Attached files
file | filename |
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EX-31.2 - CFO CERTIFICATION - ALCO STORES INC | cfocertification.htm |
EX-31.1 - CEO CERTIFICATION - ALCO STORES INC | ceocertification.htm |
EX-32.2 - CFO SOX CERTIFICATION - ALCO STORES INC | cfosoxcertification.htm |
EX-32.1 - CEO SOX CERTIFICATION - ALCO STORES INC | ceosoxcertification.htm |
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, 2009
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 incorporation or organization)
|
(I.R.S.
Employer 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
Securities
registered pursuant to Section 12(b) of the Act:
NONE
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value
$.0001 per share
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES
NO X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. YES
NO X
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
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES
NO X
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of “accelerated filer", "large accelerated filer” and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [
] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller
reporting company) [ ] Smaller reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
NO X
APPLICABLE
ONLY TO CORPORATE ISSUERS:
3,797,947
shares of common stock, $.0001 par value (the issuer's only class of common
stock), were outstanding as of November 1, 2009.
DUCKWALL-ALCO
STORES, INC.
PART
I
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|||
Item
1.
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3
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Item
2.
|
9
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||
Item
3.
|
15
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Item
4.
|
15
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PART
II
|
|||
Item
1.
|
16
|
||
Item
1A.
|
16
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||
Item
2.
|
16
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Item
3.
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16
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Item
4.
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16
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Item
5.
|
16
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Item
6.
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16
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Signature
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18
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2
ITEM
1. FINANCIAL STATEMENTS
Duckwall-ALCO
Stores, Inc. and Subsidiaries
|
||||||||
Consolidated
Balance Sheets
|
||||||||
(dollars
in thousands, except share amounts)
|
||||||||
Assets
|
||||||||
November
1, 2009
|
February
1, 2009
|
|||||||
(Unaudited)
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 5,703 | 4,744 | |||||
Receivables
|
5,998 | 5,142 | ||||||
Prepaid
income taxes
|
1,527 | 5,753 | ||||||
Inventories
|
165,131 | 146,620 | ||||||
Prepaid
expenses
|
3,688 | 4,143 | ||||||
Deferred
income taxes
|
2,835 | 5,348 | ||||||
Assets
held for sale
|
1,531 | 1,505 | ||||||
Total
current assets
|
186,413 | 173,255 | ||||||
Property
and equipment, at cost:
|
||||||||
Land
and land improvements
|
1,442 | 1,420 | ||||||
Buildings
and building improvements
|
11,518 | 11,369 | ||||||
Furniture,
fixtures and equipment
|
70,803 | 69,019 | ||||||
Transportation
equipment
|
1,375 | 1,322 | ||||||
Leasehold
improvements
|
15,166 | 13,974 | ||||||
Construction
work in progress
|
2,014 | 745 | ||||||
Total
property and equipment
|
102,318 | 97,849 | ||||||
Less
accumulated depreciation
|
71,228 | 65,591 | ||||||
Net
property and equipment
|
31,090 | 32,258 | ||||||
Property
under capital leases
|
11,015 | 11,015 | ||||||
Less
accumulated amortization
|
9,084 | 7,958 | ||||||
Net
property under capital leases
|
1,931 | 3,057 | ||||||
Other
non-current assets
|
143 | 205 | ||||||
Deferred
income taxes
|
2,055 | - | ||||||
Total
assets
|
$ | 221,632 | 208,775 | |||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Current
maturities of long-term debt
|
$ | 1,428 | 1,362 | |||||
Current
maturities of capital lease obligations
|
1,929 | 1,853 | ||||||
Accounts
payable
|
37,290 | 30,233 | ||||||
Accrued
salaries and commissions
|
5,107 | 5,375 | ||||||
Accrued
taxes other than income
|
5,410 | 4,941 | ||||||
Self-insurance
claim reserves
|
5,087 | 5,309 | ||||||
Other
current liabilities
|
4,280 | 4,676 | ||||||
Total
current liabilities
|
60,531 | 53,749 | ||||||
Long
term debt, less current maturities
|
1,786 | 2,865 | ||||||
Notes
payable under revolving loan agreement
|
47,510 | 40,714 | ||||||
Capital
lease obligations - less current maturities
|
1,527 | 3,047 | ||||||
Deferred
gain on leases
|
4,309 | 4,598 | ||||||
Deferred
income taxes, net
|
160 | 138 | ||||||
Other
noncurrent liabilities
|
1,682 | 1,624 | ||||||
Total
liabilities
|
117,505 | 106,735 | ||||||
Stockholders'
equity:
|
||||||||
Common
stock, $.0001 par value, authorized 20,000,000 shares; issued and
outstanding
|
||||||||
3,797,947
shares and 3,797,947 shares, respectively
|
1 | 1 | ||||||
Additional
paid-in capital
|
39,158 | 38,615 | ||||||
Retained
earnings
|
64,968 | 63,424 | ||||||
Total
stockholders' equity
|
104,127 | 102,040 | ||||||
Total
liabilities and stockholders' equity
|
$ | 221,632 | 208,775 | |||||
See
accompanying notes to unaudited consolidated financial
statements.
|
3
Duckwall-ALCO
Stores, Inc. and Subsidiaries
|
||||||||||||||||
Consolidated
Statements of Operations
|
||||||||||||||||
(dollars
in thousands, except share amounts)
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||
For
the Thirteen Week
|
For
the Thirty-Nine Week
|
|||||||||||||||
Periods
Ended
|
Periods
Ended
|
|||||||||||||||
November
1, 2009
|
November
2, 2008
|
November
1, 2009
|
November
2, 2008
|
|||||||||||||
Net
sales
|
$ | 111,495 | 114,880 | 352,191 | 349,692 | |||||||||||
Cost
of sales
|
75,835 | 77,756 | 235,583 | 237,527 | ||||||||||||
Gross
margin
|
35,660 | 37,124 | 116,608 | 112,165 | ||||||||||||
Selling,
general and administrative
|
34,862 | 38,097 | 105,187 | 109,918 | ||||||||||||
Depreciation
and amortization
|
2,327 | 2,118 | 6,973 | 5,794 | ||||||||||||
Total
operating expenses
|
37,189 | 40,215 | 112,160 | 115,712 | ||||||||||||
Operating
income (loss) from continuing operations
|
(1,529 | ) | (3,091 | ) | 4,448 | (3,547 | ) | |||||||||
Interest
expense, net
|
532 | 63 | 1,589 | 1,218 | ||||||||||||
Earnings
(loss) from continuing operations before income taxes
|
(2,061 | ) | (3,154 | ) | 2,859 | (4,765 | ) | |||||||||
Income
tax expense (benefit)
|
(626 | ) | (1,644 | ) | 1,310 | (2,329 | ) | |||||||||
Earnings
(loss) from continuing operations
|
(1,435 | ) | (1,510 | ) | 1,549 | (2,436 | ) | |||||||||
Loss
from discontinued operations, net of income tax benefit
|
(2 | ) | (155 | ) | (5 | ) | (1,825 | ) | ||||||||
Net
earnings (loss)
|
$ | (1,437 | ) | (1,665 | ) | 1,544 | (4,261 | ) | ||||||||
Earnings
(loss) per share
|
||||||||||||||||
Basic
|
||||||||||||||||
Continuing
operations
|
$ | (0.38 | ) | (0.40 | ) | 0.41 | (0.64 | ) | ||||||||
Discontinued
operations
|
- | (0.04 | ) | - | (0.48 | ) | ||||||||||
Net
earnings (loss)
|
$ | (0.38 | ) | (0.44 | ) | 0.41 | (1.12 | ) | ||||||||
Earnings
(loss) per share
|
||||||||||||||||
Diluted
|
||||||||||||||||
Continuing
operations
|
$ | (0.38 | ) | (0.40 | ) | 0.40 | (0.64 | ) | ||||||||
Discontinued
operations
|
- | (0.04 | ) | - | (0.48 | ) | ||||||||||
Net
earnings (loss)
|
$ | (0.38 | ) | (0.44 | ) | 0.40 | (1.12 | ) | ||||||||
See
accompanying notes to unaudited consolidated financial
statements.
