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 1, 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:
5,084,824 shares of common stock, $.0001 par value (the issuer's
only class of common stock), were outstanding as of November 1, 1998.
PART I. Financial Information.
ITEM 1. Financial Statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
November 1, February 1,
1998 1998
(Unaudited)
___________ __________
ASSETS
Current assets:
Cash on deposit and on hand $6,496 $2,555
Receivables 4,055 3,158
Inventories 128,198 103,445
Other current assets 453 2,131
Total current assets 139,202 111,289
Property and equipment 78,258 70,774
Less accumulated depreciation 34,670 30,627
Net property and equipment 43,588 40,147
Property under capital leases 20,407 20,407
Less accumulated amortization 14,274 13,811
Net property under capital leases 6,133 6,596
Debt financing cost 334 82
Total assets $189,257 $158,114
<FN>
See accompanying notes to unaudited consolidated financial statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
November 1, February 1,
1998 1998
(Unaudited)
___________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of:
Long term debt $1,145 $1,333
Capital lease obligations 540 518
Accounts payable 35,256 19,009
Income taxes payable - 2,272
Accrued salaries and commissions 3,539 4,884
Accrued taxes other than income 3,828 3,159
Other current liabilities 951 1,804
Deferred taxes 2,324 2,324
Total current liabilities 47,583 35,303
Notes payable under revolving loan 43,088 25,591
Long term debt
less current maturities 2,756 3,646
Capital lease obligations
less current maturities 8,219 8,630
Other noncurrent liabilities 943 782
Deferred revenue 1,124 1,272
Deferred income taxes 2,496 2,496
Total liabilities 106,209 77,720
Stockholders' equity:
Common stock, $.0001 par value, authorized
20,000,000 shares; issued and outstanding
5,084,824 shares and 5,098,761 shares
respectively 1 1
Additional paid-in capital 54,178 54,474
Retained earnings since June 2, 1991 28,869 25,919
Total stockholders' equity 83,048 80,394
Total liabilities and
stockholders' equity $189,257 $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 Thirty-Nine
Week Periods Week Periods
November 1, November 2, November 1, November 2,
1998 1997 1998 1997
___________ ___________ ___________ ___________
Net sales ............................... $85,308 $76,163 $256,720 $225,898
Cost of sales ........................... 56,018 49,449 168,670 148,781
Gross margin .................. 29,290 26,714 88,050 77,117
Selling, general
and administrative ................. 24,854 23,020 74,060 65,801
Depreciation
and amortization ................... 1,568 1,233 4,506 3,447
Total operating expenses ...... 26,422 24,253 78,566 69,248
Income from operations .................. 2,868 2,461 9,484 7,869
Interest expense......................... 1,083 980 3,177 2,483
Earnings
before income taxes ................. 1,785 1,481 6,307 5,386
Income tax expense ...................... 666 578 2,401 2,099
Earnings before cumulative effect of
accounting change ................... 1,119 903 3,906 3,287
Cumulative effect of accounting
change (net of tax) ................. - - ( 956) -
Net Earnings ............................ $1,119 $ 903 $2,950 $3,287
Per share data - basic
Earnings before cumulative effect of
accounting change ................... $ 0.22 $ 0.18 $ 0.76 $ 0.65
Cumulative effect of accounting change .. - - (0.19) -
Net Earnings ............................ $ 0.22 $ 0.18 $ 0.57 $ 0.65
Per share data - diluted
Earnings before cumulative effect of
accounting change ................... $ 0.22 $ 0.18 $ 0.76 $ 0.64
Cumulative effect of accounting change .. - - (0.19) -
Net Earnings ............................ $ 0.22 $ 0.18 $ 0.57 $ 0.64
Proforma amounts for effect of change
in accounting principle
Net Earnings ............................ $1,098 $3,906 $3,212
Basic Earnings per Share ................ $ 0.22 $ 0.76 $ 0.63
Diluted Earnings per Share .............. $ 0.21 $ 0.76 $ 0.62
<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 1, 1998 November 2, 1997
----------------- ----------------
Cash flows from operating activities:
Net Earnings $2,950 $3,287
Adjustments to reconcile
net earnings to net cash
used in operating activities
Cumulative effect of accounting change 956 -
Amortization of
debt financing costs 92 30
Depreciation and amortization 4,506 3,448
LIFO expense - 170
Increase in inventories (24,753) ( 31,668)
Increase in accounts payable 16,247 9,241
Decrease (increase) in receivables ( 897) ( 721)
Decrease (increase)
in other current assets 111 249
Increase in accrued taxes
other than income 669 368
Increase (decrease)in accrued
salaries and commissions (1,345) ( 868)
(Decrease) in income taxes payable (1,661) ( 2,345)
Increase (decrease)in other
liabilities (840) 266
Net cash used in
operating activities (3,965) (18,543)
Cash flow from investing activities:
Capital expenditures (7,484) ( 9,740)
Net cash used in
investing activities (7,484) ( 9,740)
Cash flow from financing activities:
Proceeds from exercise of
outstanding stock options 372 75
Common stock redemption ( 668) -
Increase in revolving loan 17,497 21,058
Principal payments on
long term notes (1,078) ( 1,091)
Principal payments on
capital leases (389) ( 456)
Increase in long term notes - 1,870
Debt issue costs (344) ( 43)
Net cash provided by
financing activities 15,390 21,413
Net increase (decrease) in cash 3,941 (6,870)
Cash at beginning of period 2,555 7,538
Cash at end of period $6,496 $ 668
<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
November 1, 1998 5,119,654 5,147,930
November 2, 1997 5,098,261 5,158,828
Thirty-Nine Weeks Ending
November 1, 1998 5,119,681 5,171,450
November 2, 1997 5,095,506 5,143,419
(4) Change In Accounting Principle
Effective November 1, 1998, the Company adopted AICPA Statement
of Position 98-5, Reporting on the Costs of Start up Activities
(SOP 98-5), retroactive to the beginning of the year. Previously,
the Company initially capitalized and then amortized preopening costs
over the initial 12 months of a store's operation. Under the new
method, the Company expenses such store preopening costs as incurred.
