##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended May 3, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
file number 1-31340
 THE CATO CORPORATION
  Delaware
    
    56-0484485(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 8100 Denmark Road, Charlotte, North Carolina 28273-5975
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year,
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



THE CATO CORPORATION
 FORM 10-Q
 Quarter Ended May 3, 2008
 Table of Contents
 PageNo.PART I  FINANCIAL INFORMATION (UNAUDITED)Item 1. Financial Statements:Condensed Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended May 3, 2008 and May 5, 2007
    
    
    2Condensed Consolidated Balance Sheets
At May 3, 2008, May 5, 2007 and February 2, 2008
    
    
    3Condensed Consolidated Statements of Cash Flows
For the Three Months Ended May 3, 2008 and May 5, 2007
    
    
    4Notes to Condensed Consolidated Financial Statements
For the Three Months Ended May 3, 2008 and May 5, 2007
    
    
    5-11Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    12-16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18Signatures
    
    
    19-23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
 Three Months EndedMay 3,
    
    
    May 5,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)(Dollars in thousands, except per sharedata)REVENUESRetail sales
    
    $
    225,791
    
    
    $
    224,134Other income (principally finance charges, late fees and
layaway charges)
    
    
    3,037
    
    
    
    3,094Total revenues
    
    
    228,828
    
    
    
    227,228COSTS AND EXPENSES, NETCost of goods sold (exclusive of depreciation shown below)
    
    
    141,620
    
    
    
    143,422Selling, general and administrative
    
    
    56,317
    
    
    
    51,136Depreciation
    
    
    5,610
    
    
    
    5,391Interest and other income
    
    
    (1,901
    )
    
    
    (1,893
    )201,646
    
    
    
    198,056Income before income taxes
    
    
    27,182
    
    
    
    29,172Income tax expense
    
    
    10,329
    
    
    
    10,502Net Income
    
    $
    16,853
    
    
    $
    18,670Basic earnings per share
    
    $
    0.58
    
    
    $
    0.60Basic weighted average shares
    
    
    29,095,913
    
    
    
    31,352,592Diluted earnings per share
    
    $
    0.58
    
    
    $
    0.59Diluted weighted average shares
    
    
    29,163,031
    
    
    
    31,897,676Dividends per share
    
    $
    .165
    
    
    $
    0.15Comprehensive income:Net income
    
    $
    16,853
    
    
    $
    18,670Unrealized gains (losses) on available-for-sale securities, net
of deferred income tax benefit
    
    
    (236
    )
    
    
    27Net comprehensive income
    
    $
    16,617
    
    
    $
    18,697
  2




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##### Table of Contents



THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 May 3,
    
    
    May 5,
    
    
    February 2,2008
    
    
    2007
    
    
    2008(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    42,091
    
    
    $
    21,164
    
    
    $
    21,583Short-term investments
    
    
    85,138
    
    
    
    132,450
    
    
    
    92,995Accounts receivable, net of allowance for doubtful accounts of $3,192,
$3,243 and $3,263 at May 3, 2008, May 5, 2007, and February 2,
2008, respectively
    
    
    45,570
    
    
    
    45,287
    
    
    
    45,282Merchandise inventories
    
    
    113,227
    
    
    
    117,037
    
    
    
    118,679Deferred income taxes
    
    
    6,837
    
    
    
    7,489
    
    
    
    6,756Prepaid expenses
    
    
    7,659
    
    
    
    6,940
    
    
    
    7,755Total Current Assets
    
    
    300,522
    
    
    
    330,367
    
    
    
    293,050Property and equipment  net
    
    
    122,936
    
    
    
    126,809
    
    
    
    123,190Other assets
    
    
    4,548
    
    
    
    4,361
    
    
    
    4,552Total Assets
    
    $
    428,006
    
    
    $
    461,537
    
    
    $
    420,792LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    92,041
    
    
    $
    90,952
    
    
    $
    110,848Accrued expenses
    
    
    29,755
    
    
    