|
4
Duckwall-ALCO
Stores, Inc. and Subsidiaries
|
||||||||
Consolidated
Statements of Cash Flows
|
||||||||
(dollars
in thousands)
|
||||||||
(Unaudited)
|
||||||||
For
the Thirty-Nine Week
|
||||||||
Periods
Ended
|
||||||||
November
1, 2009
|
November
2, 2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
earnings (loss)
|
$ | 1,544 | (4,261 | ) | ||||
Adjustments
to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
|
||||||||
Depreciation
and amortization
|
6,929 | 5,836 | ||||||
Gain
on sale of assets
|
(70 | ) | 14 | |||||
Share-based
compensation
|
601 | 34 | ||||||
Deferred
income tax expense, net
|
422 | 3,595 | ||||||
Changes
in:
|
||||||||
Receivables
|
(856 | ) | 1,385 | |||||
Prepaid
income taxes
|
4,226 | (3,963 | ) | |||||
Inventories
|
(18,511 | ) | (37,859 | ) | ||||
Prepaid
expenses
|
455 | (770 | ) | |||||
Accounts
payable
|
7,057 | 18,379 | ||||||
Accrued
salaries and commissions
|
(268 | ) | 1,878 | |||||
Accrued
taxes other than income
|
469 | 543 | ||||||
Self-insurance
claim reserves
|
(222 | ) | (253 | ) | ||||
Other
assets and liabilities
|
(565 | ) | (2,519 | ) | ||||
Net
cash provided by (used in) operating activities
|
1,211 | (17,961 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Proceeds
from the sale of assets
|
73 | 169 | ||||||
Acquisition
of property and equipment
|
(4,664 | ) | (7,578 | ) | ||||
Net
cash used in investing activities
|
(4,591 | ) | (7,409 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Net
borrowings under revolving loan agreement
|
6,796 | 27,673 | ||||||
Proceeds
from stock sale
|
- | 90 | ||||||
Repurchase
of common stock
|
- | (191 | ) | |||||
Principal
payments under term loan
|
(1,013 | ) | (951 | ) | ||||
Principal
payments under capital lease obligations
|
(1,444 | ) | (1,432 | ) | ||||
Net
cash provided by financing activities
|
4,339 | 25,189 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
959 | (181 | ) | |||||
Cash
and cash equivalents at beginning of period
|
4,744 | 5,501 | ||||||
Cash
and cash equivalents at end of period
|
$ | 5,703 | 5,320 | |||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid (received) during the period for:
|
||||||||
Interest
|
$ | 1,594 | 1,834 | |||||
Income
taxes
|
(3,097 | ) | (828 | ) | ||||
See
accompanying notes to unaudited consolidated financial
statements.
|
5
Duckwall-ALCO
Stores, Inc. and Subsidiaries
Notes
to Unaudited Consolidated Financial Statements
(dollars
in thousands, except share and per share amounts or as otherwise
noted)
(1) Basis of
Presentation
The
accompanying unaudited consolidated financial statements of Duckwall-ALCO
Stores, Inc. and Subsidiaries (the "Company") are for interim periods and have
been prepared in accordance with U.S. generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete 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 2009 Annual
Report. In the opinion of management of the Company, 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. Because the Company’s business is moderately seasonal, the results from
interim periods are not necessarily indicative of the results to be expected for
the entire year.
Fiscal
2010 and 2009 are both 52-week years consisting of four thirteen week
periods referred to as quarters. The thirteen weeks ended November 1, 2009
and November 2, 2008 are referred to herein as the third quarter of fiscal 2010
and 2009, respectively.
The
depreciation and amortization amount from the Consolidated Statements of
Operations may not agree to the Consolidated Statements of Cash Flows due to the
fact that a portion of the depreciation and amortization from the Consolidated
Statements of Cash Flows is included in the loss from discontinued
operations, net of income tax benefit line of the Consolidated Statements
of Operations.
(2) Principles of
Consolidation
The
consolidated financial statements include the accounts of the
Company. All significant intercompany transactions and balances have
been eliminated in consolidation.
(3) Share-Based
Compensation
Effective
with fiscal 2007, the Company began recognizing compensation for its
share-based payments based on the fair value of the awards. Share-based payments
consist of stock option grants. For the thirteen weeks ended November 1, 2009
and November 2, 2008, share-based compensation decreased pre-tax income by
$155 and $169, respectively. For the thirty-nine weeks ended
November 1, 2009 and November 2, 2008, share-based compensation decreased
pre-tax income by $601 and $34, respectively.
Forfeitures
are estimated at the time of valuation and reduce expense ratably over the
vesting period. This estimate is adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from the previous
estimate. Actual forfeitures exceeded estimated forfeitures for the
thirteen weeks ended May 4, 2008, resulting in a reduction of previously
recorded share-based compensation of $480.
Stock
Incentive Plan
Under our
2003 Incentive Stock Option Plan, options may be granted to officers and key
employees, not to exceed 500,000 shares. According to the terms of
the plan, the per share exercise price of options granted shall not be less than
the fair market value of the stock on the date of grant and such options will
expire no later than five years from the date of grant. The options vest in
equal amounts over a four year requisite service period beginning from the grant
date unless certain Company events occur. In the case of a stockholder owning
more than 10% of the outstanding voting stock of the Company, the exercise price
of an incentive stock option may not be less than 110% of the fair market value
of the stock on the date of grant and such options will expire no later than
five years from the date of grant. Also, the aggregate fair market
value of the stock with respect to which incentive stock options are exercisable
on a tax deferred basis for the first time by an individual in any calendar year
may not exceed $100. In the event that the foregoing results in a portion of an
option exceeding the $100 limitation, such portion of the option in excess of
the limitation shall be treated as a non-qualified stock option. At
November 1, 2009, the Company had 95,750 shares authorized for future option
grants. The Company issues these grants from the unissued shares
authorized.
Under our
Non-Qualified Stock Option Plan for Non-Management Directors, options may be
granted to Directors of the Company who are not otherwise officers or employees
of the Company, not to exceed 200,000 shares. According to the terms
of the plan, the per share exercise price of options granted shall not be less
than the fair market value of the stock on the date of grant and such options
will expire five years from the date of grant. The options vest in
equal amounts over a four year requisite service period beginning from the grant
date unless certain Company events occur. All options under the plan
shall be non-qualified stock options. There are 77,500 shares
remaining to be issued under this plan.
6
Under our
Non-Qualified Stock Option Agreement with Lawrence J. Zigerelli as part of his
starting employment with the Company on July 1, 2008, Mr. Zigerelli was granted
the right to purchase 10,000 shares of the Company’s common
stock. According to the terms of the plan, the per share exercise
price of options granted shall not be less than the fair market value of the
stock on the date of grant and such options will expire no later than five years
from the date of grant. The options vest in equal amounts over a
four year requisite service period beginning from the grant date unless certain
Company events occur. The options will terminate if Mr. Zigerelli
ceases to be a full time employee of the Company. The Company issues
these grants from the unissued shares authorized. There are no shares remaining
to be issued under this plan.
