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 1, 1999
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:
5,049,199 shares of common stock, $.0001 par value (the issuer's
only class of common stock), were outstanding as of August 1, 1999.
PART I. Financial Information.
ITEM 1. Financial Statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
August 1, January 31,
1999 1999
(Unaudited)
___________ __________
ASSETS
Current assets:
Cash and cash equivalents $10,490 $10,423
Receivables 2,501 3,557
Inventories 115,774 113,225
Prepaid expenses 137 359
Total current assets 128,902 127,564
Property and equipment 76,269 73,967
Less accumulated depreciation 37,750 35,340
Net property and equipment 38,519 38,627
Property under capital leases 20,407 20,407
Less accumulated amortization 14,728 14,428
Net property under capital leases 5,679 5,979
Other non-current assets 288 304
Total assets $173,388 $172,474
<FN>
See accompanying notes to unaudited consolidated financial statements.
Duckwall-ALCO Stores, Inc.
And Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
August 1 January 31,
1999 1999
(Unaudited)
___________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of:
Long term debt $1,436 $1,556
Capital lease obligations 540 540
Accounts payable 24,223 20,488
Income taxes payable 8 1,780
Accrued salaries and commissions 3,745 4,705
Accrued taxes other than income 4,089 3,520
Other current liabilities 1,472 2,643
Deferred income taxes 2,256 2,256
Total current liabilities 37,769 37,488
Notes payable under revolving loan 30,225 30,598
Long term debt
less current maturities 4,120 4,825
Capital lease obligations
less current maturities 7,819 8,089
Other noncurrent liabilities 1,450 1,484
Deferred revenue 964 1,075
Deferred income taxes 2,489 2,489
Total liabilities 84,836 86,048
Stockholders' equity:
Common stock, $.0001 par value, authorized
20,000,000 shares; issued and outstanding
5,049,199 shares and 5,092,324 shares
respectively 1 1
Additional paid-in capital 53,827 54,247
Retained earnings since June 2, 1991 34,724 32,178
Total stockholders' equity 88,552 86,426
Total liabilities and
stockholders' equity $173,388 $172,474
<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 1, August 2, August 1, August 2,
1999 1998 1999 1998
___________ ___________ ___________ _________
Net sales ............................... $94,144 $90,360 $181,172 $171,412
Cost of sales ........................... 62,250 59,750 120,140 112,652
Gross margin .................. 31,894 30,610 61,032 58,760
Selling, general
and administrative ................. 26,391 24,999 51,916 49,206
Depreciation
and amortization ................... 1,583 1,549 3,160 2,938
Total operating expenses ...... 27,974 26,548 55,076 52,144
Income from operations .................. 3,920 4,062 5,956 6,616
Interest expense......................... 942 1,068 1,847 2,094
Earnings before income taxes and
cumulative effect of accounting change 2,978 2,994 4,109 4,522
Income tax .............................. 1,133 1,161 1,563 1,735
Earnings before cumulative effect of
accounting change ................... 1,845 1,833 2,546 2,787
Cumulative effect of accounting
change (net of tax) ................. 0 0 0 (956)
Net earnings ............................ $1,845 $1,833 $2,546 $1,831
Earnings per share - basic
Earnings before cumulative effect of
accounting change ................... $ 0.37 $ 0.35 $ 0.50 $ 0.55
Cumulative effect of accounting change .. .00 0.00 0.00 (0.19)
Net earnings ............................ $ 0.37 $ 0.35 $ 0.50 $ 0.36
Earnings per share - diluted
Earnings before cumulative effect of
accounting change ................... $ 0.37 $ 0.35 $ 0.50 $ 0.54
Cumulative effect of accounting change .. .00 0.00 0.00 (0.19)
Net earnings ............................ $ 0.37 $ 0.35 $ 0.50 $ 0.35
<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 1, 1999 August 2, 1998
---------------- ---------------
