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EX-31.1 - CEO CERTIFICATION - ALCO STORES INCceocertification.htm
EX-31.2 - CFO CERTIFICATION - ALCO STORES INCcfocertification.htm
EX-32.2 - CFO SOX CERTIFICATION - ALCO STORES INCcfosoxcertification.htm
EX-32.1 - CEO SOX CERTFICATION - ALCO STORES INCceosoxcertification.htm
EX-10.13 - AMENDED AND RESTATED CREDIT AGREEMENT - ALCO STORES INCamendedrestatedcreditagree.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 May 2, 2010

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-20269
Company Logo
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 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:

3,828,102 shares of common stock, $.0001 par value (the issuer's only class of common stock), were outstanding as of May 2, 2010.
 
 
 

 


 
DUCKWALL-ALCO STORES, INC.
 

TABLE OF CONTENTS
       
PART I
 
 
Item 1.
3
 
Item 2.
8
 
Item 3.
15
 
Item 4.
15
       
PART II
 
 
Item 1.
15
 
Item 1A.
15
 
Item 2.
16
 
Item 3.
16
 
Item 4.
16
 
Item 5.
16
 
Item 6.
17
       
Signature
   
19







 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
2 

 

Duckwall-ALCO Stores, Inc.
 
Consolidated Balance Sheets
 
(dollars in thousands, except share and per share amounts)
 
Assets
 
   
May 2, 2010
   
January 31, 2010
 
   
(Unaudited)
       
Current assets:
           
   Cash and cash equivalents
  $ 5,186       5,164  
   Receivables
    5,852       7,437  
   Prepaid income taxes
    1,605       594  
   Inventories
    137,892       140,375  
   Prepaid expenses
    2,919       3,517  
   Deferred income taxes
    3,864       3,863  
  Assets held for sale
    1,331       1,631  
          Total current assets
    158,649       162,581  
                 
Property and equipment, at cost:
               
   Land and land improvements
    1,436       1,455  
   Buildings and building improvements
    11,900       11,844  
   Furniture, fixtures and equipment
    67,952       67,304  
   Transportation equipment
    1,288       1,303  
   Leasehold improvements
    15,625       14,855  
   Construction work in progress
    1,824       1,744  
          Total property and equipment
    100,025       98,505  
   Less accumulated depreciation
    69,894       67,959  
          Net property and equipment
    30,131       30,546  
                 
Property under capital leases
    11,015       11,015  
   Less accumulated amortization
    9,686       9,385  
          Net property under capital leases
    1,329       1,630  
                 
Other non-current assets
    1,326       51  
          Total assets
  $ 191,435       194,808  
Liabilities and Stockholders' Equity
 
                 
Current liabilities:
               
   Current maturities of long-term debt
  $ 1,475       1,451  
   Current maturities of capital lease obligations
    1,312       1,623  
   Accounts payable
    26,452       23,076  
   Accrued salaries and commissions
    4,835       4,122  
   Accrued taxes other than income
    5,096       4,913  
   Self-insurance claim reserves
    4,697       4,852  
   Other current liabilities
    4,005       4,499  
          Total current liabilities
    47,872       44,536  
                 
Long term debt, less current maturities
    1,036       1,414  
Notes payable under revolving loan agreement
    30,630       35,159  
Capital lease obligations - less current maturities
    1,153       1,345  
Deferred gain on leases
    4,115       4,212  
Deferred income taxes
    705       694  
Other noncurrent liabilities
    1,761       1,715  
          Total liabilities
    87,272       89,075  
                 
Stockholders' equity:
               
Common stock, $.0001 par value, authorized 20,000,000 shares; issued and outstanding
 
    3,828,102 shares and 3,797,947 shares, respectively
    1       1  
   Additional paid-in capital
    39,672       39,313  
   Retained earnings
    64,490       66,419  
          Total stockholders' equity
    104,163       105,733  
          Total liabilities and stockholders' equity
  $ 191,435       194,808  
See accompanying notes to unaudited consolidated financial statements.
 
 
 

 

 
Duckwall-ALCO Stores, Inc.
 