The fair
value of each option grant is separately estimated. The fair value of each
option is amortized into share-based compensation on a straight-line
basis over the requisite service period as discussed above. We
have estimated the fair value of all stock option awards as of the date of the
grant by applying a modified Black-Scholes pricing
valuation model. The application of this valuation model involves
assumptions that are judgmental and highly sensitive in the determination of
share-based compensation, including expected stock price
volatility.
The
following summarizes information concerning stock option grants during fiscal
2010 and 2009:
Fiscal 2009 Ended |
For
the Thirteen Week Periods Ended
|
For
the Thirty-Nine Week Periods Ended
|
||||||||||||||||||
February
1, 2009
|
November
1, 2009
|
November
2, 2008
|
November
1, 2009
|
November
2, 2008
|
||||||||||||||||
Stock
options granted
|
414,500 | 10,000 | 10,000 | 45,000 | 384,500 | |||||||||||||||
Weighted
average exercise price
|
$ | 12.26 | 17.89 | 14.08 | 13.95 | 12.43 | ||||||||||||||
Weighted
average grant date fair value
|
$ | 4.16 | 7.86 | 5.19 | 5.95 | 4.18 |
The
weighted average for key assumptions used in determining the fair value of
options granted in the thirteen and thirty-nine week periods ended November
1, 2009 and November 2, 2008, and a summary of the methodology applied to
develop each assumption are as follows:
|
||||||||||||||||||||
Fiscal
2009 Ended
|
For
the Thirteen Week Periods Ended
|
For
the Thirty-Nine Week Periods Ended
|
||||||||||||||||||
February
1, 2009
|
November
1, 2009
|
November
2, 2008
|
November
1, 2009
|
November
2, 2008
|
||||||||||||||||
Expected
price volatility
|
36.6 | % | 50.2 | % | 38.0 | % | 51.3 | % | 36.1 | % | ||||||||||
Risk-free
interest rate
|
2.5 | % | 1.7 | % | 2.9 | % | 1.4 | % | 2.6 | % | ||||||||||
Weighted
average expected lives in years
|
4.5 | 4.8 | 4.8 | 4.3 | 4.5 | |||||||||||||||
Dividend
yield
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |
EXPECTED
PRICE VOLATILITY -- This is a measure of the amount by which a price has
fluctuated or is expected to fluctuate. The Company uses actual historical
changes in the market value of its stock to calculate expected price volatility
because management believes that this is the best indicator of future
volatility. The Company calculates monthly market value changes from the date of
grant over a past period to determine volatility. An increase in the expected
volatility will increase share-based compensation.
RISK-FREE
INTEREST RATE -- This is the applicable U.S. Treasury rate for the date of the
grant over the expected term. An increase in the risk-free interest
rate will increase share-based compensation.
EXPECTED
LIVES -- This is the period of time over which the options granted are expected
to remain outstanding and is based on management’s expectations in relation to
the holders of the options. Options granted have a maximum term of five years.
An increase in the expected life will increase share-based
compensation.
DIVIDEND
YIELD --- The Company has not made any dividend payments nor does it have plans
to pay dividends in the foreseeable future. An increase in the dividend yield
will decrease share-based compensation.
As of
November 1, 2009, total unrecognized share-based compensation related to
non-vested stock options is $1.1 million with a weighted average expense
recognition period of 2.5 years.
(4) Accounting for Income
Taxes
The
Company recorded decreases in gross unrecognized tax benefits, inclusive of
related interest, of $8 for the thirty-nine week period ended November 1, 2009
and decreases of $2.3 million for the thirty-nine week period
ended November 2, 2008, respectively. None of the amounts recorded as
unrecognized tax benefits would impact the effective income tax rate if
recognized.
The
statute of limitations for our federal income tax returns is open for 2005
through 2007. We file in numerous state jurisdictions with varying
statutes of limitation. State returns are open from 2004 through 2007
or 2005 through 2007 depending on each state’s statute of
limitations.
(5) Subsequent
Events
The
Company has evaluated subsequent events for potential disclosure or recognition
through December 10, 2009, the issuance date of the financial
statements.
7
(6) Fair Value
Measurements
The
financial instruments of the Company consist of cash and cash equivalents,
short-term receivables and accounts payable, accrued expenses and long-term
debt instruments, including capital leases. For notes payable under
revolving loan, fair value approximates the carrying value due to the variable
interest rate. Based on the borrowing rates currently available to the Company
for debt with similar terms, the fair value of long-term debt at November
1, 2009 approximates its carrying amount of $3.2 million. For all
other financial instruments including cash and cash equivalents, short-term
receivables, accounts payable and accrued expenses, the carrying amounts
approximate fair value due to the short maturity of those
instruments.
(7) Earnings Per
Share
Basic
net earnings per share is computed by dividing net earnings by the weighted
average number of shares outstanding. Diluted net earnings per share
reflects the potential dilution that could occur if contracts to issue
securities (such as stock options) were exercised, except for those periods with
a loss.
The
average number of shares used in computing earnings per share was as
follows:
|
||||||||
Thirteen
Weeks Ended
|
Basic
|
Diluted
|
||||||
November
1, 2009
|
3,797,947 | 3,797,947 | ||||||
November
2, 2008
|
3,811,943 | 3,811,943 | ||||||
Thirty-Nine
Weeks Ended
|
Basic
|
Diluted
|
||||||
November
1, 2009
|
3,797,947 | 3,876,907 | ||||||
November
2, 2008
|
3,812,249 | 3,812,249 |
(8) Store Closings and
Discontinued Operations
The
Company closed 14 stores (ten ALCO stores and four Duckwall stores) in the first
quarter of fiscal 2009. The Company incurred costs associated with the
store closings in the first quarter of fiscal 2009 consisting
primarily of $436 of future lease costs (net of estimated sublease income of
$1.3 million), lease termination costs of $470, and severance costs of
$30. The operations of these stores were reclassified to discontinued
operations in the first quarter of fiscal 2009. In addition to
the 14 stores that were closed in the first quarter of fiscal 2009, three
Duckwall stores were closed and were replaced by an ALCO store. These
three stores are shown in continuing operations. One Duckwall store was
closed during the second quarter of fiscal 2010.
The
future lease costs were adjusted during the thirteen weeks ended November 1,
2009 for lease payments made. The actual future lease costs could
vary from these estimates. A rollforward of the future lease costs balance
is below:
Beginning
balances as of August 2, 2009
|
$
|
105
|
||
Net
lease payments made
|
(47
|
)
|
||
Ending
balance as of November 1, 2009
|
$
|
58
|
In
addition to the above store closing costs, the Company incurred severance costs
of $1.9 million during the first quarter of fiscal 2009. During the
thirty-nine week periods ended November 1, 2009 and November 2, 2008, $511
and $937, respectively, was paid out.
(9) New Accounting
Pronouncements
In April
2009, the
Financial Accounting Standards Board (FASB) modified FASB Accounting Standards
Codification (ASC) Topic 825, Financial Instruments, and FASB ASC Topic 270,
Interim Reporting, to extend the disclosure requirements related to the fair
value of financial instruments to interim financial statements of publicly
traded companies. The Company adopted this guidance in
the second quarter of fiscal 2010, the impact of which related only to
disclosures and did not have a material effect on the Company’s financial
condition, results of operations or cash flows.
8
In
May 2009, the FASB
modified FASB ASC Topic 855, Subsequent Events, which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued and requires
entities to disclose the date through which they have evaluated subsequent
events. The Company adopted this guidance effective August 2, 2009. The
adoption of this guidance changed certain financial statement disclosures but
did not have an impact on the Company’s financial condition, results of
operations or cash flows.