Cash flows from operating activities:
Net Earnings $2,546 $1,831
Adjustments to reconcile
net earnings to net cash
used in operating activities
Cumulative effect of accounting
change, net of income tax benefit 0 956
LIFO expense 374 0
Amortization of debt financing costs 60 80
Depreciation and amortization 3,160 2,938
(Increase) in inventories (2,923) (10,117)
Increase in accounts payable 3,735 7,619
Decrease in receivables 1,056 193
Decrease in other current assets 222 48
Increase in accrued taxes other than
income 569 887
(Decrease) in accrued salary and
commissions (960) (1,046)
(Decrease) in income taxes payable (1,772) (2,077)
(Decrease) in other liabilities (1,316) ( 586)
Net cash provided by operating activities 4,751 726
Cash flow from investing activities:
Capital expenditures (2,752) (5,400)
Increase in other assets (44) 0
Net cash used in investing
activities (2,796) (5,400)
Cash flow from financing activities:
(Decrease) increase in revolving loan (373) 8,699
Principal payments on long term notes (825) (849)
Principal payments on capital leases (270) (260)
Debt issue costs 0 (344)
Common stock redemption (490) 0
Proceeds from exercise of outstanding
stock options 70 365
Net cash provided by (used in) financing
activities (1,888) 7,611
Net increase in cash 67 2,937
Cash at beginning of period 10,423 2,555
Cash at end of period $10,490 $5,492
<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 1999 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 1, 1999 5,049,199 5,049,199
August 2, 1998 5,138,416 5,209,483
Twenty-Six Weeks Ending
August 1, 1999 5,065,208 5,065,208
August 2, 1998 5,131,851 5,195,246
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 1, 1999 and August 1, 1998 are referred to
herein as the second quarter of fiscal 2000 and 1999, 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
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 2000
the Company opened 4 stores, all of which were in new, non-competitive
markets, and closed 5 stores, resulting in a quarter end total of 262
stores. For the twenty-six week period ending August 1, 1999, the Company
opened 13 stores and closed 8 stores. As of August 1, 1999, over 80% of
the stores are in non-competitive markets.
Net sales for the second quarter of fiscal 2000 increased $3,784 or 4.2%
to $94,144 compared to $90,360 for the second quarter of fiscal 1999. Net
sales for the prototype Class 18 ALCO stores open the full period in both
the second quarter of fiscal 2000 and fiscal 1999 (comparable stores)
increased $414 or 1.3%. The Duckwall variety stores produced an increase
of $15 or .3% compared to the second quarter of the prior fiscal year.
Net sales for all stores open the full period decreased $226 or .3% compared
to the second quarter of the prior fiscal year. Same store sales were
impacted by the elimination of three advertising circulars and one
promotional handout as part of the implementation of the Company's new
pricing strategy "New Low Prices Everyday" (NLPE).
Net sales for the twenty-six week period ending August 1, 1999 increased
$9,760 or 5.7% to $181,172 compared to $171,412 in the comparable twenty-six
week period of the prior fiscal year. Net sales of comparable class 18
ALCO stores increased by $1,036 or 1.6% for the twenty-six week period
ending August 1, 1999 compared to the twenty-six week period of the prior
fiscal year. Same store sales were impacted by the elimination of five
advertising circulars and two promotional handouts as part of the
implementation of NLPE.
Gross margin for the second quarter of fiscal 2000 increased $1,284 or 4.2%
to $31,894 compared to $30,610 in the second quarter of fiscal 1999. Gross
margin was negatively impacted by additional LIFO expense of $197 in the
second quarter of fiscal 2000, compared to the second quarter of fiscal 1999.
Gross margin as a percentage of sales was 33.9% for the second quarter of
both fiscal years.
