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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2003

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

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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS:

4,205,632 shares of common stock, $.0001 par value (the issuer’s only class of common stock), were outstanding as of August 3, 2003.

Duckwall-ALCO Stores, Inc. And Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)

Assets

	August 3, 2003		February 2, 2003
	(Unaudited)
Current assets:
Cash and cash equivalents	$1,809			$1,356
Receivables	2,045			2,015
Inventories	132,067			129,677
Prepaid expenses	2,617			2,415
Total current assets	138,538			135,463
Property and equipment	85,315			84,155
Less accumulated depreciation	56,779			54,125
Net property and equipment	28,536			30,030
Property under capital leases	20,120			20,120
Less accumulated amortization	16,775			16,509
Net property under capital leases	3,345			3,611
Other non-current assets	202			239
Deferred income taxes	557			557
Total assets	$171,178			$169,900

See accompanying notes to unaudited consolidated financial statements.

Duckwall-ALCO Stores, Inc. And Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)

Liabilities and Stockholders’ Equity

	August 3, 2003			February 2, 2003
Current liabilities:	(Unaudited)
Current maturities of:
Long term debt	$516			$500
Capital lease obligations	712			712
Accounts payable	28,499			25,241
Income taxes payable	1,395			1,326
Accrued salaries and commissions	4,593			5,372
Accrued taxes other than income	4,822			3,935
Other current liabilities	2,832			2,836
Deferred income taxes	2,175			2,164
Total current liabilities	45,544			42,086
Notes payable under revolving loan	14,576			17,483
Long term debt - less current maturities	271			532
Capital lease obligations - less current maturities	5,028			5,384
Other noncurrent liabilities	1,397			1,448
Deferred revenue	638			857
Total liabilities	67,454			67,790
Stockholders' equity:
Common stock, $.0001 par value, authorized      20,000,000 shares; issued and outstanding      4,205,632 shares and 4,260,557 shares respectively	1			1
Additional paid-in capital	48,216			48,759
Retained earnings	55,507			53,350
Total stockholders' equity	103,724			102,110
Total liabilities and stockholders' equity	$171,178			$169,900

See accompanying notes to unaudited consolidated financial statements.

Duckwall-ALCO Stores, Inc. And Subsidiaries Consolidated Statements of Operations (Dollars in Thousands Except Per Share Amounts) (Unaudited)

	For the Thirteen Week Periods Ended				For the Twenty-Six Week Periods Ended
	August 3, 2003		August 4, 2002		August 3, 2003		August 4, 2002
Net sales	$109,501		$101,785		$209,549		$196,631
Cost of sales	73,712		67,860		140,412		131,086
Gross margin	35,789		33,925		69,137		65,545
Selling, general and administrative	31,414		29,800		61,517		58,378
Depreciation and amortization	1,878		1,662		3,675		3,260
Total operating expenses	33,292		31,462		65,192		61,638
Operating income from    continuing operations	2,497		2,463		3,945		3,907
Interest expense	328		350		718		800
Earnings from continuing operations    before income taxes	2,169		2,113		3,227		3,107
Income tax expense	786		776		1,169		1,141
Earnings from continuing operations	1,383		1,337		2,058		1,966
Earnings (Loss) from discontinued    operations, net of income tax	216		(68)		99		(166)
Net earnings	$1,599		$1,269		$2,157		$1,800
Earnings per share
Basic
Continuing operations	$0.33		$0.31		$0.49		$0.47
Discontinued operations	$0.05		($0.01)		$0.02		($0.04)
Net earnings	$0.38		$0.30		$0.51		$0.43
Diluted
Continuing operations	$0.32		$0.30		$0.48		$0.45
Discontinued operations	$0.05		($0.01)		$0.02		($0.04)
Net earnings	$0.37		$0.29		$0.50		$0.41

See accompanying notes to unaudited consolidated financial statements.

