P.O. Box 34216
Charlotte, North Carolina 28234
Fax: (704) 551-7521
Incorporated: 1946 as Cato Stores
Sales: $476.2 million
Stock Exchanges: NASDAQ
SICs: 5621 Women’s Clothing Stores
The Cato Corporation owns a chain of approximately 678 women’s apparel stores in 22 U.S. states, primarily in the South and Southeast. The company operates through two principal divisions: the Cato division, which oversees 553 Cato and Cato Plus women’s fashion stores, and the It’s Fashion! division comprising a chain of 125 off-price stores offering family fashions and accessories. Offering wide selections at low prices, Cato’s chain stores are largely based in “strip mall” shopping centers, and 40 percent are anchored by Wal-Mart stores. In 1994 the company earned $476.2 million in total revenues, with $463.7 million of the total in retail sales.
Cato has been a family business since its beginnings. Its founder, Wayland Henry Cato, made his start in retail in 1916, working a summer job in a general store in his hometown of Ridge Spring, South Carolina. Initially embarking on a career as a teacher, he took to retailing instead and became a top salesman, tenaciously capitalizing upon any opportunity to show customers merchandise. That fall he convinced his father to help him open their own dry goods store.
Cato’s retail career was interrupted by a naval stint in World War I and a failed bootlegging episode in which he was abducted and nearly killed. He returned to his store in 1919, only to face another difficult challenge. Wholesale prices dropped substantially right after he bought a shipment of goods for his store, a development that made the products much cheaper at other stores that were able to take advantage of the drop. Unlike other merchants, however, Cato chose to sell the goods at cost, hoping to make a profit after buying additional products at the lower prices. Aggressive thinking like this kept the Cato store open when many others were folding.
After marrying in 1922, Cato and his wife, Annie Derham, agreed that their future lay outside Ridge Spring. He was employed by United Merchants and Manufacturers, where he managed a subsidiary known as Aiken Stores, Inc., a chain. Cato also helped negotiate for his employer the purchase of gas stations, coal yards, lunch counters, warehouses, and mill stores, including a Greenville, South Carolina, dress shop known as the Martha Park store. Under United Merchants and Manufacturers direction, Cato helped expand the Martha Park shop to 20 locations within a few years. Moreover, as part of his compensation as an employee of United Merchants and Manufacturers, Cato was given the opportunity to purchase a few shares in Aiken Stores, Inc.
After 23 years of service, Cato left United Merchants in 1946 to launch his own business. Together with his sons, Wayland Henry Cato, Jr., and Edgar Thomas, Cato founded Cato Stores as a Delaware corporation. (Edgar would return to journalism school after two years of helping with store construction.) The company was headquartered in Charlotte, an ideal location amid the many small textile, furniture, and tobacco towns of the Carolinas. Due to a dearth of building in the Depression and World War II, main street venues in county seats were difficult to find, but Wayland Sr. located two in the towns of Sumter and Mullins, South Carolina, sites of nearly-simultaneous grand openings. Three other stores were opened the first year; their revenues totalled $136,000.
Wayland Cato Sr. hired local women to manage the stores, including Delia Parish, the manager of the neighboring Martha Park store in Gaffney, South Carolina, whom Cato had hired while working for United Merchants. Her dedication to the success of the venture—including performing alterations on her own time—helped safeguard its perilous early years. But Cato also made an unfortunate hiring decision in filling his merchandise manager position. The manager, who had plans for a ladies’ apparel chain of his own, ordered elegant and expensive styles that did not sell in the poor, rural South. He resigned in 1947, and second-year earnings for seven Cato stores rose to $404,000.
The post of merchandise manager was filled in 1949 with Murray Turkei, a New Yorker. In spite of his northern origins, he and Wayland Cato Jr. quickly targeted the store’s primary consumer—“juniors” sizes seven to 11, a younger, more fashion-oriented consumer than those of national department stores and local independent shops. Such a buying orientation made Cato stand out.
By 1948 Cato’s seven stores garnered $700,000 in sales and $30,000 in net earnings. Sales hit $1 million the next year. For the next few years, sales per store would average from $80,000 to $100,000. Sales increases and store openings of two or three a year remained fairly constant, except during a recession in the mid-1950s. In 1956 Cato began using rudimentary punch card tabulating equipment in merchandising, the first retail chain in the Southeast to do so. The same year, a heart attack forced Wayland Cato Sr. to cut back his duties.
At the end of the 1950s, the company began to tinker with its formula, reflecting changing economic conditions. It began to investigate leases in shopping centers as well as Main Street locations, although the majority of its shops (90 percent in the mid-1970s) continued to be located downtown. In response to a competitor, Cato offered a charge program for customers on an experimental basis. The program was a success, and by the 1970s it accounted for over 20 percent of total sales, supplying the company with addresses for direct mail promotions as well. Several administrative changes took place in the maturing company in this era as well. Cato issued its first annual report and for the first time offered certain employees stock options. Wayland Cato Jr. was named president of the company in 1960, though he continued to share management duties with his father, as no single chief executive officer was named. His brother Edgar became a vice-president.
Wayland Cato Jr. had learned a great deal from his father. He was also a voracious reader who was particularly struck by The Prince, a treatise on power written during medieval times by Niccolo Machiavelli. In the company publication A Commitment to Change (1975), Wayland Cato Jr. called the book “the most accurate description of the world of power and influence I’ve ever read.... For it to make sense today, the reader has only to substitute the modern chief executive officer for the prince, the board of directors for the council to the prince, the executive vice president or general manager for the prime minister, and the corporate officers for the aristocrats.”
