months ended August 1, 2009 and August 2,
2008 were $9,435,000 and $6,938,000, respectively. The income tax payments for the six months
ended August 1, 2009 include settlements of various states tax
audits of $2,455,000.
NOTE
4 FINANCING ARRANGEMENTS:
As of
August 1, 2009, the Company had an unsecured revolving credit agreement of $35 million. Net
of the Companys standby letter of credit for payments to the current general liability and
workers compensation insurance processor, the revolving credit agreement provided for borrowings
of up to $33.3 million at August 1, 2009. The revolving credit agreement is committed until August
2010. 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 August 1,
2009. There were no borrowings outstanding under this credit facility during the six months ended
August 1, 2009 or August 2, 2008, respectively, or the
fiscal year ended January 31, 2009.
Interest on any borrowings is based on LIBOR, which was 0.28% at
August 1, 2009.
At August 1, 2009 and August 2, 2008 the Company had approximately $8,301,000 and $4,771,000,
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 womens
fashion specialty retail stores in 31 states at August 1, 2009, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
August 1, 2009 |
|
Retail |
|
|
Credit |
|
|
Total |
|
|
August 1, 2009 |
|
Retail |
|
|
Credit |
|
|
Total |
|
Revenues |
|
$ |
225,932 |
|
|
$ |
2,334 |
|
|
$ |
228,266 |
|
|
Revenues |
|
$ |
464,541 |
|
|
$ |
4,752 |
|
|
$ |
469,293 |
|
Depreciation |
|
|
5,476 |
|
|
|
6 |
|
|
|
5,482 |
|
|
Depreciation |
|
|
11,010 |
|
|
|
16 |
|
|
|
11,026 |
|
Interest and other income |
|
|
(861 |
) |
|
|
|
|
|
|
(861 |
) |
|
Interest and other income |
|
|
(1,921 |
) |
|
|
|
|
|
|
(1,921 |
) |
Income before taxes |
|
|
22,918 |
|
|
|
788 |
|
|
|
23,706 |
|
|
Income before taxes |
|
|
52,288 |
|
|
|
1,404 |
|
|
|
53,692 |
|
Total assets |
|
|
380,522 |
|
|
|
71,063 |
|
|
|
451,585 |
|
|
Total assets |
|
|
380,522 |
|
|
|
71,063 |
|
|
|
451,585 |
|
Capital expenditures |
|
|
2,631 |
|
|
|
|
|
|
|
2,631 |
|
|
Capital expenditures |
|
|
6,164 |
|
|
|
|
|
|
|
6,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
August 2, 2008 |
|
Retail |
|
|
Credit |
|
|
Total |
|
|
August 2, 2008 |
|
Retail |
|
|
Credit |
|
|
Total |
|
Revenues |
|
$ |
231,401 |
|
|
$ |
2,467 |
|
|
$ |
233,868 |
|
|
Revenues |
|
$ |
457,710 |
|
|
$ |
4,986 |
|
|
$ |
462,696 |
|
Depreciation |
|
|
5,646 |
|
|
|
11 |
|
|
|
5,657 |
|
|
Depreciation |
|
|
11,246 |
|
|
|
21 |
|
|
|
11,267 |
|
Interest and other income |
|
|
(1,709 |
) |
|
|
|
|
|
|
(1,709 |
) |
|
Interest and other income |
|
|
(3,609 |
) |
|
|
|
|
|
|
(3,609 |
) |
Income before taxes |
|
|
17,309 |
|
|
|
1,011 |
|
|
|
18,320 |
|
|
Income before taxes |
|
|
43,628 |
|
|
|
1,874 |
|
|
|
45,502 |
|
Total assets |
|
|
361,874 |
|
|
|
71,557 |
|
|
|
433,431 |
|
|
Total assets |
|
|
361,874 |
|
|
|
71,557 |
|
|
|
433,431 |
|
Capital expenditures |
|
|
4,893 |
|
|
|
|
|
|
|
4,893 |
|
|
Capital expenditures |
|
|
10,540 |
|
|
|
|
|
|
|
10,540 |
|
7
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND AUGUST 2, 2008
NOTE
5 REPORTABLE SEGMENT INFORMATION (CONTINUED):
The
Company evaluates performance based on income before taxes. The Company does not allocate
certain corporate expenses or income taxes to the credit segment.