Duckwall-ALCO Stores, Inc. And Subsidiaries Consolidated Statements of Cash Flows Dollars in Thousands (Unaudited)

		For the Twenty-Six Week Periods Ended
		August 3, 2003		August 4, 2002
Cash Flows From Operating Activities:
Net earnings		$2,157		$1,800
Adjustments to reconcile net earnings to net cash    provided by operating activities
	Amortization of debt financing costs	37		39
	Depreciation and amortization	3,693		3,304
	(Increase) decrease in inventories	(2,390)		4,254
	Increase in accounts payable	3,258		2,001
	(Increase) decrease in receivables	(30)		13
	Increase in prepaid expenses	(202)		(1,605)
	Increase in accrued taxes other than income	887		341
	(Decrease) increase in accrued salaries and commissions	(779)		498
	Increase (decrease) in income taxes payable	69		(2,976)
	Increase (decrease) in deferred income taxes	11		(36)
	(Decrease) increase in deferred revenue	(219)		88
	(Decrease) increase in other liabilities	(55)		99
Net cash provided by operating activities		6,437		7,820
Cash Flows From Investing Activities:
	Proceeds from sale of property	763		1,034
	Capital expenditures	(2,696)		(4,597)
Net cash used in investing activities		(1,933)		(3,563)
Cash Flows From Financing Activities:
	Proceeds from exercise of stock options	115		1,139
	Repurchase of common stock	(658)		0
	Decrease in revolving loan	(2,907)		(5,472)
	Principal payments on long term notes	(245)		(231)
	Principal payments on capital leases	(356)		(352)
	Debt issue costs	0		(300)
Net cash used in financing activities		(4,051)		(5,216)
Net increase (decrease) in cash and cash equivalents		453		(959)
Cash and cash equivalents at beginning of period		1,356		3,219
Cash and cash equivalents at end of period		$1,809		$2,260

See accompanying notes to unaudited consolidated financial statements

Duckwall-ALCO Stores, Inc. And Subsidiaries Notes to Unaudited Consolidated Financial Statements

(1)	Basis of Presentation

The accompanying unaudited consolidated financial statements are for interim periods and, consequently, do not include all disclosures required by generally accepted accounting principles for annual financial statements. It is suggested that the accompanying unaudited consolidated financial statements be read in conjunction with the consolidated financial statements included in the Company’s fiscal 2003 Annual Report. In the opinion of management of Duckwall-ALCO Stores, Inc., the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company and the results of its operations and cash flows for the interim periods.

(2)	Principles of Consolidation

The consolidated financial statements include the accounts of Duckwall-ALCO Stores, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

(3)	Stock-based Compensation

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, net earnings and net earnings per share would have been decreased to the pro forma amounts indicated in the table below:

	For The Thirteen Week Periods Ended				For The Twenty-Six Week Periods Ended
	August 3, 2003		August 4, 2002		August 3, 2003		August 4, 2002
Net earnings as reported	$1,599		$1,269		$2,157		$1,800
Pro forma stock-based employee   compensation cost, net of tax	(21)		(62)		(42)		(106)
Pro forma net earnings	$1,578		$1,207		$2,115		$1,694
Earnings per share as reported:
Basic	$0.38		$0.30		$0.51		$0.43
Diluted	$0.37		$0.29		$0.50		$0.41
Earnings per share, pro forma:
Basic	$0.38		$0.28		$0.50		$0.40
Diluted	$0.37		$0.27		$0.49		$0.39

(4)	Impact of Change in Accounting Principle

Effective February 4, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. The statement also changes the criteria for classifying an asset as held for sale, broadens the scope of assets to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The adoption of SFAS No. 144 resulted in the reclassification of certain prior year revenue and expense activity related to five stores closed during fiscal year 2003 as discontinued operations. In

addition, seven stores were closed in the first quarter of fiscal year 2004, and one store was closed in the second quarter of fiscal year 2004. Certain revenue and expense activity related to the stores closed in Fiscal 2004 was also reclassified as discontinued operations.

Effective February 3, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial statements.

The Company adopted Emerging Issues Task Force Issue 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16). EITF 02-16 provides guidance on the income statement classification of amounts received by a customer, including a reseller (including reimbursements for expenses such as cooperative advertising), for transactions entered into after December 31, 2002 and limited guidance regarding timing of recognition for volume rebates for transactions entered into after November 21, 2002. The adoption of EITF 02-16 did not have a significant impact on the Company’s financial statements for the thirteen or twenty-six weeks ending August 3, 2003.

(5)	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.

The average number of shares used in computing earnings per share was as follows:

	Thirteen Weeks Ended	Basic		Diluted
	August 3, 2003	4,197,224		4,288,511
	August 4, 2002	4,253,054		4,407,493
	Twenty-Six Weeks Ended
	August 3, 2003	4,228,129		4,302,994
	August 4, 2002	4,212,258		4,363,960

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands)

The thirteen weeks ended August 3, 2003 and August 4, 2002 are referred to herein as the second quarter of fiscal 2004 and 2003 respectively.

