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October 2004
Making Off-the-Rack Fashionable and Affordable
By Ellison Clary

     John P. Derham Cato has got the job he long sought and it seems to be a good fit. He confidently discusses ways to please the value-conscious shopper that The Cato Corporation targets for its women’s clothing.

     When he outlines Cato’s objectives of offering fashion and quality at budget prices, he speaks as if he knows his customer. “She’s getting unique product at a great value,” he says in the pleasant drawl of a Charlotte native.

     In many ways, he does know that customer, having studied demographic and buying preferences of women on a budget in the various states where Cato or It’s Fashion! maintains retail shops. He keeps up with buying patterns through sophisticated tracking technology and ponders how to stay ahead of the fashion preference curve.

     “I’d always had personal hopes and dreams of running the business,” says Cato. It was John’s grandfather (Wayland H. Cato Sr.), father (Wayland H. Cato Jr.), and uncle (Edgar T. Cato) that founded the company in 1946, opening its first two stores in Sumter and Mullins, South Carolina. Since then, the family operation has grown that number to well over a thousand across the nation.

     John Cato has been an officer of the company since 1981. He led the corporation’s trendy It’s Fashion! division before becoming chief operating officer of corporation at large in 1996. In 1999, he took the reins from his father, Wayland Cato Jr., and became president and chief executive officer. And earlier this year he was named chairman as well, as his father finally retired becoming chairman emeritus.

     Though he has finally attained the status he has sought, John Cato insists his ascendancy was not assured. “I was not sure it would happen,” he says. “You really need the board of directors to feel like you’re the best candidate. I worked on it.”

     That was long evident, says Robert W. (Bob) Bradshaw Jr., who has served on the company’s board for a decade. “John displayed a concern for detail,” Bradshaw says. “Having Cato as a last name was sometimes a burden for him in that he felt he had to prove himself.”

     The board members appreciated the high standards John Cato set for himself, Bradshaw says, indicating that the younger Cato “has done very well,” since taking the helm.

     Indeed, Cato, now 54, has presided over most of Cato’s dividend growth, a four-fold increase since 1997. He guided a buyback of more than 8.5 million shares since 1998 and moved the stock listing from NASDAQ to the New York Stock Exchange in June 2002.

     These days, Cato and It’s Fashion! stores are opening at the rate of about 80 a year, half in the Southeast where the chain made its name, and half in the North, Midwest and West. Presently, Cato employs over 9,000 people, operating 1,132 stores in 28 states.

     John Cato wants to maintain steady growth and increase earnings and dividends by 10 percent annually over the long term. For 2003, the company did over $730 million in sales and Cato says he wants that volume to grow by $50 million to $70 million annually.

     “We’ve hit that number up until last year,” he says. “There was a very difficult economy out there and people were more budget conscious. We are in a lot of small towns that lost jobs when manufacturing plants closed or downsized.”

     He conjures up his customer again: “Tight budgets, gas prices going up, that would affect her a lot more than somebody else,” he muses. “That extra $10 a week coming out of a tight budget just made it a softer economy for us.”

     As businesses slowly start rehiring, Cato looks for a gradual improvement. “That adjustment period is going to take a while even though the sales numbers have started to look better than our 2003 trend,” he says.

     Indeed, The Cato Corporation reported net income of $8.2 million for the quarter ended July 31, 2004, up from $7.7 million from the year-previous period. One analyst who follows the company regularly recently upgraded his assessment of Cato stock to “hold;” it had been “sell.”

     John Cato attributes the performance improvement mainly to fewer price markdowns. That’s a sign that customer purse strings are loosening, he believes, and he and his executive team work diligently to give customers reasons to buy.

     Low prices every day rather than frequent up and down “sales” is one strategy he feels is working. “She doesn’t have to wait to figure out when is the right time to buy fashion,” he smiles, seeing his customer in his mind’s eye. “Any time is right, when it’s convenient for her.”


Fashion Conscious; Customer Service

     Under Cato’s watch the Cato stores have become more fashionable and that has helped the bottom line, as has increased emphasis on proprietary or Cato-labeled items. The company also is paying more attention to European trends, to stay in the fashion vanguard.

     It’s part of offering exceptional value for popular prices, John Cato says. “We offer fashion at what department stores call opening prices. Our customer is looking for prices under $20. She’s looking for an outfit for under $30. It might be a dollar or two more than at national discounters, but we have better quality, more detailing, better fabrics and better fit.”

