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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended October 27, 2012 |
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OR |
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[ ] |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ________________to__________________ |
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Commission file number 1-31340 |
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THE CATO CORPORATION |
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(Exact name of registrant as specified in its charter) |
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Delaware |
56-0484485 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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8100 Denmark Road, Charlotte, North Carolina 28273-5975 |
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(Address of principal executive offices) (Zip Code) |
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(704) 554-8510 |
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(Registrant's telephone number, including area code) |
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Not Applicable |
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(Former name, former address and former fiscal year, if changed since last report) |
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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.
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Yes |
X |
No |
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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).
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Yes |
X |
No |
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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).
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Yes |
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No |
X |
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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Page No. |
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PART I – FINANCIAL INFORMATION (UNAUDITED) |
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Item 1. |
Financial Statements (Unaudited): |
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Condensed Consolidated Statements of Income and Comprehensive Income |
2 |
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For the Three Months and Nine Months Ended October 27, 2012 and October 29, 2011 |
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Condensed Consolidated Balance Sheets |
3 |
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At October 27, 2012, January 28, 2012 and October 29, 2011 |
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Condensed Consolidated Statements of Cash Flows |
4 |
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For the Nine Months Ended October 27, 2012 and October 29, 2011 |
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Notes to Condensed Consolidated Financial Statements |
5 – 15 |
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For the Three Months and Nine Months Ended October 27, 2012 and October 29, 2011 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 – 22 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
24 |
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Item 4. |
Controls and Procedures |
24 |
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PART II – OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
25 |
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Item 1A. |
Risk Factors |
25 |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
25 |
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Item 3. |
Defaults Upon Senior Securities |
25 |
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Item 4. |
Mine Safety Disclosures |
26 |
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Item 5. |
Other Information |
26 |
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Item 6. |
Exhibits |
26 |
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Signatures |
27 - 31 |
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CATO CORPORATION
COMPREHENSIVE INCOME
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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October 27, 2012 |
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October 29, 2011 |
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October 27, 2012 |
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October 29, 2011 |
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(Dollars in thousands, except per share data) |
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REVENUES |
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Retail sales |
$ |
197,575 |
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$ |
194,094 |
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$ |
701,815 |
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$ |
699,104 |
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Other income (principally finance charges, late fees and |
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layaway charges) |
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2,430 |
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2,591 |
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7,597 |
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8,047 |
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Total revenues |
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200,005 |
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196,685 |
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709,412 |
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707,151 |
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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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130,399 |
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125,818 |
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430,690 |
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429,379 |
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Selling, general and administrative (exclusive of depreciation |
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shown below) |
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58,252 |
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57,505 |
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178,828 |
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179,776 |
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Depreciation |
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5,346 |
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5,321 |
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16,859 |
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16,096 |
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Interest and other income |
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(814) |
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(861) |
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(2,705) |
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(2,767) |
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Cost and expenses, net |
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193,183 |
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187,783 |
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623,672 |
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622,484 |
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Income before income taxes |
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6,822 |
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8,902 |
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85,740 |
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84,667 |
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Income tax expense |
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2,153 |
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2,797 |
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32,016 |
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29,938 |
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Net income |
$ |
4,669 |
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$ |
6,105 |
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$ |
53,724 |
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$ |
54,729 |
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Basic earnings per share |
$ |
0.16 |
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$ |
0.21 |
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$ |
1.84 |
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$ |
1.86 |
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Diluted earnings per share |
$ |
0.16 |
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$ |
0.21 |
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$ |
1.84 |
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$ |
1.86 |
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Dividends per share |
$ |
0.250 |
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$ |
0.230 |
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$ |
0.730 |
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$ |
0.645 |
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Comprehensive income: |
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Net income |
$ |
4,669 |
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$ |
6,105 |
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$ |
53,724 |
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$ |
54,729 |
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Unrealized gain (loss) on available-for-sale securities, net |
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of deferred income tax benefit |
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(78) |
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(300) |
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(5) |
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283 |
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Comprehensive income |
$ |
4,591 |
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$ |
5,805 |
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$ |
53,719 |
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$ |
55,012 |
See notes to condensed consolidated financial statements (unaudited).
