##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended            July 29, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-31340
 THE CATO CORPORATION
  Delaware
    
    56-0484485(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 8100 Denmark Road, Charlotte, North Carolina 28273-5975
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year,
  þ o
  o þ o
  o þ




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##### 



THE CATO CORPORATION
 FORM 10-Q
 Quarter Ended July 29, 2006
 Table of Contents
 PageNo.PART I  FINANCIAL INFORMATION (UNAUDITED)Item 1. Financial Statements:Condensed Consolidated Statements of Income and Comprehensive Income
    
    
    2For the Three Months and Six Months Ended July 29, 2006 and July 30, 2005Condensed Consolidated Balance Sheets
    
    
    3At July 29, 2006, July 30, 2005 and January 28, 2006Condensed Consolidated Statements of Cash Flows
    
    
    4For the Six Months Ended July 29, 2006 and July 30, 2005Notes to Condensed Consolidated Financial Statements
    
    
    511For the Three Months and Six Months Ended
July 29, 2006 and July 30, 2005Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    1218Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    22-26




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##### 



PART I FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 THE CATO CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
 Three Months Ended
    
    
    Six Months EndedJuly 29,
    
    
    July 30,
    
    
    July 29,
    
    
    July 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)(Dollars in thousands, except per share data)REVENUESRetail sales
    
    $
    214,633
    
    
    $
    208,316
    
    
    $
    444,374
    
    
    $
    423,380Other income (principally finance charges, late fees and
layaway charges)
    
    
    3,212
    
    
    
    3,648
    
    
    
    6,531
    
    
    
    7,511Total revenues
    
    
    217,845
    
    
    
    211,964
    
    
    
    450,905
    
    
    
    430,891COSTS AND EXPENSES, NETCost of goods sold
    
    
    143,746
    
    
    
    140,426
    
    
    
    285,858
    
    
    
    276,860Selling, general and administrative
    
    
    51,762
    
    
    
    50,765
    
    
    
    106,329
    
    
    
    100,097Depreciation
    
    
    5,223
    
    
    
    5,025
    
    
    
    10,391
    
    
    
    10,064Interest expense
    
    
    10
    
    
    
    10
    
    
    
    20
    
    
    
    162Interest and other income
    
    
    (1,940
    )
    
    
    (1,071
    )
    
    
    (3,492
    )
    
    
    (2,012
    )198,801
    
    
    
    195,155
    
    
    
    399,106
    
    
    
    385,171Income before income taxes
    
    
    19,044
    
    
    
    16,809
    
    
    
    51,799
    
    
    
    45,720Income tax expense
    
    
    6,951
    
    
    
    6,102
    
    
    
    18,907
    
    
    
    16,596Net Income
    
    $
    12,093
    
    
    $
    10,707
    
    
    $
    32,892
    
    
    $
    29,124Basic earnings per share
    
    $
    0.39
    
    
    $
    0.34
    
    
    $
    1.05
    
    
    $
    0.94Basic weighted average shares
    
    
    31,267,637
    
    
    
    31,188,146
    
    
    
    31,250,921
    
    
    
    31,146,236Diluted earnings per share
    
    $
    0.38
    
    
    $
    0.34
    
    
    $
    1.04
    
    
    $
    0.92Diluted weighted average shares
    
    
    31,803,875
    
    
    
    31,828,039
    
    
    
    31,765,992
    
    
    
    31,811,183Dividends per share
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.28
    
    
    $
    0.247Comprehensive income:Net income
    
    $
    12,093
    
    
    $
    10,707
    
    
    $
    32,892
    
    
    $
    29,124Unrealized gains on available-for-sale securities, net
of deferred income tax expense
    
    
    56
    
    
    
    70
    
    
    
    34
    
    
    
    30Net comprehensive income
    
    $
    12,149
    
    
    $
    10,777
    
    
    $
    32,926
    
    
    $
    29,154
  2




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##### 



THE CATO CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS
 July 29,
    
    
    July 30,
    
    
    January 28,2006
    
    
    2005
    
    
    2006(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    21,809
    
    
    $
    23,884
    
    
    $
    21,734Short-term investments
    
    
    94,171
    
    
    
    86,140
    
    
    
    86,085Accounts receivable, net of allowance for doubtful accounts of $3,589,
$5,955 and $3,694 at July 29, 2006, July 30, 2005 and January 28,
2006, respectively
    
