##### 



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

FORM 10-Q

[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended
    
    November 1, 2003


OR

[  ]
    
    
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934


For the transition period from __________________ to __________________

Commission file number
    
    0-3747




THE CATO CORPORATION

(Exact name of registrant as specified in its charter)


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




8100 Denmark Road, Charlotte, North Carolina 28273-5975

(Address of principal executive offices)
(Zip Code)


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




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


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes X No ___

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

Yes X No ___

As of November 18, 2003, there were 20,001,167 shares of Class A common stock
and 500,350
shares of Class B common stock outstanding.





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##### 



THE CATO CORPORATION

FORM 10-Q

November 1, 2003

Table of Contents

PageNo.PART I  FINANCIAL INFORMATION (UNAUDITED)Condensed Consolidated Statements of Income
    
    2For the Three Months and Nine Months EndedNovember 1, 2003 and November 2, 2002Condensed Consolidated Balance Sheets
    
    3At November 1, 2003, November 2, 2002 and February 1, 2003Condensed Consolidated Statements of Cash Flows
    
    4For the Nine Months Ended November 1, 2003 and November 2, 2002Notes to Condensed Consolidated Financial Statements
    
    510For the Three Months and Nine Months EndedNovember 1, 2003 and November 2, 2002Managements Discussion and Analysis ofFinancial Condition and Results of Operations
    
    1115Controls and Procedures
    
    16PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    17Item 2. Changes in Securities and Use of Proceeds
    
    17Item 3. Defaults upon Senior Securities
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    17Item 5. Other Information
    
    17Item 6. Exhibits and Reports on Form 8-K
    
    17Signatures Page and Certification
    
    18-23






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Page 2

PART I FINANCIAL INFORMATION

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended
    
    Nine Months EndedNovember 1,
    
    November 2,
    
    November 1,
    
    November 2,2003
    
    2002
    
    2003
    
    2002(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)(Dollars in thousands, except per share data)REVENUESRetail sales
    
    $
    153,171
    
    
    $
    158,217
    
    
    $
    538,693
    
    
    $
    541,734Other income (principally finance, late, and layaway charges)
    
    
    3,958
    
    
    
    4,011
    
    
    
    11,639
    
    
    
    11,700Total revenues
    
    
    157,129
    
    
    
    162,228
    
    
    
    550,332
    
    
    
    553,434COSTS AND EXPENSES, NETCost of goods sold
    
    
    108,557
    
    
    
    110,188
    
    
    
    368,171
    
    
    
    360,502Selling, general and administrative
    
    
    42,809
    
    
    
    40,533
    
    
    
    130,819
    
    
    
    129,976Depreciation
    
    
    4,713
    
    
    
    4,143
    
    
    
    13,726
    
    
    
    10,505Interest and other income, net
    
    
    (201
    )
    
    
    (1,143
    )
    
    
    (3,216
    )
    
    
    (3,952
    )Costs and expenses, net
    
    
    155,878
    
    
    
    153,721
    
    
    
    509,500
    
    
    
    497,031INCOME BEFORE INCOME TAXES
    
    
    1,251
    
    
    
    8,507
    
    
    
    40,832
    
    
    
    56,403Income tax expense
    
    
    454
    
    
    
    3,080
    
    
    
    14,822
    
    
    
    20,418NET INCOME
    
    $
    797
    
    
    $
    5,427
    
    
    $
    26,010
    
    
    $
    35,985BASIC EARNINGS PER SHARE
    
    $
    .04
    
    
    $
    .21
    
    
    $
    1.08
    
    
    $
    1.41DILUTED EARNINGS PER SHARE
    
    $
    .04
    
    
    $
    .21
    
    
    $
    1.06
    
    
    $
    1.39DIVIDENDS PER SHARE
    
    $
    .16
    
    
    $
    .15
    
    
    $
    .47
    
    
    $
    .435


See accompanying notes to condensed consolidated financial statements.





