10-K 1 fye201010-k01312010.htm FYE 2010 10-K 01312010 fye201010-k01312010.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2010

or

 
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-20269
DUCKWALL-ALCO STORES, INC. 
(Exact name of registrant as specified in its charter)

Kansas 
48-0201080
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
401 Cottage Street
Abilene, Kansas 
 
 67410-2832
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number including area code: (785) 263-3350

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes_____ No __X_

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes___ No _X__
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes _____ No _____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer", "large accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No __X__

The aggregate market value of the 3,797,947 shares of Common Stock, par value $.0001 per share, of the registrant held by non-affiliates of the registrant is $64,868,935 on August 2, 2009, based on a closing sale price of $17.08. As of April 15, 2010, there were 3,826,852 shares of Common Stock outstanding.

Documents incorporated by reference: portions of the Registrant's Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference in Part I and III hereof.
 
 

 

 
DUCKWALL-ALCO FISCAL 2010 FORM 10-K
 

TABLE OF CONTENTS
     
           
PART I
   
 
Item 1.
 
Business
3
 
 
Item 1A.
 
Risk Factors
6
 
 
Item 1B.
 
Unresolved Staff Comments
8
 
 
Item 2.
 
Properties
8
 
 
Item 3.
 
Legal Proceedings
8
 
 
Item 4.
 
Reserved
8
 
     
PART II
   
 
Item 5.
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
9
 
 
Item 6.
 
Selected Financial Data
11
 
 
Item 7.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
12
 
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
22
 
 
Item 8.
 
Financial Statements and Supplementary Data
23
 
 
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
38
 
 
Item 9A.
 
Controls and Procedures
39
 
 
Item 9B.
 
Other Information
40
 
     
PART III
   
 
Item 10.
 
Directors and Executive Officers of the Registrant
40
 
 
Item 11.
 
Executive Compensation
41
 
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
41
 
 
Item 13.
 
Certain Relationships and Related Transactions
41
 
 
Item 14.
 
Principal Accountant Fees and Services
41
 
     
PART IV
   
 
Item 15.
 
Exhibits and Financial Statement Schedules
41
 
     
Signatures
43
 
     
     

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
PART I

ITEM 1.                              BUSINESS

History

Duckwall-ALCO Stores, Inc., (the “Company” or “Registrant”), was founded as a general merchandising operation in 1901 in Abilene, Kansas by A. L. Duckwall. From its founding until 1968, the Company conducted its retail operations as small variety or “dime” stores. In 1968, the Company followed an emerging trend to broad line retailing when it opened its first ALCO store. The Company's overall business strategy involves identifying and opening stores in towns that will provide the Company with the highest return on investment.  This strategy includes opening ALCO stores. As of January 31, 2010, the Company operates 258 stores located in the central United States, consisting of 209 ALCO stores and 49 Duckwall stores.
 
The Company was incorporated on July 2, 1915 under the laws of Kansas. The Company's executive offices are located at 401 Cottage Street, Abilene, Kansas 67410-2832, and its telephone number is (785) 263-3350.

General

The Company is a regional retailer operating 258 stores in 23 states in the central United States. The Company's strategy is to target smaller markets not served by other regional or national broad line retail chains and to provide the most convenient access to retail shopping within each market. The Company's ALCO stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies', men's and children's apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys. The Company's smaller Duckwall stores offer a more limited selection of similar merchandise.

Of the Company's 209 ALCO stores, more than 70% operate in primary markets that do not have another broad line retailer. The ALCO stores account for approximately 96% of the Company's net sales. The current ALCO store averages approximately 21,000 square feet of selling space. The Company's store expansion program is primarily directed toward opening stores with a design prototype of approximately 21,000 square feet of selling space.

All of the Company's stores are serviced by the Company's 352,000 square foot distribution center in Abilene, Kansas.

For fiscal 2010, 2009 and 2008, the percentage of sales by product category were as follows:
                   
   
Percentage of Sales
 
   
2010
   
2009
   
2008
 
Merchandise Category:
                 
Consumables and commodities
    34 %     32 %     34 %
Hardlines
    33 %     33 %     34 %
Apparel and accessories
    17 %     19 %     19 %
Home furnishings and décor
    16 %     16 %     13 %
Total
    100 %     100 %     100 %

Business Strategy
 
The Company intends to focus on executing a business strategy that includes the following key components:

Markets: The Company intends to open ALCO stores primarily in towns with populations of typically less than 5,000 that are in trade areas with populations of less than 16,000 where: (1) there is no direct competition from national or regional broad line retailers; (2) economic and demographic criteria indicate the market is able to commercially support a broad line retailer; and (3) the opening of an ALCO store would significantly reduce the likelihood of the entry into such market by another broad line retailer. This key component of the Company's strategy has guided the Company in both its opening of new stores and in its closing of existing stores.
 
Market Selection: The Company utilizes a detailed process to analyze under-served markets which includes examining factors such as distance from competition, trade area, demographics, retail sales levels, existence and stability of major employers, location of county government, disposable income, and distance from the Company’s distribution center. Markets that are determined to be sizable enough to support an ALCO and that have no direct competition from another broad line retailer are examined closely and eventually selected or passed over by the Company's experienced management team.
 
Store Expansion: The Company's expansion program is designed primarily around the prototype Class 21 Store. This prototype details shelf space, merchandise presentation, store items to be offered, parking, storage requirements, as well as other store design considerations. The 21,000 square feet of selling space is large enough to permit a full line of the Company's merchandise, while minimizing capital expenditures, labor costs and general overhead costs. The Company will also consider opportunities in acceptable markets to open ALCO stores in available space in buildings already constructed.
 
 
 
 
 
 
 
 
3

 
 
Advertising and Promotion: The Company utilizes full-color photography advertising circulars of eight to 20 pages distributed through newspaper insertion or, in the case of inadequate newspaper coverage, through direct mail. During fiscal 2010, these circulars were distributed 47 times in ALCO markets. In its Duckwall markets, the Company discontinued advertising in fiscal 2008. The Company’s marketing program is designed to create awareness and recognition of its competitive pricing on a comprehensive merchandise selection for the whole family.  During fiscal 2011, the Company will distribute approximately 45 circulars in ALCO markets.
 
Store Environment: The Company's stores are open, clean, bright and offer a pleasant atmosphere with disciplined product presentation, attractive displays and efficient check-out procedures. The Company endeavors to staff its stores with courteous, highly motivated, knowledgeable store associates in order to provide a convenient, friendly and enjoyable shopping experience.
 
Store Development

The Company expects to open less than 10 ALCO stores during fiscal year 2011.  During fiscal 2010, the Company opened one ALCO store.  No ALCO stores were closed and one Duckwall store was closed, resulting in a year end total of 258 stores.  The Company's strategy regarding store development is to increase sales and profitability at existing stores by continually refining the merchandising mix and improving operating efficiencies and through new store openings in the Company's targeted base of under-served markets in the central United States. The following table summarizes the Company's store development during the past three fiscal years:
 
                                     
   
2010
   
2009
   
2008
 
   
ALCO
   
Duckwall
   
ALCO
   
Duckwall
   
ALCO
   
Duckwall
 
Stores Opened
    1       -       15       -       18       -  
Stores Closed
    -       1       11       8       3       9  
Net New Stores
    1       (1)       4       (8)       15       (9)  

As of January 31, 2010, the Company owned three ALCO locations and one Duckwall location, and leased 206 ALCO locations and 48 Duckwall locations. The Company's present intention is to lease all new stores; however, the Company may own some of the ALCO locations. The investment to open a new prototype ALCO store that is leased is approximately $1.0 million for the equipment and inventory.
 
Store Environment and Merchandising

The Company manages its stores to attractively and conveniently display a full line of merchandise within the confines of the stores' available square footage. Corporate merchandising direction is provided to each store to ensure a consistent company-wide store presentation. To facilitate long-term merchandising planning, the Company divides its merchandise into three core categories driven by the Company's customer profile: primary, secondary, and convenience. The primary core receives management's primary focus, with a wide assortment of merchandise being placed in the most accessible locations within the stores and receiving significant promotional consideration. The secondary core consists of categories of merchandise for which the Company maintains a strong assortment that is easily and readily identifiable by its customers. The convenience core consists of categories of merchandise for which ALCO will maintain convenient (but limited) assortments, focusing on key items that are in keeping with customers' expectations for a broad line retail store. Secondary and convenience cores include merchandise that the Company feels is important to carry, as the target customer expects to find them within a broad line retail store and they ensure a high level of customer traffic. The Company continually evaluates and ranks all product lines, shifting product classifications when necessary to reflect the changing demand for products.

Purchasing

Procurement and merchandising of products is directed by the Executive Vice President - Chief Operating Officer. The Company employs nineteen merchandise buyers. Buyers are assisted by a management information system that provides them with current price, volume information and on-hand quantities by SKU (stock keeping unit), thus allowing them to react quickly with buying and pricing adjustments dictated by customer buying patterns.

The Company purchases its merchandise from approximately 1,700 suppliers. The Company generally does not utilize long-term supply contracts. Only one supplier accounted for approximately 5% of the Company's total purchases in fiscal 2010 and competing brand name and private label products are available from other suppliers at competitive prices. The Company believes that its relationships with its suppliers are good and that the loss of any one or more of its suppliers would not have a material adverse effect on the Company.
 
Pricing

The Company's pricing strategy, with its promotional activities, is designed to bring consistent value to the customer. In fiscal 2011, promotions on various items will be offered approximately 45 times through advertising circulars.
 
 
 
 
 
 
 
 
 
 
 

 
Distribution and Transportation

The Company operates a 352,000 square foot distribution center in Abilene, Kansas, from which it services all stores. The distribution center is responsible for distributing approximately 80% of the Company's merchandise, with the balance being delivered directly to the Company's stores by its vendors. The distribution center maintains an integrated management information system, allowing the Company to utilize such cost cutting efficiencies as perpetual inventories, safety programs, and employee productivity software.
 
Management Information Systems

The Company has made a significant investment in the purchase and implementation of industry standard technology with the intent to lower costs, improve customer service, improve associate productivity, provide necessary controls and enhance general business planning and execution. In general, the Company's merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment. All of the Company's ALCO stores have POS computer terminals that capture sales information and transmit to the Company's data processing facilities where it is used to drive management, financial, and supply chain functions.
 
