UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION
13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended May 4, 2008
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 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
__
APPLICABLE
ONLY TO CORPORATE ISSUERS:
3,810,591
shares of common stock, $.0001 par value (the issuer's only class of common
stock), were outstanding as of May 4, 2008.
DUCKWALL-ALCO
STORES, INC.
TABLE
OF CONTENTS
|
|
|
|
|
PART
I
|
FINANCIAL INFORMATION
|
|
|
Item
1.
|
Financial
Statements
|
3
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
8
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
13
|
|
Item
4.
|
Controls
and Procedures
|
13
|
|
|
PART
II
|
OTHER INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
14
|
|
Item
1A.
|
Risk
Factors
|
14
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
14
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
15
|
|
Item
4.
|
Submissions
of Matters to a Vote of Security Holders
|
15
|
|
Item
5.
|
Other
Information
|
15
|
|
Item
6.
|
Exhibits
|
15
|
|
|
Signature
|
16
|
PART
I – FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
Duckwall-ALCO
Stores, Inc. and Subsidiaries
|
|
Consolidated
Balance Sheets
|
|
(in
thousands, except share amounts)
|
|
Assets
|
|
|
|
May
4,
|
|
|
February
3,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,977
|
|
|
$
|
5,501
|
|
Receivables
|
|
|
3,898
|
|
|
|
4,905
|
|
Prepaid
income taxes
|
|
|
4,955
|
|
|
|
768
|
|
Inventories
|
|
|
145,123
|
|
|
|
128,545
|
|
Prepaid
expenses
|
|
|
3,263
|
|
|
|
3,101
|
|
Deferred
income taxes
|
|
|
6,835
|
|
|
|
7,094
|
|
Total
current assets
|
|
|
169,051
|
|
|
|
149,914
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
|
2,401
|
|
|
|
2,205
|
|
Buildings
and building improvements
|
|
|
11,931
|
|
|
|
11,931
|
|
Furniture,
fixtures and equipment
|
|
|
58,406
|
|
|
|
58,911
|
|
Transportation
equipment
|
|
|
1,344
|
|
|
|
1,310
|
|
Leasehold
improvements
|
|
|
13,788
|
|
|
|
15,419
|
|
Construction
work in progress
|
|
|
1,445
|
|
|
|
1,282
|
|
Total
property and equipment
|
|
|
89,315
|
|
|
|
91,058
|
|
Less
accumulated depreciation
|
|
|
61,360
|
|
|
|
64,019
|
|
Net
property and equipment
|
|
|
27,955
|
|
|
|
27,039
|
|
|
|
|
|
|
|
|
|
|
Property
under capital leases
|
|
|
13,571
|
|
|
|
13,571
|
|
Less
accumulated amortization
|
|
|
9,136
|
|
|
|
8,654
|
|
Net
property under capital leases
|
|
|
4,435
|
|
|
|
4,917
|
|
|
|
|
|
|
|
|
|
|
Other
non-current assets
|
|
|
270
|
|
|
|
262
|
|
Deferred
income taxes
|
|
|
3,028
|
|
|
|
3,254
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
204,739
|
|
|
$
|
185,386
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
1,298
|
|
|
$
|
1,278
|
|
Current
maturities of capital lease obligations
|
|
|
1,840
|
|
|
|
1,860
|
|
Accounts
payable
|
|
|
36,023
|
|
|
|
19,134
|
|
Accrued
salaries and commissions
|
|
|
5,685
|
|
|
|
3,711
|
|
Accrued
taxes other than income
|
|
|
3,554
|
|
|
|
4,301
|
|
Self-insurance
claim reserves
|
|
|
4,693
|
|
|
|
4,571
|
|
Other
current liabilities
|
|
|
6,344
|
|
|
|
7,360
|
|
Total
current liabilities
|
|
|
59,437
|
|
|
|
42,215
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, less current maturities
|
|
|
3,895
|
|
|
|
4,227
|
|
Notes
payable under revolving loan
|
|
|
29,671
|
|
|
|
20,715
|
|
Capital
lease obligations - less current maturities
|
|
|
4,376
|
|
|
|
4,933
|
|
Deferred
gain on leases
|
|
|
4,888
|
|
|
|
4,985
|
|
Other
noncurrent liabilities
|
|
|
1,594
|
|
|
|
1,139
|
|
Total
liabilities
|
|
|
103,861
|
|
|
|
78,214
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, authorized 20,000,000 shares;
|
|
|
|
|
|
|
|
|
issued and outstanding 3,810,591 shares and 3,810,591 shares
respectively
|
|
|
1
|
|
|
|
1
|
|
Additional
paid-in capital
|
|
|
38,324
|
|
|
|
38,766
|
|
Retained
earnings
|
|
|
62,553
|
|
|
|
68,405
|
|
Total
stockholders' equity
|
|
|
100,878
|
|
|
|
107,172
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
204,739
|
|
|
$
|
185,386
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
Duckwall-ALCO
Stores, Inc. and Subsidiaries
|
|
Consolidated
Statements of Operations
|
|
(dollars
in thousands, except per share amounts)
|
|
(Unaudited)
|
|
|
|
For
the Thirteen Week
|
|
|
|
Periods
Ended
|
|
|
|
May
4, 2008
|
|
|
April
29, 2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
105,982
|
|
|
|
106,265
|
|
Cost
of sales
|
|
|
74,146
|
|
|
|
73,456
|
|
Gross
margin
|
|
|
31,836
|
|
|
|
32,809
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
36,912
|
|
|
|
33,351
|
|
Depreciation
and amortization
|
|
|
1,774
|
|
|
|
1,753
|
|
Total
operating expenses
|
|
|
38,686
|
|
|
|
35,104
|
|
Operating
loss from continuing operations
|
|
|
(6,850
|
)
|
|
|
(2,295
|
)
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
605
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(7,455
|
)
|
|
|
(3,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
(3,063
|
)
|
|
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(4,392
|
)
|
|
|
(1,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of income tax benefit
|
|
|
(1,460
|
)
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
|
(5,852
|
)
|
|
|
(2,232
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(1.15
|
)
|
|
|
(0.49
|
)
|
Discontinued
operations
|
|
|
(0.38
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
|
(1.53
|
)
|
|
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(1.15
|
)
|
|
|
(0.49
|
)
|
Discontinued
operations
|
|
|
(0.38
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
$
|
(1.53
|
)
|
|