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 |
|
Six Months Ended |
|
|
August 1, |
|
August 2, |
|
August 1, |
|
August 1, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Bad debt expense
|
|
$ |
828 |
|
|
$ |
696 |
|
|
$ |
1,752 |
|
|
$ |
1,462 |
|
Payroll
|
|
|
247 |
|
|
|
254 |
|
|
|
496 |
|
|
|
507 |
|
Postage
|
|
|
224 |
|
|
|
240 |
|
|
|
469 |
|
|
|
513 |
|
Other expenses
|
|
|
241 |
|
|
|
255 |
|
|
|
615 |
|
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$ |
1,540 |
|
|
$ |
1,445 |
|
|
$ |
3,332 |
|
|
$ |
3,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
6 STOCK BASED COMPENSATION:
As of August 1, 2009, the Company had three long-term compensation plans pursuant to which
stock-based compensation was outstanding or could be granted. The Companys 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 31, 2009 |
|
|
18,627 |
|
|
|
|
|
|
|
868,078 |
|
|
|
886,705 |
|
August 1, 2009 |
|
|
18,627 |
|
|
|
|
|
|
|
737,362 |
|
|
|
755,989 |
|
Stock option awards outstanding under the Companys current plans were granted at exercise prices
which were equal to the market value of the Companys stock on the date of grant, vest over five
years and expire no later than ten years after the grant date.
8
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND AUGUST 2, 2008
NOTE
6 STOCK BASED COMPENSATION (CONTINUED):
The following is a summary of the changes in stock options outstanding during the six months ended
August 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value (a) |
|
Options outstanding at January 31, 2009 |
|
|
107,950 |
|
|
$ |
12.72 |
|
|
4.07 years |
|
$ |
124,257 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
23,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 1, 2009 |
|
|
84,725 |
|
|
$ |
13.33 |
|
|
4.06 years |
|
$ |
347,642 |
|
Vested and exercisable at August 1, 2009 |
|
|
75,275 |
|
|
$ |
13.07 |
|
|
3.83 years |
|
$ |
328,093 |
|
|
|
|
(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. |
No options
were granted in fiscal 2008 or in the first half of fiscal 2009.
As of August 1, 2009, there was approximately $21,200 of total unrecognized compensation cost
related to nonvested options, which is expected to be recognized over a remaining weighted-average
vesting period of 0.2 years. The total intrinsic value of options exercised during the second
quarter and six months ended August 1, 2009 was approximately
$125,014 and $192,023, respectively.
The Company recognized share-based compensation expense for nonvested options of $15,000 and
$55,000 for the second quarter and six month period ended August 1, 2009, respectively, compared to
$23,000 and $46,000 for the second quarter and six month period ending August 2, 2008,
respectively. These expenses are classified as a component of selling, general and administrative
expenses.
SFAS No. 123R requires the benefits of tax deductions in excess of the compensation cost recognized
for those options (excess tax benefits) to be classified as financing
cash flows. For the six
months ended August 1, 2009 and August 2, 2008, the Company reported $72,000 and $41,000 of excess
tax benefits as a financing cash inflow, respectively. In addition, $244,000 and $200,000 in cash
proceeds were received from the exercise of stock options and Employee Stock Purchase Plan
purchases, respectively.
9
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND AUGUST 2, 2008
NOTE 6 STOCK BASED COMPENSATION (CONTINUED):
The Companys Employee Stock Purchase Plan allows eligible full-time employees to purchase a
limited number of shares of the Companys Class A Common Stock during each semi-annual offering
period at a 15% discount through payroll deductions. During the six months ended August 1, 2009
and August 2, 2008, the Company sold 13,686 and 18,158 shares to employees at an average discount
of $2.57 and $2.15 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 $35,000 and $39,000 for the six months ended August 1, 2009 and August 2, 2008,
respectively.
