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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 28, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
REGISTRANT: THE CATO CORPORATION
COMMISSION FILE NUMBER O-3747
State of Incorporation: Delaware I.R.S. Employer Identification
Number: 56-0484485
Address of Principal Executive Registrant's Telephone Number:
Offices: 704/554-8510
8100 Denmark Road
Charlotte, North Carolina 28273-5975
SECURITIES REGISTERED PURSUANT TO SECURITIES REGISTERED PURSUANT
SECTION 12(b) OF THE ACT: TO SECTION 12(g) OF THE ACT:
NONE CLASS A COMMON STOCK
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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. [ X ]
As of March 31, 1995, there were 23,132,327 shares of Class A Common Stock
and 5,264,317 shares of Convertible Class B Common Stock outstanding. The
aggregate market value of the Registrant's Class A Common Stock held by Non-
affiliates of the Registrant as of March 31, 1994 was approximately
$113,390,397 based on the last reported sale price per share on the NASDAQ
National Market System on that date.
Documents incorporated by reference:
Portions of the proxy statement dated April 24, 1995, relating to the 1995
annual meeting of shareholders are incorporated by reference into the
following part of this annual report:
Part III - Items 10, 11, 12 and 13
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
Part I:
Item 1. Business Page 2
Item 2. Properties Page 9
Item 3. Legal Proceedings Page 9
Item 4. Results of Votes of Security Holders Page 9
Part II:
Item 5. Market for Registrant's
Common Equity and Related
Stockholder Matters Page 10
Item 6. Selected Financial Data Page 11
Item 7. Managements' Discussion of
Analysis of Financial Condition and
Results of Operations Page 12 - 15
Item 8. Financial Statements and Supplementary Data Page 16
Item 9. Disagreements on Accounting and Financial Page 16
Disclosures
Part III:
Item 10. Directors and Executive Officers Page 17
Item 11. Executive Compensation Page 20
Item 12. Security Ownership of Certain Beneficial Page 20
Owners and Management
Item 13. Certain Relationships and Related Transactions Page 20
Part IV:
Item 14. Exhibits, Financial Statement Schedules Page 21
and Reports on Form 8-K
Page 2
PART I
Item 1. Business:
General
The Company, founded in 1946, operated 538 women's apparel
specialty stores at January 28, 1995 under the names "Cato,"
"Cato Fashions" and "Cato Plus" in 22 states, principally in non-
metropolitan markets in the South and Southeast. The Company's
merchandising strategy is to provide a wide variety of value-
priced merchandise in misses, junior and large sizes for the
fashion conscious low- to middle-income female customer, aged 18
to 45 and in fiscal 1994 the Company began offering clothing and
accessories for girls ages 4 - 14 in selected locations. With
the objective of offering head-to-toe dressing for its customers,
the Company's stores feature a broad assortment of apparel and
accessories, including casual and dressy sportswear, dresses,
careerwear, coats, hosiery, shoes, costume jewelry, handbags and
millinery. 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 specifications. Most stores
range in size from 4,800 to 8,000 square feet and are located
primarily in strip shopping centers anchored by major discount
stores. The Company emphasizes personalized 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 32% of retail sales
in fiscal 1994. In addition to its Cato Stores, the Company
operated 108 off-price family apparel and accessories stores at
January 28, 1995 under the name "It's Fashion!" These stores are
managed separately from the Cato stores with respect to
merchandising and store operations but use the same
administration, distribution and financial systems as the Cato
stores.
Business
The Company's objective is to be the leading women's apparel
specialty retailer for fashion conscious low- to middle-income
females in its markets. Management believes the Company's
success is dependent upon its ability to differentiate its stores
from department stores, mass merchandise discount stores and
competing women's specialty stores. The key elements of the
Company's business strategy are:
Merchandise Assortment. The Company's stores
offer a wide assortment of apparel and accessory items
in regular and large sizes and emphasize color,
product coordination and selection.
Value Pricing. The Company offers quality
merchandise that is generally priced below comparable
merchandise offered by department stores and higher-
end specialty apparel chains but is generally more
fashionable than merchandise offered by discount
stores.
Page 3
Item 1. Business: (continued)
Strip Shopping Center Locations. The Company
locates its stores principally in strip centers
convenient to our customers anchored by major discount
stores, such as Wal-Mart and Kmart, 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 and a layaway plan to make the purchase
of its merchandise more convenient.
Expansion. The Company plans to open new stores
and relocate or expand existing stores in small to
medium-sized towns and in selected larger cities and
metropolitan areas, principally in the South and
Southeast.
Merchandising
Merchandising
The Company offers a broad selection of apparel and
accessories to suit the various lifestyles of the fashion
conscious low-to middle-income female, aged 18 to 45. In
addition, the Company features a value pricing strategy with
lower initial markups, product quality and consistent merchandise
flow providing color and product coordination.
The Company's merchandise lines include dressy and casual
sportswear, dresses, careerwear, coats, shoes, lingerie, hosiery,
costume jewelry, handbags and millinery. In fiscal 1994,
clothing and accessories for girls ages 4 -14 was added to
selected Cato stores. The Company plans to expand these lines to
additional stores in fiscal 1995. Most of the Company's
merchandise is sold under its private labels.
In fiscal 1994, approximately 29% of Cato stores' retail
sales represented merchandise for large size customers. This
merchandise is marketed in its stores under two formats: as a
distinct display area in "Cato" and "Cato Fashions" stores and as
a separate department in the combined "Cato Fashions" and "Cato
Plus" stores.
Page 4
Item 1. Business: (continued)
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 personnel and frequently confer
with key vendors. The Company tests most new fashion-sensitive
items in selected stores to aid it in determining their appeal
before making a substantial purchasing commitment. The Company
also takes aggressive markdowns on slow-selling merchandise and
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
1994, purchases from the Company's largest vendor accounted for
approximately 8% of the Company's total purchases. No other
vendor accounted for more than 4% 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
affect 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 specifications. The Company
purchases most of its merchandise from domestic importers and
vendors, which typically minimizes the time necessary to purchase
and obtain shipments in order to enable the Company to react to
merchandise trends in a more timely fashion. Although a
significant portion of the Company's merchandise is manufactured
overseas, principally in the Far East, any economic, political or
social unrest in that region is not expected to have a material
adverse affect on the Company's ability to obtain adequate
supplies of merchandise.
An important component of the Company's strategy is the
allocation of merchandise to individual stores based on an
analysis of historical and current sales trends by merchandise
category, customer profiles and climatic conditions. A
computerized merchandise control system provides current
information on the sales activity of each merchandise style in
the Company's stores. Point-of-sale terminals in the stores
collect and transmit sales and inventory information to the
Company's central computer, 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 allocated by the merchandise distribution staff for
shipment to individual stores. The flow of merchandise from
receipt at the distribution center to shipment is controlled by
an on-line computer system. Shipments are made by common
carrier, and each store receives at least one shipment per week.
Page 5
Item 1. Business: (continued)
Advertising
The Company uses direct mail, local newspapers, radio and in-
store promotional advertising as its primary advertising media.
Weekly newspaper advertisements typically promote specific items
or merchandise at promotional prices. The Company uses radio
advertising in selected broadcast areas that include high
concentrations of its stores. The Company's total advertising
expenditures were approximately 2.0% of retail sales in fiscal
1994.