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
|
|
|
|
|
|
|
Duckwall-ALCO
Stores, Inc. and Subsidiaries
|
|
Consolidated
Statements of Cash Flows
|
|
(dollars
in thousands)
|
|
(Unaudited)
|
|
|
|
For
the Thirteen Week
|
|
|
|
Periods
Ended
|
|
|
|
|
|
|
April
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,852
|
)
|
|
|
(2,232
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,819
|
|
|
|
1,879
|
|
Gain
(loss) on sale of assets
|
|
|
(33
|
)
|
|
|
-
|
|
Share-based
compensation
|
|
|
(329
|
)
|
|
|
282
|
|
Tax
benefit from share-based compensation
|
|
|
-
|
|
|
|
11
|
|
Deferred
income tax expense, net
|
|
|
372
|
|
|
|
-
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
1,007
|
|
|
|
(1,512
|
)
|
Prepaid expenses
|
|
|
(162
|
)
|
|
|
(1,396
|
)
|
Inventories
|
|
|
(16,578
|
)
|
|
|
(7,414
|
)
|
Accounts payable
|
|
|
16,889
|
|
|
|
4,224
|
|
Prepaid income taxes
|
|
|
(4,187
|
)
|
|
|
(3,572
|
)
|
Accrued salaries and commissions
|
|
|
2,352
|
|
|
|
(168
|
)
|
Accrued taxes other than income
|
|
|
(747
|
)
|
|
|
931
|
|
Self-insurance claims reserves
|
|
|
122
|
|
|
|
397
|
|
Other assets and liabilities
|
|
|
(1,044
|
)
|
|
|
(457
|
)
|
Net
cash used in operating activities
|
|
|
(6,371
|
)
|
|
|
(9,027
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of assets
|
|
|
134
|
|
|
|
-
|
|
Acquisition
of:
|
|
|
|
|
|
|
|
|
Fixtures,
equipment and leasehold improvements
|
|
|
(2,354
|
)
|
|
|
(1,549
|
)
|
Net
cash used in investing activities
|
|
|
(2,220
|
)
|
|
|
(1,549
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
borrowings (pay downs) under revolving loan credit
agreement
|
|
|
8,956
|
|
|
|
12,999
|
|
Proceeds
from exercise of outstanding stock options
|
|
|
-
|
|
|
|
116
|
|
Excess
tax benefit from share-based compensation
|
|
|
-
|
|
|
|
11
|
|
Net
borrowings (pay downs) under term loan
|
|
|
(312
|
)
|
|
|
-
|
|
Principal
payments under capital lease obligations
|
|
|
(577
|
)
|
|
|
(547
|
)
|
Net
cash provided by financing activities
|
|
|
8,067
|
|
|
|
12,579
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(524
|
)
|
|
|
2,003
|
|
Cash
and cash equivalents at beginning of year
|
|
|
5,501
|
|
|
|
2,983
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
4,977
|
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
539
|
|
|
$
|
625
|
|
Income taxes
|
|
|
9
|
|
|
|
2,284
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
|
|
|
|
|
|
|
Duckwall-ALCO
Stores, Inc. and Subsidiaries
Notes
to Unaudited Consolidated Financial Statements
(dollars
in thousands, except per share amounts)
(1)
Basis of
Presentation
The
accompanying unaudited consolidated financial statements of Duckwall-ALCO
Stores, Inc. and Subsidiaries (the "Company") are for interim periods and have
been prepared in accordance with U.S. generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. It is suggested that the accompanying
unaudited consolidated financial statements be read in conjunction with the
consolidated financial statements included in the Company's fiscal 2008 Annual
Report. In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position of the
Company and the results of its operations and cash flows for the interim
periods. Because the Company’s business is moderately seasonal, the results from
interim periods are not necessarily indicative of the results to be expected for
the entire year.
(2)
Principles of
Consolidation
The
consolidated financial statements include the accounts of Duckwall-ALCO Stores,
Inc. and Subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
(3)
Reclassification
The
Company reclassified the change in outstanding checks in excess of bank balances
of $2,576 from net cash provided by financing activities to net cash used in
operating activities for the period ending April 29, 2007. The Company's policy
is to reflect changes in outstanding checks in excess of bank balances as cash
flow from operating activities which is consistent with the treatment for the
fiscal years ending February 3, 2008 and January 29, 2007.
(4)
Share-Based
Compensation
Effective
with fiscal 2007, the Company adopted Statement of Financial Accounting
Standards No. 123(R)
Share-Based Payment
(SFAS
123(R)) and began recognizing compensation expense for its share-based payments
based on the fair value of the awards. Share-based payments consist of stock
option grants. SFAS 123(R) requires share based compensation expense to be based
on the following: a) grant date fair value estimated in accordance with the
original provisions of SFAS 123 for unvested options granted prior to the
adoption date and b) grant date fair value estimated in accordance with the
provisions of SFAS 123(R) for all share-based payments granted subsequent to the
adoption date. For the thirteen weeks ended May 4, 2008, share-based
compensation expense increased pre-tax income by $329 and for the thirteen weeks
ended April 29, 2007 share-based compensation expense lowered pre-tax income by
$282.
Actual forfeitures
exceeded estimated forfeitures for the thirteen weeks ended May 4, 2008,
resulting in a reduction of previously recorded share-based compensation expense
of $480, offset by share-based compensation expense of $151 for the
period.
The benefits of tax deductions in excess of
recognized compensation expense are reported as a financing cash
flow.
Under
SFAS 123(R), forfeitures are estimated at the time of valuation and reduce
expense ratably over the vesting period. This estimate is adjusted periodically
based on the extent to which actual forfeitures differ, or are expected to
differ, from the previous estimate.