In
June 2009, the FASB
issued Accounting Standards Update (“ASU”) No. 2009-01 Topic 105, Generally
Accepted Accounting Principles which establishes the FASB ASC. The FASB ASC is
the single source of authoritative nongovernmental U.S. generally accepted
accounting principles (“GAAP”), superseding existing FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force, and related accounting
literature. The FASB ASC reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a consistent structure.
Also included is relevant Securities and Exchange Commission guidance organized
using the same topical structure in separate sections. The Company adopted
this guidance effective August 2, 2009. The adoption of this
guidance did not have an impact on the Company’s financial condition,
results of operations or cash flows.
In
August 2009, FASB issued ASU No. 2009-05 which amends ASC Topic 820,
Fair Value Measurements and Disclosures (“Topic 820”), to provide guidance on
the fair value measurement of liabilities. This update requires clarification
for circumstances in which a quoted price in an active market for the identical
liability is not available. A reporting entity is required to measure fair value
using one or more of the following techniques: 1) a valuation technique that
uses either the quoted price of the identical liability when traded as an asset
or quoted prices for similar liabilities or similar liabilities when traded as
an asset; or 2) another valuation technique that is consistent with the
principles in Topic 820 such as the income and market approach to valuation. The
amendments in this update also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. This update further clarifies that if
the fair value of a liability is determined by reference to a quoted price in an
active market for an identical liability, that price would be considered a Level
1 measurement in the fair value hierarchy. Similarly, if the identical liability
has a quoted price when traded as an asset in an active market, it is also a
Level 1 fair value measurement if no adjustments to the quoted price of the
asset are required. This update is effective for the Company's fourth
quarter fiscal 2010 and is not expected to have a significant impact on our
financial condition, results of operation or cash flows.
(dollars in thousands except
per share amounts or as otherwise noted)
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
Certain
statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact may constitute "forward-looking statements" within
the meaning of Section 21E of the Exchange Act. These statements are subject to
risks and uncertainties, as described below. Examples of forward-looking
statements include, but are not limited to: (i) projections of revenues, income
or loss, earnings or loss per share, capital expenditures, store openings, store
closings, payment or non-payment of dividends, capital structure and other
financial items, (ii) statements of plans and objectives of the Company's
management or Board of Directors, including plans or objectives relating to
inventory, store development, marketing, competition, business strategy, store
environment, merchandising, purchasing, pricing, distribution, transportation,
store locations and information systems, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying the statements
described in (i), (ii) and (iii). Forward-looking statements can often be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "could," "intends," "plans," "estimates",
"projects" or "anticipates," variations thereof or similar
expressions.
Forward-looking
statements are not guarantees of future performance or results. They
involve risks, uncertainties and assumptions. The Company's future
results of operations, financial condition and business operations may differ
materially from the forward-looking statements or the historical information
stated in this Quarterly Report on Form 10-Q. Stockholders and
investors are cautioned not to put undue reliance on any forward-looking
statement.
There are
a number of factors and uncertainties that could cause actual results of
operations, financial condition or business contemplated by the forward-looking
statements to differ materially from those discussed in the forward-looking
statements made herein or elsewhere orally or in writing, by, or on behalf of,
the Company, including those factors described below. Other factors not
identified herein could also have such an effect. Factors that could cause
actual results to differ materially from those discussed in the forward-looking
statements and from historical information include, but are not limited to,
those factors described below.
OVERVIEW
Operations. The
Company is a multi-regional broad line retailer operating 257 stores in 23
states in the central United States. The thirteen weeks ended
November 1, 2009 and November 2, 2008 are referred to herein as the third
quarter of fiscal 2010 and 2009, respectively. For purposes of this
management's discussion and analysis of financial condition and results of
operations, the financial numbers are presented in thousands, except as
noted.
Strategy. The
Company's overall business strategy involves identifying and opening stores in
towns that will provide the Company with the highest return on
investment. The Company competes for retail sales with other
entities, such as specialty retailers, mass merchandisers, dollar
stores and the internet.
9
The
Company is routinely evaluating the appropriate mix of merchandise to improve
sales and gross margin performance. The Company uses centralized
purchasing, merchandising, pricing and warehousing to obtain volume discounts,
improve efficiencies and achieve consistency among stores and the best overall
results. The Company utilizes information obtained from its
point-of-sale system and perpetual inventory system to make more fact based
decisions.
Recent Events. The
Company completed its store transformation project during June
2009. The actual store level labor and benefit
savings improvement is consistent with expectations, however, shrink
improvement is below expectation.
Key Items
in Third Quarter Fiscal 2010
The
Company measures itself against a number of financial metrics to assess its
performance. Some of the important financial items during the third
quarter of fiscal 2010 were:
·
|
Net
sales decreased 2.9% to $111.5 million. Same-store sales
decreased 1.7% compared to the prior year third
quarter.
|
·
|
Gross
margin percentage decreased to 32.0% of sales, compared to 32.3% in
the prior year third quarter.
|
·
|
Net
loss per share was $0.38 in the third quarter of fiscal 2010 compared to
net loss of $0.44 per share in the prior year third
quarter.
|
·
|
The
Company’s earnings from continuing operations before interest, taxes,
depreciation and amortization, share-based compensation, preopening
store costs, inventory review initiative and executive, staff
severance and store transformation project costs (“Adjusted
EBITDA”) for the third quarter 2010 was $955 compared to the prior
year third quarter of
$475.
|
RESULTS OF
OPERATIONS
Thirteen
Weeks Ended November 1, 2009 Compared to Thirteen Weeks Ended November 2,
2008
Net
Sales
Net sales
for the third quarter of fiscal 2010 decreased $3.4 million, or 2.9%, to $111.5
million compared to $114.9 million for the third quarter of fiscal
2009. Same-store sales decreased 1.7% when compared with the prior
year same quarter.
Gross
Margin
Gross
margin for the third quarter of fiscal 2010 decreased $1.5 million, or 3.9%, to
$35.7 million compared to $37.1 million in the third quarter of fiscal
2009. Gross margin as a percentage of sales was 32.0% for the third
quarter of fiscal 2010, which decreased when compared to 32.3% for the third
quarter of fiscal 2009. The decrease in the gross margin
percentage was primarily due to reduced new store allowances and increased
shrink offset by reduced freight costs.
SG&A
Selling,
general and administrative (SG&A) expense decreased $3.2 million or 8.5%, to
$34.9 million in the third quarter of fiscal 2010 compared to $38.1 million in
the third quarter of fiscal 2009. As a percentage of net sales,
SG&A expenses for the third quarter of fiscal 2010 were 31.3%, compared
to 33.2% for third quarter fiscal 2009. The decrease in SG&A
expenses is attributable to reduced store level labor and benefits of $791,
store transformation project costs of $937, point-of-sale hardware lease
expense of $489, advertising expense of $416 and preopening store costs of
$340. Excluding
share-based compensation, preopening store costs, store transformation project
costs and executive and staff severance (Adjusted SG&A expenses) were
31.1% and 31.9%, as percentage of net sales, for the third quarter
fiscal 2010 and 2009, respectively.
Depreciation
and Amortization Expense
Depreciation
and amortization expense increased $209, or 9.9%, to $2.3 million in the third
quarter of fiscal 2010 compared to $2.1 million in the third quarter of fiscal
2009.
Interest
Expense
Interest
expense increased $469, or 744.4%, to $532 in the third quarter of fiscal 2010
compared to $63 in the third quarter of fiscal
2009. The increased interest expense was due to the
reversal of accrued interest of $605 related to the FIN 48 liability of the
Company during the third quarter of fiscal 2009.
