ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
The thirteen weeks ended October 28, 2001 and October 29, 2000 are referred to herein as the third 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 October 28, 2001 Compared to Thirteen Weeks Ended October 29, 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 third quarter of fiscal 2002 the Company opened one ALCO store, which was in a new, non-competitive market and closed one ALCO store and one Duckwall store, resulting in a quarter end total of 263 stores. For the thirty-nine week period ended October 28, 2001, the Company opened three stores and closed seven stores. As of October 29, 2001, over 80% of the stores were located in non-competitive markets. As of the end of the third quarter, the Company had successfully completed the remodel of all of the planned 32 ALCO stores targeted for completion in the current fiscal year. The Company plans to continue its remodel program next year.
Net sales for the third quarter of fiscal 2002 increased $5,544 or 6.2% to $94,807 compared to $89,263 for the third quarter of fiscal 2001. Net sales for the prototype Class 18 ALCO stores open the full period in both the third quarter of fiscal 2002 and fiscal 2001 (comparable stores) increased $1,811 or 4.4%. The Duckwall variety stores produced an increase of $498 or 6.7% compared to the third quarter of the prior fiscal year. Net sales for all stores open the full period increased $4,376 or 5.1% compared to the third quarter of the prior fiscal year. The 32 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 everyday values and opening price point merchandise. These programs are designed to increase purchases by our customers while they are shopping.
Net sales for the thirty-nine week period ended October 28, 2001 increased $8,452 or 3.0% to $288,364 compared to $279,912 in the comparable thirty-nine week period of the prior fiscal year. Net sales of comparable class 18 ALCO stores increased by $3,187 or 2.5% for the thirty-nine week period ended October 28, 2001 compared to the thirty-nine week period of the prior fiscal year. Net sales for all stores open the full period increased $5,981 or 2.2% for the thirty-nine week period ended October 28, 2001 compared to the thirty-nine week period of the prior fiscal year.
Gross margin for the third quarter of fiscal 2002 increased $2,570 or 8.6% to $32,542 compared to $29,972 in the third quarter of fiscal 2001. Gross margin was positively impacted by an improved merchandise assortment as well as the mix of sales that included more higher margin items. Gross margin as a percentage of sales was 34.3% for the third quarter of fiscal 2002 compared to 33.6% in the third quarter of fiscal 2001. Gross margin as a percentage of sales also benefited from lower markdowns and transportation costs, partially offset by increased shrinkage costs.
Gross margin for the thirty-nine week period ended October 28, 2001 was $95,370, which was $1,787 or 1.9% higher than last year's thirty-nine week gross margin of $93,583. As a percent of net sales, gross margin for the thirty-nine week period ended October 28, 2001 was 33.1% compared to 33.4% in the thirty-nine 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 and higher shrinkage costs in the first six months of the year.
Selling, general and administrative expense increased $2,169 or 7.9% to $29,515 in the third quarter of fiscal 2002 compared to $27,346 in the third quarter of fiscal 2001. As a percentage of net sales, selling, general and administrative expenses in the third quarter of fiscal 2002 were 31.1%, compared to 30.6% in the third 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 that increased with the implementation of the Company's store remodel program and other marketing, merchandising and operations initiatives.
Selling, general and administrative expenses increased $4,077 or 5.0% to $86,198 for the thirty-nine week period ended October 28, 2001 compared to $82,121 for the comparable thirty-nine week period of the prior fiscal year. Selling, general and administrative expense as a percent of net sales was 29.9% for the thirty-nine week period ended October 28, 2001, compared to 29.3% for the thirty-nine week period ended October 29, 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 third quarter of both fiscal years.
Provision for asset impairment and store closure was ($8) for the thirty-nine week period ended October 28, 2001 compared to $114 for the comparable thirty-nine 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 $73 or 4.7% to $1,623 in the third quarter of fiscal 2002 compared to $1,550 in the third quarter of fiscal 2001.
Income from operations increased $328 or 30.5% to $1,404 in the third quarter of fiscal 2002 compared to $1,076 in the third quarter of fiscal 2001. Income from operations as a percentage of net sales was 1.5% in the third quarter of fiscal 2002 compared to 1.2% in the third quarter of fiscal 2001.
Income from operations decreased $2,248 or 33.6% to $4,442 for the thirty-nine week period ended October 28, 2001 compared to $6,690 in the comparable thirty-nine week period of the prior fiscal year.
Interest expense decreased $193 or 20.7% in the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. The reduction of interest expense was primarily due to the lower rate paid on the company's revolving line of credit.
Net earnings for the third quarter of fiscal 2002 were $412, an increase of $324 or 268.2% over the net earnings of $88 for the third 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 October 28, 2001 working capital (defined as current assets less current liabilities) was $67,813 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 thirty-nine week period of fiscal 2002 used cash in the amount of $2,720 and used cash in the amount of $8,174 in the thirty-nine week period of fiscal 2001. The decrease in the amount of cash used by operating activities in the thirty-nine week period of fiscal 2002 compared to the thirty-nine week period of fiscal 2001 was primarily due to a larger increase in accounts payable partially offset by an increase in inventory.
Cash used in investing activities in the thirty-nine week periods of fiscal 2002 and 2001 totaled $4,235 and $4,903 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 $7,500.
Cash was provided from financing activities in the thirty-nine week period of fiscal 2002 in the amount of $2,317 and $3,908 in the thirty-nine week period of fiscal 2001. Cash was received from increasing borrowing under the revolving loan which exceeded cash used for stock redemption, and to make principal payments on long-term notes and capital leases.
Cash used in investing activities in the thirty-nine week periods of fiscal 2002 and 2001 totaled $4,235 and $4,903 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 $7,500.
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.