The Company has committed significant efforts towards establishing a technical infrastructure, and a core of operational systems, that will support the Company’s future needs.  The Company will continue to maintain and leverage this core of systems, plus adding industry leading business area specific solutions to meet business objectives.  The Company has established an integrated infrastructure of data, processes, and technology that provides the necessary business and regulatory controls, while positioning for future growth and efficiency.  The Company is aligned on the need to use technology to enhance customer service, support fact based decision making, improve associate productivity and drive business functionality and efficiency.   
 
Financial Information About Segments
 
The Company derives 100% of its revenue through the sale of merchandise in the United States.  See Item 8.  Financial Statements & Supplemental Data, Note 13, for more information.
 
Store Locations

As of January 31, 2010, the Company operated 209 ALCO stores in 23 states located in smaller communities in the central United States. The ALCO stores average approximately 21,000 square feet of selling space, with an additional 5,000 square feet utilized for merchandise processing, temporary storage and administration. The Company also operates 49 Duckwall stores in 9 states. The geographic distribution of the Company's stores is as follows:
 
Duckwall Stores
 
ALCO Stores
 
                       
Colorado
    4  
Arizona
    8  
Montana
    1  
Iowa
    3  
Arkansas
    4  
Nebraska
    16  
Kansas
    20  
Colorado
    13  
New Mexico
    8  
Nebraska
    6  
Florida
    1  
North Dakota
    10  
New Mexico
    1  
Georgia
    3  
Ohio
    4  
North Dakota
    1  
Idaho
    5  
Oklahoma
    9  
Oklahoma
    5  
Illinois
    10  
South Dakota
    11  
South Dakota
    1  
Indiana
    14  
Texas
    28  
Texas
    8  
Iowa
    9  
Utah
    6  
         
Kansas
    26  
Wisconsin
    1  
         
Minnesota
    12  
Wyoming
    3  
         
Missouri
    7            
 
 Competition

While the broad line retail business in general is highly competitive, the Company's business strategy is to locate its ALCO stores in smaller markets where there is no direct competition with larger national or regional broad line retail chains, and where it is believed no such competition is likely to develop. Accordingly, the Company's primary method of competing is to offer its customers a conveniently located store with a wide range of merchandise at value prices in a primary trade area population under 16,000 that does not have a large national or regional broad line retail store. The Company believes that trade area size is a significant deterrent to larger national and regional broad line retail chains. Duckwall stores are located in very small markets, and like the ALCO stores, emphasize the convenience of location to the primary customer base.
 
In the broad line retail business in general, price, merchandise selection, merchandise quality, advertising and customer service are all important aspects of competing. The Company encounters direct competition with national broad line retail stores in approximately 23% of its ALCO markets, and another 6% of the ALCO stores are in direct competition with regional broad line retail stores. The competing national broad line retailers are generally larger than the Company and the stores of such competitors in the Company's markets are substantially larger, have a somewhat wider selection of merchandise and are very price competitive in some lines of merchandise. Where there are no national or regional broad line retail stores directly competing with the Company's ALCO stores, the Company's customers nevertheless shop at broad line retail stores and other retailers located in regional trade centers, and to that extent the Company competes with such broad line stores and retailers. The Company also competes for retail sales with other entities, such as specialty retailers, mass merchandisers, dollar stores and the internet. In the 114 markets in which the Company operates a Class 18 Store, approximately 18,000 square feet, only 14 markets have direct competition from a national or regional broad line retailer. The Company competes with dollar stores in approximately 85 percent of its ALCO stores and approximately 40 percent of its Duckwall stores.
 
 
 

 
Employees
 
As of January 31, 2010, the Company employed approximately 4,150 people. Of these employees, approximately 480 were employed in the store support center and distribution center in Abilene, Kansas, and 3,670 in the store locations. Additional employees are hired on a seasonal basis, most of whom are sales personnel. The Company offers a broad range of company-paid benefits to our employees, including a 401(k) plan, medical and dental plans, short-term and long-term disability insurance, paid vacation and merchandise discounts. Eligibility for and the level of these benefits varies depending on the employees' full-time or part-time status and/or length of service. There is no collective bargaining agreement for any of the Company's employees. The Company considers its relations with its employees to be excellent.
 
Seasonality

The Company, like that of most retailers, is subject to seasonal influences.  The Company’s highest sales levels occur in the fourth quarter of its fiscal year, which includes the Christmas holiday selling season.  For more information on seasonality, see “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation – Seasonality and Quarterly Results.”
 
Trademarks and Service Marks

The names “Duckwall” and “ALCO” are registered service marks of the Company.  The Company considers these marks and the accompanying name recognition to be valuable to the business. 
 
Available Information
 
The Company files reports with the Securities and Exchange Commission (“SEC”), including Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports as required. The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer and the SEC maintains an Internet site at www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically.

The Company’s internet website is www.ALCOstores.com.  Through the “Investors” portion of this website, the Company makes available, free of charge, our proxy statements, Annual Reports on Form 10-K, and any amendments to those reports as soon as reasonably practicable after such material has been filed with, or furnished to, the Securities and Exchange Commission.

Charters of our Board of Directors’ Audit Committee and Compensation Committee; and Code of Business Conduct and Ethics for Directors and Senior Officers as well as for Associates have also been posted on our website, under the caption “Investors - Corporate Governance.”

Information contained on the Company’s website is not part of this Annual Report on Form 10-K. The materials listed above will be provided without charge to any stockholder submitting a written request to the Company’s Secretary at 401 Cottage, Abilene, Kansas 67410-2832.
 
ITEM 1A.                   RISK FACTORS
 
Our business is subject to a variety of risks, most of which are beyond our control.
 
We are highly susceptible to the state of macroeconomic conditions and consumer confidence in the United States.
 
        All of our stores are located within the United States, making our results highly dependent on U.S. consumer confidence and the health of the U.S. economy. In addition, a significant portion of our total sales is derived from stores located in these states: Kansas, Texas and Nebraska, resulting in further dependence on local economic conditions in these states. Deterioration in macroeconomic conditions and consumer confidence could negatively affect our business in many ways, including slowing sales growth or reduction in overall sales, and reducing gross margins.
 
We may be forced to lower prices to effectively compete, which would adversely affect our financial results.

The Company operates in the broad line retail business, which is highly competitive. Although the Company prefers markets that don’t have direct competition from national or regional broad line retail stores, competition still exists. Even in non-competitive markets, the Company’s customers shop at broad line retail stores and other retailers located in regional trade centers. The Company also competes for retail sales with other entities, such as specialty retailers, mass merchandisers, dollar stores and the internet.  This competitive environment subjects the Company to the risk of reduced profitability because the Company may be forced to lower its prices, resulting in lower margins, in order to maintain its competitive position.

If we cannot effectively open new stores, our ability to improve our financial results will be adversely affected.

The growth in the Company’s sales and operating net income depends to a substantial degree on its expansion program. This expansion strategy is dependent upon the Company’s ability to open and operate new stores effectively, efficiently and on a profitable basis. The Company prefers to locate its ALCO stores in smaller retail markets where no competing broad line retail store is located within the primary trade area. The Company’s ability to open new stores timely and to expand into additional market areas depends in part on the following factors: availability of store locations, the ability to hire and train new store personnel, the ability to react to consumer needs and trends on a timely basis, and the availability of sufficient capital for expansion.
 
 
 
 
 
 
 

 
If we are unable to access the capital markets or obtain bank credit, our growth plans, liquidity and results of operations could suffer.
 
Disruptions in the capital and credit markets, as have been experienced during fiscal 2010, could adversely affect the ability of lenders to meet their commitments. Our access to funds under the credit facility is dependent on the ability of the banks that are parties to the facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. 
 
Constrained capital markets could threaten our liquidity and capital resources.  Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing other discretionary uses of cash. We believe operating cash flows and current credit facilities will be adequate to fund our working capital requirements, scheduled debt repayments and to support the development of our short-term and long-term operating strategies.

If we cannot effectively implement or use information technology, our financial results and operations would be adversely affected.

If we cannot effectively implement technology upgrades, it could have a material impact on the Company’s results of operations.  The Company depends on information systems to process transactions, manage inventory, purchase, sell and ship goods on a timely basis. Any material disruption or slowdown of our systems could cause information to be lost or delayed which could have a negative effect on our business.
 
Changes in federal, state or local laws and regulations, or our failure to comply with such laws and regulations, could increase our expenses and expose us to legal risks.

Our business is subject to a wide array of laws and regulations.  Significant legislative changes that impact our relationship with our workforce (none of which is represented by unions as of the end of fiscal 2010) could increase our expenses and adversely affect our operations.  Examples of possible legislative changes impacting our relationship with our workforce include changes to minimum wage requirements and health care mandates.  In addition, certain aspects of our business, such as credit card operations, are more heavily regulated than other areas.  Changes in the regulatory environmental regarding topics such as banking and consumer credit, privacy and information security, product safety or environmental protection, among others, could cause our expenses to increase.  In addition, if we fail to comply with applicable laws and regulations, particularly wage and hour laws, we could be subject to legal risk, including governmental enforcement action and class action civil litigation, which could adversely affect our results of operations.

A failure to design, implement or maintain an adequate system of internal controls could adversely affect our ability to manage our business or detect fraud.
 
The Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with U.S. generally accepted accounting principles (GAAP). Internal control over financial reporting includes: maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that our receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.  The Company continues to refine and test its internal control over financial reporting processes.
 
Our results are subject to seasonal variations.

Quarterly results of operations have historically fluctuated as a result of retail consumers purchasing patterns, with the highest quarter in terms of sales and profitability being the fourth quarter. Quarterly results of operations will likely continue to fluctuate significantly as a result of such patterns and may fluctuate due to the timing of new store openings.

Our stock price may be volatile.

No assurance can be given that operating results will not vary from quarter to quarter, and any fluctuations in quarterly operating results may result in volatility in the Company’s stock price.

We are dependent on key personnel.

The development of the Company’s business is largely dependent on the efforts of its current management team headed by Richard E. Wilson and four other executive officers. The loss of the services of one or more of these officers could have a material adverse effect on the Company.

We are exposed to interest rate risks.

The Company is subject to market risk from exposure to changes in interest rates based on its financing requirements. Changes in interest rates could have a negative impact on the Company’s profitability.
 
 
 
 
 
 
 

 
If we fail to anticipate and respond quickly to changing consumer preferences, our sales, gross margin and profitability could suffer.

A substantial part of our business is dependent on our ability to make trend-right decisions in apparel, home décor, seasonal offerings and other merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns and other lifestyles decisions could lead to lost sales, increased markdowns on inventory and adversely affect our results of operations.
 