Table of Contents
THE CATO CORPORATION
(UNAUDITED)
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October 27, 2012 |
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January 28, 2012 |
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October 29, 2011 |
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(Dollars in thousands) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
$ |
53,075 |
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$ |
34,893 |
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$ |
36,510 |
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Short-term investments |
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202,277 |
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205,771 |
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205,810 |
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Restricted cash and investments |
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5,999 |
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5,325 |
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5,325 |
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Accounts receivable, net of allowance for doubtful accounts of $2,050, |
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$2,362 and $2,567 at October 27, 2012, January 28, 2012 and |
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October 29, 2011 respectively |
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42,790 |
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43,024 |
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38,026 |
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Merchandise inventories |
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130,826 |
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130,382 |
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127,247 |
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Deferred income taxes |
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3,583 |
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3,579 |
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3,512 |
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Prepaid expenses |
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3,630 |
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6,158 |
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3,566 |
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Total Current Assets |
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442,180 |
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429,132 |
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419,996 |
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Property and equipment – net |
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130,635 |
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115,445 |
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109,811 |
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Other assets |
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7,380 |
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6,512 |
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6,888 |
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Total Assets |
$ |
580,195 |
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$ |
551,089 |
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$ |
536,695 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities: |
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Accounts payable |
$ |
84,846 |
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$ |
94,073 |
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$ |
82,248 |
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Accrued expenses |
|
46,443 |
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37,584 |
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41,416 |
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Accrued bonus and benefits |
|
4,597 |
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10,192 |
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9,451 |
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Accrued income taxes |
|
9,999 |
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|
15,144 |
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|
16,638 |
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Total Current Liabilities |
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145,885 |
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156,993 |
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149,753 |
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Deferred income taxes |
|
7,887 |
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7,887 |
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9,541 |
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Other noncurrent liabilities (primarily deferred rent) |
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24,964 |
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19,530 |
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15,431 |
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Commitments and contingencies: |
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- |
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- |
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- |
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Stockholders' Equity: |
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Preferred stock, $100 par value per share, 100,000 shares authorized, |
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none issued |
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- |
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- |
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- |
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Class A common stock, $.033 par value per share, 50,000,000 |
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shares authorized; issued 27,540,724 shares, 27,418,884 shares |
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and 27,419,745 shares at October 27, 2012, January 28, 2012 and |
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October 29, 2011 respectively |
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918 |
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914 |
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914 |
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Convertible Class B common stock, $.033 par value per share, |
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15,000,000 shares authorized; issued 1,743,525 shares at October 27, |
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2012, January 28, 2012 and October 29, 2011 |
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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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74,785 |
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72,030 |
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71,075 |
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Retained earnings |
|
324,767 |
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292,741 |
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289,364 |
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Accumulated other comprehensive income |
|
931 |
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|
936 |
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|
559 |
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Total Stockholders' Equity |
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401,459 |
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|
366,679 |
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|
361,970 |
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Total Liabilities and Stockholders’ Equity |
$ |
580,195 |
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$ |
551,089 |
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$ |
536,695 |
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See notes to condensed consolidated financial statements (unaudited).
Table of Contents
THE CATO CORPORATION
(UNAUDITED)
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Nine Months Ended |
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October 27, 2012 |
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October 29, 2011 |
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(Dollars in thousands) |
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Operating Activities: |
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Net income |
$ |
53,724 |
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$ |
54,729 |
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Adjustments to reconcile net income to net cash provided |
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by operating activities: |
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Depreciation |
|
16,859 |
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16,096 |
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Provision for doubtful accounts |
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1,004 |
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1,263 |
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Share-based compensation |
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2,111 |
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1,948 |
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Excess tax benefits from share-based compensation |
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(146) |
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(128) |
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Loss on disposal of property and equipment |
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806 |
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473 |
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Changes in operating assets and liabilities which provided |
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(used) cash: |
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Accounts receivable |
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(770) |
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414 |
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Merchandise inventories |
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(444) |
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16,781 |
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Prepaid and other assets |
|
1,678 |
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289 |
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Accrued income taxes |
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(4,999) |
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4,905 |
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Accounts payable, accrued expenses and other liabilities |
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(2,417) |
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(28,798) |
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Net cash provided by operating activities |
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67,406 |
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67,972 |
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Investing Activities: |
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Expenditures for property and equipment |
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(30,966) |
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(26,608) |
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Purchase of short-term investments |
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(104,497) |
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(105,837) |
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Sales of short-term investments |
|
107,964 |
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|
81,855 |
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Change in restricted cash and investments |
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(674) |
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(499) |
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Net cash used in investing activities |
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(28,173) |
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|
(51,089) |
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Financing Activities: |
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Dividends paid |
|
(21,346) |
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|
(19,008) |
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Repurchase of common stock |
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(361) |
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(10,599) |
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Proceeds from employee stock purchase plan |
|
463 |
|
|
444 |
|
|
Excess tax benefits from share-based compensation |
|
146 |
|
|
128 |
|
|
Proceeds from stock options exercised |
|
47 |
|
|
32 |
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Net cash used in financing activities |
|
(21,051) |
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|
(29,003) |
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|
|
|
|
|
|
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|
Net increase (decrease) in cash and cash equivalents |
|
18,182 |
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(12,120) |
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|
|
|
|
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Cash and cash equivalents at beginning of period |
|
34,893 |
|
|
48,630 |
|
|
Cash and cash equivalents at end of period |
$ |
53,075 |
|
$ |
36,510 |
|
See notes to condensed consolidated financial statements (unaudited).
