##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 April 29, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  1-31340
 THE CATO CORPORATION
  Delaware
    
    56-0484485(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 8100 Denmark Road, Charlotte, North Carolina 28273-5975
 (704) 554-8510
 Not Applicable
  x o
  o x o
  o x




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##### Table of Contents



THE CATO CORPORATION
 FORM 10-Q
 Quarter Ended April 29, 2006
 Table of Contents
 PageNo.PART I  FINANCIAL INFORMATION (UNAUDITED)Item 1. Financial Statements:Condensed Consolidated Statements of Income and Comprehensive IncomeFor the Three Months Ended April 29, 2006 and April 30, 2005
    
    
    2Condensed Consolidated Balance SheetsAt April 29, 2006, April 30, 2005 and January 28, 2006
    
    
    3Condensed Consolidated Statements of Cash FlowsFor the Three Months Ended April 29, 2006 and April 30, 2005
    
    
    4Notes to Condensed Consolidated Financial StatementsFor the Three Months Ended April 29, 2006 and April 30, 2005
    
    
    5-12Item 2. Managements Discussion and Analysis ofFinancial Condition and Results of Operations
    
    
    13-17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19Signatures
    
    
    20-24EX-31.1 Certification - CEOEX-31.2 Certification - CFOEX-32.1 Certification of Periodic Report CEOEX-32.2 Certification of Periodic Report CFO




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
 Three Months EndedApril 29,
    
    
    April 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)(Dollars in thousands, except per share data)REVENUESRetail sales
    
    $
    229,741
    
    
    $
    215,064Other income (principally finance charges, late fees and
layaway charges)
    
    
    3,319
    
    
    
    3,863Total revenues
    
    
    233,060
    
    
    
    218,927COSTS AND EXPENSES, NETCost of goods sold
    
    
    142,113
    
    
    
    136,434Selling, general and administrative
    
    
    54,567
    
    
    
    49,333Depreciation
    
    
    5,168
    
    
    
    5,038Interest expense
    
    
    10
    
    
    
    152Interest and other income
    
    
    (1,552
    )
    
    
    (941
    )200,306
    
    
    
    190,016Income before income taxes
    
    
    32,754
    
    
    
    28,911Income tax expense
    
    
    11,955
    
    
    
    10,495Net Income
    
    $
    20,799
    
    
    $
    18,416Basic earnings per share
    
    $
    0.67
    
    
    $
    0.59Basic weighted average shares
    
    
    31,084,206
    
    
    
    31,104,326Diluted earnings per share
    
    $
    0.65
    
    
    $
    0.58Diluted weighted average shares
    
    
    31,814,193
    
    
    
    31,793,139Dividends per share
    
    $
    0.13
    
    
    $
    0.117Comprehensive income:Net income
    
    $
    20,799
    
    
    $
    18,416Unrealized (losses) on available-for-sale securities, net
of deferred income tax benefit
    
    
    (22
    )
    
    
    (40
    )Net comprehensive income
    
    $
    20,777
    
    
    $
    18,376
  2




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THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 April 29,
    
    
    April 30,
    
    
    January 28,2006
    
    
    2005
    
    
    2006(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    25,319
    
    
    $
    22,773
    
    
    $
    21,734Short-term investments
    
    
    95,752
    
    
    
    71,472
    
    
    
    86,085Accounts receivable, net of allowance for doubtful accounts of $3,606,
$6,020 and $3,694 at April 29, 2006, April 30, 2005 and January
28, 2006, respectively
    
    
    47,791
    
    
    
    49,534
    
    
    
    49,644Merchandise inventories
    
    
    103,145
    
    
    
    105,084
    
    
    
    103,370Deferred income taxes
    
    
    8,538
    
    
    
    5,804
    
    
    
    8,526Prepaid expenses
    
    
    2,841
    
    
    
    6,308
    
    
    
    2,318Total Current Assets
    
    
    283,386
    
    
    
    260,975
    
    
    
    271,677Property and equipment  net
    
    
    131,516
    
    
    
    118,727
    
    
    
    124,104Other assets
    
    
    10,799
    
    
    
