CATO CORP - Interim / Quarterly Report 2014

10-Q 1 cato10q3q14.htm FORM 10-Q cato10q3q14.htm - Generated by SEC Publisher for SEC Filing

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

| [X] | QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| --- | --- |
| For the quarterly period
ended November 1, 2014 | |
| OR | |
| [ ] | 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
(Exact name of registrant as
specified in its charter)
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
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

As of November 1, 2014, there were 26,168,286 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.

THE CATO CORPORATION

FORM 10-Q

Quarter Ended November 1, 2014

Table of Contents

		Page No.
PART I – FINANCIAL INFORMATION (UNAUDITED)
Item 1.	Financial Statements (Unaudited):
Condensed Consolidated
Statements of Income and Comprehensive Income		2
For the Three Months and
Nine Months Ended November 1, 2014 and November 2, 2013
Condensed Consolidated
Balance Sheets		3
At November 1, 2014,
February 1, 2014 and November 2, 2013
Condensed Consolidated
Statements of Cash Flows		4
For the Nine Months
Ended November 1, 2014 and November 2, 2013
Notes to Condensed
Consolidated Financial Statements		5 – 17
For the Three Months and Nine Months Ended November 1, 2014 and
November 2, 2013
Item 2.	Management’s
Discussion and Analysis of Financial Condition and Results of Operations	18 – 25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
Signatures		29-33

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

(UNAUDITED)

	November 1, 2014	November 2, 2013	Nine Months Ended — November 1, 2014	November 2, 2013
	(Dollars in thousands, except per share
data)
REVENUES
Retail sales	$ 213,785	$ 198,786	$ 740,023	$ 695,345
Other revenue
(principally finance charges, late fees and
layaway
charges)	2,225	2,257	6,778	7,114
Total
revenues	216,010	201,043	746,801	702,459
COSTS AND
EXPENSES, NET
Cost of goods
sold (exclusive of depreciation shown below)	136,495	128,787	449,496	430,638
Selling,
general and administrative (exclusive of depreciation
shown below)	67,623	61,032	203,442	179,386
Depreciation	5,422	5,459	16,297	16,344
Interest and
other income	(686)	(723)	(2,527)	(2,328)
Cost and
expenses, net	208,854	194,555	666,708	624,040
Income before
income taxes	7,156	6,488	80,093	78,419
Income tax
expense	1,464	1,603	28,743	27,920
Net income	$ 5,692	$ 4,885	$ 51,350	$ 50,499
Basic earnings
per share	$ 0.20	$ 0.17	$ 1.82	$ 1.73
Diluted earnings
per share	$ 0.20	$ 0.17	$ 1.82	$ 1.73
Dividends per
share	$ 0.30	$ 0.05	$ 0.90	$ 0.15
Comprehensive
income:
Net income	$ 5,692	$ 4,885	$ 51,350	$ 50,499
Unrealized gain
(loss) on available-for-sale securities, net of
deferred
income taxes of ($21) and $0 for the three and
nine months
ended November 1, 2014 and $188 and ($18) for
the three and
nine months ended November 2, 2013, respectively	(35)	312	1	(30)
Comprehensive
income	$ 5,657	$ 5,197	$ 51,351	$ 50,469

See notes to condensed consolidated financial statements (unaudited).

Table of Contents

THE CATO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	November 1, 2014	February 1, 2014	November 2, 2013
ASSETS	(Dollars in thousands)
Current Assets:
Cash and cash
equivalents	$ 83,749	$ 79,427	$ 74,055
Short-term
investments	157,548	161,128	159,223
Restricted cash
and investments	4,686	4,701	4,706
Accounts
receivable, net of allowance for doubtful accounts of
$1,741,
$1,743 and $2,043 at November 1, 2014, February 1, 2014
and
November 2, 2013, respectively	40,555	39,224	41,156
Merchandise
inventories	127,786	150,861	131,016
Deferred income
taxes	4,720	4,720	4,649
Prepaid expenses	6,165	6,687	6,393
Total
Current Assets	425,209	446,748	421,198
Property and
equipment – net	145,962	141,129	142,991
Noncurrent
deferred income taxes	1,375	1,373	-
Other assets	9,943	7,668	7,938
Total
Assets	$ 582,489	$ 596,918	$ 572,127
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Liabilities:
Accounts payable	$ 94,135	$ 111,514	$ 89,468
Accrued expenses	45,300	45,763	44,534
Accrued bonus
and benefits	14,541	4,999	2,598
Accrued income
taxes	17,844	14,855	15,593
Total
Current Liabilities	171,820	177,131	152,193
Deferred income
taxes	-	-	3,330
Other noncurrent
liabilities (primarily deferred rent)	32,994	28,678	28,335
Commitments 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 26,168,286 shares, 27,498,216 shares
and
27,515,706 shares at November 1, 2014, February 1, 2014 and
November 2,
2013, respectively	872	917	917
Convertible
Class B common stock, $.033 par value per share,
15,000,000
shares authorized; issued 1,743,525 shares at
November 1,
2014, February 1, 2014 and November 2, 2013, respectively	58	58	58
Additional
paid-in capital	83,779	80,463	79,325
Retained
earnings	292,187	308,893	307,178
Accumulated
other comprehensive income	779	778	791
Total
Stockholders' Equity	377,675	391,109	388,269
Total
Liabilities and Stockholders' Equity	$ 582,489	$ 596,918	$ 572,127

See notes to condensed consolidated financial statements (unaudited).

