Cato Fashion - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

8100 Denmark Road, Charlotte, North Carolina 28273-5975
(Address of principal executive offices)
(Zip Code)

(704) 554-8510

Not Applicable

 

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

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 August 1, 2009 and August 2, 2008 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 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 for the fiscal year ended January 31, 2009.

The year-end condensed consolidated balance sheet data presented for fiscal year ended January 31, 2009 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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.

Short-term investments are classified as available-for-sale. As they are available for current operations, they are classified in the Condensed Consolidated Balance Sheets as current assets. Available-for-sale securities are carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Condensed Consolidated Balance Sheets and a reduction of Interest and other income in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in Interest and other income.

Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method.

On August 27, 2009, the Board of Directors maintained the quarterly dividend at $.165 per share or an annualized rate of $.66 per share.

Prior year basic and diluted weighted shares and earnings per share have been adjusted based on Financial Accounting Standards Board (FSAB) issued FASB Staff Position (FSP) No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. The impact to basic earnings per share for the prior year quarter and prior year to date due to the adoption of this FSP was $0.01. The impact to diluted earnings per share was $0.01 for the prior year to date. There was no impact to diluted earnings per share for the prior year quarter.

SFAS No. 128, Earnings Per Share, requires dual presentation of basic EPS and diluted 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. While the Company’s articles of incorporation provide 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 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.

Income tax payments, net of refunds received, for the six months ended August 1, 2009 and August 2, 2008 were $9,435,000 and $6,938,000, respectively. The income tax payments for the six months ended August 1, 2009 include settlements of various states tax audits of $2,455,000.

As of August 1, 2009, the Company had an unsecured revolving credit agreement of $35 million. Net of the Company’s standby letter of credit for payments to the current general liability and workers’ compensation insurance processor, the revolving credit agreement provided for borrowings of up to $33.3 million at August 1, 2009. The revolving credit agreement is committed until August 2010. 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 August 1, 2009. There were no borrowings outstanding under this credit facility during the six months ended August 1, 2009 or August 2, 2008, respectively, or the fiscal year ended January 31, 2009. Interest on any borrowings is based on LIBOR, which was 0.28% at August 1, 2009.

At August 1, 2009 and August 2, 2008 the Company had approximately $8,301,000 and $4,771,000, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

The Company has two reportable segments: retail and credit. The Company operated its women’s fashion specialty retail stores in 31 states at August 1, 2009, principally in the southeastern United States. The Company offers its own credit card to its customers and all related 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):

The Company evaluates 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):

As of August 1, 2009, 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 authorized 5,850,000 shares for the granting of options to officers and key employees. The 1999 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan authorized 1,500,000 and 1,350,000 shares, respectively, for the granting of various forms of equity-based awards, including restricted stock and stock options to officers and key employees. The 1999 Plan has expired as to the ability to grant new awards.

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

Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.

 

The following is a summary of the changes in stock options outstanding during the six months ended August 1, 2009:

No options were granted in fiscal 2008 or in the first half of fiscal 2009.

As of August 1, 2009, there was approximately $21,200 of total unrecognized compensation cost related to nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of 0.2 years. The total intrinsic value of options exercised during the second quarter and six months ended August 1, 2009 was approximately $125,014 and $192,023, respectively.

The Company recognized share-based compensation expense for nonvested options of $15,000 and $55,000 for the second quarter and six month period ended August 1, 2009, respectively, compared to $23,000 and $46,000 for the second quarter and six month period ending August 2, 2008, respectively. These expenses are classified as a component of selling, general and administrative expenses.

SFAS No. 123R requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. For the six months ended August 1, 2009 and August 2, 2008, the Company reported $72,000 and $41,000 of excess tax benefits as a financing cash inflow, respectively. In addition, $244,000 and $200,000 in cash proceeds were received from the exercise of stock options and Employee Stock Purchase Plan purchases, respectively.

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 six months ended August 1, 2009 and August 2, 2008, the Company sold 13,686 and 18,158 shares to employees at an average discount of $2.57 and $2.15 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 $35,000 and $39,000 for the six months ended August 1, 2009 and August 2, 2008, respectively.

In accordance with SFAS No. 123R, 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 August 1, 2009 and August 2, 2008, there was $5,104,649 and $6,342,000 of total unrecognized compensation cost related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 3.2 years and 3.45 years, respectively. The total fair value of the shares recognized as compensation expense during the second quarter and six months ended August 1, 2009 was $757,000 and $1,087,000 compared to $514,000 and $950,000 for the second quarter and six months ended August 2, 2008.