Income
Taxes
The
Company’s effective tax rate on earnings from continuing operations before
income taxes in the third quarter of fiscal 2010 was 30.4% compared to 52.1% in
the third quarter of fiscal 2009. The effective tax rate is lower due
to decreased state effective tax rates offset by the impact of permanent book
and tax differences related to fiscal 2009 income tax returns.
Loss
from Discontinued Operations
Loss from
discontinued operations, net of income tax benefit, was $2 in the third quarter
of fiscal 2010, compared to a loss of $155, net of income tax benefit, in
the third quarter of fiscal 2009. Three Duckwall stores that were
closed during fiscal year 2009 and were replaced by an ALCO store are shown
in continuing operations. In addition, 14 ALCO stores were closed in
the first quarter of fiscal 2009. One Duckwall store was closed during the
second quarter of fiscal 2010.
10
Thirty-nine
Weeks Ended November 1, 2009 Compared to Thirty-nine Weeks Ended November 2,
2008
Net
Sales
Net sales
for the thirty-nine week period of fiscal 2010 increased $2.5 million, or 0.7%,
to $352.2 million compared to $349.7 million for the thirty-nine week period of
fiscal 2009. Same-store sales increased 0.2% when compared with the
prior year.
Gross
Margin
Gross
margin for the thirty-nine week period of fiscal 2010 increased $4.4 million, or
4.0%, to $116.6 million compared to $112.2 million in the thirty-nine week
period of fiscal 2009. Gross margin as a percentage of sales was
33.1% for the thirty-nine week period of fiscal 2010, which increased when
compared to 32.1% for the thirty-nine week period of fiscal
2009. The increase in the gross margin percentage was primarily
due to reduced markdowns and freight costs offset by reduced new
store allowances. The thirty-nine week period of fiscal 2009
Adjusted Gross Margin as a percentage of sales was 32.5%, excluding the impact
of the inventory review initiative.
SG&A
Selling,
general and administrative (SG&A) expense decreased $4.7 million or 4.3%, to
$105.2 million in the thirty-nine week period of fiscal 2010 compared to $109.9
million in the thirty-nine week period of fiscal 2009. As a
percentage of net sales, SG&A expenses for the thirty-nine week period
of fiscal 2010 were 29.9%, compared to 31.4% for thirty-nine week period fiscal
2009. The decrease in SG&A expenses is attributable to reduced
severance charges of $1.9 million, preopening store costs of $1.8
million, point-of-sale hardware lease expense of $1.4 million and store
level labor and benefits of $1.2 million offset by increased real property
rent expense of $1.3 million and store transformation project costs of $1.2
million. Excluding
share-based compensation, preopening store costs, store transformation project
costs and executive and staff severance (Adjusted SG&A expenses) were
29.1% and 30.1%, as percentage of net sales, for the thirty-nine week
periods of fiscal 2010 and 2009, respectively.
Depreciation
and Amortization Expense
Depreciation
and amortization expense increased $1.2, or 20.3%, to $7.0 million in the
thirty-nine week period of fiscal 2010 compared to $5.8 million in the
thirty-nine week period of fiscal 2009.
Interest
Expense
Interest
expense increased $371, or 30.5%, to $1.6 million in the thirty-nine week period
of fiscal 2010 compared to $1.2 million in the thirty-nine week period of fiscal
2009. The increased interest expense was due to the
reversal of accrued interest of $605 related to the FIN 48 liability of the
Company during the third quarter of fiscal 2009.
Income
Taxes
The
Company’s effective tax rate on earnings from continuing operations before
income taxes in the thirty-nine week period of fiscal 2010 was 45.8% compared to
48.9% in the thirty-nine week period of fiscal 2009. The effective
tax rate is lower due to decreased state effective tax rates offset by the
impact of permanent book and tax differences related to fiscal 2009 income tax
returns.
Loss
from Discontinued Operations
Loss from
discontinued operations, net of income tax benefit, was $5 in the thirty-nine
week period of fiscal 2010, compared to a loss of $1.8 million, net of income
tax benefit, in the thirty-nine week period of fiscal
2009. Three Duckwall stores that were closed during fiscal year
2009 and were replaced by an ALCO store are shown in continuing
operations. In addition, 14 ALCO stores were closed in the
thirty-nine week period of fiscal 2009. One Duckwall store was closed
during the thirty-nine week period of fiscal
2010.
11
Certain
Non-GAAP Financial Measures
The
Company has included Adjusted Gross Margin, Adjusted SG&A and Adjusted
EBITDA, non-GAAP performance measures, as part of its disclosure as a means
to enhance its communications with stockholders. Certain stockholders have
specifically requested this information to assist them in comparing
the Company to other retailers that disclose similar non-GAAP performance
measures. Further, management utilizes these measures in internal evaluation;
review of performance and to compare the Company’s financial measures to those
of its peers. Adjusted EBITDA differs from the most comparable GAAP financial
measure (earnings (loss) from continuing operations) in that it does not
include certain items, as does Adjusted Gross Margin and Adjusted SG&A.
These items are excluded by management to better evaluate normalized operational
cash flow and expenses excluding unusual, inconsistent and non-cash
charges. To compensate for the limitations of evaluating the Company's
performance using Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA,
management also utilizes GAAP performance measures such as gross margin
return on investment, return on equity and free cash flow. As a
result, Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA may
not reflect important aspects of the results of the Company’s
operations.