Table of Contents

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	November 1, 2014	November 2, 2013
	(Dollars in thousands)
Operating
Activities:
Net income	$ 51,350	$ 50,499
Adjustments to
reconcile net income to net cash provided
by
operating activities:
Depreciation	16,297	16,344
Provision for
doubtful accounts	805	975
Amortization
(purchase) of investment premiums	258	(1,338)
Share-based
compensation	2,678	2,264
Excess tax
benefits from share-based compensation	(181)	(38)
Loss on
disposal and write-offs of property and equipment	618	1,532
Changes in
operating assets and liabilities which provided
(used)
cash:
Accounts
receivable	(2,136)	(2,115)
Merchandise inventories	23,075	9,722
Prepaid
and other assets	(1,696)	3,181
Accrued
income taxes	3,170	1,339
Accounts
payable, accrued expenses and other liabilities	(4,358)	(6,706)
Net cash
provided by operating activities	89,880	75,659
Investing
Activities:
Expenditures for
property and equipment	(21,380)	(23,781)
Purchase of
short-term investments	(33,050)	(52,358)
Sales of
short-term investments	36,320	51,871
Change in
restricted cash and investments	15	1,293
Net cash used in
investing activities	(18,095)	(22,975)
Financing
Activities:
Dividends paid	(25,508)	(4,390)
Repurchase of
common stock	(42,615)	(5,783)
Proceeds from
employee stock purchase plan	468	387
Excess tax
benefits from share-based compensation	181	38
Proceeds from
stock options exercised	11	50
Net cash used in
financing activities	(67,463)	(9,698)
Net increase in
cash and cash equivalents	4,322	42,986
Cash and cash
equivalents at beginning of period	79,427	31,069
Cash and cash
equivalents at end of period	$ 83,749	$ 74,055
Non-cash
investing activity:
Accrued plant
and equipment	$ (3,681)	$ (5,678)

See notes to condensed consolidated financial statements (unaudited).

| Table of Contents |
| --- |
| THE CATO CORPORATION |
| NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| FOR THE THREE MONTHS
AND NINE MONTHS ENDED NOVEMBER 1, 2014
AND NOVEMBER 2, 2013 |

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 three and nine month periods ended November 1, 2014 and November 2, 2013 are unaudited. In the opinion of management, all adjustments considered necessary for a fair statement have been included. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for 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/A for the fiscal year ended February 1, 2014. Amounts as of February 1, 2014 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

During the fourth quarter of 2013, the Company discovered that it had improperly netted purchases and sales activity for investments within cash flows related to investing activities in prior periods. In addition, the Company had also improperly classified the premiums and amortization of premiums on those investments in cash flows related to investing activities when it should have been in cash flows related to operating activities. The Condensed Consolidated Statement of Cash Flows for the nine months ended November 2, 2013 has been revised to correct the presentation of the amounts, which resulted in a decrease to Net cash provided by operating activities and a corresponding decrease to Net cash provided (used) in investing activities of $1.3 million dollars. The revision is not deemed material to the prior period consolidated financial statements.

The decrease in Stockholders’ Equity for the first nine months ended November 1, 2014 compared to the fiscal year ended February 1, 2014 is primarily due to a stock repurchase of $42.6 million and dividends paid of $25.5 million, partially offset by net income of $51.4 million.

On November 25, 2014, the Board of Directors maintained the quarterly dividend at $0.30 per share.

NOTE 2 - EARNINGS PER SHARE:

Accounting Standard Codification (“ASC”) 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“EPS”) on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.

Basic EPS is computed as net income less earnings allocated to non-vested equity awards 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 the Employee Stock Purchase Plan.

	November 1, 2014	November 2, 2013	November 1, 2014	November 2, 2013
(Dollars in thousands)
Numerator
Net earnings	$ 5,692	$ 4,885	$ 51,350	$ 50,499
Earnings
allocated to non-vested equity awards	(113)	(81)	(1,001)	(818)
Net earnings
available to common stockholders	$ 5,579	$ 4,804	$ 50,349	$ 49,681
Denominator
Basic weighted
average common shares outstanding	27,359,660	28,746,459	27,673,293	28,772,006
Dilutive effect
of stock options	4,493	7,860	2,640	5,309
Diluted weighted
average common shares outstanding	27,364,153	28,754,319	27,675,933	28,777,315
Net income
per common share
Basic earnings
per share (Class A and B Shares)	$ 0.20	$ 0.17	$ 1.82	$ 1.73
Diluted earnings
per share (Class A and B Shares)	$ 0.20	$ 0.17	$ 1.82	$ 1.73

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended November 1, 2014:


Comprehensive Income (a)
	Unrealized Gains
	and (Losses) on
	Available-for-Sale
	Securities
Beginning
Balance at August 2, 2014	$ 814
Other
comprehensive income before
reclassifications	(40)
Amounts
reclassified from accumulated
other
comprehensive income (b)	5
Net
current-period other comprehensive income	(35)
Ending Balance
at November 1, 2014	$ 779
(a) All amounts
are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other
Comprehensive Income.
(b) Includes $8
impact of Accumulated other comprehensive income reclassifications into
Interest and other income for net
gains on available-for-sale securities. The tax impact of this
reclassification was $3.