    29,755
    
    
    
    27,617Accrued bonus and benefits
    
    
    4,278
    
    
    
    1,065
    
    
    
    2,543Accrued income taxes
    
    
    17,900
    
    
    
    15,692
    
    
    
    7,928Total Current Liabilities
    
    
    143,974
    
    
    
    137,464
    
    
    
    148,936Deferred income taxes
    
    
    1,707
    
    
    
    8,817
    
    
    
    1,707Other noncurrent liabilities (primarily deferred rent)
    
    
    22,399
    
    
    
    23,298
    
    
    
    22,779Commitments and contingencies:Stockholders Equity:Preferred stock, $100 par value per share, 100,000 shares authorized,
none issued
    
    
    
    
    
    
    
    
    
    
    Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 36,258,360 shares, 36,082,118 shares
and 36,109,263 shares at May 3, 2008, May 5, 2007 and
February 2, 2008, respectively
    
    
    1,209
    
    
    
    1,203
    
    
    
    1,204Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 1,743,525 shares,
690,525 shares and 1,743,525 shares at May 3, 2008, May 5, 2007
and February 2, 2008, respectively
    
    
    58
    
    
    
    23
    
    
    
    58Additional paid-in capital
    
    
    59,462
    
    
    
    43,307
    
    
    
    58,685Retained earnings
    
    
    352,098
    
    
    
    341,986
    
    
    
    340,088Accumulated other comprehensive income
    
    
    473
    
    
    
    252
    
    
    
    709413,300
    
    
    
    386,771
    
    
    
    400,744Less Class A common stock in treasury, at cost (8,461,615 shares,
5,093,609 shares and 8,461,615 shares at May 3, 2008, May 5, 2007
and February 2, 2008, respectively)
    
    
    (153,374
    )
    
    
    (94,813
    )
    
    
    (153,374
    )Total Stockholders Equity
    
    
    259,926
    
    
    
    291,958
    
    
    
    247,370Total Liabilities and Stockholders Equity
    
    $
    428,006
    
    
    $
    461,537
    
    
    $
    420,792
  3




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THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMay 3,
    
    
    May 5,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    16,853
    
    
    $
    18,670Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    5,610
    
    
    
    5,391Provision for doubtful accounts
    
    
    767
    
    
    
    458Share-based compensation
    
    
    509
    
    
    
    371Excess tax benefits from share-based compensation
    
    
    (13
    )
    
    
    (62
    )Deferred income taxes
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    290
    
    
    
    133Changes in operating assets and liabilities which provided
(used) cash:Accounts receivable
    
    
    (1,055
    )
    
    
    213Merchandise inventories
    
    
    5,452
    
    
    
    (1,119
    )Prepaid and other assets
    
    
    100
    
    
    
    (366
    )Accrued income taxes
    
    
    9,985
    
    
    
    10,396Accounts payable, accrued expenses and other liabilities
    
    
    (15,213
    )
    
    
    4,539Net cash provided by operating activities
    
    
    23,285
    
    
    
    38,624INVESTING ACTIVITIESExpenditures for property and equipment
    
    
    (5,647
    )
    
    
    (3,930
    )Purchases of short-term investments
    
    
    (45,536
    )
    
    
    (158,505
    )Sales of short-term investments
    
    
    53,075
    
    
    
    124,810Net cash provided by (used in) investing activities
    
    
    1,892
    
    
    
    (37,625
    )FINANCING ACTIVITIESChange in cash overdrafts included in accounts payable
    
    
    (100
    )
    
    
    (400
    )Dividends paid
    
    
    (4,843
    )
    
    
    (4,734
    )Proceeds from employee stock purchase plan
    
    
    213
    
    
    
    214Excess tax benefits from share-based compensation
    
    
    13
    
    
    
    62Proceeds from stock options exercised
    
    
    48
    
    
    
    190Net cash used in financing activities
    
    
    (4,669
    )
    
