##### 



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 1934For the quarterly period ended October 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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)
    
    Identification No.)
 8100 Denmark Road, Charlotte, North Carolina 28273-5975  
 (704) 554-8510   Not Applicable  
 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 12b-2 of the Act). Yes x           No o As of November 16, 2004, there were 20,264,366 shares of Class A common stock
and 460,350 shares of Class B common stock outstanding.




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##### 



THE CATO CORPORATION FORM 10-Q October 30, 2004 Table of Contents PageNo.PART I  FINANCIAL INFORMATION (UNAUDITED)Item 1. Financial Statements:Condensed Consolidated Statements of Income
    
    
    2For the Three Months and Nine Months Ended
October 30, 2004 and November 1, 2003Condensed Consolidated Balance Sheets
    
    
    3At October 30, 2004, November 1, 2003 and January 31, 2004Condensed Consolidated Statements of Cash Flows
    
    
    4For the Nine Months Ended October 30, 2004 and November 1, 2003Notes to Condensed Consolidated Financial Statements
    
    
    5-8For the Three Months and Nine Months Ended
October 30, 2004 and November 1, 2003Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    9-17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    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




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Page 2 PART I FINANCIAL INFORMATION THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended
    
    Nine Months EndedOctober 30,
    
    November 1,
    
    October 30,
    
    November 1,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)(Dollars in thousands, except per share data)REVENUESRetail sales
    
    $
    163,612
    
    
    $
    153,171
    
    
    $
    565,873
    
    
    $
    538,693Other income (principally finance,
late, and layaway charges)
    
    
    3,902
    
    
    
    3,958
    
    
    
    11,727
    
    
    
    11,639Total revenues
    
    
    167,514
    
    
    
    157,129
    
    
    
    577,600
    
    
    
    550,332COSTS AND EXPENSESCost of goods sold
    
    
    115,481
    
    
    
    108,557
    
    
    
    383,876
    
    
    
    368,171Selling, general and administrative
    
    
    44,481
    
    
    
    42,809
    
    
    
    137,692
    
    
    
    130,819Depreciation
    
    
    5,140
    
    
    
    4,713
    
    
    
    15,210
    
    
    
    13,726Interest expense
    
    
    183
    
    
    
    136
    
    
    
    512
    
    
    
    140Interest and other income
    
    
    (675
    )
    
    
    (337
    )
    
    
    (1,838
    )
    
    
    (3,356
    )Costs and expenses
    
    
    164,610
    
    
    
    155,878
    
    
    
    535,452
    
    
    
    509,500INCOME BEFORE INCOME TAXES
    
    
    2,904
    
    
    
    1,251
    
    
    
    42,148
    
    
    
    40,832Income tax expense
    
    
    1,054
    
    
    
    454
    
    
    
    15,300
    
    
    
    14,822NET INCOME
    
    $
    1,850
    
    
    $
    797
    
    
    $
    26,848
    
    
    $
    26,010BASIC EARNINGS PER SHARE
    
    $
    .09
    
    
    $
    .04
    
    
    $
    1.31
    
    
    $
    1.08DILUTED EARNINGS PER SHARE
    
    $
    .09
    
    
    $
    .04
    
    
    $
    1.28
    
    
    $
    1.06DIVIDENDS PER SHARE
    
    $
    .175
    
    
    $
    .16
    
    
    $
    .51
    
    
    $
    .47
 See accompanying notes to condensed consolidated financial statements.




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Page 3 THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS October 30,
    
    November 1,
    
    January 31,2004
    
    2003
    
    2004(Unaudited)
    
    (Unaudited)(Dollars in thousands)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    27,560
    
    
    $
    17,086
    
    
    $
    23,857Short-term investments
    
    
    63,323
    
    
    
    40,036
    
    
    
    47,545Accounts receivable  net
    
    
    49,404
    
    
    
    51,178
    
    
    
    52,714Merchandise inventories
    
    
    101,807
    
    
    
    101,874
    
    
    
    97,292Deferred income taxes
    
    
    259
    
    
    
    1,631
    
    
    
    284Prepaid expenses
    
    
    2,416
    
    
    
    5,671
    
    
    
    5,708Total Current Assets
    
    
    244,769
    
    
    
    217,476
    
    
    
    227,400Property and equipment  net
    
    
    116,307
    
    
    
    114,677
    
    
    
    114,367Other assets
    
    
    10,110
    
    
    
    9,578
    
    
    