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended November 1, 2014:


Comprehensive Income (a)
	Unrealized Gains
	and (Losses) on
	Available-for-Sale
	Securities
Beginning
Balance at February 1, 2014	$ 778
Other
comprehensive income before
reclassifications	141
Amounts
reclassified from accumulated
other
comprehensive income (b)	(140)
Net
current-period other comprehensive income	1
Ending Balance
at November 1, 2014	$ 779
(a) All amounts
are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other
Comprehensive Income.
(b) Includes
$224 impact of Accumulated other comprehensive income reclassifications into
Interest and other income for net
gains on available-for-sale securities. The tax impact of this
reclassification was $84.

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED):

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended November 2, 2013:


Comprehensive Income (a)
	Unrealized Gains
	and (Losses) on
	Available-for-Sale
	Securities
Beginning
Balance at August 3, 2013	$ 479
Other
comprehensive income before
reclassifications	294
Amounts
reclassified from accumulated
other
comprehensive income (b)	18
Net
current-period other comprehensive income	312
Ending Balance
at November 2, 2013	$ 791
(a) All amounts
are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other
Comprehensive Income.
(b) Includes
$29 impact of Accumulated other comprehensive income reclassifications into
Interest and other income for net
gains on available-for-sale securities. The tax impact of this
reclassification was $11.

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended November 2, 2013:


Comprehensive Income (a)
	Unrealized Gains
	and (Losses) on
	Available-for-Sale
	Securities
Beginning
Balance at February 2, 2013	$ 821
Other
comprehensive income before
reclassifications	11
Amounts
reclassified from accumulated
other
comprehensive income (b)	(41)
Net
current-period other comprehensive income	(30)
Ending Balance
at November 2, 2013	$ 791
(a) All amounts
are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other
Comprehensive Income.
(b) Includes
$47 impact of Accumulated other comprehensive income reclassifications into
Interest and other income for net
gains on available-for-sale securities. The tax impact of this
reclassification was $25.

NOTE 4 – FINANCING ARRANGEMENTS:

As of November 1, 2014, the Company had an unsecured revolving credit agreement to borrow $35.0 million, less the value of revocable letters of credit discussed below. During 2013, the revolving credit agreement was amended and extended to August 2015. 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, 2014. There were no borrowings outstanding under this credit facility during the periods ended November 1, 2014, February 1, 2014 or November 2, 2013. The weighted average interest rate under the credit facility was zero at November 1, 2014 due to no borrowings during the year.

At November 1, 2014, February 1, 2014 and November 2, 2013, the Company had approximately $0.4 million, $0.4 million and $0.6 million, respectively, of outstanding revocable letters of credit related to purchase commitments.

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona and Credit. As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit. The Company has aggregated its retail operating segments based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of ASC 280-10, if the segments have similar economic characteristics, similar product, similar production processes, similar clients and similar methods of distribution.

The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks. They are similar in nature of product, as they all offer women’s apparel, shoes and accessories. Merchandise inventory of the Company’s operating segments is sourced from the same countries and some of the same vendors, using similar production processes. Customers of the Company’s operating segments have similar characteristics. Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to customers in a similar manner, through its retail stores.

The Company operates its women’s fashion specialty retail stores in 32 states as of November 1, 2014, 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.

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

The following schedule summarizes certain segment information (in thousands):

Three Months Ended — November 1, 2014	Retail	Credit	Total	Nine Months Ended — November 1, 2014	Retail	Credit	Total
Revenues	$ 214,569	$ 1,441	$ 216,010	Revenues	$ 742,448	$ 4,353	$ 746,801
Depreciation	5,412	10	5,422	Depreciation	16,262	35	16,297
Interest and other income	(686)	-	(686)	Interest and other income	(2,527)	-	(2,527)
Income before taxes	6,630	526	7,156	Income before taxes	78,509	1,584	80,093
Total assets	514,727	67,762	582,489	Total assets	514,727	67,762	582,489
Capital expenditures	7,414	-	7,414	Capital expenditures	21,380	-	21,380
Three Months Ended				Nine Months Ended
November 2, 2013	Retail	Credit	Total	November 2, 2013	Retail	Credit	Total
Revenues	$ 199,540	$ 1,503	$ 201,043	Revenues	$ 697,782	$ 4,677	$ 702,459
Depreciation	5,451	8	5,459	Depreciation	16,314	30	16,344
Interest and other income	(723)	-	(723)	Interest and other income	(2,328)	-	(2,328)
Income before taxes	5,948	540	6,488	Income before taxes	76,756	1,663	78,419
Total assets	505,595	66,532	572,127	Total assets	505,595	66,532	572,127
Capital expenditures	13,087	88	13,175	Capital expenditures	23,693	88	23,781

The Company evaluates segment performance based on income before taxes. The Company does not allocate certain corporate expenses or income taxes to the credit segment.

