ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
The thirteen weeks ended July 29, 2001 and July 30, 2000 are referred to herein as the second quarter of fiscal 2002 and 2001, respectively.
As used below the term "competitive market" refers to any market wherein there is one or more national or regional full-line discount stores located in the market served by the Company. The term "non-competitive market" refers to any market where there is no national or regional full-line discount store located in the market served by the Company. Even in a non-competitive market, the Company faces competition from a variety of sources.
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 29, 2001 Compared to Thirteen Weeks Ended July 30, 2000.
The Company continues to execute its basic strategy of opening stores in under-served markets that have no competition from national or regional full-line discount retailers. During the second quarter of fiscal 2002 the Company opened one ALCO store, which was in a new, non-competitive market and closed one Duckwall store, resulting in a quarter end total of 264 stores. For the twenty-six week period ending July 29, 2001, the Company opened two stores and closed five stores. As of July 29, 2001, over 80% of the stores were located in non-competitive markets. Through the second quarter, the Company has completed the remodel of 19 of the planned 32 ALCO stores targeted for completion in the current fiscal year.
Net sales for the second quarter of fiscal 2002 increased $2,205 or 2.2% to $101,763 compared to $99,558 for the second quarter of fiscal 2001. Net sales for the prototype Class 18 ALCO stores open the full period in both the second quarter of fiscal 2002 and fiscal 2001 (comparable stores) increased $1,087 or 2.4%. The Duckwall variety stores produced an increase of $187 or 2.2% compared to the second quarter of the prior fiscal year. Net sales for all stores open the full period increased $1,858 or 2.0% compared to the second quarter of the prior fiscal year. The 19 remodeled stores have, on average, experienced double digit increases in sales in the current fiscal year since their remodel. Feature items and everyday values are emphasized. In addition to the remodel program, the Company continues to benefit from exciting marketing and merchandising initiatives that are contributing to improved sales. These include opportunistic buys in various departments, feature programs, expansion of consumables and more emphasis on opening price point merchandise. These programs are designed to increase purchases by our customers while they are shopping.
Net sales for the twenty-six week period ending July 29, 2001 increased $2,908 or 1.5% to $193,557 compared to $190,649 in the comparable twenty-six week period of the prior fiscal year. Net sales of comparable class 18 ALCO stores increased by $1,375 or 1.6% for the twenty-six week period ending July 29, 2001 compared to the twenty-six week period of the prior fiscal year. Net sales for all stores open the full period increased $1,607 or 0.9% for the twenty-six week period ending July 29, 2001 compared to the twenty-six week period of the prior fiscal year.
Gross margin for the second quarter of fiscal 2002 decreased $112 or 0.3% to $33,173 compared to $33,285 in the second quarter of fiscal 2001. Gross margin was negatively impacted by higher transportation costs, as well as the mix of sales that included more lower margin items. Gross margin as a percentage of sales was 32.6% for the second quarter of fiscal 2002 compared to 33.4% in the second quarter of fiscal 2001.
Gross margin for the twenty-six week period ended July 29, 2001 was $62,828, which was $783 or 1.2% lower than last year's twenty-six week gross margin of $63,611. As a percent of net sales, gross margin for the twenty-six week period ended July 29, 2001 was 32.5% compared to 33.4% in the twenty-six week period of the prior fiscal year. The reduction in gross margin percentage was attributable to higher transportation costs, as well as the mix of sales that included more lower margin items.
Selling, general and administrative expense increased $1,529 or 5.5% to $29,341 in the second quarter of fiscal 2002 compared to $27,812 in the second quarter of fiscal 2001. As a percentage of net sales, selling, general and administrative expenses in the second quarter of fiscal 2002 was 28.8%, compared to 27.9% in the second quarter of fiscal 2001. The increase in the selling, general and administrative expense was due to higher than normal inflationary increases in utilities and insurance costs, and expenses which increased with the implementation of the Company's store remodel program and other marketing, merchandising and operations initiatives.
Selling, general and administrative expenses increased $1,908 or 3.5% to $56,683 for the twenty-six week period ended July 29, 2001 compared to $54,775 for the comparable twenty-six week period of the prior fiscal year. Selling, general and administrative expense as a percent of net sales was 29.3% for the twenty-six week period ending July 29, 2001, compared to 28.7% for the twenty-six week period ended July 30, 2000. The remodel and merchandising initiatives described above also contributed to the increased selling, general and administrative expenses.
Provision for asset impairment and store closure was $0 in the second quarter of fiscal 2002 compared to $23 in the second quarter of fiscal 2001.
Provision for asset impairment and store closure was ($8) for the twenty-six week period ended July 29, 2001 compared to $114 for the comparable twenty-six week period of the prior fiscal year. The store closing expense for the stores closed in the current fiscal year was accrued in the prior fiscal year. The resulting $8 of income was the excess of the accrual for closing over the actual expenses incurred to close the stores.
Depreciation and amortization expense increased $12 or 0.8% to $1,572 in the second quarter of fiscal 2002 compared to $1,560 in the second quarter of fiscal 2001.
Income from operations decreased $1,630 or 41.9% to $2,260 in the second quarter of fiscal 2002 compared to $3,890 in the second quarter of fiscal 2001. Income from operations as a percentage of net sales was 2.2% in the second quarter of fiscal 2002 compared to 3.9% in the second quarter of fiscal 2001.
Income from operations decreased $2,576 or 45.9% to $3,038 for the twenty-six week period ended July 29, 2001 compared to $5,614 in the comparable twenty-six week period of the prior fiscal year.
Interest expense decreased $28 or 3.7% in the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001.
Net earnings for the second quarter of fiscal 2002 were $943, a decrease of $963 or 50.5% over the net earnings of $1,906 for the second quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are cash flow from operations, borrowings under its revolving loan credit facility and vendor trade credit financing (increases in accounts payable).
At July 29, 2001 working capital (defined as current assets less current liabilities) was $67,228 compared to $94,001 at the end of fiscal 2001. The decrease in working capital was due to the classification of the revolving loan as a current liability as it becomes due in April 2002. While no commitments are in place, management expects to renew or replace the revolving loan prior to April 2002.
Operating activities in the twenty-six week period of fiscal 2002 generated cash in the amount of $1,183 and used cash in the amount of $696 in the twenty-six week period of fiscal 2001. The increase in the amount of cash generated by operating activities in the twenty-six week period of fiscal 2002 compared to the twenty-six week period of fiscal 2001 was primarily due to a larger increase in accounts payable as well as a smaller increase in inventory.
The Company used cash from financing activities in the twenty-six week period of fiscal 2002 in the amount of $2,512 and $3,620 in the twenty-six week period of fiscal 2001. Cash was used for stock redemption, as well as to make principal payments on long term notes and capital leases.
Cash used in investing activities in the twenty-six week period of fiscal 2002 and 2001 totaled $3,086 and $2,998 respectively. Total anticipated cash payments for acquisition of property and equipment in fiscal 2002, principally for store buildings and store and warehouse fixtures and equipment, are $8,200.
BUSINESS OPERATIONS AND SEGMENT INFORMATION
The Company's business activities include operation of ALCO discount stores in towns with populations which are typically less than 5,000 not served by other regional or national full-line discount chains and Duckwall variety stores that offer a more limited selection of merchandise which are primarily located in communities of less than 2,500 residents.
For financial reporting purposes, the Company has established two operating segments: "ALCO Discount Stores", and "All Other", which includes the Duckwall variety stores and other business activities, such as general office, warehouse and distribution activities.