Consolidated Statements of Operations
 
(dollars in thousands, except per share amounts)
 
(Unaudited)
 
             
   
For the Thirteen Week
 
   
Periods Ended
 
   
May 2, 2010
   
May 3, 2009
 
             
Net sales
  $ 113,023       115,160  
Cost of sales
    77,852       76,712  
Gross margin
    35,171       38,448  
                 
Selling, general and administrative
    34,814       35,603  
Depreciation and amortization
    2,482       2,377  
           Total operating expenses
    37,296       37,980  
Operating income (loss) from continuing operations
    (2,125 )     468  
                 
Interest expense, net
    674       537  
                 
Loss from continuing operations before income taxes
    (2,799 )     (69 )
                 
                 
Income tax benefit
    (1,011 )     (33 )
                 
Loss from continuing operations
    (1,788 )     (36 )
                 
                 
Loss from discontinued operations, net of income tax benefit
    (141 )     (14 )
                 
Net loss
  $ (1,929 )     (50 )
                 
Loss per share
               
     Basic
               
         Continuing operations
  $ (0.47 )     (0.01 )
         Discontinued operations
    (0.04 )     -  
                 
         Net loss per share
  $ (0.51 )     (0.01 )
                 
Loss per share
               
     Diluted
               
         Continuing operations
  $ (0.47 )     (0.01 )
         Discontinued operations
    (0.04 )     -  
                 
         Net loss per share
  $ (0.51 )     (0.01 )
                 
See accompanying notes to unaudited consolidated financial statements.
         

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
Duckwall-ALCO Stores, Inc.
 
Consolidated Statements of Cash Flows
 
(dollars in thousands)
 
(Unaudited)
 
   
For the Thirteen Week
 
   
Periods Ended
 
   
May 2, 2010
   
May 3, 2009
 
             
Cash flows from operating activities:
           
Net loss
  $ (1,929 )     (50 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
         
                 
Depreciation and amortization
    2,482       2,343  
Gain on sale of assets
    (8 )     (1 )
Share-based compensation
    81       185  
Tax benefit of stock options exercised
    13       -  
Deferred income tax expense, net
    10       (34 )
Changes in:
               
   Receivables
    1,585       38  
   Prepaid income taxes
    (1,011 )     43  
   Inventories
    2,483       (13,374 )
   Prepaid expenses
    598       698  
   Accounts payable
    3,376       4,895  
   Accrued salaries and commissions
    713       33  
   Accrued taxes other than income
    183       (706 )
   Self-insurance claim reserves
    (155 )     (43 )
   Other assets and liabilities
    (1,821 )     (1,073 )
      Net cash provided by (used in) operating activities
    6,600       (7,046 )
                 
Cash flows from investing activities:
               
Proceeds from the sale of assets
    487       1  
Acquisition of property and equipment
    (1,944 )     (596 )
      Net cash used in investing activities
    (1,457 )     (595 )
                 
Cash flows from financing activities:
               
Net (paydowns) borrowings under revolving loan agreement
    (3,229 )     11,920  
Proceeds from exercise of outstanding stock options
    265       -  
Revolving loan agreement financing costs     (1,300     -  
Principal payments under term loan
    (354 )     (332 )
Principal payments under capital lease obligations
    (503 )     (483 )
      Net cash (used in) provided by financing activities
    (5,121 )     11,105  
                 
      Net increase in cash and cash equivalents
    22       3,464  
Cash and cash equivalents at beginning of period
    5,164       4,744  
                 
Cash and cash equivalents at end of period
  $ 5,186       8,208  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 673       537  
Income taxes, net of refunds received
    77       126  
                 
See accompanying notes to unaudited consolidated financial statements.
         
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Duckwall-ALCO Stores, Inc.
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. (the "Company") are for interim periods and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") 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 GAAP 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 2010 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 2011 and 2010 are both 52-week fiscal years consisting of four thirteen week periods referred to as quarters. The thirteen weeks ended May 2, 2010 and May 3, 2009 are referred to herein as the first quarter of fiscal 2011 and 2010, 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.  
 
(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 May 2, 2010 and May 3, 2009, share-based compensation decreased pre-tax income by $81 and $185, 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. 
 
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 May 2, 2010, the Company had 107,845 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 97,500 shares remaining to be issued under this plan. 
 
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 Agreement, 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 unvested portion of these options terminated during the first quarter of fiscal 2011 due to the separation of Mr. Zigerelli from the Company.  Mr. Zigerelli exercised the 2,500 shares vested under this Agreement. The Company issues these grants from the unissued shares authorized. There are no shares remaining to be issued under this Agreement. 
 
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.
 
