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 ....... November 2, 1997
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 (I.R.S. Employer
incorporation or organization) 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
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
5,098,261 shares of common stock, $.0001 par value (the issuer's
only class of common stock), were outstanding as of November 2, 1997.
PART I. Financial Information.
ITEM 1. Financial Statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
November 2, February 2,
1997 1997
(Unaudited)
___________ __________
ASSETS
Current assets:
Cash on deposit and on hand $668 $7,538
Receivables 3,881 3,160
Inventories 111,857 80,359
Other current assets 1,536 1,785
Total current assets 117,942 92,842
Property and equipment:
Land 2,664 2,658
Buildings 21,163 20,991
Furniture, fixtures and equipment 33,081 26,215
Transportation equipment 1,719 1,688
Leasehold improvements 5,533 4,623
Construction in progress 4,686 2,931
Total property and equipment 68,846 59,106
Less accumulated depreciation 29,441 26,527
Net property and equipment 39,405 32,579
Property under capital leases 20,407 20,407
Less accumulated amortization 13,634 13,100
Net property under capital leases 6,773 7,307
Debt financing cost 93 80
Total assets $164,213 $132,808
<FN>
See accompanying notes to unaudited consolidated financial statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
November 2, February 2,
1997 1997
(Unaudited)
___________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of:
Long term debt $1,341 $1,242
Capital lease obligations 518 607
Accounts payable 26,368 17,127
Income taxes payable 0 2,345
Accrued salaries and commissions 3,008 3,876
Accrued taxes other than income 3,297 2,929
Other current liabilities 1,740 1,670
Deferred taxes 2,612 2,612
Total current liabilities 38,884 32,408
Notes payable under revolving loan 33,153 12,095
Long term debt
less current maturities 3,873 3,193
Capital lease obligations
less current maturities 8,781 9,148
Other noncurrent liabilities 989 793
Deferred income taxes 2,346 2,346
Total liabilities 88,026 59,983
Stockholders' equity:
Common stock, $.0001 par value, authorized
20,000,000 shares; issued and outstanding
5,098,261 shares and 5,089,823 shares
respectively 1 1
Additional paid-in capital 54,469 54,396
Retained earnings since June 2, 1991 21,717 18,428
Total stockholders' equity 76,187 72,825
Total liabilities and
stockholders' equity $164,213 $132,808
<FN>
See accompanying notes to consolidated financial statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Statement of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
For the Thirteen For the Thirty-Nine
Week Periods Weeks Periods
November 2, October 27, November 2, October 27,
1997 1996 1977 1996
____________ ____________ __________ __________
Net sales ............................... $76,163 $64,857 $225,898 $192,631
Cost of sales ........................... 49,449 43,201 148,781 129,013
Gross margin .................. 26,714 21,656 77,117 63,618
Selling, general
and administrative ................. 23,020 18,661 65,801 54,119
Depreciation
and amortization ................... 1,233 943 3,447 2,732
Total operating expenses ...... 24,253 19,604 69,248 56,851
Income from operations .................. 2,461 2,052 7,869 6,767
Interest expense......................... 980 912 2,483 2,504
Earnings
before income taxes ................. 1,481 1,140 5,386 4,263
Income tax expense ...................... 578 439 2,099 1,635
Net earnings ....................... $903 $701 $3,287 $2,628
Earnings per common and
common equivalent share ................ $0.18 $0.17 $0.64 $0.65
<FN>
See accompanying notes to unaudited consolidated financial statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Statements of Cash Flow
(Dollars in Thousands)
(Unaudited)
For the Thirty-Nine Week
Periods Ended
November 2, 1997 October 27, 1996
----------------- ----------------
Cash flows from operating activities:
Net Earnings $3,287 $2,628
Adjustments to reconcile
net earnings to net cash
used in operating activities
Amortization of
debt financing costs 30 30
Deferred income tax benefit 0 52
Depreciation and amortization 3,448 2,732
LIFO expense 170 180
Increase in inventories (31,668) (18,357)
Increase in accounts payable 9,241 8,283
Increase in receivables (721) (1,279)
Decrease (increase)
in other current assets 249 (669)
Increase in accrued taxes
other than income 368 518
Increase (decrease) in accrued
salaries and commissions (868) (1,359)
(Decrease) in income taxes payable (2,345) 717
Decrease (increase)in other
liabilities 266 (21)
Net cash used in
operating activities (18,543) (6,545)
Cash flow from investing activities:
Capital expenditures (9,740) (9,537)
Net cash used in
investing activities (9,740) (9,537)
Cash flow from financing activities:
Proceeds from stock issuance 0 10,757
Proceeds from exercise of
outstanding stock options 75 0
Increase in revolving loan 21,058 5,131
Principal payments on
long term notes (1,091) (636)
Principal payments on
capital leases (456) (478)
Increase in long term notes 1,870 2,826
Debt issue costs (43) (10)
Net cash provided by
financing activities 21,413 17,590
Net increase (decrease) in cash (6,870) 1,508
Cash at beginning of period 7,538 177
Cash at end of period $668 $1,685
<FN>
See accompanying notes to unaudited consolidated financial statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited consolidated financial
statements are for interim periods and, consequently, do not
include all disclosures required by generally accepted
accounting principles for annual 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 1997 Annual Report. In the opinion of management of
Duckwall-ALCO Stores, Inc., 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.