Store Operations
The Company's store operations management team consists of
an executive vice president, seven regional vice presidents and
61 district managers. Regional vice presidents receive a salary
plus a bonus based on achieving targeted goals for sales, payroll
expense, 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 staffed with a manager, two assistant
managers and additional part-time sales associates depending on
the size of the stores and seasonal personnel needs. Store
managers receive a salary and all other store personnel are paid
on an hourly basis. Store managers and assistant managers are
eligible for monthly and semi-annual bonuses based on achieving
targeted goals for their store's sales increases and shrinkage
control.
The Company has training programs at each level of store
operations. New store managers are trained in training stores
managed by experienced personnel 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 manager is
promoted from within or recruited from outside the Company. All
district managers receive at a minimum a one-week orientation
program at the Company's home office.
Store Locations
Most of the Company's stores are located in the South and
Southeast in small to medium-sized towns, with populations of
10,000 to 50,000 and retail trade areas of 25,000 to 100,000.
Approximately 150 stores, operating under the name "Cato" or
"Cato Fashions," average approximately 4,000 square feet.
Substantially all of the remaining stores are combination "Cato
Fashions" and "Cato Plus" stores, ranging in size from 4,800 to
8,000 square feet. These combination stores have two distinct
signs and selling areas but use a common sales staff and service
desk.
Page 6
Item 1. Business: (continued)
All of the Company's stores are leased. Approximately 89%
are located in strip shopping centers, 3% in downtown locations
and 8% in enclosed shopping malls. Where lease terms are
acceptable and a potential location meets the Company's
demographic and other site-selection criteria, the Company
locates stores in strip shopping centers anchored by major
discount stores, such as Wal-Mart and Kmart 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, expanding certain existing stores and
relocating other 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 for its Cato
stores since fiscal 1990.
Cato Store Development
(Excluding It's Fashion Stores)
Number of Stores
Number Number Number of Stores
Fiscal Year Beginning of Opened Closed End of Year
Year
1990 494 10 32 472
1991 472 6 47 431
1992 431 33 26 438
1993 438 65 13 490
1994 490 57 9 538
The Company intends to open approximately 63 new stores and
to relocate or expand approximately 40 existing stores in fiscal
1995. In fiscal 1996, the Company expects to open approximately
63 new stores and to relocate or expand approximately 40 existing
stores. The Company anticipates that 33 of the 63 new stores to
be opened in fiscal 1995 and 33 of the 63 new stores to be opened
in fiscal 1996 will be off-price "Its Fashion!" stores.
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 and to close underperforming stores or relocate
them to more desirable locations in their existing markets.
Page 7
Item 1. Business: (continued)
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for
approximately 22% of retail sales in fiscal 1994. The Company's
net bad debt expense in fiscal 1994 was 2.8% of credit sales.
Customers applying for the Company's credit card are
approved for credit if they have a satisfactory credit record and
meet a minimum income test. 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 charges a
finance charge based on the allowable rates in the customer's
state of residence.
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 nine 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. Layaway sales
represented approximately 10% of retail sales in fiscal 1994.
It's Fashion Stores
The Company operated 108 off-price stores at January 28,
1995 in 11 states in the South and Southeast under the name "It's
Fashion!" These stores are smaller than the Cato stores,
averaging approximately 3,000 square feet, and offer limited
selections of first-quality family apparel and accessories at
prices ranging from 20% to 80% off regular retail prices. The
Company's credit and layaway plans are not available in these
stores. Most of the merchandise for these stores is purchased at
close-out prices from manufacturers with excessive inventories
due to overruns or order cancellations. The It's Fashion stores
are managed separately from the Cato stores with respect to
merchandising and store operations but use the same
administrative, distribution and financial systems as the Cato
stores. Sales from It's Fashion stores represented 11% of the
Company's retail sales during fiscal 1994. As part of its
planned expansion program, the Company currently intends to open
approximately 33 new It's Fashion stores in fiscal 1995 and 33 in
fiscal 1996.
Page 8
Management Information 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 best seller/worst seller 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 stockkeeping unit. 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 competitive 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 local
apparel specialty stores and, to some degree, with major
department stores, general merchandise chains and discount store
chains. To the extent that the Company opens stores in larger
cities and metropolitan areas, competition is expected to be more
intense in those markets. Many of the Company's competitors have
substantially greater financial, marketing and other resources
than the Company.
Regulation
A variety of laws affect the revolving credit program
offered by the Company. The Federal Consumer Credit Protection
Act (Truth-in Lending) and Regulation Z promulgated thereunder
require written disclosure of information relating to such
financing, including the amount of the annual percentage rate and
the finance charge. 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 discrimination against any credit applicant
based on certain specified grounds. 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 provisions of the Fair Debt Collection Practices Act,
which regulates the manner in which the Company collects payments
on revolving credit accounts. In addition, various state laws
regulate collection practices, require certain disclosures to
credit customers and limit the finance charges, late fees and
other charges which may be imposed by the Company.
Page 9
Employees
As of January 28, 1995, the Company employed approximately
6,600 full-time and part-time employees. The Company also
employs additional part-time employees during the peak retailing
seasons. The Company is not a party to any collective bargaining
agreements and considers that its employee relations are good.
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.
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.
Substantially all of the leases provide for fixed rentals plus a
percentage of sales in excess of a specified volume.
Item 3. Legal Proceedings:
There are no material pending legal proceedings to which the
registrant or its subsidiaries is a party, or to which any of
their property is subject.
Item 4. Results of Votes of Security Holders:
None
Page 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market & Dividend Information
The Company's Class A Common Stock trades in the over-the-
counter market under the NASDAQ National Market System symbol
CACOA. Below is the market range and dividend information for
the four quarters of 1994 and 1993. All per share amounts have
been adjusted to reflect a three-for-two stock split effected
June 28, 1993.
_________________________________________________________________
Price
1994 High Low Dividend
First quarter $21 1/2 $9 1/2 $.025
Second quarter 14 3/4 9 1/2 .04
Third quarter 12 1/4 8 1/2 .04
Fourth quarter 9 3/4 5 1/2 .04
Price
1993 High Low Dividend
First quarter $21 1/3 $15 7/8 $.013
Second quarter 23 1/2 15 3/4 .025
Third quarter 24 1/2 14 3/4 .025
Fourth quarter 24 3/4 14 .025
- - ----------------------------------------------------------------
As of March 31, 1995 the approximate number of holders of
the Company's Class A Common stock was 8,000 and there were 16
record holders of the Company's Class B Common Stock.
