##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to Commission file number 1-31340 THE CATO CORPORATION   Delaware
    
    56-0484485(State or other jurisdiction
of incorporation)
    
    (I.R.S. Employer
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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes þ No o As of May 17, 2005, there were 20,430,455 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 April 30, 2005 Table of Contents PageNo.PART I - FINANCIAL INFORMATION (UNAUDITED)Item 1. Financial Statements:Condensed Consolidated Statements of Income
For the Three Months Ended April 30, 2005 and May 1, 2004 (restated)
    
    
    2Condensed Consolidated Balance Sheets
At April 30, 2005, May 1, 2004 (restated) and January 29, 2005
    
    
    3Condensed Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2005 and May 1, 2004 (restated)
    
    
    4Notes to Condensed Consolidated Financial Statements
For the Three Months Ended April 30, 2005 and May 1, 2004 (restated)
    
    
    5-10Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    1114Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II - OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 3. Defaults upon Senior Securities
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    16Item 5. Other Information
    
    
    16Item 6. Exhibits
    
    
    16Signatures
    
    
    17-21




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##### 



PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months EndedApril 30,
    
    
    May 1,2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)(Restated)(Dollars in thousands, except per share data)REVENUESRetail sales
    
    $
    215,064
    
    
    $
    205,193Other income (principally finance charges, late fees and
layaway charges)
    
    
    3,863
    
    
    
    4,008Total revenues
    
    
    218,927
    
    
    
    209,201COSTS AND EXPENSES, NETCost of goods sold
    
    
    136,434
    
    
    
    132,398Selling, general and administrative
    
    
    49,333
    
    
    
    45,796Depreciation
    
    
    5,038
    
    
    
    4,979Interest expense
    
    
    152
    
    
    
    162Interest and other income
    
    
    (941
    )
    
    
    (506
    )190,016
    
    
    
    182,829Income before income taxes
    
    
    28,911
    
    
    
    26,372Income tax expense
    
    
    10,495
    
    
    
    9,573Net income
    
    $
    18,416
    
    
    $
    16,799Basic earnings per share
    
    $
    0.89
    
    
    $
    0.82Basic weighted average shares
    
    
    20,736,217
    
    
    
    20,499,605Diluted earnings per share
    
    $
    0.87
    
    
    $
    0.81Diluted weighted average shares
    
    
    21,195,426
    
    
    
    20,845,867Dividends per share
    
    $
    .175
    
    
    $
    .16Comprehensive income:Net income
    
    $
    18,416
    
    
    $
    16,799Unrealized gains (losses) on available-for-sale securities, net
of deferred income tax liability or benefit
    
    
    (40
    )
    
    
    185Net comprehensive income
    
    $
    18,376
    
    
    $
    16,984
 See notes to condensed consolidated financial statements. 2




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THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS April 30,
    
    
    May 1,
    
    
    January 29,2005
    
    
    2004
    
    
    2005(Unaudited)
    
    
    (Unaudited)(Restated)(Dollars in thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    22,773
    
    
    $
    23,167
    
    
    $
    18,640Short-term investments
    
    
    71,472
    
    
    
    67,155
    
    
    
    88,588Accounts receivable, net of allowance for doubtful accounts of $6,020,
$6,242 and $6,122 at April 30, 2005, May 1, 2004 and January 29,
2005, respectively
    
    
    49,534
    
    
    
    51,427
    
    
    
    50,889Merchandise inventories
    
    
    105,084
    
    
    
    99,855
    
    
    
    100,538Deferred income taxes
    
    
    5,804
    
    
    
    4,891
    
    
    
    5,781Prepaid expenses
    
    
    6,308
    
    
    
    6,299
    
    
    
    1,986Total Current Assets
    
    
    260,975
    
    
    
    252,794
    
    
    
    266,422Property and equipment  net
    
    
    118,727
    
    
    
    116,400
    
    
    
    117,590Other assets
    
    
    10,391
    
    
    
    10,189
    
    
    
    10,122Total Assets
    
    $
    390,093
    
    
    $
    379,383
    
    
    $
    394,134LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    81,957
    
    
    $
    76,534
    
    
    $
    82,828Accrued expenses
    
    
    32,572
    
    
    
    28,134
    
    
    
    39,338Accrued income taxes
    
    
    14,242
    
    
    
    13,918
    
    
    
    4,465Current portion of long-term debt
    
    
    3⁄4
    
    
    
    6,000
    
    
    