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Table of Contents |
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|
THE CATO CORPORATION |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
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FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
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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 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.
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Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
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.
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
||||||||||||||||||||
|
|
|
|
October 27, 2012 |
|
October 29, 2011 |
|
October 27, 2012 |
|
October 29, 2011 |
||||||||||||||||||
|
|
|
|
(Dollars in thousands, except share and per share data) |
||||||||||||||||||||||||
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Net earnings |
|
$ |
4,669 |
|
$ |
6,105 |
|
$ |
53,724 |
|
$ |
54,729 |
||||||||||||||
|
|
Earnings allocated to non-vested equity awards |
|
|
(68) |
|
|
(95) |
|
|
(830) |
|
|
(894) |
||||||||||||||
|
|
Net earnings available to common stockholders |
|
$ |
4,601 |
|
$ |
6,010 |
|
$ |
52,894 |
|
$ |
53,835 |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Basic weighted average common shares outstanding |
|
|
28,822,403 |
|
|
28,851,509 |
|
|
28,780,682 |
|
|
28,936,177 |
||||||||||||||
|
|
Dilutive effect of stock options |
|
|
3,875 |
|
|
5,368 |
|
|
3,779 |
|
|
6,644 |
||||||||||||||
|
|
Diluted weighted average common shares outstanding |
|
|
28,826,278 |
|
|
28,856,877 |
|
|
28,784,461 |
|
|
28,942,821 |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Basic earnings per share |
|
$ |
0.16 |
|
$ |
0.21 |
|
$ |
1.84 |
|
$ |
1.86 |
||||||||||||||
|
|
Diluted earnings per share |
|
$ |
0.16 |
|
$ |
0.21 |
|
$ |
1.84 |
|
$ |
1.86 |
||||||||||||||
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.
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Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
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.
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Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):
The following schedule summarizes certain segment information (in thousands):
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
October 27, 2012 |
|
|
Retail |
|
|
Credit |
|
|
Total |
|
October 27, 2012 |
|
|
Retail |
|
|
Credit |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
198,247 |
|
$ |
1,758 |
|
$ |
200,005 |
|
Revenues |
|
$ |
704,019 |
|
$ |
5,393 |
|
$ |
709,412 |
|
Depreciation |
|
|
5,333 |
|
|
13 |
|
|
5,346 |
|
Depreciation |
|
|
16,820 |
|
|
39 |
|
|
16,859 |
|
Interest and other income |
|
|
(814) |
|
|
- |
|
|
(814) |
|
Interest and other income |
|
|
(2,705) |
|
|
- |
|
|
(2,705) |
|
Income before taxes |
|
|
6,153 |
|
|
669 |
|
|
6,822 |
|
Income before taxes |
|
|
83,433 |
|
|
2,307 |
|
|
85,740 |
|
Total assets |
|
|
503,110 |
|
|
77,085 |
|
|
580,195 |
|
Total assets |
|
|
503,110 |
|
|
77,085 |
|
|
580,195 |
|
Capital expenditures |
|
|
11,044 |
|
|
- |
|
|
11,044 |
|
Capital expenditures |
|
|
30,966 |
|
|
- |
|
|
30,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
October 29, 2011 |
|
|
Retail |
|
|
Credit |
|
|
Total |
|
October 29, 2011 |
|
|
Retail |
|
|
Credit |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
194,769 |
|
$ |
1,916 |
|
$ |
196,685 |
|
Revenues |
|
$ |
701,361 |
|
$ |
5,790 |
|
$ |
707,151 |
|
Depreciation |
|
|
5,302 |
|
|
19 |
|
|
5,321 |
|
Depreciation |
|
|
16,069 |
|
|
27 |
|
|
16,096 |
|
Interest and other income |
|
|
(861) |
|
|
- |
|
|
(861) |
|
Interest and other income |
|
|
(2,767) |
|
|
- |
|
|
(2,767) |
|
Income before taxes |
|
|
8,100 |
|
|
802 |
|
|
8,902 |
|
Income before taxes |
|
|
82,284 |
|
|
2,383 |
|
|
84,667 |
|
Total assets |
|
|
462,588 |
|
|
74,107 |
|
|
536,695 |
|
Total assets |
|
|
462,588 |
|
|
74,107 |
|
|
536,695 |
|
Capital expenditures |
|
|
10,857 |
|
|
- |
|
|
10,857 |
|
Capital expenditures |
|
|
26,522 |
|
|
86 |
|
|