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Page 3

THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

November 1,
    
    November 2,
    
    February 1,2003
    
    2002
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    17,086
    
    
    $
    49,528
    
    
    $
    32,065Short-term investments
    
    
    40,036
    
    
    
    54,627
    
    
    
    74,871Accounts receivable  net
    
    
    51,178
    
    
    
    52,303
    
    
    
    54,116Merchandise inventories
    
    
    101,874
    
    
    
    104,775
    
    
    
    93,457Deferred income taxes
    
    
    1,631
    
    
    
    1,069
    
    
    
    1,392Prepaid expenses
    
    
    5,671
    
    
    
    5,020
    
    
    
    4,990Total Current Assets
    
    
    217,476
    
    
    
    267,322
    
    
    
    260,891Property and equipment  net
    
    
    114,677
    
    
    
    111,351
    
    
    
    113,307Other assets
    
    
    9,578
    
    
    
    9,144
    
    
    
    9,212Total
    
    $
    341,731
    
    
    $
    387,817
    
    
    $
    383,410LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    71,947
    
    
    $
    77,240
    
    
    $
    66,620Accrued expenses
    
    
    29,218
    
    
    
    30,584
    
    
    
    28,776Income taxes
    
    
    5,004
    
    
    
    6,011
    
    
    
    2,886Current portion of long-term debt
    
    
    6,000
    
    
    
    
    
    
    
    Total Current Liabilities
    
    
    112,169
    
    
    
    113,835
    
    
    
    98,282Deferred income taxes
    
    
    6,310
    
    
    
    5,177
    
    
    
    6,310Long term debt
    
    
    23,000
    
    
    
    
    
    
    
    Other noncurrent liabilities
    
    
    10,815
    
    
    
    8,412
    
    
    
    8,654Commitments and contingenciesShareholders 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 25,907,346
shares, 25,188,736 shares and 25,218,678 shares at
November 1, 2003, November 2, 2002, and
February 1, 2003, respectively
    
    
    863
    
    
    
    840
    
    
    
    840Convertible Class B common stock, $.033 par value per
share, 15,000,000 shares authorized; issued
5,637,834 shares, 6,085,149 shares and 6,085,149
shares at November 1, 2003, November 2, 2002 and
February 1, 2003, respectively
    
    
    188
    
    
    
    203
    
    
    
    203Additional paid-in capital
    
    
    97,476
    
    
    
    92,741
    
    
    
    94,947Retained earnings
    
    
    250,754
    
    
    
    229,889
    
    
    
    235,904Accumulated other comprehensive gains (losses)
    
    
    (168
    )
    
    
    (1,053
    )
    
    
    253Unearned compensation  restricted stock awards
    
    
    (1,764
    )
    
    
    (2,619
    )
    
    
    (2,375
    )347,349
    
    
    
    320,001
    
    
    
    329,772Less Class A and Class B common stock in treasury, at cost
(5,906,179 Class A and 5,137,484 Class B shares at
November 1, 2003, 5,741,179 Class A and 0 Class B shares at
November 2, 2002, and at February 1, 2003, respectively)
    
    
    (157,912
    )
    
    
    (59,608
    )
    
    
    (59,608
    )Total Shareholders Equity
    
    
    189,437
    
    
    
    260,393
    
    
    
    270,164Total
    
    $
    341,731
    
    
    $
    387,817
    
    
    $
    383,410


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 EndedNovember 1,
    
    November 2,2003
    
    2002(Unaudited)
    
    (Unaudited)(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    26,010
    
    
    $
    35,985Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    13,726
    
    
    
    10,505Amortization of investment premiums
    
    
    4
    
    
    
    64Compensation expense related to restricted stock
awards
    
    
    611
    
    
    
    506Loss on disposal of property and equipment
    
    
    277
    
    
    
    406Changes in operating assets and liabilities which
provided (used) cash:Accounts receivable
    