Gross margin for the twenty-six week period ended August 1, 1999 was $61,032,
which was $2,272 or 3.9% higher than last year's twenty-six week gross margin
of $58,760. As a percent of net sales, gross margin for the twenty-six week
period ended August 1, 1999 was 33.7% compared to 34.3% in the twenty-six week
period of the prior fiscal year. The reduction in gross margin percentage
was attributable to higher LIFO expense as well as higher permanent markdowns
on existing merchandise in the first quarter of fiscal 2000 in conjunction
with the initial implementation of NLPE in fiscal 2000 as compared to fiscal
1999.
Selling, general and administrative expense increased $1,392 or 5.6% to
$26,391 in the second quarter of fiscal 2000 compared to $24,999 in the
second quarter of fiscal 1999, 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 2000 was 28.0%, compared to 27.7% in the
second quarter of fiscal 1999.
Selling, general and administrative expenses increased $2,710 or 5.5% to
$51,916 for the twenty-six week period ended August 1, 1999 compared to
$49,206 for the comparable twenty-six week period of the prior fiscal year.
The increase in selling, general and administrative expense in fiscal 2000
is primarily due to an increase in the number of stores. Selling, general
and administrative expense as a percent of net sales was 28.7% for the
twenty-six week period of both fiscal years.
Depreciation and amortization expense increased $34 or 2.2% to $1,583 in the
second quarter of fiscal 2000 compared to $1,549 in the second quarter of
fiscal 1999. The increase is due to additional buildings and equipment
associated with the store expansion program.
Income from operations decreased $142 or 3.5% to $3,920 in the second
quarter of fiscal 2000 compared to $4,062 in the second quarter of fiscal
1999. Income from operations as a percentage of net sales was 4.2% in the
second quarter of fiscal 2000 compared to 4.5% in the second quarter of
fiscal 1999.
Income from operations decreased $660 or 10.0% to $5,956 for the twenty-six
week period ended August 1, 1999 compared to $6,616 in the comparable
twenty-six week period of the prior fiscal year.
Interest expense decreased $126 or 11.8% in the second quarter of fiscal 2000
compared to the second quarter of fiscal 1999.
Net earnings for the second quarter of fiscal 2000 were $1,845, an increase
of $12 or 0.7% over the net earnings of $1,833 for the second quarter of
fiscal 1999.
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 1, 1999 working capital (defined as current assets less current
liabilities) was $91,133 compared to $90,076 at the end of fiscal 1999.
Operating activities in the twenty-six week period of fiscal 2000 generated
cash in the amount of $4,751 and $726 in the twenty-six week period of
fiscal 1999. The increase in the amount of cash generated by operating
activities in the twenty-six week period of fiscal 2000 compared to the
twenty-six week period of fiscal 1999 was primarily due to a larger increase
in the trade accounts payable build up relative to the overall increase in
inventory levels.
The Company used cash from financing activities in the twenty-six week period
of fiscal 2000 in the amount of $1,888 and generated cash in the amount of
$7,611 in the twenty-six week period of fiscal 1999. In fiscal 2000, the
cash was used to make principal payments on long term notes and capital
leases, as well as to repurchase stock. Cash was generated by borrowing
under the revolving loan credit facility, in fiscal 1999.
Cash used for acquisition of property and equipment in the twenty-six week
period of fiscal 2000 and 1999 totaled $2,752 and $5,400, respectively.
Total anticipated cash payments for acquisition of property and equipment in
fiscal 2000, principally for store buildings and store and warehouse fixtures
and equipment, are $11,000.
THE YEAR 2000 ISSUES
The information in this Year 2000 section is a Year 2000 Readiness Disclosure
under the Year 2000 Information Readiness and Disclosure Act.
INTERNAL CONSIDERATIONS
The Company has been evaluating and adjusting all of its known date-sensitive
systems and equipment for Year 2000 readiness. The assessment phase of the
Year 2000 project is substantially complete and mission critical systems have
been substantially remediated or replaced. The assessment phase of the
project included information technology systems as well as non-information
technology equipment. The Company estimates that over 97% of the required
coding conversions on information technology have occurred to-date. The
Company has completed the majority of all known coding conversions, and
returned, or placed these systems into production. This occurred during
the first half of fiscal 2000 as scheduled. Remaining code conversions are
currently in progress with final completions expected by September of 1999.