26,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
||||||
|
|
|
October 27, 2012 |
|
|
October 29, 2011 |
|
|
October 27, 2012 |
|
|
October 29, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense |
$ |
408 |
|
$ |
381 |
|
$ |
1,004 |
|
$ |
1,263 |
|
Payroll |
|
231 |
|
|
233 |
|
|
676 |
|
|
722 |
|
Postage |
|
170 |
|
|
186 |
|
|
555 |
|
|
574 |
|
Other expenses |
|
267 |
|
|
295 |
|
|
812 |
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
$ |
1,076 |
|
$ |
1,095 |
|
$ |
3,047 |
|
$ |
3,380 |
|
Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
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:
|
|
1987 |
|
2004 |
|
|
|
|
Plan |
|
Plan |
|
Total |
|
Options and/or restricted stock initially authorized |
5,850,000 |
|
1,350,000 |
|
7,200,000 |
|
Options and/or restricted stock available for grant: |
|
|
|
|
|
|
January 28, 2012 |
20,127 |
|
542,309 |
|
562,436 |
|
October 27, 2012 |
20,127 |
|
434,166 |
|
454,293 |
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:
|
|
|
|
|
Weighted Average |
|
|
Number of |
|
|
Grant Date Fair |
|
|
Shares |
|
|
Value Per Share |
|
Restricted stock awards at January 28, 2012 |
461,341 |
|
$ |
21.44 |
|
Granted |
110,397 |
|
|
28.23 |
|
Vested |
(113,492) |
|
|
18.83 |
|
Forfeited or expired |
(8,020) |
|
|
23.54 |
|
Restricted stock awards at October 27, 2012 |
450,226 |
|
$ |
23.73 |
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.
|
Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
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.
|
Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
NOTE 7 – 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 October 27, 2012, January 28, 2012 and October 29, 2011.
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
October 27, 2012 |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal Bonds |
|
$ |
177,774 |
|
$ |
- |
|
$ |
177,774 |
|
$ |
- |
|
Corporate Bonds |
|
|
15,414 |
|
|
- |
|
|
15,414 |
|
|
- |
|
Auction Rate Securities (ARS) |
|
|
3,450 |
|
|
- |
|
|
- |
|
|
3,450 |
|
Variable Rate Demand Notes (VRDN) |
|
|
10,495 |
|
|
10,495 |
|
|
- |
|
|
- |
|
US Treasury Notes |
|
|
3,203 |
|
|
3,203 |
|
|
- |
|
|
- |
|
Privately Managed Funds |
|
|
767 |
|
|
- |
|
|
- |
|
|
767 |
|
Corporate Equities |
|
|
462 |
|
|
462 |
|
|
- |
|
|
- |
|
Certificates of Deposit |
|
|
100 |
|
|
100 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
211,665 |
|
$ |
14,260 |
|
$ |
193,188 |
|
$ |
4,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
January 28, 2012 |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal Bonds |
|
$ |
152,650 |
|
$ |
- |
|
$ |
152,650 |
|
$ |
- |
|
Corporate Bonds |
|
|
27,732 |
|
|
- |
|
|
27,732 |
|
|
- |
|
Auction Rate Securities (ARS) |
|
|
3,450 |
|
|
- |
|
|
- |
|
|
3,450 |
|
Variable Rate Demand Notes (VRDN) |
|
|
26,472 |
|
|
26,472 |
|
|
- |
|
|
- |
|
U.S. Treasury Notes |
|
|
3,174 |
|
|
3,174 |
|
|
- |
|
|
- |
|
Privately Managed Funds |
|
|
1,604 |
|
|
- |
|
|
- |
|
|
1,604 |
|
Corporate Equities |
|
|
443 |
|
|
443 |
|
|
- |
|
|
- |
|
Certificates of Deposit |
|
|
100 |
|
|
100 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
215,625 |
|
$ |
30,189 |
|
$ |
180,382 |
|
$ |
5,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED): |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
October 29, 2011 |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Municipal Bonds |
|
$ |
146,936 |
|
$ |
- |
|
$ |
146,936 |
|
$ |
- |
|
Corporate Bonds |
|
|
29,670 |
|
|
- |
|
|
29,670 |
|
|
- |
|
Auction Rate Securities (ARS) |
|
|
3,450 |
|
|
- |
|
|
- |
|
|
3,450 |
|
Variable Rate Demand Notes (VRDN) |
|
|
30,439 |
|
|
30,439 |
|
|
- |
|
|
- |
|
US Treasury Notes |
|
|
1,421 |
|
|
1,421 |
|
|
- |
|
|
- |
|
Privately Managed Funds |
|
|
1,910 |
|
|
- |
|
|
- |
|
|
1,910 |
|
Corporate Equities |
|
|
481 |
|
|
481 |
|
|
- |
|
|
- |
|
Certificates of Deposit |
|
|
100 |
|
|
100 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
214,407 |
|
$ |
32,441 |
|
$ |
176,606 |
|
$ |
