##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|                                                                  |  |                                                                                         
|----------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|x                                                                 |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 
|                                                                  |  |                                                                                         
|For the quarterly period ended May 1, 2004                       
|                                                                  |  |                                                                                         
|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
(Exact name of registrant as specified in its charter)

|                             |  |                    
|---------------------------- |  | -------------------
|Delaware                     |  | 56-0484485         
|(State or other jurisdiction |  | (I.R.S. Employer   
|of incorporation)            |  | Identification No.)

8100 Denmark Road, Charlotte, North Carolina 28273-5975
(Address of principal executive offices)
(Zip Code)

(704) 554-8510
(Registrants telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)

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
o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act).

Yes x      No
o

As of May 18, 2004, there were 20,143,778 shares of Class A common stock and
470,350 shares of Class B common stock outstanding.





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##### 



THE CATO CORPORATION

FORM 10-Q

May 1, 2004

Table of Contents

|                                           |                                                                                               |                                                        |  |      |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  | ---- |  | 
|                                           |                                                                                               |                                                        |  | Page
|                                           |                                                                                               |                                                        |  | No. 
|                                           |                                                                                               |                                                        |  |     
|PART I  FINANCIAL INFORMATION (UNAUDITED) |                                                                                               |                                                        |  |     
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 1. Financial Statements:                                                                 |                                                        |  |      | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Condensed Consolidated Statements of Income                                                   |                                                        |  | 2    | 
|                                           |                                                                                               | For the Three Months Ended May 1, 2004 and May 3, 2003 |  |      |  | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Condensed Consolidated Balance Sheets                                                         |                                                        |  | 3    | 
|                                           |                                                                                               | At May 1, 2004, May 3, 2003 and January 31, 2004       |  |      |  | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Condensed Consolidated Statements of Cash Flows                                               |                                                        |  | 4    | 
|                                           |                                                                                               | For the Three Months Ended May 1, 2004 and May 3, 2003 |  |      |  | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Notes to Condensed Consolidated Financial Statements                                          |                                                        |  | 58  | 
|                                           |                                                                                               | For the Three Months Ended May 1, 2004 and May 3, 2003 |  |      |  | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                        |  | 916 | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                        |  | 16   | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 4. Controls and Procedures                                                               |                                                        |  | 17   | 
|                                           |                                                                                               |                                                        |  |     
|PART II  OTHER INFORMATION                |                                                                                               |                                                        |  |     
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 1. Legal Proceedings                                                                     |                                                        |  | 18   | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities      |                                                        |  | 18   | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 3. Defaults upon Senior Securities                                                       |                                                        |  | 18   | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                        |  | 18   | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 5. Other Information                                                                     |                                                        |  | 18   | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                        |  | 18   | 
|                                           |                                                                                               |                                                        |  |     
|                                           | Signatures                                                                                    |                                                        |  | 19   | 





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Page 2

PART I      FINANCIAL INFORMATION

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |         |         | 
|-------------------------- | ------------------------------------------------------------- | ----------------------- | ------ | --------------------------------------------- | ------- |  |  |  |  | ----------- | ------ | ------- | ------- | 
|                           |                                                               |                         |        | Three Months Ended                           
|                           |                                                               |                         |        |                                              
|                           |                                                               |                         |        | May 1,                                        |         |  |  |  |  | May 3,     
|                           |                                                               |                         |        | 2004                                          |         |  |  |  |  | 2003       
|                           |                                                               |                         |        | (Unaudited)                                   |         |  |  |  |  | (Unaudited)
|                           |                                                               |                         |        |                                               |         |  |  |  |  |            
|                           |                                                               |                         |        | (Dollars in thousands, except per share data)
|REVENUES                   |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           | Retail sales                                                  |                         | $      | 205,193                                       |         |  |  |  |  |             | $      | 197,304 |        
|                           | Other income (principally finance, late, and layaway charges) |                         |        | 4,008                                         |         |  |  |  |  |             |        | 3,906   |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               | Total revenues          |        |                                               | 209,201 |  |  |  |  |             |        |         | 201,210 | 
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|COSTS AND EXPENSES, NET    |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           | Cost of goods sold                                            |                         |        | 132,344                                       |         |  |  |  |  |             |        | 126,998 |        
|                           | Selling, general and administrative                           |                         |        | 45,823                                        |         |  |  |  |  |             |        | 43,444  |        
|                           | Depreciation                                                  |                         |        | 4,979                                         |         |  |  |  |  |             |        | 4,451   |        
|                           | Interest expense                                              |                         |        | 162                                           |         |  |  |  |  |             |        | 3       |        
|                           | Interest and other income                                     |                         |        | (506                                          | )       |  |  |  |  |             |        | (1,130  | )      
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               | Costs and expenses, net |        |                                               | 182,802 |  |  |  |  |             |        |         | 173,766 | 
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|INCOME BEFORE INCOME TAXES |                                                               |                         | 26,399 |                                               |         |  |  |  |  |             | 27,444 |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|Income tax expense         |                                                               |                         | 9,583  |                                               |         |  |  |  |  |             | 9,962  |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|NET INCOME                 |                                                               | $                       | 16,816 |                                               |         |  |  |  |  | $           | 17,482 |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|BASIC EARNINGS PER SHARE   |                                                               | $                       | .82    |                                               |         |  |  |  |  | $           | .69    |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|DILUTED EARNINGS PER SHARE |                                                               | $                       | .81    |                                               |         |  |  |  |  | $           | .68    |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        
|DIVIDENDS PER SHARE        |                                                               | $                       | .16    |                                               |         |  |  |  |  | $           | .15    |        
|                           |                                                               |                         |        |                                               |         |  |  |  |  |             |        |        

See accompanying notes to condensed consolidated financial statements.