    
    (4,668
    )Net increase (decrease) in cash and cash equivalents
    
    
    20,508
    
    
    
    (3,669
    )Cash and cash equivalents at beginning of period
    
    
    21,583
    
    
    
    24,833Cash and cash equivalents at end of period
    
    $
    42,091
    
    
    $
    21,164
  4




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THE CATO CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
 NOTE 1  GENERAL:
        5




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
 NOTE 2  EARNINGS PER SHARE:
   Three Months EndedMay 3,
    
    
    May 5,2008
    
    
    2007Weighted-average shares outstanding
    
    
    29,095,913
    
    
    
    31,352,592Dilutive effect of :Stock options
    
    
    17,310
    
    
    
    501,653Restricted stock
    
    
    49,808
    
    
    
    43,431Weighted-average shares and common stock
equivalents outstanding
    
    
    29,163,031
    
    
    
    31,897,676
 NOTE 3  SUPPLEMENTAL CASH FLOW INFORMATION:
  NOTE 4  FINANCING ARRANGEMENTS:
   6




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
 NOTE 5  REPORTABLE SEGMENT INFORMATION:
   Three Months EndedMay 3, 2008
    
    Retail
    
    Credit
    
    TotalRevenues
    
    $
    226,310
    
    
    $
    2,518
    
    
    $
    228,828Depreciation
    
    
    5,600
    
    
    
    10
    
    
    
    5,610Interest and other income
    
    
    (1,901
    )
    
    
    
    
    
    
    (1,901
    )Income before taxes
    
    
    26,319
    
    
    
    863
    
    
    
    27,182Total assets
    
    
    357,696
    
    
    
    70,310
    
    
    
    428,006Capital expenditures
    
    
    5,647
    
    
    
    
    
    
    
    5,647
 Three Months EndedMay 5, 2007
    
    Retail
    
    Credit
    
    TotalRevenues
    
    $
    224,630
    
    
    $
    2,598
    
    
    $
    227,228Depreciation
    
    
    5,367
    
    
    
    24
    
    
    
    5,391Interest and other income
    
    
    (1,893
    )
    
    
    
    
    
    
    (1,893
    )Income before taxes
    
    
    28,018
    
    
    
    1,154
    
    
    
    29,172Total assets
    
    
    395,385
    
    
    
    66,152
    
    
    
    461,537Capital expenditures
    
    
    3,917
    
    
    
    13
    
    
    
    3,930
   Three Months EndedMay 3,
    
    
    May 5,2008
    
    
    2007Bad debt expense
    
    $
    767
    
    
    $
    458Payroll
    
    
    253
    
    
    
    242Postage
    
    
    273
    
    
    
    278Other expenses
    
    
    352
    
    
    
    442Total expenses
    
    $
    1,645
    
    
    $
    1,420
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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
 NOTE 6  STOCK BASED COMPENSATION:
   1987
    
    1999
    
    2004Plan
    
    Plan
    
    Plan
    
    TotalOptions and/or restricted stock initially authorized
    
    
    5,850,000
    
    
    
    1,500,000
    
    
    
    1,350,000
    
    
    
    8,700,000Options and/or restricted stock available for grant:February 2, 2008
    
    
    12,277
    
    
    
    
    
    
    
    1,006,033
    
    
    
    1,018,310May 3, 2008
    
    
    12,877
    
    
    
    
    
    
    
    879,114
    
    
    
    891,991
   WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    Value (a)Options outstanding at February 2, 2008
    
    
    139,075
    
    
    $
    12.41
    
    
    
    4.64
    
    
    $
    494,087GrantedForfeited or expired
    
    
    (600
    )
    
    
    8.71Exercised
    
    
    (5,550
    )
    
    
    8.56Outstanding at May 3, 2008
    
    
    132,925
    
    
    $
    12.58
    
    
    
    4.56
    
    
    $
    431,413Vested and exercisable at May 3, 2008
    
    
    101,200
    
    
    $
    11.85
    
    
    
