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

 

Large accelerated filer  ¨    Accelerated filer  þ     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 May 26, 2010, there were 27,729,309 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 May 1, 2010

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PART I FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

 

 

See notes to consolidated financial statements.

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THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

See notes to consolidated financial statements.

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THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

See notes to consolidated financial statements.

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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 May 1, 2010 and May 2, 2009 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 30, 2010.

 

The year-end condensed consolidated balance sheet presented as of the fiscal year ended January 30, 2010 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

On May 27, 2010, the Board of Directors increased the quarterly dividend by 12% from $.165 per share to $.185 per share or an annualized rate of $.74 per share.  

 

In September 2009, the Company retired all of its treasury stock shares.  The excess of the price over par value of common stock of approximately $155.6 million was charged to retained earnings upon the retirement of the treasury stock.

 

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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.  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 three months ended May 1, 2010 and May 2, 2009 were $188,000 and $136,000, respectively. 

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NOTE 4 – FINANCING ARRANGEMENTS:

 

As of May 1, 2010, the Company had an unsecured revolving credit agreement of $35 million.  Net of the Company’s 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 May 1, 2010.  The revolving credit agreement is committed until August 2010 and is currently being reviewed by management for extension or renegotiation.  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 May 1, 2010.  There were no borrowings outstanding under this credit facility during the three months ended May 1, 2010 or May 2, 2009, respectively, or the fiscal year ended January 30, 2010.  Interest on any borrowings is based on LIBOR, which was 0.28% at May 1, 2010.

 

At May 1, 2010 and May 2, 2009 the Company had approximately $4.4 million and $4.0 million, 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 women’s fashion specialty retail stores in 31 states at May 1, 2010, 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):

 

 

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.

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NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

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 May 1, 2010, the Company had three 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 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:

 

 

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 May 1, 2010 and May 2, 2009, there was $7,975,000 and $6,545,000 of total unrecognized compensation cost related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 3.1 years and 2.7 years, respectively. The total fair value of the shares recognized as compensation expense during the first quarter ended May 1, 2010 was $454,000 compared to $329,000 for the first quarter ended May 2, 2009.  These expenses are classified as a component of selling, general and administrative expenses.

 

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NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

 

The following summary shows the changes in the shares of restricted stock outstanding during the three months ended May 1, 2010:

 

 

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 three months ended May 1, 2010 and May 2, 2009, the Company sold 11,363 and 12,113 shares to employees at an average discount of $2.99 and $2.60 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 $34,000 and $31,000 for the three months ended May 1, 2010 and May 2, 2009, respectively.  These expenses are classified as a component of selling, general and administrative expenses.

 

The following is a summary of the changes in stock options outstanding during the three months ended May 1, 2010:

 

(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.

 

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NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

 

No options were granted in the first quarter of fiscal 2010 or fiscal 2009. 

 

As of May 1, 2010, there was approximately $2,000 of total unrecognized compensation cost related to nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of 0.40 years. The total intrinsic value of options exercised during the first quarter ended May 1, 2010 was approximately $158,000.

 

The Company recognized share-based compensation expense for nonvested options of $2,000 and $40,000 for the first quarter ended May 1, 2010 and May 2, 2009, respectively.  These expenses are classified as a component of selling, general and administrative expenses. 

 

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.

 

NOTE 7 – INCOME TAXES:

 

For the quarter ended May 1, 2010, the Company’s effective tax rate was 36.9% compared to 37.3% for the prior year quarter ended May 2, 2009.  During the next 12 months, various taxing authorities’ statutes of limitations are expected to expire which could result in a potential reduction of unrecognized tax benefits.  In addition, certain state examinations may close, the ultimate resolution of which could materially affect the effective tax rate.  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 currently estimable.

 

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NOTE 8 – FAIR VALUE MEASUREMENTS:

 

 

The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of May 1, 2010 and January 30, 2010.