5,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at October 27, 2012, January 28, 2012 and October 29, 2011. The underlying securities have contractual maturities which range from 34 days to 16 years. Although the Company’s investments in VRDN’s have underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted investments and Other assets on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.
Additionally, at October 27, 2012, the Company had $0.8 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction. At January 28, 2012, the Company had $1.6 million of privately managed funds, $0.4 million of corporate equities and a single ARS of $3.5 million. At October 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single ARS of $3.5 million. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.
|
Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED):
Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors.
The Company’s failed ARS is recorded at par value which approximates fair value using Level 3 inputs at each reporting period. Because there is no active market for this particular ARS, its fair value was determined through the use of a discounted cash flow analysis. The terms used in the analysis were based on management’s 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 ARS, the Company also considered the financial condition and near-term prospects of the issuer, the 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 Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.
The Company’s privately managed funds consist of two types of funds. The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice. As a result, the Company has classified the investments as Level 3.
|
Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
NOTE 7 – FAIR VALUE MEASUREMENTS (CONTINUED):
The following tables summarize the change in the fair value of the Company’s financial assets measured using Level 3 inputs during the first nine months of fiscal 2012 and fiscal 2011 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|||||||
|
|
|
Unobservable Inputs (Level 3) |
|||||||
|
|
Available-For-Sale |
|
|
|
|
|
|
||
|
|
Debt Securities |
|
Other Investments |
|
|
|
|||
|
|
ARS |
|
|
Private Equity |
|
Total |
|||
|
Beginning Balance at January 28, 2012 |
$ |
3,450 |
|
|
$ |
1,604 |
|
$ |
5,054 |
|
Redemptions |
|
- |
|
|
|
(831) |
|
|
(831) |
|
Total gains or (losses) |
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets) |
|
- |
|
|
|
(6) |
|
|
(6) |
|
Included in other comprehensive income |
|
- |
|
|
|
- |
|
|
- |
|
Ending Balance at October 27, 2012 |
$ |
3,450 |
|
|
$ |
767 |
|
$ |
4,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|||||||
|
|
|
Unobservable Inputs (Level 3) |
|||||||
|
|
Available-For-Sale |
|
|
|
|
|
|
||
|
|
Debt Securities |
|
Other Investments |
|
|
|
|||
|
|
ARS |
|
|
Private Equity |
|
Total |
|||
|
Beginning Balance at January 29, 2011 |
$ |
3,450 |
|
|
$ |
1,925 |
|
$ |
5,375 |
|
Total gains or (losses) |
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets) |
|
- |
|
|
|
(15) |
|
|
(15) |
|
Ending Balance at October 29, 2011 |
$ |
3,450 |
|
|
$ |
1,910 |
|
$ |
5,360 |
|
Table of Contents |
|
|
|
THE CATO CORPORATION |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
|
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
Quantitative information regarding the significant unobservable inputs related to the ARS as of October 27, 2012 were as follows: |
||||||||
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Valuation Technique |
|
Unobservable Inputs |
|
|||
|
$3,450 |
|
Net present value |
|
Total Term |
|
9.9 Years |
|
|
|
|
|
of cash flows |
|
Yield |
|
0.35% |
|
|
|
|
|
|
|
Comparative bond discount rate |
|
0.20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant increases or decreases in certain of the inputs could result in a lower fair value measurement. For example, a decrease in the yield, or an increase to the comparative bond discount rate could result in a lower fair value. |
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NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for the Company the first quarter of fiscal 2012. The Company has adopted this guidance and it does not have any effect on operating results or financial position.