 
 
6

 
The following summarizes information concerning stock option grants during fiscal 2010 and 2009:
 
         
For the Thirteen Week
 
   
Fiscal 2010 Ended
   
Periods Ended
 
   
January 31, 2010
   
May 2, 2010
   
May 3, 2009
 
Stock options granted
    45,000       100,000       15,000  
Weighted average exercise price
  $ 13.95       14.34       9.25  
Weighted average grant date fair value
  $ 5.47       6.36       3.88  

 
The weighted average for key assumptions used in determining the fair value of options granted in the thirteen week periods ended May 2, 2010 and May 3, 2009, and a summary of the methodology applied to develop each assumption are as follows:

         
For the Thirteen Week
 
   
Fiscal 2010 Ended
   
Periods Ended
 
   
January 31, 2010
   
May 2, 2010
   
May 3, 2009
 
Expected price volatility
    48.9 %     51.1 %     48.1 %
Risk-free interest rate
    1.5 %     1.5 %     1.4 %
Weighted average expected lives in years
    4.8       4.8       4.8  
Dividend yield
    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 May 2, 2010, total unrecognized share-based compensation related to non-vested stock options is $1.0 million with a weighted average expense recognition period of 2.9 years.
 
(4)           Accounting for Income Taxes
 
The Company recorded decreases in gross unrecognized tax benefits, inclusive of related interest, of $7 and $10 for the thirteen week periods ended May 2, 2010 and May 3, 2009, 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 2006 through 2008.  We file in numerous state jurisdictions with varying statutes of limitation.  State returns are open from 2005 through 2008 or 2006 through 2008 depending on each state’s statute of limitations.    
 
(5)           Subsequent Events
 
The Company has evaluated subsequent events for potential disclosure or recognition to the date of the issuance of the consolidated financial statements.
 
(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 term debt at May 2, 2010 approximates its carrying amount of $2.5 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

 
(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
 
             
May 2, 2010
    3,811,153       3,811,153  
May 3, 2009
    3,797,947       3,797,947  
 
(8)           Store Closings and Discontinued Operations
 
The Company closed four Duckwall stores in the first quarter of fiscal 2011.  The operations of these stores were reclassified to discontinued operations in the first quarter of fiscal 2011.   No stores were closed during the first quarter of fiscal 2010.  All prior period amounts for closed stores have been reclassified to discontinued operations.
 
(9)           New Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updated ("ASU") 2009-16, which updated Accounting Standards Codification ("ASC") Topic 810: Accounting for Transfers of Financial Assets, which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.

In June 2009, the FASB issued an amendment to a previously issued standard regarding consolidation of variable interest entities. This amendment was intended to improve financial reporting by enterprises involved with variable interest entities. Overall, the amendment revises the test for determining the primary beneficiary of a variable interest entity from a primarily quantitative analysis to a qualitative analysis. The provisions of the amendment are effective as of the beginning of the entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company adopted this standard as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.
 
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. This update also clarifies 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. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, (ii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements and (iii) enhance disclosures of assets and liabilities subject to fair value measurements. The provisions of ASU No. 2010-06 are effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. The Company adopted this ASU as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(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.
 
 
8

 
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
 
Economic conditions.  The current economic slowdown has caused disruptions and significant volatility in financial markets, increased rates of mortgage loan default and personal bankruptcy, and declining consumer and business confidence, which has led to decreased customer traffic and reduced levels of consumer spending, particularly on discretionary items.  This decline in consumer and business confidence and the decreased levels of customer traffic and consumer spending have negatively impacted our business.  We cannot predict how long the current economically challenging conditions will persist and how such conditions might affect us and our customers.  Decreased customer traffic and reduced consumer spending, particularly on discretionary items, would, however, over an extended period of time negatively affect our financial condition, operating performance, revenues and income.
 
Management does not believe that its merchandising operations, net sales, revenue, or income from continuing operations have been materially impacted by inflation of the past two fiscal years.  The Company will continue to monitor costs, take advantage of vendor incentive programs, selectively buy from competitive vendors and adjust merchandise prices based on market conditions.
 
Operations. The Company is a regional broad line retailer operating in 23 states in the central United States.  The Company’s fiscal year ends on the Sunday closest to January 31. Fiscal years 2010 and 2009 consisted of 52 weeks and fiscal year 2008 consisted of 53 weeks, respectively. For purposes of this management's discussion and analysis of financial condition and results of operations, the financial numbers are presented in thousands.

Strategy. The Company’s overall business strategy involves identifying and opening stores in locations that will provide the Company with the highest return on investment.  The Company prefers markets that do not have direct competition from national or regional broad line retail stores. The Company also competes for retail sales with other entities, such as mail order companies, specialty retailers, dollar stores, manufacturer’s outlets and the internet.
 