The following schedule summarizes the direct expenses of the credit segment which are reflected in Selling, general and administrative expenses (in thousands):

	Three Months Ended — November 1, 2014	November 2, 2013	Nine Months Ended — November 1, 2014	November 2, 2013
Bad debt expense	$ 257	$ 279	$ 805	$ 975
Payroll	213	231	630	696
Postage	181	179	559	558
Other expenses	254	266	740	755
Total expenses	$ 905	$ 955	$ 2,734	$ 2,984

NOTE 6 – STOCK BASED COMPENSATION:

As of November 1, 2014, the Company had three long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan is for the granting of options to officers and key employees. As of May 1, 2013, there were no available stock options for grant under this plan. The 2013 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan are for the granting of various forms of equity-based awards, including restricted stock and stock options for grant, to officers, directors and key employees. Effective May 23, 2013, shares for grant were no longer available under the 2004 Amended and Restated Incentive Compensation Plan.

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of November 1, 2014:

	1987 — Plan	2004 — Plan	2013 — Plan	Total
Options and/or
restricted stock initially authorized	5,850,000	1,350,000	1,500,000	8,700,000
Options and/or
restricted stock available for grant:
February
1, 2014	-	-	1,488,902	1,488,902
November
1, 2014	-	-	1,282,621	1,282,621

In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of November 1, 2014, February 1, 2014 and November 2, 2013, there was $11,343,000, $8,298,000 and $9,100,000 of total unrecognized compensation expense related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 2.9 years, 2.6 years and 2.8 years, respectively. The total fair value of the shares recognized as compensation expense during the three and nine months ended November 1, 2014 was $893,000 and $2,582,000, respectively, compared to $739,000 and $2,187,000, respectively, for the three and nine months ended November 2, 2013. These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income.

The following summary shows the changes in the shares of restricted stock outstanding during the nine months ended November 1, 2014:

	Number of	Grant Date Fair
	Shares	Value Per Share
Restricted stock
awards at February 1, 2014	505,623	$ 24.52
Granted	206,713	28.25
Vested	(108,155)	22.41
Forfeited or
expired	(39,596)	25.89
Restricted
stock awards at November 1, 2014	564,585	$ 26.19

NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the nine months ended November 1, 2014 and November 2, 2013, the Company sold 19,743 and 18,811 shares to employees at an average discount of $4.19 and $3.63 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $83,000 and $68,000 for the nine months ended November 1, 2014 and November 2, 2013, respectively. These expenses are classified as a component of Selling, general and administrative expenses.

NOTE 7 – FAIR VALUE MEASUREMENTS:

The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of November 1, 2014, February 1, 2014 and November 2, 2013:

		Quoted
		Prices in
		Active	Significant
		Markets for	Other	Significant
		Identical	Observable	Unobservable
	November 1, 2014	Assets	Inputs	Inputs
Description		Level 1	Level 2	Level 3
Assets:
State/Municipal Bonds	$ 149,893	$ -	$ 149,893	$ -
Corporate
Bonds	8,384	-	8,384	-
Auction Rate
Securities (ARS)	3,140	-	-	3,140
U.S.
Treasury Notes	3,754	3,754	-	-
Cash
Surrender Value of Life Insurance	3,852	-	-	3,852
Privately
Managed Funds	308	-	-	308
Corporate Equities	642	642	-	-
Certificates
of Deposit	100	100	-	-
Total Assets	$ 170,073	$ 4,496	$ 158,277	$ 7,300
Liabilities:
Deferred Compensation	(4,201)	-	-	(4,201)
Total
Liabilities	$ (4,201)	$ -	$ -	$ (4,201)

		Quoted
		Prices in
		Active	Significant
		Markets for	Other	Significant
		Identical	Observable	Unobservable
	February 1, 2014	Assets	Inputs	Inputs
Description		Level 1	Level 2	Level 3
Assets:
State/Municipal Bonds	$ 159,074	$ -	$ 159,074	$ -
Corporate
Bonds	2,799	-	2,799	-
Auction Rate
Securities (ARS)	3,140	-	-	3,140
U.S.
Treasury Notes	3,405	3,405	-	-
Cash
Surrender Value of Life Insurance	2,957	-	-	2,957
Privately
Managed Funds	392	-	-	392
Corporate
Equities	585	585	-	-
Certificates
of Deposit	100	100	-	-
Total Assets	$ 172,452	$ 4,090	$ 161,873	$ 6,489
Liabilities:
Deferred
Compensation	(3,298)	-	-	(3,298)
Total
Liabilities	$ (3,298)	$ -	$ -	$ (3,298)

		Quoted
		Prices in
		Active	Significant
		Markets for	Other	Significant
		Identical	Observable	Unobservable
	November 2, 2013	Assets	Inputs	Inputs
Description		Level 1	Level 2	Level 3
Assets:
State/Municipal Bonds	$ 158,996	$ -	$ 158,996	$ -
Corporate
Bonds	978	-	978	-
Auction Rate
Securities (ARS)	3,450	-	-	3,450
U.S.
Treasury Notes	3,404	3,404	-	-
Cash
Surrender Value of Life Insurance	2,897	-	-	2,897
Privately
Managed Funds	393	-	-	393
Corporate
Equities	606	606	-	-
Certificates
of Deposit	100	100	-	-
Total Assets	$ 170,824	$ 4,110	$ 159,974	$ 6,740
Liabilities:
Deferred
Compensation	(3,043)	-	-	(3,043)
Total
Liabilities	$ (3,043)	$ -	$ -	$ (3,043)

The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and taxable governmental debt securities held in managed accounts with underlying ratings of Aa3 or better at November 1, 2014, February 1, 2014 and November 2, 2013. The state, municipal and corporate bonds have contractual maturities which range from one month to 12.1 years. The U.S. Treasury Notes and Certificates of Deposit have contractual maturities which range from four months to 2.4 years. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and investments and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.

