2010 Annual Report
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 1,280 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 3,400 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
2010
2009
2008
2007
2006
(Dollars in thousands, except per share data)
FOr THe Year eNDeD
retail sales
Total revenue
comparable store sales increase (decrease)
income before income taxes
income tax expense
Net income
Net income as a percentage of retail sales
cash dividends paid per share
Basic earnings per share
Diluted earnings per share
stores open at end of year
Number of stores opened
Number of stores closed
Net increase (decrease) in number of stores
aT Year eND
cash, cash equivalents, short-term
investments and restricted cash
Working capital
current ratio
Total assets
Total stockholders’ equity
$ 913,922
925,528
$ 872,132
883,995
$ 845,676
857,718
$ 834,341
846,437
$ 862,813
875,885
3%
1%
(1)%
(4)%
(2)%
90,809
33,070
$ 57,739
6.3%
.715
1.96
1.96
$
$
$
$
$
$
$
1,282
37
26
11
68,914
23,149
45,765
5.2%
.660
1.55
1.55
1,271
35
45
(10)
$
$
$
52,610
18,976
33,634
4.0%
.660
1.14
1.14
1,281
65
102
(37)
$ 234,851
239,228
2.4
522,092
325,564
$ 200,915
202,299
2.2
480,990
291,312
$
144,803
164,639
2.1
435,353
261,813
$
$
$
$
49,233
16,914
32,319
3.9%
.645
1.02
1.02
1,318
62
20
42
$
$
$
79,631
28,181
51,450
6.0%
.580
1.64
1.61
1,276
58
26
32
114,578
144,114
2.0
420,792
247,370
$
123,542
176,464
2.4
432,322
276,793
a MEssagE tO OUR s HaREHOlDERs
Cato had another excellent year. In fact, it was the Company’s third consecutive year with
earnings improvement in a difficult environment. We achieved this performance by focusing on
the profitable growth of our business and prudent use of our capital. and, we continued providing
our customers excellent service and offering them great fashion and quality at a great value.
the Company’s same-store sales increased 3% in 2010 as total sales increased 5% to $913.9
million. our net income increased to $57.7 million from $45.8 million in 2009 and earnings
per diluted share increased to $1.96 from $1.55. Both net income and earnings per diluted
share increased 26% after a 36% increase in 2009. In may 2010, we continued our practice
of increasing our dividend as earnings rise by increasing our dividend 12% and returning
$21.2 million in profits to Cato’s shareholders during the year.
John P. D. cato
For the year, we opened 37 stores including 14 It’s Fashion metro stores opened in conjunction
with the simultaneous closing of an It’s Fashion store in the same market (what we call a
“conversion”), relocated four stores and closed 26 stores including the 14 It’s Fashion conversions.
We remain debt free and operate from a strong financial position with approximately $235
million in cash and investments. as has long been our practice, we utilize our cash to internally
fund new concepts and store development, meet infrastructure needs and provide additional
value to long-term shareholders through dividends and by opportunistically repurchasing shares.
We continue to move our business forward in 2011 with growth in our store base. We plan to
open 54 new stores in 2011 and close up to 27 stores including 17 It’s Fashion store conversions
in existing markets.
the It’s Fashion metro concept now has 91 stores in operation and we expect 34 of the total
projected store openings to be metro stores including the 17 conversions.
We continue to develop opportunities for growth in our Cato division. the lack of shopping
center development has hindered the division’s store growth, but we are testing new real estate
strategies including stores sizes, formats and larger markets.
as an additional growth vehicle, we expect to open a new concept during the year called Versona
accessories. Versona will offer quality fashion jewelry and accessories accented by key apparel
items at exceptional values, every day. the concept will provide an upscale shopping environment
comparable to better specialty and department stores. We plan to open 10 Versona stores in the
fall of 2011. We expect it to have little financial impact on our results for the year.
In addition to our store development, we are making infrastructure investments in our distribution
facilities and office space to meet our growth plans and new systems to improve efficiency in many
areas of our business.
Several factors will make 2011 a challenging year. In addition to the negative impact of slow job
growth and higher prices for fuel and food, we now face rising costs of raw materials and labor
overseas that will increase our merchandise cost. even with these challenges, I look forward to
Cato’s growth and long-term success.
I want to thank the Cato team for their performance in producing our record results last year.
I know they will continue working to meet and exceed our customers needs. and, with three
concepts that provide opportunities for growth, we are focused on delivering value to both our
customers and shareholders.
John p. D. Cato
Chairman, president and
Chief executive officer
DEliVERing FasHiOn anD ValUE tO cUstOMERs
Cato currently 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 3,400 square feet while
It’s Fashion metro stores average approximately 10,000 square feet.
6
11
44
total n UmBer o F StoreS per S tate
(at year end)
169
55
80
1
4
8
8
20
22
28
3
2
3
11
30
1
5
7
47
69
12
62
137
85
84
90
116
62
ManagEMEnt ExEcUtiVE gROUp
John p. D. cato
Chairman, president and
Chief executive officer
sally almason
executive Vice president, merchandising,
Cato and Versona Divisions
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
grant l. Hamrick 3
retired Senior Vice president,
Chief Financial officer
american City Business Journals
Bryan F. Kennedy, iii 1 , 3
president
park Sterling Bank
thomas E. Meckley 1 , 3
Consultant
agility recovery Solutions
retired partner
ernst & Young llp
Bailey W. patrick 1 , 2
General manager
merrifield patrick Vermillion, llC
D. Harding stowe 1 , 2
president and
Chief executive officer
r. l. Stowe mills, Inc.
Edward i. Weisiger, Jr. 1 , 2
president and
Chief executive officer
Carolina tractor & equipment Company
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 29, 2011
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
No n
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¥
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, 2010, the last business day of the Company’s most recent second quarter, was $639,525,415 based on the last
reported sale price per share on the New York Stock Exchange on that date.
As of March 29, 2011, there were 27,649,402 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 2011 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
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 – 16
17
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
PART II
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 – 25
25
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 – 49
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
50
50
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.
50
50
51
51
51
PART IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 – 60
1
Forward-looking Information
The following information should be read along with the Consolidated Financial Statements, including the
accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended: (1) statements in this 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 2011
and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store
openings (including the launch of the new Versona Accessories store concept), relocations, remodels and closures;
and (5) statements relating to our future contingencies. When possible, we have attempted to identify forward-
looking statements by using words such as “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 including, but not limited to, the
continuation or worsening of (i) the current adverse or recessionary conditions affecting the U.S. and global
economies and consumer spending and (ii) the adverse conditions in the U.S. and global credit market; uncertainties
regarding the impact of any governmental responses to the foregoing adverse economic and credit market
conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel
and accessory 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 29, 2011 (“fiscal 2010”), 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 these materials with the SEC. We also post on our website the charters of our Audit, Com-
pensation 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 1,282 fashion specialty stores at January 29, 2011, 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 Cato division 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 Cato division’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 Cato division’s merchandise is sold under its private label and is
produced by various vendors in accordance with the divisions specifications. The It’s Fashion division offers
fashion with a focus on the latest trendy styles and nationally recognized urban brands for the entire family at low
prices every day. Most stores range in size from 4,000 to 10,000 square feet and are located primarily in strip
shopping centers anchored by national discounters or market-dominant grocery stores. In fiscal 2011, the Company
plans to introduce the Versona Accessories division. These stores will offer quality fashion jewelry and accessories
accented by key apparel items at exceptional values every day. 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 10% of retail sales in fiscal 2010. 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 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 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, girls sizes 7 to 16, mens and kids sizes newborn to 7 with an emphasis on
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.
3
The Company’s merchandise lines include dressy, career, and casual sportswear, dresses, coats, shoes, lingerie,
costume jewelry, handbags, mens wear and lines for kids and newborns. The Company primarily offers exclusive
merchandise with fashion and quality comparable to mall specialty stores at low prices, every day.
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 2010, purchases from the Company’s largest vendor
accounted for approximately 3% 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. This enables 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%, 0.7% and 0.8% of retail sales for
fiscal years 2010, 2009 and 2008, respectively.
