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 ....... August 2, 1998
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 Avenue
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:
5,144,074 shares of common stock, $.0001 par value (the issuer's
only class of common stock), were outstanding as of August 2, 1998.
PART I. Financial Information.
ITEM 1. Financial Statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
August 2, February 1,
1998 1998
(Unaudited)
___________ __________
ASSETS
Current assets:
Cash on deposit and on hand $5,492 $2,555
Receivables 2,965 3,158
Inventories 113,562 103,445
Other current assets 1,735 2,131
Total current assets 123,754 111,289
Property and equipment 76,174 70,774
Less accumulated depreciation 33,256 30,627
Net property and equipment 42,918 40,147
Property under capital leases 20,407 20,407
Less accumulated amortization 14,120 13,811
Net property under capital leases 6,287 6,596
Debt financing cost 347 82
Total assets $173,306 $158,114
<FN>
See accompanying notes to unaudited consolidated financial statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
August 2, February 1,
1998 1998
(Unaudited)
___________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of:
Long term debt $1,124 $1,333
Capital lease obligations 540 518
Accounts payable 26,628 19,009
Income taxes payable 39 2,272
Accrued salaries and commissions 3,838 4,884
Accrued taxes other than income 4,046 3,159
Other current liabilities 1,212 1,804
Deferred taxes 2,324 2,324
Total current liabilities 39,751 35,303
Notes payable under revolving loan 34,290 25,591
Long term debt
less current maturities 3,006 3,646
Capital lease obligations
less current maturities 8,348 8,630
Other noncurrent liabilities 886 782
Deferred revenue 1,174 1,272
Deferred income taxes 2,496 2,496
Total liabilities 89,951 77,720
Stockholders' equity:
Common stock, $.0001 par value, authorized
20,000,000 shares; issued and outstanding
5,144,074 shares and 5,098,761 shares
respectively 1 1
Additional paid-in capital 54,839 54,474
Retained earnings since June 2, 1991 28,515 25,919
Total stockholders' equity 83,355 80,394
Total liabilities and
stockholders' equity $173,306 $158,114
<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 Twenty-Six
Week Periods Week Periods
August 2, August 3, August 2, August 3,
1998 1997 1998 1997
___________ ___________ ___________ ___________
Net sales ............................... $90,360 $80,463 $171,412 $149,735
Cost of sales ........................... 59,750 53,795 112,652 99,332
Gross margin .................. 30,610 26,668 58,760 50,403
Selling, general
and administrative ................. 25,424 22,170 49,554 42,781
Depreciation
and amortization ................... 1,549 1,152 2,938 2,214
Total operating expenses ...... 26,973 23,322 52,492 44,995
Income from operations .................. 3,637 3,346 6,268 5,408
Interest expense......................... 1,068 821 2,094 1,503
Earnings
before income taxes ................. 2,569 2,525 4,174 3,905
Income tax expense ...................... 980 990 1,579 1,521
Net earnings ....................... $1,589 $1,535 $2,595 $2,384
Earnings per share:
Basic ............................. $0.31 $0.30 $0.51 $0.47
Diluted ............................ $0.31 $0.30 $0.50 $0.46
<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 Twenty-Six Week
Periods Ended
August 2, 1998 August 3, 1997
----------------- ----------------
Cash flows from operating activities:
Net Earnings $2,595 $2,384
Adjustments to reconcile
net earnings to net cash
used in operating activities
Amortization of
debt financing costs 80 20
Depreciation and amortization 2,938 2,214
LIFO expense 0 110
Increase in inventories (10,117) (13,892)
Increase in accounts payable 7,619 3,330
Decrease (increase) in receivables 193 (24)
Decrease (increase)
in other current assets 396 (188)
Increase in accrued taxes
other than income 887 46
Increase (decrease)in accrued
salaries and commissions (1,046) (848)
(Decrease) in income taxes payable (2,233) (2,313)
Increase (decrease)in other
liabilities (586) 193
Net cash used in
operating activities 726 (8,968)
Cash flow from investing activities:
Capital expenditures (5,400) (5,601)
Net cash used in
investing activities (5,400) (5,601)
Cash flow from financing activities:
Proceeds from exercise of
outstanding stock options 365 74
Increase in revolving loan 8,699 9,425
Principal payments on
long term notes (849) (848)
Principal payments on
capital leases (260) (304)
Increase in long term notes 0 1,870
Debt issue costs (344) (43)
Net cash provided by
financing activities 7,611 10,174
Net increase (decrease) in cash 2,937 (4,395)
Cash at beginning of period 2,555 7,538
Cash at end of period $5,492 $3,143
<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 1998 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.