Interruptions in our supply chain could adversely affect our results.

We are dependent on our vendors to supply merchandise in a timely and efficient manner.  If a vendor fails to deliver on its commitments, whether due to financial difficulties or other reasons, we could experience merchandise shortages that could lead to lost sales.  In addition, a large portion of our merchandise is sourced, directly or indirectly, from outside the United States, with China as our single largest source.  Political or financial instability, trade restrictions, tariffs, currency exchange rates, the outbreak of pandemics, labor unrest, transport capacity and costs, port security or other events that could slow port activities and impact foreign trade are beyond our control and could disrupt our supply of merchandise and adversely affect our results of operations.
 
Lack of availability of suitable locations in which to build new stores could slow our growth, and difficulty in executing plans for new stores, expansions and remodels could increase our costs and capital requirements.
 
        Our future growth is dependent, in part, on our ability to build new stores and expand and remodel existing stores in a manner that achieves appropriate returns on our capital investment. We compete with other retailers and businesses for suitable locations for our stores. In addition, for many sites we are dependent on a third party developer's ability to acquire land, obtain financing and secure the necessary zoning changes and permits for a larger project, of which our store may be one component. Turmoil in the financial markets has made it difficult for third party developers to obtain financing for new projects. Local land use and other regulations applicable to the types of stores we desire to construct may affect our ability to find suitable locations and also influence the cost of constructing, expanding and remodeling our stores.
 
Product safety concerns could adversely affect our sales and results of operations.

If our merchandise offerings, including food, drug and children’s products, do not meet applicable safety standards or our guests’ expectations regarding safety, we could experience lost sales, experience increased costs and be exposed to legal and reputational risk.  All of our vendors must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety standards.  Events that give rise to actual, potential or perceived product safety concerns, including food or drug contamination, could expose us to governmental enforcement action or private litigation and result in costly product recalls and other liabilities.  In addition, negative customer perceptions regarding the safety of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales.  In those circumstances, it may be difficult and costly for us to regain the confidence of our customers.

If we fail to protect the security of personal information about our customer, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer.

The nature of our experience involves the receipt and storage of personal information about our customers.  If we experience a data security breach, we could be exposed to governmental enforcement actions and private litigation.  In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of our credit card products or stop shopping at our stores altogether.  Such events could lead to lost future sales and adversely affect our results of operations.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.
PROPERTIES

The Company owns facilities in Abilene, Kansas that consist of a store support center (approximately 35,000 square feet), the Distribution Center (approximately 352,000 square feet) and additional warehouse space adjacent to the store support center (approximately 95,500 square feet).
 
Three of the ALCO stores and one of the Duckwall stores operate in buildings owned by the Company. The remainder of the stores operate in properties leased by the Company. As of January 31, 2010, such ALCO leases account for approximately 4,300,000 square feet of lease space, which expire as follows: approximately 454,000 square feet (10.6%) expire between February 1, 2010 and January 30, 2011; approximately 387,000 square feet (9.0%) expire between January 31, 2011 and January 29, 2012; and approximately 643,000 square feet (15.0%) expire between January 30, 2012 and February 3, 2013. The remainder of the leases expire through 2031. All Duckwall store leases have terms remaining of 42 months or less. The majority of the leases that are about to expire have renewal options with lease terms that are the same as the existing lease.
 
ITEM 3.
LEGAL PROCEEDINGS
 
Other than routine litigation from time to time in the ordinary course of business, the Company is not a party to any material litigation.
 
ITEM 4.
RESERVED
 
 
 
 
 
 
 
 

 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Common Stock of the Company is quoted on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol “DUCK”. The following table sets forth the range of high and low bid information for the Company's Common Stock for each quarter of fiscal 2010 and 2009.

Fiscal 2010
 
High
   
Low
 
First quarter
  $ 11.34     $ 7.77  
Second quarter
  $ 19.14     $ 11.35  
Third quarter
  $ 18.21     $ 15.89  
Fourth quarter
  $ 17.60     $ 11.85  
                 
Fiscal 2009
 
High
   
Low
 
First quarter
  $ 23.88     $ 10.55  
Second quarter
  $ 16.05     $ 9.04  
Third quarter
  $ 16.29     $ 10.51  
Fourth quarter
  $ 13.15     $ 7.52  
 
The following graph compares the cumulative total return of the Company, the NASDAQ Composite Index, and the S&P Retail Index (assuming dividends reinvested at the end of each subsequent fiscal year). The graph assumes $100 was invested on February 2, 2004 in Duckwall-ALCO Stores, Inc. Common Stock, the NASDAQ Composite Index, and the S&P Retail Index.

 
   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
   
2010
 
NASDAQ Composite Index
    100.00       99.91       112.72       121.28       118.40       59.00       85.89  
S&P Retail Index
    100.00       115.41       122.43       140.37       113.09       69.07       100.06  
Duckwall-ALCO Stores, Inc.
    100.00       128.21       176.07       234.40       148.61       65.33       82.98  
 
Based upon the data reflected in the table, at January 31, 2010, a $100 investment in the Company's Common Stock in 2004 would have a total return value of $82.98, as compared to $85.89 for the Composite NASDAQ Index and $100.06 for the S&P Retail Index.

There can be no assurances that the Company's stock performance will continue into the future with the same or similar trends depicted in the graph above.  The Company does not make or endorse any predictions as to future stock performance.  We did not sell any equity securities during fiscal 2010 which were not registered under the Securities Act.
 
As of April 15, 2010, there were approximately 1,200 holders of record of the Common Stock of the Company. The Company has not paid cash dividends on its Common Stock during the last five fiscal years.  The terms of the Security Agreement, dated as of February 10, 2010, between the Company and Bank of America allow for the payment of dividends unless certain loan covenants are triggered, which did not occur in fiscal 2010 and are not expected to occur during fiscal 2011.
 
 
9

 
 
 
Company Repurchases of Common Stock
                     
Maximum Number
 
               
Total Number of
   
(or Approximate Dollar
 
               
shares (or Units)
   
Value) of Shares (or
 
   
Total Number Of
         
Purchased as Part
   
Units) that May Yet
 
   
Shares (or Units)
   
Average Price Paid
   
of Publicly Announced
   
Be Purchased Under
 
Period
 
Purchased
   
per Share (or Unit)
   
Plans or Programs
   
the Plans or Programs
 
First Quarter
    -       -       -       174,466  
Second Quarter      -        -       -        174,466  
Third Quarter     -        -       -       174,466  
                                 
Fourth Quarter:
                               
    11/02/09 - 11/29/09
    -       -       -       174,466  
    11/30/09 - 01/03/10
    -       -       -       174,466  
    01/04/10 - 01/31/10
    -       -       -       174,466  
      -               -       174,466  
                                 
As of January 31, 2010
    25,534     $ 15.16       25,534       174,466  
                                 
 
On July 1, 2008, the Company entered into a Stock Purchase Agreement with Lawrence J. Zigerelli as part his starting employment at the Company. Mr. Zigerelli purchased 10,000 shares of the Company’s common stock. The purchase price was $9.05 which was the closing price of the stock on the NASDAQ Global Market on the date of the agreement. The agreement was executed in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act. The proceeds of this transaction were used by the Company for general purposes.
 
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

The Company did not sell any equity securities during fiscal 2010 that were not registered under the Securities Act.

Securities Authorized For Issuance Under Equity Compensation Plans

See the information provided in the “Equity Compensation Plan Information” section of the Proxy Statement for our Annual Meeting of Stockholders on or about June 3, 2010, which information is incorporated herein by reference.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 

 
  
ITEM 6.              SELECTED FINANCIAL DATA
                            SELECTED CONSOLIDATED FINANCIAL DATA
                (dollars in thousands, except per share and store data)
 
   
Fiscal Year Ended
 
   
52 Weeks
   
52 Weeks
   
53 Weeks
   
52 Weeks
   
52 Weeks
 
   
January 31,
   
February 1,
   
February 3,
   
January 28,
   
January 29,
 
Statement of Operations Data
 
2010
   
2009
   
2008
   
2007
   
2006
 
Net sales
  $ 488,691       489,753       481,475       446,575       408,272  
Cost of sales
    330,179       335,934       329,195       304,653       277,060  
Gross margin
    158,512       153,819       152,280       141,922       131,212  
                                         
Selling, general and administrative (1)
    141,208       147,735       138,250       123,564       117,115  
Depreciation and amortization (2)
    9,983       9,302       9,463       6,512       5,632  
Operating income (loss) from continuing operations
    7,321       (3,218 )     4,567       11,846       8,465  
Interest expense
    2,149       1,867       3,382       2,729       1,272  
Earnings (loss) from continuing operations before
                                       
         income taxes
    5,172       (5,085 )     1,185       9,117       7,193  
Income tax expense (benefit)
    2,135       (2,080 )     394       3,213       2,188  
Earnings (loss) from continuing operations
    3,037       (3,005 )     790       5,904       5,005  
Loss from discontinued operations, net
                                       
        of income tax benefit
    (42 )     (1,971 )     (1,015 )     (200 )     (3,056 )
Net earnings (loss) (1)(2)
  $ 2,995       (4,976 )     (224 )     5,704       1,949  
                                         
Per Share Information
                                       
Earnings (loss) per share - basic
                                       
Earnings (loss) from continuing operations
  $ 0.80       (0.79 )     0.21       1.56       1.23  
Discontinued operations
    (0.01 )     (0.52 )     (0.27 )     (0.05 )     (0.75 )
Net earnings (loss)
  $ 0.79       (1.31 )     (0.06 )     1.51       0.48  
                                         
                                         
Earnings (loss) per share - diluted
                                       
Earnings (loss) from continuing operations
  $ 0.78       (0.79 )     0.21       1.54       1.22  
Discontinued operations
    (0.01 )     (0.52 )     (0.27 )     (0.05 )     (0.74 )
Net earnings (loss)
  $ 0.77       (1.31 )     (0.06 )     1.49       0.48  
                                         
Weighted average shares outstanding:
                                       
Basic
    3,797,947       3,809,109       3,807,033       3,792,202       4,083,798  
Diluted
    3,879,656       3,809,109       3,807,033       3,828,928       4,117,922  
                                         
Operating Data
                                       
Stores open at year-end
    258       257       242       224       218  
Stores in non-competitive markets at year-end (3)
    199       199       185       170       168  
Same-same stores at year-end (4)
    257       224       218       214       208  
                                         
Percentage of total stores in non-competitive
                                       
         markets (3)
    77.1 %     77.4 %     76.4 %     75.9 %     77.1 %
Percentage of net sales from stores in
                                       
         non-competitive markets, excluding fuel (3)(5)
    82.6  %     83.0  %     81.8  %     82.3 %     82.6 %
Same-store sales increase (decrease) for all stores,                                        
         excluding fuel (4)
    (0.7 )%     (5.1 )%     1.8 %     4.9 %     3.4 %
                                         
Balance Sheet Data
                                       
Total assets
  194,808       208,775       185,386       195,420       178,992  
Total debt (includes capital lease
                                       
obligation and current maturities)
    40,992       49,841       33,013       29,988       26,240  
Stockholders' equity
  105,733       102,040       107,172       106,060       102,147  
 
 
 
 
 
 
 
 
 
 
 
11 

 

 
(1)
Included in selling, general and administrative expenses is $757 of share-based compensation in fiscal 2010, $186 in fiscal 2009, $1.1 million in fiscal 2008, respectively.  No expense was recorded for share-based compensation in earlier years. 
   