4
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
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
small towns to large metropolitan areas with trade area populations of 20,000 or more. Stores average approx-
imately 4,300 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 2006.
Fiscal Year
Store Development
Number of Stores
Beginning of
Year
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,244
1,276
1,318
1,281
1,271
In fiscal 2010 the Company relocated 5 stores.
Number
Opened
Number
Closed
Number of Stores
End of Year
58
62
65
35
37
26
20
102
45
26
1,276
1,318
1,281
1,271
1,282
The Company expects to open 54 new stores during fiscal 2011. The expected new store openings include 10
new Cato stores, 34 new It’s Fashion Metro stores (including the conversion of approximately 17 existing It’s
Fashion stores) and 10 new Versona Accessories stores. The Company anticipates closing up to 27 stores by year
end, including the 17 conversions. In addition, the Company also expects to relocate 6 stores and remodel 10 stores.
It’s Fashion Metro has 91 stores open as of fiscal year end January 2011 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 Versona Accessories stores are new concept stores the Company intends to launch in fiscal 2011 that will offer
quality fashion jewelry and accessories accented by key apparel items at exceptional values every day. The Versona
Accessories stores will seek to provide an upscale shopping environment comparable to better specialty and
department stores.
5
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 identify
underperforming stores.
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for 5.2%, 6.4%, and 7.1% of retail sales in fiscal
2010, 2009 and 2008, respectively. The Company’s net bad debt expense was 6.6%, 7.4% and 5.6% of credit sales in
fiscal 2010, 2009 and 2008, 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 subject to regulatory limits.
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 and pays for layaway merchandise. Layaway sales represented approximately 4.7%, 4.7% and 4.0% of retail
sales in fiscal 2010, 2009 and 2008, 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, major department stores,
off-price retailers and internet based retailers. 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.
6
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.
Regulation
A variety of laws affect the revolving credit card program offered by the Company. The Credit Card Account-
ability 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 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 discrimination against any credit applicants, establish
guidelines for gathering and evaluating credit information and require written notification when credit is denied.
Regulation AA, Unfair or Deceptive Acts or Practices, 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 29, 2011, the Company employed approximately 9,600 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.
7
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 offer
frequent promotions 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 a 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 energy and transportation costs have caused us significant cost increases, and
continued increases in these costs or the disruption of the means by which merchandise is transported to us could
cause us additional cost increases or interruptions of our supply chain which could be significant. 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.
Fluctuations in the price, availability and quality of inventory may result in higher cost of goods which
the Company may not be able to pass on to the customers.
Vendors are increasingly passing on higher production costs which may impact our ability to maintain or grow
our margins. The price and availability of raw materials, specifically cotton, may be impacted by demand,
regulation, weather and crop yields as well as other factors. Additionally, manufacturers are experiencing increases
in other manufacturing costs such as transportation, labor and benefit costs. These increases in production costs
result in higher merchandise costs to the Company. Due to the Company’s limited flexibility in price point, the
Company may not be able to pass on those cost increases to the consumer which could have a material adverse effect
on our results of operations and financial condition.
8
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 or worsening of adverse conditions in the general economic environment 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. Any perception that adverse conditions in the
general economy or credit markets are continuing or worsening may significantly weaken many of these drivers of
consumer spending habits. 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 merchan-
dise, 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. Any of these events 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 deliver
goods 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. Any such occurrence could adversely affect our business, results of operations
and financial condition.
9
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
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.
In addition, we depend on key management personnel to oversee the operational divisions of the Company for
the support of our existing business and future expansion. The success of executing our business strategy depends in
large part on retaining key management. We compete for key management personnel with other retailers, and our
inability to attract and retain qualified personnel could limit our ability to continue to grow.
If we are unable to retain our key management and store associates or attract, train, or retain other skilled
personnel in the future, we may not be able to service our customers effectively or execute our business strategy,
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 issues,
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 affect on our operations and our reputation.
If we fail to protect our trademarks and other intellectual property rights or infringe 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”, “It’s Fashion” and “It’s 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
10
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. Infringement 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. In the event of
such a conflict, we could be subject to lawsuits or other actions, the ultimate resolution of which we cannot predict;
however, such a controversy could adversely effect our business, financial condition and results of operations.
We may 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,
municipal and corporate debt securities. The value of those securities may be impacted by factors beyond our
control, such as changes to credit ratings, rates of default, collateral value, discount rates, and strength and quality of
market credit and liquidity. As federal, state and municipal entities struggle with declining tax revenues and budget
deficits, we cannot be assured of our ability to timely access these investments if the market for these issues
declines. Similarly, the default by issuers could adversely affect our financial condition, results of operations and
ability to execute our business strategy. In addition, we have significant amounts of cash and cash equivalents at
financial institutions that are in excess of the federally insured limits. An economic downturn or development of
adverse conditions affecting the financial sector and stability of financial institutions could cause us to 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, the rules of the Securities and Exchange Commission and New York Stock Exchange
and certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
and related rulemaking that has been and will continue to be implemented over the next several years under the
mandates of the Dodd-Frank Act. 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 control over financial reporting, which is a costly and time-consuming effort that must be re-
evaluated frequently. We cannot give assurance that our disclosure controls and procedures and our internal control
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 control over financial reporting or to comply with the other various
laws and regulations to which we are currently subject and will continue to be subject as a public company could
have an adverse material impact on our business, our financial condition and the price of our common stock. In
addition, our efforts to comply with these requirements, particularly with new requirements under the Dodd-Frank
Act that have yet to be implemented, could significantly increase our compliance costs.
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.
11
The interests of a principal shareholder may limit the ability of other shareholders to influence the
direction of the Company.
As of March 29, 2011, 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 the 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 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:
None.
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 29, 2011 are as follows:
Name
Age
Position
John P. D. Cato . . . . . . . . . . . . . . . . . .
Michael T. Greer . . . . . . . . . . . . . . . . .
John R. Howe . . . . . . . . . . . . . . . . . . .
Howard A. Severson . . . . . . . . . . . . . .
60 Chairman, President and Chief Executive Officer
48 Executive Vice President, Director of Stores
48 Executive Vice President, Chief Financial Officer
63 Executive Vice President, Chief Real Estate and
Store Development Officer
Sally Almason . . . . . . . . . . . . . . . . . . .
57 Executive Vice President, General Merchandising
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 November 2010, she has served as
Executive Vice President, Merchandising Cato and Versona Divisions. From 2009 to 2010, 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 2010 and 2009.
2010
Price
High
Low
Dividend
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.11
25.21
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.47
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29.60
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18.70
21.49
22.27
24.23
$.165
.185
.185
.185
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
As of March 29, 2011 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
1/27/2006
2/2/2007
2/1/2008
1/30/2009
1/29/2010
1/28/2011
The Cato Corporation
Dow Jones U.S. Retailers, Apparel Index
Russell 2000 Index
THE CATO CORPORATION
STOCK PERFOMANCE 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
1/27/2006
2/2/2007
2/1/2008
1/30/2009
1/29/2010
1/28/2011
100
108
82
68
109
133
100
121
95
50
95
118
100
112
102
63
87
113
The graph assumes an initial investment of $100 on January 27, 2006, the last trading day prior to the
commencement of the Company’s 2006 fiscal year, and that all dividends were reinvested.
15
Issuer Purchases of Equity Securities
The following table summarizes the Company’s purchases of its common stock for the three months ended
January 29, 2011:
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share(1)
November 2010 . . . . . . . . . . . .
December 2010 . . . . . . . . . . . .
January 2011 . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
857
—
—
857
$27.02
—
—
$27.02
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(2)
Maximum Number
(or Approximate Dollar
Value) of Shares
that may yet be
Purchased Under
the Plans or Programs(2)
857
—
—
857
442,942
(1) Prices include trading costs.
(2) On January 30, 2010, the Company’s share repurchase program had 695,942 shares remaining in open
authorizations. At fiscal year ending January 29, 2011, the Company had 442,942 shares remaining in open
authorizations. There is no specified expiration date for the Company’s repurchase program.