(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 Basic Diluted
August 2, 1998 5,138,416 5,209,483
August 3, 1997 5,097,884 5,136,261
Twenty-Six Weeks Ending
August 2, 1998 5,131,851 5,195,246
August 3, 1997 5,094,128 5,135,714
Duckwall-ALCO Stores, Inc.
And Subsidiary
[CAPTION]
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
(Dollars in thousands)
The thirteen weeks ended August 2, 1998 and August 3, 1997 are referred to
herein as the second quarter of fiscal 1999 and 1998, 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 3.6% for the second quarter of fiscal 1999 to
$1,589, an increase of $54 over the net earnings of $1,535 for the
second quarter of fiscal 1998. The Company has had 22 consecutive
quarters of earnings growth (where current quarter earnings have
exceeded prior year earnings for the same quarter). Gross margins
improved for the second quarter of fiscal 1998 to 33.9%, compared to
33.1% in the prior year's second 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 second quarter of
fiscal 1999, the Company opened 5 stores, four of which were in new,
non-competitive markets, resulting in a quarter end total of 248
stores. For the twenty-six week period ending August 2, 1998, the
Company opened 26 stores and closed 3 stores. As of August 2, 1998,
80% of the stores are in non-competitive markets.
Net sales for the second quarter of fiscal 1999 increased $9,897 or
12.3% to $90,360 compared to $80,463 for the second quarter of fiscal
1998. Net sales for the prototype Class 18 ALCO stores open the full
period in both the second quarter of fiscal 1999 and fiscal 1998
(comparable stores) increased $439 or 1.7%. The Duckwall variety
stores produced an increase of $65 or 1.6% compared to the second
quarter of the prior fiscal year. Net sales for all stores open the
full period increased $395 or .6% compared to the second quarter of
the prior fiscal year. A severe drought in the south central United
States, as well as depressed farm commodity prices, had a negative
impact on the company's operations during the second quarter of
fiscal 1999. Although these weather and economic phenomena are
largely cyclical in nature, the company will continue to be faced
with these challenges at least in the short term.
Net sales for the twenty-six week period ending August 2, 1998
increased $21,677 or 14.4% to $171,412 compared to $149,735 in
the comparable twenty-six week period of the prior fiscal year.
Net sales of comparable class 18 ALCO stores increased by $1,137
or 2.3% for the twenty-six week period ending August 2, 1998
compared to the twenty-six week period of the prior fiscal year.
Gross margin for the second quarter of fiscal 1999 increased $3,942
or 14.8% to $30,610 compared to $26,668 in the second quarter of
fiscal 1998. Gross margin as a percentage of sales was 33.9% for
the second quarter of fiscal 1999 compared to 33.1% the second
quarter of fiscal 1998. The improvement in the gross margin percentage
was due to strong sales performance in the higher margin apparel and
shoe lines as well as a continuing focus on managing product costs.
Gross margin for the twenty-six week period ended August 2, 1998 was
$58,760, which was $8,357 or 16.6% higher than last year's twenty-six
week gross margin of $50,403. As a percent of net sales, gross
margin for the twenty-six week period ended August 2, 1998 was 34.3%
compared to 33.7% in the twenty-six week period of the prior fiscal
year.
Selling, general and administrative expense increased $3,254 or 14.7%
to $25,424 in the second quarter of fiscal 1999 compared to $22,170
in the second quarter of fiscal 1998, primarily due to the increase
in total stores. As a percentage of net sales, selling, general and
administrative expenses in the second quarter of fiscal 1999 was
28.1%, compared to 27.6% in the second quarter of fiscal 1998. The
increase was due to increased payroll costs, due in part to an
increase in the minimum wage.
Selling, general and administrative expenses increased $6,773 or 15.8%
to $49,554 for the twenty-six week period ended August 2, 1998
compared to $42,781 for the comparable twenty-six week period of the
prior fiscal year. Selling, general and administrative expense as a
percent of net sales was 28.9% for the twenty-six week period ended
August 2, 1998 compared to 28.6% in the comparable twenty-six week
period last year. The increase in selling, general and administrative
expense in fiscal 1999 is primarily due to an increase in the number of
stores.
Depreciation and amortization expense increased $397 or 34.5% to
$1,549 in the second quarter of fiscal 1999 compared to $1,152 in the
second quarter of fiscal 1998. The increase is due to additional
buildings and equipment associated with the store expansion program.