In January 2012, the Company adopted accounting guidance that amends the existing requirements for fair value measurement and disclosure. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy. It also requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarified and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in stockholders’ equity. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.
Table of Contents
|
THE CATO CORPORATION |
|
|
|
CONDITION AND RESULTS OF OPERATIONS |
|
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|
|
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2012 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings (including the launch of the new Versona Accessories store concept), relocations, remodels 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 “will”, “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and any variations or negative formulations 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 and sovereign debt markets; uncertainties regarding the impact of any governmental responses to the foregoing adverse conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel and accessory buying patterns; changes and uncertainties in factors that affect consumer confidence; 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 28, 2012 (“fiscal 2011”), as amended or supplemented, and in other reports we file with or furnish to the Securities and Exchange Commission (“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.
Table of Contents
|
THE CATO CORPORATION |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
|
|
CRITICAL ACCOUNTING POLICIES:
The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) 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 Company’s financial statements include the allowance for doubtful accounts receivable, reserves related to self-insurance health insurance, workers’ compensation, general and auto insurance liabilities, calculation of potential asset impairment, inventory shrinkage and uncertain tax positions.
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
Table of Contents
|
THE CATO CORPORATION |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
|
|
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:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||
|
|
October 27, 2012 |
|
October 29, 2011 |
|
|
October 27, 2012 |
|
October 29, 2011 |
|||
|
Total retail sales |
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
Other income |
1.2 |
|
|
1.3 |
|
|
1.1 |
|
|
1.1 |
|
|
Total revenues |
101.2 |
|
|
101.3 |
|
|
101.1 |
|
|
101.1 |
|
|
Cost of goods sold (exclusive of depreciation) |
66.0 |
|
|
64.8 |
|
|
61.4 |
|
|
61.4 |
|
|
Selling, general and administrative (exclusive of depreciation) |
29.5 |
|
|
29.6 |
|
|
25.5 |
|
|
25.7 |
|
|
Depreciation |
2.7 |
|
|
2.7 |
|
|
2.4 |
|
|
2.3 |
|
|
Interest and other income |
(0.4) |
|
|
(0.4) |
|
|
(0.4) |
|
|
(0.4) |
|
|
Income before income taxes |
3.4 |
|
|
4.6 |
|
|
12.2 |
|
|
12.1 |
|
|
Net income |
2.3 |
|
|
3.1 |
|
|
7.7 |
|
|
7.8 |
|
Table of Contents
|
THE CATO CORPORATION |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
|
|
RESULTS OF OPERATIONS (CONTINUED):
Comparison of Third Quarter and First Nine Months of 2012 with 2011
Total retail sales for the third quarter were $197.6 million compared to last year’s third quarter sales of $194.1 million, a 1.8% increase. Same-store sales decreased 2.0% in the third quarter of fiscal 2012. For the nine months ended October 27, 2012, total retail sales were $701.8 million compared to last year’s comparable nine month sales of $699.1 million, and same store sales decreased 2.0% for the comparable nine month period. The Company believes the third quarter and first nine month period of fiscal 2012 were both adversely impacted by continuing customer uncertainty regarding the economy and political situation. Total revenues, comprised of retail sales and other income (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $200.0 million and $709.4 million for the third quarter and nine months ended October 27, 2012, compared to $196.7 million and $707.2 million for the third quarter and nine months ended October 29, 2011, respectively. The Company operated 1,306 stores at October 27, 2012 compared to 1,292 stores at the end of last year’s third quarter. For the first nine months of fiscal 2012, the Company opened 25 new stores, relocated seven stores and closed seven stores. The Company currently expects to open approximately 37 stores, relocate 9 stores and close approximately 14 stores in fiscal 2012.
Other income including credit revenue, as included in total revenues, was $2.4 million and $7.6 million for the third quarter and first nine months of fiscal 2012, compared to $2.6 million and $8.0 million for the prior year’s comparable third quarter and first nine months. The slight overall third quarter and year-to-date decrease resulted primarily from lower finance, late fee and layaway charges.