The Company uses a variety of broad-based targeted marketing and advertising strategies to reach consumers. These strategies include full-color photography advertising circulars of eight to 20 pages distributed through newspaper insertion or, in the case of inadequate newspaper coverage, through direct mail.  During fiscal 2010, these circulars were distributed 47 times in ALCO markets.  For fiscal 2011, the Company currently intends to distribute these circulars a similar number of times in the ALCO markets.  The Company also uses in-store marketing.  The Company’s merchandising and marketing teams work together to present the products in an engaging and innovative manner, which is coordinated so that it is consistent with the current print advertisements.  The Company regularly changes its banners and in-store promotions, which are advertised throughout the year, to attract consumers to visit the stores, to generate strong customer frequency and to increase average sales per customer.  Net marketing and promotion costs represented approximately 1.0%, 0.8% and 0.9% of net sales in fiscal years 2010, 2009 and 2008.  Management believes it has developed a comprehensive marketing strategy that will increase customer traffic and same-store sales.  The Company continues to operate as a high low retailer and has included in many of its marketing vehicles cross departmental products.  For example, the Company has used an Elder Care page with over-the-counter products, “as seen on TV” items, and dry meals—all targeting customers who have reached retirement age.  The Company believes that by providing the breadth of these key items to this targeted audience we can serve our customers’ needs more efficiently and garner a greater share of the purchases made by this demographic.  
 
The Company’s ALCO stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies’, men’s and children’s apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys.  The Company’s smaller Duckwall stores offer a more limited selection of similar merchandise.  The Company is constantly evaluating the appropriate mix of merchandise to improve sales and gross margin performance. Corporate merchandising is provided to each store to ensure a consistent company-wide store presentation.  To facilitate long-term merchandising planning, the Company divides its merchandise into three core categories: primary, secondary, and convenience.  The primary core receives management’s primary focus, with a wide assortment of merchandise being placed in the most accessible locations within the stores and receiving significant promotional consideration.  The secondary core consists of categories of merchandise for which the Company maintains a strong assortment that is easily and readily identifiable by its customers.  The convenience core consists of categories of merchandise for which the Company maintains convenient (but limited) assortments, focusing on key items that are in keeping with customers’ expectations for a broad line retail store.  Secondary and convenience cores include merchandise that the Company feels is important to carry, as the target customer expects to find them within a broad line retail store and they ensure a high level of customer traffic.  The Company continually evaluates and ranks all product lines, shifting product classifications when necessary to reflect the changing demand for products.  In addition, the Company’s merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment.  All of the Company’s ALCO stores have point-of-service computer terminals that capture sales information and transmit such information to the Company’s data processing facilities where it is used to drive management, financial, and supply chain functions.
 
 
 
 
 
 
 
 
 
9

 
Store Expansion.  The continued growth of the Company is dependent, in large part, upon the Company’s ability to open and operate new stores on a timely and profitable basis.  The Company currently intends to open fewer than 10 ALCO stores in fiscal 2011.  While the Company believes that adequate sites are currently available, the rate of new store openings is subject to various contingencies, many of which are beyond the Company’s control.  These material contingencies include:
 
·  
the Company’s ability to hire, train, and retain qualified personnel;
 
·  
the availability of adequate capital resources for us to purchase inventory, equipment, and fixtures and make other capital expenditures necessary for store expansion; and
 
·  
the ability of our landlords and developers to find appropriate financing in the current credit market to develop property to be leased by the Company.
 
Historically, we have been able to hire, train, and retain qualified personnel and we anticipate being able to do so in the future.  In order to address this contingency, the Company has initiated an Assistant Manager Training Program whereby the Company provides general management training to manager candidates at monthly seminars held at the Company’s corporate offices.  We anticipate that this program will increase our ability to train and retain qualified personnel.  We currently believe that we will have the capital resources necessary to purchase the inventory, equipment, and fixtures, and to fund the other capital expenditures necessary for the store expansions.  If we lack such capital resources, however, it would limit our expansion plans and negatively impact our operations going forward.  The Company has been working closely with multiple developers and landlords that the Company believes have the financial resources to develop property to be leased by the Company and hold such property as a long-term investment in their portfolios.  If such developers and landlords do not have, and cannot obtain, the financial resources to develop and hold such property, it would limit our expansion plans and negatively impact our operations going forward.
 