Stock
Incentive Plan
Under our
2003 Incentive Stock Option Plan, options may be granted to officers and key
employees, not to exceed 500,000 shares. According to the terms of
the plan, the per share exercise price of options granted shall not be less than
the fair market value of the stock on the date of grant and such options will
expire no later than five years from the date of grant. The options vest in
equal amounts over a four year requisite service period beginning from the grant
date. In the case of a stockholder owning more than 10% of the outstanding
voting stock of the Company, the exercise price of an incentive stock option may
not be less than 110% of the fair market value of the stock on the date of grant
and such options will expire no later than five years from the date of
grant. Also, the aggregate fair market value of the stock with
respect to which incentive stock options are exercisable on a tax deferred basis
for the first time by an individual in any calendar year may not exceed
$100,000. In the event that the foregoing results in a portion of an option
exceeding the $100,000 limitation, such portion of the option in excess of the
limitation shall be treated as a nonqualified stock option. At May 4,
2008, the Company had 284,000 shares authorized for future option
grants. The Company issues these grants from the unissued shares
authorized.
Under the
Company’s Non-Qualified Stock Option Plan for Non-Management Directors, options
may be granted to Directors of the Company who are not otherwise officers or
employees of the Company, not to exceed 120,000 shares. According to
the terms of the plan, the per share exercise price of options granted shall not
be less than the fair market value of the stock on the date of grant and such
options will expire five years from the date of grant. The options
vest in equal amounts over a four year requisite service period beginning from
the grant date. All options under the plan shall be non-qualified
stock options. There are no shares remaining to be issued under this
plan.
The fair
value of each option grant is separately estimated for each grant. The fair
value of each option is amortized into compensation expense on a straight-line
basis from the grant date for the award over the requisite service period as
discussed above. We have estimated the fair value of all stock option
awards as of the date of the grant by applying a modified
Black-Scholes
pricing
valuation model. The application of this valuation model involves
assumptions that are judgmental and highly sensitive in the determination of
compensation expense, including expected stock price volatility.
The
following summarizes information concerning stock option grants during fiscal
2009 and 2008:
|
|
|
|
|
For
the Thirteen Week
|
|
|
|
|
|
|
Periods
Ended
|
|
|
|
February
3, 2008
|
|
|
May
4, 2008
|
|
|
April
29, 2007
|
|
Stock
options granted
|
|
|
88,000
|
|
|
|
62,500
|
|
|
|
20,000
|
|
Weighted
average exercise price
|
|
$
|
39.02
|
|
|
$
|
13.50
|
|
|
$
|
38.06
|
|
Weighted
average grant date fair value
|
|
$
|
10.93
|
|
|
$
|
4.03
|
|
|
$
|
11.94
|
|
The weighted average for key assumptions used in determining the fair
value of options granted in the thirteen weeks ended May 4, 2008 and April 29,
2007 and a summary of the methodology applied to develop each assumption are as
follows:
|
|
|
|
|
For
the Thirteen Week
|
|
|
|
|
|
|
Periods
Ended
|
|
|
|
February
3, 2008
|
|
|
May
4, 2008
|
|
|
April
29, 2007
|
|
Expected
price volatility
|
|
|
25.6
|
%
|
|
|
34.4
|
%
|
|
|
32.4
|
%
|
Risk-free
interest rate
|
|
|
4.8
|
%
|
|
|
2.2
|
%
|
|
|
4.7
|
%
|
Weighted
average expected lives in years
|
|
|
3.8
|
|
|
|
4.0
|
|
|
|
3.8
|
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
EXPECTED
PRICE VOLATILITY -- This is a measure of the amount by which a price has
fluctuated or is expected to fluctuate. The Company uses actual historical
changes in the market value of its stock to calculate expected price volatility
because management believes that this is the best indicator of future
volatility. The Company calculates monthly market value changes from the date of
grant over a past period to determine volatility. An increase in the expected
volatility will increase compensation expense.
RISK-FREE
INTEREST RATE -- This is the U.S. Treasury rate for the date of the grant over
the expected term. An increase in the risk-free interest rate will
increase compensation expense.
EXPECTED
LIVES -- This is the period of time over which the options granted are expected
to remain outstanding and is based on management’s expectations in relation to
the holders of the options. Options granted have a maximum term of five years.
An increase in the expected life will increase compensation
expense.
DIVIDEND
YIELD --- The Company has not made any dividend payments nor does it have plans
to pay dividends in the foreseeable future. An increase in the dividend yield
will decrease compensation expense.
As of May
4, 2008, total unrecognized compensation expense related to non-vested stock
options is $1.4 million with a weighted average expense recognition period of
3.3 years.
(5)
Accounting for Income
Taxes
The
Company recorded decreases in gross unrecognized tax benefits, inclusive of
related interest, of $194 for the thirteen week period ended May 4, 2008 and
increases of $48 for the thirteen week period ended April 29, 2007,
respectively. None of the amounts recorded as unrecognized tax benefits
would impact the effective income tax rate if recognized.
The
statute of limitations for our federal income tax returns is open for 2004
through 2006. We file in numerous state jurisdictions with varying
statutes of limitation. State returns are open from 2003 through 2006
or 2004 through 2006 depending on each state’s statute of limitations. The
Company finalized an Internal Revenue Service audit for the fiscal
year ended January 29, 2006 during the first quarter of fiscal year
2009.
There were not any
significant adjustments identified during the audit.
(6)
Earnings Per
Share
Basic net
earnings per share is computed by dividing net earnings by the weighted average
number of shares outstanding. Diluted net earnings per share reflects
the potential dilution that could occur if contracts to issue securities (such
as stock options) were exercised, except for those periods with a
loss.
Diluted
earnings per share excludes the impact of the exercise of options to
purchase zero shares of stock for the thirteen week period
ended May 4, 2008 and 79,493 for same period ended April 29,
2007, as the effect would be antidilutive due to the net loss recorded during
each of the respective periods.
