##### 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 5, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-31340
 THE CATO CORPORATION
  Delaware
    
    56-0484485(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
 
 
  þ o
  þ o o
  o þ




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##### 



THE CATO CORPORATION
 FORM 10-Q
 Quarter Ended May 5, 2007
 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 5, 2007 and April 29, 2006
    
    
    2Condensed Consolidated Balance Sheets At May 5, 2007, April 29, 2006 and February 3, 2007
    
    
    3Condensed Consolidated Statements of Cash Flows For the Three Months Ended May 5, 2007 and April 29, 2006
    
    
    4Notes to Condensed Consolidated Financial Statements For the Three Months Ended May 5, 2007 and April 29, 2006
    
    
    5  11Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12  17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19Signatures
    
    
    2024Exhibit 10.1Exhibit 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 5,
    
    
    April 29,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)(Dollars in thousands, except per share data)REVENUESRetail sales
    
    $
    224,134
    
    
    $
    229,741Other income (principally finance charges, late fees and
layaway charges)
    
    
    3,094
    
    
    
    3,319Total revenues
    
    
    227,228
    
    
    
    233,060COSTS AND EXPENSES, NETCost of goods sold (exclusive of depreciation shown below)
    
    
    143,422
    
    
    
    142,113Selling, general and administrative
    
    
    51,136
    
    
    
    54,577Depreciation
    
    
    5,391
    
    
    
    5,168Interest and other income
    
    
    (1,893
    )
    
    
    (1,552
    )198,056
    
    
    
    200,306Income before income taxes
    
    
    29,172
    
    
    
    32,754Income tax expense
    
    
    10,502
    
    
    
    11,955Net Income
    
    $
    18,670
    
    
    $
    20,799Basic earnings per share
    
    $
    0.60
    
    
    $
    0.67Basic weighted average shares
    
    
    31,352,592
    
    
    
    31,084,206Diluted earnings per share
    
    $
    0.59
    
    
    $
    0.65Diluted weighted average shares
    
    
    31,897,676
    
    
    
    31,814,193Dividends per share
    
    $
    0.15
    
    
    $
    0.13Comprehensive income:Net income
    
    $
    18,670
    
    
    $
    20,799Unrealized gains (losses) on available-for-sale securities, net
of deferred income tax benefit
    
    
    27
    
    
    
    (22
    )Net comprehensive income
    
    $
    18,697
    
    
    $
    20,777
  2




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THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 May 5,
    
    
    April 29,
    
    
    February 3,2007
    
    
    2006
    
    
    2007(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    21,164
    
    
    $
    25,319
    
    
    $
    24,833Short-term investments
    
    
    132,450
    
    
    
    95,752
    
    
    
    98,709Accounts receivable, net of allowance for doubtful accounts of $3,243,
$3,606 and $3,554 at May 5, 2007, April 29, 2006 and February 3,
2007, respectively
    
    
    45,287
    
    
    
    47,791
    
    
    
    45,958Merchandise inventories
    
    
    117,037
    
    
    
    103,145
    
    
    
    115,918Deferred income taxes
    
    
    7,489
    
    
    
    8,538
    
    
    
    7,508Prepaid expenses
    
    
    6,940
    
    
    
    2,841
    
    
    
    6,587Total Current Assets
    
    
    330,367
    
    
    
    283,386
    
    
    
    299,513Property and equipment  net
    
    
    126,809
    
    
    
    131,516
    
    
    
    128,461Other assets
    
    
    4,361
    
    
    
    10,799
    
    
    
    4,348Total Assets
    
    $
    461,537
    
    
    $
    425,701
    
    
    $
    432,322LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    90,952
    
    
    $
    75,641
    
    
    $
    77,046Accrued expenses
    
    
    29,755
    
    
    
    30,089
    
    
    
    29,526Accrued bonus and benefits
    
    
    1,065
    
    
    
    13,194
    
    
    
    10,756Accrued income taxes
    
    
    15,692
    
    
    
    16,591
    
    
    
    5,721Total Current Liabilities
    
    
    137,464
    
    
    
    135,515
    
    
    
    123,049Deferred income taxes
    
    
    8,817
    
    
    
    9,261
    
    
    
    8,817Other noncurrent liabilities (primarily deferred rent)
    
    
    23,298
    
    
    
    23,526
    
    
    
    23,663Commitments 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 36,082,118 shares, 35,653,816 shares
and 35,955,815 shares at May 5, 2007, April 29, 2006 and
February 3, 2007, respectively
    