(2)
An asset impairment charge is included in depreciation and amortization of $831 for fiscal 2010, $1.3 million for fiscal 2009, $2.1 million for fiscal 2008 and $130 for fiscal 2007, respectively.  For fiscal 2009, $299 of the impairment is attributable to writing down the carrying value on property held for sale.
   
(3)
“Non-competitive” markets refer to those markets where there is not a national or regional broad line retail store located in the primary market served by the Company. The Company's stores in such non-competitive markets nevertheless face competition from various sources. See Item 1 “Business-Competition”.
   
(4)
Percentages, as adjusted to a comparable 52 week year, reflect the increase or decrease based upon a comparison of the applicable fiscal year with the immediately preceding fiscal year for stores open during the entirety of both years.  For fiscal 2008, sales were reduced by the week 53 amount. 
   
(5)
In fiscal 2010, the Company began including stores as same-stores in their fourteenth fiscal period of operation. 
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
Overview
 
Economic conditions:  The current economic slowdown has caused disruptions and significant volatility in financial markets, increased rates of mortgage loan default and personal bankruptcy, and declining consumer and business confidence, which has led to decreased customer traffic and reduced levels of consumer spending, particularly on discretionary items.  This decline in consumer and business confidence and the decreased levels of customer traffic and consumer spending have negatively impacted our business.  We cannot predict how long the current economically challenging conditions will persist and how such conditions might affect us and our customers.  Decreased customer traffic and reduced consumer spending, particularly on discretionary items, would, however, over an extended period of time negatively affect our financial condition, operating performance, revenues and income.
 
Operations. The Company is a regional broad line retailer operating in 23 states in the central United States.

The Company’s fiscal year ends on the Sunday closest to January 31. Fiscal years 2010 and 2009 consisted of 52 weeks and fiscal year 2008 consisted of 53 weeks, respectively. For purposes of this management's discussion and analysis of financial condition and results of operations, the financial numbers are presented in thousands.

Strategy. The Company’s overall business strategy involves identifying and opening stores in locations that will provide the Company with the highest return on investment.  The Company prefers markets that do not have direct competition from national or regional broad line retail stores. The Company also competes for retail sales with other entities, such as mail order companies, specialty retailers, stores, manufacturer’s outlets and the internet.
 
The Company uses a variety of broad-based targeted marketing and advertising strategies to reach consumers. These strategies include full-color photography advertising circulars of eight to 20 pages distributed through newspaper insertion or, in the case of inadequate newspaper coverage, through direct mail.  During fiscal 2010, these circulars were distributed 47 times in ALCO markets.  For fiscal 2011, the Company currently intends to distribute these circulars a similar number of times in the ALCO markets.  The Company also uses in-store marketing.  The Company’s merchandising and marketing teams work together to present the products in an engaging and innovative manner, which is coordinated so that it is consistent with the current print advertisements.  The Company regularly changes its banners and in-store promotions, which are advertised throughout the year, to attract consumers to visit the stores, to generate strong customer frequency and to increase average sales per customer.  Net marketing and promotion costs represented approximately 1.0%, 0.8% and 0.9% of net sales in fiscal years 2010, 2009 and 2008.  Management believes it has developed a comprehensive marketing strategy that will increase customer traffic and same-store sales.  The Company continues to operate as a high low retailer and has included in many of its marketing vehicles cross departmental products.  For example, the Company has used an Elder Care page with over-the-counter products, “as seen on TV” items, and dry meals—all targeting customers who have reached retirement age.  The Company believes that by providing the breadth of these key items to this targeted audience we can serve our customers’ needs more efficiently and garner a greater share of the purchases made by this demographic.  The Company’s ALCO stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies’, men’s and children’s apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys.  The Company’s smaller Duckwall stores offer a more limited selection of similar merchandise.  The Company is constantly evaluating the appropriate mix of merchandise to improve sales and gross margin performance. Corporate merchandising is provided to each store to ensure a consistent company-wide store presentation.  To facilitate long-term merchandising planning, the Company divides its merchandise into three core categories: primary, secondary, and convenience.  The primary core receives management’s primary focus, with a wide assortment of merchandise being placed in the most accessible locations within the stores and receiving significant promotional consideration.  The secondary core consists of categories of merchandise for which the Company maintains a strong assortment that is easily and readily identifiable by its customers.  The convenience core consists of categories of merchandise for which the Company maintains convenient (but limited) assortments, focusing on key items that are in keeping with customers’ expectations for a broad line retail store.  Secondary and convenience cores include merchandise that the Company feels is important to carry, as the target customer expects to find them within a broad line retail store and they ensure a high level of customer traffic.  The Company continually evaluates and ranks all product lines, shifting product classifications when necessary to reflect the changing demand for products.  In addition, the Company’s merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment.  All of the Company’s ALCO stores have point-of-service computer terminals that capture sales information and transmit such information to the Company’s data processing facilities where it is used to drive management, financial, and supply chain functions.
 
 
 
 
12

 
 
 
Recent Events.  
 
·
The Company completed its store transformation project during fiscal 2010.  The store transformation project involved two principal components: improving work processes and shrink reduction.  Improving work processes principally involved industrial engineering of work flow, stocking, cleanliness, and the efficient use of labor within our stores.  Shrink reduction principally involved improving paperwork processing and vendor receipts and returns processes, cashier monitoring, manager override monitoring, reducing customer and employee theft, and enhancing physical security.  During fiscal 2010, the Company achieved store level labor and benefit savings improvement of approximately $4.2 million.  In addition, for fiscal 2010, the Company experienced an approximate $1.4 million decrease in gross margin due to shrink increase.  Increases in shrink are contrary to the desired result of our store transformation project.  In order to address the increase in shrink that we experienced, the Company has implemented a Company-wide Shrink Awareness Program to devote additional efforts to improving paperwork processing, the vendor receipts and returns processes, cashier monitoring, and manager override monitoring, reducing customer and employee theft, and enhancing physical security.
·
On January 29, 2010 the Company received a United States Securities and Exchange Commission Comment Letter regarding the Company's Annual Report on Form 10-K for the Year Ended February 1, 2009, Filed on April 17, 2009, File No. 0-20269, and Related Filings.  The Company completed and provided its response to the Comment Letter on March 5, 2010.  The Company received a follow-up Comment Letter on March 18, 2010.  The Company responded to the follow-up letter on April 1, 2010.  On April 13, 2010, the Company received notification from the United States Securities and Exchange Commission that they had completed their review of the Company's responses and had no further comments.
·
On February 10, 2010, the Company closed on an Amended and Restated Credit Agreement (the "Facility") with Bank of America, N.A. and Wells Fargo Retail Finance, LLC.  The $120 million Facility has a term of four years and replaces the Company's previous revolving credit facility which was in the amount of $105 million.
·
Richard E. Wilson joined the Company on February 15, 2010 to become the President-Chief Executive Officer
·
Lawrence J. Zigerelli, President – Chief Executive Officer resigned from the Company on February 19, 2010
·
James M. Spencer, Senior Vice President - Store Operations resigned from the Company on February 26, 2010
·
James Worth, Director, resigned from the Board of Directors on March 2, 2010
·
On March 18, 2010, the Company filed Form S-8 with the Securities and Exchange Commission registering the shares of the Company's Non-Qualified Stock Option Agreement and the Company's Incentive Stock Option Plan.
·
Lawrence J. Zigerelli exercised his vested options for 27,500 shares on March 19, 2010.  Of which, 25,000 were vested under the Incentive Stock Option Plan and 2,500 were vested under the Non-Qualified Stock Option Agreement.
·
James M. Spencer elected net exercise for vested options, receiving 1,405 shares on March 19, 2010 under the Incentive Stock Option Plan
·
The Company has closed four Duckwall Stores during the first quarter of fiscal 2011.  They were located in underperforming markets and were at the end of their lease term.
 
Key Items in Fiscal 2010.
 
The Company measures itself against a number of financial metrics to assess its performance. Some of the important financial items during fiscal 2010 were:
 
·
Net sales decreased 0.2% to $488.7 million. Same-store sales decreased 0.7%, excluding the Company's two fuel centers, compared to the prior year.
·
Gross margin increased to 32.4% of sales, compared to 31.4% in the prior year.  Excluding the prior year first quarter $1.3 million inventory review initiative charge, fiscal 2009 gross margin is 31.7%.
·
Selling, general and administrative (SG&A) expenses were 28.9% of sales, compared to 30.2% in the prior year.  Excluding the prior year executive and staff severance along with the current and prior year store transformation project expenses, preopening costs and share-based compensation, fiscal 2010 and fiscal 2009 SG&A expenses, as a percent of sales, were 28.3% and 28.9%, respectively.
·
Net earnings per diluted share was $0.79, compared to a loss of ($1.31) per diluted share in the prior year.
·
Return on average equity was 2.9%, compared to (4.8%) in the prior year.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13

 
Gross margin percentage is a key measure of the Company's ability to maximize profit on the purchase and subsequent sale of merchandise, while minimizing promotional and clearance markdowns, shrinkage, damage and returns. Gross margin percentage is defined as sales less cost of sales, expressed as a percentage of sales.
 
Selling, general and administrative expenses are a measure of the Company’s ability to manage and control its expenses to purchase, distribute and sell merchandise.

Earnings (loss) per share ("EPS") is an indicator of the returns generated for the Company's stockholders. EPS from continuing operations was $0.78 per diluted share for fiscal 2010, compared to ($0.79) per diluted share for the prior fiscal year.  Return on average equity is a measure of how much income was produced on the average equity of the Company.
 