In
accordance with SFAS No. 123R, the fair value of current restricted stock awards is estimated on
the date of grant based on the market price of the Companys stock and is amortized to compensation
expense on a straight-line basis over the related vesting periods. As of August 1, 2009 and August
2, 2008, there was $5,104,649 and $6,342,000 of total unrecognized compensation cost related to
nonvested restricted stock awards, which have a remaining
weighted-average vesting period of 3.2
years and 3.45 years, respectively. The total fair value of the shares recognized as compensation
expense during the second quarter and six months ended August 1, 2009 was $757,000 and $1,087,000
compared to $514,000 and $950,000 for the second quarter and six
months ended August 2, 2008.
The following summary shows the changes in the shares of restricted stock outstanding during the
six months ended August 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value Per Share |
|
Restricted stock awards at January 31, 2009 |
|
|
439,921 |
|
|
$ |
20.46 |
|
Granted |
|
|
157,525 |
|
|
|
18.90 |
|
Vested |
|
|
(58,283 |
) |
|
|
22.52 |
|
Forfeited |
|
|
(39,437 |
) |
|
|
20.38 |
|
|
|
|
|
|
|
|
|
Restricted stock awards at August 1, 2009 |
|
|
499,726 |
|
|
|
19.73 |
|
NOTE
7 INCOME TAXES:
The
Companys effective tax rate for the second quarter 2009 was
29.7% compared to 37.3% for
the first quarter of 2009. The decrease in the quarterly effective tax rate was primarily
attributable to the settlement of various state tax audits. During the second quarter 2009,
unrecognized tax benefits decreased $1.7 million from
$10.1 million at May 2, 2009 to $8.4 million
at August 1, 2009. During the next 12 months, various taxing authorities statues of limitations
are expected to expire which could result in a potential further reduction of unrecognized tax
benefits. 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 estimable.
10
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND AUGUST 2, 2008
NOTE 8 FAIR VALUE MEASUREMENTS:
In
September 2006, the FASB issued SFAS 157, Fair Value
Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands
disclosure of fair value measurements.
Applicable provisions of SFAS 157 were adopted by the Company
effective February 3, 2008. In February 2008, the FASB issued FASB Staff Position 157-2, Effective date of
FASB Statement No. 157, which delayed for one year the effective date of SFAS 157 for non-financial
assets and non-financial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The Companys adoption of FASB Staff
Position 157-2 was immaterial.
The following table sets forth information regarding the Companys financial assets that are
measured at fair value (in thousands) as of August 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
$ |
145,427 |
|
|
$ |
145,427 |
|
|
$ |
|
|
|
$ |
|
|
Other Assets |
|
|
5,817 |
|
|
|
393 |
|
|
|
1,974 |
|
|
|
3,450 |
|
The following table sets forth information regarding the Companys financial assets that are
measured at fair value (in thousands) as of January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
$ |
93,452 |
|
|
$ |
90,002 |
|
|
$ |
3,450 |
|
|
$ |
|
|
Other Assets |
|
|
2,258 |
|
|
|
303 |
|
|
|
1,955 |
|
|
|
|
|
The Companys investment portfolio was primarily invested in tax exempt variable rate demand
notes and governmental debt securities held in managed funds. These securities with the exception
of a single ARS are classified as available-for-sale as they are highly liquid and are recorded on
the balance sheet at estimated fair value, with unrealized gains and temporary losses reported net
of taxes as accumulated other comprehensive income. Additionally, as of August 1, 2009, the
Company had $2.0 million invested in privately managed
investment funds and $0.4 million of other
miscellaneous equities which are reported within other noncurrent assets in the Consolidated
Balance Sheets.
As of
August 1, 2009, the Company held $102.5 million in variable rate demand notes (VRDN) and an
auction rate security (ARS) issued by tax exempt municipal authorities and agencies and rated A
or better. The underlying securities have contractual maturities which generally range from six to
thirty-five years. The VRDN and ARS are recorded at estimated fair value and classified as
available-for-sale. Of the $102.5 million in VRDN and ARS, a
single ARS of $3.5 million failed its
last auction as of July 23, 2009. Due to the continuing failure of the ARS at auction and because
the issuer has yet to call the security, the Company has classified the failed ARS as a long-term
investment in Other Assets.