The
average number of shares used in computing earnings per share was as
follows:
|
|
|
|
|
|
|
|
|
Thirteen
Weeks Ended
|
|
Basic
|
|
|
Diluted
|
|
May
4, 2008
|
|
|
3,810,591
|
|
|
|
3,810,591
|
|
April
29, 2007
|
|
|
3,800,120
|
|
|
|
3,800,120
|
|
(7)
Store
Closings and Discontinued Operations
The
Company closed 14 stores (ten ALCO stores and four Duckwall stores) in the first
quarter of fiscal 2009. The Company incurred costs associated with the
store closings in the first quarter of fiscal 2009 consisting primarily of $436
of future lease costs (net of estimated sublease income of $1.3 million), lease
termination costs of $470, and severance costs of $30. The operations
of these stores were reclassified to discontinued operations in the first
quarter of fiscal 2009, as well as prior years presented. The actual
results of the future lease costs could vary from these estimates. In
addition to the 14 stores that were closed in the first quarter of fiscal 2009,
three Duckwall stores were closed and replaced by an ALCO store. These
three stores are shown in continuing operations.
In
addition to the above store closing costs, the Company incurred severance costs
of $1.9 million in the first quarter of fiscal 2009 related to the elimination
of 31 corporate positions. Of which, $81 was actually paid out during
the first quarter of fiscal 2009.
(8)
Subsequent
Events
None
(9)
New Accounting
Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157,
Fair Value
Measurement
(SFAS 157). SFAS 157 provides a definition of fair
value, provides guidance for measuring fair value in U.S. GAAP and expands
disclosures about fair value measurements. SFAS 157 will be effective at
the beginning of fiscal 2010.
Effective
February 4, 2008, the Company adopted the provisions of SFAS No. 157,
Fair Value Measurements
(SFAS 157)
, for financial
assets and financial liabilities. In accordance with Financial Accounting
Standards Board Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, the Company will delay application of SFAS No. 157 for
non-financial assets and non-financial liabilities, until February 2, 2009. SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. Adoption of SFAS No. 157 did not
have
a
material impact on our consolidated financial position, results of operations,
or cash flows.
Certain
non-financial assets measured at fair value on a non-recurring basis include
non-financial long-lived assets measured at fair value for impairment
assessment. As stated above, SFAS No. 157 will be applicable to these fair
value measurements beginning February 2, 2009.
In
February 2007, the FASB issued SFAS 159,
The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of SFAS 115
(SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The fair value option
established by this standard permits all entities to choose to measure eligible
items at fair value at specified election dates. Entities choosing the fair
value option would be required to report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date. Adoption is required for fiscal years beginning after November
15, 2007. Adoption of SFAS No. 159 did not have
a
material impact on our consolidated financial position, results of operations,
or cash flows.
ITEM
2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands
except per share amounts)
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
Certain
statements contained in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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 below. Other factors not
identified herein could also have such an effect. Factors that could cause
actual results to differ materially from those discussed in the forward-looking
statements and from historical information include, but are not limited to,
those factors described below.
OVERVIEW
Operations
. The
Company is a regional discount retailer operating 251 stores in 22 states in the
central United States. The thirteen weeks ended May 4, 2008 and April
29, 2007 are referred to herein as the first quarter of fiscal 2009 and 2008,
respectively. For purposes of this management's discussion and
analysis of financial condition and results of operations, the financial numbers
are presented in thousands, except as noted.
Fiscal
year 2009 is a 52-week year following a 53-week year, fiscal
2008.
Strategy.
The
Company's overall business strategy involves identifying and opening stores in
towns that will provide the Company with the highest return on
investment. The Company competes for retail sales with other
entities, such as mail order companies, specialty retailers, mass merchandisers,
dollar stores, manufacturer's outlets, and the internet.
The
Company is routinely evaluating the appropriate mix of merchandise to improve
sales and gross margin performance. The Company uses centralized
purchasing, merchandising, pricing and warehousing to obtain volume discounts,
improve efficiencies and achieve consistency among stores and the best overall
results. The Company utilizes information obtained from its
point-of-sale system and regular input from its store associates to determine
its merchandise offerings.
The Company is aggressively reviewing its inventory levels and
marketing strategies to address its same-store sales decline. The
inventory level of the Company was allowed to decline too far during the fourth
quarter of fiscal 2008. The Company believes that this was a significant
factor in the same-store sales decline it experienced during the first quarter
of fiscal 2009. The Company is still evaluating the proper inventory level
for each of its stores to provide the proper selection of merchandise for its
customer and the proper return for its shareholders. The Company is
experiencing increased merchandise costs, especially on its import
merchandise. The Company is considering all of its purchasing options to
minimize the affect on its gross margin.
Company
Initiatives.
|
•
|
SKU rationalization
initiative: The Company is in the process of performing a SKU
(stock keeping unit) rationalization process. Each and every
SKU offered
is being
reviewed to ensure that it meets the Company expected GMROI (gross margin
return on investment).
|
|
•
|
Marketing
initiative: The Company is aggressively reviewing its fiscal
2009 marketing strategies to find the most effective and cost efficient
method to reach its customers.
|
Recent Events
.
|
•
|
The
Company closed 17 stores in the first quarter of fiscal
2009. Of these 17 stores, ten were ALCO stores, four were
Duckwall stores and three were Duckwall stores replaced by an ALCO
store. The Company took a charge of $936 in lease
termination costs and related
expenses.
|
|
•
|
Then
President and Chief Executive Officer, Bruce C. Dale resigned on February
22, 2008. On April 11, 2008, four members of the Senior
Management team were terminated. On May 2, 2008, the Company
eliminated 27 corporate office positions, including one
officer. These resignations and reduction in force have caused
the Company to record severance expenses of $1.9 million in the first
quarter of fiscal 2009 compared to $128 during the first quarter of fiscal
2008.
|
|
•
|
Inventory
review initiative: The Company has reviewed its ownership in
items that it has either discontinued, clearanced or is
inactive. This review started in the first quarter of fiscal
2009. The Company has determined a sell through plan to
liquidate this merchandise and develop a process to minimize the
accumulation of this inventory going forward. Due to this
analysis the Company has taken a $1.3 million cost of goods sold charge in
the first quarter of fiscal 2009. The Company did not take an
inventory reserve charge during the first quarter of fiscal
2008.