Results of Operations. The following table sets forth, for the fiscal years indicated, the components of the Company's consolidated statements of operations expressed as a percentage of net sales:
 
   
Fiscal Year Ended
 
   
52 Weeks
   
52 Weeks
   
53 Weeks
 
   
January 31,
   
February 1,
   
February 3,
 
   
2010
   
2009
   
2008
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    67.6       68.6       68.4  
Gross margin
    32.4       31.4       31.6  
Selling, general and administrative
    28.9       30.2       28.7  
Depreciation and amortization
    2.0       1.9       2.0  
Total operating expenses
    30.9       32.1       30.7  
Operating income (loss) from continuing operations
    1.5       (0.7 )     0.9  
Interest expense
    0.4       0.4       0.7  
Earnings (loss) from continuing operations before income taxes
    1.1       (1.1 )     0.2  
Income tax expense (benefit)
    0.4       (0.4 )     0.1  
Earnings (loss) from continuing operations
    0.7       (0.7 )     0.1  
Loss from discontinued operations, net of income tax benefit
    0.0       (0.4 )     (0.2 )
Net earnings (loss)
    0.7 %     (1.1 ) %     (0.1 )%

Critical Accounting Policies
 
Our analysis of operations and financial condition is based on our consolidated financial statements, prepared in accordance with U.S. GAAP. Preparation of these consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent assets and liabilities. In the Notes to Consolidated Financial Statements, we describe our significant accounting policies used in preparing the consolidated financial statements. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. The following items in our consolidated financial statements require significant estimation or judgment:
 
Inventory: As discussed in Note 1(d) to the Consolidated Financial Statements, inventories are stated at the lower of cost or net realizable value with cost determined using the last-in, first-out “LIFO” method. Merchandise inventories in our stores are valued by the retail method. The retail method is widely used in the retail industry due to its practicality. Under the retail method, cost is determined by applying a calculated cost-to-retail ratio across groupings of similar items, known as departments. As a result, the retail method results in an averaging of inventory costs across similar items within a department. The cost-to-retail ratio is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis. Current owned retail represents the retail price for which merchandise is offered for sale on a regular basis reduced for any permanent or clearance markdowns.  Use of the retail method does not eliminate the use of management judgments and estimates, including markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins. The Company continually evaluates product categories to determine if markdown action is appropriate, or if a markdown reserve should be established. As markdowns are taken as a reduction of the retail value of inventories, the Company recognizes the retail method results in valuing inventories at lower of cost or market.  Management believes that the retail method provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market. For LIFO, the Company determines lower of cost or market by pool.
 
Insurance: The Company retains significant deductibles on its insurance policies for workers compensation, general liability, medical claims and prescriptions. Due to the fact that it often takes more than one year to determine the actual costs, these costs are estimated based on the Company’s historical loss experience and estimates from the insurance carriers and consultants. The Company completes an actuarial evaluation of its loss experience twice each year. In between actuarial evaluations, management monitors the cost and number of claims and compares those results to historical amounts. The Company’s actuarial method is the fully developed method. The Company records its reserves on an undiscounted basis. The Company’s prior estimates have varied from actual results due to differences related to actual claims versus estimated ultimate loss calculations. Current and future estimates could be affected by changes in those same assumptions and are reasonably likely to occur.
 
 
 
 
 
 
 
14

 
Consideration received from vendors: Cost of sales and SG&A expenses are partially offset by various forms of consideration received from our vendors.  This “vendor income” is earned for a variety of vendor-sponsored programs, such as volume rebates, markdown allowances, promotions, warehouse cost reimbursement and advertising.  Consideration received, to the extent that it reimburses specific, incremental and identifiable costs incurred to date, is recorded in selling, general and administrative expenses in the same period as the associated expenses are incurred. Reimbursements received that are in excess of specific, incremental and identifiable costs incurred to date are recognized as a reduction to the cost of the merchandise purchased and are reflected in costs of sales as the merchandise is sold.  The Company establishes a receivable for the vendor income that is earned but not yet received.  Based on provisions of the agreements in place, this receivable is computed by estimating when the Company has completed its performance and the amount has been earned.  The majority of year-end receivables associated with these activities are collected within the following fiscal quarter.
 
Analysis of long-lived assets for impairment:  The Company reviews assets for impairment at the lowest level for which there are identifiable cash flows, usually at the store level.  The carrying amount of assets is compared with the expected undiscounted future cash flows to be generated by those assets over their estimated remaining economic lives.  If the undiscounted cash flows are less than the carrying amount of the asset, the asset is written down to fair value.  Factors that could result in an impairment review include, but are not limited to, a current period cash flow loss combined with a history of cash flow losses or a projection that demonstrates continuing losses associated with the use of a long-lived asset, or significant changes in a manner of use of the assets due to business strategies or competitive environment. Additionally, when a commitment is made to close a store in a period beyond the quarter in which the closure commitment is made, it is reviewed for impairment and depreciable lives are adjusted.  The impairment evaluation is based on the estimated cash flows from continuing use until the expected disposal date plus the expected terminal value.  Actual results could vary from management estimates.
 
Income Taxes: The Company adopted Accounting Standards Codification (ASC) Topic 740, on January 29, 2007. ASC Topic 740 prescribes a recognition threshold and a measurement standard for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The recognition and measurement of tax benefits is often highly judgmental. Determinations regarding the recognition and measurement of a tax benefit can change as additional developments occur relative to the issue. Accordingly, the Company’s future results may include favorable or unfavorable adjustments to our liability for uncertain tax positions.

The Company records valuation allowances against our deferred tax assets, when necessary.  Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. The Company will assess the likelihood that our deferred tax assets in each of the jurisdictions in which it operates will be recovered from future taxable income. Deferred tax assets are reduced by a valuation allowance to recognize the extent to which, more likely than not, the future tax benefits will not be realized.

Share-Based Compensation: The Company has a share-based compensation plan, which includes non-qualified stock options and nonvested share awards. See Note 1(q), Summary of Significant Accounting Policies, and Note 10, Share-based Compensation, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our stock-based compensation programs. We determine the fair value of our non-qualified stock option awards at the date of grant using option-pricing models. We determine the fair value of our share awards at the date of grant using generally accepted valuation techniques. Management reviews its assumptions and the valuations to determine the fair value of share-based compensation awards.

Customer Loyalty Program:  The Company has a customer loyalty program which allows members to earn points for each purchase completed at any of our stores. Points earned enable members to receive a certificate that may be redeemed on future purchases at our stores. The value of points earned by our customer loyalty program members is included in accrued liabilities, based on the value of points that are projected to be redeemed, and recorded as a reduction in revenue at the time the points are redeemed.

Fiscal 2010 Compared to Fiscal 2009
 
Net sales for fiscal 2010 decreased $1.1 million or 0.2% to $488.7 million compared to $489.8 million for fiscal 2009. During fiscal 2010, the Company opened one ALCO store.  No ALCO stores were closed and one Duckwall store was closed, resulting in a year end total of 258 stores. Net sales from same-stores decreased by $3.3 million or 0.7%, excluding the two fuel centers, in fiscal 2010 compared to fiscal 2009.  Fuel sales decreased $4.7 million, in fiscal 2010 compared to fiscal 2009.  Sales from non same-stores increased $7.3 million, in fiscal 2010 compared to fiscal 2009.
 
Gross margin for fiscal 2010 increased $4.7 million, or 3.1%, to $158.5 million compared to $153.8 million in fiscal 2009. As a percentage of net sales, gross margin increased to 32.4% in fiscal 2010 compared to 31.4% in fiscal 2009. Fiscal 2010 gross margin was positively impacted by reduced markdowns of $3.4 million, increased non same-store margin of $2.4 million and reduced freight expense of $1.7 million offset by increased shrink of $1.4 million and reduced new store allowances of $1.1 million.  The decline in markdowns was the result of an inventory position more representative of customer demands in fiscal 2010 when compared to fiscal 2009.  Reduced miles driven and a lower per mile freight rate allowed for less freight expense in fiscal 2010 when compared to fiscal 2009.  The increase in shrink is contrary to the desired result of our store transformation project.  In order to address the increase in shrink that we experienced, the Company has implemented a Company-wide Shrink Awareness Program to devote additional efforts to improving paperwork processing, the vendor receipts and returns processes, cashier monitoring, and manager override monitoring, reducing customer and employee theft, and enhancing physical security.  The decline in new store allowances was due to reduced store opens in fiscal 2010 compared to fiscal 2009.  Fiscal 2009 cost of sales included a $1.3 million inventory review initiative charge.  Excluding this charge from fiscal 2009, gross margin is 31.7%. 
 
Selling, general and administrative expenses decreased $6.5 million or 4.4% to $141.2 million in fiscal 2010 compared to $147.7 million in fiscal 2009. As a percentage of net sales, selling, general and administrative expenses were 28.9% in fiscal 2010 and 30.2% in fiscal 2009.  The decrease in SG&A expenses is attributable to reduced severance charges of $1.9 million, preopening store costs of $1.7 million, point-of-sale hardware lease expense of $1.7 million and store level labor and benefits of $1.7 million offset by increased real property rent expense of $1.2 million and advertising costs of $797.  Excluding share-based compensation, preopening store costs, store transformation project costs and executive and staff severance (Adjusted SG&A expenses) were 28.3% and 28.9%, as percentage of net sales, fiscal 2010 and 2009, respectively.
 
 
 
 
 
15

 
 
Depreciation and amortization expense increased $681 or 7.3% to $10.0 million in fiscal 2010 compared to $9.3 million in fiscal 2009. The increase is attributable to depreciation from stores opened in fiscal 2010 and 2009.
 
Operating income (loss) from continuing operations increased $10.5 million, or 327.5%, to $7.3 million in fiscal 2010 compared to ($3.2) million in fiscal 2009. Operating income (loss) from continuing operations as a percentage of net sales was 1.5% in fiscal 2010 compared to (0.7)% in fiscal 2009.  Operating income (loss) from continuing operations was positively impacted by reduced markdowns of $3.4 million, increased non same-store margin of $2.4 million, reduced freight expense of $1.7 million, reduced severance charges of $1.9 million, preopening store costs of $1.7 million, point-of-sale hardware lease expense of $1.7 million and store level labor and benefits of $1.7 million offset by increased shrink of $1.4 million, increased real property rent expense of $1.2 million, reduced new store allowances of $1.1 million and advertising costs of $797.
 