    6,000Total Current Liabilities
    
    
    128,771
    
    
    
    124,586
    
    
    
    132,631Deferred income taxes
    
    
    10,172
    
    
    
    10,203
    
    
    
    10,172Long-term debt
    
    
    3⁄4
    
    
    
    20,000
    
    
    
    16,000Other noncurrent liabilities (primarily deferred rent)
    
    
    24,096
    
    
    
    24,169
    
    
    
    24,156Commitments and contingencies:Stockholders Equity:Preferred stock, $100 par value per share, 100,000 shares authorized,
none issued
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 26,334,634 shares, 26,049,957 shares
and 26,249,178 shares at April 30, 2005, May 1, 2004 and
January 29, 2005, respectively
    
    
    877
    
    
    
    868
    
    
    
    875Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 5,597,834 shares,
5,607,834 shares and 5,597,834 shares at April 30, 2005,
May 1, 2004 and January 29, 2005, respectively
    
    
    187
    
    
    
    187
    
    
    
    187Additional paid-in capital
    
    
    104,355
    
    
    
    100,133
    
    
    
    103,366Retained earnings
    
    
    280,256
    
    
    
    258,328
    
    
    
    265,499Accumulated other comprehensive income
    
    
    31
    
    
    
    243
    
    
    
    71Unearned compensation  restricted stock awards
    
    
    (740
    )
    
    
    (1,422
    )
    
    
    (911
    )384,966
    
    
    
    358,337
    
    
    
    369,087Less Class A and Class B common stock in treasury, at cost (5,906,179
Class A and 5,137,484 Class B shares at April 30, 2005,
May 1, 2004 and January 29, 2005, respectively)
    
    
    (157,912
    )
    
    
    (157,912
    )
    
    
    (157,912
    )Total Stockholders Equity
    
    
    227,054
    
    
    
    200,425
    
    
    
    211,175Total Liabilities and Stockholders Equity
    
    $
    390,093
    
    
    $
    379,383
    
    
    $
    394,134
 See notes to condensed consolidated financial statements. 3




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THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months EndedApril 30,
    
    
    May 1,2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)(Restated)(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    18,416
    
    
    $
    16,799Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    5,038
    
    
    
    4,979Provision for doubtful accounts
    
    
    1,264
    
    
    
    1,422Deferred income taxes
    
    
    (23
    )
    
    
    105Compensation expense related to restricted stock awards
    
    
    171
    
    
    
    171Loss on disposal of property and equipment
    
    
    595
    
    
    
    14Changes in operating assets and liabilities which provided
(used) cash:Accounts receivable
    
    
    91
    
    
    
    (135
    )Merchandise inventories
    
    
    (4,546
    )
    
    
    (2,563
    )Prepaid and other assets
    
    
    (4,591
    )
    
    
    (974
    )Accrued income taxes
    
    
    9,777
    
    
    
    9,413Accounts payable, accrued expenses and other liabilities
    
    
    (17,436
    )
    
    
    (2,107
    )Net cash provided by operating activities
    
    
    8,756
    
    
    
    27,124INVESTING ACTIVITIESExpenditures for property and equipment
    
    
    (6,731
    )
    
    
    (6,983
    )Purchases of short-term investments
    
    
    (20,654
    )
    
    
    (19,425
    )Sales of short-term investments
    
    
    37,730
    
    
    
    Net cash provided (used) in investing activities
    
    
    10,345
    
    
    
    (26,408
    )FINANCING ACTIVITIESCash overdrafts included in accounts payable
    
    
    9,700
    
    
    
    2,900Dividends paid
    
    
    (3,660
    )
    
    
    (3,264
    )Payments to settle long term debt
    
    
    (22,000
    )
    
    
    (1,500
    )Proceeds from employee stock purchase plan
    
    
    213
    
    
    
    209Proceeds from stock options exercised
    
    
    779
    
    
    
    249Net cash used in financing activities
    
    
    (14,968
    )
    
    
    (1,406
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,133
    
    
    
    (690
    )Cash and cash equivalents at beginning of period
    
    
    18,640
    
    
    