    
    2,938
    
    
    
    (9
    )Merchandise inventories
    
    
    (8,417
    )
    
    
    (24,368
    )Other assets
    
    
    (1,047
    )
    
    
    (432
    )Accounts payable and other liabilities
    
    
    7,690
    
    
    
    24,598Accrued income taxes
    
    
    2,118
    
    
    
    5,191Net cash provided by operating activities
    
    
    43,910
    
    
    
    52,446INVESTING ACTIVITIESExpenditures for property and equipment
    
    
    (15,373
    )
    
    
    (22,125
    )Purchases of short-term investments
    
    
    (11,034
    )
    
    
    (25,520
    )Sales of short-term investments
    
    
    45,444
    
    
    
    13,265Net cash provided (used) in investing activities
    
    
    19,037
    
    
    
    (34,380
    )FINANCING ACTIVITIESDividends paid
    
    
    (11,159
    )
    
    
    (11,057
    )Purchases of treasury stock
    
    
    (98,304
    )
    
    
    (1,187
    )Proceeds of long term debt
    
    
    30,000
    
    
    
    Payments to settle long term debt
    
    
    (1,000
    )
    
    
    Proceeds from employee stock purchase plan
    
    
    491
    
    
    
    496Proceeds from stock options exercised
    
    
    2,046
    
    
    
    1,438Net cash (used) in financing activities
    
    
    (77,926
    )
    
    
    (10,310
    )Net increase (decrease) in cash and cash equivalents
    
    
    (14,979
    )
    
    
    7,756Cash and cash equivalents at beginning of period
    
    
    32,065
    
    
    
    41,772Cash and cash equivalents at end of period
    
    $
    17,086
    
    
    $
    49,528


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 NOVEMBER 1, 2003
AND NOVEMBER 2, 2002



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 November
1, 2003 and November 2, 2002 are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of the
interim period may not be indicative of the entire year.

The interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, included in the Companys
Annual Report on Form 10-K for the fiscal year ended February 1, 2003.

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, net in the accompanying Statements of Consolidated 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 other income.

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
for the third quarter and nine months ended November 2, 2002 was $5,275,000 and
$35,499,000, 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.

For the nine months ended November 1, 2003, the Company repurchased 165,000
shares of Class A Common Stock for $2,740,619, or an average market price of
$16.61 per share and 5,137,484 of Class B Common Stock for $95,563,454, or an
average market price of $18.60 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 NOVEMBER 1, 2003
AND NOVEMBER 2, 2002






NOTE 1  GENERAL (CONTINUED):

For the nine months ended November 2, 2002, the Company repurchased and
accepted a combined total of 114,681 mature shares of Class A Common Stock for
$2,331,187, or an average market price of $20.33 per share. In the third
quarter of fiscal 2002, the Company repurchased 4,100 shares of Class A Common
Stock for $70,923, or an average market price of $17.30 per share.

In May 2003, the Board of Directors increased the quarterly dividend by 7% from
$.15 per share to $.16 per share.

On August 22, 2003, the Company repurchased 5,137,484 shares of Class B Common
Stock from a limited partnership and trust affiliated with Wayland H. Cato,
Jr., a Company founder and Chairman of the Board and a limited partnership
affiliated with Edgar T. Cato, a Company founder and a member of the Board of
Directors. Shares were purchased at $18.50 per share (a 10% discount to the
closing price the day prior to the announced agreement) for a total cost of
$95,043,454. Including related expenses of $520,000 for investment banking and
related professional fees, the total cost was $95,563,454 or an average
purchase price of $18.60 per share. The repurchase was funded by the Company
through a new $30 million five-year term loan facility and approximately $65
million of cash and liquidated short-term investments. Payments on the new
term loan are due in monthly installments of $500,000 plus accrued interest.
Interest is based on LIBOR. The interest rate at November 1, 2003 was 2.27%.