Additionally, at November 1, 2014, the Company had $0.3 million of privately managed funds, $0.6 million of corporate equities, a single auction rate security (“ARS”) of $3.1 million which continues to fail its auction, and deferred compensation plan assets of $3.9 million. At February 1, 2014, the Company had $0.4 million of privately managed funds, $0.6 million of corporate equities, a single ARS of $3.1 million and deferred compensation plan assets of $3.0 million. At November 2, 2013, the Company had $0.4 million of privately managed funds, $0.6 million of corporate equities, a single ARS of $3.5 million and deferred compensation plan assets of $2.9 million. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors.

The ARS of $3,450,000 par value was issued by the Wake County, NC Industrial Facilities & Pollution Control Financing Authority. The security is an obligation of Duke Energy Progress and has a credit rating of Aa3. The Company has collected all interest payments when due since the security was purchased and continues to expect that it will receive all interest due on the security in full and timely in the future.

The Company’s failed ARS is recorded at $3,139,500, which approximates fair value using Level 3 inputs. Because there is no active market for this particular ARS, its fair value was analyzed through the use of a discounted cash flow analysis and observations from previous trades. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also considered recent trading activity, the financial condition and near-term prospects of the issuer, the probability that the Company will be unable to collect all amounts due according to the contractual terms of the security and whether the security has been downgraded by a rating agency. The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.

The Company’s privately managed funds consist of two types of funds. The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice. As a result, the Company has classified the investments as Level 3.

Deferred compensation plan assets consist of life insurance policies. These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3 of the valuation hierarchy. The Level 3 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance funds. These funds are designed to mirror existing mutual funds and money market funds that are observable and actively traded. Cash surrender values are provided by third parties and reviewed for reasonableness by the Company.

The following tables summarize the change in fair value of the Company’s financial assets measured using Level 3 inputs as of November 1, 2014 and November 2, 2013 (in thousands):


	Unobservable Asset Inputs (Level 3)
	Available-For-Sale		Cash
	Debt Securities	Other Investments	Surrender
	ARS	Private Equity	Value	Total
Beginning
Balance at February 1, 2014	$ 3,140	$ 392	$ 2,957	$ 6,489
Redemptions	-	(70)	-	(70)
Additions	-		753	753
Total gains or
(losses)
Included
in interest and other income (or changes in net assets)	-	(1)	142	141
Included
in other comprehensive income	-	(13)	-	(13)
Ending Balance
at November 1, 2014	$ 3,140	$ 308	$ 3,852	$ 7,300
	Fair Value Measurements Using Significant
	Unobservable Liability Inputs (Level 3)
	Deferred
	Compensation	Total
Beginning
Balance at February 1, 2014	$ (3,298)	$ (3,298)
Additions	(663)	(663)
Total (gains)
or losses
Included
in interest and other income (or changes in net assets)	(240)	(240)
Included
in other comprehensive income	-	-
Ending Balance
at November 1, 2014	$ (4,201)	$ (4,201)
	Fair Value Measurements Using Significant
	Unobservable Asset Inputs (Level 3)
	Available-For-Sale		Cash
	Debt Securities	Other Investments	Surrender
	ARS	Private Equity	Value	Total
Beginning
Balance at February 2, 2013	$ 3,450	$ 561	$ 2,051	$ 6,062
Redemptions	-	(174)	-	(174)
Additions			705	705
Total gains or
(losses)
Included
in interest and other income (or changes in net assets)	-	7	141	148
Included
in other comprehensive income	-	(1)		(1)
Ending Balance
at November 2, 2013	$ 3,450	$ 393	$ 2,897	$ 6,740
	Fair Value Measurements Using Significant
	Unobservable Liability Inputs (Level 3)
	Deferred
	Compensation	Total
Beginning
Balance at February 2, 2013	$ (2,178)	$ (2,178)
Additions	(637)	(637)
Total (gains)
or losses
Included
in interest and other income (or changes in net assets)	(228)	(228)
Included
in other comprehensive income	-	-
Ending Balance
at November 2, 2013	$ (3,043)	$ (3,043)

