AnnuAl RepoRt
2009
The Cato Corporation is a leading specialty retailer of value-priced
women’s fashion apparel operating two divisions, “Cato” and “It’s
Fashion”. The Company currently operates over 1,270 specialty stores
throughout the United States. Cato stores offer exclusive merchandise
with updated fashion and quality comparable to mall specialty stores
at low prices every day. Cato stores average approximately 4,000
square feet and are located primarily in strip shopping centers
anchored by national discounters or market dominant grocery stores.
The It’s Fashion division includes both It’s Fashion and It’s Fashion
Metro stores. It’s Fashion stores provide junior-inspired fashion
apparel and accessories at low prices every day with stores averaging
approximately 3,300 square feet. It’s Fashion Metro stores are an
expanded version of the It’s Fashion store with the latest styles for the
entire family including urban-inspired, nationally recognized brands at
low prices every day. It’s Fashion Metro stores average approximately
10,000 square feet. The Company is headquartered in Charlotte,
North Carolina.
Financial Highlights
FISCal Year
2009
2008
2007
2006
2005
(Dollars in thousands, except per share data)
FOr THe Year eNDeD
Retail sales
Total revenue
Comparable store sales increase (decrease)
Income before income taxes
Net income
Net income as a percentage of retail sales
Cash dividends paid per share
Basic earnings per share
Diluted earnings per share
Number of stores
Number of stores opened
Number of stores closed
Net increase (decrease) in number of stores
aT Year eND
Cash, cash equivalents and investments
Working capital
Current ratio
Total assets
Total Stockholders’ equity
$ 872,132
883,995
$ 845,676
857,718
$ 834,341
846,437
$ 862,813
875,885
$ 821,639
836,381
1%
(1)%
(4)%
(2)%
1%
68,914
$ 45,765
52,610
33,634
49,233
32,319
79,631
51,450
70,375
44,829
5.2%
4.0%
3.9%
6.0%
5.5%
.660
1.55
1.55
1,271
35
45
(10)
.660
1.14
1.14
1,281
65
102
(37)
.645
1.02
1.02
1,318
62
20
42
.580
1.64
1.61
1,276
58
26
32
.507
1.44
1.41
1,244
82
15
67
$ 200,915
202,299
2.2
480,990
291,312
$ 144,803
164,639
2.1
435,353
261,813
$ 114,578
144,114
2.0
420,792
247,370
$ 123,542
176,464
2.4
432,322
276,793
$ 107,819
139,114
2.0
406,636
239,948
John P. D. Cato
A Message
to our
Shareholders
In a weak economy, Cato delivered a 36% increase in earnings. We generated
a same-store sales increase and continued to grow and refine our It’s Fashion
Metro concept. We made improvements to our organization that strengthened
our Company and will help us drive our business forward. We believe significant
economic uncertainty still exists and will continue to plan our business
accordingly. We will continue to execute our core strategies, which are built
around value.
The Company’s same-store sales increased 1% in 2009 and sales increased
3% to $872.1 million. Our net income increased to $45.8 million from
$33.6 million last year and earnings per diluted share increased to $1.55 from
$1.14 in 2008. Net income and earnings per diluted share increased 36% for
the year, on top of 4% and 12% increases in 2008, respectively. And, in a time
where a number of companies have reduced or even suspended their dividend,
we continued to return a significant portion of our profits to Cato’s shareholders,
paying $19.5 million in dividends during the year.
We further solidified our balance sheet, ending the year with approximately
$200 million in cash and investments with no debt. Our cash balance provides
a cushion against cyclical downturns in a volatile and competitive industry,
demonstrates stability to our business partners and allows us to reduce
purchasing and operating costs. We will continue to use our cash to internally
fund store development, meet infrastructure needs and provide value to long-
term shareholders through dividends and opportunistically repurchasing shares.
For the year, we opened 35 new stores, including the conversion of 14 existing
It’s Fashion stores to It’s Fashion Metro, relocated one store and closed 45
stores including the 14 conversions. The It’s Fashion Metro concept grew from
32 stores to 60 during 2009. In 2010 we plan to open 55 new stores across
both divisions including the conversion of 20 It’s Fashion stores in established
markets to It’s Fashion Metro stores. In the Cato division, we plan to test
different store sites and formats including power centers, larger sized stores and
further test stores in larger markets in the Midwest.
Our customers see the value we offer. Market research shows shoppers in our
markets have more awareness of Cato and our existing customers have greater
loyalty to Cato. We saw a similar response from It’s Fashion Metro customers as
we increased the level of national brands and focused on customer service.
In closing, I want to thank every Cato associate for their contributions in
producing excellent results. As we move forward in 2010, we will continue to
invest our capital wisely. As a shareholder, you can rely on Cato to operate our
Company for the long term: growing our business profitably and returning value
to you through dividends.
John P. D. Cato
Chairman, President and
Chief Executive Officer
Delivering Fashion and Value to Customers: Cato operates two different concepts with almost 1,100 Cato
stores and approximately 200 It’s Fashion and It’s Fashion Metro stores. Each concept targets a different
customer base, occupies a unique niche and provides growth opportunities. Across both of its concepts, the
Company focuses on providing fashion at exceptional values.
The Cato division provides fashion with great styling, quality and fit at low prices every day. The division
offers a broad assortment of exclusive merchandise under its Cato label. Cato stores average approximately
4,000 square feet.
It’s Fashion serves a younger, more urban customer with great fashions at low prices every day.
It’s Fashion Metro is an expanded version of It’s Fashion. The larger easy-to-shop stores serve the entire
family. It’s Fashion Metro’s unique offering is an exciting combination of today’s trendy fashions and the
hottest urban brands at low prices every day. It’s Fashion stores average approximately 3,300 square feet
while It’s Fashion Metro stores average approximately 10,000 square feet.
1
4
8
8
20
22
27
3
2
3
11
30
6
11
45
168
55
80
47
69
11
61
134
86
82
89
113
1,276
1,244
1,318
1,281
1,271
1
5
7
62
05
06
07
08
09
Total Number of Stores Per State
(at year end)
Total Number of Stores
(at year end)
Management Executive Group
John P. D. Cato
Chairman, President and
Chief Executive Officer
Sally J. Almason
Executive Vice President,
General Merchandise Manager
Cato Division
Michael T. Greer
Executive Vice President,
Director of Stores
John R. Howe
Executive Vice President,
Chief Financial Officer
Howard A. Severson
Executive Vice President,
Chief Real Estate and
Store Development Officer
Board of Directors
John P. D. Cato
Chairman, President and
Chief Executive Officer
George S. Currin 1,2
Chairman and Managing Director of
The Fourth Stockton Company LLC
and Chairman Currin-Patterson
Properties LLC
Grant L. Hamrick 3
Retired Senior Vice President,
Chief Financial Officer
American City Business Journals
Bryan F. Kennedy, III1,3
President and
Chief Executive Officer
Park Sterling Bank
Thomas E. Meckley1,3
Consultant
Agility Recovery Solutions
Retired Partner
Ernst & Young LLP
Bailey W. Patrick1,2
Managing Partner
Merrifield Patrick, LLC
A. F. (Pete) Sloan 2,3
Retired Chairman and
Chief Executive Officer
Lance, Inc.
D. Harding Stowe 1,2
President and
Chief Executive Officer
R. L. Stowe Mills, Inc.
1 Member of the Corporate Governance
and Nominating Committee
2 Member of the Compensation Committee
3 Member of the Audit Committee
¥
n
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 2010
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31340
The Cato Corporation
Registrant
Delaware
State of Incorporation
8100 Denmark Road
Charlotte, North Carolina 28273-5975
Address of Principal Executive Offices
56-0484485
I.R.S. Employer Identification Number
704/554-8510
Registrant’s Telephone Number
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Name of Exchange on Which Registered
Class A Common Stock
Preferred Share Purchase Rights
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n
No ¥
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes n
No ¥
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 ¥
No n
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 (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes n
No n
Indicate by check mark, if disclosure of delinquent filers pursuant to Item 405 of the Regulation S-K is not contained
herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n
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 n
Smaller reporting company n
Accelerated filer ¥
Non-accelerated filer n
(Do not check if a smaller reporting company)
Indicate by check mark whether
the registrant
is a shell company (as defined in Exchange Act
Rule 12b-2). Yes n
No ¥
The aggregate market value of the Registrant’s Class A Common Stock held by non-affiliates of the Registrant as of
July 31, 2009, the last business day of the Company’s most recent second quarter, was $549,240,604 based on the last
reported sale price per share on the New York Stock Exchange on that date.
As of March 30, 2010, there were 27,845,455 shares of Class A Common Stock and 1,743,525 shares of Convertible
Class B Common Stock outstanding.
Portions of the proxy statement relating to the 2010 annual meeting of shareholders are incorporated by reference
into the following part of this annual report:
DOCUMENTS INCORPORATED BY REFERENCE
Part III — Items 10, 11, 12, 13 and 14
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3A. Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
3 – 7
7 – 12
12
12
12
13
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters . . . . . . . . . . . . 14 – 15
16
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 – 24
24
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 – 48
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
49
49
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
49
49
50
50
50
PART IV
Item 15. Exhibits and Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 – 59
1
Forward-looking Information
The following information should be read along with the Consolidated Financial Statements, including the
accompanying Notes appearing later 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 Annual Report on Form 10-K 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 “Business,”
“Properties,” “Legal Proceedings,” “Controls and Procedures” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2010
and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store
openings, relocations, remodelings and closures; and (5) statements relating to our future contingencies. When
possible, we have attempted to identify forward-looking statements by using words such as “expects,” “anticipates,”
“approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and variations of such words
and similar expressions. We can give no assurance that actual results or events will not differ materially from those
expressed or implied in any such forward-looking statements. Forward-looking statements included in this report
are based on information available to us as of the filing date of this report, but subject to known and unknown risks,
uncertainties and other factors that could cause actual results to differ materially from those contemplated by the
forward-looking statements. Such factors include, but are not limited to, the following: general economic
conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel
buying patterns; adverse weather conditions; inventory risks due to shifts in market demand; and other factors
discussed under “Risk Factors” in Part I, Item 1A of this annual report on Form 10-K for the fiscal year ended
January 30, 2010 (fiscal 2009), as amended or supplemented, and in other reports we file with or furnish to the SEC
from time to time. We do not undertake, and expressly decline, any obligation to update any such forward-looking
information contained in this report, whether as a result of new information, future events, or otherwise.
As used herein, the terms “we,” “our,” “us” (or similar terms), the “Company” or “Cato” include The Cato
Corporation and its subsidiaries, except that when used with reference to common stock or other securities
described herein and in describing the positions held by management of the Company, such terms include only The
Cato Corporation. Our website is located at www.catocorp.com where we make available free of charge, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other
reports (including amendments to these reports) filed or furnished pursuant to Section 13(a) or 15(d) under the
Securities Exchange Act of 1934. These reports are available as soon as reasonably practicable after we
electronically file those materials with the SEC. We also post on our website the charters of our Audit,
Compensation and Corporate Governance and Nominating Committees; our Corporate Governance Guidelines,
Code of Business Conduct and Ethics; and any amendments or waivers thereto; and any other corporate governance
materials contemplated by SEC or New York Stock Exchange regulations.
2
PART I
Item 1. Business:
General
The Company, founded in 1946, operated 1,271 women’s fashion specialty stores at January 30, 2010, in
31 states, principally in the southeastern United States, under the names “Cato”, “Cato Fashions”, “Cato Plus”, “It’s
Fashion”, and “It’s Fashion Metro”. The Company seeks to offer quality fashion apparel and accessories at low
prices, every day in junior/missy, plus sizes and girls sizes 7 to 16. The Company’s stores feature a broad assortment
of apparel and accessories, including dressy, career, and casual sportswear, dresses, coats, shoes, lingerie, costume
jewelry and handbags. A major portion of the Company’s merchandise is sold under its private label and is produced
by various vendors in accordance with the Company’s specifications. Most stores range in size from 3,500 to
6,000 square feet and are located primarily in strip shopping centers anchored by national discounters or market-
dominant grocery stores. The Company emphasizes friendly customer service and coordinated merchandise
presentations in an appealing store environment. The Company offers its own credit card and layaway plan. Credit
and layaway sales represented 11% of retail sales in fiscal 2009. See Note 15 to the Consolidated Financial
Statements, “Reportable Segment Information” for a discussion of information regarding the Company’s two
reportable segments: retail and credit.
Business
The Company’s primary objective is to be the leading fashion specialty retailer for fashion and value conscious
females in its markets. Management believes the Company’s success is dependent upon its ability to differentiate its
stores from department stores, mass merchandise discount stores and competing women’s specialty stores. The key
elements of the Company’s business strategy are:
Merchandise Assortment. The Company’s stores offer a wide assortment of on-trend apparel and accessory
items in primarily junior/missy, plus sizes and girls sizes 7 to 16 and emphasize color, product coordination and
selection. Colors and styles are coordinated and presented so that outfit selection is easily made.
Value Pricing. The Company offers quality merchandise that is generally priced below comparable mer-
chandise offered by department stores and mall specialty apparel chains, but is generally more fashionable than
merchandise offered by discount stores. Management believes that the Company has positioned itself as the
everyday low price leader in its market segment.
Strip Shopping Center Locations. The Company locates its stores principally in convenient strip centers
anchored by national discounters or market-dominant grocery stores that attract large numbers of potential
customers.
Customer Service. Store managers and sales associates are trained to provide prompt and courteous service
and to assist customers in merchandise selection and wardrobe coordination.
Credit and Layaway Programs. The Company offers its own credit card and a layaway plan to make the
purchase of its merchandise more convenient for its customers.
Merchandising
Merchandising
The Company seeks to offer a broad selection of high quality and exceptional value apparel and accessories to
suit the various lifestyles of fashion and value conscious females. In addition, the Company strives to offer on-trend
fashion in exciting colors with consistent fit and quality.
The Company’s merchandise lines include dressy, career, and casual sportswear, dresses, coats, shoes, lingerie,
costume jewelry and handbags. The Company primarily offers exclusive merchandise with fashion and quality
comparable to mall specialty stores at low prices, every day.
3
The Company believes that the collaboration of its merchandising team with an expanded in-house product
development and direct sourcing function has enhanced merchandise offerings and delivers quality exclusive on-
trend styles at lower prices. The product development and direct sourcing operations provide research on emerging
fashion and color trends, technical services and direct sourcing options.
As a part of its merchandising strategy, members of the Company’s merchandising staff frequently visit
selected stores, monitor the merchandise offerings of other retailers, regularly communicate with store operations
associates and frequently confer with key vendors. The Company also takes aggressive markdowns on slow-selling
merchandise and typically does not carry over merchandise to the next season.
Purchasing, Allocation and Distribution
Although the Company purchases merchandise from approximately 1,500 suppliers, most of its merchandise is
purchased from approximately 100 primary vendors. In fiscal 2009, purchases from the Company’s largest vendor
accounted for approximately 4% of the Company’s total purchases. No other vendor accounted for more than 3% of
total purchases. The Company is not dependent on its largest vendor or any other vendor for merchandise purchases,
and the loss of any single vendor or group of vendors would not have a material adverse effect on the Company’s
operating results or financial condition. A substantial portion of the Company’s merchandise is sold under its private
labels and is produced by various vendors in accordance with the Company’s strict specifications. The Company
purchases most of its merchandise from domestic importers and vendors, which typically minimizes the time
necessary to purchase and obtain shipments in order to enable the Company to react to merchandise trends in a more
timely fashion. Although a significant portion of the Company’s merchandise is manufactured overseas, principally
in the Far East, the Company does not expect that any economic, political or social unrest in any one country would
have a material adverse effect on the Company’s ability to obtain adequate supplies of merchandise. However, the
Company can give no assurance that any changes or disruptions in its merchandise supply chain would not
materially and adversely affect the Company. See “Risk Factors — Risks Relating To Our Business — We source a
significant portion of our merchandise directly and indirectly from overseas, and changes, disruptions or other
problems affecting the Company’s merchandise supply chain, could materially and adversely affect the Company’s
business, results of operations and financial condition.”