Cost of goods sold was $130.4 million, or 66.0% of retail sales and $430.7 million or 61.4% of retail sales for the third quarter and first nine months of fiscal 2012, compared to $125.8 million, or 64.8% of retail sales and $429.4 million or 61.4% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2011. The overall increase in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2012 resulted primarily from an increase in occupancy costs related to store development and lower merchandise margins. For the first nine months of fiscal 2012, cost of goods sold was flat with fiscal 2011 with an increase in store occupancy costs due to store development offset by an increase in merchandise margins. 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. 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 exclusive of depreciation) decreased by 1.6% to $67.2 million for the third quarter of fiscal 2012 and increased by 0.5% to $271.1 for the first nine months of fiscal 2012 compared to $68.3 million and $269.7 million for the prior year’s comparable three and nine months of fiscal 2011. Gross margin as presented may not be comparable to those of other entities.
Table of Contents
|
THE CATO CORPORATION |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
|
|
RESULTS OF OPERATIONS (CONTINUED):
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 $58.3 million, or 29.5% of retail sales and $178.8 million, or 25.5% of retail sales for the third quarter and first nine months of fiscal 2012, respectively, compared to $57.5 million, or 29.6% of retail sales and $179.8 million, or 25.7% of retail sales for the prior year’s comparable three and nine month periods, respectively. SG&A expenses as a percentage of retail sales decreased 10 basis points for the third quarter of fiscal 2012 as compared to the prior year. The third quarter SG&A decrease was primarily attributable to lower incentive-based compensation expense partially offset by higher payroll costs. For the first nine months of fiscal 2012 , SG&A expenses decreased 20 basis points as compared to the prior year. The overall dollar decrease for the first nine months of fiscal 2012 was primarily attributable to decreased incentive-based compensation expense, partially offset by higher group health insurance costs, and payroll expenses.
Depreciation expense was $5.3 million, or 2.7% of retail sales and $16.9 million, or 2.4% of retail sales for the third quarter and first nine months of fiscal 2012, respectively, compared to $5.3 million, or 2.7% of retail sales and $16.1 million or 2.3% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2011, respectively. The slight dollar increase in depreciation expense was due to store development and information technology investments.
Interest and other income was $0.8 million, or 0.4% of retail sales and $2.7 million, or 0.4% of retail sales for the third quarter and first nine months of fiscal 2012, respectively, compared to $0.9 million, or 0.4% of retail sales and $2.8 million, or 0.4% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2011. The slight quarterly dollar decrease was due to lower sales tax vendor income, as well as, label income in the third fiscal quarter of 2012.
Income tax expense was $2.2 million or 1.1% of retail sales and $32.0 million, or 4.6% of retail sales for the third quarter and first nine months of fiscal 2012, respectively, compared to $2.8 million, or 1.4% of retail sales and $29.9 million, or 4.3% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2011, respectively. The third quarter decrease resulted from lower pre-tax income partially offset by a higher effective tax rate. The effective income tax rate for the third quarter of fiscal 2012 was 31.6% compared to 31.4% for the third quarter of 2011. The nine month increase resulted from higher pre-tax income in addition to a higher effective tax rate. The effective tax rate for the first nine months of fiscal 2012 was 37.3% compared to 35.4% for the first nine months of fiscal 2011 . The current year quarter and the first nine months of fiscal 2012 were also impacted by the elimination of the benefit of the Work Opportunity Tax Credit which, as of October 27, 2012, has not been renewed for 2012 by Congress.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first nine months of fiscal 2012 was $67.4 million as compared to $68.0 million in the first nine months of fiscal 2011. 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 October 27, 2012, January 28, 2012 and October 29, 2011, except for outstanding letters of credit.
Table of Contents
|
THE CATO CORPORATION |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
|
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
|
|
|
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
Cash provided by operating activities for the first nine months of fiscal 2012 was primarily generated by earnings adjusted for depreciation and changes in working capital. The decrease of $0.6 million for the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011 was primarily due to a slight decrease in net income and provision for doubtful accounts, partially offset by an increase in depreciation.
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 Company’s regular operating requirements, expected capital expenditures, dividends and share repurchases for fiscal 2012 and for the foreseeable future.
At October 27, 2012, the Company had working capital of $296.3 million compared to $272.1 million at January 28, 2012 and $270.2 million at October 29, 2011. Additionally, the Company had $1.3 million, $2.0 million and $2.4 million invested in privately managed investment funds and other miscellaneous equities and a single auction rate security of $3.5 million at October 27, 2012, January 28, 2012 and October 29, 2011, respectively, which are included in Other assets on the Condensed Consolidated Balance Sheets.