Acquisition seemed an effective way to rapidly increase the company’s growth, and its main competitor in the Southeast, Glamor Shops, Inc., interested the Catos very much. The 54 stores owned by Glamor Shops would more than double Cato’s store holdings, and a loss in 1958 made its owners eager to sell. However, the soft economy and concerns over Glamor’s drawbacks—particularly its expensive lease arrangements and relatively inefficient operations—scuttled the deal in 1962 after almost two years of negotiations. Still, Cato’s aggressive approach to business openings enabled the company to nearly double its store total in under two years. The company diversified in opening “self-service” discount apparel and general merchandise stores in 1965. First known as C-Marts, the name was changed to Waco (a contraction of Wayland Corporation) to distinguish it from K-Marts, S-Marts, Wal-Marts, and the like. The stores sold a broader variety of merchandise aimed at the entire family, which required a correspondingly greater store area, typically 15,000 square feet. These Waco stores were later sold off or closed in the mid-1970s.
After a decade of strong performance, Cato went public in 1968, selling shares at $19 each. Mediocre preformance and stock prices over the next 12 years, however, prompted the company to go private in 1980, buying back shares at $13 each. In 1987, after five years of improved results, Cato was once again taken public. But, the cyclical business of retail fashion proved at times a cruel leveller of the company’s ambitions. In the late 1980s, Cato alienated its customers somewhat in both its selection of merchandise and its pricing. Aware of a problem, Cato installed information systems powered by a gargantuan IBM mainframe to monitor distribution of goods. Cost cutting efforts, though, soon eliminated the mainframe as overkill. Over-expansion and a highly competitive environment compounded the company’s misfortunes, however, and the company teetered towards bankruptcy, losing $10 million in 1990, when its stock fell to 56 cents a share. Nevertheless, co-founders Wayland Cato, Jr., and his brother Edgar Cato guaranteed $1.5 million each to three banks in order to secure a $30 million line of credit, averting disaster.
The early 1990s proved to be a period of recovery and expansion, thanks partly to the company’s decision to bring some new blood into the management. Under the direction of Wayland Cato, Jr., the company’s chairman, CEO, and president, several key executive positions were filled with new, promising people. Linda McFarland Jenkins, a senior merchandising officer who had been displaced when Dillard Department Stores, Inc. bought the J.B. Ivey Co., was brought in as chief merchant of the Cato division. An outstanding success, she was given the position of company president as well and was eventually made chief operating officer.
Jenkins helped change the type of merchandise Cato stocked and the way they bought and sold it. As one company representative told The Charlotte Observer, Cato was marking up prices approximately five percent lower than the competition. Subsequently, twice as many items (16-18 percent) sold before being placed on sale. The company reduced the risk of being stuck with inferior overseas goods by buying through importers, and restrained itself from stocking too many identical items, which small town shoppers would avoid. The lower risks of both policies outweighed the higher costs. In addition, Jenkins decided that Cato was stocking fashions that were too traditional for Cato’s small-town customers, who preferred items embellished with “zippers and bows and buttons,” as she told Business North Carolina in 1991. Besides lowering prices and stocking different merchandise, Cato also closed almost 100 poorly performing stores and its New York buying office. These cutbacks eerily mirrored those of 1970, when around 150 of the company’s 338 non-store employees were dismissed.
Among the other new appointments at Cato were David Kempert (executive vice-president, chief stores officer, Cato division); Howard “Skip” Severson (executive vice-president, and chief real estate and store development officer); John Cato (executive vice-president of the company and president and general manager of the It’s Fashion! division); and Clarice Cato Goodyear (executive vice-president and chief administrative officer). Together with Jenkins, the new team was instrumental in Cato’s turnaround.
In fact, the various changes instituted by Cato’s new leadership produced such a strong turnaround in performance that the company was soon expanding once again. Within a year of its 56-cent low, the stock had risen to $9.50 a share. Despite closing 68 stores in 1991, earnings increased from a loss of almost $10 million in 1990 to a positive $9.5 million, almost a $20 million swing in earnings. After the divestment of poor-performing stores, Cato opened 129 new stores, relocated and expanded 48 stores, and remodeled an additional 48 in 1992 and 1993.
In 1992, the company reported earnings of $18 million, up $9 million from the prior year. Earnings again rose to $24.8 million in 1993, a record year. Cato stock peaked at $24.75 a share in 1993, but fell to $5.50 on earnings of $18 million the next year. While some analysts alleged that lower earnings figures had sent investors, including some board members, scurrying, the company ended the year with no long-term debt, working capital of over $94,000, and stockholders’ equity of over $141,000.
Cato opened 80 Cato division stores in 1994—all of them carrying regular and plus-size clothing. It also expanded its selection, and began offering clothing for girls aged four to 14 in some stores, a unique innovation among women’s clothing stores. To accommodate these contents, the new stores averaged 6,500 square feet. By contrast, a typical 1970 vintage store had 2,000 to 3,000 square feet. Also that year, the company opened 23 It’s Fashion! stores, which averaged 3,000 square feet. The following year, Cato Corporation opened a total of 37 new stores (19 of them Cato stores and 18 It’s Fashion! stores), while also relocating and expanded 29 existing stores and remodeling an additional 40 stores in the Cato division.
CHW Corporation; Providence Insurance Company Limited.
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—Frederick C. Ingram