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Page 3

THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |        |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | -------- | ------ | ------- | ---------------------- | ------- | ----------- | ------- | ----------- | -------- | ------ | ------- | ------- | ------- | 
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         | May 1,                 |         | May 3,      |         | January 31,
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         | 2004                   |         | 2003        |         | 2004       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         | (Unaudited)            |         | (Unaudited) |         |            
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |            
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         | (Dollars in thousands)
|ASSETS                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|Current Assets                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         | Cash and cash equivalents                                                                                                                                                                                                |                            | $        | 23,167 |         |                        | $       | 43,986      |         |             | $        | 23,857 |        
|                                                                                                                                                                                                                                                                         | Short-term investments                                                                                                                                                                                                   |                            |          | 67,155 |         |                        |         | 75,069      |         |             |          | 47,545 |        
|                                                                                                                                                                                                                                                                         | Accounts receivable  net                                                                                                                                                                                                |                            |          | 51,427 |         |                        |         | 53,340      |         |             |          | 52,714 |        
|                                                                                                                                                                                                                                                                         | Merchandise inventories                                                                                                                                                                                                  |                            |          | 99,855 |         |                        |         | 102,306     |         |             |          | 97,292 |        
|                                                                                                                                                                                                                                                                         | Deferred income taxes                                                                                                                                                                                                    |                            |          | 179    |         |                        |         | 1,326       |         |             |          | 284    |        
|                                                                                                                                                                                                                                                                         | Prepaid expenses                                                                                                                                                                                                         |                            |          | 6,299  |         |                        |         | 5,787       |         |             |          | 5,708  |        
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          | Total Current Assets       |          |        | 248,082 |                        |         |             | 281,814 |             |          |        | 227,400 |        
|Property and equipment  net                                                                                                                                                                                                                                             |                                                                                                                                                                                                                          |                            | 116,400  |        |         |                        | 113,156 |             |         |             | 114,367  |       
|Other assets                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                          |                            | 10,189   |        |         |                        | 9,604   |             |         |             | 9,806    |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          | Total  |         | $                      | 374,671 |             |         | $           | 404,574  |        |         | $       | 351,573 | 
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                     |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|Current Liabilities                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         | Accounts payable                                                                                                                                                                                                         |                            | $        | 76,534 |         |                        | $       | 71,491      |         |             | $        | 76,387 |        
|                                                                                                                                                                                                                                                                         | Accrued expenses                                                                                                                                                                                                         |                            |          | 28,161 |         |                        |         | 23,600      |         |             |          | 27,815 |        
|                                                                                                                                                                                                                                                                         | Income taxes                                                                                                                                                                                                             |                            |          | 13,713 |         |                        |         | 12,572      |         |             |          | 4,290  |        
|                                                                                                                                                                                                                                                                         | Current portion of long-term debt                                                                                                                                                                                        |                            |          | 6,000  |         |                        |         |            |         |             |          | 6,000  |        
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          | Total Current Liabilities  |          |        | 124,408 |                        |         |             | 107,663 |             |          |        | 114,492 |        
|Deferred income taxes                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          |                            | 10,203   |        |         |                        | 6,310   |             |         |             | 10,203   |       
|Long-term debt                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                          |                            | 20,000   |        |         |                        |        |             |         |             | 21,500   |       
|Other noncurrent liabilities                                                                                                                                                                                                                                             |                                                                                                                                                                                                                          |                            | 11,583   |        |         |                        | 8,672   |             |         |             | 11,267   |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|Commitments and contingencies                                                                                                                                                                                                                                            |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          | Total Liabilities          |          |        | 166,194 |                        |         |             | 122,645 |             |          |        | 157,462 |        
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|Shareholders Equity:                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         | Preferred stock, $100 par value per share, 100,000
shares authorized, none issued                                                                                                                                        |                            |          |       |         |                        |         |            |         |             |          |       |        
|                                                                                                                                                                                                                                                                         | Class A common stock, $.033 par value per share,
50,000,000 shares authorized; issued 26,049,957
shares, 25,258,428 shares and 26,015,868 shares at
May 1, 2004, May 3, 2003 and
January 31, 2004, respectively          |                            |          | 868    |         |                        |         | 842         |         |             |          | 867    |        
|                                                                                                                                                                                                                                                                         | Convertible Class B common stock, $.033 par value per
share, 15,000,000 shares authorized; issued
5,607,834 shares, 6,085,149 shares and 5,607,834
shares at May 1, 2004, May 3, 2003 and
January 31, 2004, respectively |                            |          | 187    |         |                        |         | 203         |         |             |          | 187    |        
|Additional paid-in capital                                                                                                                                                                                                                                               |                                                                                                                                                                                                                          |                            | 100,133  |        |         |                        | 95,428  |             |         |             | 99,676   |       
|Retained earnings                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                          |                            | 266,380  |        |         |                        | 249,568 |             |         |             | 252,828  |       
|Accumulated other comprehensive gains                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          |                            | 243      |        |         |                        | 367     |             |         |             | 58       |       
|Unearned compensation  restricted stock awards                                                                                                                                                                                                                          |                                                                                                                                                                                                                          |                            | (1,422   | )      |         |                        | (2,130  | )           |         |             | (1,593   | )     
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            | 366,389  |        |         |                        | 344,278 |             |         |             | 352,023  |       
|Less Class A and Class B common stock in treasury, at cost
(5,906,179 Class A and 5,137,484 Class B shares at
May 1, 2004, 5,906,179 Class A and 0 Class B shares at
May 3, 2003 and 5,906,179 Class A and 5,137,484 Class B
shares at January 31, 2004, respectively) |                                                                                                                                                                                                                          |                            | (157,912 | )      |         |                        | (62,349 | )           |         |             | (157,912 | )     
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          | Total Shareholders Equity |          |        | 208,477 |                        |         |             | 281,929 |             |          |        | 194,111 |        
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            | Total    |        | $       | 374,671                |         |             | $       | 404,574     |          |        | $       | 351,573 |        
|                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                          |                            |          |        |         |                        |         |             |         |             |          |       

See accompanying notes to condensed consolidated financial statements.