    9,806Total
    
    $
    371,186
    
    
    $
    341,731
    
    
    $
    351,573LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    72,710
    
    
    $
    71,947
    
    
    $
    76,387Accrued expenses
    
    
    35,520
    
    
    
    29,218
    
    
    
    27,815Income taxes
    
    
    5,757
    
    
    
    5,004
    
    
    
    4,290Current portion of long-term debt
    
    
    6,000
    
    
    
    6,000
    
    
    
    6,000Total Current Liabilities
    
    
    119,987
    
    
    
    112,169
    
    
    
    114,492Deferred income taxes
    
    
    10,203
    
    
    
    6,310
    
    
    
    10,203Long-term debt
    
    
    17,000
    
    
    
    23,000
    
    
    
    21,500Other noncurrent liabilities
    
    
    11,158
    
    
    
    10,815
    
    
    
    11,267Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Total Liabilities
    
    
    158,348
    
    
    
    152,294
    
    
    
    157,462Shareholders 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 26,170,545
shares, 25,907,346 shares and 26,015,868 shares at
October 30, 2004, November 1, 2003 and
January 31, 2004, respectively
    
    
    872
    
    
    
    863
    
    
    
    867Convertible Class B common stock, $.033 par value per
share, 15,000,000 shares authorized; issued
5,597,834 shares, 5,637,834 shares and 5,607,834
shares at October 30, 2004, November 1, 2003 and
January 31, 2004, respectively
    
    
    187
    
    
    
    188
    
    
    
    187Additional paid-in capital
    
    
    101,509
    
    
    
    97,476
    
    
    
    99,676Retained earnings
    
    
    269,161
    
    
    
    250,754
    
    
    
    252,828Accumulated other comprehensive gains (losses)
    
    
    102
    
    
    
    (168
    )
    
    
    58Unearned compensation  restricted stock awards
    
    
    (1,081
    )
    
    
    (1,764
    )
    
    
    (1,593
    )370,750
    
    
    
    347,349
    
    
    
    352,023Less Class A and Class B common stock in treasury, at cost
(5,906,179 Class A and 5,137,484 Class B shares at
October 30, 2004, November 1, 2003 and January 31, 2004,
respectively)
    
    
    (157,912
    )
    
    
    (157,912
    )
    
    
    (157,912
    )Total Shareholders Equity
    
    
    212,838
    
    
    
    189,437
    
    
    
    194,111Total
    
    $
    371,186
    
    
    $
    341,731
    
    
    $
    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 Nine Months EndedOctober 30,
    
    November 1,2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    26,848
    
    
    $
    26,010Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    15,210
    
    
    
    13,726Amortization of investment premiums
    
    
    
    
    
    
    4Compensation expense related to restricted stock
awards
    
    
    512
    
    
    
    611Loss on disposal of property and equipment
    
    
    1,598
    
    
    
    277Changes in operating assets and liabilities which
provided (used) cash:Accounts receivable
    
    
    3,310
    
    
    
    2,938Merchandise inventories
    
    
    (4,515
    )
    
    
    (8,417
    )Other assets
    
    
    2,988
    
    
    
    (1,047
    )Accounts payable and other liabilities
    
    
    3,815
    
    
    
    7,690Accrued income taxes
    
    
    1,467
    
    
    
    2,118Net cash provided by operating activities
    
    
    51,233
    
    
    
    43,910INVESTING ACTIVITIESExpenditures for property and equipment
    
    
    (18,619
    )
    
    
    (15,373
    )Purchases of short-term investments
    
    
    (52,469
    )
    
    
    (11,034
    )Sales of short-term investments
    
    
    36,735
    
    
    
    45,444Net cash (used) provided by investing activities
    
    
    (34,353
    )
    
    
    19,037FINANCING ACTIVITIESDividends paid
    
    
    (10,516
    )
    
    
    (11,159
    )Purchases of treasury stock
    
    
    
    
    
    
    (98,304
    )Proceeds of long-term debt
    
    
    
    
    
    
    30,000Principal payments on long-term debt
    
    
    (4,500
    )
    
    
    (1,000
    )Proceeds from employee stock purchase plan
    
    
    479
    
    
    
    491Proceeds from stock options exercised
    
    
    1,360
    
    
    
    2,046Net cash used in financing activities
    
    
    (13,177
    )
    
    
    (77,926
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,703
    
    
    
    (14,979
    )Cash and cash equivalents at beginning of period
    
    
    23,857
    
    
    
    32,065Cash and cash equivalents at end of period
    
    $
    27,560
    
    
    $
    17,086
 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 AND NINE MONTHS ENDED OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)    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 October
30, 2004 and November 1, 2003 are unaudited. In the opinion of management, all
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 third quarter and nine months ended October
30, 2004 was $1,821,000 and $26,892,000, respectively. Total comprehensive
income for the third quarter and nine months ended November 1, 2003 was
$619,000 and $25,589,000, 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.