(3) In March 2011, subsequent to year-end, the Company repurchased 110,000 shares for approximately
$2.6 million or an average market price per share of $23.48.
16
Item 6. Selected Financial Data:
Certain selected financial data for the five fiscal years ended January 29, 2011 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 . . . . . . . . . . . . . . . . .
2010
2008
(Dollars in thousands, except per share data and selected operating data)
2006
2007
2009
$913,922
11,606
925,528
$872,132
11,863
883,995
$845,676
12,042
857,718
$834,341
12,096
846,437
$862,813
13,072
875,885
565,710
552,016
562,056
572,309
572,712
251,121
245,483
227,645
210,892
212,157
27.5%
28.2%
26.9%
25.3%
24.6%
21,822
37
(3,971)
90,809
33,070
$ 57,739
1.96
$
1.96
$
0.720
$
21,829
66
(4,313)
68,914
23,149
$ 45,765
1.55
$
1.55
$
0.660
$
22,572
53
(7,218)
52,610
18,976
$ 33,634
1.14
$
1.14
$
0.660
$
22,212
9
(8,218)
49,233
16,914
$ 32,319
1.02
$
1.02
$
0.645
$
20,941
41
(9,597)
79,631
28,181
$ 51,450
1.64
$
1.61
$
0.580
$
1,282
$716,000
168
$
1,271
$678,000
165
$
1,281
$640,000
162
$
1,318
$640,000
165
$
1,276
$685,000
175
$
$234,851
239,228
522,092
325,564
$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
(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.
17
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 29,
2011
January 30,
2010
January 31,
2009
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%
1.3
101.3
61.9
27.5
2.4
(0.4)
9.9
6.3%
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%
Fiscal 2010 Compared to Fiscal 2009
Retail sales increased by 4.8% to $913.9 million in fiscal 2010 compared to $872.1 million in fiscal 2009. The
increase in retail sales in fiscal 2010 was largely attributable to sales from store development and same store sales
improvement. Same store sales increased 3% from fiscal 2009. Same store sales includes stores that have been open
more than 15 months. Stores that have been relocated or expanded are also included in the same store sales
calculation after they have been open more than 15 months. The method of calculating same store sales varies across
the retail industry. As a result, our same store sales calculation may not be comparable to similarly titled measures
reported by other companies. Total revenues, comprised of retail sales and other income (principally finance
charges and late fees on customer accounts receivable and layaway fees), increased by 4.7% to $925.5 million in
fiscal 2010 compared to $884.0 million in fiscal 2009. The Company operated 1,282 stores at January 29, 2011
compared to 1,271 stores operated at January 30, 2010.
In fiscal 2010, the Company opened 37 new stores, relocated five stores and closed 26 stores.
Other income in total, as included in total revenues in fiscal 2010, decreased slightly to $11.6 million from
$11.9 million in fiscal 2009. The decrease resulted primarily from lower credit revenue and finance charges,
partially offset by an increase in layaway charges.
Credit revenue of $8.5 million represented .9% of total revenue in fiscal 2010, a decrease compared to 2009
credit revenue of $9.4 million or 1.1% of total revenue. The slight decrease in credit revenue was primarily due to
reductions in finance and late charge income as a result of lower accounts receivable balances and regulatory
changes. 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 $5.4 million in fiscal 2010 compared to $6.6 million in fiscal 2009. The
decrease in these expenses was principally due to a reduction in postage expense and bad debt expense of $906,000.
See Note 15 of the Consolidated Financial Statements for a schedule of credit-related expenses. Total segment
credit income before taxes increased $.2 million from $2.9 million in 2009 to $3.1 million in 2010 due to a decrease
in related operating expenses. Total credit income of $3.1 million in 2010 represented 3.4% of total income before
taxes of $90.8 million compared to total credit income of $2.9 million in 2009 which represented 4.2% of 2009 total
income before taxes.
Cost of goods sold was $565.7 million, or 61.9% of retail sales, in fiscal 2010 compared to $552.0 million, or
63.3% of retail sales, in fiscal 2009. 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
18
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 8.8% to
$348.2 million in fiscal 2010 from $320.1 million in fiscal 2009. 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 $251.1 million in fiscal 2010 compared to $245.5 million in fiscal 2009, an increase of 2.3%. As a
percent of retail sales, SG&A was 27.5% compared to 28.2% in the prior year. The overall dollar increase in SG&A
resulted primarily from an increase in salary expenses driven by store development and workers’ compensation
expense, partially offset by a reduction in store closing costs.
Depreciation expense was $21.8 million in both fiscal 2010 and fiscal 2009. 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 $4.0 million in fiscal 2010 compared to $4.3 million in fiscal 2009. The decrease
was due to lower interest income due to reduced interest rates. See Note 2 to the Consolidated Financial Statements
for further details.
Income tax expense was $33.1 million, or 3.6% of retail sales in fiscal 2010 compared to $23.1 million, or 2.7%
of retail sales in fiscal 2009. The increase resulted from higher pre-tax income in conjunction with an increase in the
effective tax rate. The effective tax rate was 36.4% in fiscal 2010 compared to 33.6% in fiscal 2009 primarily as a
result of the favorable resolution of various state income tax matters in the prior year.
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
attributable to inventory management and higher sell throughs of regular priced merchandise. Total gross
19
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
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
underperforming 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.
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 in the United
States (GAAP) requires management to make estimates and assumptions about future events that affect the
amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences may be material to the financial
statements. The most significant accounting estimates inherent in the preparation of the Company’s financial
statements include the allowance for doubtful accounts receivable, reserves relating to workers’ compensation,
general and auto insurance liabilities, reserves for inventory markdowns, shrinkage, uncertain tax positions, and
calculation of potential asset impairment.
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. 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
20
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
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.
Effective with the first quarter of 2011, the Company has elected to change its inventory valuation method from
the retail method to the weighted-average cost method.
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
21
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.
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 judgments regarding the application of complex tax regulations across
many jurisdictions. Despite the Company’s belief that the estimates and judgments are reasonable, differences
between the estimated and actual tax liabilities can and do exist from time to time. 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 judgment, 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.
The Company recognizes 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 is 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 2010 was $79.5 million as compared to $84.7 million in fiscal 2009. 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 29, 2011.
Cash provided by operating activities for these periods was primarily generated by earnings adjusted for
depreciation, deferred taxes, and changes in working capital. The decrease of $5.2 million for fiscal 2010 over fiscal
2009 is primarily due to an increase in merchandise inventories offset by an increase in accounts payable, accrued
expenses, net income and deferred income taxes.
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 and other operating requirements for fiscal 2011 and for the foreseeable future.
At January 29, 2011, the Company had working capital of $239.2 million compared to $202.3 million at
January 30, 2010. Additionally, the Company had $2.4 million and $2.3 million invested in privately managed
investment funds and other miscellaneous equities for fiscal years 2010 and 2009, respectively, which are reported
under Other assets in the Consolidated Balance Sheets.
22
At January 29, 2011, 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 2013. The credit
agreement contains various financial covenants and limitations, including the maintenance of specific financial
ratios with which the Company was in compliance as of January 29, 2011. There were no borrowings outstanding
under this credit facility during the fiscal year ended January 29, 2011 or the fiscal year ended January 30, 2010.
The Company had approximately $7.2 million and $8.2 million at January 29, 2011 and January 30, 2010,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
Expenditures for property and equipment totaled $19.6 million, $10.0 million and $19.4 million in fiscal 2010,
2009 and 2008, respectively. The expenditures for fiscal 2010 were primarily for store development and investments
in new technology. In fiscal 2011, the Company is planning to invest approximately $32.3 million in capital
expenditures. This includes expenditures to open 10 new Cato stores, 34 new It’s Fashion Metro stores including the
conversion of up to 17 It’s Fashion stores to It’s Fashion Metro stores, 10 new Versona Accessories stores and the
relocation of six Cato stores. In addition, the Company plans to remodel 10 stores and has planned for additional
investments in technology to be implemented over the next 12 months.