|
Key Items
in First Quarter Fiscal 2009
The
Company measures itself against a number of financial metrics to assess its
performance. Some of the important financial items during the first
quarter of fiscal 2009 were:
·
|
Net
sales decreased 0.3% to $106 million. Same store sales
decreased 8.4% compared to the prior year first
quarter.
|
·
|
Gross
margin percentage decreased to 30.0% of sales, when compared to 30.9% in
the prior year first quarter.
|
·
|
Net
loss per share was $1.53 in the first quarter of fiscal 2009 compared to
$0.59 net loss per share in the prior year first
quarter.
|
·
|
The
Company’s earnings before interest, taxes, depreciation and amortization
(“EBITDA”) from continuing operations for the first quarter 2009 was
($1,396).
|
·
|
The
Company’s return on average equity (“ROE”) for the first quarter 2009 was
(0.8)%.
|
Same
store sales growth is a measure which may indicate whether existing stores are
maintaining their market share. Other factors, such as the overall
economy, may also affect same store sales. The Company defines same
stores as those stores that were open as of the first day of the prior fiscal
year and remain open at the end of the reporting period. The same
store sales for all Company stores decreased 8.4% compared to the prior year
first quarter, the ALCO stores same store sales decreased 8.4%, and the Duckwall
same stores sales decreased 6.8% during the first quarter of fiscal
2009. In the first quarter ended May 4, 2008, the Company opened six
ALCO stores, closed ten ALCO stores and seven Duckwall stores. Of the
seven Duckwall stores closed, three of those markets were converted to ALCO
stores.
RESULTS OF
OPERATIONS
Thirteen
Weeks Ended May 4, 2008 Compared to Thirteen Weeks Ended April 29,
2007.
Net
Sales
Net sales
for the first quarter of fiscal 2009 decreased $283, or 0.3%, to $105,982
compared to $106,265 for the first quarter of fiscal 2007. Same store
sales decreased 8.4% when compared with the prior year same
quarter. The Company experienced a reduction in customer count
during the first quarter of fiscal 2009. This was a 9.5% decrease in
customer count over the prior year first quarter. The Company did
experience an increase in average sale increase of 1.3%. The
inventory level of the Company was allowed to decline too far during the fourth
quarter of fiscal 2008. The Company believes that this was a significant
factor in the same-store sales decline it experienced during the first quarter
of fiscal 2009.
Gross
Margin
Gross
margin for the first quarter of fiscal 2009 decreased $973, or 3.0%, to $31,836
compared to $32,809 in the first quarter of fiscal 2008. Gross margin
as a percentage of sales was 30.0% for the first quarter of fiscal 2009, which
decreased when compared to 30.9% for the first quarter of fiscal
2008. The decrease in the gross margin percentage was primarily
due to the inventory review initiative expense of $1.3 million, increased store
level markdowns and increased freight.
SG&A
Selling,
general and administrative (SG&A) expense increased $3,561 or 10.7%, to
$36,912 in the first quarter of fiscal 2009 compared to $33,351 in the first
quarter of fiscal 2008. As a percentage of net sales, selling,
general and administrative expenses for the first quarter of fiscal 2009
were 34.8%, compared to 31.4% for fiscal 2008. The increase in
SG&A expenses are attributable to severance charges of $1.9 million,
increased real property rent of $906 and increased new store opening
expenses of $622 offset by reduced supplies of $380 and share-based
compensation of $329. Actual forfeitures exceeded estimated
forfeitures for the thirteen weeks ended May 4, 2008, resulting in a reduction
of previously recorded share-based compensation expense of $480, offset by
share-based compensation expense of $151 for the period. The Company opened
six new stores in the first quarter of fiscal 2009 compared to one new
store opened in the first quarter of fiscal 2008.
Depreciation
and Amortization Expense
Depreciation
and amortization expense increased $21, or 1.2%, to $1,774 in the first
quarter of fiscal 2009 compared to $1,753 in the first quarter of fiscal
2008.
Interest
Expense
Interest
expense decreased $153, or 20.2%, to $605 in the first quarter of fiscal 2009
compared to $758 in the first quarter of fiscal 2008. The decrease in
interest expense was due reduced levels of borrowing by the Company. The
reduced borrowings were due to the Company having less inventory during the
first quarter of fiscal 2009 compared to the first quarter of fiscal
2008.
Income
Taxes
The
Company’s effective tax rate on earnings from continuing operations before
income taxes in the first quarter of fiscal 2009 was 41.1%, compared to 39.5% in
the first quarter of fiscal 2008. The effective tax rate is higher
due to increased state effective tax rates.
Loss
from Discontinued Operations
Loss from
discontinued operations, net of income benefit, was $1,460 in the first quarter
of fiscal 2009, compared to loss of $385 in the first quarter of fiscal
2008. In the first quarter of fiscal 2009, ten ALCO stores and four
Duckwall stores were closed. The Company closed one ALCO and one
Duckwall in the first quarter of fiscal 2008. Stores closed where the
Company has exited the market are reflected in discontinued operations in all
periods presented. The three Duckwall stores closed were replaced by
an ALCO store are shown in continuing operations.
SG&A Detail: Certain
Financial Measures
The
Company has included EBITDA, a non-GAAP performance measure, as part of its
disclosure as a means to enhance its communications with stockholders. Certain
stockholders have specifically requested this information as a means of
comparing the Company to other retailers that disclose similar non-GAAP
performance measures. Further, management utilizes this measure in internal
evaluation; review of performance and to compare the Company’s financial measure
to that of its peers. EBITDA differs from the most comparable GAAP financial
measure (earnings from continuing operations before discontinued operations) in
that it does not include non-cash items. As a result, it may not reflect
important aspects of the results of the Company’s operations.