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Page 4

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |        |       |        |   |  |  |  | 
|-------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------- | ------- | ---------------------- | ------ | ----------- |  |  |  | - | ------ | ----- | ------ | - |  |  |  | 
|                     |                                                                                   |                                                                         |                                        |         | Three Months Ended    
|                     |                                                                                   |                                                                         |                                        |         |                       
|                     |                                                                                   |                                                                         |                                        |         | May 1,                 |        | May 3,      |  |  |  |  
|                     |                                                                                   |                                                                         |                                        |         | 2004                   |        | 2003        |  |  |  |  
|                     |                                                                                   |                                                                         |                                        |         | (Unaudited)            |        | (Unaudited) |  |  |  |  
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |  
|                     |                                                                                   |                                                                         |                                        |         | (Dollars in thousands)
|OPERATING ACTIVITIES |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Net income                                                                        |                                                                         | $                                      | 16,816  |                        |        |             |  |  |  | $ | 17,482 |      
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                         |                                        |         |                        |        |             |  |  |  |   |        |      
|                     |                                                                                   | Depreciation                                                            |                                        |         | 4,979                  |        |             |  |  |  |   |        | 4,451 |       
|                     |                                                                                   | Amortization of investment premiums                                     |                                        |         |                       |        |             |  |  |  |   |        | 3     |       
|                     |                                                                                   | Compensation expense related to restricted stock
awards                 |                                        |         | 171                    |        |             |  |  |  |   |        | 245   |       
|                     |                                                                                   | Loss on disposal of property and equipment                              |                                        |         | 14                     |        |             |  |  |  |   |        | 102   |       
|                     |                                                                                   | Changes in operating assets and liabilities which
provided (used) cash: |                                        |         |                        |        |             |  |  |  |   |        |       |       
|                     |                                                                                   |                                                                         | Accounts receivable                    |         |                        | 1,287  |             |  |  |  |   |        |       | 776    |  
|                     |                                                                                   |                                                                         | Merchandise inventories                |         |                        | (2,564 | )           |  |  |  |   |        |       | (8,849 | )
|                     |                                                                                   |                                                                         | Other assets                           |         |                        | (974   | )           |  |  |  |   |        |       | (1,189 | )
|                     |                                                                                   |                                                                         | Accounts payable and other liabilities |         |                        | 872    |             |  |  |  |   |        |       | (221   | )
|                     |                                                                                   |                                                                         | Accrued income taxes                   |         |                        | 9,423  |             |  |  |  |   |        |       | 9,686  |  
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Net cash provided by operating activities                                         |                                                                         |                                        | 30,024  |                        |        |             |  |  |  |   | 22,486 |      
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|INVESTING ACTIVITIES |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Expenditures for property and equipment                                           |                                                                         |                                        | (6,983  | )                      |        |             |  |  |  |   | (4,402 | )    
|                     | Purchases of short-term investments                                               |                                                                         |                                        | (19,425 | )                      |        |             |  |  |  |   | (2,347 | )    
|                     | Sales of short-term investments                                                   |                                                                         |                                        |        |                        |        |             |  |  |  |   | 2,260  |      
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Net cash (used) in investing activities                                           |                                                                         |                                        | (26,408 | )                      |        |             |  |  |  |   | (4,489 | )    
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|FINANCING ACTIVITIES |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Dividends paid                                                                    |                                                                         |                                        | (3,264  | )                      |        |             |  |  |  |   | (3,817 | )    
|                     | Purchases of treasury stock                                                       |                                                                         |                                        |        |                        |        |             |  |  |  |   | (2,741 | )    
|                     | Payments to settle long-term debt                                                 |                                                                         |                                        | (1,500  | )                      |        |             |  |  |  |   |       |      
|                     | Proceeds from employee stock purchase plan                                        |                                                                         |                                        | 209     |                        |        |             |  |  |  |   | 245    |      
|                     | Proceeds from stock options exercised                                             |                                                                         |                                        | 249     |                        |        |             |  |  |  |   | 237    |      
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Net cash (used) in financing activities                                           |                                                                         |                                        | (4,306  | )                      |        |             |  |  |  |   | (6,076 | )    
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Net increase (decrease) in cash and cash equivalents                              |                                                                         |                                        | (690    | )                      |        |             |  |  |  |   | 11,921 |      
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Cash and cash equivalents at beginning of period                                  |                                                                         |                                        | 23,857  |                        |        |             |  |  |  |   | 32,065 |      
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       
|                     | Cash and cash equivalents at end of period                                        |                                                                         | $                                      | 23,167  |                        |        |             |  |  |  | $ | 43,986 |      
|                     |                                                                                   |                                                                         |                                        |         |                        |        |             |  |  |  |   |       

See accompanying notes to condensed consolidated financial statements.





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##### 



Page 5

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND MAY 3, 2003

---

NOTE 1  GENERAL:

The condensed consolidated financial statements have been prepared from the
accounting records of The Cato Corporation and its wholly-owned subsidiaries
(the Company), and all amounts shown as of and for the periods ended May 1,
2004 and May 3, 2003 are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of the
interim period may not be indicative of the entire year.

The interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, included in the Companys
Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

Cash equivalents consist of highly liquid investments with original maturities
of three months or less. Investments with original maturities beyond three
months are classified as short-term investments. The fair values of short-term
investments are based on quoted market prices.