Net cash used in investing activities totaled $55.7 million for fiscal 2010 compared to $58.1 million used for
the comparable period of 2009. The decrease was due primarily to the change in short-term investments and
partially offset by an increase in expenditures for property and equipment.
On May 27, 2010, the Board of Directors increased the quarterly dividend by 12% from $.165 per share to
$.185 per share, or an annualized rate of $.74 per share.
The Company does not use derivative financial instruments.
The following tables set forth information regarding the Company’s financial assets that are measured at fair
value ($ in thousands) as of January 29, 2011 and January 30, 2010.
Description
State/Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction Rate Securities (ARS) . . . . . . . . . . . . . . . . . . .
Variable Rate Demand Notes (VRDN) . . . . . . . . . . . . . .
Privately Managed Funds . . . . . . . . . . . . . . . . . . . . . . .
Corporate Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 29,
2011
$129,678
34,288
3,450
19,308
1,925
480
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$189,129
Description
State/Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction Rate Securities (ARS) . . . . . . . . . . . . . . . . . . .
Variable Rate Demand Notes (VRDN) . . . . . . . . . . . . . .
Privately Managed Funds . . . . . . . . . . . . . . . . . . . . . . .
Corporate Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
January 30,
2010
$ 76,056
8,989
3,450
65,382
1,940
407
$156,224
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
$ —
—
—
19,308
—
480
$19,788
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
$ —
—
—
65,382
—
407
$65,789
Significant
Other
Observable
Inputs
Level 2
$129,678
34,288
—
—
—
—
$163,966
Significant
Other
Observable
Inputs
Level 2(A)
$76,056
8,989
—
—
—
—
$85,045
Significant
Unobservable
Inputs
Level 3
$ —
—
3,450
—
1,925
—
$5,375
Significant
Unobservable
Inputs
Level 3
$ —
—
3,450
—
1,940
—
$5,390
(A) The state/municipal bonds were reclassed to Level 2 upon further interpretation.
23
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes
(“VRDN”), corporate bonds and governmental debt securities held in managed funds with underlying ratings of A
or better at both January 29, 2011 and January 30, 2010. The underlying securities have contractual maturities
which generally range from 3 days to 30 years. Although the Company’s investments in VRDN’s have underlying
securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of
7 days and are considered short-term investments. These securities are classified as available-for-sale and are
recorded as short-term investments in the accompanying Consolidated Balance Sheets at estimated fair value, with
unrealized gains and losses reported net of taxes in accumulated other comprehensive income.
Additionally, at January 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of
corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction. All
of these assets are recorded within Other assets in the Consolidated Balance Sheets. At January 30, 2010, the
Company had $1.9 million of privately managed funds, $0.4 million of corporate equities, and a single ARS of
$3.5 million, all of which are recorded within Other assets in the Consolidated Balance Sheets.
Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment
securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges
for identical instruments. Their fair value is principally based on market values determined by management with
assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available,
these prices are determined by the pricing service using observable market information such as quotes from less
active markets and/or quoted prices of securities with similar characteristics, among other factors.
The Company’s failed ARS is 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
security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates
used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with
comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company
also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also
considered the financial condition and near-term prospects of the issuer, the probability that the Company will be
unable to collect all amounts due according to the contractual terms of the security and whether the security has
been downgraded by a rating agency. The Company’s valuation is sensitive to market conditions and management’s
judgment and can change significantly based on the assumptions used.
The Company’s privately managed funds consist of two types of funds. The privately managed funds cannot be
redeemed at net asset value at a specific date without advance notice. As a result, the Company has classified the
investments as Level 3.
The following tables summarize the change in the fair value of the Company’s financial assets measured using
Level 3 inputs during fiscal 2010 and fiscal 2009 ($ in thousands):
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Beginning Balance at January 30, 2010 . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,450
—
$1,940
—
Total gains or (losses)
Available-For-Sale
Debt Securities
ARS
Other
Investments
Private Equity
Total
$5,390
—
Included in earnings (or changes in net assets) . . . .
Included in other comprehensive income . . . . . . . . .
—
—
(15)
—
(15)
—
Ending Balance at January 29, 2011 . . . . . . . . . . . . . . . .
$3,450
$1,925
$5,375
24
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Available-For-Sale
Debt Securities
ARS
Other
Investments
Private Equity
Beginning Balance at January 31, 2009 . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or (losses) . . . . . . . . . . . . . . . . . . . . . . . .
Included in earnings (or changes in net assets) . . . .
Included in other comprehensive income . . . . . . . . .
Ending Balance at January 30, 2010 . . . . . . . . . . . . . . . .
$ —
3,450
—
—
—
$3,450
$1,955
—
—
(15)
—
$1,940
Total
$1,955
3,450
—
(15)
—
$5,390
The following table shows the Company’s obligations and commitments as of January 29, 2011, to make future
payments under noncalcellable contractual obligations (in thousands):
Contractual Obligations
Total
Payments Due During One Year Fiscal Period Ending
2011
2015
2013
2012
2014
Thereafter
Merchandise letters of credit . . . . . . . $
Operating leases . . . . . . . . . . . . . . . .
7,179 $ 7,179 $ — $ — $ — $ — $ —
480
25,664
12,792
40,041
56,943
7,395
143,315
Total Contractual Obligations . . . . . . $150,494
$64,122
$40,041
$25,664
$12,792 $7,395
$480
(1) In addition to the amounts shown in the table above, $8.3 million of unrecognized tax benefits have been
recorded as liabilities in accordance with ASC 740 and we are uncertain if or when such amounts may be
settled. See Note 13, Income Taxes, of the Consolidated Financial Statements for additional information.
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.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends ASC 820 and clarifies and
provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This
ASU was effective for the Company on January 31, 2010, and did not have a material impact on the Company’s
disclosures.
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.
25
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 29, 2011, January 30, 2010 and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at January 29, 2011 and January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2011, January 30, 2010
and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2011,
January 30, 2010 and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II — Valuation and Qualifying Accounts for the fiscal years ended January 29, 2011,
Page
27
28
29
30
31
32
January 30, 2010 and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S-2
26
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 29, 2011 and January 30,
2010, and the results of their operations and their cash flows for each of the three years in the period ended
January 29, 2011 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 29, 2011, based on criteria established in Internal Control — Integrated
Framework 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.
limitations,
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. 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 29, 2011
27
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
January 29,
2011
Fiscal Year Ended
January 30,
2010
(Dollars in thousands, except per share data)
January 31,
2009
REVENUES
Retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (principally finance charges, late fees and layaway
$ 913,922
$ 872,132
$ 845,676
charges) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,606
11,863
12,042
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
925,528
883,995
857,718
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
565,710
552,016
562,056
251,121
21,822
37
(3,971)
245,483
21,829
66
(4,313)
227,645
22,572
53
(7,218)
834,719
815,081
805,108
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,809
33,070
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 57,739
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on available-for-sale securities, net of
$
$
$
1.96
1.96
0.720
68,914
23,149
45,765
1.55
1.55
0.660
$
$
$
$
52,610
18,976
33,634
1.14
1.14
0.660
$
$
$
$
$ 57,739
$
45,765
$
33,634
deferred income tax liability or benefit . . . . . . . . . . . . . . . . . . . . . .
(258)
121
(296)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 57,481
$
45,886
$
33,338
See notes to consolidated financial statements.
28
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
January 30,
January 29,
2011
2010
(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 $2,985 at
January 29, 2011 and $3,274 at January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . .
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,630
181,395
4,826
$ 50,385
147,955
2,575
39,703
132,020
5,001
3,199
414,774
99,773
7,545
40,154
118,628
7,812
3,258
370,767
102,769
7,454
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$522,092
$480,990
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued bonus and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities (primarily deferred rent) . . . . . . . . . . . . . . . . . . . . . . . . .