    23,857Cash and cash equivalents at end of period
    
    $
    22,773
    
    
    $
    23,167
 See notes to condensed consolidated financial statements. 4




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND MAY 1, 2004 (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 April 30, 2005 and May 1, 2004 are unaudited. In the opinion of
management, all adjustments considered necessary for a fair presentation have been included. All
such adjustments are of a normal, recurring nature. 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 29, 2005. The Company restated its consolidated balance sheet and its consolidated statements of income and
cash flows for the quarter ended May 1, 2004 as a result of correcting its leasing accounting
practices. The Company historically straight-lined lease expense over the period from the open date of the
store through the initial non-cancelable lease term expiration. However, in accordance with FASB
issued Statement No. 13 (SFAS 13), Accounting for Leases,as amended, FASB issued Technical
Bulletin No. 88-1 (FTB 88-1), Issues Relating to Accounting for Leases,and FASB issued
Technical Bulletin No. 85-3 (FTB 85-3), Accounting for Operating Leases with Scheduled Rent
Increases,the Company corrected its lease accounting practices to recognize lease expense on a
straight-line basis over the lease term which begins on the date the Company obtains control of the
property and includes any renewal periods for which failure to renew imposes a penalty on the
lessee such that renewal is determined to be reasonably assured. Likewise, the Company corrected
its practices to amortize landlord allowances on a straight-line basis over the lease term. These
corrections to our lease accounting practices reduced net income by $17,000 and had no impact on
diluted earnings per share for the quarter ended May 1, 2004. 5




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND MAY 1, 2004 (UNAUDITED) 
 NOTE 1  GENERAL (CONTINUED): As a result of the restatement, the Companys financial results have been restated as follows (in
thousands, except per share data): As PreviouslyReported
    
    
    
    
    
    
    As RestatedMay 1,
    
    
    
    
    
    
    May 1,2004
    
    
    Adjustments
    
    
    2004Deferred income taxes
    
    $
    179
    
    
    $
    4,712
    
    
    $
    4,891Total Current Assets
    
    
    248,082
    
    
    
    4,712
    
    
    
    252,794Total Assets
    
    
    374,671
    
    
    
    4,712
    
    
    
    379,383Accrued expenses
    
    
    28,161
    
    
    
    (27
    )
    
    
    28,134Accrued income tax
    
    
    13,713
    
    
    
    205
    
    
    
    13,918Total Current Liabilities
    
    
    124,408
    
    
    
    178
    
    
    
    124,586Other noncurrent liabilities
    
    
    11,583
    
    
    
    12,586
    
    
    
    24,169Total Liabilities
    
    
    166,194
    
    
    
    12,764
    
    
    
    178,958Retained earnings
    
    
    266,380
    
    
    
    (8,052
    )
    
    
    258,328Total Stockholders Equity
    
    
    208,477
    
    
    
    (8,052
    )
    
    
    200,425Total Liabilities and
Stockholders Equity
    
    $
    374,671
    
    
    $
    4,712
    
    
    $
    379,383
 Three Months EndedAs PreviouslyReported
    
    
    
    
    
    
    As RestatedMay 1,
    
    
    
    
    
    
    May 1,2004
    
    
    Adjustments
    
    
    2004Revenues
    
    $
    205,193
    
    
    $
    0
    
    
    $
    205,193Cost of Goods Sold
    
    
    132,344
    
    
    
    54
    
    
    
    132,398Selling, general and administrative
    
    
    45,823
    
    
    
    (27
    )
    
    
    45,796Income before taxes
    
    
    26,399
    
    
    
    (27
    )
    
    
    26,372Income tax provision
    
    
    9,583
    
    
    
    (10
    )
    
    
    9,573Net income (loss)
    
    $
    16,816
    
    
    $
    (17
    )
    
    $
    16,799Basic earnings per share
    
    $
    0.82
    
    
    
    
    
    
    $
    0.82Diluted earnings per share
    
    $
    0.81
    
    
    
    
    
    
    $
    0.81
 6




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND MAY 1, 2004 (UNAUDITED) 
 NOTE 1  GENERAL (CONTINUED): 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. 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 quarter ended April 30, 2005 and May 1, 2004 was $18,376,000 and
$16,984,000, respectively. Total comprehensive income is composed of net income and net unrealized
gains and losses on available-for-sale securities, net of tax. Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as
determined by the retail inventory method. On May 26, 2005, the Board of Directors approved a three-for-two stock split in the form of a stock
dividend of the Companys Class A and Class B common stock effective June 27, 2005. Furthermore,
on May 26, 2005, the Board of Directors increased the quarterly dividend by 11% from $.175 per
share to $.195 per share, or an annualized rate of $.78 per share on a pre-split basis. On a
post-split basis, the annualized rate is $.52 per share. The dividend will be paid on a post-split
basis at a quarterly rate of $.13 per share on June 27, 2005. Additionally, proforma basic and
diluted earnings per share using weighted average shares adjusted for the stock split would be
$0.59 and $0.58 versus $0.55 and $0.54 for the periods ending April 30, 2005 and May 1, 2004,
respectively. 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. 7