On August 29, 2003, the Company entered into retirement agreements with Mr.
Wayland H. Cato, Jr., a Company founder and Chairman of the Board and Mr. Edgar
T. Cato, a Company founder and a member of the Board of Directors. The
agreements provided for the retirement of Mr. Wayland Cato and Mr. Edgar Cato
from the Company and the Board of Directors effective January 31, 2004. Mr.
Wayland Cato will be available to the Company for consulting services following
his retirement. In the third quarter of fiscal 2003, the Company recognized an
expense of $2.8 million representing the present value of certain payments and
benefits under the terms of the agreements. The after-tax charge was $1.8
million or $.08 per diluted share for the third quarter and $.07 per diluted
share for the nine months.

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

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





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Page 7

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 1, 2003
AND NOVEMBER 2, 2002



NOTE 2  RECENT ACCOUNTING PRONOUNCEMENTS:

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide for alternative methods
of transition to SFAS No. 123s fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per-share in annual and
interim financial statements. While SFAS No. 148 does not amend SFAS No. 123
to require companies to account for employee stock options using the fair value
method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based compensation, regardless of whether they account for
that compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS No. 148s amendment of the transition and the annual and interim
disclosure requirements of SFAS No. 123 are effective for fiscal years ending
after December 15, 2002.

The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for
stock-based compensation where the option price of the stock approximated the
fair market value of the stock on the date of grant. Had compensation expense
for the stock options granted been determined consistent with SFAS No. 123, the
Companys net income and basic and diluted earnings per share amounts for the
three months ended November 1, 2003 and November 2, 2002 and for the nine
months ended November 1, 2003 and November 2, 2002 would approximate the
following proforma amounts (dollars in thousands, except per share data):

Three Months Ended
    
    Nine Months EndedNovember 1,
    
    November 2,
    
    November 1,
    
    November 2,2003
    
    2002
    
    2003
    
    2002Net income  as reported
    
    $
    797
    
    
    $
    5,427
    
    
    $
    26,010
    
    
    $
    35,985* Pro forma stock-based compensation cost
    
    
    (130
    )
    
    
    (179
    )
    
    
    (395
    )
    
    
    (571
    )Net income  pro forma
    
    $
    667
    
    
    $
    5,248
    
    
    $
    25,615
    
    
    $
    35,414Net income per share as reported:Basic earnings per share
    
    $
    .04
    
    
    $
    .21
    
    
    $
    1.08
    
    
    $
    1.41Diluted earnings per share
    
    $
    .04
    
    
    $
    .21
    
    
    $
    1.06
    
    
    $
    1.39Net
income per share-pro formaBasic earnings per share
    
    $
    .03
    
    
    $
    .21
    
    
    $
    1.06
    
    
    $
    1.39Diluted earnings per share
    
    $
    .03
    
    
    $
    .20
    
    
    $
    1.04
    
    
    $
    1.37* determined using fair value method






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Page 8

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 1, 2003
AND NOVEMBER 2, 2002



NOTE 2  RECENT ACCOUNTING
PRONOUNCEMENTS (CONTINUED):

In January 2003, the FASB issued Interpretation No. 46 Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This interpretation applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
a variable interest it acquired before February 1, 2003.
This interpretation may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The implementation of this interpretation had no effect on the Companys
financial position or results of operations.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 changes the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
The new Statement requires that those instruments be classified as liabilities
in statements of financial position. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and for all other
instruments for interim periods beginning after
June 15, 2003. The Company does not expect the provisions of SFAS 150 to have
a material impact on our financial position or results of operations.

NOTE 3  EARNINGS PER SHARE:

Earnings per share is calculated by dividing net income by the weighted-average
number of Class A and Class B common shares outstanding during the respective
periods. The weighted-average
shares outstanding is used in the basic earnings per share calculation, while
the weighted-average shares and common stock equivalents outstanding are used
in the diluted earnings per share calculation.