| Quantitative information regarding the significant unobservable
inputs related to the ARS as of November 1, 2014, February 1, 2014 and
November 2, 2013 were as follows: | | | |
| --- | --- | --- | --- |
| As of November 1, 2014 | | | |
| Fair Value (in thousands) | Valuation
Technique | Unobservable Inputs | |
| $3,140 | Net present
value | Total Term | 7.9 Years |
| | of cash flows | Yield | 0.07% |
| | | Comparative
bond discount rate | 0.12% |
| As of February 1, 2014 | | | |
| Fair Value (in thousands) | Valuation
Technique | Unobservable Inputs | |
| $3,140 | Net present
value | Total Term | 8.7 Years |
| | of cash flows | Yield | 0.07% |
| | | Comparative
bond discount rate | 0.14% |
| As of November 2, 2013 | | | |
| Fair Value (in thousands) | Valuation
Technique | Unobservable Inputs | |
| $3,450 | Net present
value | Total Term | 8.9 Years |
| | of cash flows | Yield | 0.11% |
| | | Comparative
bond discount rate | 0.11% |
| Significant
increases or decreases in certain of the inputs could result in a lower fair
value | | | |
| measurement.
For example, a decrease in the yield, or an increase to the comparative | | | |
| bond discount
rate, could result in a lower fair value. | | | |

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:

In the first quarter of fiscal 2014, the Company adopted new accounting guidance which eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss, a similar tax loss, or tax credit carryforward exists at the reporting date. The new guidance had no impact on the Company’s consolidated results of operations or cash flows.

In May 2014, new accounting guidance was issued that will supersede nearly all existing accounting guidance related to revenue recognition. The new guidance provides that an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments are effective for the Company for all annual and interim reporting periods beginning after December 15, 2016. The Company is currently evaluating adoption methods and the impact it will have on the consolidated financial statements.

Table of Contents

THE CATO CORPORATION
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION:

The following information should be read along with the unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-Q that reflect projections or expectations of our future financial or economic performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations, including those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2014 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodels and closures; and (5) statements relating to our future contingencies. When possible, we have attempted to identify forward-looking statements by using words such as “will,” “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and any variations or negative formations of such words and similar expressions. We can give no assurance that actual results or events will not differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements included in this report are based on information available to us as of the filing date of this report, but subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements. Such factors include, but are not limited to, the following: any actual or perceived deterioration in, or uncertainties regarding, prevailing U.S. and global economic, political or financial market conditions; changes in other factors that drive consumer or corporate confidence and spending, including, but not limited to, levels of unemployment, fuel, energy and food costs, wage rates, tax rates, home values, consumer net worth and the availability of credit; uncertainties regarding the impact of any governmental responses to the foregoing conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel and accessory buying patterns; adverse weather or any failure of, security breach or similar event affecting our information systems; similar conditions that may affect our sales or operations; inventory risks due to shifts in market demand; and other factors discussed under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K/A for the fiscal year ended February 1, 2014 (“fiscal 2013”), as amended or supplemented, and in other reports we file with or furnish to the Securities and Exchange Commission (“SEC”) from time to time. We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise.

Table of Contents

THE CATO CORPORATION
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

CRITICAL ACCOUNTING POLICIES:

The Company’s accounting policies are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K/A for the fiscal year ended February 1, 2014. As disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts receivable, reserves related to self-insured health insurance, workers’ compensation, general and auto insurance liabilities, calculation of potential asset impairment, inventory shrinkage and uncertain tax positions.

The Company’s critical accounting policies and estimates are discussed with the Audit Committee.

Table of Contents

THE CATO CORPORATION
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS:

The following table sets forth, for the periods indicated, certain items in the Company's unaudited Condensed Consolidated Statements of Income and Comprehensive Income as a percentage of total retail sales:

	Three Months Ended — November 1, 2014	November 2, 2013	Nine Months Ended — November 1, 2014	November 2, 2013
Total retail
sales	100.0 %	100.0 %	100.0 %	100.0 %
Other revenue	1.0	1.1	0.9	1.0
Total revenues	101.0	101.1	100.9	101.0
Cost of goods
sold (exclusive of depreciation)	63.8	64.8	60.7	61.9
Selling, general
and administrative (exclusive of depreciation)	31.6	30.7	27.5	25.8
Depreciation	2.5	2.7	2.2	2.4
Interest and
other income	(0.3)	(0.4)	(0.3)	(0.3)
Income before
income taxes	3.4	3.3	10.8	11.3
Net income	2.7	2.5	6.9	7.3

Table of Contents

THE CATO CORPORATION
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED):

Comparison of the Three and Nine Months ended November 1, 2014 with November 2, 2013

Total retail sales for the third quarter were $213.8 million compared to last year’s third quarter sales of $198.8 million, a 7.5% increase. The Company’s third quarter 2014 sales increased due to a same-store sales increase of 4.0% and sales from non-comparable stores. For the nine months ended November 1, 2014, total retail sales were $740.0 million compared to last year’s comparable nine month sales of $695.3 million. Sales in the first nine months of fiscal 2014 improved due to a same-store sales increase of 3.0% and sales from non-comparable stores. Same-store sales includes stores that have been open more than 15 months. Stores that have been relocated or expanded are also included in the same-store sales calculation after they have been open more than 15 months. The method of calculating same-store sales varies across the retail industry. As a result, our same-store sales calculation may not be comparable to similarly titled measures reported by other companies. E-commerce sales were less than 1% of sales for the nine months ended November 1, 2014 and are not included in the same-store sales calculation. Total revenues, comprised of retail sales and other revenue (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $216.0 million and $746.8 million for the three and nine months ended November 1, 2014, compared to $201.0 million and $702.5 million for the three and nine months ended November 2, 2013, respectively. The Company operated 1,343 stores at November 1, 2014 compared to 1,318 stores at the end of last year’s third quarter. For the first nine months of fiscal 2014, the Company opened 27 new stores, relocated two stores and closed four stores. The Company currently expects to open approximately 33 stores, relocate six stores and close eight stores in fiscal 2014.