Certain prior year cash flow amounts have been reclassified
to conform with the current year presentation.
(2) Principles of Consolidation
The consolidated financial statements include the accounts
of Duckwall-ALCO Stores, Inc. and its wholly-owned subsidiary.
All significant intercompany transactions and balances have
been eliminated in consolidation.
(3) Earnings Per Share
Earnings per share has been computed based on the weighted
average number of common shares outstanding during the period
plus common stock equivalents, when dilutive, consisting of
stock options.
The average number of shares used in computing earnings
per share was as follows:
Thirteen Weeks Ending
November 2, 1997 5,158,828
October 27, 1996 4,147,651
Thirty-Nine Weeks Ending
November 2, 1997 5,143,419
October 27, 1996 4,072,455
Duckwall-ALCO Stores, Inc.
And Subsidiary
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
(Dollars in thousands)
[CAPTION]
The thirteen weeks ended November 2, 1997 and October 27, 1996 are referred
to herein as the third quarter of fiscal 1998 and 1997, 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
Net earnings increased 28.9% for the third quarter of fiscal 1998 to
$903, an increase of $202 over the net earnings of $701 for the third
quarter of fiscal 1997. The Company has had 19 consecutive quarters of
earnings growth (where current quarter earnings have exceeded prior
year earnings for the same quarter). Gross margins improved for the
third quarter of fiscal 1998 to 35.1%, compared to 33.4% in the prior
year's third quarter.
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 1998, the Company opened 5 stores, all of which were in new,
non-competitive markets, resulting in a quarter end total of 209 stores.
For the thirty-nine week period ending November 2, 1997, the Company
opened 24 stores. As of November 2, 1997, 76% of the stores are in
non-competitive markets.
Net sales for the third quarter of fiscal 1998 increased $11,306 or
17.4% to $76,163 compared to $64,857 for the third quarter of fiscal
1997. Net sales for the prototype Class 18 ALCO stores open the full
period in both the third quarter of fiscal 1998 and fiscal 1997
(comparable stores) increased $450 or 2.2%. The Duckwall variety
stores produced an increase of $226 or 7.2% compared to the third
quarter of the prior fiscal year. Net sales for all stores open the
full period increased $692 or 1.2% compared to the third quarter of
the prior fiscal year.
Net sales for the thirty-nine week period ending November 2, 1997
increased $33,267 or 17.3% to $225,898 compared to $192,631 in the
comparable thirty-nine week period of the prior fiscal year. Net
sales of comparable stores increased by $1,525, or .8% for the thirty-
nine week period ending November 2, 1997 compared to the thirty-nine
week period of the prior fiscal year.
Gross margin for the third quarter of fiscal 1998 increased $5,058 or
23.4% to $26,714 compared to $21,656 in the third quarter of fiscal
1997. Gross margin as a percentage of sales was 35.1% for the third
quarter of fiscal 1998 compared to 33.3% in the third quarter of
fiscal 1997. The improvement in the gross margin percentage was
primarily due to a higher markup on purchases and lower markdowns.
Gross margin for the thirty-nine week period ended November 2, 1997
was $77,117, which was $13,499 or 21.2% higher than last year's
thirty-nine week gross margin of $63,618. As a percent of net sales,
gross margin for the thirty-nine week period ended November 2, 1997
was 34.1% compared to 33.0% in the thirty-nine week period of the
prior fiscal year.
Selling, general and administrative expense increased $4,359 or 21.6%
to $23,020 in the third quarter of fiscal 1998 compared to $18,661 in
the third quarter of fiscal 1997, primarily due to the increase in
total stores. As a percentage of net sales, selling, general and
administrative expenses in the third quarter of fiscal 1998 was 30.2%,
compared to 28.8% in the third quarter of fiscal 1997. The increase
was due to increased payroll costs, due in part to an increase in the
minimum wage.
Selling, general and administrative expenses increased $11,681 or 21.5%
to $65,800 for the thirty-nine week period ended November 2, 1997
compared to $54,119 for the comparable thirty-nine week period of the
prior fiscal year. Selling, general and administrative expense as a
percent of net sales was 29.1% for the thirty-nine week period ended
November 2, 1997 compared to 28.1% in the comparable thirty-nine week
period last year. The increase in selling, general and administrative
expense in fiscal 1998 is primarily due to an increase in the number
of stores and the impact of the minimum wage increase.
Depreciation and amortization expense increased $290 or 30.7% to $1,233
in the third quarter of fiscal 1998 compared to $943 in the third
quarter of fiscal 1997. The increase is due to additional buildings
and equipment associated with the store expansion program.