Three Months Ended
    
    Nine Months EndedNovember 1,
    
    November 2,
    
    November 1,
    
    November 2,2003
    
    2002
    
    2003
    
    2002Weighted-average shares outstanding
    
    
    21,499,411
    
    
    
    25,516,334
    
    
    
    24,138,935
    
    
    
    25,437,165Dilutive effect of stock options
    
    
    424,722
    
    
    
    376,203
    
    
    
    409,442
    
    
    
    498,484Weighted-average shares and
common stock equivalents
(stock options) outstanding
    
    
    21,924,133
    
    
    
    25,892,537
    
    
    
    24,548,377
    
    
    
    25,935,649






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Page 9

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 1, 2003
AND NOVEMBER 2, 2002



NOTE 4  SUPPLEMENTAL CASH FLOW INFORMATION:

Income tax payments, net of refunds received, for the nine months ended
November 1, 2003 and November 2, 2002 were $12,561,650 and $15,231,400,
respectively.

NOTE 5  FINANCING ARRANGEMENTS:

On August 22, 2003, the Company entered into a new $30 million five-year term
loan facility, the proceeds of which were used to purchase Class B Common Stock
from the Companys founders. Payments are due in monthly installments of
$500,000 plus accrued interest. Interest is based on LIBOR. The interest rate
at November 1, 2003 was 2.27%.

On August 22, 2003, the Company entered into a new revolving credit agreement
which provides for borrowings of up to $35 million. The revolving credit
agreement is committed until August 22, 2006, unless extended. This agreement
replaces a prior revolving credit agreement which was due to expire on October
31, 2004. The credit agreement contains various financial covenants and
limitations, including the maintenance of specific financial ratios with which
the Company was in compliance as of November 1, 2003. There were no borrowings
outstanding under these credit facilities during the nine months ended November
1, 2003 or the fiscal year ended February 1, 2003. Interest is based on LIBOR.
The interest rate at November 1, 2003 was 2.27%.

NOTE 6  REPORTABLE SEGMENT INFORMATION:

The Company has two reportable segments: retail and credit. The following
schedule summarizes certain segment information (in thousands):

Three Months Ended
    
    Nine Months EndedNovember 1,
    
    November 2,
    
    November 1,
    
    November 2,2003
    
    2002
    
    2003
    
    2002Revenues:Retail
    
    $
    153,510
    
    
    $
    158,732
    
    
    $
    539,523
    
    
    $
    543,192Credit
    
    
    3,619
    
    
    
    3,496
    
    
    
    10,809
    
    
    
    10,242Total
    
    $
    157,129
    
    
    $
    162,228
    
    
    $
    550,332
    
    
    $
    553,434Income before income taxes:Retail
    
    $
    (143
    )
    
    $
    7,079
    
    
    $
    37,399
    
    
    $
    52,322Credit
    
    
    1,394
    
    
    
    1,428
    
    
    
    3,433
    
    
    
    4,081Total
    
    $
    1,251
    
    
    $
    8,507
    
    
    $
    40,832
    
    
    $
    56,403






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Page 10

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 1, 2003
AND NOVEMBER 2, 2002



NOTE 6  REPORTABLE SEGMENT INFORMATION (CONTINUED):

Income before income taxes for the three months and nine months ended November
1, 2003 included $2.8 million for certain retirement costs (Note 1) which have
been allocated to the retail segment above.