For
the Thirteen Week Periods Ended
|
For
the Thirty-Nine Week Periods Ended
|
|||||||||||||||
SG&A
Expenses Breakout
|
November
1, 2009
|
November
2, 2008
|
November
1, 2009
|
November
2, 2008
|
||||||||||||
Store
support center (1)
|
$ | 5,397 | 6,551 | 17,515 | 19,318 | |||||||||||
Distribution
center
|
2,258 | 2,608 | 6,490 | 7,186 | ||||||||||||
401K
expense
|
101 | 115 | 297 | 359 | ||||||||||||
Same-store
SG&A
|
26,575 | 27,896 | 76,690 | 78,450 | ||||||||||||
Non
same-store SG&A (2)
|
376 | 758 | 3,594 | 4,571 | ||||||||||||
Share-based
compensation
|
155 | 169 | 601 | 34 | ||||||||||||
SG&A
as reported
|
34,862 | 38,097 | 105,187 | 109,918 | ||||||||||||
Less:
|
||||||||||||||||
Share-based
compensation
|
(155 | ) | (169 | ) | (601 | ) | (34 | ) | ||||||||
Preopening
store costs (2)
|
(2 | ) | (342 | ) | (2 | ) | (1,837 | ) | ||||||||
Executive
and staff severance (1)
|
- | - | - | (1,942 | ) | |||||||||||
Store
transformation project costs (1)
|
- | (937 | ) | (2,096 | ) | (937 | ) | |||||||||
Adjusted
SG&A
|
$ | 34,705 | 36,649 | 102,488 | 105,168 | |||||||||||
Adjusted
SG&A as % of sales
|
31.1 | % | 31.9 | % | 29.1 | % | 30.1 | % | ||||||||
Sales
per average selling square foot (3)
|
$ | 24.60 | 25.83 | $ | 77.71 | 79.98 | ||||||||||
Adjusted
Gross Margin dollars per average selling square feet
(3)(4)
|
$ | 7.87 | 8.35 | $ | 25.73 | 25.96 | ||||||||||
Adjusted
SG&A per average selling square foot (3)
|
$ | 7.66 | 8.24 | $ | 22.61 | 24.05 | ||||||||||
Adjusted
EBITDA per average selling square foot (3)(5)
|
$ | 0.21 | 0.11 | $ | 3.12 | 1.91 | ||||||||||
Average
inventory per average selling square feet (3)(6)(7)
|
$ | 28.80 | 28.95 | $ | 28.64 | 28.48 | ||||||||||
Average
selling square feet (3)
|
4,532 | 4,447 | 4,532 | 4,372 | ||||||||||||
Total
stores operating beginning of period
|
257 | 257 | 258 | 262 | ||||||||||||
Total
stores operating end of period
|
257 | 259 | 257 | 259 | ||||||||||||
Total
stores less than twelve months old
|
0 | |||||||||||||||
Total
non same-stores
|
1 | |||||||||||||||
Supplemental
Data:
|
||||||||||||||||
Same-store
adjusted gross margin dollar change
|
0.0 | % | (1.8 | )% | 1.3 | % | (1.4 | )% | ||||||||
Same-store
SG&A dollar change
|
(4.7 | )% | (0.9 | )% | (2.2 | )% | 2.5 | % | ||||||||
Same-store
total customer count change
|
(1.2 | )% | (5.4 | )% | (0.7 | )% | (4.0 | )% | ||||||||
Same-store
average sale per ticket change
|
(2.0 | )% | 4.0 | % | (0.6 | )% | 4.4 | % | ||||||||
(1)
Store support center includes executive and staff severance for first
quarter fiscal 2009 and store transformation project costs for first and
second quarters fiscal 2010 and the third quarter of fiscal
2009
|
||||||||||||||||
(2)
Non same-stores are those stores opened in Fiscal 2009 which have not
reached their fourteenth period of operation
|
||||||||||||||||
(3)
Average selling square feet is calculated as beginning square feet plus
ending square feet divided by 2
|
||||||||||||||||
(4)
Adjusted Gross Margin includes $1.3 million inventory review initiative
charge added back in first quarter fiscal 2009
|
||||||||||||||||
(5)
Adjusted EBITDA per selling square foot is calculated as Adjusted EBITDA
divided by selling square feet
|
||||||||||||||||
(6)
Average store level merchandise inventory for fiscal 2010 and 2009 is
calculated as beginning inventory plus ending inventory divided by
2
|
||||||||||||||||
(7)
Excludes inventory for unopened stores
|
12
Fiscal 2010 Compared to
Fiscal 2009
Store
support center expenses for fiscal 2010 decreased $1.8 million, or
9.3%. The decrease was primarily due to reduced severance costs
of $1.9 million, health insurance costs of $406, accounting fees of $321 and
market research fees of $274 offset by store transformation project costs
of $1.2 million.
Same-store SG&A
expenses decreased $1.8 million, or 2.2%. The decrease was primarily
due to reduced point-of-sale hardware lease expense of $1.4 million, labor
expenses of $1.2 million and benefits expense of $625 offset by increased
real property rent expense of $1.3 million.
Non
same-store SG&A expenses decreased $977, or 21.4%. The Company
has not opened any stores since the third quarter of fiscal
2009.
Reconciliation and
Explanation of Non-GAAP Financial Measures
The
following table shows the reconciliation of Adjusted EBITDA to net earnings
(loss) from continuing operations:
For
the Twenty-Six
|
Trailing
Twelve
|
For
the Thirteen
|
Trailing
Twelve
|
|||||||||||||||||||||||||
Week
Periods Ended
|
Periods
Ended
|
Week
Periods Ended
|
Periods
Ended
|
|||||||||||||||||||||||||
Fiscal
2009
|
August
2, 2009
|
August
3, 2008
|
August
2, 2009
|
November
1, 2009
|
November
2, 2008
|
November
1, 2009
|
||||||||||||||||||||||
Net
earnings (loss) from continuing operations (1)
|
$ | (2,996 | ) | 2,988 | (923 | ) | 915 | (1,435 | ) | (1,510 | ) | 990 | ||||||||||||||||
Plus:
|
||||||||||||||||||||||||||||
Interest
|
1,867 | 1,058 | 1,156 | 1,769 | 532 | 63 | 2,238 | |||||||||||||||||||||
Taxes
(1)
|
(2,090 | ) | 1,932 | (690 | ) | 532 | (626 | ) | (1,644 | ) | 1,550 | |||||||||||||||||
Depreciation
and amortization (1)
|
9,302 | 4,645 | 3,677 | 10,270 | 2,327 | 2,118 | 10,479 | |||||||||||||||||||||
Share-based
compensation
|
186 | 446 | (135 | ) | 767 | 155 | 169 | 753 | ||||||||||||||||||||
Preopening
store costs (2)
|
1,846 | - | 1,495 | 351 | 2 | 342 | 11 | |||||||||||||||||||||
Inventory
review initiative
|
1,345 | - | 1,345 | - | - | - | - | |||||||||||||||||||||
Executive
and staff severance
|
1,942 | - | 1,942 | - | - | - | - | |||||||||||||||||||||
Store
transformation project costs
|
2,220 | 2,096 | - | 4,316 | - | 937 | 3,379 | |||||||||||||||||||||
=Adjusted
EBITDA (1)(3)(4)(5)
|
13,622 | 13,165 | 7,867 | 18,920 | 955 | 475 | 19,400 | |||||||||||||||||||||
Cash
|
4,744 | 5,446 | 4,653 | 5,446 | 5,703 | 5,320 | 5,703 | |||||||||||||||||||||
Debt
|
49,841 | 48,802 | 36,964 | 48,802 | 54,180 | 58,303 | 54,180 | |||||||||||||||||||||
Debt,
net of cash
|
$ | 45,097 | 43,356 | 32,311 | 43,356 | 48,477 | 52,983 | 48,477 | ||||||||||||||||||||
(1)
These amounts will not agree with the fiscal 2009 first quarter 10-Q
filing due to the one store the Company closed in the third quarter of
fiscal 2009. These amounts will not agree with the fiscal year end
2009 or fiscal 2010 first quarter 10-Q filing due to the one store the
Company closed in the second quarter of fiscal 2010. These stores are
now shown in discontinued operations.
|
||||||||||||||||||||||||||||
(2) These
costs are not consistent quarter to quarter as the Company does not open
the same number of stores in each quarter of each fiscal year. These
costs are directly associated with the number of stores that have been or
will be opened and are incurred prior to the grand opening of each
store.
|
||||||||||||||||||||||||||||
(3) For
the trailing twelve periods ended November 1, 2009 the average open weeks
for the Company's one non same-store is 59 weeks.
|
||||||||||||||||||||||||||||
(4) During
fiscal year 2009, the Company made a change in its Executive Management
team and Board of Directors resulting in several initiatives to reduce
certain SG&A expenses. For the trailing twelve periods ended
November 1, 2009, these initiatives resulted in approximately $5.7 million
reduced SG&A expenses when compared to the same prior year trailing
twelve periods. The initiatives include, but are not limited to,
executive and staff reduction, reduced ALCO same-store hourly wages,
advertising expenses, net of coop offset and floor care services along
with reduced total Company insurance and travel expenses.
|
||||||||||||||||||||||||||||
(5) In
addition to continued efforts regarding the fiscal 2009 cost reduction
initiatives, the Company has also implemented new initiatives for fiscal
year 2010. The fiscal 2010 initiatives include, but are not limited to,
reduced point-of-sale hardware lease expense, energy expense and accident
reduction programs. These initiatives achieved approximately $2.0
million in reduced SG&A savings for the thirty-nine weeks of fiscal
2010 when compared to the prior year same period.
|
13
LIQUIDITY
AND CAPITAL RESOURCES
The
Company's primary sources of funds are cash flows from operations and borrowings
under its revolving loan credit facility.