Interest expense increased $282 or 15.1% to $2.1 million in fiscal 2010 compared to $1.9 million in fiscal 2009. The increase in interest expense was due to increased average borrowings to fund capital expenditures or other programs.
 
Income tax expense (benefit) on continuing operations was $2.1 million in fiscal 2010 compared to ($2.1) million in fiscal 2009. The Company's effective tax rate was 41.3% in fiscal 2010 and 40.9% in fiscal 2009. The effective tax rate is higher in fiscal 2010 due to the impact of permanent book and tax differences offset by a slight decrease in the Company's state effective tax rates.
 
Loss from discontinued operations, net of income tax benefit was $42 in fiscal 2010, compared to $2.0 million in fiscal 2009.  One Duckwall store was closed during fiscal 2010.  Three Duckwall stores and 14 ALCO stores were closed during fiscal 2009.  The three Duckwall stores that were closed in fiscal 2009 were replaced by an ALCO store and are therefore shown in continuing operations.  Results of all other closed stores are included in discontinued operations.
 
Fiscal 2009 Compared to Fiscal 2008
 
Net sales for fiscal 2009 increased $8.3 million or 1.7% to $489.8 million compared to $481.5 million for fiscal 2008. During fiscal 2009, the Company opened fifteen ALCO stores, of which four were in markets previously occupied by a Duckwall store. Eleven ALCO stores were closed and four Duckwall stores were closed, resulting in a year end total of 258 stores. Net sales for all stores open the full year in both fiscal 2009 and 2008 (same-stores), decreased by $22.6 million or 5.1%, excluding the two fuel centers, in fiscal 2009 compared to fiscal 2008, as adjusted for 52 week comparability.  Fuel sales decreased $1.2 million, in fiscal 2009 compared to fiscal 2008.  Sales from non same-stores increased $43.3 million, in fiscal 2009 compared to fiscal 2008.
 
Gross margin for fiscal 2009 increased $1.5 million, or 1.0%, to $153.8 million compared to $152.3 million in fiscal 2008.  As a percentage of net sales, gross margin decreased to 31.4% in fiscal 2009 compared to 31.6% in fiscal 2008.  Fiscal 2009 gross margin was positively impacted primarily by continued shrink improvement of $2.7 million and vendor considerations of $1.1 million, offset by inventory review initiative expenses of $1.3 million.  The shrink improvement was a result of the store transformation project and a Company-wide increased Shrink Awareness Program.  Improved vendor considerations were driven by increased purchases and new vendors participating in the vendor consideration program.  Inventory review initiative expenses resulted from a review by the Company of its ownership in items that it has either discontinued, clearanced or are inactive.  The Company has determined to implement a sell through plan to liquidate this merchandise and to develop a process to minimize the accumulation of this inventory going forward.   Excluding the first quarter $1.3 million inventory review initiative charge, fiscal 2009 gross margin is 31.7%.
 
Selling, general and administrative expenses increased $9.5 million or 6.9% to $147.7 million in fiscal 2009 compared to $138.2 million in fiscal 2008. As a percentage of net sales, selling, general and administrative expenses were 30.2% in fiscal 2009 and 28.7% in fiscal 2008. This increase is primarily attributable to operating 33 new stores, along with $2.2 million in fees to Accenture associated with the store transformation project and executive and staff severance of $1.9 million.  This increase of new stores contributed to increased employee labor and benefits of $5.6 million and real property rent of $4.7 million.   In addition to the store transformation project fees of $2.2 million, also impacting SG&A expenses were executive and staff severance of $1.9 million and reduced co-op advertising offset of $603.  These expense increases were somewhat mitigated by reduced share-based compensation of $944, floor care services of $520 and advertising expense of $631.  Excluding share-based compensation, preopening store costs, store transformation project fees and executive and staff severance (Adjusted SG&A expenses) were 28.9% and 27.9% of sales respectively for the fiscal 2009 and fiscal 2008.
 
Depreciation and amortization expense decreased $161 or 1.7% to $9.3 million in fiscal 2009 compared to $9.5 million in fiscal 2008. The decrease is attributable to reduced asset impairment for fiscal 2009 compared to fiscal 2008 offset by increased depreciation from stores opened in fiscal 2009 and 2008.
 
Operating income (loss) from continuing operations decreased $7.8 million, or 170.5%, to ($3.2) million in fiscal 2009 compared to $4.6 million in fiscal 2008. Operating income (loss) from continuing operations as a percentage of net sales was (0.7%) in fiscal 2009 compared to 1.0% in fiscal 2008.  Operating income (loss) from continuing operations was negatively impacted by store transformation project fees of $2.2 million, executive and staff severance of $1.9 million, inventory review initiative expenses of $1.3 million and reduced co-op advertising offset of $603.  Operating income (loss) from continuing operations was positively impacted by continued shrink improvement of $2.7 million, increased vendor considerations of $1.1 million, reduced share-based compensation of $944, floor care services of $520 and advertising expense of $631.
 
Interest expense decreased $1.5 million or 44.8%, to $1.9 million in fiscal 2009 compared to $3.4 million in fiscal 2008. The decrease in interest expense was due to the reversal of accrued interest of $587 related to the uncertain tax positions liability of the Company and lower interest rates.  
 
Income tax expense (benefit) on continuing operations were ($2.1) million in fiscal 2009 compared to $394 in fiscal 2008. The Company's effective tax rate was 40.9% in fiscal 2009 and 33.3% in fiscal 2008. The effective tax rate is higher in fiscal 2009 due to the impact of permanent book and tax differences which have remained relatively constant over the reporting periods as compared to a decrease in book income.
 
Loss from discontinued operations, net of income tax benefit was $2.0 million in fiscal 2009, compared to $1.0 million in fiscal 2008.  Three Duckwall stores that were closed during fiscal 2009 were replaced by an ALCO store and are therefore shown in continuing operations.  In addition, 14 ALCO stores were closed in fiscal 2009.
 
 
 
16 

 
   SG&A Detail; Certain Financial Matters

The Company has included Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, non-GAAP performance measures, as part of its disclosure as a means to enhance its communications with stockholders. Certain stockholders have specifically requested this information to assist them in comparing the Company to other retailers that disclose similar non-GAAP performance measures. Further, management utilizes these measures in internal evaluation, review of performance and to compare the Company’s financial measures to those of its peers. Adjusted EBITDA differs from the most comparable GAAP financial measure (earnings (loss) from continuing operations) in that it does not include certain items, as does Adjusted Gross Margin and Adjusted SG&A. These items are excluded by management to better evaluate normalized operational cash flow and expenses excluding unusual, inconsistent and non-cash charges.  To compensate for the limitations of evaluating the Company's performance using Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, management also utilizes GAAP performance measures such as gross margin, return on investment, return on equity and cash flow from operations.  As a result, Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA may not reflect important aspects of the results of the Company’s operations. 
 
   
For the Years Ended
 
   
52 Weeks
   
52 Weeks
 
SG&A Expenses Breakout
 
January 31, 2010
   
February 1, 2009
 
Store support center (1)
  $ 23,221       26,427  
Distribution center
    8,728       9,470  
401K expense
    381       462  
Same-store SG&A
    104,482       108,324  
Non same-store SG&A (2)
    3,639       2,866  
Share-based compensation
    757       186  
SG&A as reported
    141,208       147,735  
Less:
               
Share-based compensation
    (757 )     (186 )
Preopening store costs (2)
    (128 )     (1,846 )
Executive and staff severance (1)
    -       (1,942 )
Store transformation project costs (1)
    (2,096 )     (2,220 )
Adjusted SG&A
  $ 138,227       141,541  
                 
Adjusted SG&A as % of sales
    28.3 %     28.9 %
                 
Sales per average selling square foot (3)
  $ 107.77       112.03  
                 
Adjusted Gross Margin dollars per average selling square feet (3)(4)
  $ 34.95       35.49  
                 
Adjusted SG&A per average selling square foot (3)
  $ 30.48       32.37  
                 
Adjusted EBITDA per average selling square foot (3)(5)
  $ 4.47       3.12  
                 
Average inventory per average selling square feet (3)(6)(7)
  $ 27.02       26.75  
                 
Average selling square feet (3)
    4,535       4,372  
                 
Total stores operating beginning of period
    258       262  
Total stores operating end of period
    258       258  
Total stores less than twelve months old
    1       15  
Total non same-stores
    1        33  
                 
Supplemental Data:
               
Same-store adjusted gross margin dollar change
    (0.4 )%     (8.4 )%
Same-store SG&A dollar change
    (3.6 )%     (6.1 )%
Same-store total customer count change
    (0.1 )%     (10.4 )%
Same-store average sale per ticket change
    (0.6 )%     4.0  %
                 
                 
(1) Store support center includes executive and staff severance for first quarter of fiscal 2009 and store transformation project costs for first and second quarters of fiscal 2010 and the third and fourth quarter of fiscal 2009
 
(2) Non same-stores are those stores opened in Fiscal 2009 which have not reached their fourteenth period of operation
 
(3) Average selling square feet is calculated as beginning square feet plus ending square feet divided by 2
 
(4) Adjusted Gross Margin includes $1.3 million inventory review initiative charge added back in first quarter fiscal 2009
(5) Adjusted EBITDA per average selling square foot is calculated as Adjusted EBITDA divided by average selling square feet
 
(6) Average store level merchandise inventory for fiscal 2010 and 2009 is calculated as beginning inventory plus ending inventory divided by 2
 
(7) Excludes inventory for unopened stores
 
 
 
 
 
 
17 

 

Fiscal 2010 Compared to Fiscal 2009

Store support center expenses for fiscal 2010 decreased $3.2 million, or 12.1%.  The decrease was primarily due to executive and staff severance of $1.9 million, $454 in health insurance benefits and $432 in accounting fees.
 
Same-store SG&A expenses decreased $3.8 million, or (3.6%).   The decrease is primarily due to reduced labor expenses of $2.6 million, point-of-sale hardware lease expense of $1.7 million and benefits of $711 offset by increased advertising costs of $1.5 million.

Non same-store SG&A expenses increased $773. The Company opened one store in 2010 and 15 stores in 2009.
 
