UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
OR
For the transition period from ________________to__________________
THE CATO CORPORATION AND SUBSIDIARIES
8100 Denmark Road, Charlotte, North Carolina 28273-5975
(704) 554-8510
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
As of August 20, 2002, there were 19,419,703 shares of Class A Common Stock and 6,085,149 shares of Class B Common Stock outstanding.
THE CATO CORPORATION
August 3, 2002
Table of Contents
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PART I FINANCIAL INFORMATION
THE CATO CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
See accompanying notes to condensed consolidated financial statements.
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THE CATO CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS
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THE CATO CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THE CATO CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2002AND AUGUST 4, 2001
NOTE 1 — GENERAL:
The consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the Company), and all amounts shown as of August 3, 2002 and August 4, 2001 are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of the interim period may not be indicative of the entire year.
The interim financial statements should be read in conjunction with the financial statements and notes thereto, included in the Company’s Annual Report in Form 10-K for the fiscal year ended February 2, 2002.
The Company’s short-term investments are classified as available-for-sale securities, and therefore, are carried at fair value, with unrealized gains and losses, net of income taxes, reported as a component of other comprehensive income.
Total comprehensive income for the second quarter and six months ended August 3, 2002 was $12,234,000 and $30,224,000, respectively. Total comprehensive income for the second quarter and six months ended August 4, 2001 was $11,319,000 and $26,925,000, respectively. Total comprehensive income is composed of net income and net unrealized gains and losses on available-for-sale securities.
Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method.
In the second quarter of fiscal 2002, the Company repurchased 61,900 shares of Class A common stock for a total of $1,115,764, or an average price of $18.03 per share. Additionally, in the first quarter of 2002, the Company accepted 48,681 mature shares of Class A common stock from an officer in an option transaction for $1,144,500, or an average price of $23.51 per share. For the six months ended August 3, 2002, the Company repurchased and accepted a combined total of 110,581 shares of Class A common stock for $2,260,264, or an average price of $20.44 per share. For the six months ended August 4, 2001, the Company repurchased 452,500 shares of Class A common stock for a total of $6,938,925, or an average price of $15.33 per share and accepted 9,071 mature shares of Class A common stock from an officer in an option transaction for $171,669, or an average price of $18.93 per share, for a combined total of 461,571 shares of Class A common stock for $7,110,594, or an average price of $15.41 per share.
In May 2002, the Board of Directors increased the quarterly dividend by 11% from $.135 per share to $.15 per share.
The provisions for income taxes are based on the Company’s estimated annual effective tax rate. As allowed by SFAS No. 109, “Accounting for Income Taxes”, deferred income taxes are calculated annually.
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NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company adopted SFAS No. 142 on February 3, 2002, and the adoption of this statement had no impact on the Company’s consolidated results of operations and financial position, as the Company had no indefinite lived intangible assets.
In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets”. SFAS No. 144 supercedes SFAS No. 121, “Accounting for Impairment of Long-Lived Assets to be Disposed Of” and Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Along with establishing a single accounting model, based on the framework established in SFAS No. 121 for impairment of long-lived assets, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement, but broadens that presentation to include a component of the entity. The Company adopted SFAS No. 144 on February 3, 2002, and the adoption of this statement had no material impact on the Company’s consolidated results of operations and financial position.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement is effective for exit or disposal activities initiated after December 31, 2002. Liabilities for costs associated with an exit activity should be initially measured at fair value, when incurred. This statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination, or a disposal activity covered by SFAS No. 144. The Company does not believe that this statement will have a material impact on its financial position or its results of operations.
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NOTE 3 — EARNINGS PER SHARE:
Earnings per share is calculated by dividing net income by the weighted-average number of Class A and Class B common shares outstanding during the respective periods. The weighted-average shares outstanding is used in the basic earnings per share calculation, while the weighted-average shares and common stock equivalents outstanding is used in the diluted earnings per share calculation.
NOTE 4 — SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax payments, net of refunds received, for the six months ended August 3, 2002 and August 4, 2001 were $10,364,500 and $14,119,000, respectively.
NOTE 5 — FINANCING ARRANGEMENTS:
At August 3, 2002, the Company had an unsecured revolving credit agreement which provides for borrowings of up to $35 million. The revolving credit agreement is committed until July 2003. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance. There were no borrowings outstanding during the periods ended August 3, 2002, August 4, 2001 or the fiscal year ended February 2, 2002.
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NOTE 6 – REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The following schedule summarizes certain segment information (in thousands):
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THE CATO CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the Company’s unaudited Condensed Consolidated Statements of Income as a percentage of total retail sales:
Comparison of Second Quarter and First Six Months of 2002 with 2001.
Total retail sales for the second quarter were $186.9 million compared to last year’s second quarter sales of $172.4 million, an 8% increase. Same-store sales increased 1% in the second quarter. For the six months ended August 3, 2002, total retail sales were $383.5 million compared to last year’s first six months sales of $352.8 million, a 9% increase, and same-store sales increased 2% for the comparable six month period. The increase in retail sales for the first six months of 2002 resulted from the Company’s continued everyday low pricing strategy, improved merchandise offerings, and an increase in store development activity. The Company operated 972 stores at August 3, 2002 compared to 895 stores at the end of last year’s second quarter.