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Page 6 THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)    NOTE 1  GENERAL (CONTINUED): The provisions for income taxes are based on the Companys estimated annual
effective tax rate. 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 and
other convertible securities. Unvested restricted stock is included in the
computation of diluted EPS using the treasury stock method. There was an
insignificant number of shares withheld from the computation of diluted EPS due
to potential anti-dilutive effects for the nine months ended October 30, 2004
and November 1, 2003. Three Months Ended
    
    Nine Months EndedOctober 30,
    
    November 1,
    
    October 30,
    
    November 1,2004
    
    2003
    
    2004
    
    2003Weighted-average shares outstanding
    
    
    20,609,123
    
    
    
    21,499,411
    
    
    
    20,554,929
    
    
    
    24,138,935Dilutive effect of stock options
    
    
    358,213
    
    
    
    424,722
    
    
    
    363,053
    
    
    
    409,442Weighted-average shares and
common stock equivalents
(stock options) outstanding
    
    
    20,967,336
    
    
    
    21,924,133
    
    
    
    20,917,982
    
    
    
    24,548,377
 NOTE 3 
SUPPLEMENTAL CASH FLOW INFORMATION: Income tax payments, net of refunds received, for the nine months ended October
30, 2004 and November 1, 2003 were $12,221,300 and $12,561,650, respectively.




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Page 7 THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)    NOTE 4  FINANCING ARRANGEMENTS: The Company has an unsecured revolving credit agreement which provides for
borrowings of up to $35 million. This revolving credit agreement was entered
into on August 22, 2003 and is committed until August 2006. The credit
agreement contains various financial covenants and limitations, including the
maintenance of specific financial ratios. There were no borrowings outstanding
during the nine months ended October 30, 2004 or the fiscal year ended January
31, 2004. Interest is based on LIBOR, which was 2.00% on October 30, 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. The amounts outstanding under the
loan totaled $23.0 million as of October 30, 2004. Payments are due in monthly
installments of $500,000 plus accrued interest. Interest is based on LIBOR,
which was 2.00% on October 30, 2004. The Company had approximately $2,957,000 and $6,708,000 at October 30, 2004 and
November 1, 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 29 states at October
30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedOctober 30, 2004
    
    Retail
    
    Credit
    
    Total
    
    October 30, 2004
    
    Retail
    
    Credit
    
    TotalRevenues
    
    $
    163,953
    
    
    $
    3,561
    
    
    $
    167,514
    
    
    Revenues
    
    $
    567,004
    
    
    $
    10,596
    
    
    $
    577,600Depreciation
    
    
    5,120
    
    
    
    20
    
    
    
    5,140
    
    
    Depreciation
    
    
    15,151
    
    
    
    59
    
    
    
    15,210Interest and other income
    
    
    (675
    )
    
    
    
    
    
    
    (675
    )
    
    Interest and other income
    
    
    (1,838
    )
    
    
    
    
    
    
    (1,838
    )Income before taxes
    
    
    1,400
    
    
    
    1,504
    
    
    
    2,904
    
    
    Income before taxes
    
    
    38,224
    
    
    
    3,924
    
    
    
    42,148Total assets
    
    
    306,365
    
    
    
    64,821
    
    
    
    371,186
    
    
    Total assets
    
    
    306,365
    
    
    
    64,821
    
    
    
    371,186Capital expenditures
    
    
    6,804
    
    
    
    50
    
    
    
    6,854
    
    
    Capital expenditures
    
    
    18,484
    
    
    
    135
    
    
    
    18,619Three Months Ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedNovember 1, 2003
    
    Retail
    
    Credit
    
    Total
    
    November 1, 2003
    
    Retail
    
    Credit
    
    TotalRevenues
    
    $
    153,510
    
    
    $
    3,619
    
    
    $
    157,129
    
    
    Revenues
    
    $
    539,523
    
    
    $
    10,809
    
    
    $
    550,332Depreciation
    
    
    4,693
    
    
    
    20
    
    
    
    4,713
    
    
    Depreciation
    
    
    13,667
    
    
    
    59
    
    
    