Virtually all of the Company's remediation efforts have been and will
continue to be performed by Company associates and a limited number of
selected software and hardware providers.
As systems have been replaced or remediated, system testing has been
conducted prior to return to production. Enterprise wide system testing
will be conducted throughout calendar 1999 and through the end of fiscal
2000.
Rollout of Y2K ready store systems was completed in June of 1999. At this
point the Company believes the store systems to be Y2K ready, however,
additional testing and monitoring will continue throughout 1999 as deemed
necessary.
COSTS RELATED TO YEAR 2000
The total estimated cost of the Company's Year 2000 project is $1,000.
To-date the Company has spent approximately $479 on hardware and software
upgrades (excluding internal costs), and expects to spend as much as an
additional $221. Additionally the Company has or will incur as much as $300
in internal and external programming costs. Additional resources are
providing the Company with some enhancements to proprietary systems, and
project planning has begun for future enhancements.
All expenditures related to the Company's Year 2000 readiness initiatives
have or will be funded by cash flows from operations, borrowing under the
Company's line of credit, or other financing sources, and have or will be
capitalized or expensed depending on the classification of the expenditure
according to generally accepted accounting principles.
EXTERNAL CONSIDERATIONS
In addition to internal Year 2000 activities, the Company is communicating
with other companies with which its systems interface or rely upon.
Conversion, testing and implementation of Year 2000 ready EDI transactions
is underway. To-date we have converted approximately 140 out of 500 trading
partners. We have recently accelerated the conversion schedule to attempt
to complete the conversion by the end of September. However, we are reliant
upon our trading partners to be Y2K ready. Contingency plans will be
developed where possible and practical for those vendors who appear to be
unlikely to achieve Y2K readiness by the end of September 1999.
There can be no assurance that there will not be adverse effects on the
Company if third parties, such as utility companies or merchandise suppliers,
do not convert their systems in a timely manner and in a way that is
compatible with the Company's systems. However, management believes that
ongoing communications with and assessment of these third parties will
minimize these risks.
The Company recognizes the risks of business disruption resulting from
service and merchandise suppliers noncompliance. Possible consequences
include, but are not limited to, loss of basic utilities within certain
locations, inability to process transactions, send or transmit purchase
orders, or engage in similar normal business activities. Additionally,
due to the lack of a uniform definition of Year 2000 compliance, the
Company recognizes the potential of an increase in sales returns of
merchandise that contain embedded chips, or hardware or software components.
Due to the Company's product mix, and the anticipated cooperation from the
Company's suppliers, if returns of merchandise increase, such returns are
not expected to be material to the Company's financial condition.
CONTINGENCY PLANS
The contingency planning phase of the Year 2000 project has begun. To-date
the Company has determined areas where contingency planning is appropriate,
and contingency plans and policies are in the process of being created.
External dependency contingency planning will be based on ongoing
communications with the Company's suppliers and service providers. The
Company anticipates the majority of its contingency plans to be in place by
the end of September 1999. In addition the Company intends, during the four
the quarter of 1999 to conduct training with associates on the execution of
contingency plans should the need arise.
SUMMARY
The Company believes its IT systems will be ready for the Year 2000. Should
incidences of non-compliance occur the Company will dedicate both internal
and external resources to resolve any problems. Although the Company is
taking the steps it deems reasonable to mitigate external Year 2000 issues,
many elements of these risks, and the ability to definitively mitigate them,
are outside the control of the Company. Given the importance of certain key
service providers, the inability of these business partners to provide their
services to the Company on a timely basis could have a material adverse
effect on the Company's operations and financial results. Ongoing
communications with the Company's service providers should help mitigate
these risks. No single merchandise vendor accounts for a significant total
of the Company's purchases.
The cost of the conversions and the completion dates are based on management's
best estimates and may be updated as additional information becomes available.