An important component of the Company’s strategy is the allocation of merchandise to individual stores based
on an analysis of sales trends by merchandise category, customer profiles and climatic conditions. A merchandise
control system provides current information on the sales activity of each merchandise style in each of the
Company’s stores. Point-of-sale terminals in the stores collect and transmit sales and inventory information to the
Company’s central database, permitting timely response to sales trends on a store-by-store basis.
All merchandise is shipped directly to the Company’s distribution center in Charlotte, North Carolina, where it
is inspected and then allocated by the merchandise distribution staff for shipment to individual stores. The flow of
merchandise from receipt at the distribution center to shipment to stores is controlled by an on-line system.
Shipments are made by common carrier, and each store receives at least one shipment per week. The centralization
of the Company’s distribution process also subjects it to risks in the event of damage to or destruction of its
distribution facility or other disruptions affecting the distribution center or the flow of goods into or out of Charlotte,
North Carolina generally. See “Risk Factors — Risks Relating To Our Business — A disruption or shutdown of our
centralized distribution center or transportation network could materially and adversely affect our business and
results of operations.”
Advertising
The Company uses television, in-store signage, graphics and a Company website as its primary advertising
media. The Company’s total advertising expenditures were approximately 0.7%, 0.8% and 0.8% of retail sales for
fiscal years 2009, 2008 and 2007, respectively.
Store Operations
The Company’s store operations management team consists of 1 director of stores, 4 territorial managers, 15
regional managers and 141 district managers. Regional managers receive a salary plus a bonus based on achieving
4
targeted goals for sales, payroll, shrinkage control and store profitability. District managers receive a salary plus a
bonus based on achieving targeted objectives for district sales increases and shrinkage control. Stores are typically
staffed with a manager, two assistant managers and additional part-time sales associates depending on the size of the
store and seasonal personnel needs. Store managers receive a salary and all other store personnel are paid on an
hourly basis. Store managers, assistant managers and sales associates are eligible for monthly and semi-annual
bonuses based on achieving targeted goals for their store’s sales increases and shrinkage control.
The Company constantly strives to improve its training programs to develop associates. Over 80% of store and
field management are promoted from within, allowing the Company to internally staff an expanding store base. The
Company has training programs at each level of store operations. New store managers are trained in training stores
managed by experienced associates who have achieved superior results in meeting the Company’s goals for store
sales, payroll expense and shrinkage control. The type and extent of district manager training varies depending on
whether the district manager is promoted from within or recruited from outside the Company.
Store Locations
Most of the Company’s stores are located in the southeastern United States in a variety of markets ranging from
towns to large metropolitan areas with trade area populations of 20,000 or more. Stores average
small
approximately 4,000 square feet in size.
All of the Company’s stores are leased. Approximately 96% are located in strip shopping centers and 4% in
enclosed shopping malls. The Company locates stores in strip shopping centers anchored by a national discounter,
primarily Wal-Mart Supercenters or market-dominant grocery stores. The Company’s strip center locations provide
ample parking and shopping convenience for its customers.
The Company’s store development activities consist of opening new stores in new and existing markets, and
relocating selected existing stores to more desirable locations in the same market area. The following table sets forth
information with respect to the Company’s development activities since fiscal 2005.
Fiscal Year
Store Development
Number of Stores
Beginning of
Year
Number
Opened
Number
Closed
Number of Stores
End of Year
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,177
1,244
1,276
1,318
1,281
82
58
62
65
35
15
26
20
102
45
1,244
1,276
1,318
1,281
1,271
In fiscal 2009 the Company relocated one store.
The Company expects to open 55 new stores during fiscal 2010. The expected new store openings include 15
new Cato stores and 40 new It’s Fashion Metro stores including the conversion of approximately 20 existing It’s
Fashion stores. The Company anticipates closing up to 40 stores by year end, including the 20 conversions. In
addition, the Company also expects to relocate 6 stores and remodel 10 stores. It’s Fashion Metro has 60 stores open
and is a value-priced fashion format offering the latest styles for the entire family including urban-inspired,
nationally recognized brands at everyday low prices.
The Company periodically reviews its store base to determine whether any particular store should be closed
based on its sales trends and profitability. The Company intends to continue this review process to close
underperforming stores.
5
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for 6.4%, 7.1% and 7.6% of retail sales in fiscal
2009, 2008 and 2007, respectively. The Company’s net bad debt expense was 7.4%, 5.6% and 4.9% of credit sales in
fiscal 2009, 2008 and 2007, respectively.
Customers applying for the Company’s credit card are approved for credit if they have a satisfactory credit
record and the Company has considered the customer’s ability to make the required minimum payment. Customers
are required to make minimum monthly payments based on their account balances. If the balance is not paid in full
each month, the Company assesses the customer a finance charge. If payments are not received on time, the
customer is assessed a late fee.
Layaway Plan
Under the Company’s layaway plan, merchandise is set aside for customers who agree to make periodic
payments. The Company adds a nonrefundable administrative fee to each layaway sale. If no payment is made for
four weeks, the customer is considered to have defaulted, and the merchandise is returned to the selling floor and
again offered for sale, often at a reduced price. All payments made by customers who subsequently default on their
layaway purchase are returned to the customer upon request, less the administrative fee and a restocking fee. The
Company defers recognition of layaway sales and its related fees to the accounting period when the customer picks
up layaway merchandise. Layaway sales represented approximately 4.7%, 4.0% and 3.3% of retail sales in fiscal
2009, 2008 and 2007, respectively.
Information Technology Systems
The Company’s systems provide daily financial and merchandising information that is used by management to
enhance the timeliness and effectiveness of purchasing and pricing decisions. Management uses a daily report
comparing actual sales with planned sales and a weekly ranking report to monitor and control purchasing decisions.
Weekly reports are also produced which reflect sales, weeks of supply of inventory and other critical data by product
categories, by store and by various levels of responsibility reporting. Purchases are made based on projected sales
but can be modified to accommodate unexpected increases or decreases in demand for a particular item.
Sales information is projected by merchandise category and, in some cases, is further projected and actual
performance measured by stock keeping unit (SKU). Merchandise allocation models are used to distribute
merchandise to individual stores based upon historical sales trends, climatic differences, customer demographic
differences and targeted inventory turnover rates.
Competition
The women’s retail apparel industry is highly competitive. The Company believes that the principal com-
petitive factors in its industry include merchandise assortment and presentation, fashion, price, store location and
customer service. The Company competes with retail chains that operate similar women’s apparel specialty stores.
In addition, the Company competes with mass merchandise chains, discount store chains and major department
stores. Although we believe we compete favorably with respect to the principal competitive factors described
above, many of our direct and indirect competitors are well-established national, regional or local chains, and some
have substantially greater financial, marketing and other resources. The Company expects its stores in larger cities
and metropolitan areas to face more intense competition.
Seasonality
Due to the seasonal nature of the retail business, the Company has historically experienced and expects to
continue to experience seasonal fluctuations in its revenues, operating income and net income. Results of a period
shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature
of our business may affect comparisons between periods. See Note 14 of the Consolidated Financial Statements for
information regarding our quarterly results of operations for the last two fiscal years.
6
Regulation
A variety of laws affect the revolving credit card program offered by the Company. The Credit Card
Accountability Responsibility and Disclosure Act of 2009 (“The Act”) amended the Truth in Lending Act, to
establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan.
The Act contained provisions addressing matters such as change in terms, notices, limits on fees, rate increases,
payment allocation and account disclosures. The Act requires creditors to provide the consumers with account
disclosures that are timely and in a form that is readily understandable. The Federal Fair Credit Reporting Act also
requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The
Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit lenders from discrim-
ination against any credit applicants, establishes guidelines for gathering and evaluating credit information and
requires written notification when credit is denied. Regulation AA establishes consumer complaint procedures and
defines unfair or deceptive practices in extending credit to consumers. The Federal Trade Commission has adopted
or proposed various trade regulation rules dealing with unfair credit and collection practices and the preservation of
consumers’ claims and defenses. The Company is also subject to the U.S. Patriot Act and the Bank Secrecy Act,
which require the Company to monitor account holders and account transactions, respectively. Additionally, the
Gramm-Leach-Bliley Act requires the Company to disclose, initially and annually, to its customers, the Company’s
privacy policy as it relates to a customer’s non-public personal information.
Associates
As of January 30, 2010, the Company employed approximately 9,100 full-time and part-time associates. The
Company also employs additional part-time associates during the peak retailing seasons. The Company is not a
party to any collective bargaining agreements and considers its associate relations to be good.
Item 1A. Risk Factors:
An investment in our common stock involves numerous types of risks. You should carefully consider the
following risk factors, in addition to the other information contained in this report, including the disclosures under
“Forward Looking Information” above in evaluating our Company and any potential investment in our common
stock. If any of the following risks or uncertainties occur, our business, financial condition and operating results
could be materially and adversely affected, the trading price of our common stock could decline and you could lose
all or a part of your investment in our common stock. The risks and uncertainties described in this section are not the
only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also materially and adversely affect our business operating results and financial condition.
Risks Relating To Our Business:
If we are unable to anticipate, identify and respond to rapidly changing fashion trends and customer
demands in a timely manner, our business and results of operations could materially suffer.
Customer tastes and fashion trends, particularly for women’s apparel, are volatile and tend to change rapidly.
Our success depends in part upon our ability to anticipate and respond to changing merchandise trends and
consumer preferences in a timely manner. Accordingly, any failure by us to anticipate, identify and respond to
changing fashion trends could adversely affect consumer acceptance of our merchandise, which in turn could
adversely affect our business and our image with our customers. If we miscalculate either the market for our
merchandise or our customers’ tastes or purchasing habits, we may be required to sell a significant amount of unsold
inventory at below average markups over cost, or below cost, which would adversely affect our margins and results
of operations.
Existing and increased competition in the women’s retail apparel industry may negatively impact our
business, results of operations, financial condition and market share.
The women’s retail apparel industry is highly competitive. We compete primarily with discount stores, mass
merchandisers, department stores, off-price retailers, specialty stores, and internet-based retailers, many of which
have substantially greater financial, marketing and other resources than we have. Many of our competitors continue
7
to be promotional and reduce their selling prices. In some cases our competitors are expanding into markets in
which we have a significant market presence. As a result of this competition, including close-out sales and going-
out-of-business sales by other women’s apparel retailers, we may experience pricing pressures, increased marketing
expenditures, as well as, loss of market share, which could materially and adversely affect our business, results of
operations and financial condition.
Unusual weather, natural disasters or similar events may adversely affect our sales or operations.
Extreme changes in weather patterns or natural disasters can influence customer trends and shopping habits.
For example, heavy rainfall or other extreme weather conditions over a prolonged period might make it difficult for
our customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible
to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the
winter season or cool weather during the summer season could render a portion of our inventory incompatible with
those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions would
adversely affect our business. Extreme weather patterns, natural disasters, power outages, terrorist acts or other
catastrophic events could reduce customer traffic in our stores and likewise disrupt our ability to conduct operations,
which could materially and adversely affect us.
We source a significant portion of our merchandise directly and indirectly from overseas, and changes,
disruptions or other problems affecting the Company’s merchandise supply chain, could materially and
adversely affect the Company’s business, results of operations and financial condition.
A significant amount of our merchandise is manufactured overseas principally in the Far East. We directly
import some of this merchandise and indirectly import the remaining merchandise from domestic vendors who
acquire the merchandise from foreign sources. As a result, political instability or other events resulting in the
disruption of trade from other countries, increased security requirements for imported merchandise, or the
imposition of additional regulations relating to or duties on imports, could cause significant delays or interruptions
in the supply of our merchandise or increase our costs. Either of these could have a material adverse effect on our
business. In addition, increased transportation costs or disruption of the means by which merchandise is transported
to us could cause significant cost increases or interruptions of our supply chain. If we are forced to source
merchandise from other countries or other domestic vendors with foreign sources in different countries, those goods
may be more expensive or of a different or inferior quality from the ones we now sell. Furthermore, the deterioration
in any of our key vendors’ financial condition, their failure to perform as we expect, the failure to follow our vendor
guidelines or comply with applicable laws and regulations could expose us to operational, competitive and legal
risks. If we were not able to timely or adequately replace the merchandise we currently source with merchandise
produced elsewhere, or if our vendors fail to perform as we expect, our business, results of operations and financial
condition could be adversely affected.
Our costs are affected by foreign currency fluctuations.
Because we purchase a significant portion of our inventory from foreign suppliers, our cost of these goods is
affected by the fluctuation of the local currencies where these goods are produced against the dollar. Accordingly,
changes in the value of the dollar relative to foreign currencies may increase our cost of goods sold and, if we are
unable to pass such cost increases on to our customers, decrease our gross margins and ultimately our earnings.
Accordingly, foreign currency fluctuations may have a material adverse effect on our business, financial condition
and results of operations.
A continuation of, or further deterioration in, the current adverse economic conditions and the general
economy or outlook and its related impact on consumer confidence and spending may materially and
adversely affect consumer demand for our apparel and accessories and our results of operations.
Consumer spending habits, including spending for our apparel and accessories, are affected by, among other
things, prevailing economic conditions, levels of employment, fuel and energy costs, salaries and wage rates and
other sources of income, tax rates, home values, consumer net worth, the availability of consumer credit, consumer
confidence or consumer perceptions of economic conditions or trends. The current adverse economic and credit
8
markets along with other factors have significantly weakened many of these drivers of consumer spending habits.
As a result, consumer confidence and spending have significantly deteriorated and may continue to do so for an
extended period of time, which may continue to adversely affect our net sales and results of operations. Adverse
economic conditions or uncertainties also generally cause consumers to defer purchases of discretionary items, such
as our merchandise or by purchasing cheaper alternatives to our merchandise, all of which may also adversely affect
our net sales and results of operations. In addition, numerous events, whether or not related to actual economic
conditions, such as downturns in the stock markets, acts of war or terrorism, political unrest or natural disasters, or
similar events, may also dampen consumer confidence, and accordingly, lead to reduced consumer spending. A
continuation or worsening of the current economic downturn and reduction in consumer confidence could have a
material adverse effect on our business, results of operations and financial condition.
The failure, disruption or security breach relating to our information technology systems could adversely
affect our business.
We rely on our existing information technology systems for merchandise operations including merchandise
planning, replenishment, pricing, ordering, markdowns and product life cycle management. In addition to
merchandise operations, we utilize our information technology systems for our distribution processes, as well
as our financial systems including accounts payable, general ledger, accounts receivable, sales, banking, inventory
and fixed assets. Any disruption in the operation of our information technology systems, or our failure to continue to
upgrade or improve such systems could adversely affect our business. In addition, any security breach or other
problem that results in the unauthorized disclosure of confidential customer information, such as personally
identifiable information and payment information, could adversely affect our standing with customers and expose
us to the risk of litigation and liability. Any such occurrences could result in reputational damage or loss of business
or goodwill and could adversely affect our business, results of operations and financial condition.
A disruption or shutdown of our centralized distribution center or transportation network could materially
and adversely affect our business and results of operations.
The distribution of our products is centralized in one distribution center in Charlotte, North Carolina and
distributed through our network of third party freight carriers. The merchandise we purchase is shipped directly to
our distribution center where it is prepared for shipment to the appropriate stores and subsequently delivered to the
stores by our third party freight carriers. If the distribution center or our third party freight carriers were to be
shutdown or lose significant capacity for any reason, our operations would likely be seriously disrupted. Such
problems could occur as the result of any loss, destruction or impairment of our ability to use our distribution center,
as well as any broader problem generally affecting the ability to ship goods into our distribution center or delivery to
our stores. As a result, we could incur significantly higher costs and longer lead times associated with distributing
our products to our stores during the time it takes for us to reopen or replace the distribution center and/or our
transportation network.
Our ability to attract consumers and grow our revenues is dependant on the success of our store location
strategy and our ability to successfully open new stores as planned.
Our sales are dependent in part on the location of our stores in shopping centers where we believe our
consumers and potential consumers shop. In addition, our ability to grow our revenues has been substantially
dependent on our ability to secure space for and open new stores in attractive locations. Centers where we currently
operate existing stores or seek to open new stores may be adversely affected by, among other things, general
economic downturns or those particularly affecting the commercial real estate industry, the closing of anchor stores,
changes in tenant mix and changes in customer shopping preferences. To take advantage of consumer traffic and the
shopping preferences of our consumers, we need to maintain and acquire stores in desirable locations where
competition for suitable store locations is intense. A decline in the popularity of these shopping centers among our
target consumers, or in availability or cost of space in these centers could adversely affect consumer traffic and
reduce our sales and net earnings or increase our operating costs.