Reconciliation and Explanation of Non-GAAP Financial Measures

The following table shows the reconciliation of Adjusted EBITDA to net earnings (loss) from continuing operations:
         
For the Thirty-Nine
   
Trailing Twelve
   
For the Thirteen
       
   
52 Weeks
   
Week Periods Ended
   
Periods Ended
   
Week Periods Ended
   
52 Weeks
 
   
Fiscal 2009
   
November 1, 2009
   
November 2, 2008
   
November 1, 2009
   
January 31, 2010
   
February 1, 2009
   
Fiscal 2010
 
Net earnings (loss) from continuing operations (1)
  $ (3,005 )     1,549       (2,368 )     912       1,487       (638 )     3,037  
Plus:
                                                       
Interest
    1,867       1,590       1,219       2,238       559       648       2,149  
Taxes (1)
    (2,080 )     1,310       (2,397 )     1,627       825       317       2,135  
Depreciation and amortization (1)
    9,302       6,973       5,794       10,481       3,011       3,509       9,983  
Share-based compensation
    186       601       34       753       156       152       757  
Preopening store costs (2)
    1,845       2       1,837       10       127       9       128  
Inventory review initiative
    1,345       -       1,345       -       -       -       -  
Executive and staff severance
    1,942       -       1,942       -       -       -       -  
Store transformation project costs
    2,220       2,096       937       3,379       -       1,283       2,096  
=Adjusted EBITDA (1)(3)(4)(5)
    13,622       14,121       8,343       19,400       6,165       5,280       20,285  
                                                         
                                                         
Cash
    4,744       5,703       5,320       5,703       5,164       4,744       5,164  
Debt
    49,841       54,180       58,303       54,180       40,992       49,841       40,992  
Debt, net of cash
  $ 45,097       48,477       52,983       48,477       35,828       45,097       35,828  
                                                         
(1) These amounts will not agree with the fiscal 2009 first quarter 10-Q filing due to the one store the Company closed in the third quarter of fiscal 2009. These amounts will not agree with the fiscal year end 2009 or fiscal 2010 first quarter 10-Q filing due to the one store the Company closed in the second quarter of fiscal 2010. These stores are now shown in discontinued operations.
 
(2) These costs are not consistent quarter to quarter as the Company does not open the same number of stores in each quarter of each fiscal year. These costs are directly associated with the number of stores that have been or will be opened and are incurred prior to the grand opening of each store.
 
(3) For the trailing twelve periods ended January 31, 2010 the average open weeks for the Company's one non same-store is 3 weeks.
 
(4) During fiscal year 2009, the Company made a change in its Executive Management team and Board of Directors resulting in several initiatives to reduce certain SG&A expenses. For the trailing twelve periods ended January 31, 2010, these initiatives resulted in approximately $4.3 million reduced SG&A expenses when compared to the same prior year trailing twelve periods.  The initiatives include, but are not limited to, executive and staff reduction, reduced ALCO same-store hourly wages, advertising expenses, net of coop offset and floor care services along with reduced total Company insurance and travel expenses.
 
(5) In addition to continued efforts regarding the fiscal 2009 cost reduction initiatives, the Company has also implemented new initiatives for fiscal year 2010. The fiscal 2010 initiatives include, but are not limited to, reduced point-of-sale hardware lease expense, energy expense and accident reduction programs. These initiatives achieved approximately $2.6 million in SG&A savings in fiscal 2010 when compared to the prior year same period.
 



 
 
 
 
 
 

 
18 

 

Seasonality and Quarterly Results

The following table sets forth the Company's net sales, gross margin, income from operations and net earnings during each quarter of fiscal 2010, 2009 and 2008.
 
     
First
   
Second
   
Third
   
Fourth
 
     
Quarter
   
Quarter
   
Quarter
   
Quarter(1)
 
                           
Fiscal 2010
Net sales
  $ 115.4       125.3       111.5       136.5  
 
Gross margin
    38.5       42.4       35.7       41.9  
 
Earnings (loss) from continuing operations
    (0.0 )     3.0       (1.4 )     1.5  
 
Net earnings (loss)
    (0.1 )     3.0       (1.4 )     1.5  
                                   
Fiscal 2009
Net sales
  $ 105.6       129.2       114.9       140.1  
 
Gross margin
    31.7       43.3       37.1       41.7  
 
Earnings (loss) from continuing operations
    (4.3 )     3.5       (1.5 )     (0.6 )
 
Net earnings (loss)
    (5.9 )     3.3       (1.7 )     (0.7 )
                                   
Fiscal 2008
Net sales
  $ 105.9     $ 118.6     $ 109.9     $ 147.1  
 
Gross margin
    32.7       39.4       35.7       44.5  
 
Earnings (loss) from continuing operations
    (1.8 )     3.0       (1.4 )     1.0  
 
Net earnings (loss)
    (2.2 )     2.6       (1.6 )     1.0  

 
(1)
Asset impairment charges of $831, $1.3 million and $2.1 million negatively impacted net earnings for fiscal 2010, 2009 and 2008, respectively.
 
See Note 11 of Notes to Consolidated Financial Statements for quarterly earnings per share information.

The Company’s business is subject to seasonal fluctuations. The Company’s highest sales levels occur in the fourth quarter of its fiscal year which includes the Christmas holiday selling season. The Company's results of operations in any one quarter are not necessarily indicative of the results of operations that can be expected for any other quarter or for the full fiscal year. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of sales contributed by new stores and the integration of the new stores into the operations of the Company, as well as other factors. The addition of a large number of new stores can, therefore, significantly affect the quarterly results of operations.

Inflation

Management does not believe that its merchandising operations have been materially affected by inflation over the past few years. The Company will continue to monitor costs, take advantage of vendor incentive programs, selectively buy from competitive vendors and adjust merchandise prices based on market conditions.
 
Liquidity and Capital Resources

At the end of fiscal 2010, working capital (defined as current assets less current liabilities) was $118.0 million compared to $119.5 million at the end of fiscal 2009 and $107.7 million at the end of fiscal 2008.

The Company's primary sources of funds are cash flow from operations, borrowings under its revolving loan credit facility, vendor trade credit financing, term loan and lease financing.  
 
Cash provided by (used in) operating activities aggregated $16.2 million, ($3.2) million and $11.1 million, in fiscal 2010, 2009 and 2008, respectively. The increase in cash provided in fiscal 2010 relative to fiscal 2009 resulted primarily from better inventory management, income tax refunds and increased profitability of the Company.  The decrease in cash provided in fiscal 2009 relative to fiscal 2008 resulted primarily from an increase in merchandise inventory, net of accounts payable.

The Company uses its revolving loan credit facility and vendor trade credit financing to fund the buildup of inventories periodically during the year for its peak selling seasons and to meet other short-term cash requirements. The revolving loan credit facility provides up to $105 million of financing in the form of notes payable and letters of credit. The loan agreement expires in January 2011. The revolving loan note payable and letter of credit balance at January 31, 2010 was $43.3 million, resulting in an available line of credit at that date of approximately $56.4 million, subject to a borrowing base calculation. Loan advances are secured by a security interest in the Company’s inventory and credit card receivables.  The loan agreement contains various restrictions that are applicable when outstanding borrowings exceed $77.5 million, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payments of dividends. The Company's loan agreement contains various covenants including limitations on additional indebtedness and certain financial tests, as well as various subjective acceleration clauses. The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC Topic 470-10-45. As of January 31, 2010, the Company was in compliance with all covenants and subjective acceleration clauses of the debt agreements. Accordingly, this obligation has been classified as a long-term liability in the accompanying consolidated balance sheet.  Short-term trade credit represents a significant source of financing for inventory to the Company. Trade credit arises from the willingness of the Company's vendors to grant payment terms for inventory purchases.

On February 10, 2010, the Company closed on an Amended and Restated Credit Agreement (the "Facility") with Bank of America, N.A. and Wells Fargo Retail Finance, LLC.  The $120 million Facility has a term of four years and replaces the Company's previous revolving credit facility.
 
19 

 
In fiscal 2010, the Company had net cash pay downs of $5.6 million on its revolving credit facility and made cash payments of $3.2 million to reduce its long-term debt and capital lease obligations. During fiscal 2009, the Company exercised an early buyout of an operating lease for store level point-of-sale equipment of $5.1 million.  This buyout was financed through the revolving credit facility.  In fiscal 2009, the Company had net cash borrowing on its revolving credit facility of $20.0 million and made cash payments of $3.2 million to reduce its long-term debt and capital lease obligations.  The Company received $90 in proceeds from the exercise of outstanding stock options. In fiscal 2008, the Company entered into a term loan for $5.5 million representing the equipment costs associated with the fiscal 2008 opened stores.  These proceeds were used to pay down the revolving credit facility.  In fiscal 2008, the Company had net cash pay downs on its revolving credit facility of $362 and made cash payments of $2.1 million to reduce its capital lease obligations.

The Company’s long-range plan assumes growth in the number of stores and, in accordance with this plan, for fiscal 2010, one new ALCO store was opened.  In fiscal 2009, 15 new ALCO stores, of which four were in markets previously occupied by a Duckwall store, were opened.  

Cash used in investing activities in fiscal 2010, 2009 and 2008 totaled ($7.0) million, ($14.2) million and ($11.7) million, respectively, and consisted primarily of capital expenditures.

On March 23, 2006, the Board of Directors approved a new plan authorizing the repurchase of 200,000 shares of the Company’s common stock, of which 25,534 shares have been repurchased at an average cost of $15.16. As of January 31, 2010, 174,466 shares remain available to be repurchased.
 
The following table summarizes the Company’s significant contractual obligations payable as of January 31, 2010 (in thousands):
 
   
Payments due by Period (1)
 
         
Less than
      2 - 3       4 - 5    
After
 
Contractual Obligations
 
Total
   
1 year (2)
   
years
   
years
   
5 years
 
                                   
Revolving loan credit facility
  $ 35,159       -       -       35,159       -  
FF&E term loan
    2,865       1,451       1,414       -       -  
Capital lease obligations
    3,413       2,638       775       -       -  
Operating leases
    164,650       19,676       34,660       26,783       83,531  
Transportation contract
    255       255       -       -       -  
Contingent rentals
    9,898       1,192       2,430       2,510       3,766  
                                         
Total contractual cash obligations
  $ 216,240       25,212       39,279       64,452       87,297  
 
(1)  
The principal amount of the Company’s Revolving Loan Credit Facility is shown in its contractual obligations table as the amount being paid during the year that the February 10, 2010 amended credit facility expires. Interest related to the Revolving Loan Credit Facility is dependent on the level of borrowing and variable interest rates as more fully described in Note 3 to the consolidated financial statements and is not shown in this table.
 
(2)  
Total liabilities for uncertain tax positions were $54, as of January 31, 2010 and February 1, 2009, are classified on the Company's consolidated balance sheet within "Other current liabilities" and are not included in the table.