The Companys short-term investments are classified as available-for-sale. As
they are available for current operations, they are classified in the Condensed
Consolidated Balance Sheets as current assets. Available-for-sale securities
are carried at fair value, with unrealized gains and temporary losses, net of
income taxes, reported as a component of accumulated other comprehensive
income. Other than temporary declines in fair value of investments are
recorded as a reduction in the cost of the investments in the accompanying
Condensed Consolidated Balance Sheets and a reduction of interest and other
income in the accompanying Condensed Consolidated Statements of Income.
The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. The amortization of premiums, accretion of
discounts and realized gains and losses are included in interest and other
income.

Total comprehensive income for the quarters ended May 1, 2004 and May 3, 2003
was $17,001,000 and $17,596,000, respectively. Total comprehensive income is
composed of net income and net unrealized gains and losses on
available-for-sale securities.

Merchandise inventories are stated at the lower of cost (first-in, first-out
method) or market as determined by the retail inventory method.

In May 2004, the Board of Directors increased the quarterly dividend by 9% from
$.16 per share to $.175 per share.

The provisions for income taxes are based on the Companys estimated annual
effective tax rate. As allowed by SFAS No. 109, Accounting for Income Taxes,
deferred income taxes are calculated annually.





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##### 



Page 6

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND MAY 3, 2003

---

NOTE 1  GENERAL (CONTINUED):

Certain reclassifications have been made to the condensed consolidated
financial statements for prior periods to conform to the current period
presentation.

NOTE 2  EARNINGS PER SHARE:

FASB No. 128 requires dual presentation of basic EPS and diluted EPS on the
face of all income statements for all entities with complex capital structures.
Basic EPS is computed as net income divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and other convertible securities. Unvested restricted stock is
included in the computation of diluted EPS using the treasury stock method.
The weighted-average number of shares used in the basic earnings per share
computations was 20,499,605 and 25,439,385 for the three months ended May 1,
2004 and May 3, 2003, respectively. The weighted-average number of shares
representing the dilutive effect of stock options was 20,845,867 and 25,796,506
for the three months ended May 1, 2004 and May 3, 2003, respectively. There
was an immaterial number of shares withheld in the computation of diluted EPS
due to potential anti-dilutive effects for the three months ended May 1, 2004
and May 3, 2003.

|                                                                                 |  |                    |            |        |  |  |            | 
|-------------------------------------------------------------------------------- |  | ------------------ | ---------- | ------ |  |  | ---------- | 
|                                                                                 |  | Three Months Ended
|                                                                                 |  |                   
|                                                                                 |  | May 1,             |            | May 3,
|                                                                                 |  | 2004               |            | 2003  
|                                                                                 |  |                    |            |       
|Weighted-average shares outstanding                                              |  |                    | 20,499,605 |        |  |  | 25,439,385 | 
|Dilutive effect of stock options                                                 |  |                    | 346,262    |        |  |  | 357,121    | 
|                                                                                 |  |                    |            |        |  |  |            | 
|Weighted-average shares and
common stock equivalents (stock options)
outstanding |  |                    | 20,845,867 |        |  |  | 25,796,506 | 
|                                                                                 |  |                    |            |        |  |  |            | 

NOTE 3  SUPPLEMENTAL CASH FLOW INFORMATION:

Income tax payments, net of refunds received, for the three months ended May 1,
2004 and May 3, 2003 were $3,960,000 and $292,000, respectively.

NOTE 4  FINANCING ARRANGEMENTS:

At May 1, 2004, the Company had an unsecured revolving credit agreement which
provided for borrowings of up to $35 million. This revolving credit agreement
was entered into on August 22,





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##### 



Page 7

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND MAY 3, 2003

---

NOTE 4  FINANCING ARRANGEMENTS (CONTINUED):

2003 and is committed until August 2006. The credit agreement contains various
financial
covenants and limitations, including the maintenance of specific financial
ratios with which the Company was in compliance as of May 1, 2004. There were
no borrowings outstanding during the three months ended May 1, 2004 or the
fiscal year ended January 31, 2004. Interest is based on LIBOR, which was
1.10% on May 1, 2004.

On August 22, 2003, the Company entered into a new unsecured $30 million
five-year term loan facility, the proceeds of which were used to purchase Class
B Common Stock from the Companys founders. Payments are due in monthly
installments of $500,000 plus accrued interest. Interest is based on LIBOR,
which was 1.10% on May 1, 2004.

The Company had approximately $3,281,000 and $4,661,000 at May 1, 2004 and May
3, 2003, respectively, of outstanding irrevocable letters of credit relating to
purchase commitments.

NOTE 5  REPORTABLE SEGMENT INFORMATION:

The Company has two reportable segments: retail and credit. The Company
operated its womens fashion specialty retail stores in 28 states at May 1,
2004, principally in the southeastern United States. The Company offers its own
credit card to its customers and all credit authorizations, payment processing,
and collection efforts are performed by a separate subsidiary of the Company.

The following schedule summarizes certain segment information (in thousands):

|                          |  |        |         |        |  |       |        |  |  |   |         |  
|------------------------- |  | ------ | ------- | ------ |  | ----- | ------ |  |  | - | ------- | -
|Three Months Ended        |  |        |         |        |  |       |        |  |  |   |         |  
|May 1, 2004               |  | Retail |         | Credit |  | Total
|                          |  |        |         |        |  |      
|Revenues                  |  | $      | 205,691 |        |  | $     | 3,510  |  |  | $ | 209,201 |  
|Depreciation              |  |        | 4,959   |        |  |       | 20     |  |  |   | 4,979   |  
|Interest and other income |  |        | (506    | )      |  |       |       |  |  |   | (506    | )
|Income before taxes       |  |        | 25,290  |        |  |       | 1,109  |  |  |   | 26,399  |  
|Total assets              |  |        | 312,533 |        |  |       | 62,138 |  |  |   | 374,671 |  
|Capital expenditures      |  |        | 6,981   |        |  |       | 2      |  |  |   | 6,983   |  
|                          |  |        |         |        |  |       |        |  |  |   |         |  
|Three Months Ended        |  |        |         |        |  |       |        |  |  |   |         |  
|May 3, 2003               |  | Retail |         | Credit |  | Total
|                          |  |        |         |        |  |      
|Revenues                  |  | $      | 197,598 |        |  | $     | 3,612  |  |  | $ | 201,210 |  
|Depreciation              |  |        | 4,431   |        |  |       | 20     |  |  |   | 4,451   |  
|Interest and other income |  |        | (1,130  | )      |  |       |       |  |  |   | (1,130  | )
|Income before taxes       |  |        | 26,476  |        |  |       | 968    |  |  |   | 27,444  |  
|Total assets              |  |        | 329,695 |        |  |       | 74,879 |  |  |   | 404,574 |  
|Capital expenditures      |  |        | 4,402   |        |  |       |       |  |  |   | 4,402   |  