|
|
|
|
|
|
|
|
|
For
the Thirteen Week Periods Ended
|
|
SG&A
Expenses Breakout
|
|
May
4, 2008
|
|
|
April
29, 2007
|
|
General
office
|
|
$
|
8,110
|
|
|
$
|
5,904
|
|
Distribution
center
|
|
|
2,337
|
|
|
|
2,291
|
|
401K
expense
|
|
|
125
|
|
|
|
121
|
|
Same-store
SG&A
|
|
|
22,740
|
|
|
|
24,328
|
|
Non
same-store SG&A (1)
|
|
|
3,929
|
|
|
|
425
|
|
Share-based
compensation expense
|
|
|
(329
|
)
|
|
|
282
|
|
Final
SG&A as reported
|
|
$
|
36,912
|
|
|
$
|
33,351
|
|
|
|
|
|
|
|
|
|
|
ROE
(2)
|
|
|
-0.8
|
%
|
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
105,982
|
|
|
$
|
106,265
|
|
SG&A
as % of sales
|
|
|
34.8
|
%
|
|
|
31.4
|
%
|
|
|
|
|
|
|
|
|
|
SG&A
per average selling square foot
|
|
$
|
8.61
|
|
|
$
|
8.61
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(3)
|
|
$
|
(1,396
|
)
|
|
$
|
(132
|
)
|
EBITDA
per average selling square foot (4)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Sales
per average selling square feet (5)
|
|
|
|
|
|
|
|
|
ALCO
|
|
$
|
24.45
|
|
|
$
|
27.24
|
|
Duckwall
|
|
$
|
18.29
|
|
|
$
|
19.81
|
|
Total
|
|
$
|
24.71
|
|
|
$
|
27.42
|
|
|
|
|
|
|
|
|
|
|
Average
inventory per average selling square feet (5)(6)
|
|
|
|
|
|
|
|
|
ALCO
(7)
|
|
$
|
28.09
|
|
|
$
|
31.83
|
|
Duckwall
|
|
$
|
21.38
|
|
|
$
|
21.46
|
|
Total
(7)
|
|
$
|
27.64
|
|
|
$
|
31.00
|
|
|
|
|
|
|
|
|
|
|
Average
selling square feet (in thousands) (5)
|
|
|
4,289
|
|
|
|
3,875
|
|
Average
square feet % change
|
|
|
10.7
|
%
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
Total
stores operating beginning of period
|
|
|
262
|
|
|
|
256
|
|
Total
stores operating end of period
|
|
|
251
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
Same-store
sales change
|
|
|
-8.4
|
%
|
|
|
1.2
|
%
|
Same-store
gross margin percentage change
|
|
|
0.4
|
%
|
|
|
2.4
|
%
|
Same-store
SG&A percentage change
|
|
|
-6.5
|
%
|
|
|
6.6
|
%
|
Total
customer count change
|
|
|
-9.5
|
%
|
|
|
-2.7
|
%
|
Average
sale per ticket change
|
|
|
1.3
|
%
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
(1)
Non Comparable Stores are those stores opened in Fiscal 2008 & Fiscal
2007
|
|
|
|
|
|
|
|
|
(2)
Return on average equity (ROE) is calculated as net earnings (loss)
divided by average stockholders' equity
|
|
|
|
|
Average
Stockholders' Equity is calculated as (beginning of period stockholders'
equity plus end of period stockholders' equity) divided by
2
|
|
|
(3)
Adjusted EBITDA is a non-GAAP financial measure and is calculated as
earnings (loss) from continuing operations before interest, taxes,
depreciation and amortization, and stock option
expense.
|
(4)
Adjusted EBITDA per selling square foot is a non-GAAP financial measure
and is calculated as EBITDA divided by selling square
feet.
|
|
(5)
Average selling square feet is (beginning square feet plus ending square
feet) divided by 2.
|
|
|
|
|
|
|
|
|
(6)
Average inventory is (beginning inventory plus ending inventory) divided
by 2. This includes only the merchandise inventory at store
level.
|
|
(7)
Excludes inventory for unopened stores.
|
|
|
|
|
|
|
|
|
Fiscal 2009 Compared to
Fiscal 2008
General Office expenses for fiscal
200
9
increased $
2.2 million
or
37.4
%. The increase
was
primarily due to
severance costs of 1.9
million
Comparable store SG&A expenses
de
creased $
1.6 million
or
6.5
%. The
de
crease
was
primarily due to
d
ec
reased
labor and benefits of $1.2
million,
de
creased
supplies expenses of $412
and
de
creased
advertising
expenses
of
$
224
.
Non
Comparable Stores SG&A expenses increased $3.5 million or
824.5%. The Company has opened 23 stores since the first quarter of
fiscal 2008.
Reconciliation and
Explanation of Non-GAAP Financial Measures
The
following table shows the reconciliation of Adjusted EBITDA per selling square
foot from loss from continuing operations:
|
|
For
the Thirteen Week
|
|
|
|
Periods
Ended
|
|
|
|
|
|
|
|
|
|
|
May
4, 2008
|
|
|
April
29, 2007
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(4,392
|
)
|
|
$
|
(1,847
|
)
|
Plus
interest
|
|
|
605
|
|
|
|
758
|
|
Plus
taxes
|
|
|
(3,063
|
)
|
|
|
(1,206
|
)
|
Plus
depreciation and amortization
|
|
|
1,774
|
|
|
|
1,753
|
|
Plus
shared-based compensation expense
|
|
|
(329
|
)
|
|
|
282
|
|
Plus
preopening store costs
|
|
|
722
|
|
|
|
100
|
|
Plus
inventory review initiative
|
|
|
1,345
|
|
|
|
-
|
|
Plus
executive and staff severance
|
|
|
1,942
|
|
|
|
128
|
|
=EBITDA
|
|
$
|
(1,396
|
)
|
|
$
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations per square foot
|
|
$
|
(1.02
|
)
|
|
$
|
(0.48
|
)
|
Plus
interest per square foot
|
|
|
0.14
|
|
|
|
0.20
|
|
Plus
taxes per square foot
|
|
|
(0.71
|
)
|
|
|
(0.31
|
)
|
Plus
depreciation and amortization per square foot
|
|
|
0.41
|
|
|
|
0.45
|
|
Plus
share-based compensation expense per square foot
|
|
|
(0.08
|
)
|
|
|
0.07
|
|
Plus
preopening store costs per square feet
|
|
|
0.17
|
|
|
|
0.03
|
|
Plus
inventory review initiative per square feet
|
|
|
0.31
|
|
|
|
-
|
|
Plus
executive and staff severance per square feet
|
|
|
0.45
|
|
|
|
0.03
|
|
=EBITDA
per selling square foot
|
|
$
|
(0.33
|
)
|
|
$
|
(0.01
|
)
|
LIQUIDITY AND CAPITAL
RESOURCES
The
Company's primary sources of funds are cash flows from operations and borrowings
under its revolving loan credit facility.