Recent Events

·
On February 10, 2010, the Company closed on an Amended and Restated Credit Agreement (the "Facility") with Bank of America, N.A. and Wells Fargo Retail Finance, LLC.  The $120 million Facility has a term of four years and replaces the Company's previous revolving credit facility which was in the amount of $105 million.
·
Richard E. Wilson joined the Company on February 15, 2010 to become the President - Chief Executive Officer
·
Lawrence J. Zigerelli, President - Chief Executive Officer resigned from the Company on February 19, 2010
·
James M. Spencer, Senior Vice President - Store Operations resigned from the Company on February 26, 2010
·
James Worth, Director, resigned from the Board of Directors on March 2, 2010
·
On March 18, 2010, the Company filed Form S-8 with the Securities and Exchange Commission registering the shares of the Company's stock under the Non-Qualified Stock Option Agreement, Non-Qualified Stock Option Plan and the Company's Incentive Stock Option Plan.
·
Lawrence J. Zigerelli exercised his vested options for 27,500 shares on March 19, 2010.  Of these, 25,000 were vested under the Incentive Stock Option Plan and 2,500 were vested under the Non-Qualified Stock Option Agreement.
·
James M. Spencer elected net exercise for vested options, receiving 1,405 shares on March 19, 2010 under the Incentive Stock Option Plan
·
The Company closed four Duckwall Stores during the first quarter of fiscal 2011.  They were located in underperforming markets and were at the end of their lease term.
·
On May 13, 2010, the Company notified Jane F. Gilmartin, Executive Vice President - Chief Operating Officer, that her employment with the Company would terminate effective June 12, 2010.
 
Key Items in First Quarter Fiscal 2011.
 
The Company measures itself against a number of financial metrics to assess its performance.  Some of the important financial items during the first quarter of fiscal 2011 were:
 
·
Net sales decreased 1.9% to $113.0 million.  Same-store sales decreased 2.7% compared to the prior year first quarter.
·
Gross margin percentage decreased to 31.1% of sales, compared to 33.4% in the prior year first quarter.
·
Net loss per share was $0.51 in the first quarter of fiscal 2011 compared to net loss of $0.01 per share in the prior year first quarter.
·
The Company’s earnings from continuing operations before interest, taxes, depreciation and amortization, share-based compensation, preopening store costs and store transformation project costs (“Adjusted EBITDA”) for the first quarter 2011 was $637 compared to the prior year first quarter of $4.4 million. 
 
RESULTS OF OPERATIONS

Thirteen Weeks Ended May 2, 2010 Compared to Thirteen Weeks Ended May 3, 2009

Net Sales

Net sales for the first quarter of fiscal 2011 decreased $2.1 million, or 1.9%, to $113.0 million compared to $115.1 million for the first quarter of fiscal 2010.  Same-store sales decreased 2.7% when compared with the prior year same quarter.  Company sales were negatively impacted by decreases in apparel, electronics and “As seen on TV” products, which were slightly offset by increases in the consumable categories of food, pet supplies and health care.
 
 
 
 
 
10

 
Gross Margin

Gross margin for the first quarter of fiscal 2011 decreased $3.3 million, or 8.5%, to $35.2 million compared to $38.5 million in the first quarter of fiscal 2010.  Gross margin as a percentage of sales was 31.1% for the first quarter of fiscal 2011, which decreased when compared to 33.4% for the first quarter of fiscal 2010.   The decrease in the gross margin percentage was primarily due to increased markdowns of $1.4 million, lower margin due to product mix of $629 and reduced vendor consideration of $407.  The increase in markdowns was attributable to the aggressive acceleration of clearance markdowns exiting the winter season.  Reduced merchandise receipts of certain seasonal and apparel items during the first quarter of fiscal 2011 attributed to the decline in margin due to product mix.  The reduced merchandise receipts also resulted in lower vendor consideration.

SG&A

Selling, general and administrative (SG&A) expense decreased $789 or 2.2%, to $34.8 million in the first quarter of fiscal 2011 compared to $35.6 million in the first quarter of fiscal 2010.   As a percentage of net sales, SG&A expenses for the first quarter of fiscal 2011 were 30.8%, compared to 30.9% for first quarter fiscal 2010.  The decrease in SG&A expenses is attributable to reduced store transformation project costs of $1.4 million and store level labor and benefits of $737 offset by increased advertising expense of $453, legal fees of $377 and preopening store costs of $199.  Excluding share-based compensation, preopening store costs and store transformation project costs (Adjusted SG&A expenses) were 30.6% and 29.6%, as percentage of net sales, for the first quarter fiscal 2011 and 2010, respectively.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense increased $105, or 4.4%, to $2.5 million in the first quarter of fiscal 2011 compared to $2.4 million in the first quarter of fiscal 2010.  
 