11
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND
AUGUST 2, 2008
NOTE 8 FAIR VALUE MEASUREMENTS (CONTINUED):
The Companys auction rate security was measured at fair value using Level 3 inputs under SFAS 157.
Because there is no active market for the Companys auction rate security, its fair value was
determined through the use of a discounted cash flow analysis using Level 3 inputs. The terms used
in the analysis were based on managements 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 investment, the Company also
considered the financial condition and near-term prospects of the issuer, the low 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 Companys valuation
is sensitive to market conditions and managements judgment and can change significantly based on
the assumptions used.
The following table summarizes the change in the fair value of the Companys auction rate
securities measured using Level 3 inputs during the first six months of fiscal 2009:
|
|
|
|
|
(in thousands) |
|
Fair Value |
|
Balance at January 31, 2009
|
|
$ |
|
|
Transfer into Level 3
|
|
|
3,450 |
|
|
|
|
|
|
Balance at August 1, 2009
|
|
$ |
3,450 |
|
|
|
|
|
|
NOTE
9 RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. EITF 03-6-1 requires that unvested
share-based payments that contain nonforfeitable rights to dividends are participating securities
and shall be included in the computation of EPS pursuant to the two class method. EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008. The impact to basic earnings per
share for the prior year quarter and prior year to date due to the adoption of this FSP was $0.01.
The impact to diluted earnings per share was $0.01 for the prior year to date. There was no impact
to earnings per share for the prior year quarter.
In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 provides guidance on (1)
estimating the fair value of an asset or liability when the volume and level of activity for the
asset or liability have significantly decreased and (2) identifying transactions that are not
orderly. FSP 157-4 is
12
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2009 AND
AUGUST 2, 2008
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
effective for interim and annual periods ending after June 15, 2009. The impact of the Companys
adoption of FSP 157-4 was immaterial.
In April 2009, the FASB issued FASB Staff Position No. 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP 115-2). FSP 115-2 amends the
other-than-temporary impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary impairments on debt and
equity securities. FSP 115-2 is effective for interim and annual periods ending after June 15,
2009. The impact of the Companys adoption of FSP 115-2 was immaterial.
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events
(SFAS No. 165), which establishes general standards for disclosure of and accounting for events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009.
The Companys adoption of SFAS No. 165 on August 2, 2009 did not have a material effect on the
Companys financial position or results of operations. The Company evaluated all events or
transactions that occurred after August 1, 2009 up through September 9, 2009, the date we issued
these Condensed Consolidated Financial Statements. We did not have any material recognizable or
nonrecognizable subsequent events during this period.
13
THE CATO CORPORATION
ITEM
2. MANAGEMENTS 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 Managements Discussion
and Analysis of Financial Condition and Results of Operations; (4) statements relating to our
operations or activities for fiscal 2009 and beyond, including, but not limited to, statements
regarding expected amounts of capital expenditures and store openings, relocations, remodelings 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. and global credit markets; uncertainties
regarding the impact of any governmental responses to the foregoing adverse economic and credit
market conditions; competitive factors and pricing pressures; our ability to predict fashion
trends; consumer apparel 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 31, 2009 (fiscal 2008), 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.
14
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES:
The Companys accounting policies are more fully described in Note 1 to the Consolidated Financial
Statements included in the Companys Annual Report on Form 10-K. As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the preparation of the Companys 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 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 Companys
financial statements include the allowance for doubtful accounts receivable, reserves relating to
workers compensation, general and auto insurance liabilities, reserves for group health insurance,
reserves for inventory markdowns, calculation of asset impairment, inventory shrinkage accrual and
reserves for uncertain tax positions.
The Companys critical accounting policies and estimates are discussed with the Audit Committee.