The change is considered a cumulative effect-type accounting change
and, accordingly, the cumulative effect as of February 1, 1998 has
been reported in the accompanying financial statements. Financial
statements for fiscal 1998 and prior periods have not been restated
but net earnings and earnings per share computed on a pro forma basis
have been reflected in the accompanying financial statements for all
periods presented as if the accounting change had been applied
consistently during all periods affected.
Financial statements for the quarters ended May 3, 1998 and August 2,
1998 have been restated to reflect adoption of the new accounting
policy as follows:
Thirteen Weeks Ended
May 3, August 2,
1998 1998
Net earnings as originally reported $1,006 $1,589
Effect of accounting change ( 52) 244
Earnings before cumulative effect of
accounting change 954 1,833
Cumulative effect of accounting change ( 956) -
Net earnings (loss) as restated $ ( 2) $1,833
Earnings per share - basic and diluted
Earnings per share as originally reported $ .20 $ .31
Effect of accounting change ( .01) .05
Earnings per share before cumulative effect
of accounting change .19 .36
Cumulative effect of accounting change ( .19) -
Earnings per share as restated $ - $ .36
The effect of adopting the accounting change on earnings before
cumulative effect of accounting change, net earnings and earnings per
share for all interim periods of fiscal 1999 is to increase (decrease)
such amounts as follows:
Thirty-Nine
Thirteen Weeks Ended Weeks Ended
May 3, Aug. 2, Nov. 1, Nov. 1,
1998 1998 1998 1998
Earings before cumulative effect $( 52) $244 $165 $ 357
Net earnings $(1,008) $244 $165 $(599)
Earnings per share: basic and diluted $( .20) $.05 $.03 $(.12)
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 November 1, 1998 and November 2, 1997 are referred
to herein as the third 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 23.9% for the third quarter of fiscal 1999 to
$1,119, an increase of $216 over the net earnings of $903 for the third
quarter of fiscal 1998. The Company has had 23 consecutive quarters of
earnings growth (where current quarter earnings have exceeded prior year
earnings for the same quarter). Selling general, and administrative expense
decreased for the third quarter of fiscal 1999 to 29.1%, compared to 30.2%
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 1999, the
Company opened 4 ALCO stores, all of which were in new, non-competitive
markets, resulting in a quarter end total of 252 stores. For the thirty-nine
week period ending November 1, 1998, the Company opened 30 stores and closed
3 stores. As of November 1, 1998, 80% of the stores are in non-competitive
markets.
Net sales for the third quarter of fiscal 1999 increased $9,145 or
12.0% to $85,308 compared to $76,163 for the third quarter of fiscal 1998.
Net sales for the prototype Class 18 ALCO stores open the full period in
both the third quarter of fiscal 1999 and fiscal 1998 (comparable stores)
increased $485 or 2.0%. The Duckwall variety stores produced an increase
of $89 or 2.1% compared to the third quarter of the prior fiscal year. Net
sales for all stores open the full period increased $570 or .9% compared to
the third quarter of the prior fiscal year. Depressed farm commodity prices
have had a negative impact on the Company's operations during the third
quarter of fiscal 1999.
Net sales for the thirty-nine week period ending November 1, 1998
increased $30,822 or 13.6% to $256,720 compared to $225,898 in the
comparable thirty-nine week period of the prior fiscal year. Net sales of
comparable class 18 ALCO stores increased by $1,621 or 2.2% for the thirty-
nine week period ending November 1, 1998 compared to the thirty-nine week
period of the prior fiscal year.
Gross margin for the third quarter of fiscal 1999 increased $2,576 or
9.6% to $29,290 compared to $26,714 in the third quarter of fiscal 1998.
Gross margin as a percentage of sales was 34.3% for the third quarter of
fiscal 1999 compared to 35.1% the second quarter of fiscal 1998. The lower
gross margin percent this year was due to higher shrinkage and lower sales of
the Company's higher margin cold weather merchandise.