Interest Expense

Interest expense increased $137, or 25.5%, to $674 in the first quarter of fiscal 2011 compared to $537 in the first quarter of fiscal 2010.  
 
Income Taxes
 
The Company’s effective tax rate on earnings from continuing operations before income taxes in the first quarter of fiscal 2011 was 36.1% compared to 47.8% in the first quarter of fiscal 2010.  The effective tax rate has decreased as a result of lower projected taxable income for fiscal 2011, which resulted in a lower federal statutory tax rate.  Also contributing to the decrease were lower permanent book to tax differences and increased Federal income tax credits.
 
Loss from Discontinued Operations

Loss from discontinued operations, net of income tax benefit, was $141 in the first quarter of fiscal 2011, compared to a loss of $14, net of income tax benefit, in the first quarter of fiscal 2010.  Four Duckwall stores were closed during the first quarter of fiscal year 2011.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 cash flow from operations.  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
 
SG&A Expenses Breakout
 
May 2, 2010
   
May 3, 2009
 
Store support center (1)
  $ 5,830       6,519  
Distribution center
    2,175       2,191  
401K expense
    24       110  
Same-store SG&A
    26,326       26,578  
Non same-store SG&A (2)
    378       20  
Share-based compensation
    81       185  
SG&A as reported
    34,814       35,603  
Less:
               
Share-based compensation
    (81 )     (185 )
Preopening store costs (2)
    (199 )     -  
Store transformation project costs (1)
    -       (1,378 )
Adjusted SG&A
  $ 34,534       34,040  
                 
Adjusted SG&A as % of sales
    30.6 %     29.6 %
                 
Sales per average selling square foot (3)
  $ 24.84       25.52  
                 
Gross Margin dollars per average selling square feet (3)
  $ 7.73       8.52  
                 
Adjusted SG&A per average selling square foot (3)
  $ 7.59       7.54  
                 
Adjusted EBITDA per average selling square foot (3)(4)
  $ 0.14       0.98  
                 
Average inventory per average selling square feet (3)(5)(6)
  $ 26.15       28.75  
                 
Average selling square feet (3)
    4,550       4,513  
                 
Total stores operating beginning of period
    258       258  
Total stores operating end of period
    255       258  
Total stores less than twelve months old
    2          
Total non same-stores
    2          
                 
Supplemental Data:
               
Same-store gross margin dollar change
    (2.1 )%     1.5 %
Same-store SG&A dollar change
    (0.9 )%     (0.9 )%
Same-store total customer count change
    (3.0 )%     5.9 %
Same-store average sale per ticket change
    0.7 %     3.5 %
                 
                 
(1) Store support center includes store transformation project costs for first quarter fiscal 2010
 
(2) Non same-stores are those stores opened in fiscal 2011 and 2010 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 EBITDA per selling square foot is calculated as Adjusted EBITDA divided by selling square feet
 
(5) Average store level merchandise inventory for fiscal 2011 and 2010 is calculated as beginning inventory plus ending inventory divided by 2
 
(6) Excludes inventory for unopened stores
 
 
 
 
12 

 

Fiscal 2011 Compared to Fiscal 2010

Store support center expenses for fiscal 2011 decreased $689 million, or 10.6%.  The decrease was primarily due to reduced store transformation project costs of $1.4 million offset by increased legal expenses of $377 and insurance expenses of $188.
 
Same-store SG&A expenses decreased $252, or 0.9%.  The decrease was primarily due to reduced labor and benefits of $682 offset by increased advertising expense of $453.
 
Non same-store SG&A expenses increased $358, or 1,790.0%.  The Company has opened two stores since the first quarter of fiscal 2010.
 