Page 11
Item 6. Selected Financial Data:
THE CATO CORPORATION
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
January 28, January 29, January 30, February 1, February 2,
1995 1994 1993 1992 1991
(In thousands, except per share and selected operating data)
Statement of Operations Data:
Retail sales $ 463,737 $ 407,878 $ 331,262 $265,115 $ 230,308
Other income 12,449 12,021 9,494 8,707 7,940
Total revenues 476,186 419,899 340,756 273,822 238,248
Cost of goods sold, including
occupancy, distribution and
buying 324,309 275,090 220,663 180,552 160,079
Gross margin percent, including
occupancy, distribution and
buying 30.1 % 32.6 % 33.4 % 31.9 % 30.5 %
Selling, general and administrative 116,144 100,760 85,667 70,523 74,382
Depreciation 6,844 5,465 4,148 4,342 4,914
Restructuring expense - - - - 10,504
Interest 377 250 1,213 3,299 3,365
Income (loss) before income taxes 28,512 38,334 29,065 15,106 (14,996)
Income tax expense (benefit) 10,407 13,532 10,597 5,589 (5,006)
Net income (loss) $ 18,105 $ 24,802 $ 18,468 $9,517 $ (9,990)
Earnings (loss) per share (1) $ 0.62 $ 0.84 $ 0.71 $0.43 $ (0.45)
Cash dividends paid per share $ 0.145 $ 0.088 $ 0.04 $ - $ 0.013
Selected Operating Data:
Stores open at end of period 646 575 505 487 528
Average sales per store $ 749,000 $ 744,000 $ 663,000 $527,000 $ 415,000
Average sales per square foot of
selling space $ 172 $ 187 $ 173 $ 142 $ 116
Comparable store sales increase
(decrease) 1.0 % 8.1 % 18.6 % 19.9 % (4.5)%
Balance Sheet Data:
Working capital $ 94,581 $ 91,569 $ 53,862 $33,186 $ 25,386
Total assets 201,322 178,603 122,225 94,930 83,408
Long-term debt - - - 24,891 29,446
Total stockholders' equity $ 141,508 $ 127,533 $ 78,216 $30,479 $ 19,969
(1)All per share amounts have been adjusted to reflect a three-for-two stock
split effected June 28, 1993.
Page 12
Item 7. Managements' Discussion and Analysis of Financial
Condition and Results of Operations:
RESULTS OF OPERATIONS
The table below sets forth financial data of the Company
expressed as a percentage of retail sales for the periods
indicated:
_________________________________________________________________
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
Retail sales 100.0% 100.0% 100.0%
Other income 2.7 2.9 2.9
Total revenues 102.7 102.9 102.9
Cost of goods sold,
including occupancy,
distribution, and buying 69.9 67.4 66.6
Selling, general and
administrative 25.0 24.7 25.9
Depreciation 1.6 1.3 1.3
Selling, general,
administrative,
and depreciation 26.6 26.0 27.2
Income
before income taxes 6.1 9.4 9.0
Net Income 3.9% 6.1% 5.6%
Fiscal 1994 Compared to Fiscal 1993
Retail sales increased by 14% to $463.7 million in fiscal
1994 from $407.9 million in fiscal 1993. Same-store sales
increased 1% over fiscal 1993. Total revenues, comprised of
retail sales and other income (principally finance charges on
customer accounts receivable, layaway fees and interest income),
increased 13% to $476.2 million in fiscal 1994 from $419.9
million in fiscal 1993. The Company operated 646 stores at
January 28, 1995, compared to 575 stores in operation at January
29, 1994.
The increase in retail sales in the current year resulted
primarily from the Company's store development activities. In
fiscal 1994, the Company increased selling square footage by
approximately 20% by opening 80 new stores, relocating 30 stores,
and expanding 20 stores while closing 9 existing stores.
Page 13
Other income in fiscal 1994 increased 4% over fiscal 1993.
The increase resulted primarily from higher finance charge income
and by increased earnings on cash equivalents and short-term
investments.
Cost of goods sold, including occupancy, distribution, and
buying was $324.3 million, or 69.9% of retail sales, in fiscal
1994 compared to $275.1 million, or 67.4% of retail sales, in
fiscal 1993. The increase in cost of goods sold as a percent of
retail sales resulted primarily from higher levels of promotional
markdowns taken in fiscal 1994. Inventory levels throughout the
year were consistently higher than were needed for the sales
levels achieved, resulting in markdowns above plan and a decrease
in merchandise margins. Total gross margin dollars (retail sales
less cost of goods sold) increased by 5% to $139.4 million in
fiscal 1994 from $132.8 million in fiscal 1993.
Selling, general and administrative expenses (SG&A) were
$116.1 million in fiscal 1994, compared to $100.8 million in
fiscal 1993, an increase of 15%. As a percent of retail sales,
SG&A was 25.0% compared to 24.7% of retail sales in the prior
year. The overall increase in SG&A resulted primarily from
increased selling-related expenses and increased infrastructure
expenses brought about by the Company's store development
program.
Depreciation expense was $6.8 million in fiscal 1994,
compared to $5.5 million in fiscal 1993. The 25% increase in the
current year resulted primarily from additions to property and
equipment from the Company's store development activities.
Fiscal 1993 Compared to Fiscal 1992
Retail sales increased by 23% to $407.9 million in fiscal
1993 from $331.3 million in fiscal 1992. Same-store sales
increased 8% over fiscal 1992. Total revenues, comprised of
retail sales and other income, increased 23% to $419.9 million in
fiscal 1993 from $340.8 million in fiscal 1992. The Company
operated 575 stores at January 29, 1994 compared to 505 stores
operated at January 30, 1993.
The improvement in same-store sales in fiscal 1993 following
increases of 19% and 20% in the prior two years reflected the
continued success of the Company's merchandising, marketing
strategies and the Company's commitment to superior customer
service. The Company's strategy has been to aggressively
increase sales and market share through intensified marketing
efforts, increasing and broadening merchandise assortments and by
improving merchandise allocation and distribution. Additionally,
the Company's strategy has been to increase sales by expanding
selling square footage through store development activities. In
fiscal 1993, the Company increased selling square footage by
approximately 21% by opening 86 new stores, relocating or
expanding an additional 46 stores while closing 16 existing
stores.
Other income in fiscal 1993 increased by 27% over fiscal
1992. The increase resulted primarily from higher finance charge
income and by increased earnings on cash equivalents and short-
term investments.
Cost of goods sold, including occupancy, distribution, and
buying was $275.1 million, or 67.4% of retail sales, in fiscal
1993, compared to $220.7 million, or 66.6% of retail sales, in
Page 14
fiscal 1992. The increase in cost of goods sold as a percent of
retail sales resulted primarily from higher levels of promotional
markdowns in fiscal 1993's fourth quarter. Total gross margin
dollars increased by 20% to $132.8 million in fiscal 1993 from
$110.6 million in fiscal 1992.
SG&A expenses were $100.8 million in fiscal 1993, compared
to $85.7 million in fiscal 1992, an increase of 18%. As a
percent of retail sales, SG&A improved to 24.7% in fiscal 1993
from 25.9% in fiscal 1992. The improvement in fiscal 1993
reflected the Company's ability to leverage operating expenses by
maintaining a conservative cost structure. The overall increase
in SG&A was attributable to increases in selling-related
expenses, increased marketing costs, and the costs related to
fiscal 1993 store closings. Additionally, expenses relating to
the Company's store development plans contributed to increased
overhead expenses.
Depreciation expense was $5.5 million in fiscal 1993,
compared to $4.1 million in fiscal 1992. The 32% increase in
fiscal 1993 resulted primarily from additions to property and
equipment from the Company's store development activities. The
Company incurred no interest related to long-term debt in fiscal
1993, whereas in fiscal 1992 the Company recorded interest of
$1.2 million on $24.9 million of Subordinated Debentures prior to
their retirement in June 1992.
Liquidity and Capital Resources
At January 28, 1995, the Company had working capital of
$94.6 million, compared to $91.6 million at January 29, 1994.
Cash provided by operating activities was $33.4 million in fiscal
1994, compared to $6.5 million in fiscal 1993. The increase in
cash provided by operating activities in fiscal 1994 resulted
primarily from a decrease in the build-up of inventory levels,
which was partially offset by the decrease in net income. At
January 28, 1995, the Company had $46.2 million in cash, cash
equivalents and short-term investments compared to $42.6 million
at January 29, 1994.