Our ability to open and operate new stores depends on many factors, some of which are beyond our control.
These factors include, but are not limited to, our ability to identify suitable store locations, negotiate acceptable
9
lease terms, and hire and train appropriate store personnel. In addition, our continued expansion into new regions of
the country where we have not done business before may present new challenges in competition, distribution and
merchandising as we enter these new markets. Our failure to successfully and timely execute our plans for opening
new stores or the failure of these stores to perform up to our expectations, could adversely affect our business,
results of operations and financial condition.
Failure to attract, train, and retain skilled personnel could adversely affect our business and our financial
condition.
Like most retailers, we experience significant associate turnover rates, particularly among store sales
associates and managers. Our continued store growth will require the hiring and training of new associates.
We must continually attract, hire and train new store associates to meet our staffing needs. A significant increase in
the turnover rate among our store sales associates and managers would increase our recruiting and training costs as
well as possibly cause a decrease in our store operating efficiency and productivity. We compete for qualified store
associates, as well as, experienced management personnel with other companies in our industry or other industries,
many of whom have greater financial resources than we do.
If we are unable to retain our associates or attract, train, or retain other skilled personnel in the future, we may
not be able to service our customers effectively, which could adversely affect our business, results, and financial
condition.
Our business operations subject us to legal compliance and litigation risks that could result in increased
costs or liabilities, divert our management’s attention or otherwise adversely affect our business.
Our operations are subject to federal, state and local laws, rules and regulations and litigation risk. Compliance
risks and litigation claims have or may arise in the ordinary course of our business and may include, among other
matters, employment issues, commercial disputes, intellectual property issues, product-oriented matters, tax,
customer relations and personal injury claims. These matters frequently raise complex factual and legal issues,
which are subject to risks and uncertainties and could divert significant management time. In addition, governing
laws, rules and regulations, and interpretations of existing laws are subject to change from time to time. Compliance
and litigation matters could result in unexpected expenses and liability, as well as have an adverse effect on our
operations and our reputation.
If we fail to protect our trademarks or other intellectual property rights or avoid infringing the
intellectual property rights of others, our business, brand image, growth strategy, results of operations
and financial condition could be adversely affected.
We believe that our “Cato”, “Its Fashion” and “Its Fashion Metro” trademarks are integral to our store designs
and our ability to successfully build consumer loyalty. We have registered these trademarks with the U.S. Patent and
Trademark Office (“PTO”) and have also registered, or applied for registration of, additional trademarks with the
PTO that we believe are important to our business. We cannot assure that these registrations will prevent imitation of
our trademarks, merchandising concepts, store designs or private label merchandise or the infringement of our other
intellectual property rights by others. Imitation of our names, concepts, store designs or merchandise in a manner
that projects lesser quality or carries a negative connotation of our image could adversely affect our business,
financial condition and results of operations.
In addition, we cannot assure that others will not try to block the manufacture or sale of our private label
merchandise by claiming that our merchandise violates their trademarks or other proprietary rights. Although we
cannot currently estimate the likelihood of success of any such lawsuit or ultimate resolution of such a conflict, such
a controversy could adversely affect our business, financial condition and results of operations.
We may continue to experience market conditions that could adversely impact the valuation and liquidity
of, and our ability to access, our short-term investments and cash and cash equivalents.
Our short-term investments and cash equivalents are primarily comprised of investments in federal, state and
municipal debt securities. With the continuing downturn in the economy, we cannot be assured of our ability to
10
access these investments timely. In addition, we have significant amounts of cash and cash equivalents at financial
institutions that are in excess of the federally insured limits. In light of the continuing economic downturn and
adverse conditions affecting the financial sector and stability of financial institutions, we cannot be assured that we
will not experience losses on our deposits.
Maintaining and improving our internal control over financial reporting and other requirements
necessary to operate as a public company may strain our resources and any material failure in these
controls may negatively impact our business, the price of our common stock and market confidence in
our reported financial information.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002, and the rules of the New York Stock Exchange. The requirements of these rules and
regulations have, and may continue to, increase our compliance costs and place undue strain on our personnel,
systems and resources. To satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we must
continue to document, test, monitor and enhance our internal controls over financial reporting, which is a costly and
time-consuming effort that must be re-evaluated frequently. We cannot be assured that our disclosure controls and
procedures and our internal controls over financial reporting required under Section 404 of the Sarbanes-Oxley Act
will be adequate in the future. Any failure to maintain the effectiveness of internal controls over financial reporting
or to comply with the requirements of the Sarbanes-Oxley Act could have an adverse material impact on our
business, our financial condition and the price of our common stock.
Risks Relating To Our Common Stock:
Our operating results are subject to seasonal and quarterly fluctuations, which could adversely affect the
market price of our common stock.
Our business varies with general seasonal trends that are characteristic of the retail apparel industry. As a
result, our stores typically generate a higher percentage of our annual net sales and profitability in the first and
second quarters of our fiscal year compared to other quarters. Accordingly, our operating results for any one fiscal
period are not necessarily indicative of results to be expected from any future period, and such seasonal and
quarterly fluctuations could adversely affect the market price of our common stock.
The interests of a principal shareholder may limit the ability of other shareholders to influence the
direction of the Company.
As of March 30, 2010, John P. D. Cato, Chairman, President and Chief Executive Officer, beneficially
controlled approximately 39% of the voting power of our common stock. As a result, Mr. Cato may be able to
control or significantly influence substantially all matters requiring approval by the shareholders, including the
election of directors and the approval of mergers and other business combinations. Mr. Cato may have interests that
differ from those of other shareholders, and may vote in a way with which other shareholders disagree or perceive as
adverse to their interests. In addition, the concentration of voting power held by Mr. Cato could have the effect of
preventing, discouraging or deferring a change in control of the Company, which could depress the market price of
our common stock.
Conditions in the stock market, generally or particularly relating to our Company or common stock, may
materially and adversely affect the market price of our common stock and make its trading price more
volatile.
The trading price of our common stock at times has been, and is likely to continue to be, subject to significant
volatility. A variety of factors may cause the price of the common stock to fluctuate, perhaps substantially,
including, but not limited to: low trading volume; general market fluctuations resulting from factors not directly
related to our operations or the inherent value of our common stock; announcements of developments related to our
business; fluctuations in our reported operating results; general conditions in fashion and retail industry; conditions
in the domestic or global economy or the domestic or global credit or capital markets; changes in financial estimates
or the scope of coverage given to our Company by securities analysts; negative commentary regarding our Company
11
and corresponding short-selling market behavior; adverse customer relations developments; significant changes in
our senior management team; and legal proceedings. Over the past several years the stock market in general, and the
market for shares of equity securities of many retailers in particular, have experienced extreme price fluctuations
that have at times been unrelated to the operating performance of those companies. Such fluctuations and market
volatility based on these or other factors may materially and adversely affect the market price of our common stock.
Item 1B. Unresolved Staff Comments:
Not Applicable.
Item 2. Properties:
The Company’s distribution center and general offices are located in a Company-owned building of
approximately 492,000 square feet located on a 15-acre tract in Charlotte, North Carolina. The Company’s
automated merchandise handling and distribution activities occupy approximately 418,000 square feet of this
building and its general offices and corporate training center are located in the remaining 74,000 square feet. A
building of approximately 24,000 square feet located on a 2-acre tract adjacent to the Company’s existing location is
used for receiving and staging shipments prior to processing.
Substantially all of the Company’s retail stores are leased from unaffiliated parties. Most of the leases have an
initial term of five years, with two to three five-year renewal options. Many of the leases provide for fixed rentals
plus a percentage of sales in excess of a specified volume.
Item 3. Legal Proceedings:
From time to time, claims are asserted against the Company arising out of operations in the ordinary course of
business. The Company currently is not a party to any pending litigation that it believes is likely to have a material
adverse effect on the Company’s financial position, results of operations or cash flows.
12
Item 3A. Executive Officers of the Registrant:
The executive officers of the Company and their ages as of March 30, 2010 are as follows:
Name
Age
Position
John P. D. Cato . . . . . . . . . . . . . . . . . .
Michael T. Greer . . . . . . . . . . . . . . . . .
John R. Howe . . . . . . . . . . . . . . . . . . .
Howard A. Severson . . . . . . . . . . . . . .
59 Chairman, President and Chief Executive Officer
47 Executive Vice President, Director of Stores
47 Executive Vice President, Chief Financial Officer
62 Executive Vice President, Chief Real Estate and
Store Development Officer
Sally Almason . . . . . . . . . . . . . . . . . . .
56 Executive Vice President, General Merchandise
Manager — Cato Division
John P. D. Cato has been employed as an officer of the Company since 1981 and has been a director of the
Company since 1986. Since January 2004, he has served as Chairman, President and Chief Executive Officer. From
May 1999 to January 2004, he served as President, Vice Chairman of the Board and Chief Executive Officer. From
June 1997 to May 1999, he served as President, Vice Chairman of the Board and Chief Operating Officer. From
August 1996 to June 1997, he served as Vice Chairman of the Board and Chief Operating Officer. From 1989 to
1996, he managed the Company’s off-price division, serving as Executive Vice President and as President and
General Manager of the It’s Fashion! Division from 1993 to August 1996. Mr. John Cato is currently a director of
Ruddick Corporation.
Michael T. Greer has been employed by the Company since 1985. Since May 2006, he has served as Executive
Vice President, Director of Stores of the Company. From November 2004 until May 2006, he served as Senior Vice
President, Director of Stores of the Company. From February 2004 until November 2004, he served as Senior Vice
President, Director of Stores of the Cato Division. From 2002 to 2003 Mr. Greer served as Vice President, Director
of Stores of the It’s Fashion! Division. From 1999 to 2001 he served as Territorial Vice President of Stores of the
Cato Division and from 1996 to 1999 he served as Regional Vice President of Stores of the Cato Division. From
1985 to 1995, Mr. Greer held various store operational positions in the Cato Division.
John R. Howe has been employed by the Company since 1986. Since September 2008, he has served as
Executive Vice President, Chief Financial Officer. From June 2007 until September 2008, he served as Senior Vice
President, Controller. From 1999 to 2007, he served as Vice President, Assistant Controller. From 1997 to 1999, he
served as Assistant Vice President, Budgets and Planning. From 1995 to 1997, he served as Director, Budgets and
Planning. From 1995 to 1997, he served as Assistant Tax Manager. From 1986 to 1995, Mr. Howe held various
positions within the finance area.
Howard A. Severson has been employed by the Company since 1985. Since January 1993, he has served as
Executive Vice President, Chief Real Estate and Store Development Officer. From 1993 to 2001 Mr. Severson also
served as a director. From August 1989 through January 1993, Mr. Severson served as Senior Vice President —
Chief Real Estate Officer.
Sally Almason has been employed by the Company since 1995. Since April 2009, she has served as Executive
Vice President, General Merchandise Manager for the Cato Division. From 2004 to 2009, she served as Senior Vice
President, General Merchandise Manager for the Cato Division. From 1995 to 2004, she served as Vice President,
Divisional Merchandise Manager for the Cato Division.
13
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities:
Market & Dividend Information
The Company’s Class A Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol
CATO. Below is the market range and dividend information for the four quarters of fiscal 2009 and 2008.
2009
Price
High
Low
Dividend
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19.61
20.84
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.86
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.84
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13.13
15.32
16.46
18.67
$.165
.165
.165
.165
2008
Price
High
Low
Dividend
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17.98
18.94
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.38
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.20
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14.05
14.03
11.99
12.06
$.165
.165
.165
.165
As of March 30, 2010 the approximate number of record holders of the Company’s Class A Common Stock
was 5,000 and there were 2 record holders of the Company’s Class B Common Stock.
14
Stock Performance Graph
The following graph compares the yearly change in the Company’s cumulative total shareholder return on the
Company’s Common Stock (which includes Class A Stock and Class B Stock) for each of the Company’s last five
fiscal years with (i), the Dow Jones U.S. Retailers, Apparel Index and (ii) the Russell 2000 Index.
The Cato Corporation
Stock Performance Graph
150
100
50
1/28/2005
1/27/2006
2/2/2007
2/1/2008
1/30/2009
1/29/2010
The Cato Corporation
Dow Jones U.S. Retailers, Apparel Index
Russell 2000 Index
THE CATO CORPORATION
STOCK PERFORMANCE TABLE
(BASE 100 — IN DOLLARS)
LAST TRADING DAY
OF THE FISCAL YEAR
THE CATO
CORPORATION
DOW JONES
U.S. RETAILERS,
APPL INDEX
RUSSELL 2000
INDEX
1/28/05
1/27/06
2/02/07
2/01/08
1/30/09
1/29/10
100
116
130
86
63
131
100
114
138
109
57
109
100
121
135
123
76
105
The graph assumes an initial investment of $100 on January 28, 2005, the last trading day prior to the
commencement of the Company’s 2005 fiscal year, and that all dividends were reinvested.
15
Item 6. Selected Financial Data:
Certain selected financial data for the five fiscal years ended January 30, 2010 have been derived from the
Company’s audited financial statements. The financial statements and Independent Registered Public Accounting
Firm’s integrated audit reports for the three most recent fiscal years are contained elsewhere in this report. All data
set forth below are qualified by reference to, and should be read in conjunction with, the Company’s Consolidated
Financial Statements (including the Notes thereto) and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing elsewhere in this annual report.
Fiscal Year(1)
STATEMENT OF OPERATIONS DATA:
Retail sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold (exclusive of depreciation
shown below) . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative (exclusive of
depreciation shown below) . . . . . . . . . . . . . .
Selling, general and administrative percent of
retail sales . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share(2) . . . . . . . . . . . . . . . .
Diluted earnings per share(2) . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . .
SELECTED OPERATING DATA:
Stores open at end of year . . . . . . . . . . . . . . . .
Average sales per store(3) . . . . . . . . . . . . . . . . .
Average sales per square foot of selling space . .
BALANCE SHEET DATA (at period end):
Cash, cash equivalents, short-term investments
and restricted cash . . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . .
2009
2007
(Dollars in thousands, except per share data and selected operating data)
2008
2006
2005
$872,132
11,863
883,995
$845,676
12,042
857,718
$834,341
12,096
846,437
$862,813
13,072
875,885
$821,639
14,742
836,381
552,016
562,056
572,309
572,712
546,955
245,483
227,645
210,892
212,157
203,156
28.2%
26.9%
25.3%
24.6%
24.7%
21,829
66
(4,313)
68,914
23,149
$ 45,765
1.55
$
1.55
$
.660
$
22,572
53
(7,218)
52,610
18,976
$ 33,634
1.14
$
1.14
$
.660
$
22,212
9
(8,218)
49,233
16,914
$ 32,319
1.02
$
1.02
$
.645
$
20,941
41
(9,597)
79,631
28,181
$ 51,450
1.64
$
1.61
$
.580
$
20,275
183
(4,563)
70,375
25,546
$ 44,829
1.44
$
1.41
$
.507
$
1,271
$678,000
165
$
1,281
$640,000
162
$
1,318
$640,000
165
$
1,276
$685,000
175
$
1,244
$684,000
173
$
$200,915
202,299
480,990
291,312
$144,803
164,639
435,353
261,813
$114,578
144,114
420,792
247,370
$123,542
176,464
432,322
276,793
$107,819
139,114
406,636
239,948
(1) The fiscal year 2006 contained 53 weeks versus 52 weeks for all other years shown.
(2) Per share amounts for 2008 and earlier periods have been retroactively restated for the adoption of guidance
related to participating dividends on unvested restricted stock awards. See Note 1 to the Consolidated Financial
Statements.
(3) Calculated using actual sales volume for stores open for the full year and an estimated annual sales volume for
new stores opened during the year.
16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
Results of Operations
The table below sets forth certain financial data of the Company expressed as a percentage of retail sales for the
years indicated:
Fiscal Year Ended
January 30,
2010
January 31,
2009
February 2,
2008
Retail sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
1.4
101.4
63.3
28.2
2.5
(0.5)
7.9
5.2%
100.0%
1.4
101.4
66.5
26.9
2.7
(0.9)
6.2
4.0%
100.0%
1.4
101.4
68.6
25.3
2.7
(1.0)
5.9
3.9%
Fiscal 2009 Compared to Fiscal 2008
Retail sales increased by 3.1% to $872.1 million in fiscal 2009 compared to $845.7 million in fiscal
2008 which was primarily attributable to an increase in comparable store sales and sales from store development.