As used below the term “competitive market” refers to any market wherein there is one or more national or regional full-line discount stores located in the market served by the Company. The term “non-competitive market” refers to any market where there is no national or regional full-line discount store located in the market served by the Company. Even in a non-competitive market, the Company faces competition from a variety of sources.

RESULTS OF OPERATIONS

Thirteen and Twenty-Six Weeks Ended August 3, 2003 Compared to Thirteen and Twenty-Six Weeks Ended August 4, 2002.

The Company continues to execute its basic strategy of opening stores in under-served markets that have no competition from national or regional full-line discount retailers. During the second quarter of fiscal 2004 the Company closed one Duckwall store and replaced it with an ALCO store in the same market. For the twenty-six week period ending August 3, 2003, the Company opened seven stores and closed eight stores. The operations of stores closed in the current and prior year have been reflected as discontinued operations in all periods presented. As of August 3, 2003 over 85% of the Company’s 263 stores are in non-competitive markets.

Net sales for the second quarter of fiscal 2004 increased $7,716 or 7.6% to $109,501 compared to $101,785 for the second quarter of fiscal 2003. Same store sales decreased $210 or 0.2%. Sales of spring and summer seasonal products were generally soft in May and early June, but improved as the quarter progressed. July same-store sales increased 2.7%. Net sales for the twenty-six week period ending August 3, 2003 increased $12,918 or 6.6% to $209,549 compared to $196,631 in the comparable twenty-six week period of the prior fiscal year. Same store sales increased $31, which, in percentage terms, was essentially flat to the prior year.

Gross margin for the second quarter of fiscal 2004 increased $1,864 or 5.5% to $35,789 compared to $33,925 in the second quarter of fiscal 2003. Gross margin as a percentage of sales was 32.7% for the second quarter of fiscal 2004 compared to 33.3% for the second quarter of fiscal 2003. The decline in the gross margin percentage was due to soft sales of higher margin spring and summer seasonal products during May and early June, as well as an increase in shrinkage expense.

Gross margin for the twenty-six week period ended August 3, 2003 was $69,137, which was $3,592 or 5.5% higher than last year’s twenty-six week gross margin of $65,545. As a percent of net sales, gross margin for the twenty-six week period ended August 3, 2003 was 33.0% compared to 33.3% in the twenty-six week period of the prior fiscal year. The slight decline in the gross margin percentage was due entirely to issues in the second quarter described above.

Selling, general and administrative expense increased $1,614 or 5.4% to $31,414 in the second quarter of fiscal 2004 compared to $29,800 in the second quarter of fiscal 2003. As a percentage of net sales, selling, general and administrative expenses in the second quarter of fiscal 2004 were 28.7%, compared to 29.3% in the second quarter of fiscal 2003. The decrease in the selling, general and administrative expense percentage was due to lower distribution center and incentive compensation costs, which were partially offset by increased general insurance expense.

Selling, general and administrative expense increased $3,139 or 5.4% to $61,517 for the twenty-six week period ended August 3, 2003 compared to $58,378 for the comparable twenty-six week period of the prior fiscal year. Selling, general and administrative expense as a percent of net sales was 29.4% for the twenty-six week period ending August 3, 2003 compared to 29.7% for the twenty-six week period of the prior fiscal year. The decrease in the selling, general and administrative expense percentage was due primarily to lower store remodeling, payroll, and incentive compensation costs, which were partially offset by higher store opening and general insurance expenses.

Depreciation and amortization expense increased $216 or 13.0% to $1,878 in the second quarter of fiscal 2004 compared to $1,662 in the second quarter of fiscal 2003. Depreciation and amortization expense increased $415 or 12.7% to $3,675 for the twenty-six week period ended August 3, 2003 compared to $3,260 in the comparable twenty-six week period of the prior fiscal year.

Operating income from continuing operations increased $34 or 1.4% to $2,497 in the second quarter of fiscal 2004 compared to $2,463 in the second quarter of fiscal 2003. Operating income from continuing operations

as a percentage of net sales was 2.3% in the second quarter of fiscal 2004 compared to 2.4% in the second quarter of fiscal 2003.