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND MAY 1, 2004 (UNAUDITED) 
 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 three months
ended April 30, 2005 and May 1, 2004. Three Months EndedApril 30,
    
    
    May 1,2005
    
    
    2004Weighted-average shares outstanding
    
    
    20,736,217
    
    
    
    20,499,605Dilutive effect of stock options
    
    
    459,209
    
    
    
    346,262Weighted-average shares and common stock equivalents
(stock options) outstanding
    
    
    21,195,426
    
    
    
    20,845,867
 NOTE 3  -  SUPPLEMENTAL CASH FLOW INFORMATION: Income tax payments, net of
refunds received, for the three months ended April 30, 2005 and May 1, 2004 were $330,000 and $3,960,000, respectively. Cash paid for interest for the three
months ended April 30, 2005 and May 1, 2004 were $209,000 and $152,000, respectively. 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
three months ended April 30, 2005 or the fiscal year ended January 29, 2005. Interest is based on
LIBOR, which was 3.09% on April 30, 2005. On August 22, 2003, the Company entered into a new unsecured $30 million five-year term loan
facility, the proceeds of which were used to purchase Class B Common Stock from the Companys
founders. Payments are due in monthly installments of $500,000 plus accrued interest. Interest is
based on LIBOR, which was 3.09% on April 30, 2005. On April 5, 2005, the Company repaid the remaining balance of $20.5 million on this loan facility.
With the early retirement of this loan, the Company had no outstanding debt as of April 5, 2005. The Company had approximately $2,439,000 and $2,081,000 at April 30, 2005 and May 1, 2004,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments. 8




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND MAY 1, 2004 (UNAUDITED) 
 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 31 states at April 30, 2005, 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 EndedApril 30, 2005
    
    Retail
    
    
    Credit
    
    
    TotalRevenues
    
    $
    215,590
    
    
    $
    3,337
    
    
    $
    218,927Depreciation
    
    
    5,009
    
    
    
    29
    
    
    
    5,038Interest and other income
    
    
    (941
    )
    
    
    
    
    
    
    (941
    )Income before taxes
    
    
    27,826
    
    
    
    1,085
    
    
    
    28,911Total assets
    
    
    326,231
    
    
    
    63,862
    
    
    
    390,093Capital expenditures
    
    
    6,731
    
    
    
    
    
    
    
    6,731
 Three Months EndedMay 1, 2004
    
    Retail
    
    
    Credit
    
    
    Total(Restated)
    
    
    
    
    
    
    (Restated)Revenues
    
    $
    205,691
    
    
    $
    3,510
    
    
    $
    209,201Depreciation
    
    
    4,959
    
    
    
    20
    
    
    
    4,979Interest and other income
    
    
    (506
    )
    
    
    
    
    
    
    (506
    )Income before taxes
    
    
    25,263
    
    
    
    1,109
    
    
    
    26,372Total assets
    
    
    317,245
    
    
    
    62,138
    
    
    
    379,383Capital expenditures
    
    
    6,981
    
    
    
    2
    
    
    
    6,983
 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 EndedApril 30,
    
    
    May 1,2005
    
    
    2004Bad debt expense
    
    $
    1,264
    
    
    $
    1,422Payroll
    
    
    296
    
    
    
    278Postage
    
    
    305
    
    
    
    316Other expenses
    
    
    358
    
    
    
    365Total expenses
    
    $
    2,223
    
    
    $
    2,381
 9




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND MAY 1, 2004 (UNAUDITED) 
 NOTE 6  STOCK OPTIONS: The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock option plans. The exercise price for all options
awarded under the Companys stock option plans has been equal to the fair market value of the
underlying common stock on the date of grant. Accordingly, no compensation expense has been
recognized for options granted under the plans. Had compensation expense for the stock options
granted been determined consistent with SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, the Companys net income and basic and diluted earnings
per share amounts for the three months ended April 30, 2005 and May 1, 2004 would approximate the
following proforma amounts (dollars in thousands, except per share data): Three Months EndedApril 30,
    
    
    May 1,2005
    
    
    2004Net Income as Reported
    
    $
    18,416
    
    
    $
    16,799Add: Stock-Based employee compensation expense
included in reported net income, net of related tax
effects
    