Comparable store sales increased 1% in fiscal 2009. Total revenues, comprised of retail sales and other income
(principally finance charges and late fees on customer accounts receivable and layaway fees), increased by 3.1% to
$884.0 million in fiscal 2009 compared to $857.7 million in fiscal 2008. The Company operated 1,271 stores at
January 30, 2010 compared to 1,281 stores operated at January 31, 2009.
In fiscal 2009, the Company opened 35 new stores, relocated one store and closed 45 stores.
Other income in total, as included in total revenues in fiscal 2009, decreased slightly to $11.9 million from
$12.0 million in fiscal 2008. The decrease resulted primarily from lower credit revenue and finance charges offset
by an increase in layaway service charges.
Credit segment revenue of $9.4 million represented 1.1% of total revenue in fiscal 2009 compared to 2008
credit revenue of $10.1 million or 1.2% of total revenue. The decrease in credit revenue was primarily due to
reductions in finance and late charge income as a result of lower accounts receivable balances. Credit revenue is
comprised of interest earned on the Company’s private label credit card portfolio and related fee income. Related
expenses include principally bad debt expense, payroll, postage and other administrative expenses and totaled
$6.6 million in fiscal 2009 compared to $7.0 million in fiscal 2008. The decrease in these expenses was principally
due to a decrease in late fee reserves of $0.5 million. See Note 15 of the Consolidated Financial Statements for a
schedule of credit related expenses. Total segment credit income before taxes decreased $0.2 million from
$3.1 million in 2008 to $2.9 million in 2009 due to decreased finance charge income offset by a decrease in bad debt
expense. Total credit income of $2.9 million in 2009 represented 4.2% of total income before taxes of $68.9 million
compared to total credit income of $3.1 million in 2008 which represented 5.9% of 2008 total income before taxes.
Cost of goods sold was $552.0 million, or 63.3% of retail sales, in fiscal 2009 compared to $562.1 million, or
66.5% of retail sales, in fiscal 2008. The decrease in cost of goods sold as a percent of retail sales resulted primarily
from lower occupancy costs, freight charges and markdowns. The decrease in markdowns was primarily attrib-
utable to inventory management and higher sell throughs of regular priced merchandise. Total gross margin dollars
(retail sales less cost of goods sold) increased by 12.9% to $320.1 million in fiscal 2009 from $283.6 million in
fiscal 2008. Gross margin as presented may not be comparable to that of other companies.
Selling, general and administrative expenses (SG&A), which primarily include corporate and store payroll,
related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad
debts were $245.5 million in fiscal 2009 compared to $227.6 million in fiscal 2008, an increase of 7.9%. As a
17
percent of retail sales, SG&A was 28.2% compared to 26.9% in the prior year. The overall dollar increase in SG&A
resulted primarily from an increase in incentive based compensation expenses, payroll and legal reserves partially
offset by a reduction in workers’ compensation expense and the costs associated with the closure of under-
performing stores from fiscal 2008.
Depreciation expense was $21.8 million in fiscal 2009 compared to $22.6 million in fiscal 2008. Depreciation
expense was flat from period to period because the Company’s store count and related investments in store
development as well as its information technology investments were both relatively stable.
Interest and other income was $4.3 million in fiscal 2009 compared to $7.2 million in fiscal 2008. The decrease
was due to lower interest income due to reduced interest rates. See Note 2 to the Consolidated Financial Statements
for details.
Income tax expense was $23.1 million or 2.7% of retail sales in fiscal 2009 compared to $19.0 million or 2.2%
of retail sales in fiscal 2008. The increase resulted from higher pre-tax income partially offset by a decrease in the
effective tax rate. The effective tax rate was 33.6% in fiscal 2009 and 36.1% in fiscal 2008 due to non-recurring
settlements of various state audits resulting in reversals of certain income tax reserves for uncertain tax positions.
Fiscal 2008 Compared to Fiscal 2007
Retail sales increased by 1.4% to $845.7 million in fiscal 2008 compared to $834.3 million in fiscal 2007. The
increase in retail sales in fiscal 2008 was attributable to sales from store development. Comparable store sales
decreased 1% from fiscal 2007. Total revenues, comprised of retail sales and other income (principally finance
charges and late fees on customer accounts receivable and layaway fees), increased by 1.3% to $857.7 million in
fiscal 2008 compared to $846.4 million in fiscal 2007. The Company operated 1,281 stores at January 31, 2009
compared to 1,318 stores operated at February 2, 2008.
In fiscal 2008, the Company opened 65 new stores, relocated 9 stores and closed 102 stores.
Other income in total, as included in total revenues in fiscal 2008, decreased slightly to $12.0 million from
$12.1 million in fiscal 2007. The decrease resulted primarily from lower credit revenue and finance and layaway
charges.
Credit revenue of $10.1 million represented 1.2% of total revenue in fiscal 2008. This is comparable to 2007
credit revenue of $10.4 million or 1.2% of total revenue. The slight decrease in actual credit revenue was primarily
due to reductions in finance charge income as a result of lower accounts receivable balances. Credit revenue is
comprised of interest earned on the Company’s private label credit card portfolio and related fee income. Related
expenses include principally bad debt expense, payroll, postage and other administrative expenses and totaled
$7.0 million in fiscal 2008 compared to $6.1 million in fiscal 2007. The increase in these expenses was principally
due to an increase in the bad debt reserve of $0.6 million. See Note 15 of the Consolidated Financial Statements for a
schedule of credit related expenses. Total segment credit income before taxes decreased $1.2 million from
$4.3 million in 2007 to $3.1 million in 2008 due to decreased finance charge income and increased bad debt expense
due to an increase in the allowance for doubtful accounts. Total credit income of $3.1 million in 2008 represented
5.9% of total income before taxes of $52.6 million compared to total credit income of $4.3 million in 2007, which
represented 8.7% of 2007 total income before taxes.
Cost of goods sold was $562.1 million, or 66.5% of retail sales, in fiscal 2008 compared to $572.3 million, or
68.6% of retail sales, in fiscal 2007. The decrease in cost of goods sold as a percent of retail sales resulted primarily
from lower procurement costs and reduced markdowns. 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) increased by 8.2% to
18
$283.6 million in fiscal 2008 from $262.0 million in fiscal 2007. Gross margin as presented may not be comparable
to that of other companies.
Selling, general and administrative expenses (SG&A), which primarily include corporate and store payroll,
related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad
debts were $227.6 million in fiscal 2008 compared to $210.9 million in fiscal 2007, an increase of 7.9%. As a
percent of retail sales, SG&A was 26.9% compared to 25.3% in the prior year. The overall dollar increase in SG&A
resulted primarily from an increase in incentive based compensation expenses, salary expenses driven by store
development, expenses incurred to close underperforming stores and insurance expense.
Depreciation expense was $22.6 million in fiscal 2008 compared to $22.2 million in fiscal 2007. The
depreciation expense in fiscal 2008 and 2007 resulted primarily from the Company’s store development activity and
investment in technology.
Interest and other income was $7.2 million in fiscal 2008 compared to $8.2 million in fiscal 2007. The decrease
was due to lower interest income due to reduced interest rates. See Note 2 to the Consolidated Financial Statements
for details.
Income tax expense was $19.0 million, or 2.2% of retail sales in fiscal 2008 compared to $16.9 million or 2.0%
of retail sales in fiscal 2007. The increase resulted from higher pre-tax income in conjunction with an increase in
effective tax rate. The effective tax rate was 36.1% in fiscal 2008 and 34.4% in fiscal 2007.
Off-Balance Sheet Arrangements
Other than operating leases in the ordinary course of business, the Company is not a party to any off-balance
sheet arrangements.
Critical Accounting Policies
The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial
Statements. 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 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 judgement. Actual results will inevitably 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, reserves for
inventory markdowns, calculation of asset impairment, shrinkage accrual and reserves for uncertain tax positions.
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable and records an allowance for doubtful
accounts based on estimates of actual write-offs and the accounts receivable aging over a period of up to 12 months.
The allowance is reviewed for adequacy and adjusted, as necessary, on a quarterly basis. The Company also
provides for estimated uncollectible late fees charged based on historical write-offs. The Company’s financial
results can be significantly impacted by changes in bad debt write-off experience and the aging of the accounts
receivable portfolio.
Merchandise Inventories
The Company’s inventory is valued using the retail method of accounting and is stated at the lower of cost
(first-in, first-out method) or market. Under the retail inventory method, the valuation of inventory at cost and
resulting gross margin are calculated by applying an average cost to retail ratio to the retail value of inventory. The
retail inventory method is an averaging method that has been widely used in the retail industry. Inherent in the retail
19
method are certain significant estimates, including initial merchandise markup, markdowns and shrinkage, which
can significantly impact the ending inventory valuation at cost and the resulting gross margins. Physical inventories
are conducted throughout the year to calculate actual shrinkage and inventory on hand. Estimates based on actual
shrinkage results are used to estimate inventory shrinkage, which is accrued for the period between the last physical
inventory and the financial reporting date. The Company regularly reviews its inventory levels to identify slow
moving merchandise and uses markdowns to clear slow moving inventory. The general economic environment for
retail apparel sales could result in an increase in the level of markdowns, which would result in lower inventory
values and increases to cost of goods sold as a percentage of net sales in future periods. Management makes
estimates regarding markdowns based on inventory levels on hand and customer demand, which may impact
inventory valuations. Markdown exposure with respect to inventories on hand is limited due to the fact that seasonal
merchandise is not carried forward. Historically, actual results have not significantly deviated from those
determined using the estimates described above.
Lease Accounting
The Company recognizes rent expense on a straight-line basis over the lease term as defined in ASC 840 — Leases.
Our lease agreements generally provide for scheduled rent increases during the lease term or rent holidays,
including rental payments commencing at a date other than the date of initial occupancy. We include any rent
escalation and rent holidays in our straight-line rent expense. In addition, we record landlord allowances for normal
tenant improvements as deferred rent, which is included in other noncurrent liabilities in the consolidated balance
sheets. This deferred rent is amortized over the lease term as a reduction of rent expense. Also, leasehold
improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the
related lease term. See Note 1 to the Consolidated Financial Statements for further information on the Company’s
accounting for its leases.
Impairment of Long-Lived Assets
The Company primarily invests in property and equipment in connection with the opening and remodeling of
stores and in computer software and hardware. The Company periodically reviews its store locations and estimates
the recoverability of its assets, recording an impairment charge, if necessary, when the Company decides to close
the store or otherwise determines that future estimated undiscounted cash flows associated with those assets will not
be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s
historical operating results and cash flows, estimated future sales growth, real estate development in the area and
perceived local market conditions that can be difficult to predict and may be subject to change. In addition, the
Company regularly evaluates its computer-related and other long-lived assets and may accelerate depreciation over
the revised useful life if the asset is expected to be replaced or has limited future value. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is reflected in income for that period.
Insurance Liabilities
The Company is primarily self-insured for health care, workers’ compensation and general liability costs.
These costs are significant primarily due to the large number of the Company’s retail locations and associates. The
Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims
incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews
current and historical claims data in developing its estimates. The Company also uses information provided by
outside actuaries with respect to workers’ compensation and general liability claims. If the underlying facts and
circumstances of the claims change or the historical experience upon which insurance provisions are recorded is not
indicative of future trends, then the Company may be required to make adjustments to the provision for insurance
costs that could be material to the Company’s reported financial condition and results of operations. Historically,
actual results have not significantly deviated from estimates.
20
Uncertain Tax Positions
The Company records liabilities for uncertain tax positions principally related to state income taxes as of the
balance sheet date. These liabilities reflect the Company’s best estimate of its ultimate income tax liability based on
the tax codes, regulations, and pronouncements of the jurisdictions in which we do business. Estimating our
ultimate tax liability involves significant judgements regarding the application of complex tax regulations across
many jurisdictions. Despite the Company’s belief that the estimates and judgements are reasonable, differences
between the estimated and actual tax liabilities could exist. These differences may arise from settlements of tax
audits, expiration of the statute of limitations, or the evolution and application of the various jurisdictional tax codes
and regulations. Any differences will be recorded in the period in which they become known and could have a
material effect on the results of operations in the period the adjustment is recorded.
Revenue Recognition
While the Company’s recognition of revenue is predominantly derived from routine retail transactions and
does not involve significant judgement, revenue recognition represents an important accounting policy of the
Company. As discussed in Note 1 to the Consolidated Financial Statements, the Company recognizes sales at the
point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with
cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales are also recorded when the
customer takes possession of the merchandise. Gift cards and layaway sales are recorded as deferred revenue until
they are redeemed or forfeited. Gift cards do not have expiration dates. A provision is made for estimated product
returns based on sales volumes and the Company’s experience; actual returns have not varied materially from
amounts provided historically.
Beginning with the fourth quarter of fiscal 2007, the Company began recognizing income on unredeemed gift
cards (“gift card breakage”) as a component of other income. Gift card breakage is determined after 60 months
when the likelihood of the remaining balances being redeemed is remote based on our historical redemption data
and there is no legal obligation to remit the remaining balances to relevant jurisdictions. Gift card breakage income
will be recognized on a quarterly basis and is not expected to be material.
Credit revenue on the Company’s private label credit card portfolio is recognized as earned under the interest
method. Late fees are recognized as earned, less provisions for estimated uncollectible fees.
Liquidity, Capital Resources and Market Risk
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities
during fiscal 2009 was $84.7 million as compared to $71.6 million in fiscal 2008. These amounts have enabled the
Company to fund its regular operating needs, capital expenditure program and cash dividend payments. In addition,
the Company maintains $35.0 million of unsecured revolving credit facilities for short-term financing of seasonal
cash needs, none of which was outstanding at January 30, 2010. Borrowing capacity under this facility was
$33.3 million, net of standby letter of credit obligations.
Cash provided by operating activities for these periods was primarily generated by earnings adjusted for
depreciation, deferred taxes, and changes in working capital. The increase of $13.1 million for fiscal 2009 over
fiscal 2008 is primarily due to an increase in net income and accrued bonus and benefits partially offset by a change
in inventories, accrued income taxes and losses on disposal of property and equipment due to store closures.
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 proposed capital expenditures, dividends, purchase of treasury stock and other operating requirements
for fiscal 2010 and for the foreseeable future.
At January 30, 2010, the Company had working capital of $202.3 million compared to $164.6 million at
January 31, 2009. Additionally, the Company had $2.3 million invested in privately managed investment funds and
other miscellaneous equities, which are reported under Other assets in the Consolidated Balance Sheets.
21
At January 30, 2010, the Company had an unsecured revolving credit agreement, which provided for
borrowings of up to $35.0 million. The revolving credit agreement is committed until August 2010. The credit
agreement contains various financial covenants and limitations, including the maintenance of specific financial
ratios with which the Company was in compliance as of January 30, 2010. There were no borrowings outstanding
under the credit facility during the fiscal year ended January 30, 2010 or the fiscal year ended January 31, 2009. The
Company is currently reviewing the credit agreement.
The Company had approximately $8.2 million and $4.5 million at January 30, 2010 and January 31, 2009,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments. In addition, the
Company has a standby letter of credit for payments to the current general liability and workers’ compensation
insurance processor.
Expenditures for property and equipment totaled $10.0 million, $19.4 million and $18.3 million in fiscal 2009,
2008 and 2007, respectively. The expenditures for fiscal 2009 were primarily for store development and investments
in new technology. In fiscal 2010, the Company is planning to invest approximately $24.8 million in capital
expenditures. This includes expenditures to open 55 new stores including the conversion of up to 20 It’s Fashion
stores to It’s Fashion Metro stores and relocate 6 stores. In addition, the Company plans to remodel 10 stores and has
planned for additional investments in technology scheduled to be implemented over the next 12 months.
Net cash used in investing activities totaled $58.1 million for fiscal 2009 compared to $29.3 million used for
the comparable period of 2008. The increase was due primarily to the decrease in sales of short-term investments
and expenditures for property and equipment.