    3.99
    
    
    $
    402,941
 
 (a)
    
    The intrinsic value of a stock option is the amount by which the market value of the underlying
stock exceeds the exercise price of the option.  8




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##### Table of Contents



THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
 NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
    
  9




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
 NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
  Weighted AverageGrant Date FairNumber of Shares
    
    
    Value Per ShareRestricted
stock awards at February 2, 2008
    
    
    301,967
    
    
    $
    22.56Granted
    
    
    138,169
    
    
    
    16.68Vested
    
    
    
    
    
    
    Forfeited or expired
    
    
    (11,250
    )
    
    
    23.88Restricted
stock awards at May 3, 2008
    
    
    428,886
    
    
    $
    20.63
 NOTE 7  INCOME TAXES:
  NOTE 8  FAIR VALUE MEASUREMENTS
 Fair Value Measurements Effective date of
FASB Statement No. 157
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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
 NOTE 8  FAIR VALUE MEASUREMENTS (CONTINUED):
  Fair Value Measurements at Reporting Date UsingQuoted MarketPrices in Active
    
    SignificantMarket for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets/Liabilities
    
    Inputs
    
    InputsDescription
    
    May 3, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Short-term investments
    
    $
    85,138
    
    
    $
    77,788
    
    
    $
    7,350
    
    
    
    Other Assets
    
    $
    2,783
    
    
    $
    574
    
    
    $
    2,209
    
    
    
    
 NOTE 9  RECENT ACCOUNTING PRONOUNCEMENTS:
 Fair Value Measurements  Effective date of
FASB Statement No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for Income Tax
Benefits of Dividends on Share-Based Payment
 11




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##### Table of Contents



THE CATO CORPORATION
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS
 FORWARD LOOKING INFORMATION:
  12




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 CRITICAL ACCOUNTING POLICIES:
   RESULTS OF OPERATIONS:
  Three Months EndedMay 3,
    
    May 5,2008
    
    2007Total retail sales
    
    
    100.0
    %
    
    
    100.0
    %Total revenues
    
    
    101.3
    
    
    
    101.4Cost of goods sold
    
    
    62.7
    
    
    
    64.0Selling, general and administrative
    
    
    24.9
    
    
    
    22.8Depreciation
    
    
    2.5
    
    
    
    2.4Interest and other income
    
    
    (0.8
    )
    
    
    (0.8
    )Income before income taxes
    
    
    12.1
    
    
    
    13.0Net income
    
    
    7.5
    
    
    
    8.3
 Comparison of First Quarter of 2008 with 2007
  13




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 RESULTS OF OPERATIONS  (CONTINUED):
      14




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 RESULTS OF OPERATIONS  (CONTINUED):
     LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
    15




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




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THE CATO CORPORATION  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
  
 ITEM 4. CONTROLS AND PROCEDURES:
  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
  17




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PART II OTHER INFORMATION
 THE CATO CORPORATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Item3.1
    
    Registrants Restated Certificate of Incorporation of the Registrant
dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form
S-8 of the Registrant filed February 7, 2000 (SEC File No.
333-96283).3.2
    
    Registrants By Laws, incorporated by reference to Exhibit 99.2 to
Form 8-K of the Registrant filed December 10, 2007.4.1
    
    Rights Agreement dated December 18, 2003, incorporated by reference
to Exhibit 4.1 to Form 8-A12G of the Registrant filed December 22,
2003 and as amended in Form 8-A12B/A filed January 6, 2004.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Principal Financial Officer.
 18




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##### Table of Contents



PART II OTHER INFORMATION
 THE CATO CORPORATION
  THE CATO CORPORATIONJune 11, 2008
    
    /s/ John P. D. CatoDate
    
    John P. D. CatoChairman, President andChief Executive OfficerJune 11, 2008
    
    /s/ John R. HoweDate
    
    John R. HowePrincipal Financial OfficerSenior Vice PresidentController
 19