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;
27,758,123 and 27,842,587 shares issued at January 29, 2011 and
January 30, 2010, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares
authorized; 1,743,525 shares issued at January 29, 2011 and January 30, 2010 . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$105,526
35,318
22,841
11,861
175,546
5,695
15,287
$103,627
31,615
22,286
10,940
168,468
4,087
17,123
—
—
925
928
58
68,537
255,768
276
325,564
58
64,706
225,086
534
291,312
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$522,092
$480,990
See notes to consolidated financial statements.
29
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 . . . . . . . .
January 29,
2011
January 30,
2010
(Dollars in thousands)
January 31,
2009
$ 57,739
$ 45,765
$ 33,634
21,822
2,827
2,341
(468)
4,531
733
(2,376)
(13,392)
10
1,389
4,320
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
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .
79,476
INVESTING ACTIVITIES
Expenditures for property and equipment . . . . . . . . . . . . . . . . . . . . . . .
Purchases of short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in restricted cash and short-term investments . . . . . . . . . . . . . .
(19,559)
(144,630)
110,778
(2,251)
(9,960)
(162,957)
108,287
6,514
(19,443)
(169,979)
160,136
—
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . .
(55,662)
(58,116)
(29,286)
FINANCING ACTIVITIES
Change in cash overdrafts included in accounts payable . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock purchase plan . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . .
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . .
—
(21,216)
(5,863)
436
468
606
—
(19,481)
(49)
412
201
467
(500)
(19,389)
(2,435)
432
66
224
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,569)
(18,450)
(21,602)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . .
(1,755)
50,385
8,123
42,262
20,679
21,583
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . .
$ 48,630
$ 50,385
$ 42,262
See notes to consolidated financial statements.
30
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Class A
Common
Stock
Convertible
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Total
Stockholders’
Equity
Balance — February 2, 2008 . . . . . . . . . . . . . . . . . . . $1,204
Comprehensive income:
(Dollars in thousands)
$58
$58,685 $ 340,088
$ 709
$(153,374)
$247,370
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 . . . . . . .
Balance — January 30, 2010 . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on available-for-sale securities, net of
deferred income tax benefit of ($112) . . . . . . . . . . .
Dividends paid ($.72 per share) . . . . . . . . . . . . . . . . . .
Class A common stock sold through employee stock
purchase plan — 23,849 shares . . . . . . . . . . . . . . . . .
Class A common stock sold through stock option plans —
42,675 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock issued through restricted stock grant
plans 109,291 shares. . . . . . . . . . . . . . . . . . . . . . . .
Windfall tax benefit from equity compensation plans . . . . .
Repurchase of treasury shares — 260,277 shares . . . . . . . .
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
(19,481)
121
1
2
4
483
535
1,879
201
38
(289)
(155,569)
(49)
155,858
45,765
121
(19,481)
484
537
1,921
201
(49)
—
928
58
64,706
225,086
534
— 291,312
57,739
(21,216)
(258)
1
1
4
(9)
512
739
2,299
281
13
(5,854)
57,739
(258)
(21,216)
513
740
2,316
281
(5,863)
Balance — January 29, 2011 . . . . . . . . . . . . . . . . . . . $ 925
$58
$68,537 $ 255,768
$ 276
$
— $325,564
See notes to consolidated financial statements.
31
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 a
fashion specialty stores segment (Retail Segment) and a credit card segment (Credit 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 (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, inventory shrinkage, uncertain tax positions, and the calculation of asset impairment.
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. See Note 4 for the Company’s fair value measurements.
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 the 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.
In addition, the Company has $4.8 million in escrow at January 29, 2011 as security and collateral for
administration of the Company’s self-insured workers’ compensation and general liability coverage which is
reported as Restricted cash and short-term investments on the Consolidated Balance Sheets.
Concentration of Credit Risk: Financial
the Company to a
concentration 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.
instruments that potentially subject
Supplemental Cash Flow Information:
Income tax payments, net of refunds received, for the fiscal years
ended January 29, 2011, January 30, 2010 and January 31, 2009 were approximately $27,615,000, $23,753,000 and
$13,368,000, respectively.
Inventories: Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as
determined by the retail method. Effective with the first quarter of 2011, the Company has elected to change its
inventory valuation method from the retail method to the weighted-average cost method.
Property and Equipment: Property and equipment are recorded at cost. Maintenance and repairs are
expensed to operations as incurred; renewals and betterments are capitalized. Depreciation is determined on the
32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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
Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 years
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 that can be difficult to predict and may be subject to change. Store asset
impairment charges incurred in fiscal 2010, 2009 and 2008 were $351,000, $689,000 and $498,000, 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 a 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.
33
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
In fiscal 2010, 2009 and 2008, the Company recognized $391,000, $302,000 and $287,000, respectively, of
income on unredeemed gift cards (“gift card breakage”) as a component of Other income on the Consolidated
Statements of Income and Comprehensive 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 collectability 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 $6,663,000, $6,406,000 and $6,460,000 for the fiscal years ended January 29, 2011, January 30,
2010 and January 31, 2009, 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 and 198,718 shares for approximately $2.4 million for fiscal
2008. For fiscal 2010, the Company purchased and retired 260,000 shares at a cost of $5.9 million with
442,942 shares remaining in open authorizations. In March 2011, subsequent
the company
purchased and retired 110,000 shares for approximately $2.6 million or an average market price per share of $23.48.
to year-end,
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.
34
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 29,
2011
Fiscal Year Ended
January 30,
2010
January 31,
2009
Basic earnings per share:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings allocated to non-vested equity awards . . . . . .
Net earnings available to common stockholders . . . . . .
$
$
57,739
(970)
56,769
$
$
45,765
(654)
45,111
$
$
33,634
(425)
33,209
Basic weighted average common shares outstanding . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . .
28,985,627
1.96
$
29,036,549
1.55
$
29,065,594
1.14
$
Diluted earnings per share:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings allocated to non-vested equity awards . . . . . .
Net earnings available to common stockholders . . . . . .
$
$
57,739
(970)
56,769
$
$
45,765
(654)
45,111
$
$
33,634
(425)
33,209
Basic weighted average common shares outstanding . .
Dilutive effect of stock options and restricted stock . . .
28,985,627
6,692
29,036,549
18,203
29,065,594
13,095
Diluted weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,992,319
29,054,752
29,078,689
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . .
$
1.96
$
1.55
$
1.14
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 when
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.
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 on a discounted cash flow basis, reduced by any expected sublease rentals.
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.
35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Management reviews current and historical claims data in developing its estimates. The Company has stop-loss
insurance coverage for individual claims in excess of $300,000 for employee health care, $350,000 for workers’
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 in fiscal 2008. 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 2010 and 2009 were
$14,968,000 and $13,898,000, respectively. The health care liability (a component of Accrued expenses on the
Consolidated Balance Sheets) was $1,488,000 and $1,584,000, at January 29, 2011 and January 30, 2010,
respectively.
The Company paid workers’ compensation and general liability claims of $4,069,000, $3,049,000 and
$3,388,000 in fiscal years 2010, 2009 and 2008, respectively. Including claims incurred, but not yet paid, the
Company recognized an expense of $6,607,000, $4,003,000 and $4,959,000 in fiscal 2010, 2009 and 2008,
respectively. Accrued workers’ compensation and general liabilities (a component of Accrued expenses on the
Consolidated Balance Sheets) were $6,519,000 and $4,921,000 at January 29, 2011 and January 30, 2010,
respectively. At January 29, 2011 and January 30, 2010, the Company had $0 and $1,700,000, respectively, of
standby letters of credit for the benefit of its current workers’ compensation and general liability insurance carrier
relating to claims incurred during 2010 and 2009.
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 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.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends ASC 820 and clarifies and
provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This
ASU was effective for the Company on January 31, 2010, and did not have a material impact on the Company’s
disclosures.
36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2.
Interest and Other Income:
The components of Interest and other income are shown below (in thousands):
January 29,
2011
January 30,
2010
January 31,
2009
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Visa/Mastercard claims settlement . . . . . . . . . . . . . . . . . . . . .