The following summary shows the changes in the shares of restricted stock outstanding during the six months ended August 1, 2009:

The Company’s effective tax rate for the second quarter 2009 was 29.7% compared to 37.3% for the first quarter of 2009. The decrease in the quarterly effective tax rate was primarily attributable to the settlement of various state tax audits. During the second quarter 2009, unrecognized tax benefits decreased $1.7 million from $10.1 million at May 2, 2009 to $8.4 million at August 1, 2009. During the next 12 months, various taxing authorities’ statues of limitations are expected to expire which could result in a potential further reduction of unrecognized tax benefits. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. It is reasonably possible such changes could be significant when compared to our total unrecognized tax benefits, but the amount of change is not estimable.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. Applicable provisions of SFAS 157 were adopted by the Company effective February 3, 2008. In February 2008, the FASB issued FASB Staff Position 157-2, Effective date of FASB Statement No. 157, which delayed for one year the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company’s adoption of FASB Staff Position 157-2 was immaterial.

The following table sets forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of August 1, 2009:

The following table sets forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of January 31, 2009:

The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes and governmental debt securities held in managed funds. These securities with the exception of a single ARS are classified as available-for-sale as they are highly liquid and are recorded on the balance sheet at estimated fair value, with unrealized gains and temporary losses reported net of taxes as accumulated other comprehensive income. Additionally, as of August 1, 2009, the Company had $2.0 million invested in privately managed investment funds and $0.4 million of other miscellaneous equities which are reported within other noncurrent assets in the Consolidated Balance Sheets.

As of August 1, 2009, the Company held $102.5 million in variable rate demand notes (“VRDN”) and an auction rate security (“ARS”) issued by tax exempt municipal authorities and agencies and rated A or better. The underlying securities have contractual maturities which generally range from six to thirty-five years. The VRDN and ARS are recorded at estimated fair value and classified as available-for-sale. Of the $102.5 million in VRDN and ARS, a single ARS of $3.5 million failed its last auction as of July 23, 2009. Due to the continuing failure of the ARS at auction and because the issuer has yet to call the security, the Company has classified the failed ARS as a long-term investment in Other Assets.

The Company’s auction rate security was measured at fair value using Level 3 inputs under SFAS 157. Because there is no active market for the Company’s auction rate security, its fair value was determined through the use of a discounted cash flow analysis using Level 3 inputs. 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 investment, the Company also considered the financial condition and near-term prospects of the issuer, the low 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 following table summarizes the change in the fair value of the Company’s auction rate securities measured using Level 3 inputs during the first six months of fiscal 2009:

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. EITF 03-6-1 requires that unvested share-based payments that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of EPS pursuant to the two class method. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The impact to basic earnings per share for the prior year quarter and prior year to date due to the adoption of this FSP was $0.01. The impact to diluted earnings per share was $0.01 for the prior year to date. There was no impact to earnings per share for the prior year quarter.

In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions that are not orderly. FSP 157-4 is

effective for interim and annual periods ending after June 15, 2009. The impact of the Company’s adoption of FSP 157-4 was immaterial.

In April 2009, the FASB issued FASB Staff Position No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”). FSP 115-2 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. FSP 115-2 is effective for interim and annual periods ending after June 15, 2009. The impact of the Company’s adoption of FSP 115-2 was immaterial.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events(“SFAS No. 165”), which establishes general standards for disclosure of and accounting for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company’s adoption of SFAS No. 165 on August 2, 2009 did not have a material effect on the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after August 1, 2009 up through September 9, 2009, the date we issued these Condensed Consolidated Financial Statements. We did not have any material recognizable or nonrecognizable subsequent events during this period.

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 2009 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodelings 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 “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and variations 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: general economic conditions including, but not limited to, the continuation or worsening of (i) the current adverse or recessionary conditions affecting the U.S. and global economies and consumer spending and (ii) the adverse conditions in the U.S. and global credit markets; uncertainties regarding the impact of any governmental responses to the foregoing adverse economic and credit market conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel buying patterns; adverse weather conditions; 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 for the fiscal year ended January 31, 2009 (fiscal 2008), as amended or supplemented, and in other reports we file with or furnish to the 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.