    
    1,203
    
    
    
    1,188
    
    
    
    1,199Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 690,525 shares,
at May 5, 2007, April 29, 2006 and
February 3, 2007, respectively
    
    
    23
    
    
    
    23
    
    
    
    23Additional paid-in capital
    
    
    43,307
    
    
    
    39,743
    
    
    
    42,475Retained earnings
    
    
    341,986
    
    
    
    311,202
    
    
    
    327,684Accumulated other comprehensive income
    
    
    252
    
    
    
    56
    
    
    
    225386,771
    
    
    
    352,212
    
    
    
    371,606Less Class A common stock in treasury, at cost (5,093,609 shares at
May 5, 2007, April 29, 2006 and February 3, 2007,
respectively)
    
    
    (94,813
    )
    
    
    (94,813
    )
    
    
    (94,813
    )Total Stockholders Equity
    
    
    291,958
    
    
    
    257,399
    
    
    
    276,793Total Liabilities and Stockholders Equity
    
    $
    461,537
    
    
    $
    425,701
    
    
    $
    432,322
  3




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THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMay 5,
    
    
    April 29,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    18,670
    
    
    $
    20,799Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    5,391
    
    
    
    5,168Provision for doubtful accounts
    
    
    458
    
    
    
    981Share-based compensation
    
    
    371
    
    
    
    244Excess tax benefits from share-based compensation
    
    
    (62
    )
    
    
    (80
    )Deferred income taxes
    
    
    
    
    
    
    (12
    )Loss on disposal of property and equipment
    
    
    133
    
    
    
    136Changes in operating assets and liabilities which provided
(used) cash:Accounts receivable
    
    
    213
    
    
    
    872Merchandise inventories
    
    
    (1,119
    )
    
    
    225Prepaid and other assets
    
    
    (366
    )
    
    
    (467
    )Accrued income taxes
    
    
    10,396
    
    
    
    11,681Accounts payable, accrued expenses and other liabilities
    
    
    4,539
    
    
    
    (10,739
    )Net cash provided by operating activities
    
    
    38,624
    
    
    
    28,808INVESTING ACTIVITIESExpenditures for property and equipment
    
    
    (3,930
    )
    
    
    (12,765
    )Purchases of short-term investments
    
    
    (158,505
    )
    
    
    (50,069
    )Sales of short-term investments
    
    
    124,810
    
    
    
    40,380Net cash used in investing activities
    
    
    (37,625
    )
    
    
    (22,454
    )FINANCING ACTIVITIESChange in cash overdrafts included in accounts payable
    
    
    (400
    )
    
    
    805Dividends paid
    
    
    (4,734
    )
    
    
    (4,059
    )Proceeds from employee stock purchase plan
    
    
    214
    
    
    
    189Excess tax benefits from share-based compensation
    
    
    62
    
    
    
    80Proceeds from stock options exercised
    
    
    190
    
    
    
    216Net cash used in financing activities
    
    
    (4,668
    )
    
    
    (2,769
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,669
    )
    
    
    3,585Cash and cash equivalents at beginning of period
    
    
    24,833
    
    
    
    21,734Cash and cash equivalents at end of period
    
    $
    21,164
    
    
    $
    25,319
  4




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 5, 2007 AND APRIL 29, 2006
 
 NOTE 1  GENERAL:
       5




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 5, 2007 AND APRIL 29, 2006
 
 NOTE 2  EARNINGS PER SHARE:
  Three Months EndedMay 5,
    
    April 29,2007
    
    2006Weighted-average shares outstanding
    
    
    31,352,592
    
    
    
    31,084,206Dilutive effect of :Stock options
    
    
    501,653
    
    
    
    586,610Restricted stock
    
    
    43,431
    
    
    
    143,377Weighted-average shares and common stock
equivalents outstanding
    
    
    31,897,676
    
    
    
    31,814,193
 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 5, 2007 AND APRIL 29, 2006
 
 NOTE 5  REPORTABLE SEGMENT INFORMATION:
   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 EndedApril 29, 2006
    
    Retail
    
    Credit
    
    TotalRevenues
    
    $
    230,370
    
    
    $
    2,690
    
    
    $
    233,060Depreciation
    
    
    5,148
    
    
    
    20
    
    
    
    5,168Interest and other income
    
    
    (1,552
    )
    
    
    
    
    
    
    (1,552
    )Income before taxes
    
    
    31,977
    
    
    
    777
    
    
    