Miscellaneous income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain)/loss on investment sales . . . . . . . . . . . . . . . . . . . . . . .
(15)
$
(1,544)
(26)
(2,308)
(78)
(15)
$
(1,426)
(414)
(2,445)
(13)
(10)
$
(4,617)
—
(2,709)
118
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(3,971)
$(4,313)
$(7,218)
3. Short-Term Investments:
At January 29, 2011, 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 and 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 29,
2011 and January 30, 2010.
Security Type:
Debt securities issued by
various states of the United
States and political
subdivisions of the states:
With unrealized gain. . . . . .
With unrealized (loss) . . . . .
Corporate debt securities:
January 29, 2011
Unrealized
Gain/(Loss)
Estimated
Fair Value
Cost
January 30, 2010
Unrealized
Gain/(Loss)
Estimated
Fair Value
Cost
$ 79,461
67,822
$ 309
(484)
$ 79,770
67,338
$130,519
8,098
$525
(48)
$131,044
8,050
With unrealized gain. . . . . .
With unrealized loss . . . . . .
29,996
4,027
274
(10)
30,270
4,017
7,964
863
35
(1)
7,999
862
Total . . . . . . . . . . . . . . . . . . .
$181,306
$ 89
$181,395
$147,444
$511
$147,955
Additionally, the Company had $2.4 million and $2.3 million invested in privately managed investment funds
and other miscellaneous equities at January 29, 2011 and January 30, 2010, respectively, which are reported within
other noncurrent assets in the Consolidated Balance Sheets.
Accumulated other comprehensive income on the Consolidated Balance Sheets reflects the accumulated
unrealized net gains in short-term investments in addition to unrealized gains from equity and restricted cash
investments. At January 29, 2011, an unrealized gain from equity investments of $344,000 and a deferred tax benefit
of $158,000 was recorded. At January 30, 2010, an unrealized gain from equity investments of $292,000 and a
deferred tax benefit of $270,000 was recorded.
As disclosed in Note 2, the Company had realized gains of $78,000 in fiscal 2010, realized gains of $13,000 in
fiscal 2009 and realized losses of $118,000 in fiscal 2008 relating to sales of debt and equity securities.
37
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Fair Value Measurements:
The following tables set forth information regarding the Company’s financial assets that are measured at fair
value (in thousands) as of January 29, 2011 and January 30, 2010.
Description
State/Municipal Bonds . . . . . . . . . . . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . .
Auction Rate Securities (ARS) . . . . . . . . . . . .
Variable Rate Demand Notes (VRDN) . . . . . .
Privately Managed Funds . . . . . . . . . . . . . . . .
Corporate Equities . . . . . . . . . . . . . . . . . . . . .
January 29,
2011
$129,678
34,288
3,450
19,308
1,925
480
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
$ —
—
—
19,308
480
Significant
Other
Observable
Inputs
Level 2
$129,678
34,288
—
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$189,129
$19,788
$163,966
Description
State/Municipal Bonds . . . . . . . . . . . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . .
Auction Rate Securities (ARS) . . . . . . . . . . . .
Variable Rate Demand Notes (VRDN) . . . . . .
Privately Managed Funds . . . . . . . . . . . . . . . .
Corporate Equities . . . . . . . . . . . . . . . . . . . . .
January 30,
2010
$ 76,056
8,989
3,450
65,382
1,940
407
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
$ —
—
—
65,382
—
407
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$156,224
$65,789
Significant
Other
Observable
Inputs
Level 2(A)
$76,056
8,989
—
—
—
—
$85,045
Significant
Unobservable
Inputs
Level 3
$ —
—
3,450
—
1,925
—
$5,375
Significant
Unobservable
Inputs
Level 3
$ —
—
3,450
—
1,940
—
$5,390
(A) The state/municipal bonds were reclassed to Level 2 upon further interpretation.
The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes
(“VRDN”), corporate bonds and governmental debt securities held in managed funds with underlying ratings of A
or better at both January 29, 2011 and January 30, 2010. The underlying securities have contractual maturities
which generally range from 3 days to 30 years. Although the Company’s investments in VRDN’s have underlying
securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of
7 days and are considered short-term investments. These securities are classified as available-for-sale and are
recorded as short-term investments on the accompanying Consolidated Balance Sheets at estimated fair value, with
unrealized gains and losses reported net of taxes in accumulated other comprehensive income.
Additionally, at January 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of
corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction. All
of these assets are recorded within Other assets in the Consolidated Balance Sheets. At January 30, 2010, the
Company had $1.9 million of privately managed funds, $0.4 million of corporate equities, and a single ARS of
$3.5 million, all of which are recorded within Other assets in the Consolidated Balance Sheets.
38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment
securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges
for identical instruments. Their fair value is principally based on market values determined by management with
assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available,
these prices are determined by the pricing service using observable market information such as quotes from less
active markets and/or quoted prices of securities with similar characteristics, among other factors.
The Company’s failed ARS is measured at fair value using Level 3 inputs at each reporting period. Because
there is no active market for this particular ARS, its fair value was determined through the use of a discounted cash
flow analysis. The terms used in the analysis were based on management’s estimate of the timing of future liquidity,
which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to
maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid
tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of
future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this
ARS, the Company also considered the financial condition and near-term prospects of the issuer, the probability that
the Company will be unable to collect all amounts due according to the contractual terms of the security and
whether the security has been downgraded by a rating agency. The Company’s valuation is sensitive to market
conditions and management’s judgment and can change significantly based on the assumptions used.
The Company’s privately managed funds consist of two types of funds. The privately managed funds cannot be
redeemed at net asset value at a specific date without advance notice. As a result, the Company has classified the
investments as Level 3.
The following tables summarize the change in the fair value of the Company’s financial assets measured using
Level 3 inputs during fiscal 2010 and fiscal 2009 ($ in thousands).
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Available-For-Sale
Debt Securities
ARS
Other
Investments
Private Equity
Beginning Balance at January 30, 2010 . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or (losses)
Included in earnings (or changes in net assets) . . . .
Included in other comprehensive income . . . . . . . . .
$3,450
—
—
—
Ending Balance at January 29, 2011 . . . . . . . . . . . . . . . .
$3,450
$1,925
$5,375
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Available-For-Sale
Debt Securities
ARS
Other
Investments
Private Equity
Beginning Balance at January 31, 2009 . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or (losses)
Included in earnings (or changes in net assets) . . . .
Included in other comprehensive income . . . . . . . . .
$ —
3,450
—
—
Ending Balance at January 30, 2010 . . . . . . . . . . . . . . . .
$3,450
$1,940
$5,390
39
$1,940
—
Total
$5,390
—
(15)
—
(15)
—
$1,955
—
Total
$1,955
3,450
(15)
—
(15)
—
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. Accounts Receivable:
Accounts receivable consist of the following (in thousands):
Customer accounts — principally deferred payment accounts . . . . . . . . . . .
Miscellaneous trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,385
7,303
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,688
2,985
$38,047
5,381
43,428
3,274
Accounts receivable — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,703
$40,154
January 29,
2011
January 30,
2010
Finance charge and late charge revenue on customer deferred payment accounts totaled $8,515,000,
$9,405,000 and $10,073,000 for the fiscal years ended January 29, 2011, January 30, 2010 and January 31,
2009, respectively, and charges against the allowance for doubtful accounts were approximately $2,827,000,
$3,643,000 and $3,825,000 for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009,
respectively. Expenses relating to the allowance for doubtful accounts are classified as a component of selling,
general and administrative expense in the accompanying Consolidated Statements of Income and Comprehensive
Income.
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 29,
2011
January 30,
2010
$ 4,023
19,831
61,729
173,259
52,851
1,631
313,324
213,551
$ 3,694
19,121
57,960
166,490
51,309
377
298,951
196,182
Property and equipment — net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 99,773
$102,769
Construction in progress primarily represents costs related to new store development and investments in new
technology.
