CHARLOTTE, N.C. (AP) ¿ Women's clothing retailer The Cato Corp. said Thursday its second-quarter profit rose 38 percent as the company cut expenses and more than offset a drop in sales.

But investors weren't pleased and Cato shares dropped $1.39, or 7.7 percent, to $16.67 in morning trading.

For the quarter ended Aug. 1, Cato earned $16.7 million, or 56 cents per share, up from $12.1 million, or 41 cents per share, in the year-ago period.

Sales fell 2.4 percent to $228.3 million from $233.9 million, as same-store sales ¿ or sales at stores open at least a year ¿ fell 3 percent.

Gross margin rose to 36.3 percent from 35.9 percent last year due primarily to lower freight costs.

Selling, general and administrative costs as a percent of sales fell to 25.1 percent from 27.5 percent last year. The company attributed the drop to costs related to closing stores in last year's quarter and lower health and worker's compensation costs this year.

The company also projected a third-quarter loss of 3 cents to 7 cents per share and a fourth-quarter profit of 8 cents to 13 cents per share.

For the year, earnings are pegged at $1.21 to $1.29 per share.

Same-store sales for both quarters are expected to be in the range of flat to down 3 percent.

At Aug. 1, Cato operated 1,285 stores in 31 states, and it expects to open 46 stores this year.
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