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 Thirteen
   
Trailing Twelve
 
         
Week Periods Ended
   
Periods Ended
 
   
Fiscal 2010
   
May 2, 2010
   
May 3, 2009
   
May 2, 2010
 
Net earnings (loss) from continuing operations (1)
  $ 3,100       (1,788 )     (36 )     1,348  
Plus:
                               
Interest
    2,149       674       537       2,286  
Taxes (1)
    2,174       (1,011 )     (33 )     1,196  
Depreciation and amortization (1)
    9,982       2,482       2,377       10,087  
Share-based compensation
    757       81       185       653  
Preopening store costs (2)
    128       199       -       327  
Store transformation project costs
    2,096       -       1,378       718  
=Adjusted EBITDA (1)(3)(4)(5)
    20,386       637       4,408       16,615  
                                 
                                 
Cash
    5,164       5,186       8,208       5,186  
Debt
    40,992       35,606       60,946       35,606  
Debt, net of cash
  $ 35,828       30,420       52,738       30,420  
                                 
(1) These amounts will not agree with the fiscal year end 2010 10-K or fiscal 2010 first quarter 10-Q filing due to the five stores the Company closed since 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 May 2, 2010 the average open weeks for the Company's two non same-stores is nine weeks.
 
(4) The Company 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 $734 in SG&A savings for the first quarter of fiscal 2010 when compared to the prior year same period.
 
(5) The store transformation project completed in fiscal 2010 continues to provide SG&A savings in fiscal 2011. This initiative achieved approximately $458 in SG&A savings for the first quarter of fiscal 2011 when compared to the prior year same period.
 
 
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 May 2, 2010, working capital (defined as current assets less current liabilities) was $110.8 million compared to $132.4 million at May 3, 2009.  The decrease in working capital was primarily attributable to decreased inventory.
 
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 $120 million of financing in the form of notes payable and letters of credit. The loan agreement expires in February 2014. The revolving loan note payable and letter of credit balance at May 2, 2010 was $37.0 million, resulting in an available line of credit at that date of $60.7 million based upon 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 June 10, 2010, 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 ASC Topic 470-10-45. 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.
 
 
13

 
Cash provided by (used in) operating activities in the first quarters of fiscal 2011 and fiscal 2010 were $6.6 million and $(7.0) million, respectively.  The increase in the amount of cash provided by operating activities in the thirteen week period of fiscal 2011 compared to the same period of fiscal 2010 was primarily due to the $14.3 million reduction in inventory, net of accounts payable decrease.

Cash used in investing activities in the first quarters of fiscal 2011 and 2010 were $1.5 million and $595, respectively.
 
Cash (used in) provided by financing activities in the first quarters of fiscal 2011 and 2010 were $(5.1) million and $11.1 million, respectively.  Net borrowings on the revolving loan declined $4.5 million during the thirteen week period ended May 2, 2010 compared to increasing $11.9 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 January 31, 2010. There have been no significant developments with respect to our contractual obligations since January 31, 2010.

As of June 10, 2010, the Company has repurchased 25,534 shares of stock since March 23, 2006.  The average price paid was $15.16.  Since the fiscal year end January 31, 2010, 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 first quarter of fiscal 2011 and 2010, respectively:

   
For the Thirteen Week Periods Ended
 
   
May 2, 2010
   
May 3, 2009
 
Merchandise Category:
           
Consumables and commodities
    42 %     41 %
Hardlines
    28 %     28 %
Apparel and accessories
    16 %     16 %
Home furnishings and décor
    14 %     15 %
                 
Total
    100 %     100 %
 
 
NEW ACCOUNTING PRONOUNCEMENTS
 
In June 2009, the FASB issued ASU 2009-16, which updated ASC Topic 810: Accounting for Transfers of Financial Assets, which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.

In June 2009, the FASB issued an amendment to a previously issued standard regarding consolidation of variable interest entities. This amendment was intended to improve financial reporting by enterprises involved with variable interest entities. Overall, the amendment revises the test for determining the primary beneficiary of a variable interest entity from a primarily quantitative analysis to a qualitative analysis. The provisions of the amendment are effective as of the beginning of the entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company adopted this standard as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.
 
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. This update also clarifies 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. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
 
 
 
 
14

 
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, (ii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements and (iii) enhance disclosures of assets and liabilities subject to fair value measurements. The provisions of ASU No. 2010-06 are effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. The Company adopted this ASU as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
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 $387. 
 
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 May 2, 2010. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of May 2, 2010, 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.
 
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the 1934 Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b)   Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal control over financial reporting during fiscal 2011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
 
 
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 January 31, 2010.
 