    
    46,436
    
    
    
    48,229
    
    
    
    49,644Merchandise inventories
    
    
    91,989
    
    
    
    84,904
    
    
    
    103,370Deferred income taxes
    
    
    8,506
    
    
    
    5,764
    
    
    
    8,526Prepaid expenses
    
    
    2,464
    
    
    
    2,180
    
    
    
    2,318Total Current Assets
    
    
    265,375
    
    
    
    251,101
    
    
    
    271,677Property and equipment  net
    
    
    130,422
    
    
    
    118,599
    
    
    
    124,104Other assets
    
    
    11,201
    
    
    
    10,818
    
    
    
    10,855Total Assets
    
    $
    406,998
    
    
    $
    380,518
    
    
    $
    406,636LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    58,210
    
    
    $
    64,272
    
    
    $
    78,036Accrued expenses
    
    
    32,433
    
    
    
    29,951
    
    
    
    31,967Accrued bonus and benefits
    
    
    10,342
    
    
    
    8,161
    
    
    
    17,570Accrued income taxes
    
    
    7,779
    
    
    
    10,252
    
    
    
    4,990Total Current Liabilities
    
    
    108,764
    
    
    
    112,636
    
    
    
    132,563Deferred income taxes
    
    
    9,261
    
    
    
    10,172
    
    
    
    9,261Other noncurrent liabilities (primarily deferred rent)
    
    
    23,230
    
    
    
    23,732
    
    
    
    24,864Commitments and contingencies:Stockholders Equity:Preferred stock, $100 par value per share, 100,000 shares authorized,
none issued
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 35,909,497 shares, 30,650,431 shares
and 35,622,516 shares at July 29, 2006, July 30, 2005 and
January 28, 2006, respectively
    
    
    1,197
    
    
    
    1,021
    
    
    
    1,188Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 690,525 shares, 5,597,834
shares and 690,525 shares at July 29, 2006, July 30, 2005 and
January 28, 2006, respectively
    
    
    23
    
    
    
    187
    
    
    
    23Additional paid-in capital
    
    
    40,668
    
    
    
    37,635
    
    
    
    39,244Retained earnings
    
    
    318,556
    
    
    
    286,890
    
    
    
    294,462Accumulated other comprehensive income
    
    
    112
    
    
    
    101
    
    
    
    78Unearned compensation  restricted stock awards
    
    
    3⁄4
    
    
    
    (569
    )
    
    
    (229
    )360,556
    
    
    
    325,265
    
    
    
    334,766Less Class A and Class B common stock in treasury, at cost (5,093,609
Class A and 0 Class B shares at July 29, 2006, and
231 Class A and 4,907,309 Class B at July 30, 2005 and
5,093,840 Class A and 0 Class B at January 28, 2006)
    
    
    (94,813
    )
    
    
    (91,287
    )
    
    
    (94,818
    )Total Stockholders Equity
    
    
    265,743
    
    
    
    233,978
    
    
    
    239,948Total Liabilities and Stockholders Equity
    
    $
    406,998
    
    
    $
    380,518
    
    
    $
    406,636
  3




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##### 



THE CATO CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJuly 29,
    
    
    July 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    32,892
    
    
    $
    29,124Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    10,391
    
    
    
    10,064Provision for doubtful accounts
    
    
    1,627
    
    
    
    2,443Share-based compensation
    
    
    626
    
    
    
    341Excess tax benefits from share-based compensation
    
    
    (284
    )
    
    
    3⁄4Deferred income taxes
    
    
    20
    
    
    
    17Loss on disposal of property and equipment
    
    
    569
    
    
    
    690Changes in operating assets and liabilities which provided
(used) cash:Accounts receivable
    
    
    1,581
    
    
    
    217Merchandise inventories
    
    
    11,381
    
    
    
    15,634Prepaid and other assets
    
    
    (493
    )
    
    
    (890
    )Accrued income taxes
    
    
    3,073
    
    
    
    5,787Accounts payable, accrued expenses and other liabilities
    
    
    (28,930
    )
    
    
    (24,485
    )Net cash provided by operating activities
    
    
    32,453
    
    
    
    38,942INVESTING ACTIVITIESExpenditures for property and equipment
    
    
    (17,370
    )
    