The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of the Company’s financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts receivable, reserves relating to workers’ compensation, general and auto insurance liabilities, reserves for group health insurance, reserves for inventory markdowns, calculation of asset impairment, inventory shrinkage accrual and reserves for uncertain tax positions.

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

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:

Total retail sales for the second quarter were $225.4 million compared to last year’s second quarter sales of $231.0 million, a 2% decrease. Same-store sales decreased 3% in the second quarter of fiscal 2009. For the six months ended August 1, 2009, total retail sales were $463.4 million compared to last year’s first six months sales of $456.7 million, and same-store sales remained flat for the comparable six month period. Total revenues, comprised of retail sales and other income (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $228.3 million and $469.3 million for the second quarter and six months ended August 1, 2009, respectively, compared to $233.9 million and $462.7 million for the second quarter and six months ended August 2, 2008, respectively. The Company operated 1,285 stores at August 1, 2009 compared to 1,287 stores at the end of last year’s second quarter. For the first six months of 2009 the Company opened 12 stores and closed 8 stores. The Company expects to open approximately 46 stores, relocate 2 stores and close approximately 42 stores in fiscal 2009.

Credit revenue of $2.3 million represented 1.0% of total revenues in the second quarter of 2009, compared to 2008 credit revenue of $2.5 million or 1.1% of total revenues. The slight reduction in credit revenue was due to lower finance charge and late fee income from lower sales under the Company’s proprietary credit card, partially offset by improved collections compared to the prior year. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income. Related expenses include principally bad debt expense, payroll, postage and other administrative expenses and totaled $1.5 million in the second quarter of 2009, $0.1 million higher compared to last year’s second quarter expenses of $1.4 million. Bad debt expense was higher compared to the second quarter and first six months of 2008, partially offset by lower administrative expenses.

Other income in total, as included in total revenues was $2.9 million and $5.9 million for the second quarter and first six months of fiscal 2009, flat compared to the prior year’s comparable three and six month periods.

Cost of goods sold was $143.5 million, or 63.7% of retail sales and $285.4 million or 61.6% of retail sales for the second quarter and first six months of fiscal 2009, compared to $148.0 million, or 64.1% of retail sales and $289.6 million, or 63.4% of retail sales for the prior year’s comparable three and six month period, respectively. The overall decrease in cost of goods sold as a percent of retail sales for the second quarter and first six months of 2009 resulted primarily from lower markdowns and freight charges. The decrease in markdowns was primarily attributable to tight inventory management and higher sell-throughs of regular priced merchandise. 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) decreased by 1.2% to $81.9 million for the second quarter of fiscal 2009 and increased by 6.6% to $178.1 million for the first six months of fiscal 2009, compared to $82.9 million and $167.1 million for the prior year’s comparable three and six month periods, respectively. Gross margin as presented may not be comparable to those of other entities.

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 $56.5 million, or 25.1% of retail sales and $121.1 million, or 26.1% of retail sales for the second quarter and first six months of fiscal 2009, compared to $63.6 million, or 27.5% of retail sales and $119.9 million, or 26.2% of retail sales for the prior year’s comparable three and six month period, respectively. SG&A expenses as a percentage of retail sales decreased 240 basis points for the second quarter of fiscal 2009 as compared to the prior year and decreased 10 basis points for the first six months of fiscal 2009 as compared to the prior year. The decrease in SG&A expenses as a percentage of retail sales and the overall dollar decrease for the second quarter of fiscal 2009 was primarily attributable to a decrease in worker’s compensation and group health insurance expenses and the closure of underperforming stores from the second quarter of fiscal 2008. The overall dollar increase in SG&A expenses for the first six months of fiscal 2009 resulted primarily from increased incentive based compensation expenses, payroll and legal reserve expenses offset by a reduction in worker’s compensation and group health care expenses and the closure of underperforming stores from the second quarter of fiscal 2008.

Depreciation expense was $5.5 million, or 2.4% of retail sales and $11.0 million or 2.4% of retail sales, for the second quarter and first six months of fiscal 2009, compared to $5.7 million, or 2.5% of retail sales and $11.3 million, or 2.5% of retail sales, for prior year’s comparable three and six month periods, respectively.

