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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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.

 

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).

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer  þ     Accelerated filer  ¨      Non-accelerated filer  ¨      Smaller reporting company ¨ 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

As of October 27, 2012, there were 27,540,724 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.

 

THE CATO CORPORATION

 

FORM 10-Q

 

Quarter Ended October 27, 2012

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PART I FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

(UNAUDITED)

 

 

See notes to condensed consolidated financial statements (unaudited).

 

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THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

See notes to condensed consolidated financial statements (unaudited).

 

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THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

See notes to condensed consolidated financial statements (unaudited).

 

 

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 three and nine month periods ended October 27, 2012 and October 29, 2011 are unaudited.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal, recurring nature unless otherwise noted.  The results of the interim period may not be indicative of the results expected for the entire year.

 

The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012.  Amounts as of January 28, 2012, have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

 

On November 20, 2012, the Board of Directors declared the regular quarterly dividend of $0.25 per share to be paid on December 28, 2012, to shareholders of record on December 14, 2012. 

 

On November 30, 2012, the Board of Directors declared a special dividend of $1.00 per share and accelerated the 2013 dividend of a $1.00 per share both to be paid on December 28, 2012, to shareholders of record on December 14, 2012.

 

 

NOTE 2 - EARNINGS PER SHARE:

 

ASC 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“EPS”) on the face of all income statements for all entities with complex capital structures.  The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.  While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice.  Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.

 

Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan.   

 

 

 

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:

 

Income tax payments, net of refunds received, for the nine months ended October 27, 2012 and October 29, 2011 were $37,023,000 and $25,045,000, respectively.

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of October 27, 2012, the Company had an unsecured revolving credit agreement to borrow $35.0 million.  The revolving credit agreement is committed until August 2013.  The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of October 27, 2012.  There were no borrowings outstanding under this credit facility during the periods ended October 27, 2012, January 28, 2012 or October 29, 2011.  Interest on any borrowings is based on One Month LIBOR, which was 0.214% at October 27, 2012.

 

At October 27, 2012, January 28, 2012 and October 29, 2011, the Company had approximately $3.3 million, $2.3 million and $4.2 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

 

The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona Accessories and Credit.  As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit.  The Company has aggregated its retail operating segments based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of ASC 280-10, if the segments have similar economic characteristics, similar product, similar production processes, similar clients and similar methods of distribution. 

 

The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks.  They are similar in nature of product, as they all offer women’s apparel, shoes and accessories.  Merchandise inventory of the Company’s operating segments is sourced from the same countries and some of the same vendors, using similar production processes.  Clients of the Company’s operating segments have similar characteristics.  Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner, through its retail stores.

                          

The Company operates its women’s fashion specialty retail stores in 31 states as of October 27, 2012, principally in the southeastern United States. The Company offers its own credit card to its customers and all credit authorizations, payment processing, and collection efforts are performed by a separate subsidiary of the Company.

 

 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

The following schedule summarizes certain segment information (in thousands):

 

 

The Company evaluates segment performance based on income before taxes.  The Company does not allocate certain corporate expenses or income taxes to the credit segment.

 

The following schedule summarizes the direct expenses of the credit segment which are reflected in selling, general and administrative expenses (in thousands):

 

 

 

NOTE 6 – STOCK BASED COMPENSATION:

 

As of October 27, 2012, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan is for the granting of options to officers and key employees and the 2004 Amended and Restated Incentive Compensation Plan is for the granting of various forms of equity-based awards, including restricted stock and stock options, to officers and key employees.  

 

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans:

 

 

In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of October 27, 2012, January 28, 2012 and October 29, 2011, there was $7.0 million, $ 6.0 million  and $6.7 million of total unrecognized compensation expense related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 2.5 years, 2.2 years and 2.5 years, respectively. The total fair value of the shares recognized as compensation expense during the third quarter and nine months ended October 27, 2012 was $631,000 and $2,029,000, respectively compared to $613,000 and $1,870,000, respectively for the third quarter and nine months ended October 29, 2011.  These expenses are classified as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

 

The following summary shows the changes in the shares of restricted stock outstanding during the nine months ended October 27, 2012:

 

 

The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the nine months ended October 27, 2012 and October 29, 2011, the Company sold 21,463 and 21,810 shares to employees at an average discount of $3.81 and $3.59 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 $82,000 and $78,000 for the nine months ended October 27, 2012 and October 29, 2011, respectively.  These expenses are classified as a component of selling, general and administrative expenses.

 

 

No options were granted in the first nine months of fiscal 2012 or fiscal 2011. 

 

The total intrinsic value of options exercised during the third quarter and nine months ended October 27, 2012 was $23,000 and $73,000, respectively, compared to $0 and $41,000, respectively, for the three and nine months ended October 29, 2011.

 

There was no stock option expense for the three or nine months ended October 27, 2012 or October 29, 2011.

 

Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.