    13,726Interest and other income
    
    
    (337
    )
    
    
    
    
    
    
    (337
    )
    
    Interest and other income
    
    
    (3,356
    )
    
    
    
    
    
    
    (3,356
    )Income (loss) before
taxes
    
    
    (143
    )
    
    
    1,394
    
    
    
    1,251
    
    
    Income before taxes
    
    
    37,399
    
    
    
    3,433
    
    
    
    40,832Total assets
    
    
    281,424
    
    
    
    60,307
    
    
    
    341,731
    
    
    Total assets
    
    
    281,424
    
    
    
    60,307
    
    
    
    341,731Capital expenditures
    
    
    6,290
    
    
    
    3
    
    
    
    6,293
    
    
    Capital expenditures
    
    
    15,370
    
    
    
    3
    
    
    
    15,373




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Page 8 THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 30, 2004
AND NOVEMBER 1, 2003 (UNAUDITED)    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 direct expenses of the credit segment
which are reflected in selling, general and administrative expenses (in
thousands): Three Months Ended
    
    Nine Months EndedOctober 30,
    
    November 1,
    
    October 30,
    
    November 1,2004
    
    2003
    
    2004
    
    2003Bad debt expense
    
    $
    1,208
    
    
    $
    1,366
    
    
    $
    3,877
    
    
    $
    4,538Payroll
    
    
    287
    
    
    
    281
    
    
    
    859
    
    
    
    829Postage
    
    
    250
    
    
    
    265
    
    
    
    826
    
    
    
    873Other expenses
    
    
    292
    
    
    
    293
    
    
    
    1,051
    
    
    
    1,077Total expenses
    
    $
    2,037
    
    
    $
    2,205
    
    
    $
    6,613
    
    
    $
    7,317




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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
    
    Nine Months EndedOctober 30,
    
    November 1,
    
    October 30,
    
    November 1,2004
    
    2003
    
    2004
    
    2003Total retail sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Total revenues
    
    
    102.4
    
    
    
    102.6
    
    
    
    102.0
    
    
    
    102.2Cost of goods sold
    
    
    70.6
    
    
    
    70.9
    
    
    
    67.8
    
    
    
    68.3Selling, general and
administrative
    
    
    27.2
    
    
    
    27.9
    
    
    
    24.3
    
    
    
    24.3Depreciation
    
    
    3.1
    
    
    
    3.1
    
    
    
    2.7
    
    
    
    2.6Interest expense
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.0Interest and other income
    
    
    (0.4
    )
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (0.6
    )Income before income taxes
    
    
    1.8
    
    
    
    0.8
    
    
    
    7.4
    
    
    
    7.6Net income
    
    
    1.1
    
    
    
    0.5
    
    
    
    4.7
    
    
    
    4.8
 Comparison of Third Quarter and First Nine Months of 2004 with 2003. Total retail sales for the third quarter were $163.6 million compared to last
years third quarter sales of $153.2 million, a 7% increase. Same-store sales
increased 2% in the third quarter of fiscal 2004. For the nine months ended
October 30, 2004, total retail sales were $565.9 million compared to last
years first nine months sales of $538.7 million, a 5% increase, and same-store
sales decreased 1% for the comparable nine month period. Total revenue,
comprised of retail sales and other income (principally, finance charges and
late fees on customer accounts receivable and layaway fees), were $167.5
million and $577.6 million for the third quarter and nine months ended October
30, 2004, respectively, compared to $157.1 million and $550.3 million for the
third quarter and nine months ended November 1, 2003, respectively. The
Company operated 1,149 stores at October 30, 2004 compared to 1,082 stores at
the end of last years third quarter. For the first nine months of 2004 the
Company opened 50 stores and relocated 24 stores. Credit revenue of $3.6 million, represented 2.1% of total revenues in the third
quarter of 2004. This is comparable to 2003 credit revenue of $3.6 million or
2.3% 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, which are included in selling, general and administrative expense,
include principally bad debt expense, payroll, postage and other administrative
expenses and totaled $2.0 million in the third quarter of 2004 compared to last
years third quarter expenses of $2.2 million. The decrease in costs was
principally due to lower bad debt expense.