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in the Companys unaudited
Condensed Consolidated Statements of Income and Comprehensive Income as a percentage of total
retail sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
August 1, |
|
|
August 2, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Total retail sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Other income |
|
|
1.3 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
1.3 |
|
Total revenues |
|
|
101.3 |
|
|
|
101.3 |
|
|
|
101.3 |
|
|
|
101.3 |
|
Cost of goods sold |
|
|
63.7 |
|
|
|
64.1 |
|
|
|
61.6 |
|
|
|
63.4 |
|
Selling, general and administrative |
|
|
25.1 |
|
|
|
27.5 |
|
|
|
26.1 |
|
|
|
26.2 |
|
Depreciation |
|
|
2.4 |
|
|
|
2.5 |
|
|
|
2.4 |
|
|
|
2.5 |
|
Interest and other income |
|
|
(0.4 |
) |
|
|
(0.7 |
) |
|
|
(0.4 |
) |
|
|
(0.8 |
) |
Income before income taxes |
|
|
10.5 |
|
|
|
7.9 |
|
|
|
11.6 |
|
|
|
10.0 |
|
Net income |
|
|
7.4 |
|
|
|
5.2 |
|
|
|
7.7 |
|
|
|
6.3 |
|
15
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
Comparison of Second Quarter and First Six Months of 2009 with 2008.
Total retail sales for the second quarter were $225.4 million compared to last years second
quarter sales of $231.0 million, a 2% decrease. Same-store sales decreased 3% in the second
quarter of fiscal 2009. For the six months ended August 1, 2009, total retail sales were $463.4
million compared to last years first six months sales of $456.7 million, and same-store sales
remained flat for the comparable six 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 $228.3 million and $469.3 million for the second quarter and six months ended
August 1, 2009, respectively, compared to $233.9 million and $462.7 million for the second quarter
and six months ended
August 2, 2008, respectively. The Company operated 1,285 stores at August 1, 2009 compared to 1,287
stores at the end of last years second quarter. For the first six months of 2009 the Company
opened 12 stores and closed 8 stores. The Company expects to open approximately 46 stores,
relocate 2 stores and close approximately 42 stores in fiscal 2009.
Credit revenue of $2.3 million represented 1.0% of total revenues in the second quarter of 2009,
compared to 2008 credit revenue of $2.5 million or 1.1% of total revenues. The slight reduction in
credit revenue was due to lower finance charge and late fee income from lower sales under the
Companys proprietary credit card, partially offset by improved collections compared to the prior
year. Credit revenue is comprised of interest earned on the Companys private label credit card
portfolio and related fee income. Related expenses include principally bad debt expense, payroll,
postage and other administrative expenses and totaled $1.5 million in the second quarter of 2009,
$0.1 million higher compared to last years second quarter expenses of $1.4 million. Bad debt
expense was higher compared to the second quarter and first six months of 2008, partially offset by
lower administrative expenses.
Other income in total, as included in total revenues was $2.9 million and $5.9 million for the
second quarter and first six months of fiscal 2009, flat compared to the prior years comparable
three and six month periods.
Cost of goods sold was $143.5 million, or 63.7% of retail sales and $285.4 million or 61.6% of
retail sales for the second quarter and first six months of fiscal 2009, compared to $148.0
million, or 64.1% of retail sales and $289.6 million, or 63.4% of retail sales for the prior years
comparable three and six month period, respectively. The overall decrease in cost of goods sold as
a percent of retail sales for the second quarter and first six months of 2009 resulted primarily
from lower markdowns and freight charges. The decrease in markdowns was primarily attributable to
tight inventory management and higher 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.
16
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
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) decreased by 1.2% to
$81.9 million for the second quarter of fiscal 2009 and increased by 6.6% to $178.1 million for the
first six months of fiscal 2009, compared to $82.9 million and $167.1 million for the prior years
comparable three and six month periods, respectively. Gross margin as presented may not be
comparable to those of other entities.
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 $56.5 million, or 25.1% of retail sales and
$121.1 million, or 26.1% of retail sales for the second quarter and first six months of fiscal
2009, compared to $63.6 million, or 27.5% of retail sales and $119.9 million, or 26.2% of retail
sales for the prior years comparable three and six month period, respectively. SG&A expenses as a
percentage of retail sales decreased 240 basis points for the second quarter of fiscal 2009 as
compared to the prior year and decreased 10 basis points for the first six months of fiscal 2009 as
compared to the prior year. The decrease in SG&A expenses as a percentage of retail sales and the
overall dollar decrease for the second quarter of fiscal 2009 was primarily attributable to a
decrease in workers compensation and group health insurance expenses and the closure of
underperforming stores from the second quarter of fiscal 2008. The overall dollar increase in SG&A
expenses for the first six months of fiscal 2009 resulted primarily from increased incentive based
compensation expenses, payroll and legal reserve expenses offset by a reduction in workers
compensation and group health care expenses and the closure of underperforming stores from the
second quarter of fiscal 2008.