40
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
Accrued payroll and related items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,138
12,063
8,047
8,070
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,318
$ 4,854
12,275
6,556
7,930
$31,615
January 29,
2011
January 30,
2010
8. Financing Arrangements:
At January 29, 2011, the Company had an unsecured revolving credit agreement of $35.0 million. The
revolving credit agreement is committed until August 2013. The credit agreement contains various financial
covenants and limitations, including the maintenance of specific financial ratios with which the Company was in
compliance as of January 29, 2011. There were no borrowings outstanding under this facility during the fiscal years
ended January 29, 2011 or January 30, 2010. Interest is based on LIBOR, which was 0.26% on January 29, 2011.
The Company had approximately $7.2 million and $8.2 million at January 29, 2011 and January 30, 2010,
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
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 27, 2010 the Board of Directors increased the quarterly dividend by 12% from $.165 per share to $.185
per share, or an annualized rate of $.74 per share.
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 29, 2011,
January 30, 2010 and January 31, 2009 were approximately $1,181,000, $1,677,000 and $1,586,000, respectively.
41
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has a trusteed, non-contributory Employee Stock Ownership Plan (ESOP), which covers
substantially all associates who meet minimum age and service requirements. The amount of the Company’s
discretionary contribution to the ESOP is determined annually by the Compensation Committee of the Board of
Directors and can be made in Company Class A Common stock or cash. The Company has chosen to contribute cash
and the plan purchases stock on the open market consistent with prior years. In March 2011, the Company approved
a contribution of approximately $12,583,000. The Company’s contributions for the year ended January 30, 2010
was $11,765,000. No contribution was made for the year ended January 31, 2009.
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. 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 $300,000. 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. 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.
The minimum rental commitments under non-cancelable operating leases are (in thousands):
Fiscal Year
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 56,943
40,041
25,664
12,792
7,395
480
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$143,315
The following schedule shows the composition of total rental expense for all leases (in thousands):
Fiscal Year Ended
January 29,
2011
January 30,
2010
January 31,
2009
Minimum rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent rent
$53,680
30
Total rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$53,710
$51,978
25
$52,003
$52,762
28
$52,790
12. Related Party Transactions:
The Company leases certain stores from entities in which Mr. George S. Currin, a former director of the
Company, has a controlling or non-controlling ownership interest. Mr. Currin retired from the Board of Directors
prior to the May 27, 2010 annual meeting. Rent expense and related charges totaling $144,000, $432,000 and
42
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$432,000 were paid to entities controlled by Mr. Currin or his family in fiscal 2010, 2009 and 2008, respectively,
under these leases. Rent expense and related charges totaling $366,000, $1,101,000 and $1,081,000 were paid to
entities in which Mr. Currin or his family had a non-controlling ownership interest in fiscal 2010, 2009 and 2008,
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 29, 2011, the Company had gross unrecognized tax benefits totaling approximately
$8.3 million, of which approximately $5.7 million would affect the effective tax rate if recognized. The Company
had approximately $5.0 million, $4.9 million and $5.9 million of interest and penalties accrued related to uncertain
tax positions as of January 29, 2011, January 30, 2010 and January 31, 2009, respectively. The Company recognizes
interest and penalties related to uncertain tax positions in income tax expense. The Company recognized $760,000,
$390,000 and $1.1 million of interest and penalties in the Consolidated Statement of Income and Comprehensive
Income for the years ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively. The Company is
no longer subject to U.S. federal income tax examinations for years before 2007. In state and local tax jurisdictions,
the Company has limited exposure before 2004.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in
thousands):
Fiscal Year Ended
January 29,
2011
January 30,
2010
January 31,
2009
Balances, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of the current year . . . . . . . . . .
Additions for tax positions prior years . . . . . . . . . . . . . . . .
$10,331
1,124
114
$ 9,522
3,901
—
$9,180
1,394
35
Reduction for tax positions of prior years for:
Changes in judgment
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements during the period . . . . . . . . . . . . . . . . . . . . . .
Lapses of applicable statue of limitations . . . . . . . . . . . . . .
(2,779)
(122)
(325)
(200)
(2,561)
(331)
—
(571)
(516)
Balance, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,343
$10,331
$9,522
The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended
Current income taxes:
January 29,
2011
January 30,
2010
January 31,
2009
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,916
3,166
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,082
$20,603
2,667
23,270
$15,895
1,768
17,663
Deferred income taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,457
531
4,988
(133)
12
(121)
1,173
140
1,313
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,070
$23,149
$18,976
43
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets and liabilities as of January 29, 2011 and
January 30, 2010 are as follows (in thousands):
January 29,
2011
January 30,
2010
Deferred tax assets:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal benefit of uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,122
2,355
41
5,915
1,939
799
4,045
1,931
—
1,575
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,722
Deferred tax liabilities
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on short-term investments . . . . . . . . . . . . . . . . . . . . . .
Health care expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,071
158
1,151
2,036
20,416
$ 1,231
1,984
—
6,547
1,661
1,465
3,531
1,795
2,760
1,766
22,740
15,764
270
1,091
1,890
19,015
Net deferred tax liabilities (assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
694
$ (3,725)
The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows:
Fiscal Year Ended
January 29,
2011
January 30,
2010
January 31,
2009
Federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt interest
Effects of permanent differences . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0%
2.7
(1.4)
(0.4)
0.4
0.1
36.4%
35.0%
0.3
(2.2)
(0.7)
0.6
0.6
33.6%
35.0%
5.7
(2.5)
(2.6)
0.5
—
36.1%
44
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 2010
First
Second
Third
Fourth
Retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $259,760
262,683
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . .
146,854
Cost of goods sold (exclusive of depreciation) . . . .
42,891
Income before income taxes . . . . . . . . . . . . . . . . .
27,060
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.92
Basic earnings per share . . . . . . . . . . . . . . . . . . . . $
0.92
Diluted earnings per share . . . . . . . . . . . . . . . . . . . $
$231,865
234,727
143,039
25,100
16,019
0.54
0.54
$
$
$197,985
200,784
125,694
10,011
6,736
0.23
0.23
$
$
$224,312
227,334
150,123
12,807
7,924
0.27
0.27
$
$
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
$
$
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.
45
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following schedule summarizes certain segment information (in thousands):
Fiscal 2010
Retail
Credit
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2009
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2008
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$916,993
21,801
(3,971)
87,740
446,515
19,560
$874,555
21,799
(4,313)
66,064
408,842
9,957
$847,606
22,531
(7,218)
49,499
361,697
19,443
$ 8,535
21
—
3,069
75,577
—
$ 9,440
30
—
2,850
72,148
3
$10,112
41
—
3,111
73,656
—
$925,528
21,822
(3,971)
90,809
522,092
19,560
$883,995
21,829
(4,313)
68,914
480,990
9,960
$857,718
22,572
(7,218)
52,610
435,353
19,443
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 29,
2011
January 30,
2010
January 31,
2009
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,827
954
811
853
$5,445
$3,643
969
901
1,047
$6,560
$3,844
1,000
979
1,137
$6,960
16. Stock Based Compensation:
The Company recognizes share-based compensation expense over the vesting period, net of estimated
forfeitures. During the twelve month periods ended January 29, 2011, January 30, 2010 and January 31, 2009,
the Company recognized share-based compensation expense of $2,341,000, $2,063,000 and $2,208,000,
respectively, which is classified as a component of selling, 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
46
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
basis over the related vesting periods. As of January 29, 2011, there was $6,069,000 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 2.4 years. Restricted stock compensation expense during the twelve
months ended January 29, 2011, January 30, 2010 and January 31, 2009 was $2,316,000, $1,921,000 and
$1,991,000, respectively. These amounts are classified as a component of selling, general and administrative
expenses.
During the twelve months ended January 29, 2011, the Company sold 23,849 shares to associates at an average
discount of $3.23 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 $77,000, $73,000 and $74,000 for
fiscal years 2010, 2009 and 2008, respectively.