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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): Other income in total, as included in total revenues in the third quarter of
2004, remained flat at $3.9 million compared to the third quarter of 2003. Cost of goods sold was $115.5 million, or 70.6% of retail sales and $383.9
million or 67.8% of retail sales for the third quarter and first nine months of
fiscal 2004, compared to $108.6 million, or 70.9% of retail sales and $368.2
million, or 68.3% of retail sales for the prior years comparable three and
nine months periods, respectively. The overall dollar increase in cost of
goods sold resulted primarily from increased occupancy costs. The overall
decrease in cost of goods sold as a percent of retail sales for the third
quarter and first nine months of 2004 resulted primarily from lower procurement
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. Total gross margin dollars (retail sales less cost of
goods sold) increased by 7.8% to $48.1 million and by 6.7% to $182.0 million
for the third quarter and first nine months of fiscal 2004 compared to $44.6
million and $170.5 million for the prior years comparable three and nine month
periods. 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. Selling,
general and administrative (SG&A) expenses were $44.5 million, or 27.2% of
retail sales and $137.7 million, or 24.3% of retail sales for the third quarter
and first nine months of fiscal 2004, compared to $42.8 million, or 27.9% of
retail sales and $130.8 million, or 24.3% of retail sales for prior years
comparable three and nine months periods, respectively. SG&A expenses as a
percentage of retail sales decreased 70 basis points for the third quarter of
fiscal 2004 as compared to the prior year which included a retirement charge of
$2.8 million. For the first nine months of fiscal 2004, SG&A expenses as a
percentage of retail sales remained flat due to increased incentive based
performance bonus expense offsetting the retirement charge. The overall dollar
increase in SG&A expenses for the third quarter and first nine months of fiscal
2004 resulted primarily from increased selling-related expenses and increased
infrastructure expenses attributable to the Companys store growth and from the
increased incentive based performance bonus programs.




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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): Depreciation expense was $5.1 million, or 3.1% of retail sales and $15.2
million or 2.7% of retail sales, for the third quarter and first nine months of
fiscal 2004, compared to $4.7 million, or 3.1% of retail sales and $13.7
million, or 2.6% of retail sales, for prior years comparable three and nine
month periods, respectively. The 11% increase for the first nine months of
fiscal 2004 resulted primarily from the Companys new store growth. Interest expense was $0.2 million, or 0.1% of retail sales and $0.5 million or
0.1% of retail sales, for the third quarter and first nine months of fiscal
2004, compared to $0.1 million or 0.1% of retail sales and $0.1 million, or
0.0% of retail sales, for the prior years comparable three and nine month
periods, respectively. The increase in fiscal 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 $0.7 million, or 0.4% of retail sales and $1.8
million or 0.3% of retail sales, for the third quarter and first nine months of
fiscal 2004, compared to $0.3 million, or 0.2% of retail sales and $3.4
million, or 0.6% of retail sales, for the prior years comparable three and
nine month periods, respectively. The increase in the third quarter of fiscal
2004 resulted primarily from the Companys higher cash and short-term
investment position. Income tax expense was $1.1 million, or 0.7% of retail sales and $15.3 million,
or 2.7% of retail sales, for the third quarter and first nine months of fiscal
2004, compared to $0.5 million, or 0.3% of retail sales and $14.8 million, or
2.8% of retail sales, for the prior years comparable three and nine month
periods. The third quarter increase resulted from higher pre-tax income. The
effective income tax rate for the third quarter and first nine months of fiscal
2004 was 36.3%, unchanged from fiscal 2003. 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.




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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): 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. 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.




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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): Impairment of Long-Lived Assets The Company primarily invests in property and equipment in connection with the
opening, relocating 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
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




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Page 14 THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS    CRITICAL ACCOUNTING POLICIES  (CONTINUED): 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. Changes in the
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. 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 and nine months
ended October 30, 2004 and November 1, 2003 would approximate the following
proforma amounts (dollars in thousands, except per share data): Three Months Ended
    
    Nine Months EndedOctober 30,
    
    November 1,
    
    October 30,
    
    November 1,2004
    
    2003
    
    2004
    
    2003Net Income as Reported
    
    $
    1,850
    
    
    $
    797
    
    
    $
    26,848
    
    
    $
    26,010Add: Stock-Based employee compensation
expense included in reported net
income, net
of related tax effects
    
    
    109
    
    
    
    109
    
    
    
    326
    
    
    
    389Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of
related tax effects
    
    
    (109
    )
    
    
    (239
    )
    
    
    (356
    )
    