    
    109
    
    
    
    109Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects
    
    
    (139
    )
    
    
    (133
    )Pro forma Net Income
    
    $
    18,386
    
    
    $
    16,775Earnings per share:Basic  as reported
    
    $
    .89
    
    
    $
    .82Basic  pro forma
    
    $
    .89
    
    
    $
    .82Diluted  as reported
    
    $
    .87
    
    
    $
    .81Diluted  pro forma
    
    $
    .87
    
    
    $
    .80
 10




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THE CATO CORPORATIONITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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 EndedApril 30,
    
    
    May 1,2005
    
    
    2004(Restated)Total retail sales
    
    
    100.0
    %
    
    
    100.0
    %Total revenues
    
    
    101.8
    
    
    
    102.0Cost of goods sold
    
    
    63.4
    
    
    
    64.5Selling, general and administrative
    
    
    22.9
    
    
    
    22.3Depreciation
    
    
    2.3
    
    
    
    2.4Interest expense
    
    
    0.1
    
    
    
    0.1Interest and other income
    
    
    (0.4
    )
    
    
    (0.2
    )Income before income taxes
    
    
    13.5
    
    
    
    12.9Net income
    
    
    8.6
    
    
    
    8.2
 Comparison of First Quarter of 2005 with 2004. Total retail sales for the first quarter were $215.1 million compared to last years first quarter
sales of $205.2 million, a 5% increase. Same-store sales were flat to last year. Total revenue,
comprised of retail sales and other income (principally, finance charges and late fees on customer
accounts receivable and layaway fees), were $218.9 million in the first quarter of 2005 compared to
$209.2 million in the first quarter of 2004. The Company operated 1,188 stores at April 30, 2005
compared to 1,118 stores at the end of last years first quarter. In the first quarter of 2005 the
Company opened 17 stores, relocated five stores and closed six stores. Credit revenue of $3.3 million, represented 1.5% of total revenues in the first quarter of 2005.
This is comparable to 2004 credit revenue of $3.5 million or 1.7% 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 $2.2 million in the first quarter of 2005 compared to last years first quarter
expenses of $2.4 million. The decrease in costs was principally due to lower bad debt expense. 11




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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 first quarter of 2005, decreased
slightly to $3.9 million from $4.0 million in the first quarter of 2004. The decrease resulted
primarily from lower finance charge income. Cost of goods sold was $136.4 million, or 63.4% of retail sales, in the first quarter of 2005
compared to $132.4 million, or 64.5% of retail sales, in the first quarter of 2004. The overall
decrease in cost of goods sold as a percent of retail sales for the first quarter of 2005 resulted
primarily from lower procurement costs and markdowns offset by increases attributable to store
growth. 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 8.0% to $78.6 million as related to total
retail sales in the first quarter of 2005 compared to $72.8 million in the first quarter of 2004.
Gross margin as presented may not be comparable to that of other entities, as they may include
internal transfer costs in selling, general and administrative expenses while the Company
classifies such costs 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. SG&A expenses were $49.3 million, or 22.9% of retail sales in the
first quarter of fiscal 2005, compared to $45.8 million, or 22.3% of retail sales in the prior
years first quarter. SG&A expenses as a percentage of retail sales increased 60 basis points for
the first quarter of fiscal 2005 as compared to the prior year. The overall dollar increase in
SG&A expenses for the first quarter of fiscal 2005 resulted primarily from increased
selling-related expenses and increased infrastructure expenses attributable to the Companys store
growth, increased incentive based performance bonus programs and increased healthcare costs. Depreciation expense was $5.0 million, or 2.3% of retail sales in the first quarter of 2005
compared to $5.0 million or 2.4% in the first quarter of 2004. Interest expense was $0.2 million, or 0.1% of retail sales in the first quarter of 2005 compared to
$0.2 million, or 0.1% of retail sales in the first quarter of 2004. The interest was on a $30
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. 12