At
November 1, 2009, working capital (defined as current assets less current
liabilities) was $125.9 million compared to $129.2 million at November 2,
2008. The decrease in working capital was primarily attributable to a
decrease in prepaid income taxes as the Company received a $3.4 million refund
due to fiscal 2009 net loss carrybacks and tax method changes.
The
Company uses its revolving loan credit facility and vendor trade credit
financing (accounts payable) to fund the build up of inventories periodically
during the year for its peak selling seasons and to meet other short-term cash
requirements. The revolving loan credit facility provides up to $105 million of
financing in the form of notes payable and letters of credit. The loan agreement
expires in January 2011. The revolving loan note payable and letter of credit
balance at November 1, 2009 was $55.4 million, resulting in an available line of
credit at that date of $49.6 million, subject to a borrowing base calculation.
Loan advances are secured by a security interest in the Company’s inventory and
credit card receivables. The loan agreement contains various restrictions
that are applicable when outstanding borrowings exceed $77.5 million, including
limitations on additional indebtedness, prepayments, acquisition of assets,
granting of liens, certain investments and payments of dividends. The Company's
loan agreement contains various covenants including limitations on additional
indebtedness and certain financial tests, as well as various subjective
acceleration clauses. As of December 10, 2009, the Company believes it is in
compliance with all covenants and subjective acceleration clauses of the debt
agreements. The balance sheet classification of the borrowings under the
revolving loan credit facility has been determined in accordance with Emerging
Issues Task Force (EITF) Issue 95- 22, Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement. Accordingly,
this obligation has been classified as a long-term liability in the accompanying
consolidated balance sheet. Short-term trade credit represents a
significant source of financing for inventory to the Company. Trade credit
arises from the willingness of the Company's vendors to grant payment terms for
inventory purchases.
Cash provided
by (used in) operating activities in the thirty-nine week periods of fiscal 2010
and 2009 was $1.2 million and $(18.0) million, respectively. The
increase in the amount of cash provided by operating activities in the
thirty-nine week period of fiscal 2010 compared to the thirty-nine week period
of fiscal 2009 was primarily due to $8.2 million change in prepaid income
taxes, $8.0 million reduction in inventory, net of accounts payable decrease and
$5.8 million in increased net earnings.
Cash used
in acquisition of property and equipment in the thirty-nine week periods of
fiscal 2010 and 2009 was $4.6 million and $7.4 million,
respectively.
Cash provided
by financing activities in the thirty-nine week periods of fiscal 2010 and
2009 was $4.3 million and $25.2 million, respectively. Net
borrowings on the revolving loan generated $6.8 million during the
thirty-nine week period ended November 1, 2009 compared to $27.7 million during
the same period in the prior fiscal year.
For a
discussion of our other contractual obligations, see a discussion of future
commitments under Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in our Form 10-K for the fiscal year ended
February 1, 2009. There have been no significant developments with respect to
our contractual obligations since February 1, 2009.
As of
December 10, 2009, the Company has repurchased 22,197 shares of stock since
August 13, 2008. The average price paid was $12.86. Since the
fiscal year end February 1, 2009, the Company has not repurchased any
shares.
OFF-BALANCE SHEET
ARRANGEMENTS
The
Company has no off-balance sheet arrangements that affect the Company’s current
or future financial condition.
BUSINESS
OPERATIONS
The
following chart indicates the percentage of sales, excluding fuel sales,
represented by each of our major product categories for the thirteen and
thirty-nine week periods of fiscal 2010 and 2009:
For
the Thirteen Week Periods Ended
|
For
the Thirty-Nine Week Periods Ended
|
|||||||||||||||
November
1, 2009
|
November
1, 2008
|
November
1, 2009
|
November
1, 2008
|
|||||||||||||
Merchandise
Category:
|
||||||||||||||||
Consumables
and commodities
|
32 | % | 32 | % | 30 | % | 32 | % | ||||||||
Electronics,
entertainment, sporting goods, toys and outdoor living
|
21 | % | 20 | % | 25 | % | 25 | % | ||||||||
Apparel
and accessories
|
18 | % | 22 | % | 17 | % | 19 | % | ||||||||
Home
furnishings and décor
|
18 | % | 14 | % | 17 | % | 13 | % | ||||||||
Other
|
11 | % | 12 | % | 11 | % | 11 | % | ||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % |
14
NEW ACCOUNTING
PRONOUNCEMENTS
In April
2009, the FASB
modified FASB ASC Topic 825, Financial Instruments, and FASB ASC 270, Interim
Reporting, to extend the disclosure requirements related to the fair value of
financial instruments to interim financial statements of publicly traded
companies. The Company adopted this guidance in the
second quarter of fiscal 2010, the impact of which related only to disclosures
and did not have a material effect on the Company’s financial condition,
results of operations or cash flows.
In
May 2009, the FASB
modified FASB ASC Topic 855, Subsequent Events, which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued and requires
entities to disclose the date through which they have evaluated subsequent
events. The Company adopted this guidance effective August 2, 2009. The
adoption of this guidance changed certain financial statement disclosures but
did not have an impact on the Company’s financial condition, results of
operations or cash flows.
In
June 2009, the FASB
issued ASU No. 2009-01 Topic 105, Generally Accepted Accounting
Principles which establishes the FASB ASC. The FASB ASC is the single source of
authoritative nongovernmental U.S. GAAP, superseding existing FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force,
and related accounting literature. The FASB ASC reorganizes the thousands of
GAAP pronouncements into roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections. The Company adopted this guidance effective August 2, 2009.
The adoption of this guidance did not have an impact on the
Company’s financial condition, results of operations or cash flows.
In
August 2009, FASB issued ASU No. 2009-05 which amends ASC Topic 820,
Fair Value Measurements and Disclosures (“Topic 820”), to provide guidance on
the fair value measurement of liabilities. This update requires clarification
for circumstances in which a quoted price in an active market for the identical
liability is not available. A reporting entity is required to measure fair value
using one or more of the following techniques: 1) a valuation technique that
uses either the quoted price of the identical liability when traded as an asset
or quoted prices for similar liabilities or similar liabilities when traded as
an asset; or 2) another valuation technique that is consistent with the
principles in Topic 820 such as the income and market approach to valuation. The
amendments in this update also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. This update further clarifies that if
the fair value of a liability is determined by reference to a quoted price in an
active market for an identical liability, that price would be considered a Level
1 measurement in the fair value hierarchy. Similarly, if the identical liability
has a quoted price when traded as an asset in an active market, it is also a
Level 1 fair value measurement if no adjustments to the quoted price of the
asset are required. This update is effective for the Company's fourth
quarter fiscal 2010 and is not expected to have a significant impact on our
financial condition, results of operation or cash flows.
INSTRUMENTS ENTERED INTO
OTHER THAN FOR TRADING – INTEREST RATE RISK
The
Company is exposed to various types of market risk in the normal course of its
business, including the impact of interest rate changes. The Company
may enter into interest rate swaps to manage its exposure to interest rate
changes, and we may employ other risk management strategies, including the use
of foreign currency forward contracts. The Company does not currently
hold any derivative instruments and would enter into such instruments solely for
cash flow hedging purposes and not for trading purposes.
As
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources", the Company has a
variable interest rate debt facility that is subject to interest rate
risk. The Company uses this facility to meet the short-term needs of
its capital improvements and inventory purchases and other operating
activities. These obligations expose the Company to variability in
interest payments due to changes in interest rates. If interest rates
increase, interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases. Based on the Company’s current
borrowings under its revolving credit facility, if interest rates were to
increase 100 basis points on an annual basis interest expense would increase
$441.