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##### 



Page 8

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND MAY 3, 2003

---

NOTE 5  REPORTABLE SEGMENT INFORMATION (CONTINUED):

The Company evaluates performance based on profit or loss from operations
before income taxes. The Company does not allocate certain corporate expenses
or income taxes to the segments.

The following schedule summarizes the credit segment and related direct
expenses which are reflected in selling, general and administrative expenses
(in thousands):

|                 |  |                    |       |        |  |   |       | 
|---------------- |  | ------------------ | ----- | ------ |  | - | ----- | 
|                 |  | Three Months Ended
|                 |  |                   
|                 |  | May 1,             |       | May 3,
|                 |  | 2004               |       | 2003  
|                 |  |                    |       |       
|Bad debt expense |  | $                  | 1,422 |        |  | $ | 1,627 | 
|Payroll          |  |                    | 278   |        |  |   | 271   | 
|Postage          |  |                    | 316   |        |  |   | 333   | 
|Other expenses   |  |                    | 365   |        |  |   | 393   | 
|                 |  |                    |       |        |  |   |       | 
|                 |  |                    |       |        |  |   |       | 
|Total expenses   |  | $                  | 2,381 |        |  | $ | 2,624 | 
|                 |  |                    |       |        |  |   |       | 





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##### 



Page 9

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

RESULTS OF OPERATIONS:

The following table sets forth, for the periods indicated, certain items in the
Companys unaudited Condensed Consolidated Statements of Income as a percentage
of total retail sales:

|                                    |  |                    |       |        |  |  |       |  
|----------------------------------- |  | ------------------ | ----- | ------ |  |  | ----- | -
|                                    |  | Three Months Ended
|                                    |  |                   
|                                    |  | May 1,             |       | May 3,
|                                    |  | 2004               |       | 2003  
|                                    |  |                    |       |       
|Total retail sales                  |  |                    | 100.0 | %      |  |  | 100.0 | %
|Total revenues                      |  |                    | 102.0 |        |  |  | 102.0 |  
|Cost of goods sold                  |  |                    | 64.5  |        |  |  | 64.4  |  
|Selling, general and administrative |  |                    | 22.3  |        |  |  | 22.0  |  
|Depreciation                        |  |                    | 2.4   |        |  |  | 2.3   |  
|Interest expense                    |  |                    | 0.1   |        |  |  | 0.0   |  
|Interest and other income           |  |                    | (0.2  | )      |  |  | (0.6  | )
|Income before income taxes          |  |                    | 12.9  |        |  |  | 13.9  |  
|Net income                          |  |                    | 8.2   |        |  |  | 8.9   |  

Comparison of First Quarter of 2004 with 2003.

Total retail sales for the first quarter were $205.2 million compared to last
years first quarter sales of $197.3 million, a 4% increase due to store
development activities. Same-store sales decreased 2% in the first quarter of
fiscal 2004. Total revenue, comprised of retail sales and other income
(principally, finance charges and late fees on customer accounts receivable and
layaway fees), were $209.2 million in the first quarter of 2004 compared to
$201.2 million in the first quarter of 2003. The Company operated 1,118 stores
at May 1, 2004 compared to 1,035 stores at the end of last years first
quarter. In the first quarter of 2004 the Company opened 16 stores and
relocated 10 stores.

Credit revenue of $3.5 million, represented 1.7% of total revenues in the first
quarter of 2004. This is comparable to 2003 credit revenue of $3.6 million or
1.8% of total revenues. Credit revenue is comprised of interest earned on the
Companys private label credit card portfolio and related fee income. Related
expenses include principally bad debt expense, payroll, postage and other
administrative expenses and totaled $2.4 million in the first quarter of 2004
compared to last years first quarter expenses of $2.6 million. The decrease
in costs was principally due to lower bad debt expense. Total credit income
before taxes increased $0.1 million from $1.0 million in 2003 to $1.1 million
in 2004 due to reduced operating costs.

Other income in total, as included in total revenues in the first quarter of
2004, increased slightly to $4.0 million from $3.9 million in the first quarter
of 2003. The increase resulted primarily from an increase in late fees.





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##### 



Page 10

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

RESULTS OF OPERATIONS  (CONTINUED):

Cost of goods sold was $132.3 million, or 64.5% of retail sales, in the first
quarter of 2004 compared to $127.0 million or 64.4% of retail sales in the
first quarter of 2003. The overall increase in cost of goods sold resulted
primarily from increased freight and occupancy costs. Cost of goods sold
includes merchandise costs, net of discounts and allowances, buying costs,
distribution costs, occupancy costs, freight and inventory shrinkage. Net
merchandise costs and in-bound freight are capitalized as inventory costs.
Buying and distribution costs include payroll, payroll-related costs and
operating expenses for the buying departments and distribution center.
Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities and maintenance for stores and distribution facilities.
Pursuant to Emerging Task Force Issue No. 02-16, certain vendor allowances
have been classified in cost of goods sold totaling $0.3 million in the first
quarter of 2004 which were previously recorded as a reduction in selling,
general and administrative expenses. Total gross margin dollars (retail sales
less cost of goods sold) increased by 4% to $72.8 million as related to total
retail sales in the first quarter of 2004 compared to $70.3 million in the
first quarter of 2003. Gross margin as presented may not be comparable to
those of other entities as they may include internal transfer costs in selling,
general and administrative expenses while the Company classifies them as cost
of goods sold.