During the year, the Company completed amortizing its nonvested options. In accordance with ASC 718, the
Company adjusted its related forfeiture assumptions. As a result, the Company recognized a reduction in share-
based compensation expense of $52,000 for the year ended January 29, 2011, compared to an expense of $69,000
and $91,000 for the twelve months ended January 30, 2010 and January 31, 2009, respectively. These amounts are
classified as a component of selling, general and administrative expenses.
In April 2004,
the Board of Directors adopted the 2004 Incentive Compensation Plan, of which
1,350,000 shares are issuable. As of January 29, 2011, 722,128 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. 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 23,849 shares, 27,051 shares and
32,830 shares for the years ended January 29, 2011, January 30, 2010 and January 31, 2009, 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 29, 2011, 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 29, 2011:
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 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,627
18,627
—
—
737,162
627,872
755,789
646,499
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.
47
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summary shows the changes in shares of restricted stock outstanding during the three fiscal
years ended January 29, 2011, January 30, 2010 and January 31, 2009:
Number of
Shares
Weighted Average
Grant Date Fair
Value Per Share
Restricted stock awards at February 2, 2008 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock awards at January 31, 2009 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock awards at January 30, 2010 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
301,967
156,795
—
(18,841)
439,921
158,225
(61,781)
(39,937)
496,428
119,120
(88,901)
(17,191)
Restricted stock awards at January 29, 2011 . . . . . . . . . . . . . . . . . . . .
509,456
22.56
16.88
—
22.55
20.46
18.91
22.34
20.35
19.74
24.54
22.79
20.05
20.32
Option plan activity for the three fiscal years ended January 29, 2011 is set forth below:
Options
Range of
Option Prices
Weighted
Average
Price
Outstanding options,
February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,075
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(23,875)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,250)
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6.39 - 21.75
—
8.19 - 13.97
8.71 - 21.72
$12.41
—
9.36
17.78
Outstanding options,
January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,950
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(43,600)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.39 - 19.99
—
6.39 - 15.08
—
Outstanding options,
January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,350
—
(42,675)
—
11.10 - 19.99
—
11.33 - 19.99
—
12.72
—
10.71
—
14.08
—
14.19
—
Outstanding options,
January 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,675
$11.10 - 18.96
$13.86
48
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of changes in stock options outstanding during the twelve months ended
January 29, 2011:
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining Contractual
Term
Options outstanding at January 30, 2010 . . . . . 64,350
—
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . .
—
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,675
$14.08
—
4.02 years
—
Aggregate
Intrinsic
Value(a)
$398,312
—
Outstanding at January 29, 2011 . . . . . . . . . . . 21,675
Vested and exercisable at January 29, 2011 . . . 21,675
$13.86
$13.86
2.78 years
2.78 years
$228,434
$228,434
(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 29, 2011:
Options Outstanding and Exercisable
Range of
Exercise Prices
$11.10 – $14.17
15.08 – 18.96
$11.10 – $18.96
Options
18,375
3,300
21,675
Weighted Average
Remaining
Contractual Life
2.54 years
4.14 years
2.78 years
Weighted
Average
Exercise Price
$13.01
18.61
$13.86
Outstanding options at January 29, 2011 covered 21,675 shares of Class A Common Stock and no shares of
Class B Common Stock. Outstanding options at January 30, 2010 covered 64,350 shares of Class A Common Stock
and no shares of Class B Common Stock.
No options were granted in fiscal 2010 and no options were granted in fiscal 2009 or 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 $4,069,000, $3,049,000 and $3,388,000 in fiscal 2010, 2009 and 2008, respectively.
Including claims incurred, but not yet paid, the Company recognized an expense of $6,607,000, $4,003,000 and
$4,959,000 in fiscal 2010, 2009 and 2008, respectively. Accrued workers’ compensation and general liabilities were
$6,519,000 and $4,921,000 at January 29, 2011 and January 30, 2010, respectively. 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 guarantees with third parties.
In addition, the Company has $4.8 million in escrow at January 29, 2011 as security and collateral for
administration of the Company’s self-insured workers’ compensation and general liability coverage which is
reported as Restricted cash and short-term investments on 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, individually or collectively, are not expected to have a material effect on the Company’s results
of operations, cash flows or financial position.
49
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 29, 2011. Based on this
evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of January 29, 2011,
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
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 29, 2011 based on the Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on this evaluation, management concluded that our internal control over financial reporting was
effective as of January 29, 2011.
PricewaterhouseCoopers LLP, our
registered public accounting firm, has audited the
effectiveness of our internal control over financial reporting as of January 29, 2011, as stated in its report
which is included herein.
independent
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 29, 2011 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 2011 annual stockholders’ meeting (the “2011 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 “2010 Executive Compensation”, “Director Compensation”,
“Corporate Governance Matters-Compensation Committee Interlocks and Insider Participation” in the
Company’s 2011 Proxy Statement is incorporated by reference in response to this Item.
50
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 29, 2011.
(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)
21,675
—
21,675
$13.86
—
$13.86
816,680
—
816,680
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:
627,872 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.
Additionally, 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
170,181 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 2011
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 2011 Proxy Statement is
incorporated by reference in response to this Item.
Item 14. Principal Accountant Fees and Services:
Information contained under the captions “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 2011 Proxy Statement is incorporated by reference in
response to this item.
51
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 29, 2011, January 30, 2010 and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at January 29, 2011 and January 30, 2010. . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2011,
January 30, 2010, and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2011,
January 30, 2010 and January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Financial Statement Schedule: The following report and financial statement schedule is
filed herewith:
Page
27
28
29
30
31
32
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.
52
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
55
56
57
58
59
60
53
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 29, 2011
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/ D. HARDING STOWE
Thomas E. Meckley
(Director)
D. Harding Stowe
(Director)
/s/ EDWARD I. WEISIGER, JR
Edward I. Weisiger, Jr.
(Director)
54
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
55
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 29, 2011 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 29, 2011
56
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 29, 2011
/s/ John P. D. Cato
John P. D. Cato
Chairman, President and
Chief Executive Officer
57
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 29, 2011
/s/ John R. Howe
John R. Howe
Executive Vice President
Chief Financial Officer
58
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 29, 2011 (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 29, 2011
/s/ John P. D. Cato
John P. D. Cato
Chairman, President and
Chief Executive Officer
59
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 29, 2011 (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 29, 2011
/s/ John R. Howe
John R. Howe
Executive Vice President
Chief Financial Officer
60
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at January 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to costs and expenses . . . . . . . . . . . . .
Additions (reductions) charged to other accounts . . . . . . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance
for
Doubtful
Accounts(a)
$ 3,263
3,825
933(d)
(4,298)(e)
3,723
3,643
846(d)
(4,938)(e)
3,274
2,827
646(d)
(3,762)(e)
Self Insurance
Reserves(b)
Inventory
Reserves(c)
$ 4,127
4,959
(809)
(3,388)
4,889
4,003
(922)
(3,049)
4,921
6,607
(940)
(4,069)
$ 3,826
747
—
(1,142)
3,431
225
—
(782)
2,874
481
—
(295)
Balance at January 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,985
$ 6,519
$ 3,060
(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 29, 2011 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
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
tRansFER agEnt an D REgistRaR
american Stock transfer
Securities transfer Department, CmG-5
Charlotte, north Carolina 28288
annUal M EEting nOticE
the annual meeting of Shareholders
11:00 a.m.
thursday, may 26, 2011
Corporate office
8100 Denmark road
Charlotte, nC 28273-5975
MaRKEt & Di ViDEnD 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 2010 and 2009.
2010
First quarter
Second quarter
third quarter
Fourth quarter
2009
First quarter
Second quarter
third quarter
Fourth quarter
pRicE
HigH
$ 25.11
25.21
28.47
29.60
lOW
$ 18.70
21.49
22.27
24.23
DiViDEnD
$ .165
.185
.185
.185
pRicE
HigH
$ 19.61
20.84
22.86
21.84
lOW
$ 13.13
15.32
16.46
18.67
DiViDEnD
$ .165
.165
.165
.165
as of march 29, 2011 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