    10,391
    
    
    
    10,855Total Assets
    
    $
    425,701
    
    
    $
    390,093
    
    
    $
    406,636LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    75,641
    
    
    $
    81,957
    
    
    $
    78,036Accrued expenses
    
    
    30,089
    
    
    
    28,336
    
    
    
    31,967Accrued bonus and benefits
    
    
    13,194
    
    
    
    4,236
    
    
    
    17,570Accrued income taxes
    
    
    16,591
    
    
    
    14,242
    
    
    
    4,990Total Current Liabilities
    
    
    135,515
    
    
    
    128,771
    
    
    
    132,563Deferred income taxes
    
    
    9,261
    
    
    
    10,172
    
    
    
    9,261Other noncurrent liabilities (primarily deferred rent)
    
    
    23,526
    
    
    
    24,096
    
    
    
    24,864Commitments and contingencies:Stockholders Equity:Preferred stock, $100 par value per share, 100,000 shares authorized,
none issued
    
    
    
    
    
    
    
    
    
    
    Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 35,653,816 shares, 26,334,634 shares
and 35,622,516 shares at April 29, 2006, April 30, 2005 and
January 28, 2006, respectively
    
    
    1,188
    
    
    
    877
    
    
    
    1,188Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 690,525 shares, 5,597,834
shares and 690,525 shares at April 29, 2006, April 30, 2005 and
January 28, 2006, respectively
    
    
    23
    
    
    
    187
    
    
    
    23Additional paid-in capital
    
    
    39,743
    
    
    
    104,355
    
    
    
    39,244Retained earnings
    
    
    311,202
    
    
    
    280,256
    
    
    
    294,462Accumulated other comprehensive income
    
    
    56
    
    
    
    31
    
    
    
    78Unearned compensation  restricted stock awards
    
    
    
    
    
    
    (740
    )
    
    
    (229
    )352,212
    
    
    
    384,966
    
    
    
    334,766Less Class A and Class B common stock in treasury, at cost (5,093,609
Class A and 0 Class B shares at April 29, 2006, and
5,906,179 Class A and 5,137,484 Class B at April 30, 2005
and 5,093,840 Class A and 0 Class B at January 28, 2006)
    
    
    (94,813
    )
    
    
    (157,912
    )
    
    
    (94,818
    )Total Stockholders Equity
    
    
    257,399
    
    
    
    227,054
    
    
    
    239,948Total Liabilities and Stockholders Equity
    
    $
    425,701
    
    
    $
    390,093
    
    
    $
    406,636
  3




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THE CATO CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedApril 29,
    
    
    April 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    20,799
    
    
    $
    18,416Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    5,168
    
    
    
    5,038Provision for doubtful accounts
    
    
    981
    
    
    
    1,264Share-based compensation
    
    
    244
    
    
    
    171Excess tax benefits from share-based compensation
    
    
    (80
    )
    
    
    Deferred income taxes
    
    
    (12
    )
    
    
    (23
    )Loss on disposal of property and equipment
    
    
    136
    
    
    
    595Changes in operating assets and liabilities which provided
(used) cash:Accounts receivable
    
    
    872
    
    
    
    91Merchandise inventories
    
    
    225
    
    
    
    (4,546
    )Prepaid and other assets
    
    
    (467
    )
    
    
    (4,591
    )Accrued income taxes
    
    
    11,681
    
    
    
    9,777Accounts payable, accrued expenses and other liabilities
    
    
    (10,739
    )
    
    
    (17,436
    )Net cash provided by operating activities
    
    
    28,808
    
    
    
    8,756INVESTING ACTIVITIESExpenditures for property and equipment
    
    
    (12,765
    )
    
    
    (6,731
    )Purchases of short-term investments
    
    
    (50,069
    )
    
    
    (20,654
    )Sales of short-term investments
    
    
    40,380
    
    
    
    37,730Net cash (used in) provided by investing activities
    
    
    (22,454
    )
    
    
    10,345FINANCING ACTIVITIESChange in cash overdrafts included in accounts payable
    
    
    805
    
    
    