 
 
 
 
 
 
 
 
 
 
 
15

 
 
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 June 10, 2010.  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 January 31, 2010
    25,534     $ 15.16       25,534       174,466  
                                 
First Quarter:
                               
    02/01/10 - 02/28/10
    -       -       -       174,466  
    03/01/10 - 04/04/10
    -       -       -       174,466  
    04/05/10 - 05/02/10
    -       -       -       174,466  
      -               -       174,466  
                                 
As of May 2, 2010
    25,534     $ 15.16       25,534       174,466  
 
 
Not applicable.
 
ITEM 4.  RESERVED
 
 
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

 


 
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 January 5, 2006 between the Company and Tom L. Canfield, Jr. is incorporated by reference as Exhibit 10.1 to the Current Report on Form 10-K of the Company dated April 15, 2010.
     
10.2
Employment Agreement dated August 1, 2007 between the Company and Donny R. Johnson is incorporated by reference as Exhibit 10.2 to the Current Report on Form 10-K of the Company dated April 15, 2010.
     
10.3
Employment Agreement dated January 5, 2006 between the Company and Jon A. Ramsey is incorporated by reference as Exhibit 10.3 to the Current Report on Form 10-K of the Company dated April 15, 2010.
     
10.4
Addendum to Employment Agreement dated December 31, 2008 between the Company and Tom L. Canfield, Jr. is incorporated by reference as Exhibit 10.4 to the Current Report on Form 10-K of the Company dated April 15, 2010.
     
10.5
Addendum to Employment Agreement dated December 31, 2008 between the Company and Donny R. Johnson is incorporated by reference as Exhibit 10.5 to the Current Report on Form 10-K of the Company dated April 15, 2010.
     
10.6
Addendum to Employment Agreement dated December 31, 2008 between the Company and Jon A. Ramsey is incorporated by reference as Exhibit 10.6 to the Current Report on Form 10-K of the Company dated April 15, 2010.

10.7
Employment Agreement dated December 11, 2009 between the Company and James 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.
   
10.8
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.
   
10.9
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.
   
10.10
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.
   
10.11
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements is incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of the Company dated January 12, 2010.  On December 31, 2009, Royce Winsten, the Chairman of the Board of Directors of the Company, was awarded a special bonus for the amount of $50,000.
   
10.12
Separation Release, dated as of February 1, 2010, between the Company and James M. Spencer, is incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K of the Company dated February 1, 2010.
   
10.13
Amended and Restated Credit Agreement, dated as of February 10, 2010, between the Company and Bank of America, N.A., and Wells Fargo Retail Finance, LLC is incorporated as Exhibit 10.13.
   
10.14
Employment Agreement dated December 11, 2009 between the Company and Richard E. Wilson is incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K of the Company dated February 25, 2010.
   
10.15
Resignation of Director.  On March 2, 2010 James V. Worth resigned from the Board of Directors is incorporated by reference to Exhibit 10.15 to the Current Report on Form 8-K of the Company dated March 2, 2010.
   
10.16
Separation Agreement and Release, dated as of March 17, 2010, between the Company and Lawrence J. Zigerelli, is incorporated by reference to Exhibit 10.16 to the Current Report on Form 8-K of the Company dated March 16, 2010.
   
10.17
Separation Agreement and Release, dated as of May 13, 2010, between the Company and Jane F. Gilmartin, is incorporated by reference to Exhibit 10.17 to the Current Report on Form 8-K of the Company dated May 13, 2010.
 
 
 
 
17

 
 
31.1
Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc. dated June 10, 2010, 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 2003.
   
31.2
Certification of Chief Financial Officer of Duckwall-ALCO Stores, Inc. dated June 10, 2010, 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 2003.
   
32.1
Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc, dated June 10, 2010, 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 May 2, 2010 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 June 10, 2010, 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 May 2, 2010 and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
18

 

Signature and Title
   
Date
       
/s/ Richard E. Wilson
   
June 10, 2010
Richard E. Wilson
     
President and Chief Executive Officer
     
(Principal Executive Officer)
     
       
/s/ Donny R. Johnson
   
June 10, 2010
Donny R. Johnson
     
Executive Vice President - Chief Financial Officer
     
(Principal Financial and Accounting Officer)
     
       
/s/ Raymond A.D. French
   
June 10, 2010
Raymond A.D. French
     
Director
     
       
/s/ Dennis E. Logue
   
June 10, 2010
Dennis E. Logue
     
Director
     
       
/s/ Lolan C. Mackey
   
June 10, 2010
Lolan C. Mackey
     
Director
     
       
/s/ Royce L. Winsten
   
June 10, 2010
Royce L. Winsten
     
Director - Chairman of Board
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19