Income from operations increased $409 or 20.0% to $2,461 in the third
quarter of fiscal 1998 compared to $2,052 in the third quarter of
fiscal 1997. Income from operations as a percentage of net sales was
3.2% in the third quarter of both fiscal years.
Income from operations increased $1,102 or 16.3% to $7,869 for the
thirty-nine week period ended November 2, 1997 compared to $6,767 in
the comparable thirty-nine week period of the prior fiscal year.
Interest expense increased $68 or 7.5% in the third quarter of fiscal
1998 compared to the third quarter of fiscal 1997.
Net earnings for the third quarter of fiscal 1998 were $903, an
increase of $202 or 28.9% over the net earnings of $701 for the third
quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are cash flow from operations,
borrowings under its revolving loan credit facility, mortgage financing,
and vendor trade credit financing (increases in accounts payable).
The Company has temporarily increased its revolving loan credit
facility from $35,000 to $45,000 to meet its credit needs for the
holiday season. The increased line is available for the period
September 1, 1997 to December 31, 1997, and is under the same terms
and conditions as the original credit facility. The Company expects
this additional credit line to be sufficient to meet all of its seasonal
credit needs.
At November 2, 1997 working capital (defined as current assets less
current liabilities) was $79,058 compared to $60,434 at the end of
fiscal 1997.
Cash used by operating activities in the first three quarters of fiscal
1998 and 1997 was $18,543 and $6,545 respectively. The increase in the
amount of cash used by operating activities in the first three quarters
of fiscal 1998 in relation to the comparable period of fiscal 1997 was
primarily due to purchases of inventory for a larger number of store
openings and a smaller increase in the trade accounts payable build up
relative to the overall increase in inventory levels.
The Company generated cash from financing activities in the first
three quarters of fiscal 1998 and 1997 of $21,413 and $17,590,
respectively. This was generated by borrowing under the revolving
loan credit facility, as well as a $1,870 mortgage secured by certain
company fixed assets. In fiscal 1997, cash generated from financing
activities included $10,757 from a secondary offering of stock, a
$1,000 mortgage secured by certain company fixed assets and a $1,668
leaseback of computer equipment.
Cash used for acquisition of property and equipment in the first three
quarters of fiscal 1998 and 1997 totaled $9,740 and $9,537,
respectively. Total anticipated cash payments for acquisition of
property and equipment in fiscal 1998, principally for store buildings
and store and warehouse fixtures and equipment, are approximately
$14,000.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
[CAPTION]
The Financial Accounting Standards Board has issued SFAS No. 128,
Earnings Per Share ("Statement 128") which replaces the current
accounting standard regarding computation of earnings per share.
Statement 128 requires a dual presentation of basic earnings per share
(based on the weighted average number of common shares outstanding)
and diluted earnings per share which reflects the potential dilution
that could occur if contracts to issue securities (such as stock
options) were exercised. Statement 128 is effective for financial
statements issued for periods ending after December 15, 1997. If
Statement 128 had been adopted, on a pro-forma basis, for the 13 weeks
and 39 weeks ended November 2, 1997 and October 27, 1996, there would
have been no effect on the amount of earnings per share as presented in
the accompanying financial statements.
In April 1997, the American Institute of Certified Public Accountants
issued a proposed Statement of Position (SOP) REPORTING ON THE COSTS
OF START-UP ACTIVITIES. The proposed SOP requires that entities expense
costs of start-up activities as they are incurred. The proposed SOP, if
approved, would be effective for financial statements for fiscal years
beginning after December 15, 1998, with earlier application encouraged.
The initial application of the SOP is to be reported as a cumulative
effect of a change in accounting principle. The Company currently
capitalizes store pre-opening costs and amortizes such costs over the
initial twelve months of a store's operations. Pre-opening costs
capitalized, net of accumulated amortization, at November 2, 1997 are
$1,195. While the one-time recording of the cumulative effect of the
change in accounting principle could be material, the ongoing effect of
the proposed new accounting principle would be dependent upon the
number and timing of new stores opened. Generally, pre-opening costs
would be recognized during the two months prior to a store commencing
operation under the proposed new accounting principle versus over the
twelve months subsequent to commencing operation under the existing
principle.
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. In 1998,
the Company will commence, for all of its systems, a year 2000 date
conversion project to address all necessary code changes, testing and
implementation. The "Year 2000" problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure
or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the
year 2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed timely, the year
2000 problem may have a material impact on the operations of the
Company. Until the Company has undertaken this year 2000 project, the
Company will not know the total cost of the conversion and whether it
will be material to the future financial results or financial condition
of the Company.
OTHER INFORMATION
PART II
Item 1. Legal Proceedings
No legal proceedings except those covered by insurance occurred
during the thirteen week period ended November 2, 1997.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) Reports on Form 8-K
No reports filed
Duckwall-ALCO Stores, Inc.
And Subsidiary
SIGNATURES
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)
Date, December 16, 1997 /s/Richard A. Mansfield
Richard A. Mansfield
Vice President - Finance
Chief Financial Officer
Signing on behalf of the
registrant and as principal
financial officer