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 
 RESULTS OF OPERATIONS  (CONTINUED): On April 5, 2005, the Company repaid the remaining outstanding balance of $20.5 million on this
loan facility. With the early retirement of this loan, the Company had no outstanding debt as of
April 5, 2005. Interest and other income was $0.9 million, or 0.4% of retail sales in the first quarter of 2005
compared to $0.5 million or 0.2% of retail sales in the first quarter of 2004. The increase in the
first quarter of fiscal 2005 resulted primarily from the Companys higher cash and short-term
investment position. Income tax expense was $10.5 million, or 4.9% of retail sales in the first quarter of 2005 compared
to $9.6 million, or 4.7% of retail sales in the first quarter of 2004. The first quarter increase
resulted from higher pre-tax income. The effective income tax rate was 36.3% in both the first
quarter of 2005 and 2004, respectively. LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK: The Company has consistently maintained a strong liquidity position. Cash provided by operating
activities during the first quarter of 2005 was $8.8 million as compared to $27.1 million in the
first quarter of 2004. 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. 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 planned capital expenditures, dividends and other operating
requirements for fiscal 2005 and for the foreseeable future beyond twelve months. At April 30, 2005, the Company had working capital of $132.2 million compared to $128.2 million at
May 1, 2004. The decrease in net cash provided by operating activities for the first quarter of
2005 is primarily the result of an increase in net income of $1.6 million; an increase in loss and
disposal of property and equipment of $0.6 million and an increase of $0.4 million in accrued
income taxes due to timing. Offsetting these increases in net cash provided by operating
activities was an increase in merchandise inventories of $2.0 million; an increase in prepaid
expenses and other assets of $3.6 million and a decrease of accounts payable and other liabilities
of $15.3 million. Additionally, the Company had $1.8 million invested in privately managed investment funds at
April 30, 2005, which are included in other assets of the consolidated balance sheets. 13




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 
 LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED): At April 30, 2005, 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 with which the Company was in compliance as of April 30, 2005. There
were no borrowings outstanding under these credit facilities during the first quarter ended April
30, 2005 or the fiscal year ended January 29, 2005. On August 22, 2003, the Company entered into a new unsecured $30 million five-year term loan
facility, the proceeds of which were used to purchase Class B Common Stock from the Companys
founders. Payments are due in monthly installments of $500,000 plus accrued interest. Interest is
based on LIBOR, which was 3.09% on April 30, 2005. On April 5, 2005, the Company repaid the remaining balance of $20.5 million on this loan facility.
With the early retirement of this loan, the Company had no outstanding debt as of April 5, 2005. The Company had approximately $2.4 million and $2.1 million at the April 30, 2005 and May 1, 2004,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments. Expenditures for property and equipment totaled $6.7 million for first quarter ended April 30,
2005, compared to $7.0 million in last years first three months. The expenditures for the first
three months of 2005 were primarily for store development and investments in new technology. In
fiscal
2005, the Company is planning to invest approximately $33 million for capital expenditures. This
includes expenditures to open 90 new stores and relocate 20 stores and close 10 stores. In
addition, the Company plans to remodel 15 stores and has planned for additional investments in
technology scheduled to be implemented over the remainder of the fiscal year. Net cash provided in investing activities totaled $10.3 million for the first three months of 2005
compared to $26.4 million used for the comparable period of 2004. The decrease was due primarily
to the sale of short-term investments. On May 26, 2005, the Board of Directors approved a three-for-two stock split in the form of a stock
dividend of the Companys Class A and Class B common stock effective June 27, 2005. Additionally,
on May 26, 2005, the Board of Directors increased the quarterly dividend by 11% from $.175 per
share to $.195 per share, or an annualized rate of $.78 per share on a pre-split basis. On a
post-split basis, the annualized rate is $.52 per share. The dividend will be paid on a post-split
basis at a quarterly rate of $.13 per share on June 27, 2005. The Company does not use derivative financial instruments. At April 30, 2005, 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. 14




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##### 



THE CATO CORPORATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 ITEM 3. 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. ITEM 4. CONTROLS AND PROCEDURES: As of April 30, 2005, 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 April 30, 2005, 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. 15




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##### 



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.
    
    Item3.1
    
    Registrants Restated Certificate of Incorporation of the
Registrant dated March 6, 1987, incorporated by reference to Form
S-8 of the Registrant filed February 7, 2000.3.2
    
    Registrants By Laws, incorporated by reference to Form S-8 of
the Registrant Filed February 7, 2000.31.1
    
    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.
 16




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##### 



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 CORPORATIONJune 6, 2005
    /s/ John P. Derham CatoDate
    John P. Derham CatoChairman, President and
Chief Executive OfficerJune 6, 2005
    /s/ Michael O. MooreDate
    Michael O. MooreExecutive Vice President
Chief Financial Officer and SecretaryJune 6, 2005
    /s/ Robert M. SandlerDate
    Robert M. SandlerSenior Vice President
Controller 17