Gross margin for the thirty-nine week period ended November 1, 1998
was $88,050, which was $10,933 or 14.2% higher than last year's thirty-nine
week gross margin of $77,117. As a percent of net sales, gross margin for
the thirty-nine week period ended November 1, 1998 was 34.3% compared to
34.1% in the thirty-nine week period of the prior fiscal year.
Selling, general and administrative expense increased $1,834 or 8.0%
to $24,854 in the third quarter of fiscal 1999 compared to $23,020 in the
third 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 third quarter of fiscal 1999 was 29.1%, compared to 30.2% in the third
quarter of fiscal 1998. The decrease was due primarily to lower pre-opening
costs for new stores and reduced administrative expenses as a percent of
sales.
Selling, general and administrative expenses increased $8,259 or
12.6% to $74,060 for the thirty-nine week period ended November 1, 1998
compared to $65,801 for the comparable thirty-nine week period of the prior
fiscal year. Selling, general and administrative expense as a percent of net
sales was 28.8% for the thirty-nine week period ended November 1, 1998
compared to 29.1% in the comparable thirty-nine 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 $335 or 27.2% to
$1,568 in the third quarter of fiscal 1999 compared to $1,233 in the third
quarter of fiscal 1998. The increase is due to additional buildings and
equipment associated with the store expansion program.
Income from operations increased $407 or 16.5% to $2,868 in the
third quarter of fiscal 1999 compared to $2,461 in the third quarter of
fiscal 1998. Income from operations as a percentage of net sales was 3.4%
in the third quarter of fiscal 1999 compared to 3.2% in the third quarter of
fiscal 1998.
Income from operations increased $1,615 or 20.5% to $9,484 for the
thirty-nine week period ended November 1, 1998 compared to $7,869 in the
comparable thirty-nine week period of the prior fiscal year.
Interest expense increased $103 or 10.5% in the third quarter of
fiscal 1999 compared to the third quarter of fiscal 1998.
Net earnings for the third quarter of fiscal 1999 were $1,119, an
increase of $216 or 23.9% over the net earnings of $903 for the third
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 November 1, 1998 working capital (defined as current assets less
current liabilities) was $91,619 compared to $75,986 at the end of fiscal
1998.
Cash used by operating activities in the first three quarters of
fiscal 1999 and 1998 was $3,965 and $18,543 respectively. The decrease in
the amount of cash used by operating activities in the first three quarters
of fiscal 1999 compared to the first three quarters 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 first
three quarters of fiscal 1999 and 1998 of $15,390 and $21,413, 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 first
three quarters of fiscal 1999 and 1998 totaled $7,484 and $9,740,
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 approximately $12,000.
During the third quarter, the Company's Board of Directors authorized
a stock repurchase program. The Company has been authorized to purchase up
to 411,000 shares, or 8% of its outstanding common stock. A total of 60,000
shares of stock were purchased during the third quarter under this program.
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-half 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. Except as identified below, this brings the total estimated
maximum expenditures to $1,000,000. All costs will be funded out of current
operating cash flow, borrowing under the Company's line of credit, or other
financing sources, and will be capitalized or expensed depending on the
classification of the expenditure according to generally accepted accounting
principles.
During the rollout of a year 2000 ready software upgrade to the store Point of
Sale system presently used in approximately 117 stores, the Company
encountered unexpected difficulties which initially caused the Company to
question whether that specific software upgrade could be effectively
implemented. Presently, the Company believes, based on test results for a
limited period of time in 25 stores, that such difficulties will be resolved
within both the above disclosed estimated cost and completion schedule.
However, the Company began an evaluation of its options and related costs in
the event that an alternate solution is deemed to be necessary. The Company
has identified several potential alternate solutions, which could be used in
lieu of the aforementioned software upgrade. While these options are still
under research, the most expensive option, if an entire hardware and software
replacement was required, is estimated at $4.5 million.
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. No single merchandise vendor accounts for a significant total of
the Company's purchases, and competing brand name and private label products
are available from other suppliers at competitive prices. The Company has
devoted phases four and five of its plan 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 many of 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.
As time goes on, the Company will evaluate the need for contingency plans
for all systems based on its assessment of the risks involved.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements, as referenced in
the Private Securities Litigation Reform Act of 1995 ("the Act"). Any
forward-looking statements are made by the Company in good faith, pursuant
to the safe-harbor provisions of the Act. These forward-looking statements
reflect management's current views and projection regarding economic
conditions, retail industry environments and Company performance. Factors
which could significantly change results include, but are not limited to:
sales performance, expense levels, competitive activity, interest rates,
change in the Company's financial condition and factors effecting the retail
category in general. Additional information regarding these and other
factors may be included in the Company's Annual Report and other public
documents, copies of which are available from the Company on request.
OTHER INFORMATION
PART II
Item 1. Legal Proceedings
No legal proceedings except those covered by insurance occurred
during the thirteen week period ended November 1, 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, December 15, 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