    9,700Dividends paid
    
    
    (4,059
    )
    
    
    (3,660
    )Payments to settle long term debt
    
    
    
    
    
    
    (22,000
    )Proceeds from employee stock purchase plan
    
    
    189
    
    
    
    213Excess tax benefits from share-based compensation
    
    
    80
    
    
    
    Proceeds from stock options exercised
    
    
    216
    
    
    
    779Net cash used in financing activities
    
    
    (2,769
    )
    
    
    (14,968
    )Net increase in cash and cash equivalents
    
    
    3,585
    
    
    
    4,133Cash and cash equivalents at beginning of period
    
    
    21,734
    
    
    
    18,640Cash and cash equivalents at end of period
    
    $
    25,319
    
    
    $
    22,773
  4




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
 NOTE 1  GENERAL:
        5




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
 NOTE 1  GENERAL (CONTINUED):
  NOTE 2  EARNINGS PER SHARE:
  Three Months EndedApril 29,
    
    
    April 30,2006
    
    
    2005Weighted-average shares outstanding
    
    
    31,084,206
    
    
    
    31,104,326Dilutive effect of stock options
    
    
    729,987
    
    
    
    688,813Weighted-average shares and common stock
equivalents (stock options) outstanding
    
    
    31,814,193
    
    
    
    31,793,139
 NOTE 3  SUPPLEMENTAL CASH FLOW INFORMATION:
  NOTE 4  FINANCING ARRANGEMENTS:
  6




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
 NOTE 4  FINANCING ARRANGEMENTS (CONTINUED):
   NOTE 5  REPORTABLE SEGMENT INFORMATION:
   Three Months EndedApril 29, 2006
    
    Retail
    
    
    Credit
    
    
    TotalRevenues
    
    $
    230,370
    
    
    $
    2,690
    
    
    $
    233,060Depreciation
    
    
    5,148
    
    
    
    20
    
    
    
    5,168Interest and other income
    
    
    (1,552
    )
    
    
    
    
    
    
    (1,552
    )Income before taxes
    
    
    31,977
    
    
    
    777
    
    
    
    32,754Total assets
    
    
    357,683
    
    
    
    68,018
    
    
    
    425,701Capital expenditures
    
    
    12,748
    
    
    
    17
    
    
    
    12,765
 Three Months 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
   7




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
 NOTE 5  REPORTABLE SEGMENT INFORMATION (CONTINUED):
 Three Months EndedApril 29,
    
    
    April 30,2006
    
    
    2005Bad debt expense
    
    $
    981
    
    
    $
    1,264Payroll
    
    
    252
    
    
    
    296Postage
    
    
    296
    
    
    
    305Other expenses
    
    
    364
    
    
    
    358Total expenses
    
    $
    1,893
    
    
    $
    2,223
 NOTE 6  STOCK BASED COMPENSATION:
 Share-Based Payment, Accounting for Stock Issued to
Employees,
  8




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
 NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
  1987
    
    
    1999
    
    
    2004Plan
    
    
    Plan
    
    
    Plan
    
    
    TotalOptions and/or restricted stock initially authorized
    
    
    4,612,500
    
    
    
    1,000,000
    
    
    
    1,350,000
    
    
    
    6,962,500Options and/or restricted stock available for grant:January 28, 2006
    
    
    6,727
    
    
    
    
    
    
    
    1,300,500
    
    
    
    1,307,227April 29, 2006
    
    
    6,727
    
    
    
    
    
    
    
    1,300,500
    
    
    
    1,307,227
   Weighted AverageWeighted Average
    
    
    Remaining Contractual
    
    
    Aggregate IntrinsicShares
    
    
    Exercise Price
    
    
    Term
    
    
    Value (a)Options outstanding at January 28, 2006
    
    
    1,341,900
    
    
    $
    8.23
    
    
    3.05 yearsGranted
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    Exercised
    
    
    (20,225
    )Outstanding at April 29, 2006
    
    
    1,321,675
    
    
    $
    8.19
    
    
    2.8 years
    
    $
    17,560,181Vested and exercisable at April 29, 2006
    
    
    1,211,750
    
    
    $
    7.59
    
    
    2.3 years
    
    $
    16,828,910
 
 (a)
    