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##### 



Page 11

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 EndedNovember 1,
    
    November 2,
    
    November 1,
    
    November 2,2003
    
    2002
    
    2003
    
    2002Total retail sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Total revenues
    
    
    102.6
    
    
    
    102.6
    
    
    
    102.2
    
    
    
    102.2Cost of goods sold
    
    
    70.9
    
    
    
    69.7
    
    
    
    68.3
    
    
    
    66.6Selling, general and
administrative
    
    
    27.9
    
    
    
    25.6
    
    
    
    24.3
    
    
    
    24.0Depreciation
    
    
    3.1
    
    
    
    2.6
    
    
    
    2.6
    
    
    
    1.9Interest and other, net
    
    
    (0.1
    )
    
    
    (0.7
    )
    
    
    (0.6
    )
    
    
    (0.7
    )Income before income taxes
    
    
    0.8
    
    
    
    5.4
    
    
    
    7.6
    
    
    
    10.4Net income
    
    
    0.5
    
    
    
    3.4
    
    
    
    4.8
    
    
    
    6.6


Comparison of Third Quarter and First Nine Months of 2003 with 2002.

Total retail sales for the third quarter were $153.2 million compared to last
years third
quarter sales of $158.2 million, a 3% decrease. Same-store sales decreased 10%
in the third quarter of fiscal 2003. For the nine months ended November 1,
2003, total retail sales were $538.7 million compared to last years first nine
months sales of $541.7 million, a 1% decrease, and
same-store sales decreased 8% for the comparable nine month period. The
decrease in sales for the first nine months of 2003 was due to a lower average
retail sale and lower average transactions per store as a result of the
continued difficult economic conditions. The Company operated 1,082 stores at
November 1, 2003 compared to 992 stores at the end of last years third
quarter.

Other income for the third quarter of 2003 decreased 1% over the prior years
comparable period. The decrease in the third quarter resulted primarily from
decreased layaway fees. Other income for the first nine months of 2003 was
virtually equivalent to the comparable nine month period last year.

Cost of goods sold were 70.9% and 68.3% of total retail sales for the third
quarter and first nine months of 2003, respectively, compared to 69.7% and
66.6% for prior years comparable three and nine month periods, respectively.
The increase in cost of goods sold as a percent of retail sales for the first
nine months of 2003 resulted primarily from lower than planned sales and
additional markdowns taken to bring inventory levels in line with sales trends.

Selling, general and administrative (SG&A) expenses were $42.8 million, or
27.9% and $130.8 million, or 24.3% for the third quarter and first nine months
of this year, compared to $40.5





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Page 12

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



RESULTS OF OPERATIONS  (CONTINUED):

million, or 25.6% and $130.0 million, or 24.0% of retail sales for prior years
comparable three and nine month periods, respectively. SG&A expenses as a
percentage of retail sales increased 230 basis points for the third quarter of
2003 as compared to the prior year and increased 30 basis points for the first
nine months of 2003, as compared to the prior year. The overall increase in
SG&A expenses for the third quarter and first nine months of 2003 results
primarily from $2.8 million costs related to the retirement agreements with the
Companys founders, partially offset by reduced incentive-based performance
bonus programs.

Depreciation expense was $4.7 million, or 3.1% and $13.7 million or 2.6% of
retail sales, for the third quarter and first nine months of fiscal 2003,
compared to $4.1 million, or 2.6% and $10.5 million, or 1.9% of retail sales,
for prior years comparable three and nine month periods, respectively. The
increase resulted primarily from the Companys new store development and
depreciation of the Companys enterprise-wide information system which was
implemented in August 2002.

Income tax expense was $.5 million, or .3% and $14.8 million, or 2.8% of retail
sales, for the third quarter and first nine months of fiscal 2003, compared to
$3.1 million, or 2.0% and $20.4 million, or 3.8% of retail sales, for the prior
years comparable three and nine month periods. The decrease resulted from
lower pre-tax income.

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 judgement. 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 and reserves for inventory markdowns.

The Company evaluates the collectibility of accounts receivable and records
allowances for doubtful accounts based on estimates of actual write-offs and
the relative age of accounts. The Companys self-insurance liabilities related
to workers compensation, general and auto insurance liabilities are based on
estimated costs of claims filed and claims incurred but not reported and data
provided by outside actuaries. Merchandise inventories are stated at the lower
of cost (first-in, first-out method) or market as determined by the retail
method. Management makes estimates regarding markdowns based on customer
demand which can impact inventory valuations. Historically, actual results
have not significantly deviated from those determined using the estimates
described above.