Depreciation expense was $5.5 million, or 2.4% of retail sales and $11.0 million or 2.4% of retail
sales, for the second quarter and first six months of fiscal 2009, compared to $5.7 million, or
2.5% of retail sales and $11.3 million, or 2.5% of retail sales, for prior years comparable three
and six month periods, respectively.
Interest and other income was $0.9 million, or 0.4% of retail sales and $1.9 million, or 0.4% of
retail sales for the second quarter and first six months of fiscal 2009, compared to $1.7 million,
or 0.7% of retail sales and $3.6 million, or 0.8% of retail sales, for the prior years comparable
three and six month periods, respectively. The decrease in fiscal 2009 resulted primarily from
lower interest rates.
Income tax expense was $7.0 million, or 3.1% of retail sales and $18.2 million, or 3.9% of retail
sales, for the second quarter and first six months of fiscal 2009, compared to $6.2 million, or
2.7% of retail sales and $16.6 million, or 3.6% of retail sales, for the prior years comparable
three and six month periods. The slight overall dollar increase for the second quarter resulted
from higher pre- tax income offset by a lower tax rate due to the settlements of various state tax
audits. The effective income tax rate for the second quarter of fiscal 2009 was 29.7% compared to
34.0% for the second
17
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
quarter of 2008. The increase in dollars for the six month period resulted from higher pre-tax
income offset by a lower effective tax rate due to the settlements of various state tax audits.
The effective income tax rate for the first six months of fiscal 2009 was 33.9% compared to 36.4%
for the six months of fiscal 2008.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
The Company has consistently maintained a strong liquidity position. Cash provided by operating
activities during the first six months of fiscal 2009 was $54.0 million as compared to $59.1
million in the first six months of fiscal 2008. 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 August 1, 2009 and borrowing capacity under the facility was $33.3 million, net of related
standby letter of credit obligations.
Cash provided by operating activities for the first six months of fiscal 2009 was primarily
generated by earnings adjusted for depreciation and changes in working capital. The decrease of
$5.1 million for the first six months of fiscal 2009 as compared to the first six months of fiscal
2008 was primarily due to a decrease in inventories, accrued income taxes and losses on disposal of
property and equipment due to store closures, partially offset by an increase in net income in
fiscal 2009.
The Company believes that its cash, cash equivalents and short-term investments, together with cash
flows from operations and borrowings available under its revolving credit agreement, will be
adequate to fund the Companys dividends, share repurchases and other operating requirements and
expected capital expenditures for fiscal 2009 and for the foreseeable future.
At August 1, 2009, the Company had working capital of $192.1 million compared to $165.8 million at
August 2, 2008. Additionally, the Company had $2.4 million and $2.2 million invested in privately
managed investment funds at August 1, 2009 and August 2, 2008, respectively, which are included in
other assets on the Condensed Consolidated Balance Sheets.
At August 1, 2009, the Company had an unsecured revolving credit agreement, which provided for
borrowings of up to $33.3 million. The revolving credit agreement is committed until August 2010.
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 August 1,
2009. There were no borrowings outstanding under this credit facility during the first six months
ended August 1, 2009 or the fiscal year ended January 31, 2009.
18
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
At August 1, 2009 and August 2, 2008, the Company had approximately $8.3 million and $4.8 million,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
In addition, the Company has a standby letter of credit in the amount of approximately $1.7
million at August 1, 2009 for payments to the current general liability and workers compensation
insurance processor.
Expenditures for property and equipment totaled $6.2 million in the first six months of fiscal
2009,
compared to $10.5 million in last years first six months. The expenditures for the first six
months of 2009 were primarily for the development of 12 new stores and additional investments in
new technology. For the full fiscal 2009 year, the Company is planning to invest approximately
$16.1 million for capital expenditures. This includes expenditures to open 46 new stores and
relocate 2 stores.
