Principles of Consolidation: The consolidated financial statements include the accounts of The Cato Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated.

Description of Business and Fiscal Year: The Company has two reportable segments — the operation of a fashion specialty stores segment (“Retail Segment”) and a credit card segment (“Credit Segment”). The apparel specialty stores operate under the names “Cato,” “Cato Fashions,” “Cato Plus,” “It's Fashion”, “It's Fashion Metro” and “Versona Accessories” and are located primarily in strip shopping centers principally in the southeastern United States. The Company's fiscal year ends on the Saturday nearest January 31.

Change in Accounting Principle: The Company elected to change its method of accounting for inventory to the weighted average cost method from the retail method. Refer to Note 2, “Change in Accounting Principle” for additional information.

Use of Estimates: The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company's financial statements include the allowance for doubtful accounts receivable, reserves relating to self-insured health insurance, workers' compensation liabilities, general and auto insurance liabilities, inventory shrinkage, uncertain tax positions, and the calculation of asset impairment.

Cash and Cash Equivalents and Short-Term Investments: 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. See Note 5 for the Company's estimated fair value of, and other information regarding, its short-term investments.

The Company's short-term investments are all classified as available-for-sale. As they are available for current operations, they are classified on the 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 the fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of Interest and other income in the accompanying Consolidated Statements of 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.

In addition, the Company has $5.3 million in escrow at January 28, 2012 as security and collateral for administration of the Company's self-insured workers' compensation and general liability coverage which is reported as Restricted cash and short-term investments on the Consolidated Balance Sheets.

Concentration of Credit Risk: Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash equivalents, short-term investments, restricted cash and short-term investments and accounts receivable. The Company places its cash equivalents with high credit qualified institutions and, by practice, limits the amount of credit exposure to any one institution. The Company's short-term investments and restricted cash and short-term investments are placed with high credit issuers, and by practice, omit exposure to any one issuer. Concentrations of credit risks with respect to accounts receivable are limited due to the dispersion across different geographies of the Company's customer base.

Supplemental Cash Flow Information: Income tax payments, net of refunds received, for the fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010 were approximately $34,290,000, $27,615,000 and $23,753,000, respectively.

Inventories: Merchandise inventories are stated at the lower of cost or market as determined by the weighted-average cost method. The Company changed its method of accounting for inventory effective January 30, 2011. Refer to Note 2, “Change in Accounting Principle” for additional information.

Property and Equipment: Property and equipment are recorded at cost. Maintenance and repairs are expensed to operations as incurred; renewals and betterments are capitalized. Depreciation is determined on the straight-line method over the estimated useful lives of the related assets excluding leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful life or lease term. For leases with renewal periods at the Company's option, the Company generally uses the original lease term plus reasonably assured renewal option periods (generally one five year option period) to determine estimated useful lives. Typical estimated useful lives are as follows:

			Estimated
Classification			Useful Lives

Land improvements			10 years
Buildings			30 – 40 years
Leasehold improvements			5 – 10 years
Fixtures and equipment			3 – 10 years
Information technology equipment and software			3 – 10 years

The Company invests in property and equipment primarily in connection with the opening and remodeling of stores and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its assets, recording an impairment charge, if necessary, when the Company decides to close the store or otherwise determines that future estimated undiscounted cash flows associated with those assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store's historical operating results and cash flows, estimated future sales growth, real estate development in the area and perceived local market conditions that can be difficult to predict and may be subject to change. Store asset impairment charges incurred in fiscal 2011, 2010 and 2009 were $254,000, $351,000 and $689,000, respectively. In addition, the Company regularly evaluates its computer-related and other long-lived assets and may accelerate depreciation over the revised useful life if the asset is expected to be replaced or has limited future value. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period.

The Company determines the classification of leases consistent with ASC 840 - Leases. The Company leases all of its retail stores. Most lease agreements contain construction allowances and rent escalations. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, including renewal periods considered reasonably assured, the Company begins amortization as of the initial possession date which is when the Company enters the space and begins to make improvements in preparation for intended use.

For construction allowances, the Company records a deferred rent liability in Other noncurrent liabilities on the Consolidated Balance Sheets and amortizes the deferred rent over the term of the respective lease as a reduction to Cost of goods sold on the Consolidated Statements of Income and Comprehensive Income.

For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases.

The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales are also recorded when the customer takes possession of the merchandise. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales are recorded as deferred revenue until the customer takes possession or forfeits the merchandise. Gift cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales volumes and the Company's experience; actual returns have not varied materially from amounts provided historically.

In fiscal 2011, 2010 and 2009, the Company recognized $470,000, $391,000 and $302,000, respectively, of income on unredeemed gift cards (“gift card breakage”) as a component of Other income on the Consolidated Statements of Income and Comprehensive Income. Gift card breakage is determined after 60 months when the likelihood of the remaining balances being redeemed is remote based on our historical redemption data and there is no legal obligation to remit the remaining balances to relevant jurisdictions.

Finance revenue on the Company's private label credit card portfolio is recognized as earned under the interest method. Late fees are recognized as earned, less provisions for estimated uncollectible fees.

Cost of Goods Sold: 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 our buying departments and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Buying, distribution, occupancy and internal transfer costs are treated as period costs and are not capitalized as part of inventory.

Credit Sales: The Company offers its own credit card to customers. All credit activity is performed by the Company's wholly-owned subsidiaries. None of the credit card receivables are secured. Finance income is recognized as earned under the interest method and late charges are recognized in the month in which they are assessed, net of provisions for estimated uncollectible amounts. The Company evaluates the collectability of accounts receivable and records an allowance for doubtful accounts based on the aging of accounts and estimates of actual write-offs.

Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising expense was approximately $7,056,000, $6,663,000 and $6,406,000 for the fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010, respectively.

Stock Repurchase Program: In September 2009, the Company retired all of its shares of treasury stock. The excess of the purchase price over par value of common stock of approximately $155.6 million was charged to retained earnings upon retirement of the treasury stock. Prior to this retirement, the Company repurchased 2,569 shares at a cost of $48,811 for fiscal 2009. For fiscal 2010, the Company purchased and retired 260,000 shares at a cost of $5.9 million. The Company purchased and retired 453,655 shares for approximately $10.6 million or an average cost of $23.41 per share in fiscal 2011. On August 25, 2011, the Board of Directors authorized an increase in the Company's share repurchase program of 2,000,000 shares. As of January 28, 2012, 1,989,287 shares remain in open repurchase authorizations.

Earnings Per Share: ASC 260 - 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 Consolidated Statements of 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 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.

	Fiscal Year Ended
			As Restated
	January 28,		January 29,		January 30,
	2012		2011		2010
Basic earnings per share:
Net earnings	$	64,834	$	58,851	$	44,985
Earnings allocated to non-vested equity awards		(1,016)		(989)		(643)
Net earnings available to common stockholders	$	63,818	$	57,862	$	44,342

Basic weighted average common shares outstanding		28,896,355		28,985,627		29,036,549

Basic earnings per share	$	2.21	$	2.00	$	1.53

Diluted earnings per share:
Net earnings	$	64,834	$	58,851	$	44,985
Earnings allocated to non-vested equity awards		(1,016)		(989)		(642)
Net earnings available to common stockholders	$	63,818	$	57,862	$	44,343

Basic weighted average common shares outstanding		28,896,355		28,985,627		29,036,549
Dilutive effect of stock options and restricted stock		4,930		6,692		18,203
Diluted weighted average common shares outstanding		28,901,285		28,992,319		29,054,752

Diluted earnings per share	$	2.21	$	2.00	$	1.53

Vendor Allowances: The Company receives certain allowances from vendors primarily related to purchase discounts and markdown and damage allowances. All allowances are reflected in cost of goods sold as earned when the related products are sold. Cash consideration received from a vendor is presumed to be a reduction of the purchase cost of merchandise and is reflected as a reduction of inventory. The Company does not receive cooperative advertising allowances.

Income Taxes: The Company files a consolidated federal income tax return. Income taxes are provided based on the asset and liability method of accounting, whereby deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities.

Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740 when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances. Potential accrued interest and penalties related to unrecognized tax benefits within operations are recognized as a component of earnings before taxes.

Store Opening Costs: Costs relating to the opening of new stores or the relocating or
expanding of existing stores are expensed as incurred. A portion of construction, design, and site selection costs are capitalized to new, relocated and remodeled stores.

Closed Store Lease Obligations: At the time stores are closed, provisions are made for the rentals
required to be paid over the remaining lease terms on a discounted cash flow basis, reduced by any expected sublease rentals.

Insurance: The Company is self-insured with respect to employee health care, workers' compensation and general liability. The Company's self-insurance liabilities are based on the total estimated cost of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. The Company has stop-loss insurance coverage for individual claims in excess of $300,000 for employee healthcare, $350,000 for workers' compensation and $250,000 for general liability.

The Company directly funds employee health claims to a disbursement account maintained by a third party provider. Contributions to the third party provider account in fiscal 2011 and 2010 were $14,248,000 and $14,968,000, respectively. The health care liability (a component of Accrued expenses on the Consolidated Balance Sheets) was $1,393,000 and $1,488,000, at January 28, 2012 and January 29, 2011, respectively.

The Company paid workers' compensation and general liability claims of $4,204,000, $4,069,000 and $3,049,000 in fiscal years 2011, 2010 and 2009, respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $5,062,000, $6,607,000 and $4,003,000 in fiscal 2011, 2010 and 2009, respectively. Accrued workers' compensation and general liabilities (a component of Accrued expenses on the Consolidated Balance Sheets) were $6,332,000 and $6,519,000 at January 28, 2012 and January 29, 2011, respectively. At January 28, 2012 and January 29, 2011, the Company had no standby letters of credit for the benefit of its current workers' compensation and general liability insurance carrier relating to claims incurred during 2011 and 2010.

Fair Value of Financial Instruments: The Company's carrying values of financial instruments, such as cash and cash equivalents, short-term investments, restricted cash and short-term investments, approximate their fair values due to their short terms to maturity and/or their variable interest rates.

Stock Based Compensation: The Company records compensation expense associated with restricted stock and other forms of equity compensation in accordance with ASC 718 - Compensation – Stock Compensation. Compensation cost associated with stock awards recognized in all years presented includes: 1) amortization related to the remaining unvested portion of all stock awards based on the grant date fair value and 2) adjustments for the effects of actual forfeitures versus initial estimated forfeitures.

In January 2011, the Company adopted accounting guidance regarding changes to disclosure requirements for fair value measurements. For fair value measurements using significant unobservable inputs (Level 3), the guidance requires a reporting entity to present separate information about gross purchases, sales, issuances and settlements. The adoption of this guidance did not have a significant impact on the consolidated financial statement disclosures.

In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. In December 2011, the FASB issued a deferral of a portion of this new guidance, specifically, the requirement to present reclassifications of other comprehensive income on the face of the income statement. The provisions of this new guidance are effective for the Company the first quarter of fiscal 2012. The adoption of this guidance is not expected to have any effect on operating results or financial position.