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##### 



Page 13

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



STOCK OPTIONS:

The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for
stock-based compensation where the option price of the stock approximated the
fair market value of the stock on the date of grant. Had compensation expense
for
the stock options granted been determined consistent with SFAS No. 123, the
Companys net income and basic and diluted earnings per share amounts for the
three months ended November 1, 2003 and November 2, 2002 and for the nine
months ended November 1, 2003 and November 2, 2002 would approximate the
following proforma amounts (dollars in thousands, except per share data):

Three Months Ended
    
    Nine Months EndedNovember 1,
    
    November 2,
    
    November 1,
    
    November 2,2003
    
    2002
    
    2003
    
    2002Net income  as reported
    
    $
    797
    
    
    $
    5,427
    
    
    $
    26,010
    
    
    $
    35,985*Pro forma stock-based compensation cost
    
    
    (130
    )
    
    
    (179
    )
    
    
    (395
    )
    
    
    (571
    )Net income  pro forma
    
    $
    667
    
    
    $
    5,248
    
    
    $
    25,615
    
    
    $
    35,414Net income per share as reported:Basic earnings per share
    
    $
    .04
    
    
    $
    .21
    
    
    $
    1.08
    
    
    $
    1.41Diluted earnings per share
    
    $
    .04
    
    
    $
    .21
    
    
    $
    1.06
    
    
    $
    1.39Net income per share-pro formaBasic earnings per share
    
    $
    .03
    
    
    $
    .21
    
    
    $
    1.06
    
    
    $
    1.39Diluted earnings per share
    
    $
    .03
    
    
    $
    .20
    
    
    $
    1.04
    
    
    $
    1.37*determined using fair value method


LIQUIDITY AND CAPITAL RESOURCES:

At November 1, 2003, the Company had working capital of $105.3 million,
compared to $153.5 million at November 2, 2002 and $162.6 million at February
1, 2003. Cash provided by operating activities was $43.9 million for the nine
months ended November 1, 2003, compared to $52.4 million for last years
comparable nine month period. The decrease in net cash provided by operating
activities resulted primarily from a decrease in net income, payments related
to accounts payable and other liabilities made prior to the end of third
quarter of 2003 versus after the end of third quarter 2002 partially offset by
a decrease in inventories. At November 1, 2003, the Company had cash, cash
equivalents, and short-term investments of $57.1 million, compared to $104.2
million at November 2, 2002 and $106.9 million at February 1, 2003. The
reduction in cash, cash equivalents, and short-term investments was primarily
due to the repurchase of stock from the Companys founders, partially funded by
approximately $65 million of cash and liquidated short-term investments.

Net cash provided in investing activities totaled $19.0 million for the first
nine months of 2003 compared to $34.4 million used for the comparable period of
2002. Cash was provided by the sale of





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Page 14

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



LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):

short-term investments partially offset by funding of capital expenditures for
new, relocated and remodeled stores and for investments in technology.

Expenditures for property and equipment totaled $15.4 million for the nine
months ended November 1, 2003, compared to $22.1 million of expenditures in
last years first nine months. The Company expects total capital expenditures
to be approximately $27 million for the current fiscal year. The Company
intends to open approximately 87 new stores, relocate 24 stores, and close 6
stores during the current fiscal year. For the nine months ended November 1,
2003, the Company had opened 61 new stores, relocated 18 stores, and closed one
store.

Net cash used in financing activities totaled $77.9 million for the first nine
months of 2003 compared to $10.3 million for the comparable period of 2002.
The increase was due primarily to the repurchase of stock from the Companys
founders partially offset by a new $30 million five-year term loan facility.

In May 2003, the Board of Directors increased the quarterly dividend by 7% from
$.15 per share to $.16 per share.