    32,754Total assets
    
    
    357,683
    
    
    
    68,018
    
    
    
    425,701Capital expenditures
    
    
    12,748
    
    
    
    17
    
    
    
    12,765
   Three Months EndedMay 5,
    
    
    April 29,2007
    
    
    2006Bad debt expense
    
    $
    458
    
    
    $
    981Payroll
    
    
    242
    
    
    
    252Postage
    
    
    278
    
    
    
    296Other expenses
    
    
    442
    
    
    
    364Total expenses
    
    $
    1,420
    
    
    $
    1,893
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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 5, 2007 AND APRIL 29, 2006
 
 NOTE 6  STOCK BASED COMPENSATION:
 Share-Based Payment, Accounting for Stock Issued to
Employees,
   1987
    
    1999
    
    2004Plan
    
    Plan
    
    Plan
    
    TotalOptions and/or restricted stock initially authorized
    
    
    5,850,000
    
    
    
    1,000,000
    
    
    
    1,350,000
    
    
    
    8,200,000Options and/or restricted stock available for grant:February 3, 2007
    
    
    9,277
    
    
    
    
    
    
    
    1,091,618
    
    
    
    1,100,895May 5, 2007
    
    
    9,277
    
    
    
    
    
    
    
    992,393
    
    
    
    1,001,670
  8




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 5, 2007 AND APRIL 29, 2006
 
 NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    Value (a)Options outstanding at February 3, 2007
    
    
    1,236,675
    
    
    $
    8.01
    
    
    1.86 years
    
    $
    18,363,084Granted
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    (15,675
    )Exercised
    
    
    (300
    )Outstanding at May 5, 2007
    
    
    1,220,700
    
    
    $
    7.96
    
    
    1.57 years
    
    $
    17,724,034Vested and exercisable at May 5, 2007
    
    
    1,157,900
    
    
    $
    7.59
    
    
    1.26  years
    
    $
    17,243,726
 
 (a)
    
    The intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option.    9




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 5, 2007 AND APRIL 29, 2006
 
 NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
  
   Weighted AverageGrant Date FairNumber of Shares
    
    
    Value Per ShareVested and exercisable at February 3, 2007
    
    
    214,882
    
    
    $
    22.92Granted
    
    
    99,885
    
    
    
    21.87Vested
    
    
    
    
    
    
    N/AForfeited or expired
    
    
    (660
    )
    
    
    22.89Outstanding at May 5, 2007
    
    
    314,107
    
    
    $
    22.59
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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 5, 2007 AND APRIL 29, 2006
 
 NOTE 7  INCOME TAXES:
  NOTE 8  RECENT ACCOUNTING PRONOUNCEMENTS:
  11




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THE CATO CORPORATION  ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS
 
 FORWARD LOOKING INFORMATION:
  www.catocorp.com
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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
 CRITICAL ACCOUNTING POLICIES:
   RESULTS OF OPERATIONS:
  Three Months EndedMay 5,
    
    April 29,2007
    
    2006Total retail sales
    
    
    100.0
    %
    
    
    100.0
    %Total revenues
    
    
    101.4
    
    
    
    101.5Cost of goods sold
    
    
    64.0
    
    
    
    61.8Selling, general and administrative
    
    
    22.8
    
    
    
    23.8Depreciation
    
    
    2.4
    
    
    
    2.3Interest and other income
    
    
    (0.8
    )
    
    
    (0.7
    )Income before income taxes
    
    
    13.0
    
    
    
    14.3Net income
    
    
    8.3
    
    
    
    9.1
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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
 RESULTS OF OPERATIONS  (CONTINUED):
 Comparison of First Quarter of 2007 with 2006.
     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
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
 LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
  17




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THE CATO CORPORATION  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:
  18




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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.
    
    Item10.1
    
    Separation and Confidentiality Agreement and General Release,
between the Registrant and Reynolds C. Faulkner, dated April 18,
2007.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.
 19




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PART
II OTHER INFORMATION
 THE CATO CORPORATION
  THE CATO CORPORATIONJune 13, 2007

Date
    
    
    
    /s/ John P. D. Cato

John P. D. Cato
Chairman, President and
Chief Executive OfficerJune 13, 2007

Date
    
    
    
    /s/ Thomas W. Stoltz

Thomas W. Stoltz
Executive Vice President
Chief Financial OfficerJune 13, 2007

Date
    
    
    
    /s/ John R. Howe

John R. Howe
Senior Vice President
Controller
 20