Selling, general and administrative expenses (SG&A) primarily include corporate
and store payroll, related payroll taxes and benefits, insurance, supplies,
advertising, bank and credit card processing fees and bad debts and were $45.8
million in the first quarter of 2004 compared to $43.4 million in the first
quarter of 2003, an increase of 5%. As a percent of retail sales, SG&A was
22.3% for the first quarter of 2004 compared to 22.0% in the prior years first
quarter. The overall increase in SG&A resulted primarily from increased
selling-related expenses and increased infrastructure expenses attributable to
the Companys store development activities.

Depreciation expense was $5.0 million in the first quarter of 2004 compared to
$4.5 million in the first quarter of 2003. The 12% increase in the first
quarter of 2004 resulted primarily from the Companys store development
activities.

Interest expense was $0.2 million in the first quarter of 2004 compared to $0.0
in the first quarter of 2003. The increase in the first quarter of 2004
resulted from interest payments on a new $30.0 million five-year term loan
facility entered into on August 22, 2003, the proceeds of which were used to
purchase Class B Common Stock from the Companys founders.

Interest and other income was $0.5 million in the first quarter of 2004
compared to $1.1 million in the first quarter of 2003. The decrease in the
first quarter of 2004 resulted primarily from the Companys lower cash and
short-term investment position following the repurchase of $98.3 million of
Company stock in fiscal 2003.





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##### 



Page 11

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

RESULTS OF OPERATIONS  (CONTINUED):

Income tax expense was $9.6 million, or 4.7% of retail sales in the first
quarter of 2004 compared to $10.0, or 5.0% of retail sales in the prior years
first quarter. The decrease resulted from lower pre-tax income. The effective
tax rate was 36.3% in both the first quarter of 2004 and 2003, respectively.
The Company expects the effective rate in 2004 to be in the range of 35% to
37%.

CRITICAL ACCOUNTING POLICIES:

The preparation of the Companys financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements. The most significant accounting estimates inherent in the
preparation of the Companys financial statements include the allowance for
doubtful accounts receivable, reserves relating to workers compensation,
general and auto insurance liabilities, reserves for inventory markdowns,
calculation of asset impairment, shrink accrual and tax contingency reserves.

The Companys critical accounting estimates are discussed with the Audit
Committee.

Allowance for Doubtful Accounts

The Company evaluates the collectibility of accounts receivable and records an
allowance for doubtful accounts based on estimates of actual write-offs and the
accounts receivable aging roll rates over the prior five months. The allowance
is reviewed for adequacy and adjusted, as necessary, on a monthly basis. The
Company also provides for estimated uncollectible late fees charged based on
historical write-offs. The Companys financial results can be significantly
impacted by changes in bad debt write-off experience and the aging of the
accounts receivable portfolio. Historically, actual results have not
significantly deviated from estimates.

Insurance Liabilities

The Company is primarily self-insured for health care, property loss, workers
compensation and general liability costs. These costs are significant primarily
due to the large number of the Companys retail locations and employees. The
Companys self-insurance liabilities are based on the total estimated costs of
claims filed and estimates of claims incurred but not reported, less amounts
paid against such claims, and are not discounted. Management reviews current
and historical claims data in developing its estimates. The Company also uses
information provided by outside actuaries with respect to workers compensation
and general liability claims. If the underlying facts and circumstances of the
claims change or the historical experience upon which insurance provisions are
recorded is not indicative of future trends, then the Company may be required
to adjust the provision for insurance costs, which could be material to the
Companys reported financial condition and results of operations. Historically,
actual results have not significantly deviated from estimates.





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##### 



Page 12

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

CRITICAL ACCOUNTING POLICIES  (CONTINUED):

Revenue Recognition

While the Companys recognition of revenue is predominantly derived from
routine retail transactions and does not involve significant judgment, revenue
recognition represents an important accounting policy of the Company. The
Company recognizes sales at the point of purchase when the customer takes
possession of the merchandise and pays for the purchase, generally with cash or
credit. Sales from purchases made with Cato credit, gift cards and layaway
sales are also recorded when the customer takes possession of the merchandise.
Gift cards, layaway deposits and merchandise credits granted to customers are
recorded as deferred revenue until they are redeemed or forfeited. A provision
is made for estimated product returns based on sales volumes and the Companys
experience; actual returns have not varied materially from amounts provided
historically.

Credit revenue on the Companys private label credit card portfolio is
recognized as earned under the interest method. Late fees are recognized as
earned, less provisions for estimated uncollectible fees.

Impairment of Long-Lived Assets

The Company primarily invests in property and equipment in connection with the
opening and remodeling of stores and in computer software and hardware. Most of
the Companys store leases give the Company the option to terminate the lease
if certain specified sales volumes are not achieved during the first few years
of the lease. The Company periodically reviews its store locations and
estimates the recoverability of its assets, recording an impairment charge, if
necessary, when the Company decides to close the store or otherwise determines
that future undiscounted cash flows associated with those assets will not be
sufficient to recover the carrying value. This determination is based on a
number of factors, including the stores historical operating results and cash
flows, estimated future sales growth, real estate development in the area and
perceived local market conditions that can be difficult to predict and may be
subject to change. In addition, the Company regularly evaluates its
computer-related and other long-lived assets and may accelerate depreciation
over the revised useful life if the asset is expected to be replaced or has
limited future value. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is reflected in income for that
period.