    The intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option.  9




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
 NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
 Three Months EndedApril 30,2005Risk free interest rate
    
    
    3.84
    %Expected life
    
    5.0 yearsExpected volatility
    
    
    38.20
    %Expected dividend yield
    
    
    2.31
    %Weighted-average grant date fair value
    
    $
    9.613
    Three Months EndedApril 30,2005Net Income as Reported
    
    $
    18,416Add: Stock-Based employee compensation expense included
in reported net income, net of related tax effects
    
    
    109Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (139
    )Pro forma Net Income
    
    $
    18,386Earnings per share:Basic  as reported
    
    $
    .59Basic  pro forma
    
    $
    .59Diluted  as reported
    
    $
    .58Diluted  pro forma
    
    $
    .58
 10




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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
 NOTE 6  STOCK BASED COMPENSATION (CONTINUED):
     Weighted AverageGrant Date FairNumber of Shares
    
    
    Value Per ShareRestricted stock awards at January 28, 2006
    
    
    150,000
    
    
    $
    18.21Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Restricted stock awards at April 29, 2006
    
    
    150,000
    
    
    $
    18.21
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THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 29, 2006 AND APRIL 30, 2005
  12




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THE CATO CORPORATION  ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS
 FORWARD LOOKING INFORMATION:
  www.catocorp.com
 13




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 RESULTS OF OPERATIONS:
  Three Months EndedApril 29,
    
    
    April 30,2006
    
    
    2005Total retail sales
    
    
    100.0
    %
    
    
    100.0
    %Total revenues
    
    
    101.5
    
    
    
    101.8Cost of goods sold
    
    
    61.8
    
    
    
    63.4Selling, general and administrative
    
    
    23.8
    
    
    
    22.9Depreciation
    
    
    2.3
    
    
    
    2.3Interest expense
    
    
    
    
    
    
    0.1Interest and other income
    
    
    (0.7
    )
    
    
    (0.4
    )Income before income taxes
    
    
    14.3
    
    
    
    13.5Net income
    
    
    9.1
    
    
    
    8.6
 Comparison of First Quarter of 2006 with 2005.
   14




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 RESULTS OF OPERATIONS  (CONTINUED):
     15




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




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THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
        17




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THE CATO CORPORATION  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
  
 ITEM 4. CONTROLS AND PROCEDURES:
  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
  18




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PART II OTHER INFORMATION
 THE CATO CORPORATION
 
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  Exhibit No.
    
    Item3.1
    
    
    Registrants Restated Certificate of Incorporation of the
Registrant dated March 6, 1987, incorporated by reference to
Exhibit 4.1 to Form S-8 of the Registrant filed February 7, 2000.3.2
    
    
    Registrants By Laws, incorporated by reference to Exhibit 4.2 to
Form S-8 of the Registrant Filed February 7, 2000.10.1
    
    
    Letter Agreement between the Company and Reynolds C. Faulkner,
incorporated by reference to Exhibit 99.1 to Form 8-K filed March
22, 2006.10.2
    
    
    Summary of Named Executive Officer Compensation Determinations,
incorporated by reference to Exhibit 99.1 to Form 8-K filed April
12, 2006.10.3
    
    
    Summary of Named Executive Officer Restricted Stock Grants,
incorporated by reference to Exhibit 99.1 to Form 8-K filed May
2, 2006.31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.32.1
    
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    
    Section 1350 Certification of Chief Financial Officer.
 19




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PART II OTHER INFORMATION
 THE CATO CORPORATION
 
 SIGNATURE
  THE CATO CORPORATIONJune 6, 2006

    /s/ John P. D. CatoDate

    John P. D. CatoChairman, President and
Chief Executive OfficerJune 6, 2006

    /s/ Reynolds C. FaulknerDate

    Reynolds C. FaulknerExecutive Vice President
Chief Financial OfficerJune 6, 2006

    /s/ Robert M. SandlerDate

    Robert M. SandlerSenior Vice President
Controller 20