Income from operations increased $292 or 8.7% to $3,637 in the second
quarter of fiscal 1999 compared to $3,346 in the second quarter of
fiscal 1998. Income from operations as a percentage of net sales was
4.0% in the second quarter of fiscal 1999 compared to 4.2% in the
second quarter of fiscal 1998.
Income from operations increased $860 or 15.9% to $6,268 for the
twenty-six week period ended August 2, 1998 compared to $5,408 in
the comparable twenty-six week period of the prior fiscal year.
Interest expense increased $247 or 30.1% in the second quarter of
fiscal 1999 compared to the second quarter of fiscal 1998.
Net earnings for the second quarter of fiscal 1999 were $1,589, an
increase of $54 or 3.6% over the net earnings of $1,535 for the
second quarter of fiscal 1998.
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).
At August 2, 1998 working capital (defined as current assets less
current liabilities) was $84,003 compared to $75,986 at the end of
fiscal 1998.
Operating activities in the second quarter of fiscal 1999 generated
cash in the amount of $726 and used cash in the amount of $8,968 in
the second quarter of fiscal 1998. The increase in the amount of
cash generated by operating activities in the second quarter of
fiscal 1999 compared to the second quarter of fiscal 1998 was
primarily due to a larger 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 second
quarter of fiscal 1999 and 1998 of $7,611 and $10,174, 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 1998.
Cash used for acquisition of property and equipment in the second
quarters of fiscal 1999 and 1998 totaled $5,400 and $5,601,
respectively. Total anticipated cash payments for acquisition of
property and equipment in fiscal 1999, principally for store buildings
and store and warehouse fixtures and equipment, are $13,308.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In April 1998, the American Institute of Certified Public Accountants adopted
a Statement of Position (SOP) REPORTING ON THE COSTS OF START-UP ACTIVITIES.
The SOP requires that entities expense costs of start-up activities as they
are incurred. The SOP is 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 August 2, 1998 and February 1, 1998 are $1,219 and $1,567,
respectively. 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 YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Company has
commenced, for all of its systems, a year 2000 date conversion project to
address all necessary code changes, testing and implementation.
I. The Company's state of readiness: The Company has defined this project
as consisting of five phases: 1) Enterprise level assessment, 2) Strategy
Development and Confirmation, 3) Implementation, 4) Vendor Compliance
planning, and 5) Vendor Compliance Management. The Company has completed
phases one and two and is currently active in phases three and four. Major
project components have been prioritized and are on target for completion on
schedule as established by the Company.
II. The costs to address the Company's Year 2000 issues: The Company has
specifically identified necessary hardware and software upgrades that will
cost approximately $400,000. Approximately one-third of that amount has
been expended to date. As on-going testing continues, it is expected that up
to $300,000 in additional hardware and software costs will be identified.
The costs associated with internal and external programming staff to review
and modify software programs are estimated to be not more than $300,000.
This brings the total estimated maximum expenditures to $1,000,000. All
costs will be funded out of current operating cash flow, and will be
capitalized or expensed depending on the classification of the expenditure
according to current company policies.
III. The Risks of the Company's Year 2000 Issues: The Company has not made
an assessment of the estimated material lost revenue due to Year 2000 issues.
The Company presently believes that, with modifications to existing software
and converting to new software, the year 2000 problem will not pose
significant operations problems for the Company's computer systems as so
modified and converted. The largest risk to lost revenue appears to be if
the company's merchandise vendors were unable to ship goods for the company
to sell. For this reason, phases four and five of the Company's plan are
devoted to Vendor Compliance Planning and Vendor Compliance Management. As
the Company completes these phases of the project, it believes that it will
have assurances from its vendors that there will be no material disruptions
to the flow of goods to the Company. However, even the best efforts on the
part of the Company and its suppliers will not eliminate 100% of the risk of
lost revenues.
IV. The Company's Contingency Plans: The Company's efforts have been focused
on identifying and implementing solutions for the Year 2000 issue. The
Company feels this has been a better use of its time rather than developing
contingency plans that could take its focus off solving year 2000 issues. As
time goes on, the Company will evaluate the need for contingency plans based
on its assessment of the risks involved.
OTHER INFORMATION
PART II
Item 1. Legal Proceedings
No legal proceedings except those covered by insurance occurred
during the thirteen week period ended August 2, 1998.
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, September 11, 1998 /s/Richard A. Mansfield
Richard A. Mansfield
Vice President - Finance
Chief Financial Officer
Signing on behalf of the
registrant and as principal
financial officer