Tax Reserves

The Company records an estimated tax liability or tax benefit for income and
other taxes based on what it determines will likely be paid in the various tax
jurisdictions in which it operates. Management uses its best judgment in the
determination of these amounts. However, the liabilities ultimately realized
and paid are dependent upon various matters, including resolution of tax
audits, and may differ from amounts recorded. An adjustment to the estimated
liability would be recorded as





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##### 



Page 13

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

CRITICAL ACCOUNTING POLICIES  (CONTINUED):

Tax Reserves (Continued)

a provision or benefit to income tax expense in the period in which it becomes
probable that the amount of the actual liability differs from the recorded
amount.

Merchandise Inventories

The Companys inventory is valued using the retail method of accounting and is
stated at the lower of cost (first-in, first-out method) or market. Under the
retail inventory method, the valuation of inventory at cost and resulting gross
margin are calculated by applying an average cost to retail ratio to the retail
value of inventory. The retail inventory method is an averaging method that has
been widely used in the retail industry. Inherent in the retail method are
certain significant estimates including initial merchandise markup, markdowns
and shrinkage, which significantly impact the ending inventory valuation at
cost and the resulting gross margins. Physical inventories are conducted
throughout the year to calculate actual shrinkage and inventory on hand.
Estimates based on actual shrinkage results are used to estimate inventory
shrinkage, which is accrued for the period between the last inventory and the
financial reporting date. The Company continuously reviews its inventory levels
to identify slow moving merchandise and uses markdowns to clear slow moving
inventory. General economic environment for retail apparel sales could result
in an increase in the level of markdowns, which would result in lower inventory
values and increases to cost of goods sold as a percentage of net sales in
future periods. Management makes estimates regarding markdowns based on
inventory levels on hand and customer demand, which may impact inventory
valuations. Markdown exposure with respect to inventories on hand is limited
due to the fact that seasonal merchandise is not carried forward. Historically,
actual results have not significantly deviated from those determined using the
estimates described above.





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##### 



Page 14

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

STOCK OPTIONS:

The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plans. The exercise price for all options awarded under the Companys stock
option plans has been equal to the fair market value of the underlying common
stock on the date of grant. Accordingly, no compensation expense has been
recognized for options granted under the plans. Had compensation expense for
the stock options granted been determined consistent with SFAS No. 148,
Accounting for Stock-Based
Compensation  Transition and Disclosure, the Companys net income and basic
and diluted earnings per share amounts for the three months ended May 1, 2004
and May 3, 2003 would approximate the following proforma amounts (dollars in
thousands, except per share data):

|                       |                                                                                                                                             |   |        |      |        |   |        |      |  
|---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | - | ------ | ---- | ------ | - | ------ | ---- | -
|                       |                                                                                                                                             |   | May 1, |      | May 3,
|                       |                                                                                                                                             |   | 2004   |      | 2003  
|                       |                                                                                                                                             |   |        |      |       
|Net Income as Reported |                                                                                                                                             | $ | 16,816 |      |        | $ | 17,482 |     
|                       | Add: Stock-Based employee compensation expense
included in reported net income, net of related tax
effects                                  |   |        | 109  |        |   |        | 155  |  
|                       | Deduct: Total stock-based employee compensation
expense determined under fair value based method
for
all awards, net of related tax effects |   |        | (133 | )      |   |        | (290 | )
|                       |                                                                                                                                             |   |        |      |        |   |        |     
|                       |                                                                                                                                             |   |        |      |        |   |        |     
|Pro forma Net Income   |                                                                                                                                             | $ | 16,792 |      |        | $ | 17,347 |     
|                       |                                                                                                                                             |   |        |      |        |   |        |     
|                       |                                                                                                                                             |   |        |      |        |   |        |     
|Earnings per share:    |                                                                                                                                             |   |        |      |        |   |        |     
|                       | Basic  as reported                                                                                                                         |   | $      | .82  |        |   | $      | .69  |  
|                       | Basic  pro forma                                                                                                                           |   | $      | .82  |        |   | $      | .68  |  
|                       | Diluted  as reported                                                                                                                       |   | $      | .81  |        |   | $      | .68  |  
|                       | Diluted  pro forma                                                                                                                         |   | $      | .81  |        |   | $      | .67  |  

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:

The Company believes that its cash, cash equivalents and short-term
investments, together with cash flows from operations and borrowings available
under its revolving credit agreement, will be adequate to fund the Companys
proposed capital expenditures and other operating requirements for fiscal 2004
and the long term.

The Company has consistently maintained a strong liquidity position. Cash
provided by operating activities during the first quarter of 2004 was $30.0
million as compared to $22.5 million in the first quarter of 2003. These
amounts have enabled the Company to fund its regular operating needs, capital
expenditure program, cash dividend payments and any repurchase of the Companys
Common Stock. In addition, the Company maintains $35 million of unsecured
revolving credit facilities for short-term financing of seasonal cash needs.





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Page 15

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):

At May 1, 2004, the Company had working capital of $123.7 million compared to
$174.2 million at May 3, 2003. The decline in working capital resulted
primarily from the repurchase of Class B Common Stock from the Companys
founders for $95.6 million, partially offset by the proceeds of a new $30 million five-year
term loan facility entered into in the third quarter of fiscal 2003. The increase in net
cash provided by operating activities in the first quarter of 2004 is primarily
the result of an increase in depreciation expense of $0.5 million due to store
expansion; a reduction in accounts receivable from strong collection efforts of
$0.5 million; a reduction of merchandise inventories of $6.3 million and an
increase of accounts payable and other liabilities of $1.1 million. Offsetting
these increases in net cash provided by operating activities was a decrease in
net income of $0.7 million and a decrease of $0.3 million in accrued income
taxes.