Other income for the second quarter and first six months of 2002 increased 11% and 2%, respectively, over the prior year’s comparable periods. The increase in the current year resulted primarily from increased finance and late charge income on the Company’s customer accounts receivable and layaway fees.
Cost of goods sold were 66.8% and 65.0% of total retail sales for the second quarter and first six months of 2002, respectively, compared to 68.5% and 66.5% for last year’s comparable three and six month periods. The decrease in cost of goods sold as a percent of retail sales for the first six months of 2002 resulted primarily from improved procurement, maintaining timely and aggressive markdowns, strong sell-through of regular priced goods and tightly managed inventory.
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RESULTS OF OPERATIONS — CONTINUED
Selling, general and administrative (SG&A) expenses were $45.1 million and $90.5 million for the second quarter and first six months of this year, compared to $39.9 million and $82.1 million for last year’s comparable three and six month periods, respectively. SG&A expenses as a percentage of retail sales increased 100 basis points for the second quarter of 2002 and 30 basis points for the first six months of 2002, as compared to the prior year. The overall increase in SG&A resulted primarily from increased selling-related expenses and increased infrastructure expenses attributable to the Company’s store development activities.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company’s 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 effect cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgement. Actual results may 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 Company’s financial statements include the allowance for doubtful accounts receivable, reserves relating to workers’ compensation, general and auto insurance liabilities and reserves for inventory markdowns. Historically, actual results have not significantly deviated from those determined using the estimates described above.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The company adopted SFAS No. 142 on February 3, 2002, and the adoption of this statement had no impact on the Company’s consolidated results of operations and financial position, as the Company had no indefinite lived intangible assets.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 supercedes SFAS No. 121, “Accounting for Impairment of Long-Lived Assets to be Disposed Of” and Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Along with establishing a single accounting model, based on the framework established in SFAS No. 121 for impairment of long-lived assets, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement, but broadens that presentation to include a component of the entity. The Company adopted SFAS No. 144 on February 3, 2002, and the adoption of this statement had no material impact on the Company’s consolidated results of operations and financial position.
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CRITICAL ACCOUNTING POLICIES – CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
At August 3, 2002, the Company had working capital of $155.1 million, compared to $136.1 million at August 4, 2001 and $139.6 million at February 2, 2002. Cash provided by operating activities was $47.7 million for the six months ended August 3, 2002, compared to $27.5 million for last year’s comparable six month period. The increase in net cash provided by operating activities results primarily from an increase in net income, accrued taxes and accounts payable and other liabilities offset by an increase in inventories and other assets. At August 3, 2002, the Company had cash, cash equivalents, and short-term investments of $111.0 million, compared to $88.5 million at August 4, 2001 and $84.7 million at February 2, 2002.
Net cash used in investing activities totaled $9.1 million for the first six months of 2002 compared to $20.6 million for the comparable period of 2001. Cash was used to fund capital expenditures for new, relocated and remodeled stores and for investments in new technology for an enterprise-wide information system for merchandising, distribution and finance. Additionally, the decrease in cash used was in part related to a decrease in the purchase of short-term investments offset by a decrease in the sale of short-term investments in fiscal 2002 as compared to fiscal 2001.
Expenditures for property, equipment and investments in technology totaled $14.2 million for the six months ended August 3, 2002, compared to $11.9 million of expenditures in last year’s first six months. The Company expects total capital expenditures to be approximately $31 million for the current fiscal year. The Company intends to open approximately 90 new stores, close 10 stores and to relocate 20 stores during the current fiscal year. For the six months ended August 3, 2002, the Company opened 35 new stores, relocated 12 stores and closed no stores.
Net cash used in financing activities totaled $6.8 million for the first six months of 2002 compared to $10.1 million for the comparable period of 2001. The decrease was due primarily to a reduction in its share buyback program offset partially by a decrease in proceeds from stock options exercised and an increase in dividends paid in fiscal 2002 as compared to fiscal 2001.
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LIQUIDITY AND CAPITAL RESOURCES — CONTINUED
The Company does not use derivative financial instruments. At August 3, 2002, August 4, 2001 and February 2, 2002, the Company’s investment portfolio was primarily invested in governmental debt securities with maturities of up to 36 months. These securities are classified as available-for-sale, and are recorded on the balance sheet at fair value with unrealized gains and losses reported as accumulated other comprehensive losses.
The Company believes that its cash, cash equivalents and short-term investments, together with cash flow from operations and borrowings available under its revolving credit agreement, will be adequate to fund the Company’s proposed capital expenditures and other operating requirements during fiscal 2002.
Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical facts included in the Form 10-Q and located elsewhere herein regarding the Company’s financial position and business strategy may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Following are the results of the matters voted upon at the Company’s Annual Meeting which was held on May 23, 2002.
ITEM 5. OTHER INFORMATION
The Company’s stock began trading on the New York Stock Exchange on Thursday, June 13, 2002 under the symbol “CTR”. The Company’s stock previously traded on the NASDAQ National Market System.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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PART II OTHER INFORMATION (CONTINUED)
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.