Operating income from continuing operations increased $38 or 1.0% to $3,945 for the twenty-six week period ended August 3, 2003 compared to $3,907 in the comparable twenty-six week period of the prior fiscal year.

Interest expense decreased $22 or 6.3% to $328 in the second quarter of fiscal 2004 compared to $350 in the second quarter of fiscal 2003. Interest expense decreased $82 or 10.3% to $718 for the twenty-six week period ended August 3, 2003 compared to $800 in the comparable twenty-six week period of the prior fiscal year. The reduction in interest expense was due primarily to lower interest rates for both the thirteen and twenty-six week periods of fiscal 2004.

Earnings from continuing operations for the second quarter of fiscal 2004 were $1,383, an increase of $46 or 3.4% from the earnings from continuing operations of $1,337 for the second quarter of fiscal 2003. Earnings from continuing operations for the twenty-six week period ended August 3, 2003 were $2,058, and increase of $92 or 4.7% compared to $1,966 in the comparable twenty-six week period of the prior fiscal year.

Earnings from discontinued operations, net of income tax, was $216 in the second quarter of fiscal 2004, compared to a loss of $68 in the second quarter of fiscal 2003. The operations of closed stores have been reflected as discontinued operations in all periods presented. The increase in earnings from discontinued operations was impacted by the gain on the sale of a store building that increased earnings by $259, or $0.06 per diluted share. Earnings from discontinued operations, net of income tax, was $99 for the twenty-six week period ended August 3, 2003, compared to a loss of $166 in the comparable twenty-six week period of the prior fiscal year.

Net earnings for the second quarter of fiscal 2004 were $1,599, an increase of $330 or 26.0% from the net earnings of $1,269 in the second quarter of fiscal 2003. Diluted net earnings per share for the second quarter of fiscal 2004 were $0.37, an increase of $0.08, or 27.6% from the diluted net earnings per share of $0.29 in the second quarter of fiscal 2003. Net earnings for the twenty-six week period ended August 3, 2003 were $2,157, an increase of $357 or 19.8% compared to $1,800 in the comparable twenty-six week period of the prior fiscal year. Diluted net earnings per share for the twenty-six week period ended August 3, 2003 were $0.50, an increase of $0.09 or 22.0% compared to $0.41 per share in the comparable twenty-six week period or the prior fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funds are cash flows from operations, borrowings under its revolving loan credit facility, mortgage financing and vendor trade credit financing (increases in accounts payable).

At August 3, 2003 working capital (defined as current assets less current liabilities) was $92,994 compared to $93,377 at the end of fiscal 2003.

Cash provided by operating activities in the twenty-six week period of fiscal 2004 and 2003 was $6,437 and $7,820 respectively. The decrease in the amount of cash provided by operating activities in the twenty-six week period of fiscal 2004 compared to the twenty-six week period of fiscal 2003 was primarily due to a larger buildup of inventory levels in fiscal 2004 compared to fiscal 2003, due to the higher number of store openings.

Cash used in investing activities in the twenty-six week period of fiscal 2004 and 2003 totaled $1,933 and $3,563, respectively. Total anticipated cash payments for acquisition of property and equipment in fiscal 2004, principally for store buildings and store and warehouse fixtures and equipment are approximately $8,000.

The Company used cash in financing activities in the twenty-six week period of fiscal 2004 and 2003 of $4,051 and $5,216 respectively. Cash was used to pay down the revolving loan. Cash was also used to purchase and retire 69,300 shares of Common Stock in fiscal 2004.

BUSINESS OPERATIONS AND SEGMENT INFORMATION

The Company’s business activities include operation of ALCO discount stores in towns with populations which are typically less than 5,000 not served by other regional or national full-line discount chains and Duckwall variety stores that offer a more limited selection of merchandise which are primarily located in communities of less than 2,500 residents.

For financial reporting purposes, the Company has established two operating segments: “ALCO Discount Stores”, and “All Other”, which includes the Duckwall variety stores and other business activities, such as general office, warehouse and distribution activities.

	For The Thirteen Week Periods Ended				For The Twenty-Six Week Periods Ended
	August 3, 2003		August 4, 2002		August 3, 2003		August 4, 2002
Segment Information
Net Sales:
ALCO Discount Stores	$100,923		$93,798		$193,632		$181,553