At January 28, 1995, the Company had an unsecured revolving
credit and term loan agreement which provides for borrowing of up
to $35 million and an additional letter of credit facility of $15
million. This agreement, which was amended in December 1994, is
committed until May 31, 1998 with the letter of credit facility
renewable on an annual basis. The Company has the option at any
time during the agreement to convert up to $20 million of
borrowings into a four-year term loan at the lender's prime rate,
repayable in equal quarterly installments. The Company had no
borrowings under the agreement at January 28, 1995 or January 29,
1994. The credit agreement contains various financial covenants
and limitations, including maintenance of specific financial
ratios and a limitation on capital expenditures based on a
formula derived from operating results. Based on the prescribed
formula, the Company is limited to approximately $40.9 million of
capital expenditures in the next fiscal year. In fiscal 1994,
the Company entered into an agreement to lease $10 million of
store fixtures, point-of-sale devices and warehouse equipment.
The operating lease is for a term of seven years but may be
cancelled annually upon proper notice to the lessor. Upon notice
of cancellation, the Company would be obligated to purchase the
equipment at a prescribed termination value from the lessor.
Additionally, the Company has the option of leasing up to $15
million more of qualifying assets from the lessor in fiscal 1995.
Page 15
Expenditures for property and equipment totaled $25.5
million, $17.2 million and $7.6 million in fiscal 1994, 1993, and
1992, respectively. The expenditures for fiscal 1994 included,
in addition to store development expenditures, the costs relating
to the expansion of the Company's distribution facility which was
completed and in operation at the end of fiscal 1994. The
Company intends to open approximately 63 new stores in each of
the next two fiscal years, and to relocate and expand
approximately 40 stores in both fiscal 1995 and 1996. The Company
is currently planning approximately $21.0 million and $19.5
million of capital expenditures in fiscal 1995 and fiscal 1996,
respectively.
The Company believes that its cash, cash equivalents and
short-term investments, together with cash flow from operations
and borrowings available under its revolving credit and term loan
agreement, will be adequate to fund the Company's proposed
capital expenditures for its store expansion program and other
operating requirements.
Page 16
Item 8. Financial Statements and Supplementary Data:
The response to this Item is submitted in a separate section
of this report.
Item 9. Disagreements on Accounting and Financial Disclosures:
None
Page 17
PART III
Item 10. Directors and Executive Officers:
The directors and executive officers of the Company and
their ages as of March 31, 1995 are as follows:
Name Age Position
Wayland H. Cato, Jr. * ++ 72 Chairman of the
Board of Directors and
Chief Executive Officer
Edgar T. Cato 70 Vice Chairman of
the Board of Directors
Linda McFarland Jenkins 47 President and
Chief Operating Officer and
Director
John P. Derham Cato 44 Executive Vice President,
President and General
Manager - It's Fashion!
Division and Director
Alan E. Wiley 48 Executive Vice President,
Secretary, Chief Financial
and Administrative Officer
and Director
Howard A. Severson 47 Executive Vice President,
Assistant Secretary,
Chief Real Estate and
Store Development Officer
and Director
David Kempert 45 Executive Vice
President - Chief Store
Operations Officer
Clarice Cato Goodyear * + + 48 Executive Vice
President and Assistant
Secretary and Director
Patrick J. McIntyre 50 Senior Vice
President - Chief
Information Officer
Thomas E. Cato 40 Vice President -
Divisional Merchandise
Manager, Accessories and
Shoes and Director
Robert W. Bradshaw, Jr. * + 61 Director
George S. Currin * + 58 Director
Paul Fulton*+ 61 Director
Grant L. Hamrick * + 56 Director
Robert L. Kirby * + 64 Director
James H. Shaw * + 66 Director
A.F.(Pete) Sloan* + 66 Director
* Members of Compensation Committee
+ Members of Audit and Stock Option Committees
++ Member of Audit Committee
Page 18
Wayland H. Cato, Jr. is Chairman of the Board of Directors
and has been a director of the Company since 1946. Since 1960,
he has served as the Company's Chief Executive Officer.
Edgar T. Cato is the Vice Chairman of the Board of Directors
and has been a director of the Company since 1946. Mr. Edgar T.
Cato is the brother of Mr. Wayland H. Cato, Jr.
Linda McFarland Jenkins joined the Company in June 1990.
She currently serves as President and Chief Operating Officer and
has been a director since 1991. Prior to joining the Company,
she was Senior Vice President - General Merchandise Manager of
J.B. Ivey & Company, a Charlotte, North Carolina based regional
department store chain, where she was employed for 11 years.
John P. Derham Cato has been employed as an officer of the
Company since 1981 and has served as a director since 1986. He
currently serves as Executive Vice President, President and
General Manager - It's Fashion! Division. Mr. John Cato is a son
of Mr. Wayland H. Cato, Jr.
Alan E. Wiley joined the Company in July 1992. He currently
serves as Executive Vice President, Secretary, Chief Financial
and Administrative Officer and has been a director since 1994.
From 1981 through 1990 he held senior administrative and
financial positions with British American Tobacco, U.S. in
various companies of their specialty retail division. From 1990
until joining the Company, he was President and majority
stockholder of Gibbs-Louis, Inc., an Orlando, Florida based
women's specialty store chain. In May 1992, Gibbs-Louis, Inc.
filed a petition pursuant to the U.S. Bankruptcy Code and was
liquidated in June 1992.
Howard A. Severson has been an officer of the Company since
1985. He currently serves as Executive Vice President, Assistant
Secretary, Chief Real Estate and Store Development Officer and
has been a director since March 1995. Prior to joining the
Company, Mr. Severson served for five years as the Director of
Real Estate for Minnesota Fabric Company, a Charlotte based
retail fabric store chain.
David Kempert joined the Company as Executive Vice
President - Chief Store Operations Officer in August 1989. From
1982 until 1989, he was employed by The Gap Stores, an apparel
specialty chain, where his most recent position was Zone Vice
President of the Northeast Region.
Clarice Cato Goodyear has been employed by the Company since
1975 and has served as a director and officer of the Company
since 1979. She currently serves as Executive Vice President and
Assistant Secretary. Ms. Goodyear is a daughter of
Mr. Wayland H. Cato, Jr.
Patrick J. McIntyre has been an officer of the Company since
1988. He currently serves as Senior Vice President - Chief
Information Officer. He was previously employed for seven years
as Vice President of Management Information Services at The
Higbee Company, a Cleveland, Ohio based regional department store chain.
Page 19
Thomas E. Cato has been employed by the Company since 1977,
has served as an officer since 1986 and has been a director since
1993. He currently serves as Vice President, Divisional
Merchandise Manager - Accessories and Shoes. Mr. Thomas Cato is
a son of Mr. Wayland H. Cato, Jr.
Robert W. Bradshaw, Jr. has been a director of the Company
since 1994. Since 1961, he has been engaged in the private
practice of law with Robinson, Bradshaw & Hinson, P.A. and as a
shareholder, officer and director of the firm. The law firm
serves as General Counsel to the Company.
George S. Currin has been a director of the Company since
1973. From 1978 to 1989, Mr. Currin was the President and Chief
Executive Officer and a director of Southeastern Savings Bank,
Inc. Since 1989, he has served as Chairman and Managing Director
of Fourth Stockton Company and Chairman of Currin - Patterson
Properties LLC.
Paul Fulton has been a director of the Company since 1994.