Interest and other income was $0.9 million, or 0.4% of retail sales and $1.9 million, or 0.4% of retail sales for the second quarter and first six months of fiscal 2009, compared to $1.7 million, or 0.7% of retail sales and $3.6 million, or 0.8% of retail sales, for the prior year’s comparable three and six month periods, respectively. The decrease in fiscal 2009 resulted primarily from lower interest rates.

Income tax expense was $7.0 million, or 3.1% of retail sales and $18.2 million, or 3.9% of retail sales, for the second quarter and first six months of fiscal 2009, compared to $6.2 million, or 2.7% of retail sales and $16.6 million, or 3.6% of retail sales, for the prior year’s comparable three and six month periods. The slight overall dollar increase for the second quarter resulted from higher pre- tax income offset by a lower tax rate due to the settlements of various state tax audits. The effective income tax rate for the second quarter of fiscal 2009 was 29.7% compared to 34.0% for the second

quarter of 2008. The increase in dollars for the six month period resulted from higher pre-tax income offset by a lower effective tax rate due to the settlements of various state tax audits. The effective income tax rate for the first six months of fiscal 2009 was 33.9% compared to 36.4% for the six months of fiscal 2008.

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first six months of fiscal 2009 was $54.0 million as compared to $59.1 million in the first six months of fiscal 2008. 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 August 1, 2009 and borrowing capacity under the facility was $33.3 million, net of related standby letter of credit obligations.

Cash provided by operating activities for the first six months of fiscal 2009 was primarily generated by earnings adjusted for depreciation and changes in working capital. The decrease of $5.1 million for the first six months of fiscal 2009 as compared to the first six months of fiscal 2008 was primarily due to a decrease in inventories, accrued income taxes and losses on disposal of property and equipment due to store closures, partially offset by an increase in net income in fiscal 2009.

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 dividends, share repurchases and other operating requirements and expected capital expenditures for fiscal 2009 and for the foreseeable future.

At August 1, 2009, the Company had working capital of $192.1 million compared to $165.8 million at August 2, 2008. Additionally, the Company had $2.4 million and $2.2 million invested in privately managed investment funds at August 1, 2009 and August 2, 2008, respectively, which are included in other assets on the Condensed Consolidated Balance Sheets.

At August 1, 2009, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $33.3 million. The revolving credit agreement is committed until August 2010. 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 August 1, 2009. There were no borrowings outstanding under this credit facility during the first six months ended August 1, 2009 or the fiscal year ended January 31, 2009.

At August 1, 2009 and August 2, 2008, the Company had approximately $8.3 million and $4.8 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments. In addition, the Company has a standby letter of credit in the amount of approximately $1.7 million at August 1, 2009 for payments to the current general liability and workers’ compensation insurance processor.

Expenditures for property and equipment totaled $6.2 million in the first six months of fiscal 2009, compared to $10.5 million in last year’s first six months. The expenditures for the first six months of 2009 were primarily for the development of 12 new stores and additional investments in new technology. For the full fiscal 2009 year, the Company is planning to invest approximately $16.1 million for capital expenditures. This includes expenditures to open 46 new stores and relocate 2 stores.

Net cash used in investing activities totaled $58.1 million in the first six months of fiscal 2009 compared to $26.0 million used in the comparable period of 2008. The increase was due primarily to the decrease in sales of short-term investments.

On August 27, 2009, the Board of Directors maintained the quarterly dividend at $.165 per share, or an annualized rate of $.66 per share.

The Company’s Board of Director’s authorized an increase in the Company’s share repurchase program of 2,000,000 and 500,000 on August 30, 2007 and February 26, 2009, respectively. There is no specified expiration on any of these repurchase authorizations. For the six months ended August 1, 2009, the Company has repurchased 2,569 shares at a cost of $49,000. At August 1, 2009, 693,373 shares remain available for repurchase in open authorizations.

The Company does not use derivative financial instruments.

At August 1, 2009, the Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes and governmental securities held in managed funds. These securities with the exception of the single ARS are classified as available-for-sale as they are highly liquid 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 Condensed Consolidated Balance Sheets.

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.

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 August 1, 2009. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of August 1, 2009, 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 Securities and Exchange Commission’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.

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 August 1, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Not Applicable

     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 for our fiscal year ended January 31, 2009. 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 and adversely affect our business, financial condition or results of operations.

     The following table summarizes the Company’s purchases of its common stock for the three months ended August 1, 2009:

ISSUER PURCHASES OF EQUITY SECURITIES

     Not Applicable

     Not Applicable

   

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.