On May 20, 2009, the Board of Directors held the quarterly dividend to $.165 per share, or an annualized rate
of $.66 per share.
The Company does not use derivative financial instruments.
At January 30, 2010, the Company’s investment portfolio was primarily invested in tax exempt variable rate
demand notes and governmental securities held in managed funds. These securities are classified as availa-
ble-for-sale as they are highly liquid. They are recorded on the balance sheet at fair value, with unrealized gains and
temporary losses reported net of taxes as accumulated other comprehensive income. Other than temporary declines
in fair value of investments are recorded as a reduction in the cost of investments in the accompanying Consolidated
Balance Sheets.
The following table sets forth information regarding the Company’s financial assets that are measured at fair
value (in thousands) as of January 30, 2010 in accordance with U.S. GAAP.
Description
Assets:
Fair Value Measurements at Reporting Date Using
(Level 3)
(Level 2)
(Level 1)
Total
Short-term investments . . . . . . . . . . . . . . . . . . . . . . $147,955
2,485
Restricted cash and short-term investments . . . . . . .
5,797
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$147,955
2,485
407
$—
—
—
$ —
—
5,390
The following table sets forth information regarding the Company’s financial assets that are measured at fair
value (in thousands) as of January 31, 2009:
Description
Assets:
Fair Value Measurements at Reporting Date Using
(Level 3)
(Level 2)
(Level 1)
Total
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and short-term investments . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$93,452
9,089
2,258
$90,002
9,089
303
$3,450
—
—
$ —
—
1,955
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes
(“VRDN”) and governmental debt securities held in managed funds. These securities with the exception of a single
22
auction rate security (“ARS”) are classified as available-for-sale as they are highly liquid. They are recorded on the
Consolidated Balance Sheets at estimated fair value, with unrealized gains and temporary losses reported net of
taxes as accumulated other comprehensive income. Additionally, as of January 30, 2010, the Company had
$1.9 million invested in privately managed investment funds and $0.4 million of other miscellaneous equities which
are reported within Other assets in the Consolidated Balance Sheets.
As of January 30, 2010, the Company held $60.5 million in general obligation and revenue bonds, VRDN and
ARS issued by tax exempt municipal authorities and agencies rated A or better. The underlying securities have
contractual maturities which generally range from one month to thirty-one years. The bonds, VRDN and ARS are
recorded at estimated fair value and classified as available-for-sale. Of the $60.5 million in bonds, VRDN and ARS,
a single ARS with a carrying value of $3.5 million failed its last auction as of January 14, 2010. Due to the
continuing failure of the ARS at auction and because the issuer has yet to call the security, the Company has
classified the failed ARS as a long-term investment in Other assets on the Consolidated Balance Sheets.
The Company’s failed ARS was measured at fair value using Level 3 inputs. Because there is no active market
for the Company’s 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 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.
The following table summarizes the change in the fair value of the Company’s ARS measured using Level 3
inputs during fiscal 2009:
Auction
Rate
Security
Private
Advisors
Managed
Fund
(In thousands)
Total
Balance at January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on asset held . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $1,955
—
(15)
3,450
—
$1,955
3,450
(15)
Balance at January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,450
$1,940
$5,390
The following table shows the Company’s obligations and commitments as of January 30, 2010, to make future
payments under noncancellable contractual obligations (in thousands):
Contractual Obligations
Total
Payments Due During One Year Fiscal Period Ending
2010
2014
2012
2011
2013
Thereafter
Merchandise letters of credit . . . . . . . $
Operating leases . . . . . . . . . . . . . . . .
8,232 $ 8,232 $ — $ — $ — $ — $ —
124
27,595
55,132
41,857
15,968
5,092
145,768
Total Contractual Obligations . . . . . . $154,000
$63,364
$41,857
$27,595
$15,968 $5,092
$124
(1) In addition to the amounts shown in the table above, $15.2 million of unrecognized tax benefits have been
recorded as liabilities in accordance with ASC 740 and we are uncertain as to if or when such amounts may be
settled. See Note 13, Income Taxes, of the Consolidated Financial Statements for additional information.
23
Recent Accounting Pronouncements
Effective July 1, 2009, the FASB’s Accounting Standards Codification (“ASC”) became the single official
source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States.
The historical GAAP hierarchy was eliminated, and the ASC became the only level of authoritative GAAP, other
than guidance issued by the Securities and Exchange Commission. This statement is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The Company’s accounting
policies were not affected by the conversion to ASC.
For fiscal year end 2008, basic and diluted weighted average shares outstanding and earnings per share have
been adjusted based on guidance issued in June 2008 that states that unvested share-based payment awards that
contain nonforteitable rights to dividends or dividend equivalents whether paid or unpaid, are participating
securities and shall be included in the computation of both basic and diluted earnings per share. This guidance
was effective for all periods in fiscal years beginning after December 15, 2008. The impact to basic earnings per
share for the fiscal year end 2008 was $0.02 while the impact to diluted earnings per share was $0.01. For fiscal year
end 2007, the impact to both basic and diluted earnings per share was $0.01
In April 2009, additional guidance was issued on (1) estimating the fair value of an asset or liability when the
volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions
that are not orderly. This guidance is effective for interim and annual periods ending after June 15, 2009 and the
impact to the Company was immaterial.
In April 2009, guidance was issued that amends previous other-than-temporary impairment guidance that was
intended to bring greater consistency to the timing of impairment recognition and provide greater clarity to investors
about the credit and noncredit components of impaired debt securities that are not expected to be sold. This
guidance is effective for interim and annual periods ending after June 15, 2009. The impact to the Company was
immaterial.
In May 2009, guidance was issued which establishes general standards for disclosure of and accounting for
events that occur after the balance sheet date but before financial statements are issued or are available to be issued.
This guidance was effective for interim and annual periods ending after June 15, 2009. The Company’s adoption on
August 2, 2009 did not have a material effect on the Company’s financial position or results of operations.
Item 7A. 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.
24
Item 8. Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income and Comprehensive Income for the fiscal years ended
January 30, 2010, January 31, 2009 and February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at January 30, 2010 and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the fiscal years ended January 30, 2010, January 31, 2009
and February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 30, 2010,
January 31, 2009 and February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II — Valuation and Qualifying Accounts for the fiscal years ended January 30, 2010,
Page
26
27
28
29
30
31
January 31, 2009 and February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S-2
25
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
The Cato Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of The Cato Corporation and its subsidiaries at January 30, 2010 and January 31,
2009, and the results of their operations and their cash flows for each of the three years in the period ended
January 30, 2010 in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of January 30, 2010, based on criteria established in Internal Control — Integrated Frame-
work issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement
schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 30, 2010
26
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
January 30,
2010
Fiscal Year Ended
January 31,
2009
(Dollars in thousands, except per share data)
February 2,
2008
REVENUES
Retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (principally finance charges, late fees and layaway
$ 872,132
$ 845,676
$ 834,341
charges) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,863
12,042
12,096
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
883,995
857,718
846,437
COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of depreciation shown below) . . . . . . . .
Selling, general and administrative (exclusive of depreciation shown
below). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
552,016
562,056
572,309
245,483
21,829
66
(4,313)
227,645
22,572
53
(7,218)
210,892
22,212
9
(8,218)
815,081
805,108
797,204
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68,914
23,149
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45,765
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1.55
1.55
.660
52,610
18,976
33,634
1.14
1.14
.660
$
$
$
$
49,233
16,914
32,319
1.02
1.02
.645
$
$
$
$
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on available-for-sale securities, net of
deferred income tax liability or benefit . . . . . . . . . . . . . . . . . . . . . .
$ 45,765
$
33,634
$
32,319
121
(296)
484
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45,886
$
33,338
$
32,803
See notes to consolidated financial statements.
27
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
January 31,
January 30,
2010
2009
(Dollars in thousands)
Current Assets:
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $3,274 at
January 30, 2010 and $3,723 at January 31, 2009 . . . . . . . . . . . . . . . . . . . . . .
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
50,385
147,955
2,575
40,154
118,628
7,812
3,258
370,767
102,769
7,454
$ 480,990
$
42,262
93,452
9,089
44,136
112,290
6,403
7,737
315,369
116,262
3,722
$ 435,353
Current Liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued bonus and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities (primarily deferred rent) . . . . . . . . . . . . . . . . . . . . . . . .
$ 103,627
31,615
22,286
10,940
168,468
4,087
17,123
$ 102,971
29,946
6,307
11,506
150,730
2,528
20,282
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $100 par value per share, 100,000 shares authorized, none
issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock, $.033 par value per share, 50,000,000 shares authorized;
27,842,587 and 36,303,922 shares issued at January 30, 2010 and January 31,
2009, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares
authorized; 1,743,525 shares issued at January 30, 2010 and January 31,
2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
928
1,210
58
64,706
225,086
534
291,312
58
61,608
354,333
413
417,622
Less Class A common stock in treasury, at cost (-0- shares at January 30, 2010 and
8,660,333 shares at January 31, 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders’ Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . .
—
291,312
$ 480,990
(155,809)
261,813
$ 435,353
See notes to consolidated financial statements.
28
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
January 30,
2010
Fiscal Year Ended
January 31,
2009
(Dollars in thousands)
February 2,
2008
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities which provided (used)
cash:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued expenses and other liabilities . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .
$ 45,765
$ 33,634
$ 32,319
21,829
3,643
2,063
(201)
113
1,624
339
(6,338)
1,072
(365)
15,145
84,689
22,572
3,825
2,208
(66)
1,175
3,799
(2,679)
6,389
848
3,644
(3,782)
71,567
22,212
2,844
1,694
(5,964)
(6,358)
1,163
(2,168)
(2,761)
(1,372)
8,533
24,022
74,164
INVESTING ACTIVITIES
Expenditures for property and equipment . . . . . . . . . . . . . . . . . . . . . . .
Purchases of short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,960)
(162,957)
108,287
6,514
(19,443)
(169,979)
160,136
—
(18,330)
(313,761)
319,960
—
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . .
(58,116)
(29,286)
(12,131)
FINANCING ACTIVITIES
Change in cash overdrafts included in accounts payable . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock purchase plan . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . .
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . .
—
(19,481)
(49)
412
201
467
(500)
(19,389)
(2,435)
432
66
224
(1,000)
(20,277)
(58,561)
481
5,964
8,110
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,450)
(21,602)
(65,283)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . .
8,123
42,262
20,679
21,583
(3,250)
24,833
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . .
$ 50,385
$ 42,262
$ 21,583
See notes to consolidated financial statements.
29
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Balance — February 3, 2007 . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on available-for-sale securities, net of
deferred income tax liability of $247 . . . . . . . . . . . . . .
Dividends paid ($.645 per share) . . . . . . . . . . . . . . . . . . . . .
Class A common stock sold through employee stock purchase
plan — 27,164 shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock sold through stock option plans —
39,200 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B common stock sold through stock option plans
1,053,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock issued through restricted stock grant plans
87,085 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Windfall tax benefit from equity compensation plans . . . . . . . . .
Repurchase of treasury shares — 3,368,006 shares . . . . . . . . . .
Adoption of ASC 740 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance — February 2, 2008 . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on available-for-sale securities, net of
deferred income tax benefit of ($138) . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Dividends paid ($.66 per share)
Class A common stock sold through employee stock purchase
plan — 32,830 shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock sold through stock option plans —
23,875 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock issued through restricted stock grant plans
137,953 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Windfall tax benefit from equity compensation plans . . . . . . . . .
Repurchase of treasury shares — 198,718 shares . . . . . . . . . . .
Balance — January 31, 2009 . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on available-for-sale securities, net of deferred
income tax liability of $37 . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Dividends paid ($.66 per share)
Class A common stock sold through employee stock purchase
plan — 27,051 shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock sold through stock option plans —
43,600 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock issued through restricted stock grant plans
130,916 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Windfall tax benefit from equity compensation plans . . . . . . . . .
Repurchase of treasury shares — 2,569 shares . . . . . . . . . . . . .
Retirement of treasury shares — 8,662,902 shares . . . . . . . . . .
Class A
Common
Stock
Convertible
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Total
Stockholders’
Equity
(Dollars in thousands)
$1,199
$23
$42,475
$ 327,684
$ 225
$ (94,813)
$276,793
32,319
(20,277)
484
1
1
3
35
565
514
7,677
1,490
5,964
362
(58,561)
32,319
484
(20,277)
566
515
7,712
1,493
5,964
(58,561)
362
1,204
58
58,685
340,088
709
(153,374)
247,370
33,634
(19,389)
(296)
33,634
(296)
(19,389)
506
315
2,042
66
(2,435)
(2,435)
1
1
4
505
314
2,038
66
1,210
58
61,608
354,333
413
(155,809)
261,813
45,765
(19,443)
121
1
2
4
483
535
1,879
201
(289)
(155,569)
(49)
155,858
45,765
121
(19,443)
484
537
1,883
201
(49)
-0-
Balance — January 30, 2010 . . . . . . . . . . . . . . . . . . . . . .
$ 928
$58
$64,706
$ 225,086
$ 534
$
— $291,312
See notes to consolidated financial statements.
30
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Principles of Consolidation: The consolidated financial statements include the accounts of The Cato
Corporation and its wholly-owned subsidiaries (“the Company”). All significant intercompany accounts and
transactions have been eliminated.
Description of Business and Fiscal Year: The Company has two reportable segments — the operation of
women’s fashion specialty stores segment and a credit card segment. The apparel specialty stores operate under the
names “Cato,” “Cato Fashions,” “Cato Plus,” “It’s Fashion” and “It’s Fashion Metro” and are located primarily in
strip shopping centers principally in the southeastern United States. The Company’s fiscal year ends on the Saturday
nearest January 31.
Use of Estimates: The preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the
Company’s financial statements include the allowance for doubtful accounts receivable, reserves relating to self
insured health insurance, workers’ compensation liabilities, general and auto insurance liabilities, reserves for
inventory markdowns, calculation of asset impairment, inventory shrinkage accrual and uncertain tax positions.
Cash and Cash Equivalents and Short-Term Investments: Cash equivalents consist of highly liquid
investments with original maturities of three months or less. Investments with original maturities beyond three
months are classified as short-term investments. The fair values of short-term investments are based on quoted
market prices.
The Company’s short-term investments are all classified as available-for-sale. As they are available for current
operations, they are classified on the Consolidated Balance Sheets as current assets. Available-for-sale securities are
carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of
accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded
as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of
interest and other income in the accompanying Consolidated Statements of Income. The cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums,
accretion of discounts and realized gains and losses are included in Interest and other income.
Concentration of Credit Risk: Financial instruments that potentially subject the Company to a concen-
tration of credit risk principally consist of cash equivalents and accounts receivable. The Company places its cash
equivalents with high credit qualified institutions and, by practice, limits the amount of credit exposure to any one
institution. Concentrations of credit risks with respect to accounts receivable are limited due to the dispersion across
different geographies of the Company’s customer base.
Supplemental Cash Flow Information:
Income tax payments, net of refunds received, for the fiscal years
ended January 30, 2010, January 31, 2009 and February 2, 2008 were approximately $23,753,000, $13,368,000, and
$15,012,000, respectively. Cash paid for interest for the fiscal years ended January 30, 2010, January 31, 2009 and
February 2, 2008 were $-0-, $-0- and $8,000, respectively.
Inventories: Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as
determined by the retail method.
Property and Equipment: Property and equipment are recorded at cost. Maintenance and repairs are
charged to operations as incurred; renewals and betterments are capitalized. The Company accounts for its software
development costs in accordance with U.S. GAAP. Depreciation is provided on the straight-line method over the
estimated useful lives of the related assets excluding leasehold improvements. Leasehold improvements are
amortized over the shorter of the estimated useful life or lease term. For leases with renewal periods at the
31
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s option, the Company generally uses the original lease term plus reasonably assured renewal option
periods (generally one five year option period) to determine estimated useful lives. Typical estimated useful lives
are as follows:
Classification
Estimated
Useful Lives
10 years
Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-40 years
5-10 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3-10 years
Fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3-10 years
Information Technology equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of Long-Lived Assets
The Company primarily invests in property and equipment in connection with the opening and remodeling of
stores and in computer software and hardware. The Company periodically reviews its store locations and estimates
the recoverability of its assets, recording an impairment charge, if necessary, when the Company decides to close
the store or otherwise determines that future estimated undiscounted cash flows associated with those assets will not
be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s
historical operating results and cash flows, estimated future sales growth, real estate development in the area and
perceived local market conditions which can be difficult to predict and may be subject to change. Store asset
impairment charges incurred in fiscal 2009, 2008 and 2007 were $689,471, $498,239 and $1,039,120, respectively.