    
    (11,684
    )Purchases of short-term investments
    
    
    (95,287
    )
    
    
    (44,877
    )Sales of short-term investments
    
    
    87,235
    
    
    
    47,355Net cash used in investing activities
    
    
    (25,422
    )
    
    
    (9,206
    )FINANCING ACTIVITIESChange in cash overdrafts included in accounts payable
    
    
    805
    
    
    
    4,195Dividends paid
    
    
    (8,798
    )
    
    
    (7,734
    )Payments to settle long term debt
    
    
    3⁄4
    
    
    
    (22,000
    )Proceeds from employee stock purchase plan
    
    
    206
    
    
    
    230Excess tax benefits from share-based compensation
    
    
    284
    
    
    
    3⁄4Proceeds from stock options exercised
    
    
    547
    
    
    
    817Net cash used in financing activities
    
    
    (6,956
    )
    
    
    (24,492
    )Net increase in cash and cash equivalents
    
    
    75
    
    
    
    5,244Cash and cash equivalents at beginning of period
    
    
    21,734
    
    
    
    18,640Cash and cash equivalents at end of period
    
    $
    21,809
    
    
    $
    23,884
  4




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##### 



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 29, 2006 AND JULY 30, 2005
  NOTE 1  GENERAL:
        5




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##### 



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 29, 2006 AND JULY 30, 2005
  NOTE
1  GENERAL (CONTINUED):
  NOTE 2  EARNINGS PER SHARE:
  Three Months Ended
    
    
    Six Months EndedJuly 29,
    
    
    July 30,
    
    
    July 29,
    
    
    July 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted-average shares outstanding
    
    
    31,267,637
    
    
    
    31,188,146
    
    
    
    31,250,921
    
    
    
    31,146,236Dilutive effect of :Stock options
    
    
    522,683
    
    
    
    520,120
    
    
    
    509,122
    
    
    
    549,145Restricted stock
    
    
    13,260
    
    
    
    119,773
    
    
    
    5,704
    
    
    
    115,802Employee stock purchase plan
    
    
    295
    
    
    
    3⁄4
    
    
    
    245
    
    
    
    3⁄4Weighted-average shares and
common stock equivalents
outstanding
    
    
    31,803,875
    
    
    
    31,828,039
    
    
    
    31,765,992
    
    
    
    31,811,183
 NOTE 3  SUPPLEMENTAL CASH FLOW INFORMATION:
  NOTE 4  FINANCING ARRANGEMENTS:
  6




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##### 



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 29, 2006 AND JULY 30, 2005
  NOTE 4  FINANCING ARRANGEMENTS (CONTINUED):
   NOTE
5  REPORTABLE SEGMENT INFORMATION:
   Three Months Ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJuly 29, 2006
    
    Retail
    
    
    Credit
    
    
    Total
    
    
    July 29, 2006
    
    Retail
    
    
    Credit
    
    
    TotalRevenues
    
    $
    215,177
    
    
    $
    2,668
    
    
    $
    217,845
    
    
    Revenues
    
    $
    445,547
    
    
    $
    5,358
    
    
    $
    450,905Depreciation
    
    
    5,203
    
    
    
    20
    
    
    
    5,223
    
    
    Depreciation
    
    
    10,352
    
    
    
    39
    
    
    
    10,391Interest and other
income
    
    
    (1,940
    )
    
    
    
    
    
    
    (1,940
    )
    
    Interest and other income
    
    
    (3,492
    )
    
    
    
    
    
    
    (3,492
    )Income before taxes
    
    
    17,827
    
    
    
    1,217
    
    
    
    19,044
    
    
    Income before taxes
    
    
    49,805
    
    
    
    1,994
    
    
    
    51,799Total assets
    
    
    337,564
    
    
    
    69,434
    
    
    
    406,998
    
    
    Total assets
    
    
    337,564
    
    
    
    69,434
    
    
    
    406,998Capital expenditures
    
    
    4,601
    
    
    
    4
    
    
    
    4,605
    
    
    Capital expenditures
    
    
    17,348
    
    
    
    22
    
    
    