At May 4,
2008, working capital (defined as current assets less current liabilities) was
$109.6 million compared to $117.1 million at April 29, 2007. The
decrease in working capital was primarily attributable to decreased
inventory.
The
Company uses its revolving loan credit facility and vendor trade credit
financing (accounts payable) to fund the build up 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 May 4, 2008 was $33.0 million, resulting in an available line of
credit at that date of $72.0 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 have been determined in accordance with
Emerging Issues Task Force of the Financial Accounting Standards Board as set
forth in EITF Issue 95- 22,
Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include both a
Subjective Acceleration Clause and a Lock-Box
Arrangement
. As of June 11,
2008, the Company believes it is 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.
Cash used
in operating activities in the thirteen week period of fiscal 2009 and 2008 was
$6,371 and $9,027 respectively. The decrease in the amount of cash
used in operating activities in the thirteen week period of fiscal 2009
compared to the thirteen week period of fiscal 2008 was primarily due to an
increase in accrued salaries and commissions and a decrease in
receivables.
Cash used
in by investing activities (including acquisitions, divestitures and
remodeling of property and equipment) in the thirteen week period of fiscal 2009
and 2008 was $2,220 and $1,549, respectively.
Cash provided
by financing activities in the thirteen week period of fiscal 2009 and 2008
of $8,067 and $12,579 respectively. Net borrowings on the revolving
loan generated $8,956 during the thirteen week ended May 4, 2008, compared to
$12,999 during the thirteen week period of the prior fiscal year.
BUSINESS
OPERATIONS
The
following chart indicates the percentage of sales, excluding fuel sales,
represented by each of our major product categories for the thirteen week
periods of fiscal 2009 and 2008:
|
|
|
|
|
|
|
|
|
Percentage
of Sales
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Merchandise
Category:
|
|
|
|
|
|
|
Consumables
and commodities
|
|
|
33
|
%
|
|
|
32
|
%
|
Electronics,
entertainment, sporting goods, toys and outdoor living
|
|
|
25
|
%
|
|
|
24
|
%
|
Apparel
and accessories
|
|
|
19
|
%
|
|
|
19
|
%
|
Home
furnishings and decor
|
|
|
13
|
%
|
|
|
14
|
%
|
Other
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
NEW ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157,
Fair Value
Measurement
(SFAS 157). SFAS 157 provides a definition of fair
value, provides guidance for measuring fair value in U.S. GAAP and expands
disclosures about fair value measurements. SFAS 157 will be effective at
the beginning of fiscal 2010.
Effective
February 4, 2008, the Company adopted the provisions of SFAS No. 157,
Fair Value Measurements
(SFAS 157)
, for financial
assets and financial liabilities. In accordance with Financial Accounting
Standards Board Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, the Company will delay application of SFAS No. 157 for
non-financial assets and non-financial liabilities, until February 2, 2009. SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. Adoption of SFAS No. 157 did not
have
a
material impact on our consolidated financial position, results of operations,
or cash flows.
Certain
non-financial assets measured at fair value on a non-recurring basis include
non-financial long-lived assets measured at fair value for impairment
assessment. As stated above, SFAS No. 157 will be applicable to these fair
value measurements beginning February 2, 2009.
In
February 2007, the FASB issued SFAS 159,
The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of SFAS 115
(SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The fair value option
established by this standard permits all entities to choose to measure eligible
items at fair value at specified election dates. Entities choosing the fair
value option would be required to report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date. Adoption is required for fiscal years beginning after November
15, 2007. Adoption of SFAS No. 159 did not have
a
material impact on our consolidated financial position, results of operations,
or cash flows.
ITEM
3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
INSTRUMENTS ENTERED INTO
OTHER THAN FOR TRADING – INTEREST RATE RISK
The
Company is exposed to various types of market risk in the normal course of its
business, including the impact of interest rate changes. The Company
may enter into interest rate swaps to manage its exposure to interest rate
changes, and we may employ other risk management strategies, including the use
of foreign currency forward contracts. The Company does not currently
hold any derivative instruments and would enter into such instruments solely for
cash flow hedging purposes and not for trading purposes.
As
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources", the Company has a
variable interest rate debt facility that is subject to interest rate
risk. The Company uses this facility to meet the short-term needs of
its capital improvements and inventory purchases and other operating
activities. These obligations expose the Company to variability in
interest payments due to changes in interest rates. If interest rates
increase, interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases. Based on the Company’s current
borrowings under its revolving credit facility, if interest rates were to
increase 1% on an annual basis interest expense would increase
$296.
The
Company has and continues to analyze its debt structure in relation to interest
rate risk and believes the mix of debt instruments utilized by the Company
(revolving line of credit, capital leases and operating leases) adequately
addresses these risk issues. This process of evaluation is continuous
and the Company will adjust its debt structure as is appropriate depending on
market conditions.
ITEM
4.
CONTROLS
AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Interim Chief Executive
Officer and the Interim Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, as
amended) as of May 4, 2008. Based upon this evaluation, the Interim Chief
Executive Officer and the Interim Chief Financial Officer have concluded that
the Company’s disclosure controls and procedures were not effective as of May 4,
2008 because of the material weakness described in internal control over
financial reporting described below in Item 4(b).
(b) Management’s
Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities and Exchange Act of 1934, as amended. The Company’s internal control
system is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external reporting purposes in accordance with U.S. generally accepted
accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
A
material weakness represents a deficiency or a combination
of deficiencies in internal controls over financial reporting, such that
there is a reasonable possibility that a material misstatement of the
Company's annual or interim financial statements will not be prevented or
detected on a timely basis.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of February 3, 2008 based on the criteria established in
Internal Control- Integrated
Framework
issued
by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of
this assessment, management concluded that the Company’s internal control over
financial reporting was not effective as of May 4, 2008.