Credit revenue of $1.4 million represented 0.7% of total revenues in the third quarter of fiscal 2014, compared to 2013 credit revenue of $1.5 million or 0.7% of total revenues. Credit revenue decreased slightly for the most recent comparable period due to lower finance charge income and lower late fee income from sales under the Company’s proprietary credit card. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income. Related expenses principally include bad debt expense, payroll, postage and other administrative expenses and totaled $0.9 million in the third quarter of fiscal 2014, compared to last year’s third quarter expense of $1.0 million. The decrease was primarily due to lower bad debt expense.

Other revenue in total, as included in total revenues, was $2.2 million and $6.8 million for the three and nine months ended November 1, 2014, compared to $2.3 million and $7.1 million for the prior year’s comparable three and nine months. The overall decrease in the three and nine months ended November 1, 2014 resulted primarily from lower finance charges.

Cost of goods sold was $136.5 million, or 63.8% of retail sales and $449.5 million or 60.7% of retail sales for the three and nine months ended November 1, 2014, compared to $128.8 million, or 64.8% of retail sales and $430.6 million, or 61.9% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2013. The overall decrease in cost of goods sold as a percent of retail sales for the third quarter of fiscal 2014 resulted primarily from leveraging of merchandise, freight and distribution costs due to higher sales of regular priced goods. 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 exclusive of depreciation) increased by 10.4% to $77.3 million for the third quarter of fiscal 2014 and increased by 9.7% to $290.5 million for the first nine months of fiscal 2014 compared to $70.0 million and $264.7 million for the prior year’s comparable three and nine months of fiscal 2013. Gross margin as presented may not be comparable to those of other entities.

Table of Contents

THE CATO CORPORATION
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

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 $67.6 million, or 31.6% of retail sales and $203.4 million, or 27.5% of retail sales for the third quarter and first nine months of fiscal 2014, respectively, compared to $61.0 million, or 30.7% of retail sales and $179.4 million, or 25.8% of retail sales for the prior year’s comparable three and nine month periods, respectively. The increase in SG&A expense for the third quarter was primarily attributable to higher incentive-based compensation expense and insurance expense partially offset by lower store fixture write-offs. The increase in SG&A expense for the first nine months of fiscal 2014 was primarily attributable to higher incentive-based compensation expense and point-of-sale (POS) equipment upgrades.

Depreciation expense was $5.4 million, or 2.5% of retail sales and $16.3 million, or 2.2% of retail sales for the third quarter and first nine months of fiscal 2014, respectively, compared to $5.5 million, or 2.7% of retail sales and $16.3 million or 2.4% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2013, respectively.

Interest and other income was $0.7 million, or 0.3% of retail sales and $2.5 million, or 0.3% of retail sales for the three and nine months ended November 1, 2014, respectively, compared to $0.7 million, or 0.4% of retail sales and $2.3 million, or 0.3% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2013.

Income tax expense was $1.5 million, or 0.7% of retail sales and $28.7 million, or 3.9% of retail sales for the third quarter and first nine months of fiscal 2014, respectively, compared to $1.6 million, or 0.8% of retail sales and $27.9 million, or 4.0% of retail sales for the prior year’s comparable three and nine month periods of fiscal 2013, respectively. The effective income tax rate for the third quarter of fiscal 2014 was 20.5% compared to 24.7% for the third quarter of 2013. The effective tax rate decreased for the third quarter primarily due to favorable return to provision adjustments compared to prior year.

Earnings per diluted share increased 18% for the third quarter for fiscal 2014 compared to the third quarter of fiscal 2013. The increase was due to a net income increase of 16% and the positive impact of the Company’s share repurchases. The Company estimates the impact to be $0.01 for the quarter. Earnings per diluted share increased 5% for the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013 due to a 2% increase in net income and the positive impact of the Company’s share repurchases. The Company estimates the impact to be $0.07.

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first nine months of fiscal 2014 was $89.9 million as compared to $75.7 million in the first nine months of fiscal 2013. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments, and share repurchases. In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at November 1, 2014, February 1, 2014 and November 2, 2013.

Table of Contents

THE CATO CORPORATION
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

Cash provided by operating activities for the first nine months of fiscal 2014 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $14.2 million for the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013 was primarily due to a larger decrease in inventory from the end of the fiscal year.

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 regular operating requirements, expected capital expenditures, dividends and share repurchases for the next 12 months and for the foreseeable future.