     “A lot of my work is related to thinking time, trying to think through what’s been learned that day,” he says. “I take all the pieces of information and try to put together a picture of how the business is changing.”

     He thinks often about giving his customer more reasons to shop at Cato. Top service and an inviting atmosphere are important elements, he believes.

     Most Cato stores range in size from 4,000 to 6,000 square feet and newer ones feature natural wood decorative elements. They carry junior, misses and plus size fashions, as well as shoes, accessories and gifts.

     They typically employ three or four well-trained associates. It’s critical, he says, that these associates make shopping as easy as possible. “Absolutely, she gets more customer service,” he adds, again speaking of the Cato customer.

     Cato is also particular about store location. “It’s very much about convenience,” John Cato maintains. The company’s real  ‰ estate people scour cities and towns for locations in smaller shopping centers anchored by a big retailer, such as a Wal-Mart Super Center, or by the dominant grocery store in the market. That makes it easier to shop for fashionable clothes on the same trip to the discount or grocery store.

     The importance of convenience is heightened for John Cato because he knows his customer cross-shops at department stores as well as discounters. Both categories have improved customer appeal, squeezing out the small, specialty retail stores. Fashion Bug, based in Philadelphia, is one of the few direct competitors left.

     “The winners offer the best values,” John Cato says. “Dad talked about that a lot.”


Wardrobe Changes; Hemming in Costs

     “I look forward,” John Cato smiles. “You’re always changing and changing the business.”

One challenge is promoting the Cato brand in a footprint that extends as far north as Michigan and west as Arizona. Outside the southeast, communicating the firm’s mantra of fashion and value is vital to attracting customers.

     “We’re finding clothing tastes are similar in new territories, but we are encountering the issue of cold versus warm,” he says. “We adjust what we offer to the harsher winters in the North. We sell more dresses in the South than as you go north.”

     Another way to maintain prices that customers recognize for value, John Cato says, is to operate as efficiently as possible. “We put in a merchandising system several years ago which really gave us the backbone to offer better size and color distributions to stores and to collect better buying preference information,” he says. “We’re constantly investing in new technology that helps lower our cost to operate.”

     Technology such as this makes everyone in the Cato organization more productive, he adds. “You learn as you go,” he says, and technology promotes that process. “You read your numbers and try to understand the subtleties.”

     For 2003, the firm invested $21 million in stores, systems and infrastructure. In 2005, the chain will install a state-of-the-art cash register system for better control and more efficient processing, he adds.

     Currently the firm maintains a single distribution center next to the corporate headquarters in southwest Charlotte. It’s efficient and cost effective, John Cato says.

     “Everything goes through here,” he emphasizes as he points out the window of a second floor conference room to the warehouse that employs about half of the 700 associates in Charlotte. Near the window is a map of the United States bristling with hundreds of multicolored pins to mark the cities and towns where Cato operates stores.

     “We shoot the merchandise out by truck and we get store shipments out every week,” he says, adding “that keeps inventories fresh. We’re able to get products to stores in a couple of days.” The one distribution center avoids duplication of operating several, he says, so it’s more economical.

     “At some point we’ll have to add another distribution site as we get more stores out west,” Cato admits. “But Charlotte’s centrally located and we’ve got a good trucking system and distribution network.”

     Another advantage of Charlotte, John Cato says, is that people want to live here. “It’s great for recruiting and employee retention. Once you get people here, they love it.”

     He highlights the good value in housing, the proximity of mountains and beaches, and traffic loads that don’t approach the permanently clogged conditions of a city such as Atlanta.

     Cato himself is a graduate of the University of North Carolina at Charlotte with an accounting degree, he remains active at his alma mater. He serves on the Business Advisory Council of UNC Charlotte’s Belk College of Business Administration and is a member of the UNCC Foundation’s board of directors. He also is a member of the McColl School of Business Board of Visitors at Queen’s University of Charlotte.

     Having grown up in Charlotte, Cato marvels that the sleepy Southern city of his youth has become home to two of the country’s biggest financial institutions – Bank of America and Wachovia – and that it has grown into one of the nation’s top metropolitan areas.

     That the corporation which bears his family name has experienced growth some would characterize as parallel to its headquarters city seems not to cross his mind.

     Instead, he’s mulling the future for The Cato Corporation. “I’m thinking about how to tweak what we’re doing to keep ahead of the curve,” he says.

Ellison Clary is a Charlotte-based freelance writer.
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