    17,370
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJuly 30, 2005
    
    Retail
    
    
    Credit
    
    
    Total
    
    
    July 30, 2005
    
    Retail
    
    
    Credit
    
    
    TotalRevenues
    
    $
    208,706
    
    
    $
    3,258
    
    
    $
    211,964
    
    
    Revenues
    
    $
    424,296
    
    
    $
    6,595
    
    
    $
    430,891Depreciation
    
    
    4,996
    
    
    
    29
    
    
    
    5,025
    
    
    Depreciation
    
    
    10,006
    
    
    
    58
    
    
    
    10,064Interest and other
income
    
    
    (1,071
    )
    
    
    
    
    
    
    (1,071
    )
    
    Interest and other income
    
    
    (2,012
    )
    
    
    
    
    
    
    (2,012
    )Income before taxes
    
    
    15,567
    
    
    
    1,242
    
    
    
    16,809
    
    
    Income before taxes
    
    
    43,393
    
    
    
    2,327
    
    
    
    45,720Total assets
    
    
    315,492
    
    
    
    65,026
    
    
    
    380,518
    
    
    Total assets
    
    
    315,492
    
    
    
    65,026
    
    
    
    380,518Capital expenditures
    
    
    4,951
    
    
    
    2
    
    
    
    4,953
    
    
    Capital expenditures
    
    
    11,682
    
    
    
    2
    
    
    
    11,684
   7




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##### 



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 29, 2006 AND JULY 30, 2005
  NOTE
5  REPORTABLE SEGMENT INFORMATION (CONTINUED):
 Three Months Ended
    
    
    Six Months EndedJuly 29,
    
    
    July 30,
    
    
    July 29,
    
    
    July 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Bad debt expense
    
    $
    600
    
    
    $
    1,179
    
    
    $
    1,581
    
    
    $
    2,443Payroll
    
    
    262
    
    
    
    254
    
    
    
    514
    
    
    
    550Postage
    
    
    245
    
    
    
    292
    
    
    
    541
    
    
    
    597Other expenses
    
    
    324
    
    
    
    262
    
    
    
    689
    
    
    
    620Total expenses
    
    $
    1,431
    
    
    $
    1,987
    
    
    $
    3,325
    
    
    $
    4,210
 NOTE 6  STOCK BASED COMPENSATION:
 Share-Based Payment, Accounting for Stock Issued to
Employees,
  8




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##### 



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 29, 2006 AND JULY 30, 2005
  NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
  1987
    
    
    1999
    
    
    2004Plan
    
    
    Plan
    
    
    Plan
    
    
    TotalOptions and/or restricted stock initially authorized
    
    
    4,612,500
    
    
    
    1,000,000
    
    
    
    1,350,000
    
    
    
    6,962,500Options and/or restricted stock available for grant:January 28, 2006
    
    
    5,227
    
    
    
    
    
    
    
    1,300,500
    
    
    
    1,305,727July 29, 2006
    
    
    5,227
    
    
    
    
    
    
    
    1,082,996
    
    
    
    1,088,223
   Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateExercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price
    
    
    Contractual Term
    
    
    Value (a)Options outstanding at January 28, 2006
    
    
    1,343,400
    
    
    $
    8.23
    
    
    3.05 yearsGranted
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    (900
    )Exercised
    
    
    (57,625
    )Outstanding at July 29, 2006
    
    
    1,284,875
    
    
    $
    8.18
    
    
    2.49 years
    
    $
    18,433,699Vested and exercisable at July 29, 2006
    
    
    1,178,400
    
    
    $
    7.58
    
    
    2.09 years
    
    $
    17,617,916
 
 (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.  9




---



##### 



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 29, 2006 AND JULY 30, 2005
  NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
 Six Months EndedJuly 30,2005Risk free interest rate
    
    
    4.14
    %Expected life
    
    5.0
    yearsExpected volatility
    
    
    37.63
    %Expected dividend yield
    
    
    2.57
    %Weighted-average grant date fair value
    
    $
    6.260
    Three Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 30,
    
    
    July 30,2005
    
    
    2005Net Income as Reported
    
    $
    10,707
    
    
    $
    29,124Add: Stock-Based employee compensation expense included
in reported net income, net of related tax effects
    
    
    109
    
    
    
    217Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (130
    )
    