At November 1, 2014, the Company had working capital of $253.4 million compared to $269.6 million at February 1, 2014 and $269.0 million at November 2, 2013. Additionally, the Company had $0.9 million, $1.0 million and $1.0 million invested in privately managed investment funds and other miscellaneous equities and a single auction rate security of $3.1 million, $3.1 million and $3.5 million at November 1, 2014, February 1, 2014 and November 2, 2013, respectively, which are included in Other assets on the Condensed Consolidated Balance Sheets.

At November 1, 2014, February 1, 2014 and November 2, 2013, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million, less the value of revocable letters of credit discussed below. The revolving credit agreement is committed until August 2015. 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, 2014.

Expenditures for property and equipment totaled $21.4 million in the first nine months of fiscal 2014, compared to $23.8 million in last year’s first nine months. The expenditures for the first nine months of 2014 were primarily for the development of 27 new stores, additional investments in new technology and home office renovations. For the full fiscal 2014 year, the Company expects to invest approximately $30.6 million for capital expenditures. This includes expenditures to open 33 new stores and relocate six stores, upgrade merchandise systems and complete home office renovations.

Net cash used in investing activities totaled $18.1 million in the first nine months of fiscal 2014 compared to $23.0 million used in the comparable period of 2013. The decrease was due primarily to a decrease in capital expenditures partially offset by sales of short-term investments.

Net cash used in financing activities totaled $67.5 million in the first six months of fiscal 2014 compared to $9.7 million used in the comparable period of 2013. The increase was primarily due to an increase in share repurchases and dividends paid.

On November 25, 2014, the Board of Directors maintained the quarterly dividend at $0.30 per share.

Table of Contents

THE CATO CORPORATION
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

On May 20, 2014, the Board of Directors increased, by 2 million shares, the authorization to purchase shares. As of November 1, 2014, the Company had 2,195,113 shares remaining in open authorizations under its share repurchase program.

The Company does not use derivative financial instruments.

Table of Contents

THE CATO CORPORATION
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS:

Table of Contents

THE CATO CORPORATION
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 activities, but the Company does not believe such exposure is material.

ITEM 4. CONTROLS AND PROCEDURES :

We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of November 1, 2014. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of November 1, 2014, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended November 1, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

*THE CATO CORPORATION*

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS:

Not Applicable

ITEM 1A. RISK FACTORS:

In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K/A for our fiscal year ended February 1, 2014. These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:

The following table summarizes the Company’s purchases of its common stock for the three months ended November 1, 2014:

ISSUER PURCHASES OF EQUITY SECURITIES

			Total Number of — Shares Purchased as	Maximum Number — (or Approximate Dollar
	Total Number	Average	Part of Publicly	Value) of Shares that may
Fiscal	of Shares	Price Paid	Announced Plans or	Yet be Purchased Under
Period	Purchased	per Share (1)	Programs (2)	The Plans or Programs (2)
August 2014	-	$ -	-
September 2014	-	-
October 2014	-	-	-
Total	-	$ -	-	2,195,113

(1) Prices include trading costs.

(2) On May 20, 2014, the Board of Directors increased, by 2 million shares, the authorization to purchase shares. During the third quarter ended November 1, 2014, the Company did not repurchase shares under this program. As of the third quarter ended November 1, 2014, the Company had 2,195,113 shares remaining in open authorizations. There is no specified expiration date for the Company’s repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES:

Not Applicable

Table of Contents

*THE CATO CORPORATION*

PART II OTHER INFORMATION

ITEM 4. MINE SAFETY DISCLOSURES:

Not Applicable

ITEM 5. OTHER INFORMATION:

Not Applicable

ITEM 6. EXHIBITS:

Exhibit No.	Item
3.1	Registrant’s Restated Certificate of Incorporation
dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form S-8 of
the Registrant filed February 7, 2000 (SEC File No. 333-96283).
3.2	Registrant’s By Laws incorporated by reference to
Exhibit 99.2 to Form 8-K of the Registrant Filed December 10, 2007.
4.1	Rights Agreement dated December 18, 2003, incorporated
by reference to Exhibit 4.1 to Form 8-A12G of the Registrant filed December
22, 2003 and as amended in Form 8-A12B/A filed January 6, 2004.
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Principal
Executive Officer.
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Principal
Financial Officer.
32.1*	Section 1350 Certification of Principal Executive
Officer.
32.2*	Section 1350 Certification of Principal Financial
Officer.
101.1*	The following materials from Registrant’s Quarterly
Report on Form 10-Q for the fiscal quarter ended November 1, 2014, formatted
in XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months and Nine Months ended November 1, 2014 and
November 2, 2013; (ii) Condensed Consolidated Balance Sheets at November 1,
2014, February 1, 2014 and November 2, 2013; (iii) Condensed Consolidated
Statements of Cash Flows for the Nine Months Ended November 1, 2014 and
November 2, 2013; and (iv) Notes to Condensed Consolidated Financial
Statements.

Submitted electronically herewith.

Table of Contents

*THE CATO CORPORATION*

PART II OTHER INFORMATION

SIGNATURES

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 CORPORATION

December 2, 2014	/s/ John P. D. Cato
Date	John P. D. Cato Chairman, President and Chief Executive Officer
December 2, 2014	/s/ John R. Howe
Date	John R. Howe Executive Vice President Chief Financial Officer

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CATO CORP — Interim / Quarterly Report 2014

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