From July 1988 to December 1993, Mr. Fulton served as President
of Sara Lee Corporation. Since January 1994, Mr. Fulton has
served as Dean of the Kenan-Flagler Business School of the
University of North Carolina at Chapel Hill. Mr. Fulton is
currently a director of Sonoco Products, NationsBank Corporation,
Bassett Furniture Industries, Inc., and Winston Hotels, Inc.
Grant L. Hamrick has been a director of the Company since
1994. From 1961 to 1985, Mr. Hamrick was employed by the public
accounting firm Price Waterhouse and served as Managing Partner
of the Charlotte, North Carolina office. Since 1989, Mr. Hamrick
has served as Senior Vice President and Chief Financial Officer
for American City Business Journals, Inc.
Robert L. Kirby has been a director of the Company since
1992. Mr. Kirby served as Executive Vice President of
NationsBank of North Carolina from 1983 to 1988 and as President
and as director of NationsBank of Florida from 1988 until his
retirement in 1990.
James H. Shaw has been a director of the Company since 1989.
Mr. Shaw was Chairman of Consolidated Ivey's, a regional
department store chain, from 1988 until his retirement in 1989,
Chairman and Chief Executive Officer of J.B. Ivey & Company from
1986 to 1988 and Chairman and Chief Executive Officer of Ivey's
Carolinas from 1983 to 1986.
A.F. (Pete) Sloan has been a director of the Company since
1994. Mr. Sloan was Chairman of the Board of Lance, Inc. where
he was employed from 1955 until his retirement in 1990. Mr.
Sloan is currently a director of Lance, Inc., Bassett Furniture
Industries, Inc., PCA International, Inc., and Richfood, Inc.
Page 20
Item 11. Executive Compensation:
Incorporated by reference to Registrant's proxy statement
for 1995 annual stockholders' meeting.
Item 12. Security Ownership of Certain Beneficial Owners and
Management:
Incorporated by reference to Registrant's proxy statement
for 1995 annual stockholders' meeting.
Item 13. Certain Relationships and Related Transactions:
Incorporated by reference to Registrant's proxy statement
for 1995 annual stockholders' meeting.
Page 21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1.& 2. LIST OF FINANCIAL STATEMENTS AND SCHEDULE
The response to this portion of Item 14 is submitted as a
separate section of this report.
(a) 3. LIST OF EXHIBITS
See Exhibit Index at page 44 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
January 28, 1995.
Page 22
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A), (1) AND (2), (C) AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED JANUARY 28, 1995
THE CATO CORPORATION
CHARLOTTE, NORTH CAROLINA
Page 23
ITEM 14(A) 1. AND 2. LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
THE CATO CORPORATION
The following consolidated financial statements of The Cato
Corporation are included in Item 8:
Report of Independent Auditors Page 24
Consolidated Statements of Income Page 25
Consolidated Balance Sheets Page 26
Consolidated Statements of Cash Flows Page 27
Consolidated Statements of Stockholders' Equity Page 28
Notes to Consolidated Financial Statements Pages 29 - 42
The following consolidated financial statement schedule of the
Cato Corporation is included in Item 14 (d):
SCHEDULE II - Valuation and qualifying accounts Page 43
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
Page 24
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
THE CATO CORPORATION
We have audited the accompanying consolidated balance sheets of
The Cato Corporation as of January 28, 1995 and January 29, 1994,
and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period
ended January 28, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of The Cato Corporation at January 28, 1995
and January 29, 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended January 28, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Charlotte, North Carolina
March 10, 1995
Page 25
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
Revenues: (In thousands, except per share data)
Retail sales $ 463,737 $ 407,878 $ 331,262
Other income (principally finance and layaway charges) 12,449 12,021 9,494
Total revenues 476,186 419,899 340,756
Costs and Expenses:
Cost of goods sold, including occupancy, distribution and buying 324,309 275,090 220,663
Selling, general and administrative 116,144 100,760 85,667
Depreciation 6,844 5,465 4,148
Interest 377 250 1,213
Total operating expenses 447,674 381,565 311,691
Income Before Income Taxes 28,512 38,334 29,065
Income tax expense 10,407 13,532 10,597
Net Income $ 18,105 $ 24,802 $ 18,468
Earnings Per Share $ 0.62 $ 0.84 $ 0.71
Dividends Per Share $ 0.145 $ 0.088 $ 0.04
See notes to consolidated financial statements.
Page 26
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
January 28, January 29,
1995 1994
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 23,963 $ 22,001
Short-term investments 22,263 20,613
Accounts receivable, net of allowance for doubtful accounts of $3,401,000 at
January 28, 1995 and $3,162,000 at January 29, 1994 37,926 36,814
Merchandise inventories 54,674 55,814
Deferred income taxes 2,053 1,607
Prepaid expenses 2,602 1,935
Total Current Assets 143,481 138,784
Property and Equipment 53,146 35,497
Other Assets 4,695 4,322
Total Assets $ 201,322 $ 178,603
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 36,159 $ 34,547
Accrued expenses 11,832 12,668
Income taxes 909 -
Total Current Liabilities 48,900 47,215
Deferred Income Taxes 4,192 3,482
Other Noncurrent Liabilities 6,722 373
Stockholders' Equity:
Class A Common Stock, $.033 par value per share, 50,000,000 shares authorized;
23,132,327 shares issued and outstanding at January 28, 1995 and 23,078,208
shares issued and outstanding at January 29, 1994 770 769
Convertible Class B Common Stock, $.033 par value per share, 15,000,000 shares
authorized; 5,264,317 shares issued and outstanding at January 28, 1995 and
January 29, 1994 176 176
Preferred Stock, $100 par value per share, 100,000 shares authorized,
none issued - -
Additional paid-in capital 62,278 61,753
Retained earnings 78,284 64,835
Total Stockholders' Equity 141,508 127,533
Total Liabilities and Stockholders' Equity $ 201,322 $ 178,603
See notes to consolidated financial statements.
Page 27
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
(In thousands)
Operating Activities
Net income $ 18,105 $24,802 $18,468
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 6,844 5,465 4,148
Amortization of investment premiums 235 720 -
Deferred income taxes 575 1,161 (140)
Loss on disposal of property and equipment 352 - 123
Changes in assets and liabilities:
(Increase) in accounts receivable (1,112) (9,077) (4,468)
(Increase) decrease in merchandise inventories 1,140 (22,072) (6,399)
(Increase) decrease in other assets (1,040) (1,294) 719
Increase (decrease) in accrued income taxes 909 (1,198) (3,060)
Increase in accounts payable and other liabilities 7,386 7,995 7,080
Net cash provided by operating activities 33,394 6,502 16,471
Investing Activities
Expenditures for property and equipment (25,484) (17,214) (7,646)
Proceeds from sale of property and equipment 378 - -
Purchases of short-term investments (11,882) (34,081) (3,829)
Sales of short-term investments 9,145 16,577 -
Net cash used in investing activities (27,843) (34,718) (11,475)
Financing Activities
Dividends paid (4,115) (2,499) (1,063)
Proceeds from employee stock purchase plan 435 - -
Proceeds from stock options exercised 91 1,459 348
Proceeds from sale of common stock - 24,262 29,984
Income tax benefit from stock options exercised - 1,293 -
Repayments of life insurance policy loans - (203) -
Retirement of subordinated debentures - - (24,981)
Net cash provided by (used in) financing activities (3,589) 24,312 4,288
Net Increase (Decrease) in Cash and Cash Equivalents 1,962 (3,904) 9,284
Cash and Cash Equivalents at Beginning of Year 22,001 25,905 16,621
Cash and Cash Equivalents at End of Year $ 23,963 $22,001 $ 25,905
See notes to consolidated financial statements.