On August 22, 2003, the Company entered into a new $30 million five-year term
loan facility, the proceeds of which were used to purchase Class B Common Stock
from the Companys founders. Payments are due in monthly installments of
$500,000 plus accrued interest. Interest is based on LIBOR and was 2.27% at
November 1, 2003.

On August 22, 2003, the Company entered into a new revolving credit agreement
which provides for borrowings of up to $35 million. The revolving credit
agreement is committed until August 22, 2006, unless extended. This agreement
replaces a prior revolving credit agreement which was due to expire on October
31, 2004. The credit agreement contains various financial covenants and
limitations, including the maintenance of specific financial ratios with which
the Company was in compliance as of November 1, 2003. There were no borrowings
outstanding under these credit facilities during the nine months ended November
1, 2003 or the fiscal year ended February 1, 2003.

The Company does not use derivative financial instruments. At November 1,
2003, November 2, 2002, and February 1, 2003, the Companys investment
portfolio was primarily invested in governmental debt securities with
maturities of up to 36 months. These securities are classified as
available-for-sale, and are recorded on the balance sheet at fair value with
unrealized gains and losses reported as accumulated other comprehensive gains
or losses, net of applicable deferred taxes.

The Company believes that its cash, cash equivalents and short-term
investments, together with cash flow 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 during fiscal
2003 and the foreseeable future.





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Page 15

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



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 expected capital expenditures, intended
store openings, closures and relocations and expected adequacy of liquidity
during the current fiscal year and for the foreseeable future, are
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 apparel buying patterns; adverse weather
conditions and inventory risks due to shifts in market demand. The Company
does not undertake to publicly update or revise the forward-looking statements
even if experience or future changes make it clear that the projected results
expressed or implied therein will not be realized.





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Page 16

THE CATO CORPORATION
CONTROLS AND PROCEDURES



EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company is recorded,
processed, summarized, and reported within the time periods specified in the
appropriate rules and forms of the Securities and Exchange Commission and that
such information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer. The
Companys Chief Executive Officer and Chief Financial Officer have evaluated
the Companys disclosure controls and procedures as of November 1, 2003. Each
has concluded that these controls and procedures are effective.

CHANGES IN INTERNAL CONTROLS:

There have been no changes in the Companys internal control over financial
reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.





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##### 



Page 17

PART II OTHER INFORMATION

THE CATO CORPORATION

ITEM 1.   LEGAL
PROCEEDINGS

None

ITEM 2.   CHANGES IN 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 AND REPORTS ON FORM 8-K

(A)Exhibit No.
    
    ITEMNone
    
    None




(B)
    
    Form 8-K was furnished on August 20, 2003 disclosing the
August 19, 2003 Press Release regarding the Companys financial
results for the second quarter of 2003.Form 8-K was filed on September 23, 2003 as amended by Form 8-K/A filed
October 6, 2003, to report that the Company dismissed Deloitte &
Touche LLP as its principal independent accountants from the
engagement to perform the audit of the financial statements of the
Company for the fiscal year ending January 31, 2004 and engaged the
accounting firm of PricewaterhouseCoopers LLP as independent
accountants to audit the Companys financial statements for the
fiscal year ending January 31, 2004.






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Page 18

PART II OTHER INFORMATION (CONTINUED):

THE CATO CORPORATION

SIGNATURES PAGE AND CERTIFICATES





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##### 



Page 19

PART II OTHER INFORMATION (CONTINUED):

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 15, 2003
    
    
    
    /s/ John P. Derham CatoDate
    
    
    
    John P. Derham Cato
President, Vice Chairman of the Board
and Chief Executive OfficerDecember 15, 2003
    
    
    
    /s/ Michael O. MooreDate
    
    
    
    Michael O. Moore
Executive Vice President
Chief Financial Officer and SecretaryDecember 15, 2003
    
    
    
    /s/ Robert M. SandlerDate
    
    
    
    Robert M. Sandler
Senior Vice President
Controller