    
    (258
    )Pro forma Net Income
    
    $
    10,686
    
    
    $
    29,083Earnings per share:Basic  as reported
    
    $
    .34
    
    
    $
    .94Basic  pro forma
    
    $
    .34
    
    
    $
    .93Diluted  as reported
    
    $
    .34
    
    
    $
    .92Diluted  pro forma
    
    $
    .34
    
    
    $
    .91
 10




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##### 



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 29, 2006 AND JULY 30, 2005
  NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
     Weighted AverageNumber of
    
    
    Grant Date FairShares
    
    
    Value Per ShareRestricted stock awards at January 28, 2006
    
    
    150,000
    
    
    $
    18.21Granted
    
    
    219,754
    
    
    
    22.84Vested
    
    
    (150,000
    )
    
    
    18.21Forfeited
    
    
    (2,250
    )
    
    
    22.89Restricted stock awards at July 29, 2006
    
    
    217,504
    
    
    $
    22.84
 NOTE
7  RECENT ACCOUNTING PRONOUNCEMENTS:
  11




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THE CATO CORPORATION  ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS
  FORWARD LOOKING INFORMATION:
  www.catocorp.com
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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  CRITICAL ACCOUNTING POLICIES:
   13




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  RESULTS OF OPERATIONS:
  Three Months Ended
    
    Six Months EndedJuly 29,
    
    July 30,
    
    July 29,
    
    July 30,2006
    
    2005
    
    2006
    
    2005Total retail sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Total revenues
    
    
    101.5
    
    
    
    101.7
    
    
    
    101.5
    
    
    
    101.8Cost of goods sold
    
    
    67.0
    
    
    
    67.4
    
    
    
    64.3
    
    
    
    65.4Selling, general and administrative
    
    
    24.1
    
    
    
    24.4
    
    
    
    23.9
    
    
    
    23.6Depreciation
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.4Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest and other income
    
    
    (0.9
    )
    
    
    (0.5
    )
    
    
    (0.8
    )
    
    
    (0.4
    )Income before income taxes
    
    
    8.9
    
    
    
    8.0
    
    
    
    11.7
    
    
    
    10.8Net income
    
    
    5.6
    
    
    
    5.1
    
    
    
    7.4
    
    
    
    6.9
 Comparison of Second Quarter and First Six Months of 2006 with 2005.
   14




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##### 



THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  RESULTS OF OPERATIONS  (CONTINUED):
     15




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##### 



THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  RESULTS OF OPERATIONS  (CONTINUED):
     LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
   16




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##### 



THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
        17




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##### 



THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
   18




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##### 



THE CATO CORPORATION  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
  ITEM 4. CONTROLS AND PROCEDURES:
  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
  19




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PART II OTHER INFORMATION
 THE CATO CORPORATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Election of Directors :
 For
    
    Withheld
    
    Voting Power For
    
    Voting Power WithheldMr. John P. D. Cato
    
    
    27,881,605
    
    
    
    988,347
    
    
    
    34,055,605
    
    
    
    988,347Mr. William H. Grigg
    
    
    14,220,220
    
    
    
    14,649,732
    
    
    
    20,394,220
    
    
    
    14,649,732Mr. James H. Shaw
    
    
    27,849,509
    
    
    
    1,020,218
    
    
    
    34,023,734
    
    
    
    1,020,218
 Ratification of Independent Autitor:
 For
    
    Withheld
    
    Voting Power For
    
    Voting Power Withheld28,654,043
    
    
    
    215,908
    
    
    
    34,828,043
    
    
    
    215,908
 ITEM 5. OTHER INFORMATION
  20




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##### 



PART II OTHER INFORMATION (CONTINUED)
 THE CATO CORPORATION
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Item3.1
    
    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, 2000.3.2
    
    Registrants By Laws, incorporated by reference to Exhibit 4.2 to
Form S-8 of the Registrant Filed February 7, 2000.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.
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##### 



PART II OTHER INFORMATION
 THE CATO CORPORATION
  THE CATO CORPORATIONSeptember 5, 2006
    
    /s/ John P. D. CatoDate
    
    John P. D. Cato
Chairman, President and
Chief Executive OfficerSeptember 5, 2006
    
    /s/ Reynolds C. FaulknerDate
    
    Reynolds C. Faulkner
Executive Vice President
Chief Financial OfficerSeptember 5, 2006
    
    /s/ Robert M. SandlerDate
    
    Robert M. Sandler
Senior Vice President
Controller
 22