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Class A Class B Additional
Common Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock
(In thousands)
Balance - February 1, 1992 $ 501 $ 188 $ 11,504 $ 25,127 $ 6,841
Net income 18,468
Dividends paid ($.04 per share) (1,063)
Sale of Class A Common Stock - 2,875,000 95 29,889
Treasury shares sold through
stock option plans - 55,200 shares 322 (26)
Shares converted from Class B
Common Stock to Class A
Common Stock - 246,021 shares 12 (12)
Balance - January 30, 1993 608 176 41,715 42,532 6,815
Net income 24,802
Dividends paid ($.088 per share) (2,499)
Sale of Class A Common Stock - 34 24,228
1,012,500 shares
Class A Common Stock sold through
stock option plans - 178,550 shares 6 1,193
Treasury shares sold through
stock option plans - 23,300 shares 249 (11)
Retirement of treasury stock -
5,778,970 shares (192) (6,612) (6,804)
Three-for-two stock split -
9,395,385 shares of Class A Common Stock 313 (313)
Income tax benefit from stock options
exercised 1,293
Shares converted from Class B Common
Stock to Class A Common Stock -
18,000 shares - -
Balance - January 29, 1994 769 176 61,753 64,835 -
Net income 18,105
Dividends paid ($.145 per share) (4,115)
Class A Common Stock sold through
employee stock purchase plan - 41,769
shares 1 434
Class A Common Stock sold through
stock option plans - 12,350 shares - 91
Unrealized losses on available for
sale securities, net of an income tax
benefit of $311,000 (541)
Balance - January 28, 1995 $ 770 $ 176 $ 62,278 $ 78,284 $ -
See notes to consolidated financial statements.
Page 29
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 Company and its wholly-
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Description of Business and Fiscal Year - The Company has
principally one segment of business - operation of women's
apparel specialty stores. The Company's fiscal year ends on the
Saturday nearest January 31.
Cash Equivalents and Short-Term Investments - Cash
equivalents consist of highly liquid investments with original
maturities of three months or less. Investments with original
maturities beyond three months are classified as short-term
investments. The fair value of short-term investments are based
on quoted market prices.
The Company adopted Statement of Financial Accounting
Standards (SFAS 115) Accounting for Certain Investments in Debt
and Equity Securities in fiscal 1994. In accordance with the
guidelines set forth in SFAS 115, the Company has determined that
short-term investments held at January 28, 1995 should be
classified as available-for-sale. Available for sale securities
are carried at fair value, with unrealized gains and losses, net
of income taxes, reported as an adjustment to retained earnings.
In accordance with SFAS 115, prior years' financial statements
have not been restated to reflect the change in accounting
method. There was no cumulative effect as a result of adopting
SFAS 115 in fiscal 1994. At January 29, 1994, short-term
investments were carried at amortized cost which approximated
market value. The amortized 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 other income.
Accounts Receivable - Accounts receivable include customer
trade accounts, customer layaway receivables and miscellaneous
trade receivables. Customer receivables related to layaway sales
are reflected net of a reserve for unrealized profit. Net
layaway receivables amounted to approximately $2,019,000 and
$2,004,000 at January 28, 1995 and January 29, 1994,
respectively.
Supplemental Cash Flow Information - Interest paid during
the fiscal years ended January 28, 1995, January 29, 1994, and
January 30, 1993 was $202,000, $271,000, and $1,534,000
respectively. Income tax payments, net of refunds received, for
the fiscal years ended January 28, 1995, January 29, 1994, and
January 30, 1993 were $8,495,000, $12,828,000 and $13,967,000,
respectively.
Inventories - Merchandise inventories are stated at the
lower of cost (first-in, first-out method) or market as
determined by the retail method.
Page 30
Property and Equipment - Property and equipment are recorded
at cost. Maintenance and repairs are charged to operations as
incurred; renewals and betterments are capitalized. Depreciation
of property and equipment is provided on the straight-line method
over the estimated useful lives of the related assets.
Retail Sales - Revenues from retail sales (including layaway
transactions) are recognized at the time of the sale, net of
returns, and exclude sales taxes.
Advertising - Advertising costs are expensed in the period
in which they are incurred. Advertising expense was $9,046,000,
$7,350,000 and $4,988,000 for the fiscal years ended January 28,
1995, January 29, 1994, and January 30, 1993, respectively.
Earnings Per Share - Earnings per share have been computed
based on the weighted average number of Class A and Class B
common shares and common stock equivalents outstanding during the
respective periods. Common stock equivalents represent the
dilutive effect of the assumed exercise of outstanding stock
options. The number of shares used in the earnings per share
computations were 29,113,091, 29,655,394, and 26,012,639 for the
fiscal years ended January 28, 1995, January 29, 1994, and
January 30, 1993, respectively. All per share amounts have been
adjusted to reflect a three-for-two stock split effected June 28,
1993.
Income Taxes - The Company and its subsidiaries file a
consolidated federal income tax return. Income taxes are
provided based on the 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.
Store Opening Costs - Costs relating to the opening of new
stores or the relocating or expanding of existing stores are
expensed as incurred.
Closed Store Lease Obligations - At the time stores are
closed, provision is made for the rentals required to be paid
over the remaining lease terms. Rentals due the Company under
non-cancelable subleases are offset against the related
obligations in the year the sublease is signed. There is no
offset for assumed sublease revenues.
Reclassifications - Certain reclassifications have been made
to the consolidated financial statements for prior fiscal years
to conform with classifications used as of January 28, 1995.
Page 31
2. Short-Term Investments:
Short-term investments at January 28, 1995, include the following:
(In thousands)
Unrealized Estimated
Security Type Cost Loss Fair Value
Obligations of states and political
subdivisions $ 16,567 $ (120) $ 16,447
Corporate debt securities 2,000 (160) 1,840
Subtotal 18,567 (280) 18,287
Equity securities 4,548 (572) 3,976
Total $ 23,115 $ (852) $ 22,263
The amortized cost and estimated fair value of debt and
marketable equity securities at January 28, 1995, by contractual
maturity, are shown below: (In thousands)
Estimated
Security Type Cost Fair Value
Due in one year or less $ 16,290 $ 16,027
Due in one year through three years 2,277 2,260
Subtotal 18,567 18,287
Equity securities 4,548 3,976
Total $ 23,115 $ 22,263
The unrealized loss of $541,000, net of an income tax benefit of
$311,000, is included in stockholders' equity as an adjustment to
retained earnings.
Page 32
3. Accounts Receivable:
Accounts receivable consist of the following:
January 28, January 29,
1995 1994
(In thousands)
Customer accounts-
principally deferred
payment accounts $ 38,291 $ 37,250
Miscellaneous trade
receivables 3,036 2,726
Total 41,327 39,976
Less allowance for
doubtful accounts 3,401 3,162
Accounts receivable - net $ 37,926 $ 36,814
Finance charge and late charge revenue on customer deferred
payment accounts were $6,324,000, $5,539,000, and $4,490,000 for
the fiscal years ended January 28, 1995, January 29, 1994, and
January 30, 1993, respectively, and the provision for doubtful
accounts was $2,888,000, $1,352,000, and $1,489,000 for the
fiscal years ended January 28, 1995, January 29, 1994, and
January 30, 1993, respectively. The provision for doubtful
accounts is classified as a component of selling, general and
administrative expenses.