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.
For The Thirteen Week For The Twenty-Six Week
Periods Ended Periods Ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
Segment Information
Net Sales:
ALCO Discount Stores $85,590 $82,464 $164,675 $155,669
All Other
External 8,554 7,896 16,497 15,743
Intercompany 42,352 44,705 96,211 97,257
$136,496 $135,065 $277,383 $268,669
Depreciation and Amortization
ALCO Discount Stores $982 $887 $1,972 $1,612
All Other 601 662 1,188 1,326
$1,583 $1,549 $3,160 $2,938
Income (expense) from Operations:
ALCO Discount Stores $8,751 $7,988 $15,062 $13,846
All Other (4,650) (4,132) (8,762) (7,622)
$4,101 $3,856 $6,300 $6,224
Capital Expenditures:
ALCO Discount Stores $898 $1,331 $1,813 $3,173
All Other 241 920 939 2,227
$1,139 $2,251 $2,752 $5,400
Identifiable Assets:
ALCO Discount Stores $132,058 $135,487 $132,058 $135,487
All Other 41,330 36,600 41,330 36,600
$173,388 $172,087 $173,388 $172,087
<FN>
Income from operations as reflected in the above segment information has been
determined differently than income from operations in the accompanying
consolidated statements of operations as follows:
INTERCOMPANY SALES
Intercompany sales represent transfers of merchandise from the warehouse to
ALCO discount stores and Duckwall variety stores.
INTERCOMPANY EXPENSE ALLOCATIONS
General and administrative expenses incurred at the general office have not
been allocated to the ALCO Discount Stores for purposes of determining income
from operations for the segment information.
Warehousing and distribution costs including freight applicable to
merchandise purchases, have been allocated to the ALCO Discount Stores
segment based on the Company's customary method of allocation for such costs
(primarily as a stipulated percentage of merchandise purchases).
INVENTORIES
Inventories are based on the FIFO method for segment information purposes and
on the LIFO method for the consolidated statements of operations.
PROPERTY COSTS
In fiscal 1999, for ALCO stores for which the Company owns the store building,
rent expense was charged to, and the applicable depreciation expense was
excluded from income from operations for purposes of determining the segment
information for the ALCO Discount Stores. In fiscal 2000, for most such ALCO
stores, no rent expense was charged to, and applicable depreciation expense
was included in income from operations. This change in accounting method
resulted in a $81 increase in income from operations for the ALCO Discount
Store segment in fiscal 2000. There was no effect on income from operations
as reflected in the accompanying consolidated statements of operations.
LEASES
All leases are accounted for as operating leases for purposes of determining
income from operations for purposes of determining the segment information
for the ALCO Discount Stores whereas capital leases are accounted for as
such in the consolidated statements of operations.
Identifiable assets as reflected in the above segment information include
cash and cash equivalents, receivables, inventory, property and equipment,
and property under capital leases.
A reconciliation of the segment information to the amounts reported in the
consolidated financial statements is presented below:
For The Thirteen Week For The Twenty-Six Week
Periods Ended Periods Ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
Net sales per above segment information $136,496 $135,065 $277,383 $268,669
Intercompany elimination (42,352) (44,705) (96,211) (97,257)
Net sales per consolidated statements $94,144 $90,360 $181,172 $171,412
of operations
Income from operations per above segment information $4,101 $3,856 $6,300 $6,224
Inventory method (196) 0 (373) 0
Property costs 30 231 59 442
Leases (15) (25) (30) (50)
Income from operations per consolidated $3,920 $4,062 $5,956 $6,616
statements of operations
<FN>
OTHER INFORMATION
PART II
Item 1. Legal Proceedings
No legal proceedings except those covered by insurance occurred
during the thirteen week period ended August 1, 1999.
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 7, 1999 /s/Richard A. Mansfield
Richard A. Mansfield
Vice President - Finance
Chief Financial Officer
Signing on behalf of the
registrant and as principal
financial officer