Expansion Plans

The continued growth of the Company is dependent, in large part, upon the Company’s ability to open and operate new stores on a timely and profitable basis.  The Company currently intends to open fewer than 10 ALCO stores in fiscal 2011.  While the Company believes that adequate sites are currently available, the rate of new store openings is subject to various contingencies, many of which are beyond the Company’s control.  These material contingencies include:
 
· 
the Company’s ability to hire, train, and retain qualified personnel
· 
the availability of adequate capital resources for us to purchase inventory, equipment, and fixtures and make other capital expenditures necessary for store expansion
· 
the ability of our landlords and developers to find appropriate financing in the current credit market to develop property to be leased by the Company
 
Historically, we have been able to hire, train, and retain qualified personnel and we anticipate being able to do so in the future.  In order to address this contingency, the Company has initiated an Assistant Manager Training Program whereby the Company provides general management training to manager candidates at monthly seminars held at the Company’s corporate offices.  We anticipate that this program will increase our ability to train and retain qualified personnel.  We currently believe that we will have the capital resources necessary to purchase the inventory, equipment, and fixtures, and to fund the other capital expenditures necessary for the store expansions.  If we lack such capital resources, however, it would limit our expansion plans and negatively impact our operations going forward.  The Company has been working closely with multiple developers and landlords that the Company believes have the financial resources to develop property to be leased by the Company and hold such property as a long-term investment in their portfolios.  If such developers and landlords do not have, and cannot obtain, the financial resources to develop and hold such property, it would limit our expansion plans and negatively impact our operations going forward.
 
Off-Balance Sheet Arrangements

The Company has not provided any financial guarantees as of year-end fiscal 2010.

The Company has not created and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the business.  The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
 
 
 
20 

 
New Accounting Standards
 
Fiscal 2009 Adoptions
 
In April 2009, the Financial Accounting Standards Board ("FASB") modified ASC Topic 825, Financial Instruments, and FASB ASC 270, Interim Reporting, to extend the disclosure requirements related to the fair value of financial instruments to interim financial statements of publicly traded companies.  The Company adopted this guidance in the second quarter of fiscal 2010, the impact of which related only to disclosures and did not have a material effect on the Company’s financial condition, results of operations or cash flows.
 
In May 2009, the FASB modified FASB ASC Topic 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued and requires entities to disclose the date through which they have evaluated subsequent events. The Company adopted this guidance effective August 2, 2009. The adoption of this guidance changed certain financial statement disclosures but did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
In June 2009, the FASB issued Accounting Standards Updated (ASU) No. 2009-01 Topic 105, Generally Accepted Accounting Principles which establishes the FASB ASC. The FASB ASC is the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. The FASB ASC reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections.  The Company adopted this guidance effective August 2, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.

In August 2009, the FASB issued ASU No. 2009-05 which amends ASC Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), to provide guidance on the fair value measurement of liabilities. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is not available. A reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in Topic 820 such as the income and market approach to valuation. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
Fiscal 2010 and Future Adoptions
 
 In June 2009, the FASB issued ASU 2009-16, which updated ASC Topic 810: Accounting for Transfers of Financial Assets, which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. This guidance will be effective for the beginning in fiscal 2011 and adoption is not anticipated to affect our consolidated net earnings, cash flows or financial position.
 
        In June 2009, the FASB issued ASC topic 810-10, which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under former guidance. This guidance will be effective beginning in fiscal 2011 and adoption is not anticipated to affect our consolidated net earnings, cash flows or financial position.
 
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
 
Certain statements contained in this Annual Report on Form 10-K that are not statements of historical fact may constitute "forward-looking statements" within the meaning of Section 21E of the Exchange Act. These statements are subject to risks and uncertainties, as described below. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, store openings, store closings, payment or non-payment of dividends, capital structure and other financial items, (ii) statements of plans and objectives of the Company’s management or Board of Directors, including plans or objectives relating to inventory, store development, marketing, competition, business strategy, store environment, merchandising, purchasing, pricing, distribution, transportation, store locations and information systems, (iii) statements of future economic performance, and (iv) statements of assumptions underlying the statements described in (i), (ii) and (iii). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” “could,” “intends,” “plans,” “estimates”, “projects” or “anticipates,” variations thereof or similar expressions.

Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. The Company’s future results of operations, financial condition and business operations may differ materially from the forward-looking statements or the historical information stated in this Annual Report on Form 10-K. Stockholders and investors are cautioned not to put undue reliance on any forward-looking statement.
 
There are a number of factors and uncertainties that could cause actual results of operations, financial condition or business contemplated by the forward-looking statements to differ materially from those discussed in the forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company, including those factors described in “Item 1A. Risk Factors” above. Other factors not identified herein could also have such an effect.
 
 
 
 
 
21 

 
 
ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing and cash management activities. The Company maintains a secured line of credit at variable interest rates to meet the short-term needs of its expansion program and seasonal inventory increases. The credit line available is $105 million which carries a variable rate of interest.
 
On February 10, 2010, the Company closed on an Amended and Restated Credit Agreement (the "Facility") with Bank of America, N.A. and Wells Fargo Retail Finance, LLC.  The $120 million Facility has a term of four years and replaces the Company's previous revolving credit facility which was in the amount of $105 million and was due on January 18, 2011. The repayment of funds borrowed under the line of credit is now due on February 9, 2014.

The Company’s borrowing arrangement contains no limitation on the change in the variable interest rate paid by the Company. Based on the Company’s average borrowing outstanding during the year of approximately $42.6 million, a 1% change either up or down in the LIBOR rate would have changed the Company’s interest expense by approximately $426.
 
The Company was not party to any derivative financial instruments in fiscal 2010.


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
22 

 

 
ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

 
   
Page
 
       
Report of Independent Registered Public Accounting Firm……………………..
    24  
         
Financial Statements:
       
Consolidated Balance Sheets --
       
January 31, 2010 and February 1, 2009………………………………..
    25  
         
Consolidated Statements of Operations --
       
Fiscal years Ended January 31, 2010,
       
February 1, 2009 and February 3, 2008……………………………….
    26  
         
Consolidated Statements of Stockholders'
       
Equity -- Fiscal years Ended January 31, 2010,
       
February 1, 2009 and February 3, 2008……………………..………..
    27  
         
Consolidated Statements of Cash Flows --
       
Fiscal years Ended January 31, 2010,
       
February 1, 2009 and February 3, 2008………………………………..
    28  
         
Notes to Consolidated Financial Statements……………………………………..
       
      29  
Financial Statement Schedules:
       
         
No financial statement schedules are included as they are not applicable to the Company
       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
23 

 

 
 
 
 

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Duckwall-ALCO Stores, Inc.:
 
We have audited the accompanying consolidated balance sheets of Duckwall-ALCO Stores, Inc. (the Company) as of January 31, 2010 and February 1, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended January 31, 2010. These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2010 and February 1, 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 7 to the consolidated financial statements, effective January 29, 2007, the Company adopted Accounting Standards Codification Topic 740 (previously Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes).  

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 15, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
 
/s/ KPMG LLP

 
Kansas City, Missouri
April 15, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
24 

 
 
Duckwall-ALCO Stores, Inc.
 
Consolidated Balance Sheets
 
(dollars in thousands, except share amounts)
 
             
Assets
 
   
January 31,
   
February 1,
 
   
2010
   
2009
 
             
Current assets:
           
   Cash and cash equivalents
  $ 5,164     $ 4,744  
   Receivables
    7,437       5,142  
   Prepaid income taxes
    594       5,753  
   Inventories
    140,375       146,620  
   Prepaid expenses
    3,517       4,143  
   Deferred income taxes
    3,863       5,348  
  Property held for sale
    1,631       1,505  
          Total current assets
    162,581       173,255  
                 
Property and equipment, at cost:
               
   Land and land improvements
    1,455       1,420  
   Buildings and building improvements
    11,844       11,369  
   Furniture, fixtures and equipment
    67,304       69,019  
   Transportation equipment
    1,303       1,322  
   Leasehold improvements
    14,855       13,974  
   Construction work in progress
    1,744       745  
          Total property and equipment
    98,505       97,849  
   Less accumulated depreciation
    67,959       65,591  
          Net property and equipment
    30,546       32,258  
                 
Property under capital leases
    11,015       11,015  
   Less accumulated amortization
    9,385       7,958  
          Net property under capital leases
    1,630       3,057  
                 
Other non-current assets
    51       205  
          Total assets
  194,808       208,775  
                 
Liabilities and Stockholders' Equity
 
                 
Current liabilities:
               
   Current maturities of long-term debt
 
1,451       1,362  
   Current maturities of capital lease obligations
    1,623       1,853  
   Accounts payable
    23,076       30,233  
   Accrued salaries and commissions
    4,122       5,375  
   Accrued taxes other than income
    4,913       4,941  
   Self-insurance claim reserves
    4,852       5,309  
   Other current liabilities
    4,499       4,676  
          Total current liabilities
    44,536       53,749  
                 
Long term debt, less current maturities
    1,414       2,865  
Notes payable under revolving loan
    35,159       40,714  
Capital lease obligations - less current maturities
    1,345       3,047  
Deferred gain on leases
    4,212       4,598  
Deferred income taxes
    694       138  
Other noncurrent liabilities
    1,715       1,624  
          Total liabilities
    89,075       106,735  
                 
Stockholders' equity:
               
  Common stock, $.0001 par value, authorized 20,000,000 shares; issued and outstanding
               
    3,797,947 shares and 3,797,947 shares, respectively
    1       1  
   Additional paid-in capital
    39,313       38,615  
   Retained earnings
    66,419       63,424  
          Total stockholders' equity
    105,733       102,040  
          Total liabilities and stockholders' equity
  $ 194,808     $ 208,775  
                 
See accompanying notes to consolidated financial statements.
 
 
 
 
25 

 


Duckwall-ALCO Stores, Inc.
 
Consolidated Statements of Operations
 
Fiscal Years ended January 31, 2010, February 1, 2009 and February 3, 2008
 
(dollars in thousands, except per share amounts)
 
                   
   
52 Weeks
   
52 Weeks
   
53 Weeks
 
   
2010
   
2009
   
2008
 
Net sales
  $ 488,691       489,753       481,475  
Cost of sales
    330,179       335,934       329,195  
                         
Gross margin
    158,512       153,819       152,280  
                         
Selling, general and administrative
    141,208       147,735       138,250  
Depreciation and amortization
    9,983       9,302       9,463  
                         
           Total operating expenses
    151,191       157,037       147,713