Page 33
4. Property and Equipment:
Property and equipment consist of the following:
January 28, January 29,
1995 1994
(In thousands)
Land and improvements $ 763 $ 646
Buildings 6,751 4,654
Leasehold improvements 12,811 7,051
Fixtures and equipment 49,897 43,087
Construction in progress 14,352 5,095
Total 84,574 60,533
Less accumulated
depreciation 31,428 25,036
Property and equipment - net $ 53,146 $ 35,497
Depreciation expense was $6,844,000, $5,465,000, and
$4,148,000 for the fiscal years ended January 28, 1995, January
29, 1994, and January 30, 1993.
Page 34
5. Accrued Expenses:
Accrued expenses consist of the following:
January 28, January 29,
1995 1994
Accrued bonus and retirement
savings plan contributions $ 1,787 $ 4,488
Accrued payroll and related items 4,472 3,088
Closed stores 486 290
Property taxes 1,018 816
Contingent rent 735 934
Advertising 267 453
Accrued credit expenses 306 167
Accrued data processing expenses 280 181
Restructuring reserve - 576
Other 2,481 1,675
Total accrued expenses $ 11,832 $ 12,668
Page 35
6. Financing Arrangements:
On January 28, 1995, the Company had an unsecured revolving
credit and term loan agreement which provides for borrowings of
up to $35 million and an additional letter of credit facility of
$15 million. The agreement, which was amended in December 1994,
is committed until May 31, 1998 with the letter of credit
facility renewable annually. The Company has the option at any
time during the agreement period to convert up to $20 million of
borrowings into a four-year term loan at the lender's prime rate,
repayable in equal quarterly installments. The agreement
contains various financial covenants including the maintenance of
specific financial ratios. There were no borrowings outstanding
under this agreement at January 28, 1995 or January 29, 1994.
The Company had approximately $8,607,000 and $7,178,000 at
January 28, 1995 and January 29, 1994, respectively, of
outstanding irrevocable letters of credit relating to purchase
commitments. Upon satisfaction of the terms of the letters of
credit, the Company is obligated to pay the issuing bank the
dollar amount of the commitment.
Page 36
7. 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 charter 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.
In February 1993, the Company issued 1,012,500 shares of
Class A Common Stock in a public offering at an offering price of
$25.50 per share. The net proceeds of $24,262,000 were added to
working capital and are being used to fund the Company's store
development plans and for general corporate purposes.
In May 1993, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of
Class A Common Stock to 50,000,000 shares from 25,000,000 shares
and to permit distributions of Class A Common Stock or Class B
Common Stock to holders of Class B Common Stock in the event of
any dividend or other distribution payable in stock of the
Company. Additionally, in May 1993, the Company retired all of
the shares of Class A Common Stock that were held in treasury at
their aggregate cost of $6,804,000.
In June 1993, the Company effected a three-for-two stock
split in the form of a stock dividend. The split resulted in the
issuance of 9,395,385 shares of Class A Common Stock to Class A
and B shareholders. All references in the financial statements
to average numbers of shares outstanding and related prices, per
share amounts and stock option plan data have been restated to
reflect the split.
In October 1993, the Company registered 250,000 shares of
Class A Common Stock available for issuance under an Employee
Stock Purchase Plan (the plan). Under the terms of the Plan,
substantially all employees may purchase Class A Common Stock
through payroll deductions of up to 10% of their salary. 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, employees are given the
opportunity to make a lump sum purchase of up to $10,000 worth of
Class A Common Stock at 85% of market value. During the year
ended January 28, 1995, 41,769 shares of Class A Common Stock
were purchased by participants through the plan.
Page 37
In 1987, the Company adopted an Incentive Stock Option Plan
and a Non-Qualified Stock Option Plan for key employees of the
Company. In 1991, the Board of Directors of the Company amended
the 1987 option plans increasing the number of shares reserved
under the plans from 2,100,000 shares to 3,150,000 shares. In
1994, the Board of Directors increased the number of shares
issuable under the plans to 3,900,000 shares of which 825,000
shares are issuable under the Incentive Stock Option Plan and
3,075,000 shares are issuable under the Non-Qualified Stock
Option Plan. The purchase price of the shares under option must
be at least 100 percent of the fair market value of the Common
Stock at the date of the grant and must be exercisable not later
than 10 years after the date of the grant unless otherwise
expressly authorized by the Board of Directors.
Option plan activity for the three fiscal years ended
January 28, 1995 is set forth below:
Number of Price Per
Shares Share
Outstanding options,
February 1, 1992 2,534,100 $1.33 -$9.50
Granted 146,250 8.00 -13.17
Exercised (82,800) .33 - 7.50
Cancelled (96,000) 2.75 - 7.63
Outstanding options,
January 30, 1993 2,501,550 1.33 - 13.17
Granted 226,750 7.50-23.06
Exercised (224,750) 1.50 - 13.17
Cancelled (50,700) 1.50 - 19.17
Outstanding options,
January 29, 1994 2,452,850 1.33 - 23.06
Granted 584,500 6.75 - 17.13
Exercised (12,350) 3.25 - 8.00
Cancelled (32,700) 3.25 - 20.67
Outstanding options,
January 28, 1995 2,992,300 1.33 -$23.00
Exercisable at
January 28, 1995 1,787,200 $1.33 -$23.00
Outstanding options at January 28, 1995 covered 927,918 shares of
Class B Common Stock and 2,064,382 shares of Class A Common
Stock. Outstanding options at January 29, 1994 covered 927,918
shares of Class B Common Stock and 1,524,932 shares of Class A
Common Stock. Options available to be granted under the option
plans were 387,700 shares at January 28, 1995, and 189,500 shares
at January 29, 1994.
Page 38
8. Employee Benefit Plans:
The Company has a defined contribution retirement savings
plan (401(k)) which covers all employees who meet minimum age and
service requirements. The 401 (k) plan allows participants to
contribute up to 16% of their annual compensation. The Company
is obligated to make a minimum contribution and further Company
contributions, at the Board of Directors discretion, are based on
a formula of percentages of pre-tax profits. The Company's
contributions for the years ended January 28, 1995, January 29,
1994, and January 30, 1993 were approximately $1,278,000,
$2,272,000 and $2,237,000, respectively. The Company has an
Employee Stock Ownership Plan (ESOP), which covers substantially
all employees who meet minimum age and service requirements. The
Board of Directors determines contributions to the ESOP. No
contributions were made to the ESOP for the years ended January
28, 1995, January 29, 1994 and January 30, 1993, respectively.
Page 39
9. Leases:
The Company has operating lease arrangements for store
facilities and equipment. Facility leases generally are for
periods of five years with renewal options, and most provide for
additional contingent rentals based on a percentage of store
sales in excess of stipulated amounts. Equipment leases are
generally for three - to seven - year periods. In fiscal 1994,
the Company entered into an agreement with a lessor to lease $10
million of store fixtures, POS devices and warehouse equipment.
The lease, which is being accounted for as an operating lease, is
for a term of seven years but may be cancelled annually upon
proper notice to the lessor. Upon notice of cancellation, the
Company would be obligated to purchase the equipment at a
prescribed termination value from the lessor. At the end of the
initial lease year, if the lease was cancelled, the purchase
price for the equipment would be approximately $9,173,000.