·
|
The
Company did not have adequate transition plans to address turnover in
finance and accounting personnel. As a result, due to
significant changes in these personnel that occurred around the Company’s
February 3, 2008 year-end closing process, the Company did not have
sufficient trained resources to effectively operate the year-end closing
process controls. This resulted in misstatements that were
corrected prior to the issuance of the consolidated financial
statements. As a result of this material weakness, there is more
than a reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
|
(c) Changes
in Internal Control over Financial Reporting
The
Company had significant changes to its accounting and finance personnel during
the first quarter of fiscal 2009. These changes resulted in
improvement in each position. The Company replaced three positions
with individuals who had obtained Bachelors of Science accounting
degrees. These positions were previously held by individuals without
this education. The Company replaced one position with an individual
who has achieved their certified public accountant license. The
person who had previously held this particular position did not have this
license. The Company believes that these changes have significantly
strengthened the Finance Department for the future.
The
President and Chief Executive Officer of the Company resigned on February 22,
2008. At that time the Board of Directors appointed the current
Senior Vice President – Chief Financial Officer to assume the duties of Interim
President and Chief Executive Officer. The Vice President –
Controller was appointed to assume the duties of Interim Chief Financial
Officer.
PART
II - OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
There are
no material pending legal proceedings other than routine litigation incidental
to the business to which the Company is party of or with any property is
subject.
ITEM
1A.
RISK
FACTORS
There
have been no material changes to our risk factors as previously disclosed in our
Form 10-K for the fiscal year ended February 3, 2008.
ITEM
2.
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
The Board
of Directors of the Company has authorized the Company to repurchase up to
2,014,461 shares of Common Stock, of which 1,817,798 shares had been purchased
as of May 4, 2008. The following are details of repurchases under
this program for the period covered by this report:
|
|
|
|
|
|
|
|
|
|
|
Maximum
Number
|
|
|
|
|
|
|
|
|
|
Total
Number of
|
|
|
(or
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
shares
(or Units)
|
|
|
Value)
of Shares (or
|
|
|
|
Total
Number
|
|
|
Average
Price
|
|
|
Purchased
as Part
|
|
|
Units)
that May Yet
|
|
|
|
Of
Shares (or
|
|
|
Paid
per Share
|
|
|
of
Publicly Announced
|
|
|
Be
Purchased Under
|
|
Period
|
|
Units)
Purchased
|
|
|
(or
Unit)
|
|
|
Plans
or Programs
|
|
|
the
Plans or Programs
|
|
February
4, 2008 – March 2, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
196,663
|
|
March
3, 2008 – April 6, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
196,663
|
|
April
7, 2008 – May 4, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
196,663
|
|
ITEM
3.
DEFAULTS
UPON SENIOR SECURITIES
Not
applicable.
ITEM
4.
SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
None.
ITEM
5.
OTHER
INFORMATION
None.
ITEM
6.
EXHIBITS
See the
Exhibit Index immediately following the signature page hereto.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934 the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DUCKWALL-ALCO STORES,
INC.
(Registrant)
/s/ Jon A.
Ramsey
Jon A.
Ramsey
Interim
Chief Financial Officer – Vice
President Controller
Signing
on behalf of the registrant and as Principal Financial Officer
EXHIBIT
INDEX
3.1
|
Articles of Incorporation of
Duckwall-ALCO Stores, Inc., amended as of June 13, 1994 and restated
solely for filing with the Securities and Exchange Commission (filed as
Exhibit 3.1 to Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 1, 2004 and incorporated herein by
reference).
|
3.2
|
Bylaws of Duckwall-ALCO Stores,
Inc. (filed as Exhibit 3.2 to Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 1, 2004 and incorporated herein by
reference).
|
4.1
|
Specimen of Duckwall-ALCO Stores,
Inc. Common Stock Certificate. (filed as Exhibit 4.1 to Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2004
and incorporated herein by
reference).
|
4.2
|
Reference is made to the Amended
and Restated Articles of Incorporation described under 3.1 above and
Bylaws described under 3.2
above.
|
31.1
|
Certification of Interim Chief
Executive Officer of Duckwall-ALCO Stores, Inc. dated June 11, 2008,
pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification of Interim Chief
Financial Officer of Duckwall-ALCO Stores, Inc. dated June 11, 2008,
pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
Certification of Interim Chief
Executive Officer of Duckwall-ALCO Stores, Inc, dated June 11, 2008,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly
Report on Form 10-Q for the quarter ended May 4, 2008 and is not treated
as filed in reliance upon § 601(b)(32) of Regulations
S-K.
|
32.2
|
Certification of Interim Chief
Financial Officer of Duckwall-ALCO Stores, Inc., dated June 11, 2008,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly
Report on Form 10-Q for the quarter ended May 4, 2008 and is not treated
as filed in reliance upon § 601(b)(32) of Regulations
S-K.
|
Signature
and Title
|
|
|
Date
|
|
|
|
|
/s/
Donny R. Johnson
|
|
|
June
11, 2008
|
Donny
R. Johnson
|
|
|
|
Interim
President and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Jon A. Ramsey
|
|
|
June
11, 2008
|
Jon
A. Ramsey
|
|
|
|
Interim
Chief Financial Officer and Treasurer
|
|
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Raymond A.D. French
|
|
|
June
11, 2008
|
Raymond
A.D. French
|
|
|
|
Director
|
|
|
|
|
|
|
|
/s/
James G. Hyde
|
|
|
June
11, 2008
|
James
G. Hyde
|
|
|
|
Director
|
|
|
|
|
|
|
|
/s/
Dennis E. Logue
|
|
|
June
11, 2008
|
Dennis
E. Logue
|
|
|
|
Director
|
|
|
|
|
|
|
|
/s/
Lolan C. Mackey
|
|
|
June
11, 2008
|
Lolan
C. Mackey
|
|
|
|
Director
|
|
|
|
|
|
|
|
/s/
Royce L. Winsten
|
|
|
June
11, 2008
|
Royce
L. Winsten
|
|
|
|
Director
|
|
|
|
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