Net cash used in investing activities totaled $58.1 million in the first six months of fiscal 2009
compared to $26.0 million used in the comparable period of 2008. The increase was due primarily to
the decrease in sales of short-term investments.
On August 27, 2009, the Board of Directors maintained the quarterly dividend at $.165 per share, or
an annualized rate of $.66 per share.
The Companys Board of Directors authorized an increase in the Companys share repurchase program
of 2,000,000 and 500,000 on August 30, 2007 and February 26, 2009, respectively. There is no
specified expiration on any of these repurchase authorizations. For the six months ended August 1,
2009, the Company has repurchased 2,569 shares at a cost of $49,000. At August 1, 2009, 693,373
shares remain available for repurchase in open authorizations.
The Company does not use derivative financial instruments.
At August 1, 2009, the Companys investment portfolio was primarily invested in tax exempt variable
rate demand notes and governmental securities held in managed funds. These securities with the
exception of the single ARS are classified as available-for-sale as they are highly liquid and are
recorded on the balance sheet at fair value, with unrealized gains and temporary losses reported
net of taxes as accumulated other comprehensive income. Other than temporary declines in fair value
of investments are recorded as a reduction in the cost of investments in the accompanying Condensed
Consolidated Balance Sheets.
19
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
August 1, 2009. Based on this evaluation, our Principal Executive Officer and Principal Financial
Officer concluded that, as of August 1, 2009, 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
ensure 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 Commissions 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 Companys internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) has occurred during the Companys fiscal quarter ended August 1, 2009 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
20
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 31, 2009. 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 and 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 Companys purchases of its common stock for the three
months ended August 1, 2009:
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 |
|
|
Paid per Share (1) |
|
|
Programs (2) |
|
|
The Plans or Programs (2) |
|
May 2009 |
|
|
2,569 |
|
|
$ |
19.00 |
|
|
|
48,811 |
|
|
|
|
|
June 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,569 |
|
|
$ |
19.00 |
|
|
|
48,811 |
|
|
693,373 shares |
|
|
|
|
|
|
(1) |
|
Prices include trading costs. |
|
(2) |
|
The Companys Board of Directors authorized an increase in the share repurchase program
of 2,000,000 shares and 500,000 shares on August 30, 2007 and February 26, 2009,
respectively. At the second quarter ending August 1, 2009, the Company had 693,373 million
shares remaining in open authorizations. There is no specified expiration date for the
Companys repurchase program. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
21
PART II OTHER INFORMATION (CONTINUED)
THE CATO CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Following are the results of the matters voted upon and approved at the Companys Annual
Meeting which was held on May 20, 2009.
Election of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting Power |
|
|
For |
|
Withheld |
|
For |
|
Withheld |
Mr. John P. D. Cato |
|
|
26,673,892 |
|
|
|
771,877 |
|
|
|
42,365,617 |
|
|
|
771,877 |
|
Mr. Bailey W. Patrick |
|
|
26,992,993 |
|
|
|
452,776 |
|
|
|
42,684,718 |
|
|
|
452,776 |
|
Mr. Thomas E. Meckley |
|
|
26,994,190 |
|
|
|
451,579 |
|
|
|
42,685,915 |
|
|
|
451,579 |
|
Ratification of Independent Auditor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting Power |
For |
|
Against |
|
Abstain |
|
For |
|
Against |
|
Abstain |
|
27,185,835
|
|
|
|
235,759 |
|
|
|
24,175 |
|
|
|
42,877,560 |
|
|
|
235,759 |
|
|
|
24,175 |
|
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Item |
|
3.1 |
|
|
Registrants 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. 33396283). |
|
|
|
|
|
|
3.2 |
|
|
Registrants 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. |
|
|
|
|
|
|
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 Chief Executive Officer. |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification of Chief Financial Officer. |
22
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 |
|
|
|
September 9, 2009
|
|
/s/ John P. D. Cato |
|
|
|
Date
|
|
John P. D. Cato
Chairman, President and
Chief Executive Officer |
|
|
|
September 9, 2009
|
|
/s/ John R. Howe |
|
|
|
Date
|
|
John R. Howe
Executive Vice President
Chief Financial Officer |
23