    
    (784
    )Pro forma Net Income
    
    $
    1,850
    
    
    $
    667
    
    
    $
    26,818
    
    
    $
    25,615Earnings per share:Basic  as reported
    
    $
    .09
    
    
    $
    .04
    
    
    $
    1.31
    
    
    $
    1.08Basic  pro forma
    
    $
    .09
    
    
    $
    .03
    
    
    $
    1.30
    
    
    $
    1.06Diluted  as reported
    
    $
    .09
    
    
    $
    .04
    
    
    $
    1.28
    
    
    $
    1.06Diluted  pro forma
    
    $
    .09
    
    
    $
    .03
    
    
    $
    1.28
    
    
    $
    1.04




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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: 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 foreseeable long term. The Company has consistently maintained a strong liquidity position. Cash
provided by operating activities during the first nine months of 2004 was $51.2
million as compared to $43.9 million in the first nine months of 2003. These
amounts have enabled the Company to fund its regular operating
needs, capital expenditure program, cash dividend payments and 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. Changes in net cash provided by operating activities for the first nine months
of 2004 included an increase in net income of $0.8 million; an increase in
depreciation expense of $1.5 million due to store expansion; an increase in
loss and disposal of property and equipment of $1.3 million; a reduction in
accounts receivable of $0.4 million from improved collection efforts; a
decrease in merchandise inventories of $3.9 million and a decrease of $4.0
million in other assets. Offsetting these increases in net cash provided by
operating activities was a decrease of accounts payable and other liabilities
of $3.9 million and a decrease of $0.7 million in accrued income taxes due to
timing. Additionally, the Company had $1.8 million invested in privately managed
investment funds at
October 30, 2004, which are included in other assets of the consolidated
balance sheets. The Company has an unsecured revolving credit agreement, which provides for
borrowings of up to $35 million. The revolving credit agreement is committed
until August 2006. The credit agreement contains various financial covenants
and limitations, including the maintenance of specific financial ratios. There
were no borrowings outstanding under these credit facilities during the nine
months ended October 30, 2004 or the fiscal year ended January 31, 2004. The Company had approximately $3.0 million and $6.7 million at October 30, 2004
and November 1, 2003, respectively, of outstanding irrevocable letters of
credit relating to purchase commitments. Expenditures for property and equipment totaled $18.6 million for the nine
months ended October 30, 2004, compared to $15.4 million in last years first
nine months. The expenditures for the first nine months of 2004 were primarily
for store development and investments in new technology. In fiscal




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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): 2004, the Company is planning to invest approximately $23 million for capital
expenditures. This includes expenditures to open 80 new stores and relocate 29
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. Net cash used in investing activities totaled $34.4 million for the first nine
months of 2004 compared to $19.0 million for the comparable period of 2003.
The increase was due primarily to the purchase of short-term investments. In May 2004, the Board of Directors increased the quarterly dividend by 9% from
$.16 per share to $.175 per share. The Companys previously reported repurchase in August 2003 of 5,137,484 shares
of Class B Common Stock from entities affiliated with Wayland H. Cato, Jr., and
Edgar T. Cato, 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 October 30, 2004 was 2.00%. As of October 30, 2004, the
outstanding balance on the loan facility was $23.0 million. The Company does not use derivative financial instruments. At October 30, 2004,
the Companys investment portfolio was invested in governmental and other debt
securities with maturities less than 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.




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Page 17 THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS    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 planned investments in
technology 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, and other factors discussed from
time to time in the Companys SEC reports and press releases, which may be
accessed via the Companys website, www.catofashions.com. The Company does not
undertake any obligation to update any forward-looking statements. CONTROLS AND PROCEDURES: As of October 30, 2004, an evaluation of the effectiveness of the Companys
disclosure controls and procedures (as defined in Rule 13a-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
Financial 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 quarter ended October 30, 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.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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 (A) Exhibit No.
    
    ITEM10.1
    
    The Cato Corporation 2004 Incentive Compensation Plan
(incorporated by reference from Exhibit 4.1 to Registration
Statement on Form S-8 (No. 333-119300)10.2
    
    The Cato Corporation 2003 Employee Stock Purchase Plan
(incorporated by reference from Exhibit 4.1 to Registration
Statement on Form S-8 (No. 333-119299)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.




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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 CORPORATIONDecember 6, 2004
    
    /s/ John P. Derham CatoDate
    
    John P. Derham CatoChairman, President andChief Executive OfficerDecember 6, 2004
    
    /s/ Michael O. MooreDate
    
    Michael O. MooreExecutive Vice PresidentChief Financial Officer and SecretaryDecember 6, 2004
    
    /s/ Robert M. SandlerDate
    
    Robert M. SandlerSenior Vice PresidentController