Additionally, the Company had $1.6 million invested in privately managed
investment funds at May 1, 2004, which are reported under other assets of the
consolidated balance sheets.

At May 1, 2004, the Company had an unsecured revolving credit agreement, which
provided for borrowings of up to $35 million. The revolving credit agreement is
committed until August 2006. This agreement replaced a prior revolving credit
agreement which was due to expire in October 2004. The credit agreement
contains various financial covenants and limitations, including the maintenance
of specific financial ratios with which the Company was in compliance as of May
1, 2004. There were no borrowings outstanding under these credit facilities
during the three months ended May 1, 2004 or the fiscal year ended January 31,
2004.

The Company had approximately $3.3 million and $4.7 million at May 1, 2004 and
May 3, 2003, respectively, of outstanding irrevocable letters of credit
relating to purchase commitments.

Expenditures for property and equipment totaled $7.0 million for the quarter
ended May 1, 2004, compared to $4.4 million in last years first quarter. The
expenditures for the first quarter of 2004 were primarily for store development
and investments in new technology. In fiscal 2004, the Company is planning to
invest approximately $33 million for capital expenditures. This includes
expenditures to open 90 new stores, relocate 27 stores and close 10 stores. In
addition, the Company plans to remodel 15 stores and has planned for additional
investments in technology scheduled to be implemented over the remainder of the
fiscal year.

In May 2004, the Board of Directors increased the quarterly dividend by 9% from
$.16 per share to $.175 per share.

In August 2003, the Company repurchased 5,137,484 shares of Class B Common
Stock from a limited partnership and trust affiliated with Wayland H. Cato,
Jr., a Company founder and Chairman of the Board, and a limited partnership
affiliated with Edgar T. Cato, a Company founder and a member of the Board of
Directors. Shares were purchased at $18.50 per share for a total cost of





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Page 16

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

---

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):

$95,043,454. Including related expenses of $520,000 for investment banking and
related professional
fees, the total cost was $95,563,454 or an average purchase price of $18.60 per
share. The repurchase was funded by the Company through a new $30 million
five-year term loan facility and approximately $65 million of cash and
liquidated short-term investments. Payments on the new term loan are due in
monthly installments of $500,000 plus accrued interest. Interest is based on
LIBOR. The LIBOR rate at May 1, 2004 was 1.10%. As of May 1, 2004, the
outstanding balance on the loan facility was $26.0 million.

The Company does not use derivative financial instruments. At May 1, 2004, the
Companys investment portfolio was invested in governmental and other debt
securities with maturities of up to 36 months. These securities are classified
as available-for-sale and are recorded on the balance sheet at fair value with
unrealized gains and temporary losses reported net of taxes as accumulated
other comprehensive income. Other than temporary declines in fair value of
investments are recorded as a reduction in the cost of investments in the
accompanying Consolidated Balance Sheets and a reduction of interest and other
income in the accompanying Statements of Consolidated Income.

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK:

The Company is subject to market rate risk from exposure to changes in interest
rates based on its financing, investing and cash management.

FORWARD LOOKING STATEMENTS:

Form 10-Q includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical facts included in this Form 10-Q including
statements regarding the Companys planned capital expenditures, intended store
openings, closures, relocations and remodelings, its expected effective tax
rate and the expected adequacy of the Companys liquidity, constitute
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Forward-looking
statements involve risks and uncertainties that could cause the Companys
actual results to differ materially depending on a variety of important
factors, including, but not limited to the following: general economic
conditions; competitive factors and pricing pressures; the Companys ability to
predict fashion trends; consumer buying patterns; weather conditions and
inventory risk due to shifts in market demand. The Company does not undertake
any obligation to update any forward-looking statements.





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Page 17

THE CATO CORPORATION
CONTROLS AND PROCEDURES

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EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:

As of May 1, 2004, an evaluation of the effectiveness of the Companys
disclosure controls and procedures (as defined in Rule 13(a)-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) was performed under the supervision and with the
participation of the Companys management, including the Chief Executive
Officer and Chief Finance Officer. Based on that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of the period covered by this report, the Companys disclosure controls
and procedures were effective to ensure that information required to be
disclosed by the Company in its reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commission rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTS:

During the Companys first fiscal quarter of 2004, there has been no change in
the Companys internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.





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Page 18

PART II OTHER INFORMATION

THE CATO CORPORATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF
EQUITY SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (A) |  | 
| | --- |  | 

|            |  |                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------
|Exhibit No. |  | ITEM                                                                                               
|            |  |                                                                                                    
|31.1        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Chief Executive Officer.
|            |  |                                                                                                    
|31.2        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Chief Financial Officer.
|            |  |                                                                                                    
|32.1        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Chief Executive Officer.
|            |  |                                                                                                    
|32.2        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Chief Financial Officer.



| | (B) |  | Form 8-K was furnished on March 18, 2004 disclosing the March
16, 2004 Press Release regarding the Companys financial results for
the fourth quarter of 2003.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------





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##### 



Page 19

PART II      OTHER INFORMATION

THE CATO CORPORATION

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.

|             |  |                                      
|------------ |  | -------------------------------------
|             |  | THE CATO CORPORATION                 
|             |  |                                      
|June 7, 2004 |  | /s/ John P. Derham Cato              
|             |  |                                      
|Date         |  | John P. Derham Cato                  
|             |  | Chairman, President and              
|             |  | Chief Executive Officer              
|             |  |                                      
|June 7, 2004 |  | /s/ Michael O. Moore                 
|             |  |                                      
|Date         |  | Michael O. Moore                     
|             |  | Executive Vice President             
|             |  | Chief Financial Officer and Secretary
|             |  |                                      
|June 7, 2004 |  | /s/ Robert M. Sandler                
|             |  |                                      
|Date         |  | Robert M. Sandler                    
|             |  | Senior Vice President                
|             |  | Controller