CATO

Business Context and Reporting Period

Company: The Cato Corporation (CATO CORP)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended August 3, 2002
Business Overview: The Company operates two reportable segments: retail and credit. As of August 3, 2002, the Company operated 972 stores. The stock began trading on the New York Stock Exchange under the symbol "CTR" on June 13, 2002.

Key Financial Metrics

Margins (as % of Retail Sales):

• Cost of Goods Sold: 66.8% (3mo 2002) vs 68.5% (3mo 2001); 65.0% (6mo 2002) vs 66.5% (6mo 2001).
• SG&A Expenses: 24.1% (3mo 2002) vs 23.1% (3mo 2001); 23.6% (6mo 2002) vs 23.3% (6mo 2001).
• Net Income: 6.6% (3mo 2002) vs 6.4% (3mo 2001); 8.0% (6mo 2002) vs 7.6% (6mo 2001).

Material Changes vs. Prior Period

• Revenue Growth: Total retail sales increased 8% in the second quarter and 9% for the first six months compared to the prior year. Same-store sales increased 1% (quarter) and 2% (six months).
• Profitability: Net income increased 12% for the quarter and 14% for the six months. Income before taxes improved due to better procurement and inventory management, which reduced the cost of goods sold percentage.
• Expenses: SG&A expenses increased in absolute dollars and as a percentage of sales, primarily driven by store development activities and infrastructure costs.
• Liquidity: Cash and cash equivalents increased significantly from $21.99 million (Aug 2001) to $73.52 million (Aug 2002). Working capital improved to $155.1 million.
• Store Count: The Company operated 972 stores at August 3, 2002, compared to 895 stores at the end of the prior year's second quarter.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company expects total capital expenditures to be approximately $31 million for the current fiscal year. Expenditures to date include new store openings, relocations, and technology investments.
• Store Development: The Company intends to open approximately 90 new stores, close 10 stores, and relocate 20 stores during the current fiscal year.
• Dividends: In May 2002, the Board increased the quarterly dividend by 11% from $0.135 to $0.15 per share.
• Financing: The Company has an unsecured revolving credit agreement of up to $35 million committed until July 2003. There were no borrowings outstanding as of August 3, 2002.
• Accounting Changes: The Company adopted SFAS No. 142 (Goodwill) and SFAS No. 144 (Impairment of Long-Lived Assets) with no material impact. SFAS No. 146 (Exit Costs) is not expected to have a material impact.
• Risks: Management notes that critical accounting estimates include allowances for doubtful accounts, workers' compensation reserves, and inventory markdowns. Actual results may differ from estimates.

Key Facts for Investor Verification

• Same-Store Sales Growth: Verify the sustainability of the 1-2% same-store sales growth amidst increased SG&A expenses.
• Capital Allocation: Monitor the execution of the $31 million capital expenditure plan and the net impact of opening 90 new stores versus closing 10.
• Inventory Management: Review inventory levels ($86.4 million) relative to sales growth to ensure the improved cost of goods sold margin is maintained.
• Share Repurchases: Note the reduction in share buybacks compared to the prior year ($1.1 million in Q2 2002 vs $6.9 million in Q2 2001).
• Credit Segment: Assess the contribution of the credit segment (finance and late charges) to total revenue, which saw an 11% increase in the quarter.