The
Company has and continues to analyze its debt structure in relation to interest
rate risk and believes the mix of debt instruments utilized by the Company
(revolving line of credit, term loans, capital leases and operating
leases) adequately addresses these risk issues. This process of
evaluation is continuous and the Company will adjust its debt structure as is
appropriate depending on market conditions.
ITEM
4. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
The
Company carried out an evaluation required by the Securities Exchange Act of
1934, as amended (the “1934 Act”), under the supervision and with the
participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under
the 1934 Act) as of November 1, 2009. Based on this evaluation, our principal
executive officer and principal financial officer concluded that, as of November
1, 2009, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the 1934 Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms.
(b) Changes in Internal
Control over Financial Reporting
There
have been no changes in our internal control over financial reporting
during fiscal 2010 that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.
15
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
There are
no material pending legal proceedings other than routine litigation incidental
to the business to which the Company is a party or to which any
property is subject.
ITEM
1A. RISK FACTORS
There
have been no material changes to our risk factors as previously disclosed in our
Form 10-K for the fiscal year ended February 1, 2009.
On March
23, 2006, the Board of Directors of the Company authorized the Company to
repurchase up to 200,000 shares of Common Stock, of which 25,534 shares had been
purchased as of December 10, 2009. On August 13, 2008 the Company
announced that it was resuming its stock repurchase program. Since August
13, 2008, 22,197 shares have been repurchased. The following are details
of repurchases under this program for the period covered by this report, in
accordance with Rule 10b-1 and Rule 10b-18 of the Securities Exchange Act of
1934:
Total
Number
|
Maximum
Number
|
|||||||||||||||
of
Shares
|
of
Shares
|
|||||||||||||||
Total
Number Of
|
Purchased
as Part
|
that
May Yet
|
||||||||||||||
Shares
|
Average
Price Paid
|
of
Publicly Announced
|
Be
Purchased Under
|
|||||||||||||
Period
|
Purchased
|
per
Share
|
Plans
or Programs
|
the
Plans or Programs
|
||||||||||||
As
of August 2, 2009
|
25,534
|
$
|
15.16
|
25,534
|
174,466
|
|||||||||||
Third
Quarter:
|
||||||||||||||||
08/03/09
- 08/30/09
|
-
|
-
|
-
|
174,466
|
||||||||||||
08/31/09
- 10/04/09
|
-
|
-
|
-
|
174,466
|
||||||||||||
10/05/09
- 11/01/09
|
-
|
-
|
-
|
174,466
|
||||||||||||
-
|
-
|
174,466
|
||||||||||||||
As
of November 1, 2009
|
25,534
|
$
|
15.16
|
25,534
|
174,466
|
On July
1, 2008, the Company entered into a Stock Purchase Agreement with Lawrence J.
Zigerelli as part his starting employment at the Company. Mr.
Zigerelli purchased 10,000 shares of the Company’s common stock. The
purchase price was $9.05 which was the closing price of the stock on the NASDAQ
Global Market on the date of the agreement. The agreement was
executed in reliance upon the exemption from securities registration afforded by
Section 4(2) of the Securities Act. The proceeds of this transaction
were used by the Company for general purposes.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
See the
Exhibit Index immediately following the signature page hereto.
SIGNATURE
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)
/s/ Donny R.
Johnson
Donny R. Johnson
Chief Financial Officer – Executive Vice President
Signing
on behalf of the registrant and as Principal Financial Officer
16
EXHIBIT
INDEX
3.1
|
Articles
of Incorporation of Duckwall-ALCO Stores, Inc., amended as of June 13,
1994 and restated solely for filing with the Securities and Exchange
Commission (filed as Exhibit 3.1 to Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 1, 2004 and incorporated herein
by reference).
|
3.2
|
Bylaws
of Duckwall-ALCO Stores, Inc. (filed as Exhibit 3.2 to Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 1, 2004 and
incorporated herein by reference).
|
4.1
|
Specimen
of Duckwall-ALCO Stores, Inc. Common Stock Certificate. (filed
as Exhibit 4.1 to Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 3, 2008 and incorporated herein by
reference).
|
4.2
|
Reference
is made to the Amended and Restated Articles of Incorporation described
under 3.1 above and Bylaws described under 3.2
above.
|
10.1
|
Employment
Agreement dated August 25, 2008 between the Company and Edmond C.
Beaith is incorporated by reference to Exhibit 10.5 to the Current Report
on Form 8-K of the Company dated August 25, 2008.
|
10.2
|
Separation
Agreement and Release, dated as of August 1, 2008, between the Company and
Anthony C. Corradi, including consulting agreement is incorporated by
reference to Exhibit 10.6 to the Current Report on Form 8-K of the Company
dated August 1, 2008.
|
10.3
|
Employment
Agreement dated December 11, 2009 between the Company and Jim M.
Spencer is incorporated by reference to Exhibit 10.7 to the Current Report
on Form 8-K of the Company dated December 17, 2009.
|
10.4
|
Separation
Agreement and Release, dated as of February 4, 2009, between the Company
and Phillip D. Hixon is incorporated by reference to Exhibit 10.8 to the
Current Report on Form 8-K of the Company dated February 4,
2009.
|
10.5
|
Addendum
to Employment Agreement effective as of May 31, 2009 between the Company
and Mr. Zigerelli is incorporated by reference to Exhibit 10.9 to the
Current Report on Form 8-K of the Company dated June 3,
2009.
|
10.6
|
Addendum
to Employment Agreement effective as of May 31, 2009 between the Company
and Ms. Gilmartin is incorporated by reference to Exhibit 10.10 to the
Current Report on Form 8-K of the Company dated June 3,
2009.
|
31.1
|
Certification
of Chief Executive Officer of Duckwall-ALCO Stores, Inc. dated December
10, 2009, pursuant to Rule 13a-4(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification
of Chief Financial Officer of Duckwall-ALCO Stores, Inc. dated December
10, 2009, pursuant to Rule 13a-4(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
Certification
of Chief Executive Officer of Duckwall-ALCO Stores, Inc, dated December
10, 2009, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with
this Quarterly Report on Form 10-Q for the quarter ended November 1, 2009
and is not treated as filed in reliance upon § 601(b)(32) of
Regulations S-K.
|
32.2
|
Certification
of Chief Financial Officer of Duckwall-ALCO Stores, Inc., dated December
10, 2009, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with
this Quarterly Report on Form 10-Q for the quarter ended November 1, 2009
and is not treated as filed in reliance upon § 601(b)(32) of
Regulations S-K.
|
17
Signature
and Title
|
Date
|
/s/
Lawrence J. Zigerelli
|
December
10, 2009
|
Lawrence
J. Zigerelli
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
/s/
Donny R. Johnson
|
December
10, 2009
|
Donny
R. Johnson
|
|
Executive
Vice President - Chief Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
|
/s/
Raymond A.D. French
|
December
10, 2009
|
Raymond
A.D. French
|
|
Director
|
|
/s/
Dennis E. Logue
|
December
10, 2009
|
Dennis
E. Logue
|
|
Director
|
|
/s/
Lolan C. Mackey
|
December
10, 2009
|
Lolan
C. Mackey
|
|
Director
|
|
/s/
Royce L. Winsten
|
December
10, 2009
|
Royce
L. Winsten
|
|
Director
- Chairman of Board
|
|
/s/
James V. Worth
|
December
10, 2009
|
James
V. Worth
|
|
Director
|
18