In addition, the Company regularly evaluates its computer-related and other long-lived assets and may accelerate
depreciation over the revised useful life if the asset is expected to be replaced or has limited future value. When
assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is reflected in income for that period.
Leases
The Company determines the classification of leases consistent with ASC 840 — Leases. The Company leases
all of its retail stores. Most lease agreements contain construction allowances and rent escalations. For purposes of
recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases including
renewal periods considered reasonably assured, the Company begins amortization as of the initial possession date
which is when the Company enters the space and begins to make improvements in preparation for intended use.
For construction allowances, the Company records a deferred rent liability in “Other noncurrent liabilities” on
the Consolidated Balance Sheets and amortizes the deferred rent over the term of the respective lease as reduction to
“Cost of goods sold” on the Consolidated Statements of Income.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other
than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the
terms of the leases.
Revenue Recognition
The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise
and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and
layaway sales are also recorded when the customer takes possession of the merchandise. Gift cards and layaway
sales are recorded as deferred revenue until they are redeemed or forfeited. Gift cards do not have expiration dates.
A provision is made for estimated merchandise returns based on sales volumes and the Company’s experience;
actual returns have not varied materially from amounts provided historically.
32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In fiscal 2009, 2008 and 2007, the Company recognized $302,000, $287,000 and $79,000, respectively, of
income on unredeemed gift cards (“gift card breakage”) as a component of Other income. Gift card breakage is
determined after 60 months when the likelihood of the remaining balances being redeemed is remote based on our
historical redemption data and there is no legal obligation to remit the remaining balances to relevant jurisdictions.
Credit revenue on the Company’s private label credit card portfolio is recognized as earned under the interest
method. Late fees are recognized as earned, less provisions for estimated uncollectible fees.
Cost of Goods Sold: 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 our buying departments and distribution center. Occupancy expenses include rent, real estate
taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Buying,
distribution, occupancy and internal transfer costs are treated as period costs and are not capitalized as part of
inventory.
Credit Sales: The Company offers its own credit card to customers. All credit activity is performed by the
Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. Finance income is
recognized as earned under the interest method and late charges are recognized in the month in which they are
assessed, net of provisions for estimated uncollectible amounts. The Company evaluates the collectibility of
accounts receivable and records an allowance for doubtful accounts based on the aging of accounts and estimates of
actual write-offs.
Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising expense
was approximately $6,406,000, $6,460,000 and $6,760,000 for the fiscal years ended January 30, 2010, January 31,
2009 and February 2, 2008, respectively.
Stock Repurchase Program:
In September 2009, the Company retired all of its shares of treasury stock.
The excess of the purchase price over par value of common stock of approximately $155.6 million was charged to
retained earnings upon retirement of the treasury stock. Prior to this retirement, the Company repurchased
2,569 shares at a cost of $48,811 for fiscal 2009. For fiscal 2008, the Company repurchased 198,718 shares
for approximately $2.4 million.
Earnings Per Share: ASC 260 — Earnings Per Share, requires dual presentation of basic EPS and diluted
EPS on the face of all income statements for all entities with complex capital structures. The Company has
presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Consolidated
Statements of Income. While the Company’s certificate of incorporation provides the right for the Board of
Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares,
the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of
Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of
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.
33
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
January 30,
2010
Fiscal Year Ended
January 31,
2009
February 2,
2008
Basic earnings per share:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings allocated to non-vested equity awards . . . . . .
Net earnings available to common stockholders . . . . . .
$
$
45,765
(654)
45,111
$
$
33,634
(425)
33,209
$
$
32,319
(271)
32,048
Basic weighted average common shares outstanding . .
29,036,549
29,065,594
31,279,918
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings allocated to non-vested equity awards . . . . . .
Net earnings available to common stockholders . . . . . .
$
$
$
1.55
45,765
(654)
45,111
$
$
$
1.14
33,634
(425)
33,209
$
$
$
1.02
32,319
(270)
32,049
Basic weighted average common shares outstanding . .
Dilutive effect of stock options and restricted stock . . .
29,036,549
18,203
29,065,594
13,095
31,279,918
187,593
Diluted weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,054,752
29,078,689
31,467,511
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . .
$
1.55
$
1.14
$
1.02
Vendor Allowances: The Company receives certain allowances from vendors primarily related to purchase
discounts and markdown and damage allowances. All allowances are reflected in cost of goods sold as earned as the
related products are sold. Cash consideration received from a vendor is presumed to be a reduction of the purchase
cost of merchandise and is reflected as a reduction of inventory. The Company does not receive cooperative
advertising allowances.
Income Taxes: The Company files a consolidated federal income tax return. Income taxes are provided
based on the asset and liability method of accounting, whereby deferred income taxes are provided for temporary
differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities.
Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740 when,
despite the fact that the tax return positions are supportable, the Company believes these positions may be
challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and
circumstances. In 2007, the Company recognized a transition adjustment for the adoption of new guidance related
to the accounting for uncertain tax positions increasing beginning retained earnings by $362,000 for the effects of
adopting ASC 740 relating to uncertain tax positions.
Store Opening and Closing Costs: Costs relating to the opening of new stores or the relocating or
expanding of existing stores are expensed as incurred. A portion of construction, design, and site selection costs are
capitalized to new, relocated and remodeled stores.
Closed Store Lease Obligations: At the time stores are closed, provisions are made for the rentals required
to be paid over the remaining lease terms, reduced by expected sublease rentals.
34
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Insurance: The Company is self-insured with respect to employee health care, workers’ compensation and
general liability. The Company’s self-insurance liabilities are based on the total estimated cost of claims filed and
estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted.
Management reviews current and historical claims data in developing its estimates. The Company has stop-loss
insurance coverage for individual claims in excess of $250,000 for employee health care, $350,000 for worker’s
compensation and $250,000 for general liability.
Until December 31, 2008, employee health claims were funded through a VEBA trust to which the Company
made periodic contributions. Contributions to the VEBA trust were $10,070,000 and $12,065,000 in fiscal 2008 and
2007, respectively. After December 31, 2008 the VEBA trust was dissolved and since then the Company has directly
funded a disbursement account maintained by a third party provider. Contributions to the third party provider
account in fiscal 2009 and 2008 were $13,898,000 and $2,559,000, respectively. The healthcare liability was
$1,584,000 and $1,612,000, at January 30, 2010 and January 31, 2009, respectively.
The Company paid workers’ compensation and general liability claims of $3,049,000, $3,388,000 and
$4,080,000 in fiscal years 2009, 2008 and 2007, respectively. Including claims incurred, but not yet paid, the
Company recognized an expense of $4,003,000, $4,959,000 and $4,739,000 in fiscal 2009, 2008 and 2007,
respectively. Accrued workers’ compensation and general liabilities were $4,921,000 and $4,889,000 at January 30,
2010 and January 31, 2009, respectively. At January 30, 2010 and January 31, 2009, the Company had $1,700,000
and $700,000, respectively, of standby letters of credit for the benefit of its current workers’ compensation and
general liability insurance carrier relating to claims incurred during 2009 and 2008. At January 31, 2009, the
Company had no outstanding letters of credit relating to such claims for 2007.
Fair Value of Financial Instruments: The Company’s carrying values of financial instruments, such as
cash and cash equivalents, approximate their fair values due to their short terms to maturity and/or their variable
interest rates.
Stock Based Compensation: The Company records compensation expense associated with restricted stock
and other forms of equity compensation in accordance with ASC 718 — Compensation — Stock Compensation.
Compensation cost associated with stock awards recognized in all years presented includes: 1) amortization related
to the remaining unvested portion of all stock awards based on the grant date fair value and 2) adjustments for the
effects of actual forfeitures versus initial estimated forfeitures.
Recent Accounting Pronouncements
Effective July 1, 2009, the FASB’s Accounting Standards Codification (“ASC”) became the single official
source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States.
The historical GAAP hierarchy was eliminated, and the ASC became the only level of authoritative GAAP, other
than guidance issued by the Securities and Exchange Commission. This statement was effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The Company’s accounting
policies were not affected by the conversion to ASC.
For fiscal year ending January 31, 2009, basic and diluted weighted average shares outstanding and earnings
per share have been adjusted based on guidance issued in June 2008 that states that unvested share-based payment
awards that contain nonforteitable rights to dividends or dividend equivalents whether paid or unpaid, are
participating securities and shall be included in the computation of both basic and diluted earnings per share.
This guidance was effective for all periods in fiscal years beginning after December 15, 2008. The impact to basic
earnings per share for fiscal year end 2008 was $0.02 while the impact to diluted earnings per share was $0.01. For
fiscal year end 2007, the impact to both basic and diluted earnings per share was $0.01.
In April 2009, additional guidance was issued on (1) estimating the fair value of an asset or liability when the
volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions
35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
that are not orderly. This guidance is effective for interim and annual periods ending after June 15, 2009. The impact
to the Company was immaterial.
In April 2009, guidance was issued that amends previous other-than-temporary impairment guidance that was
intended to bring greater consistency to the timing of impairment recognition and provide greater clarity to investors
about the credit and noncredit components of impaired debt securities that are not expected to be sold. This
guidance is effective for interim and annual periods ending after June 15, 2009. The impact to the Company was
immaterial.
In May 2009, guidance was issued which establishes general standards for disclosure of and accounting for
events that occur after the balance sheet date but before financial statements are issued or are available to be issued.
This guidance was effective for interim and annual periods ending after June 15, 2009. The Company’s adoption on
August 2, 2009 did not have a material effect on the Company’s financial position or results of operations.
2.
Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
January 30,
2010
January 31,
2009
February 2,
2008
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Visa/Mastercard claims settlement . . . . . . . . . . . . . . . . . . . . .
Miscellaneous income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain)/loss on investment sales . . . . . . . . . . . . . . . . . . . . . . .
$
(15)
(1,426)
(414)
(2,445)
(13)
$
(10)
(4,617)
—
(2,709)
118
$
(17)
(5,729)
—
(2,207)
(265)
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4,313)
$(7,218)
$(8,218)
3. Short-Term Investments:
At January 30, 2010, the Company’s investment portfolio was primarily invested in variable rate demand notes
and governmental debt securities held in managed funds. These securities are classified as available-for-sale as they
are highly liquid, are recorded on the Consolidated Balance Sheets at estimated fair value, with unrealized gains and
temporary losses reported net of taxes in accumulated other comprehensive income.
The table below reflects gross accumulated unrealized gains (losses) in short-term investments at January 30,
2010 and January 31, 2009.
Security Type:
January 30, 2010
Unrealized
Gain/(Loss)
Estimated
Fair Value
January 31, 2009
Unrealized
Gain/(Loss)
Estimated
Fair Value
Cost
Cost
Debt Securities issued by states
of the United States and
political subdivisions of the
states:
With unrealized gain . . . . . . . $132,629
6,119
With unrealized (loss) . . . . . .
Corporate debt securities:
$485
(8)
$133,114
6,111
$92,778
—
$674
—
$93,452
—
With unrealized gain . . . . . . .
8,696
34
8,730
—
—
—
Total . . . . . . . . . . . . . . . . . . . . $147,444
$511
$147,955
$92,778
$674
$93,452
36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, the Company had $2.3 million invested in privately managed investment funds and other
miscellaneous equities at both January 30, 2010 and January 31, 2009, which are reported within other noncurrent
assets in the Consolidated Balance Sheets.
Accumulated other comprehensive income in the Consolidated Balance Sheets reflects the accumulated
unrealized gains in short-term investments shown above in addition to unrealized gains from equity investments of
$292,000, of which a deferred income tax benefit of $270,000 was recorded at January 30, 2010. At January 31,
2009, an unrealized loss from equity investments of $29,000 and a deferred tax benefit of $233,000 was recorded.
As disclosed in Note 2, the Company had realized gains of $13,000 in fiscal 2009, realized losses of $118,000
in fiscal 2008 and realized gains of $265,000 in fiscal 2007 relating to sales of debt securities.
4. Fair Value Measurements:
The following table sets forth information regarding the Company’s financial assets that are measured at fair
value (in thousands) as of January 30, 2010 in accordance with U.S. GAAP.
Description
Assets:
Fair Value Measurements at Reporting Date Using
(Level 3)
(Level 2)
(Level 1)
Total
Short-term investments . . . . . . . . . . . . . . . . . . . . . . $147,955
2,485
Restricted cash and short-term investments . . . . . . .
5,797
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$147,955
2,485
407
$—
—
—
$ —
—
5,390
The following table sets forth information regarding the Company’s financial assets that are measured at fair
value (in thousands) as of January 31, 2009:
Description
Assets:
Fair Value Measurements at Reporting Date Using
(Level 3)
(Level 2)
(Level 1)
Total
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and short-term investments . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$93,452
9,089
2,258
$90,002
9,089
303
$3,450
—
—
$ —
—
1,955
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes
(“VRDN”) and governmental debt securities held in managed funds. These securities with the exception of a single
auction rate security (“ARS”) are classified as available-for-sale as they are highly liquid. They are recorded on the
Consolidated Balance Sheets at estimated fair value, with unrealized gains and temporary losses reported net of
taxes as accumulated other comprehensive income. Additionally, as of January 30, 2010, the Company had
$1.9 million invested in privately managed investment funds and $0.4 million of other miscellaneous equities which
are reported within other assets in the Consolidated Balance Sheets.
As of January 30, 2010, the Company held $60.5 million in general obligation and revenue bonds, VRDN and
ARS issued by tax exempt municipal authorities and agencies rated A or better. The underlying securities have
contractual maturities which generally range from one month to thirty-one years. The bonds, VRDN and ARS are
recorded at estimated fair value and classified as available-for-sale. Of the $60.5 million in bonds, VRDN and ARS,
a single ARS with a carrying value of $3.5 million failed its last auction as of January 14, 2010. Due to the
continuing failure of the ARS at auction and because the issuer has yet to call the security, the Company has
classified the failed ARS as a long-term investment in Other assets on the Consolidated Balance Sheets.
The Company’s failed ARS was measured at fair value using Level 3 inputs. 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
37
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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.
The following table summarizes the change in the fair value of the Company’s ARS measured using Level 3
inputs during fiscal 2009:
Auction Rate
Security
Private Advisors
Managed Fund
Total
Balance at January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . .
Transfer into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on asset held . . . . . . . . . . . . . . . . . . . . . . . .
$ —
3,450
—
(In thousands)
$1,955
—
(15)
Balance at January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . .
$3,450
$1,940
$1,955
3,450
(15)
$5,390
5. Accounts Receivable:
Accounts receivable consist of the following (in thousands):
Customer accounts — principally deferred payment accounts . . . . . . . . . . .
Miscellaneous trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 30,
2010
January 31,
2009
$38,047
5,381
43,428
3,274
$40,516
7,343
47,859
3,723
Accounts receivable — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40,154
$44,136
Finance charge and late charge revenue on customer deferred payment accounts totaled $9,405,000,
$10,073,000 and $10,370,000 for the fiscal years ended January 30, 2010, January 31, 2009 and February 2,
2008, respectively, and charges against the allowance for doubtful accounts were approximately $3,643,000,
$3,825,000 and $2,844,000 for the fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008,
respectively. Expenses relating to the allowance for doubtful accounts are classified as a component of selling,
general and administrative expenses in the accompanying Consolidated Statements of Income.
38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Property and Equipment:
Property and equipment consist of the following (in thousands):
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Technology equipment and software . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 30,
2010
January 31,
2009
$ 3,694
19,121
57,960
166,490
51,309
377
298,951
196,182
$ 3,694
18,926
56,224
164,136
50,575
865
294,420
178,158
Property and equipment — net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$102,769
$116,262
Construction in progress primarily represents costs related to a new store development and investments in new
technology.
7. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
Accrued payroll and related items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,854
12,275
6,556
7,930
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,615
$ 4,491
11,978
6,264
7,213
$29,946
January 30,
2010
January 31,
2009
8. Financing Arrangements:
At January 30, 2010, the Company had an unsecured revolving credit agreement of $35 million. Net of the
Company’s standby letter of credit for payments to the current general liability and workers’ compensation
insurance processor, the revolving credit agreement provides for borrowings of up to $33.3 million at January 30,
2010. The revolving credit agreement is committed until August 2010. The credit agreement contains various
financial covenants and limitations, including the maintenance of specific financial ratios with which the Company
was in compliance as of January 30, 2010. There were no borrowings outstanding under this facility during the fiscal
years ended January 30, 2010 or January 31, 2009. Interest is based on LIBOR, which was 0.23% on January 30,
2010.
The Company had approximately $8.2 million and $4.5 million at January 30, 2010 and January 31, 2009
respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
9. Stockholders’ Equity:
The holders of Class A Common Stock are entitled to one vote per share, whereas the holders of Class B
Common Stock are entitled to ten votes per share. Each share of Class B Common Stock may be converted at any
time into one share of Class A Common Stock. Subject to the rights of the holders of any shares of Preferred Stock
39
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
that may be outstanding at the time, in the event of liquidation, dissolution or winding up of the Company, holders of
Class A Common Stock are entitled to receive a preferential distribution of $1.00 per share of the net assets of the
Company. Cash dividends on the Class B Common Stock cannot be paid unless cash dividends of at least an equal
amount are paid on the Class A Common Stock.
The Company’s certificate of incorporation provides that shares of Class B Common Stock may be transferred
only to certain “Permitted Transferees” consisting generally of the lineal descendants of holders of Class B Stock,
trusts for their benefit, corporations and partnerships controlled by them and the Company’s employee benefit
plans. Any transfer of Class B Common Stock in violation of these restrictions, including a transfer to the Company,
results in the automatic conversion of the transferred shares of Class B Common Stock held by the transferee into an
equal number of shares of Class A Common Stock.
On May 20, 2009 the Board of Directors held the quarterly dividend at $.165 per share, or an annualized rate of
$.66 per share.
10. Employee Benefit Plans:
The Company has a defined contribution retirement savings plan (“401(k) plan”) which covers all associates
who meet minimum age and service requirements. The 401(k) plan allows participants to contribute up to 60% of
their annual compensation up to the maximum elective deferral, designated by the IRS. The Company is obligated
to make a minimum contribution to cover plan administrative expenses. Further Company contributions are at the
discretion of the Board of Directors. The Company’s contributions for the years ended January 30, 2010, January 31,
2009 and February 2, 2008 were approximately $1,677,000, $1,586,000 and $1,530,000, respectively.
The Company has an Employee Stock Ownership Plan (“ESOP”), which covers substantially all associates
who meet minimum age and service requirements.. In March 2010, the Company approved a contribution of
approximately $11,765,000. The Company’s contributions for the years ended January 31, 2009 and February 2,
2008 were zero.
The Company is primarily self-insured for health care. These costs are significant primarily due to the large
number of the Company’s retail locations and associates. The Company’s self-insurance liabilities are based on the
total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against
such claims, and are not discounted. Management reviews current and historical claims data in developing its
estimates. If the underlying facts and circumstances of the claims change or the historical trend is not indicative of
future trends, then the Company may be required to record additional expense or a reduction to expense which could
be material to the Company’s reported financial condition and results of operations. The Company has stop-loss
insurance coverage for individual claims in excess of $250,000. Employee health claims were funded through a
VEBA trust to which the Company made periodic contributions until December 2008, after which the Company has
funded health care contributions to a third party provider.
11. Leases:
The Company has operating lease arrangements for store facilities and equipment. Facility leases generally are
at a fixed rate for periods of five years with renewal options and most provide for additional contingent rentals based
on a percentage of store sales in excess of stipulated amounts. For leases with landlord capital improvement
funding, the funded amount is recorded as a deferred liability and amortized over the term of the lease as a reduction
to rent expense on the Consolidated Statements of Income. Equipment leases are generally for one to three year
periods.
40
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The minimum rental commitments under non-cancelable operating leases are (in thousands):
Fiscal Year
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 55,132
41,857
27,595
15,968
5,092
124
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$145,768
The following schedule shows the composition of total rental expense for all leases (in thousands):
Fiscal Year Ended
January 30,
2010
January 31,
2009
February 2,
2008
Minimum rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent rent
$51,978
25
Total rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$52,003
$52,762
28
$52,790
$51,142
54
$51,196
12. Related Party Transactions:
The Company leases certain stores from entities in which Mr. George S. Currin, a director of the Company, has
a controlling or non-controlling ownership interest. Rent expense and related charges totaling $432,199, $432,199
and $423,631 were paid to entities controlled by Mr. Currin or his family in fiscal 2009, 2008 and 2007,
respectively, under these leases. Rent expense and related charges totaling $1,100,791, $1,080,996 and $1,008,664
were paid to entities in which Mr. Currin or his family had a non-controlling ownership interest in fiscal 2009, 2008
and 2007, respectively, under these leases.
13.
Income Taxes:
Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740 when,
despite the fact that the tax return positions are supportable, the Company believes these positions may be
challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and
circumstances. As of January 30, 2010, the Company had gross unrecognized tax benefits totaling approximately
$10.3 million, of which approximately $7.9 million would affect the effective tax rate if recognized. As of
January 31, 2009, the Company had gross unrecognized tax benefits totaling approximately $9.5 million, of which
approximately $6.4 million would affect the effective tax rate if recognized. As of February 2, 2008, the Company
had gross unrecognized tax benefits totaling approximately $9.2 million, of which approximately $5.9 million
would affect our effective tax rate if recognized. The Company had approximately $4.9 million, $5.9 million and
$5.1 million of interest and penalties accrued related to uncertain tax positions as of January 30, 2010, January 31,
2009 and February 2, 2008, respectively. The Company recognizes interest and penalties related to uncertain tax
positions in income tax expense. The Company recognized $390,000, $1.1 million and $1.5 million of interest and
penalties in the Consolidated Statement of Income and Comprehensive Income for the years ended January 30,
2010, January 31, 2009 and February 2, 2008, respectively. With few exceptions, the Company is no longer subject
to U.S. federal income tax examinations for years before 2007 and for state and local tax jurisdictions before 2004.
During the next 12 months, various state and local taxing authorities’ statues of limitations will expire and certain
state examinations may close which could result in a potential reduction of unrecognized tax benefits.
41
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in
thousands):
January 30,
2010
January 31,
2009
February 2,
2008
Balances, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of the current year . . . . . . . . . .
Additions for tax positions prior years . . . . . . . . . . . . . . . .
$ 9,522
3,901
—
$9,180
1,394
35
$6,193
1,686
1,301
Reduction for tax positions of prior years for:
Changes in judgement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements during the period . . . . . . . . . . . . . . . . . . . . . .
Lapses of applicable statue of limitations . . . . . . . . . . . . . .
(200)
(2,561)
(331)
—
(571)
(516)
—
—
—
Balance, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,331
$9,522
$9,180
The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended
Current income taxes:
January 30,
2010
January 31,
2009
February 2,
2008
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,603
2,667
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,270
$15,895
1,768
17,663
$23,800
(280)
23,520
Deferred income taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(133)
12
(121)
1,173
140
1,313
(5,902)
(704)
(6,606)
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,149
$18,976
$16,914
42
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets and liabilities as of January 30, 2010 and
January 31, 2009 are as follows (in thousands):
January 30,
2010
January 31,
2009
Deferred tax assets:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal benefit of uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,231
1,984
—
6,547
1,661
1,465
3,531
1,795
2,760
1,766
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,740
Deferred tax liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on short-term investments . . . . . . . . . . . . . . . . . . . . . .
Health care expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,764
270
1,091
1,890
19,015
$ 1,467
2,263
232
10,251
1,721
1,282
4,320
2,109
—
—
23,645
19,381
233
408
(252)
19,770
Net deferred tax liabilities (assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3,725)
$ (3,875)
The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows:
Fiscal Year Ended
January 30,
2010
January 31,
2009
February 2,
2008
Federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt interest
Effects of other permanent differences. . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0%
0.3
(2.2)
(0.7)
0.6
0.6
33.6%
35.0%
5.7
(2.5)
(2.6)
0.5
0.0
36.1%
35.0%
2.9
(3.1)
(3.4)
0.4
2.6
34.4%
43
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. Quarterly Financial Data (Unaudited):
Summarized quarterly financial results are as follows (in thousands, except per share data):
Fiscal 2009
First
Second
Third
Fourth
Retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $238,055
241,027
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . .
141,913
Cost of goods sold (exclusive of depreciation) . . . .
29,986
Income before income taxes . . . . . . . . . . . . . . . . .
18,813
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.64
Basic earnings per share . . . . . . . . . . . . . . . . . . . . $
0.64
Diluted earnings per share . . . . . . . . . . . . . . . . . . . $
$225,368
228,266
143,459
23,706
16,658
0.57
0.56
$
$
$190,966
193,820
124,545
4,272
2,983
0.10
0.10
$
$
$217,743
220,882
142,099
10,950
7,311
0.25
0.25
$
$
Fiscal 2008
First
Second
Third
Fourth
Retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,791
228,828
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . .
141,620
Cost of goods sold (exclusive of depreciation) . . . .
27,182
Income before income taxes . . . . . . . . . . . . . . . . .
16,853
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.57
Basic earnings per share . . . . . . . . . . . . . . . . . . . . $
0.57
Diluted earnings per share . . . . . . . . . . . . . . . . . . . $
$230,957
233,868
148,020
18,320
12,091
0.41
0.41
$
$
$179,838
182,785
127,172
1,274
823
0.03
0.03
$
$
$209,091
212,238
145,245
5,834
3,866
0.13
0.13
$
$
15. Reportable Segment Information:
The Company has two reportable segments: retail and credit. The Company operates its women’s fashion
specialty retail stores in 31 states, 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.
The following schedule summarizes certain segment information (in thousands):
Fiscal 2009
Retail
Credit
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$874,555
21,799
(4,313)
66,064
408,842
9,957
$ 9,440
30
—
2,850
72,148
3
$883,995
21,829
(4,313)
68,914
480,990
9,960
Fiscal 2008
Retail
Credit
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$847,606
22,531
(7,218)
49,499
361,697
19,443
$10,112
41
—
3,111
73,656
—
$857,718
22,572
(7,218)
52,610
435,353
19,443
44
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal 2007
Retail
Credit
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$836,023
22,112
(8,218)
44,983
354,001
18,211
$10,414
100
—
4,250
68,491
119
$846,437
22,212
(8,218)
49,233
422,492
18,330
The accounting policies of the segments are the same as those described in the summary of significant
accounting policies in Note 1. The Company evaluates performance based on profit or loss from operations before
income taxes. The Company does not allocate certain corporate expenses to the credit segment.
The following schedule summarizes the credit segment and related direct expenses which are reflected in
selling, general and administrative expenses (in thousands):
January 30,
2010
January 31,
2009
February 2,
2008
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,643
969
901
1,047
$6,560
$3,844
1,000
979
1,137
$6,960
$2,844
983
985
1,252
$6,064
16. Stock Based Compensation:
The Company recognizes share-based compensation expense ratably over the vesting period, net of estimated
forfeitures. During the twelve month periods ended January 30, 2010, January 31, 2009 and February 2, 2008, the
Company recognized share-based compensation expense of $2,063,000, $2,156,000 and $1,694,000, respectively,
which is classified as component of settling, general and administrative expense.
In accordance with U.S. GAAP, 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 January 30, 2010, there was $5,755,000 of total unrecognized
compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a
remaining weighted-average vesting period of 2.3 years. Restricted stock compensation expense during the twelve
months ended January 30, 2010, January 31, 2009 and February 2, 2008 was $1,920,000, $1,991,000 and
$1,496,000, respectively.
As of January 30, 2010, there was approximately $4,600 of total unrecognized compensation cost related to
nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of
.25 years. The total intrinsic value of options exercised in fiscal 2009 was approximately $414,500. The Company
recognized $69,000, $91,000 and $113,000 of compensation expense related to the amortization of stock options
during the twelve months ended January 30, 2010, January 31, 2009 and February 2, 2008.
The Company’s Employee Stock Purchase Plan allows eligible full-time associates 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 twelve months ended January 30, 2010, the Company sold
27,056 shares to associates at an average discount of $3.52 per share under the Employee Stock Purchase Plan. The
compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was
approximately $73,000, $74,000 and $85,000 for fiscal years 2009, 2008 and 2007, respectively.
45
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In April 2004,
the Board of Directors adopted the 2004 Incentive Compensation Plan, of which
1,350,000 shares are issuable. As of January 30, 2010, 612,838 shares had been granted from this Plan.
In May 2003, the shareholders approved the 2003 Employee Stock Purchase Plan with 250,000 Class A shares
of Common Stock authorized. Under the terms of the Plan, substantially all associates may purchase Class A
Common Stock through payroll deductions of up to 10% of their salary, up to a maximum market value of $25,000
per year. The Class A Common Stock is purchased at the lower of 85% of market value on the first or last business
day of a six-month payment period. Additionally, each April 15, associates are given the opportunity to make a lump
sum purchase of up to $10,000 of Class A Common Stock at 85% of market value. The number of shares purchased
by participants through the plan were 27,051 shares, 32,830 shares and 27,164 shares for the years ended
January 30, 2010, January 31, 2009 and February 2, 2008, respectively.
The Company adopted in 1987 an Incentive Compensation Plan and a Non-Qualified Stock Option Plan for
key associates of the Company. Total shares issuable under the plans are 5,850,000, of which 1,237,500 shares were
issuable under the Incentive Compensation Plan and 4,612,500 shares are issuable under the Non-Qualified Stock
Option Plan. The purchase price of the shares under an option must be at least 100 percent of the fair market value of
Class A Common Stock at the date of the grant. Options granted under these plans vest over a 5-year period and
expire 10 years after the date of the grant unless otherwise expressly authorized by the Board of Directors. As of
January 30, 2010, 5,831,373 shares had been granted under the plans.
In August 1999,
the Board of Directors adopted the 1999 Incentive Compensation Plan, of which
1,500,000 shares are issuable. The ability to grant awards under the 1999 Plan expired on July 31, 2004.
The following table presents the number of options and shares of restricted stock initially authorized and
available to grant under each of the plans as of January 30, 2010:
Options and/or restricted stock initially authorized . . . . . .
Options and/or restricted stock available for grant:
1987
Plan
1999
Plan
2004
Plan
Total
5,850,000
1,500,000
1,350,000
8,700,000
January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,627
18,627
—
—
868,078
737,162
886,705
755,789
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.
46
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summary shows the changes in the shares of restricted stock outstanding during the three fiscal
years ended January 30, 2010:
Number of Shares
Weighted Average
Grant Date Fair
Value Per Share
Restricted stock awards at February 3, 2007 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock awards at February 2, 2008 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock awards at January 31, 2009 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
214,882
102,399
—
(15,314)
301,967
156,795
—
(18,841)
439,921
158,225
(61,781)
(39,937)
$22.92
21.14
—
19.90
22.56
16.88
—
22.55
20.46
18.91
22.34
20.35
Restricted stock awards at January 30, 2010 . . . . . . . . . . . . . . .
496,428
$19.74
Option plan activity for the three fiscal years ended January 30, 2010 is set forth below:
Options
Range of
Option Prices
Weighted
Average
Price
Outstanding options,
February 3, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,236,675
—
(1,092,200)
(5,400)
$ 5.50-21.75
—
5.50-17.84
13.52-19.53
$ 8.01
—
7.41
17.45
Outstanding options,
February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding options,
January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding options,
139,075
—
(23,875)
(7,250)
107,950
—
(43,600)
—
6.39-21.75
—
8.19-13.97
8.71-21.72
6.39-19.99
—
6.39-15.08
—
12.41
—
9.36
17.78
12.72
—
10.71
—
January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,350
$11.10-19.99
$14.08
47
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the changes in stock options outstanding during the twelve months ended
January 30, 2010:
Options outstanding at January 31, 2009 . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at January 30, 2010 . . . . . . . . . .
Vested and exercisable at January 30, 2010 . .