The minimum commitments relating to future payments under
non-cancelable operating leases are (in thousands):
Fiscal
Year
1995 $ 28,414
1996 24,068
1997 19,902
1998 12,999
1999 8,068
2000 and thereafter 13,530
Total minimum lease payments $106,981
The following schedule shows the composition of total rental
expense for all leases:
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
(In thousands)
Minimum rentals $ 24,817 $ 20,180 $ 17,025
Contingent rentals 658 872 672
Total rent $ 25,475 $ 21,052 $ 17,697
Page 40
10. Income Taxes
The provisions for income taxes consist of the following:
Fiscal Year
Ended
January January 29, January
28, 30,
1995 1994 1993
(In
thousands)
Current income taxes:
Federal $9,681 $10,488 $10,007
State 151 590 730
Total 9,832 11,078 10,737
Deferred income taxes:
Federal 518 1,061 (104)
State 57 100 (36)
Total 575 1,161 (140)
Allocation of tax
benefit to
capital for stock
options
exercised - 1,293 -
$10,407 $13,532 $10,597
The components of the provision for deferred income taxes
(benefit) are as follows:
Fiscal Year
Ended
January 28, January 29, January 30,
1995 1994 1993
(In thousands)
Depreciation $901 $ 74 $ (807)
Provision for doubtful
accounts (86) 206 85
Restructuring expenses
18 418 405
Inventory valuation
(50) (41) (41)
Self-insurance reserve (12) 113 (113)
Change in tax rate - 13 -
Other (196) 378 331
Total $575 $1,161 $(140)
Page 41
Significant components of the Company's deferred tax assets and
liabilities as of January 28, 1995 and January 29, 1994, are as
follows:
Fiscal Year Ended
January 28, January 29,
1995 1994
(In thousands)
Deferred tax assets:
Bad debt reserve $ 1,329 $ 1,233
Inventory valuation 435 393
Unrealized losses on short-
term investments 311 -
Reserves 992 327
Total deferred tax assets 3,067 1,953
Deferred tax liabilities:
Tax over book depreciation 4,607 3,355
Other, net 599 473
Total deferred tax liabilities 5,206 3,828
Net deferred tax liabilities $ 2,139 $ 1,875
The reconciliation of the Company's effective income tax
rate with the statutory rate is as follows:
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
(In thousands)
Federal income
tax rate 35.0% 35.0% 34.0%
State income taxes 0.5 1.3 1.5
Other 1.0 (1.0) 1.0
Effective income
tax rate 36.5% 35.3% 36.5%
Page 42
11. Quarterly Financial Data (Unaudited):
Summarized quarterly financial results are as follows (in
thousands, except per share data):
First Second Third Fourth
Fiscal 1994: Quarter Quarter Quarter Quarter
Retail Sales $ 110,105 $ 110,196 $ 109,111 $ 134,325
Total revenues 113,131 113,263 112,212 137,580
Cost of goods sold,
including
occupancy,
distribution, and buying 70,781 77,020 77,505 99,003
Net income $ 8,210 $ 4,325 $ 2,799 $ 2,771
Earnings per share $ .28 $ .15 $ .10 $ .10
Fiscal 1993:
Retail Sales $ 93,942 $ 95,502 $ 94,598 $ 123,836
Total revenues 96,705 98,358 97,524 127,312
Cost of goods sold,
including
occupancy,
distribution and
buying 57,872 63,835 64,567 88,816
Net income $ 9,395 $ 5,841 $ 4,436 $ 5,130
Earnings per share $ .32 $ .20 $ .15 $ .17
Page 43
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance Reserve
for for
Doubtful Rental Restructuring
Accounts(a) Commitment(b) Reserve
(In thousands)
Balance at February 1, 1992 $ 4,000 $ 395 $ 3,919
Additions charged to costs and
expenses 1,489 - -
Additions charged to other
accounts 681(d) - -
Deductions (2,420)(c) (228) (2,336)
Balance at January 30, 1993 3,750 167 1,583
Additions charged to costs and
expenses 1,352 268 -
Additions (Deductions) charged
to other accounts 605(d) 269(e) (269)
Deductions (2,545)(c) (414) (681)
Balance at January 29, 1994
3,162 290 633
Additions charged to costs and
expenses 2,888 825 -
Additions (Deductions) charged
to other accounts 843(d) - -
Deductions (3,492)(c) (700) (563)
Balance at January 28, 1995 $ 3,401 $ 415 $ 70
(a) Deducted from trade accounts receivable
(b) Provision for the difference between costs and revenues from
noncancelable subleases over the
lease terms of closed stores.
(c) Uncollectible accounts written off.
(d) Recoveries of amounts previously written off.
(e) Transferred from restructuring reserve.
Page 44
EXHIBIT INDEX
Designation of
Exhibit Page
10.5.0 Loan agreement, dated December 16, 1994 between
The Cato Corporation and NationsBank of North
Carolina and Wachovia Bank of North Carolina, N.A.,
incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 30, 1993
10.6 Lease agreement dated January 27, 1995 between The Cato
Corporation and NationsBank of North Carolina N.A.
22 Subsidiary of the Registrant 45
23 Consent of Independent Auditors 46
Page 45
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Name of State of Name under which
Subsidiary Incorporation Subsidiary does Business
C.H.W. Corporation Delaware C.H.W. Corporation
Page 46
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-41314) pertaining to The Cato
Corporation Employee Incentive Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-41315) pertaining to The
Cato Corporation Non-qualified Stock Option Plan, and in the
Registration Statement (Form S-8 No. 33-69844) pertaining to The
Cato Corporation Employee Stock Purchase Plan, of our report
dated March 10, 1995, with respect to the consolidated financial
statements and schedule of The Cato Corporation included in the
Annual Report (Form 10-K) for the year ended January 28, 1995.
ERNST & YOUNG LLP
Charlotte, North Carolina
April 21, 1995
Page 47
SIGNATURES
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.
The Cato Corporation
By /s/ Wayland H. Cato, Jr. By /s/ Robert M. Sandler
___________________________ ________________________
Wayland H. Cato, Jr. Robert M. Sandler
Chairman of the Board of Senior Vice President
Directors and Controller
Chief Executive Officer
By /s/ Alan E. Wiley
___________________________
Alan E. Wiley
Executive Vice President, Secretary
Chief Financial and Administrative
Officer
Date: April 27, 1995
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/ Wayland H. Cato, Jr. /s/ Rober W. Bradshaw, Jr.
________________________ ________________________
Wayland H. Cato, Jr. Robert W. Bradshaw, Jr.
(Director) (Director)
/s/ Edgar T. Cato /s/ George S. Currin
_____________________ ____________________
Edgar T. Cato George S. Currin
(Director) (Director)
/s/ Linda McFarland Jenkins /s/ Paul Fulton
_______________________ _______________
Linda McFarland Jenkins Paul Fulton
(Director) (Director)
/s/ John P. Derham Cato /s/ Grant L. Hamrick
____________________ __________________
John P. Derham Cato Grant L. Hamrick
(Director) (Director)
/s/ Alan E. Wiley /s/ Robert L. Kirby
___________________ __________________
Alan E. Wiley Robert L. Kirby
(Director) (Director)
/s/ Howard A. Severson /s/ James H. Shaw
______________________ ______________
Howard A. Severson James H. Shaw
(Director) (Director)
/s/ A.F. (Pete) Sloan
_____________________ __________________
Clarice Cato Goodyear A.F. (Pete) Sloan
(Director) (Director)
/s/ Thomas E. Cato
_________________
Thomas E. Cato
(Director)