Cato's slip is showing.

• Position: Company profile

Cato's slip is showing

For 41 years, Charlotte-based retailer Cato Corp. has lived by the fortunes of fashion. Flourishing in the staid and stable county-seat economies of the rural Southeast, Cato prospered with a budget formula for women's fashions.

Operating from small-town Main Streets and strip shopping centers, Cato's strategy was to sell dresses and sportswear at reasonable prices in its customer's hometowns. The formula worked so well that Cato even segmented its market --Cato Fashions stores for younger women and Cato Plus stores for a growing market of "large women." In 1987, Cato management expressed itself well pleased with an audacious--if somewhat tardy--fling at the off-price market, a chain of $6 and $8 Fashions stores.

By the end of 1987, Cato and 515 stores in 26 states and was adding 40 or 50 stores a year.

Today, however, fickle fashion has turned cruel to Cato (OTC-CACOA). Months after Cato went public for the second time in April 1987 (Chairman Waylon Cato took it private in 1980 after 11 years as a publicly held company), the women's apparel market simply withered, and with it the stock's $12 offering price. Today, the stock trades around $4.

At the end of 1987, Cato reported earnings of just 15 cents a share, down from 57 cents. Worse, 10 cents of those earnings came from an accounting change; only a nickel came from operations. The company lost 5 cents a share in the second quarter of 1988 and earned less than 1 cent for the first six months.

"When things turned down, they didn't have the controls to stay on top of it," says Stephen Shook, an analyst who follows Cato for Interstate/Johnson Lane in Charlotte. "They got burned pretty bad, and it will probably take more than one or two quarters [of improved earnings] to do them aright."

It may be awhile before the market shows much interest in Cato. Shook expects the company to finish this year in the red. "I think they'll lose money," he says. "And if they have to have any special markdowns, they'll lose more."

To be sure, the entire women's fashion industry is struggling through dismal times, much of it brought on by the industry's own rigidity.

Long accustomed to dictating to consumers, the fashion world seems to have been unaware of the deep changes in American demographics that have occurred in the past decade.

The majority of American women now work, and increasing numbers are vying for middle-and upper-management--even board-room--positions. Baby boomers are...