Shares
107,950
—
—
43,600
64,350
64,050
$12.72
—
$14.08
$14.07
Weighted Average
Exercise Price
Weighted Average
Remaining Contractual
Term
Aggregate
Intrinsic
Value(a)
$124,257
—
4.07 years
—
4.02 years
4.02 years
$398,312
$397,352
(a) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds
the exercise price of the option.
The following tables summarize stock option information at January 30, 2010:
Range of
Exercise Prices
Options
Options Outstanding
Weighted Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
Options Exercisable
Weighted
Average
Exercise Price
Options
$11.10 – $14.56
48,150
15.08 – 19.99 16,200
3.75 years
4.83 years
$11.10 – $19.99
64,350
4.02 years
$13.23
16.60
$14.08
48,150
15,900
64,050
$13.23
16.59
$14.07
Outstanding options at January 30, 2010 covered 64,350 shares of Class A Common Stock and no shares of
Class B Common Stock. Outstanding options at January 31, 2009 covered 107,950 shares of Class A Common
Stock and no shares of Class B Common Stock.
No options were granted in fiscal 2009 and no options were granted in fiscal 2008. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing model.
17. Commitments and Contingencies:
Workers’ compensation and general liability claims are settled through a claims administrator and are limited
by stop-loss insurance coverage for individual claims in excess of $350,000 and $250,000, respectively. The
Company paid claims of $3,049,000, $3,388,000 and $4,080,000 in fiscal 2009, 2008 and 2007, respectively.
Including claims incurred, but not yet paid, the Company recognized an expense of $4,003,000, $4,959,000 and
$4,739,000 in fiscal 2009, 2008 and 2007, respectively. Accrued workers’ compensation and general liabilities were
$4,921,000 and $4,889,000 at January 30, 2010 and January 31, 2009, respectively. The Company had no
outstanding letters of credit relating to such claims at January 30, 2010 or at January 31, 2009. See Note 8 for
a discussion of letters of credit related to purchase commitments and Note 11 for lease commitments.
The Company does not have any guarantee with third parties.
In addition, the Company has $2.6 million in escrow as security and collateral for administration of the
Company’s self-insured workers’ compensation and general liability coverage which are reported as restricted cash
and short term investments in the Consolidated Balance Sheets.
The Company is a defendant in legal proceedings considered to be in the normal course of business the
resolution of which, singularly or collectively, are not expected to have a material effect on the Company’s results of
operations, cash flows or financial position.
48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
None.
Item 9A. Controls and Procedures:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial
Officer, of the effectiveness of our disclosure controls and procedures as of January 30, 2010. Based on this
evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of January 30, 2010,
our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934
(the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’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.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our
management, including our Principal Executive Officer and Principal Financial Officer, we carried out an
evaluation of the effectiveness of our internal control over financial reporting as of January 30, 2010 based on
the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on this evaluation, our management concluded that our internal control
over financial reporting was effective as of January 30, 2010.
PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effective-
ness of our internal control over financial reporting as of January 30, 2010, as stated in its report which is included
herein.
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 January 30, 2010 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information:
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance:
Information contained under the captions “Election of Directors,” “Meetings and Committees,” “Corporate
Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy
Statement for its 2010 annual stockholders’ meeting (the “2010 Proxy Statement”) is incorporated by reference in
response to this Item 10. The information in response to this Item 10 regarding executive officers of the Company is
contained in Item 3A, Part I hereof under the caption “Executive Officers of the Registrant.”
Item 11. Executive Compensation:
Information contained under the captions “Executive Compensation”, “Corporate Governance Matters-
Compensation Committee Interlocks and Insider Participation” in the Company’s 2010 Proxy Statement is
incorporated by reference in response to this Item.
49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters:
Equity Compensation Plan Information.
The following table provides information about stock options outstanding and shares available for future
awards under all of Cato’s equity compensation plans. The information is as of January 30, 2010.
(a)
(b)
Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights(1)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights(1)
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))(2)
64,350
—
64,350
$14.08
—
$14.08
949,813
—
949,813
Plan Category
Equity compensation plans approved
by security holders . . . . . . . . . . . .
Equity compensation plans not
approved by security holders . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
(1) This column contains information regarding employee stock options only; there are no outstanding warrants or
stock appreciation rights.
(2) Includes the following:
737,162 shares available for grant under the Company’s stock incentive plan, referred to as the 2004 Incentive
Compensation Plan. Under this plan, non-qualified stock options may be granted to key associates.
18,627 shares available for grant under the Company’s stock incentive plan, referred to as the “1987 Non-
qualified Stock Option Plan.” Stock options have terms of 10 years, vest evenly over 5 years, and are assigned
an exercise price of not less than the fair market value of the Company’s stock on the date of grant; and
194,024 shares available under the 2003 Employee Stock Purchase Plan. Eligible associates may participate in
the purchase of designated shares of the Company’s common stock. The purchase price of this stock is equal to
85% of the lower of the closing price at the beginning or the end of each semi-annual stock purchase period.
Information contained under “Security Ownership of Certain Beneficial Owners and Management” in the 2010
Proxy Statement is incorporated by reference in response to this Item.
Item 13. Certain Relationships and Related Transactions and Director Independence:
Information contained under the caption “Certain Relationships and Related Person Transactions”, “Corporate
Governance Matters-Director Independence” and “Meetings and Committees” in the 2010 Proxy Statement is
incorporated by reference in response to this Item.
Item 14. Principal Accountant Fees and Services:
The information required by this Item is incorporated herein by reference to the section entitled “Ratification
of Independent Registered Public Accounting Firm-Audit Fees” and “Policy on Audit Committee Pre-Approval of
Audit and Permissible Non-Audit Service by the Independent Registered Public Accounting Firm” in the 2010
Proxy Statement.
50
PART IV
Item 15. Exhibits and Financial Statement Schedules:
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income and Comprehensive Income for the fiscal years ended
January 30, 2010, January 31, 2009 and February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at January 30, 2010 and January 31, 2009. . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the fiscal years ended January 30, 2010,
January 31, 2009, and February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 30, 2010,
January 31, 2009, and February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Financial Statement Schedule: The following report and financial statement schedule is
filed herewith:
Page
26
27
28
29
30
31
Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S-2
All other schedules are omitted as the required information is inapplicable or the information is presented in
the consolidated financial statements or related notes thereto.
(3) Index to Exhibits: The following exhibits are filed with this report or, as noted, incorporated by reference
herein. The Company will supply copies of the following exhibits to any shareholder upon receipt of a written
request addressed to the Corporate Secretary, The Cato Corporation, 8100 Denmark Road, Charlotte, NC 28273 and
the payment of $.50 per page to help defray the costs of handling, copying and postage. In most cases, documents
incorporated by reference to exhibits to our registration statements, reports or proxy statements filed by the
Company with the Securities and Exchange Commission are available to the public over the Internet from the SEC’s
web site at http://www.sec.gov. You may also read and copy any such document at the SEC’s public reference room
located at Room 1580, 100 F. Street, N.E., Washington, D.C. 20549 under the Company’s SEC file number
(1-31340).
Exhibit
Number Description of Exhibit
3.1
3.2
4.1
10.2*
10.3*
10.4*
10.5*
Registrant’s Restated Certificate of Incorporation of the Registrant 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).
Registrant’s By Laws incorporated by reference to Exhibit 4.2 to Form S-8 of the Registrant filed February
7, 2000 (SEC File No. 333-96283).
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 on January 6, 2004.
1999 Incentive Compensation Plan dated August 26, 1999, incorporated by reference to Exhibit 4.3 to
Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283).
2004 Incentive Compensation Plan, amended and restated as of May 22, 2008, incorporated by reference
to Appendix A to Definitive Proxy Statement on Schedule 14A filed April 11, 2008.
Form of Agreement, dated as of August 29, 2003, between the Registrant and Wayland H. Cato, Jr.,
incorporated by reference to Exhibit 99(c) to Form 8-K of the Registrant filed on July 22, 2003.
Form of Agreement, dated as of August 29, 2003, between the Registrant and Edgar T. Cato, incorporated
by reference to Exhibit 99(d) to Form 8-K of the Registrant filed on July 22, 2003.
10.6* Retirement Agreement between Registrant and Wayland H. Cato, Jr. dated August 29, 2003 incorporated
by reference to Exhibit 10.1 to Form 10-Q of the Registrant for quarter ended August 2, 2003.
51
Exhibit
Number Description of Exhibit
10.9*
10.7* Retirement Agreement between Registrant and Edgar T. Cato dated August 29, 2003, incorporated by
reference to Exhibit 10.2 to Form 10-Q of the Registrant for the quarter ended August 2, 2003.
Letter Agreement between the Registrant and John R. Howe dated as of August 28, 2008, incorporated by
Reference to Exhibit 99.1 to Form 8-K of the Registrant filed September 3, 2008.
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
21
23.1
31.1
31.2
32.1
32.2
* Management contract or compensatory plan required to be filed under Item 15 of this report and Item 601 of
Regulation S-K.
Designation
of Exhibit
EXHIBIT INDEX
21
23.1
31.1
31.2
32.1
32.2
Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consent of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . .
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer . . . . . . . . . . . . . . . .
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer . . . . . . . . . . . . . . . . .
Section 1350 Certification of Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 1350 Certification of Chief Financial Officer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
54
55
56
57
58
59
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cato has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
The Cato Corporation
By /s/
JOHN R. HOWE
John R. Howe
Executive Vice President
Chief Financial Officer
By /s/
JOHN P. D. CATO
John P. D. Cato
Chairman, President and
Chief Executive Officer
By /s/
JEFFREY R. SHOCK
Jeffrey R. Shock
Senior Vice President
Controller
Date: March 30, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the date indicated:
/s/
JOHN P. D. CATO
/s/ BAILEY W. PATRICK
John P. D. Cato
(President and Chief Executive Officer
(Principal Executive Officer) and Director)
Bailey W. Patrick
(Director)
/s/
JOHN R. HOWE
/s/ GRANT L. HAMRICK
John R. Howe
(Executive Vice President
Chief Financial Officer (Principal Financial Officer))
Grant L. Hamrick
(Director)
/s/
JEFFREY R. SHOCK
/s/ BRYAN F. KENNEDY III
Jeffrey R. Shock
(Senior Vice President
Controller (Principal Accounting Officer))
Bryan F. Kennedy III
(Director)
/s/ THOMAS E. MECKLEY
/s/ A.F. (PETE) SLOAN
Thomas E. Meckley
(Director)
A.F. (Pete) Sloan
(Director)
/s/ GEORGE S. CURRIN
/s/ D. HARDING STOWE
George S. Currin
(Director)
D. Harding Stowe
(Director)
53
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
State of
Incorporation/Organization
Name under which
Subsidiary does Business
CHW LLC
Providence Insurance Company,
Delaware
A Bermudian Company
Limited
CatoSouth LLC
Cato of Texas L.P.
Cato Southwest, Inc.
CaDel LLC
CatoWest LLC
Cedar Hill National Bank
catocorp.com, LLC
North Carolina
Texas
Delaware
Delaware
Nevada
A Nationally Chartered Bank
Delaware
CHW LLC
Providence Insurance Company,
Limited
CatoSouth LLC
Cato of Texas L.P.
Cato Southwest, Inc.
CaDel LLC
CatoWest LLC
Cedar Hill National Bank
catocorp.com, LLC
54
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Numbers
333-119300, 333-119299, 333-96283, 33-41314, 33-41315, 33-69844, and 333-96285) of The Cato Corporation of
our report dated March 30, 2010 relating to the financial statements, financial statement schedule and the
effectiveness of internal control over financial reporting, which appears in this Form 10-K.
EXHIBIT 23.1
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 30, 2010
55
EXHIBIT 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John P. D. Cato, certify that:
1. I have reviewed this Annual Report on Form 10-K of The Cato Corporation (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 30, 2010
/s/ John P. D. Cato
John P. D. Cato
Chairman, President and
Chief Executive Officer
56
EXHIBIT 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Howe, certify that:
1. I have reviewed this Annual Report on Form 10-K of The Cato Corporation (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 30, 2010
/s/ John R. Howe
John R. Howe
Executive Vice President
Chief Financial Officer
57
EXHIBIT 32.1
CERTIFICATION OF PERIODIC REPORT
I, John P. D. Cato, Chairman, President and Chief Executive Officer of The Cato Corporation, certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended January 30, 2010 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 30, 2010
/s/ John P. D. Cato
John P. D. Cato
Chairman, President and
Chief Executive Officer
58
EXHIBIT 32.2
CERTIFICATION OF PERIODIC REPORT
I, John R. Howe, Executive Vice President, Chief Financial Officer of The Cato Corporation, certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of this Certification:
1. the Annual Report on Form 10-K of the Company for the annual period ended January 30, 2010 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 30, 2010
/s/ John R. Howe
John R. Howe
Executive Vice President
Chief Financial Officer
59
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Balance at February 3, 2007 . . . . . . . . . . . . . . . . . . .
Additions charged to costs and expenses . . . . . . . .
Additions (reductions) charged to other accounts . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at February 2, 2008 . . . . . . . . . . . . . . . . . . .
Additions charged to costs and expenses . . . . . . . .
Additions (reductions) charged to other accounts . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at January 31, 2009 . . . . . . . . . . . . . . . . . . .
Additions charged to costs and expenses . . . . . . . .
Additions (reductions) charged to other accounts . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance
for
Doubtful
Accounts(a)
$ 3,554
2,844
1,038(d)
(4,173)(e)
3,263
3,825
933(d)
(4,298)(e)
3,723
3,643
846(d)
(4,938)(e)
Self Insurance
Reserves(b)
Inventory
Reserves(c)
4,602
4,739
(1,134)
(4,080)
4,127
4,959
(809)
(3,388)
4,889
4,003
(922)
(3,049)
3,140
1,350
—
(664)
3,826
747
—
(1,142)
3,431
225
—
(782)
Balance at January 30, 2010 . . . . . . . . . . . . . . . . . . .
$ 3,274
$ 4,921
$ 2,874
(a) Deducted from trade accounts receivable.
(b) Reserve for Workers’ Compensation and General Liability.
(c) Reserves for inventory shortage and markdowns.
(d) Recoveries of amounts previously written off.
(e) Uncollectible accounts written off.
S-2
Corporate Information
A copy of the Company’s Annual
Report to the Securities and Exchange
Commission (Form 10-K) for the
fiscal year ended January 30, 2010
is available to shareholders without
charge upon written request to:
Mr. John R. Howe
Executive Vice President,
Chief Financial Officer
The Cato Corporation
P.O. Box 34216
Charlotte, North Carolina 28234
Transfer Agent and Registrar
American Stock Transfer
Securities Transfer Department,
CMG-5
Charlotte, North Carolina 28288
Annual Meeting Notice
The Annual Meeting of Shareholders
11:00 a.m.
Thursday, May 27, 2010
Corporate Office
8100 Denmark Road
Charlotte, NC 28273-5975
Corporate Headquarters
The Cato Corporation
8100 Denmark Road
Charlotte, North Carolina
28273-5975
(704) 554-8510
Mailing Address
P.O. Box 34216
Charlotte, North Carolina 28234
Independent Auditor
PricewaterhouseCoopers LLP
Charlotte, North Carolina 28202
Corporate Counsel
Robinson, Bradshaw & Hinson, P.A.
Charlotte, North Carolina 28246
Market & Dividend Notice
The Company’s Class A Common Stock trades on the New York Stock Exchange
(“NYSE”) under the symbol CATO. Below is the market range and dividend
information for the four quarters of fiscal 2009 and 2008.
2009
First quarter
Second quarter
Third quarter
Fourth quarter
2008
First quarter
Second quarter
Third quarter
Fourth quarter
HigH
$ 19.61
20.84
22.86
21.84
HigH
$ 17.98
18.94
19.38
15.20
Price
Price
Low
$ 13.13
15.32
16.46
18.67
Low
$ 14.05
14.03
11.99
12.06
DiviDenD
$ .165
.165
.165
.165
DiviDenD
$ .165
.165
.165
.165
As of March 30, 2010 the approximate number of record holders
of the Company’s Class A Common Stock was 5,000 and there were
2 record holders of the Company’s Class B Common Stock.
8100 Denmark Road
Charlotte, NC 28273-5975
catocorp.com