At October 27, 2012, January 28, 2012 and October 29, 2011, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $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 the credit facility as of October 27, 2012, January 28, 2012 and October 29, 2011.
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.
Expenditures for property and equipment totaled $31.0 million in the first nine months of fiscal 2012, compared to $26.6 million in last year’s first nine months. The expenditures for the first nine months of 2012 were primarily for the development of 25 new stores, additional investments in new technology and home office expansion. For the full fiscal 2012 year, the Company expects to invest approximately $43.0 million for capital expenditures. This includes expenditures to open 37 new stores and relocate 9 stores, upgrades to merchandise systems and home office and distribution center expansion.
Net cash used in investing activities totaled $28.2 million in the first nine months of fiscal 2012 compared to $51.1 million used in the comparable period of 2011. The decrease was due primarily to the increase in sales of short-term investments offset slightly by the increase in capital expenditures.
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.
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THE CATO CORPORATION |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
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As of October 27, 2012, the Company had 1,976,511 shares remaining in open authorizations under its share repurchase program.
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THE CATO CORPORATION |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
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LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
The Company does not use derivative financial instruments.
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at October 27, 2012, January 28, 2012 and October 29, 2011. The underlying securities have contractual maturities which generally range from 34 days to 16 years. Although the Company’s investments in VRDN’s have underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted investments and Other assets on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.
Additionally, at October 27, 2012, the Company had $0.8 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction. At January 28, 2012, the Company had $1.6 million of privately managed funds, $0.4 million of corporate equities and a single ARS of $3.5 million. At October 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single ARS of $3.5 million. See Note 7 – Fair Value Measurements for further information regarding the failed ARS. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.
Information regarding recent accounting pronouncements is provided in Note 8 to the Company’s Condensed Consolidated Financial Statements.
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THE CATO CORPORATION |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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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
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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 October 27, 2012. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of October 27, 2012, 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 SEC’s 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 Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended October 27, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
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 28, 2012. 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 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 Company’s purchases of its common stock for the three months ended October 27, 2012:
ISSUER PURCHASES OF EQUITY SECURITIES
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Total Number of |
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Maximum Number |
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Shares Purchased as |
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(or Approximate Dollar |
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Total Number |
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Average |
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Part of Publicly |
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Value) of Shares that may |
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of Shares |
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Price Paid |
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Announced Plans or |
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Yet be Purchased Under |
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Period |
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Purchased |
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per Share (1) |
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Programs (2) |
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The Plans or Programs (2) |
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August 2012 |
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193 |
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$ |
29.18 |
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193 |
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September 2012 |
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- |
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- |
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- |
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October 2012 |
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- |
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- |
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- |
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Total |
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193 |
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$ |
29.18 |
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193 |
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1,976,511 |
(1) Prices include trading costs.
(2) As of July 28, 2012, the Company’s share repurchase program had 1,976,704 shares remaining in open authorizations. During the third quarter ending October 27, 2012, the Company repurchased and retired 193 shares under this program for approximately $5,632 or an average market price of $29.18 per share. As of the third quarter ending October 27, 2012, the Company had 1,976,511 shares remaining in open authorizations. There is no specified expiration date for the Company’s repurchase program.
Not Applicable
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PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM
5. OTHER INFORMATION
Not Applicable
ITEM
6. EXHIBITS
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Exhibit No. |
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Item |
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3.1 |
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Registrant’s 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. 333-96283). |
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3.2 |
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Registrant’s By Laws incorporated by reference to
Exhibit 99.2 to Form
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4.1 |
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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. |
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31.1* |
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Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. |
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31.2* |
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Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. |
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32.1* |
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Section 1350 Certification of Principal Executive Officer. |
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32.2* |
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Section 1350 Certification of Principal Financial Officer. |
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101.1* |
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The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 27, 2012, formatted in XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Nine Months ended October 27, 2012 and October 29, 2011; (ii) Condensed Consolidated Balance Sheets at October 27, 2012; October 29, 2011 and January 28, 2012; (iii) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 27, 2012 and October 29, 2011; and (iv) Notes to Condensed Consolidated Financial Statements. |
* Submitted electronically herewith.
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THE CATO CORPORATION
SIGNATURES
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
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December 5, 2012 |
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/s/ John P. D. Cato |
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Date |
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John P. D. Cato Chairman, President and Chief Executive Officer |
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December 5, 2012 |
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/s/ John R. Howe |
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Date |
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John R. Howe Executive Vice President Chief Financial Officer |
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
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| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
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No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
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